Exhibit 13
TRUSTCO Bank Corp NY
Annual Report
2005
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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 83 community banking offices and
81 Automatic Teller Machines throughout the Bank's market area. The Company
serves four states and 18 counties with a broad range of community banking
services.
Financial Highlights
(dollars in thousands, except per share data) Years ended December 31,
Percent
2005 2004 Change
Income:
Net interest income (Taxable Equivalent)...................................... $ 107,948 105,024 2.78%
Net income.................................................................... 58,989 56,540 4.33
Per Share:
Basic earnings................................................................ .787 .761 3.42
Diluted earnings.............................................................. .782 .753 3.85
Tangible book value........................................................... 3.05 3.02 0.99
Average Balances:
Assets........................................................................ 2,844,974 2,828,195 0.59
Loans, net.................................................................... 1,336,899 1,176,856 13.60
Deposits...................................................................... 2,505,967 2,474,179 1.28
Shareholders' equity.......................................................... 226,571 223,719 1.27
Financial Ratios:
Return on average assets...................................................... 2.07% 2.00 3.50
Return on average equity (1).................................................. 26.07 26.65 (2.18)
Consolidated tier 1 capital to:
Total average assets (leverage)............................................. 8.04 7.74 3.88
Risk-adjusted assets........................................................ 16.58 17.09 (2.98)
Total capital to risk-adjusted assets......................................... 17.85 18.37 (2.83)
Net loans charged off (recovered) to average loans............................ (.17) (.02) 750.00
Allowance for loan losses to nonperforming loans.............................. 14.1x 15.6x (9.62)
Efficiency ratio.............................................................. 38.29% 38.78 1.26
Dividend payout ratio......................................................... 77.46 78.83 (1.74)
Per share information of common stock
Tangible Range of Stock
Basic Diluted Cash Book Price
Earnings Earnings Dividend Value High Low
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
2005
First quarter.......................................... .199 .197 .150 2.99 13.87 11.20
Second quarter......................................... .200 .199 .150 3.12 13.25 10.73
Third quarter.......................................... .210 .208 .150 3.07 13.66 12.15
Fourth quarter......................................... .179 .178 .160 3.05 13.47 11.40
(1) Excludes the market adjustment on securities available for sale.
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TRUSTCO Bank Corp NY
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
Branch Locations..................................................... 48-49
Officers and Board of Directors......................................... 50
General Information..................................................... 51
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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TRUSTCO Bank Corp NY
President's Message
Dear Shareholder:
We are pleased to report that 2005 marked another year of record results
at TrustCo. Our net income reached a new all-time high and we continued to
grow our branch network. We are grateful to our shareholders, board of
directors, and employees for their support and enthusiasm, ensuring our
continued strong performance.
TrustCo's branch office expansion continues. We have now opened
twenty-three offices in new markets since announcing our growth plans. These
openings have been concentrated in downstate New York and Florida. We
currently have fourteen offices in Florida, nine in downstate New York and
recently celebrated the simultaneous grand openings of four locations. This
brings our total branch offices to 83. We plan an aggressive branch expansion
program in both of these markets along with a continued evaluation of
opportunities in the upstate New York region. The excellent reception we have
received at our new offices gives us confidence that our expansion into these
areas positions TrustCo very well for the future.
During 2005, we made an offer to purchase Ballston Spa Bancorp, Inc.,
which was rejected. We continue to evaluate acquisition opportunities as they
arise, careful to avoid diluting shareholder value of the existing TrustCo
franchise.
TrustCo continues to receive positive external recognition in the
financial industry. In a recent Barron's article (a leading financial
publication), our Company has been recognized as one of the top companies
maintaining over ten straight years of uninterrupted growth in earnings per
share.
During 2005, the board of directors approved a 7% increase to our
quarterly cash dividend. Our total annual dividend is now $0.64 resulting in
a 5.1% annual yield based on 2005's average stock price. It continues to be
our philosophy to return excess capital to shareholders in the form of
dividends. We also believe that it is prudent to retain sufficient capital to
support our growth goals and to remain well-capitalized for regulatory
purposes.
Despite a difficult overall banking environment, given the flattening
interest rate yield curve, TrustCo's operating results nonetheless continued
in the right direction in 2005 with net income increasing to $59 million.
TrustCo's most important ratio, return on average equity, was 26.07% for
2005. We are committed to ensuring that our return on average equity compares
favorably with any peer group.
In 2005, TrustCo showed impressive growth in its loan portfolio. Loans
grew by $230.7 million, a strong 18.6% compared to 2004. The majority of this
growth occurred in our residential mortgage portfolio. Customers in our new
markets have commented that our competitive rates, combined with a simple
application process and great customer service, make Trustco Bank an
outstanding choice when purchasing or refinancing their home.
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TRUSTCO Bank Corp NY
President's Message (continued)
Two members were added to the Board of Directors in 2005. The addition
of Thomas O. Maggs, President of Maggs & Associates and myself brings the
total number of directors to seven. There were also a number of other senior
staff changes during the year. Eric W. Schreck was elevated to Administrative
Vice President and Paul D. Matthews was named Vice President. Our future
should continue to benefit from the solid performance of the employee team at
TrustCo, which has always been a hallmark of our success.
For 2005, the often quoted efficiency ratio of our Company was 38.3% at
a time when many banking companies struggle to reach 60.0%. This level of
performance in efficiency will benefit us through reduced operating expenses
for years to come.
Community needs continue to expand and TrustCo has responded. We
established, in 2005, a new charitable entity called the Trustco Charitable
Foundation, and through our Winter Warmth Fund, TrustCo was able to help
hundreds of families with heating assistance during the winter months.
TrustCo also increased its overall charitable contributions in 2005, and our
employees donated thousands of hours of community services in all of the
areas we serve.
We are very proud of our results last year. As we look forward to 2006,
a difficult year is expected. In 2005, we made several moves resulting in
one-time gains. These included securities transactions, and the sale of our
Trust Building, Canajoharie office, and credit card portfolio. In all
likelihood, events of this nature will not be repeated in 2006. The second
item we are concerned over is the difficult rate environment all banks are
facing. The previously referenced flat/inverted yield curve has resulted in
tight loan and deposit pricing. This causes margin pressure and stress on net
income.
We should rest assured our Company is well positioned for these
difficulties. The plans we have in place, combined with our hawkish approach
to expense control, will see us through these times.
On behalf of the board of directors and employees of our Bank, we thank
our shareholders for their continued support. We are proud of the 2005
results and look forward to seeing our Company through a challenging 2006.
Sincerely,
/s/ Robert J. McCormick
Robert J. McCormick
President & Chief Executive Officer
TrustCo Bank Corp NY
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis of Financial Condition and Results
of Operations
The financial review which follows will focus on the factors affecting the
financial condition and results of operations of TrustCo Bank Corp NY (the
Company", "TrustCo" or the "Bank"), during 2005 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 2005 should
be read in conjunction with this review. Certain amounts in years prior to
2005 have been reclassified to conform with the 2005 presentation.
Overview
TrustCo recorded net income of $59.0 million or $0.782 of diluted earnings
per share for the year ended December 31, 2005, compared to $56.5 million or
$0.753 of diluted earnings per share for the year ended December 31, 2004.
This represents an increase of 4.3% in net income between 2004 and 2005.
During 2005, the following had a significant effect on net income:
o an increase of $2.9 million in taxable equivalent net interest
income compared to 2004, as a result of an increase in the average
balance of interest earning assets of $37.9 million coupled with an
increase of five basis points ("bp") in the net interest margin,
o a reduction in the provision for loan losses from $450,000 expense
in 2004 to $6.3 million credit in 2005 and,
o the recognition of net securities gains of $6.0 million in 2005
compared to $13.7 million recorded in 2004.
Return on Equity
2003 26.21%
2004 26.65%
2005 26.07%
MIX OF AVERAGE EARNING ASSETS
(dollars in thousands) 2005 2004 Components of
vs. vs. Total Earning Assets
2005 2004 2003 2004 2003 2005 2004 2003
Loans, net of unearned income..... $1,336,899 1,176,856 1,275,023 160,043 (98,167) 48.3% 43.1% 48.9
Securities available for sale:
U.S. Treasuries and agencies.... 1,059 634 2,930 425 (2,296) -- -- 0.1
Government sponsored
enterprises................... 667,967 713,969 503,678 (46,002) 210,291 24.2 26.2 19.3
States and political
subdivisions.................. 127,704 168,723 203,718 (41,019) (34,995) 4.6 6.2 7.8
Mortgage-backed securities and
collateralized mortgage
obligations................... 210,720 149,298 60,248 61,422 89,050 7.6 5.5 2.3
Other........................... 16,734 25,221 63,331 (8,487) (38,110) 0.6 0.9 2.5
Total securities available
for sale...................... 1,024,184 1,057,845 833,905 (33,661) 223,940 37.0 38.8 32.0
Federal funds sold and other
short-term investments........ 406,131 494,579 497,364 (88,448) (2,785) 14.7 18.1 19.1
Total earning assets.............. $2,767,214 2,729,280 2,606,292 37,934 122,988 100.0% 100.0 100.0
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Management's Discussion and Analysis (continued)
In addition to these items the Company recognized certain non-recurring
transactions that had a significant impact on the net income for 2005. These
items include the sale of the former operations center in Schenectady at a
net gain of approximately $600 thousand, the sale of the credit card
portfolio for a net gain of approximately $1.4 million and the sale of the
Canajoharie Branch for a net gain of approximately $600 thousand. These items
are not expected to re-occur in 2006.
TrustCo has performed well with respect to a number of key performance
ratios during 2005 and 2004, including:
o return on average equity of 26.07% for 2005 and 26.65% for 2004,
o return on average assets of 2.07% for 2005 and 2.00% for 2004, and
o an efficiency ratio of 38.29% for 2005 and 38.78% for 2004.
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 2005 a net increase
of five new branches were added to the franchise. The new branch locations
continue the plan established several years ago to expand the franchise to
areas experiencing economic growth. In 2006, 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 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, 2005 was marked by growth in each of the key drivers of
performance. Deposits ended 2005 at $2.56 billion, an increase from the prior
year, and the loan portfolio grew to a total of $1.47 billion, an increase of
$230.7 million over the 2004 year end balance. Likewise there was an increase
of $188.1 million in the year end balance of securities available for sale.
The increase in deposits and loans reflect the success the Company has had in
attracting new customers to the Bank both in new branch locations
LOAN PORTFOLIO
(dollars in thousands) As of December 31,
2005 2004 2003
Amount Percent Amount Percent Amount Percent
Commercial................... $ 202,570 13.8% $ 193,188 15.6% $ 190,501 16.4%
Real estate -- construction.. 22,123 1.5 20,148 1.6 7,476 0.6
Real estate -- mortgage...... 1,047,994 71.2 822,103 66.3 779,227 67.0
Home equity lines of credit.. 192,291 13.1 191,242 15.4 171,078 14.7
Installment loans............ 5,741 0.4 13,384 1.1 13,984 1.3
Total loans.................. 1,470,719 100.0% 1,240,065 100.0% 1,162,266 100.0%
Less: Allowance for
loan losses................ 45,377 49,384 48,739
Net loans $1,425,342 $1,190,681 $1,113,527
Average Balances
2005 2004 2003 2002 2001
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial................... $ 192,378 14.4% $ 189,179 16.1% $ 199,729 15.7% $ 198,566 13.1% $ 195,152 12.8%
Real estate -- construction.. 18,893 1.4 12,430 1.1 6,684 0.5 9,752 0.6 14,526 1.0
Real estate -- mortgage...... 922,875 69.0 780,777 66.3 899,415 70.5 1,156,779 76.5 1,161,521 76.5
Home equity lines of credit.. 192,819 14.4 181,948 15.5 155,185 12.2 129,847 8.6 125,778 8.3
Installment loans............ 9,934 0.8 12,522 1.0 14,010 1.1 17,504 1.2 21,791 1.4
Total loans.................. 1,336,899 100.0% 1,176,856 100.0% 1,275,023 100.0% 1,512,448 100.0% 1,518,768 100.0%
Less: Allowance for
loan losses................ 47,653 49,299 51,311 56,525 57,398
Net loans.................... $1,289,246 $1,127,557 $1,223,712 $1,455,923 $1,461,370
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Management's Discussion and Analysis (continued)
Taxable Equivalent
Net Interest Income (dollars in millions)
2003 $102.8
2004 $105.0
2005 $107.9
as well as overall. Management believes that TrustCo's success is predicated
on providing core banking services to a wider number of customers.
