UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number 0-10592
March 31, 2002
TRUSTCO BANK CORP NY
(Exact name of registrant as specified in its charter)
NEW YORK 14-1630287
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5 SARNOWSKI DRIVE, GLENVILLE, NEW YORK 12302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 377-3311
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Common
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes.(x) No.( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding
Class of Common Stock as of May 7, 2002
--------------------------- ----------------------
$1 Par Value 72,256,104
1
TrustCo Bank Corp NY
INDEX
Part I. FINANCIAL INFORMATION PAGE NO.
Item 1. Interim Financial Statements (Unaudited): Consolidated
Statements of Income for the Three Months
Ended March 31, 2002 and 2001 1
Consolidated Statements of Financial Condition 2
as of March 31, 2002 and December 31, 2001
Consolidated Statements of Cash Flows for the 3 - 4
Three Months Ended March 31, 2002 and 2001
Notes to Consolidated Interim Financial Statements 5 - 7
Independent Accountants' Review Report 8
Item 2. Management's Discussion and Analysis 10 - 17
Item 3. Quantitative and Qualitative Disclosures About 18
Market Risk
Part II. OTHER INFORMATION
Item 1. Legal Proceedings -- None
Item 2. Changes in Securities and Use of Proceeds -- None
Item 3. Defaults Upon Senior Securities --None
Item 4. Submissions of Matters to Vote of Security Holders
-- None
Item 5. Other Information -- None
2
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
On April 16, 2002, TrustCo filed a Current Report on Form 8-K,
regarding two press releases dated April 16, 2002, detailing first
quarter financial results.
3
TRUSTCO BANK CORP NY
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)
3 Months
Ended
March 31,
2002 2001
Interest and dividend income:
Interest and fees on loans $ 28,720 30,042
Interest on U. S. Treasuries and agencies 2,949 3,194
Interest on states and political
subdivisions 2,928 2,368
Interest on mortgage-backed securities 1,373 3,594
Interest and dividends on other securities 1,216 858
Interest on federal funds sold and other short-term
investments 1,877 3,773
--------------------------------
Total interest income 39,063 43,829
Interest expense:
Interest on deposits:
Interest-bearing checking 770 717
Savings 3,253 3,940
Money market deposit accounts 445 399
Time deposits 9,819 12,488
Interest on short-term borrowings 856 2,372
Interest on long-term debt 9 13
--------------------------------
Total interest expense 15,152 19,929
--------------------------------
Net interest income 23,911 23,900
Provision for loan losses 520 1,495
--------------------------------
Net interest income after
provision for loan losses 23,391 22,405
--------------------------------
Noninterest income:
Trust department income 1,832 2,063
Fees for other services to customers 2,442 2,308
Net gain on securities transactions 1,868 1,142
Other 611 813
--------------------------------
Total noninterest income 6,753 6,326
Noninterest expenses:
Salaries and employee benefits 5,814 6,623
Net occupancy expense 1,362 1,329
Equipment expense 718 1,348
FDIC insurance expense 90 94
Professional services 667 591
Other real estate expenses / (income) 71 (160)
Other 3,671 2,436
--------------------------------
Total noninterest expenses 12,393 12,261
--------------------------------
Income before taxes 17,751 16,470
Applicable income taxes 5,383 5,172
--------------------------------
Net income $ 12,368 11,298
================================
Net income per Common
Share:
- Basic $ 0.172 0.159
================================
- Diluted $ 0.166 0.154
================================
Per share data is adjusted for the effect of the 15% stock split declared
August 2001.
See accompanying notes to consolidated interim financial statements.
