-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, THD3+RTEMppwOPubf6+GZidhAu6BqmnCYTB04fqjogVXwhPfn9XD2LM2T+FpxQqn 8ImG6af/ZscirF106+/VIw== 0000357301-03-000016.txt : 20030813 0000357301-03-000016.hdr.sgml : 20030813 20030813140049 ACCESSION NUMBER: 0000357301-03-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRUSTCO BANK CORP N Y CENTRAL INDEX KEY: 0000357301 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 141630287 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10592 FILM NUMBER: 03840391 BUSINESS ADDRESS: STREET 1: 5 SARNOWSKI DRIVE CITY: GLENVILLE STATE: NY ZIP: 12302 BUSINESS PHONE: 5183773311 MAIL ADDRESS: STREET 1: 5 SARNOWSKI DRIVE CITY: GLENVILLE STATE: NY ZIP: 12302 10-Q 1 q10q063003.txt JUNE200310Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended Commission File Number 0-10592 June 30, 2003 TRUSTCO BANK CORP NY (Exact name of registrant as specified in its charter) NEW YORK 14-1630287 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 SARNOWSKI DRIVE, GLENVILLE, NEW YORK 12302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 377-3311 Securities registered pursuant to Section 12(b) of the Act: Name of exchange on Title of each class which registered None None Securities registered pursuant to Section 12(g) of the Act: (Title of class) Common Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes.(x) No.( ) Indicate by check mark whether the registrant is accelerated filer (as defined in Rule 12b - 2 of the Act). Yes.(x) No.( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of Shares Outstanding Class of Common Stock as of August 4,2003 --------------------------- ---------------------- $1 Par Value 74,275,463 TrustCo Bank Corp NY INDEX Part I. FINANCIAL INFORMATION PAGE NO. Item 1. Interim Financial Statements (Unaudited): Consolidated Statements of Income for the Three Months and Six 1 Months Ended June 30, 2003 and 2002 Consolidated Statements of Financial Condition as of 2 June 30, 2003 and December 31, 2002 Consolidated Statements of Cash Flows for the Six 3 - 4 Months Ended June 30, 2003 and 2002 Notes to Consolidated Interim Financial Statements 5 - 9 Independent Accountants' Review Report 10 Item 2. Management's Discussion and Analysis 11 - 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 25 Part II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities and use of Proceeds - None Item 3. Defaults Upon Senior Securities --None Item 4. Submissions of Matters to Vote of Security 26 Holders - Annual Meeting Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K 27 i
TRUSTCO BANK CORP NY Consolidated Statements of Income (Unaudited) (dollars in thousands, except per share data) 3 Months Ended 6 Months Ended June 30 June 30 2003 2002 2003 2002 Interest and dividend income: Interest and fees on loans $ 22,722 28,275 47,308 56,995 Interest on U. S. Treasuries and agencies 5,707 2,992 9,094 5,941 Interest on states and political subdivisions 2,950 2,973 5,918 5,901 Interest on mortgage-backed securities 1,014 1,170 2,005 2,543 Interest and dividends on other securities 870 1,264 2,684 2,480 Interest on federal funds sold and other short term investments 1,482 2,278 3,137 4,155 --------------------------------------------------------------- Total interest income 34,745 38,952 70,146 78,015 --------------------------------------------------------------- Interest expense: Interest on deposits: Interest-bearing checking 379 811 890 1,581 Savings 2,373 3,441 4,943 6,694 Money market deposit accounts 508 651 1,061 1,096 Time deposits 6,822 9,356 14,541 19,175 Interest on short-term borrowings 259 841 606 1,697 Interest on long-term debt 5 7 11 16 --------------------------------------------------------------- Total interest expense 10,346 15,107 22,052 30,259 --------------------------------------------------------------- Net interest income 24,399 23,845 48,094 47,756 Provision for loan losses 300 300 600 820 --------------------------------------------------------------- Net interest income after provision for loan losses 24,099 23,545 47,494 46,936 --------------------------------------------------------------- Noninterest income: Trust department income 1,573 2,050 2,972 3,882 Fees for other services to customers 2,936 2,793 5,556 5,235 Net gain on securities transactions 2,234 1,904 5,330 3,772 Other 765 988 1,500 1,599 --------------------------------------------------------------- Total noninterest income 7,508 7,735 15,358 14,488 --------------------------------------------------------------- Noninterest expenses: Salaries and employee benefits 5,066 5,467 10,314 11,281 Net occupancy expense 1,482 1,357 3,184 2,719 Equipment expense 688 813 1,914 1,531 FDIC insurance expense 95 90 188 180 Professional services 777 1,048 1,397 1,715 Charitable contributions 129 1,157 283 1,314 Outsourced services 1,850 845 3,100 1,005 Other real estate expenses / (income) (163) (95) (197) (24) Other 2,655 3,035 5,065 6,389 --------------------------------------------------------------- Total noninterest expenses 12,579 13,717 25,248 26,110 --------------------------------------------------------------- Income before taxes 19,028 17,563 37,604 35,314 Applicable income taxes 5,617 4,992 11,001 10,375 --------------------------------------------------------------- Net income $ 13,411 12,571 26,603 24,939 =============================================================== Net income per common share: - Basic $ 0.180 0.174 0.358 0.347 =============================================================== - Diluted $ 0.178 0.169 0.354 0.335 =============================================================== See accompanying notes to consolidated interim financial statements.
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TRUSTCO BANK CORP NY Consolidated Statements of Financial Condition (Unaudited) (dollars in thousands, except share data) 6/30/03 12/31/02 ASSETS: Cash and due from banks $ 55,927 63,957 Federal funds sold and other short term investments 378,175 542,125 ----------------- ----------------- Total cash and cash equivalents 434,102 606,082 ----------------- ----------------- Securities available for sale: U. S. Treasuries and agencies 592,056 230,428 States and political subdivisions 241,682 235,495 Mortgage-backed securities 64,047 52,591 Other 66,375 134,649 ----------------- ----------------- Total securities available for sale 964,160 653,163 ----------------- ----------------- Loans: Commercial 201,727 202,707 Residential mortgage loans 904,657 1,063,375 Home equity lines of credit 155,332 139,294 Installment loans 15,079 17,465 ----------------- ----------------- Total loans 1,276,795 1,422,841 ----------------- ----------------- Less: Allowance for loan losses 49,528 52,558 Unearned income 462 540 ----------------- ----------------- Net loans 1,226,805 1,369,743 ----------------- ----------------- Bank premises and equipment 19,372 19,544 Real estate owned -- 86 Other assets 38,726 47,470 ----------------- ----------------- Total assets $ 2,683,165 2,696,088 ================== ================= LIABILITIES: Deposits: Demand $ 194,642 178,058 Interest-bearing checking 312,851 338,740 Savings accounts 769,476 715,349 Money market deposit accounts 145,010 130,914 Certificates of deposit (in denominations of $100,000 or more) 151,907 137,513 Other time accounts 761,696 773,694 ----------------- ----------------- Total deposits 2,335,582 2,274,268 Short-term borrowings 71,283 141,231 Long-term debt 334 427 Accrued expenses and other liabilities 41,538 45,318 ---------------- ----------------- Total liabilities 2,448,737 2,461,244 ---------------- ----------------- SHAREHOLDERS' EQUITY: Capital stock par value $1; 100,000,000 shares authorized, and 80,010,274 and 79,107,851 shares issued at June 30, 2003 and December 31, 2002, respectively 80,010 79,108 Surplus 95,524 92,009 Undivided profits 73,923 69,553 Accumulated other comprehensive income: Net unrealized gain on securities available for sale, net of tax 28,518 27,277 Treasury stock at cost - 5,889,974 and 4,930,300 shares at June 30, 2003 and December 31, 2002, respectively (43,547) (33,103) ----------------- ----------------- Total shareholders' equity 234,428 234,844 ----------------- ----------------- Total liabilities and shareholders' equity $ 2,683,165 2,696,088 ================== ================= See accompanying notes to consolidated interim financial statements.