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 97.3% and 96.5% of
average total assets for 2005 and 2004, 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 a significant impact on the operations and financial
results of all financial services companies. One of the most important
interest rates used to control national economic policy is the "federal
funds" rate. This is the interest rate utilized within the banking system for
overnight borrowings for institutions with the highest credit rating. The
federal funds rate increased by 200 basis points during 2005 from 2.25% at
the beginning of the year to 4.25% by year end. For 2004 the federal funds
rate began the year at 1.00% and ended 2004 at 2.25%, an increase of 125
basis points. Therefore the federal funds rate has increased by a total of
325 basis points between January 1,2004 and December 31, 2005. Traditionally
bank deposit accounts are heavily influenced by the federal funds rate.
Consequently the cost of deposits during this time period also increased.
During this same time period the 10 year treasury bond rate did not change
consistent with the increased federal funds rate. The 10 year treasury was
4.22% at the beginning of 2005 and ended the year at 4.36%. Likewise in 2004
the 10 year treasury began the year at 4.25% and ended 2004 at 4.22%.
Therefore for the period from January 1, 2004 to December 31, 2005 the 10
year treasury increased by 11 basis points as compared to the 325 basis
points increase in the federal funds rate. The rate on the 10 year treasury
bond is a significant influence on the rates for new residential real estate
loans. These changes in interest rates have an effect on the Company relative
to the interest income on loans, securities and federal funds sold and other
short term instruments 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 securities available for sale portfolio, which is recorded at fair market
value. Generally, as interest rates increase the fair market value of the
securities available for sale portfolio will decrease. Interest rates on new
residential real estate loan originations are also influenced by the rates
established by secondary market participants
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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, 2005
After 1 Year
In 1 Year But Within After
or Less 5 Years 5 Years Total
Commercial................................................ $ 72,513 68,720 61,337 202,570
Real estate construction.................................. 22,123 -- -- 22,123
Total..................................................... 94,636 68,720 61,337 224,693
Predetermined rates....................................... 25,390 68,699 61,337 155,426
Floating rates............................................ 69,246 21 -- 69,267
Total..................................................... $ 94,636 68,720 61,337 224,693
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.
The net effect of these interest rate changes is that the yields earned on
short term investments have increased while longer term investment yields
have remained relatively flat, and deposit costs have risen.
Earning Assets
Average earning assets during 2005 were $2.77 billion, which was an
increase of $37.9 million from the prior year. This increase was primarily
the result of growth in the average balance of loans by $160.0 million offset
by a $33.7 million decrease in securities available for sale and a decrease
of $88.4 million of federal funds sold and other short term investments
between 2004 and 2005. The increase in the loan portfolio is primarily the
result of the $148.6 million increase in real estate loans. This increase in
real estate loans is a result of aggressive marketing of this product
throughout the TrustCo branch network, an effective marketing campaign and
competitive rates and closing costs.
Total average assets were $2.84 billion for 2005 and $2.83 billion for
2004.
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 increased $160.0 million during 2005. Interest income on the
loan portfolio also increased to $86.7 million in 2005 from $75.2 million in
2004. The average yield increased from 6.39% in 2004 to 6.48% in 2005.
Historically, TrustCo has distinguished itself as a principal originator
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. The average balance of residential real estate loans was $930.7
million in 2005 and $787.3 million in 2004. Income on real estate loans
increased to $58.9 million in 2005 from $52.7 million in 2004. The yield on
the portfolio decreased from 6.69% for 2004 to 6.33% in 2005 due to changes
in retail rates in the marketplace. Residential real estate loans at December
31, 2005 were $1.06 billion compared to $833.7 million at year end 2004, an
increase of $224.2 million.
The overwhelming majority of TrustCo's real estate loans are secured by
properties within the Bank's market area. During 2005, management 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 $203.4 million in 2005 increased by $8.4
million from $195.1 million in 2004. The average yield on the commercial loan
portfolio increased to 7.26% for 2005 from 6.88% in 2004. This resulted in
income on commercial loans of $14.8 million in 2005 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
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Management's Discussion and Analysis (continued)
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 2005, the average balance of home equity credit
lines was $192.8 million, an increase from $181.9 million in 2004. 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 6.11% for 2005 from 4.23% in
2004. This resulted in interest income on home equity credit lines of $11.8
million in 2005, compared to $7.7 million in 2004.
The average balance of installment loans, net of unearned income,
decreased to $9.9 million in 2005 from $12.5 million in 2004. The yield on
installment loans increased to 12.26% in 2005 from 11.63% in 2004, resulting
in interest income of $1.2 million.
During the third quarter of 2005 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 a net gain of $1.4 million and will have continuing income from
credit cards for new card originations.
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. The Company currently has no intent to sell securities with
temporary impairment. 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 $1.08 billion at year end 2005. For 2005, the average
balance of securities available for sale was $1.02 billion with an average
yield of 5.36%, compared to an average balance in 2004 of $1.06 billion with
an average yield of 5.85%. The taxable equivalent income earned on the
securities portfolio in 2004 was $61.9 million, compared to $54.9 million
earned in 2005. Yields earned on securities available for sale were down for
2005 compared to 2004 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 shorter
average life.
Increases in the year-end 2005 balance of securities available for sale
were the result of efforts to invest federal funds sold and other short term
investments along with deposit inflows into relatively higher yielding
assets. 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 2.96% for the year. Interest income was positively
affected by investing the funds in the securities available for sale
portfolio at higher interest rates. All security purchases are made in
accordance with management's long standing investment policies. Management
believes these additional investments offered the best combination of yield
and credit protection.
During 2005, TrustCo recognized approximately $6.0 million of net gains
from securities transactions, compared to approximately $13.7 million in
2004. 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.
TrustCo has not invested in any exotic investment products such as
interest rate swaps, forward
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Management's Discussion and Analysis (continued)
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, 2005 and 2004, the market value of
TrustCo's portfolio of securities available for sale carried net unrealized
losses of approximately $10.1 million and net unrealized gains of
approximately $7.4 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, 2005. Mortgage-backed
securities are reported using an estimate of average life; equity securities
are excluded.
The table, "Securities Portfolio Maturity Distribution and Yield,"
distributes the securities available for sale portfolio as of December 31,
2005, based on the final maturity of the securities. Mortgage-backed
securities are stated using 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 2005, the average
balance of federal funds sold and other short-term investments was $406.1
million, a decrease from $494.6 million in 2004. The average rate earned on
these assets was 2.96% in 2005 and 1.35% in 2004. TrustCo utilizes this
category of earning assets as a means of
SECURITIES AVAILABLE FOR SALE
(dollars in thousands) As of December 31,
2005 2004 2003
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
U.S. Treasuries and agencies................. $ 499 498 500 500 998 1,001
Government sponsored enterprises............. 756,525 743,265 521,078 517,061 862,530 862,658
States and political subdivisions............ 115,010 118,950 147,988 154,939 182,118 191,727
Mortgage-backed securities and collateralized
mortgage obligations....................... 202,007 200,963 201,579 201,623 64,718 66,322
Other........................................ 685 681 685 685 685 685
Total debt securities available for sale... 1,074,726 1,064,357 871,830 874,808 1,111,049 1,122,393
Equity securities............................ 19,418 19,719 16,741 21,181 30,880 54,533
Total securities available for sale........ $1,094,144 1,084,076 888,571 895,989 1,141,929 1,176,926
SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION
Debt securities available for sale:
(dollars in thousands) As of December 31, 2005
Based on Based on
Final Maturity Call Date
Amortized Fair Amortized Fair
Cost Value Cost Value
Within 1 year.................................................... $ 26,490 26,347 772,215 758,952
1 to 5 years..................................................... 341,367 338,942 195,854 195,510
5 to 10 years.................................................... 138,355 136,778 100,598 103,574
After 10 years................................................... 568,514 562,290 6,059 6,321
Total debt securities available for sale....................... $ 1,074,726 1,064,357 1,074,726 1,064,357
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
maintaining strong liquidity as interest rates change.
During 2005, 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 $257.2 million for 2005 compared to $642.2 million for year
end 2004. 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 2004. Management
anticipates evaluating the overall level of the federal funds sold and other
short term investments portfolio for 2006 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 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 $2.51 billion in 2005, compared to $2.47 billion in 2004, an
increase of $31.8 million. Increases were noted primarily in the demand
deposits and time account categories. The average balance of interest bearing
checking accounts decreased by $10.6 million to $318.2 million in 2005. Money
market accounts had an average balance of $157.4 million in 2004 compared to
$153.8 million in 2005. Savings account balances decreased from $809.4
million in 2004 to $783.4 million in 2005. Time deposits increased on average
by $49.1 million and demand deposits increased by $22.9 million during 2005
compared to 2004.
SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD
Debt securities available for sale:
(dollars in thousands) As of December 31, 2005
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........................ $ 499 -- -- -- 499
Fair value............................ 498 -- -- -- 498
Weighted average yield................ 1.63% -- -- -- 1.63
Government sponsored enterprises
Amortized cost........................ $15,000 159,155 109,883 472,487 756,525
Fair value............................ 14,951 157,530 108,542 462,242 743,265
Weighted average yield................ 3.48% 4.57 5.11 5.41 5.15
States and political subdivisions
Amortized cost........................ $ 285 16,988 2,635 95,102 115,010
Fair value............................ 286 16,859 2,686 99,119 118,950
Weighted average yield................ 4.50% 3.39 5.35 4.89 4.68
Mortgage-backed securities and
collateralized mortgage obligations
Amortized cost........................ $10,706 164,589 25,787 925 202,007
Fair value............................ 10,612 163,922 25,500 929 200,963
Weighted average yield................ 4.62% 4.70 4.58 6.85 4.69
Other
Amortized cost........................ $ -- 635 50 -- 685
Fair value............................ -- 631 50 -- 681
Weighted average yield................ --% 4.43 5.49 -- 4.50
Total debt securities available for sale
Amortized cost........................ $26,490 341,367 138,355 568,514 1,074,726
Fair value............................ 26,347 338,942 136,778 562,290 1,064,357
Weighted average yield................ 3.95% 4.57 5.02 5.33 5.01
Weighted average yields have not been adjusted for any tax-equivalent factor.
Government sponsored enterprises maturing after 10 years have final
maturities of less than 15 years. States and political subdivisions maturing
after 10 years generally have final maturities of less than 20 years.
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS
(dollars in thousands) 2005 2004 2003
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........ $1,336,899 86,669 6.48% 1,176,856 75,232 6.39% 1,275,023 87,669 6.88%
Securities available for sale:
U.S. Treasuries and agencies....... 1,059 28 2.64 634 11 1.74 2,930 209 7.13
Government sponsored enterprises... 667,967 34,478 5.16 713,969 39,785 5.57 503,678 25,780 5.12
States and political subdivisions.. 127,704 9,658 7.56 168,723 13,302 7.88 203,718 16,131 7.92
Mortgage-backed securities and
collateralized mortgage
obligations...................... 210,720 9,738 4.62 149,298 7,032 4.71 60,248 3,618 6.01
Other.............................. 16,734 1,025 6.12 25,221 1,744 6.92 63,331 4,430 7.00
Total securities available
for sale......................... 1,024,184 54,927 5.36 1,057,845 61,874 5.85 833,905 50,168 6.01
Federal funds sold and other
short-term investments........... 406,131 12,009 2.96 494,579 6,675 1.35 497,364 5,654 1.14
Total interest earning assets...... 2,767,214 153,605 5.55% 2,729,280 143,781 5.27% 2,606,292 143,491 5.50%
Allowance for loan losses............ (47,653) (49,299) (51,311)
Cash and noninterest earning assets.. 125,413 148,214 155,194
Total assets....................... $2,844,974 2,828,195 2,710,175
Liabilities and shareholders' equity
Interest bearing deposits:
Interest bearing checking accounts. $ 318,167 1,376 0.43% 328,804 1,586 0.48% 320,179 1,678 0.52%
Savings............................ 783,410 6,769 0.86 809,438 7,968 0.98 759,308 8,795 1.16
Time deposits and money markets.... 1,169,018 35,481 3.04 1,123,474 28,223 2.51 1,072,078 29,370 2.74
Total interest bearing deposits.... 2,270,595 43,626 1.92 2,261,716 37,777 1.67 2,151,565 39,843 1.85
Short-term borrowings................ 83,381 2,026 2.43 100,855 972 0.96 107,799 877 0.81
Long-term debt....................... 99 5 5.22 151 8 5.40 326 19 5.80
Total interest bearing liabilities. 2,354,075 45,657 1.94% 2,362,722 38,757 1.64% 2,259,690 40,739 1.80%
Demand deposits...................... 235,372 212,463 189,262
Other liabilities.................... 28,956 29,291 36,178
Shareholders' equity................. 226,571 223,719 225,045
Total liabilities and
shareholders' equity............. $2,844,974 2,828,195 2,710,175
Net interest income.................... 107,948 105,024 102,752
Net interest spread.................... 3.61% 3.63% 3.70%
Net interest margin
(net interest income
to total interest earning assets).... 3.90 3.85 3.94
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 2005, 2004, and 2003. 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 $0.3 million, $11.5 million, and $22.7 million in
2005, 2004, and 2003, 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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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
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 to the increase in deposits is the
overall increase in the rates paid on deposit accounts. As noted previously
the largest growth in deposits is in the category of time deposits which
carries the highest cost in terms of interest rates while at the same time
the Company experienced a deposit outflow in savings accounts which is a
relatively low cost source of deposits. The increasing rates on time deposits
is attracting customers away from other investment opportunitites. TrustCo,
with its expanding branch network, is well positioned to attract these new
deposits.
