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, 1999
TRUSTCO BANK CORP NY
(Exact name of registrant as specified in its charter)
NEW YORK 14-1630287
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 STATE STREET, SCHENECTADY, NEW YORK 12305
(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 April 15, 1999
- --------------------------- ----------------------
$1 Par Value 26,944,748
TrustCo Bank Corp NY
INDEX
Part I. FINANCIAL INFORMATION PAGE NO.
- -------------------------------------------------------------------------------
Item 1. Interim Financial Statements (Unaudited): Consolidated 1
Statements of Income for the Three Months Ended March 31, 1999
and 1998
Consolidated Statements of Financial Condition as of March 31, 2
1999 and December 31, 1998
Consolidated Statements of Cash Flows for the Three Months 3 - 4
Ended March 31, 1999 and 1998
Notes to Consolidated Interim Financial Statements 5 - 6
Independent Auditors' Report 7
Item 2. Management's Discussion and Analysis 8 - 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings -- None
Item 2. Changes in Securities -- None
Item 3. Defaults Upon Senior Securities --None
Item 4. Submissions of Matters to Vote of Security Holders -- None
Item 5. Other Information -- None
i
Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
Filing of Form 8-K on April 20, 1999, regarding two press releases dated
April 20, 1999, detailing first quarter financial results, incorporated
herein by reference.
ii
TRUSTCO BANK CORP NY
Consolidated Statements of Income (unaudited)
(dollars in thousands, except per share data)
3 Months Ended
March 31
1999 1998
Interest income:
Interest and fees on loans $ 26,560 27,882
Interest on U. S. Treasuries and agencies 2,952 5,078
Interest on states and political
subdivisions 1,773 1,521
Interest on mortgage-backed securities 4,079 2,909
Other securities 2,086 891
Interest on federal funds sold 4,216 5,122
----------------------------
Total interest income 41,666 43,403
----------------------------
Interest expense:
Interest on deposits:
Interest-bearing checking 676 908
Savings 4,397 5,115
Money market deposit accounts 399 417
Time deposits 12,319 13,748
Interest on short-term borrowings 1,448 1,567
----------------------------
Total interest expense 19,239 21,755
----------------------------
Net interest income 22,427 21,648
Provision for loan losses 1,513 1,372
----------------------------
Net interest income after provision
for loan losses 20,914 20,276
----------------------------
Noninterest income:
Trust department income 1,871 1,675
Fees for other services to customers 2,132 2,056
Net gain/(loss) on securities transactions (420) 32
Other 1,837 791
----------------------------
Total noninterest income 5,420 4,554
----------------------------
Noninterest expenses:
Salaries and employee benefits 6,224 5,797
Net occupancy expense 1,241 1,265
Equipment expense 1,797 1,248
FDIC insurance expense 63 62
Professional services 594 587
Other real estate expenses (88) 326
Other 2,371 2,244
----------------------------
Total noninterest expenses 12,202 11,529
----------------------------
Income before taxes 14,132 13,301
Applicable income taxes 4,809 4,923
----------------------------
Net income $ 9,323 8,378
============================
Net income per Common Share:
- Basic $ 0.35 0.31
============================
- Diluted $ 0.33 0.30
============================
Per share data is adjusted for the effect of the 15% stock split declared
August, 1998.
See accompanying notes to consolidated interim financial statements.