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TRUSTCO BANK CORP NY Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS SIX MONTHS ENDED June 30, 2003 2002 -------- -------- Cash flows from operating activities: Net income.............................................. $ 26,603 24,939 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 1,362 1,030 Gain on sales of fixed assets.......................... --- (300) Provision for loan losses................................ 600 820 Loss on sale of securities available for sale.................. 2,252 1,349 Gain on sale of securities available for sale.................. (7,582) (5,121) Deferred tax benefit.............................. (835) (181) Decrease in taxes receivable........................... 9,496 9,761 Increase in interest receivable........................... (1,448) (229) Decrease in interest payable........................... (530) (210) (Increase)/decrease in other assets..................... 1,124 (4,340) Increase/(decrease) in accrued expenses and other liabilities..... (2,796) 2,791 -------- -------- Total adjustments.................................... 1,643 5,370 -------- -------- Net cash provided by operating activities................ 28,246 30,309 -------- -------- Cash flows from investing activities: Proceeds from sales and calls of securities available for sale.......... 398,039 163,759 Purchase of securities available for sale................... (704,548) (188,312) Proceeds from maturities and calls of securities available for sale...................... 2,366 10,555 Net decrease in loans.................................. 142,338 34,594 Proceeds from dispositions of real estate owned... 86 686 Proceeds from sales of fixed assets.................... --- 300 Capital expenditures................................... (1,066) (1,797) -------- -------- Net cash provided by/(used in) investing activities................ (162,785) 19,785 -------- -------- Cash flows from financing activities: Net increase in deposits............................... 61,314 139,672 Increase/(decrease) in short-term borrowings........................ (69,948) 19,667 Repayment of long-term debt............................ (93) (108) Proceeds from exercise of stock options................ 4,417 3,958 Proceeds from sale of treasury stock................... 3,786 3,860 Purchase of treasury stock............................. (14,230) (6,880) Dividends paid......................................... (22,687) (21,493) -------- -------- Net cash (used in)/provided by financing activities................ (37,441) 138,676 -------- -------- Net increase/(decrease) in cash and cash equivalents................ (171,980) 188,770 Cash and cash equivalents at beginning of period............ 606,082 398,573 -------- -------- Cash and cash equivalents at end of period.............. $ 434,102 587,343 ======== ======== See accompanying notes to consolidated interim financial statements.
3
TRUSTCO BANK CORP NY Consolidated Statements of Cash Flows Continued (Unaudited) (dollars in thousands) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: SIX MONTHS ENDED June 30, 2003 2002 -------- -------- Interest paid......................................... $ 22,582 30,469 Income taxes paid...................................... 2,385 789 Transfer of loans to real estate owned................. --- 197 Increase/(decrease) in dividends payable.......................... (454) 141 Change in unrealized gain on securities available for sale-gross of deferred taxes............ (1,524) (11,810) Change in deferred tax effect on unrealized gain on securities available for sale.................................... 283 4,671 See accompanying notes to consolidated interim financial statements.
4 TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (Unaudited) 1. Financial Statement Presentation In the opinion of the management of TrustCo Bank Corp NY (the Company), the accompanying unaudited Consolidated Interim Financial Statements contain all adjustments necessary to present fairly the financial position as of June 30, 2003, the results of operations for the three months and six months ended June 30, 2003 and 2002, and the cash flows for the six months ended June 30, 2003 and 2002. The accompanying Consolidated Interim Financial Statements should be read in conjunction with the TrustCo Bank Corp NY year-end Consolidated Financial Statements, including notes thereto, which are included in TrustCo Bank Corp NY's 2002 Annual Report to Shareholders on Form 10-K. 2. Earnings Per Share A reconciliation of the component parts of earnings per share for the three month and six month periods ended June 30, 2003 and 2002 follows:
(In thousands, Net Weighted Average Shares Per Share except per share data) Income Outstanding Amounts ----------------- -------------------------- ------------------- For the three months ended June 30, 2003: Basic EPS: Net income available to common shareholders.............. $13,411 74,369 $0.180 Effect of Dilutive Securities: Stock options............................. ------ 868 ------- ----------------- -------------------------- ------------------- Diluted EPS $13,411 75,237 $0.178 ================= ========================== =================== For six months ended June 30, 2003: Basic EPS: Net income available to common shareholders.............. $26,603 74,309 $0.358 Effect of Dilutive Securities: Stock options............................. ------- 901 ------- ----------------- -------------------------- ------------------- Diluted EPS $26,603 75,210 $0.354 ================= ========================== =================== There were 793,250 stock options which were antidilutive as of June 30, 2003 and were therefore excluded from the June 30, 2003 calculations.
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Weighted Average Shares (In thousands, Net Outstanding Per Share except per share data) Income Amounts ----------------- -------------------------- ------------------- For the three months ended June 30, 2002: Basic EPS: Net income available to common shareholders.............. $12,571 72,152 $0.174 Effect of Dilutive Securities: Stock options............................. ------ 2,303 ------- ----------------- -------------------------- ------------------- Diluted EPS $12,571 74,455 $0.169 ================= ========================== =================== For six months ended June 30, 2002: Basic EPS: Net income available to common shareholders.............. $24,939 71,967 $0.347 Effect of Dilutive Securities: Stock options............................. ------- 2,404 ------- ----------------- -------------------------- ------------------- Diluted EPS $24,939 74,371 $0.335 ================= ========================== =================== There were no antidilutive stock options as of June 30, 2002.