The overall cost of interest bearing deposits was 1.92% in 2005 compared
to 1.67% in 2004. The increase in the average balance of interest bearing
deposits, coupled with a 25 basis point increase in the average cost,
resulted in an increase of approximately $5.9 million in interest expense to
$43.6 million in 2005.
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.
MATURITY OF TIME DEPOSITS
OVER $100 THOUSAND
(dollars in thousands) As of December 31, 2005
Under 3 months.............................. $ 22,981
3 to 6 months .............................. 10,909
6 to 12 months ............................. 55,891
Over 12 months.............................. 135,830
Total....................................... $225,611
Other funding sources: The Company had $83.4 million of average short-term
borrowings outstanding during 2005 compared to $100.9 million in 2004. The
average cost of short-term borrowings was 2.43% in 2005 and 0.96% in 2004.
This resulted in interest expense of approximately $2.0 million in 2005. The
increase in the rate paid on these funds is a result of the increase in the
target federal funds rate during 2004 and 2005.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable
financial organization, TrustCo strives to maintain strong capital ratios and
to qualify 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
MIX OF AVERAGE SOURCES OF FUNDING
(dollars in thousands) 2005 2004 Components of
vs. vs. Total Funding
2005 2004 2003 2004 2003 2005 2004 2003
Demand deposits........................ $ 235,372 212,463 189,262 22,909 23,201 9.1% 8.3 7.7
Retail deposits:
Savings.............................. 783,410 809,438 759,308 (26,028) 50,130 30.3 31.4 31.0
Time deposits under $100 thousand.... 813,751 789,211 767,505 24,540 21,706 31.4 30.6 31.3
Interest bearing checking accounts... 318,167 328,804 320,179 (10,637) 8,625 12.3 12.8 13.1
Money market deposits................ 153,838 157,418 149,520 (3,580) 7,898 5.9 6.1 6.1
Total retail deposits................ 2,069,166 2,084,871 1,996,512 (15,705) 88,359 79.9 80.9 81.5
Total core deposits.................. 2,304,538 2,297,334 2,185,774 7,204 111,560 89.0 89.2 89.2
Time deposits over $100 thousand....... 201,429 176,845 155,053 24,584 21,792 7.8 6.9 6.4
Short-term borrowings.................. 83,381 100,855 107,799 (17,474) (6,944) 3.2 3.9 4.4
Long-term debt......................... 99 151 326 (52) (175) -- -- --
Total purchased liabilities.......... 284,909 277,851 263,178 7,058 14,673 11.0 10.8 10.8
Total sources of funding............. $2,589,447 2,575,185 2,448,952 14,262 126,233 100.0% 100.0 100.0
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
AVERAGE DEPOSITS BY TYPE OF DEPOSITOR
(dollars in thousands) Years Ended December 31,
2005 2004 2003 2002 2001
Individuals, partnerships and corporations............... $2,485,922 2,453,843 2,318,424 2,150,986 1,947,700
U.S. Government.......................................... 72 70 73 35 83
States and political subdivisions........................ 4,875 5,539 9,802 48,049 64,811
Other (certified and official checks, etc.).............. 15,098 14,727 12,528 13,370 15,056
Total average deposits by type of depositor............ $2,505,967 2,474,179 2,340,827 2,212,440 2,027,650
the view of management, but not excessive. This philosophy has led to a
dividend payout ratio of 77.5% of net income in 2005, 78.8% of net income in
2004, and 84.0% for 2003. 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 16.58% of risk-adjusted assets at December
31, 2005, and 17.09% of risk-adjusted assets at December 31, 2004. Tier 1
capital to average assets at December 31, 2005 was 8.04%, as compared to
7.74% at year end 2004.
At December 31, 2005 and 2004, TrustCo and Trustco Bank met their
respective regulators' definition of a well capitalized institution.
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
VOLUME AND YIELD ANALYSIS
(dollars in thousands) 2005 vs. 2004 2004 vs. 2003
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........... $ 5,334 (941) 6,275 1,021 (32) 1,053
Securities available for sale:
Taxable........................... (3,302) (153) (3,149) 14,535 12,791 1,744
Tax-exempt........................ (3,665) (3,123) (522) (2,829) (2,756) (73)
Total securities available
for sale........................ (6,947) (3,276) (3,671) 11,706 10,035 1,671
Loans............................... 11,437 9,596 1,841 (12,437) (7,553) (4,884)
Total interest income............. 9,824 5,379 4,445 290 2,450 (2,160)
Interest expense:
Interest bearing checking accounts.. (210) (50) (160) (92) 55 (147)
Savings............................. (1,199) (249) (950) (827) 640 (1,467)
Time deposits
and money markets................ 7,258 1,376 5,882 (1,147) 1,654 (2,801)
Short-term borrowings............... 1,054 (134) 1,188 95 (49) 144
Long-term debt...................... (3) (3) -- (11) (10) (1)
Total interest expense............ 6,900 940 5,960 (1,982) 2,290 (4,272)
Net interest income (TE).......... $ 2,924 4,439 (1,515) 2,272 160 2,112
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.
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
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 2005 and 2004 totaled $3.2 million.
Nonperforming loans as a percentage of the total loan portfolio were 0.22% in
2005 and 0.26% in 2004.
Included in nonperforming loans at year end 2005 were $1.7 million of
residential mortgage loans in nonaccrual status as compared to $557 thousand
at year end 2004. There were no loans past due three payments or more and
still accruing interest at year end 2004 and $35 thousand at year end 2005.
Restructured loans at year end 2004 were $2.6 million, compared to $1.5
million at year end 2005. 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, 2005 are
residential real estate or retail consumer loans. A significant portion of
the charge-offs for 2005 and 2004 occurred in the residential real estate and
retail consumer loan portfolios. During 2005, gross charge-offs of these
types of loans were $1.6 million (which represented 63% of total gross
charge-offs). In 2004, charge-offs for these types of loans were $5.5
million. The reduction in gross charge offs in the residential real estate
portfolio between 2004 and 2005 reflects the economic improvements in this
area and the positive effect of prior collection actions. Since 2000, there
has been a shift of charge-offs 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
territory, and
o the relative slow growth in real estate values in many of TrustCo's
lending areas that has occurred since the middle of the 1990's,
thereby limiting the collateral value that supports the real estate
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
continued 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 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, 2005, 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.
At year end 2005 and 2004, there were $1.5 and $2.6 million,
respectively, of impaired loans. The average balances of impaired loans were
$1.9 million during 2005 and $2.9 million during 2004. The Company recognized
approximately $201 thousand of interest income on these loans in 2005 and
$314 thousand in 2004.
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.
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
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 loan charge-offs, and recoveries,
Allowance for
Loan Losses (dollars in millions)
2003 $48.7
2004 $49.4
2005 $45.4
o the change in the loan portfolio and the implication that it has in
relation to the economic climate in the Bank's business territory,
o 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
o 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 two years have
been improving. As noted previously, bankruptcies in the Capital District
area have decreased relative to state wide trends recently and general
housing prices have continued to increase. These positive trends have helped
marginal credits better manage their debt load. Because of continued
improvements in nearly all of the indicators of the Company's credit quality
and management's assessment of economic conditions and risk, combined with
the significant increase in the level of net recoveries from $195 thousand in
2004 to $2.3 million in 2005, as well as the impact of the sale of the credit
card portfolio in 2005, a negative provision of $6.3 million was recognized
in 2005.
Management continues to monitor these trends in determining future
provisions or credits for loan losses in relation to loan charge offs,
recoveries and the level and trends of nonperforming loans.
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 2005
and 2004 were $2.5 million and $5.8 million, respectively. Recoveries were
$4.7 million in 2005 and $6.0 million in 2004. The provision recorded in 2004
was $450,000 compared to a recovery of this provision of $6.3 million in
2005. 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 $3.3 million
between 2004 and 2005 while at the same time the level of nonperforming loans
remained relatively constant between the two years.
Market Risk
The Company's principal exposure to market risk is with respect to
interest rate risk. Interest rate risk
NONPERFORMING ASSETS
(dollars in thousands) As of December 31,
2005 2004 2003 2002 2001
Loans in nonaccrual status........................... $ 1,662 557 -- 615 1,090
Loans contractually past due 3 payments or more
and still accruing interest........................ 35 -- -- -- 801
Restructured loans................................... 1,518 2,610 3,260 4,303 5,159
Total nonperforming loans............................ 3,215 3,167 3,260 4,918 7,050
Foreclosed real estate............................... 23 -- -- 86 603
Total nonperforming assets........................... $ 3,238 3,167 3,260 5,004 7,653
Allowance for loan losses............................ $45,377 49,384 48,739 52,558 57,203
Allowance coverage of nonperforming loans............ 14.11x 15.59 14.95 10.69 8.11
Nonperforming loans as a % of total loans............ 0.22% 0.26 0.28 0.35 0.45
Nonperforming assets as a % of total assets.......... 0.11 0.11 0.12 0.19 0.30
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
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 market risk for the Company.
Interest rate risk management focuses on maintaining adequate 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, 2005 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, 2005. 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 and 200 bp.
Estimated Percentage of
Fair value of Capital to
As of December 31, 2005 Fair value of Assets
+200 BP 13.58%
+100 BP 14.85
Current rates 16.22
- -100 BP 15.09
- -200 BP 13.37
At December 31, 2005 the book value of capital (excluding the market
adjustment on securities available for sale) to assets was 8.04%.
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 16.22% of assets
whereas the current book value of capital to assets is 8.04% at December 31,
2005. The significant difference between these two capital ratios reflects
the impact that a fair value calculation can have on the capital ratios of a
company. The fair value of capital calculations take into consideration the
fair value of deposits, including those deposits considered core deposits,
along with the fair value of assets such as the loan portfolio.
A secondary method to identify and manage the interest rate risk profile
is the static gap analysis. Interest sensitivity gap analysis measures the
difference between the assets and liabilities repricing or maturing within
specific time periods. An asset-sensitive position indicates that there are
more rate-sensitive assets than rate-sensitive liabilities repricing or
maturing within specific time periods, which would generally imply a
favorable impact on net interest income in periods of rising interest rates
and a negative impact in periods of falling rates. A liability-sensitive
position would generally imply a negative impact on net interest income in
periods of rising rates and a positive impact in periods of falling rates.
Static gap analysis has limitations because it cannot measure precisely
the effect of interest rate movements, and competitive pressures on the
repricing and maturity characteristics of interest-earning assets and
interest-bearing liabilities. In addition, a significant portion of the
interest sensitive assets are fixed rate securities with relatively long
lives whereas the interest-bearing liabilities are not subject to these same
limitations. As a result, certain assets and liabilities may in fact reprice
at different times and at different volumes than the static gap analysis
would indicate.
