Exhibit 13
TRUSTCO Bank Corp NY
Annual Report
2004
[LOGO] TRUSTCO Bank Corp NY
TrustCo Bank Corp NY is a savings and loan holding company headquartered in
Glenville, New York. The Company is the largest financial services company
headquartered in the Capital Region of New York State. The Company's
principal subsidiary, Trustco Bank, operates 75 community banking offices and
72 Automatic Teller Machines throughout the Bank's market area. The Company
serves three states and 17 counties with a broad range of community banking
services.
Financial Highlights
(dollars in thousands, except per share data) Years ended December 31,
Percent
2004 2003 Change
Income:
Net interest income (Taxable Equivalent)...................................... $ 105,024 102,752 2.21%
Net income.................................................................... 56,540 53,031 6.62
Per Share:
Basic earnings................................................................ .761 .713 6.73
Diluted earnings.............................................................. .753 .704 6.96
Tangible book value........................................................... 3.02 3.06 (1.31)
Average Balances:
Assets........................................................................ 2,828,195 2,710,175 4.35
Loans, net.................................................................... 1,176,856 1,275,023 (7.70)
Deposits...................................................................... 2,474,179 2,340,827 5.70
Shareholders' equity.......................................................... 223,719 225,045 (0.59)
Financial Ratios:
Return on average assets...................................................... 2.00% 1.96 2.04
Return on average equity <F1>................................................. 26.65 26.21 1.68
Consolidated tier 1 capital to:
Total average assets (leverage)............................................. 7.74 7.53 2.79
Risk-adjusted assets........................................................ 17.09 16.54 3.33
Total capital to risk-adjusted assets......................................... 18.37 17.82 3.09
Net loans charged off (recovered) to average loans............................ (.02) .39 --
Allowance for loan losses to nonperforming loans.............................. 15.6x 15.0x 4.00
Efficiency ratio.............................................................. 38.78 38.33 (1.17)
Dividend payout ratio......................................................... 78.83 83.98 (6.13)
<FN>
<F1> Excludes the market adjustment on securities available for sale.
</FN>
Per share information of common stock
Tangible Range of Stock
Basic Diluted Cash Book Price
Earnings Earnings Dividend Value High Low
2003
First quarter.......................................... $ .178 .175 .150 3.12 11.40 9.50
Second quarter......................................... .180 .178 .150 3.16 11.75 9.72
Third quarter.......................................... .192 .189 .150 3.14 13.47 10.81
Fourth quarter......................................... .163 .161 .150 3.06 14.25 12.25
2004
First quarter.......................................... .191 .188 .150 3.15 14.00 12.64
Second quarter......................................... .193 .191 .150 2.89 13.79 11.87
Third quarter.......................................... .205 .203 .150 3.02 13.21 12.17
Fourth quarter......................................... .172 .171 .150 3.02 14.18 12.80
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MAP OF NEW BRANCH LOCATIONS
[OMITTED]
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Table of Contents
Financial Highlights....................................................... 1
President's Message........................................................ 4
Management's Discussion and Analysis
of Financial Condition and Results of Operations......................... 6
Average Balances, Yields
and Net Interest Margins................................................ 13
Glossary of Terms......................................................... 26
Management's Report on Internal Control
Over Financial Reporting................................................ 27
Reports of Independent Registered Public Accounting Firm............. 28 - 29
Consolidated Financial Statements and Notes............................... 30
Officers and Board of Directors........................................... 47
Officers of Trustco Bank.................................................. 47
Branch Locations.......................................................... 48
General Information........................................ Inside Back Cover
TrustCo Mission Statement:
TrustCo will be the low cost provider of high quality services to our
customers in the communities we serve and return to our owners an above
average return on their investment.
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President's Message
Dear Shareholder:
We had another record year in 2004 at TrustCo. Although others in our
industry did well, few can match the TrustCo record of sustained superior
performance. We are grateful to our shareholders, customers, Board of
Directors and employees for their strong support and enthusiasm.
During 2004, measurements that drive shareholder value continued in the
right direction with net income at $56.5 million, up a significant 6.6% over
2003. In 2004, return on average equity (ROE), our most important
measurement, was 26.65% up from 26.21% in 2003. TrustCo's enviable five-year
ROE was 25.66% and our plans call for a 26% ROE in 2005.
TrustCo's world-class efficiency ratio was 38.8% for 2004. This
measurement is one of the best tests to identify effective expense controls
and productivity.
We have often discussed our philosophy of returning excess capital to our
shareholders while maintaining sufficient capital to meet the regulatory
definition of "well capitalized." Therefore, in 2004, 78.8% of net income was
paid to shareholders in cash dividends.
TrustCo's branch office expansion program continues. In 2004 we opened
offices in Osprey and Sarasota, our first two branches on the west coast of
Florida. Our expansion downstate is also on track with the opening of our
Wappingers Falls office, our third in Dutchess County. We continue to find
opportunities in Upstate New York, and in 2004, we opened branches in Valatie
and Slingerlands. During 2004 we also relocated our Rotterdam Square office
to a more visible location within the mall. Our plans call for aggressive
branch expansion in 2005, targeting the Capital Region, downstate New York/
northern New Jersey and Florida.
The quality of the loan portfolio is excellent, and our allowance for loan
loss ratios and other asset quality indicators remain strong.
We note with sorrow the passing of Barton A. Andreoli, a director of
TrustCo Bank Corp NY and Trustco Bank since 1993. Mr. Andreoli was an
enthusiastic and contributing member of several committees, and will be
missed.
There were a number of senior staff changes during 2004. Kevin M. Curley
and Robert M. Leonard were elevated to Administrative Vice Presidents; and
Michael J. Lofrumento and Patrick M. Canavan were named Vice Presidents. I
believe that the TrustCo management team has the experience and ability to
continue to lead the Company along the road of accomplishment and prosperity
in the future.
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President's Message (continued)
2004 was a year in which average assets of $2.82 billion grew by $118.0
million, an increase of 4.4%. This solid performance will provide us with
investment opportunities going forward. Our loan portfolio grew by 6.7%
during 2004 with continued emphasis on the retail side of the product mix.
Our Trust Department, which currently manages assets in excess of $992
million, has ambitious expectations for 2005 and continues moving forward.
Our community needs have expanded, and TrustCo has responded
appropriately. Our staff involvement with hundreds of nonprofit agencies
throughout our market area, coupled with financial support from TrustCo, has
received increased public awareness.
We are enthusiastic about TrustCo's future. It is our intention at every
level in the Company to carry our past success into the future. Our products
are tailored to the needs of our community; we have a solid team to deliver
them, and a management style that can adapt almost immediately to marketplace
changes.
We are sure the combination of management, products, financial strength
and the enthusiastic commitment of the Board of Directors will bring us
continued success in the years ahead, whatever the banking environment.
Sincerely,
/s/ Robert J. McCormick
Robert J. McCormick
President & Chief Executive Officer
TrustCo Bank Corp NY
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Management's Discussion and Analysis of Financial Condition and Results
of Operations
The financial review which follows will focus on the factors affecting the
financial condition and results of operations of TrustCo Bank Corp NY (the
"Company", "TrustCo" or the "Bank"), and Trustco Bank during 2004 and, in
summary form, the two preceding years. Net interest income and net interest
margin are presented in this discussion on a taxable equivalent basis.
Balances discussed are daily averages unless otherwise described. The
consolidated financial statements and related notes and the quarterly reports
to shareholders for 2004 should be read in conjunction with this review.
Certain amounts in years prior to 2004 have been reclassified to conform with
the 2004 presentation.
Overview
TrustCo recorded net income of $56.5 million or $0.753 of diluted earnings
per share for the year ended December 31, 2004, compared to $53.0 million or
$0.704 per share for the year ended December 31, 2003. This represents an
increase of 6.6% in net income between 2003 and 2004.
During 2004, the following had a significant effect on net income:
o an increase of $3.6 million in net interest income compared to 2003, as
an increase in the average balance of interest earning assets of $123.0
million was partially offset by a reduction of nine basis points ("bp")
in the net interest margin,
o a reduction in the provision for loan losses from $1.2 million in 2003
to $450,000 in 2004 and,
o the recognition of net securities gains of $13.7 million in 2004
compared to $9.8 million recorded in 2003
Return on Equity
2002 26.08%
2003 26.21%
2004 26.65%
MIX OF AVERAGE EARNING ASSETS
(dollars in thousands) 2004 2003 Components of
vs. vs. Total Earning Assets
2004 2003 2002 2003 2002 2004 2003 2002
Loans, net of unearned income..... $1,176,856 1,275,023 1,512,448 (98,167) (237,425) 43.1% 48.9% 58.6
Securities available for sale:
U.S. Treasuries and agencies.... 714,603 506,608 185,462 207,995 321,146 26.2 19.4 7.2
States and political
subdivisions................. 168,723 203,718 222,696 (34,995) (18,978) 6.2 7.8 8.6
Mortgage-backed securities and
collaterized mortgage
obligations................... 149,298 60,248 62,494 89,050 (2,246) 5.5 2.3 2.4
Other........................... 25,221 63,331 97,404 (38,110) (34,073) 0.9 2.5 3.8
Total securities available
for sale...................... 1,057,845 833,905 568,056 223,940 265,849 38.8 32.0 22.0
Federal funds sold and other
short-term investments........ 494,579 497,364 498,875 (2,785) (1,511) 18.1 19.1 19.4
Total earning assets.............. $2,729,280 2,606,292 2,579,379 122,988 26,913 100.0% 100.0 100.0
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Management's Discussion and Analysis (continued)
TrustCo has performed well with respect to a number of key performance
ratios during 2004 and 2003, including:
o return on average equity of 26.65% for 2004 and 26.21% for 2003,
o return on average assets of 2.00% for 2004 and 1.96% for 2003, and
o an efficiency ratio of 38.78% for 2004 and 38.33% for 2003.
TrustCo's operations focus on providing high quality service to the
communities served by the branch-banking network. The financial results for
the Company are influenced by economic events that affect those communities,
as well as national economic trends, primarily interest rates, affecting the
entire banking industry.
TrustCo continues to open new branch locations. During 2004 five new
branches were added to the franchise - two branches were opened on the west
coast of Florida, one in Dutchess County, New York and two new branches in
the Capital District region. The new branch locations continue the plan
established several years ago to expand the franchise to areas experiencing
economic growth. In 2005, this strategy will lead to the opening of seven to
ten new branches. Management believes that expanding into central and western
Florida and the downstate region of New York has been a success. The new
branches have all of the same products and features found at our other
locations. With a combination of competitive rates, excellent service and
convenient locations, management believes that the new branches will attract
deposit and loan customers and be a welcome addition to these communities.
Overall, 2004 was marked by growth in each of the key elements of
performance. Deposits ended 2004 at $2.53 billion, an increase of $107.3
million from the prior year, and the loan portfolio grew to a total of $1.19
billion, an increase of $77.2 million over the 2003 year end balance.
Likewise, the balance of overnight investments in federal funds sold and
other short term investments increased to $642.2 million at year end from
$355.3 million at year end 2003. This increase in federal funds sold and
other short-term investments is described below in the sections on Securities
Available for Sale and Federal Funds Sold and Other Short-term Investments.
Offsetting these increases was a reduction of $280.9 million in the year end
balance of securities available for sale. The increase in deposits and loans
reflect
LOAN PORTFOLIO
(dollars in thousands) As of December 31,
2004 2003 2002
Amount Percent Amount Percent Amount Percent
Commercial........................ $ 193,188 15.6% $ 190,501 16.4% $ 199,795 14.1%
Real estate - construction........ 20,148 1.6 7,476 0.6 7,252 0.5
Real estate - mortgage............ 822,103 66.3 779,227 67.0 1,059,035 74.4
Home equity lines of credit....... 191,242 15.4 171,078 14.7 139,294 9.8
Installment loans................. 13,749 1.1 14,365 1.3 17,465 1.2
Total loans....................... 1,240,430 100.0% 1,162,647 100.0% 1,422,841 100.0%
Less: Unearned income............. 365 381 540
Allowance for loan losses... 49,384 48,739 52,558
Net loans......................... $1,190,681 $1,113,527 $1,369,743
Average Balances
2004 2003 2002 2001 2000
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial............ $ 189,179 16.1% $ 199,729 15.7% $ 198,566 13.1% $ 195,152 12.8% $ 179,952 12.9%
Real estate -
construction........ 12,430 1.1 6,684 0.5 9,752 0.7 14,526 1.0 18,338 1.3
Real estate -
mortgage............ 780,777 66.3 899,415 70.5 1,156,779 76.4 1,161,521 76.4 1,040,127 74.5
Home equity
lines of credit..... 181,948 15.4 155,185 12.2 129,847 8.6 125,778 8.3 134,459 9.6
Installment loans..... 12,895 1.1 14,460 1.1 18,181 1.2 22,687 1.5 23,471 1.7
Total loans........... 1,177,229 100.0% 1,275,473 100.0% 1,513,125 100.0% 1,519,664 100.0% 1,396,347 100.0%
Less: Unearned
income........ 373 450 677 896 933
Allowance for
loan losses... 49,299 51,311 56,525 57,398 56,362
Net loans............. $1,127,557 1,223,712 1,455,923 1,461,370 1,339,052
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Management's Discussion and Analysis (continued)
Taxable Equivalent
Net Interest Income (dollars in millions)
2002 $103.3
2003 $102.8
2004 $105.0
the success the Company has had in attracting new customers to the Bank
both in new branch locations as well as overall. Management believes that
TrustCo's success is predicated on providing core banking services to a wider
number of customers.
The decrease in the year end balance of securities available for sale is
reflective of decisions made by management near year end to create additional
liquidity (federal funds sold and other short-term investments) in the event
interest rates begin to rise in 2005. On average for 2004 the balance of
securities available for sale was $1.06 billion compared to $833.9 million in
2003. Sales of investment securities resulted in net gains of $13.7 million
in 2004 and $9.8 million in 2003. These net gains were primarily from the
portfolio of local bank stocks purchased over the years in connection with
unsuccessful merger opportunities. For 2005 management does not anticipate
that security gains will be as significant. Net unrealized gains on
securities available for sale were $7.4 million at December 31, 2004,
including $4.4 million of unrealized gains on equity securities.
Asset/Liability Management
In managing its balance sheet, TrustCo utilizes funding and capital
sources within sound credit, investment, interest rate, and liquidity risk
guidelines established by management and approved by the Board of Directors.
Loans and securities (including federal funds sold) are the Company's primary
earning assets. Average interest earning assets were 96.5% and 96.2% of
average total assets for 2004 and 2003, respectively.
TrustCo, through its management of liabilities, attempts to provide stable
and flexible sources of funding within established liquidity and interest
rate risk guidelines. This is accomplished through core deposit banking
products offered within the markets served by the Company. TrustCo does not
actively seek to attract out-of-area deposits or so called hot money; rather
the Company focuses on core relationships with both depositors and borrowers.
TrustCo's objectives in managing its balance sheet are to limit the
sensitivity of net interest income to actual or potential changes in interest
rates and to enhance profitability through strategies that should provide
sufficient reward for understood and controlled risk. The Company is
deliberate in its effort to maintain adequate liquidity under prevailing and
projected economic conditions and to maintain an efficient and appropriate
mix of core deposit relationships.
The Company relies on traditional banking investment instruments and its
large base of core deposits to help in asset/liability management.
Interest Rates
TrustCo competes with other financial service providers based upon many
factors including quality of service, convenience of operations, and rates
paid on deposits and charged on loans. The absolute level of interest rates,
changes in rates, and customers' expectations with respect to the direction
of interest rates have a significant impact on the volume of loan and deposit
originations in any particular year.
Interest rates have remained at relatively low levels during 2004. One of
the most important interest rates used to control national economic policy is
the "federal funds" rate. This is the interest rate utilized within the
banking system for overnight borrowings for institutions with the highest
credit quality rating. The federal funds rate increased by a total of 125
basis points during 2004 from 1.00% for the first half of the year to 2.25%
by year-end. During this same time period the 10 year treasury bond did not
change consistently with the increased federal funds rate. The 10 year
treasury rate was 4.25% as of year end 2003 and 4.22% as of year end 2004.
The Federal Reserve has indicated its intention to continue to monitor
economic expansion in the United States economy which may require additional
increases in the federal funds rate.
These changes in interest rates have an effect on the Company relative to
the interest income on loans, securities and federal funds sold as well as on
interest expense on deposits and borrowings. Residential real estate loans
and longer-term investments are most affected by the changes in longer term
market interest rates such as the 10 year treasury. The federal funds sold
portfolio and other short term investments are affected primarily by changes
in the federal funds target rate. Deposit interest rates are most affected by
short term market interest rates. Also, changes in interest rates have an
effect on the recorded balance of the securities available for sale
portfolio, which is recorded at market value. Generally, as interest rates
increase the market value of the securities available for sale portfolio will
decrease.
The principal loan product for TrustCo is residential
real estate loans. Interest rates on new residential
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Management's Discussion and Analysis (continued)
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
(dollars in thousands) December 31, 2004
After 1 Year
In 1 Year But Within After
or Less 5 Years 5 Years Total
Commercial................................................ $ 80,850 67,377 44,961 193,188
Real estate construction.................................. 20,148 -- -- 20,148
Total..................................................... 100,998 67,377 44,961 213,336
Predetermined rates....................................... 25,518 67,226 44,961 137,705
Floating rates............................................ 75,480 151 -- 75,631
Total..................................................... $100,998 67,377 44,961 213,336
real estate loan originations are also influenced by the rates established
by secondary market participants such as Freddie Mac and Fannie Mae. Because
TrustCo is a portfolio lender and does not sell loans into the secondary
market, the Company establishes rates that management determines are
appropriate in light of the long-term nature of residential real estate loans
while remaining competitive with the secondary market rates.
Earning Assets
Average earning assets during 2004 were $2.73 billion, which was an
increase of $123.0 million from the prior year. This increase was primarily
the result of growth in the average balance of securities available for sale
of $223.9 million offset by a $98.2 million decrease in the average balance
of loans. These changes resulted from mortgage loan customers refinancing
with other financial institutions and reinvestment of the loan payoffs into
securities.
Total average assets were $2.83 billion for 2004 and $2.71 billion for
2003.
The table "Mix of Average Earning Assets" shows how the mix of the earning
assets has changed over the last three years. While the growth in earning
assets is critical to improved profitability, changes in the mix also have a
significant impact on income levels, as discussed below.
Loans
Average loans decreased $98.2 million during 2004. Interest income on the
loan portfolio also decreased to $75.2 million in 2004 from $87.7 million in
2003. The average yield decreased from 6.88% in 2003 to 6.39% in 2004.
Historically, management believes, TrustCo has distinguished itself in
the Upstate New York region as one of the principal originators of
residential real estate loans. Through marketing and pricing and a
customer-friendly service delivery network, TrustCo has attempted to limit
the amount of mortgage loans refinanced with other institutions. The
uniqueness of the loan products was highlighted by TrustCo in an effort to
differentiate them from those of other lenders. Specifically, low closing
costs, no escrow or private mortgage insurance and quick loan approvals were
identified and marketed. The fact that the Company holds mortgages in its
loan portfolio rather than selling them into secondary markets was also
highlighted. While management believes this policy ultimately benefits the
borrower, it can result in slightly higher rates as compared to the local
competition. Despite these efforts, certain existing and potential borrowers
chose to refinance/originate their loans with institutions offering lower
rates, resulting in a decline in the balance of this portfolio. The average
balance of real estate loans was $899.4 million in 2003 and $780.8 million in
2004. Income on real estate loans decreased to $52.7 million in 2004 from
$64.9 million in 2003. The yield on the portfolio decreased to 6.69% for 2004
from 7.19% in 2003 due to general changes in retail rates in the marketplace.
