UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number 0-10592
September 30, 2005
TRUSTCO BANK CORP NY
(Exact name of registrant as specified in its charter)
NEW YORK 14-1630287
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 SARNOWSKI DRIVE, GLENVILLE, NEW YORK 12302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 377-3311
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes.(x) No.( )
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes (x) No ( ).
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ( ) No (x).
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding
Class of Common Stock as of October 31, 2005
--------------------------- ----------------------
$1 Par Value 74,898,885
TrustCo Bank Corp NY
INDEX
PAGE NO.
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Part I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited): Consolidated 1
Statements of Income for the Three Months and Nine Months Ended
September 30, 2005 and 2004
Consolidated Statements of Financial Condition as of September 2
30, 2005 and December 31, 2004
Consolidated Statements of Cash Flows for the Nine Months Ended 3 - 4
September 30, 2005 and 2004
Notes to Consolidated Interim Financial Statements 5 - 11
Report of Independent Registered Public Accounting Firm 12
Item 2. Management's Discussion and Analysis of Financial Condition and 13 - 30
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31 - 32
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Unregistered Sales of Equity Securities and Use 33
of Proceeds
Item 3. Defaults Upon Senior Securities 33
Item 4. Submissions of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 34
TRUSTCO BANK CORP NY
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)
3 Months Ended 9 Months Ended
September 30, September 30,
2005 2004 2005 2004
------- ------- -------- --------
Interest and dividend income:
Interest and fees on loans $22,225 18,644 63,195 55,854
Interest on U. S. Treasuries and agencies 9,440 9,926 24,779 30,653
Interest on states and political
subdivisions 1,422 2,071 4,911 6,582
Interest on mortgage-backed securities and
collateralized mortgage obligations 2,571 2,066 7,272 4,916
Interest and dividends on other securities 256 446 658 1,262
Interest on federal funds sold and other
short term investments 2,519 1,798 9,519 4,198
------- ------- -------- --------
Total interest income 38,433 34,951 110,334 103,465
------- ------- -------- --------
Interest expense:
Interest on deposits:
Interest-bearing checking 311 408 1,078 1,193
Savings 1,545 2,042 4,752 5,947
Money market deposit accounts 1,002 326 2,013 1,154
Time deposits 8,105 6,765 22,637 19,648
Interest on short-term borrowings 537 254 1,350 633
Interest on long-term debt 1 2 4 7
------- ------- -------- --------
Total interest expense 11,501 9,797 31,834 28,582
------- ------- -------- --------
Net interest income 26,932 25,154 78,500 74,883
Provision (credit) for loan losses (1,680) 150 (4,760) 450
------- ------- -------- --------
Net interest income after provision
for loan losses 28,612 25,004 83,260 74,433
------- ------- -------- --------
Noninterest income:
Trust department income 1,520 1,406 4,476 4,405
Fees for other services to customers 2,787 2,510 7,878 7,805
Net gain on securities transactions 776 4,620 5,683 12,394
Other 2,019 454 4,103 1,482
------- ------- -------- --------
Total noninterest income 7,102 8,990 22,140 26,086
------- ------- -------- --------
Noninterest expenses:
Salaries and employee benefits 5,126 4,975 15,420 15,437
Net occupancy expense 1,787 1,464 5,542 4,968
Equipment expense 638 382 2,029 1,322
Professional services 628 900 2,404 2,657
Outsourced Services 1,015 1,121 3,043 3,298
Other real estate expenses / (income) (237) (111) (631) (332)
Other 2,524 2,752 7,627 8,340
------- ------- -------- --------
Total noninterest expenses 11,481 11,483 35,434 35,690
------- ------- -------- --------
Income before taxes 24,233 22,511 69,966 64,829
Income taxes 8,514 7,298 24,355 21,112
------- ------- -------- --------
Net income $15,719 15,213 45,611 43,717
======= ======= ======== ========
Net income per Common Share:
- Basic $ 0.210 0.205 0.608 0.589
======= ======= ======== ========
- Diluted $ 0.208 0.203 0.605 0.582
======= ======= ======== ========
See accompanying notes to unaudited consolidated interim financial statements.
1
TRUSTCO BANK CORP NY
Consolidated Statements of Financial Condition (Unaudited)
(dollars in thousands, except per share data)
09/30/05 12/31/04
---------- ---------
ASSETS:
Cash and due from banks $ 51,410 54,222
Federal funds sold and other short term investments 242,898 642,208
---------- ---------
Total cash and cash equivalents 294,308 696,430
Securities available for sale:
U. S. Treasuries and agencies 744,633 517,561
States and political subdivisions 118,915 154,939
Mortgage-backed securities and collateralized mortgage obligations 217,908 201,623
Other 17,812 21,866
---------- ---------
Total securities available for sale 1,099,268 895,989
---------- ---------
Loans:
Commercial 207,971 201,742
Residential mortgage loans 991,706 833,697
Home equity line of credit 192,916 191,242
Installment loans 6,199 13,749
---------- ---------
Total loans 1,398,792 1,240,430
---------- ---------
Less:
Allowance for loan losses 46,665 49,384
Unearned income 437 365
---------- ---------
Net loans 1,351,690 1,190,681
Bank premises and equipment 21,056 22,479
Other assets 62,493 58,255
---------- ---------
Total assets $2,828,815 2,863,834
========== =========
LIABILITIES:
Deposits:
Demand $ 247,664 237,423
Interest-bearing checking 308,136 336,538
Savings accounts 743,233 820,593
Money market deposit accounts 160,097 155,299
Certificates of deposit (in denominations of
$100,000 or more) 203,645 178,021
Time deposits 821,598 799,228
---------- ---------
Total deposits 2,484,373 2,527,102
Short-term borrowings 81,266 77,979
Long-term debt 94 114
Accrued expenses and other liabilities 33,421 32,807
---------- ---------
Total liabilities 2,599,154 2,638,002
---------- ---------
SHAREHOLDERS' EQUITY:
Capital stock par value $1; 100,000,000 shares authorized,
and 82,119,360 and 81,727,754 shares issued September 30, 2005
and December 31, 2004, respectively 82,120 81,728
Surplus 115,679 114,218
Undivided profits 101,894 90,018
Accumulated other comprehensive income:
Net unrealized (loss) gain on securities available for sale (1,712) 4,459
Treasury stock at cost - 7,380,350 and 7,187,784 shares at
September 30, 2005 and December 31, 2004, respectively (68,320) (64,591)
---------- ---------
Total shareholders' equity 229,661 225,832
---------- ---------
Total liabilities and shareholders' equity $2,828,815 2,863,834
========== =========
See accompanying notes to unaudited consolidated interim financial
statements.
