EX-13 2 ex13.htm EXHIBIT 13

EXHIBIT 13
 
 
TrustCo Bank Corp NY (the “Company,” “TrustCo” or the “Bank”) 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, and its principal subsidiary, Trustco Bank, operates 139 community banking offices and 148 Automatic Teller Machines throughout the Bank’s market areas. The Company serves 5 states and 29 counties with a broad range of community banking services.

Financial Highlights
 
(dollars in thousands, except per share data)
 
Years ended December 31,
 
 
 
2013
   
2012
   
Percent Change
 
Income:
 
   
   
 
Net interest income (Taxable Equivalent)
 
$
136,094
     
135,669
     
0.31
%
Net Income
   
39,812
     
37,534
     
6.07
 
Per Share:
                       
Basic earnings
   
0.422
     
0.400
     
5.50
 
Diluted earnings
   
0.422
     
0.400
     
5.50
 
Tangible book value
   
3.82
     
3.81
     
0.26
 
Average Balances:
                       
Assets
   
4,422,393
     
4,332,793
     
2.07
 
Loans, net
   
2,771,663
     
2,572,983
     
7.72
 
Deposits
   
3,863,420
     
3,809,690
     
1.41
 
Shareholders' equity
   
356,979
     
350,680
     
1.80
 
Financial Ratios:
                       
Return on average assets
   
0.90
%
   
0.87
     
3.45
 
Return on average equity
   
11.15
     
10.70
     
4.21
 
Consolidated tier 1 capital to:
                       
Total average assets (leverage)
   
8.27
     
8.21
     
0.73
 
Risk-adjusted assets
   
16.74
     
16.68
     
0.36
 
Total capital to risk-adjusted assets
   
18.00
     
17.94
     
0.33
 
Net loans charged off to average loans
   
0.26
     
0.50
     
(47.95
)
Allowance for loan losses to nonperforming loans
   
1.10
x    
0.91
     
20.88
 
Efficiency ratio
   
52.78
%
   
52.28
     
(0.96
)
Dividend Payout ratio
   
62.19
     
65.60
     
(5.20
)

Per Share information of common stock

 
 
   
   
   
Tangible
   
Range of Stock
 
 
 
Basic
   
Diluted
   
Cash
   
Book
   
Price
 
 
 
Earnings
   
Earnings
   
Dividend
   
Value
   
High
   
Low
 
 
 
   
   
   
   
   
 
2013
 
   
   
   
   
   
 
First quarter
 
$
0.097
     
0.097
     
0.0656
     
3.83
     
5.65
     
5.13
 
Second quarter
   
0.104
     
0.104
     
0.0656
     
3.69
     
5.74
     
5.14
 
Third quarter
   
0.109
     
0.109
     
0.0656
     
3.75
     
6.32
     
5.46
 
Fourth quarter
   
0.113
     
0.112
     
0.0656
     
3.82
     
7.67
     
5.85
 
 
                                               
2012
                                               
First quarter
 
$
0.095
     
0.095
     
0.0656
     
3.68
     
5.92
     
5.15
 
Second quarter
   
0.097
     
0.097
     
0.0656
     
3.73
     
5.86
     
5.02
 
Third quarter
   
0.104
     
0.104
     
0.0656
     
3.81
     
5.91
     
5.37
 
Fourth quarter
   
0.104
     
0.104
     
0.0656
     
3.81
     
5.84
     
5.09
 

1

 
Financial Highlights
1
 
 
President’s Message
3-4
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
5
 
 
Average Balances, Yields and Net Interest Margins
18
 
 
Glossary of Terms
36-38
 
 
Management’s Report on Internal Control Over Financial Reporting
39
 
 
Report of Independent Registered Public Accounting Firm
40
 
 
Consolidated Financial Statements and Notes
41-96
 
 
Branch Locations
97-101
 
 
Officers and Board of Directors
102-103
 
 
General Information
104
 
 
Share Price Information
105-106

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.
2

 
President’s Message
 
Dear fellow shareholders:

Our Bank had a very good year in 2013. We were able to produce solid operating results while continuing to grow and refine our operations.  Our profitability was up over 6% in 2013, to just under $40 million.  We finished the year strong with quarter-over-quarter results up 8.4%. We also had improvement in the quarter’s return on average assets and return on average equity to .94% and 11.78% respectively.