-1-
TRUSTCO BANK CORP NY
Consolidated Statements of Financial Condition
(dollars in thousands, except share data)
03/31/99 12/31/98
ASSETS: (unaudited)
Cash and due from banks $ 38,233 41,950
Federal funds sold 364,000 358,000
Other short-term funds 0 24,979
-------------------------------
Total cash and cash equivalents 402,233 424,929
Securities available for sale:
U. S. Treasuries and agencies 151,100 167,825
States and political subdivisions 138,398 129,745
Mortgage-backed securities 245,820 249,489
Other 145,842 170,351
-------------------------------
Total securities available for sale 681,160 717,410
-------------------------------
Loans:
Commercial 183,256 188,115
Residential mortgage loans 967,241 961,499
Home equity line of credit 143,689 147,581
Installment loans 24,953 26,574
-------------------------------
Total loans 1,319,139 1,323,769
-------------------------------
Less:
Allowance for loan losses 54,772 54,375
Unearned income 951 1,066
-------------------------------
Net loans 1,263,416 1,268,328
Bank premises and equipment 15,824 17,022
Real estate owned 2,950 5,174
Other assets 68,580 52,217
-------------------------------
Total assets $ 2,434,163 2,485,080
===============================
LIABILITIES:
Deposits:
Demand $ 146,107 154,358
Interest-bearing checking 261,458 266,027
Savings accounts 665,592 660,376
Money market deposit accounts 58,941 58,061
Certificates of deposit (in denominations of
$100,000 or more) 122,053 139,310
Time deposits 806,407 829,282
-------------------------------
Total deposits 2,060,558 2,107,414
Short-term borrowings 144,350 147,924
Accrued expenses and other liabilities 44,038 43,900
-------------------------------
Total liabilities 2,248,946 2,299,238
-------------------------------
SHAREHOLDERS' EQUITY:
Capital stock par value $1; 50,000,000 shares authorized,
and 28,163,017 and 27,976,793 shares issued March 31, 1999
and December 31, 1998, respectively 28,163 27,977
Surplus 111,828 110,398
Undivided profits 42,452 40,533
Accumulated other comprehensive income:
Net unrealized gain on securities available for sale 16,532 18,603
Treasury stock at cost - 1,252,026 and 1,184,525 shares at
March 31, 1999 and December 31, 1998, respectively (13,758) (11,669)
-------------------------------
Total shareholders' equity 185,217 185,842
-------------------------------
Total liabilities and shareholders' equity $ 2,434,163 2,485,080
===============================
See accompanying notes to consolidated interim financial statements.
- 2 -
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, 1999 1998
-------- --------
Cash flows from operating activities:
Net income..............................................$ 9,323 8,378
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 811 579
Gain on sales of fixed assets.......................... (1,244) (186)
Provision for loan losses............................... 1,513 1,372
Loss on sale of securities available for sale........... 972 1
Gain on sale of securities available for sale........... (552) (33)
Provision for deferred tax benefit..................... (717) (971)
Decrease in taxes receivable........................... 5,176 4,748
Increase in interest receivable......................... (1,148) (1,408)
Increase/(decrease) in interest payable................. (53) 91
Increase in other assets............................... (17,637) (3,884)
Increase/(decrease) in accrued expenses................. 156 (22)
-------- --------
Total adjustments.................................... (12,723) 287
-------- --------
Net cash provided by/(used in) operating activities....... (3,400) 8,665
-------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale.... 76,020 267
Purchase of securities available for sale............... (83,450) (104,450)
Proceeds from maturities and calls
of securities available for sale...................... 39,758 82,666
Net (increase)/decrease in loans........................ 2,081 (6,390)
Proceeds from dispositions of real estate owned........ 2,936 2,333
Proceeds from sales of fixed assets.................... 2,079 479
Capital expenditures................................... (448) (296)
-------- --------
Net cash provided by/(used in) investing activities... 38,976 (25,391)
-------- --------
Cash flows from financing activities:
Net increase/(decrease) in deposits..................... (46,856) 21,444
Increase/(decrease) in short-term borrowing............. (3,574) 3,928
Proceeds from exercise of stock options................ 1,312 102
Proceeds from sale of treasury stock................... 1,391 2,253
Purchase of treasury stock............................. (3,176) (4,723)
Dividends paid......................................... (7,369) (6,439)
-------- --------
Net cash (used in)/provided by financing activities... (58,272) 16,565
-------- --------
Net decrease in cash and cash equivalents................ (22,696) (161)
Cash and cash equivalents at beginning of period.......... 424,929 437,740
-------- --------
Cash and cash equivalents at end of period..............$ 402,233 437,579
======== ========
See accompanying notes to consolidated interim financial statements. (Continued)
- 3 -
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, 1999 1998
-------- --------
Interest paid.........................................$ 19,292 21,664
Income taxes paid...................................... 350 1,146
Transfer of loans to real estate owned................. 1,318 966
Increase/(decrease) in dividends payable............... 35 (20)
Change in unrealized gain on securities
available for sale-gross of deferred taxes............ 3,502 2,431
Change in deferred tax effect on unrealized gain
on securities available for sale...................... (1,431) (993)
See accompanying notes to consolidated interim financial statements.
- 4 -
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,
1999, the results of operations for the three months ended March 31, 1999 and
1998, and the cash flows for the three months ended March 31, 1999 and 1998. 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 1998 Annual Report to Shareholders on Form 10-K. All share and per share
data have been adjusted for the 15% stock split declared in August 1998.