2
TRUSTCO BANK CORP NY
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED September 30, 2005 2004
--------- ---------
Cash flows from operating activities:
Net income $ 45,611 43,717
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,015 1,296
Gain on sale of other real estate owned (690) (461)
(Credit) provision for loan losses (4,760) 450
Deferred tax expense 1,994 2,485
(Gain) loss on sale of premises and equipment (595) 55
Net gain on sale of securities available for sale (5,683) (12,394)
Decrease/(increase) in taxes receivable 5,616 (7,340)
(Increase)/decrease in interest receivable (3,185) 360
Increase/(decrease) in interest payable 322 (8)
(Increase)/decrease in other assets (4,512) 12,364
Increase/(decrease) in accrued expenses and other liabilities 235 (7,496)
--------- ---------
Total adjustments (9,243) (10,689)
--------- ---------
Net cash provided by operating activities 36,368 33,028
--------- ---------
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale 250,312 932,618
Purchase of securities available for sale (459,810) (819,296)
Proceeds from maturities of securities available for sale 1,636 668
Net increase in loans (156,305) (26,941)
Proceeds from dispositions of real estate owned 690 461
Proceeds from dispositions of bank premises and equipment 2,226 23
Purchases of bank premises and equipment (2,223) (1,882)
--------- ---------
Net cash (used in)/provided by investing activities (363,474) 85,651
--------- ---------
Cash flows from financing activities:
Net (decrease)/increase in deposits (42,729) 72,993
Increase/(decrease) in short-term borrowings 3,287 (3,575)
Repayment of long-term debt (20) (119)
Proceeds from exercise of stock options 2,324 5,270
Proceeds from sale of treasury stock 8,929 5,883
Purchase of treasury stock (13,129) (12,978)
Dividends paid (33,678) (33,369)
--------- ---------
Net cash (used in)/provided by financing activities (75,016) 34,105
--------- ---------
Net (decrease)/increase in cash and cash equivalents (402,122) 152,784
Cash and cash equivalents at beginning of period 696,430 411,682
--------- ---------
Cash and cash equivalents at end of period $ 294,308 564,466
========= =========
See accompanying notes to unaudited consolidated interim financial statements.
(Continued)
3
TRUSTCO BANK CORP NY
Consolidated Statements of Cash Flows Continued (Unaudited)
(dollars in thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
NINE MONTHS ENDED September 30, 2005 2004
--------- ---------
Interest paid 31,512 28,590
Income taxes paid 17,224 3,384
Transfer of loans to real estate owned 56 --
Increase in dividends payable 57 10
Change in unrealized gain on securities
available for sale-gross of deferred taxes (10,265) (18,482)
Change in deferred tax effect on unrealized gain
on securities available for sale 4,095 7,370
See accompanying notes to unaudited consolidated interim financial
statements.
4
TrustCo Bank Corp NY
Notes to Consolidated Interim Financial Statements
(Unaudited)
1. Financial Statement Presentation
The unaudited Consolidated Interim Financial Statements of TrustCo Bank Corp
NY ("TrustCo" or the "Company") include the accounts of the subsidiaries
after elimination of all significant intercompany accounts and transactions.
In the opinion of the management of the Company, the accompanying unaudited
Consolidated Interim Financial Statements contain all adjustments necessary
to present fairly the financial position as of September 30, 2005, the
results of operations for the three months and nine months ended September
30, 2005 and 2004, and cash flows for the nine months ended September 30,
2005 and 2004. The accompanying Consolidated Interim Financial Statements
should be read in conjunction with the TrustCo Bank Corp NY year-end
Consolidated Financial Statements, including notes thereto, which are
included in TrustCo Bank Corp NY's 2004 Annual Report to Shareholders on Form
10K.
2. Earnings Per Share
A reconciliation of the component parts of earnings per share for the three
and nine month periods ended September 30, 2005 and 2004 follows:
(In thousands, Net Weighted Average Shares Per Share
except per share data) Income Outstanding Amounts
------- ----------------------- -------
For the quarter ended September 30, 2005:
Basic EPS:
Net income available to
Common shareholders $15,719 74,931 $0.210
Effect of Dilutive Securities:
Stock options -- 509 (.002)
------- ------ ------
Diluted EPS $15,719 75,440 $0.208
======= ====== ======
For nine months ended September 30, 2005:
Basic EPS:
Net income available to
Common shareholders $45,611 74,958 $0.608
Effect of Dilutive Securities:
Stock options -- 475 (.003)
------- ------ ------
Diluted EPS $45,611 75,433 $0.605
======= ====== ======
There were 517,720 stock options which, if included, would have been
antidilutive in the calculation of average shares outstanding as of September
30, 2005 and were therefore excluded from the earnings per share
calculations.
5
TrustCo Bank Corp NY
Notes to Consolidated Interim Financial Statements (unaudited) continued
(In thousands, Net Weighted Average Shares Per Share
except per share data) Income Outstanding Amounts
------- ----------------------- -------
For the quarter ended September 30, 2004:
Basic EPS:
Net income available to
Common shareholders $15,213 74,244 $0.205
Effect of Dilutive Securities:
Stock options -- 736 (0.002)
------- ------ -------
Diluted EPS $15,213 74,980 $0.203
======= ====== =======
For nine months ended September 30, 2004:
Basic EPS:
Net income available to
Common shareholders $43,717 74,242 $0.589
Effect of Dilutive Securities:
Stock options -- 817 (0.007)
------- ------ -------
Diluted EPS $43,717 75,059 $0.582
======= ====== =======
There were no antidilutive stock options as of September 30, 2004.
3. 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 because the exercise price is equal
to the fair market value on the date of grant. 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 for the periods ended
September 30, 2005 and 2004 would have been as follows:
6
TrustCo Bank Corp NY
Notes to Consolidated Interim Financial Statements (unaudited) continued
(dollars in thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
------- ------- ------- -------
Net income:
As reported $15,719 15,213 45,611 43,717
Deduct: total stock-based
compensation expense
determined under fair
value based method
for all awards, net of
related tax effects (191) (165) (573) (496)
------- ------- ------- -------
Pro forma net income $15,528 15,048 45,038 43,221
======= ======= ======= =======
Earnings per share:
Basic - as reported $ .210 .205 .608 .589
Basic - pro forma .207 .203 .601 .582
Diluted - as reported .208 .203 .605 .582
Diluted - pro forma .206 .201 .597 .576
The weighted average fair value of each option as of the grant date was
estimated using the Black-Scholes pricing model, and calculated in accordance
with Statement 123.
7
TrustCo Bank Corp NY
Notes to Consolidated Interim Financial Statements (unaudited) continued
4. Comprehensive Income
Comprehensive income includes the reported net income of a company adjusted
for items that are accounted for as direct entries to equity, such as the
mark to market adjustment on securities available for sale, foreign currency
items, minimum pension liability adjustments, and certain derivative gains
and losses. At the Company, comprehensive income represents 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. 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.
Comprehensive income for the three month periods ended September 30, 2005 and
2004 was $9,680,000 and $21,219,000, respectively, and $39,440,000 and
$32,605,000 for the nine month periods ended September 30, 2005 and 2004,
respectively The following summarizes the components of other comprehensive
income (loss):
(dollars in thousands)
Three months ended September 30
2005 2004
------- ------
Unrealized holding gains (losses) arising during period, net of tax
(pre-tax loss of $9,260 for 2005 and pre-tax
gain of $14,588 for 2004) $(5,572) 8,785
Reclassification adjustment for net gain realized in net
income during the period, net of tax (pre-tax gains of $776
for 2005 and $4,620 for 2004) (467) (2,779)
------- ------
Other comprehensive (loss) income $(6,039) 6,006
======= ======
(dollars in thousands)
Nine months ended September 30
2005 2004
------- -------
Unrealized holding losses arising during period, net of tax
(pre-tax loss of $4,582 for 2005 and pre-tax
loss of $6,088 for 2004) $(2,753) (3,657)
Reclassification adjustment for net gain realized in net
income during the period, net of tax (pre-tax gains of $5,683
for 2005 and $12,394 for 2004) (3,418) (7,455)
------- -------
Other comprehensive loss $(6,171) (11,112)
======= =======
8
TrustCo Bank Corp NY
Notes to Consolidated Interim Financial Statements (unaudited) continued
5. Benefit Plans
The table below outlines the component's of the Company's net periodic
expense (benefit) recognized during the three and nine month periods ended
September 30, 2005 and 2004 for its pension and other postretirement benefit
plans:
Components of Net Periodic Expense/(Benefit) for the three months ended September 30,
Pension Benefits Other Postretirement Benefits
2005 2004 2005 2004
------ ---- ---- ----
Service cost $ 201 216 13 1
Interest cost 380 410 23 8
Expected return on plan assets (473) (348) (101) (58)
Amortization of prior service cost 26 38 (136) (114)
------ ---- ---- ----
Net periodic expense/(benefit) $ 134 316 (201) (163)
====== ==== ==== ====
Components of Net Periodic Expense/(Benefit) for the nine months ended September 30,
Pension Benefits Other Postretirement Benefits
2005 2004 2005 2004
------ ------ ---- ----
Service cost $ 603 648 32 3
Interest cost 1,139 1,230 59 24
Expected return on plan assets (1,376) (1,207) (303) (305)
Amortization of prior service cost 79 114 (395) (342)
------ ------ ---- ----
Net periodic expense/(benefit) $ 445 785 (607) (620)
====== ====== ==== ====
Contributions
The Company previously disclosed in its consolidated financial statements for
the year ended December 31, 2004, that it did not expect to make any
contributions to its pension and postretirement benefit plans in 2005. As of
September 30, 2005, no contributions have been made. The Company presently
anticipates that it will not make any contributions in 2005.