Our balance sheet showed impressive growth on the asset side. We grew about 4% driven by $224 million in loan portfolio growth. The mortgage portfolio saw the greatest benefit of this growth, but all loan categories were up.  Our total deposits grew by about $123 million. We continue to see the very positive shift in our deposit mix. We are less dependent on time accounts, with about $192 million growth in the average balance core categories.  We also improved our franchise value by growing average deposits per branch to $28.3 million at year end.

As shareholders you know we actively work at growing, improving and refining our branch network. This is important to our Company since unlike many of our competitors who have abandoned branches, we embrace them as our platform to conduct business. We opened only one new branch in 2013, but have more activity planned for 2014.

We are pleased our non-performing assets dropped over $9 million in 2013 to just over $52 million. Our net charge off’s also saw a significant drop. We had two successful bulk sales of hard-core long-term problem assets which we realized a gain on.  We continue to work our way through a bubble, and are finally seeing real positive results. Our asset quality ratios have all moved in the right direction in 2013.

Our low efficiency ratio has always been a hallmark at the Bank. We are careful about expense control and try to never miss an opportunity to improve our operations. We ended the year with an efficiency ratio in the low 50’s, world-class by any measure.

Our net interest margin ended the year with an uptick in the fourth quarter. Our philosophy has always included a very liquid balance sheet and a well-capitalized position.
3

 
Trustco Financial Services continues to expand adding additional clients and services. We began to offer annuities as an added investment option in 2013.They have been well received by our customers. Our Financial Services professionals welcome a meeting to discuss your estate and or financial planning needs.

Congratulations to Bob Leonard who was promoted to Executive Vice President in 2013. Bob has had a distinguished career at the Bank of over 27 years.  The Company greatly benefits from his tremendous experience and knowledge.

We mourn the passing of James Niland, a long-term former Officer in the Trust Department. I assure you he will be missed by his many friends and co-workers.

Our employees continue to volunteer many hours supporting local charitable organizations. Additionally, the Bank made over 250 charitable donations in 2013.  TrustCo is committed to our communities and to being a good corporate citizen.

The past 10 years have been both challenging and rewarding. As a team we have faced the Great Recession, a banking crisis, a real estate crash of epic proportion, a challenging rate environment, regulatory and legal challenges like we have never seen before, and a turbulent stock market.  As a team we have responded. We entered and expanded into new markets: New York, Massachusetts, Vermont, New Jersey, and most notably Florida.  We increased capital and stayed very liquid. We took no bailouts. We stayed profitable. We continued to pay a very healthy dividend. During the past 10 years, we have doubled our branch network, built a growth engine that will continue to prosper into the next generation. We enter 2014 with great optimism and strength. Our Company has a very bright future, continuing our pattern of sound profitable growth.

On behalf of our Board of Directors and employees, thank you for your support.
 
Sincerely,
 
Robert J. McCormick
President and Chief Executive Officer

4

 
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 (“Company”, or “TrustCo”), during 2013 and, in summary form, the two preceding years. Unless otherwise indicated, 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 2013 should be read in conjunction with this review. Reclassifications are made where necessary to conform to the current year’s presentation.

TrustCo made significant progress in 2013 despite continued softness in the economy and a generally challenging operating environment for banks. Among the key accomplishments for 2013, in management’s view:

· Net income was up 6.1% to $39.8 million in 2013 versus 2012;
· Average loans and average deposits were up $199 million and $54 million, respectively, for 2013 compared to the prior year;
· The average balance of core deposits grew $192 million in 2013 compared to 2012:
·
Nonperforming assets declined $9.3 million or 15.1% to $52.1 million from year-end 2012 to year-end 2013;
· At 53%, the efficiency ratio remained at an industry leading level, and;
· The regulatory capital levels of both the Company and Trustco Bank remained strong at December 31, 2013.

Management believes that the Company was able to achieve these accomplishments, despite a continued weak economy and increased regulatory burden, by executing its long term plan focused on traditional lending criteria and conservative balance sheet management. Achievement of specific business goals such as the continued expansion of loans and deposits, along with tight control of operating expenses and manageable levels of nonperforming assets is fundamental to the long term success of the Company as a whole.

Return on average equity was 11.15% in 2013 compared to 10.70% in 2012, while return on average assets was 0.90% in 2013 and 0.87% in 2012.

