Dear Fellow Shareholder,
In a time when the sustainability of business enterprises, and the investments of shareholders in them, is of paramount importance, we can all be proud to say that we are the owners of Trustco Bank. We can be proud of Trustco Bank because it has a 120-year long tradition of profitability that supports dependable shareholder return in the form of dividends. We can be proud of Trustco Bank because it is made up of a team of people who reflect the rich diversity of the communities that we serve. We can be proud of Trustco because it is the Hometown Bank that helps make dreams come true for first-time homebuyers, growing families, increasingly-mobile individuals, retirees, and innovative small business entrepreneurs.
In 2021, TrustCo had record earnings, successfully implemented a reverse stock split, continued a stock buy-back program, increased the amount of its dividend, and strategically positioned the company with capital sufficient to take advantage of the opportunities that we believe the near-term future has in store for us. All of this was made possible through the skill and commitment to excellence of our team members and the fortitude of those who support us.
As our Florida operation has matured, so has the extent to which we are a part of the fabric of the places where we have the privilege of providing banking, investment, and mortgage services. Not content with over $1 billion each in loans and deposits in the Sunshine State, our Florida operation unveiled a new full-service branch in Palm Coast on the eastern shore and deployed a new loan production office in Naples on the west coast. The Naples expansion is the first move in a strategic initiative for the company through which we intend to expand into new areas on the edges of our footprint by leading with our industry-best residential mortgage product. We could not be more proud of our family of customers and team members in the great state of Florida.
We are also are very proud of our deep roots in the Northeast. As we mark the 120th anniversary of Trustco Bank, we celebrate our continued commitment to the communities where it all began for us. We are deeply grateful that we have branch locations in operation today that have been open continuously since our first days. It is upon this foundation that we stand as we roll out today’s state-of-the-art technology and look ahead toward the technology of the future.
Capitalists rightly advise that to be meaningful, success must be sustainable. Our corporate commitment to running a bank that is the low-cost provider of high-quality banking products and services has sustained us for 120 years. It is our passion for empowering our team members to help make dreams come true for the people of the communities that we serve that will sustain us for years to come. Detailed information about the composition of our team and our many efforts in environmental, social, and governance matters can be found on our corporate sustainability page at www.trustcobank.com/sustainability and in the human capital management section in our 10-K filing.
None of what has been accomplished would have been possible without the support of you, our shareholders. All of us at TrustCo are truly thankful for the faith that you have placed in us. As we look ahead, we are excited for the opportunities that await us.
Yours sincerely,
Robert J. McCormick
Chairman, President, and Chief Executive Officer
TrustCo Bank Corp NY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial review which follows will focus on the factors affecting the financial condition and results of operations of TrustCo during 2021 and, in summary form, the two preceding years. Unless otherwise indicated, net interest income and net interest margin are presented in this discussion on a non-GAAP, taxable equivalent basis. Balances discussed are daily averages unless otherwise described. The consolidated financial statements and related notes and the quarterly reports to shareholders for 2021 should be read in conjunction with this review. Reclassifications of prior year data are made where necessary to conform to the current year’s presentation.
COVID-19 Impact
Beginning in March 2020, we experienced negative impacts to our business in the form of requests for loan deferrals of principal and interest due to the business disruption caused by the COVID-19 pandemic. The Company evaluated the impact of the effects of COVID-19 and determined that there were no material or systematic adverse impacts on the Company’s balance sheets and results of operations as of and for the years ended December 31, 2021 and 2020, except for adjustments in the provision for loan losses. At this time, it is difficult to quantify the impact COVID-19 will have on future periods due to various uncertainties, including the duration, severity, spread, variants and resurgences of COVID-19.
The following is a description of the impact the COVID-19 global pandemic is having on certain elements of our business:
Loan modifications
We have always been committed to working with our customers or borrowers to allow time to work through the challenges of the pandemic. At this time, it is uncertain what future impact, if any, further loan modifications related to COVID-19 difficulties will have on our financial condition, results of operations and provision for loan losses. We began receiving requests from our borrowers for loan deferrals in March 2020 and agreed with many borrowers to modify their loans. Modifications included the deferral of principal and/or interest payments for terms generally up to 90 days. Requests were evaluated individually and approved modifications were based on the unique circumstances of each borrower. Loan modifications and payment deferrals as a result of the COVID-19 pandemic that meet the criteria established under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) or under applicable interagency guidance of the federal banking regulators have been and will be excluded from evaluation of troubled debt restructuring (“TDR”) classification and will continue to be reported as current during the payment deferral period. Although there are no loan deferrals outstanding as of December 31, 2021, the Company’s policy is to continue to accrue interest during the deferral period if additional deferrals arise. Loans not meeting the CARES Act or regulatory guidance will be evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures.
Paycheck Protection Program (“PPP”) and Liquidity
As part of the CARES Act, the Small Business Administration (SBA) was authorized to guarantee loans under the PPP for small businesses that meet the necessary eligibility requirements in order to keep their workers on the payroll. The Company began accepting applications on April 3, 2020 and granted 663 PPP loans totaling $46 million during 2020, and in 2021 the Company granted an additional 344 PPP loans totaling approximately $23 million. As of December 31, 2021 190 PPP loans totaling approximately $10 million remain outstanding. The Company has received loan origination fees from the SBA which are being recognized over the life of the loan using the effective yield method.
Asset impairment
At this time, we do not believe there exists any impairment to our goodwill, long-lived assets, right of use assets, held to maturity investment securities or available-for-sale investment securities due to the COVID-19 pandemic. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets.
Provision for loan losses
See “Allowance for Loan Losses” for more information.
Financial Review
TrustCo made significant progress in 2021 despite a challenging operating environment and mixed economic conditions as a result of the pandemic. Among the key results for 2021, in management’s view:
• | Net income after taxes was up 17.3% or $9.1 million to $61.5 million as compared to the prior year; |
• | Period-end loans were up $194 million for 2021 compared to the prior year; |
• | Period-end deposits were up $231 million for 2021 compared to the prior year; |
• | Nonperforming assets declined $2.5 million or 11.6% to $19.1 million from year-end 2020 to year-end 2021; |
• | At 56.90%, the efficiency ratio remained consistent with our peer-group levels (see Non-GAAP Financial Measures Reconciliation), and; |
• | The regulatory capital levels of both the Company and the Bank continued to remain very strong at December 31, 2021, and the Bank continues to meet the definition of “well capitalized” for regulatory purposes. |
Management believes that the Company was able to achieve these accomplishments, despite the ongoing pandemic and increased regulatory expectations, by executing its long-term plan focused on traditional lending criteria and balance sheet management. Achievement of specific business goals such as the continued expansion of loans and deposits, along with tight control of operating expenses and manageable levels of nonperforming assets, is fundamental to the long-term success of the Company as a whole.
Return on average equity was 10.61% in 2021 compared to 9.47% in 2020, while return on average assets was 1.01% in 2021 as compared to 0.94% in 2020.
During 2021 the U.S. saw continued economic recovery highlighted by job growth and lower unemployment claims. Despite the ongoing pandemic, labor shortages, and supply-chain bottlenecks, the stock market thrived with each of the major indexes posting double-digit gains. Contributing to these gains were additional stimulus measures, more job opportunities, increased availability of coronavirus vaccines, and low interest rates. For the year ending 2021, the Dow Jones Industrial Average ended with growth of 18.7%, as compared to growth of 7.25% in 2020. The S&P 500 Index also showed growth of 26.89% for the year, compared to growth of 16.26% in 2020. United States Three Month Treasury Bills experienced a slight decline in rates ending the year at 0.06%, 146 basis points behind the ten-year Treasury yield at year-end of 1.52%. These yields compare to 2020 year-end yields of 0.09% for the three month Treasury and 0.93% for the ten-year Treasury yields. These rates are important to the banking industry because deposit rates tend to track the changes in the shorter term treasury markets and the mortgage loans products tend to track with the ten-year Treasury yields. Beginning in 2021 the yield on the two year Treasury bond was 0.13% and increased 60 basis points during the year to close 2021 at 0.73% and the ten-year Treasury bond began 2021 at 0.93% and closed the year up 59 basis points to 1.52% at year-end. These rate changes have a significant implication to the broader economic cycle and reflect the Federal Reserve Board’s desire for lower shorter term rates to help economic expansion and provide for target levels of employment as a result of the pandemic. However, during 2021 the United States experienced a significant increase in inflation which could trigger the Federal Reserve to increase interest rates.
The outlook for the United States economy is anticipated to bring continued economic recovery. Growth in business operations and expansion of corporate activities will be necessary for broad range increases in revenues and profits.
Generally, a steady increase in economic activities is viewed as a positive for the banking and finance industries as economic growth creates additional demand for goods and services, which in turn result in increased revenues and profits. TrustCo like most other banking organizations prices many of its liabilities (deposits and short term debt) off of the shorter end of the Treasury maturity curve. The average for the three month Treasury was 32 basis points lower in 2021 than in 2020, with the median yield of 0.05% in 2021 down 7 basis points over the median yield in 2020. These trends generally reflect a decrease in the cost for deposit products that price off of the short term treasury market yields. At the same time the average yield of the ten-year Treasury has increased to 1.45% in 2021, up 56 basis points from 2020 when the average was 0.89%. Generally longer term loans are priced consistent with the changes in the ten-year treasury markets. These two trends – lower shorter term rates coupled with an increase in longer term rates – result in the spread of these yields widening, which is a positive trend to the banking industry, but did not mitigate historical low rates putting pressure on banking net interest margins.
Management believes that TrustCo’s long-term focus on traditional banking services has enabled the Company to avoid significant impact from asset quality problems, and the Company’s strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with past practices even in these uncertain times. While we continue to adhere to prudent underwriting standards, as a lender, we may be adversely impacted by general economic weaknesses and by a downturn in the housing markets in the areas we serve.
Overview
2021 results were marked by continued growth in the Company’s loan portfolio. The loan portfolio grew to a total of $4.44 billion, an increase of $194 million or 4.6% over the 2020 year-end balance. Deposits ended 2021 at $5.27 billion, up from $5.04 billion the prior year-end. The year-over-year increases in loans and deposits reflect the success the Company has had in attracting customers to the Bank, as well as the belief that in the current pandemic environment there is a desire of customers to have additional funds in the safety and security offered by TrustCo’s long history of conservative banking. Also contributing to the increase in retail deposits was additional federal stimulus payments sent to eligible customers from the Internal Revenue Service. Management believes that TrustCo’s success is predicated on providing core banking services to a wider number of customers and continuing to provide added services to existing customers where possible. Growing the customer base should contribute to continued growth of loans and deposits, as well as net interest income and non-interest income.
TrustCo recorded net income of $61.5 million or $3.194 of diluted earnings per share for the year ended December 31, 2021, compared to $52.5 million or $2.717 of diluted earnings per share for the year ended December 31, 2020. Net income before taxes was $82.1 million in 2021 compared to $69.4 million in 2020.
During 2021, the following had a significant effect on net income:
• | An increase of $6.8 million in net interest income from 2020 to 2021 primarily as a result of lower deposit rates; |
• | a decrease of $11.1 million in the provision for loan losses to a credit of $5.5 million in 2021; |
• | an increase in non-interest income of $767 thousand, and; |
• | an increase in non-interest expense of $6.0 million. |
TrustCo performed well in comparison to its peers with respect to a number of key performance ratios during 2021 and 2020, including:
• | Tier 1 risk-based capital ratio of 19.54% for 2021 and 19.19% for 2020, compared to medians of 12.79% in 2021 and 12.90% in 2020 for a peer group comprised of all publicly traded banks and thrifts tracked by S&P Global Market Intelligence with assets of $2 billion to $10 billion, and |
• | an efficiency ratio, as calculated by S&P Global Market Intelligence, of 56.90% for 2021 and 56.38% for 2020, compared to the peer group medians of 56.70% in 2021 and 57.45% in 2020. |
During 2021, TrustCo’s results were affected by the growth of deposits, strong loan growth and a shift in asset mix. Despite the low interest rate environment and the ongoing effects from the pandemic during 2021, the Company was able to continue to attract and retain deposits. On average for 2021, non-maturity deposits were 77.5% of total deposits, up from 71.5% in 2020. Overall, the cost of interest bearing liabilities decreased 41 basis points to 0.16% in 2021 as compared to 2020. Average loan balances increased 4.2% from 2020 to 2021, while the total of federal funds sold and other short-term investments, available for sale securities and held to maturity securities increased 28.7%, average net loans decreased to 73.2% of average earning assets in 2021 from 77.2% in 2020. The Company has traditionally maintained a high liquidity position and taken a conservative stance in its investment portfolio through the use of relatively short-term securities. The low rate environment in 2021 as well as the current pandemic resulted in maturing and called securities being reinvested in loans and bonds, with any remaining funds continuing to be held in Federal funds sold and other short-term investments.
As discussed previously, market interest rates moved during the course of 2021, with shorter term three month Treasury rates being consistent year over year, and longer term rates increasing versus year‑end 2020. Overall, trends in market rates caused a steepening of the yield curve, on average, during the year. The average daily spread between the ten-year Treasury and the two-year Treasury was 118 basis points in 2021, up from an average of 50 basis points in 2020 and 17 basis points in 2019. The spread between the ten-year Treasury and the two-year Treasury changed throughout the year but ended 2021 at 79 basis points, which was relatively flat year over year. Generally, a more positive slope in the yield curve is beneficial for the Company’s earnings derived from its core mix of loans and deposits.
The tables below illustrate the range of key Treasury bond interest rates during 2021 and 2020.
| | 3 Month T Bill (BEY) Yield(%) | | | 2 Year T Note Yield(%) | | | 5 Year T Note Yield(%) | | | 10 Year T Note Yield(%) | | | 10 Year – 2 Year Spread(%) | |
2021 | | | | | | | | | | | | | | | |
Beginning of Year | | | 0.09 | | | | 0.13 | | | | 0.36 | | | | 0.93 | | | | 0.80 | |
Peak | | | 0.09 | | | | 0.76 | | | | 1.34 | | | | 1.74 | | | | 1.59 | |
Trough | | | 0.01 | | | | 0.09 | | | | 0.36 | | | | 0.93 | | | | 0.72 | |
End of Year | | | 0.06 | | | | 0.73 | | | | 1.26 | | | | 1.52 | | | | 0.79 | |
Average | | | 0.04 | | | | 0.27 | | | | 0.86 | | | | 1.45 | | | | 1.18 | |
Median | | | 0.05 | | | | 0.20 | | | | 0.83 | | | | 1.48 | | | | 1.14 | |
| | | | | | | | | | | | | | | | | | | | |
2020 | | | | | | | | | | | | | | | | | | | | |
Beginning of Year | | | 1.55 | | | | 1.58 | | | | 1.69 | | | | 1.92 | | | | 0.34 | |
Peak | | | 1.59 | | | | 1.58 | | | | 1.67 | | | | 1.88 | | | | 0.83 | |
Trough | | | - | | | | 0.11 | | | | 0.19 | | | | 0.52 | | | | 0.12 | |
End of Year | | | 0.09 | | | | 0.13 | | | | 0.36 | | | | 0.93 | | | | 0.80 | |
Average | | | 0.36 | | | | 0.39 | | | | 0.53 | | | | 0.89 | | | | 0.50 | |
Median | | | 0.12 | | | | 0.17 | | | | 0.36 | | | | 0.74 | | | | 0.52 | |
Source: www.treasury.gov
During 2020, management increased certain allowance qualitative factors based on its assessment of the impact of the pandemic on local, national, and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics. In light of an improving economic environment in 2021 and based on the approach utilized in the prior year the company adjusted the pandemic specific provision during the second half of 2021. Changes to the pandemic specific provision, as well as sustained improvement in asset quality trends and changes in economic conditions, has resulted in a decrease in the provision for loan losses from an expense of $5.6 million in 2020 to a credit of $5.5 million in 2021, which favorably affected net income. Net charge‑offs decreased from $322 thousand in 2020 to net recoveries of $122 thousand in 2021. Total nonperforming loans decreased $2.3 million from 2020. Details on nonperforming loans and net charge-offs are included in the notes to the financial statements. The decrease in the provision for loan losses is primarily driven by improvements in asset quality trends and economic conditions, as well as adjustments to the pandemic specific provision.