The Company recognizes the relatively long-term nature of the fixed rate
residential loan portfolio. To
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands) 2005 2004 2003 2002 2001
Amount of loans outstanding at end of year
(less unearned income).......................... $1,470,719 1,240,065 1,162,266 1,422,301 1,556,686
Average loans outstanding during year
(less average unearned income).................. 1,336,899 1,176,856 1,275,023 1,512,448 1,518,768
Balance of allowance at beginning of year......... 49,384 48,739 52,558 57,203 56,298
Loans charged off:
Commercial...................................... 656 335 432 997 1,084
Real estate..................................... 1,561 5,054 8,651 6,648 5,383
Installment..................................... 247 408 515 705 561
Total......................................... 2,464 5,797 9,598 8,350 7,028
Recoveries of loans previously charged off:
Commercial...................................... 440 446 1,393 803 1,664
Real estate..................................... 4,121 5,334 3,003 1,285 1,106
Installment..................................... 156 212 183 197 223
Total......................................... 4,717 5,992 4,579 2,285 2,993
Net loans charged off (recovered)................. (2,253) (195) 5,019 6,065 4,035
Provision (credit) for loan losses ............... (6,260) 450 1,200 1,420 4,940
Balance of allowance at end of year............... $ 45,377 49,384 48,739 52,558 57,203
Net charge offs (recoveries)
as a percent of average
loans outstanding during year
(less average unearned income).................. (.17)% (.02) .39 .40 .27
Allowance as a percent of loans outstanding
at end of year.................................. 3.09 3.98 4.17 3.70 3.67
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, 2005. 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 virtually all of the time periods
presented. The effect 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.
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
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
INTEREST RATE SENSITIVITY
(dollars in thousands) At December 31, 2005
Repricing in:
0-90 91-365 1-5 Over 5 Rate
days days years years Insensitive Total
Total assets........................ $617,305 260,134 923,273 998,401 113,646 2,912,759
Cumulative total assets............. $617,305 877,439 1,800,712 2,799,113 2,912,759
Total liabilities
and shareholders' equity........... $274,633 533,844 1,273,199 497,115 333,968 2,912,759
Cumulative total liabilities
and shareholders' equity........... $274,633 808,477 2,081,676 2,578,791 2,912,759
Cumulative interest
sensitivity gap.................... $342,672 68,962 (280,964) 220,322
Cumulative gap as a % of interest
earning assets for the period...... 55.51% 7.86 (15.60) 7.87
Cumulative interest sensitive
assets to liabilities.............. 224.77 108.53 86.50 108.54
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. Average core deposits
(total deposits less time deposits greater than $100 thousand) amounted to
$2.30 billion in 2005 and 2004. 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 2005, the average balance of
purchased liabilities was $284.9 million, compared with $277.9 million in
2004.
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, 2005 and 2004,
commitments to extend credit in the form of loans, including unused lines of
credit, amounted to $306.7 million and $313.3 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 $2.8 million and $3.6 million
at December 31, 2005 and 2004, 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, 2005 and
2004 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.
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
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 $27.6 million in 2005, $32.0 million in 2004 and $29.6 million in
2003. Included in the 2005 results are $6.0 million of net securities gains
compared with net gains of approximately $13.7 million in 2004 and $9.8
million in 2003. Excluding securities transactions, noninterest income was
$21.6 million in 2005, and $18.3 million in 2004 and $19.8 million in 2003.
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 totalled $6.0
million in 2005, $5.9 million in 2004, and $6.0 million in 2003. 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, 2005
and 2004 assets under management by the Trust Department were approximately
$886.5 million and $992.3 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.
Included in the category of other noninterest income are certain
non-recurring transactions that occurred in 2005 as follows:
o the sale of the former operations center in Schenectady at a net
gain of approximately $600 thousand,
o the sale of the credit card portfolio for a net gain of
approximately $1.4 million and
o the sale of the Canajoharie Branch for a net gain of approximately
$600 thousand.
These items are not expected to recur in 2006.
Noninterest expense: Noninterest expense was $48.6 million in 2005, compared
with $48.2 million in 2004 and $48.5 million in 2003. 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
38.3% in 2005, 38.8% in 2004 and 38.3% in 2003. Excluded from the efficiency
ratio calculation was $3.2 million, $248 thousand, and $255 thousand of
non-recurring income and $812 thousand, $1.2 million, and $1.9 million of
non-recurring expenses for 2005, 2004 and 2003, respectively.
Salaries and employee benefits are the most significant component of
noninterest expense. For 2005, these expenses amounted to $20.6 million,
compared with $20.7 million in 2004, and $20.4 million in 2003.
Net occupancy expense increased $707 thousand between 2004 and 2005 due
primarily to new branch openings during 2004 and 2005. Equipment expense,
increased $438 thousand for 2005 to $2.7 million as compared to $2.3 million
in 2004. The increase in net occupancy expense is the result of new equipment
purchased for the branch expansion program and upgrades to the ATM equipment.
Professional services expense decreased to $3.4 million in 2005 compared
to $3.7 million in 2004 and $3.0 million in 2003. Decrease in professional
service expense is due primarily to contract negotiations in 2004 related to
computer services.
Outsourced service expense was $4.1 million in 2005 compared to $4.3
million in 2004. The decrease is the result of new processing contracts in
2004.
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 2005, TrustCo recognized income tax expense of $30.8 million, as
compared to $26.8 million in 2004 and $23.3 million in 2003. 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 $30.2 million and $33.1 million
at December 31, 2005 and 2004, respectively, will be realized.
NONINTEREST INCOME
(dollars in thousands) For the year ended December 31, 2005 vs. 2004
2005 2004 2003 Amount Percent
Trust department income............................. $ 6,009 5,869 6,046 140 2.4%
Fees for services to customers...................... 10,529 10,486 10,896 43 0.4
Net gains on securities transactions................ 5,999 13,712 9,807 (7,713) (56.3)
Other............................................... 5,110 1,898 2,900 3,212 169.2
Total noninterest income.......................... $27,647 31,965 29,649 (4,318) (13.5)%
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
NONINTEREST EXPENSE
(dollars in thousands) For the year ended December 31, 2005 vs. 2004
2005 2004 2003 Amount Percent
Salaries and employee benefits...................... $20,622 20,697 20,449 (75) (0.4)%
Net occupancy expense............................... 7,308 6,601 6,265 707 10.7
Equipment expense................................... 2,721 2,283 3,078 438 19.2
Professional services............................... 3,372 3,685 3.040 (313) (8.5)
Outsourced services................................. 4,093 4,348 5,601 (255) (5.9)
Other real estate income, net....................... (617) (739) (457) 122 (16.5)
Other............................................... 11,091 11,290 10,510 (199) (1.8)
Total noninterest expense......................... $48,590 48,165 48,486 425 0.9%
Contractual Obligations
The Company is contractually obligated to make the following payments on
long-term debt and leases as of December 31, 2005:
(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........ $ 28 59 -- -- 87
Operating leases.... 2,534 5,473 5,482 31,879 45,368
Total............... $ 2,562 5,532 5,482 31,879 45,455
In addition, the Company is contractually obligated to pay data processing
vendors approximately $4 million to $5 million per year through 2013.
Impact of Inflation and Changing Prices
The consolidated financial statements for the years ended 2005, 2004 and
2003 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.
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.
Stock Options
In the fourth quarter of 2005 the Board of Director's of the Company
approved the accelerated vesting of all outstanding unvested stock options to
purchase shares of common stock. These options were previously awarded to
executive officers and employees under the 1995 and 2004 Stock Option Plans.
By accelerating the vesting of these options the Company estimates that
approximately $1.3 million of future compensation expense, net of tax, will
be eliminated in anticipation of the adoption of FASB Statement 123R which
the Company will adopt as of January 1, 2006.
Options to purchase 882,100 shares of the Company's common stock, which
would otherwise have vested from time to time over the next four years,
became immediately exercisable as a result of this action. The number of
shares and the exercise prices of the options subject to the acceleration
remained unchanged. Also, all of the other terms of the options remain the
same. The Company recorded $127,000 of expense related to this acceleration
based upon an analysis performed in accordance with APB Opinion 25.
The accelerated options included 749,500 options held by executive
officers and 132,600 options held by other employees. Based upon the
Company's closing stock price of $12.76 price per share on the date of
accelerated vesting certain of the options were below and other above the
closing market price as follows:
Efficiency Ratio
2003 38.3%
2004 38.8%
2005 38.3%
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
Grant Accelerated Exercise
Date Vesting Shares Price
2005 411,200 $12.15
2004 394,500 $13.55
2002 76,400 $11.83
-------
882,100
The decision to accelerate the vesting of these options was made primarily
to reduce non-cash compensation expense that would have been recorded in its
income statement in future periods upon the adoption of FASB Statement No.
123R (Share-Based Payment) in January 2006.
Impact of New Accounting Standards
SFAS No. 123R
In 2004, the FASB issued a statement to revise Statement of Financial
Accounting Standards ("SFAS") No. 123 and SFAS No. 95, "Share-Based Payment,"
that addresses the accounting for share-based payment transactions in which
an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. The Statement will eliminate the ability
to account for share-based compensation transactions using APB Opinion No.
25, "Accounting for Stock Issued to Employees," and will require instead that
such transactions be accounted for using a fair-value-based method. The FASB
had indicated that the Statement would be effective for any interim or annual
period beginning after June 15, 2005, meaning that an entity should apply the
statement to all employee awards of share-based payment granted, modified, or
settled in any interim or annual period beginning after June 15, 2005. On
April 14, 2005, the Securities and Exchange Commission (SEC) announced the
adoption of a new rule that amends the compliance dates for SFAS No. 123R.
The SEC's new rule allows companies to implement SFAS No. 123R at the
beginning of their next fiscal year, instead of the next reporting period,
that begins after June 15, 2005. The Company will adopt the provisions of
SFAS No. 123R using the modified prospective method of transition beginning
January 1, 2006. Under this method, SFAS No. 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 period 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 SFAS No. 123. Based
on stock-based compensation plans outstanding as of December 31, 2005,
management does not expect that the impact of SFAS No. 123R will be material
to the Company's consolidated financial condition or results of operations.
See Note 1, Stock Option Plans, for pro-forma earnings per share for
stock-based compensation and information on the acceleration of vesting
periods that occurred in 2005.
EITF Issue No. 03-1
The Emerging Issues Task Force ("EITF") reached consensus in March 2004
regarding guidance provided in EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments.
The purpose of EITF Issue No. 03-1 is to determine the meaning of
other-than-temporary impairment and its application to certain securities,
including debt and equity securities that are within the scope of SFAS No.
115. Guidance in EITF Issue No. 03-1 should be used to determine when an
investment is considered impaired, whether that impairment is
other-than-temporary, and the measurement of an impaired loss. This guidance
also includes accounting considerations for securities subsequent to the
recognition of an other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary. Portions of this guidance were effective for reporting
periods beginning after June 15, 2004 and other portions will be deliberated
further. This delay does not suspend the current requirement to recognize
other-than-temporary impairments as required by existing authoritative
literature. The Company has not identified any other-than-temporary
impairment in its securities portfolio as of December 31, 2005. Subsequent to
the FASB final deliberations, the Company will evaluate the potential impact
on its process of identifying other-than-temporary declines in value of its
debt and equity securities. Management does not believe that the provisions,
as currently written, will have a material impact on the results of future
operations.
SFAS No. 150
In 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No.
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity. SFAS
No. 150 has not had a significant impact on the Company's consolidated
financial condition or results of operations.
SFAS No. 154
In 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error
Corrections." This statement replaces Accounting Principles Board Opinion No.