The economic and business environment remained mixed during 2013. Equity markets were generally very strong, with gains in equity indices including the Dow Jones Industrial Average (up 26.5%), the S&P 500 (up 29.6%) and the Russell 2000 index (up 37.0%). United States Treasuries saw significant price depreciation as yields moved higher during the second half of the year, with most other domestic fixed income securities seeing similar, though less pronounced, moves. Overseas markets experienced more mixed conditions during 2013, with modest improvements in some areas but with slower growth in other areas, including China. Despite gains in equity markets and some modest improvements in parts of the economy, the underlying economy of the United States continued to face many significant challenges, with key measures of the health of the economy remaining at troubled levels and progress coming slowly. High unemployment levels and stagnant real estate values in parts of the country are prime examples of the major issues that overhang the economy, although some geographic areas have seen significant improvement in these areas. The residential mortgage market is still in somewhat of a state of flux as reform of entities such as the Federal National Mortgage Association (FNMA) and Government National Mortgage Association (GNMA) remains an open issue and regulatory changes have caused some significant operating changes for lenders.  The unprecedented intervention by governments in markets and attempts to stimulate the economy have led to very large fiscal deficits for the United States and other nations, which may have long term consequences. The sharp easing of monetary policy during 2007-2008 and some of the market interventions have yet to be unwound, while some of these programs have actually grown. Finally, the impact of regulatory changes that have been enacted has only partly been felt at this point, and we expect that these changes will continue to impact the banking industry going forward.  In recent months, the Federal Reserve has begun to scale down its quantitative easing program, although there is no current plan to unwind it.

TrustCo’s long-term focus on traditional banking services has enabled the Company to avoid significant impact from asset quality problems, and the Company’s strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with past practice. TrustCo has not engaged in the types of high risk loans and investments that led to the widely reported problems in the industry in recent years. A number of major competitors of the Company were severely impacted by these issues. While we continue to adhere to prudent underwriting standards, as a lender we may be adversely impacted by general economic weaknesses and by the downturn in the housing market in the areas we serve.
5


 
Overview

Overall, 2013 was marked by growth in the two key drivers of the Company’s long-term performance, deposits and loans. Deposits ended 2013 at $3.93 billion, an increase of $122.9 million or 3.2% from the prior year end, and the loan portfolio grew to a total of $2.91 billion, an increase of $224.1 million or 8.3% over the 2012 year-end balance. The year-over-year increases in deposits and loans reflect the success the Company has had in attracting customers to the Bank, both in new branch locations as well as in its established offices. Management believes that TrustCo’s success is predicated on providing core banking services to a wider number of customers. Growing the customer base should contribute to continued growth of loans and deposits, as well as net interest income and non-interest income.

TrustCo recorded net income of $39.8 million or $0.422 of diluted earnings per share for the year ended December 31, 2013, compared to $37.5 million or $0.400 of diluted earnings per share for the year ended December 31, 2012. This represents an increase of 6.1% in net income and 5.5% in diluted earnings per share between 2012 and 2013.

During 2013, the following had a significant effect on net income:
 
· an increase of $776 thousand in net interest income from 2012 to 2013 as a result of 2.3% growth in average interest earning assets, partly offset by a 6 basis point decline in the net interest margin to 3.14%,
·
a decrease in the provision for loan losses from $12.0 million in 2012 to $7.0 million in 2013,
· a decrease of $655 thousand in non-interest income (excluding net gain on sales of securities) in 2013 as compared to 2012,
· the recognition of net gains on securities transactions of $1.6 million in 2013 compared to net securities gains of $2.2 million recorded in 2012,
· a $1.0 million decline in advertising costs, and
· an increase of $1.3 million in income tax expense from $22.4 million in 2012 to $23.7 million in 2013.
 
TrustCo performed well in comparison to its peers with respect to a number of key performance ratios during 2013 and 2012, including:
 
· return on average equity of 11.15% for 2013 and 10.70% for 2012, compared to medians of 8.72% in 2013 and 8.44% in 2012 for a peer group comprised of all publicly traded banks and thrifts tracked by SNL Financial with assets of $2 billion to $10 billion, and
· an efficiency ratio of 52.78% for 2013 and 52.28% for 2012, compared to the peer group levels of 63.62% in 2013 and 61.04% in 2012.