6 3. Comprehensive Income Comprehensive income for the three month periods ended June 30, 2003 and 2002 was $18,057,000 and $19,072,000 respectively, and $27,844,000 and $32,079,000 for the six month periods ended June 30, 2003 and 2002, respectively. The following summarizes the components of other comprehensive income:
(dollars in thousands) Three months ended June 30 2003 2002 ---------------------------------- Unrealized holding gains arising during period, net of tax (pre-tax gain of $9,917 for 2003 and pre-tax gain of $12,840 for 2002) $5,997 7,642 Less reclassification adjustment for net gain realized in net income during the period, net of tax (pre-tax gain of $2,234 for 2003 and pre-tax gain of $1,904 for 2002) 1,351 1,141 --------------------------------- Other comprehensive income $4,646 6,501 ==================================== (dollars in thousands) Six months ended June 30 2003 2002 ------------------------------------ Unrealized holding gains arising during period, net of tax (pre-tax gain of $6,854 for 2003 and pre-tax gain of $15,582 for 2002) $4,436 9,401 Less reclassification adjustment for net gain realized in net income during the period, net of tax (pre-tax gain of $5,330 for 2003 and pre-tax gain of $3,772 for 2002) 3,195 2,261 ------------------------------------ Other comprehensive income $1,241 7,140 ====================================
7 4. Stock Option Plans The Company has stock option plans for officers and directors and has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123) and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" (Statement 148). The Company's stock option plans are accounted for in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion 25) and as such, no compensation expense has been recorded for these plans. Had compensation expense for the Company's stock option plans been determined consistent with Statement 123, the Company's net income and earnings per share for the periods ended June 30, 2003 and 2002 would have been as follows: (dollars in thousands except per share data)
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 -------------------- ---------------------- Net income: As reported $13,411 12,571 $26,603 24,939 Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (231) (302) (463) (604) -------------------------- ------------------------------ Pro forma net income $13,180 12,269 $26,140 24,335 --------------------------- ------------------------------ --------------------------- ------------------------------ Earnings per share: Basic - as reported $ .180 .174 .358 .347 Basic - pro forma .177 .170 .352 .338 Diluted - as reported .178 .169 .354 .335 Diluted - pro forma .175 .165 .348 .327
The weighted average fair value of each option as of the grant date was estimated using the Black-Scholes pricing model, and calculated in accordance with Statement 123. No options were granted in the first six months of 2003. The estimated fair values of options granted in 2002 was as follows: Employees' Directors' Plan Plan $1.730 1.680 8 The following assumptions were utilized in the calculation of the fair value of the 2002 options under Statement 123: Employees' Directors' Plan Plan Expected dividend yield: 4.45% 4.45% Risk-free interest rate: 4.10 3.79 Expected volatility rate: 21.75 22.41 Expected lives 7.5 years 6.0 years 5. Impact of Changes in Accounting Standards In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - - Transition and Disclosure - an Amendment of FASB Statement No. 123", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of this statement did not have a material impact on the Company's consolidated financial statements. 6. Guarantees The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $2.2 million at June 30, 2003 and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of the Company's standby letters of credit at June 30, 2003 was insignificant. 9 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Shareholders TrustCo Bank Corp NY: We have reviewed the consolidated statement of condition of TrustCo Bank Corp NY and subsidiaries (the Company) as of June 30, 2003, and the related consolidated statements of income for the three month and six month periods ended June 30, 2003 and 2002, and the consolidated statements of cash flows for the six month periods ended June 30, 2003 and 2002. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 2002, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 17, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of condition as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived. /s/KPMG LLP - ------------------------------ KPMG LLP Albany, New York July 11, 2003 10 TrustCo Bank Corp NY Management's Discussion and Analysis June 30, 2003 The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo Bank Corp NY ("TrustCo" or "Company") during the three month and six month periods ended June 30, 2003, with comparisons to 2002 as applicable. Net interest income and net interest margin are presented on a fully taxable equivalent basis in this discussion. The consolidated interim financial statements and related notes, as well as the 2002 Annual Report to Shareholders should be read in conjunction with this review. Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation. Forward-looking Statements Statements included in this review and in future filings by TrustCo with the Securities and Exchange Commission, in TrustCo's press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect TrustCo's actual results, and could cause TrustCo's actual financial performance to differ materially from that expressed in any forward-looking statement: (1) credit risk, (2) interest rate risk, (3) competition, (4) changes in the regulatory environment, and (5) changes in general business and economic trends. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events. Overview TrustCo recorded net income of $13.4 million, or $0.178 of diluted earnings per share for the three months ended June 30, 2003, as compared to net income of $12.6 million or $0.169 of diluted earnings per share in the same period in 2002. For the six month period ended June 30, 2003, TrustCo recorded net income of $26.6 million, or $0.354 of diluted earnings per share, as compared to $24.9 million, or $0.335 of diluted earnings per share for the comparable period in 2002. The primary factors accounting for the year to date increases are: - - A $35.0 million increase in the average balance of interest earning assets from $2.56 billion at June 30, 2002 to $2.60 billion at June 30, 2003, - - A reduction in the provision for loan losses from $820 thousand in 2002 to $600 thousand in 2003, 11 - - An increase in total noninterest income from $14.5 million in 2002 to $15.4 million in 2003. Within this category net securities transactions were $3.8 million of gains in 2002 compared to $5.3 million in 2003, and - - A reduction in total non-interest expense from $26.1 million for the six months ended June 30, 2002 to $25.2 million for the comparable period in 2003. Partially offsetting these year to date positive factors was a decrease in net interest margin from 4.00% in 2002 to 3.98% in 2003 and a decrease of $9.5 million in average demand deposit accounts from $190.3 million in 2002 to $180.7 million in 2003. Following this discussion is the table "Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential" which gives a detailed breakdown of TrustCo's average interest earning assets and interest bearing liabilities for the three months and six months ended June 30, 2003 and 2002. Asset/Liability Management The Company strives to generate superior earnings capabilities through a mix of core deposits, funding a prudent mix of earning assets. This is, in its most fundamental form, the essence of asset/liability management. Additionally, TrustCo attempts to maintain adequate liquidity and reduce the sensitivity of net interest income to changes in interest rates to an acceptable level while enhancing profitability both on a short-term and long-term basis. The following Management's Discussion and Analysis for the second quarter and first six months of 2003 compared to the comparable periods in 2002 is greatly affected by the change in interest rates in the marketplace in which TrustCo competes. Included in the 2002 Annual Report to