20 "Accounting Changes", and FASB Statement No. 3, "Reporting Accounting
Changes in Interim Financial Statements" and changes the requirements for the
accounting for and reporting of
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TRUSTCO Bank Corp NY
Management's Discussion and Analysis (continued)
SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
(dollars in thousands, except per share data)
2005 2004
Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
Income statement:
Interest income........ $34,885 37,016 38,433 39,840 150,174 34,409 34,105 34,951 35,320 138,786
Interest expense....... 10,025 10,308 11,501 13,823 45,657 9,346 9,439 9,797 10,174 38,757
Net interest income ... 24,860 26,708 26,932 26,017 104,517 25,063 24,666 25,154 25,146 100,029
Provision (credit) for
loan losses.......... (1,500) (1,580) (1,680) (1,500) (6,260) 150 150 150 -- 450
Net interest income
after provision for
loan losses.......... 26,360 28,288 28,612 27,517 110,777 24,913 24,516 25,004 25,146 99,579
Noninterest income..... 8,138 6,900 7,102 5,507 27,647 8,721 8,375 8,990 5,879 31,965
Noninterest expense.... 11,730 12,223 11,481 13,156 48,590 12,508 11,699 11,483 12,475 48,165
Income before
income taxes......... 22,768 22,965 24,233 19,868 89,834 21,126 21,192 22,511 18,550 83,379
Income tax expense..... 7,861 7,980 8,514 6,490 30,845 6,993 6,821 7,298 5,727 26,839
Net income............. $14,907 14,985 15,719 13,378 58,989 14,133 14,371 15,213 12,823 56,540
Per share data:
Basic earnings......... $ .199 .200 .210 .179 .787 .191 .193 .205 .172 .761
Diluted earnings....... .197 .199 .208 .178 .782 .188 .191 .203 .171 .753
Cash dividends
declared............. .150 .150 .150 .160 .610 .150 .150 .150 .150 .600
a change in accounting principle. SFAS No. 154 shall be effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Therefore, the Company will adopt this statement, as
applicable, on January 1, 2006.
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 2005 Annual
Report on 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.
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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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,
2005 2004 2003 2002 2001
Statement of income data:
Interest income................................. $ 150,174 138,786 137,130 153,735 168,660
Interest expense................................ 45,657 38,757 40,739 58,020 72,763
Net interest income............................. 104,517 100,029 96,391 95,715 95,897
Provision (credit) for loan losses.............. (6,260) 450 1,200 1,420 4,940
Net interest income after provision
for loan losses............................... 110,777 99,579 95,191 94,295 90,957
Noninterest income.............................. 21,648 18,253 19,842 19,799 21,285
Net gain on securities transactions............. 5,999 13,712 9,807 7,499 4,517
Noninterest expense............................. 48,590 48,165 48,486 55,326 51,313
Income before income taxes...................... 89,834 83,379 76,354 66,267 65,446
Income taxes.................................... 30,845 26,839 23,323 17,023 19,936
Net income...................................... $ 58,989 56,540 53,031 49,244 45,510
Share data:
Average equivalent diluted shares
(in thousands)................................ 75,397 75,081 75,306 74,618 73,673
Tangible book value............................. $ 3.05 3.02 3.06 3.16 2.88
Cash dividends.................................. .610 .600 .600 .600 .541
Basic earnings.................................. .787 .761 .713 .678 .640
Diluted earnings................................ .782 .753 .704 .660 .618
Financial:
Return on average assets........................ 2.07% 2.00 1.96 1.83 1.83
Return on average shareholders' equity ......... 26.07 26.65 26.21 26.08 25.31
Cash dividend payout ratio...................... 77.46 78.83 83.98 88.60 84.58
Tier 1 capital to average assets
(leverage ratio).............................. 8.04 7.74 7.53 7.78 7.72
Tier 1 capital as a % of total risk adjusted
assets........................................ 16.58 17.09 16.54 15.48 13.58
Total capital as a % of total risk adjusted
assets........................................ 17.85 18.37 17.82 16.77 14.86
Efficiency ratio................................ 38.29 38.78 38.33 36.66 38.96
Net interest margin............................. 3.90% 3.85 3.94 4.00 4.31
Average balances:
Total assets.................................... $2,844,974 2,828,195 2,710,175 2,693,505 2,488,169
Earning assets.................................. 2,767,214 2,729,280 2,606,292 2,579,379 2,376,359
Loans, net...................................... 1,336,899 1,176,856 1,275,023 1,512,448 1,518,768
Allowance for loan losses....................... (47,653) (49,299) (51,311) (56,525) (57,398)
Securities available for sale................... 1,024,184 1,057,845 833,905 568,056 581,669
Deposits........................................ 2,505,967 2,474,179 2,340,827 2,212,440 2,027,650
Short-term borrowings........................... 83,381 100,855 107,799 210,363 205,821
Long-term debt.................................. 99 151 326 510 758
Shareholders' equity............................ 226,571 223,719 225,045 214,963 202,848
25
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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 and other short term investments.
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 and other non-recurring income
items). 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.
Government Sponsored Enterprises (GSE)
Government Sponsored Enterprises are corporations sponsored by the United
States government and include the Federal Home Loan Bank (FHLB), the Federal
Home Loan Mortgage Corporation (FHLMC or Freddie Mac), and the Federal
National Mortgage Association (FNMA or Fannie Mae). Obligations of these
enterprises are not guaranteed by the full faith and credit of the United
States.
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, 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.
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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. TrustCo's
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management has completed an assessment of TrustCo Bank Corp NY's internal
control over financial reporting as of December 31, 2005. In making this
assessment, we used the criteria set forth by the "Internal Control --
Integrated Framework" promulgated by the Committee of Sponsoring
Organizations of the Treadway Commission, commonly referred to as the "COSO"
criteria. Based on our assessment, we believe that, as of December 31, 2005,
the Company maintained effective internal control over financial reporting.
Management's assessment of the effectiveness of TrustCo Bank Corp NY's
internal control over financial reporting and the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005
has been audited by KPMG LLP, the Company's independent registered public
accounting firm, as stated in their attestation report which is included
herein.
/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
February 24, 2006
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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, 2005, 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, 2005,
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, 2005, 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, 2005
and 2004, 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, 2005, and our report dated February 24, 2006,
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Albany, New York
February 24, 2006
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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, 2005 and 2004, 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, 2005. 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, 2005 and 2004, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, 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, 2005,
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 February 24, 2006, 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
February 24, 2006
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TRUSTCO Bank Corp NY
Consolidated Statements of Income
(dollars in thousands, except per share data) Years Ended December 31,
2005 2004 2003
Interest income:
Interest and fees on loans...................................................... $ 86,636 75,194 87,614
Interest and dividends on:
U.S. Treasuries and agencies.................................................. 34,506 39,795 25,985
States and political subdivisions............................................. 6,301 8,666 10,718
Mortgage-backed securities and collateralized mortgage obligations............ 9,738 7,032 3,618
Other......................................................................... 984 1,424 3,541
Interest on federal funds sold and other short-term investments................. 12,009 6,675 5,654
Total interest income....................................................... 150,174 138,786 137,130
Interest expense:
Interest on deposits............................................................ 43,626 37,777 39,843
Interest on short-term borrowings............................................... 2,026 972 877
Interest on long-term debt.................................................... 5 8 19
Total interest expense...................................................... 45,657 38,757 40,739
Net interest income......................................................... 104,517 100,029 96,391
Provision (credit) for loan losses................................................ (6,260) 450 1,200
Net interest income after provision for loan losses......................... 110,777 99,579 95,191
Noninterest income:
Trust department income......................................................... 6,009 5,869 6,046
Fees for services to customers.................................................. 10,529 10,486 10,896
Net gain on securities transactions............................................. 5,999 13,712 9,807
Other........................................................................... 5,110 1,898 2,900
Total noninterest income.................................................... 27,647 31,965 29,649
Noninterest expense:
Salaries and employee benefits.................................................. 20,622 20,697 20,449
Net occupancy expense........................................................... 7,308 6,601 6,265
Equipment expense............................................................... 2,721 2,283 3,078
Professional services........................................................... 3,372 3,685 3,040
Outsourced services............................................................. 4,093 4,348 5,601
Other real estate income, net................................................... (617) (739) (457)
Other........................................................................... 11,091 11,290 10,510
Total noninterest expense................................................... 48,590 48,165 48,486
Income before income taxes ....................................................... 89,834 83,379 76,354
Income taxes...................................................................... 30,845 26,839 23,323
Net income........................................................................ $ 58,989 56,540 53,031
Earnings per share:
Basic........................................................................... $ .787 .761 .713
Diluted......................................................................... .782 .753 .704
See accompanying notes to consolidated financial statements.
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TRUSTCO Bank Corp NY
Consolidated Statements of Condition
(dollars in thousands, except share data) As of December 31,
2005 2004
ASSETS
Cash and due from banks................................................................. $ 55,667 54,222
Federal funds sold and other short-term investments..................................... 257,196 642,208
Total cash and cash equivalents................................................... 312,863 696,430
Securities available for sale........................................................... 1,084,076 895,989
Loans................................................................................... 1,470,719 1,240,065
Less: Allowance for loan losses....................................................... 45,377 49,384
Net loans....................................................................... 1,425,342 1,190,681
Bank premises and equipment............................................................. 21,734 22,479
Other assets............................................................................ 68,744 58,255
Total assets...................................................................... $2,912,759 2,863,834
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand................................................................................ $ 251,012 237,423
Savings .............................................................................. 725,336 820,593
Interest bearing checking accounts.................................................... 309,668 336,538
Money market deposit accounts......................................................... 190,560 155,299
Certificates of deposit (in denominations of $100,000 or more)........................ 225,611 178,021
Other time accounts................................................................... 860,300 799,228
Total deposits.................................................................... 2,562,487 2,527,102
Short-term borrowings................................................................... 87,935 77,979
Long-term debt.......................................................................... 87 114
Accrued expenses and other liabilities.................................................. 33,589 32,807
Total liabilities................................................................. 2,684,098 2,638,002
Shareholders' equity:
Capital stock; $1 par value. 100,000,000 shares authorized, 82,119,360 and
81,727,754 shares issued at December 31, 2005 and 2004, respectively................ 82,120 81,728
Surplus............................................................................... 117,770 114,218
Undivided profits..................................................................... 103,315 90,018
Accumulated other comprehensive income/(loss):
Net unrealized (loss)/gain on securities available for sale, net of tax............. (6,054) 4,459
Treasury stock; 7,343,783 and 7,187,784 shares, at cost, at December 31, 2005
and 2004, respectively.............................................................. (68,490) (64,591)
Total shareholders' equity........................................................ 228,661 225,832
Total liabilities and shareholders' equity........................................ $2,912,759 2,863,834
See accompanying notes to consolidated financial statements.
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TRUSTCO Bank Corp NY
Consolidated Statements of Changes in Shareholders' Equity
(dollars in thousands, except per share data) Three Years Ended December 31, 2005
Accumulated
Other Compre-
Capital Undivided Comprehensive hensive Treasury
Stock Surplus Profits Income (Loss) Income Stock Total
Beginning balance, January 1, 2003 $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 loss, net of tax:
Unrealized net holding loss
arising during the year,
net of tax (pre-tax loss $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 of $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
Comprehensive income
Net income -- 2005...................... -- -- 58,989 -- 58,989 -- 58,989
Other comprehensive loss, net of tax:
Unrealized net holding loss
arising during the year,
net of tax (pre-tax loss $11,487)..... -- -- -- -- (6,905) -- --
Reclassification adjustment
for net gain realized
in net income during the year
(pre-tax gain $5,999)................. -- -- -- -- (3,608) -- --
Other comprehensive loss................ -- -- -- (10,513) (10,513) -- (10,513)
Comprehensive income...................... 48,476
Cash dividend declared, $.610 per share... -- -- (45,692) -- -- (45,692)
Stock options exercised and
related tax benefits.................... 392 3,426 -- -- -- 3,818
Non-cash stock based compensation
expense net of tax...................... -- 77 -- -- -- 77
Treasury stock purchased
(1,172,366 shares)...................... -- -- -- -- (14,846) (14,846)
Sale of treasury stock
(1,016,367 shares)...................... -- 49 -- -- 10,947 10,996
Ending balance, December 31, 2005......... $82,120 117,770 103,315 (6,054) (68,490) 228,661
See accompanying notes to consolidated financial statements.