9
TrustCo Bank Corp NY
Notes to Consolidated Interim Financial Statements (unaudited) continued
6. Impact of Changes in Accounting Standards
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.
During the first quarter of 2005, the Company implemented the provisions of
this SOP. This implementation did not have a material impact on the Company's
financial condition or results of operations.
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 106-2, "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
grant-date fair value of employee stock options and similar awards. In April
2005, the effective date of the accounting provisions of FAS 123R were
delayed from July 1, 2005 to January 2006 for public companies like TrustCo.
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 in the
first quarter of 2006 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.
10
TrustCo Bank Corp NY
Notes to Consolidated Interim Financial Statements (unaudited) continued
7. Guarantees
The Company does not issue any guarantees that would require
liability-recognition or disclosure, other than its standby letters of
credit. Standby letters of credit are conditional commitments issued by the
Company to 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 at
September 30, 2005 and represent the maximum potential future payments the
Company could be required to make. Typically, these instruments have terms of
twelve 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 September 30, 2005 was insignificant.
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
TrustCo Bank Corp NY:
We have reviewed the consolidated statement of financial condition of TrustCo
Bank Corp NY and subsidiaries (the Company) as of September 30, 2005, the
related consolidated statements of income for the three and nine month
periods ended September 30, 2005 and 2004 and the related consolidated
statements of cash flows for the nine month periods ended September 30, 2005
and 2004. These consolidated financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
statement of financial condition of TrustCo Bank Corp NY and subsidiaries as
of December 31, 2004, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated March 8, 2005, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated statement
of financial condition as of December 31, 2004 is fairly stated, in all
material respects, in relation to the consolidated statement of financial
condition from which it has been derived.
/s/ KPMG LLP
- ------------
KPMG LLP
Albany, New York
November 7, 2005
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The review that follows focuses on the factors affecting the financial
condition and results of operations of TrustCo Bank Corp NY ("TrustCo" or
"Company") during the three month and nine month periods ended September 30,
2005, with comparisons to 2004 as applicable. Net interest income and net
interest margin are presented on a fully taxable equivalent basis in this
discussion. The consolidated interim financial statements and related notes,
as well as the 2004 Annual Report to Shareholders should be read in
conjunction with this review. Amounts in prior period consolidated interim
financial statements are reclassified whenever necessary to conform to the
current period's presentation.
Forward-looking Statements
Statements included in this review and in future filings by TrustCo with the
Securities and Exchange Commission, in TrustCo's press releases, and in oral
statements made with the approval of an authorized executive officer, which
are not historical or current facts, are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, and are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. TrustCo wishes to caution readers
not to place undue reliance on any such forward-looking statements, which
speak only as of the date made. The following important factors, among
others, in some cases have affected and in the future could affect TrustCo's
actual results, and could cause TrustCo's actual financial performance to
differ materially from that expressed in any forward-looking statement: (1)
credit risk, (2) interest rate risk, (3) competition, (4) changes in the
regulatory environment, and (5) changes in general business and economic
trends. The foregoing list should not be construed as exhaustive, and the
Company disclaims any obligation to subsequently revise any forward-looking
statements to reflect events or circumstances after the date of such
statements, or to reflect the occurrence of anticipated or unanticipated
events.
Following this discussion is the table "Distribution of Assets, Liabilities
and Shareholders' Equity: Interest Rates and Interest Differential" which
gives a detailed breakdown of TrustCo's average interest earning assets and
interest bearing liabilities for the three months and nine months ended
September 30, 2005 and 2004.
Overview
TrustCo recorded net income of $15.7 million, or $0.208 of diluted earnings
per share for the three months ended September 30, 2005, as compared to net
income of $15.2 million or $0.203 of diluted earnings per share in the same
period in 2004. For the nine month period ended September 30, 2005, TrustCo
recorded net income of $45.6 million, or $0.605 of diluted earnings per
share, as compared to $43.7 million, or $0.582 of diluted earnings per share
for the comparable period in 2004.
13
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
The primary factors accounting for the year to date increases are:
- A $36.7 million increase in the average balance of interest earning
assets between 2004 and 2005,
- An increase in the net interest margin from 3.85% for 2004 to 3.92%
for 2005, and,
- A reduction in the provision for loan losses from $450 thousand
expense in 2004 to $4.8 million credit in 2005.
Offsetting these positive factors affecting the year to date net income for
2005 was a reduction of $3.9 million in noninterest income from $26.1 million
for the nine months of 2004 to $22.1 million for the comparable period in
2005. Also the Company's effective tax rate increased to 34.8% for 2005
compared to 32.6% for 2004.
Asset/Liability Management
The Company strives to generate superior earnings capabilities through a mix
of core deposits, funding a prudent mix of earning assets. This is, in its
most fundamental form, the essence of asset/liability management.
Additionally, TrustCo attempts to maintain adequate liquidity and reduce the
sensitivity of net interest income to changes in interest rates to an
acceptable level while enhancing profitability both on a short-term and long-
term basis.
The following Management's Discussion and Analysis for the third quarter and
first nine months of 2005 compared to the comparable periods in 2004 is
affected by the change in interest rates in the marketplace in which TrustCo
competes. Included in the 2004 Annual Report to Shareholders is a description
of the effect interest rates had on the results for the year 2004 compared to
2003. Most of the same market factors discussed in the 2004 Annual Report
also had a significant impact on 2005 results.
TrustCo competes with other financial service providers based upon many
factors including quality of service, convenience of operations, and rates
paid on deposits and charged on loans. The absolute level of interest rates,
changes in rates and customers' expectations with respect to the direction of
interest rates have a significant impact on the volume of loan and deposit
originations in any particular period.
One of the most important interest rates used to control national economic
policy is the "federal funds" rate. This is the interest rate utilized for
institutions with the highest credit quality rating. The federal funds rate
increased by 150 basis points during the first nine months of 2005 from 2.25%
at the beginning of the year to 3.75% by September 30, 2005. For 2004 the
federal funds rates was 1.00% at the beginning of that year and increased to
1.75% by September 30, 2004. During the first nine months of 2005 the 10 year
treasury bond did not change consistently with the increase in the federal
funds rate. The 10 year treasury was 4.22% as of year end 2004 and increased
14
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
slightly to 4.32% by the end of the third quarter of 2005. For comparison
purposes the 10 year treasury was 4.25% at the beginning of 2004 and ended
the third quarter down 13 basis points to 4.12%. 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 subsequent to September 30, 2005.
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
the 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 real estate loan originations are
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 relation to the long-term nature of
a residential real estate loan, while remaining competitive with the
secondary market rates.