4
TRUSTCO BANK CORP NY
Consolidated Statements of Financial Condition
(dollars in thousands, except share data)
3/31/02 12/31/01
------- --------
ASSETS: (Unaudited)
Cash and due from banks $ 44,679 60,121
Federal funds sold and other short term investments 475,008 338,452
---------------- ----------------
Total cash and cash equivalents 519,687 398,573
Securities available for sale:
U. S. Treasuries and agencies 173,230 160,372
States and political subdivisions 225,010 216,566
Mortgage-backed securities 72,746 96,621
Other 121,609 113,541
---------------- ----------------
Total securities available for sale 592,595 587,100
---------------- ----------------
Loans:
Commercial 206,506 212,423
Residential mortgage loans 1,177,634 1,201,723
Home equity line of credit 124,690 122,332
Installment loans 18,719 20,979
---------------- ----------------
Total loans 1,527,549 1,557,457
---------------- ----------------
Less:
Allowance for loan losses 56,639 57,203
Unearned income 718 771
---------------- ----------------
Net loans 1,470,192 1,499,483
Bank premises and equipment 18,564 18,312
Real estate owned 303 603
Other assets 81,654 74,550
---------------- ----------------
Total assets $ 2,682,995 2,578,621
================ ================
LIABILITIES:
Deposits:
Demand $ 195,784 195,390
Interest-bearing checking 297,659 295,514
Savings accounts 691,642 649,081
Money market deposit accounts 97,574 75,620
Certificates of deposit (in denominations of
$100,000 or more) 124,962 128,887
Time deposits 761,762 748,414
---------------- ----------------
Total deposits 2,169,383 2,092,906
Short-term borrowings 243,641 218,219
Long-term debt 560 624
Accrued expenses and other liabilities 60,563 61,045
---------------- ----------------
Total liabilities 2,474,147 2,372,794
---------------- ----------------
SHAREHOLDERS' EQUITY:
Capital stock par value $1; 100,000,000 shares authorized, and 76,998,655 and
76,168,795 shares issued March 31, 2002
and December 31, 2001, respectively 76,999 76,169
Surplus 77,410 75,355
Undivided profits 65,505 63,940
Accumulated other comprehensive income:
Net unrealized gain on securities available for sale 22,307 21,668
Treasury stock at cost - 5,025,774 and 4,862,718 shares at
March 31, 2002 and December 31, 2001, respectively (33,373) (31,305)
---------------- ----------------
Total shareholders' equity 208,848 205,827
---------------- ----------------
Total liabilities and shareholders' equity $ 2,682,995 2,578,621
================ ================
See accompanying notes to consolidated interim financial statements.
5
TRUSTCO BANK CORP NY
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED March 31, 2002 2001
---------------- ----------------
Cash flows from operating activities:
Net income $12,368 11,298
---------------- ----------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 505 515
Provision for loan losses 520 1,495
Loss on sale of securities available for sale 452 118
Gain on sale of securities available for sale (2,320) (1,260)
Provision for deferred tax expense/(benefit) 2,102 (1,297)
Decrease in taxes receivable 2,493 5,854
Decrease in interest receivable 623 312
Decrease in interest payable (65) (192)
Increase in other assets (12,657) (5,897)
Decrease in accrued expenses (532) (2,687)
---------------- ----------------
Total adjustments (8,879) (3,039)
---------------- ----------------
Net cash provided by operating activities 3,489 8,259
---------------- ----------------
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale 59,025 67,257
Purchase of securities available for sale (71,877) (67,065)
Proceeds from maturities and calls
of securities available for sale 10,099 964
Net (increase)/decrease in loans 28,771 (20,080)
Proceeds from dispositions of real estate owned 334 467
Capital expenditures (691) (1,349)
---------------- ----------------
Net cash provided by/(used in) investing activities 25,661 (19,806)
---------------- ----------------
Cash flows from financing activities:
Net increase in deposits 76,477 8,638
Increase in short-term borrowings 25,422 16,811
Repayment of long-term debt (64) (70)
Proceeds from exercise of stock options 2,885 2,036
Proceeds from sale of treasury stock 1,923 1,677
Purchase of treasury stock (3,991) (2,936)
Dividends paid (10,688) (9,207)
---------------- ----------------
Net cash provided by financing activities 91,964 16,949
---------------- ----------------
Net increase in cash and cash equivalents 121,114 5,402
Cash and cash equivalents at beginning of period 398,573 345,446
---------------- ----------------
Cash and cash equivalents at end of period $519,687 350,848
================ ================
See accompanying notes to consolidated interim financial
statements.
(Continued)
6
TRUSTCO BANK CORP NY
Consolidated Statements of Cash Flows Continued (Unaudited)
(dollars in thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
THREE MONTHS ENDED March 31, 2002 2001
---------------- ----------------
Interest paid $15,217 20,121
Income taxes paid 788 899
Transfer of loans to real estate owned --- 723
Increase/(decrease) in dividends payable 115 26
Change in unrealized gain on securities
available for sale-gross of deferred taxes (874) (2,260)
Change in deferred tax effect on unrealized gain
on securities available for sale 235 933
See accompanying notes to consolidated interim financial statements.