During 2013, TrustCo’s results were positively affected by the growth of low-cost core deposits. The low short-term rate environment prevailing throughout 2013 allowed the Company to reduce rates paid on its deposit products, particularly time deposits. A change in customer behavior also led to the shift of funds from higher yielding certificates of deposit accounts to lower yielding core accounts. This change may be due to customers’ desire to retain flexibility in case rates rise, in which case core deposits may decrease if customers move their accounts from TrustCo to seek higher yielding accounts elsewhere or shift into higher yielding accounts at TrustCo. This shift and the general decline in rates resulted in a lower cost of funds for the Company, which partly offset the diminished yields in its loans and securities portfolios. The Company has traditionally maintained a high liquidity position, and taken a conservative stance in its investment portfolio through the use of relatively short term securities. The low rate environment that prevailed during the year resulted in maturing and called securities being reinvested at lower yields. The Federal Reserve Board’s (“FRB”) significant easing during 2007-2008 and other government attempts to reduce and restrain interest rates, along with the weak economy, were key drivers of the rate environment during 2013. The 2007-2008 easing included a particularly sharp reduction in the Federal Funds rate in 2008, from the 4.25% rate at the beginning of the year to a target range of between 0.00% to 0.25% by year end. That target range was in place throughout 2012 and 2013 and continues to be in place at this time. The FRB Federal Open Market Committee (“FOMC”) has begun to reduce its quantitative easing program, but affirmed in its January 29, 2014 press release that, “…a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”  Improved economic conditions could cause the FOMC to revise its position at any time.  Market rates generally stayed within a narrow range in the early part of 2013, but began to rise during the second half of the year.  The increases were more pronounced with maturities from five years and further out on the curve, creating a larger spread between long and short term rates.  On average, the spread between the 10 year Treasury and the 2 year Treasury was 204 basis point in 2013, compared to 153 basis points in 2012, and ended the year at a spread of 266 basis points.  A more positive slope in the yield curve is generally beneficial for the Company’s earnings derived from its core mix of loans and deposits. The tables below illustrate the range of key interest rates during 2012 and 2013.
6

 
  2012     
 
 
3 Month
Yield (%)
   
2 Year
Yield (%)
   
5 Year
Yield (%)
   
10 Year
Yield (%)
   
10 Year - 2 Year
Spread (%)
 
 
 
   
   
   
   
 
Beginning of Year
   
0.02
     
0.27
     
0.89
     
1.97
     
1.70
 
Peak
   
0.14
     
0.41
     
1.22
     
2.39
     
2.00
 
Trough
   
0.01
     
0.21
     
0.56
     
1.43
     
1.21
 
End of Year
   
0.05
     
0.25
     
0.72
     
1.78
     
1.53
 
Average
   
0.09
     
0.28
     
0.76
     
1.80
     
1.53
 
 
 
2013
  
 
 
3 Month
Yield (%)
   
2 Year
Yield (%)
   
5 Year
Yield (%)
   
10 Year
Yield (%)
   
10 Year - 2 Year
Spread (%)
 
 
 
   
   
   
   
 
Beginning of Year
   
0.08
     
0.27
     
0.76
     
1.86
      1.59  
Peak
   
0.14
     
0.52
     
1.85
     
3.04
      2.66  
Trough
   
0.00
     
0.20
     
0.65
     
1.66
      1.46  
End of Year
   
0.07
     
0.38
     
1.75
     
3.04
      2.66  
Average
   
0.06
     
0.31
     
1.17
     
2.35
      2.04  
 

The decrease in the provision for loan losses from $12.0 million in 2012 to $7.0 million in 2013 positively affected net income. Net charge-offs decreased from $12.8 million in 2012 to $7.2 million in 2013. Nonperforming loans decreased from $52.7 million to $43.4 million and the nature of these loans changed in terms of both geographic location and, to a lesser degree, loan type. The decline in the provision for loan losses is primarily a reflection of the improvement in the performance of the loan portfolio, with reductions in both nonperforming loans (“NPLs”) and charge-offs, with a continuation of the trend towards particular improvements in the Florida market.

TrustCo focuses on providing high quality service to the communities served by its 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 added one new branch in 2013, bringing the total to 139 at year-end. The Company remains focused on building its customer relationships, deposits and loans throughout its branch network, with a particular emphasis on the branches added during the major branch expansion that was completed in 2010. Although that specific expansion program is complete, the Company typically opens new offices each year, filling in or extending existing markets. The expansion program was established to expand the franchise to areas experiencing economic growth, specifically in central Florida and the downstate New York region. The Company has experienced significant growth in both new markets as measured by deposit balances, and to a lesser extent, by loan balances. All new branches have the same products and features found at other TrustCo locations. With a combination of competitive rates, excellent service and convenient locations, management believes that the new branches will continue to attract deposit and loan customers and be a welcome addition to these communities. The branches opened since the expansion program began have continued to add to the Company’s customer base. As expected, some branches have grown more rapidly than others. Typically, new bank branches continue to grow for years after being opened. The expansion program has contributed significantly to the growth of both deposits and loans in recent years, as well as to non-interest income and non-interest expense. The higher costs are offset by net interest income earned on core loans and deposits generated by these branches, as well as associated non-interest income. The major expansion program has been completed and is expected to continue to reduce the rate of growth in non-interest expenses. Revenue growth is expected to continue, as these branches typically continue to add new customers and increase penetration with existing customers over time.
7