Shareholders is a description of the effect interest rates had on the results for the year 2002 compared to 2001. Most of the same market factors discussed in the 2002 Annual Report also had a significant impact on 2003 results. TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations, and rates paid on deposits and charged on loans. The absolute level of interest rates, changes in rates and customers' expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period. Interest rates have changed dramatically in response to the slowing economic conditions. One of the most important interest rates utilized to control economic activity is the "federal funds" rate. This is the rate utilized within the banking system for overnight borrowings for the highest credit quality institutions. The federal funds rate was 1.75% at the beginning of 2002 and had decreased by 50bp to 1.25% by the end of 2002 . In 2003 the federal funds rate was reduced another 25bp to 1.00% during the second quarter. The federal funds rate affects the level of other interest rates in the economy, most specifically the prime rate. The prime rate was 4.75% at the beginning of 2002 and had decreased 50bp to 4.25% by the end of 2002. Similar to the change in 2003 for the federal funds rate, the prime rate was reduced to 4.00% in the second quarter of 2003. 12 Earning Assets Total average interest earning assets increased from $2.61 billion for the second quarter of 2002 to $2.62 billion in 2003 with an average yield of 6.26% in 2002 and 5.58% in 2003. Income on earning assets decreased during this same time-period from $40.8 million in 2002 to $36.5 million in 2003. For the six month period ended June 30, 2003, the average balance of interest earning assets was $2.60 billion, an increase of $35.0 million from the comparable period in 2002 of $2.56 billion. The average yield on interest earning assets was 6.39% for 2002, compared to 5.70% in 2003. The increase in the average balance of earning assets was more than offset by the decrease in the yield earned on these assets, thereby resulting in a reduction in interest income of $7.8 million to $73.8 million for the six months of 2003, compared to $81.6 million for the six months of 2002. Loans The average balance of loans for the second quarter was $1.31 billion in 2003 and $1.53 billion in 2002. The yield on loans decreased from 7.42% in 2002 to 6.96% in 2003. The combination of the lower average balances and the lower rates resulted in a decrease in the interest income on loans by $5.6 million. For the six-month period ended June 30, 2003, the average balance in the loan portfolio was $1.35 billion compared to $1.53 billion for the comparable period in 2002. The average yield decreased from 7.46% in 2002 to 7.04% in 2003. The decrease in the average balance of loans outstanding and the impact of the decrease in the yield resulted in total interest income of $57.0 million in 2002 compared to $47.3 million in 2003. During the second quarter and first half of 2003 the balance of the loan portfolio decreased primarily as a result of residential mortgages, though decreases were also noted in other loan areas. The average balance of residential mortgage loans for the first half of 2002 was $1.18 billion compared to $982.7 million in 2003, a decrease of 16.8%. The average yield on residential mortgage loans decreased by 26 basis points compared to 2002. The average balance of residential mortgage loans for the second quarter of 2003 was $939.5 million compared to $1.18 billion for the comparable period in 2002. The average yield decreased to 7.26% for the second quarter of 2003 compared to 7.54% for 2002. TrustCo actively markets the residential loan products within its market territory. Mortgage loan rates are affected by a number of factors including, the prime rate, the federal funds rate, rates set by competitors and secondary market participants. As noted earlier, market interest rates have dropped significantly as a result of national economic policy in the United States. During this time TrustCo aggressively marketed the unique features of its loan products thereby differentiating itself from other lenders. These differences include extremely low closing costs, quick turnaround on credit decisions, no required escrow payments or private mortgage insurance and the fact that the loans are held in portfolio. 13 The decrease in the residential mortgage loan portfolio is the result of loan refinancing to other institutions by customers. This occurred in all the categories of the loan portfolio but primarily in the residential real estate loan area. The prepayment in the residential loan portfolio reflects the effect of the historically low interest rates experienced recently in the 30-year mortgage loans market. As noted earlier, certain mortgage loan customers are attracted to TrustCo's loan products as a result of the low closing costs and lack of escrow requirements. However, in light of the strategic decision by TrustCo to retain loans in the portfolio, its rates are somewhat higher than rates offered by lenders that sell loans in the secondary market, contributing to the recent decline in the portfolio balance. The impact of the decrease in the benchmark interest rate indexes (prime rate, federal funds rate, etc.) is apparent in the decrease in the yield earned in the commercial and home equity loan portfolios. The average yield earned on these loan types in 2003 were 57 bp and 62 bp, respectively less than the average yields earned in the first six months of 2002. The average balance of home equity lines of credit increased to $150.9 million in the second quarter of 2003 compared to $126.7 million in the comparable period in 2002. The average yield during this time period was 4.10% in 2003 and 4.74% in 2002. The six month results reflected these same trends with an average balance in 2003 of $146.6 million and $125.1 million in 2002. The average yield for the six months of 2003 was 4.16% and 4.78% for 2002. The increase in the average balance of home equity lines of credit reflect consumers desire to obtain the lowest cost financing vehicles available. Trustco's home equity line of credit is at the prime rate during an introductory period and then floats with prime over the life of the line. Closing costs are waived for consumers so long as the line remains active and utilized for a set period of time. Securities Available for Sale During the second quarter of 2003, the average balance of securities available for sale was $832.5 million with a yield of 5.89%, compared to $566.3 million for the second quarter of 2002 with a yield of 7.20%. The combination of the increase in average balance offset by the decrease in the yields caused an increase in interest income on securities available for sale of approximately $2.1 million between the second quarter of 2003 and 2002. The six-month results reflect the same principal trends noted for the second quarter. The total average balance of securities available for sale during the six months of 2003 was $741.3 million with an average yield of 6.30% compared to an average balance for 2002 of $554.8 million with a yield of 7.37%. The securities available for sale portfolio balance fluctuates because this portfolio is used to help fund or retain funding for the loan and deposit portfolios. Funding for loan growth either comes from new sources of deposits/borrowings or through the reallocation of existing assets. 