Dear Fellow Shareholder,
As we report our financial results for 2022, we reflect on a year during which we celebrated Trustco Bank’s 120th year. While our communities, our customers, and our shareholders celebrated the bank’s history, our team was making history of its own. We grew our core lending business by $294 million – an unprecedented level of growth. We delivered record earnings in each quarter of the year increasing net income after taxes by 22.3% or $13.7 million to $72.5 million for the year. We maintained rock-solid credit quality, holding non-performing loans as a percent of total loans and total assets to a negligible 0.37% and 0.33%, respectively. Our team accomplished all of that while achieving nearly 13% growth in our stock price year over year, in contrast to both our industry and the overall stock market, which contracted in value.
Our company is known for its very long-standing dividend payment – every quarter since 1904. While achieving the results highlighted above and detailed in this report, our company accomplished something else extraordinary. We increased our dividend for the second time in as many years and for the third time since 2018. In so doing, we continued to fulfill our mission of delivering a meaningful return to our owners.
The sense of history runs deep at TrustCo and is a key part of our sustained success. This year also saw a new generation of leaders advance in the ranks of executive management at the bank. Three new Senior Vice Presidents were named and each of these bankers already has served long and true at our venerable institution. Carly Batista started with the bank in 2004 as a floating customer service representative in Upstate New York. Michael Ewell’s tenure dates to 2001 when he was a customer service representative at our State Street Albany branch. Michelle Simmonds became a clerk in the Deposit Operations Department in 1996, working in our Erie Boulevard location in Schenectady. Carly, Michael and Michelle all have held numerous titles over the years and now have key roles in Branch Administration, Compliance, and Retail Lending, respectively. Their stories are typical of people at Trustco Bank. A great many of our leaders, both established and up –and-coming, have been with us for decades. Over time, people develop expertise and institutional knowledge that inure to the benefit of our customers and bring long-term value to our owners through our enduring corporate culture.
Well embedded in our culture is service to the community. As a company, we have supported veterans and active-duty service members, victims of natural disasters, aspiring homeowners, and residents of underserved communities. This year we also started the Hometown Pledge Program, which allows newly hired employees to direct a contribution to the community group of their choosing. Through this program, we have made 427 donations to 80 charities. Participants report that they are excited that their new employer is empowering them to direct contributions to the organizations that are important to them.
Sadly, we also lost our longest-tenured employee this year. Mary-Jean Riley was a proud member of the TrustCo team for 47 years before her retirement in 2020. She mentored many members of our family with sincerity and grace. We are diminished by her passing, but are better for her many contributions.
More and more it seems that managing the uncertainty of the economic and interest-rate environments, evolving technologies, and the challenges presented by an ever-changing labor market are as much a part of what we do as designing loan and deposit products that serve the needs of our customers. Lesser groups have faltered when faced with such challenges, but what TrustCo accomplished in 2022 plainly demonstrates that our team is better than that. We look forward to the year, and years, to come with confidence that our products and our people are the best in the business and the certainty that Trustco Bank is well positioned to grow, evolve, and thrive for another century.
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 2022 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 2022 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.
Financial Review
TrustCo made historic progress in 2022 posting record earnings while also celebrating our 120th anniversary. Among the key results for 2022, in management’s view:
| • | Net income after taxes was up 22.3% or $13.7 million to $75.2 million as compared to the prior year; |
| • | Period-end loans were up $294 million for 2022 compared to the prior year; |
| • | Net interest income was up 12.3% or $19.7 million as compared to the prior year; |
| • | Nonperforming loans declined $1.3 million or 6.7% to $17.5 million from year-end 2021 to year-end 2022; |
| • | At 50.22%, the efficiency ratio improved 12% over 2021 (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, 2022, 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, 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, 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 12.60% in 2022 compared to 10.61% in 2021, while return on average assets was 1.22% in 2022 as compared to 1.01% in 2021.
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, 2022, 2021, and 2020, except for adjustments in the provision for loan losses. Additionally, 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. 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, of potential variants and resurgences of COVID-19.
While the U.S. economy has experienced pockets of growth during 2022, such as the growth in GDP at an annual rate of 3.2% in the third quarter of 2022, the ongoing conflict in Ukraine and increasing inflation, among other items, put pressure on the economy and growth decelerated compared to 2021. Commencing in March 2022, the Federal Open Market Committee (“FOMC”) increased the target range for the federal funds rate seven times in 2022 by a total of 425 basis points, to a range of 4.25% to 4.50% as of end of 2022. At its meeting on February 1, 2023, the FOMC increased the target range for the federal funds by an additional 25 basis points, to a range of 4.50% to 4.75%. All of these increases were expressly made in response to inflationary pressures, which are currently expected to continue. In its October 2022 “Beige Book”, the FRB noted that national economic activity had expanded at a modest pace since the previous report, while conditions varied across industries and districts. Rising mortgage rates and elevated housing prices further weakened single-family starts in the second half of 2022 and there were scattered reports of declining property prices. Commercial real estate slowed in both construction and sales amid supply shortages and elevated construction and borrowing costs.
For the year ending 2022, the Dow Jones Industrial Average ended down 8.8%, as compared to growth of 18.7% in 2021. The S&P 500 Index also was down 19.4% for the year, compared to growth of 26.9% in 2021. United States Three Month Treasury Bills experienced an increase in rates ending the year at 4.42%, 54 basis points ahead of the ten-year Treasury yield at year-end of 3.88%. These yields compare to 2021 year-end yields of 0.06% for the Three Month Treasury and 1.52% 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 loan products tend to track with the ten-year Treasury yields. Beginning in 2022 the yield on the two year Treasury bond was 0.73% and increased 368 basis points during the year to close 2022 at 4.41% and the ten-year Treasury bond began 2022 at 1.52% and closed the year up 2.36 basis points to 3.88% at year-end. These rate changes have a significant implication to the broader economic cycle and reflect the Federal Reserve Board’s desire to address the increase in inflation.
The outlook for the United States economy is anticipated to bring further deceleration in growth compared to 2022. Growth in business operations and expansion of corporate activities will be necessary for broad range increases in 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 205 basis points higher in 2022 than in 2021, with the median yield of 1.83% in 2022 up 178 basis points over the median yield in 2021. These trends generally reflect an increase in the cost for deposit products that price off the short term treasury market yields. At the same time the average yield of the ten-year Treasury has increased to 2.95% in 2022, up 150 basis points from 2021 when the average was 1.45%. Generally longer term loans are priced consistent with the changes in the ten-year Treasury markets. These two trends – higher shorter term rates coupled with an increase in longer term rates – result in increases of both loan and deposit yields.
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
2022 results were marked by significant growth in the Company’s loan portfolio. The loan portfolio grew to a total of $4.73 billion, an increase of $294 million or 6.6% over the 2021 year-end balance. Deposits ended 2021 at $5.19 billion, down from $5.27 billion the prior year-end. The year-over-year increase in loans reflects the success the Company has had in attracting customers to the Bank given its array of loan products. 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 a renewed growth of deposits, as well as net interest income and non-interest income.
TrustCo earned a record net income of $75.2 million or $3.93 of diluted earnings per share for the year ended December 31, 2022, compared to $61.5 million or $3.19 of diluted earnings per share for the year ended December 31, 2021. Net income before taxes was $99.4 million in 2022 compared to $82.1 million in 2021.
During 2022, the following items had a significant effect on net income:
| • | An increase of $19.7 million in net interest income from 2021 to 2022 primarily as a result of the increased Federal Funds rate and loan growth; |
| • | a decrease in the credit for credit losses on loans of $5.1 million; |
| • | an increase in non-interest income of $1.3 million; and |
| • | a decrease in non-interest expense of $1.3 million. |
Management believes that TrustCo performed well in comparison to its peers with respect to a number of key performance ratios during 2022 and 2021, including:
| • | Tier 1 risk-based capital ratio of 18.93% for 2022 and 19.54% for 2021, compared to medians of 12.22% in 2022 and 12.79% in 2021 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 50.22% for 2022 and 56.90% for 2021, compared to the peer group medians of 56.32% in 2022 and 56.70% in 2021. |
During 2022, TrustCo’s results were affected by strong loan growth and a changing interest rate environment. Average loan balances increased 4.9% from 2021 to 2022, while the total of average Federal Funds Sold and other short-term investments, available for sale securities and held to maturity securities decreased 8.1%. Average net loans increased to 75.7% of average earning assets in 2022 from 73.2% in 2021. On average for 2022, non-maturity deposits were 81.6% of total deposits, up from 77.5% in 2021. Overall, the cost of interest bearing liabilities decreased 2 basis points to 0.14% in 2022 as compared to 2021. 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 changing rate environment throughout 2022 and into 2023 will likely cause the cost of interest-bearing liabilities to increase.
As discussed previously, market interest rates moved significantly during the course of 2022, with shorter term Three Month Treasury rates and longer term rates also increasing year over year. However the slope of the yield curve flattened and became negative at times in 2022. The average daily spread between the ten-year Treasury and the two-year Treasury was negative 0.04 basis points in 2022, down from an average of 1.18 basis points in 2021 and 50 basis points in 2020. The spread between the ten-year Treasury and the two-year Treasury changed throughout the year but still ended 2022 at a negative 53 basis points. 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; however, the increase in the shorter term Treasury rates outpaced the increase in the longer term rates, which resulted in an inverted yield curve, an indication of a possible recession.
The tables below illustrate the range of key Treasury bond interest rates during 2022 and 2021.
| | | 3 Month T Bill (BEY) | | | 2 Year T Note | | | 5 Year T Note | | | 10 Year T Note | | | 10 Year - 2 Year | |
| | | Yield(%) | | | Yield(%) | | | Yield(%) | | | Yield(%) | | | Spread(%) | |
| 2022 | | | | | | | | | | | | | | | |
| Beginning of Year | | | 0.06 | | | | 0.73 | | | | 1.26 | | | | 1.52 | | | | 0.79 | |
| Peak | | | 4.46 | | | | 4.72 | | | | 4.45 | | | | 4.25 | | | | 0.89 | |
| Trough | | | 0.08 | | | | 0.77 | | | | 1.37 | | | | 1.63 | | | | (0.84 | ) |
| End of Year | | | 4.42 | | | | 4.41 | | | | 3.99 | | | | 3.88 | | | | (0.53 | ) |
| Average | | | 2.09 | | | | 2.99 | | | | 3.00 | | | | 2.95 | | | | (0.04 | ) |
| Median | | | 1.83 | | | | 3.03 | | | | 3.00 | | | | 2.96 | | | | (0.01 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| 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 | |
Source: www.treasury.gov
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 in recent years.
The Company continually looks for opportunities to open new offices each year by filling in or extending existing markets. The Company has experienced continued growth in all markets as measured by the growth in our loan balances. All branches have the same products and features found at other Trustco Bank locations. Additionally, over the last several years 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 97.7% and 97.6% of average total assets for 2022 and 2021, 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 change assumptions to determine expected impact on net interest income.