2. Earnings Per Share
A reconciliation of the component parts of earnings per share for the three
month periods ended March 31, 1999 and 1998 follows:
Weighted Average Shares
(In thousands, Net Outstanding Per Share
except per share data) Income Amounts
-----------------------------------------------
For the quarter ended March 31, 1999:
Basic EPS:
Net income available to
Common shareholders.............. $9,323 26,873 $0.35
Effect of Dilutive Securities:
Stock options....................... ------ 1,119 -----
----------------------------------------------
Diluted EPS $9,323 27,992 $0.33
==============================================
For quarter ended March 31, 1998:
Basic EPS:
Net income available to
Common shareholders.............. $8,378 26,888 $0.31
Effect of Dilutive Securities:
Stock options....................... ------ 1,088 -----
---------------------------------------------
Diluted EPS $8,378 27,976 $0.30
=============================================
Per share data has been adjusted for the 15% stock split declared in August
1998.
5
3. Comprehensive Income
On January 1, 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," (Statement 130).
This Statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income includes the reported net income
of a company adjusted for items that are currently accounted for as direct
entries to equity, such as the mark to market adjustment on securities available
for sale, foreign currency items and minimum pension liability adjustments. 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, 1999 and 1998
was $7,252,000 and $6,940,000 respectively. The following summarizes the
components of other comprehensive income:
Unrealized gains on securities: (dollars in thousands)
Unrealized net holding losses arising during three months ended
March 31, 1999, net of tax
(pre-tax loss of $3,922) ($2,319)
Reclassification adjustment for net loss realized in net income during the
three months ended March 31, 1999, net of tax (pre-tax
loss of $420) (248)
----------
Other comprehensive income - three months ended March 31, 1999 ($2,071)
==========
Unrealized net holding losses arising during three months ended March 31,
1998, net of tax
(pre-tax loss of $2,399) ($1,419)
Reclassification adjustment for net gain realized in net income during the
three months ended March 31, 1998 net of tax (pre-tax
gain of $32) 19
----------
Other comprehensive income - three months ended March 31, 1998 ($1,438)
==========
6
INDEPENDENT AUDITORS' 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, 1999, and the
related consolidated statements of income and cash flows for the three month
periods ended March 31, 1999 and 1998. 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of TrustCo Bank
Corp NY and subsidiaries as of December 31, 1998 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 22,
1999, 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, 1998 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 12, 1999
7
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
TrustCo Bank Corp NY
Management's Discussion and Analysis
March 31, 1999
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, 1999, with comparisons to 1998 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 1998 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 1998.
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) certain vendors of critical systems or services failing to
comply with Year 2000 programming issues, (5) changes in the regulatory
environment, and (6) 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, 1999 and 1998.
Overview
TrustCo recorded net income of $9.3 million, or $0.33 of diluted earnings per
share for the three months ended March 31, 1999, as compared to net income of
$8.4 million or $0.30 of diluted earnings per share in the same period in 1998.
The primary factors accounting for the year to date increases are:
8
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
` Increase in average total interest earning assets of $76.5 million or 3.4%
between March 31, 1998 and March 31, 1999,
` A 2 basis points increase in the
net interest margin from 3.92% for the first quarter 1998 to 3.94% for 1999,
and
` An increase in noninterest income (excluding securities transactions) of $1.3
million to $5.8 million at March 31, 1999.
These increases were partially offset by an increase of $670 thousand in
noninterest expense.
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.
Earning Assets
Total interest earning assets increased from $2.28 billion in 1998 to $2.36
billion in 1999 with an average yield of 7.26% in 1999 and 7.79% in 1998. Income
on earning assets decreased by $1.6 million during this same time-period from
$44.3 million in 1998 to $42.6 million in 1999. The decrease in interest income
on earning assets was attributable to the reduction in yield on these assets.
Loans
The average balance of loans was $1.32 billion in 1999 and $1.30 billion in
1998. The yield on loans decreased from 8.63% in 1998 to 8.09% in 1999. The
combination of the higher average balances offset by the lower rates resulted in
a decrease in the interest income on loans by $1.4 million.
Within the category of loans, the average commercial loan balances decreased by
$4.7 million, residential mortgage loans increased by $49.5 million, home equity
lines of credit decreased by $24.0 million, and the installment loan portfolio
decreased by $3.1 million. These changes continue to reflect the competitive
environment that exists for loans and the emphasis that TrustCo has for the
residential mortgage loan products.
Securities Available for Sale
Securities available for sale had an average balance of $678.3 million during
the quarter ended March 31, 1999, as compared to $605.9 million in 1998. These
balances earned an average yield of 6.95% in 1999 and 7.37% in 1998. This
resulted in interest income on the securities available for sale of $11.8
million in 1999 and $11.2 million in 1998. The increase in average balances
during the quarter caused a $2.1 million increase in the interest income, which
was offset by a $1.4 million decrease in interest income due
9
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
to the change in the average rates.