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TRUSTCO Bank Corp NY
Consolidated Statements of Cash Flows
(dollars in thousands) Years Ended December 31,
2005 2004 2003
Increase/(decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income................................................................... $ 58,989 56,540 53,031
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................................... 2,690 1,898 2,492
Net gain on sales of real estate owned.................................. (690) (893) (522)
Net (gain)/loss on sales of bank premises and equipment................. (665) 55 (263)
(Credit)/provision for loan losses...................................... (6,260) 450 1,200
Deferred tax expense/(benefit).......................................... 2,874 3,106 (2,645)
Net gain on securities transactions..................................... (5,999) (13,712) (9,807)
Decrease/(increase) in taxes receivable................................. 2,760 (2,424) 3,356
(Increase)/decrease in interest receivable.............................. (3,761) 2,864 (2,837)
Increase/(decrease) in interest payable................................. 659 75 (507)
(Increase)/decrease in other assets..................................... (5,289) 5,011 (1,761)
Decrease in accrued expenses............................................ (665) (8,037) (3,636)
Total adjustments.................................................... (14,346) (11,607) (14,930)
Net cash provided by operating activities............................ 44,643 44,933 38,101
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale............. 275,855 1,155,807 1,064,580
Proceeds from maturities of securities available for sale.................. 1,781 881 3,573
Purchases of securities available for sale................................. (477,210) (889,618) (1,592,974)
Net (increase)/decrease in loans .......................................... (228,457) (77,604) 255,016
Proceeds from sales of real estate owned .................................. 723 893 608
Proceeds from sales of bank premises and equipment......................... 2,576 23 271
Purchases of bank premises and equipment................................... (3,855) (4,287) (2,953)
Net cash (used in) provided by investing activities........................ (428,587) 186,095 (271,879)
Cash flows from financing activities:
Net increase in deposits................................................... 35,385 107,292 145,542
Net increase (decrease) in short-term borrowings........................... 9,956 (12,629) (50,623)
Repayment of long-term debt................................................ (27) (125) (188)
Proceeds from exercise of stock options and related tax benefits........... 3,818 9,281 12,084
Proceeds from sales of treasury stock...................................... 10,996 7,887 7,605
Payments to acquire treasury stock......................................... (14,846) (13,482) (30,034)
Dividends paid............................................................. (44,905) (44,504) (45,008)
Net cash provided by financing activities.................................. 377 53,720 39,378
Net (decrease)/increase in cash and cash equivalents......................... (383,567) 284,748 (194,400)
Cash and cash equivalents at beginning of year............................... 696,430 411,682 606,082
Cash and cash equivalents at end of year..................................... $ 312,863 696,430 411,682
SUPPLEMENTAL INFORMATION:
Interest paid................................................................ $ 44,998 38,681 41,246
Income taxes paid............................................................ 27,388 24,038 18,865
Transfer of loans to real estate owned....................................... 56 -- --
Increase/(decrease) in dividends payable..................................... 787 69 (475)
Change in unrealized gain on securities available for sale -- gross.......... (17,486) (27,579) 10,865
Change in deferred tax effect on unrealized gain on securities
available for sale......................................................... 6,973 10,996 (4,630)
Non-cash stock-based compensation expense, net of tax........................ 77 -- --
See accompanying notes to consolidated financial statements.
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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 Charitable Foundation,
Inc., 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 at trade date.
Loans
Loans are carried at the principal amount outstanding net of unearned
income and unamortized loan fees and costs, which are recognized as
adjustments to interest 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 nonaccruing 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, or decreased by credits
added to 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.
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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 2006 Trustco Bank could pay cash dividends to the Company of $52.5
million plus 2006 year-to-date net profits.
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 which retirees pay all
of their premiums. At age 65, the Company provides access to a Medicare
Supplemental program for 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 is ordinarily recorded for these plans.
In the fourth quarter of 2005 the Board of Director's of the Company
approved the accelerated vesting of all outstanding unvested stock option to
purchase shares of common stock. These options were previously awarded to
executive officers and employees under the 1995 and 2004 Stock Option Plans.
By accelerating the vesting of these options the Company estimates that
approximately $1.3 million of future compensation expense, net of tax, will
be eliminated in anticipation of the adoption of Statement 123R which the
Company will adopt as of January 1, 2006.
Options to purchase 882,100 shares of the Company's common stock, which
would otherwise have vested from time to time over the next four years,
became immediately vested and exercisable as a result of this action. The
number of shares and exercise prices of the options subject to the
acceleration remained unchanged. Also, all of the other terms of the options
remain the same. The Company recorded $127 thousand of expense related to
this acceleration based upon an analysis performed in accordance with APB
Opinion 25.
The accelerated options included 749,500 options held by executive
officers and 132,600 options held by other employees. Based upon the
Company's closing stock price of $12.76 per share on the date of accelerated
vesting certain of the options were below and others above the closing market
price as follows:
Grant Accelerated Exercise
Date Vesting Shares Price
2005 411,200 $12.15
2004 394,500 $13.55
2002 76,400 $11.83
-------
882,100
The decision to accelerate the vesting of these options was made primarily
to reduce non-cash compensation expense that would have been recorded in its
income statement in future periods upon the adoption of FASB Statement No.
123R (Share-Based Payment) in January 2006.
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) 2005 2004 2003
Net income:
As reported................ $58,989 56,540 53,031
Deduct: total stock-based
compensation expense,
net of related tax effects..... (2,035) (868) (926)
Pro forma net income....... $56,954 55,672 52,105
Earnings per share:
Basic -- as reported....... $ .787 .761 .713
Basic -- pro forma......... .760 .750 .701
Diluted -- as reported..... .782 .753 .704
Diluted -- pro forma....... .755 .742 .692
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TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
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
2005............................. $1.675 1.480
2004............................. 2.090 1.870
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:
2005........................ 4.95% 4.95
2004........................ 4.32 4.32
Risk-free interest rate:
2005........................ 3.91 3.76
2004........................ 3.89 3.71
Expected volatility rate:
2005........................ 21.25 19.76
2004........................ 21.42 20.38
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.
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
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, 2005 and 2004. Goodwill at December
31, 2005 and 2004 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 $20.5
million and $19.6 million at December 31, 2005 and 2004, respectively.
36
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TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
(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, 2005
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasuries
and agencies..................... $ 499 -- 1 498
Government
sponsored
enterprises...................... 756,525 -- 13,260 743,265
States and political
subdivisions..................... 115,010 4,143 203 118,950
Mortgage-backed
securities and
collateralized
mortgage
obligations...................... 202,007 593 1,637 200,963
Other.............................. 685 -- 4 681
Total debt
securities....................... 1,074,726 4,736 15,105 1,064,357
Equity securities.................. 19,418 301 -- 19,719
Total securities
available for
sale............................. $1,094,144 5,037 15,105 1,084,076
(dollars in thousands) December 31, 2004
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasuries
and agencies..................... $ 500 -- -- 500
Government
sponsored
enterprises...................... 521,078 98 4,115 517,061
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
Federal Home Loan Bank stock and Federal Reserve Bank stock included in
equity securities at December 31, 2005 and 2004, was $4.7 million and $12.1
million, respectively.
The following table distributes the debt securities included in the
available for sale portfolio as of December 31, 2005, 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.................. $ 26,490 26,347
Due after one year through five years.... 341,367 338,942
Due after five years through ten years... 138,355 136,778
Due after ten years...................... 568,514 562,290
$1,074,726 1,064,357
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, 2005
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........... $ 498 1 -- -- 498 1
Government
sponsored
enterprises............ 653,612 10,413 89,653 2,847 743,265 13,260
States and political
subdivisions........... 18,024 156 2,808 47 20,832 203
Mortgage-backed
securities and
collateralized
mortgage
obligations............ 40,623 537 107,329 1,100 147,952 1,637
Other.................... 596 4 -- -- 596 4
Total.................... $713,353 11,111 199,790 3,994 913,143 15,105
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TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
(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
Government
sponsored
enterprises............ $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
U.S. Treasuries and agencies,Government sponsored enterprises, and 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 and the
Company has no current intent to sell these securities, these investments are
not considered other-than-temporarily impaired.
Mortgage-backed securities and collateralized mortgage obligations: The
unrealized losses on investments in mortgage-backed securities and
collateralized mortgage obligations were caused by market interest rate
increases. The contractual cash flows of these securities or the underlying
loans are guaranteed by various government agencies or government sponsored
enterprises. 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 and the Company has no current intent to sell these securities,
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 2005, 2004 and 2003 are as
follows:
(dollars in thousands) December 31,
2005 2004 2003
Proceeds............................ $275,855 1,155,807 1,064,580
Gross realized gains................ 6,297 25,006 22,645
Gross realized losses............... 298 11,294 12,838
The amount of securities available for sale that have been pledged to
secure short-term borrowings and for other purposes required by law amounted
to $104.7 million and $96.3 million at December 31, 2005 and 2004,
respectively.
The Company has the following balances of securities available for sale as
of December 31, 2005 that represent greater than 10% of shareholders equity:
Amortized Market
Cost Value
Federal Home Loan Bank.............. $211,158 207,726
Federal National
Mortgage Association.............. 217,850 215,144
Federal Home Loan
Mortgage Corporation.............. 474,167 466,435
Federal Farm Credit Bank............ 24,900 24,469
(4) Loans and Allowance for Loan Losses
A summary of loans by category is as follows:
(dollars in thousands) December 31,
2005 2004
Commercial.......................... $ 202,570 193,188
Real estate -- construction......... 22,123 20,148
Real estate mortgage................ 1,047,994 822,103
Home equity lines of credit......... 192,291 191,242
Installment loans................... 5,741 13,384
Total loans......................... 1,470,719 1,240,065
Less: Allowance for loan losses..... 45,377 49,384
Net loans........................... $1,425,342 1,190,681
At December 31, 2005 and 2004, loans to executive officers, directors, and
to associates of such persons aggregated $3.0 million and $2.0 million,
respectively. During 2005, approximately $1.2 million of new loans were made
and repayments of loans totalled approximately $263 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 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.
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TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
The following table sets forth information with regard to nonperforming
loans:
(dollars in thousands) December 31,
2005 2004 2003
Loans in nonaccrual status.......... $1,662 557 --
Loans contractually past due
3 payments or more and still
accruing interest............... 35 -- --
Restructured loans.................. 1,518 2,610 3,260
Total nonperforming loans........... $3,215 3,167 3,260
Interest on nonaccrual and restructured loans of $250 thousand in 2005,
$377 thousand in 2004, and $500 thousand in 2003 would have been earned in
accordance with the original contractual terms of the loans. Approximately
$201 thousand, $329 thousand, and $431 thousand of interest on nonaccrual and
restructured loans was collected and recognized as income in 2005, 2004, and
2003, 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,
2005 2004 2003
Balance at beginning of year........ $49,384 48,739 52,558
Provision (credit) for loan losses.. (6,260) 450 1,200
Loans charged off................... (2,464) (5,797) (9,598)
Recoveries on loans
previously charged off............ 4,717 5,992 4,579
Balance at year end................. $45,377 49,384 48,739
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, 2005 and 2004. Retail loans
totaling $1.5 million as of December 31, 2005, and $2.6 million as of
December 31, 2004, 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 2005, 2004, and 2003, the average balance of impaired loans was
$1.9 million, $2.9 million, and $3.7 million, respectively, and there was
approximately $201 thousand, $314 thousand, and $380 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, 2005 and 2004 follows:
(dollars in thousands) 2005 2004
Land......................................... $ 2,413 2,786
Buildings.................................... 23,208 28,038
Furniture, fixtures and equipment............ 25,231 23,318
Leasehold improvements....................... 6,467 6,260
57,319 60,402
Accumulated depreciation and
amortization............................... (35,585) (37,923)
Total........................................ $ 21,734 22,479
Depreciation and amortization expense approximated $2.7 million, $1.9
million, and $2.5 million for the years 2005, 2004, and 2003, respectively.
Occupancy expense of the Bank's premises included rental expense of $2.4
million in 2005, $2.1 million in 2004, and $1.8 million in 2003.
(6) Deposits
Interest expense on deposits was as follows:
(dollars in thousands) For the years ended December 31,
2005 2004 2003
Interest bearing
checking accounts................. $ 1,376 1,586 1,678
Savings accounts.................... 6,769 7,968 8,795
Time deposits and
money market accounts............. 35,481 28,223 29,370
Total............................... $43,626 37,777 39,843
At December 31, 2005, the maturity of total time deposits is as follows:
(dollars in thousands)
Under 1 year................................. $538,982
1 to 2 years................................. 172,089
2 to 3 years................................. 183,354
3 to 4 years................................. 109,354
4 to 5 years................................. 79,576
Over 5 years................................. 2,556
$1,085,911
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TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
(7) Short-Term Borrowings
Short-term borrowings of the Company were cash management accounts as
follows:
(dollars in thousands) 2005 2004
Amount outstanding at
December 31,...................... $87,935 77,979
Maximum amount
outstanding at any
month end......................... 87,935 115,681
Average amount
outstanding....................... 83,381 100,855
Weighted average interest rate:
For the year...................... 2.43 0.96
As of year end.................... 3.32 2.00
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, 2005 and 2004, of $87 thousand and $114
thousand consisted of a FHLB term loan with an interest rate of 5.22%
maturing in 2008. This debt was assumed as part of an acquisition during
2000. The FHLB loan is 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) 2005 2004 2003
Current tax expense:
Federal........................... $ 26,161 23,337 25,104
State............................. 1,810 396 864
Total current tax expense........... 27,971 23,733 25,968
Deferred tax expense (benefit)...... 2,874 3,106 (2,645)
Total income tax expense............ $ 30,845 26,839 23,323
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 2005 and 2004, are as follows:
December 31,
(dollars in thousands) 2005 2004
Deductible Deductible
temporary temporary
differences differences
Benefits and deferred
remuneration.................... $ 460 1,632
Deferred loan fees, net............. 15 79
Difference in reporting the
allowance for loan losses, net.. 21,676 22,565
Other income or expense
not yet reported for
tax purposes.................... 5,254 6,633
Depreciable assets.................. 2,253 1,502
Other items......................... 555 676
Net deferred tax asset
at end of year.................. 30,213 33,087
Net deferred tax asset at
beginning of year............... 33,087 36,193
Deferred tax expense................ $ 2,874 3,106
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 expected future taxable income, management believes it is more
likely than not that the remaining deferred tax asset of $30.2 million and
$33.1 million at December 31, 2005 and 2004, respectively, will be realized.