14 During 2003 management decided to invest some of the additional cash flows coming from the loan portfolio refinancings and deposit increases into the securities available for sale portfolio so as to provide interest income and as a means of utilizing these funds other than in overnight investments. The securities purchased during this time period have been primarily federal agency bonds and municipal securities consistent with the Company's past practices. While this strategy provides the Company with additional interest income over the federal funds rate, it does subject these assets to a greater degree of interest rate risk. Subsequent to the end of the second quarter of 2003, overall general interest rates have increased as speculation continues as to the direction and intensity of the national economic recovery. These general market interest rate changes impact the market value of the securities available for sale portfolio thereby creating a reduction in the overall portfolio's unrealized gain position and lowering the Company's accumulated other comprehensive income (a component of shareholders' equity). Federal Funds Sold and Other Short-Term Investments During the second quarter of 2003, the average balance of federal funds sold and other short-term investments was $475.5 million with a yield of 1.25%, compared to the average balance for the three month period ended June 30, 2002 of $512.9 million with an average yield of 1.78%. The $37.4 million decrease in the average balance, combined with the 53 basis points decrease in the average yield, resulted in total interest income on federal funds sold and other short-term investments of $1.5 million for 2003 compared to $2.3 million for 2002. During the six-month period ended June 30, 2003, the average balance of federal funds sold and other short-term investments was $507.8 million with a yield of 1.25% compared to an average balance of $473.6 million in 2002 with an average yield of 1.77%. The increase in average federal funds balances and other short-term investments between the first half of 2002 and 2003 reflects a decision to hold funds in overnight deposits versus making longer-term investments in loans or securities available for sale. The decision to retain additional liquidity in the form of federal fund balances and other short-term investments is a result of the relatively low interest rates in the market for such alternative investments while keeping the balances available for investment once rates change. The effect of this decision by TrustCo is to have significantly more funds invested in the federal funds portfolio at significantly lower interest rates during 2003 with expectation that opportunities for reinvestment at higher levels will be available later in 2003. During the second quarter of 2003 the average balance of federal funds sold and other short-term investments decreased as a result of investments made in the securities available for sale portfolios and funding for the outflow in short-term borrowings. As noted in the discussion of securities available for sale, general market interest rates have increased since June 30, 2003 and therefore provide the opportunity for further reinvestment of the available funds. 15 Funding Opportunities TrustCo utilizes various funding sources to support its earning asset portfolio. The vast majority of the Company's funding comes from traditional deposit vehicles such as savings, interest bearing checking and time deposit accounts. During the quarter, total interest bearing liabilities were $2.26 billion for both 2003 and 2002. The rate paid on total interest bearing liabilities was 2.68% for the second quarter of 2002 and 1.84% for 2003. Total interest expense for the second quarter decreased approximately $4.8 million to $10.3 million for 2003 compared to $15.1 million for 2002. Similar changes in interest bearing liabilities were noted for the six-month period as was discussed for the quarter. Total interest bearing liabilities were $2.25 billion for the six-month periods ended June 30, 2003 and $2.22 billion for 2002. The rate paid on total interest bearing liabilities was 2.75% for 2002 and 1.97% for 2003 and total interest expense was $30.3 million in 2002 and $22.1 million in 2003. Demand deposit balances decreased $3.0 million during the second quarter of 2003 compared to the second quarter of 2002. Demand deposits averaged $190.9 million in 2002 and $188.0 million in 2003. On a year to date basis, demand deposits were $190.3 million in 2002 compared to $180.7 million in 2003. Interest bearing deposit balances have increased from $1.98 billion for the first six months of 2002 to $2.12 billion for 2003. Each of the deposit categories has also increased with the most notable being the increase in the average balance of savings accounts which averaged $743.2 million in 2003 and $685.4 million in 2002. TrustCo has experienced a deposit inflow primarily as a result of customers moving funds back into the banking system from the stock and bond market and from TrustCo's new branch openings. Short-term borrowings for the quarter were $124.4 million in 2003 compared to $244.6 million in 2002. The average cost decreased during this time period from 1.38% to 0.83% for the second quarter of 2003. The largest component of short-term borrowing is the Trustco Short Term Investments Account, which is available only to Trustco Trust Department customers. The balances in this account are a result of trust customers temporarily investing their funds in money market type instruments while waiting for some stability in the equity and bond markets. During the later part of the second quarter of 2003 management decided to have the Trust Department move the funds in the Trustco Short-Term Investment Account to a third party money market fund. For the second quarter of 2003 the Trustco Short-Term Investment Account had an average balance of $55.9 million. Historically, the Bank invested the funds received from this account in overnight investments and paid a money market rate tied to independent third party money market funds. Consequently the net spread (the difference between the yield earned on the investments and paid on the account) and, accordingly, the income generated was very low. In an offset to support the net interest margin, these assets and liabilities were liquidated and disposed off. 16 Net Interest Income Taxable equivalent net interest income increased to $26.1 million for the second quarter of 2003. The net interest spread increased 16 basis points between 2002 and 2003 and the net interest margin increased by 6 basis points. Net interest income for the first six months of 2003 was $51.8 million, an increase of approximately $382 thousand over the $51.4 million for the first six months of 2002. Net interest spread increased 9 basis points to 3.73% and net interest margin decreased 2 basis points to 3.98% for the six-month period ended June 30, 2003, compared to the six-month period ended June 30, 2002. Nonperforming Assets Nonperforming assets include nonperforming loans, which are those loans in a nonaccrual status, loans that have been restructured, and loans past due three payments or more, and still accruing interest. Also included in the total of nonperforming assets are foreclosed real estate properties, which are categorized, as real estate owned. Impaired loans are considered to be those commercial and commercial real estate loans in a nonaccrual status and loans restructured since January 1, 1995, when the accounting standards required the identification, measurement and reporting of impaired loans. The following will describe the nonperforming assets of TrustCo as of June 30, 2003. Nonperforming loans: Total nonperforming loans were $3.9 million at June 30, 2003, a decrease from the $6.5 million of nonperforming loans at June 30, 2002. There were no nonaccrual loans at June 30, 2003 down from the $916 thousand at June 30, 2002. Restructured loans were $5.5 million at June 30, 2002 compared to $3.9 million at June 30, 2003. There were no loans past due three payments or more and still accruing interest at June 30, 2003 and there were $151 thousand at June 30, 2002. All of the $3.9 million of nonperforming loans as of June 30, 2003 are restructured residential real estate or retail consumer loans. During the 1990's the majority of nonperforming loans were concentrated in the commercial and commercial real estate portfolios. Since 2000, there has been a continued shifting in the components of Trustco's problem loans and charge-offs from commercial and commercial real estate to the residential real estate and retail consumer loan portfolios. Contributing factors to this shift include: - - The overall emphasis within TrustCo for residential real estate originations, ` The relatively weak economic environment in the upstate New York territory, and - - The reduction in real estate values in TrustCo's market area that has occurred since the middle of the 1990's, thereby causing a reduction in the collateral that supports the real estate loans. 