Though there remains debate, the Company believes the general tenor of the
economy is for improvement, and consequently, increases in long-term interest
rates. As a result, the significant amount of refinancing that has occurred
during 2003 and 2004 may not continue in 2005. Assuming a slowdown in
refinancing, TrustCo anticipates that the low closing cost and other unique
features of its mortgage loan products may once again attract customers.
Real estate loans at December 31, 2004 were $822.1 million compared to
$779.2 million at year end 2003, an increase of $42.9 million. This increase
occurred primarily in the second half of 2004 as the level of refinancing
activity lessened.
The overwhelming majority of TrustCo's real estate loans are secured by
properties within the Bank's market area. During 2004, management continued
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Management's Discussion and Analysis (continued)
its established practice of retaining all new loan originations in the
Bank's portfolio rather than selling them in the secondary market.
Average commercial loans of $189.2 million in 2004 decreased by $10.6
million from $199.7 million in 2003. The average yield on the commercial loan
portfolio decreased to 6.88% for 2004 compared to 7.26% for 2003. This
resulted in income on commercial loans of $14.7 million in 2003 and $13.4
million in 2004.
TrustCo strives to maintain strong asset quality in all segments of its
loan portfolio, especially commercial loans. Competition for commercial loans
continues to be very intense in the Bank's market region. The Bank competes
with large money center and regional banks as well as with smaller locally
based banks and thrifts. Over the last several years, competition for
commercial loans has intensified as smaller banks and thrifts have tried to
develop commercial loan portfolios.
TrustCo's commercial lending activities are focused on balancing the
Company's commitment to meeting the credit needs of businesses in its market
area with the necessity of managing its credit risk. In accordance with these
goals, the Company has consistently emphasized the origination of loans
within its market area. The portfolio contains no foreign loans, nor does it
contain any significant concentrations of credit to any single borrower or
industry. The commercial loan portfolio reflects the diversity of businesses
found in the Capital Region's economy. Light manufacturing, retail, service,
and real estate related business are a few examples of the types of
businesses located in the Company's market area.
TrustCo has a leadership position in the home equity credit line product
in its market area. TrustCo was one of the first financial institutions in
the Capital Region to aggressively market and originate this product, and,
management believes, has developed significant expertise with respect to its
risks and rewards. During 2004, the average balance of home equity credit
lines was $181.9 million, an increase from $155.2 million in 2003. The home
equity credit line product has developed into a significant business line for
most financial services companies. Trustco Bank competes with both regional
and national concerns for these lines of credit and faces stiff competition
with respect to interest rates, closing costs, and customer service for these
loans. TrustCo continuously reviews changes made by competitors with respect
to the home equity credit line product and adjusts its offerings to remain
competitive. The average yield increased to 4.23% for 2004 from 4.01% in
2003. This resulted in interest income on home equity credit lines of $7.7
million in 2004, compared to $6.2 million in 2003.
The average balance of installment loans, net of unearned income,
decreased to $12.5 million in 2004 from $14.0 million in 2003. The yield on
installment loans decreased to 11.63% in 2004, resulting in interest income
of $1.5 million.
Securities available for sale: The portfolio of securities available for sale
is designed to provide a stable source of interest income and liquidity. The
portfolio is also managed by the Company to take advantage of changes in
interest rates. The securities available for sale portfolio is managed under
a policy detailing the types, duration, and interest rates acceptable in the
portfolio.
The designation of "available for sale" is made at the time of purchase,
based upon management's intent to hold the securities for an indefinite
period of time. However, these securities are available for sale in response
to changes in market interest rates, related changes in prepayment risk,
needs for liquidity, or changes in the availability of and yield on
alternative investments.
At December 31, 2004, securities available for sale amounted to $896.0
million, compared to $1.18 billion at year end 2003. As previously discussed,
the decrease in the year end balance of securities available for sale is
reflective of decisions made by management near year end to create additional
liquidity in the event interest rates begin to rise in 2005. For 2004, the
average balance of securities available for sale was $1.06 billion with an
average yield of 5.85%, compared to an average balance in 2003 of $833.9
million with an average yield of 6.01%. The taxable equivalent income earned
on the securities portfolio in 2004 was $61.9 million, compared to $50.2
million earned in 2003. Yields earned on securities available for sale were
down slightly for 2004 compared to 2003 due primarily to additional
investments made in the mortgage-backed securities and collateralized
mortgage obligations portfolio. These additional investments were made at
relatively low interest rates as compared to the remainder of the portfolio
and have an anticipated average life of less than 4 years.
Increases in the 2004 average balance of securities available for sale
were the result of efforts to invest the funds from loan refinancings and
deposit inflows into investment securities available for sale. The interest
rates on the securities purchased during the year were attractive as compared
to investing the funds in overnight federal funds and other short term
investments and compared to the Company's overall cost of funding. Federal
funds sold and other short-term investments yielded an average rate of return
of 1.35% for the year. Interest income was positively affected by investing
the funds in the securities available for sale portfolio at significantly
higher interest rates. The additional interest earned on these securities
helped offset lower income in the loan portfolio. All security purchases are
made in accordance with management's long standing
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Management's Discussion and Analysis (continued)
investment policies. Management believes these additional investments
offered the best combination of yield and credit protection. Sales of
securities available for sale were made at year end in anticipation of rising
interest rates and the availability of higher yielding bonds in 2005.
During 2004, TrustCo recognized approximately $13.7 million of net gains
from securities transactions, compared to approximately $9.8 million in 2003.
The Company recognized these transactions in response to lower interest rates
in the marketplace, which had the effect of increasing the value of these
securities. Net unrealized gains on securities available for sale were $7.4
million at December 31, 2004, including $4.4 million of unrealized gain on
equity securities. At year end 2004, TrustCo continued to have significant
liquidity in the form of $642.2 million of federal funds sold and other
short-term investments.
TrustCo has not invested in any exotic investment products such as
interest rate swaps, forward placement contracts, or other instruments
commonly referred to as derivatives. By actively managing a portfolio of high
quality securities, TrustCo can meet the objectives of asset/liability
management and liquidity, while at the same time producing a reasonably
predictable earnings stream.
Securities available for sale are recorded at their fair value, with any
unrealized gains or losses, net of taxes, recognized as a component of
shareholders' equity. Average balances of securities available for sale are
stated at amortized cost. At December 31, 2004 and 2003, the market value of
TrustCo's portfolio of securities available for sale carried net unrealized
gains of approximately $7.4 million and $35.0 million, respectively.
Maturity and call dates of securities: Many of the securities in the
investment portfolio have a call date in addition to the stated maturity
date. Call dates allow the issuer to redeem the bonds prior to maturity at
specified dates and at predetermined prices. Normally, securities are
redeemed at the call date when the issuer can reissue the security at a lower
interest rate. Therefore, for cash flow, liquidity and interest rate
management purposes, it is important to monitor both maturity dates and call
dates. The table below details the portfolio of securities available for sale
by both maturity date and call date as of December 31, 2004. Mortgage-backed
securities are reported using an estimate of average life; equity securities
are excluded.
SECURITIES AVAILABLE FOR SALE
(dollars in thousands) As of December 31,
2004 2003 2002
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
U.S. Treasuries and agencies................. $521,578 517,561 863,528 863,659 224,576 230,428
States and political subdivisions............ 147,988 154,939 182,118 191,727 223,873 235,495
Mortgage-backed securities and
collateralized mortgage obligations........ 201,579 201,623 64,718 66,322 49,537 52,591
Other........................................ 685 685 685 685 26,068 26,138
Total debt securities available for sale... 871,830 874,808 1,111,049 1,122,393 524,054 544,652
Equity securities............................ 16,741 21,181 30,880 54,533 83,246 108,511
Total securities available for sale........ $888,571 895,989 1,141,929 1,176,926 607,300 653,163
SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION
Debt securities available for sale:
(dollars in thousands) As of December 31, 2004
Based on Based on
Final Maturity Call Date
Amortized Market Amortized Market
Cost Value Cost Value
Within 1 year.................................................... $ 24,653 25,066 560,188 557,026
1 to 5 years..................................................... 169,344 169,209 187,204 188,799
5 to 10 years.................................................... 40,075 39,992 117,400 121,567
After 10 years................................................... 637,758 640,541 7,038 7,416
Total debt securities available for sale....................... $871,830 874,808 871,830 874,808
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[LOGO] TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
The table, "Securities Portfolio Maturity Distribution and Yield,"
distributes the securities available for sale portfolio as of December 31,
2004, based on the final maturity of the securities. Mortgage-backed
securities are presented in the time period of their estimated average life,
and equity securities are excluded. Actual maturities may differ from
contractual maturities because of securities prepayments and the right of
certain issuers to call or prepay their obligations without penalty.
Federal funds sold and other short-term investments: During 2004, the
average balance of federal funds sold and other short-term investments was
$494.6 million, a slight decrease from $497.4 million in 2003. The average
rate earned on these assets was 1.35% in 2004 and 1.14% in 2003. TrustCo
utilizes this category of earning assets as a means of maintaining strong
liquidity as interest rates change.
During 2004, the target federal funds rate set by the Federal Open Market
Committee (FOMC) changed significantly as described previously. The federal
funds sold and other short-term investments portfolio is significantly
affected by changes in the target federal funds rate as are virtually all
interest sensitive instruments.
The year end balance of federal funds sold and other short term
investments was $642.2 million for 2004 compared to $355.3 million for year
end 2003. The year end balance for 2004 is significantly higher than the
average balance for the year of $494.6 million due to the proceeds of sales
of securities available for sale executed near year end. These proceeds had
not been reinvested in either the loan or securities available for sale
portfolio by December 31, 2004. Management anticipates evaluating the overall
level of the federal funds sold and other short term investments portfolio
for 2005 and will make appropriate adjustments based upon market
opportunities and interest rates.
Funding Sources
TrustCo utilizes various traditional sources of funds to support its asset
portfolio. The table, "Mix of Average Sources of Funding," presents the
various categories
SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD
Debt securities available for sale:
(dollars in thousands) As of December 31, 2004
Maturing:
After 1 After 5
Within But Within But Within After
1 Year 5 Years 10 Years 10 Years Total
U.S. Treasuries and agencies
Amortized cost........................ $ 500 15,000 10,000 496,078 521,578
Market value.......................... 500 14,991 10,076 491,994 517,561
Weighted average yield................ 1.62% 3.00 6.00 5.41 5.35
States and political subdivisions
Amortized cost........................ $ 505 1,246 5,496 140,741 147,988
Market value.......................... 505 1,250 5,608 147,576 154,939
Weighted average yield................ 4.59% 4.60 5.55 5.35 5.35
Mortgage-backed securities and
collateralized mortgage obligations
Amortized cost........................ $23,648 152,463 24,529 939 201,579
Market value.......................... 24,061 152,333 24,258 971 201,623
Weighted average yield................ 8.34% 4.70 4.51 6.91 5.12
Other
Amortized cost........................ $ -- 635 50 -- 685
Market value.......................... -- 635 50 -- 685
Weighted average yield................ --% 4.42 5.50 -- 4.50
Total debt securities available for sale
Amortized cost........................ $24,653 169,344 40,075 637,758 871,830
Market value.......................... 25,066 169,209 39,992 640,541 874,808
Weighted average yield................ 8.13% 4.55 5.02 5.40 5.29
Weighted average yields have not been adjusted for any tax-equivalent factor.
U.S. Treasuries and agencies maturing after 10 years have final maturities of
less than 15 years. States and political subdivisions maturing after 10 years
have final maturities of less than 20 years.
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Management's Discussion and Analysis (continued)
AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS
(dollars in thousands) 2004 2003 2002
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets
Loans, net of unearned income........ $1,176,856 75,232 6.39% 1,275,023 87,669 6.88% 1,512,448 112,085 7.41%
Securities available for sale:
U.S. Treasuries and agencies....... 714,603 39,796 5.57 506,608 25,989 5.13 185,462 11,669 6.29
States and political subdivisions.. 168,723 13,302 7.88 203,718 16,131 7.92 222,696 17,917 8.05
Mortgage-backed securities and
collateralized mortgage
obligations...................... 149,298 7,032 4.71 60,248 3,618 6.01 62,494 4,483 7.17
Other.............................. 25,221 1,744 6.92 63,331 4,430 7.00 97,404 6,697 6.88
Total securities available
for sale......................... 1,057,845 61,874 5.85 833,905 50,168 6.01 568,056 40,766 7.18
Federal funds sold and other
short-term investments........... 494,579 6,675 1.35 497,364 5,654 1.14 498,875 8,458 1.70
Total interest earning assets...... 2,729,280 143,781 5.27% 2,606,292 143,491 5.50% 2,579,379 161,309 6.25%
Allowance for loan losses............ (49,299) (51,311) (56,525)
Cash and noninterest earning assets.. 148,214 155,194 170,651
Total assets....................... $2,828,195 2,710,175 2,693,505
Liabilities and shareholders' equity
Interest bearing deposits:
Interest bearing
checking accounts................ $ 328,804 1,586 0.48% 320,179 1,678 0.52% 306,856 3,124 1.02%
Savings............................ 809,438 7,968 0.98 759,308 8,795 1.16 701,966 12,758 1.82
Time deposits and money markets.... 1,123,474 28,223 2.51 1,072,078 29,370 2.74 1,010,529 39,268 3.89
Total interest bearing deposits.... 2,261,716 37,777 1.67 2,151,565 39,843 1.85 2,019,351 55,150 2.73
Short-term borrowings................ 100,855 972 0.96 107,799 877 0.81 210,363 2,840 1.35
Long-term debt....................... 151 8 5.40 326 19 5.80 510 30 5.91
Total interest bearing
liabilities...................... 2,362,722 38,757 1.64% 2,259,690 40,739 1.80% 2,230,224 58,020 2.60%
Demand deposits...................... 212,463 189,262 193,089
Other liabilities.................... 29,291 36,178 55,229
Shareholders' equity................. 223,719 225,045 214,963
Total liabilities and
shareholders' equity............. $2,828,195 2,710,175 2,693,505
Net interest income.................... 105,024 102,752 103,289
Net interest spread.................... 3.63% 3.70% 3.65%
Net interest margin
(net interest income
to total interest earning assets).... 3.85 3.94 4.00
Portions of income earned on certain commercial loans, U.S. Government
obligations, obligations of states and political subdivisions, and equity
securities are exempt from federal and/or state taxation. Appropriate
adjustments have been made to reflect the equivalent amount of taxable income
that would have been necessary to generate an equal amount of after tax
income. Federal and New York State tax rates used to calculate income on a
tax equivalent basis were 35.0% and 7.5% for 2004, and 2003, and 35.0% and
8.0%, for 2002. The average balances of securities available for sale were
calculated using amortized costs for these securities. Included in the
average balance of shareholders' equity is $19.5 million, $22.7 million, and
$26.1 million in 2004, 2003, and 2002, respectively, net of unrealized
appreciation, net of tax, in the available for sale securities portfolio.
Nonaccrual loans are included in average loans.
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[LOGO] TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
of funds used and the corresponding average balances for each of the
last three years.
Deposits: Average total deposits (including time deposits greater than
$100 thousand) were $2.47 billion in 2004, compared to $2.34 billion in 2003,
an increase of $133.4 million. Increases were noted in all categories of
accounts. The average balance of interest bearing checking accounts increased
by $8.6 million to $328.8 million in 2004. Money market accounts had an
average balance of $157.4 million in 2004 compared to $149.5 million in 2003.
Savings account balances increased from $759.3 million in 2003 to $809.4
million in 2004, an increase of 6.6%. Time deposits increased on average by
$43.5 million and demand deposits increased by $23.2 million during 2004
compared to 2003.
The increase in deposits reflects the impact of new branches opened over
the last several years, and the continuing focus at TrustCo on providing core
banking services better, faster and cheaper than its competitors. Management
believes that another contributing factor is the moving of funds by customers
away from the stock and bond markets back into the banking system. TrustCo,
with its expanding branch network, is well positioned to attract these new
deposits.
The overall cost of interest bearing deposits was 1.67% in 2004 compared
to 1.85% in 2003. The increase in the average balance of interest bearing
deposits, coupled with an 18 basis point decrease in the average cost,
resulted in a decrease of approximately $2.1 million in interest expense to
$37.8 million in 2004.
The Company strives to maintain competitive rates on deposit accounts and
to attract customers through a combination of competitive interest rates,
quality customer service, and convenient banking locations. In this fashion,
management believes, TrustCo is able to attract deposit customers looking for
a long-term banking relationship, and to cross sell banking services
utilizing the deposit account relationship as the starting point. As a result
of changing to a federal savings bank charter in 2002, TrustCo no longer
competitively bids on new deposits from states and political subdivisions.
Therefore, the average balance of these deposits has decreased significantly
since that time. Management believes that the benefits of the federal savings
bank charter outweigh the loss of these municipal deposits.
MATURITY OF TIME DEPOSITS OVER $100 THOUSAND
(dollars in thousands) As of December 31, 2004
Under 3 months.............................. $ 16,592
3 to 6 months .............................. 19,175
6 to 12 months ............................. 33,833
Over 12 months.............................. 108,421
Total....................................... $178,021
Other funding sources: The Company had $107.8 million of average short-term
borrowings outstanding during 2003 compared to $100.9 million in 2004. The
average cost of short-term borrowings was 0.81% in 2003 and 0.96% in 2004.
This resulted in interest expense of approximately $1.0 million in 2004.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable
financial organization, TrustCo
MIX OF AVERAGE SOURCE OF FUNDING
(dollars in thousands) Components of
2004 2003 Total Funding
vs. vs.