For the third quarter of 2005, the net interest margin increased to 4.03%
from 3.83% for the third quarter of 2004. The quarterly results reflect the
following significant factors:
- The average balance of securities available for sale increased by
$15.9 million and the average yield decreased to 5.27%.
- The average balance of federal funds sold and other short term
investments decreased by $204.0 million and the average yield
increased 195 basis points to 3.38%. The increase in yield on
federal funds sold and other short-term investments is attributable
to the increase in the target federal funds rate during these time
periods.
- The loan portfolio grew by $188.6 million to $1.36 billion and the
average yield increased 16 basis points to 6.51%.
- The average balance of interest bearing liabilities (primarily
deposit accounts) decreased $48.0 million and the average yield
increased 31 basis points to 1.95%.
These changes resulted in a net interest margin increase of 20 basis points
from 3.83% for the third quarter of 2004 to 4.03% for the comparable period
in 2005.
15
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
During the third quarter of 2005 the Company's strategy was to expand the
loan portfolio by offering competitive interest rates as the rate environment
began to increase. The TrustCo residential real estate loan product is very
competitive compared to local and national competitors.
The strategy on the funding side of the balance sheet continues to be to
attract customers to the Company based upon a combination of service,
convenience and interest rate. The Company offered attractive long-term
deposit rates as part of a strategy to lengthen deposit lives. This strategy
has been successful but has also resulted in part of the increase in the
deposit costs.
The decrease in balances of total interest bearing liabilities is also
reflected in the short term borrowing category which decreased by $25.0
million between the third quarter of 2004 and 2005.
Earning Assets
Total average interest earning assets was $2.76 billion for the third quarter
of 2005 and 2004 with an average yield of 5.25% in 2004 and 5.68% in 2005.
Income on earning assets increased by $3.0 million during this same
time-period from $36.2 million in 2004 to $39.2 million in 2005. The increase
in interest income on earning assets was attributable to the increase in
yield on these assets.
For the nine month period ended September 30, 2005, the average balance of
interest earning assets was $2.76 billion, an increase of $36.7 million from
the average balance for the comparable period in 2004 of $2.72 billion. The
average yield on interest earning assets was 5.25% for 2004, compared to
5.46% in 2005. The increase in the average balance of earning assets and the
increase in the yield earned on these assets, resulted in interest income of
$113.0 million for the nine months of 2005, compared to $107.3 million for
the nine months of 2004.
Loans
The average balance of loans for the third quarter was $1.36 billion in 2005
and $1.17 billion in 2004. The yield on loans increased from 6.35% in 2004 to
6.51% in 2005. The combination of the increase in average balances coupled
with higher rates resulted in an increase of $3.6 million in interest income
on loans.
For the nine month period ended September 30, 2005, the average balance in
the loan portfolio was $1.31 billion compared to $1.17 billion for the
comparable period in 2004. The average yield increased from 6.39% in 2004 to
6.46% in 2005. The increase in the average balance of loans outstanding and
the increase in the yield resulted in total interest income of $55.9 million
in 2004 compared to $63.2 million in 2005.
16
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
TrustCo actively markets residential mortgage loan products (which include
the residential real estate mortgages and home equity credit lines) within
its market territory. Mortgage loan rates are affected by a number of factors
including the prime rate, the federal funds rate, rates set by competitors
and secondary market participants. As noted previously, mortgage interest
rates have changed significantly as a result of national economic policy in
the United States. During this period of changing interest rates, TrustCo
aggressively marketed the unique aspects of its loan products thereby
attempting to create a differentiation from other lenders. These unique
aspects include extremely low closing costs, fast turnaround time on loan
approvals, no escrow or mortgage insurance requirements and the fact that the
Company holds these loans in portfolio and does not sell them into secondary
markets.
Though there is debate among nationally recognized economists, the general
tenor of the national economy is for improvement and increases in long-term
interest rates. Consequently the significant amount of refinancing that
occurred during 2003 and 2004 has been completed with only residual effects
into the remainder of 2005. Assuming a rise in long-term interest rates, the
Company would anticipate that the unique features of its loan product will
once again attract customers in the residential mortgage loan area.
The impact of the increase in the benchmark interest rate indexes (prime
rate, federal funds rate, etc.) is apparent in the change in the yield earned
in the commercial and home equity loan portfolios. The average yields earned
on these loan types for 2005 were 36 basis points and 183 basis points,
respectively, greater than the average yields earned during the first nine
months of 2004.
The average balance of home equity lines of credit increased to $193.0
million during the third quarter of 2005 compared to $183.9 million for the
comparable period in 2004. The average yield increased from 4.25% in the
third quarter of 2004 to 6.35% in 2005. The nine month results also reflect
growth with an average balance in 2005 of $192.8 million compared to $179.2
million in 2004. The average yield for these periods was 5.84% in 2005 and
4.01% in 2004. The increase in the average balance of home equity lines of
credit reflects the consumers desire to obtain the lowest cost financing
vehicles available. TrustCo's home equity line of credit is priced at a
discount to the prime rate during an introductory period and then floats with
prime over the life of the line. Closing costs are waived for these loans as
long as the line remains active for a set period of time.
The average balance of commercial loans increased by $7.5 million for the
third quarter of 2005 compared to 2004. The yield earned on the commerical
loans was 7.37% in 2005 and 6.80% in the third quarter of 2004. The increase
in the yields is the result of changes in the underlying loan indices.
17
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
Similar to the changes in the quarter, the year to date results for
commercial loans reflects an increase in the average balance to $200.9
million for the nine months of 2005 compared to $193.7 million for the
comparable period in 2004. The yield earned during these periods was 7.20% in
2005 and 6.84% in 2004.
Securities Available for Sale
During the third quarter of 2005, the average balance of securities available
for sale was $1.10 billion with a yield of 5.27%, compared to $1.08 billion
for the third quarter of 2004 with a yield of 5.82%. The combination of the
increase in average balance and the decrease in the yields caused a decrease
in interest income on securities available for sale of $1.3 million between
the third quarter of 2004 and 2005.
The decrease in average balance combined with the decrease in yield caused a
$7.0 million decrease in interest income on securities available for sale
during the first nine months of 2005 versus the first nine months of 2004.
The total average balance of securities available for sale during the nine
months of 2004 was $1.07 billion with an average yield of 5.90% compared to
an average balance for 2005 of $1.00 billion with a yield of 5.37%.
Within the portfolio of securities available for sale, there was a $18.9
million increase in the average balance of US Treasury and agency obligations
from $719.7 million in the third quarter of 2004 to $738.6 million for the
comparable period in 2005. The yield on this category of securities decreased
from 5.52% in 2004 to 5.11% in 2005.
The nine month balance for US Treasury and agency obligations decreased from
$730.2 million in 2004 to $641.0 million in 2005. The yield was 5.60% in 2004
as compared to 5.15% in 2005.
The average balance of mortgage backed securities and collateralized mortgage
obligations increased by $48.7 million during the third quarter of 2005
compared to 2004 with a yield of 4.69% in 2004 and 4.57% in 2005. The average
balance of mortgage backed securities and collateralized mortgage obligations
during the first nine months of 2005 was $211.4 million as compared to $138.6
million in 2004. The increase in the average balance reflects management's
decision to invest additional funds in securities that provide cash flow and
repayment of principal over the life of the instrument. The average yield for
the nine months of 2005 was 4.59% as compared to 4.73% in 2004.