7
TrustCo Bank Corp NY
Notes to Consolidated Interim Financial Statements
(Unaudited)
1. Financial Statement Presentation
In the opinion of the management of TrustCo Bank Corp NY (the Company), the
accompanying unaudited Consolidated Interim Financial Statements contain all
adjustments necessary to present fairly the financial position as of March 31,
2002 and the results of operations and cash flows for the three months ended
March 31, 2002 and 2001. The accompanying Consolidated Interim Financial
Statements should be read in conjunction with the TrustCo Bank Corp NY year-end
Consolidated Financial Statements, including notes thereto, which are included
in TrustCo Bank Corp NY's 2001 Annual Report to Shareholders on Form 10-K.
2. Earnings Per Share
A reconciliation of the component parts of earnings per share for the three
month period ended March 31, 2002 and 2001 follows:
Weighted Average Shares
(In thousands, Net Outstanding Per Share
except per share data) Income Amounts
----------------- -------------------------- -------------------
For the quarter ended March 31, 2002:
Basic EPS:
Net income available to
Common shareholders $12,368 71,779 $0.172
Effect of Dilutive Securities:
Stock options ------ 2,509 -------
----------------- -------------------------- -------------------
Diluted EPS $12,368 74,288 $0.166
================= ========================== ===================
For quarter ended March 31, 2001:
Basic EPS:
Net income available to
Common shareholders $11,298 70,831 $0.159
Effect of Dilutive Securities:
Stock options ------- 2,594 -------
----------------- -------------------------- -------------------
Diluted EPS $11,298 73,425 $0.154
================= ========================== ===================
Share and per share data have been adjusted for the 15% stock split declared
in August 2001.
8
3. Comprehensive Income
Comprehensive income includes the reported net income of a company adjusted for
items that are accounted for as direct entries to equity, such as the mark to
market adjustment on securities available for sale, foreign currency items,
minimum pension liability adjustments, and certain derivative gains and losses.
At the Company, comprehensive income represents net income plus other
comprehensive income, which consists of the net change in unrealized gains or
losses on securities available for sale for the period. Accumulated other
comprehensive income represents the net unrealized gains or losses on securities
available for sale as of the balance sheet dates.
Comprehensive income for the three month period ended March 31, 2002 and 2001
was $13,007,000 and $12,625,000 respectively. The following summarizes the
components of other comprehensive income:
Unrealized gains on securities: (dollars in thousands)
Unrealized net holding gains arising during the
three months ended March 31, 2002, net of tax
(pre-tax gain of $2,742). $1,759
Less reclassification adjustment for net gain
realized in net income during the three months
ended March 31, 2002, net of tax (pre-tax gain
of $1,868). 1,120
--------------
Other comprehensive income - three months
ended March 31, 2002 $ 639
==============
Unrealized net holding gains arising during the
three months ended March 31, 2001, net of tax
(pre-tax gain of $3,402). $2,002
Less reclassification adjustment for net gain
realized in net income during the three months
ended March 31, 2001 net of tax (pre-tax gain
of $1,142). 675
--------------
Other comprehensive income - three months
ended March 31, 2001 $1,327
==============
9
4. Impact of Changes in Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations"(Statement 141) and Statement No. 142, "Goodwill and
Other Intangible Assets" (Statement 142). Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 141 also specifies criteria that intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. Statement 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually. Statement 142
also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of".
The Company was required to adopt the provisions of Statement 141 in July 2001
and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30,2001, will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
As of December 31, 2001, the Company had $553 thousand of unamortized goodwill,
which is subject to the transition provisions of Statements 141 and 142.
Amortization expense related to goodwill was $62 thousand for the twelve months
ended December 31, 2001. No impairment loss was required at adoption.
The adoption of these Statements did not have a material effect on the Company's
consolidated financial statements.
10
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
TrustCo Bank Corp NY:
We have reviewed the consolidated statement of financial condition of TrustCo
Bank Corp NY and subsidiaries (the Company) as of March 31, 2002, and the
related consolidated statements of income and cash flows for the three month
periods ended March 31, 2002 and 2001. These consolidated financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial condition of TrustCo Bank Corp NY and subsidiaries as of December 31,
2001 and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for the year then ended (not presented herein); and in
our report dated January 18, 2002, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated statement of financial condition as of December
31, 2001 is fairly stated, in all material respects, in relation to the
consolidated statement of financial condition from which it has been derived.