2004 2003 2002 2003 2002 2004 2003 2002
Demand deposits........................ $ 212,463 189,262 193,089 23,201 (3,827) 8.3% 7.7 8.0
Retail deposits:
Savings.............................. 809,438 759,308 701,966 50,130 57,342 31.4 31.0 29.0
Time deposits under $100 thousand.... 789,211 767,505 766,133 21,706 1,372 30.6 31.3 31.6
Interest bearing checking accounts... 328,804 320,179 306,856 8,625 13,323 12.8 13.1 12.7
Money market deposits................ 157,418 149,520 117,478 7,898 32,042 6.1 6.1 4.8
Total retail deposits................ 2,084,871 1,996,512 1,892,433 88,359 104,079 80.9 81.5 78.1
Total core deposits.................. 2,297,334 2,185,774 2,085,522 111,560 100,252 89.2 89.2 86.1
Time deposits over $100 thousand....... 176,845 155,053 126,918 21,792 28,135 6.9 6.4 5.2
Short-term borrowings.................. 100,855 107,799 210,363 (6,944) (102,564) 3.9 4.4 8.7
Long-term debt......................... 151 326 510 (175) (184) -- -- --
Total purchased liabilities.......... 277,851 263,178 337,791 14,673 (74,613) 10.8 10.8 13.9
Total sources of funding............. $2,575,185 2,448,952 2,423,313 126,233 25,639 100.0% 100.0 100.0
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[LOGO] TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
AVERAGE DEPOSITS BY TYPE OF DEPOSITOR
(dollars in thousands) Years Ended December 31,
2004 2003 2002 2001 2000
Individuals, partnerships and corporations............... $2,453,843 2,318,424 2,150,986 1,947,700 1,922,399
U.S. Government.......................................... 70 73 35 83 79
States and political subdivisions........................ 5,539 9,802 48,049 64,811 49,651
Other (certified and official checks, etc.).............. 14,727 12,528 13,370 15,056 13,674
Total average deposits by type of depositor............ $2,474,179 2,340,827 2,212,440 2,027,650 1,985,803
strives to maintain strong capital ratios and to qualify as a well
capitalized bank in accordance with federal regulatory requirements.
Historically, most of the Company's capital requirements have been provided
through retained earnings generated. New issues of equity securities have not
been required to support the Company's growth.
A basic element of TrustCo's operating philosophy is that the Company will
not retain excess capital. Capital generated by the Company that is in excess
of the levels considered by management to be necessary for the safe and sound
operation of the Company has been distributed to the shareholders in the form
of cash dividends. Consequently, the capital ratios that are maintained are
adequate, in the view of management, but not excessive. This philosophy has
led to a dividend payout ratio of 78.8% of net income in 2004, 84.0% for 2003
and 88.6% for 2002. These are significant payouts to the Company's
shareholders and are considered by management to be a prudent use of excess
capital. As to the likelihood of future dividends, it is currently
anticipated that the philosophy stated above will continue.
TrustCo's Tier 1 capital was 17.09% of risk-adjusted assets at December
31, 2004, and 16.54% of risk-adjusted assets at December 31, 2003. Tier 1
capital to average assets at December 31, 2003 was 7.53%, as compared to
7.74% at year end 2004.
At December 31, 2004 and 2003, Trustco Bank met its regulators' definition
of a well capitalized institution.
VOLUME AND YIELD ANALYSIS
(dollars in thousands) 2004 vs. 2003 2003 vs. 2002
Increase Due to Due to Increase Due to Due to
(Decrease) Volume Rate (Decrease) Volume Rate
Interest income (TE):
Federal funds sold and other
short-term investments............. $ 1,021 (32) 1,053 (2,804) (12) (2,792)
Securities available for sale:
Taxable............................ 14,535 12,791 1,744 11,189 14,298 (3,109)
Tax-exempt......................... (2,829) (2,756) (73) (1,787) (1,507) (280)
Total securities available
for sale......................... 11,706 10,035 1,671 9,402 12,791 (3,389)
Loans................................ (12,437) (7,553) (4,884) (24,416) (18,178) (6,238)
Total interest income.............. 290 2,450 (2,160) (17,818) (5,399) (12,419)
Interest expense:
Interest bearing checking accounts... (92) 55 (147) (1,446) 131 (1,577)
Savings.............................. (827) 640 (1,467) (3,963) 980 (4,943)
Time deposits
and money markets................. (1,147) 1,654 (2,801) (9,898) 1,722 (11,620)
Short-term borrowings................ 95 (49) 144 (1,963) (1,087) (876)
Long-term debt....................... (11) (10) (1) (11) (11) --
Total interest expense............. (1,982) 2,290 (4,272) (17,281) 1,735 (19,016)
Net interest income (TE)........... $ 2,272 160 2,112 (537) (7,134) 6,597
Increases and decreases in interest income and interest expense due to both
rate and volume have been allocated to the two categories of variances
(volume and rate) based on the percentage relationship of such variances to
each other.
15
[LOGO] TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
Risk Management
The responsibility for balance sheet risk management oversight is the
function of the Asset Allocation Committee. This committee meets monthly and
includes the executive officers of the Company as well as other department
managers as appropriate. The meetings include a review of balance sheet
structure, formulation of strategy in light of anticipated economic
conditions, and comparison to established guidelines to control exposures to
various types of risk.
Credit Risk
Credit risk is managed through a network of loan officer authorities,
review committees, loan policies, and oversight from the senior executives of
the Company. Management follows a policy of continually identifying,
analyzing, and evaluating the credit risk inherent in the loan portfolio. As
a result of management's ongoing reviews of the loan portfolio, loans are
placed in nonaccrual status, either due to the delinquent status of the
principal and/or interest payments, or based on a judgment by management
that, although payment of principal and/or interest is current, such action
is prudent. Thereafter, no interest is taken into income unless received in
cash or until such time as the borrower demonstrates a sustained ability to
make scheduled payments of interest and principal.
Management has also developed policies and procedures to monitor the
credit risk in relation to the federal funds sold portfolio. TrustCo monitors
the credit rating and capital levels of the third party banks that they sell
federal funds to. Only banks with the highest rating from the credit rating
agency selected are included in the list for federal funds transactions.
Nonperforming Assets
Nonperforming assets include loans in nonaccrual status, loans that have
been treated as troubled debt restructurings, loans past due three payments
or more and still accruing interest, and foreclosed real estate properties.
Nonperforming assets at year end 2004 totalled $3.2 million as compared to
the balance of $3.3 million at year end 2003. All of the nonperforming assets
at year end 2004 and 2003 are nonperforming loans. Nonperforming loans as a
percentage of the total loan portfolio were 0.26% in 2004 and 0.28% in 2003.
Included in nonperforming loans at year end 2004 were $557,000 of
residential mortgage loans in nonaccrual status as compared to none at year
end 2003. There were no loans past due three payments or more and still
accruing interest at year end 2004 and 2003. Restructured loans at year end
2004 were $2.6 million, compared to $3.3 million at year end 2003. Adherence
to sound underwriting standards, vigorous loan collection efforts and timely
charge-offs have been cornerstones of the operating philosophy of TrustCo.
All of the $3.2 million of nonperforming loans at December 31, 2004 are
residential real estate or retail consumer loans. A significant portion of
the charge-offs for 2004 and 2003 occurred in the residential real estate and
retail consumer loan portfolios. During 2004, gross charge-offs of these
types of loans were $5.5 million (which represented 94% of total gross
charge-offs). In 2003, charge-offs for these types of loans were $9.2
million. In the past several years there has been a shift of charge-offs from
the commercial loan portfolio to the residential real estate and retail
consumer loan portfolios for several reasons, including:
o the overall emphasis within TrustCo on residential real estate
originations,
o the relatively weak economic environment in the Upstate New York market,
and
o the relatively stagnant growth in real estate values in many of the
Company's market areas that has occurred since the middle of the 1990's,
thereby causing a reduction in the collateral that support the loans.
Consumer defaults and bankruptcies had increased over the last several
years, and this led to an increase in defaults on loans. However, beginning
in 2004 the number of new bankruptcy filings in the Capital District area
decreased from the prior year as compared to state wide trends which continue
to show increases year over year in new bankruptcy filings. This trend, along
with the decrease in residential real estate and consumer loan charge offs in
2004 compared to 2003, may be indicators of future economic stability for
this region and a continued lessening of charge offs in the residential real
estate portfolio.
Ongoing portfolio management is intended to result in early identification
and disengagement from deteriorating credits. TrustCo has a diversified loan
portfolio that includes a significant balance of residential mortgage loans
to borrowers in the Capital Region and avoids concentrations to any one
borrower or any single industry.
Management is aware of no other loans in the Bank's portfolio that pose
significant risk of the eventual non-collection of principal and interest. As
of December 31, 2004, there were no other loans classified for regulatory
purposes that management reasonably expects will materially impact future
operating results, liquidity, or capital resources. TrustCo has no advances
to borrowers or projects located outside the United States.
TrustCo has identified nonaccrual commercial and commercial real estate
loans, as well as all loans restructured since 1995 under a troubled debt
restructuring, as impaired loans.
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[LOGO] TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
At year end 2004 and 2003, there were $2.6 and $3.1 million, respectively,
of impaired loans. The average balances of impaired loans were $2.9 million
during 2004 and $3.7 million during 2003. The Company recognized
approximately $314 thousand of interest income on these loans in 2004 and
$380 thousand in 2003.
Allowance for Loan Losses (dollars in millions)
2002 $52.6
2003 $48.7
2004 $49.4
Allowance for Loan Losses
The allowance for loan losses is available to absorb losses on loans that
management determines are uncollectible. The balance of the allowance is
maintained at a level that is, in management's judgment, representative of
the loan portfolio's inherent risk.
In deciding on the adequacy of the allowance for loan losses, management
reviews past due information, historical charge-off data, and nonperforming
loan activity. Also, there are a number of other factors that are taken into
consideration, including:
o the magnitude and nature of recent loan charge offs,
o the growth in the loan portfolio and the risks associated with the
absolute balance of the loan portfolio in relation to the economic
climate in the Bank's business territory,
o significant growth in the level of losses associated with bankruptcies
and the time period needed to foreclose, secure, and dispose of
collateral, and
o the relatively weak economic environment in the Upstate New York
territory over the last several years.
The table, "Summary of Loan Loss Experience", includes an analysis of the
changes to the allowance for the past five years. Loans charged off in 2004
and 2003 were $5.8 million and $9.6 million, respectively. Recoveries were
$6.0 million in 2004 and $4.6 million in 2003. The provision recorded in 2004
was $450,000 compared to $1.2 million in 2003. The reduction in the provision
for loan losses over the last several years is a result of the allowance for
loan losses being considered adequate by management in relation to the
overall loan portfolio.
The level of loan charge offs decreased by approximately $3.8 million
between 2003 and 2004 while at the same time the level of nonperforming loans
remained relatively constant between the two years. The mix of the
nonperforming loans has changed between 2003 and 2004 in that virtually all
of the increase in nonperforming loans in 2004 are loans on a nonaccrual
status. Though the economic climate in the Upstate New York area has suffered
over the last several years, resulting in higher bankruptcies and stagnant
real estate prices, overall economic trends in the last two years have been
improving. As noted earlier, bankruptcies in the Capital District area have
recently decreased on a year over year basis, and general housing prices have
been increasing. These positive trends have helped marginal credits better
manage their
NONPERFORMING ASSETS
(dollars in thousands) As of December 31,
2004 2003 2002 2001 2000
Loans in nonaccrual status........................... $ 557 -- 615 1,090 4,395
Loans contractually past due 3 payments or more
and still accruing interest........................ -- -- -- 801 896
Restructured loans................................... 2,610 3,260 4,303 5,159 6,370
Total nonperforming loans............................ 3,167 3,260 4,918 7,050 11,661
Foreclosed real estate............................... -- -- 86 603 1,911
Total nonperforming assets........................... $ 3,167 3,260 5,004 7,653 13,572
Allowance for loan losses............................ $49,384 48,739 52,558 57,203 56,298
Allowance coverage of nonperforming loans............ 15.59x 14.95 10.69 8.11 4.83
Nonperforming loans as a % of total loans............ 0.26% 0.28 0.35 0.45 0.79
Nonperforming assets as a % of total assets.......... 0.11 0.12 0.19 0.30 0.55
17
[LOGO] TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
situations and thereby keep their loans current. Because of continued
improvement in nearly all of the indicators of the Company's credit quality
and management's assessment of economic conditions and risk, no provision for
loan losses was recorded in the fourth quarter 2004. Management will continue
to monitor these trends in determining future provisions for loan losses in
relation to charge offs, loan recoveries and the level and trends of
nonperforming loans.
Market Risk
The Company's principal exposure to market risk is with respect to
interest rate risk. Interest rate risk is the potential for economic loss due
to future interest rate changes. These economic losses can be reflected as a
loss of future net interest income and/or a loss of current market value.
Quantitative and Qualitative Disclosure about Market Risk
TrustCo realizes income principally from the difference or spread between
the interest earned on loans, investments and other interest-earning assets
and the interest paid on deposits and borrowings. Loan volume and yield, as
well as the volume of and rates on investments, deposits and borrowings are
affected by market interest rates. Additionally, because of the terms and
conditions of many of the loan documents and deposit accounts, a change in
interest rates could also affect the projected maturities of the loan
portfolio and/or the deposit base. Accordingly, TrustCo considers interest
rate risk to be a significant market risk for the Company.
Interest rate risk management focuses on maintaining consistent levels of
net interest income and the fair value of capital in varying interest rate
cycles within Board-approved policy limits. Interest rate risk management
also must take into consideration, among other factors, the Company's overall
credit, operating income, operating cost, and capital profile. The Asset
Allocation Committee, which includes all members of executive management and
reports quarterly to the Board of Directors, monitors and manages interest
rate risk to maintain an acceptable level of potential change in the fair
value of capital as a result of changes in market interest rates.
The Company uses an internal model as the primary tool to identify,
quantify and project changes in interest rates and the impact on the balance
sheet. The model utilizes assumptions with respect to cash flows and
prepayment speeds taken both from industry sources and internally generated
data based upon historical trends in the Bank's balance sheet. Assumptions
based on the historical behavior of deposit rates and balances in relation to
changes in market interest rates are also incorporated into the model. This
model assumes a fair value amount with respect to non-time deposit categories
since these deposits are part of the core deposit products of the Company.
These assumptions are inherently uncertain and, as a result, the model cannot
precisely measure the fair value of capital or precisely predict the impact
of fluctuations in interest rates on the fair value of capital.
Using this internal model, the fair values of capital projections as of
December 31, 2004 are referenced below. The base case scenario shows the
present estimate of the fair value of capital assuming no change in the
operating environment or operating strategies and no change in interest rates
from those existing in the marketplace as of December 31, 2004. The table
indicates the impact on the fair value of capital assuming interest rates
were to instantaneously increase by 100 bp and 200 bp or to decrease by 100
bp. The decrease in interest rates was limited to a 100 bp decline in rates
due to the relatively low interest rate environment at year end 2004.
Estimated Percentage of
Fair value of Capital to
As of December 31, 2004 Fair value of Assets
+200 BP 14.58%
+100 BP 16.37
Current rates 17.81
- -100 BP 16.85
At December 31, 2004 the book value of capital (excluding the market
adjustment on securities available for sale) to assets was 7.74%.
The fair value of capital is calculated as the fair value of assets less
the fair value of liabilities in the interest ratio scenario presented. The
fair value of capital in the current rate environment is 17.81% of assets
whereas the current book value of capital to assets is 7.74% at December 31,
2004. The significant difference between these two capital ratios reflects
the impact that a fair value calculation can have on the capital ratios of a
company. The fair value of capital calculations take into consideration the
fair value of deposits, including those deposits considered core deposits,
along with the fair value of assets such as the loan portfolio.
A secondary method to identify and manage the interest rate risk profile
is the static gap analysis. Interest sensitivity gap analysis measures the
difference between the assets and liabilities repricing or maturing within
specific time periods. An asset-sensitive position indicates that there are
more rate-sensitive assets than rate-sensitive liabilities repricing or
maturing within specific time periods, which would generally imply a
favorable impact on net interest income in periods of rising interest rates
and a negative impact in periods of falling rates. A liability-sensitive
position would generally imply a negative impact on net interest income in
periods of rising rates and a positive impact in periods of falling rates.
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Management's Discussion and Analysis (continued)
SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands) 2004 2003 2002 2001 2000
Amount of loans outstanding at end of year
(less unearned income).......................... $1,240,065 1,162,266 1,422,301 1,556,686 1,475,048
Average loans outstanding during year
(less average unearned income).................. 1,176,856 1,275,023 1,512,448 1,518,768 1,395,414
Balance of allowance at beginning of year......... 48,739 52,558 57,203 56,298 55,820
Loans charged off:
Commercial...................................... 335 432 997 1,084 1,951
Real estate..................................... 5,054 8,651 6,648 5,383 2,992
Installment..................................... 408 515 705 561 557
Total......................................... 5,797 9,598 8,350 7,028 5,500
Recoveries of loans previously charged off:
Commercial...................................... 446 1,393 803 1,664 847
Real estate..................................... 5,334 3,003 1,285 1,106 612
Installment..................................... 212 183 197 223 171
Total......................................... 5,992 4,579 2,285 2,993 1,630
Net loans charged off (recovered)................. (195) 5,019 6,065 4,035 3,870
Provision for loan losses ........................ 450 1,200 1,420 4,940 4,114
Allowance of acquired bank........................ -- -- -- -- 234
Balance of allowance at end of year............... $ 49,384 48,739 52,558 57,203 56,298
Net charge offs (recoveries) as a
percent of average
loans outstanding during year
(less average unearned income).................. (.02)% .39 .40 .27 .28
Allowance as a percent of loans outstanding
at end of year.................................. 3.98 4.17 3.70 3.67 3.82
Static gap analysis has limitations because it cannot measure precisely
the effect of interest rate movements, and competitive pressures on the
repricing and maturity characteristics of interest-earning assets and
interest-bearing liabilities. In addition, a significant portion of the
interest sensitive assets are fixed rate securities with relatively long
lives whereas the interest-bearing liabilities are not subject to these same
limitations. As a result, certain assets and liabilities may in fact reprice
at different times and at different volumes than the static gap analysis
would indicate.
The Company recognizes the relatively long-term nature of the fixed rate
residential loan portfolio. To fund those long-term assets the Company
cultivates long-term deposit relationships (often called core deposits).
These core deposit relationships tend to be longer term in nature and not as
susceptible to changes in interest rates. Core deposit balances allow the
Company to take on certain interest rate risk with respect to the asset side
of the balance sheet.
The table "Interest Rate Sensitivity" presents an analysis of the
interest-sensitivity gap position at December 31, 2004. All interest-earning
assets and interest-bearing liabilities are shown based upon their
contractual maturity or repricing date adjusted for forecasted prepayment
rates. Asset prepayment and liability repricing periods are selected after
considering the current rate environment, industry prepayment and data
specific to the Company. The interest rate sensitivity table indicates that
TrustCo is asset sensitive throughout the time periods presented and that the
Company is significantly asset sensitive for the period to five years. The
affect of being asset sensitive is that should interest rates increase, the
Company would be able to reinvest these assets at higher rates. Conversely,
should interest rates fall, the Company would record less interest income due
to reinvesting the assets in a lower interest rate environment.
There are several significant shortcomings inherent in the gap analysis.
For example, although certain assets and liabilities have similar periods to
maturity or to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while other assets and liabilities may lag behind changes in market interest
rates. Management takes these factors, and others, into consideration when
reviewing the Bank's gap position and establishing its asset/liability
strategy.