The changes in the balance of securities available for sale were in response
to the historical low yields available in the federal funds marketplace,
fluctuations in cash flow as a result of loan refinancing, repayments and new
loan originations and deposit inflows/outflows. Though the investment yields
on 2005 purchases are lower overall than the yield earned on the existing
securities portfolio, the new investments provide
18
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
additional interest income and help to offset the loss of interest income
from other areas. Virtually all of the new purchases were US Treasury and
agency callable bonds and mortgage related securities. These bonds have call
features that allow the issuer to redeem the bonds at predetermined times.
The average balance of investments in the State, County and Municipal
portfolio decreased during the third quarter from $161.9 million in 2004 to
$116.3 million in 2005. The average yield was 7.81% in the third quarter of
2004 compared to 7.51% in 2005. For the nine months of 2005 the average
balance was $131.2 million with a yield of 7.65% compared to $170.5 million
in 2004 with an average yield of 7.90%.
The decrease in the balances of State, County and Municipal investments
during the quarter and year to date reflect sales and maturities from this
portoflio during these time periods. With interest rates at historical lows,
the determination was made to sell a portion of this portfolio to capture the
gain and to reinvest the proceeds in shorter term tax advantaged obligations.
This also explains the decrease in the yields during this time period.
Federal Funds Sold and Other Short-Term Investments
During the third quarter of 2005, the average balance of federal funds sold
and other short term investments was $296.2 million with an average yield of
3.38%, compared to the average balance for the three month period ended
September 30, 2004 of $500.2 million with an average yield of 1.43%. The
decrease in the average balance and the increase in the average yield,
resulted in total interest income on federal funds sold and other short-term
investments of $1.8 million for 2004 compared to $2.5 million for 2005.
During the nine month period ended September 30, 2005, the average balance of
federal funds sold and other short-term investments was $456.1 million with a
yield of 2.79% compared to an average balance of $490.9 million in 2004 with
an average yield of 1.14%.
The federal funds portfolio is utilized to generate additional interest
income and liquidity as funds are waiting to be deployed into the loan and
securities portfolios. The growth in the loan portfolio was funded primarily
through reductions in federal funds sold and other short-term investments.
Changes in the yield on the federal funds and other short-term investment
portfolios resulted primarily from changes in the target rate set by the
Federal Reserve Board for federal funds sold.
19
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
Funding Opportunities
TrustCo utilizes various funding sources to support its earning asset
portfolio. The vast majority of the Company's funding comes from traditional
deposit vehicles such as savings, interest bearing checking and time deposit
accounts.
During the third quarter, total average interest bearing liabilities were
$2.38 billion for 2004 and $2.33 billion for 2005. The rate paid on total
interest bearing liabilities was 1.64% for 2004 and 1.95% for 2005. Total
interest expense for the third quarter increased approximately $1.7 million
to $11.5 million for 2005 compared to $9.8 million for 2004.
Similar changes in interest bearing liabilities were noted for the nine-month
period as was discussed for the quarter except the average yield increased
from 1.61% in 2004 to 1.81% in 2005. The increase in yield for the nine
months of 2005 versus 2004 of 20 basis points is due primarily to the
increase in interest rates on certificates of deposit and money market
accounts. These deposit yields increased due to general trends in market rate
indices during this time period. Total average interest bearing liabilities
were $2.36 billion for the nine-month period ended September 30, 2004 and
$2.35 billion for 2005.
Average demand deposit balances increased during the third quarter of 2005
compared to the third quarter of 2004. Demand deposits averaged $218.4
million in 2004 and $240.3 million in 2005. On a year to date basis, average
demand deposits were $207.4 million in 2004 compared to $233.3 million in
2005.
Average interest bearing deposit balances have decreased from $2.28 billion
for the third quarter of 2004 to $2.25 billion for the same period in 2005.
Each of the deposit categories changed as follows: increases were noted in
money market accounts of $9.9 million, and certificates of deposit of $34.4
million offset by decreases in interest bearing checking accounts of $16.6
million and savings accounts of $50.7 million. In contrast, the average
balance of interest bearing deposit accounts for the nine-month periods has
increased. For the nine months of 2005 the average balance of interest
bearing deposits was $2.27 billion compared to $2.26 billion in 2004.
For both the third quarter and year to date, the Company has experienced a
flow of deposits out of the savings category and into certificates of
deposit. On a year to date basis, overall deposits have increased between the
nine months of 2004 and 2005, however for the third quarter, total deposits
have decreased by $23.0 million. The changes in deposit classification
between savings and certificates of deposit reflect the desire by depositors
to maximize the interest they are earning on deposit balances. Overall, the
yield on certificates of deposit has increased during the quarter to 3.19%
20
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
whereas the savings yield was 0.79%. These changes increase the funding cost
for Trustco as customers move funds from low rate savings accounts into the
higher costing certificates of deposit.
Average short-term borrowings for the quarter were $82.5 million in 2005
compared to $107.5 million in 2004. The average rate increased during this
time period from 0.94% to 2.59% for the third quarter of 2005, reflecting
recent increases in the federal funds rate.
For the nine months ended September 30, 2005 the average balance of short
term borrowings was $82.1 million as compared to $106.4 million in 2004. The
average yield was 0.79% in 2004 and 2.20% in 2005.
Net Interest Income
Taxable equivalent net interest income increased to $27.7 million for the
third quarter of 2005. The net interest spread increased 12 basis points
between 2004 and 2005 and the net interest margin increased by 20 basis
points.
Similar changes were noted in taxable equivalent net interest income, net
interest spread and net interest margin for the nine-month period ended
September 30, 2005, compared to the same period in 2004. Net interest income
for the first nine months of 2005 was $81.2 million, an increase of $2.4
million from the $78.7 million for the first nine months of 2004. Net
interest spread was 3.64% for 2004 and 3.65% for 2005, while net interest
margin increased 7 basis points to 3.92% for the nine month period ended
September 30, 2005, compared to the nine month period ended September 30,
2004.
Nonperforming Assets
Nonperforming assets include nonperforming loans which are those loans in a
nonaccrual status, loans that have been restructured, and loans past due
three payments or more and still accruing interest. Also included in the
total of nonperforming assets are foreclosed real estate properties, which
are categorized as real estate owned.
Impaired loans are considered to be those commercial and commercial real
estate loans in a nonaccrual status and loans restructured since January 1,
1995, when the accounting standards required the identification, measurement
and reporting of impaired loans. The following will describe the
nonperforming assets of TrustCo as of September 30, 2005.
Nonperforming loans: Total nonperforming loans were $2.9 million at September
30, 2005, a decrease from the $3.1 million of nonperforming loans at
September 30, 2004.
21
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
Nonaccrual loans were $1.3 million at September 30, 2005 and $340 thousand at
September 30, 2004. Loans past due 3 payments or more and still accruing
interest were $27 thousand at September 30, 2005 and $8 thousand at September
30, 2004. Restructured loans were $1.6 million at September 30, 2005 compared
to $2.8 million at September 30, 2004.
All of the nonperforming loans at September 30, 2005 and 2004 are residential
real estate or retail consumer loans. Since 2000, there has been a continued
shifting in the components of TrustCo's problem loans and chargeoffs from
commercial and commercial real estate to the residential real estate and
retail consumer loan portfolios. Contributing factors to this shift include:
- The overall emphasis within TrustCo for residential real estate
originations,
- The relatively weak economic environment in the upstate New York
territory, and
- The relative slow growth in real estate values in many of TrustCo's
market areas that has occurred since the middle of the 1990's,
thereby limiting the collateral value that supports the real estate
loans.
Consumer loan defaults and bankruptcies have increased over the last several
years and this has led to an increase in defaults on loans. TrustCo strives
to identify borrowers that are experiencing financial difficulties and to
work aggressively with them so as to minimize losses or exposures. However,
beginning in 2004 the number of new bankruptcy filings in the Capital
District area decreased from the prior year. Also the demand for housing in
the Capital District area has increased which has resulted in increased real
estate prices in selected sectors of the marketplace. These trends may be
indicators of future economic stability for this region and a continued
lessening of loan charge offs.