/s/KPMG LLP
- ------------------------------
KPMG LLP
Albany, New York
April 11, 2002
11
TrustCo Bank Corp NY
Management's Discussion and Analysis
March 31, 2002
The review that follows focuses on the factors affecting the financial condition
and results of operations of TrustCo Bank Corp NY ("TrustCo" or "Company")
during the three month period ended March 31, 2002, with comparisons to 2001 as
applicable. Net interest income and net interest margin are presented on a fully
taxable equivalent basis in this discussion. The consolidated interim financial
statements and related notes, as well as the 2001 Annual Report to Shareholders
should be read in conjunction with this review. Amounts in prior period
consolidated interim financial statements are reclassified whenever necessary to
conform to the current period's presentation. Per share results have been
adjusted for the 15% stock split declared in August 2001.
Forward-looking Statements
Statements included in this review and in future filings by TrustCo with the
Securities and Exchange Commission, in TrustCo's press releases, and in oral
statements made with the approval of an authorized executive officer, which are
not historical or current facts, are "forward-looking statements" made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, and are subject to certain risks and uncertainties that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. 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: (1) credit risk, (2) interest rate risk, (3)
competition, (4) changes in the regulatory environment, and (5) changes in
general business and economic trends. The foregoing list should not be construed
as exhaustive, and the Company disclaims any obligation to subsequently revise
any forward-looking statements to reflect events or circumstances after the date
of such statements, or to reflect the occurrence of anticipated or unanticipated
events.
Following this discussion is the table "Distribution of Assets, Liabilities and
Shareholders' Equity: Interest Rates and Interest Differential" which gives a
detailed breakdown of TrustCo's average interest earning assets and interest
bearing liabilities for the three months ended March 31, 2002 and 2001.
Overview
TrustCo recorded net income of $12.4 million, or $0.166 of diluted earnings per
share for the three months ended March 31, 2002, as compared to net income of
$11.3 million or $0.154 of diluted earnings per share in the same period in
2001.
The primary factors accounting for the year to date increases were:
. Increase in interest earning assets of $179.2 million to $2.51 billion in
2002 as compared to $2.33 billion in 2001,
. Reduction in the provision for loan losses from $1.5 million in 2001 to
$520 thousand in 2002, and
12
. Increases in noninterest income from $6.3 million to $6.8 million in
2002.
These positive factors affecting net income were partially offset by:
. Decrease in net interest margin from 4.28% in 2001 to 4.07% in 2002, and
. Increase in noninterest expense from $12.3 million in 2001 to $12.4
million in 2002.
Asset/Liability Management
The Company strives to generate superior earnings capabilities through a mix of
core deposits, funding a prudent mix of earning assets. This is, in its most
fundamental form, the essence of asset/liability management. Additionally,
TrustCo attempts to maintain adequate liquidity and reduce the sensitivity of
net interest income to changes in interest rates to an acceptable level while
enhancing profitability both on a short-term and long- term basis.
The following Management's Discussion and Analysis for the first quarter of 2002
compared to the comparable period in 2001 is greatly affected by the change in
interest rates in the marketplace in which TrustCo competes. Included in the
2001 Annual Report to Shareholders is a description of the effect interest rates
had on the results for the year 2001 compared to 2000. Most of the same market
factors discussed in the 2001 Annual Report also had a significant impact on the
first quarter 2002 results.
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 period.
Interest rates have changed dramatically in response to the slowing economic
conditions. One of the most important interest rates utilized to control
economic activity is the "federal funds" rate. This is the rate utilized within
the banking system for overnight borrowings for the highest credit quality
institutions. The federal funds rate was 6% at the beginning of 2001 and had
decreased to 5% by the end of the first quarter of 2001. In 2002 the federal
funds rate was consistent from the beginning of the year and throughout the
quarter at 1.75%. The federal funds rate affects the level of other interest
rates in the economy, most specifically the prime rate. The prime rate was 9% at
the beginning of 2001 and had decreased to 8% by the end of the first quarter of
2001. By the end of 2001, the prime rate had declined to 4.75% and has remained
there for the first four months of 2002.
13
Earning Assets
Total interest earning assets increased to $2.51 billion in 2002 from $2.33
billion in 2001 with an average yield of 7.74% in 2001 and 6.51% in 2002. Income
on earning assets decreased by $4.2 million during this same time-period from
$45.1 million in 2001 to $40.9 million in 2002. The decrease in interest income
on earning assets was attributable to the decrease in yield on these assets
offset by the increase in average balances.