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%. However, in an effort address the rising rate of inflation, the Federal Funds rate increased to a range of 4.25% to 4.50% by the end of 2022, and it further increased to a range of 4.50% to 4.75% in February 2023.
The yield on the ten-year Treasury bond increased by 236 basis points from 1.52% at the beginning of 2022 to the year‑end level of 3.88%. 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. TrustCo is primarily a portfolio lender and has not yet to date sold 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. The Company has begun to originate loans for sale into the secondary market. This will allow the Company greater flexibility going forward with respect to mortgage rate volatility and the loans we choose to portfolio. Higher market interest rates also generally increase the value of retail deposits.
The increase in the Federal Funds target range in 2022 continues to have a positive impact on earnings and 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 had driven down deposit costs. However, as interest rates have increased throughout 2022 and into 2023, we have experienced increased yields on our Federal Fund Sold and other short-term investments, investment portfolios, loans, and deposits.
Earning Assets
Average earning assets during 2022 were $6.0 billion, which was an increase of $86.8 million from 2021. This increase was primarily the result of growth in the average balance of net loans of $214.4 million and securities available for sale of $17.5 million, offset by decreases of $142.2 million in Federal Funds Sold and other short-term investments and $3.1 million in held-to-maturity securities between 2021 and 2022. The increase in the average loan portfolio is the result of an increase in residential mortgage loans, home equity lines of credit, and installment loans, which more than offset a decrease in commercial loans. 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, competitive rates, and closing costs.
Total average assets were $6.2 billion for 2022 and $6.1 billion for 2021.
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) | | | | | 2022 | | | 2021 | | | Components of | |
| | | | vs. | | | vs. | | | Total Earning Assets | |
| | | 2022 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2022 | | | 2021 | | | 2020 | |
| Loans, net | | $ | 4,551,281 | | | $ | 4,336,834 | | | $ | 4,163,399 | | | $ | 214,447 | | | $ | 173,435 | | | | 75.7 | % | | | 73.2 | % | | | 77.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities available for sale (1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government sponsored enterprises | | | 89,557 | | | | 63,743 | | | | 38,508 | | | | 25,814 | | | | 25,235 | | | | 1.5 | | | | 1.1 | | | | 0.7 | |
| State and political subdivisions | | | 41 | | | | 48 | | | | 111 | | | | (7 | ) | | | (63 | ) | | | - | | | | - | | | | - | |
| Mortgage-backed securities and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| collateralized mortgage obligations- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| residential | | | 284,901 | | | | 308,777 | | | | 333,093 | | | | (23,876 | ) | | | (24,316 | ) | | | 4.7 | | | | 5.2 | | | | 6.2 | |
| Corporate bonds | | | 78,266 | | | | 53,699 | | | | 50,982 | | | | 24,567 | | | | 2,717 | | | | 1.3 | | | | 0.9 | | | | 0.9 | |
| Small Business Administration-guaranteed | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| participation securities | | | 26,679 | | | | 35,723 | | | | 44,379 | | | | (9,044 | ) | | | (8,656 | ) | | | 0.4 | | | | 0.6 | | | | 0.8 | |
| Other | | | 686 | | | | 685 | | | | 686 | | | | 1 | | | | (1 | ) | | | - | | | | - | | | | - | |
| Total securities available for sale | | | 480,130 | | | | 462,675 | | | | 467,759 | | | | 17,455 | | | | (5,084 | ) | | | 7.9 | | | | 7.8 | | | | 8.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Held-to-maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| collateralized mortgage obligations-residential | | | 8,647 | | | | 11,733 | | | | 16,376 | | | | (3,086 | ) | | | (4,643 | ) | | | 0.1 | | | | 0.2 | | | | 0.3 | |
| Total held-to-maturity securities | | | 8,647 | | | | 11,733 | | | | 16,376 | | | | (3,086 | ) | | | (4,643 | ) | | | 0.1 | | | | 0.2 | | | | 0.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal Reserve Bank and Federal Home | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loan Bank stock | | | 5,749 | | | | 5,578 | | | | 7,381 | | | | 171 | | | | (1,803 | ) | | | 0.1 | | | | 0.1 | | | | 0.1 | |
| Federal funds sold and other short-term | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| investments | | | 969,043 | | | | 1,111,257 | | | | 748,085 | | | | (142,214 | ) | | | 363,172 | | | | 16.2 | | | | 18.7 | | | | 13.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total earning assets | | $ | 6,014,850 | | | $ | 5,928,077 | | | $ | 5,403,000 | | | $ | 86,773 | | | $ | 525,077 | | | | 100.0 | % | | | 100.0 | % | | | 100.0 | |
(1) The average balances of securities available for sale are presented using amortized cost for these securities.
Loans
In 2022, the Company experienced another year of significant loan growth. The $294.4 million increase or 6.6% in the Company’s gross loan portfolio from December 31, 2021 to December 31, 2022 was due to higher balances in all loan categories except for home equity loans. Average loans increased $214.4 million during 2022 to $4.55 billion. Interest income on the loan portfolio increased to $162.2 million in 2022 from $159.2 million in 2021. The average yield decreased 11 basis points to 3.56% in 2022 compared to 3.67% in 2021.
LOAN PORTFOLIO
| (dollars in thousands) | | As of December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
| Commercial | | $ | 208,737 | | | | 4.4 | % | | $ | 180,814 | | | | 4.1 | % | | $ | 198,328 | | | | 4.7 | %
|
| Real estate - construction | | | 36,351 | | | | 0.8 | | | | 37,279 | | | | 0.8 | | | | 24,749 | | | | 0.6 | |
| Real estate - mortgage | | | 4,189,374 | | | | 88.5 | | | | 3,980,294 | | | | 89.7 | | | | 3,769,582 | | | | 88.8 | |
| Home equity lines of credit | | | 286,432 | | | | 6.0 | | | | 230,976 | | | | 5.2 | | | | 242,194 | | | | 5.7 | |
| Installment loans | | | 12,307 | | | | 0.3 | | | | 9,416 | | | | 0.2 | | | | 9,617 | | | | 0.2 | |
| Total loans | | | 4,733,201 | | | | 100.0 | % | | | 4,438,779 | | | | 100.0 | % | | | 4,244,470 | | | | 100.0 | %
|
| Less: Allowance for loan losses | | | 46,032 | | | | | | | | 44,267 | | | | | | | | 49,595 | | | | | |
| Net loans (1) | | $ | 4,687,169 | | | | | | | $ | 4,394,512 | | | | | | | $ | 4,194,875 | | | | | |
| | | Average Balances | |
| | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
| Commercial | | $ | 185,314 | | | | 4.1 | % | | $ | 193,370 | | | | 4.5 | % | | $ | 203,314 | | | | 4.9 | % | | $ | 176,165 | | | | 4.5 | % | | $ | 175,814 | | | | 4.7 | % |
| Real estate - construction | | | 36,815 | | | | 0.8 | | | | 31,014 | | | | 0.7 | | | | 26,641 | | | | 0.6 | | | | 27,728 | | | | 0.7 | | | | 26,717 | | | | 0.7 | |
| Real estate - mortgage | | | 4,065,135 | | | | 89.3 | | | | 3,870,097 | | | | 89.2 | | | | 3,667,909 | | | | 88.2 | | | | 3,433,683 | | | | 87.4 | | | | 3,236,631 | | | | 86.5 | |
| Home equity lines of credit | | | 254,168 | | | | 5.6 | | | | 233,628 | | | | 5.4 | | | | 255,583 | | | | 6.1 | | | | 277,905 | | | | 7.1 | | | | 297,678 | | | | 7.9 | |
| Installment loans | | | 9,849 | | | | 0.2 | | | | 8,725 | | | | 0.2 | | | | 9,952 | | | | 0.2 | | | | 10,718 | | | | 0.3 | | | | 9,242 | | | | 0.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total loans | | | 4,551,281 | | | | 100.0 | % | | | 4,336,834 | | | | 100.0 | % | | | 4,163,399 | | | | 100.0 | % | | | 3,926,199 | | | | 100.0 | % | | | 3,746,082 | | | | 100.0 | % |
| Less: Allowance for loan losses | | | 46,124 | | | | | | | | 49,421 | | | | | | | | 47,330 | | | | | | | | 44,639 | | | | | | | | 44,651 | | | | | |
| Net loans (1) | | $ | 4,505,157 | | | | | | | $ | 4,287,413 | | | | | | | $ | 4,116,069 | | | | | | | $ | 3,881,560 | | | | | | | $ | 3,701,431 | | | | | |
(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, and also by offering competitive interest rates to expand the loan portfolio. 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 $4.07 billion in 2022 and approximately $3.88 billion in 2021. Income on real estate loans increased to $140.4 million in 2022 from $138.8 million in 2021. The yield on the portfolio decreased from 3.57% in 2021 to 3.44% in 2022. The vast majority of TrustCo’s real estate loans are secured by properties within the Bank’s market areas.
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 $206.1 million in 2022 decreased by $4.0 million from $210.1 million in 2021, primarily because of PPP loan payoffs. Average commercial loans included $22.3 million and $19.4 million of commercial real estate construction loans in 2022 and 2021, respectively. The average yield on the commercial loan portfolio decreased to 4.93% for 2022 from 5.19% in 2021, primarily as a result of more PPP loans being forgiven during 2021. Interest income on commercial loans was $10.2 million in 2022 compared to $10.9 million in 2021, down primarily as a result of more income recognized on the forgiveness of the PPP loans in 2021 as compared to 2022.
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 2022, the average balance of home equity credit lines was $254.2 million, an increase from $233.6 million in 2021. Trustco Bank competes with both regional and national companies 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. TrustCo’s average yield on this portfolio was 4.31% for 2022 and 3.77% for 2021 reflecting increases in the prime lending rate that occurred in 2022. Interest income on home equity credit lines increased from $8.8 million in 2021 to $11.0 million in 2022.
At December 31, 2022 and 2021, the Company had approximately $36.4 million and $37.3 million of real estate construction loans, respectively. Of the $36.4 million in real estate construction loans at December 31, 2022, approximately $14.1 million was secured by first mortgages to residential borrowers with the remaining $22.3 million were loans to commercial borrowers for residential construction projects. Of the $37.3 million in real estate construction loans at December 31, 2021, approximately $17.9 million was secured by first mortgages to residential borrowers and the remaining $19.4 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.