Total impaired loans at September 30, 2005 of $1.6 million, consisted of
restructured retail loans. During the first nine months of 2005, there were
$431.1 thousand of commercial loan charge offs, $175.5 thousand of consumer
loan charge offs and $1.2 million of residential mortgage loan charge offs as
compared with $335 thousand of commercial loan charge offs, $295 thousand of
consumer loan charge offs and $4.8 million of residential mortgage loan
charge offs in the first nine months of 2004. Recoveries during the first
nine months were $3.8 million in 2005 and $4.9 million in 2004.
The significant reduction in the loan charge offs from the residential real
estate portfolio, along with ancillary information previously noted of the
increased real estate prices and reduction in financial stress as
demonstrated by bankruptcy filings resulted in a negative provision for loan
losses of $1.7 million during the third quarter of 2005 compared to
22
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
$150 thousand expense for the comparable period in 2004. The negative
provision was $4.8 for the first nine months of 2005 compared to a provision
for loan losses of $450 thousand for the comparable period in 2004. The
Company continues to monitor these trends and believes they will continue
into the last quarter of 2005.
Real estate owned: Total real estate owned was $56 thousand at September 30,
2005 and zero at September 30, 2004.
Allowance for loan losses: The balance of the allowance for loan losses is
maintained at a level that is, in management's judgment, representative of
the amount of the risk inherent in the loan portfolio.
At September 30, 2005, the allowance for loan losses was $46.7 million, which
represents a decrease from the $49.4 million in the allowance at December 31,
2004. The allowance represents 3.34% of the loan portfolio as of September
30, 2005 compared to 4.10% at September 30, 2004.
In deciding on the adequacy of the allowance for loan losses, management
reviews the current nonperforming loan portfolio as well as loans that are
past due and not yet categorized as nonperforming for reporting purposes.
Also, there are a number of other factors that are taken into consideration,
including:
- The magnitude and nature of loan charge offs,
- The change in the loan portfolio and the implication that it has in
relation to the economic climate in the bank's business territory,
- Significant growth in the level of losses associated with
bankruptcies in New York State over the last several years and the
time period needed to foreclose, secure and dispose of collateral,
and
- The relatively weak economic environment in the upstate New York
territory over the last several years.
Though the economic climate in the Upstate New York area has suffered over
the last several years, resulting in higher bankruptcies and relatively flat
real estate prices, overall economic trends in the last 2 years have been
improving. As noted previously, bankruptcies in the Capital District area
have recently decreased on a year over year basis, and general housing prices
have continued to increase. These positive trends have helped marginal
credits better manage their debt load. 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, a negative provision of
23
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
$1.7 million for the third quarter was recognized.
Management continues to monitor these in determining future provisions for
loan losses in relation to loan charge offs, recoveries and the level and
trends of nonperforming loans.
Liquidity and Interest Rate Sensitivity
TrustCo seeks to obtain favorable sources of funding and to maintain prudent
levels of liquid assets in order to satisfy varied liquidity demands.
TrustCo's earnings performance and strong capital position enable the Company
to raise funds easily in the marketplace and to secure new sources of
funding. The Company actively manages its liquidity through target ratios
established under its liquidity policies. Continual monitoring of both
historical and prospective ratios allows TrustCo to employ strategies
necessary to maintain adequate liquidity. Management has also defined various
degrees of adverse liquidity situations, which could potentially occur, and
has prepared appropriate contingency plans should such a situation arise.
Noninterest Income
Total noninterest income for the three months ended September 30, 2005 was
$7.1 million, as compared to $9.0 million for the comparable period in 2004.
During these periods, the Company recorded net securities gains of $776
thousand for 2005 and $4.6 million for 2004. Excluding these securities
transactions, noninterest income increased from $4.4 million in the third
quarter of 2004 to $6.3 million in 2005.
Similar results were also recognized for the nine months of 2005 compared to
2004. Total noninterest income was $22.1 million for 2005 compared to $26.1
million for 2004. Excluding net securities transactions, noninterest income
was $13.7 million for 2004 and $16.5 million for 2005.
Trust department income increased slightly to $1.5 million for the third
quarter of 2005. Service fees and other income are also up slightly between
2004 and 2005 due primarily to loan volume and deposit activity.
The increase in other noninterest income for the third quarter of 2005 as
compared to 2004 is primarily attributable to the gain on sale of credit
cards of $1.4 million. During the third quarter the Company sold
approximately $7.4 million of credit card receivables and entered into a
marketing arrangement with a third party credit card servicer. As a result of
this sale the Company recognized this gain and will have continuing income
from credit cards for new card originations. The anticipated income for
future years is not expected to be material to the Company's operations.
Similarly, for the nine months of 2005 compared to 2004, the increase is
primarily the result of the credit card sale in the third quarter and the
gain recognized on the sale of the former operations center in
24
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
Schenectady. The Company recognized approximately a $600 thousand gain as a
result of this property sale.
Noninterest Expenses
Total noninterest expense for the third quarter of 2005 and 2004 was $11.5
million. For the nine months ended September 30, 2005 total noninterest
expense was $35.4 million compared to $35.7 million in 2004.
Salaries and employee benefits expense increased from $5.0 million for the
third quarter of 2004 to $5.1 million for the comparable period in 2005.
Total salaries and employee benefits were $15.4 million for the nine months
of 2005 and 2004.
Net occupancy expense increased during the quarter from $1..5 million in 2004
to $1.8 million in 2005 due primarily to the new branch operations and the
cost of utilities. Similar increases were also noted during the nine month
period with net occupancy expense of $5.0 million for 2004 compared to $5.5
million in 2005.
Equipment expense increased approximately $256 thousand for the third quarter
of 2005 compared to 2004 as a result of new items purchased for the branch
expansion program and upgrades to the ATM equipment. On a year to date basis,
equipment expense increased by $707 thousand to $2.0 million due to the same
factors that affected the third quarter.
Income Taxes
In the third quarter of 2005 and 2004, TrustCo recognized income tax expense
of $8.5 million and $7.3 million, respectively. This resulted in an effective
tax rate of 35.1% for 2005 and 32.4% for 2004. For the nine months of 2005,
total income tax expense was $24.4 million compared to $21.1 million for
2004. This resulted in an effective tax rate of 34.8% for 2005 and 32.6% for
2004. This increase was primarily the result of a reduction in the amount of
securities invested in tax advantaged states and political subdivisions
during these time periods.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable
financial organization, TrustCo strives to maintain strong capital ratios.
New issues of equity securities have not been required since traditionally,
most of its capital requirements are met through the capital retained in the
Company (after the dividends on the common stock).
Total shareholders' equity at September 30, 2005 was $229.7 million, an
increase of $3.8 million from the year-end 2004 balance of $225.8 million.
The change in total shareholders' equity between year-end 2004 and September
30, 2005 reflects net
25
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
income of $11.9 million retained by TrustCo (net income of $45.6 million less
dividends to shareholders of $33.7 million) and a $2.3 million increase as a
result of stock option exercises partially offset by an $6.2 million
reduction in the net unrealized gain on securities available for sale, net of
tax, and $4.2 million net increase in treasury stock.