Loans
The average balance of loans was $1.54 billion in 2002 and $1.48 billion in
2001. The yield on loans decreased from 8.12% in 2001 to 7.49% in 2002. The
combination of the higher average balances and the lower rates resulted in a
decrease in the interest income on loans by $1.3 million.
During the first quarter of 2002 the balance of the loan portfolio increased
primarily as a result of the increase in the residential mortgages. The average
balance of residential mortgage loans was $1.13 billion in 2001 compared to
$1.19 billion in 2002, an increase of 5.1%. The average yield on residential
mortgage loans decreased by 26 basis points in 2002 compared to 2001. TrustCo
actively markets the residential loan products within its market territory.
Mortgage loan rates are affected by a number of factors including, the prime
rate, the federal funds rate, rates set by competitors and secondary market
participants. As noted earlier, market interest rates have dropped significantly
as a result of national economic policy in the United States. Though interest
rates on the residential mortgage loan products decreased during this time
period they did not decrease as much as the reduction in the target federal
funds rate or the prime rate. Also during this time TrustCo aggressively
marketed the unique features of its loan products thereby differentiating itself
from other lenders. These differences include extremely low closing costs, quick
turnaround on credit decisions, no required escrow payments or private mortgage
insurance and the fact that the loans are held in portfolio. The combination of
competitive interest rates and the product differentiation are the principal
reasons for the increase in the balance of the residential loans outstanding.
The impact of the decrease in the benchmark interest rate indexes (prime rate,
federal funds, etc.) is apparent in the decrease in the yield earned in the
commercial and home equity loan portfolios. The rates earned in 2002 were 83 bp,
and 383 bp, respectively, less than in the first three months of 2001.
Securities Available for Sale
Securities available for sale had an average balance of $543.2 million during
the quarter ended March 31, 2002, as compared to $582.3 million in 2001. These
balances earned an average yield of 7.55% in 2002 and 7.72% in 2001. This
resulted in interest income on the securities available for sale of $10.3
million in 2002 and $11.2 million in 2001. The decrease in average balances
during the quarter and the decrease in the average rates caused a $983 thousand
decrease in interest income to $10.3 million in 2002.
14
Federal Funds Sold
The 2002 first quarter average balance of federal funds sold was $423.7 million,
$155.5 million more than the $268.2 million in 2001. The portfolio yield
decreased to 1.75% in 2002, compared to 5.71% in 2001. Changes in the yield
resulted from changes in the target rate set by the Federal Reserve Board for
federal funds sold. Interest income on this portfolio decreased by approximately
$1.9 million from $3.8 million in 2001 to $1.8 million in 2002.
The increase in federal funds balances between the first quarter of 2001 and
2002 reflects a decision to hold funds in overnight deposits versus making
longer-term investments in loans or securities available for sale. The decision
to retain additional liquidity in the form of federal fund balances is a result
of the relatively low interest rates in the market for such alternative
investments while keeping the balances available for investment once rates
change. The effect of this decision by TrustCo is to have significantly more
funds invested in the federal funds portfolio at significantly lower interest
rates during the first quarter of 2002 with the expectation that opportunities
for reinvestment at higher yields will be available later in 2002.
Funding Opportunities
TrustCo utilizes various funding sources to support its earning asset portfolio.
The vast majority of the Company's funding comes from traditional deposit
vehicles such as savings, interest-bearing checking and time deposit accounts.
Total interest-bearing deposits (which includes interest bearing checking, money
market accounts, savings, and certificates of deposit) increased to $1.94
billion during 2002, and the average rate paid decreased to 2.99% for 2002 from
3.91% for 2001. Total interest expense on these deposits decreased $3.3 million
to $14.3 million.
Short-term borrowings, primarily the Trustco Short-Term Investment Account,
increased by $39.4 million between the first quarter of 2001 and 2002. Total
interest expense on this account decreased by $1.5 million in 2002, and the
average rate paid decreased 337 basis points to 1.45%.
Demand deposit balances increased by 7.6% during the period from the first
quarter of 2001 to the first quarter of 2002. The average balance was $189.6
million in 2002, and $176.1 million in 2001.
Net Interest Income
Taxable equivalent net interest income increased to $25.7 million in 2002. The
net interest spread decreased 5 basis points between 2001 and 2002 and the net
interest margin decreased by 21 basis points.