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Management's Discussion and Analysis (continued)
INTEREST RATE SENSITIVITY
(dollars in thousands) At December 31, 2004
Repricing in:
0-90 91-365 1-5 Over 5 Rate
days days years years Insensitive Total
Total assets...................... $1,012,796 252,015 648,099 853,277 97,647 2,863,834
Cumulative total assets........... $1,012,796 1,264,811 1,912,910 2,766,187 2,863,834
Total liabilities
and shareholders' equity......... $ 77,986 192,120 543,939 1,345,366 704,423 2,863,834
Cumulative total liabilities
and shareholders' equity......... $ 77,986 270,106 814,045 2,159,411 2,863,834
Cumulative interest
sensitivity gap.................. $ 934,810 994,705 1,098,865 606,776
Cumulative gap as a % of interest
earning assets for the period.... 92.30% 78.64 57.44 21.94
Cumulative interest sensitive
assets to liabilities............ 1,298.69 468.26 234.99 128.10
Liquidity Risk
TrustCo seeks to obtain favorable funding sources and to maintain prudent
levels of liquid assets in order to satisfy various liquidity demands. In
addition to serving as a funding source for maturing obligations, liquidity
provides flexibility in responding to customer initiated needs. Many factors
affect the ability to meet liquidity needs, including changes in the markets
served by the Bank's network of branches, the mix of assets and liabilities,
and general economic conditions.
The Company actively manages its liquidity position through target ratios
established under its Asset/ Liability Management policies. Continual
monitoring of these ratios, both historically and through forecasts under
multiple interest rate scenarios, allows TrustCo to employ strategies
necessary to maintain adequate liquidity levels. Management has also
developed various liquidity alternatives should abnormal situations develop.
The Company achieves its liability-based liquidity objectives in a variety
of ways. Liabilities can be classified into three categories for the purposes
of managing liability-based liquidity: core deposits, purchased money, and
capital market funds. TrustCo seeks deposits that are dependable and
predictable and that are based as much on the level and quality of service as
they are on interest rate. For 2004, average core deposits (total deposits
less time deposits greater than $100 thousand) amounted to $2.30 billion,
compared to $2.19 billion in 2003. Average balances of core deposits are
detailed in the table "Mix of Average Sources of Funding."
In addition to core deposits, another source of liability-based funding
available to TrustCo is purchased money, which consists of long-term and
short-term borrowings, federal funds purchased, securities sold under
repurchase agreements, and time deposits greater than $100 thousand. The
average balances of these purchased liabilities are detailed in the table
"Mix of Average Sources of Funding." During 2004, the average balance of
purchased liabilities was $277.9 million, compared with $263.2 million in
2003.
TrustCo also has a line of credit available with the Federal Home Loan
Bank of New York.
Off-Balance Sheet Risk
Commitments to extend credit: The Bank makes contractual commitments to
extend credit, and extends lines of credit which are subject to the Bank's
credit approval and monitoring procedures. At December 31, 2004 and 2003,
commitments to extend credit in the form of loans, including unused lines of
credit, amounted to $313.3 million and $273.9 million, respectively. In
management's opinion, there are no material commitments to extend credit that
represent unusual risk.
The Company has issued conditional commitments in the form of standby
letters of credit to guarantee payment on behalf of a customer and guarantee
the performance of a customer to a third party. Standby letters of credit
generally arise in connection with lending relationships. The credit risk
involved in issuing these instruments is essentially the same as that
involved in extending loans to customers. Contingent obligations under
standby letters of credit totaled approximately $3.6 million and $3.9 million
at December 31, 2004 and 2003, respectively, and represent the maximum
potential future payments the Company could be required to make. Typically,
these instruments have terms of 12 months or less
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[LOGO] TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
and expire unused; therefore, the total amounts do not necessarily represent
future cash requirements. Each customer is evaluated individually for
credit-worthiness under the same underwriting standards used for commitments
to extend credit and on- balance sheet instruments. Company policies
governing loan collateral apply to standby letters of credit at the time of
credit extension. Loan-to-value ratios are generally consistent with
loan-to-value requirements for other commercial loans secured by similar
types of collateral. The fair value of the Company's standby letters of
credit at December 31, 2004 and 2003 was insignificant.
Other off-balance sheet risk: TrustCo does not engage in activities involving
interest rate swaps, forward placement contracts, or any other instruments
commonly referred to as derivatives. Management believes these instruments
pose a high degree of risk, and that investing in them is unnecessary.
TrustCo has no off-balance sheet partnerships, joint ventures, or other
risk sharing entities.
Noninterest Income and Expense
Noninterest income: Noninterest income is a significant source of revenue for
the Company and an important factor in overall results. Total noninterest
income was $32.0 million in 2004, $29.6 million in 2003 and $27.3 million in
2002. Included in the 2004 results are $13.7 million of net securities gains
compared with net gains of approximately $9.8 million in 2003 and $7.5
million in 2002. Excluding securities transactions, noninterest income was
$18.3 million in 2004, and $19.8 million in 2003 and 2002.
The Trust Department contributes a large recurring portion of noninterest
income through fees generated by providing fiduciary and investment
management services. Income from these fiduciary activities totaled $5.9
million in 2004, $6.0 million in 2003, and $6.8 million in 2002. Trust fees
are generally calculated as a percentage of the assets under management by
the Trust Department. Assets under management by the Trust Department are not
included on the Company's consolidated financial statements because the Trust
Department holds these assets in a fiduciary capacity. At December 31, 2004
and 2003 assets under management by the Trust Department were approximately
$992.3 million and $970.0 million, respectively.
Changes in fees for services to customers reflect changes in the fee scale
used for pricing the services and the volume of services customers utilized.
Noninterest expense: Noninterest expense was $48.2 million in 2004, compared
with $48.5 million in 2003 and $55.3 million in 2002. TrustCo's operating
philosophy stresses the importance of monitoring and controlling the level of
noninterest expense. The efficiency ratio is a strong indicator of how well
controlled and monitored these expenses are for a banking enterprise. A low
ratio indicates highly efficient performance. TrustCo's efficiency ratio was
38.8% in 2004, 38.3% in 2003 and 36.7% in 2002.
Salaries and employee benefits are the most significant component of
noninterest expense. For 2004, these expenses amounted to $20.7 million,
compared with $20.4 million in 2003, and $22.3 million in 2002. The reduction
in salaries and employee benefit expense between 2002 and 2003 is the result
of reductions in salary and bonus payments made to senior executives and the
payment, in 2002, of a supplemental retirement benefit for the former chief
executive officer.
Net occupany expense increased $336 thousand between 2003 and 2004 due
primarily to new branch openings during 2004. Equipment expense, however,
decreased $795 thousand for 2004 to $2.3 million as compared to $3.1 million
in 2003. The decrease in net occupany expense is the result of new equipment
purchased in prior years that requires less maintenance and due to general
reductions in maintenance contracts in 2004.
Professional services expense increased to $3.7 million in 2004 compared
to $3.0 million in 2003 and $9.0 million in 2002. The increase in 2004 is the
result of payments made to outside computer vendors and additional cost
associated with complying with new Securities and Exchange Commission
internal control reporting regulations. The decrease from 2002 to 2003 is the
result of expensing a $6.0 million consulting contract with the Company's
former chief executive officer in 2002.
NONINTEREST INCOME
(dollars in thousands) For the year ended December 31, 2004 vs. 2003
2004 2003 2002 Amount Percent
Trust department income............................. $ 5,869 6,046 6,769 (177) (2.9)%
Fees for services to customers...................... 10,486 10,896 10,305 (410) (3.8)
Net gains on securities transactions................ 13,712 9,807 7,499 3,905 39.8
Other............................................... 1,898 2,900 2,725 (1,002) (34.6)
Total noninterest income.......................... $31,965 29,649 27,298 2,316 7.8%
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Management's Discussion and Analysis (continued)
NONINTEREST EXPENSE
(dollars in thousands) For the year ended December 31, 2004 vs. 2003
2004 2003 2002 Amount Percent
Salaries and employee benefits....................... $20,697 20,449 22,338 248 1.2%
Net occupancy expense................................ 6,601 6,265 5,594 336 5.4
Equipment expense.................................... 2,283 3,078 2,946 (795) (25.8)
Professional services................................ 3,685 3,040 8,987 645 21.2
Outsourced services.................................. 4,348 5,601 2,055 (1,253) (22.4)
Charitable contributions............................. 654 513 1,588 141 27.5
Other real estate income, net........................ (739) (457) (348) (282) 61.7
Other................................................ 10,636 9,997 12,166 639 6.4
Total noninterest expense.......................... $48,165 48,486 55,326 (321) (0.1)%
Outsourced service expense was $4.3 million in 2004 compared to $5.6
million in 2003. The decrease is the result of new processing contracts in
2004 at lower rates and the full year effect in 2004 of services brought back
in house during 2003.
Charitable contributions expense decreased approximately $1.1 million
between 2003 and 2002 as a result of an additional contribution made in 2002
in recognition of the 100 year anniversary of the Company.
Changes in other components of noninterest expense are the results of
normal banking activities and the increased activities associated with new
branching facilities.
Income Tax
In 2004, TrustCo recognized income tax expense of $26.8 million, as
compared to $23.3 million in 2003 and $17.0 million in 2002. The tax expense
on the Company's income was different than tax expense at the Federal
statutory rate of 35%, due primarily to tax exempt income and, to a lesser
extent, the effect of New York State income taxes.
Deferred tax assets are recognized subject to management's judgment that
realization is more likely than not.
Based primarily on the sufficiency of historical and future taxable
income, management believes it is more likely than not that the net deferred
tax assets of $33.1 million and $36.2 million at December 31, 2004 and 2003,
respectively, will be realized.
Contractual Obligations
The Company is contractually obligated to make the following payments on
long-term debt and leases as of December 31, 2004:
(dollars in thousands) Payments Due by Period:
Less Than 1-3 3-5 More Than
1 Year Years Years 5 Years Total
Federal Home
Loan Bank
borrowings......... $ 27 58 29 -- 114
Operating leases..... 2,588 4,473 4,322 23,497 34,880
Total $2,615 4,531 4,351 23,497 34,994
In addition, the Company is contractually obligated to pay data processing
vendors approximately $5 million per year through 2011.
Impact of Inflation and Changing Prices
The consolidated financial statements for the years ended 2004, 2003 and
2002 have been prepared in accordance with accounting principles generally
accepted in the United States of America which require the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increasing cost of operations.
Efficiency Ratio
2002 36.7%
2003 38.3%
2004 38.8%
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[LOGO] TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
Unlike most industrial companies, nearly all the assets and liabilities
of the Company are monetary.
As a result, changes in interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation,
because interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
Impact of New Accounting Standards
Emerging Issues Task Force ("EITF") issue 03-1 ("EITF 03-1"), The Meaning
of Other-Than-Temporary Impairment and its Application to Certain
Investments, addresses when impairment of securities is considered other than
temporary. The initial EITF consensus, reached in November 2003, required
disclosures related to other than temporary impairment. In March 2004, the
EITF reached a consensus on the recognition and measurement of impairment of
securities considered other than temporarily impaired for reporting periods
beginning after June 15, 2004. However, in September 2004, the Financial
Accounting Standards Board ("FASB") issued EITF 03-1-1, which deferred the
effective date for the measurement and recognition provisions of EITF 03-1.
The FASB is currently reconsidering all other than temporary impairment
literature. Management does not believe the provisions, as currently written,
will have a material impact on the results of future operations.
In December 2003, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 03-3, "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer." The SOP is effective for loans
acquired in fiscal years beginning after December 15, 2004. The SOP addresses
accounting for differences between contractual cash flows and cash flows
expected to be collected from an investor's initial investment in loans or
debt securities (loans) acquired in a transfer if those differences are
attributable, at least in part, to credit quality. The SOP applies to loans
acquired in business combinations but does not apply to originated loans.
Management does not believe the provision of this standard will have a
material impact on the results of future operations.
In December 2003, the FASB issued a revision to SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an Amendment
of FASB Statements No. 87, 88, and 106". This statement prescribes employers'
disclosures about pension plans and other postretirement benefit plans; it
does not change the measurement or recognition of those plans. The statement
retains and revises the disclosure requirements contained in the original
Statement 132. It also requires additional disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other postretirement benefit plans. The Company's
disclosures in Note 10 to the consolidated financial statements incorporate
the requirements of the revised Statement 132.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) became law in the United States. The Act
introduced a prescription drug benefit under Medicare as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D under the
Act. In accordance with FASB Staff Position FAS 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," the Company has elected to defer
recognition of the effects of the Act in any measures of the benefit
obligation or cost. The Company is still analyzing the specific authoritative
guidance on the accounting for the federal subsidy, which was issued in
January 2005, but the Company anticipates that, in order to make the plan
actuarially equivalent, it will make minor changes to its non-pension
postretirement plan. Accordingly, the measures of the accumulated non-pension
postretirement benefit obligation and net periodic non-pension postretirement
benefit cost do not reflect any amount associated with the subsidy.
In December 2004, the FASB issued revised statement No. 123 (FAS 123R),
"Share-Based Payment," which requires companies to expense the estimated fair
value of employee stock options and similar awards. The accounting provisions
of FAS 123R will be effective for public companies beginning July 1, 2005.
The Company will adopt the provisions of FAS 123R using a modified
prospective application. Under modified prospective application, FAS 123R
will apply to new awards and to awards that are outstanding on the effective
date and are subsequently modified or cancelled. Compensation expense for
outstanding awards for which the requisite service had not been rendered as
of the effective date will be recognized over the remaining service period
using the compensation cost calculated for pro forma disclosure purposes
under FAS 123. The Company will incur additional expense beginning July 1,
2005 related to new awards granted and the unvested portions of earlier
awards. The Company is in the process of determining the impact the
recognition of compensation expense related to stock awards will have on its
consolidated financial statements.
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[LOGO] TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
(dollars in thousands, except per share data)
2004 2003
Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
Income statement:
Interest income........ $34,409 34,105 34,951 35,320 138,785 35,401 34,745 32,041 34,943 137,130
Interest expense....... 9,346 9,439 9,797 10,174 38,756 11,706 10,346 9,307 9,380 40,739
Net interest income ... 25,063 24,666 25,154 25,146 100,029 23,695 24,399 22,734 25,563 96,391
Provision for
loan losses.......... 150 150 150 -- 450 300 300 300 300 1,200
Net interest income
after provision for
loan losses.......... 24,913 24,516 25,004 25,146 99,579 23,395 24,099 22,434 25,263 95,191
Noninterest income..... 8,721 8,375 8,990 5,879 31,965 7,850 7,508 10,201 4,090 29,649
Noninterest expense.... 12,508 11,699 11,483 12,475 48,165 12,669 12,579 11,600 11,638 48,486
Income before
income taxes......... 21,126 21,192 22,511 18,550 83,379 18,576 19,028 21,035 17,715 76,354
Income tax expense..... 6,993 6,821 7,298 5,727 26,839 5,384 5,617 6,750 5,572 23,323
Net income............. $14,133 14,371 15,213 12,823 56,540 13,192 13,411 14,285 12,143 53,031
Per share data:
Basic earnings......... $ .191 .193 .205 .172 .761 .178 .180 .192 .163 .713
Diluted earnings....... .188 .191 .203 .171 .753 .175 .178 .189 .161 .704
Cash dividends
declared............. .150 .150 .150 .150 .600 .150 .150 .150 .150 .600
Critical Accounting Policies
Pursuant to 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 Note 1 to
the consolidated financial statements is a description of the significant
accounting policies that are utilized by the Company in the preparation of
the consolidated financial statements.
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
local market area and 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.
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[LOGO] TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
FIVE YEAR SUMMARY OF FINANCIAL DATA
(dollars in thousands, except per share data) Years Ended December 31,
2004 2003 2002 2001 2000
Statement of income data:
Interest income................................. $ 138,785 137,130 153,735 168,660 173,702
Interest expense................................ 38,756 40,739 58,020 72,763 75,648
Net interest income............................. 100,029 96,391 95,715 95,897 98,054
Provision for loan losses....................... 450 1,200 1,420 4,940 4,114
Net interest income after provision
for loan losses............................... 99,579 95,191 94,295 90,957 93,940
Noninterest income.............................. 31,965 29,649 27,298 25,802 16,366
Noninterest expense............................. 48,165 48,486 55,326 51,313 47,767
Income before income taxes...................... 83,379 76,354 66,267 65,446 62,539
Income taxes.................................... 26,839 23,323 17,023 19,936 20,837
Net income...................................... $ 56,540 53,031 49,244 45,510 41,702
Share data:
Average equivalent diluted shares
(in thousands)................................ 75,081 75,306 74,618 73,673 73,044
Tangible book value............................. $ 3.02 3.06 3.16 2.88 2.77
Cash dividends.................................. .600 .600 .600 .541 .471
Basic earnings.................................. .761 .713 .678 .640 .590
Diluted earnings................................ .753 .704 .660 .618 .571
Financial:
Return on average assets........................ 2.00% 1.96 1.83 1.83 1.76
Return on average shareholders' equity <F1>..... 26.65 26.21 26.08 25.31 24.07
Cash dividend payout ratio...................... 78.83 83.98 88.60 84.58 79.78
Tier 1 capital to average assets
(leverage ratio).............................. 7.74 7.53 7.78 7.72 7.31
Tier 1 capital as a % of total risk adjusted
assets........................................ 17.09 16.54 15.48 13.58 14.03
Total capital as a % of total risk adjusted
assets........................................ 18.37 17.82 16.77 14.86 15.32
Efficiency ratio................................ 38.78 38.33 36.66 38.96 38.06
Net interest margin............................. 3.85% 3.94 4.00 4.31 4.47
Average balances:
Total assets.................................... $2,828,195 2,710,175 2,693,505 2,488,169 2,372,926
Earning assets.................................. 2,729,280 2,606,292 2,579,379 2,376,359 2,292,094
Loans, net...................................... 1,176,856 1,275,023 1,512,448 1,518,768 1,395,414
Allowance for loan losses....................... (49,299) (51,311) (56,525) (57,398) (56,362)
Securities available for sale................... 1,057,845 833,905 568,056 581,669 654,454
Deposits........................................ 2,474,179 2,340,827 2,212,440 2,027,650 1,985,803
Short-term borrowings........................... 100,855 107,799 210,363 205,821 164,114
Long-term debt.................................. 151 326 510 758 596
Shareholders' equity............................ 223,719 225,045 214,963 202,848 175,973
<FN>
<F1> Average shareholders' equity excludes the market adjustment for
securities available for sale.
</FN>
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[LOGO] TRUSTCO Bank Corp NY
Glossary of Terms
Allowance for Loan Losses
A balance sheet account which represents management's estimate of probable
credit losses in the loan portfolio. The provision for loan losses is added
to the allowance account, charge offs of loans decrease the allowance balance
and recoveries on previously charged off loans serve to increase the balance.
Basic Earnings Per Share
Net income divided by the weighted average number of common shares
outstanding during the period.
Cash Dividends Per Share
Total cash dividends for each share outstanding on the record dates.
Comprehensive Income
Net income plus the change in selected items recorded directly to capital
such as the net change in unrealized market gains and losses on securities
available for sale.
Core Deposits
Deposits that are traditionally stable, including all deposits other than
time deposits of $100,000 or more.
Derivative Investments
Investments in futures contracts, forwards, swaps, or other investments with
similar characteristics.
Diluted Earnings Per Share
Net income divided by the weighted average number of common shares
outstanding during the period, taking into consideration the effect of any
dilutive stock options.
Earning Assets
The sum of interest-bearing deposits with banks, securities available for
sale, investment securities, loans, net of unearned income, and federal funds
sold.