TrustCo focuses on providing high quality service to the communities served by its branch‑banking network. The financial results for the Company are influenced by economic events that affect those communities, as well as national economic trends, primarily interest rates, affecting the entire banking industry.
The Company remains focused on building its customer relationships, deposits and loans throughout its branch network, with a particular emphasis on the newest branches added to our “network.”
The Company continually looks for opportunities to open new offices each year by filling in or extending existing markets and in 2021 the Company expanded its Florida market by opening a branch in Palm Coast. The Company has experienced continued growth in all markets as measured by the growth in deposit and loan balances. All branches have the same products and features found at other Trustco Bank locations. Additionally, the Company has made significant investments in the online and mobile banking platforms, including new automated tools. With a combination of competitive rates, excellent service, technology, and convenient locations, management believes that as branches mature, they will continue to attract deposit and loan customers. As expected, some branches have grown more rapidly than others. Generally, new bank branches continue to grow for years after being opened, although there is no specific time frame that could be characterized as typical.
Asset/Liability Management
In managing its balance sheet, TrustCo utilizes funding and capital sources within sound credit, investment, interest rate, and liquidity risk guidelines established by management and approved by the Board of Directors. Loans and securities (including Federal Funds sold and other short-term investments) are the Company’s primary earning assets. Average interest earning assets were 97.6% and 97.3% of average total assets for 2021 and 2020, respectively.
TrustCo, through its management of liabilities, attempts to provide stable and flexible sources of funding within established liquidity and interest rate risk guidelines. This is accomplished through core deposit banking products offered within the markets served by the Company. TrustCo does not actively seek to attract out‑of‑area deposits or so‑called “hot money,” but rather focuses on core relationships with both depositors and borrowers.
TrustCo’s objectives in managing its balance sheet are to limit the sensitivity of net interest income to actual or potential changes in interest rates and to enhance profitability through strategies that should provide sufficient reward for predicted and controlled risk. The Company is deliberate in its efforts to maintain adequate liquidity under prevailing and projected economic conditions and to maintain an efficient and appropriate mix of core deposit relationships. The Company relies on traditional banking investment instruments and its large base of core deposits to help in asset/liability management. Predicting the impact of changing rates on the Company’s net interest income and net fair value of its balance sheet is complex and subject to uncertainty for a number of reasons. For example, in making a general assumption that rates will rise, a myriad of other assumptions regarding whether the slope of the yield curve remains the same or changes, whether the spreads of various loans, deposits and investments remain unchanged, widen or narrow and what changes occur in customer behavior all need to be made. The Company routinely models various rate changes and monitors basis changes that may be incorporated into that modeling.
Interest Rates
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. The absolute level of interest rates, changes in 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 year.
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 control 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. From December 2015 through December 2018, the U.S. Federal Reserve Board increased its federal funds target rate from a range of 0.00% - 0.25% to a range of 2.25% - 2.50%. Beginning in the second half of 2019, the Federal Reserve Board began lowering the rate in response to a slowing economy. During the first quarter of 2020 the rate was significantly decreased again as a result of the global pandemic related to COVID-19, and returned the range of 0.00% to 0.25% where it currently remains.
The yield on the ten-year Treasury bond increased by 59 basis points from 0.93% at the beginning of 2021 to the year‑end level of 1.52%. The rate on the ten-year Treasury bond and other long-term interest rates have a significant influence on the rates offered for new residential real estate loans. These changes in interest rates have an effect on the Company relative to the interest income on loans, securities, and Federal Funds sold and on other short-term instruments as well as the interest expense on deposits and borrowings. Residential real estate loans and longer‑term investments are most affected by the changes in longer term market interest rates such as the ten‑year Treasury. The Federal Funds sold portfolio and other short‑term investments are affected primarily by changes in the Federal Funds target rate. Deposit interest rates are most affected by short term market interest rates. Also, changes in interest rates have an effect on the recorded balance of the securities available for sale portfolio, which are recorded at fair value. Generally, as market interest rates decrease, the fair value of the securities will increase and the reverse is also generally applicable. 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. Because TrustCo is a portfolio lender and does not sell loans into the secondary market, the Company establishes 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. Higher market interest rates also generally increase the value of retail deposits.
The decrease in the Federal Funds target range in 2020 continues to have a negative impact on earnings on the Company’s cash position. The net effect of market changes in interest rates during 2020 was that yields earned on both the investment portfolios and loans remained quite low in 2020 and 2021 relative to historic levels, which also has driven down deposit costs. However, as previously discussed, it is believed that the Federal Reserve will begin to increase the Federal Funds target rate in the first part of 2022.
Earning Assets
Average earning assets during 2021 were $5.9 billion, which was an increase of $525.1 million from 2020. This increase was primarily the result of growth in the average balance of net loans of $173.4 million and in Federal Funds sold and other short‑term investments of $363.2 million, offset by decreases of $5.1 million in securities available for sale and $4.6 million in held-to-maturity securities between 2020 and 2021. The increase in the loan portfolio is the result of a significant increase in residential mortgage loans, which more than offset net decreases in the other loan categories. The increase in residential real estate loans is a result of a strategic focus on growth of this product throughout the Trustco Bank branch network through an effective marketing campaign and competitive rates and closing costs.
Total average assets were $6.1 billion for 2021 and $5.6 billion for 2020.
The table “Mix of Average Earning Assets” shows how the mix of the earning assets has changed over the last three years. While the growth in earning assets is critical to improved profitability, changes in the mix also have a significant impact on income levels, as discussed below.
MIX OF AVERAGE EARNING ASSETS
(dollars in thousands) | | 2021 | | | 2020 | | | 2019 | | | 2021 vs. 2020 | | | 2020 vs. 2019 | | | Components of Total Earning Assets | |
2021 | | | 2020 | | | 2019 | |
Loans, net | | $ | 4,336,834 | | | | 4,163,399 | | | | 3,926,199 | | | | 173,435 | | | | 237,200 | | | | 73.2 | % | | | 77.2 | % | | | 78.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities available for sale (1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government sponsored enterprises | | | 63,743 | | | | 38,508 | | | | 156,292 | | | | 25,235 | | | | (117,784 | ) | | | 1.1 | | | | 0.7 | | | | 3.1 | |
State and political subdivisions | | | 48 | | | | 111 | | | | 167 | | | | (63 | ) | | | (56 | ) | | | - | | | | - | | | | - | |
Mortgage-backed securities and collateralized mortgage obligations-residential | | | 308,777 | | | | 333,093 | | | | 345,718 | | | | (24,316 | ) | | | (12,625 | ) | | | 5.2 | | | | 6.2 | | | | 6.9 | |
Corporate bonds | | | 53,699 | | | | 50,982 | | | | 34,637 | | | | 2,717 | | | | 16,345 | | | | 0.9 | | | | 0.9 | | | | 0.7 | |
Small Business Administration-guaranteed participation securities | | | 35,723 | | | | 44,379 | | | | 53,269 | | | | (8,656 | ) | | | (8,890 | ) | | | 0.6 | | | | 0.8 | | | | 1.1 | |
Other | | | 685 | | | | 686 | | | | 685 | | | | (1 | ) | | | 1 | | | | - | | | | - | | | | - | |
Total securities available for sale | | | 462,675 | | | | 467,759 | | | | 590,768 | | | | (5,084 | ) | | | (123,009 | ) | | | 7.8 | | | | 8.6 | | | | 11.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Held-to-maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities and collateralized mortgage obligations-residential | | | 11,733 | | | | 16,376 | | | | 20,643 | | | | (4,643 | ) | | | (4,267 | ) | | | 0.2 | | | | 0.3 | | | | 0.4 | |
Total held-to-maturity securities | | | 11,733 | | | | 16,376 | | | | 20,643 | | | | (4,643 | ) | | | (4,267 | ) | | | 0.2 | | | | 0.3 | | | | 0.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Federal Reserve Bank and Federal Home Loan Bank stock | | | 5,578 | | | | 7,381 | | | | 9,123 | | | | (1,803 | ) | | | (1,742 | ) | | | 0.1 | | | | 0.1 | | | | 0.2 | |
Federal funds sold and other short-term investments | | | 1,111,257 | | | | 748,085 | | | | 477,181 | | | | 363,172 | | | | 270,904 | | | | 18.7 | | | | 13.8 | | | | 9.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total earning assets | | $ | 5,928,077 | | | | 5,403,000 | | | | 5,023,914 | | | | 525,077 | | | | 379,086 | | | | 100.0 | % | | | 100.0 | % | | | 100.0 | |
(1) | The average balances of securities available for sale are presented using amortized cost for these securities. |
As mentioned, average net loans decreased to 73.2% of average earning assets in 2021 from 77.2% in 2020. The low rate environment resulted in maturing and called securities, as well as increases in deposits, being reinvested in federal funds sold and other short-term investments, which has always been a source of liquidity to fund loan growth and provide flexibility for balance sheet management.
Loans
In 2021, the Company experienced another year of solid loan growth despite the challenges of the ongoing pandemic. The $194.3 million increase or 4.6% in the Company’s gross loan portfolio from December 31, 2020 to December 31, 2021 was due to higher residential balances, which offset lower balances in other loan categories. Average loans increased $173.4 million during 2021 to $4.34 billion. Interest income on the loan portfolio decreased to $159.2 million in 2021 from $166.0 million in 2020. The average yield decreased 32 basis points to 3.67% in 2021 compared to 3.99% in 2020.
LOAN PORTFOLIO
(dollars in thousands) | | As of December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
Commercial | | $ | 180,814 | | | | 4.1 | % | | $ | 198,328 | | | | 4.7 | % | | $ | 181,635 | | | | 4.5 | % |
Real estate - construction | | | 37,279 | | | | 0.8 | | | | 24,749 | | | | 0.6 | | | | 28,532 | | | | 0.7 | |
Real estate - mortgage | | | 3,980,294 | | | | 89.7 | | | | 3,769,582 | | | | 88.8 | | | | 3,573,106 | | | | 87.9 | |
Home equity lines of credit | | | 230,976 | | | | 5.2 | | | | 242,194 | | | | 5.7 | | | | 267,922 | | | | 6.6 | |
Installment loans | | | 9,416 | | | | 0.2 | | | | 9,617 | | | | 0.2 | | | | 11,001 | | | | 0.3 | |
Total loans | | | 4,438,779 | | | | 100.0 | % | | | 4,244,470 | | | | 100.0 | % | | | 4,062,196 | | | | 100.0 | % |
Less: Allowance for loan losses | | | 44,267 | | | | | | | | 49,595 | | | | | | | | 44,317 | | | | | |
Net loans (1) | | $ | 4,394,512 | | | | | | | $ | 4,194,875 | | | | | | | $ | 4,017,879 | | | | | |
| | Average Balances | |
| | 2021 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | |
| | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
Commercial | | $ | 193,370 | | | | 4.5 | % | | $ | 203,314 | | | | 4.9 | % | | $ | 176,165 | | | | 4.5 | % | | $ | 175,814 | | | | 4.7 | % | | $ | 175,596 | | | | 5.0 | % |
Real estate - construction | | | 31,014 | | | | 0.7 | | | | 26,641 | | | | 0.6 | | | | 27,728 | | | | 0.7 | | | | 26,717 | | | | 0.7 | | | | 26,616 | | | | 0.8 | |
Real estate - mortgage | | | 3,870,097 | | | | 89.2 | | | | 3,667,909 | | | | 88.2 | | | | 3,433,683 | | | | 87.4 | | | | 3,236,631 | | | | 86.5 | | | | 2,985,870 | | | | 84.9 | |
Home equity lines of credit | | | 233,628 | | | | 5.4 | | | | 255,583 | | | | 6.1 | | | | 277,905 | | | | 7.1 | | | | 297,678 | | | | 7.9 | | | | 318,660 | | | | 9.1 | |
Installment loans | | | 8,725 | | | | 0.2 | | | | 9,952 | | | | 0.2 | | | | 10,718 | | | | 0.3 | | | | 9,242 | | | | 0.2 | | | | 8,158 | | | | 0.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans | | | 4,336,834 | | | | 100.0 | % | | | 4,163,399 | | | | 100.0 | % | | | 3,926,199 | | | | 100.0 | % | | | 3,746,082 | | | | 100.0 | % | | | 3,514,900 | | | | 100.0 | % |
Less: Allowance for loan losses | | | 49,421 | | | | | | | | 47,330 | | | | | | | | 44,639 | | | | | | | | 44,651 | | | | | | | | 44,319 | | | | | |
Net loans (1) | | $ | 4,287,413 | | | | | | | $ | 4,116,069 | | | | | | | $ | 3,881,560 | | | | | | | $ | 3,701,431 | | | | | | | $ | 3,470,581 | | | | | |
| (1) | Presented net of deferred direct loan origination fees and costs. |
Through marketing, pricing and a customer-friendly service delivery network, TrustCo has attempted to distinguish itself from other mortgage lenders by highlighting the uniqueness of its loan products. Specifically, low closing costs, no escrow or private mortgage insurance, quick loan decisions and fast closings were identified and marketed. The fact that the Company holds mortgages in its loan portfolio rather than selling them into secondary markets was also highlighted to customers. The average balance of residential real estate mortgage loans was approximately $3.88 billion in 2021 and approximately $3.68 billion in 2020. Income on real estate loans decreased to $138.8 million in 2021 from $144.2 million in 2020. The yield on the portfolio decreased from 3.92% in 2020 to 3.57% in 2021. The vast majority of TrustCo’s real estate loans are secured by properties within the Bank’s market area.
TrustCo does not make subprime loans or purchase investments collateralized by subprime loans. A loan may be considered subprime for a number of reasons, but effectively subprime loans are loans where the certainty of repayment of principal and interest is lower than for a traditional prime loan due to the structure of the loan itself, the credit worthiness of the borrower, the underwriting standards of the lender or some combination of these. For instance, adjustable loans underwritten at initial low “teaser” rates instead of the fully indexed rate and loans to borrowers with poor payment history would generally be classified as subprime. TrustCo underwrites its loan originations in a traditional manner, focusing on key factors that have proven to result in good credit decisions, rather than relying on automated systems or basing decisions primarily on one factor, such as a borrower’s credit score.