In addition to the deferred tax items described in the preceding table,
the Company has a deferred tax asset of $4.0 million and a deferred tax
liability of $3.0 million at December 31, 2005 and 2004, relating to the net
unrealized losses/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,
2005 2004 2003
Statutory federal income tax rate... 35.0% 35.0 35.0
Increase/(decrease) in taxes
resulting from:
Tax exempt income................ (2.3) (3.5) (4.6)
State income tax, net of
federal tax benefit............. 1.7 0.8 0.8
Other items...................... (0.1) (0.1) (0.6)
Effective income tax rate........... 34.3% 32.2 30.6
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TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
(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, 2005 and 2004.
Change in Projected Benefit Obligation:
(dollars in thousands) 2005 2004
Projected benefit obligation
at beginning of year.............. $27,581 24,555
Service cost........................ 804 784
Interest cost....................... 1,519 1,499
Benefits paid....................... (1,567) (1,411)
Net actuarial loss.................. 205 2,154
Projected benefit obligation
at end of year.................... $28,542 27,581
Change in Plan Assets and
Reconciliation of Funded Status:
(dollars in thousands) 2005 2004
Fair value of plan assets at
beginning of year................. $29,242 28,474
Actual gain on plan assets.......... 1,323 2,179
Benefits paid....................... (1,567) (1,411)
Fair value of plan assets
at end of year.................... 28,998 29,242
Funded status....................... 457 1,661
Unrecognized net actuarial loss..... 746 14
Unrecognized prior service cost..... 1,595 1,702
Net amount recognized............... $2,798 3,377
The accumulated benefit obligation for the plan was $25.8 million and
$24.4 million at December 31, 2005 and 2004, respectively.
Components of Net Periodic Pension Expense:
For the years ended
December 31,
(dollars in thousands) 2005 2004 2003
Service cost........................ $ 804 784 695
Interest cost....................... 1,519 1,499 1,409
Expected return on plan assets...... (1,850) (1,669) (1,665)
Amortization of unrecognized
prior service cost................ 106 90 25
Net periodic pension expense........ $ 579 704 464
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
2006................................ $1,537
2007................................ 1,500
2008................................ 1,480
2009................................ 1,462
2010................................ 1,467
2011 -- 2015........................ 7,806
The assumptions used to determine benefit obligations at December 31 are
as follows:
2005 2004
Discount rate................................ 5.50% 5.75
Rate of increase in future compensation...... 4.00 5.00
The assumptions used to determine net periodic pension expense for the
years ended December 31 are as follows:
2005 2004 2003
Discount rate....................... 5.75% 6.00 6.50
Rate of increase in future
compensation...................... 4.50 5.00 5.00
Expected long-term rate of return
on assets......................... 6.50 6.00 6.50
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 $581 thousand, $662 thousand, and $1.2 million, in
2005, 2004, and 2003, 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 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.
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TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
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 Consolidated Statements
of Condition. As of December 31, 2005 and 2004, the trusts had assets
totaling $5.7 million and $5.0 million, respectively. (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 has been eliminated. The Company continues
to provide postretirement medical benefits for a limited number of retired
executives in accordance with their employment contracts.
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, 2005 and 2004.
Change in Accumulated Benefit Obligation:
(dollars in thousands) 2005 2004
Accumulated benefit obligation
at beginning of year....................... $ 891 790
Service cost................................. 35 12
Retiree contributions........................ 176 230
Interest cost................................ 65 31
Benefits paid................................ (221) (324)
Net actuarial loss........................... 326 152
Accumulated benefit obligation
at end of year............................. $1,272 891
Change in Plan Assets and
Reconciliation of Funded Status:
(dollars in thousands) 2005 2004
Fair value of plan assets at
beginning of year.......................... $11,726 10,986
Actual gain on plan assets................... 491 834
Retiree contributions........................ 176 230
Benefits paid................................ (221) (324)
Fair value of plan assets at end of year..... 12,172 11,726
Funded status................................ 10,901 10,835
Unrecognized net actuarial gain.............. (2,680) (3,014)
Unrecognized prior service credit............ (6,780) (7,182)
Net amount recognized........................ $ 1,441 639
Components of Net Periodic Benefit:
For the years ended
December 31,
(dollars in thousands) 2005 2004 2003
Service cost........................ $ 35 12 4
Interest cost....................... 65 31 46
Expected return on plan assets...... (405) (428) (377)
Amortization of net
actuarial gain.................... (75) (107) (43)
Amortization of prior
service credit.................... (403) (403) (403)
Net periodic benefit................ $(783) (895) (773)
Expected Future Benefit Payments
The following benefit payments are expected to be paid:
(dollars in thousands)
Year Postretirement Benefits
2006................................ $ 43
2007................................ 45
2008................................ 47
2009................................ 48
2010................................ 50
2011 -- 2015........................ 271
The discount rate assumption used to determine benefit obligations at
December 31 is as follows:
2005 2004
Discount rate................................ 5.50% 5.75
The assumptions used to determine net periodic pension benefit for the
years ended December 31 are as follows:
2005 2004 2003
Discount rate....................... 5.75% 6.00 6.50
Expected long-term rate of return
on assets, net of tax............. 3.45 3.90 3.90
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 2006 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, 2005, and the interest
and service components of net periodic postretirement benefit cost for the
year ended December 31, 2005.
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TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
(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
2005 2004 2005 2004
Debt Securities............. 33.00% 33.20 30.72 36.61
Equity Securities........... 64.37 64.52 64.01 61.81
Other....................... 2.63 2.28 5.27 1.58
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 2006.
(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 2005 and 2004 and $1.1 million in 2003.
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 $2.0 million in 2005 and $2.1
million in 2004 and 2003.
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
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, 2005, 2004 and 2003, 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, 2003.................. 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
New options awarded -- 2005............... 526,000 12.15 114,800 12.15
Cancelled options -- 2005................. (12,000) 13.55 (12,000) 13.55
Exercised options -- 2005................. (781,061) 6.87 (781,061) 6.87
Options became exercisable................ -- -- 1,148,288 12.65
Balance, December 31, 2005................ 4,178,049 $10.85 4,178,049 $10.85
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TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
The following table summarizes information about total stock options
outstanding and exercisable at December 31, 2005:
Weighted
Average Weighted
Range of Options Remaining Average
Exercise Outstanding Contractual Exercise
Price and Exercisable Life Price
Less than
$7.50.......... 97,232 1.7 years $ 5.75
Between $7.51
and $10.00...... 2,136,317 4.7 years 9.58
Greater than
$10.00......... 1,944,500 8.5 years 12.51
Total............... 4,178,049 6.4 years $10.85
As described in Note 1, the Company accelerated all unvested options in
December 2005, accordingly there are no unvested options as of December 31,
2005. The decision to accelerate the vesting of these options was made
primarily to reduce the non-cash compensation expense that would have been
recorded in the Company's consolidated income statement in future periods
under the adoption of SFAS 123R.
(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)
2006......................................... $ 2,534
2007......................................... 2,732
2008......................................... 2,741
2009......................................... 2,743
2010......................................... 2,739
2011 and after............................... 31,879
$45,368
(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 $4.1 million in 2005,
$4.3 million in 2004 and $5.6 million in 2003. The Company is contractually
obligated to pay these third-party service providers approximately $4 million
to $5 million per year through 2013.
(12) Earnings Per Share
A reconciliation of the component parts of earnings per share for 2005,
2004 and 2003 follows:
(dollars in thousands, Weighted
except per share data) Average Shares Per share
Income Outstanding Amounts
For the year ended
December 31, 2005:
Basic EPS:
Income available to
common shareholders............ $58,989 74,928 $.787
Effect of Dilutive Securities:
Stock Options.................. -- 469 (.005)
Diluted EPS...................... $58,989 75,397 $.782
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 (.008)
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 (.009)
Diluted EPS...................... $53,031 75,306 $.704
As of December 31, 2005, the number of antidulitive stock options excluded
from diluted earnings per share was approximately 665 thousand. The number of
antidilutive stock options excluded from diluted earnings per share for 2004
and 2003 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, 2005 and 2004, was $306.7 million and
$313.3 million, respectively. Approximately 75% of these commitments were for
variable rate products at the end of 2005.
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TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
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. 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 $2.8 million and $3.6 million
at December 31, 2005 and 2004, 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, 2005 and
2004 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, 2005
Carrying Fair
Value Value
Financial assets:
Cash and cash equivalents......... $ 312,863 312,863
Securities available for sale..... 1,084,076 1,084,076
Loans............................. 1,425,342 1,462,679
Accrued interest receivable....... 18,432 18,432
Financial liabilities:
Demand deposits................... 251,012 251,012
Interest bearing deposits......... 2,311,475 2,311,475
Short-term borrowings............. 87,935 87,935
Long-term debt.................... 87 87
Accrued interest payable.......... 2,204 2,204
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
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.
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TRUSTCO Bank Corp NY
Notes to Consolidated Financial Statements (continued)
Deposit Liabilities
The fair values disclosed for noninterest bearing deposits, interest
bearing checking accounts, savings 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 creditworthiness 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, 2005 and 2004, 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, 2005 and 2004, 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, 2005 and
2004, for Trustco Bank:
(dollars in thousands) As of December 31, 2005
Amount Ratio
Leverage capital:................ $222,327 7.82%
Tier 1 risk-based capital:....... 222,327 15.81
Total risk-based capital:........ 240,244 17.09
(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
The following is a summary of actual capital amounts and ratios as of
December 31, 2005 and 2004 for TrustCo on a consolidated basis:
(dollars in thousands) As of December 31, 2005
Amount Ratio
Leverage capital:................ $234,162 8.04%
Tier 1 risk-based capital:....... 234,162 16.58
Total risk-based capital:........ 252,160 17.85
(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
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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: 2005 2004 2003
Dividends and interest
from subsidiaries................ $37,733 19,403 31,096
Net gain on sales of securities.... 4,068 21,157 12,952
Income from other investments...... 131 424 1,110
Total income................... 41,932 40,984 45,158
Expense:
Operating supplies................. 67 61 75
Professional services.............. 276 203 63
Miscellaneous expense.............. 277 85 95
Total expense................. 620 349 233
Income before income
taxes and subsidiaries'
undistributed earnings............ 41,312 40,635 44,925
Income tax expense.................. 1,485 8,303 5,267
Income before subsidiaries'
undistributed earnings............ 39,827 32,332 39,658
Equity in undistributed
earnings of subsidiaries........... 19,162 24,208 13,373
Net income.......................... $58,989 56,540 53,031
Statements of Condition
(dollars in thousands) December 31,
2005 2004
Assets:
Cash in subsidiary bank..................... $ 12,603 20,530
Investments in subsidiaries................. 216,647 205,522
Securities available for sale............... 6,841 9,106
Other assets................................ 3 824
Total assets............................ $236,094 235,982
Liabilities and shareholders' equity:
Accrued expenses
and other liabilities..................... 7,433 10,150
Total liabilities....................... 7,433 10,150
Shareholders' equity......................... 228,661 225,832
Total liabilities and
shareholders' equity.................. $236,094 235,982
Statements of Cash Flows
(dollars in thousands) Years Ended December 31,
2005 2004 2003
Increase/(decrease) in cash and
cash equivalents:
Cash flows from operating activities:
Net income.............................. $58,989 56,540 53,031
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed
earnings of subsidiaries.......... (19,162) (24,208) (13,373)
Net gain on sales of securities...... (4,068) (21,157) (12,952)
Net change in other assets and
accrued expenses............. (943) 4,764 972
Total adjustments.................. (24,173) (40,601) (25,353)
Net cash provided by operating
activities........................... 34,816 15,939 27,678
Cash flows from investing activities:
Proceeds from sales of securities
available for sale................... 14,360 57,997 49,831
Purchases of securities available
for sale............................. (12,166) (29,951) (23,475)
Net cash provided by
investing activities............. 2,194 28,046 26,356
Cash flows from financing activities:
Proceeds from exercise of stock
options and related tax benefits...... 3,818 9,281 12,084
Dividends paid......................... (44,905) (44,504) (45,008)
Payments to acquire treasury stock..... (14,846) (13,482) (30,034)
Proceeds from sales of treasury
stock................................. 10,996 7,887 7,605
Net cash used in financing
activities....................... (44,937) (40,818) (55,353)
Net increase/(decrease) in cash and
cash equivalents................... (7,927) 3,167 (1,319)
Cash and cash equivalents at
beginning of year..................... 20,530 17,363 18,682
Cash and cash equivalents at
end of year........................... $12,603 20,530 17,363
Supplemental Information
Increase (decrease) in
dividends payable..................... $ 787 69 (475)
Change in unrealized gain on
securities available for sale --
gross................................ 4,139 19,328 638
Change in deferred tax effect on
unrealized gain on securities
available for sale................... (1,651) (7,707) (261)