 
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 and other short term investments) are the Company’s primary earning assets. Average interest earning assets were 98.0% of average total assets for 2013, compared to 97.8% for 2012.

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 predicted 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. Predicting the impact of changing rates on the Company’s net interest income and net fair value of its balance sheet is complex and subject to uncertainty for a number of reasons. For example, in making a general assumption that rates will rise, a myriad of other assumptions regarding whether the slope of the yield curve remains the same or changes, whether the spreads of various loans, deposits and investments remain unchanged or widen or narrow and what changes occur in customer behavior all need to be made. The Company routinely models various rate changes and monitors basis changes that may be incorporated into that modeling.

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. During 2007-2008 the FRB aggressively reduced the Federal Funds rate, including a decrease from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008. The target range has remained at that level ever since and statements by the FRB indicate that low rates are likely to remain in place until the economy shows improved strength.

As noted previously, the yield on longer term financial instruments, including the 10 year Treasury bond rate, generally trended up in the second half of 2013. The yield on the 10 year Treasury increased by 118 basis points from 1.86% at the beginning of 2013 to the year-end level of 3.04%. The rate on the 10 year Treasury bond and other long-term interest rates have a significant influence on the rates for new residential real estate loans. The FRB is also attempting to influence rates on mortgage loans by other means, including direct intervention in the mortgage-backed securities market, by purchasing these securities in an attempt to raise prices and reduce yields. 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 the securities available for sale portfolio, which are recorded at fair value. Generally, as market interest rates increase the fair value of the securities will decrease. Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae. Because TrustCo is a portfolio lender and does not generally 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. Higher market rates also generally increase the value of retail deposits.
8

 
The net effect of these interest rate changes is that the yields earned on both short term investments and longer term investments remained quite low for most of 2013, while loan yields and deposit costs, as noted, declined through most of the year.

Earning Assets

Average earning assets during 2013 were $4.33 billion, which was an increase of $96.2 million from the prior year. This increase was the result of growth in the average balance of net loans of $198.7 million, a $67.3 million decrease in held-to-maturity securities, a $76.7 million decrease in securities available for sale, and a $40.6 million increase in Federal Funds sold and other short-term investments between 2012 and 2013. The increase in the loan portfolio is the result of an increase in real estate loans, primarily in the residential segment of the portfolio. This increase in real estate loans is a result of aggressive sales of this product throughout the TrustCo branch network, an effective marketing campaign, competitive rates and closing costs, and changes in competitive conditions.

Total average assets were $4.42 billion for 2013 and $4.33 billion for 2012.

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.
9

 

MIX OF AVERAGE EARNING ASSETS

(dollars in thousands)
 
   
   
   
2013
   
2012
   
Components of
 
 
 
   
   
   
vs.
   
vs.
   
Total Earning Assets
 
 
 
2013
   
2012
   
2011
   
2012
   
2011
   
2013
   
2012
   
2011
 
Loans, net
 
$
2,771,663
     
2,572,983
     
2,423,337
     
198,680
     
149,646
     
63.9
%
   
60.7
     
60.7
 
 
                                                               
Securities available for sale:
                                                               
U.S. government sponsored enterprises
   
221,028
     
568,425
     
667,037
     
(347,397
)
   
(98,612
)
   
5.1
     
13.4
     
16.7
 
State and political subdivisions
   
12,845
     
35,435
     
58,725
     
(22,590
)
   
(23,290
)
   
0.3
     
0.8
     
1.5
 
Mortgage-backed securities and collateralized mortgage obligations-residential
   
545,487
     
334,616
     
112,504
     
210,871
     
222,112
     
12.6
     
7.9
     
2.8
 
Corporate bonds
   
46,049
     
68,182
     
108,513
     
(22,133
)
   
(40,331
)
   