Most of the decrease in the balances of securities available for sale was
centered in the category of U.S. Treasuries and agencies, which decreased by
$106.5 million between the first quarter of 1998 and 1999. Mortgage-backed
securities and investments in states and political subdivisions increased on
average $80.1 million and $22.2 million, respectively.
Reflected in the 1999 results are reductions in the average balances invested in
securities issued by the U.S. Government or its agencies that are "callable" by
the agency. As interest rates in the market have decreased, these securities
were called by the agency and consequently resulted in TrustCo having additional
funds in overnight investments. Through the first quarter there has been an
increase in the amount invested in mortgage-backed securities. These are pass
through securities and are secured by the underlying mortgage loans and
government guarantees. With the types of mortgage-backed securities that TrustCo
purchases, there is little credit risk in the portfolio. Rather, the risk with
respect to these securities rests with the issue of interest rates. As interest
rates in the mortgage markets decrease, the underlying loans will prepay or
refinance. Generally, mortgage-backed securities provide cash flows over a
longer time period to final maturity than do callable securities.
Also during the later part of 1998 and into 1999, TrustCo has invested in
asset-backed securities. The underlying collateral for these bonds are home
equity loans and home equity lines of credit. Virtually all of the bonds are
insured and have an average life of less than three years. All of the bonds are
"AAA" rated by Standard and Poors or Moody's. At March 31, 1999, the Company had
invested $100.9 million in asset-backed securities.
Federal Funds Sold
The 1999 first quarter average balance of federal funds sold was $357.9 million,
$15.2 million less than the $373.1 million in 1998. The portfolio yield
decreased to 4.78% in 1999, compared to 5.57% in 1998. 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
$900 thousand from $5.1 million in 1998 to $4.2 million in 1999.
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 $1.92
billion during 1999, and the average rate paid decreased to 3.75% for 1999 from
4.30% for 1998. Total interest expense on these deposits decreased $2.4 million
to $17.8 million.
10
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
Short-term borrowings, primarily the Trustco Short-Term Investment Account,
increased by $16.1 million between the first quarter of 1998 and 1999. Total
interest expense on this account decreased by $120 thousand in 1999, and the
average rate paid decreased 86 basis points to 4.00%.
Demand deposit balances increased by 15.6% during the period from the first
quarter of 1998 to the first quarter of 1999. The average balance was $128.1
million in 1998, and $148.0 million in 1999.
Growth in deposit balances resulted from successful marketing and advertising
campaigns. In TrustCo's past experience, deposits gathered as the result of
these types of campaigns tend to become a very stable source of core customers
who maintain their deposit relationship with the Company through various
interest rate cycles. TrustCo competes based on a combination of interest rate,
quality service and convenience. Growth in deposits can also be attributed to
the success of the branch expansion program. Beginning in 1995, the Company
stated its intention to open between two and four branches each year. Through
the first quarter of 1999, that has resulted in the addition of ten new banking
facilities.
During 1998 and continuing into 1999, TrustCo has reduced the rate paid on all
funding sources from 4.34% for the first quarter of 1998 to 3.77% for the first
quarter of 1999. These reductions in interest rates were a result of a general
fall in interest rates in the market place between those two dates. The Federal
Reserve Bank reduced the target federal funds rate by 75 basis points during the
same time period. From that reduction there were also reductions in bond yields,
mortgage interest rates and deposit rates. TrustCo has actively managed the
pricing of deposit products in relation to investment opportunities and
marketing objectives. Interest rates on all deposit types have been aggressively
reduced while at the same time the average balances have increased from the
period one year ago.
Net Interest Income
Taxable equivalent net interest income increased to $23.4 million in 1999. The
net interest spread also increased 4 basis points between 1998 and 1999 and the
net interest margin increased by 2 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.
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 will describe the nonperforming assets of
TrustCo as of
11
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
March 31, 1999.
Nonperforming loans: Total nonperforming loans were $12.1 million at March 31,
1999, a decrease from the $ 12.4 million of nonperforming loans at December 31,
1998 and up from the $11.7 million at March 31, 1998. Nonaccrual loans were $8.2
million at March 31, 1999 down slightly from the $8.6 million at December 31,
1998 and down from the $8.3 million at March 31, 1998. Restructured loans were
$3.9 million at March 31, 1999 compared to $3.8 million at December 31, 1998 and
$3.3 million at March 31, 1998.