47
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TRUSTCO Bank Corp NY
Branch Locations
NEW YORK
Altamont Ave. Office
1400 Altamont Ave.
Schenectady, NY
Telephone: (518) 356-1317
Altamont Ave. West Office
1900 Altamont Ave.
Rotterdam, NY
Telephone: (518) 355-1900
Ballston Spa Office
235 Church Ave.
Ballston Spa, NY
Telephone: (518) 885-1561
Bedford Hills Office
180 Harris Rd.
Bedford Hills, NY
Telephone: (914) 666-6230
Brandywine Office
State St. at Brandywine Ave.
Schenectady, NY
Telephone: (518) 346-4295
Briarcliff Manor Office
64 Route 100
Briarcliff Manor, NY
Telephone: (914) 762-7133
Central Ave. Office
163 Central Ave.
Albany, NY
Telephone: (518) 426-7291
Clifton Country Road Office
7 Clifton Country Rd.
Clifton Park, NY
Telephone: (518) 371-5002
Clifton Park Office
1018 Route 146
Clifton Park, NY
Telephone: (518) 371-8451
Cobleskill Office
RR #3, Rt. 7
Cobleskill, NY
Telephone: (518) 254-0290
Colonie Office
1892 Central Ave.
Colonie Plaza, Colonie, NY
Telephone: (518) 456-0041
Delmar Office
167 Delaware Ave.
Delmar, NY
Telephone: (518) 439-9941
East Greenbush Office
501 Columbia Turnpike
Rensselaer, NY
Telephone: (518) 479-7233
Elmsford Office
100 Clearbrook Rd.
Elmsford, NY
Telephone: (914) 345-1808
Exit 8/Crescent Rd. Office
CVS Plaza
Clifton Park, NY
Telephone: (518) 383-0039
Fishkill Office
1542 Route 52
Fishkill, NY
Telephone: (518) 896-8260
Freemans Bridge Rd. Office
Trustco Center
Glenville, NY
Telephone: (518) 344-7510
Glens Falls Office
3 Warren Street
Glens Falls, NY
Telephone: (518) 798-8131
Greenwich Office
131 Main St.
Greenwich, NY
Telephone: (518) 692-2233
Guilderland Office
3900 Carman Rd.
Schenectady, NY
Telephone: (518) 355-4890
Halfmoon Office
Country Dollar Plaza
Halfmoon, NY
Telephone: (518) 371-0593
Highland Office
3580 Route 9W
Highland, NY
Telephone: (845) 691-7023
Hoosick Falls Office
47 Main St.
Hoosick Falls, NY
Telephone: (518) 686-5352
Hudson Office
507 Warren St.
Hudson, NY
Telephone: (518) 828-9434
Hudson Falls Office
3376 Burgoyne Ave.
Hudson Falls, NY
Telephone: (518) 747-0886
Latham Office
1 Johnson Rd.
Latham, NY
Telephone: (518) 785-0761
Loudon Plaza Office
372 Northern Blvd.
Albany, NY
Telephone: (518) 462-6668
Madison Ave. Office
1084 Madison Ave.
Albany, NY
Telephone: (518) 489-4711
Malta 4 Corners Office
2471 Route 9
Malta, NY
Telephone: (518) 899-1056
Malta Mall Office
43 Round Lake Rd.
Ballston Lake, NY
Telephone: (518) 899-1558
Mayfair Office
286 Saratoga Rd.
Glenville, NY
Telephone: (518) 399-9121
Mechanicville Office
9 Price Chopper Plaza
Mechanicville, NY
Telephone: (518) 664-1059
Milton Office
2 Trieble Ave.
Ballston Spa, NY
Telephone: (518) 885-0498
Mont Pleasant Office
Crane St. at Main Ave.
Schenectady, NY
Telephone: (518) 346-1267
New Scotland Office
301 New Scotland Ave.
Albany, NY
Telephone: (518) 438-7838
Newton Plaza Office
588 New Loudon Rd.
Latham, NY
Telephone: (518) 786-3687
Niskayuna-Woodlawn Office
3461 State St.
Schenectady, NY
Telephone: (518) 377-2264
Northern Pines Road Office
647 Maple Ave. (Route 9)
Wilton, NY
Telephone: (518) 583-2634
Pomona Office
1581 Route 202
Pomona, NY
Telephone: (518) 354-0176
Poughkeepsie Office
2656 South Rd.
(Route 9)
Poughkeepsie, NY
Telephone: (518) 485-6419
Queensbury Office
118 Quaker Rd.
Suite 9, Queensbury, NY
Telephone: (518) 798-7226
Rotterdam Office
Curry Road Shopping Ctr.
Rotterdam, NY
Telephone: (518) 355-8330
Rotterdam Square Office
93 W. Campbell Rd.
Rotterdam, NY
Telephone: (518) 377-2393
Route 2 Office -- Latham
201 Troy-Schenectady Rd.
Latham, NY
Telephone: (518) 785-7155
Route 7 Office
1156 Troy-Schenectady Rd.
Latham, NY
Telephone: (518) 785-4744
Saratoga Office
34 Congress St.
Saratoga Springs, NY
Telephone: (518) 587-3500
Scotia Office
123 Mohawk Ave.
Scotia, NY
Telephone: (518) 372-9416
Sheridan Plaza Office
1350 Gerling St.
Schenectady, NY
Telephone: (518) 377-8517
Shoppers' World Office
Old Rte. 146 and Plank Rd.
Clifton Park, NY
Telephone: (518) 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: (518) 793-7668
State Farm Rd. Office
2050 Western Ave.
Guilderland, NY
Telephone: (518) 452-6913
State St. Albany Office
112 State St.
Albany, NY
Telephone: (518) 436-9043
State St. Schenectady Office
320 State St.
Schenectady, NY
Telephone: (518) 377-3311
Stuyvesant Plaza Office
Western Ave. at Fuller Rd.
Albany, NY
Telephone: (518) 489-2616
Tanners Main Office
345 Main St.
Catskill, NY
Telephone: (518) 943-2500
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TRUSTCO Bank Corp NY
Branch Locations
Tanners West Side Office
238 West Bridge St.
Catskill, NY
Telephone: (518) 943-5090
Troy Office
5th Ave. and State St.
Troy, NY
Telephone: (518) 274-5420
Union Street East Office
1700 Union St.
Schenectady, NY
Telephone: (518) 382-7511
Upper Union Street Office
1620 Union St.
Schenectady, NY
Telephone: (518) 374-4056
Ushers Road Office
308 Ushers Rd.
Ballston Lake, NY
Telephone: (518) 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: (518) 674-3327
Wilton Mall Office
Route 50
Saratoga Springs, NY
Telephone: (518) 583-1716
Wolf Road Office
34 Wolf Rd.
Albany, NY
Telephone: (518) 458-7761
Wynantskill Office
134-136 Main St., Rt. 66
Wynantskill, NY
Telephone: (518) 286-2674
FLORIDA
Colonial Drive Office
4450 East Colonial Dr.
Orlando, FL
Telephone: (407) 895-6393
Curry Ford Road Office
Shoppes at Andover, Suite 116
3020 Lamberton Boulevard
Orlando, FL
Telephone: (407) 277-9663
Dean Road Office
3920 Dean Rd.
Orlando, FL
Telephone: (407) 657-8001
East Colonial Office
12901 East Colonial Drive
Orlando, FL
Telephone: (407) 275-3075
Lake Mary Office
350 West Lake Mary Blvd.
Sanford, FL
Telephone: (407) 330-7106
Longwood Office
1400 West State Rd.
Longwood, FL
Telephone (407) 339-3396
Maitland Office
9400 US Rt. 17/92, Suite 1008
Maitland, FL
Telephone: (407) 332-6071
Osprey Office
1300 South Tamiami Trail
Osprey, FL
Telephone: (941) 918-9380
Oviedo Office
1875 West County Road 419
Suite 600
Oviedo, FL
Telephone: (407) 365-1145
Rinehart Road Office
1185 Rinehart Road
Sanford, FL
Telephone: (407) 268-3720
Sarasota Office
2704 Bee Ridge Road
Sarasota, FL
Telephone: (941) 929-9451
South Clermont Office
16908 High Grove Blvd.
Clermont, FL
Telephone: (352) 243-9511
Tuskawilla Road Office
1295 Tuskawilla Road
Winter Springs, FL
Telephone: (407) 695-5558
Villaggio Office
851 SR 434
Winter Springs, FL
Telephone: (407) 327-6064
NEW JERSEY
Ramsey Office
385 N. Franklin Turnpike
Ramsey, NJ
Telephone: (201) 934-1429
VERMONT
Bennington Office
215 North St.
Bennington, VT
Telephone: (802) 447-4952
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[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
Directors of TrustCo Bank Corp NY
are also Directors of Trustco Bank
BOARD OF DIRECTORS
Joseph Lucarelli
President
Traditional Builders
Thomas O. Maggs
President
Maggs & Associates
Anthony J. Marinello, M.D., Ph.D.
Physician
Robert A. McCormick
Chairman
TrustCo Bank Corp NY
Robert J. McCormick
President and Chief Executive Officer
Trustco Bank
William D. Powers
Partner
Powers & Co., LLC
Consulting
William J. Purdy
President
Welbourne & Purdy Realty, Inc.
Real Estate
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
Administrative Vice President
Eric W. Schreck
Vice Presidents
Deborah K. Appel
Paul D. Matthews
Officers
John R. George
Colleen A. Meliski
Michael V. Pitnell
Mary Jean Riley
COMPLIANCE
Vice President
Thomas M. Poitras
COMMERCIAL LENDING
Vice President
Patrick M. Canavan
Officers
Bradley T. Delarm
James M. Poole
Paul R. Steenburgh
MARKETING/PC GROUP/
FACILITIES
Administrative Vice President
Robert M. Leonard
Vice President
George W. Wickswat
MORTGAGE LOANS
Vice President
Michael J. Lofrumento
Officer
Robert O. Breton, Esq.
OPERATIONS
Administrative Vice President
Kevin M. Curley
Vice President
Christopher L. Cox
PERSONNEL/QUALITY
CONTROL
Vice President
Cheri J. Parvis
TRUST DEPARTMENT
Vice President
Patrick J. LaPorta, Esq.
Officers
Craig C. Chenevert
Stephanie A. Duma
Richard W. Provost
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[LOGO]
TRUSTCO Bank Corp NY
General Information
ANNUAL MEETING
Monday, May 15, 2006
10:00 AM
Mallozzi's Restaurant
1930 Curry Road
Schenectady, NY 12303
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 Glenville, New York
Member FDIC
(and its wholly owned subsidiary,
Trustco Vermont Investment Company Trustco Charitable Foundation, Inc.
Bennington, Vermont) Glenville, New York
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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