1.1
     
1.6
     
2.7
 
Small Business Administration-guaranteed participation securities
   
109,913
     
15,707
     
-
     
94,206
     
15,707
     
2.5
     
0.4
     
0.0
 
Mortgage-backed securities and collateralized mortgage obligations-commercial
   
10,420
     
-
     
-
     
10,420
     
-
     
0.2
     
0.0
     
0.0
 
Other
   
625
     
660
     
703
     
(35
)
   
(43
)
   
0.0
     
0.0
     
0.0
 
Total securities available for sale
   
946,367
     
1,023,025
     
947,482
     
(76,658
)
   
75,543
     
21.8
     
24.1
     
23.7
 
 
                                                               
Held-to-maturity securities:
                                                               
U.S. government sponsored enterprises
   
-
     
1,048
     
11,035
     
(1,048
)
   
(9,987
)
   
0.0
     
0.0
     
0.3
 
Mortgage-backed securities and collateralized mortgage obligations
   
90,360
     
131,092
     
114,296
     
(40,732
)
   
16,796
     
2.1
     
3.2
     
2.9
 
Corporate bonds
   
14,011
     
39,570
     
56,253
     
(25,559
)
   
(16,683
)
   
0.3
     
0.9
     
1.4
 
Total held-to-maturity securities
   
104,371
     
171,710
     
181,584
     
(67,339
)
   
(9,874
)
   
2.4
     
4.1
     
4.6
 
 
                                                               
Federal Reserve Bank and Federal Home Loan Bank stock
   
10,266
     
9,425
     
6,898
     
841
     
2,527
     
0.2
     
0.2
     
0.2
 
Federal funds sold and other short-term investments
   
502,136
     
461,495
     
432,631
     
40,641
     
28,864
     
11.6
     
10.9
     
10.8
 
 
                                                               
Total earning assets
 
$
4,334,803
   
$
4,238,638
   
$
3,991,932
     
96,165
     
246,706
     
100.0
%
   
100.0
     
100.0
 

(1) The average balances of securities available for sale are presented using amortized cost for these securities.

Loans

Average loans increased $198.7 million during 2013 to $2.77 billion. Interest income on the loan portfolio decreased to $128.0 million in 2013 from $128.7 million in 2012. The average yield declined 38 basis points to 4.62% in 2013 compared to 2012.
 

LOAN PORTFOLIO

(dollars in thousands)
 
As of December 31,
 
 
 
2013
   
2012
   
2011
 
 
 
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Commercial
 
$
202,038
     
6.9
%
 
$
198,750
     
7.4
%
 
$
227,302
     
9.0
%
Real estate - construction
   
35,358
     
1.2
     
37,205
     
1.4
     
32,507
     
1.3
 
Real estate - mortgage
   
2,325,029
     
79.9
     
2,110,290
     
78.6
     
1,944,305
     
77.1
 
Home equity lines of credit
   
340,489
     
11.7
     
333,909
     
12.4
     
313,038
     
12.4
 
Installment loans
   
5,895
     
0.2
     
4,579
     
0.2
     
4,151
     
0.2
 
 
                                               
Total loans
   
2,908,809
     
100.0
%
   
2,684,733
     
100.0
%
   
2,521,303
     
100.0
%
Less: Allowance for loan losses
   
47,714
             
47,927
             
48,717
         
 
                                               
Net loans (1)
 
$
2,861,095
           
$
2,636,806
           
$
2,472,586
         

10

 
 
 
Average Balances
 
 
 
2013
   
2012
   
2011
   
2010
   
2009
 
 
 
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
 Percent
   
Amount
   
 Percent
   
Amount
   
 Percent
 
Commercial
 
$
193,065
     
7.0
%
 
$
209,323
     
8.1
%
 
$
242,256
     
10.0
%
 
$
261,621
     
11.3
%
 
$
281,254
     
12.8
%
Real estate - construction
   
36,689
     
1.3
     
34,387
     
1.3
     
18,666
     
0.8
     
12,971
     
0.6
     
16,121
     
0.7
 
Real estate - mortgage
   
2,201,348
     
79.4
     
2,004,059
     
77.9
     
1,859,797
     
76.8
     
1,755,791
     
75.6
     
1,636,833
     
74.3
 
Home equity lines of credit
   
335,409
     
12.1
     
321,299
     
12.5
     
298,996
     
12.3
     
285,416
     
12.3
     
264,754
     
12.0
 
Installment loans
   
5,152
     
0.2
     
3,915
     
0.2
     
3,622
     
0.1
     
4,211
     
0.2
     
4,721
     
0.2
 
 
                                                                               
Total loans
   
2,771,663
     
100.0
%
   
2,572,983
     
100.0
%
   
2,423,337
     
100.0
%
   
2,320,010
     
100.0
%
   
2,203,683
     
100.0
%
 
                                                                               
Less: Allowance for loan losses
   
48,452
             
49,148
             
46,210
             
40,846
             
36,521
         
 
                                                                               
Net loans (1)
 
$
2,723,211
           
$
2,523,835
           
$
2,377,127
           
$
2,279,164
           
$
2,167,162
         
 
(1) Presented net of deferred direct loan origination fees and costs.