TrustCo declared dividends of $0.450 per share during the first nine months
of 2005 and 2004. These resulted in a dividend payout ratio of 74.0% in 2005
and 76.4% in 2004. The Company achieved the following capital ratios as of
September 30, 2005 and 2004:
September 30, Minimum Regulatory
2005 2004 Guidelines
----- ----- ------------------
Tier 1 risk adjusted
capital 16.92% 16.80% 4.00
Total risk adjusted
capital 18.19% 18.08% 8.00
In addition, at September 30, 2005 and 2004, the consolidated equity to total
assets ratio (excluding the mark to market effect of securities available for
sale) was 8.17% and 7.58%, respectively.
Pending Transaction:
On April 13, 2005 Trustco Bank and Patriot Federal Bank (Proposed) announced
that they had entered into an agreement for the sale of a branch location
from Trustco Bank to Patriot Federal subject to certain contingencies, such
as regulatory approval. Trustco Bank had acquired the branch location as part
of its acquisition of Landmark Community Bank in 2000. In addition to the
real estate, the branch sale will include approximately $10 million of
deposits. The transaction is expected to be completed by year end.
Critical Accounting Policies:
Pursuant to recent SEC guidance, management of the Company is encouraged to
evaluate and disclose those accounting policies that are judged to be
critical policies - those most important to the portrayal of the Company's
financial condition and results, and that require management's most difficult
subjective or complex judgments.
Management considers the accounting policy relating to the allowance for loan
losses to be a critical accounting policy given the inherent uncertainty in
evaluating the levels of the allowance required to cover credit losses in the
portfolio and the material effect that such judgments can have on the results
of operations. Included in Note 1 to the Consolidated Financial Statements
contained in the Company's 2004 Annual Report on
26
TrustCo Bank Corp NY
Management's Discussion and Analysis - Continued
September 30, 2005
Form 10-K is a description of the significant accounting policies that are
utilized by the Company in the preparation of the Consolidated Financial
Statements.
Proposed Accounting Standards:
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.
During the first quarter of 2005, the Company implemented the provision of
this SOP. This implementation did not have a material impact on the Company's
financial condition or results of operations.
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 106-2, "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
grant-date fair value of employee stock options and similar awards. In April
2005, the effective date of the accounting provisions of FAS 123R were
delayed from July 1, 2005 to January 2006 for public companies like TrustCo.
The Company will adopt the provisions of FAS 123R
27
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
September 30, 2005
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 in first quarter of 2006 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.
28
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of average balance
sheet, related interest income and expense and the average annualized yields
on interest earning assets and annualized rates on interest bearing
liabilities of TrustCo (adjusted for tax equivalency) for each of the
reported periods. Nonaccrual loans are included in loans for this analysis.
The average balances of securities available for sale is calculated using
amortized costs for these securities. Included in the balance of
shareholders' equity is unrealized appreciation, net of tax, in the available
for sale portfolio of $2.0 million in 2005 and $7.4 million in 2004. The
subtotals contained in the following table are the arithmetic totals of the
items contained in that category.
Three Months 2005 Three Months 2004
Average Interest Average Average Interest Average Change in Variance Variance
(dollars in thousands) Balance Rate Balance Rate Interest Balance Rate
Income/ Change Change
Expense
---------- ------- ------- ---------- ------- ------- -------- -------- --------
Assets
Securities available for sale:
U.S. Treasuries and agencies $ 738,623 $ 9,440 5.11% $ 719,707 $ 9,927 5.52% (487) 267 (754)
Mortgage-backed securities
and collateralized mortgage
obligations 224,940 2,571 4.57% 176,255 2,066 4.69% 505 557 (52)
States and political subdivisions 116,302 2,183 7.51% 161,884 3,161 7.81% (978) (861) (117)
Other 17,405 264 6.07% 23,561 577 9.80% (313) (127) (186)
---------- ------- ------- ---------- ------- ------- -------- -------- --------
Total securities available for sale 1,097,270 14,458 5.27% 1,081,407 15,731 5.82% (1,273) (165) (1,108)
Federal funds sold and other
short-term Investments 296,222 2,519 3.38% 500,249 1,798 1.43% 721 (308) 1,029
Commercial Loans 203,184 3,749 7.37% 195,705 3,330 6.80% 419 131 288
Residential mortgage loans 957,335 15,081 6.30% 782,855 12,993 6.64% 2,088 2,711 (623)
Home equity lines of credit 193,016 3,091 6.35% 183,941 1,967 4.25% 1,124 102 1,022
Installment loans 9,966 313 12.47% 12,443 364 11.63% (51) (80) 29
---------- ------- ------- ---------- ------- ------- -------- -------- --------
Loans, net of unearned income 1,363,501 22,234 6.51% 1,174,944 18,654 6.35% 3,580 2,864 716
Total interest earning assets 2,756,993 39,211 5.68% 2,756,600 36,183 5.25% 3,028 2,392 636
------- ------- ------- ------- -------- -------- --------
Allowance for loan losses (47,630) (49,445)
Cash & non-interest earning assets 124,191 141,112
---------- ----------
Total assets $2,833,554 $2,848,267
========== ==========
Liabilities and shareholders' equity
Deposits:
Interest Bearing Checking Accounts $ 318,185 311 0.39% $ 334,792 408 0.48% (97) (20) (77)
Money market accounts 152,007 1,002 2.61% 142,061 326 0.91% 676 24 652
Savings 775,151 1,545 0.79% 825,879 2,042 0.98% (497) (120) (377)
Time deposits 1,006,731 8,105 3.19% 972,350 6,765 2.77% 1,340 253 1,087
---------- ------- ------- ---------- ------- ------- -------- -------- --------
Total interest bearing deposits 2,252,074 10,963 1.93% 2,275,082 9,541 1.67% 1,422 138 1,284
Short-term borrowings 82,482 537 2.59% 107,495 254 0.94% 283 (43) 326
Long-term debt 96 1 5.18% 122 2 5.19% (1) (1) (0)
---------- ------- ------- ---------- ------- ------- -------- -------- --------
Total Interest Bearing Liabilities 2,334,652 11,501 1.95% 2,382,699 9,797 1.64% 1,704 94 1,610
------- ------- -------- -------- --------
Demand deposits 240,253 218,372
Other liabilities 28,891 28,853
Shareholders' equity 229,758 218,343
Total liab. & shareholders' equity $2,833,554 $2,848,267
========== ==========
Net Interest Income 27,710 26,386 1,324 2,298 (974)
------- ------- -------- -------- --------
Net Interest Spread 3.73% 3.61%
Net Interest margin (net interest
income to total interest
earning assets) 4.03% 3.83%
Tax equivalent adjustment (778) (1,232)
------- ------
Net Interest Income per book 26,932 25,154
29
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of average balance
sheet, related interest income and expense and the average annualized yields
on interest earning assets and annualized rates on interest bearing
liabilities of TrustCo (adjusted for tax equivalency) for each of the
reported periods. Nonaccrual loans are included in loans for this analysis.
The average balances of securities available for sale is calculated using
amortized costs for these securities. Included in the balance of
shareholders' equity is unrealized appreciation, net of tax, in the available
for sale portfolio of $2.2 million in 2005 and $12.7 million in 2004. The
subtotals contained in the following table are the arithmetic totals of the
items contained in that category.