LOAN MATURITY SCHEDULE
The following table sets forth the maturities of our loan portfolio at December 31, 2022. Loans having no stated maturity and overdrafts are shown as due in one year or less. Loans are stated in the following table at contractual maturity and actual maturities could differ due to prepayments.
| (dollars in thousands) | | Amounts Due: | |
| | | | | | | | | | | | | | | Total Due | | | | |
| | | Within 1 Year | | | 1 to 5 Years | | | 5 to 15 Years | | | Over 15 Years | | | After 1 Year | | | Total | |
| Commercial | | $ | 14,965 | | | $ | 41,802 | | | $ | 134,926 | | | $ | 18,229 | | | $ | 194,957 | | | $ | 209,922 | |
| Commercial - other | | | 10,712 | | | | 7,582 | | | | 2,766 | | | | 29 | | | | 10,377 | | | | 21,089 | |
| First Mortgage | | | 3,069 | | | | 12,622 | | | | 507,874 | | | | 3,623,337 | | | | 4,143,833 | | | | 4,146,902 | |
| Home Equity Loans | | | 119 | | | | 1,937 | | | | 24,942 | | | | 29,551 | | | | 56,430 | | | | 56,549 | |
| Home Equity Lines of Credit | | | 3,031 | | | | 93,459 | | | | 119,102 | | | | 70,840 | | | | 283,401 | | | | 286,432 | |
| Installment | | | 1,616 | | | | 8,600 | | | | 2,091 | | | | - | | | | 10,691 | | | | 12,307 | |
| | | $ | 33,512 | | | $ | 166,002 | | | $ | 791,701 | | | $ | 3,741,986 | | | $ | 4,699,689 | | | $ | 4,733,201 | |
The following table shows the loans as of December 31, 2022 due after December 31, 2023 according to type and loan category:
| | | | | | Floating or | | | | |
| (dollars in thousands) | | Fixed Rates | | | Adjustable Rates | | | Total | |
| | | | | | | | | | |
| Commercial | | $ | 191,473 | | | $ | 3,484 | | | $ | 194,957 | |
| Commercial - other | | | 8,232 | | | | 2,145 | | | | 10,377 | |
| First Mortgage | | | 4,143,833 | | | | - | | | | 4,143,833 | |
| Home Equity Loans | | | 56,430 | | | | - | | | | 56,430 | |
| Home Equity Lines of Credit | | | 66,123 | | | | 217,278 | | | | 283,401 | |
| Installment | | | 10,691 | | | | - | | | | 10,691 | |
| | | $ | 4,476,782 | | | $ | 222,907 | | | $ | 4,699,689 | |
The following table sets forth the amortized cost and fair value of our securities portfolio at the dates indicated:
INVESTMENT SECURITIES
| (dollars in thousands) | | As of December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | Amortized | | | Fair | | | Amortized | | | Fair | | | Amortized | | | Fair | |
| | | Cost | | | Value | | | Cost | | | Value | | | Cost | | | Value | |
| Securities available for sale: | | | | | | | | | | | | | | | | | | |
U. S. government sponsored enterprises | | $ | 124,123 | | | $ | 118,187 | | | $ | 59,976 | | | $ | 59,179 | | | $ | 20,000 | | | $ | 19,968 | |
| State and political subdivisions | | | 34 | | | | 34 | | | | 41 | | | | 41 | | | | 103 | | | | 103 | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | 291,431 | | | | 260,316 | | | | 269,907 | | | | 270,798 | | | | 308,432 | | | | 316,158 | |
| Corporate bonds | | | 85,641 | | | | 81,346 | | | | 45,805 | | | | 45,337 | | | | 59,185 | | | | 59,939 | |
Small Business Adminstration- guaranteed participation securities | | | 23,115 | | | | 20,977 | | | | 31,303 | | | | 31,674 | | | | 40,955 | | | | 42,217 | |
| Other | | | 686 | | | | 653 | | | | 685 | | | | 684 | | | | 685 | | | | 686 | |
| Total securities available for sale | | | 525,030 | | | | 481,513 | | | | 407,717 | | | | 407,713 | | | | 429,360 | | | | 439,071 | |
| Held to maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | 7,707 | | | | 7,580 | | | | 9,923 | | | | 10,695 | | | | 13,824 | | | | 14,988 | |
| Total held to maturity securities | | | 7,707 | | | | 7,580 | | | | 9,923 | | | | 10,695 | | | | 13,824 | | | | 14,988 | |
| Total investment securities | | $ | 532,737 | | | $ | 489,093 | | | $ | 417,640 | | | $ | 418,408 | | | $ | 443,184 | | | $ | 454,059 | |
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 increasing 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 the timing 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, 2022, 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, 2022, 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, 2022 the Company did not consider any of the unrealized losses to be other than temporary.
At December 31, 2022, the carrying value of securities available for sale amounted to $481.5 million, compared to $407.7 million at year-end 2021. For 2022, the average balance of securities available for sale was $480.1 million with an average yield of 1.97%, compared to an average balance in 2021 of 462.7 million with an average yield of 1.44%. The taxable equivalent income earned on the securities available for sale portfolio in 2022 was $9.4 million, compared to $6.7 million earned in 2021.
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, 2022, the fair value of TrustCo’s portfolio of securities available for sale carried gross unrealized gains of approximately $35 thousand and gross unrealized losses of approximately $43.6 million. 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 of approximately $3.9 million. 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, 2022, the Company held $7.7 million of held to maturity securities, compared to $9.9 million at December 31, 2021. For 2022, the average balance of held to maturity securities was $8.6 million, compared to $11.7 million in 2021. 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 3.71% in 2021 to 3.97% in 2022 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 $435 thousand in 2021 to $343 thousand in 2022, 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, 2022 was $7.6 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, 2022 there were $217 thousand of unrecognized losses and $90 thousand of unrecognized gains on securities in this portfolio.
Securities Gains: During 2022 and 2021, 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 2022, 2021 or 2020.
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, 2022 | |
| | | Maturing: | |
| | | | | | After 1 | | | After 5 | | | | | | | |
| | | Within | | | But Within | | | But Within | | | After | | | | |
| Debt securities available for sale: | | 1 Year | | | 5 Years | | | 10 Years | | | 10 Years | | | Total | |
| | | | | | | | | | | | | | | | |
U. S. government sponsored enterprises | | | | | | | | | | | | | | | |
| Amortized cost | | $ | - | | | $ | 124,123 | | | $ | - | | | $ | - | | | $ | 124,123 | |
| Fair Value | | | - | | | | 118,187 | | | | - | | | | - | | | | 118,187 | |
| Weighted average yield | | | - | % | | | 2.61 | | | | - | | | | - | | | | 2.61 | |
State and political subdivisions | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | 8 | | | | 26 | | | | - | | | | - | | | | 34 | |
| Fair Value | | | 8 | | | | 26 | | | | - | | | | - | | | | 34 | |
| Weighted average yield | | | 5.23 | % | | | 5.27 | | | | - | | | | - | | | | 5.26 | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | 28 | | | | 136,576 | | | | 154,827 | | | | - | | | | 291,431 | |
| Fair Value | | | 28 | | | | 125,376 | | | | 134,912 | | | | - | | | | 260,316 | |
| Weighted average yield | | | 1.70 | % | | | 2.27 | | | | 2.80 | | | | - | | | | 2.56 | |
Corporate bonds | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | 5,000 | | | | 80,641 | | | | - | | | | - | | | | 85,641 | |
| Fair Value | | | 4,975 | | | | 76,371 | | | | - | | | | - | | | | 81,346 | |
| Weighted average yield | | | 3.77 | % | | | 2.37 | | | | - | | | | - | | | | 2.45 | |
Small Business Administration-guaranteed participation securities | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | 23,115 | | | | - | | | | - | | | | - | | | | 23,115 | |
| Fair Value | | | 20,977 | | | | - | | | | - | | | | - | | | | 20,977 | |
| Weighted average yield | | | 2.12 | % | | | - | | | | - | | | | - | | | | 2.12 | |
Other | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | 36 | | | | 650 | | | | - | | | | - | | | | 686 | |
| Fair Value | | | 36 | | | | 617 | | | | - | | | | - | | | | 653 | |
| Weighted average yield | | | 0.01 | % | | | 2.21 | | | | - | | | | - | | | | 2.09 | |
Total securities available for sale | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | 28,187 | | | $ | 342,016 | | | $ | 154,827 | | | $ | - | | | $ | 525,030 | |
| Fair Value | | $ | 26,024 | | | $ | 320,577 | | | $ | 134,912 | | | $ | - | | | $ | 481,513 | |
| Weighted average yield | | | 2.41 | % | | | 2.41 | | | | 2.80 | | | | - | | | | 2.53 | |
| | | | | | | | | | | | | | | | | | | | | |
| Held to maturity securities: | | | | | | | | | | | | | | | | | | | | |
| Mortgage backed securities and collateralized mortgage obligations-residential | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | -
| | | $ | 199
| | | $ | 2,886
| | | $ | 4,622
| | | $ | 7,707
| |
| Fair Value | | | -
| | | | 193
| | | | 2,697
| | | | 4,690
| | | | 7,580
| |
| Weighted average yield | | | -
| % | | | 4.58
| | | | 2.91
| | | | 5.48
| | | | 4.96
| % |
| Total held to maturity securities | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | -
| | | $ | 199
| | | $ | 2,886
| | | $ | 4,622
| | | $ | 7,707
| |
| Fair Value | | $ | -
| | | $ | 193
| | | $ | 2,697
| | | $ | 4,690
| | | $ | 7,580
| |
| Weighted average yield | | | -
| % | | | 4.58
| | | | 2.91
| | | | 5.48
| | | | 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 and 2022 levels due to the significant reduction in interest rates in early 2020 as a result of the pandemic. Given the current interest rate environment, the probability of future calls will depend 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, 2022. 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, 2022 on each type/maturity grouping.
SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION
Debt securities available for sale:
(dollars in thousands) | | As of December 31, 2022 | |
| | | Based on | | | Based on | |
| | | Final Maturity | | | Call Date | |
| | | Amortized | | | Fair | | | Amortized | | | Fair | |
| | | Cost | | | Value | | | Cost | | | Value | |
Within 1 year | | $ | 5,044 | | | $ | 5,020 | | | $ | 187,466 | | | $ | 177,157 | |
1 to 5 years | | | 207,516 | | | | 197,147 | | | | 182,738 | | | | 169,444 | |
5 to 10 years | | | 66,853 | | | | 61,598 | | | | 154,826 | | | | 134,912 | |
After 10 years | | | 245,617 | | | | 217,748 | | | | - | | | | - | |
| Total debt securities available for sale | | $ | 525,030 | | | $ | 481,513 | | | $ | 525,030 | | | $ | 481,513 | |
Held to maturity securities:
| (dollars in thousands) | | As of December 31, 2022 | |
| | | Based on | | | Based on | |
| | | Final Maturity | | | Call Date | |
| | | Amortized | | | Fair | | | Amortized | | | Fair | |
| | | Cost | | | Value | | | Cost | | | Value | |
| Within 1 year | | $ | - | | | $ | - | | | $ | 16 | | | $ | 16 | |
| 1 to 5 years | | | 199 | | | | 193 | | | | 6,410 | | | | 6,262 | |
| 5 to 10 years | | | 2,886 | | | | 2,697 | | | | 1,281 | | | | 1,302 | |
| After 10 years | | | 4,622 | | | | 4,690 | | | | - | | | | - | |
| Total held to maturity securities | | $ | 7,707 | | | $ | 7,580 | | | $ | 7,707 | | | $ | 7,580 | |
Federal Funds Sold and Other Short-term Investments
During 2022, the average balance of Federal Funds sold and other short-term investments was $969 million, a decrease from $1.1 billion in 2021. The average rate earned on these assets was 1.47% in 2022 and 0.13% in 2021. 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 $607 million for 2022, compared to $1.2 billion at year-end 2021. While yields on investment securities with acceptable risk characteristics were insufficient to justify shifting overnight liquidity into other investment types during 2022, 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 2023 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 $5.3 billion in 2022, compared to approximately $5.2 billion in 2021, an increase of $114.1 million. Changes in deposit categories (average balances 2022 versus 2021) included: demand deposits up $88.8 million, interest-bearing checking deposits up $55.6 million, savings up $155.6 million, money market up $6.6 million and time deposits down $192.5 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 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) | | | | | | | | | | | 2022 | | | 2021 | | | Components of | |
| | | | | | | | | | | | vs. | | | vs. | | | Total Funding | |
| | | 2022 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Retail deposits | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | $ | 838,944 | | | $ | 750,111 | | | $ | 567,265 | | | $ | 88,833 | | | $ | 182,846 | | | | 15.30 | % | | | 13.8 | % | | | 9.4 | % |
| Savings | | | 1,553,016 | | | | 1,397,432 | | | | 1,191,532 | | | | 155,584 | | | | 205,900 | | | | 28.30 | | | | 25.8 | | | | 24.8 | |
| Time deposits under $250 thousand | | | 755,842 | | | | 964,541 | | | | 1,126,636 | | | | (208,698 | ) | | | (162,095 | ) | | | 13.80 | | | | 17.8 | | | | 26.0 | |
| Interest bearing checking accounts | | | 1,190,337 | | | | 1,134,702 | | | | 971,385 | | | | 55,635 | | | | 163,317 | | | | 21.70 | | | | 20.9 | | | | 19.1 | |
| Money market deposits | | | 745,714 | | | | 739,139 | | | | 662,107 | | | | 6,575 | | | | 77,032 | | | | 13.60 | | | | 13.6 | | | | 12.2 | |
| Total retail deposits | | | 5,083,853 | | | | 4,985,925 | | | | 4,518,925 | | | | 97,929 | | | | 467,000 | | | | 92.70 | | | | 91.9 | | | | 91.5 | |
Time deposits over $250 thousand | | | 218,586 | | | | 202,422 | | | | 223,527 | | | | 16,163 | | | | (21,105 | ) | | | 4.00 | | | | 3.7 | | | | 5.0 | |
| Short-term borrowings | | | 177,599 | | | | 232,815 | | | | 180,065 | | | | (55,216 | ) | | | 52,750 | | | | 3.30 | | | | 4.4 | | | | 3.5 | |
| Total purchased liabilities | | | 396,185 | | | | 435,237 | | | | 403,592 | | | | (39,053 | ) | | | 31,645 | | | | 7.30 | | | | 8.1 | | | | 8.5 | |
| Total sources of funding | | $ | 5,480,038 | | | | 5,421,162 | | | | 4,922,517 | | | | 58,876 | | | | 498,645 | | | | 100.00 | % | | | 100.0 | | | | 100.0 | |
AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS
(dollars in thousands) | | 2022 | | | 2021 | | | 2020 | |
| | | | | | Interest | | | | | | | | | Interest | | | | | | | | | Interest | | | | |
| | | Average | | | Income/ | | | Average | | | Average | | | Income/ | | | Average | | | Average | | | Income/ | | | Average | |
| | | Balance | | | Expense | | | Rate | | | Balance | | | Expense | | | Rate | | | Balance | | | Expense | | | Rate | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans, net | | $ | 4,551,281 | | | $ | 162,214 | | | | 3.56 | % | | $ | 4,336,834 | | | $ | 159,168 | | | | 3.67 | % | | $ | 4,163,399 | | | $ | 165,964 | | | | 3.99 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government sponsored enterprises | | | 89,557 | | | | 1,405 | | | | 1.57 | | | | 63,743 | | | | 314 | | | | 0.49 | | | | 38,508 | | | | 568 | | | | 1.48 | |
| State and political subdivisions | | | 41 | | | | 3 | | | | 6.66 | | | | 48 | | | | 3 | | | | 6.56 | | | | 111 | | | | 9 | | | | 7.82 | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | 284,901 | | | | 5,677 | | | | 1.99 | | | | 308,777 | | | | 4,515 | | | | 1.46 | | | | 333,093 | | | | 6,131 | | | | 1.84 | |
| Corporate bonds | | | 78,266 | | | | 1,804 | | | | 2.31 | | | | 53,699 | | | | 1,065 | | | | 1.98 | | | | 50,982 | | | | 1,721 | | | | 3.38 | |
Small Business Administration- guaranteed participation securities | | | 26,679 | | | | 551 | | | | 2.07 | | | | 35,723 | | | | 745 | | | | 2.09 | | | | 44,379 | | | | 902 | | | | 2.03 | |
| Other | | | 686 | | | | 9 | | | | 1.31 | | | | 685 | | | | 20 | | | | 2.92 | | | | 686 | | | | 23 | | | | 3.35 | |
| Total securities available for sale | | | 480,130 | | | | 9,449 | | | | 1.97 | | | | 462,675 | | | | 6,662 | | | | 1.44 | | | | 467,759 | | | | 9,354 | | | | 2.00 | |
Held to maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | 8,647 | | | | 343 | | | | 3.97 | | | | 11,733 | | | | 435 | | | | 3.71 | | | | 16,376 | | | | 604 | | | | 3.69 | |
Total held to maturity securities | | | 8,647 | | | | 343 | | | | 3.97 | | | | 11,733 | | | | 435 | | | | 3.71 | | | | 16,376 | | | | 604 | | | | 3.69 | |
Federal Reserve Bank and Federal Home | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Bank stock | | | 5,749 | | | | 305 | | | | 5.31 | | | | 5,578 | | | | 260 | | | | 4.66 | | | | 7,381 | | | | 421 | | | | 5.70 | |
Federal funds sold and other short-term | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
investments | | | 969,043 | | | | 14,292 | | | | 1.47 | | | | 1,111,257 | | | | 1,458 | | | | 0.13 | | | | 748,085 | | | | 1,948 | | | | 0.26 | |
Total interest earning assets | | | 6,014,850 | | | | 186,603 | | | | 3.10 | % | | | 5,928,077 | | | | 167,983 | | | | 2.83 | % | | | 5,403,000 | | | | 178,291 | | | | 3.30 | % |
Allowance for loan losses | | | (46,124 | ) | | | | | | | | | | | (49,421 | ) | | | | | | | | | | | (47,330 | ) | | | | | | | | |
Cash and noninterest earning assets | | | 190,278 | | | | | | | | | | | | 196,825 | | | | | | | | | | | | 197,966 | | | | | | | | | |
Total assets | | $ | 6,159,004 | | | | | | | | | | | $ | 6,075,481 | | | | | | | | | | | $ | 5,553,636 | | | | | | | | | |
Liabilities and shareholders' equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing checking accounts | | $ | 1,190,337 | | | | 190 | | | | 0.02 | % | | $ | 1,134,702 | | | | 178 | | | | 0.02 | % | | $ | 971,385 | | | | 148 | | | | 0.02 | % |
Savings | | | 1,553,016 | | | | 920 | | | | 0.06 | | | | 1,397,432 | | | | 624 | | | | 0.04 | | | | 1,191,532 | | | | 716 | | | | 0.06 | |
Time deposits and money markets | | | 1,720,142 | | | | 4,617 | | | | 0.27 | | | | 1,906,102 | | | | 5,863 | | | | 0.31 | | | | 2,012,270 | | | | 22,834 | | | | 1.13 | |
Total interest bearing deposits | | | 4,463,495 | | | | 5,727 | | | | 0.13 | | | | 4,438,236 | | | | 6,665 | | | | 0.15 | | | | 4,175,187 | | | | 23,698 | | | | 0.57 | |
Short-term borrowings | | | 177,599 | | | | 740 | | | | 0.42 | | | | 232,815 | | | | 909 | | | | 0.39 | | | | 180,065 | | | | 1,010 | | | | 0.56 | |
Total interest bearing liabilities | | | 4,641,094 | | | | 6,467 | | | | 0.14 | % | | | 4,671,051 | | | | 7,574 | | | | 0.16 | % | | | 4,355,252 | | | | 24,708 | | | | 0.57 | % |
Demand deposits | | | 838,944 | | | | | | | | | | | | 750,111 | | | | | | | | | | | | 567,265 | | | | | | | | | |
Other liabilities | | | 81,880 | | | | | | | | | | | | 74,396 | | | | | | | | | | | | 77,487 | | | | | | | | | |
Shareholders' equity | | | 597,086 | | | | | | | | | | | | 579,923 | | | | | | | | | | | | 553,632 | | | | | | | | | |
| Total liabilities and shareholders' equity | | $ | 6,159,004 | | | | | | | | | | | $ | 6,075,481 | | | | | | | | | | | $ | 5,553,636 | | | | | | | | | |
Net interest income | | | | | | | 180,136 | | | | | | | | | | | | 160,409 | | | | | | | | | | | | 153,583 | | | | | |
Taxable equivalent adjustment | | | | | | | (1 | ) | | | | | | | | | | | (1 | ) | | | | | | | | | | | (3 | ) | | | | |
Net interest income | | | | | | $ | 180,135 | | | | | | | | | | | $ | 160,408 | | | | | | | | | | | $ | 153,580 | | | | | |
Net interest spread | | | | | | | | | | | 2.96 | % | | | | | | | | | | | 2.67 | % | | | | | | | | | | | 2.73 | % |
Net interest margin (net interest income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
to total interest earnings assets) | | | | | | | | | | | 2.99 | | | | | | | | | | | | 2.71 | | | | | | | | | | | | 2.84 | |
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 2022, 2021 and 2020. 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 $(22.0) million, $3.3 million, and $7.1 million in 2022, 2021, and 2020, 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 slightly as a result of lower deposit rates during the first half of the year, however, during the second half of the year the Company began to raise rates in response to the rising interest rate environment. 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. Given the current interest rate environment, the Company expects the cost of interest bearing deposits to increase in 2023.
Other funding sources: The Company had $177.6 million of average short‑term borrowings outstanding during 2022, compared to $232.8 million in 2021. The decrease over the prior year is attributable to customer behavior and the products they choose. These borrowings represent customer repurchase accounts, which behave more like deposit accounts than traditional borrowings. The average cost of short-term borrowings was 0.42% in 2022 and 0.39% in 2021. This resulted in interest expense of approximately $740 thousand in 2022, compared to $909 thousand in 2021.