Nonperforming Assets
Nonperforming assets include nonperforming loans which are those loans in a
nonaccrual status, loans that have been restructured, and loans past due 90 days
or more and still accruing interest. Also included in the total of nonperforming
assets are foreclosed real estate properties, which are categorized as real
estate owned.
15
Impaired loans are considered to be those commercial and commercial real estate
loans in a nonaccrual status and loans restructured since January 1, 1995, when
the accounting standards required the identification, measurement and reporting
of impaired loans. The following describes the nonperforming assets of TrustCo
as of March 31, 2002.
Nonperforming loans: Total nonperforming loans were $8.1 million at March 31,
2002, a decrease from the $11.2 million of nonperforming loans at March 31,
2001. Nonaccrual loans were $2.4 million at March 31, 2002 a decrease from the
$5.5 million at March 31, 2001. Restructured loans were $5.5 million at March
31, 2002 compared to $5.1 million at March 31, 2001.
Virtually all of the nonperforming loans at March 31, 2002 and 2001 are
residential real estate or retail consumer loans. Historically the vast majority
of nonperforming loans were concentrated in the commercial and commercial real
estate portfolios. There has been a dramatic shifting of nonperforming loans to
the residential real estate and retail consumer loan portfolio for several
factors, including:
. The overall emphasis within TrustCo for residential real estate
originations,
. The relatively weak economic environment in the upstate
New York territory, and
. The reduction in real estate values in TrustCo's market area
that has occurred since the middle of the 1990's, thereby
causing a reduction in the collateral value that supports the
real estate loans.
Consumer defaults and bankruptcies have increased dramatically over the last
several years and this has lead to an increase in defaults on loans. TrustCo
strives to identify borrowers that are experiencing financial difficulties and
to work aggressively with them so as to minimize losses or exposures.
Total impaired loans at March 31 2002 of $5.3 million, consisted of restructured
retail loans. During the first quarter of 2002, there were $837 thousand of
commercial loan charge offs, $148 thousand of consumer loan charge offs and $440
thousand of residential mortgage loan charge offs as compared with $248 thousand
of commercial loan charge offs, $140 thousand of consumer loan charge offs and
$1.2 million of residential mortgage loan charge offs in the first quarter of
2001. Recoveries during the quarter were $341 thousand in 2002 and $559 thousand
in 2001.
Real estate owned: Total real estate owned of $303 thousand at March 31, 2002
decreased by $1.9 million since March 31, 2001.
Allowance for loan losses: The balance of the allowance for loan losses is
maintained at a level that is, in management's judgment, representative of the
amount of the risk inherent in the loan portfolio.
16
At March 31, 2002, the allowance for loan losses was $56.6 million, which
represents a slight decrease from the $57.2 million in the allowance at December
31, 2001. The allowance represents 3.71% of the loan portfolio as of March 31,
2002 compared to 3.80% at March 31, 2001. The provision charged to expense was
$520 thousand compared to $1.5 million for 2001. The allowance has reached an
overall level that Management feels is appropriate given current market
conditions.
In deciding on the adequacy of the allowance for loan losses, management reviews
the current nonperforming loan portfolio as well as loans that are past due and
not yet categorized as nonperforming for reporting purposes. Also, there are a
number of other factors that are taken into consideration, including:
. The magnitude and nature of the recent loan charge offs and the
movement of charge offs to the residential real estate loan
portfolio,
. The growth in the loan portfolio and the implication that has
in relation to the economic climate in the bank's business
territory,
. Changes in underwriting standards in the competitive environment
that TrustCo operates in,
. Significant growth in the level of losses associated with
bankruptcies and the time period needed to foreclose, secure and
dispose of collateral, and
. The relatively weak economic environment in the upstate New York
territory combined with declining real estate prices.
Consumer bankruptcies and defaults in general have risen significantly during
the 1990's. This trend appears to be continuing as a result of economic strife
and the relative ease of access by consumers to additional credit. Job growth in
the upstate New York area has been modest to declining and there continues to be
a shifting of higher paying jobs in manufacturing and government to lower paying
service jobs.
In light of these trends, management believes the allowance for loan losses is
reasonable in relation to the risk that is present in its current loan
portfolio.
Liquidity and Interest Rate Sensitivity
TrustCo seeks to obtain favorable sources of funding and to maintain prudent
levels of liquid assets in order to satisfy varied liquidity demands. TrustCo's
earnings performance and strong capital position enable the Company to raise
funds easily in the marketplace and to secure new sources of funding. The
Company actively manages its liquidity through target ratios established under
its liquidity policies. Continual monitoring of both historical and prospective
ratios allows TrustCo to employ strategies necessary to maintain adequate
liquidity. Management has also defined various degrees of adverse liquidity
situations, which could potentially occur, and has prepared appropriate
contingency plans should such a situation arise.