 
Through marketing, pricing and a customer-friendly service delivery network, TrustCo has attempted to distinguish itself from other mortgage lenders, including by highlighting the uniqueness of its loan products. Specifically, low closing costs, no escrow or private mortgage insurance and quick loan decisions 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 $2.00 billion in 2012 and $2.20 billion in 2013. Income on real estate loans increased to $104.6 million in 2013 from $104.0 million in 2012. The yield on the portfolio decreased from 5.16% for 2012 to 4.72% in 2013 due to changes in retail rates in the marketplace. Residential real estate loans at December 31, 2013 were $2.33 billion compared to $2.11 billion at year-end 2012, an increase of $214.7 million. The vast majority of TrustCo’s real estate loans are secured by properties within the Bank’s market area.

TrustCo does not make subprime loans or purchase investments collateralized by subprime loans. A loan may be considered subprime for a number of reasons, but effectively subprime loans are loans where the certainty of repayment of principal and interest is lower than for a traditional prime loan due to the structure of the loan itself, the credit worthiness of the borrower, the underwriting standards of the lender or some combination of these. For instance, adjustable loans underwritten at initial low “teaser” rates instead of the fully indexed rate and loans to borrowers with poor payment history would generally be classified as subprime. TrustCo underwrites its loan originations in a traditional manner, focusing on key factors that have proven to result in good credit decisions, rather than relying on automated systems or basing decisions primarily on one factor, such as a borrower’s credit score.

Average commercial loans of $193.1 million in 2013 decreased by $16.3 million from $209.3 million in 2012. The average yield on the commercial loan portfolio decreased to 5.22% for 2013 from 5.42% in 2012 as a result of declining market rates. This resulted in interest income on commercial loans of $11.2 million in 2013 and $12.5 million in 2012.

TrustCo’s commercial lending activities are focused on balancing the Company’s commitment to meeting the credit needs of businesses in its market areas 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 Capital Region commercial loan portfolio reflects the diversity of businesses found in the market area, including light manufacturing, retail, service, and real estate related business. Commercial loans made in the downstate New York market area and in the central Florida market area also reflect the businesses in those areas, with a focus on real estate. Market conditions in the central Florida market area continued to improve during 2013.

TrustCo strives to maintain strong asset quality in all segments of its loan portfolio, especially commercial loans. Competition for commercial loans continues to be intense in the Bank’s market regions although the dislocations of recent years has resulted in some competitors exiting the business or scaling back their efforts. The Bank competes with large money center and regional banks as well as with smaller locally based banks and thrifts and other financial services companies.

11

 
TrustCo has a strong position in the home equity credit line product in its Capital Region market area. TrustCo was one of the first financial institutions in the area to market and originate this product, and, management believes, has developed significant expertise with respect to its risks and rewards. During 2013, the average balance of home equity credit lines was $335.4 million, an increase from $321.3 million in 2012. The home equity credit line product has developed into a significant business line for many 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 was 3.41% for 2013 and 3.60% in 2012. This is consistent with its prime rate index which has remained at 3.25% since December 16, 2008. This resulted in interest income on home equity credit lines of $11.5 million in 2013, compared to $11.6 million in 2012.
 

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGE IN INTEREST RATES

(dollars in thousands)
 
December 31, 2013
 
 
 
   
After 1 Year
   
   
 
 
 
In 1 Year
   
But Within
   
After
   
 
 
 
or Less
   
5 Years
   
5 Years
   
Total
 
Commercial
 
$
87,674
     
62,247
     
52,117
     
202,038
 
Real estate construction
   
35,358
     
-
     
-
     
35,358
 
 
                               
Total
   
123,032
     
62,247
     
52,117
     
237,396
 
 
                               
Predetermined rates
   
43,197
     
62,247
     
52,117
     
157,561
 
Floating rates
   
79,835
     
-
     
-
     
79,835
 
 
                               