AVERAGE DEPOSITS BY TYPE OF DEPOSITOR
(dollars in thousands) | | Years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
Individuals, partnerships and corporations | | $ | 5,262,996 | | | $ | 5,144,071 | | | $ | 4,700,635 | | | $ | 4,380,866 | | | $ | 4,184,850 | |
States and political subdivisions | | | 14,854 | | | | 15,761 | | | | 15,709 | | | | 8,663 | | | | 3,007 | |
Other (certified and official checks, etc.) | | | 24,589 | | | | 28,515 | | | | 26,108 | | | | 19,531 | | | | 18,720 | |
| Total average deposits by type of depositor | | $ | 5,302,439 | | | $ | 5,188,347 | | | $ | 4,742,452 | | | $ | 4,409,060 | | | $ | 4,206,577 | |
MATURITY OF TIME DEPOSITS IN EXCESS OF THE FDIC INSURANCE LIMIT
(dollars in thousands) | | | |
| | | As of December 31, 2022 | |
| | | | |
Under 3 months | | $ | 28,788 | |
3 to 6 months | | | 50,154 | |
6 to 12 months | | | 77,335 | |
Over 12 months | | | 93,748 | |
| | | | | |
Total | | $ | 250,025 | |
As of December 31, 2022 and 2021, approximately $968.6 million and $705.5 million, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.
VOLUME AND YIELD ANALYSIS
| (dollars in thousands) | | 2022 vs. 2021 | | | 2021 vs. 2020 | |
| | | Increase | | | Due to | | | Due to | | | Increase | | | Due to | | | Due to | |
| | | (Decrease) | | | Volume | | | Rate | | | (Decrease) | | | Volume | | | Rate | |
| Interest income (TE): | | | | | | | | | | | | | | | | | | |
| Federal funds sold and other short-term | | | | | | | | | | | | | | | | | | |
| investments | | $ | 12,834 | | | $ | (211 | ) | | $ | 13,045 | | | $ | (490 | ) | | $ | 714 | | | $ | (1,204 | ) |
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | | 2,787 | | | | 157 | | | | 2,630 | | | | (2,686 | ) | | | (266 | ) | | | (2,420 | ) |
| Tax-exempt | | | - | | | | 0 | | | | (0 | ) | | | (6 | ) | | | (5 | ) | | | (1 | ) |
| Total securities available for sale | | | 2,787 | | | | 157 | | | | 2,630 | | | | (2,692 | ) | | | (271 | ) | | | (2,421 | ) |
| Held to maturity securities (taxable) | | | (92 | ) | | | (121 | ) | | | 29 | | | | (169 | ) | | | (172 | ) | | | 3 | |
| Federal Reserve Bank and Federal Home | | | | | | | | | | | | | | | | | | | | | | | | |
| Loan Bank stock | | | 45 | | | | 8 | | | | 37 | | | | (161 | ) | | | (92 | ) | | | (69 | ) |
| Loans, net | | | 3,046 | | | | 7,572 | | | | (4,526 | ) | | | (6,796 | ) | | | 6,391 | | | | (13,187 | ) |
| Total interest income | | | 18,620 | | | | 7,405 | | | | 11,215 | | | | (10,308 | ) | | | 6,570 | | | | (16,878 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing checking accounts | | | 12 | | | | 9 | | | | 3 | | | | 30 | | | | 26 | | | | 4 | |
| Savings | | | 296 | | | | 76 | | | | 220 | | | | (92 | ) | | | 111 | | | | (203 | ) |
| Time deposits and money markets | | | (1,246 | ) | | | (747 | ) | | | (499 | ) | | | (16,971 | ) | | | (2,061 | ) | | | (14,910 | ) |
| Short-term borrowings | | | (169 | ) | | | (227 | ) | | | 58 | | | | (101 | ) | | | 251 | | | | (352 | ) |
| Total interest expense | | | (1,107 | ) | | | (889 | ) | | | (218 | ) | | | (17,134 | ) | | | (1,673 | ) | | | (15,461 | ) |
| Net interest income (TE) | | $ | 19,727 | | | $ | 8,294 | | | $ | 11,433 | | | $ | 6,826 | | | $ | 8,243 | | | $ | (1,417 | ) |
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, 2022, 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, 2022 and 2021, 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 35.86% of net income in 2022 and 42.95% of net income in 2021. The Company executed a 1 for 5 reverse stock split on May 28, 2021. The per-share dividend paid was $1.41 in 2022 and $1.37 in 2021, 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 18.93% of risk-adjusted assets at December 31, 2022, and 19.54% of risk‑adjusted assets at December 31, 2021. Consolidated Tier 1 capital to assets (leverage ratio) at December 31, 2022 was 10.39%, as compared to 9.61% at year-end 2021. Note 14 to the financial statements includes information on all regulatory capital ratios.
TrustCo maintains a dividend reinvestment and stock purchase plan (DRSPP) with approximately 6,987 participants. During 2022, $2.2 million of dividends paid on the shares held in this plan were reinvested in shares of the Company. The DRSPP also allows for additional purchases of stock 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 had 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 represented approximately 2% of its then currently outstanding common stock. During the year 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. On March 9, 2022 the Company’s Board of Directors authorized another share repurchase program of up to 200,000 shares, or approximately 1% of its then currently outstanding common stock. During the year ended December 31, 2022, the Company repurchased a total of 200,000 shares at an average price per share of $33.44, for a total of $6.7 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 non-accrual 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, 2022, 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 non-accrual 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 2022 and 2021 totaled $19.6 million and $19.1 million, respectively. Nonperforming loans as a percentage of the total loan portfolio were 0.37% in 2022 and 0.42% in 2021. As of December 31, 2022 and 2021, there were $7.6 million and $6.5 million, respectively, of loans in non-accruing status that were less than 90 days past due.
At December 31, 2022, nonperforming loans included a mix of commercial and residential loans. Of the total non-accrual loans of $17.5 million, $16.9 were residential real estate loans and $533 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, 2022, 68.0% of loans are in New York, including both the Upstate and Downstate areas, as well as nominal loan balances in adjoining states. The remaining 32.0% of the loan portfolio are Florida loans. At December 31, 2022, 13.1% of nonperforming loans were in Florida and 86.9% were in the Company’s New York area markets. At December 31, 2022 nonperforming Florida loans amounted to $2.3 million compared to $2.0 million at December 31, 2021.
(dollars in thousands) | | As of December 31, | |
| | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
Loans in non-accrual status | | $ | 17,483 | | | $ | 18,739 | | | $ | 21,061 | | | $ | 20,840 | | | $ | 24,952 | |
Restructured retail loans | | | 10 | | | | 17 | | | | 23 | | | | 29 | | | | 34 | |
Total nonperforming loans | | | 17,493 | | | | 18,756 | | | | 21,084 | | | | 20,869 | | | | 24,986 | |
Foreclosed real estate | | | 2,061 | | | | 362 | | | | 541 | | | | 1,579 | | | | 1,676 | |
Total nonperforming assets | | $ | 19,554 | | | $ | 19,118 | | | $ | 21,625 | | | $ | 22,448 | | | $ | 26,662 | |
Allowance for credit losses on loans | | $ | 46,032 | | | $ | 44,267 | | | $ | 49,595 | | | $ | 44,317 | | | $ | 44,766 | |
Allowance coverage of nonperforming loans | | | 2.63 | x | | | 2.36 | x | | | 2.35 | x | | | 2.12 | x | | | 1.79 | x |
Allowance for credit losses on loans to nonaccrual loans | | | 2.63 | x | | | 2.36 | x | | | 2.35 | x | | | 2.13 | x | | | 1.79 | x |
Nonperforming loans as a % of total loans | | | 0.37 | % | | | 0.42 | % | | | 0.50 | % | | | 0.51 | % | | | 0.64 | % |
Nonperforming assets as a % of total assets | | | 0.33 | % | | | 0.31 | % | | | 0.37 | % | | | 0.43 | % | | | 0.54 | % |
Non-accrual loans to total loans outstanding | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.01 | % | | | 0.01 | % |
TrustCo has identified nonaccrual commercial and commercial real estate loans, all loans restructured under a TDR, and residential non-accrual loans over 180 days past due as individually evaluated loans.
There were $646 thousand and $232 thousand of commercial loans classified as individually evaluated as of December 31, 2022 and 2021, respectively. In addition, there were $25.0 million and $18.3 million of residential TDRs individually evaluated at December 31, 2022 and 2021, respectively.
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, 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, 2022, 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 2022 and 2021 there were $2.1 million and $362 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 Credit Losses on Loans
On January 1, 2022, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses" (referred to as “CECL” and as Accounting Standards Codification Topic 326 (“ASC 326”)). Under this standard, allowances have been established for loans and commitments to lend. The allowance for credit losses on loans (“ACLL”) replaces the previous allowance for loan losses (“ALL”). Upon adoption of CECL, the ACLL increased by $2.4 million to $46.6 million from $44.2 at December 31, 2021 under the ALL. The allowance for credit losses on unfunded commitments (“ACLUC’) increased from $18 thousand to $2.4 million and is recorded in accrued expenses and other liabilities. The Company recorded a net decrease to undivided profits of $3.5 million, net of $1.2 million in deferred tax balances as of January 1, 2022 for the cumulative effect of adopting CECL.
For the year ended December 31, 2022, the Company recorded a credit to the provision for credit losses of $341 thousand, which includes a credit to the provision for credit losses on loans of $900 thousand as a result of improving unemployment, housing price forecasts and a sustained low level of NPL’s and charge-offs, and a provision for credit losses on unfunded commitments of $659 thousand as a result of a corresponding increase in unfunded commitments.
During 2022, the FOMC increased the target federal funds rate on six occasions totaling 4.25 basis points. Rising inflation weighs on consumers’ purchasing power by slowing spending and driving monetary tightening. Inflation has reached a forty-year high, and labor and supply chain challenges have been heightened by the global impacts of the Russian invasion of Ukraine. Management has taken into consideration the possible effects of these changes qualitatively within the CECL ACLL and ALCUC.
The Company evaluates several external forecasts in choosing the forecast element for the economic components of the allowance for credit losses on loans. The Company selected the stagflation forecast for both January 1, 2022 and December 31, 2022 for economic modeling.
The following changes in forecasts from January 1, 2022 to December 31, 2022 impacted the reserves:
| • | unemployment rates increasing 1% for both New York and Florida, |
| • | an increase in consumer price indices (“CPI”) of 7% for New York and 9% for Florida, |
| • | a decrease in Gross Metro Product (“GMP”) of 0.1% for New York, |
| • | an increase in Gross Metro Product (“GMP”) of 3.6% for Florida, |
| • | a decrease in the housing price index of 3% for New York and an increase of 11% for Florida. |
See Notes 1 and 4 of the consolidated financial statements for additional discussion related to the adoption of CECL, and the process for determining the provision for credit losses.