17
Noninterest Income
Total noninterest income for the first quarter was $6.8 million, compared to
$6.3 million in 2001. Included in both the 2002 and 2001 first quarter results
are net securities gains of $1.9 million in 2002, and $1.1 million in 2001.
Noninterest Expenses
Total noninterest expense increased slightly from $12.3 million for the three
months ended March 31, 2001 to $12.4 million for the three months ended March
31, 2002. Within the category of noninterest expense, salaries and employee
benefits decreased by approximately $809 thousand due primarily to the reduction
in salary and benefits by the chief executive officer. The Chief Executive
Officer's salary was reduced by $450,000 which in turn affected the amount
reserved for the incentive bonus plans. In addition the supplemental executive
retirement plan for the Chief Executive Officer was also capped at the level of
the accrual as of December 31, 2001.
Equipment expense decreased by approximately $630 thousand primarily as a result
of reduced computer expense due to contracts not being renewed in 2002 as a
result of the anticipated conversion to Fiserv. Other expenses increased by $1.2
million from $2.4 million in 2001 to $3.7 million in 2002. Of the $1.2 million
increased expense, approximately $460 thousand relates to the additional cost of
the Fiserv conversion, and $400 thousand was the result of various equipment and
other asset write offs.
Income Taxes
In the first quarter of 2002 and 2001, TrustCo recognized income tax expense of
$5.4 million and $5.2 million, respectively. The effective tax rate for the
first quarter of 2002 was 30.3% compared to 31.4% for the same period of 2001.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable financial
organization, TrustCo strives to maintain strong capital ratios. New issues of
equity securities have not been required since traditionally, most of its
capital requirements are met through capital retention.
Total shareholders' equity at March 31, 2002 was $208.8 million, an increase
from the $205.8 million at year-end 2001. TrustCo declared dividends of $0.150
in 2002, compared with $0.130 in 2001. These results represent a dividend payout
ratio of 87.36% in 2002 and 81.72% in 2001.
18
The Company achieved the following ratios as of March 31, 2002 and 2001:
March 31, Minimum Regulatory
2002 2001 Guidelines
--------------------------------------------
Tier 1 risk adjusted
capital 13.36% 13.75 4.00
Total risk adjusted
capital 14.65 15.04 8.00
In addition, at March 31, 2002 and 2001, the consolidated equity to total assets
ratio (excluding the mark to market effect of securities available for sale) was
7.01% and 7.24% respectively.
Critical Accounting Policies:
Pursuant to recent SEC guidance, management of the Company is encouraged to
evaluate and disclose those accounting policies that are judged to be critical
policies - those most important to the portrayal of the Company's financial
condition and results, and that require management's most difficult subjective
or complex judgments. Management considers the accounting policy relating to the
allowance for loan losses to be a critical accounting policy given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the portfolio and the material effect that such judgments can have on
the results of operations. Included in the notes to the Consolidated Financial
Statements is a description in Note 1 of the significant accounting policies
that are utilized by the Company in the preparation of the Consolidated
Financial Statements.
19
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of average
balance sheet, related interest income and expense and the average
annualized yields on interest earning assets and annualized rates on
interest bearing liabilities of TrustCo (adjusted for tax equivalency)
for each of the reported periods. Nonaccrual loans are included in loans
for this analysis. The average balances of securities available for sale is
calculated using amortized costs for these securities. Included in the
balance of shareholders' equity is unrealized appreciation, net of tax, in
the available for sale portfolio of $23.6 million in 2002 and $21.4 million
in 2001. The subtotals contained In the following table are the arithmetic
totals of the items contained in that category.