Efficiency Ratio
Noninterest expense (excluding nonrecurring charges, and other real estate
expense) divided by taxable equivalent net interest income plus noninterest
income (excluding securities transactions). This is an indicator of the
recurring total cost of operating the Company in relation to the recurring
total income generated.
Federal Funds Sold
A short term (generally one business day) investment of excess cash reserves
from one bank to another.
Impaired Loans
Loans, principally commercial, where it is probable that the borrower will be
unable to make the principal and interest payments according to the
contractual terms of the loan, and all loans restructured subsequent to
January 1, 1995.
Interest Bearing Liabilities
The sum of interest bearing deposits, federal funds purchased, securities
sold under agreements to repurchase, other short-term borrowings, and
long-term debt.
Interest Rate Spread
The difference between the taxable equivalent yield on earning assets and the
rate paid on interest bearing liabilities.
Liquidity
The ability to meet loan commitments, deposit withdrawals, and maturing
borrowings as they come due.
Net Interest Income
The difference between income on earning assets and interest expense on
interest bearing liabilities.
Net Interest Margin
Fully taxable equivalent net interest income as a percentage of average
earning assets.
Net Loans Charged Off
Reductions to the allowance for loan losses written off as losses, net of the
recovery of loans previously charged off.
Nonaccrual Loans
Loans for which no periodic accrual of interest income is recognized.
Nonperforming Assets
The sum of nonperforming loans plus foreclosed real estate properties.
Nonperforming Loans
The sum of loans in a nonaccrual status (for purposes of interest
recognition), plus loans whose repayment criteria have been renegotiated to
less than market terms due to the inability of the borrowers to repay the
loan in accordance with its original terms, plus accruing loans three
payments or more past due as to principal or interest payments.
Parent Company
A company that owns or controls a subsidiary through the ownership of voting
stock.
Real Estate Owned
Real estate acquired through foreclosure proceedings.
Restructured Loans
A refinanced loan in which the bank allows the borrower certain concessions
that would normally not be considered. The concessions are made in light of
the borrower's financial difficulties and the bank's objective to maximize
recovery on the loan.
Return on Average Assets
Net income as a percentage of average total assets.
Return on Average Equity
Net income as a percentage of average equity, excluding the impact of the
mark to market adjustment for securities available for sale.
Risk-Adjusted Assets
A regulatory calculation that assigns risk factors to various assets on the
balance sheet.
Risk-Based Capital
The amount of capital required by federal regulatory standards, based on a
risk-weighting of assets.
Tangible Book Value Per Share
Total shareholders' equity (less goodwill) divided by shares outstanding on
the same date. This provides an indication of the tangible book value of a
share of stock.
Taxable Equivalent (TE)
Tax exempt income that has been adjusted to an amount that would yield the
same after tax income had the income been subject to taxation at the
statutory federal and/or state income tax rates.
Tier 1 Capital
Total shareholders' equity excluding the market value adjustment of
securities available for sale.
26
[LOGO] TRUSTCO Bank Corp NY
Management's Report on Internal Control over Financial Reporting
The management of TrustCo Bank Corp NY is responsible for establishing
and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
TrustCo's internal control system is designed to provide reasonable assurance
to the Company's management and board of directors regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles.
TrustCo management assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on our assessment we believe that, as of
December 31, 2004, the Company's internal control over financial reporting is
effective based on those criteria.
TrustCo's independent registered public accounting firm has issued an audit
report on our assessment of, and the effective operation of, the Company's
internal control over financial reporting as of December 31, 2004. This
report appears on page 28.
/s/ Robert J. McCormick
Robert J. McCormick
President and
Chief Executive Officer
/s/ Robert T. Cushing
Robert T. Cushing
Executive Vice President and
Chief Financial Officer
/s/ Scot R. Salvador
Scot R. Salvador
Executive Vice President and
Chief Banking Officer
March 8, 2005
27
[LOGO] TRUSTCO Bank Corp NY
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
TrustCo Bank Corp NY:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
TrustCo Bank Corp NY (the Company) maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that TrustCo Bank Corp NY maintained
effective internal control over financial reporting as of December 31, 2004,
is fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements
of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 2004
and 2003, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004, and our report dated March 8, 2005, expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Albany, New York
March 8, 2005
28
[LOGO] TRUSTCO Bank Corp NY
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
TrustCo Bank Corp NY:
We have audited the accompanying consolidated statements of condition of
TrustCo Bank Corp NY and subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TrustCo
Bank Corp NY and subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 8, 2005, expressed an
unqualified opinion on management's assessment of, and the effective
operation of, internal control over financial reporting.
/s/ KPMG LLP
Albany, New York
March 8, 2005
29
[LOGO] TRUSTCO Bank Corp NY
Consolidated Statements of Income
(dollars in thousands, except per share data) Years Ended December 31,
2004 2003 2002
Interest income:
Interest and fees on loans...................................................... $ 75,194 87,614 111,993
Interest and dividends on:
U.S. Treasuries and agencies.................................................. 39,795 25,985 11,649
States and political subdivisions............................................. 8,666 10,718 11,905
Mortgage-backed securities and collateralized mortgage obligations............ 7,032 3,618 4,483
Other......................................................................... 1,424 3,541 5,247
Interest on federal funds sold and other short-term investments................. 6,675 5,654 8,458
Total interest income....................................................... 138,786 137,130 153,735
Interest expense:
Interest on deposits............................................................ 37,777 39,843 55,150
Interest on short-term borrowings............................................... 972 877 2,840
Interest on long-term debt.................................................... 8 19 30
Total interest expense................................................ 38,757 40,739 58,020
Net interest income......................................................... 100,029 96,391 95,715
Provision for loan losses......................................................... 450 1,200 1,420
Net interest income after provision for loan losses......................... 99,579 95,191 94,295
Noninterest income:
Trust department income......................................................... 5,869 6,046 6,769
Fees for services to customers.................................................. 10,486 10,896 10,305
Net gain on securities transactions............................................. 13,712 9,807 7,499
Other........................................................................... 1,898 2,900 2,725
Total noninterest income.................................................... 31,965 29,649 27,298
Noninterest expense:
Salaries and employee benefits.................................................. 20,697 20,449 22,338
Net occupancy expense........................................................... 6,601 6,265 5,594
Equipment expense............................................................... 2,283 3,078 2,946
Professional services........................................................... 3,685 3,040 8,987
Outsourced services............................................................. 4,348 5,601 2,055
Charitable contributions........................................................ 654 513 1,588
Other real estate income, net................................................... (739) (457) (348)
Other........................................................................... 10,636 9,997 12,166
Total noninterest expense................................................... 48,165 48,486 55,326
Income before income taxes ....................................................... 83,379 76,354 66,267
Income taxes...................................................................... 26,839 23,323 17,023
Net income........................................................................ $ 56,540 53,031 49,244
Earnings per share:
Basic........................................................................... $ .761 .713 .678
Diluted......................................................................... .753 .704 .660
See accompanying notes to consolidated financial statements.
30
[LOGO] TRUSTCO Bank Corp NY
Consolidated Statements of Condition
(dollars in thousands, except share data) As of December 31,
2004 2003
ASSETS
Cash and due from banks................................................................. $ 54,222 56,425
Federal funds sold and other short-term investments..................................... 642,208 355,257
Total cash and cash equivalents................................................... 696,430 411,682
Securities available for sale........................................................... 895,989 1,176,926
Loans................................................................................... 1,240,430 1,162,647
Less: Unearned income................................................................. 365 381
Allowance for loan losses....................................................... 49,384 48,739
Net loans....................................................................... 1,190,681 1,113,527
Bank premises and equipment............................................................. 22,479 20,168
Other assets............................................................................ 58,255 55,816
Total assets...................................................................... $2,863,834 2,778,119
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand................................................................................ $ 237,423 197,116
Savings .............................................................................. 820,593 780,862
Interest bearing checking accounts.................................................... 336,538 334,038
Money market deposit accounts......................................................... 155,299 159,645
Certificates of deposit (in denominations of $100,000 or more)........................ 178,021 170,423
Other time accounts................................................................... 799,228 777,726
Total deposits.................................................................... 2,527,102 2,419,810
Short-term borrowings................................................................... 77,979 90,608
Long-term debt.......................................................................... 114 239
Accrued expenses and other liabilities.................................................. 32,807 40,700
Total liabilities................................................................. 2,638,002 2,551,357
Shareholders' equity:
Capital stock; $1 par value. 100,000,000 shares authorized, 81,727,754 and
80,711,016 shares issued at December 31, 2004 and 2003, respectively................ 81,728 80,711
Surplus............................................................................... 114,218 103,611
Undivided profits..................................................................... 90,018 78,051
Accumulated other comprehensive income:
Net unrealized gain on securities available for sale, net of tax.................... 4,459 21,042
Treasury stock; 7,187,784 and 6,765,119 shares, at cost, at December 31, 2004
and 2003, respectively.............................................................. (64,591) (56,653)
Total shareholders' equity........................................................ 225,832 226,762
Total liabilities and shareholders' equity........................................ $2,863,834 2,778,119
See accompanying notes to consolidated financial statements.
31
[LOGO] TRUSTCO Bank Corp NY
Consolidated Statements of Changes in Shareholders' Equity
(dollars in thousands, except per share data) Three Years Ended December 31, 2004
Accumulated
Other Compre-
Capital Undivided Comprehensive hensive Treasury
Stock Surplus Profits Income Income Stock Total
---------------------------------------------------------------------------
Beginning balance, January 1, 2002.............. 76,169 75,355 63,940 21,668 (31,305) 205,827
Comprehensive income
Net income -- 2002............................ -- -- 49,244 -- 49,244 -- 49,244
-------
Other comprehensive income, net of tax:
Unrealized net holding gain
arising during the year,
net of tax (pre-tax gain $16,729)........... -- -- -- -- 10,166 -- --
Reclassification adjustment for
net gain realized
in net income during the year
(pre-tax gain $7,499)....................... -- -- -- -- (4,557) -- --
-------
Other comprehensive income.................... -- -- -- 5,609 5,609 -- 5,609
-------
Comprehensive income............................ 54,853
=======
Cash dividend declared, $.600 per share......... -- -- (43,631) -- -- (43,631)
Stock options exercised and
related tax benefits.......................... 2,939 15,946 -- -- -- 18,885
Treasury stock purchased (703,704 shares)....... -- -- -- -- (8,844) (8,844)
Sale of treasury stock (636,122 shares)......... -- 708 -- -- 7,046 7,754
---------------------------------------------------------------------------
Ending balance, December 31, 2002............... 79,108 92,009 69,553 27,277 (33,103) 234,844
Comprehensive income
Net income -- 2003............................ -- -- 53,031 -- 53,031 -- 53,031
-------
Other comprehensive income, net of tax:
Unrealized net holding loss
arising during the year,
net of tax (pre-tax loss of $1,059)......... -- -- -- -- (608) -- --
Reclassification adjustment
for net gain realized
in net income during the year
(pre-tax gain $9,807)....................... -- -- -- -- (5,627) -- --
-------
Other comprehensive loss...................... -- -- -- (6,235) (6,235) -- (6,235)
-------
Comprehensive income............................ 46,796
=======
Cash dividend declared, $.600 per share......... -- -- (44,533) -- -- (44,533)
Stock options exercised and
related tax benefits.......................... 1,603 10,481 -- -- -- 12,084
Treasury stock purchased (2,525,000 shares)..... -- -- -- -- (30,034) (30,034)
Sale of treasury stock (690,181 shares)......... -- 1,121 -- -- 6,484 7,605
---------------------------------------------------------------------------
Ending balance, December 31, 2003............... 80,711 103,611 78,051 21,042 (56,653) 226,762
Comprehensive income
Net income -- 2004............................ -- -- 56,540 -- 56,540 -- 56,540
-------
Other comprehensive loss, net of tax:
Unrealized net holding loss
arising during the year,
net of tax (pre-tax loss $13,868)........... -- -- -- -- (8,335) -- --
Reclassification adjustment
for net gain realized
in net income during the year
(pre-tax gain $13,712)...................... -- -- -- -- (8,248) -- --
-------
Other comprehensive loss...................... -- -- -- (16,583) (16,583) -- (16,583)
-------
Comprehensive income............................ 39,957
=======
Cash dividend declared, $.600 per share......... -- -- (44,573) -- -- (44,573)
Stock options exercised and
related tax benefits.......................... 1,017 8,264 -- -- -- 9,281
Treasury stock purchased (1,021,397 shares)..... -- -- -- -- (13,482) (13,482)
Sale of treasury stock (598,732 shares)......... -- 2,343 -- -- 5,544 7,887
---------------------------------------------------------------------------
Ending balance, December 31, 2004............... $81,728 114,218 90,018 4,459 (64,591) 225,832
===========================================================================
See accompanying notes to consolidated financial statements.
32
[LOGO] TRUSTCO Bank Corp NY
Consolidated Statements of Cash Flows
(dollars in thousands) Years Ended December 31,
2004 2003 2002
Increase/(decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income................................................................... $ 56,540 53,031 49,244
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................................... 1,898 2,492 2,168
Net gain on sales of real estate owned.................................. (893) (522) (726)
Net loss/(gain) on sales of bank premises and equipment................. 55 (263) 4
Provision for loan losses............................................... 450 1,200 1,420
Deferred tax (benefit)/expense.......................................... 3,106 (2,645) 10,500
Net gain on securities transactions..................................... (13,712) (9,807) (7,499)
Decrease/(increase) in taxes receivable................................. (2,424) 3,356 (8,296)
Decrease/(increase) in interest receivable.............................. 2,864 (2,837) 3,605
Increase/(decrease) in interest payable................................. 75 (507) (295)
Decrease/(increase) in other assets..................................... 5,011 (1,761) 17,573
Decrease in accrued expenses............................................ (8,037) (3,636) (15,875)
Total adjustments.................................................... (11,607) (14,930) 2,579
Net cash provided by operating activities............................ 44,933 38,101 51,823
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale............. 1,155,807 1,064,580 238,602
Proceeds from maturities of securities available for sale.................. 881 3,573 180,332
Purchases of securities available for sale................................. (889,618) (1,592,974) (468,268)
Net decrease/(increase) in loans .......................................... (77,604) 255,016 128,093
Proceeds from sales of real estate owned .................................. 893 608 1,282
Proceeds from sales of bank premises and equipment......................... 23 271 25
Purchases of bank premises and equipment................................... (4,287) (2,953) (3,164)
Net cash provided by (used in) investing activities........................ 186,095 (271,879) 76,902
Cash flows from financing activities:
Net increase in deposits................................................... 107,292 145,542 181,362
Net decrease in short-term borrowings...................................... (12,629) (50,623) (76,988)
Repayment of long-term debt................................................ (125) (188) (197)
Proceeds from exercise of stock options and related tax benefits........... 9,281 12,084 18,885
Proceeds from sales of treasury stock...................................... 7,887 7,605 7,754
Payments to acquire treasury stock......................................... (13,482) (30,034) (8,844)
Dividends paid............................................................. (44,504) (45,008) (43,188)
Net cash provided by financing activities.................................. 53,720 39,378 78,784
Net increase/(decrease) in cash and cash equivalents......................... 284,748 (194,400) 207,509
Cash and cash equivalents at beginning of year............................... 411,682 606,082 398,573
Cash and cash equivalents at end of year..................................... $ 696,430 411,682 606,082
SUPPLEMENTAL INFORMATION:
Interest paid................................................................ $ 38,681 41,246 58,315
Income taxes paid............................................................ 24,038 18,865 8,035
Transfer of loans to real estate owned....................................... -- -- 227
Increase/(decrease) in dividends payable..................................... 69 (475) 443
Change in unrealized gain on securities available for sale -- gross.......... (27,579) 10,865 (9,230)
Change in deferred tax effect on unrealized gain on securities
available for sale......................................................... 10,996 (4,630) 3,621
See accompanying notes to consolidated financial statements.
33
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The accounting and financial reporting policies of TrustCo Bank Corp NY
(Company or TrustCo), ORE Subsidiary Corp., Trustco Bank (referred to as
Trustco Bank or Bank), and its wholly owned subsidiary, Trustco Vermont
Investment Company, and its subsidiary Trustco Realty Corporation conform to
general practices within the banking industry and are in conformity with
accounting principles generally accepted in the United States of America. A
description of the more significant policies follows.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Consolidation
The consolidated financial statements of the Company include the accounts
of the subsidiaries after elimination of all significant intercompany
accounts and transactions.
Securities Available for Sale
Securities available for sale are carried at approximate market value with
any unrealized appreciation or depreciation of value, net of tax, included as
an element of accumulated other comprehensive income or loss in shareholders'
equity. Management maintains an available for sale portfolio in order to
provide maximum flexibility in balance sheet management. The designation of
available for sale is made at the time of purchase based upon management's
intent to hold the securities for an indefinite period of time. These
securities, however, are available for sale in response to changes in market
interest rates, related changes in liquidity needs, or changes in the
availability of and yield on alternative investments. Unrealized losses on
securities that reflect a decline in value which is other than temporary, if
any, are charged to income. Nonmarketable equity securities (principally
stock of the Federal Reserve Bank and the Federal Home Loan Bank, both of
which are required holdings for the Company) are included in securities
available for sale at cost since there is no readily available market value.
The cost of debt securities available for sale is adjusted for
amortization of premium and accretion of discount using the level yield
method.
Gains and losses on the sale of securities available for sale are based on
the amortized cost of the specific security sold.
Loans
Loans are carried at the principal amount outstanding net of unearned
income and unamortized loan fees and costs, which are recognized as income
over the applicable loan term.
Nonperforming loans include nonaccrual loans, restructured loans, and
loans which are three payments or more past due and still accruing interest.
Generally, loans are placed in nonaccrual status either due to the delinquent
status of principal and/or interest payments, or a judgment by management
that, although payments of principal and/or interest are current, such action
is prudent. Future payments received on nonperforming loans are recorded as
interest income or principal reductions based upon management's ultimate
expectation for collection. Loans may be removed from nonaccrual status when
they become current as to principal and interest and have demonstrated a
sustained ability to make loan payments in accordance with the contractual
terms of the loan. Loans may also be removed from nonaccrual status when, in
the opinion of management, the loan is expected to be fully collectable as to
principal and interest.
Impaired loans have been defined as commercial and commercial real estate
loans in nonaccrual status and restructured loans. Income recognition for
impaired loans is consistent with income recognition for non-performing
loans.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate
by management to provide for probable loan losses based on consideration of
the credit risk of the loan portfolio, including a review of past experience,
current economic conditions, and underlying collateral value. The allowance
is increased by provisions charged against income and reduced/increased by
net charge offs/recoveries.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to change the allowance based
on their judgments of information available to them at the time of their
examination.
Bank Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization computed on either the straight-line or accelerated methods
over the remaining useful lives of the assets.
34
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
Real Estate Owned
Real estate owned are assets acquired through foreclosures on loans.
Foreclosed assets held for sale are recorded on an individual basis at
the lower of (1) fair value minus estimated costs to sell or (2) "cost"
(which is the fair value at initial foreclosure). When a property is
acquired, the excess of the loan balance over fair value is charged to the
allowance for loan losses. Subsequent write downs and gains on sale are
included in noninterest expense.