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 2022 and 2021 were $322 thousand and $122 thousand, respectively. The increase in net recoveries was primarily the result of lower gross charge offs in the New York residential segment of the portfolio, partially offset by less recoveries in New York for all segments. New York commercial, residential, and installment gross recoveries were down $28 thousand, $14 thousand, and $47 thousand, respectively, from 2022 to 2021. Total gross charge-offs in 2022 were $152 thousand versus $430 thousand in 2021. There were no Florida commercial charge-offs in either 2022 or 2021, and New York commercial charge-offs increased $10 thousand from 2022 to 2021. Residential gross charge-offs were down $316 thousand from 2022 to 2021 and gross installment charge‑offs increased $28 thousand from 2022 to 2021. The changes in gross and net charge-offs in these categories reflected economic and market changes. As mentioned above, the Company adopted CECL on January 1, 2022, which resulted in a credit in 2022 of $900 thousand to the provision for credit losses on loans primarily as a result of improving unemployment and housing price forecasts. The $5.5 million credit to the provision for loan losses in 2021, under the incurred loss method, was primarily driven by improvements in asset quality trends and economic conditions, as well as adjustments to the pandemic specific provision made in 2020. The allowance for credit losses on loans decreased from $46.6 million at the CECL adoption date of January 1, 2022, or 1.05% of total loans at that date, to $46.0 million at December 31, 2022, or 0.97% of total loans at that date.
Conditions in most of the Bank’s market areas are stabilizing or improving as compared to 2022 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.
SUMMARY OF LOAN LOSS EXPERIENCE
| (dollars in thousands) | | | | | | | | | | | | | | | |
| | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| Amount of loans outstanding at end of year (less unearned income) | | $ | 4,733,201 | | | $ | 4,438,779 | | | $ | 4,244,470 | | | $ | 4,062,196 | | | $ | 3,874,096 | |
| Average loans outstanding during year (less average unearned income) | | | 4,551,281 | | | | 4,336,834 | | | | 4,163,399 | | | | 3,926,199 | | | | 3,746,082 | |
| Balance of allowance at beginning of year | | | 44,267 | | | | 49,595 | | | | 44,317 | | | | 44,766 | | | | 44,170 | |
| Impact of ASU 2016-13, Current Expected Credit Loss (CECL) | | | 2,353 | | | | - | | | | - | | | | - | | | | - | |
| Balance as of January 1, 2022 as adjusted for ASU 2016-13 | | | 46,620 | | | | 49,595 | | | | 44,317 | | | | 44,766 | | | | 44,170 | |
| | | | | | | | | | | | | | | | | | | | | |
| Loans charged off: | | | | | | | | | | | | | | | | | | | | |
| Commercial and commercial real estate | | | 40 | | | | 30 | | | | 36 | | | | 20 | | | | 100 | |
| Real estate mortgage - 1 to 4 family | | | 24 | | | | 340 | | | | 404 | | | | 974 | | | | 846 | |
| Installment | | | 88 | | | | 60 | | | | 221 | | | | 213 | | | | 257 | |
| Total | | | 152 | | | | 430 | | | | 661 | | | | 1,207 | | | | 1,203 | |
| Recoveries of loans previously charged off: | | | | | | | | | | | | | | | | | | | | |
| Commercial and commercial real estate | | | 4 | | | | 32 | | | | 10 | | | | 46 | | | | 10 | |
| Real estate mortgage - 1 to 4 family | | | 450 | | | | 466 | | | | 317 | | | | 532 | | | | 351 | |
| Installment | | | 10 | | | | 54 | | | | 12 | | | | 21 | | | | 38 | |
| Total | | | 464 | | | | 552 | | | | 339 | | | | 599 | | | | 399 | |
| Net loan (recoveries) chargeoffs | | | (312 | ) | | | (122 | ) | | | 322 | | | | 608 | | | | 804 | |
| Provision for credit losses on loans | | | (900 | ) | | | (5,450 | ) | | | 5,600 | | | | 159 | | | | 1,400 | |
| Balance of allowance at end of year | | $ | 46,032 | | | $ | 44,267 | | | $ | 49,595 | | | $ | 44,317 | | | $ | 44,766 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net charge offs as a percent of average loans outstanding during year (less average unearned income) | | | (0.01 | )% | | | 0.00 | % | | | 0.01 | % | | | 0.02 | % | | | 0.02 | |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance as a percent of loans outstanding at end of year | | | 0.97 | | | | 1.00 | | | | 1.17 | | | | 1.09 | | | | 1.16 | |
The following table presents the ratio of net charge-offs (recoveries) to average loans outstanding by loan category, along with the components of the calculation, for the periods indicated:
| | | For the Years Ended December 31, | |
| (dollars in thousands) | | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | Net charge- | | | | | | | | | Net charge- | | | | | | | | | Net charge- | |
| | | | | | | | | offs as a | | | | | | | | | offs as a | | | | | | | | | offs as a | |
| | | Net | | | Average | | | percent of | | | Net | | | Average | | | percent of | | | Net | | | Average | | | percent of | |
| | | charge-offs | | | loans | | | average loans | | | charge-offs | | | loans | | | average loans | | | charge-offs | | | loans | | | average loans | |
| | | (recoveries) | | | outstanding | | | outstanding | | | (recoveries) | | | outstanding | | | outstanding | | | (recoveries) | | | outstanding | | | outstanding | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | $ | 36 | | | $ | 206,144 | | | | 0.02 | % | | $ | (2 | ) | | $ | 210,145 | | | | 0.00 | % | | $ | 26 | | | $ | 219,328 | | | | 0.01 | % |
| Real estate mortgage - 1 to 4 family | | | (426 | ) | | | 4,335,288 | | | | -0.01 | % | | | (126 | ) | | | 4,117,964 | | | | 0.00 | % | | | 87 | | | | 3,934,119 | | | | 0.00 | % |
| Installment | | | 78 | | | | 9,849 | | | | 0.79 | % | | | 6 | | | | 8,725 | | | | 0.07 | % | | | 209 | | | | 9,952 | | | | 2.10 | % |
| Total net (recoveries) chargeoffs | | $ | (312 | ) | | $ | 4,551,281 | | | | -0.01 | % | | $ | (122 | ) | | $ | 4,336,834 | | | | 0.00 | % | | $ | 322 | | | $ | 4,163,399 | | | | 0.01 | % |
Our loan portfolio experienced an annualized net charge-off rate of (0.01)% for the year ended December 31, 2022, a decrease of one basis point from the 0.00% rate for the year ended December 31, 2021.
Allocation of the Allowance for Credit Losses on Loans
The allocation of the allowance for credit loss on loans is as follows:
| (dollars in thousands) | | As of | | | As of | |
| | | December 31, 2022 | | | December 31, 2021 | |
| | | | | | Percent of | | | | | | Percent of | |
| | | | | | Loans to | | | | | | Loans to | |
| | | Amount | | | Total Loans | | | Amount | | | Total Loans | |
| Commercial | | $ | 2,343 | | | | 4.41 | % | | $ | 2,942 | | | | 4.08 | % |
| Real estate - construction | | | 385 | | | | 0.77 | % | | | 375 | | | | 0.84 | % |
| Real estate mortgage - 1 to 4 family | | | 38,859 | | | | 88.51 | % | | | 37,650 | | | | 89.67 | % |
| Home equity lines of credit | | | 4,280 | | | | 6.05 | % | | | 2,857 | | | | 5.20 | % |
| Installment Loans | | | 165 | | | | 0.26 | % | | | 443 | | | | 0.21 | % |
| | | $ | 46,032 | | | | 100.00 | % | | $ | 44,267 | | | | 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, 2022 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, 2022. 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, 200 and 300 basis points.
| (dollars in thousands) | | December 31, 2022 | |
| | | | | | | | | 1 to 12 Months | | | 13 to 24 Months | |
| Change in | | $ Amount | | | % Change | | | $ Amount | | | % Change | | | $ Amount | | | % Change | |
| Interest Rates | | of EVE | | | in EVE | | | of NII | | | In NII | | | of NII | | | In NII | |
| | | | | | | | | | | | | | | | | | | |
| +400 BP | | | 1,428,613 | | | | -17.2 | % | | | 174,432 | | | | -9.7 | % | | | 178,258 | | | | -10.2 | % |
| +300 BP | | | 1,473,359 | | | | -14.6 | % | | | 178,561 | | | | -7.6 | % | | | 181,724 | | | | -8.4 | % |
| +200 BP | | | 1,578,927 | | | | -8.5 | % | | | 194,154 | | | | 0.5 | % | | | 196,646 | | | | -0.9 | % |
| +100 BP | | | 1,687,831 | | | | -2.2 | % | | | 194,334 | | | | 0.6 | % | | | 199,473 | | | | 0.5 | % |
| Current rates | | | 1,725,968 | | | | 0.0 | % | | | 193,159 | | | | 0.0 | % | | | 198,496 | | | | 0.0 | % |
| -100 BP | | | 1,686,243 | | | | -2.3 | % | | | 189,936 | | | | -1.7 | % | | | 193,224 | | | | -2.7 | % |
| -200 BP | | | 1,559,345 | | | | -9.7 | % | | | 181,248 | | | | -6.2 | % | | | 180,187 | | | | -9.2 | % |
| -300 BP | | | 1,388,557 | | | | -19.5 | % | | | 173,269 | | | | -10.3 | % | | | 169,390 | | | | -14.7 | % |
At December 31, 2022, the Company’s consolidated Tier 1 capital to assets ratio (leverage capital ratio) was 10.39%.
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 31.10% of the fair value of assets, whereas the current Tier 1 capital to assets ratio was 10.39% at December 31, 2022, 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, 2022. 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 liability sensitive on a cumulative basis when measured in the less than 1 year time frame, and asset sensitive when measured in the 1-5 year and the over 5 year time frames. The effect of being liability sensitive is that rising interest rates should result in liabilities repricing to higher levels faster than assets repricing to higher levels, thus decreasing net interest income. Conversely, should interest rates decline, the Company’s interest bearing liabilities would reprice down faster than assets, resulting in higher net interest income. 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, 2022 | |
| | | Repricing in: | |
| | | Less than 1 | | | 1-5 | | | Over 5 | | | Rate | | | | |
| | | year | | | years | | | years | | | Insensitive | | | Total | |
| Total assets | | $ | 1,511,604 | | | | 2,438,339 | | | | 1,882,483 | | | | 167,626 | | | | 6,000,052 | |
| Cumulative total assets | | $ | 1,511,604 | | | | 3,949,943 | | | | 5,832,426 | | | | 6,000,052 | | | | | |
| Total liabilities and shareholders' equity | | $ | 1,648,816 | | | | 145,459 | | | | 3,520,617 | | | | 685,160 | | | | 6,000,052 | |
| Cumulative total liabilities and shareholders' equity | | $ | 1,648,816 | | | | 1,794,275 | | | | 5,314,892 | | | | 6,000,052 | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Cumulative interest sensitivity gap | | $ | (137,212 | ) | | | 2,155,668 | | | | 517,534 | | | | | | | | | |
| Cumulative gap as a % of interest earning assets for the period | | | (9.1 | %) | | | 54.6 | % | | | 8.9 | % | | | | | | | | |
| Cumulative interest sensitive assets to liabilities | | | 91.7 | % | | | 220.1 | % | | | 109.7 | % | | | | | | | | |
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
Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations in a cost-effective manner and to meet current and future potential obligations such as loan commitments, lease obligations, and unexpected deposit outflows. See “Risk Factors – Risks Related to Our Lending Activities – We may not be able to meet the cash flow requirements of our depositors or borrowers or meet our operating cash needs to fund corporate expansion and other activities” in our Annual Report on Form 10-K for the year ended December 31, 2022.