First 2002 First 2001
Quarter Quarter
--------- --- ------- ----- --- -------- --- ------ ------ ------- --------- -------
Average Interest Average Average Interest Average Change in Variance Variance
Rate Balance Rate Interest Balance Rate
(dollars in thousands)
Income/ Change Change
Expense
Assets
Commercial loans $ 208,976 $ 4,156 7.98% $ 202,992 $ 4,459 8.81% (303) 732 (1,035)
Residential mortgage loans 1,185,714 22,482 7.58% 1,128,368 22,113 7.84% 369 3,731 (3,362)
Home equity lines of credit 123,477 1,470 4.83% 129,339 2,761 8.66% (1,291) (120) (1,171)
Installment loans 18,828 635 13.67% 23,777 749 12.77% (114) (406) 292
----------- ------------------- ------------- -----------------------------------------------
Loans, net of unearned income 1,536,995 28,743 7.49% 1,484,476 30,082 8.12% (1,339) 3,937 (5,276)
Securities available for sale:
U.S. Treasuries and agencies 161,164 2,957 7.34% 166,373 3,204 7.70% (247) (98) (149)
Mortgage-backed securities 76,461 1,373 7.18% 193,456 3,594 7.43% (2,221) (2,104) (117)
States and political
subdivisions 218,206 4,337 7.95% 174,297 3,485 8.00% 852 994 (142)
Other 87,383 1,584 7.26% 48,132 951 7.93% 633 1,159 (526)
----------- ------------------ ------------- -----------------------------------------------
Total securities available 543,214 10,251 7.55% 582,258 11,234 7.72% (983) (49) (934)
for sale
Federal funds sold 423,670 1,826 1.75% 268,162 3,773 5.71% (1,947) 8,780 (10,727)
Other short-term investments 10,209 51 2.02% --- --- --- 51 51 ---
----------- ------------------ ------------- -----------------------------------------------
Total Interest earning
assets 2,514,088 40,871 6.51% 2,334,896 45,089 7.74% (4,218) 12,719 (16,937)
------------------- -------------------------------------------------
Allowance for loan losses (57,748) (57,024)
Cash and non-interest earning
assets 174,804 163,655
----------- ----------
Total assets $ 2,631,144 $ 2,441,527
=========== ===========
Liabilities and shareholders'equity
Deposits:
Interest bearing checking 294,142 770 1.06% $ 273,690 717 1.06% 53 53 ---
Money market accounts 85,835 445 2.10% 59,310 399 2.73% 46 524 (478)
Savings 669,842 3,253 1.97% 591,545 3,940 2.70% (687) 2,613 (3,300)
Time deposits 888,655 9,819 4.48% 893,426 12,488 5.67% (2,669) (66) (2,603)
----------- --------------------------------- ------------------------------------------------
Total interest bearing
deposits 1,938,474 14,287 2.99% 1,817,971 17,544 3.91% (3,257) 3,124 (6,381)
Short-term borrowings 239,065 856 1.45% 199,622 2,372 4.82% (1,516) 2,629 (4,145)
Long-term debt 582 9 5.95% 873 13 5.91% (4) (4) ---
----------- ---------------------------------- ------------------------------------------------
Total interest bearing
liabilities 2,178,121 15,152 2.82% 2,018,466 19,929 4.00% (4,777) 5,749 (10,526)
------- ------ ------------------------------
Demand deposits 189,582 176,129
Other liabilities 53,966 48,661
Shareholders' equity 209,475 198,271
----------- --------
Total liab. & shareholders'
equity $ 2,631,144 $ 2,441,527
=========== ============
Net interest income 25,719 25,160 559 6,970 (6,411)
-------- ------- ------------------------------
Net interest spread 3.69% 3.74%
Net interest margin (net interest
income to total interest
earning assets) 4.07% 4.28%
Tax equivalent adjustment 1,808 1,260
------ ------
Net interest income per book $ 23,911 $ 23,900
========= =========
20
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
As detailed in the Annual Report to Shareholders as of December 31, 2001 the
Company is subject to interest rate risk as it is principal market risk. As
noted in detail throughout this Management's Discussion and Analysis for the
three months ended March 31, 2002 the Company continues to respond to changes
in interest rates in a fashion to position the Company to meet both short term
earning goals but to also allow the Company to respond to changes in interest
rates in the future. Consequently the average balance of federal funds sold
and other short-term investments has increased from $268.2 million in 2001 to
$433.9 million in 2002. These increases in federal funds sold and short term
investments position the Company with added funds available for investment in
the securities and loan portfolios if rates rise.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TrustCo Bank Corp NY
Date: May 10, 2002 By: /s/Robert A. McCormick
-----------------------------------
Robert A. McCormick
President and
Chief Executive Officer
Date: May 10, 2002 By: /s/ Robert T. Cushing
-----------------------------------
Robert T. Cushing
Vice President and Chief
Financial Officer
22
(a) Exhibits - None
23