Income Taxes
Deferred taxes are recorded for the future tax consequences of events that
have been recognized in the financial statements or tax returns based upon
enacted tax laws and rates. Deferred tax assets are recognized subject to
management's judgment that realization is more likely than not.
Dividend Restrictions
Banking regulations restrict the amount of cash dividends which may be
paid during a year by Trustco Bank to the Company without the written consent
of the appropriate bank regulatory agency. Based on these restrictions,
during 2005 Trustco Bank could pay cash dividends to the Company of $41.7
million plus 2005 year-to-date net profits. In addition, at December 31, 2004
the Company has $29.6 million of assets available to pay dividends to
shareholders.
Benefit Plans
The Company has a defined benefit pension plan covering substantially all
of its employees. The benefits are based on years of service and the
employee's compensation.
The Company has a postretirement benefit plan that permits retirees under
age 65 to participate in the Company's medical plan by paying certain levels
of premium payment. At age 65, the Company provides a Medicare Supplemental
program to retirees.
Stock Option Plans
The Company has stock option plans for officers and directors and has
adopted the disclosure only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123)
and Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" (Statement 148).
The Company's stock option plans are accounted for in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB Opinion 25) and as such, no compensation
expense has been recorded for these plans. Had compensation expense for the
Company's stock option plans been determined consistent with Statement 123,
the Company's net income and earnings per share would have been as follows:
(dollars in thousands,
except per share data) 2004 2003 2002
Net income:
As reported............. $56,540 53,031 49,244
Deduct: total stock-based
compensation expense
determined under fair
value based method
for all awards, net of
related tax effects......... (868) (926) (1,207)
Pro forma net income.... $55,672 52,105 48,037
Earnings per share:
Basic - as reported..... $ .761 .713 .678
Basic - pro forma....... .750 .701 .661
Diluted - as reported... .753 .704 .660
Diluted - pro forma..... .742 .692 .645
The weighted average fair value of each option as of the grant date,
estimated using the Black-Scholes pricing model, and calculated in accordance
with Statement 123 was as follows for options granted in the year indicated:
Employees' Directors'
Plan Plan
2004.......................... $2.090 1.870
2002.......................... 1.730 1.680
Stock options were not issued in 2003 for officers or directors.
The following assumptions were utilized in the calculation of the fair
value of the options under Statement 123:
Employees' Directors'
Plan Plan
Expected dividend yield:
2004........................ 4.32% 4.32
2002........................ 4.45 4.45
Risk-free interest rate:
2004........................ 3.89 3.71
2002........................ 4.10 3.79
Expected volatility rate:
2004........................ 21.42 20.38
2002........................ 21.75 22.41
Expected lives................... 7.5 years 6.0 years
Earnings Per Share
Basic EPS is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted EPS is
computed by dividing net income by the weighted average number of common
shares outstanding during the period, taking into consideration the effect of
any dilutive stock options.
35
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
Reclassification of Prior Year Statements
It is the Company's policy to reclassify prior year consolidated financial
statements to conform to the current year presentation.
Segment Reporting
The Company's operations are exclusively in the financial services
industry and include the provision of traditional banking services.
Management evaluates the performance of the Company based on only one
business segment, that of community banking. The Company operates primarily
in the geographical region of Upstate New York with new Company operations in
central Florida and the mid-Hudson valley region of New York. In the opinion
of management, the Company does not have any other reportable segments as
defined by Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information".
Cash and Cash Equivalents
The Company classifies cash on hand, cash due from banks, federal funds
sold, and other short-term investments as cash and cash equivalents for
disclosure purposes.
Trust Assets
Assets under management by the Trust Department are not included on the
Company's consolidated financial statements because the Trust Department
holds these assets in a fiduciary capacity.
Intangible Assets
Intangible assets consist of goodwill arising from the acquisition of
Landmark Financial Corporation in a purchase business combination during
2000. Due to the adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" effective January 1, 2002,
goodwill is no longer being amortized. The Company considers this intangible
asset to be unimpaired at December 31, 2004 and 2003. Goodwill at December
31, 2004 and 2003 was $553 thousand.
Comprehensive Income
Comprehensive income represents the sum of net income and items of other
comprehensive income or loss, which are reported directly in shareholders'
equity, net of tax, such as the change in net unrealized gain or loss on
securities available for sale. The Company has reported comprehensive income
and its components in the Consolidated Statements of Changes in Shareholders'
Equity. Accumulated other comprehensive income or loss, which is a component
of shareholders' equity, represents the net unrealized gain or loss on
securities available for sale, net of tax.
(2) Balances at Other Banks
The Company is required to maintain certain reserves of vault cash and/or
deposits with the Federal Reserve Bank. The amount of this reserve
requirement, included in cash and due from banks, was approximately $19.6
million and $16.3 million at December 31, 2004 and 2003, respectively.
(3) Securities Available for Sale
The amortized cost and market value of the securities available for sale
are as follows:
(dollars in thousands) December 31, 2004
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasuries
and agencies........ $521,578 98 4,115 517,561
States and political
subdivisions........ 147,988 7,033 82 154,939
Mortgage-backed
securities and
collateralized
mortgage
obligations......... 201,579 1,466 1,422 201,623
Other................. 685 -- -- 685
Total debt
securities.......... 871,830 8,597 5,619 874,808
Equity securities 16,741 4,440 -- 21,181
Total securities
available for
sale................ $888,571 13,037 5,619 895,989
(dollars in thousands) December 31, 2003
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasuries
and agencies........ $ 863,528 4,517 4,386 863,659
States and political
subdivisions........ 182,118 9,722 113 191,727
Mortgage-backed
securities and
collateralized
mortgage
obligations......... 64,718 1,642 38 66,322
Other................. 685 -- -- 685
Total debt
securities.......... 1,111,049 15,881 4,537 1,122,393
Equity securities 30,880 23,768 115 54,533
Total securities
available for
sale................ $1,141,929 39,649 4,652 1,176,926
Federal Home Loan Bank stock and Federal Reserve Bank stock included in
equity securities at December 31, 2004 and 2003, was $12.1 million and $14.4
million, respectively.
36
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
The following table distributes the debt securities included in the available
for sale portfolio as of December 31, 2004, based on the securities' final
maturity (mortgage-backed securities and collateralized mortgage obligations
are stated using an estimated average life):
(dollars in thousands) Amortized Market
Cost Value
Due in one year or less........... $ 24,653 25,066
Due after one year
through five years.............. 169,344 169,209
Due after five years
through ten years............... 40,075 39,992
Due after ten years............... 637,758 640,541
$871,830 874,808
Actual maturities may differ from contractual maturities because of
securities prepayments and the right of certain issuers to call or prepay
their obligations without penalty.
Gross unrealized losses on investment securities available for sale and
the related fair values aggregated by the length of time that individual
securities have been in an unrealized loss position, were as follows:
(dollars in thousands) December 31, 2004
Less than 12 months
12 months or more Total
Gross Gross Gross
Fair Unreal. Fair Unreal. Fair Unreal.
Value Loss Value Loss Value Loss
U.S. Treasuries
and agencies....... $381,738 3,248 82,133 867 463,871 4,115
States and
political
subdivisions....... 3,046 63 908 19 3,954 82
Mortgage-backed
securities and
collateralized
mortgage
obligations........ 125,090 1,419 1,433 3 126,523 1,422
Total................ $509,874 4,730 84,474 889 594,348 5,619
(dollars in thousands) December 31, 2003
Less than 12 months
12 months or more Total
Gross Gross Gross
Fair Unreal. Fair Unreal. Fair Unreal.
Value Loss Value Loss Value Loss
U.S. Treasuries
and agencies....... $321,188 4,386 -- -- 321,188 4,386
States and
political
subdivisions....... 4,661 113 -- -- 4,661 113
Mortgage-backed
securities and
collateralized
mortgage
obligations........ 19,393 38 -- -- 19,393 38
Equity securities.... 4,790 115 -- -- 4,790 115
Total................ $350,032 4,652 -- -- 350,032 4,652
U.S. Treasuries and agencies, States and political subdivisions: The
unrealized losses on these investments were caused by market interest rate
increases. The contractual terms of these investments require the issuer to
settle the securities at par upon maturity of the investment. Because the
Company has the ability to hold these investments until a market price
recovery or possibly to maturity, these investments are not considered
other-than-temporarily impaired.
Mortgage-backed securities: The unrealized losses on investments in
mortgage-backed securities were caused by market interest rate increases. The
contractual cash flows of these securities are guaranteed by various
government agencies or government sponsored enterprises, such as GNMA, FNMA,
and FHLMC. Because the decline in fair value is attributable to changes in
market interest rates and not credit quality, and because the Company has the
ability to hold these investments until a market price recovery or possibly
to maturity, these investments are not considered other-than-temporarily
impaired.
The proceeds from sales and calls of securities, gross realized gains and
gross realized losses from sales and calls during 2004, 2003 and 2002 are as
follows:
(dollars in thousands) December 31,
2004 2003 2002
Proceeds................... $1,155,807 1,064,580 238,602
Gross realized gains....... 25,006 22,645 9,617
Gross realized losses...... 11,294 12,838 2,118
The amount of securities available for sale that have been pledged to
secure short-term borrowings, public deposits, and for other purposes
required by law amounted to $96.3 million and $105.1 million at December 31,
2004 and 2003, respectively.
The Company has the following balances of securities available for sale as
of December 31, 2004 that represent greater than 10% of shareholders equity:
Amortized Market
Cost Value
Federal Home Loan Bank............ $ 72,000 71,585
Federal National Mortgage
Association..................... 126,823 126,714
Federal Home Loan
Mortgage Corporation............ 514,581 510,653
37
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
(4) Loans and Allowance for Loan Losses
A summary of loans by category is as follows:
(dollars in thousands) December 31,
2004 2003
Commercial....................... $ 193,188 190,501
Real estate - construction....... 20,148 7,476
Real estate mortgage............. 822,103 779,227
Home equity lines of credit...... 191,242 171,078
Installment loans................ 13,749 14,365
Total loans...................... 1,240,430 1,162,647
Less: Unearned income............ 365 381
Allowance for loan losses... 49,384 48,739
Net loans........................ $1,190,681 1,113,527
At December 31, 2004 and 2003, loans to executive officers, directors, and
to associates of such persons aggregated $2.7 million and $3.0 million,
respectively. During 2004, approximately $200 thousand of new loans were made
and repayments of loans totalled approximately $500 thousand. In the opinion
of management, such loans were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions. These loans do not
involve more than normal risk of collectibility or present other unfavorable
features.
TrustCo lends primarily in the Capital District region of New York State
and in the geographic territory surrounding its borders, and to a lesser
extent, in central Florida and the mid-Hudson Valley region of New York.
Although the loan portfolio is diversified, a portion of its debtors' ability
to repay depends significantly on the economic conditions prevailing in New
York State.
The following table sets forth information with regard to nonperforming
loans:
(dollars in thousands) December 31,
2004 2003 2002
Loans in nonaccrual status....... $ 557 -- 615
Loans contractually past due
3 payments or more and still
accruing interest............ -- -- --
Restructured loans............... 2,610 3,260 4,303
Total nonperforming loans........ $3,167 3,260 4,918
At December 31, 2004 there were $557 thousand of nonaccrual residential
loans.
Interest on nonaccrual and restructured loans of $377 thousand in 2004,
$500 thousand in 2003, and $700 thousand in 2002 would have been earned in
accordance with the original contractual terms of the loans. Approximately
$329 thousand, $431 thousand, and $649 thousand of interest on nonaccrual and
restructured loans was collected and recognized as income in 2004, 2003, and
2002, respectively. There are no commitments to extend further credit on
nonaccrual or restructured loans.
Transactions in the allowance for loan losses account are summarized as
follows:
(dollars in thousands) For the years ended December 31,
2004 2003 2002
Balance at beginning of year... $48,739 52,558 57,203
Provision for loan losses...... 450 1,200 1,420
Loans charged off.............. (5,797) (9,598) (8,350)
Recoveries on loans
previously charged off....... 5,992 4,579 2,285
Balance at year end............ $49,384 48,739 52,558
The Company identifies impaired loans and measures the impairment in
accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (Statement 114), as
amended. A loan is considered impaired when it is probable that the borrower
will be unable to repay the loan according to the original contractual terms
of the loan agreement or the loan is restructured in a troubled debt
restructuring. These standards are applicable principally to commercial and
commercial real estate loans; however, certain provisions dealing with
restructured loans also apply to retail loan products.
There were no nonaccrual commercial and commercial real estate loans
classified as impaired loans at December 31, 2004 and 2003. Retail loans
totaling $2.6 million as of December 31, 2004, and $3.1 million as of
December 31, 2003, were restructured after the effective date of Statement
114 and, accordingly, are identified as impaired loans. None of the allowance
for loan losses has been specifically allocated to these retail loans.
During 2004, 2003, and 2002, the average balance of impaired loans was
$2.9 million, $3.7 million, and $4.9 million, respectively, and there was
approximately $314 thousand, $380 thousand, and $540 thousand of interest
income recorded on these loans in the accompanying Consolidated Statements of
Income.
(5) Bank Premises and Equipment
A summary of premises and equipment at December 31, 2004 and 2003 follows:
(dollars in thousands) 2004 2003
Land.................................. $ 2,786 2,786
Buildings............................. 28,038 26,942
Furniture, fixtures and equipment..... 23,318 21,379
Leasehold improvements................ 6,260 6,072
....................................... 60,402 57,179
Accumulated depreciation and
amortization........................ (37,923) (37,011)
Total................................. $ 22,479 20,168
38
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
Depreciation and amortization expense approximated $1.9 million, $2.5
million, and $2.2 million for the years 2004, 2003, and 2002, respectively.
Occupancy expense of the Bank's premises included rental expense of $2.1
million in 2004, $1.8 million in 2003, and $1.6 million in 2002.
(6) Deposits
Interest expense on deposits was as follows:
(dollars in thousands) For the years ended December 31,
2004 2003 2002
Interest bearing
checking accounts........ $ 1,586 1,678 3,124
Savings accounts........... 7,968 8,795 12,758
Time deposits and
money market accounts.... 28,223 29,370 39,268
Total...................... $37,777 39,843 55,150
At December 31, 2004, the maturity of total time deposits is as follows:
(dollars in thousands)
Under 1 year.................................... $517,275
1 to 2 years.................................... 154,740
2 to 3 years.................................... 59,405
3 to 4 years.................................... 141,252
4 to 5 years.................................... 102,659
Over 5 years.................................... 1,918
$977,249
(7) Short-Term Borrowings
Short-term borrowings consisted of the following:
(dollars in thousands) 2004
Trustco Cash
Short-Term Management
Account Account Total
Amount outstanding at
December 31, 2004..... $-- 77,979 77,979
Maximum amount
outstanding at any
month end............. -- 115,681 115,681
Average amount
outstanding........... -- 100,855 100,855
Weighted average
interest rate:
For the year.......... --% 0.96 0.96
As of year end........ -- 2.00 2.00
(dollars in thousands) 2003
Trustco Cash
Short-Term Management
Account Account Total
Amount outstanding at
December 31, 2003..... $ -- 90,608 90,608
Maximum amount
outstanding at any
month end............. 91,184 90,608 181,792
Average amount
outstanding........... 33,045 74,754 107,799
Weighted average
interest rate:
For the year.......... 0.82% 0.81 0.81
As of year end........ -- 0.65 0.65
The Cash Management Account represents retail deposits with customers for
which the Bank has pledged certain assets as collateral.
Trustco also has an available line of credit with the Federal Home Loan
Bank which approximates the balance of securities pledged against such
borrowings.
(8) Long-Term Debt
Long-term debt at December 31, 2004 and 2003, of $114 thousand and $239
thousand consisted of FHLB term loans with interest rates ranging from 5.22%
to 6.29% and maturities ranging from 2004 to 2008. This debt was assumed as
part of an acquisition during 2000. The FHLB loans are collateralized by
approximately $500 thousand in deposits at the FHLB.
(9) Income Taxes
A summary of income tax expense/(benefit) included in the Consolidated
Statements of Income follows:
For the years ended December 31,
(dollars in thousands) 2004 2003 2002
Current tax expense (benefit):
Federal................... $23,337 25,104 8,398
State..................... 396 864 (1,875)
Total current tax expense... 23,733 25,968 6,523
Deferred tax expense (benefit) 3,106 (2,645) 10,500
Total income tax expense.... $26,839 23,323 17,023
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 2004 and 2003, are as follows:
December 31,
(dollars in thousands) 2004 2003
Deductible/ Deductible/
(taxable) (taxable)
temporary temporary
differences differences
Bond accounting....................... $ (211) (630)
Benefits and deferred
remuneration...................... 1,632 2,104
Deferred loan fees, net............... 79 154
Difference in reporting the
allowance for loan losses, net.... 22,565 22,309
Other income or expense
not yet reported for
tax purposes...................... 6,633 9,232
Depreciable assets.................... 1,502 2,068
Other items........................... 887 956
Net deferred tax asset
at end of year.................... 33,087 36,193
Net deferred tax asset at
beginning of year................. 36,193 33,548
Deferred tax benefit/(expense)........ $(3,106) 2,645
Deferred tax assets are recognized subject to
management's judgment that realization is more likely
39
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
than not. Based primarily on the sufficiency of historical and expected
future taxable income, management believes it is more likely than not that
the remaining net deferred tax asset of $33.1 million and $36.2 million at
December 31, 2004 and 2003, respectively, will be realized.
In addition to the deferred tax items described in the preceding table,
the Company has deferred tax liabilities of $3.0 million and $14.0 million at
December 31, 2004 and 2003, relating to the net unrealized gains on
securities available for sale, respectively.
The effective tax rates differ from the statutory federal income tax rate.
The reasons for these differences are as follows:
For the years ended
December 31,
2004 2003 2002
Statutory federal income tax rate.... 35.0% 35.0 35.0
Increase/(decrease) in taxes
resulting from:
Tax exempt income................. (3.5) (4.6) (5.8)
State income tax, net of
federal tax benefit.............. 0.8 0.8 0.5
Change in valuation allowance -- -- (1.8)
Other items....................... (0.1) (0.6) (2.2)
Effective income tax rate............ 32.2% 30.6 25.7
During the fourth quarter 2002, Robert A. McCormick retired as President
and Chief Executive Officer of TrustCo. As a result of his retirement the
Company paid out his deferred compensation and supplemental retirement
package. As a result of the timing of these payments, any uncertainty
relative to the deductibility of these payments for tax purposes was
eliminated and the deferred tax asset valuation allowance of $1.1 million was
reversed.
(10) Benefit Plans
(a) Retirement Plan
The Company maintains a trusteed non-contributory pension plan covering
employees that have completed one year of employment and 1,000 hours of
service. The benefits are based on the sum of (a) a benefit equal to a prior
service benefit plus the average of the employees' highest five consecutive
years' compensation in the ten years preceding retirement multiplied by a
percentage of service after a specified date plus (b) a benefit based upon
career average compensation. The amounts contributed to the plan are
determined annually on the basis of (a) the maximum amount that can be
deducted for federal income tax purposes or (b) the amount certified by a
consulting actuary as necessary to avoid an accumulated funding deficiency as
defined by the Employee Retirement Income Security Act of 1974. Contributions
are intended to provide not only for benefits attributed to service to date
but also for those expected to be earned in the future. Assets of the plan
are administered by Trustco Bank's Trust Department. The following tables set
forth the plan's funded status as of a December 31 measurement date and
amounts recognized in the Company's consolidated statements of condition at
December 31, 2004 and 2003.