Nine Months 2005 Nine Months 2004
Average Interest Average Average Interest Average Change in Variance Variance
(dollars in thousands) Balance Rate Balance Rate Interest Balance Rate
Income/ Change Change
Expense
---------- -------- ----- ---------- -------- ----- --------- -------- --------
Securities available for sale:
U.S. Treasuries and agencies $ 641,002 $ 24,779 5.15% $ 730,167 $ 30,653 5.60% (5,874) (3,543) (2,331)
Mortgage-backed securities
and collateralized mortgage
obligations 211,382 7,271 4.59% 138,648 4,916 4.73% 2,355 2,496 (141)
States and political subdivisions 131,163 7,528 7.65% 170,471 10,104 7.90% (2,576) (2,265) (311)
Other 15,969 677 5.66% 27,634 1,571 7.58% (894) (559) (335)
---------- -------- ----- ---------- -------- ----- --------- -------- --------
Total securities available for sale 999,516 40,255 5.37% 1,066,920 47,244 5.90% (6,989) (3,871) (3,118)
Federal funds sold and other
short-term Investments 456,100 9,519 2.79% 490,874 4,198 1.14% 5,321 (274) 5,595
Commercial Loans 200,900 10,846 7.20% 193,745 9,938 6.84% 908 374 534
Residential mortgage loans 900,115 42,934 6.36% 780,841 39,474 6.74% 3,460 5,484 (2,024)
Home equity lines of credit 192,760 8,419 5.84% 179,225 5,379 4.01% 3,040 432 2,608
Installment loans 11,414 1,021 11.95% 12,528 1,092 11.65% (71) (100) 29
---------- -------- ----- ---------- -------- ----- --------- -------- --------
Loans, net of unearned income 1,305,189 63,220 6.46% 1,166,339 55,883 6.39% 7,337 6,190 1,147
Total interest earning assets 2,760,805 112,994 5.46% 2,724,133 107,325 5.25% 5,669 2,046 3,623
Allowance for loan losses (48,202) (49,321)
Cash & non-interest earning assets 127,466 148,867
---------- ----------
Total assets 2,840,069 $2,823,679
========== ==========
Liabilities and shareholders' equity
Deposits:
Interest Bearing Checking Accounts $ 322,664 1,078 0.45% $ 330,664 1,193 0.48% (115) (32) (83)
Money market accounts 147,480 2,013 1.82% 157,260 1,154 0.98% 859 (67) 926
Savings 801,265 4,752 0.79% 807,514 5,947 0.98% (1,195) (46) (1,149)
Time deposits 996,629 22,637 3.04% 962,082 19,648 2.73% 2,989 718 2,271
---------- -------- ----- ---------- -------- ----- --------- -------- --------
Total interest bearing deposits 2,268,038 30,480 1.80% 2,257,520 27,942 1.65% 2,538 573 1,965
Short-term borrowings 82,148 1,350 2.20% 106,425 633 0.79% 717 (105) 822
Long-term debt 103 4 5.24% 162 7 5.46% (3) (3) (0)
---------- -------- ----- ---------- -------- ----- --------- -------- --------
Total Interest Bearing Liabilities 2,350,289 31,834 1.81% 2,364,107 28,582 1.61% 3,252 465 2,787
-------- -------- --------- -------- --------
Demand deposits 233,316 207,387
Other liabilities 27,651 31,442
Shareholders' equity 228,813 220,743
Total liab. & shareholders' equity $2,840,069 $2,823,679
========== ==========
Net Interest Income 81,160 78,743 2,417 1,580 837
-------- --------
Net Interest Spread 3.65% 3.64%
Net Interest margin (net interest income
to total interest earning assets) 3.92% 3.85%
Tax equivalent adjustment (2,660) (3,860)
-------- --------
Net Interest Income per book 78,500 74,883
======== ========
30
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As detailed in the Annual Report to Shareholders as of December 31, 2004 the
Company is subject to interest rate risk as its principal market risk. As
noted in detail throughout this Management's Discussion and Analysis for the
nine months ended September 30, 2005, the Company continues to respond to
changes in interest rates not only to position the Company to meet short term
earnings goals but also to allow the Company to respond to changes in
interest rates in the future. Consequently the average balance of federal
funds sold and other short-term investments has decreased from $490.9 million
in 2004 to $456.1 million in 2005. As investment opportunities have presented
themselves, management has, and continues to invest funds from the federal
funds sold and other short-term investment portfolio into the securities
available for sale and loan portfolios. This trend is expected to continue
into the fourth quarter. The Company believes there was no significant change
to its interest rate risk during the third quarter of 2005.
Item 4. Controls and Procedures
An evaluation was carried out under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the Company's
disclosure controls and procedures as of the end of the period covered by
this report.
The Company maintains disclosure controls and procedures (as that term is
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934 ("Exchange Act") designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
Based upon this evaluation of those disclosure controls and procedures, the
Chief Executive and Chief Financial Officer of the Company concluded, as of
the end of the period covered by this report, that the Company's disclosure
controls and procedures were effective to ensure that information required to
be disclosed in the reports the Company files and submits under the Exchange
Act is recorded, processed, summarized and reported as and when required.
In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Further, no evaluation of a cost-effective system of controls
can provide absolute assurance that all control issues and instances of
fraud, if any, will be detected.
31
There have been no changes in internal control over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the
quarter to which this report relates that have materially affected or are
reasonably likely to materially affect, the internal control over financial
reporting.
32
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
- -------------------------- --------- --------------- ------------ -----------------
Total
Number of
Shares Maximum Number
Purchased as of Shares that
Total Part of May Yet Be
Number of Average Price Publicly Purchases Under
Shares Paid per Share Announced the
Period Purchased Plans or Plans or Programs
Programs
- -------------------------- --------- --------------- ------------ -----------------
July 1 - July 31 - $ - 0 N/A
- -------------------------- --------- --------------- ------------ -----------------
August 1 - August 31 340,737 $ 13.18 0 N/A
- -------------------------- --------- --------------- ------------ -----------------
September 1 - September 30 100,000 $ 13.17 0 N/A
- -------------------------- --------- --------------- ------------ -----------------
Total 440,737 $ 13.18 0 N/A
- -------------------------- --------- --------------- ------------ -----------------
All 440,737 shares were purchased by other than through a publicly announced
plan or program. All purchases were made in open-market transactions in
satisfaction of the Company's obligations upon exercise of outstanding stock
options issued by the Company and for quarterly sales to the dividend
reinvestment plan.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submissions of Matters to Vote of Security Holders
None.
Item 5. Other Information
None.
33
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Reg S-K
(Item 601)
Exhibit No. Description
- ----------- --------------------------------------------------------------
31(i) Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick,
principal executive officer.
31(i) Rule 13a-15(e)/15d-15(e) Certification of Robert T. Cushing,
principal financial officer.
32 Section 1350 Certifications of Robert J. McCormick,
principal executive officer and Robert T. Cushing,
principal financial officer.
(b) Reports on Form 8-K
During the quarter ended September 30, 2005, TrustCo filed the following
reports on Form 8-K:
July 19, 2005, regarding two press releases dated July 19, 2005, detailing
second quarter and year to date 2005 financial results and the appointment of
Thomas O. Maggs as a director.
August 16, 2005, regarding a press release dated August 16, 2005, declaring a
cash dividend of $0.15 per share payable on October 3, 2005, to shareholders
of record at the close of business on September 9, 2005 and announcing the
Board's intention to increase the quarterly cash dividend to 16 cents per
share beginning in the fourth quarter of 2005 and the extension of Chairman
Robert A. McCormick's consulting agreement.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TrustCo Bank Corp NY
By: /s/Robert J. McCormick
--------------------------
Robert J. McCormick
President
and Chief Executive Officer
By: /s/Robert T. Cushing
------------------------
Robert T. Cushing
Executive Vice President
and Chief Financial Officer
Date: November 7, 2005
35
Exhibits Index
Reg S-K
Exhibit No. Description
- ----------- --------------------------------------------------------------
31(i) Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick,
principal executive officer.
31(i) Rule 13a-15(e)/15d-15(e) Certification of Robert T. Cushing,
principal financial officer.
32 Section 1350 Certifications of Robert J. McCormick, principal
executive officer and Robert T. Cushing, principal financial
officer.
36