17 Consumer defaults and bankruptcies have increased dramatically over the last several years and this has lead to an increase in defaults on loans. TrustCo strives to identify borrowers that are experiencing financial difficulties and to work aggressively with them to minimize losses or exposures. Total impaired loans at June 30, 2003 of $3.7 million, consisted of restructured residential loans. During the first six months of 2003, there have been $134 thousand of commercial loan charge offs, $290 thousand of consumer loan charge offs and $5.33 million of mortgage loan charge offs as compared with $837 thousand of commercial loan charge offs, $288 thousand of consumer loan charge offs and $2.11 million of mortgage loan charge offs in the first six months of 2002. Recoveries during the first six-month periods have been $2.03 million in 2003 and $1.17 million in 2002. Real estate owned: There was no real estate owned as of June 30, 2003 and $268 thousand at June 30, 2002. Allowance for loan losses: The balance of the allowance for loan losses is maintained at a level that is, in management's judgment, representative of the amount of the risk inherent in the loan portfolio. At June 30, 2003, the allowance for loan losses was $49.5 million, which represents a decrease from the $52.6 million in the allowance at December 31, 2002. The allowance represents 3.88% of the loan portfolio as of June 30, 2003 compared to 3.68% at June 30, 2002. The provision charged to expense was $300 thousand for the second quarter of 2003 and 2002. For the six-month periods, the provision charged to expense was $820 thousand for 2002 and $600 thousand for 2003. In deciding on the adequacy of the allowance for loan losses, management reviews the current nonperforming loan portfolio as well as loans that are past due and not yet categorized as nonperforming for reporting purposes. Also, there are a number of other factors that are taken into consideration, including: - - The magnitude and nature of the recent loan charge offs and the movement of charge offs to the residential real estate loan portfolio, - - The change in the loan portfolio and the implication that has in relation to the economic climate in the bank's business territory, - - Changes in underwriting standards in the competitive environment in which TrustCo operates, - - Significant growth in the level of losses associated with bankruptcies and the time period needed to foreclose, secure and dispose of collateral, and 18 - - The relatively weak economic environment in the upstate New York territory combined with declining real estate prices in many of the communities Trustco serves. Consumer bankruptcies and defaults in general have risen significantly since the 1990's. This trend appears to be continuing as a result of economic strife and the relative ease of access by consumers to additional credit. Job growth in the upstate New York area has been modest to declining and there continues to be a shifting of higher paying jobs in manufacturing and government to lower paying service jobs. Management continues to monitor these and other asset quality trends in the review of allowance adequacy. Liquidity and Interest Rate Sensitivity TrustCo seeks to obtain favorable sources of funding and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. TrustCo's earnings performance and strong capital position enable the Company to raise funds easily in the marketplace and to secure new sources of funding. The Company actively manages its liquidity through target ratios established under its liquidity policies. Continual monitoring of both historical and prospective ratios allows TrustCo to employ strategies necessary to maintain adequate liquidity. Management has also defined various degrees of adverse liquidity situations, which could potentially occur, and has prepared appropriate contingency plans should such a situation arise. Noninterest Income Total noninterest income for the three months ended June 30, 2003 was $7.5 million, a decrease of $227 thousand from the comparable period in 2002. During the 2003 period, the Company recorded net securities gains of $2.2 million compared to $1.9 million for the comparable period in 2002. Excluding these securities transactions, noninterest income decreased from $5.8 million in the second quarter of 2002 to $5.3 million for the comparable period in 2003. Total noninterest income was $15.4 million for six months of 2003 compared to $14.5 million for 2002. Excluding net securities gains of $5.3 million and $3.8 million, the balances for 2003 and 2002 would have been $10.0 million and $10.7 million respectively. Net securities transactions have been significant for both the six-month and quarterly results in 2003 and 2002. The level of these transactions reflects management's decision to liquidate certain investments as interest rates were at historically low levels and therefore the gains on security sales were high. These sales provide the Company with additional liquidity for potential reinvestment at higher interest rates later in 2003. Management also has begun liquidating certain of the equity investments that had accumulated over the last several years as part of the expansion program to acquire other companies. 19 Trust department income decreased by $477 thousand to $1.6 million for the second quarter of 2003. The reduction in trust fee income is the result of market conditions that have negatively affected the underlying trust assets. Trust department assets under management were $916 million at June 30, 2003 compared to $1.07 billion at June 30, 2002. Noninterest Expenses Total noninterest expense for the second quarter of 2003 and 2002 was $12.6 million and $13.7 million respectively. For the six-months ended June 30, 2003 and 2002, total noninterest expense was $25.2 million and $26.1 million respectively. Salaries and employee benefits cost decreased from $5.5 million for the second quarter of 2002 to $5.1 million for the comparable period in 2003. The reduction in salaries and employee benefits is the result of the reduction in salary due to the retirement of the former Chief Executive Officer. Benefit costs also decreased as a result of changes made to post retirement benefits wherein retirees will assume increased levels of premium payment. Similar reductions in salaries and benefits were also noted for the six month period ended June 30, 2003 compared to 2002. Total salaries and employee benefits were $10.3 million for 2003 and $11.3 million for 2002. Net occupancy expense increased $125 thousand for the second quarter of 2003 compared to 2002 due primarily to the new branch operations and the cost of utilities. Equipment expense decreased approximately $125 thousand during the second quarter of 2003 compared to 2002 as a result of reduced computer expense due to contracts not being renewed in 2003 as a result of the data processing conversion. On a year to date basis equipment expense increased by $383 thousand to $1.9 million due to additional branches and the write-off of equipment and software no longer utilized. Professional service expenses for the second quarter of 2003 were $777 thousand, a decrease of $271 thousand from the comparable period in 2002. On a year to date basis, professional service expenses were $1.4 million in 2003 compared to $1.7 million in 2002. Included in the 2002 expense accounts were additional fees paid for computer consultants to assist in the conversion. Those expenses were not incurred in 2003. Charitable contributions expense is down approximately $1.0 million as a result of an additional contribution made in the second quarter of 2002 in recognition of the 100 year anniversary of the Company. This additional contribution was made in the form of a donation of appreciated stock to assist in funding the operating cost of a not-for-profit activity located in the Capital District region. Outsourced services increased from $845 thousand in the second quarter of 2002 to $1.9 million for the second quarter of 2003. On a year to date basis outsourced services were $3.1 million in 2003 compared to $1.0 million in 2002. These costs are for data processing, item processing and certain back room operations that were transferred to a third party vendor in the fourth quarter of 2002. 