Change in Projected Benefit Obligation:
(dollars in thousands) 2004 2003
Projected benefit obligation
at beginning of year.............. $24,555 22,169
Service cost........................ 784 695
Interest cost....................... 1,499 1,409
Benefits paid....................... (1,411) (1,394)
Net actuarial loss.................. 2,154 1,676
Projected benefit obligation
at end of year.................... $27,581 24,555
Change in Plan Assets and
Reconciliation of Funded Status:
(dollars in thousands) 2004 2003
Fair value of plan assets at
beginning of year................. $28,474 26,251
Actual gain on plan assets.......... 2,179 3,617
Benefits paid....................... (1,411) (1,394)
Fair value of plan assets
at end of year.................... 29,242 28,474
Funded status....................... 1,661 3,919
Unrecognized net actuarial
loss (gain)....................... 14 (544)
Unrecognized prior service cost..... 1,702 707
Net amount recognized............... $ 3,377 4,082
The accumulated benefit obligation for the plan was $24.4 million and
$21.5 million at December 31, 2004 and 2003, respectively.
Components of Net Periodic Pension Expense/(Benefit):
For the years ended
December 31,
(dollars in thousands) 2004 2003 2002
Service cost............................. $ 784 695 651
Interest cost............................ 1,499 1,409 1,359
Expected return on plan assets........... (1,669) (1,665) (2,184)
Amortization of net actuarial gain....... -- -- (213)
Amortization of unrecognized
prior service cost..................... 90 25 25
Net periodic pension expense/(benefit)... $ 704 464 (362)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
(dollars in thousands)
Year Pension Benefits
2005 $1,310
2006 1,302
2007 1,274
2008 1,258
2009 1,246
2010 - 2014 6,686
40
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
The assumptions used to determine benefit obligations at December 31 are
as follows: 2004 2003
2004 2003
Discount rate.............................. 5.75% 6.00
Rate of increase in future compensation.... 5.00 5.00
The assumptions used to determine net periodic pension expense/(benefit)
for the years ended December 31 are as follows:
2004 2003 2002
Discount rate ................... 6.00% 6.50 6.75
Rate of increase in future
compensation .................. 5.00 5.00 6.50
Expected long-term rate of return
on assets ..................... 6.00 6.50 7.25
The Company also has a supplementary pension plan under which additional
retirement benefits are accrued for eligible executive officers. The expense
recorded for this plan was $662 thousand, $1.2 million, and $1.6 million, in
2004, 2003, and 2002, respectively. This plan supplements the defined benefit
retirement plan for eligible employees that are negatively affected by the
Internal Revenue Service limit on the amount of pension payments that are
allowed from a retirement plan. The supplemental plan provides eligible
employees with total benefit payments as calculated by the Trustco retirement
plan without regard to this limitation. Benefits under this plan are
calculated using the same actuarial assumptions and interest rates as used
for the retirement plan calculations.
Rabbi trusts have been established for certain benefit plans. These
trust accounts are administered by the Company's Trust Department and invest
primarily in money market instruments. These assets are recorded at their
market value and are included as other assets in the December 31, 2004 and
2003, Consolidated Statements of Condition.
(b) Postretirement Benefits
The Company permits retirees under age 65 to participate in the Company's
medical plan by making certain payments. At age 65, the Bank provides a
Medicare Supplemental program to retirees. Assets of the plan are invested
primarily in individual stocks, index funds, and tax exempt bonds.
In 2003, the Company amended the medical plan to reflect changes to the
retiree medical insurance coverage portion. The Company's subsidy of the
retiree medical insurance premiums will be reduced and eliminated in 2006.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) became law in the United States. The Act
introduced a prescription drug benefit under Medicare as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D under the
Act. In accordance with FASB Staff Position FAS 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," the Company has elected to defer
recognition of the effects of the Act in any measures of the benefit
obligation or cost. The Company is still analyzing the specific authoritative
guidance on the accounting for the federal subsidy, which was issued in
January 2005, but the Company anticipates that, in order to make the plan
actuarially equivalent, it will make minor changes to its non-pension
postretirement plan. Accordingly, the measures of the accumulated non-pension
postretirement benefit obligation and net periodic non-pension postretirement
benefit cost do not reflect any amount associated with the subsidy.
The following tables show the plan's funded status as of a December 31
measurement date and amounts recognized in the Company's Consolidated
Statements of Condition at December 31, 2004 and 2003.
Change in Accumulated Benefit Obligation:
(dollars in thousands) 2004 2003
Accumulated benefit obligation
at beginning of year.............. $ 790 10,677
Service cost........................ 12 4
Retiree contributions............... 230 173
Interest cost....................... 31 46
Benefits paid....................... (324) (360)
Plan amendments..................... -- (7,990)
Net actuarial (gain) loss........... 152 (1,760)
Accumulated benefit obligation
at end of year.................... $ 891 790
Change in Plan Assets and
Reconciliation of Funded Status:
(dollars in thousands) 2004 2003
Fair value of plan assets at
beginning of year................. $10,986 9,666
Actual gain on plan assets.......... 834 1,507
Retiree contributions............... 230 173
Benefits paid....................... (324) (360)
Fair value of plan assets
at end of year.................... 11,726 10,986
Funded status....................... 10,835 10,196
Unrecognized net actuarial gain..... (3,014) (2,866)
Unrecognized prior service credit .. (7,182) (7,586)
Net amount recognized............... $ 639 (256)
Components of Net Periodic Expense/(Benefit):
For the years ended
December 31,
(dollars in thousands) 2004 2003 2002
Service cost........................... $ 12 4 320
Interest cost.......................... 31 46 528
Expected return on plan assets......... (428) (377) (453)
Amortization of net actuarial gain..... (107) (43) (113)
Amortization of prior service credit... (403) (403) --
Net periodic (benefit)/expense......... $(895) (773) 282
41
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
Expected Future Benefit Payments
The following benefit payments are expected to be paid:
(dollars in thousands)
Year Postretirement Benefits
2005 $ 39
2006 40
2007 39
2008 39
2009 40
2010 - 2014 203
The assumptions used to determine benefit obligations at December 31 are
as follows:
2004 2003
Discount rate.............................. 5.75% 6.00
The assumptions used to determine net periodic pension expense/(benefit)
for the years ended December 31 are as follows:
2004 2003 2002
Discount rate ....................... 6.00% 6.50 6.75
Expected long-term rate of return
on assets ......................... 3.90 3.90 4.30
For measurement purposes, a graded annual rate of increase in the per
capita cost of covered benefits (i.e., health care cost trend rate) was
assumed for 2005 and thereafter. Due to the plan amendment recognized in 2003
relating to the reimbursed portion of the retiree's medical insurance
premiums, a one percentage point increase or decrease in the assumed health
care cost in each year would have a negligible impact on the accumulated
postretirement benefit obligation as of December 31, 2004, and the interest
and service components of net periodic postretirement benefit cost for the
year ended December 31, 2004.
(c) Major Categories of Pension and Postretirement Benefit Plan Assets:
The asset allocations of the Company's pension and postretirement benefit
plans at December 31, were as follows:
Pension Benefit Postretirement Benefit
Plan Assets Plan Assets
2004 2003 2004 2003
Debt Securities........ 33.20% 36.55 36.61 57.24
Equity Securities...... 64.52 61.45 61.81 40.47
Other.................. 2.28 2.00 1.58 2.29
Total.................. 100.00% 100.00 100.00 100.00
The expected long-term rate-of-return on plan assets, noted in sections
(a) and (b) above, reflects long-term earnings expectations on existing plan
assets. In estimating that rate, appropriate consideration was given to
historical returns earned by plan assets and the rates of return expected to
be available for reinvestment. Rates of return were adjusted to reflect
current capital market assumptions and changes in investment allocations.
The Company's investment policies and strategies for the pension benefit
and postretirement benefit plans prescribe a target allocation of 60% equity
securities and 40% debt securities for the asset categories. The Company's
investment goals are to maximize returns subject to specific risk management
policies. Its risk management policies permit direct investments in equity
and debt securities and mutual funds while prohibiting direct investment in
derivative financial instruments. The Company addresses diversification by
the use of mutual fund investments whose underlying investments are in
domestic and international debt and equity securities. These mutual funds are
readily marketable and can be sold to fund benefit payment obligations as
they become payable.
The Company does not expect to make any contributions to its pension and
postretirement benefit plans in 2005.
(d) Incentive and Bonus Plans
The Company provides a profit-sharing plan for substantially all
employees. The expense of this plan, which is based on management discretion
as defined in the plan, and is subject to board approval, amounted to $1.3
million in 2004 and $1.1 million in 2003 and 2002.
The Company also has an executive incentive plan. The expense of this plan
is based on the Company's performance and estimated distributions to
participants are accrued during the year and generally paid in the following
year. The expense recorded for this plan was $2.1 million in 2004 and 2003,
and $3.3 million in 2002.
The Company has awarded 2.7 million performance bonus units to the
executive officers and directors. These units become vested and exercisable
only under a change of control as defined in the plan. The units were awarded
based upon the stock price at the time of grant and, if exercised under a
change of control, allow the holder to receive the increase in value offered
in the exchange over the stock price at the date of grant for each unit.
(e) Stock Option Plans
Under the 2004 TrustCo Bank Corp NY Stock Option Plan, the Company may
grant options to its eligible employees for up to approximately 2.0 million
shares of common stock. Under the 1995 TrustCo Bank Corp NY Stock Option
Plan, the Company may grant options to its eligible employees for up to
approximately 7.9 million shares of common stock. Under the 2004 Directors
Stock Option Plan, the Company may grant options to its directors for up to
approximately 200 thousand shares of its common stock. Under the 1993
Directors Stock Option Plan, the Company could have granted options to its
directors for up to approximately 531 thousand shares of its common stock.
Under each of these plans, the exercise price of each option equals the
market price of the Company's stock on the date of grant, and an option's
maximum term is ten years. Options vest over five years from the date the
42
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
options are granted for the employees plans and they are immediately
vested under the directors' plan. A summary of the status of TrustCo's stock
option plans as of December 31, 2004, 2003 and 2002, and changes during the
years then ended, are as follows:
Outstanding Options Exercisable Options
Weighted Weighted
Average Average
Option Option
Shares Price Shares Price
Balance, January 1, 2002....... 8,805,804 $ 6.44 7,427,667 $ 5.85
New options awarded - 2002..... 837,750 11.83 182,950 11.83
Cancelled options - 2002....... (45,430) 9.96 (45,430) 9.96
Exercised options - 2002....... (2,952,304) 4.16 (2,952,304) 4.16
Options became exercisable..... -- -- 1,112,103 10.00
Balance, December 31, 2002..... 6,645,820 8.11 5,724,986 7.69
New options awarded - 2003..... -- -- -- --
Cancelled options - 2003....... (60,396) 11.07 (60,396) 11.07
Exercised options - 2003....... (1,645,222) 5.42 (1,645,222) 5.42
Options became exercisable..... -- -- 382,752 10.49
Balance, December 31, 2003..... 4,940,202 8.97 4,402,120 8.74
New options awarded - 2004..... 677,500 13.55 145,100 13.55
Cancelled options - 2004....... (28,987) 10.38 (28,987) 10.38
Exercised options - 2004....... (1,143,605) 7.63 (1,143,605) 7.63
Options became exercisable..... -- -- 333,394 10.63
Balance, December 31, 2004..... 4,445,110 $10.00 3,708,022 $ 9.42
The following table summarizes information about total stock options
outstanding at December 31, 2004:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise
Price Outstanding Life Price
Less than
$7.50......... 615,646 2.9 years $ 5.89
Between $7.51
and $10.00.... 2,398,964 5.5 years 9.49
Greater than
$10.00........ 1,430,500 8.9 years 12.64
Total............. 4,445,110 6.3 years $10.00
The following table summarizes information about the exercisable stock
options at December 31, 2004:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise
Price Exercisable Life Price
Less than
$7.50......... 615,646 2.9 years $ 5.89
Between $7.51
and $10.00.... 2,347,076 5.5 years 9.48
Greater than
$10.00........ 745,300 8.4 years 12.16
Total............. 3,708,022 5.6 years $ 9.42
(11) Commitments and Contingent Liabilities
(a) Leases
The Bank leases certain banking premises. These leases are accounted for
as operating leases with minimum rental commitments in the amounts presented
below. The majority of these leases contain options to renew.
(dollars in thousands)
2005.............................................. $ 2,588
2006.............................................. 2,322
2007.............................................. 2,151
2008.............................................. 2,160
2009.............................................. 2,162
2010 and after.................................... 23,497
$34,880
(b) Litigation
Existing litigation arising in the normal course of business is not
expected to result in any material loss to the Company.
(c) Outsourced Services
During the fourth quarter 2001, the Company contracted with third-party
service providers to perform certain banking functions beginning 2002. The
outsourced services include data and item processing for the Bank and trust
operations. The service expense can vary based upon volume and nature of
transactions processed. Outsourced service expense was $4.3 million in 2004,
$5.6 million in 2003 and $2.1 million in 2002.
(12) Earnings Per Share
A reconciliation of the component parts of earnings per share for 2004,
2003 and 2002 follows:
(dollars in thousands, Weighted
except per share data) Average Shares Per share
Income Outstanding Amounts
For the year ended
December 31, 2004:
Basic EPS:
Income available to
common shareholders............. $56,540 74,278 $.761
Effect of Dilutive Securities:
Stock Options................... -- 803 --
Diluted EPS....................... $56,540 75,081 $.753
For the year ended
December 31, 2003:
Basic EPS:
Income available to
common shareholders............. $53,031 74,337 $.713
Effect of Dilutive Securities:
Stock Options................... -- 969 --
Diluted EPS....................... $53,031 75,306 $.704
For the year ended
December 31, 2002:
Basic EPS:
Income available to
common shareholders..... $49,244 72,675 $.678
Effect of Dilutive Securities:
Stock Options................... -- 1,943 --
Diluted EPS....................... $49,244 74,618 $.660
43
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
The number of antidilutive stock options excluded from diluted earnings
per share for 2004, 2003, and 2002 was not significant.
(13) Off-Balance Sheet Financial Instruments
Loan commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require a fee. Commitments sometimes expire without being
drawn upon. Therefore, the total commitment amounts do not necessarily
represent future cash requirements. These arrangements have credit risk
essentially the same as that involved in extending loans to customers and are
subject to the Bank's normal credit policies, including obtaining collateral.
The Bank's maximum exposure to credit loss for loan commitments, including
unused lines of credit, at December 31, 2004 and 2003, was $313.3 million and
$273.9 million, respectively. Approximately 66% of these commitments were for
variable rate products at the end of 2004.
The Company does not issue any guarantees that require
liability-recognition or disclosure, other than its standby letters of
credit. The Company has issued conditional commitments in the form of standby
letters of credit to guarantee payment on behalf of a customer and guarantee
the performance of a customer to a third party. Stand by letters of credit
generally arise in connection with lending relationships. The credit risk
involved in issuing these instruments is essentially the same as that
involved in extending loans to customers. Contingent obligations under
standby letters of credit totaled approximately $3.6 million and $3.9 million
at December 31, 2004 and 2003, respectively, and represent the maximum
potential future payments the Company could be required to make. Typically,
these instruments have terms of 12 months or less and expire unused;
therefore, the total amounts do not necessarily represent future cash
requirements. Each customer is evaluated individually for creditworthiness
under the same underwriting standards used for commitments to extend credit
and on-balance sheet instruments. Company policies governing loan collateral
apply to standby letters of credit at the time of credit extension.
Loan-to-value ratios are generally consistent with loan-to-value requirements
for other commercial loans secured by similar types of collateral. The fair
value of the Company's standby letters of credit at December 31, 2004 and
2003 was insignificant.
No losses are anticipated as a result of loan commitments or standby
letters of credit.
(14) Fair Value of Financial Instruments
The fair values shown below represent management's estimates of values at
which the various types of financial instruments could be exchanged in
transactions between willing, unrelated parties. They do not necessarily
represent amounts that would be received or paid in actual transactions.
As of
(dollars in thousands) December 31, 2004
Carrying Fair
Value Value
Financial assets:
Cash and cash equivalents...... $ 696,430 696,430
Securities available for sale.. 895,989 895,989
Loans.......................... 1,190,681 1,254,986
Accrued interest receivable.... 14,671 14,671
Financial liabilities:
Demand deposits................ 237,423 237,423
Interest bearing deposits...... 2,289,679 2,289,679
Short-term borrowings.......... 77,979 77,979
Long-term debt................. 114 114
Accrued interest payable....... 1,545 1,545
As of
(dollars in thousands) December 31, 2003
Carrying Fair
Value Value
Financial assets:
Cash and cash equivalents...... $ 411,682 411,682
Securities available for sale.. 1,176,926 1,176,926
Loans.......................... 1,113,527 1,207,958
Accrued interest receivable.... 17,535 17,535
Financial liabilities:
Demand deposits................ 197,116 197,116
Interest bearing deposits...... 2,222,694 2,229,139
Short-term borrowings ......... 90,608 90,608
Long-term debt................. 239 239
Accrued interest payable....... 1,470 1,470
The specific estimation methods and assumptions used can have a
substantial impact on the resulting fair values of financial instruments.
Following is a brief summary of the significant methods and assumptions used
in estimating fair values:
Cash and Cash Equivalents
The carrying values of these financial instruments approximate fair
values.
Securities
Fair values for all securities portfolios are based upon quoted market
prices, where available. The carrying value of certain local, unrated
municipal obligations was used as an approximation of fair value.
Loans
The fair values of all loans are estimated using discounted cash flow
analyses with discount rates equal to the interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Deposit Liabilities
The fair values disclosed for noninterest bearing deposits, interest
bearing checking accounts, savings
44
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
accounts, and money market accounts are, by definition, equal to the
amount payable on demand at the balance sheet date. The carrying value of all
variable rate certificates of deposit approximates fair value. The fair value
of fixed rate certificates of deposit is estimated using discounted cash flow
analyses with discount rates equal to the interest rates currently being
offered on certificates of similar size and remaining maturity.
Short-Term Borrowings, Long-Term Debt and Other Financial Instruments
The fair value of all short-term borrowings, long-term debt, and other
financial instruments approximates the carrying value.
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet
risk. Such financial instruments consist of commitments to extend financing
and standby letters of credit. If the commitments are exercised by the
prospective borrowers, these financial instruments will become interest
earning assets of the Company. If the commitments expire, the Company retains
any fees paid by the prospective borrower. The fair value of commitments is
estimated based upon fees currently charged to enter into similar agreements,
taking into consideration the remaining terms of the agreements and the
present credit worthiness of the borrower. For fixed rate commitments, the
fair value estimation takes into consideration an interest rate risk factor.