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 $5.08 billion in 2022 and $4.99 billion in 2021. 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 2022, the average balance of purchased liabilities was $396.2 million, compared with $435.2 million in 2021. 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 decrease in borrowed funds is wholly the result of customers’ behavioral preferences in regard to managing their funds and does not reflect any decision by management to decrease 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, 2022 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.
Management believes that the Company’s overall liquidity position 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, 2022 and 2021, TrustCo’s loan to deposit ratio was 91.2% and 84.3%, respectively, while the median peer group of all publicly traded banks and thrifts tracked by S&P Global Market Intelligence financial with assets between $2 billion and $10 billion had ratios of 89.3% and 78.2%, respectively. In addition, at December 31, 2022 and 2021, the Company had cash and cash equivalents totaling $650.6 million and $1.2 billion, respectively, as well as unpledged securities available for sale with a fair value of $310.1 million and $124.5 million, respectively. The Federal Reserve raised the Federal Funds rate again in February 2023, and it is our expectation that there will be further Federal Funds rate increases throughout 2023, which will more than likely put additional pressure on deposit rates during 2023. Management believes that the Company currently has strong liquidity and historical trends and that it has adequate sources of liquidity to cover its contractual obligations and commitments over the next twelve months and beyond.
The Company is contractually obligated to make the following payments on leases as of December 31, 2022:
(dollars in thousands) | | Payments Due by Period: | |
| | Less Than | | | 1-3 | | | 3-5 | | | More than | | | | |
| | 1 Year | | | Years | | | Years | | | 5 Years | | | Total | |
| | | | | | | | | | | | | | | | | |
Operating leases | | $ | 8,310 | | | $ | 15,997 | | | $ | 12,361 | | | $ | 19,260 | | | $ | 55,928 | |
In addition, the Company is contractually obligated to pay data processing vendors approximately $9 million to $10 million per year through 2025.
Also, the Company is obligated under its various employee benefit plans to make certain payments of approximately $1.8 to $1.9 million per year through 2032. Additionally, the Company is obligated to pay the accumulated benefits under the Company’s post retirement pension plan which amounted to $4.9 million and $7.0 million, respectively, as of December 31, 2022 and 2021. 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, 2022 and 2021, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $535.4 million and $469.7 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 at both December 31, 2022 and 2021, 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, 2022 and 2021 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.
The Company’s allowance for credit losses on unfunded commitments is recognized as a liability (accrued expenses and other liabilities) with adjustments to the reserve recognized in (credit) provision for credit losses in the consolidated income statement. The impact of the adoption of CECL was an additional liability of $2.3 million, and for the year ended December 31, 2022, the Company recorded a provision for credit losses of $559 thousand. As of December 31, 2022 the allowance for unfunded commitments was $2.9 million.
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 $19.3 million in 2022, $17.9 million in 2021 and $17.2 million in 2020. There was no net gain or loss on securities transactions in 2022 and 2021. There was $1.2 million from net gain on securities transactions in 2020. Fees for services to customers was up $1.1 million in 2022 compared to 2021 primarily as a result of increased interchange fees. 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. Other income was up $496 thousand in 2022 compared to 2021 primarily as a result of a gain on the sale of fixed assets.
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 $7.0 million in 2022, $7.4 million in 2021 and $6.3 million in 2020. 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, 2022, 2021 and 2020, fair value of assets under management by the Trustco Financial Services were approximately $918 million, $1.1 billion and $996.7 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 decline in income is due to the market value decline offset by fees for other services.
NONINTEREST INCOME
(dollars in thousands) | | For the year ended December 31, | | | 2022 vs. 2021 | |
| | | 2022 | | | 2021 | | | 2020 | | | Amount | | | Percent | |
| | | | | | | | | | | | | | | | |
Trustco Financial Services income | | $ | 7,037 | | | $ | 7,358 | | | $ | 6,279 | | | $ | (321 | ) | | | (4.4 | )% |
Fees for services to customers | | | 10,947 | | | | 9,799 | | | | 8,779 | | | | 1,148 | | | | 11.7 | |
Net gain on securities transactions | | | - | | | | - | | | | 1,155 | | | | - | | | | - | |
Other | | | 1,276 | | | | 780 | | | | 957 | | | | 496 | | | | 63.6 | |
| Total noninterest income | | $ | 19,260 | | | $ | 17,937 | | | $ | 17,170 | | | $ | 1,323 | | | | 7.4 | % |
Noninterest expense: Noninterest expense was $100.3 million in 2022, $101.7 million in 2021, and $95.7 million in 2020. 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 56.3% for 2022. TrustCo’s efficiency ratio was 50.2% in 2022, 56.9% in 2021 and 56.4% in 2020. 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, | | | 2022 vs. 2021 | |
| | | 2022 | | | 2021 | | | 2020 | | | Amount | | | Percent | |
| | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | $ | 45,904 | | | $ | 48,721 | | | $ | 45,647 | | | $ | (2,817 | ) | | | (5.8 | )% |
| Net occupancy expense | | | 17,527 | | | | 17,742 | | | | 17,519 | | | | (215 | ) | | | (1.2 | ) |
| Equipment expense | | | 6,487 | | | | 6,617 | | | | 6,636 | | | | (130 | ) | | | (2.0 | ) |
| Professional services | | | 5,577 | | | | 6,108 | | | | 5,618 | | | | (531 | ) | | | (8.7 | ) |
| Outsourced services | | | 9,210 | | | | 8,384 | | | | 7,750 | | | | 826 | | | | 9.9 | |
| Advertising expense | | | 2,046 | | | | 1,975 | | | | 1,921 | | | | 71 | | | | 3.6 | |
| FDIC and other insurance | | | 3,159 | | | | 3,010 | | | | 2,220 | | | | 149 | | | | 5.0 | |
| Other real estate expense (income), net | | | 310 | | | | 183 | | | | 92 | | | | 127 | | | | 69.4 | |
| Other | | | 10,099 | | | | 8,922 | | | | 8,301 | | | | 1,177 | | | | 13.2 | |
| Total noninterest expense | | $ | 100,319 | | | $ | 101,662 | | | $ | 95,704 | | | $ | (1,343 | ) | | | (1.3 | )% |
Salaries and employee benefits are the most significant component of noninterest expense. For 2022, these expenses amounted to $45.9 million, compared with $48.7 million in 2021 and $45.6 million in 2020. The decrease in salaries and benefits in 2022 was primarily as a result of a $2 million favorable true-up to the incentive compensation accrual upon payout in the first quarter of 2022, as well as decreases in various other employee benefit plan expenses. Full time equivalent headcount decreased from 759 as of December 31, 2021 to 750 as of December 31, 2022. The decrease in headcount as compared to the prior year was not due to any impact on the labor market. The Company constantly hires qualified candidates and from time-to-time experiences fluctuations in head count.
Net occupancy expense decreased $215 thousand during 2022 compared to 2021 primarily as a result of a decrease in building maintenance expenses.
Professional services expense was $5.6 million in both 2022 and 2020, and was higher in 2021 at $6.1 million primarily as a result of expenses associated with the reverse stock split.
Outsourced services expense increased $826 thousand during 2022 compared to 2021 primarily as a result of additional services being utilized from our providers.
FDIC and other insurance expense was $3.2 million in 2022, $3.0 million in 2021 and $2.2 million in 2020. The increase in 2022 and 2021 as compared to 2020 was primarily due to FDIC credits received in 2020 and 2019 as a result of the FDIC reaching the Deposit Reserve Fund reserve ratio. These credits expired after 2020.
Other real estate expense was $310 thousand in 2022 and $183 thousand in 2021, compared to other real estate expense of $92 thousand in 2020. Included in ORE expense, net during 2022, 2021 and 2020 were write downs of properties included in ORE totaling $68 thousand, $121 thousand and $120 thousand, respectively. Additionally, included in ORE expense, net during 2022, 2021 and 2020 were gains on sale of $122 thousand, $216 thousand and $347 thousand, respectively.
Other noninterest expense was $10.1 million in 2022 compared to $8.9 million in 2021 and $8.3 million in 2020. The increase in 2022 as compared to 2021 was primarily as a result of debit card conversion related expenses, including customer disputes, charges, losses, and collection expenses.
Income Tax
TrustCo recognized income tax expense of $24.2 million, $20.6 million and $17.0 million in 2022, 2021 and 2020, respectively. The effective tax rates were 24.3% in 2022, 25.1% in 2021, and 24.5% in 2020.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements for the years ended 2022, 2021 and 2020 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 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, costs and expenses, income taxes and related disclosures. On an ongoing basis, the Company evaluates its estimates and assumptions. The Company’s actual results may differ from these estimates under different assumptions or conditions.
Management considers the accounting policy relating to the allowance for credit losses on loans to be a critical accounting policy given the measurement uncertainty and subjective judgment necessary in evaluating the levels of the allowance required to cover the life time losses in the loan portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in this Annual Report to Shareholders is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.
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 our best estimate of life time expected losses in our loan portfolio, and fluctuations in the provision for credit losses may result from management’s assessment of the adequacy of the allowance. The allowance is made up of a quantitative calculation with an overlay for qualitative factors and reasonable and supportable forecast. The majority of the allowance for credit losses is determined using qualitative factors. The determination of qualitative factors inherently involves significant judgement and subjective measurement being applied by management.
Significant assumptions evaluated each reporting period include the determination of the forecast scenario to be utilized and the assumption for prepayment speeds. During 2022 and as of December 31, 2022, management utilized stagflation scenario with 100% weighting. Hypothetically, had management utilized the Moody’s most likely scenario, Baseline scenario, the impact of the allowance would be a reduction of $2 million. For its largest portfolio, 1-4 family residential real estate, the prepayment assumption applied within the quantitative calculation was 11.5% as of December 31, 2022. Hypothetically, if the prepayment assumption would be increased to 15%, the impact of the allowance would be a decrease of $1.8 million. Hypothetically, if the prepayment assumption would be decreased to 8%, the impact of the allowance would be an increase of $2.2 million. Changes in these judgments and assumptions are possible and may have a material impact on our allowance, and therefore our financial position, liquidity, or results of operations.