Average commercial loans of $210.1 million in 2021 decreased by $9.2 million from $219.3 million in 2020, primarily because of PPP loan payoffs. Average commercial loans included $19.4 million and $14.2 million of commercial real estate construction loans in 2021 and 2020, respectively. The average yield on the commercial loan portfolio increased to 5.19% for 2021 from 4.92% in 2020, primarily as a result of PPP loans being forgiven during 2021. Interest income on commercial loans was $10.9 million in 2021 compared to $10.8 million in 2020, up slightly primarily as a result of income recognized on the forgiveness of the PPP loans.
TrustCo’s commercial lending activities are focused on balancing the Company’s commitment to meeting the credit needs of businesses in its market areas with the necessity of managing its credit risk. In accordance with these goals, the Company has consistently emphasized the origination of loans within its market areas. TrustCo’s commercial loan portfolio contains no foreign loans, nor does it contain any significant concentrations of credit to any single borrower or industry. The Capital Region commercial loan portfolio reflects the diversity of businesses found in the market area, including light manufacturing, retail, service, and real estate-related businesses. Commercial loans made in the downstate New York market area and in the central Florida market area also reflect the businesses in those areas, with a focus on real estate. TrustCo strives to maintain strong asset quality in all segments of its loan portfolio, especially commercial loans. There is significant competition for commercial loans in the Bank’s market regions.
TrustCo has a strong position in the home equity credit line product in its market area. During 2021, the average balance of home equity credit lines was $233.6 million, a decrease from $255.6 million in 2020. Trustco Bank competes with both regional and national concerns for these lines of credit and faces stiff competition with respect to interest rates, closing costs, and customer service for these loans. TrustCo continuously reviews changes made by competitors with respect to the home equity credit line product and adjusts its offerings to remain competitive while meeting evolving needs. Changes in tax law and consumer behavior have resulted in this product being somewhat less popular in recent years. TrustCo’s average yield on this portfolio was 3.77% for 2021 and 4.01% for 2020. Interest income on home equity credit lines decreased from $10.3 million in 2020 to $8.8 million in 2021.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGE IN INTEREST RATES
(dollars in thousands) | | December 31, 2021 | |
| | In 1 Year or Less | | | After 1 Year But Within 5 Years | | | After 5 Years | | | Total | |
Commercial | | $ | 29,709 | | | | 65,198 | | | | 85,907 | | | | 180,814 | |
Real estate construction | | | 37,279 | | | | - | | | | - | | | | 37,279 | |
| | | | | | | | | | | | | | | | |
Total | | | 66,988 | | | | 65,198 | | | | 85,907 | | | | 218,093 | |
| | | | | | | | | | | | | | | | |
Predetermined rates | | | 34,144 | | | | 65,198 | | | | 85,907 | | | | 185,249 | |
Floating rates | | | 32,844 | | | | - | | | | - | | | | 32,844 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 66,988 | | | | 65,198 | | | | 85,907 | | | | 218,093 | |
At December 31, 2021 and 2020, the Company had approximately $37.3 million and $24.7 million of real estate construction loans, respectively. Of the $37.3 million in real estate construction loans at December 31, 2021, approximately $17.9 million were secured by first mortgages to residential borrowers with the remaining $19.4 million were loans to commercial borrowers for residential construction projects. Of the $24.7 million in real estate construction loans at December 31, 2020, approximately $10.5 million were secured by first mortgages to residential borrowers with the remaining $14.2 million were loans to commercial borrowers for residential construction projects. The vast majority of the Company’s construction loans are in the Company’s New York market.
INVESTMENT SECURITIES
(dollars in thousands) | | As of December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
| | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
Securities available for sale: | | | | | | | | | | | | | | | | | | |
U. S. government sponsored enterprises | | $ | 59,976 | | | | 59,179 | | | | 20,000 | | | | 19,968 | | | | 104,895 | | | | 104,512 | |
State and political subdivisions | | | 41 | | | | 41 | | | | 103 | | | | 103 | | | | 160 | | | | 162 | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | 269,907 | | | | 270,798 | | | | 308,432 | | | | 316,158 | | | | 388,537 | | | | 389,517 | |
Corporate bonds | | | 45,805 | | | | 45,337 | | | | 59,185 | | | | 59,939 | | | | 30,164 | | | | 30,436 | |
Small Business Adminstration-guaranteed participation securities | | | 31,303 | | | | 31,674 | | | | 40,955 | | | | 42,217 | | | | 48,991 | | | | 48,511 | |
Other | | | 685 | | | | 684 | | | | 685 | | | | 686 | | | | 685 | | | | 685 | |
Total securities available for sale | | | 407,717 | | | | 407,713 | | | | 429,360 | | | | 439,071 | | | | 573,432 | | | | 573,823 | |
Held to maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | 9,923 | | | | 10,695 | | | | 13,824 | | | | 14,988 | | | | 18,618 | | | | 19,680 | |
Total held to maturity securities | | | 9,923 | | | | 10,695 | | | | 13,824 | | | | 14,988 | | | | 18,618 | | | | 19,680 | |
Total investment securities | | $ | 417,640 | | | | 418,408 | | | | 443,184 | | | | 454,059 | | | | 592,050 | | | | 593,503 | |
Securities available for sale: The portfolio of securities available for sale is designed to provide a stable source of interest income and liquidity. The portfolio is also managed by the Company to take advantage of changes in interest rates and is particularly important in providing greater flexibility in the current low interest rate environment. The securities available for sale portfolio is managed under a policy detailing the types and characteristics acceptable in the portfolio. Mortgage backed securities and collateralized mortgage obligations held in the portfolio include only pass‑throughs issued by United States government agencies or sponsored enterprises.
Holdings of various types of securities may vary from year‑to‑year depending on management’s assessment of relative risk and reward, and also due to timing issues of calls, maturities, prepayments and purchases. Holdings of both municipal and corporate securities are subject to additional monitoring requirements under current regulations, adding to the costs of owning those securities.
Proceeds from sales, calls and maturities of securities available for sale have been typically invested in higher yielding assets, such as loans, or temporarily held in Federal Funds sold and other short-term investments until deployed to fund future loan growth or future investment opportunities.
The designation of securities as “available for sale” is made at the time of purchase, based upon management’s intent and ability to hold the securities for an indefinite period of time. These securities are available for sale in response to changes in market interest rates, related changes in prepayment risk, needs for liquidity, or changes in the availability of and yield on alternative investments. At December 31, 2021, some securities in this portfolio had fair values that were less than the amortized cost due to changes in interest rates and market conditions and not related to the credit condition of the issuers. At December 31, 2021, the Company did not intend to sell, and it is not likely that the Company will be required to sell, these securities before market recovery. Accordingly, at December 31, 2021 the Company did not consider any of the unrealized losses to be other than temporary.
At December 31, 2021, the carrying value of securities available for sale amounted to $407.7 million, compared to $439.1 million at year-end 2020. For 2021, the average balance of securities available for sale was $462.7 million with an average yield of 1.44%, compared to an average balance in 2020 of 467.8 million with an average yield of 2.00%. The taxable equivalent income earned on the securities available for sale portfolio in 2021 was $6.7 million, compared to $9.4 million earned in 2020.
Securities available for sale are recorded at their fair value, with any unrealized gains or losses, net of taxes, recognized as a component of shareholders’ equity. Average balances of securities available for sale are stated at amortized cost. At December 31, 2021, the fair value of TrustCo’s portfolio of securities available for sale carried gross unrealized gains of approximately $3.9 million and gross unrealized losses also of approximately $3.9 million. At December 31, 2020, the fair value of TrustCo’s portfolio of securities available for sale carried gross unrealized gains of approximately $9.9 million and gross unrealized losses of approximately $217 thousand. As previously noted, in both periods, unrealized losses were related to market interest rate levels and were not credit related.
Held to Maturity Securities: At December 31, 2021, the Company held $9.9 million of held to maturity securities, compared to $13.8 million at December 31, 2020. For 2021, the average balance of held to maturity securities was $11.7 million, compared to $16.4 million in 2020. Similar to securities available for sale, cash flow from these securities has been reinvested in higher yielding assets, such as loans, or temporarily held in Federal Funds sold and other short-term investments to fund future loan growth or future investment opportunities. The average yield on held to maturity securities increased slightly from 3.69% in 2020 to 3.71% in 2021 as the mix within the portfolio changed due primarily to normal pay downs and prepayments on the mortgage-backed securities held in the portfolio. Interest income on held to maturity securities declined from $604 thousand in 2020 to $435 thousand in 2021, reflecting the decline in average balances. Held to maturity securities are recorded at amortized cost. The fair value of these securities as of December 31, 2021 was $10.7 million.
The designation of securities as “held to maturity” is made at the time of purchase, based upon management’s intent and ability to hold the securities until final maturity. At December 31, 2021 there was $1 thousand of unrecognized losses on securities in this portfolio.
Securities Gains: During 2021, and 2019, TrustCo did not recognize any net gains from securities transactions. During 2020, TrustCo recognized approximately $1.2 million from net gains from securities transactions. There were no sales or transfers of held to maturity securities in 2021, 2020 and 2019.
TrustCo has not invested in any exotic investment products such as interest rate swaps, forward placement contracts, or other instruments commonly referred to as derivatives. In addition, the Company has not invested in securities backed by subprime mortgages or in collateralized debt obligations (CDOs). By actively managing a portfolio of high quality securities, TrustCo believes it can meet the objectives of asset/liability management and liquidity, while at the same time producing a reasonably predictable earnings stream.
SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD
(dollars in thousands) | | As of December 31, 2021 | |
| | Maturing: | |
Debt securities available for sale: | | Within 1 Year | | | After 1 But Within 5 Years | | | After 5 But Within 10 Years | | | After 10 Years | | | Total | |
| | | | | | | | | | | | | | | |
U. S. government sponsored enterprises | | | | | | | | | | | | | | | |
Amortized cost | | $ | - | | | | 59,976 | | | | - | | | | - | | | | 59,976 | |
Fair Value | | | - | | | | 59,179 | | | | - | | | | - | | | | 59,179 | |
Weighted average yield | | | - | % | | | 0.61 | | | | - | | | | - | | | | 0.61 | |
State and political subdivisions | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | $ | 7 | | | | 34 | | | | - | | | | - | | | | 41 | |
Fair Value | | | 7 | | | | 34 | | | | - | | | | - | | | | 41 | |
Weighted average yield | | | 5.23 | % | | | 5.27 | | | | - | | | | - | | | | 5.26 | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | $ | 1,672 | | | | 162,905 | | | | 101,273 | | | | 4,057 | | | | 269,907 | |
Fair Value | | | 1,689 | | | | 165,913 | | | | 99,217 | | | | 3,979 | | | | 270,798 | |
Weighted average yield | | | 3.83 | % | | | 2.27 | | | | 1.77 | | | | 1.98 | | | | 2.09 | |
Corporate bonds | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | $ | 14,965 | | | | 30,840 | | | | - | | | | - | | | | 45,805 | |
Fair Value | | | 15,121 | | | | 30,216 | | | | - | | | | - | | | | 45,337 | |
Weighted average yield | | | 3.44 | % | | | 1.01 | | | | - | | | | - | | | | 1.82 | |
Small Business Administration-guaranteed participation securities | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | $ | 6,807 | | | | 24,496 | | | | - | | | | - | | | | 31,303 | |
Fair Value | | | 6,893 | | | | 24,781 | | | | - | | | | - | | | | 31,674 | |
Weighted average yield | | | 1.99 | % | | | 2.11 | | | | - | | | | - | | | | 2.08 | |
Other | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | $ | 85 | | | | 600 | | | | - | | | | - | | | | 685 | |
Fair Value | | | 86 | | | | 598 | | | | - | | | | - | | | | 684 | |
Weighted average yield | | | 2.81 | % | | | 1.23 | | | | - | | | | - | | | | 1.43 | |
Total securities available for sale | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | $ | 23,536 | | | | 278,851 | | | | 101,273 | | | | 4,057 | | | | 407,717 | |
Fair Value | | | 23,796 | | | | 280,721 | | | | 99,217 | | | | 3,979 | | | | 407,713 | |
Weighted average yield | | | 3.05 | % | | | 1.76 | | | | 1.77 | | | | 1.98 | | | | 1.85 | |
| | | | | | | | | | | | | | | | | | | | |
Held to maturity securities: | | | | | | | | | | | | | | | | | | | | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | $ | - | | | | 339 | | | | 1,319 | | | | 8,265 | | | | 9,923 | |
Fair Value | | | - | | | | 351 | | | | 1,375 | | | | 8,969 | | | | 10,695 | |
Weighted average yield | | | - | % | | | 4.83 | | | | 2.87 | | | | 5.28 | | | | 4.96 | % |
Total held to maturity securities | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | $ | - | | | | 339 | | | | 1,319 | | | | 8,265 | | | | 9,923 | |
Fair Value | | | - | | | | 351 | | | | 1,375 | | | | 8,969 | | | | 10,695 | |
Weighted average yield | | | - | % | | | 4.83 | | | | 2.87 | | | | 5.28 | | | | 4.96 | % |
Weighted average yields have not been adjusted for any tax-equivalent factor.
Maturity and call dates of securities: Many of the securities in the Company’s portfolios have a call date in addition to the stated maturity date. Call dates allow the issuer to redeem the bonds prior to maturity at specified dates and at predetermined prices. Normally, securities are redeemed at the call date when the issuer can reissue the security at a lower interest rate. Therefore, for cash flow, liquidity and interest rate management purposes, it is important to monitor both maturity dates and call dates. The level of calls in 2020 was higher than the 2021 level due to the reduction in interest rates in early 2020 as a result of the pandemic. The probability of future calls will change depending on market interest rate levels. The tables labeled “Securities Portfolio Maturity and Call Date Distribution,” show the distribution, based on both final maturity and call date of each security, broken out by the available for sale and held to maturity portfolios as of December 31, 2021. Mortgage backed securities, collateralized mortgage obligations and Small Business Administration securities are reported using an estimate of average life. Actual maturities may differ from contractual maturities because of securities’ prepayments and the right of certain issuers to call or prepay their obligations without penalty. The table, “Securities Portfolio Maturity Distribution and Yield,” shows the distribution of maturities for each of the securities portfolios, based on final maturity, as well as the average yields at December 31, 2021 on each type/maturity grouping.
SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION
Debt securities available for sale:
(dollars in thousands) | | As of December 31, 2021 | |
| | Based on Final Maturity | | | Based on Call Date | |
| | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
Within 1 year | | $ | 15,057 | | | | 15,215 | | | | 78,512 | | | | 78,046 | |
1 to 5 years | | | 91,462 | | | | 90,040 | | | | 223,875 | | | | 226,471 | |
5 to 10 years | | | 17,725 | | | | 18,079 | | | | 101,273 | | | | 99,217 | |
After 10 years | | | 283,473 | | | | 284,379 | | | | 4,057 | | | | 3,979 | |
Total debt securities available for sale | | $ | 407,717 | | | | 407,713 | | | | 407,717 | | | | 407,713 | |
Held to maturity securities:
(dollars in thousands) | | As of December 31, 2021 | |
| | Based on Final Maturity | | | Based on Call Date | |
| | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
Within 1 year | | $ | - | | | | - | | | | 53 | | | | 54 | |
1 to 5 years | | | 339 | | | | 351 | | | | 8,639 | | | | 9,261 | |
5 to 10 years | | | 1,319 | | | | 1,375 | | | | 1,231 | | | | 1,380 | |
After 10 years | | | 8,265 | | | | 8,969 | | | | - | | | | - | |
Total held to maturity securities | | $ | 9,923 | | | | 10,695 | | | | 9,923 | | | | 10,695 | |
Federal Funds Sold and Other Short-term Investments
During 2021, the average balance of Federal Funds sold and other short-term investments was $1.1 billion, an increase from $748.1 million in 2020. The average rate earned on these assets was 0.13% in 2021 and 0.26% in 2020. TrustCo utilizes this category of earning assets as a means of maintaining strong liquidity. The Federal Funds sold and other short-term investments portfolio is significantly affected by changes in the target Federal Funds rate, as are virtually all short-term interest-sensitive instruments.
The year-end balance of Federal Funds sold and other short-term investments was approximately $1.2 billion for 2021, compared to $1.1 billion at year-end 2020. While yields on investment securities with acceptable risk characteristics were insufficient to justify shifting overnight liquidity into other investment types during 2021, some funds were shifted into higher yielding loans. Management will continue to evaluate the overall level of Federal Funds sold and other short-term investments in 2022 and will make appropriate adjustments based upon market opportunities and interest rates.
Funding Sources
TrustCo utilizes various traditional sources of funds to support its earning asset portfolio. The table, “Mix of Average Sources of Funding,” presents the various categories of funds used and the corresponding average balances for each of the last three years.
Deposits: Average total deposits were approximately $5.2 billion in 2021, compared to approximately $4.7 billion in 2020, an increase of $445.9 million. Changes in deposit categories (average balances 2021 versus 2020) included: demand deposits up $182.8 million, interest-bearing checking deposits up $163.3 million, savings up $205.9 million, money market up $77.0 million and time deposits down $183.2 million. While many customers remain in one product type for many years, others may move funds between product types to maximize the yield earned or as a result of increased or decreased liquidity needs. The increase in retail deposits reflects the focus on growing funding sources by providing core banking services better, faster and at competitive rates. Additionally, we also believe the increase in retail deposits continues to reflect of the desire of customers to have additional funds in the safety and security offered by TrustCo’s long history of conservative banking. Also contributing to the increase in retail deposits was federal stimulus payments sent to eligible customers from the Internal Revenue Service. The balance in time deposits over $250 thousand is not the result of any incentive pricing as TrustCo does not offer premium rates on large certificates of deposit.
MIX OF AVERAGE SOURCES OF FUNDING
(dollars in thousands) | | 2021 | | | 2020 | | | 2019 | | | 2021 vs. 2020 | | | 2020 vs. 2019 | | | Components of Total Funding | |
2021 | | | 2020 | | | 2019 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Retail deposits | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | $ | 750,111 | | | | 567,265 | | | | 427,276 | | | | 182,846 | | | | 139,989 | | | | 13.8 | % | | | 9.4 | | | | 9.0 | |
Savings | | | 1,397,432 | | | | 1,191,532 | | | | 1,134,050 | | | | 205,900 | | | | 57,482 | | | | 25.8 | | | | 24.8 | | | | 28.2 | |
Time deposits under $250 thousand | | | 964,541 | | | | 1,126,636 | | | | 1,189,901 | | | | (162,095 | ) | | | (63,265 | ) | | | 17.8 | | | | 26.0 | | | | 22.0 | |
Interest bearing checking accounts | | | 1,134,702 | | | | 971,385 | | | | 874,700 | | | | 163,317 | | | | 96,685 | | | | 20.9 | | | | 19.1 | | | | 20.4 | |
Money market deposits | | | 739,139 | | | | 662,107 | | | | 555,547 | | | | 77,032 | | | | 106,560 | | | | 13.6 | | | | 12.2 | | | | 11.8 | |
Total retail deposits | | | 4,985,925 | | | | 4,518,925 | | | | 4,181,474 | | | | 467,000 | | | | 337,451 | | | | 91.9 | | | | 91.5 | | | | 91.4 | |
Time deposits over $250 thousand | | | 202,422 | | | | 223,527 | | | | 227,586 | | | | (21,105 | ) | | | (4,059 | ) | | | 3.7 | | | | 5.0 | | | | 4.1 | |
Short-term borrowings | | | 232,815 | | | | 180,065 | | | | 159,220 | | | | 52,750 | | | | 20,845 | | | | 4.4 | | | | 3.5 | | | | 4.4 | |
Total purchased liabilities | | | 435,237 | | | | 403,592 | | | | 386,806 | | | | 31,645 | | | | 16,786 | | | | 8.1 | | | | 8.5 | | | | 8.6 | |
Total sources of funding | | $ | 5,421,162 | | | | 4,922,517 | | | | 4,568,280 | | | | 498,645 | | | | 354,237 | | | | 100.0 | % | | | 100.0 | | | | 100.0 | |
AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS
(dollars in thousands) | | 2021 | | | 2020 | | | 2019 | |
| | Average Balance | | | Interest Income/ Expense | | | Average Rate | | | Average Balance | | | Interest Income/ Expense | | | Average Rate | | | Average Balance | | | Interest Income/ Expense | | | Average Rate | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans, net | | $ | 4,336,834 | | | | 159,168 | | | | 3.67 | % | | $ | 4,163,399 | | | | 165,964 | | | | 3.99 | % | | $ | 3,926,199 | | | | 166,610 | | | | 4.24 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government sponsored enterprises | | | 63,743 | | | | 314 | | | | 0.49 | | | | 38,508 | | | | 568 | | | | 1.48 | | | | 156,292 | | | | 3,209 | | | | 2.05 | |
State and political subdivisions | | | 48 | | | | 3 | | | | 6.56 | | | | 111 | | | | 9 | | | | 7.82 | | | | 167 | | | | 13 | | | | 7.78 | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | 308,777 | | | | 4,515 | | | | 1.46 | | | | 333,093 | | | | 6,131 | | | | 1.84 | | | | 345,718 | | | | 8,219 | | | | 2.38 | |
Corporate bonds | | | 53,699 | | | | 1,065 | | | | 1.98 | | | | 50,982 | | | | 1,721 | | | | 3.38 | | | | 34,637 | | | | 1,096 | | | | 3.16 | |
Small Business Administration-guaranteed participation securities | | | 35,723 | | | | 745 | | | | 2.09 | | | | 44,379 | | | | 902 | | | | 2.03 | | | | 53,269 | | | | 1,121 | | | | 2.10 | |
Other | | | 685 | | | | 20 | | | | 2.92 | | | | 686 | | | | 23 | | | | 3.35 | | | | 685 | | | | 22 | | | | 3.21 | |
Total securities available for sale | | | 462,675 | | | | 6,662 | | | | 1.44 | | | | 467,759 | | | | 9,354 | | | | 2.00 | | | | 590,768 | | | | 13,680 | | | | 2.32 | |
Held to maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | 11,733 | | | | 435 | | | | 3.71 | | | | 16,376 | | | | 604 | | | | 3.69 | | | | 20,643 | | | | 797 | | | | 3.86 | |
Total held to maturity securities | | | 11,733 | | | | 435 | | | | 3.71 | | | | 16,376 | | | | 604 | | | | 3.69 | | | | 20,643 | | | | 797 | | | | 3.86 | |
Federal Reserve Bank and Federal Home Loan Bank stock | | | 5,578 | | | | 260 | | | | 4.66 | | | | 7,381 | | | | 421 | | | | 5.70 | | | | 9,123 | | | | 568 | | | | 6.23 | |
Federal funds sold and other short-term investments | | | 1,111,257 | | | | 1,458 | | | | 0.13 | | | | 748,085 | | | | 1,948 | | | | 0.26 | | | | 477,181 | | | | 10,478 | | | | 2.20 | |
Total interest earning assets | | | 5,928,077 | | | | 167,983 | | | | 2.83 | % | | | 5,403,000 | | | | 178,291 | | | | 3.30 | % | | | 5,023,914 | | | | 192,133 | | | | 3.82 | % |
Allowance for loan losses | | | (49,421 | ) | | | | | | | | | | | (47,330 | ) | | | | | | | | | | | (44,639 | ) | | | | | | | | |
Cash and noninterest earning assets | | | 196,825 | | | | | | | | | | | | 197,966 | | | | | | | | | | | | 182,545 | | | | | | | | | |
Total assets | | $ | 6,075,481 | | | | | | | | | | | $ | 5,553,636 | | | | | | | | | | | $ | 5,161,820 | | | | | | | | | |
Liabilities and shareholders’ equity Interest bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing checking accounts | | $ | 1,134,702 | | | | 178 | | | | 0.02 | % | | $ | 971,385 | | | | 148 | | | | 0.02 | % | | $ | 874,700 | | | | 288 | | | | 0.03 | % |
Savings | | | 1,397,432 | | | | 624 | | | | 0.04 | | | | 1,191,532 | | | | 716 | | | | 0.06 | | | | 1,134,050 | | | | 1,338 | | | | 0.12 | |
Time deposits and money markets | | | 1,906,102 | | | | 5,863 | | | | 0.31 | | | | 2,012,270 | | | | 22,834 | | | | 1.13 | | | | 1,973,034 | | | | 33,227 | | | | 1.68 | |
Total interest bearing deposits | | | 4,438,236 | | | | 6,665 | | | | 0.15 | | | | 4,175,187 | | | | 23,698 | | | | 0.57 | | | | 3,981,784 | | | | 34,853 | | | | 0.88 | |
Short-term borrowings | | | 232,815 | | | | 909 | | | | 0.39 | | | | 180,065 | | | | 1,010 | | | | 0.56 | | | | 159,220 | | | | 1,468 | | | | 0.92 | |
Total interest bearing liabilities | | | 4,671,051 | | | | 7,574 | | | | 0.16 | % | | | 4,355,252 | | | | 24,708 | | | | 0.57 | % | | | 4,141,004 | | | | 36,321 | | | | 0.88 | % |
Demand deposits | | | 750,111 | | | | | | | | | | | | 567,265 | | | | | | | | | | | | 427,276 | | | | | | | | | |
Other liabilities | | | 74,396 | | | | | | | | | | | | 77,487 | | | | | | | | | | | | 80,051 | | | | | | | | | |
Shareholders’ equity | | | 579,923 | | | | | | | | | | | | 553,632 | | | | | | | | | | | | 513,489 | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 6,075,481 | | | | | | | | | | | $ | 5,553,636 | | | | | | | | | | | $ | 5,161,820 | | | | | | | | | |
Net interest income | | | | | | | 160,409 | | | | | | | | | | | | 153,583 | | | | | | | | | | | | 155,812 | | | | | |
Taxable equivalent adjustment | | | | | | | (1 | ) | | | | | | | | | | | (3 | ) | | | | | | | | | | | (5 | ) | | | | |
Net interest income | | | | | | | 160,408 | | | | | | | | | | | | 153,580 | | | | | | | | | | | | 155,807 | | | | | |
Net interest spread | | | | | | | | | | | 2.67 | % | | | | | | | | | | | 2.73 | % | | | | | | | | | | | 2.94 | % |
Net interest margin (net interest income to total interest earnings assets) | | | | | | | | | | | 2.71 | | | | | | | | | | | | 2.84 | | | | | | | | | | | | 3.10 | |
Portions of income earned on certain commercial loans, obligations of states and political subdivisions, and equity securities are exempt from federal and/or state taxation. Appropriate adjustments have been made to reflect the equivalent amount of taxable income that would have been necessary to generate an equal amount of after tax income. Federal and state tax rates used to calculate income tax on a tax equivalent basis were 21% and 6%, respectively, for 2021, 2020 and 2019. The average balances of securities available for sale and held to maturity were calculated using amortized costs. Included in the average balance of shareholders’ equity is $3.3 million, $7.1 million, and $(3.6) million in 2021, 2020, and 2019, respectively, of net unrealized gain (loss), net of tax, in the available for sale securities portfolio. The gross amounts of the net unrealized income (loss) has been included in cash and noninterest earning assets. Nonaccrual loans are included in average loans.
The overall cost of interest bearing deposits decreased primarily as a result of the lower interest rate environment resulting from the pandemic.
The Company strives to maintain competitive rates on deposit accounts and to attract customers through a combination of competitive interest rates, quality customer service, and convenient banking locations. In this fashion, management believes TrustCo is able to attract deposit customers looking for a long-term banking relationship and to cross-sell banking services utilizing the deposit account relationship as the starting point.
Other funding sources: The Company had $232.8 million of average short‑term borrowings outstanding during 2021, compared to $180.1 million in 2020. The increase over the prior year is consistent with the overall increase in core deposits and is not attributed with efforts to grow this product type. These borrowings represent customer repurchase accounts, which behave more like deposit accounts than traditional borrowings. The average cost of short-term borrowings was 0.39% in 2021 and 0.56% in 2020. This resulted in interest expense of approximately $909 thousand in 2021, compared to $1.0 million in 2020.