The fair value of these off-balance sheet items approximates the recorded
amounts of the related fees, which are considered to be immaterial.
The Company does not engage in activities involving interest rate swaps,
forward placement contracts, or any other instruments commonly referred to as
derivatives.
(15) Regulatory Capital Requirements
Office of Thrift Supervision (OTS) capital regulations require banks to
maintain minimum levels of regulatory capital. Under the regulations in
effect at December 31, 2004 and 2003, Trustco Bank was required to maintain a
minimum tangible capital of 1.5% of adjusted total assets, a minimum leverage
ratio of core capital to adjusted total assets of 4.00% and a minimum ratio
of total capital to risk weighted assets of 8.00%.
Federal banking regulations also establish a framework for the
classification of banks into five categories: well capitalized, adequately
capitalized, under capitalized, significantly under capitalized, and
critically under capitalized. Generally, an institution is considered well
capitalized if it has a leverage capital ratio of at least 5.0% (based on
total adjusted quarterly average assets), a Tier 1 risk-based capital ratio
of at least 6.0%, and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based on specific quantitative measures
of assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. Capital amounts and classifications
are also subject to qualitative judgments by the regulator about capital
components, risk weighting and other factors.
Management believes that as of December 31, 2004 and 2003, Trustco Bank
met all capital adequacy requirements to which it was subject. Further, the
most recent regulator notification categorized the Bank as a well-capitalized
institution. There have been no conditions or events since that notification
that management believes have changed the Bank's capital classification.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions could
have a direct material effect on an institution's financial statements. As
stated above, the Bank has been classified as well capitalized for regulatory
purposes, and therefore, these regulations do not apply. The following is a
summary of actual capital amounts and ratios as of December 31, 2004 and
2003, for Trustco Bank:
(dollars in thousands) As of December 31, 2004
Amount Ratio
Leverage capital:............. $203,177 7.24%
Tier 1 risk-based capital:.... 203,177 15.79
Total risk-based capital:..... 219,668 17.08
(dollars in thousands) As of December 31, 2003
Amount Ratio
Leverage capital:............. $178,952 6.51%
Tier 1 risk-based capital:.... 178,952 14.54
Total risk-based capital:..... 194,745 15.83
The following is a summary of actual capital amounts and ratios as of
December 31, 2004 and 2003 for TrustCo on a consolidated basis:
(dollars in thousands) As of December 31, 2004
Amount Ratio
Leverage capital:............. $220,819 7.74%
Tier 1 risk-based capital:.... 220,819 17.09
Total risk-based capital:..... 237,378 18.37
(dollars in thousands) As of December 31, 2003
Amount Ratio
Leverage capital:............. $205,720 7.53%
Tier 1 risk-based capital:.... 205,720 16.54
Total risk-based capital:..... 221,679 17.82
45
[LOGO] TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
(16) Parent Company Only
The following statements pertain to TrustCo Bank Corp NY (Parent Company):
Statements of Income
(dollars in thousands) Years Ended December 31,
Income: 2004 2003 2002
Dividends and interest
from subsidiaries............... $19,403 31,096 35,898
Net gain on sales of securities... 21,157 12,952 7,587
Income from other investments..... 424 1,110 1,394
Total income.................. 40,984 45,158 44,879
Expense:
Operating supplies................ 61 75 72
Professional services............. 203 63 6,173
Miscellaneous expense............. 85 95 1,167
Total expense................ 349 233 7,412
Income before income
taxes and subsidiaries'
undistributed earnings........... 40,635 44,925 37,467
Income tax expense................. 8,303 5,267 135
Income before subsidiaries'
undistributed earnings........... 32,332 39,658 37,332
Equity in undistributed
earnings of subsidiaries.......... 24,208 13,373 11,912
Net income......................... $56,540 53,031 49,244
Statements of Condition
(dollars in thousands) December 31,
2004 2003
Assets:
Cash in subsidiary bank................... $ 20,530 17,363
Investments in subsidiaries............... 205,522 186,290
Securities available for sale............. 9,106 35,323
Other assets.............................. 824 1,741
Total assets.......................... $235,982 240,717
Liabilities and shareholders' equity:
Accrued expenses and other liabilities.... 10,150 13,955
Total liabilities..................... 10,150 13,955
Shareholders' equity....................... 225,832 226,762
Total liabilities and shareholders'
equity................................ $235,982 240,717
Statements of Cash Flows
(dollars in thousands) Years Ended December 31,
2004 2003 2002
Increase/(decrease) in cash and
cash equivalents:
Cash flows from operating activities:
Net income.................................. $ 56,540 53,031 49,244
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed
earnings of subsidiaries.............. (24,208) (13,373) (11,912)
Net gain on sales of securities.......... (21,157) (12,952) (7,587)
Net change in other assets and
accrued expenses................. 4,764 972 (5,677)
Total adjustments...................... (40,601) (25,353) (25,176)
Net cash provided by operating
activities............................... 15,939 27,678 24,068
Cash flows from investing activities:
Proceeds from sales of securities
available for sale....................... 57,997 49,831 18,079
Purchases of securities available
for sale................................. (29,951) (23,475) (12,834)
Net cash provided by
investing activities................. 28,046 26,356 5,245
Cash flows from financing activities:
Proceeds from exercise of stock
options and related tax benefits.......... 9,281 12,084 18,885
Dividends paid............................. (44,504) (45,008) (43,188)
Payments to acquire treasury stock......... (13,482) (30,034) (8,844)
Proceeds from sales of treasury
stock..................................... 7,887 7,605 7,754
Net cash used in financing
activities.......................... (40,818) (55,353) (25,393)
Net increase/(decrease) in cash and
cash equivalents.......................... 3,167 (1,319) 3,920
Cash and cash equivalents at
beginning of year......................... 17,363 18,682 14,762
Cash and cash equivalents at
end of year............................... $ 20,530 17,363 18,682
Supplemental Information
Increase (decrease) in dividends payable.... $ 69 (475) 443
Change in unrealized gain on
securities available for sale --
gross.................................... 19,328 638 1,340
Change in deferred tax effect on
unrealized gain on securities
available for sale....................... (7,707) (261) (547)
46
[LOGO] TRUSTCO Bank Corp NY
TrustCo Bank Corp NY Officers and Board of Directors
OFFICERS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Robert J. McCormick
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Robert T. Cushing
EXECUTIVE VICE PRESIDENT AND
CHIEF BANKING OFFICER
Scot R. Salvador
SECRETARY
Robert M. Leonard
ASSISTANT SECRETARIES
Cheri J. Parvis
Thomas M. Poitras
BOARD OF DIRECTORS
Joseph Lucarelli
President
Traditional Builders
Anthony J. Marinello, M.D., Ph.D.
Physician
Robert A. McCormick
Chairman
TrustCo Bank Corp NY
William D. Powers
Partner
Powers & Co., LLC
Consulting
William J. Purdy
President
Welbourne & Purdy Realty, Inc.
Real Estate
Directors of TrustCo Bank Corp NY
are also Directors of Trustco Bank
HONORARY DIRECTORS
Lionel O. Barthold
M. Norman Brickman
Bernard J. King
Nancy A. McNamara
William H. Milton, III
John S. Morris, Ph.D.
James H. Murphy, D.D.S.
Richard J. Murray, Jr.
Daniel J. Rourke, M.D.
Anthony M. Salerno
Edwin O. Salisbury
William F. Terry
Harry E. Whittingham, Jr.
Trustco Bank Officers
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Robert J. McCormick
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Robert T. Cushing
EXECUTIVE VICE PRESIDENT AND CHIEF BANKING OFFICER
Scot R. Salvador
AUDITOR
Kenneth E. Hughes, Jr.
ACCOUNTING/FINANCE
Vice Presidents
Michael M. Ozimek
Daniel R. Saullo
BRANCH ADMINISTRATION/
MARKETING
Administrative Vice President
Robert M. Leonard
Vice President
Deborah K. Appel
Officers
John R. George
Paul D. Matthews
Michael V. Pitnell
Mary Jean Riley
COMPLIANCE
Vice President
Thomas M. Poitras
COMMERCIAL LENDING
Vice President
Patrick M. Canavan
Officer
Paul R. Steenburgh
FACILITIES
Vice President
George W. Wickswat
MORTGAGE LOANS
Vice President
Michael J. Lofrumento
Officer
Robert O. Breton, Esq.
OPERATIONS
Vice Presidents
Christopher L. Cox
Eric W. Schreck
PERSONNEL/QUALITY
CONTROL
Vice President
Cheri J. Parvis
TRUST DEPARTMENT
Administrative Vice President
Kevin M. Curley
Vice President
Patrick J. LaPorta, Esq.
Officers
Craig C. Chenevert
Stephanie A. Duma
Richard W. Provost
47
[LOGO] TRUSTCO Bank Corp NY
Branch Locations
Altamont Ave. Office
1400 Altamont Ave.
Schenectady, NY
Telephone: 356-1317
Altamont Ave. West Office
1900 Altamont Ave.
Rotterdam, NY
Telephone: 355-1900
Ballston Spa Office
235 Church Ave.
Ballston Spa, NY
Telephone: 885-1561
Bedford Hills Office
180 Harris Rd.
Bedford Hills, NY 10507
Telephone: (914) 666-6230
Bennington Office
215 North St.
Bennington, VT
Telephone: (802) 447-4952
Brandywine Office
State St. at Brandywine Ave.
Schenectady, NY
Telephone: 346-4295
Briarcliff Manor Office
64 Route 100
Briarcliff Manor, NY 10510
Telephone: (914) 762-7133
Canajoharie Office
211 Erie Blvd.
Canajoharie, NY
Telephone: 673-2012
Central Ave. Office
163 Central Ave.
Albany, NY
Telephone: 426-7291
Clifton Country Road Office
7 Clifton Country Rd.
Clifton Park, NY
Telephone: 371-5002
Clifton Park Office
1018 Route 146
Clifton Park, NY
Telephone: 371-8451
Cobleskill Office
RR #3, Rt. 7
Cobleskill, NY
Telephone: 254-0290
Colonial Drive Office
4450 East Colonial Dr.
Orlando, FL 32803
Telephone: (407) 895-6393
Colonie Office
1892 Central Ave.
Colonie Plaza, Colonie, NY
Telephone: 456-0041
Dean Road Office
3920 Dean Rd.
Orlando, FL 32817
Telephone: (407) 657-8001
Delmar Office
167 Delaware Ave.
Delmar, NY
Telephone: 439-9941
East Colonial Office
12901 East Colonial Drive
Orlando, FL
Telephone: (407) 275-3075
East Greenbush Office
501 Columbia Turnpike
Rensselaer, NY
Telephone: 479-7233
Elmsford Office
100 Clearbrook Rd.
Elmsford, NY
Telephone: (914) 345-1808
Exit 8/Crescent Rd. Office
CVS Plaza
Clifton Park, NY
Telephone: 383-0039
Fishkill Office
1542 Route 52
Fishkill, NY
Telephone: 896-8260
Freemans Bridge Rd. Office
Trustco Center
Glenville, NY
Telephone: 344-7510
Glens Falls Office
3 Warren Street
Glens Falls, NY
Telephone: 798-8131
Greenwich Office
131 Main St.
Greenwich, NY
Telephone: 692-2233
Guilderland Office
3900 Carman Rd.
Schenectady, NY
Telephone: 355-4890
Halfmoon Office
Country Dollar Plaza
Halfmoon, NY
Telephone: 371-0593
Hoosick Falls Office
47 Main St.
Hoosick Falls, NY
Telephone: 686-5352
Hudson Office
507 Warren St.
Hudson, NY
Telephone: 828-9434
Hudson Falls Office
3376 Burgoyne Ave.
Hudson Falls, NY
Telephone: 747-0886
Lake Mary Office
350 West Lake Mary Blvd.
Sanford, FL 32773
Telephone: (407) 330-7106
Latham Office
1 Johnson Rd.
Latham, NY
Telephone: 785-0761
Loudon Plaza Office
372 Northern Blvd.
Albany, NY
Telephone: 462-6668
Longwood Office
1400 West State Rd.
Longwood, FL
Telephone (407) 339-3396
Madison Ave. Office
1084 Madison Ave.
Albany, NY
Telephone: 489-4711
Malta 4 Corners Office
2471 Route 9
Malta, NY
Telephone: 899-1056
Malta Mall Office
43 Round Lake Rd.
Ballston Lake, NY
Telephone: 899-1558
Mayfair Office
286 Saratoga Rd.
Glenville, NY
Telephone: 399-9121
Mechanicville Office
9 Price Chopper Plaza
Mechanicville, NY
Telephone: 664-1059
Milton Office
2 Trieble Ave.
Ballston Spa, NY
Telephone: 885-0498
Mont Pleasant Office
Crane St. at Main Ave.
Schenectady, NY
Telephone: 346-1267
New Scotland Office
301 New Scotland Ave.
Albany, NY
Telephone: 438-7838
Newton Plaza Office
588 New Loudon Rd.
Latham, NY
Telephone: 786-3687
Niskayuna-Woodlawn Office
3461 State St.
Schenectady, NY
Telephone: 377-2264
Osprey Office
1300 South Tamiami Trail
Osprey, FL
Telephone: (941) 918-9380
Pomona Office
1581 Route 202
Pomona, NY
Telephone: 354-0176
Poughkeepsie Office
2656 South Rd.
(Route 9)
Poughkeepsie, NY
Telephone: 485-6419
Queensbury Office
118 Quaker Rd.
Suite 9, Queensbury, NY
Telephone: 798-7226
Rotterdam Office
Curry Road Shopping Ctr.
Rotterdam, NY
Telephone: 355-8330
Rotterdam Square Office
93 W. Campbell Rd.
Rotterdam, NY
Telephone: 377-2393
Route 2 Office -- Latham
201 Troy-Schenectady Rd.
Latham, NY
Telephone: 785-7155
Route 7 Office
1156 Troy-Schenectady Rd.
Latham, NY
Telephone: 785-4744
Sarasota Office
2704 Bee Ridge Road
Sarasota, FL
Telephone: (941) 929-9451
Saratoga Office
34 Congress St.
Saratoga Springs, NY 12866
Telephone: 587-3500
Scotia Office
123 Mohawk Ave.
Scotia, NY
Telephone: 372-9416
Sheridan Plaza Office
1350 Gerling St.
Schenectady, NY
Telephone: 377-8517
Shoppers' World Office
Old Rte. 146 and Plank Rd.
Clifton Park, NY
Telephone: 383-6850
Slingerlands Office
1569 New Scotland Avenue
Slingerlands, NY
Telephone: (518) 439-9352
South Glens Falls Office
Glengate Shopping Plaza
133 Saratoga Road, Suite 1
South Glens Falls, NY
Telephone: 793-7668
State Farm Rd. Office
2050 Western Ave.
Guilderland, NY
Telephone: 452-6913
State St. Albany Office
112 State St.
Albany, NY
Telephone: 436-9043
State St. Schenectady Office
320 State St.
Schenectady, NY
Telephone: 377-3311
Stuyvesant Plaza Office
Western Ave. at Fuller Rd.
Albany, NY
Telephone: 489-2616
Tanners Main Office
345 Main St.
Catskill, NY
Telephone: 943-2500
Tanners West Side Office
238 West Bridge St.
Catskill, NY
Telephone: 943-5090
Troy Office
5th Ave. and State St.
Troy, NY
Telephone: 274-5420
Union Street East Office
1700 Union St.
Schenectady, NY
Telephone: 382-7511
Upper New Scotland Office
583 New Scotland Ave.
Albany, NY
Telephone: 438-6611
Upper Union Street Office
1620 Union St.
Schenectady, NY
Telephone: 374-4056
Ushers Road Office
308 Ushers Rd.
Ballston Lake, NY
Telephone: 877-8069
Valatie Office
2929 Route 9
Valatie, NY
Telephone: (518) 758-2265
Wappingers Falls Office
1490 Route 9
Wappingers Falls, NY
Telephone: (845) 298-9315
West Sand Lake Office
3707 NY Rt. 43
West Sand Lake, NY
Telephone: 674-3327
Wilton Mall Office
Route 50
Saratoga Springs, NY
Telephone: 583-1716
Wolf Road Office
34 Wolf Rd.
Albany, NY
Telephone: 458-7761
Wynantskill Office
134-136 Main St., Rt. 66
Wynantskill, NY
Telephone: 286-2674
48
[LOGO] TRUSTCO Bank Corp NY
General Information
ANNUAL MEETING
Monday, May 9, 2005
10:00 AM
192 Erie Boulevard
Schenectady, NY 12305
CORPORATE HEADQUARTERS
5 Sarnowski Drive
Glenville, NY 12302
(518) 377-3311
DIVIDEND REINVESTMENT PLAN
A Dividend Reinvestment Plan is available to shareholders of TrustCo Bank
Corp NY. It provides for the reinvestment of cash dividends and optional cash
payments to purchase additional shares of TrustCo stock. The Plan has certain
administrative charges, and provides a convenient method of acquiring
additional shares. Trustco Bank acts as administrator for this service, and
is the agent for shareholders in these transactions. Shareholders who want
additional information may contact the TrustCo Shareholder Services
Department at (518) 381-3601.
DIRECT DEPOSIT OF DIVIDENDS
Electronic deposit of dividends, which offers safety and convenience, is
available to TrustCo shareholders who wish to have dividends deposited
directly to personal checking, savings or other accounts. Electing direct
deposit will not affect the mailing of annual and quarterly reports and proxy
materials. If you would like to arrange direct deposit, please write the
TrustCo Shareholder Services Department at the corporate headquarters address
listed on this page.
DUPLICATE MAILING NOTIFICATION
If you are a shareholder of record and are currently receiving multiple
copies of TrustCo's annual and quarterly reports, please contact the TrustCo
Shareholder Services Department at (518) 381-3601, or at the corporate
headquarters address listed on this page.
EQUAL OPPORTUNITY AT TRUSTCO
Trustco Bank is an Affirmative Action Equal Opportunity Employer.
FORM 10-K
TrustCo Bank Corp NY will provide, without charge, a copy of its Form 10-K
upon written request. Requests and related inquiries should be directed to
Robert M. Leonard, Secretary, TrustCo Bank Corp NY, P.O. Box 380,
Schenectady, New York 12301-0380.
CODE OF CONDUCT
TrustCo Bank Corp NY will provide, without charge, a copy of its Code of
Conduct upon written request. Requests and related inquiries should be
directed to Cheri J. Parvis, Vice President-Personnel, TrustCo Bank Corp NY,
P.O. Box 1082, Schenectady, New York 12301-1082.
NASDAQ SYMBOL: TRST
The Corporation's common stock trades on The Nasdaq Stock MarketSM under the
symbol TRST.
SUBSIDIARIES:
Trustco Bank ORE Subsidiary Corp.
Glenville, New York Schenectady, New York
Member FDIC
(and its wholly owned subsidiary,
Trustco Vermont Investment Company
Bennington, Vermont)
TRANSFER AGENT
Trustco Bank
Securities Department
P.O. Box 380
Schenectady, New York 12301-0380
Trustco Bank(R) is a registered service mark with the U.S. Patent &
Trademark Office.
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