20 Income Taxes In the second quarter of 2003 and 2002, TrustCo recognized income tax expense of $5.6 million and $5.0 million respectively. This resulted in an effective tax rate of 29.5% for 2003 and 28.4% for 2002. For the six-months of 2003, total income tax expense was $11.0 million compared to $10.4 million for 2002. Capital Resources Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios. New issues of equity securities have not been required since traditionally, most of its capital requirements are met through the capital retained in the Company (after the dividends on the common stock). Total shareholders' equity at June 30, 2003 was $234.4 million, a decrease of $416 thousand from the year-end of 2002 balance of $234.8 million. The change in the shareholders' equity between year-end 2002 and June 30, 2003 primarily reflects the net income retained by TrustCo, the proceeds from shares issued upon the exercise of stock options, a $1.2 million increase in accumulated other comprehensive income, less approximately $10.4 million increase in the amount of treasury stock. TrustCo declared dividends of $0.300 per share during the first six-months of 2003 and 2002. These resulted in a dividend payout ratio of 83.6% in 2003 and 86.8% in 2002. The Company achieved the following capital ratios as of June 30, 2003 and 2002. June 30, Minimum Regulatory 2003 2002 Guidelines --------------------------------------- Tier 1 risk adjusted capital 16.33% 13.52 4.00 Total risk adjusted capital 17.62 14.81 8.00 In addition, at June 30, 2003 and 2002, the consolidated equity to total assets ratio (excluding the mark to market effect of securities available for sale) was 7.76% and 6.92%, respectively compared to a minimum regulatory guideline of 4.00%. 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. 21 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 2002 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. 22
TrustCo Bank Corp NY Management's Discussion and Analysis STATISTICAL DISCLOSURE I.DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following table summarizes the component distribution of average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing libilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Non- accrual loans are included in loans for this analysis. The average balances of securities available for sale is calculated using amortized costs for these securities. Included in the balance of shareholders' equity is unrealized appreciation ,net of tax, in the available for sale portfolio of $26.8 million in 2003 and $24.7 million in 2002.The subtotals contained in the following table are the arithmetic totals of the items in that category. Second Quarter Second Quarter 2003 2002 ------------------------------ ---------------------- ------------------------------ Average Average Average Average Change in Variance Variance (dollars in thousands) Balance Interest Rate Balance Interest Rate Interest Balance Rate Income/ Change Change Assets Expense Commercial loans......................$ 202,690 $ 3,693 7.29% $205,970 $4,106 7.98% (413) (65) (348) Residential mortgage loans............. 939,518 17,041 7.26% 1,175,879 22,172 7.54% (5,131) (4,314) (817) Home equity lines of credit ........... 150,925 1,540 4.10% 126,677 1,498 4.74% 42 987 (945) Installment loans...................... 14,220 461 13.04% 17,797 529 11.92% (68) (314) 246 ------------------------------ ---------------------- ------------------------------- Loans, net of unearned income.......... 1,307,353 22,735 6.96% 1,526,323 28,305 7.42% (5,570) (3,706) (1,864) Securities available for sale: U.S. Treasuries and agencies.......... 479,208 5,707 4.76% 181,866 2,997 6.59% 2,710 8,000 (5,290) Mortgage-backed securities............ 67,223 1,014 6.03% 64,514 1,170 7.25% (156) 284 (440) States and political subdivisions..... 222,340 4,440 7.99% 222,476 4,404 7.92% 36 (18) 54 Other ................................ 63,745 1,107 6.95% 97,485 1,619 6.65% (512) (971) 459 ------------------------------ ---------------------- -------------------------------- Total securities available for sale. 832,516 12,268 5.89% 566,341 10,190 7.20% 2,078 7,295 (5,217) Federal funds sold and other short-term investments........... 475,475 1,482 1.25% 512,897 2,281 1.78% (799) (157) (642) ------------------------------ ---------------------- --------------------------------- Total Interest earning assets........ 2,615,344 36,485 5.58% 2,605,561 40,776 6.26% (4,291) 3,432 (7,723) ----------------------------- ----------------------- ---------------------------------- Allowance for loan losses.............. (52,336) (57,389) Cash and non-interest earning assets.... 153,158 172,569 ---------- ---------- Total assets........................$2,716,166 $2,720,741 ========== ========== Liabilities and shareholders' equity Deposits: Interest bearing checking..........$ 313,820 $ 379 0.48% $304,473 $ 811 1.07% (432) 166 (598) Money market accounts............... 148,607 508 1.37% 123,761 651 2.11% (143) 614 (757) Savings............................. 761,004 2,373 1.25% 700,768 3,441 1.97% (1,068) 1,718 (2,786) Time deposits....................... 911,604 6,822 3.00% 885,133 9,356 4.24% (2,534) 1,800 (4,334) ----------------------------- ---------------------- --------------------------------- Total interest bearing deposits..... 2,135,035 10,082 1.89% 2,014,135 14,259 2.84% (4,177) 4,298 (8,475) Short-term borrowings.................. 124,418 259 0.83% 244,557 841 1.38% (582) (322) (260) Long-term debt......................... 350 5 5.84% 531 7 5.67% (2) (4) 2 ----------------------------- ---------------------- --------------------------------- Total interest bearing liabilities... 2,259,803 10,346 1.84% 2,259,223 15,107 2.68% (4,761) 3,972 (8,733) Demand deposits........................ 187,977 190,949 Other liabilities...................... 36,616 56,670 Shareholders' equity................... 231,770 213,899 ---------- ---------- Total liab. & shareholders' equity..$2,716,166 $2,720,741 ========== ========== Net interest income.................... 26,139 25,669 470 (540) 1,010 --------- -------- -------------------------------- Net interest spread.................... 3.74% 3.58% Net interest margin (net interest income to total interest earning assets)............................. 4.00% 3.94% Tax equivalent adjustment 1,740 1,824 -------- -------- Net interest income per book........ $ 24,399 $ 23,845 ======== ========
23
TrustCo Bank Corp NY Management's Discussion and Analysis STATISTICAL DISCLOSURE I.DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following table summarizes the component distribution of average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing libilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Non- accrual loans are included in loans for this analysis. The average balances of securities available for sale is calculated using amortized costs for these securities. Included in the balance of shareholders' equity is unrealized appreciation ,net of tax, in the available for sale portfolio of $27.2 million in 2003 and $24.1 million in 2002.The subtotals contained in the following table are the arithmetic totals of the items in that category. Six Months Six Months 2003 2002 ------------------------------ ---------------------- ------------------------------ Average Average Average Average Change in Variance Variance (dollars in thousands) Balance Interest Rate Balance Interest Rate Interest Balance Rate Income/ Change Change Assets Expense Commercial loans......................$ 202,121 $ 7,479 7.41% $207,465 $8,262 7.98% (783) (209) (574) Residential mortgage loans............. 982,656 35,889 7.30% 1,180,769 44,654 7.56% (8,765) (7,279) (1,486) Home equity lines of credit ........... 146,618 3,019 4.16% 125,086 2,967 4.78% 52 927 (875) Installment loans...................... 14,523 953 13.27% 18,310 1,164 12.82% (211) (316) 105 ------------------------------ ---------------------- ------------------------------- Loans, net of unearned income.......... 1,345,918 47,340 7.04% 1,531,630 57,047 7.46% (9,707) (6,877) (2,830) Securities available for sale: U.S. Treasuries and agencies.......... 364,981 9,098 4.99% 171,572 5,954 6.94% 3,144 7,882 (4,738) Mortgage-backed securities............ 63,465 2,005 6.32% 70,455 2,543 7.22% (538) (238) (300) States and political subdivisions..... 