AVERAGE DEPOSITS BY TYPE OF DEPOSITOR
(dollars in thousands) | | Years ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | |
Individuals, partnerships and corporations | | $ | 5,144,071 | | | | 4,700,635 | | | | 4,380,866 | | | | 4,184,850 | | | | 4,149,832 | |
U.S. Government | | | - | | | | - | | | | - | | | | - | | | | - | |
States and political subdivisions | | | 15,761 | | | | 15,709 | | | | 8,663 | | | | 3,007 | | | | 2,765 | |
Other (certified and official checks, etc.) | | | 28,515 | | | | 26,108 | | | | 19,531 | | | | 18,720 | | | | 18,799 | |
Total average deposits by type of depositor | | $ | 5,188,347 | | | | 4,742,452 | | | | 4,409,060 | | | | 4,206,577 | | | | 4,171,396 | |
MATURITY OF TIME DEPOSITS OVER $250 THOUSAND
| | As of December 31, 2021 | |
| | | |
Under 3 months | | $ | 44,980 | |
3 to 6 months | | | 27,880 | |
6 to 12 months | | | 69,424 | |
Over 12 months | | | 19,230 | |
| | | | |
Total | | $ | 161,514 | |
VOLUME AND YIELD ANALYSIS
(dollars in thousands) | | 2021 vs. 2020 | | | 2020 vs. 2019 | |
| | Increase (Decrease) | | | Due to Volume | | | Due to Rate | | | Increase (Decrease) | | | Due to Volume | | | Due to Rate | |
Interest income (TE): | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Federal funds sold and other short-term investments | | $ | (490 | ) | | | 714 | | | | (1,204 | ) | | | (8,530 | ) | | | 3,909 | | | | (12,439 | ) |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | (2,686 | ) | | | (266 | ) | | | (2,420 | ) | | | (4,322 | ) | | | (1,853 | ) | | | (2,469 | ) |
Tax-exempt | | | (6 | ) | | | (5 | ) | | | (1 | ) | | | (4 | ) | | | (4 | ) | | | - | |
Total securities available for sale | | | (2,692 | ) | | | (271 | ) | | | (2,421 | ) | | | (4,326 | ) | | | (1,857 | ) | | | (2,469 | ) |
Held to maturity securities (taxable) | | | (169 | ) | | | (172 | ) | | | 3 | | | | (193 | ) | | | (159 | ) | | | (34 | ) |
Federal Reserve Bank and Federal Home Loan Bank stock | | | (161 | ) | | | (92 | ) | | | (69 | ) | | | (147 | ) | | | (102 | ) | | | (45 | ) |
Loans, net | | | (6,796 | ) | | | 6,391 | | | | (13,187 | ) | | | (646 | ) | | | 9,646 | | | | (10,292 | ) |
Total interest income | | | (10,308 | ) | | | 6,570 | | | | (16,878 | ) | | | (13,842 | ) | | | 11,437 | | | | (25,279 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing checking accounts | | | 30 | | | | 26 | | | | 4 | | | | (140 | ) | | | 22 | | | | (162 | ) |
Savings | | | (92 | ) | | | 111 | | | | (203 | ) | | | (622 | ) | | | 68 | | | | (690 | ) |
Time deposits and money markets | | | (16,971 | ) | | | (2,061 | ) | | | (14,910 | ) | | | (10,393 | ) | | | (611 | ) | | | (9,782 | ) |
Short-term borrowings | | | (101 | ) | | | 251 | | | | (352 | ) | | | (458 | ) | | | 172 | | | | (630 | ) |
Total interest expense | | | (17,134 | ) | | | (1,673 | ) | | | (15,461 | ) | | | (11,613 | ) | | | (349 | ) | | | (11,264 | ) |
Net interest income (TE) | | $ | 6,826 | | | | 8,243 | | | | (1,417 | ) | | $ | (2,229 | ) | | | 11,786 | | | | (14,015 | ) |
Capital Resources
Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios and to qualify Trustco Bank as a well-capitalized institution in accordance with federal regulatory requirements. Historically, most of the Company’s capital requirements have been provided through retained earnings.
Both TrustCo and Trustco Bank are subject to regulatory capital requirements. The regulatory capital rules contain a Tier 1 leverage ratio of 4.0% of consolidated assets, a common equity Tier 1 minimum capital requirement of 4.5% of risk-weighted assets, a minimum Tier 1 capital to risk-based assets requirement of 6.0% of risk-weighted assets, and a total risk-based capital ratio or 8.0% of risk-weighted assets. In addition, the Company and the Bank are required to maintain additional levels of Tier 1 common equity (known as the capital conservation buffer) above the minimum risk-based capital levels in order to avoid restrictions on dividends, repurchase shares, or payment of discretionary bonuses.
As of December 31, 2021, the capital levels of both TrustCo and the Bank exceeded the minimum standards, including with the capital conservation buffer taken into account.
Under the OCC’s “prompt corrective action” regulations, a bank is deemed to be “well-capitalized” when its CET1, Tier 1, total risk-based, and leverage capital ratios are at least 6.5%, 8%, 10%, and 5%, respectively. A bank is deemed to be “adequately capitalized” or better if its capital ratios meet or exceed the minimum federal regulatory capital requirements, and “undercapitalized” if it fails to meet these minimal capital requirements. A bank is “significantly undercapitalized” if its CET1, Tier 1, total risk-based and leverage capital ratios fall below 3%, 4%, 6%, and 3%, respectively and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. At December 31, 2021 and 2020, Trustco Bank met the definition of “well-capitalized.”
The federal bank regulatory agencies have adopted rules creating a “community bank leverage ratio” framework designed to simplify capital requirements for qualifying banks and bank or thrift holding companies. The new rule was effective as of January 1, 2020. Although TrustCo would qualify to take advantage of the community bank leverage ratio framework, it has decided it would not opt-in to the framework.
The Company’s dividend payout ratio was 42.95% of net income in 2021 and 50.12% of net income in 2020. The Company executed a 1 for 5 reverse stock split on May 28, 2021. The per-share dividend paid was $1.372 in 2021 and $1.363 in 2020, adjusted for the reverse split. The Company’s ability to pay dividends to its shareholders is dependent upon the ability of the Bank to pay dividends to the Company. The payment of dividends by the Bank to the Company is subject to continued compliance with minimum regulatory capital requirements.
TrustCo’s consolidated Tier 1 risk-based capital was 19.54% of risk-adjusted assets at December 31, 2021, and 19.19% of risk‑adjusted assets at December 31, 2020. Consolidated Tier 1 capital to assets (leverage ratio) at December 31, 2021 was 9.61%, as compared to 9.65% at year-end 2020. Note 14 to the financial statements includes information on all regulatory capital ratios.
TrustCo maintains a dividend reinvestment plan (DRP) with approximately 7,156 participants. During 2021, $2.2 million of dividends paid on the shares held in this plan were reinvested in shares of the Company. The DRP also allows for additional purchases by participants and has a discount feature (up to 5%) that can be activated by management as a tool to raise capital. To date, the discount feature has not been utilized.
On June 7, 2019 the Company’s Board of Directors authorized a share repurchase program of up to 1,000,000 shares. During the three months ended March 31, 2020, the Company repurchased a total of 489 thousand shares at an average price per share of $7.11 for a total of $3.5 million under its Board authorized share repurchase program. The shares purchased as of March 31, 2020 represented 0.51% of our common shares outstanding. On April 16, 2020 the Company announced that it has suspended its share repurchase program. On February 18, 2021 the Company’s Board of Directors authorized another share repurchase program of up to 2,000,000 shares and was adjusted to 400,000 shares as a result of the approval of the Reverse Stock Split, and represents approximately 2% of its currently outstanding common stock. During the twelve months ended December 31, 2021, the Company repurchased a total of 70 thousand shares at an average price per share of $32.82 for a total of $2.3 million under its Board authorized share repurchase program.
Risk Management
The responsibility for balance sheet risk management oversight is the function of the Company’s Asset Allocation Committee. The Committee meets monthly and includes the executive officers of the Company as well as other department managers as appropriate. The meetings include a review of balance sheet structure, formulation of strategy in light of anticipated economic conditions, and comparison to Board-established guidelines to control exposures to various types of risk.
Credit Risk
Credit risk is managed through a network of loan officer authorities, review committees, loan policies, and oversight from the senior executives of the Company. In addition, the Company utilizes an independent loan review function to evaluate management’s loan grading of non-homogeneous loans. Management follows a policy of continually identifying, analyzing, and evaluating the credit risk inherent in the loan portfolio. As a result of management’s ongoing reviews of the loan portfolio, loans are placed in nonaccrual status, either due to the delinquent status of the principal and/or interest payments, or based on a judgment by management that, although payment of principal and/or interest is current, such action is prudent. Thereafter, no interest is taken into income unless received in cash or until such time as the borrower demonstrates a sustained ability to make scheduled payments of interest and principal.
Management has also developed policies and procedures to monitor the credit risk in relation to the Federal Funds sold portfolio. TrustCo maintains an approved list of third party banks to which Trustco can sell Federal Funds and monitors the credit rating and capital levels of those institutions. At December 31, 2021, virtually all of the Federal Funds sold and other short-term investments were funds on deposit at the Federal Reserve Bank of New York (“FRBNY”) and the Federal Home Loan Bank of New York (“FHLBNY”). The Company also monitors the credit ratings on its investment securities and performs initial and periodic reviews of financial information for the issuers of corporate and municipal bonds.
Nonperforming Assets
Nonperforming assets include loans in nonaccrual status, restructured loans, loans past due by three payments or more and still accruing interest, and foreclosed real estate properties.
Nonperforming assets at year-end 2021 and 2020 totaled $19.1 million and $21.6 million, respectively. Nonperforming loans as a percentage of the total loan portfolio were 0.42% in 2021 and 0.50% in 2020. As of December 31, 2021 and 2020, there were $6.5 million and $7.1 million, respectively, of loans in non-accruing status that were less than 90 days past due.
At December 31, 2021, nonperforming loans include a mix of commercial and residential loans. Of the total nonaccrual loans of $18.7 million, $18.6 were residential real estate loans and $112 thousand were commercial loans. It is the Company’s policy to classify loans as nonperforming if three monthly payments have been missed. Economic conditions generally improved as compared to the prior year. The majority of the Company’s loan portfolio continues to come from its historical market area in Upstate New York. As of December 31, 2021, 70.6% of loans are in New York, including both the Upstate and Downstate areas, as well as nominal loan balances in adjoining states. The remaining 29.4% of the loan portfolio are Florida loans. At December 31, 2021, 10.7% of nonperforming loans were in Florida and 89.3% were in the Company’s New York area markets. At December 31, 2021 nonperforming Florida loans amounted to $2.0 million compared to $1.2 million at December 31, 2020.
(dollars in thousands) | | As of December 31, | |
| | 2021 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | |
Loans in nonaccrual status | | $ | 18,739 | | | | 21,061 | | | | 20,840 | | | | 24,952 | | | | 24,339 | |
Restructured retail loans | | | 17 | | | | 23 | | | | 29 | | | | 34 | | | | 38 | |
Total nonperforming loans | | | 18,756 | | | | 21,084 | | | | 20,869 | | | | 24,986 | | | | 24,377 | |
Foreclosed real estate | | | 362 | | | | 541 | | | | 1,579 | | | | 1,676 | | | | 3,246 | |
Total nonperforming assets | | $ | 19,118 | | | | 21,625 | | | | 22,448 | | | | 26,662 | | | | 27,623 | |
Allowance for loan losses | | $ | 44,267 | | | | 49,595 | | | | 44,317 | | | | 44,766 | | | | 44,170 | |
Allowance coverage of nonperforming loans | | | 2.36 | x
| | | 2.35 | | | | 2.12 | | | | 1.79 | | | | 1.81 | |
Nonperforming loans as a % of total loans | | | 0.42 | % | | | 0.50 | | | | 0.51 | | | | 0.64 | | | | 0.67 | |
Nonperforming assets as a % of total assets | | | 0.31 | % | | | 0.37 | | | | 0.43 | | | | 0.54 | | | | 0.56 | |
TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured under a TDR, as impaired loans.
There were $232 thousand and $1.0 million of commercial loans classified as impaired as of December 31, 2021 and 2020, respectively. In addition, there were $18.3 million and $20.6 million of residential TDRs classified as impaired at December 31, 2021 and 2020, respectively. Generally, residential TDRs involve the borrower filing for bankruptcy protection. The average balances of all impaired loans were $20.8 million during both 2021 and 2020, and $21.0 million in 2019.
As noted above, Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the CARES Act or under applicable federal banking agency guidance are excluded from evaluation of TDR classification and will continue to be reported as current during the payment deferral period. Loans not meeting the CARES Act or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures.
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.
There are inherent risks associated with lending; however based on its review of the loan portfolio, including loans classified as nonperforming loans, TDRs, and impaired loans, management is aware of no other loans in the portfolio that pose significant risk of the eventual non-collection of principal and interest. As of December 31, 2021, 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 no advances to borrowers or projects located outside the United States. The Bank makes loans to executive officers, directors and to associates of such persons in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions. None of these loans involve more than normal risk of collectability or present other unfavorable features.
At year-end 2021 and 2020 there were $362 thousand and $541 thousand of foreclosed real estate, respectively. Although the length of time to complete a foreclosure has remained elevated in recent years, TrustCo, as a portfolio lender, has not encountered issues such as lost notes and other documents, which have been a problem in the foreclosure process for many other mortgagees.
Allowance for Loan Losses
The Company maintains an allowance for loan losses that is available to absorb losses on loans that management determines are uncollectible. The balance of the allowance is maintained at a level that is, in management’s judgment, representative of probable incurred losses related to the loan portfolio at the end of the reporting period.
The allowance for loan losses represents management’s estimate of probable and reasonably estimable credit losses inherent in the held for investment loan portfolio. In determining the allowance, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably estimated. On a quarterly basis, we assess the risk inherent in our loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature of the portfolio, industry concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses, and the impacts of local, regional and national economic factors on the quality of the loan portfolio. Based on this analysis, we record a provision for loan losses in order to maintain the allowance at appropriate levels.
Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including management’s assessment of overall portfolio quality. The allowance is maintained at an amount we believe is sufficient to provide for estimated losses inherent in our loan portfolio at each balance sheet date, and fluctuations in the provision for loan losses may result from management’s assessment of the adequacy of the allowance. Changes in these estimates and assumptions are possible and may have a material impact on our allowance, and therefore our financial position, liquidity or results of operations.
The table, “Summary of Loan Loss Experience”, includes an analysis of the changes to the allowance for the past five years. Net loans recovered in 2021 were $122 thousand and net loans charged off were $322 thousand in 2020. The decrease in net charge-offs was primarily the result of lower gross charge offs in both the New York and Florida residential, commercial and installment segments of the portfolio, and increased recoveries in the New York residential, commercial and installment segments of the portfolio. New York commercial gross recoveries were up $22 thousand from 2020 to 2021, residential gross recoveries were up $150 thousand in 2021 relative to 2020, and installment recoveries were up $42 thousand from 2020 to 2021. Total gross charge-offs in 2021 were $430 thousand versus $661 thousand in 2020. There were no Florida commercial charge-offs in either 2021 or 2020, and New York commercial charge-offs decreased $6 thousand from 2020 to 2021. Residential gross charge-offs were down $64 thousand from 2020 to 2021 and gross installment charge‑offs decreased $161 thousand from 2020 to 2021. The changes in gross and net charge-offs in these categories reflected economic and market changes. The provision for loan losses was a credit in 2021 of $5.5 million compared to an expense of $5.6 million in 2020. The decrease in the provision for loan losses in 2021 was primarily driven by improvements in asset quality trends and economic conditions, as well as adjustments to the pandemic specific provision. The allowance for loan losses decreased from $49.6 million at December 31, 2020, or 1.17% of total loans at that date, to $44.3 million at December 31, 2021, or 1.00% of total loans at that date.
Conditions in most of the Bank’s market areas are stabilizing or improving as compared to 2020 however, should general economic conditions weaken and/or real estate values begin to decline again, the level of problem loans may increase, as would the level of the provision for loan losses. Additionally, the foreclosure moratorium has expired and the Company could experience an increase in other real estate owned.
As noted in Note 18, In September 2016, the FASB released ASU 2016-13, “Financial Instruments - Credit Losses” (referred to as “CECL”) which amended existing guidance to replace current generally accepted accounting principles used to measure a reporting entity’s credit losses. The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. As previously disclosed, the Company formed a cross-functional team to work through its implementation of CECL. The Company has selected the Discounted Cash Flow modeling method and has run parallel processes and is in final review stages of completing its documentation including third party model validations. The Company had previously elected to delay its adoption of CECL, as provided by the CARES Act until the date on which the National Emergency concerning COVID-19 was terminated or December 31, 2020, whichever occurred first. The December 31, 2020 adoption date under the CARES Act was extended to January 1, 2022 as a part of the COVID-19 Relief Bill, which became law in December 2020, and therefore the Company has adopted CECL on January 1, 2022. The Company does not expect the adoption to have a material impact to the statement of financial position or results of operations.