All of the $12.1 million of nonperforming loans at March 31, 1999 are
residential real estate or retail consumer loans. In prior years 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 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 1999 of $5.2 million, consisted of restructured
retail loans. During the first quarter of 1999, there have been $150 thousand of
commercial loan charge offs, $170 thousand of consumer loan charge offs and $2.0
million of mortgage loan charge offs as compared with $400 thousand of
commercial loan charge offs, $200 thousand of consumer loan charge offs and $700
thousand of mortgage loan charge offs in the first quarter of 1998. Recoveries
during the quarter have been $1.2 million in 1999 and $485 thousand in 1998.
Real estate owned: Total real estate owned of $3.0 million at March 31, 1999
decreased by $2.2 million since year-end 1998. This decrease was due to the sale
of two commercial real estate properties during the quarter.
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.
At March 31, 1999, the allowance for loan losses was $54.8 million, which
represents a slight increase from the $54.4 million in the allowance at December
31, 1998. The
12
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
allowance represents 4.16% of the loan portfolio as of March 31,
1999 compared to 4.11% at December 31, 1998. The provision charged to expense
was $1.5 million compared to $1.4 million for 1998.
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.
Noninterest Income
Total noninterest income for the first quarter was $5.4 million, compared to
$4.6 million in 1998. Included in both the 1999 and 1998 first quarter results
are net gains/losses on
13
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
securities transactions of ($420) thousand in 1999, and
$30 thousand in 1998. Once these securities transactions are removed, total
noninterest income increased from $4.5 million in 1998 to $5.8 million in 1999.
During the first quarter of 1999, the Company sold a banking building and
realized a gain of $1.2 million, which is included in other noninterest income
for the quarter.
Noninterest Expenses
Total noninterest expense was $12.2 million for 1999 compared to $11.5 million
in 1998. The Company's efficiency ratio was 41.3% in 1999 and 39.1% in 1998.
During the first quarter of 1999, equipment expense increased by $550 thousand
as a result of additional depreciation on computer equipment purchased as a
result of the Year 2000 project, and the expenses associated with new branch
facilities. Other real estate expense was a benefit of $90 thousand in 1999
compared to expense of $330 thousand in 1998. The benefit in 1999 is principally
the result of gains realized on the sale of two commercial real estate
properties during the quarter. These sales resulted in gains of approximately
$300 thousand during the first quarter of 1999.
Income Taxes
In the first quarter of 1999 TrustCo recognized income tax expense of $4.8
million, compared to $4.9 million in 1998. The effective tax rate for 1999 was
34.0% and was 37.0% for 1998.
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. Previously, TrustCo has
stated its intention to open two to four new branch offices each year for the
next couple of years. These new branches and the related deposit growth
anticipated from these locations will not require additional capital beyond that
which is already existing within the Company, or that which will be developed
and retained in the coming years.
Total shareholders' equity at March 31, 1999 was $185.2 million, down slightly
from the $185.8 million at year-end 1998. The change in shareholder's equity
between year end and the first quarter 1999 reflects a $2.1 million reduction in
the net unrealized gain on securities available for sale, and a $2.1 million
increase in treasury stock during the first quarter of 1999 offset by $2.0
million of net earnings retained by the Company and a $1.3 million increase in
capital and surplus resulting from stock options exercised.
TrustCo declared dividends of $0.275 in 1999, compared with $0.239 in 1998.
These results represent a dividend payout ratio of 79.42% in 1999 and 76.62% in
1998. The Company achieved the following ratios as of March 31, 1999 and 1998:
14
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
March 31, Minimum Regulatory
1999 1998 Guidelines
--------------------------------------
Tier 1 risk adjusted
capital 13.14% 13.01 4.00
Total risk adjusted
capital 14.43 14.30 8.00
In addition, at March 31, 1999 and 1998, the consolidated equity to total assets
ratio (excluding the mark to market effect of securities available for sale) was
6.98% and 6.83%, respectively.
Year 2000 Update
General:
Management believes that TrustCo's company-wide Year 2000 project is proceeding
on schedule. The Year 2000 project is addressing the issue of computer software,
hardware, and embedded computer chips being unable to distinguish between the
years 1900 and 2000. TrustCo operates its principal financial accounting and
record keeping systems using software purchased from Alltel. Beginning in 1995,
TrustCo started a project to upgrade this software to the most current release
available and to work with Alltel to make the appropriate changes in order to be
ready to process Year 2000 transactions. A timetable was established for these
upgrades to occur which would culminate in the installation of a final set of
upgrades that would be Year 2000 ready. Since 1995, TrustCo has worked closely
with Alltel to ensure that they are making the appropriate remediation efforts
required to have their programs Year 2000 ready. While these activities were
ongoing, TrustCo directed its efforts to installing the upgrades and making the
other changes required to be positioned to handle the Year 2000 programs from
Alltel once they were completed.