222,643 8,907 8.00% 220,353 8,741 7.93% 166 91 75 Other ................................ 90,186 3,335 7.40% 92,462 3,203 6.93% 132 (196) 328 ------------------------------ ---------------------- -------------------------------- Total securities available for sale. 741,275 23,345 6.30% 554,842 20,441 7.37% 2,904 7,539 (4,635) Federal funds sold and other short-term investments........... 507,836 3,137 1.25% 473,606 4,159 1.77% (1,022) 774 (1,796) ------------------------------ ---------------------- --------------------------------- Total Interest earning assets........ 2,595,029 73,822 5.70% 2,560,078 81,647 6.39% (7,825) 1,436 (9,261) ----------------------------- ----------------------- ---------------------------------- Allowance for loan losses.............. (52,508) (57,568) Cash and non-interest earning assets.... 160,954 173,680 ---------- ---------- Total assets........................$2,703,475 $2,676,190 ========== ========== Liabilities and shareholders' equity Deposits: Interest bearing checking..........$ 316,454 $ 890 0.57% $299,336 $1,581 1.06% (691) 249 (940) Money market accounts............... 146,388 1,061 1.46% 104,903 1,096 2.11% (35) 743 (778) Savings............................. 743,206 4,943 1.34% 685,391 6,694 1.97% (1,751) 1,435 (3,186) Time deposits....................... 911,526 14,541 3.22% 886,884 19,175 4.36% (4,634) 1,498 (6,132) ----------------------------- ---------------------- --------------------------------- Total interest bearing deposits..... 2,117,574 21,435 2.04% 1,976,514 28,546 2.91% (7,111) 3,925 (11,036) Short-term borrowings.................. 136,296 606 0.90% 241,826 1,697 1.42% (1,091) (593) (498) Long-term debt......................... 373 11 5.89% 556 16 5.95% (5) (5) --- ----------------------------- ---------------------- --------------------------------- Total interest bearing liabilities... 2,254,243 22,052 1.97% 2,218,896 30,259 2.75% (8,207) 3,327 (11,534) ---------------------------- ------------------------ --------------------------------- Demand deposits........................ 180,728 190,269 Other liabilities...................... 36,163 55,326 Shareholders' equity................... 232,341 211,699 ---------- ---------- Total liab. & shareholders' equity..$2,703,475 $2,676,190 ========== ========== Net interest income.................... 51,770 51,388 382 (1,891) 2,273 --------- -------- -------------------------------- Net interest spread.................... 3.73% 3.64% Net interest margin (net interest income to total interest earning assets)............................. 3.98% 4.00% Tax equivalent adjustment 3,676 3,632 -------- -------- Net interest income per book........ $ 48,094 $ 47,756 ======== ========
24 Item 3. Quantitative and Qualitative Disclosures about Market Risk As detailed in the Annual Report to Shareholders as of December 31, 2002 the Company is subject to interest rate risk as it is principal market risk. As noted in detail throughout this Management's Discussion and Analysis for the six months ended June 30, 2003 the Company continues to respond to changes in interest rates in a fashion to position the Company to meet both short term earning goals but to also allow the Company to respond to changes in interest rates in the future. The average balance of federal funds sold and other short-term investments has increased from $473.6 million in 2002 to $507.8 million in 2003. These increases in federal funds sold and short term investments position the Company with added funds available for investment in the securities and loan portfolios if rates rise. Investment opportunity began to be realized in the later part of the second quarter. Management began investing funds from federal funds sold and the other short-term investment portfolio into the securities available for sale and loan portfolios. This trend continued into the third quarter of 2003. Item 4. Controls and Procedures The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 ("Exchange Act") designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those disclosure controls and procedures, the Chief Executive and Chief Financial Officer of the Company concluded, as of the end of the period covered by this report, that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected. 25 As of the end of the period covered by this report, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or is reasonably likely to materially affect, the internal control over financial reporting. Part II. Item 4. Submission of Matters to Vote of Security Holders - Annual Meeting At the annual meeting held May 19, 2003, shareholders of the Company were asked to consider the Company's nominees for directors and to elect three (3) directors to serve for a term of three (3) years. The Company's nominees for director were Barton A. Andreolli, James H. Murphy, DDS, and William J. Purdy. The results of shareholder voting are as follows: 1. Election of Directors: Director For Withheld -------- --- -------- Barton A. Andreolli 61,209,779 4,106,198 James H. Murphy 61,010,931 4,305,046 William J. Purdy 61,133,904 4,182,073 Directors continuing in office are Joseph A. Lucarelli, Anthony J. Marinello, M.D., Robert A. McCormick, and William D. Powers. 2. Proposal to ratify the appointment of KPMG LLP as the independent certified public accountants of TrustCo for the fiscal year ending December 31, 2003. For Withheld Abstain --- -------- ------- 61,946,565 2,899,293 470,119 26 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Reg S-K (Item 601) Exhibit No. Description Page No. 31 Certification Pursuant to Section 302 of The 30 Sarbanes-Oxley Act of 2002 32 Certification Pursuant to 18 U.S.C. Section 1350, 32 As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K Filing of Form 8-K on May 21, 2003, regarding the May 20, 2003, letter to shareholders which contained discussion of May 19, 2003, annual meeting of shareholders, a press release dated May 20, 2003 discussing results of the annual meeting held on May 19, 2003, and a press release dated May 20, 2003, declaring a cash dividend of $0.15 per share payable on July 1, 2003, to shareholders of record June 6, 2003, is incorporated herein by reference. Filing of Form 8-K on July 2, 2003, regarding the June 16, 2003, letter from the Office of Thrift Supervision terminating Trustco Bank's obligation to comply with the August 22, 2002 Formal Agreement with the Office of the Comptroller of the Currency, is incorporated herein by reference. Filing of Form 8-K on July 15, 2003, regarding two press releases dated July 15, 2003, detailing second quarter financial results for 2003, is incorporated herein by reference. Filing of Form 8-K on July 17, 2003, regarding Amendment No. 1 to the current report on Form 8-K, being filed to include year-to-date data regarding Financial Highlights and Consolidated Statements of Income contained in the press release dated July 15, 2003, is incorporated herein by reference. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TrustCo Bank Corp NY Date: August 13, 2003 By:/S/ Robert T. Cushing -------------------------- Robert T. Cushing Chief Executive Office and Chief Financial Officer 28 Exhibits Index Reg S-K Exhibit No. Description Page No. 31 Certification Pursuant to Section 302 of The 30 Sarbanes-Oxley Act of 2002 32 Certification Pursuant to 18 U.S.C. Section 1350, 32 As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 29 Exhibit 31 Certification Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002 I, Robert T. Cushing, the principal executive officer and principal financial officer of TrustCo Bank Corp NY, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TrustCo Bank Corp NY; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 30 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 13, 2003 /S/ Robert T. Cushing --------------------------- Robert T. Cushing Chief Executive Officer and Chief Financial Officer 31 Exhibit 32 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of TrustCo Bank Corp NY (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of the undersigned's knowledge and belief: 1. The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /S/ Robert T. Cushing -------------------------- Robert T. Cushing Chief Executive Officer and Chief Financial Officer August 13, 2003 32 -----END PRIVACY-ENHANCED MESSAGE-----