SUMMARY OF LOAN LOSS EXPERIENCE
| | 2021 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | |
Amount of loans outstanding at end of year (less unearned income) | | $ | 4,438,779 | | | | 4,244,470 | | | | 4,062,196 | | | | 3,874,096 | | | | 3,636,407 | |
Average loans outstanding during year (less average unearned income) | | | 4,336,834 | | | | 4,163,399 | | | | 3,926,199 | | | | 3,746,082 | | | | 3,514,900 | |
Balance of allowance at beginning of year | | | 49,595 | | | | 44,317 | | | | 44,766 | | | | 44,170 | | | | 43,890 | |
Loans charged off: | | | | | | | | | | | | | | | | | | | | |
Commercial and commercial real estate | | | 30 | | | | 36 | | | | 20 | | | | 100 | | | | 72 | |
Real estate mortgage - 1 to 4 family | | | 340 | | | | 404 | | | | 974 | | | | 846 | | | | 2,220 | |
Installment | | | 60 | | | | 221 | | | | 213 | | | | 257 | | | | 219 | |
Total | | | 430 | | | | 661 | | | | 1,207 | | | | 1,203 | | | | 2,511 | |
Recoveries of loans previously charged off: | | | | | | | | | | | | | | | | | | | | |
Commercial and commercial real estate | | | 32 | | | | 10 | | | | 46 | | | | 10 | | | | 96 | |
Real estate mortgage - 1 to 4 family | | | 466 | | | | 317 | | | | 532 | | | | 351 | | | | 669 | |
Installment | | | 54 | | | | 12 | | | | 21 | | | | 38 | | | | 26 | |
Total | | | 552 | | | | 339 | | | | 599 | | | | 399 | | | | 791 | |
Net loans charged off | | | (122 | ) | | | 322 | | | | 608 | | | | 804 | | | | 1,720 | |
Provision for loan losses | | | (5,450 | ) | | | 5,600 | | | | 159 | | | | 1,400 | | | | 2,000 | |
Balance of allowance at end of year | | $ | 44,267 | | | | 49,595 | | | | 44,317 | | | | 44,766 | | | | 44,170 | |
| | | | | | | | | | | | | | | | | | | | |
Net charge offs as a percent of average loans outstanding during year (less average unearned income) | | | 0.00 | % | | | 0.01 | | | | 0.02 | | | | 0.02 | | | | 0.05 | |
| | | | | | | | | | | | | | | | | | | | |
Allowance as a percent of loans outstanding at end of year | | | 1.00 | | | | 1.17 | | | | 1.09 | | | | 1.16 | | | | 1.21 | |
Allocation of the Allowance for Loan Losses
The allocation of the allowance for loans losses is as follows:
(dollars in thousands) | | As of December 31, 2021 | | | As of December 31, 2020 | |
| | Amount | | | Percent of Loans to Total Loans | | | Amount | | | Percent of Loans to Total Loans | |
Commercial | | $ | 2,942 | | | | 4.08 | % | | $ | 3,975 | | | | 4.67 | % |
Real estate - construction | | | 375 | | | | 0.84 | % | | | 290 | | | | 0.58 | % |
Real estate mortgage - 1 to 4 family | | | 37,650 | | | | 89.67 | % | | | 41,228 | | | | 88.81 | % |
Home equity lines of credit | | | 2,857 | | | | 5.20 | % | | | 3,597 | | | | 5.71 | % |
Installment Loans | | | 443 | | | | 0.21 | % | | | 505 | | | | 0.23 | % |
| | $ | 44,267 | | | | 100.00 | % | | $ | 49,595 | | | | 100.00 | % |
Market Risk
The Company’s principal exposure to market risk is with respect to interest rate risk. Interest rate risk is the potential for economic loss due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current market value.
Quantitative and Qualitative Disclosure about Market Risk
TrustCo realizes income principally from the difference or spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings. Loan volume and yield, as well as the volume of and rates on investments, deposits and borrowings are affected by market interest rates. Additionally, because of the terms and conditions of many of the loan documents and deposit accounts, a change in interest rates could also affect the projected maturities of the loan portfolio and/or the deposit base.
In monitoring interest rate risk, management focuses on evaluating the levels of net interest income and the fair value of capital in varying interest rate cycles within Board-approved policy limits. Interest rate risk management also must take into consideration, among other factors, the Company’s overall credit, operating income, operating cost, and capital profile. The Asset Allocation Committee, which includes all members of executive management and reports quarterly to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of potential net interest income and change in the fair value of capital as a result of changes in market interest rates.
The Company uses a third party industry standard simulation model as the primary tool to identify, quantify and project changes in interest rates and the impact on the balance sheet and forecasted net interest income. The model utilizes assumptions with respect to cash flows 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 a 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 values of capital projections as of December 31, 2021 are referenced below. The base case 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 December 31, 2021. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100, 200, 300 and 400 basis points (BP) or to decrease by 100 basis points.
As of December 31, 2021 | | Estimated Percentage of Fair value of Capital to Fair value of Assets | |
+400 BP | | | 23.00 | %
|
|
+300 BP | | | 22.80 | | |
+200 BP | | | 22.60 | | |
+100 BP | | | 22.60 | | |
Current rates | | | 21.70 | | |
-100 BP | | | 18.70 | | |
At December 31, 2021, the Company’s consolidated Tier 1 capital to assets ratio (leverage capital ratio) was 9.61%.
The fair value of capital is calculated as the fair value of assets less the fair value of liabilities in the interest rate scenario presented. The fair value of capital in the current rate environment is 21.7% of the fair value of assets, whereas the current Tier 1 capital to assets ratio was 9.61% at December 31, 2021, as noted. The significant difference between these two capital ratios reflects the impact that a fair value calculation can have on the capital ratios of a company. The fair value of capital calculations take into consideration the fair value of deposits, including those deposits considered core deposits, along with the fair value of assets such as the loan portfolio.
A secondary method to identify and manage the interest rate risk profile is the static gap analysis. Interest sensitivity gap analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods. An asset‑sensitive position indicates that there are more rate-sensitive assets than rate‑sensitive liabilities repricing or maturing within specific time periods, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling rates. A liability‑sensitive position would generally imply a negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates.
Static gap analysis has limitations because it cannot measure precisely the effect of interest rate movements and competitive pressures on the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. In addition, a significant portion of the interest sensitive assets are fixed rate securities with relatively long lives whereas the interest-bearing liabilities are not subject to these same limitations. As a result, certain assets and liabilities may in fact reprice at different times and at different volumes than the static gap analysis would indicate. The Company deemphasized the use of gap analysis in favor of the more advanced methods provided by the previously noted model, including the sensitivity of the economic value of equity and net interest income.
The Company recognizes the relatively long-term nature of the fixed rate residential loan portfolio. To fund those long‑term assets, the Company cultivates long-term deposit relationships (often called core deposits). These core deposit relationships tend to be longer-term in nature and not as susceptible to changes in interest rates. Core deposit balances, along with substantial levels of short‑term liquid assets allows the Company to take on certain interest rate risk with respect to the fixed rate loans on its balance sheet.
The table, “Interest Rate Sensitivity,” presents an analysis of the interest-sensitivity gap position at December 31, 2021. All interest-earning assets and interest-bearing liabilities are shown based upon their contractual maturity or repricing date adjusted for forecasted prepayment rates. Asset prepayment and liability repricing periods are selected after considering the current rate environment, industry prepayment and data specific to the Company. The interest rate sensitivity table indicates that TrustCo is asset sensitive on a cumulative basis when measured in the less than 1 year, 1-5 years, and the over 5 years time frames. The effect of being asset sensitive is that rising interest rates should result in assets repricing to higher levels faster than liabilities repricing to higher levels, thus increasing net interest income. Conversely, should interest rates decline, the Company’s interest bearing assets would reprice down faster than liabilities, resulting in lower net interest income.
INTEREST RATE SENSITIVITY
(dollars in thousands) | | At December 31, 2021 | |
| | Repricing in: | |
| | Less than 1 year | | | 1-5 years | | | Over 5 years | | | Rate Insensitive | | | Total | |
Total assets | | $ | 2,090,321 | | | | 2,175,752 | | | | 1,774,707 | | | | 155,766 | | | | 6,196,546 | |
Cumulative total assets | | $ | 2,090,321 | | | | 4,266,073 | | | | 6,040,780 | | | | 6,196,546 | | | | | |
Total liabilities and shareholders’ equity | | $ | 1,953,956 | | | | 88,197 | | | | 3,469,640 | | | | 684,753 | | | | 6,196,546 | |
Cumulative total liabilities and shareholders’ equity | | $ | 1,953,956 | | | | 2,042,153 | | | | 5,511,793 | | | | 6,196,546 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Cumulative interest sensitivity gap | | $ | 136,365 | | | | 2,223,920 | | | | 528,987 | | | | | | | | | |
Cumulative gap as a % of interest earning assets for the period | | | 6.5 | % | | | 52.1 | % | | | 8.8 | % | | | | | | | | |
Cumulative interest sensitive assets to liabilities | | | 107.0 | % | | | 208.9 | % | | | 109.6 | % | | | | | | | | |
In practice, the optionality imbedded in many of the Company’s assets and liabilities, along with other limitations such as differing timing between changes in rates on varying assets and liabilities limits the effectiveness of static gap analysis. Thus, the table should be viewed as a rough framework in the evaluation of interest rate risk. Management takes these factors, and others, into consideration when reviewing the Bank’s gap position and establishing its asset/liability strategy. As noted, the simulation model is better able to consider these aspects of the Bank’s exposure to potential rate changes and thus is viewed as the more important of the two methodologies.
Liquidity Risk
TrustCo seeks to obtain favorable funding sources and to maintain prudent levels of liquid assets in order to satisfy various liquidity demands. In addition to serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer-initiated needs. Many factors affect the ability to meet liquidity needs, including changes in the markets served by the Bank’s network of branches, the mix of assets and liabilities, and general economic conditions.
The Company actively manages its liquidity position through target ratios established under its asset/liability management policies. Continual monitoring of these ratios, both historically and through forecasts under multiple interest rate scenarios, allows TrustCo to employ strategies necessary to maintain adequate liquidity levels as provided in its asset/liability management policies. Management has also developed various contingent liquidity alternatives, such as borrowings from the FHLBNY and the FRBNY, and through the utilization of brokered CDs, should the need develop.
The Company achieves its liability-based liquidity objectives in a variety of ways. Liabilities can be classified into three categories for the purposes of managing liability-based liquidity: retail deposits, purchased money, and capital market funds. TrustCo seeks deposits that are dependable and predictable and that are based as much on the level and quality of service as they are on interest rate. Average retail deposits (total deposits less time deposits greater than $250 thousand) amounted to $4.99 billion in 2021 and $4.52 billion in 2020. Average balances of core deposits are detailed in the table “Mix of Average Sources of Funding.”
In addition to core deposits, another source of liability-based funding available to TrustCo is purchased money, which consists of long-term and short-term borrowings, Federal Funds purchased, securities sold under repurchase agreements, and time deposits greater than $250 thousand. The average balances of these purchased liabilities are detailed in the table “Mix of Average Sources of Funding.” During 2021, the average balance of purchased liabilities was $435.2 million, compared with $403.6 million in 2020. Although classified as purchased liabilities for the purposes of this analysis the Company does not offer premium rates on large time deposits and thus views its time deposits as relatively stable funds. The increase in borrowed funds is wholly the result of customer’s behavioral preferences in regard to managing their funds and does not reflect any decision by management to increase this category of funding. The classification of time deposits over $250 thousand as purchased liabilities is typical industry practice, partly reflecting that some banks pay premium rates for larger balance time deposits.
The Bank also has a line of credit available with the FHLBNY. The amount of that line is determined by the Bank’s total assets and the amount and types of collateral pledged. Assets that are eligible for pledging include most loans and securities. The Bank can borrow up to 30% of its total assets from the FHLBNY without special approval and may apply to borrow up to 50% of its total assets. Securities and loans pledged as collateral against any borrowings must cover certain margin requirements. Eligible securities have a maximum lendable value of 67% to 97%, depending on the security type, with the securities in the Bank’s investment portfolio generally having maximum lendable values of 80% to 95%. The maximum lendable value against loans is 90% for 1-4 family residential mortgages, 80% for multifamily mortgages and 75% for commercial mortgages. For both securities and loans, the maximum lendable limits are applied to the market value of the asset pledged. At December 31, 2021 there were no outstanding balances associated with this line of credit. In addition, the Bank has access to borrowings from the FRBNY. Borrowings from the FRBNY are subject to collateralization by securities or loans acceptable to the FRBNY and at collateral margins set by the FRBNY.
The Company’s overall liquidity position is remains strong. A simple liquidity proxy often used in the industry is the ratio of loans to deposits, with a lower number representing a more liquid institution. At December 31, 2021 and 2020, TrustCo’s loan to deposit ratio was 84.3%, while the median peer group of all publically traded banks and thrifts tracked by S&P Global Market Intelligence financial with assets between $2 billion and $10 billion had ratios of 78.2% and 86.2%, respectively. In addition, at December 31, 2021 and 2020, the Company had cash and cash equivalents totaling $1.2 billion and $1.1 billion, respectively, as well as unpledged securities available for sale with a fair value of $124.5 million and $169.6 million, respectively. Current expectations are that the Federal Reserve will be increasing the Federal Funds target rate in early 2022 which may also put pressure on deposit rates during 2022. The Company currently has strong liquidity compared to its peers and historical trends.
The Company is contractually obligated to make the following payments on leases as of December 31, 2021:
(dollars in thousands) | | Payments Due by Period: | |
| | Less Than 1 Year | | | 1-3 Years | | | 3-5 Years | | | More than 5 Years | | | Total | |
| | | | | | | | | | | | | | | |
Operating leases | | $ | 8,125 | | | | 15,701 | | | | 13,859 | | | | 22,868 | | | | 60,553 | |
In addition, the Company is contractually obligated to pay data processing vendors approximately $8 million to $9 million per year through 2025.
Also, the Company is obligated under its various employee benefit plans to make certain payments of approximately $1.9 to $2.0 million per year through 2031. Additionally, the Company is obligated to pay the accumulated benefits under the Company’s post retirement pension plan which amounted to $7.0 million and $6.6 million, respectively, as of December 31, 2021 and 2020. Actual payments under the plan are made in accordance with the plan provisions.
Off-Balance Sheet Risk
Commitments to extend credit: The Bank makes contractual commitments to extend credit, and extends lines of credit which are subject to the Bank’s credit approval and monitoring procedures. At December 31, 2021 and 2020, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $469.7 million and $458.2 million, respectively. In management’s opinion, there are no material commitments to extend credit that represent unusual risk.
The Company has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $5.3 million and $5.4 million at December 31, 2021 and 2020, respectively, and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of the Company’s standby letters of credit at December 31, 2021 and 2020 was insignificant.
Other off-balance sheet risk: TrustCo does not engage in activities involving interest rate swaps, forward placement contracts, or any other instruments commonly referred to as “derivatives.” Management believes these instruments pose a high degree of risk, and that investing in them is unnecessary. TrustCo has no off-balance sheet partnerships, joint ventures, or other risk sharing entities.