In addition to the Alltel programs, there are a limited number of mainframe
application programs that were purchased from Kirchman Corporation. TrustCo
worked directly with the technical support staff at Kirchman to evaluate these
applications for any program changes required to accommodate Year 2000
processing requirements. In light of the program structure and the fact that
these programs already utilize the full century date in their processing, it is
not anticipated that there will be any difficulties with these programs
accepting Year 2000 data.
Throughout the organization, TrustCo utilizes other computer systems to process
various activities. Some of the functionality provided by these systems is of a
routine nature and is not critical to the operations of TrustCo. The critical
non-
15
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
mainframe applications are the ATM application, which runs on an IBM AS400
system; Trust Accounting, which runs on an Alpha system from Digital Equipment
Corporation (DEC); and Payroll, which is a server-based application.
The Year 2000 project also addresses the increasing speculation regarding
short-and long-term unavailability of certain consumer goods, which may prompt
people to accumulate or hoard cash in quantities sufficient to meet their
personal needs for a period of time. The Year 2000 project has provisions
dealing with the need for additional cash in the branches later in 1999 and into
the year 2000. Arrangements have been made to obtain and transport additional
cash to the branches should the demand increase during those time periods.
Mainframe Operations:
Alltel Software: The vast majority of all transactions processed by TrustCo are
performed using Alltel software. Beginning in 1995, the Company inventoried all
of the applications that are processed on the mainframe and identified the
program release that TrustCo needed in order to be Year 2000 ready. A schedule
was developed and outside consulting resources were engaged to assist the
in-house programming staff to have all applications operating Year 2000 ready
programs upgraded by mid-1998. Completion of that schedule has been accomplished
and all Alltel Year 2000 ready programs have been installed.
Kirchman programs: TrustCo utilizes three programs purchased from Kirchman that
operate on the mainframe computer. The TrustCo in-house programming staff and
outside consultants have reviewed these programs and have concluded that the
programs are currently Year 2000 ready.
IBM operating system: The IBM operating system also required an upgrade to a new
version to ensure that it would be Year 2000 ready. This software has been
obtained and installed.
ATM application: A second system, identical to the system in place being used
for daily production, has been installed for ATM Year 2000 testing. The system
software for the platform has been upgraded to IBM's Year 2000 release. The
application software for both TrustCo and non-TrustCo ATM transactions has been
installed and placed into service.
Trust Accounting: A second system, identical to the system being used for daily
production, has been installed for Trust Department Year 2000 testing. The
operating system software has been upgraded to DEC's Year 2000 release. The
application software has been upgraded to the vendor's Year 2000 release.
Non-information Technology: In addition to computer systems utilized for
16
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
information technology, TrustCo is also dependent upon certain computerized
operations for such things as electrical services, heating and communications.
As part of the Year 2000 project, TrustCo has taken steps to evaluate the
magnitude of the computer dependency of these systems and the potential
disruption of services should these systems fail. Third-party vendors that
support these systems have been contacted and are being monitored by TrustCo in
relation to their Year 2000 implementation plan. Significant dependencies exist
with respect to utilities such as the electric companies. TrustCo has obtained
the Year 2000 project plans for these utilities and is monitoring the continued
compliance with their plans. The TrustCo contingency plan also provides for
generator back up power at key sites to allow for minimum functionality should
the primary electric providers be inoperative in Year 2000.
Personal Computers:
TrustCo reviewed all programs and departmental functions that utilize personal
computers. This inventory was then prioritized to identify critical programs
that needed to be Year 2000 ready. All of the critical programs have been
rewritten or new software has been installed so that they are year 2000 ready.
Testing:
To ensure that each of the systems that TrustCo operates will be Year 2000
ready, a testing plan has been developed. To assist in testing, TrustCo has
purchased redundant equipment for all of the hardware. This will facilitate
extended hours for testing and will ensure that none of the testing will in any
way affect production programs. As part of the test plan, TrustCo has identified
several dates that need to be tested. These include year-end 1999 and 2000 and
other critical dates during 1999 and 2000. Also various software and hardware
vendors have identified critical test dates for their systems which have been
incorporated into the overall test plan.
Detailed test scripts have been developed to determine that once the computer
clocks have been rolled forward to the appropriate test dates, specific
transactions and processes are performed to validate operational integrity. Data
aging software has also been obtained that will assist in identifying all of the
affected data fields and change them to the future date as required for the
test.