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:
| • | changes in interest rates, including recent and possible future increases fueled by inflation, may significantly impact our financial condition and results of operations; |
| • | inflationary pressures and rising prices may affect our results of operations and financial condition; |
| • | exposure to credit risk in our lending activities; |
| • | the allowance for credit losses on loans (“ACLL”) is not sufficient to cover actual loan losses, resulting in a decrease in earnings; |
| • | our inability to meet the cash flow requirements of our depositors or borrowers or meet our operating cash needs to fund corporate expansion and other activities; |
| • | we are subject to claims and litigation pertaining to fiduciary responsibility and lender liability; |
| • | our dependency upon the services of the management team; |
| • | our disclosure controls and procedures may not prevent or detect all errors or acts of fraud; |
| • | if the business continuity and disaster recovery plans that we have in place are not adequate to continue our operations in the event of a disaster, the business disruption can adversely impact its operations; |
| • | our risk management framework may not be effective in mitigating risk and loss; |
| • | a prolonged economic downturn, especially one affecting our geographic market area, will adversely affect our operations and financial results; |
| • | instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on our results of operations and financial condition; |
| • | the COVID-19 pandemic could continue to have an adverse effect on our business; |
| • | the soundness of other financial institutions could adversely affect us; |
| • | the trust wealth management fees we receive may decrease as a result of poor investment performance, in either relative or absolute terms, which could decrease our revenues and net earnings; |
| • | regulatory capital rules could slow our growth, cause us to seek to raise additional capital, or both; |
| • | changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income; |
| • | non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions; |
| • | changes in tax laws may adversely affect us, and the Internal Revenue Service or a court may disagree with our tax positions, which may result in adverse effects on our business, financial condition, results of operations or cash flows; |
| • | our ability to pay dividends is subject to regulatory limitations and other limitations that may affect our ability to pay dividends to our stockholders or to repurchase our common stock; |
| • | we may be subject to a higher effective tax rate if Trustco Realty Corp. (“Trustco Realty”) fails to qualify as a real estate investment trust (“REIT”); |
| • | changes in accounting standards could impact reported earnings; |
| • | strong competition within the Bank’s market areas could hurt profits and slow growth; |
| • | consumers and businesses are increasingly using non-banks to complete their financial transactions, which could adversely affect our business and results of operations; |
| • | our business could be adversely affected by third-party service providers, data breaches, and cyber-attacks; |
| • | a failure in or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt our businesses, and adversely impact our results of operations, liquidity and financial condition, as well as cause reputational harm; |
| • | unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, could severely harm our business; |
| • | we could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, our computer systems; |
| • | new lines of business or new products and services may subject us to additional risks; |
| • | provisions in our articles of incorporation and bylaws and New York law may discourage or prevent takeover attempts, and these provisions may have the effect of reducing the market price of our stock; |
| • | we cannot guarantee that the allocation of capital to various alternatives, including stock repurchase plans, will enhance long-term stockholder value; |
| • | we are exposed to climate risk; |
| • | societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers; and, |
| • | other risks and uncertainties included under “Risk Factors” in our Form 10-K for the year ended December 31, 2022. |
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) | |
| | | 2022 | | | 2021 | |
| | | | Q1 | | | | Q2 | | | | Q3 | | | | Q4 | | | Year | | | | Q1 | | | | Q2 | | | | Q3 | | | | Q4 | | | Year | |
| Income statement: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest and dividend income | | $ | 41,290 | | | $ | 44,187 | | | $ | 49,041 | | | $ | 52,084 | | | $ | 186,602 | | | $ | 42,495 | | | $ | 42,055 | | | $ | 41,662 | | | $ | 41,770 | | | $ | 167,982 | |
| Interest expense | | | 1,194 | | | | 1,127 | | | | 1,248 | | | | 2,898 | | | | 6,467 | | | | 2,388 | | | | 1,933 | | | | 1,775 | | | | 1,478 | | | | 7,574 | |
| Net interest income | | | 40,096 | | | | 43,060 | | | | 47,793 | | | | 49,186 | | | | 180,135 | | | | 40,107 | | | | 40,122 | | | | 39,887 | | | | 40,292 | | | | 160,408 | |
| (Credit) Provision for loan losses | | | (200 | ) | | | (491 | ) | | | 300 | | | | 50 | | | | (341 | ) | | | 350 | | | | - | | | | (2,800 | ) | | | (3,000 | ) | | | (5,450 | ) |
| Net interest income after provison for loan losses | | | 40,296 | | | | 43,551 | | | | 47,493 | | | | 49,136 | | | | 180,476 | | | | 39,757 | | | | 40,122 | | | | 42,687 | | | | 43,292 | | | | 165,858 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest income | | | 5,183 | | | | 4,916 | | | | 4,386 | | | | 4,775 | | | | 19,260 | | | | 4,428 | | | | 4,688 | | | | 4,295 | | | | 4,526 | | | | 17,937 | |
| Noninterest expense | | | 22,765 | | | | 25,005 | | | | 26,144 | | | | 26,405 | | | | 100,319 | | | | 25,335 | | | | 25,440 | | | | 24,697 | | | | 26,190 | | | | 101,662 | |
| Income before income taxes | | | 22,714 | | | | 23,462 | | | | 25,735 | | | | 27,506 | | | | 99,417 | | | | 18,850 | | | | 19,370 | | | | 22,285 | | | | 21,628 | | | | 82,133 | |
| Income tax expense | | | 5,625 | | | | 5,591 | | | | 6,371 | | | | 6,596 | | | | 24,183 | | | | 4,767 | | | | 4,937 | | | | 5,523 | | | | 5,387 | | | | 20,614 | |
| Net income | | $ | 17,089 | | | $ | 17,871 | | | $ | 19,364 | | | $ | 20,910 | | | $ | 75,234 | | | $ | 14,083 | | | $ | 14,433 | | | $ | 16,762 | | | $ | 16,241 | | | $ | 61,519 | |
| Per share data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic earnings (1) | | $ | 0.890 | | | $ | 0.933 | | | $ | 1.013 | | | $ | 1.100 | | | $ | 3.933 | | | $ | 0.730 | | | $ | 0.748 | | | $ | 0.871 | | | $ | 0.845 | | | $ | 3.194 | |
| Diluted earnings (1) | | | 0.890 | | | | 0.933 | | | | 1.013 | | | | 1.100 | | | | 3.932 | | | | 0.730 | | | | 0.748 | | | | 0.871 | | | | 0.845 | | | | 3.194 | |
| Cash dividends declared (1) | | | 0.3500 | | | | 0.3500 | | | | 0.3500 | | | | 0.3600 | | | | 1.4100 | | | | 0.3406 | | | | 0.3406 | | | | 0.3406 | | | | 0.3500 | | | | 1.3719 | |
| (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
The Securities and Exchange Commission (“SEC”) has adopted certain rules with respect to the use of “non-GAAP financial measures” by companies with a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as TrustCo. Under the SEC’s rules, companies making disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. 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 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 this provides a reasonable measure of primary banking expenses relative to primary banking revenue. Additionally, we believe this measure is important to investors looking for a measure of efficiency in our productivity measured by the amount of revenue generated for each dollar spent.
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 taxable equivalent net interest margin and efficiency ratio to the most directly comparable GAAP financial measures is set forth below.
(dollars in thousands, except per share amounts) | |
(Unaudited) | |
| | | Years ended | |
| | | 12/31/22 | | | 12/31/21 | | | 12/31/20 | | | 12/31/19 | | | 12/31/18 | |
| Taxable Equivalent Net Interest Margin | | | | | | | | | | | | | | | |
| Net interest income (GAAP) | | $ | 180,135 | | | $ | 160,408 | | | $ | 153,580 | | | $ | 155,807 | | | $ | 160,686 | |
| Taxable Equivalent Adjustment | | | 1 | | | | 1 | | | | 3 | | | | 5 | | | | 12 | |
| Net interest income (Taxable Equivalent) (Non-GAAP) | | $ | 180,136 | | | $ | 160,409 | | | $ | 153,583 | | | $ | 155,812 | | | $ | 160,698 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Interest Earning Assets | | | 6,014,850 | | | | 5,928,077 | | | | 5,403,000 | | | | 5,023,914 | | | | 4,822,577 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net Interest Margin (GAAP) | | | 2.99 | % | | | 2.71 | % | | | 2.84 | % | | | 3.10 | % | | | 3.33 | % |
| Taxable Equivalent Net Interest Margin (Non-GAAP) | | | 2.99 | % | | | 2.71 | % | | | 2.84 | % | | | 3.10 | % | | | 3.33 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | Years ended | |
| | | 12/31/22 | | | 12/31/21 | | | 12/31/20 | | | 12/31/19 | | | 12/31/18 | |
| Efficiency Ratio | | | | | | | | | | | | | | | | | | | | |
| Net interest income (Taxable Equivalent) (Non-GAAP) | | $ | 180,136 | | | $ | 160,409 | | | $ | 153,583 | | | $ | 155,812 | | | $ | 160,698 | |
| Non-interest income (GAAP) | | | 19,260 | | | | 17,937 | | | | 17,170 | | | | 18,591 | | | | 18,081 | |
| Less: Net gain on securities | | | - | | | | - | | | | 1,155 | | | | - | | | | - | |
Less: Net gain on sale of building and net gain on sale of nonperforming loans | | | 268 | | | | - | | | | - | | | | - | | | | - | |
| Revenue used for efficiency ratio (Non-GAAP) | | $ | 199,128 | | | $ | 178,346 | | | $ | 169,598 | | | $ | 174,403 | | | $ | 178,779 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Noninterest expense (GAAP) | | $ | 100,319 | | | $ | 101,662 | | | $ | 95,704 | | | $ | 97,730 | | | $ | 97,713 | |
| Less: Other real estate (income) expense, net | | | 310 | | | | 183 | | | | 92 | | | | (166 | ) | | | 1,231 | |
| Expenses used for efficiency ratio (Non-GAAP) | | $ | 100,009 | | | $ | 101,479 | | | $ | 95,612 | | | $ | 97,896 | | | $ | 96,482 | |
| | | | | | | | | | | | | | | | | | | | | |
| Efficiency Ratio | | | 50.22 | % | | | 56.90 | % | | | 56.38 | % | | | 56.13 | % | | | 53.97 | % |
Allowance for Credit Losses on Loans:
A balance sheet account which represents management’s estimate of expected credit losses in the loan portfolio. The provision for credit 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 (Loss):
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).
Glossary of Terms (continued)
Individually Evaluated Loans:
Loans that no longer match the risk profile of the pool are individually assessed for credit losses. Non-accrual loans that have been delinquent 180 days or greater, commercial non-accrual loans and loans identified as troubled debt restructuring (“TDR”) are individually assessed.
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 credit losses on loans 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 (as such term is defined in Exchange Act Rule 13a-15(f)). 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, 2022. 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, 2022, the Company maintained effective internal control over financial reporting.
The Company’s internal control over financial reporting as of December 31, 2022 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
March 1, 2023