Noninterest Income and Expense
Noninterest income: Noninterest income is an important source of revenue for the Company and a factor in overall results. Total noninterest income was $17.9 million in 2021, $17.2 million in 2020 and $18.6 million in 2019. There was no net gain or loss on securities transactions in 2021 and 2019. There was $1.2 million from net gain on securities transactions in 2020. Fees for services to customers was up $1.0 million in 2021 compared to 2020 primarily as a result of increased interchange fees. Other income was down $177 thousand in 2021 compared to 2020.
Trustco Financial Services contributes a large recurring portion of noninterest income through fees generated by providing fiduciary and investment management services. Income from these fiduciary activities totaled $7.4 million in 2021, $6.3 million in 2020 and $6.4 million in 2019. Trust fees are generally calculated as a percentage of the assets under management by Trustco Financial Services. In addition, trust fees include fees for estate settlements, tax preparation, and other services. Assets under management by Trustco Financial Services are not included on the Company’s Consolidated Financial Statements because Trustco Financial Services holds these assets in a fiduciary capacity. At December 31, 2021, 2020 and 2019, fair value of assets under management by the Trustco Financial Services were approximately $1.1 billion, $996.7 million and $927.5 million, respectively. The changes in levels of assets under management reflects a combination of changing market valuations and the net impact of new customer asset additions, losses of accounts and the settlement of estates.
The Company routinely reviews its service charge policies and levels relative to its competitors. Reflecting those reviews, the Company makes changes in fees for services to customers in terms of both the levels of fees as well as types of fees where appropriate. The changes in reported noninterest income also reflect the volume of services customers utilized and regulatory changes governing overdrafts.
NONINTEREST INCOME
(dollars in thousands) | | For the year ended December 31, | | | 2021 vs. 2020 | |
| | 2021 | | | 2020 | | | 2019 | | | Amount | | | Percent | |
| | | | | | | | | | | | | | | |
Trustco Financial Services income | | $ | 7,358 | | | | 6,279 | | | | 6,387 | | | $ | 1,079 | | | | 17.2 | % |
Fees for services to customers | | | 9,799 | | | | 8,779 | | | | 10,110 | | | | 1,020 | | | | 11.6 | |
Net gain on securities transactions | | | - | | | | 1,155 | | | | - | | | | (1,155 | ) | | | (100.0 | ) |
Other | | | 780 | | | | 957 | | | | 2,094 | | | | (177 | ) | | | (18.5 | ) |
Total noninterest income | | $ | 17,937 | | | | 17,170 | | | | 18,591 | | | $ | 767 | | | | 4.5 | % |
Noninterest expense: Noninterest expense was $101.7 million in 2021, $95.7 million in 2020, and $97.7 million in 2019. TrustCo’s operating philosophy stresses the importance of monitoring and controlling the level of noninterest expense. The efficiency ratio is a strong indicator of how well controlled and monitored these expenses are for a banking enterprise. A low ratio indicates highly efficient performance. The median efficiency ratio for a peer group composed of banking institutions with assets of $2 to $10 billion was 56.7% for 2021. TrustCo’s efficiency ratio was 56.9% in 2021, 56.4% in 2020 and 56.1% in 2019. In 2020 the ratio excludes net gain on securities transactions. Other real estate owned expense or income is also excluded from this calculation for all periods presented.
NONINTEREST EXPENSE
(dollars in thousands) | | For the year ended December 31, | | | 2021 vs. 2020 | |
| | 2021 | | | 2020 | | | 2019 | | | Amount | | | Percent | |
| | | | | | | | | | | | | | | |
Salaries and employee benefits | | $ | 48,721 | | | | 45,647 | | | | 46,630 | | | $ | 3,074 | | | | 6.7 | % |
Net occupancy expense | | | 17,742 | | | | 17,519 | | | | 16,666 | | | | 223 | | | | 1.3 | |
Equipment expense | | | 6,617 | | | | 6,636 | | | | 7,068 | | | | (19 | ) | | | (0.3 | ) |
Professional services | | | 6,108 | | | | 5,618 | | | | 6,174 | | | | 490 | | | | 8.7 | |
Outsourced services | | | 8,384 | | | | 7,750 | | | | 7,600 | | | | 634 | | | | 8.2 | |
Advertising expense | | | 1,975 | | | | 1,921 | | | | 2,521 | | | | 54 | | | | 2.8 | |
FDIC and other insurance | | | 3,010 | | | | 2,220 | | | | 1,787 | | | | 790 | | | | 35.6 | |
Other real estate expense (income), net | | | 183 | | | | 92 | | | | (166 | ) | | | 91 | | | | 98.9 | |
Other | | | 8,922 | | | | 8,301 | | | | 9,450 | | | | 621 | | | | 7.5 | |
Total noninterest expense | | $ | 101,662 | | | | 95,704 | | | | 97,730 | | | $ | 5,958 | | | | 6.2 | % |
Salaries and employee benefits are the most significant component of noninterest expense. For 2021, these expenses amounted to $48.7 million, compared with $45.6 million in 2020 and $46.6 million in 2019. The increase in salaries and benefits in 2021 was primarily due to increased benefits in an effort to retain key personnel. Full time equivalent headcount decreased from 778 as of December 31, 2020 to 759 as of December 31, 2021. The decrease in headcount as compared to the prior year was not due to the effects of the pandemic. The Company constantly hires qualified candidates and from time-to-time experiences fluctuations in head count.
Net occupancy expense increased $223 thousand during 2021 compared to 2020 primarily as a result of an increase in building maintenance expenses.
Professional services expense was $6.1 million in 2021, compared to $5.6 million in 2020 and $6.2 million in 2019. The increase in these costs in 2021 compared to 2020 was driven by the increased use of various consultants and experts, as well as less legal fees in 2020 relating to the foreclosure moratorium.
Outsourced services expense increased $634 thousand during 2021 compared to 2020 primarily as a result of additional services being utilized from our providers.
FDIC and other insurance expense was $3.0 million in 2021, $2.2 million in 2020 and $1.8 million in 2019. The increase in 2021 was primarily due to FDIC credits received in 2020 and 2019 as a result of the FDIC reaching the Deposit Reserve Fund reserve ratio as well as increased costs due to higher asset balances.
Other real estate expense was $183 thousand in 2021 and $92 thousand in 2020, compared to other real estate income of $166 thousand in 2019. Included in ORE expense (income) during 2021, 2020 and 2019 were write downs of properties included in ORE totaling $121 thousand, $120 thousand and $366 thousand, respectively. Additionally, included in ORE expense (income) during 2021, 2020 and 2019 were gains of $216 thousand, $347 thousand and $1.3 million, respectively.
Changes in other noninterest expense items are the results of normal banking activities.
The overall increase in expenses for the year ended December 31, 2021 as compared to 2020 and 2019 is primarily a result of costs of retaining key employees, increased services as the Company grows, inflation, and an improved economy from 2020.
Income Tax
TrustCo recognized income tax expense of $20.6 million, $17.0 million and $18.7 million in 2021, 2020 and 2019, respectively. The effective tax rates were 25.1% in 2021, 24.5% in 2020, and 24.4% in 2019.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements for the years ended 2021, 2020 and 2019 have been prepared in accordance with U.S. generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increasing cost of operations.
Nearly all assets and liabilities of the Company are monetary. As a result, changes in interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation, because interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
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 credit losses in the 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 2021 Annual Report on Form 10‑K is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.
Management believes that the Company’s policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.
The provision for loan losses is based upon Management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated fair value of any underlying collateral, guarantees securing the loans, and current economic and market conditions. Although Management uses current and relevant information available in relation to their loan portfolio, the adequacy of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in primarily New York and Florida. Accordingly, the collectability of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in local market economic conditions and may experience adverse changes. Future adjustments to the provision for loan losses and allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.
Recent Accounting Pronouncements
Please refer to Note 18 to the consolidated financial statements for a detailed discussion of new accounting pronouncements and their impact on the Company.
Forward‑Looking Statements
Statements included in this report and in future filings by TrustCo with the SEC, in TrustCo’s press releases, and in oral statements made with the approval of an authorized executive officer, that 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. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.
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:
| • | the effect of the COVID-19 pandemic on TrustCo’s and Trustco Bank’s businesses, financial condition, liquidity and results of operations and the impact of actions taken by governmental authorities to contain COVID-19 or address the impact of the COVID-19 pandemic on the economy, and the effect of all such items on the operations, liquidity and capital position and the financial condition of borrowers and other customers; |
| • | TrustCo’s future business strategies related to the implementation of CECL; |
| • | credit risks and risks from concentrations (by geographic and by loan product) with TrustCo and Trustco Bank’s loan portfolio |
| • | changes in local market areas and general business economic trends, as well as changes in consumer spending, borrowing and savings habits and the ability to assess and react effectively to such changes; |
| • | TrustCo’s ability to continue to originate a significant volume of one- to- four family mortgage loans in its market areas and to otherwise maintain or increase its market share in the areas in which it operates; |
| • | TrustCo’s ability to continue to maintain noninterest expense and other overhead costs at reasonable levels relative to income; |
| • | 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 and lease losses; |
| • | the effects of and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board, inflation, interest rates, market and monetary fluctuations; |
| • | changes in and uncertainty related to benchmark interest rates used to price loans and deposits; |
| • | 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 under regulatory rules to distribute capital from Trustco Bank to TrustCo, which could affect the ability of TrustCo to pay dividends; |
| • | the results of supervisory monitoring or 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; |
| • | adverse conditions in the securities markets that lead to impairment in the value of securities in TrustCo’s investment portfolio; |
| • | 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; |
| • | changes in consumer spending, borrowing and savings habits; |
| • | 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, including regulatory capital requirements; |
| • | changes in management personnel; |
| • | real estate and collateral values; |
| • | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies Financial Accounting Standards Board or the Public Company Accounting Oversight Board; |
| • | disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions; |
| • | technological changes and electronic, cyber and physical security breaches; |
| • | 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 our Form 10-K for the year ended December 31, 2021. |
You should not rely upon forward-looking statements as predictions of future events. Although TrustCo believes that the expectations reflected in the forward‑looking statements are reasonable, it cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. 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.
SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
(dollars in thousands, except per share data)
| | 2021 | | | 2020 | |
| | | Q1 | | | | Q2 | | | | Q3 | | | | Q4 | | | Year | | | | Q1 | | | | Q2 | | | | Q3 | | | | Q4 | | | Year | |
Income statement: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest and dividend income | | $ | 42,495 | | | | 42,055 | | | | 41,662 | | | | 41,770 | | | | 167,982 | | | $ | 46,611 | | | | 44,569 | | | | 43,988 | | | | 43,120 | | | | 178,288 | |
Interest expense | | | 2,388 | | | | 1,933 | | | | 1,775 | | | | 1,478 | | | | 7,574 | | | | 8,058 | | | | 6,888 | | | | 5,823 | | | | 3,939 | | | | 24,708 | |
Net interest income | | | 40,107 | | | | 40,122 | | | | 39,887 | | | | 40,292 | | | | 160,408 | | | | 38,553 | | | | 37,681 | | | | 38,165 | | | | 39,181 | | | | 153,580 | |
(Credit) Provision for loan losses | | | 350 | | | | - | | | | (2,800 | ) | | | (3,000 | ) | | | (5,450 | ) | | | 2,000 | | | | 2,000 | | | | 1,000 | | | | 600 | | | | 5,600 | |
Net interest income after provison for loan losses | | | 39,757 | | | | 40,122 | | | | 42,687 | | | | 43,292 | | | | 165,858 | | | | 36,553 | | | | 35,681 | | | | 37,165 | | | | 38,581 | | | | 147,980 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest income | | | 4,428 | | | | 4,688 | | | | 4,295 | | | | 4,526 | | | | 17,937 | | | | 5,334 | | | | 3,426 | | | | 4,341 | | | | 4,069 | | | | 17,170 | |
Noninterest expense | | | 25,335 | | | | 25,440 | | | | 24,697 | | | | 26,190 | | | | 101,662 | | | | 24,268 | | | | 23,932 | | | | 22,674 | | | | 24,830 | | | | 95,704 | |
Income before income taxes | | | 18,850 | | | | 19,370 | | | | 22,285 | | | | 21,628 | | | | 82,133 | | | | 17,619 | | | | 15,175 | | | | 18,832 | | | | 17,820 | | | | 69,446 | |
Income tax expense | | | 4,767 | | | | 4,937 | | | | 5,523 | | | | 5,387 | | | | 20,614 | | | | 4,306 | | | | 3,921 | | | | 4,761 | | | | 4,006 | | | | 16,994 | |
Net income | | $ | 14,083 | | | | 14,433 | | | | 16,762 | | | | 16,241 | | | | 61,519 | | | $ | 13,313 | | | | 11,254 | | | | 14,071 | | | | 13,814 | | | | 52,452 | |
Per share data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings (1) | | $ | 0.730 | | | | 0.748 | | | | 0.871 | | | | 0.845 | | | | 3.194 | | | $ | 0.688 | | | | 0.584 | | | | 0.730 | | | | 0.716 | | | | 2.718 | |
Diluted earnings (1) | | | 0.730 | | | | 0.748 | | | | 0.871 | | | | 0.845 | | | | 3.194 | | | | 0.687 | | | | 0.584 | | | | 0.730 | | | | 0.716 | | | | 2.717 | |
Cash dividends declared (1) | | | 0.3406 | | | | 0.3406 | | | | 0.3406 | | | | 0.3500 | | | | 1.3719 | | | | 0.3406 | | | | 0.3406 | | | | 0.3406 | | | | 0.3406 | | | | 1.3625 | |
| (1) | All periods presented have been adjusted for the 1 for 5 reverse stock split which occurred on May 28, 2021. |
FIVE YEAR SUMMARY OF FINANCIAL DATA
(dollars in thousands, except per share data) | | Years ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | |
Statement of income data: | | | | | | | | | | | | | | | |
Interest and dividend income | | $ | 167,982 | | | | 178,288 | | | | 192,128 | | | | 180,914 | | | | 168,960 | |
Interest expense | | | 7,574 | | | | 24,708 | | | | 36,321 | | | | 20,228 | | | | 14,592 | |
Net interest income | | | 160,408 | | | | 153,580 | | | | 155,807 | | | | 160,686 | | | | 154,368 | |
(Credit) Provision for loan losses | | | (5,450 | ) | | | 5,600 | | | | 159 | | | | 1,400 | | | | 2,000 | |
Net interest income after provision for loan losses | | | 165,858 | | | | 147,980 | | | | 155,648 | | | | 159,286 | | | | 152,368 | |
Noninterest income | | | 17,937 | | | | 16,015 | | | | 18,591 | | | | 18,081 | | | | 18,373 | |
Net gain on securities transactions | | | - | | | | 1,155 | | | | - | | | | - | | | | - | |
Noninterest expense | | | 101,662 | | | | 95,704 | | | | 97,730 | | | | 97,713 | | | | 93,994 | |
Income before income taxes | | | 82,133 | | | | 69,446 | | | | 76,509 | | | | 79,654 | | | | 76,747 | |
Income taxes | | | 20,614 | | | | 16,994 | | | | 18,669 | | | | 18,209 | | | | 33,602 | |
Net income | | $ | 61,519 | | | | 52,452 | | | | 57,840 | | | | 61,445 | | | | 43,145 | |
Share data (1): | | | | | | | | | | | | | | | | | | | | |
Average equivalent diluted shares (in thousands) | | | 19,263 | | | | 19,303 | | | | 19,385 | | | | 19,329 | | | | 19,244 | |
Book value | | $ | 31.28 | | | | 29.46 | | | | 27.75 | | | | 25.35 | | | | 23.77 | |
Cash dividends | | | 1.372 | | | | 1.363 | | | | 1.363 | | | | 1.337 | | | | 1.313 | |
Basic earnings | | | 3.194 | | | | 2.718 | | | | 2.986 | | | | 3.185 | | | | 2.243 | |
Diluted earnings | | | 3.194 | | | | 2.717 | | | | 2.984 | | | | 3.180 | | | | 2.242 | |
Financial: | | | | | | | | | | | | | | | | | | | | |
Return on average assets | | | 1.01 | % | | | 0.94 |
| | | 1.12 | | | | 1.25 | | | | 0.88 | |
Return on average shareholders’ equity | | | 10.61 | | | | 9.47 | | | | 11.26 | | | | 13.05 | | | | 9.64 | |
Cash dividend payout ratio | | | 42.95 | | | | 50.12 | | | | 45.60 | | | | 42.02 | | | | 58.44 | |
Tier 1 capital to assets (leverage ratio) | | | 9.61 | | | | 9.65 | | | | 10.25 | | | | 10.13 | | | | 9.45 | |
Tier 1 capital as a % of total risk adjusted assets | | | 19.54 | | | | 19.19 | | | | 18.99 | | | | 18.79 | | | | 18.02 | |
Common equity tier 1 capital ratio | | | 19.54 | | | | 19.19 | | | | 18.99 | | | | 18.79 | | | | 18.02 | |
Total capital as a % of total risk adjusted assets | | | 20.79 | | | | 20.44 | | | | 20.24 | | | | 20.05 | | | | 19.28 | |
Efficiency ratio* | | | 56.90 | | | | 56.38 | | | | 56.13 | | | | 53.97 | | | | 53.75 | |
Net interest margin | | | 2.71 | | | | 2.84 | | | | 3.10 | | | | 3.33 | | | | 3.22 | |
Average balances: | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 6,075,481 | | | | 5,553,636 | | | | 5,161,820 | | | | 4,900,450 | | | | 4,875,668 | |
Earning assets | | | 5,928,077 | | | | 5,403,000 | | | | 5,023,914 | | | | 4,822,577 | | | | 4,790,890 | |
Loans, net | | | 4,336,834 | | | | 4,163,399 | | | | 3,926,199 | | | | 3,746,082 | | | | 3,514,900 | |
Allowance for loan losses | | | (49,421 | ) | | | (47,330 | ) | | | (44,639 | ) | | | (44,651 | ) | | | (44,319 | ) |
Securities available for sale | | | 462,675 | | | | 467,759 | | | | 590,768 | | | | 547,721 | | | | 617,180 | |
Held to maturity securities | | | 11,733 | | | | 16,376 | | | | 20,643 | | | | 24,801 | | | | 37,929 | |
Federal Reserve Bank and Federal Home Loan Bank stock | | | 5,578 | | | | 7,381 | | | | 9,123 | | | | 8,907 | | | | 9,295 | |
Deposits | | | 5,188,347 | | | | 4,742,452 | | | | 4,409,060 | | | | 4,206,577 | | | | 4,171,396 | |
Short-term borrowings | | | 232,815 | | | | 180,065 | | | | 159,220 | | | | 194,810 | | | | 228,086 | |
Shareholders’ equity | | | 579,923 | | | | 553,632 | | | | 513,489 | | | | 470,814 | | | | 447,680 | |
* Non-GAAP figure; refer to Non-gaap financial measures reconciliation section for definition
(1) | All periods presented have been adjusted for the 1 for 5 reverse stock split which occurred on May 28, 2021. |
Non-GAAP Financial Measures Reconciliation
Certain of the financial measures used in this report, such as taxable equivalent net interest income and net interest margin, and efficiency ratio, are determined by methods other than in accordance with generally accepted accounting principles (“GAAP”).