The test plan requires each application to be tested initially on a stand-alone
basis to ensure that it is operational in current date mode and will support
production. Once that test is completed, the plan calls for each application to
be tested in future date mode on a stand-alone basis. The test plan is designed
to help identify and isolate problems, if any exist, in future date mode
testing. The individual application testing will then lead to entity-wide
testing in future date mode to ensure that all of the applications function
properly in the future date
17
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
environment.
TrustCo has substantially completed testing of the mission-critical systems in
future date mode. Test data and test scripts were completed for selected dates
and all output and processing was completed. Further testing will continue in
1999 as TrustCo interfaces with third-party vendors and service providers.
The detailed test plan covers all aspects of TrustCo's operations on the
mainframe, as well as all other mission-critical platforms.
Customer Evaluations:
TrustCo has completed a review of its significant customer relationships and
their dependency on computerized systems. In addition, significant new customer
relationships will also be subject to this evaluation. TrustCo has established
an ongoing assessment as part of the credit granting and review process.
Vendor Monitoring:
In addition to the main application software vendors, TrustCo has numerous
interfaces and data exchanges with third parties and vendors. Each of the
critical interfaces and vendors has been contacted to determine that their Year
2000 plans are adequate and will meet the timetables required by TrustCo. When
such plans are not provided or do not adequately address Year 2000 concerns,
alternate vendors or data exchange methods have been identified.
These interfaces and data exchanges with third parties and vendors occur
utilizing numerous types of programs and computer systems. Their Year 2000
projects require them to be compliant in accordance with timetables that are
acceptable to TrustCo and in accordance with guidelines established by bank
regulators. Due to the number of such interfaces and data exchanges with third
parties and vendors, there is a risk that some may not meet their schedules.
TrustCo is monitoring these activities and will take appropriate action should
the need arise.
Contingency Planning:
All of the mainframe application software is currently operational on software
that TrustCo's vendors have identified as being Year 2000 ready. Likewise, all
of the critical PC programs have been updated or rewritten to be Year 2000
ready. Substantially all future date testing has been completed and test results
provided assurance to management that the system will be functional in Year
2000. As problems are identified, the affected programming code is analyzed and
rewritten or replaced if needed.
The contingency plan that has been developed was designed to ensure that all
18
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
the testing and remediation efforts are completed in order to provide adequate
time for final corrections to software prior to Year 2000. Plans are also
being developed to identify and plan for unanticipated disruption of services
after Year 2000. These plans include timetables for moving operations to
disaster recovery sites, the availability of additional programming staff
during the critical time periods and back-up for program and data files. Initial
plans have been developed and will be updated continuously.
Cost:
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Company's financial statements.
Most of the costs associated with this project are for programming services paid
to third-party consultants. Internal costs have not been captured, since they
are relatively fixed costs and are a reallocation of existing resources to this
project. Costs paid to third-party vendors during the Year 2000 project were for
the following services:
' Installation of upgrades to software in order to utilize the most recent
version released by the vendor,
' Applying the Year 2000 code,
' Applying custom code that is utilized by TrustCo in its operations, and,
' Providing production support to the Company as these upgrades are
being installed.
The cost of applying the Year 2000 remediation code to the upgraded programs is
not separately determinable from the other services that the third-party
consultants have been providing. The professional service cost for the services
noted above is estimated to be approximately $2 million for the Year 2000
project. Through March 31, 1999, approximately 75% of these costs have been
expensed.
Risk:
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party exchange partners and
vendors, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The Year 2000 project
is expected to significantly reduce the Company's level of uncertainty about the
Year 2000 problem and, in particular, about the Year 2000 compliance and
readiness of its material third-party data
19
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
March 31, 1999
exchange partners and vendors. The Company believes that, with the
implementation of the modifications of all the software and the monitoring of
third-party data exchange partners and vendors, the possibility of significant
interruptions of normal operations should be reduced.
The most likely worst case scenario is that certain interfaces and data
exchanges with third parties and vendors may not be fully functional at or after
the century date change. Because it is impossible to predict the nature of the
failure, the length of time that it takes to correct, and the extent of the
failure, it is not possible to reasonably estimate the impact on TrustCo.
Management's plan for testing with third parties and vendors will be completed
during 1999. This worst case scenario could increase the overall cost of the
Year 2000 project; however, management believes that this scenario, though
possible, has only a minor likelihood of occurring.
Readers are cautioned that forward-looking statements contained in the Year 2000
update should be read in conjunction with the Company's disclosures under the
heading "Forward-Looking Statements" dealing with cautionary statements for the
purpose of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
20
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 libilities of the Registrant and the Bank
(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 $18.2 million in 1999 and $15.0
million in 1999 The subtotals contained in the following table are the
arithmetic totals of the items contained in that category.