Taxable Equivalent Net Interest Income and Taxable Equivalent Net Interest Margin: Net interest income is commonly presented on a taxable equivalent basis. That is, to the extent that some component of the institution’s net interest income will be exempt from taxation (e.g., was received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added back to the net interest income total. Management considers this adjustment helpful to investors in comparing one financial institution’s net interest income (pre-tax) to that of another institution, as each will have a different proportion of tax-exempt items in their portfolios. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, taxable equivalent net interest income is generally used by financial institutions, again to provide investors with a better basis of comparison from institution to institution. We calculate the taxable equivalent net interest margin by dividing GAAP net interest income, adjusted to include the benefit of non-taxable interest income, by average interest earnings assets.
The Efficiency Ratio: Financial institutions often use an “efficiency ratio” as a measure of expense control. The efficiency ratio typically is defined as noninterest expense divided by the sum of taxable equivalent net interest income and noninterest income. As in the case of net interest income, generally, net interest income as utilized in calculating the efficiency ratio is typically expressed on a taxable equivalent basis. Moreover, many financial institutions, in calculating the efficiency ratio, also adjust both noninterest expense and noninterest income to exclude from these items (as calculated under GAAP) certain component elements, such as other real estate expense (deducted from noninterest expense) and securities transactions (excluded from noninterest income). We calculate the efficiency ratio by dividing total noninterest expenses as determined under GAAP, as adjusted, by net interest income (fully taxable equivalent) and total noninterest income as determined under GAAP, as adjusted, as stated in the table below.
We believe that these non-GAAP financial measures provide information that is important to investors and that is useful in understanding the Company’s financial position, results and ratios. Management internally assesses our performance based, in part, on these measures. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these measures, this presentation may not be comparable to other similarly titled measures reported by other companies. A reconciliation of the non-GAAP measures of tangible book value per share, efficiency ratio, and taxable equivalent net interest income and net interest margin to the underlying GAAP financial measures is set forth below.
(dollars in thousands, except per share amounts)
(Unaudited)
| | Years ended | |
| | 12/31/21 | | | 12/31/20 | | | 12/31/19 | | | 12/31/18 | | | 12/31/17 | |
Taxable Equivalent Net Interest Margin | | | | | | | | | | | | | | | |
Net interest income (GAAP) | | $ | 160,408 | | | | 153,580 | | | | 155,807 | | | | 160,686 | | | | 154,368 | |
Taxable Equivalent Adjustment | | | 1 | | | | 3 | | | | 5 | | | | 12 | | | | 45 | |
Net interest income (Taxable Equivalent) (Non-GAAP) | | | 160,409 | | | | 153,583 | | | | 155,812 | | | | 160,698 | | | | 154,413 | |
| | | | | | | | | | | | | | | | | | | | |
Total Interest Earning Assets | | | 5,928,077 | | | | 5,403,000 | | | | 5,023,914 | | | | 4,822,577 | | | | 4,790,890 | |
| | | | | | | | | | | | | | | | | | | | |
Net Interest Margin (GAAP) | | | 2.71 | % | | | 2.84 | % | | | 3.10 | % | | | 3.33 | % | | | 3.22 | % |
Taxable Equivalent Net Interest Margin (Non-GAAP) | | | 2.71 | % | | | 2.84 | % | | | 3.10 | % | | | 3.33 | % | | | 3.22 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Years ended | |
| | 12/31/21 | | | 12/31/20 | | | 12/31/19 | | | 12/31/18 | | | 12/31/17 | |
Efficiency Ratio | | | | | | | | | | | | | | | | | | | | |
Net interest income (Taxable Equivalent) (Non-GAAP) | | $ | 160,409 | | | | 153,583 | | | | 155,812 | | | | 160,698 | | | | 154,413 | |
Non-interest income (GAAP) | | | 17,937 | | | | 17,170 | | | | 18,591 | | | | 18,081 | | | | 18,373 | |
Less: Net gain on securities | | | - | | | | 1,155 | | | | - | | | | - | | | | - | |
Less: Net gain on sale of building and net gain on sale of nonperforming loans | | | - | | | | - | | | | - | | | | - | | | | 84 | |
Revenue used for efficiency ratio (Non-GAAP) | | | 178,346 | | | | 169,598 | | | | 174,403 | | | | 178,779 | | | | 172,702 | |
| | | | | | | | | | | | | | | | | | | | |
Total Noninterest expense (GAAP) | | | 101,662 | | | | 95,704 | | | | 97,730 | | | | 97,713 | | | | 93,994 | |
Less: Other real estate (income) expense, net | | | 183 | | | | 92 | | | | (166 | ) | | | 1,231 | | | | 1,171 | |
Expenses used for efficiency ratio (Non-GAAP) | | | 101,479 | | | | 95,612 | | | | 97,896 | | | | 96,482 | | | | 92,823 | |
| | | | | | | | | | | | | | | | | | | | |
Efficiency Ratio | | | 56.90 | % | | | 56.38 | % | | | 56.13 | % | | | 53.97 | % | | | 53.75 | % |
Allowance for Loan Losses:
A balance sheet account which represents management’s estimate of probable credit losses in the loan portfolio. The provision for loan losses is added to the allowance account, charge offs of loans decrease the allowance balance and recoveries on previously charged off loans serve to increase the balance.
Basic Earnings Per Share:
Net income divided by the weighted average number of common shares outstanding (including participating securities) during the period.
Cash Dividends Per Share:
Total cash dividends for each share outstanding on the record dates.
Common equity tier 1 capital ratio
Common equity Tier 1 capital to risk weighted assets
Comprehensive Income:
Net income plus the change in selected items recorded directly to capital such as the net change in unrealized market gains and losses on securities available for sale and the overfunded/underfunded positions in the retirement plans.
Core Deposits:
Deposits that are traditionally stable, including all deposits other than time deposits of $250,000 or more.
Derivative Investments:
Investments in futures contracts, forwards, swaps, or other investments with similar characteristics.
Diluted Earnings Per Share:
Net income divided by the weighted average number of common shares outstanding during the period, taking into consideration the effect of any dilutive stock options.
Earning Assets:
The sum of interest-bearing deposits with banks, securities available for sale, securities held to maturity, trading securities, loans, net of unearned income, and Federal Funds sold and other short-term investments.
Efficiency Ratio:
Noninterest expense (excluding other real estate expense) divided by taxable equivalent net interest income plus noninterest income (excluding securities transactions and other component income items). This is an indicator of the total cost of operating the Company in relation to the total income generated.
Federal Funds Sold:
A short-term (generally one business day) investment of excess cash reserves from one bank to another.
Government Sponsored Enterprises (“GSE”):
Corporations sponsored by the United States government and include the Federal Home Loan Bank (FHLB), the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), the Federal National Mortgage Association (FNMA or Fannie Mae) and the Small Business Administration (SBA).
Impaired Loans:
Loans, principally commercial, where it is probable that the borrower will be unable to make the principal and interest payments according to the contractual terms of the loan, and all loans considered TDRs.
Glossary of Terms (continued)
Interest Bearing Liabilities:
The sum of interest bearing deposits, Federal Funds purchased, securities sold under agreements to repurchase, short-term borrowings, and long-term debt.
Interest Rate Spread:
The difference between the taxable equivalent yield on earning assets and the rate paid on interest bearing liabilities.
Liquidity:
The ability to meet loan commitments, deposit withdrawals, and maturing borrowings as they come due.
Net Interest Income:
The difference between income on earning assets and interest expense on interest bearing liabilities.
Net Interest Margin:
Fully taxable equivalent net interest income as a percentage of average earning assets.
Net Loans Charged Off:
Reductions to the allowance for loan losses written off as losses, net of the recovery of loans previously charged off.
Nonaccrual Loans:
Loans for which no periodic accrual of interest income is recognized.
Nonperforming Assets:
The sum of nonperforming loans plus foreclosed real estate properties.
Nonperforming Loans:
The sum of loans in a nonaccrual status (for purposes of interest recognition), plus accruing loans three payments or more past due as to principal or interest payments.
Parent Company:
A company that owns or controls a subsidiary through the ownership of voting stock.
Real Estate Owned:
Real estate acquired through foreclosure proceedings.
Return on Average Assets:
Net income as a percentage of average total assets.
Return on Average Equity:
Net income as a percentage of average equity.
Glossary of Terms (continued)
Reverse Stock Split:
Effective as of May 28, 2021, the Company completed a 1-for-5 reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of common stock, par value $1.00 per share, as previously approved by our shareholders. Proportional adjustments were made to the Company’s issued and outstanding common stock and to the exercise price and number of shares issuable upon exercise of the options outstanding under the Company’s equity incentive plans, and the number of shares subject to restricted stock units under the Company’s equity incentive plans. No fractional shares of common stock were issued in connection with the Reverse Stock Split, and shareholders received cash in lieu of any fractional shares. All references herein to common stock and per share data for all periods presented in the consolidated financial statements and notes thereto, have been retrospectively adjusted to reflect the Reverse Stock Split.
Risk-Adjusted Assets:
A regulatory calculation that assigns risk factors to various assets on the balance sheet.
Risk-Based Capital:
The amount of capital required by federal regulatory standards, based on a risk-weighting of assets.
Subprime Loans:
Loans, including mortgages, that are underwritten based on non-traditional guidelines or structured in non-traditional ways, typically with the goal of facilitating the approval of loans that more conservative lenders would likely decline.
Tangible Book Value Per Share:
Total shareholders’ equity (less goodwill) divided by shares outstanding on the same date. This provides an indication of the tangible book value of a share of stock.
Taxable Equivalent (“TE”):
Tax exempt income that has been adjusted to an amount that would yield the same after tax income had the income been subject to taxation at the statutory federal and/or state income tax rates.
Tier 1 Capital:
Total shareholders’ equity excluding accumulated other comprehensive income.
Troubled Debt Restructurings (TDRs):
A refinanced loan in which the bank allows the borrower certain concessions that would normally not be considered. The concessions are made in light of the borrower’s financial difficulties and the bank’s objective to maximize recovery on the loan. TDRs are considered impaired loans.
Management’s Report on Internal Control over Financial
Reporting
The management of TrustCo Bank Corp NY is responsible for establishing and maintaining adequate internal control over financial reporting. TrustCo’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has completed an assessment of TrustCo Bank Corp NY’s internal control over financial reporting as of December 31, 2021. In making this assessment, we used the criteria set forth by the 2013 Internal Control - Integrated Framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based on our assessment, we believe that, as of December 31, 2021, the Company maintained effective internal control over financial reporting.
The Company’s internal control over financial reporting as of December 31, 2021 has been audited by Crowe LLP, the Company’s independent registered public accounting firm, as stated in their report which is included herein.
Robert J. McCormick
Chairman, President, and Chief Executive Officer
Michael M. Ozimek
Executive Vice President, and Chief Financial Officer
February 25, 2022