First Quarter First Quarter
1999 1998
___________________________ ___________________________ ____________________________
Average Average Average Average Change in Variance Variance
(dollars in thousands) Balance Interest Rate Balance Interest Rate Interest Balance Rate
Income/ Change Change
Assets Expense
Commercial loans......................$ 185,039 $ 4,146 8.99%$ 189,731 $ 4,546 9.61% (400) (110) (290)
Residential mortgage loans............. 963,790 18,920 7.85% 914,262 18,626 8.15% 294 3,421 (3,127)
Home equity lines of credit ........... 145,809 2,783 7.74% 169,807 3,944 9.42% (1,161) (513) (648)
Installment loans...................... 24,372 764 12.71% 27,520 879 12.95% (115) (99) (16)
--------- ------ --------- ------ ----- ----- -----
Loans, net of unearned income..........1,319,010 26,613 8.09% 1,301,320 27,995 8.63% (1,382) 2,699 (4,081)
Securities available for sale:
U.S. Treasuries and agencies.......... 160,025 2,963 7.41% 266,512 5,091 7.64% (2,128) (1,976) (152)
Mortgage-backed securities............ 248,932 4,079 6.55% 168,790 2,909 6.89% 1,170 2,098 (928)
States and political subdivisions..... 131,705 2,611 7.93% 109,485 2,230 8.15% 381 757 (376)
Other ................................ 137,651 2,123 6.18% 61,119 928 6.09% 1,195 1,181 14
--------- ------ --------- ------ ----- ----- -----
Total securities available for sale. 678,313 11,776 6.95% 605,906 11,158 7.37% 618 2,060 (1,442)
Federal funds sold..................... 357,911 4,216 4.78% 373,144 5,122 5.57% (906) (203) (703)
Other short-term investments........... 1,666 21 5.16% --- --- --- 21 21 ---
--------- ------ --------- ------ ----- ----- -----
Total Interest earning assets........2,356,900 42,626 7.26% 2,280,370 44,275 7.79% (1,649) 4,577 (6,226)
Allowance for loan losses.............. (56,275) ------ (54,547) ------ ----- ----- -----
Cash and noninterest earning assets.... 142,232 152,837
--------- ---------
Total assets........................$2,442,857 $ 2,378,660
========= =========
Liabilities and shareholders' equity
Deposits:
Interest bearing checking..........$ 258,415 676 1.06%$ 239,338 $ 908 1.54% (232) 419 (651)
Money market accounts............... 59,302 399 2.73% 57,835 417 2.93% (18) 57 (75)
Savings............................... 659,406 4,397 2.70% 651,644 5,115 3.18% (718) 405 (1,123)
Other time deposits................... 945,305 12,319 5.28% 954,321 13,748 5.84% (1,429) (129) (1,300)
--------- ------ --------- ------ ----- ----- -----
Total time deposits..................1,922,428 17,791 3.75% 1,903,138 20,188 4.30% (2,397) 752 (3,149)
Short-term borrowings.................. 146,902 1,448 4.00% 130,830 1,567 4.86% (119) 874 (993)
--------- ------ --------- ------ ----- ----- -----
Total interest bearing liabilities...2,069,330 19,239 3.77% 2,033,968 21,755 4.34% (2,516) 1,626 (4,142)
Demand deposits........................ 148,018 ------ 128,083 ------ ----- ----- -----
Other liabilities...................... 38,946 40,682
Shareholders' equity................... 186,563 175,927
--------- ---------
Total liab. & shareholders' equity..$2,442,857 $ 2,378,660
========= =========
Net interest income.................... 23,387 22,520 867 2,951 (2,084)
------ ------ ----- ----- -----
Net interest spread.................... 3.49% 3.45%
Net interest margin (net interest
income to total interest earning
assets)............................. 3.94% 3.92%
Tax equivalent adjustment 960 872
------ ------
Net interest income per book........ $ 22,427 $ 21,648
====== ======
-21-
Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's interest rate risk
position since December 31, 1998. Other types of market risk, such as foreign
exchange rate risk and commodity price risk do not arise in the normal course
of the Company's business activities.
22
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: April 28, 1999 By: /s/Robert A. McCormick
----------------------
Robert A. McCormick
President and
Chief Executive Officer
Date: April 28, 1999 By: /s/Robert T. Cushing
----------------------
Robert T. Cushing
Vice President and Chief
Financial Officer
23
Exhibits Index
(a) Exhibits - None
24