Total
 
$
123,032
     
62,247
     
52,117
     
237,396
 
 

 
At December 31, 2013 and 2012, the Company had approximately $35.4 million and $37.2 million of real estate construction loans. As of December 31, 2013, approximately $13.9 million are secured by first mortgages to residential borrowers while approximately $21.5 million were to commercial borrowers for residential constructions projects. Of the $37.2 million in real estate construction loans at December 31, 2012, approximately $16.4 million were secured by first mortgages to residential borrowers with the remaining $20.8 million were to commercial borrowers for residential construction projects. The vast majority of construction loans are in the Company’s New York market.
12

 

INVESTMENT SECURITIES

(dollars in thousands)
 
As of December 31,
 
 
 
2013
   
  2012
   
         2011
 
 
 
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
 
 
 
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
 
Securities available for sale:
 
   
   
   
   
   
 
U. S. government sponsored enterprises
 
$
200,531
     
198,829
     
262,063
     
263,108
     
562,588
     
563,459
 
State and political subdivisions
   
7,623
     
7,758
     
25,815
     
26,457
     
42,812
     
43,968
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
552,230
     
532,449
     
515,322
     
518,776
     
202,103
     
204,023
 
Corporate bonds
   
10,429
     
10,471
     
26,312
     
26,529
     
102,248
     
96,608
 
Small Business Adminstration-guaranteed participation securities
   
111,383
     
103,029
     
75,674
     
76,562
     
-
     
-
 
Mortgage backed securities and collateralized mortgage obligations-commercial
   
10,965
     
10,558
     
-
     
-
     
-
     
-
 
Other
   
650
     
650
     
650
     
650
     
650
     
650
 
Total debt securities available for sale
   
893,811
     
863,744
     
905,836
     
912,082
     
910,401
     
908,708
 
Equity securities
   
10
     
10
     
10
     
10
     
10
     
10
 
Total securities available for sale
   
893,821
     
863,754
     
905,846
     
912,092
     
910,411
     
908,718
 
Held to maturity securities:
                                               
U. S. government sponsored enterprises
   
-
     
-
     
-
     
-
     
15,000
     
15,019
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
76,270
     
78,876
     
108,471
     
114,195
     
141,857
     
149,538
 
Corporate bonds
   
9,945
     
11,429
     
34,955
     
36,931
     
59,431
     
59,883
 
Total held to maturity securities
   
86,215
     
90,305
     
143,426
     
151,126
     
216,288
     
224,440
 
Total investment securities
 
$
980,036
     
954,059
     
1,049,272
     
1,063,218
     
1,126,699
     
1,133,158
 


 
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 and is particularly important in providing greater flexibility in the current unusually low interest rate environment. The securities available for sale portfolio is managed under a policy detailing the types and characteristics acceptable in the portfolio. Mortgage backed securities and collateralized mortgage obligations held in the portfolio include only pass-throughs issued by United States Government agencies or sponsored enterprises. During 2012 and 2013, the Company added Small Business Administration (“SBA”) guaranteed participation securities to the available for sale portfolio. These securities are Government guaranteed, offer better yields than agency securities and have more certainty in regard to final maturity than mortgage-backed securities (“MBS”). During 2013 there was a continued shift by the Company to invest more in MBS and less in agency securities as MBS offer a baseline cashflow as opposed to the callable agency securities the Bank has typically invested in that tend to result in extremely concentrated cashflows, which can expose the Bank to greater reinvestment risk. In addition, the expected yield on MBS is also typically higher for a given duration security than for a similar duration agency security.

Holdings of securities issued by states and political subdivisions have declined in recent years, reflecting management’s concern regarding the potential impact of economic conditions on the financial condition of the issuing entities. Similarly, corporate bond holdings have declined as the result of concern about economic conditions and the stability of some larger financial institutions in which the Bank had previously invested.

The designation of “available for sale” is made at the time of purchase, based upon management’s intent and ability to hold the securities for an indefinite period of time. 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, 2013 some securities in this portfolio had fair values that were less than the amortized cost due to changes in interest rates and market conditions and not related to the credit condition of the issuers. At December 31, 2013, the Company did not intend to sell, and it is not likely that the Company will be required to sell these securities before market recovery. Accordingly, at December 31, 2013 the Company did not consider any of the unrealized losses to be other than temporary.
13

 
At December 31, 2013, the carrying value of securities available for sale amounted to $863.8 million, compared to $912.1 million at year end 2012. For 2013, the average balance of securities available for sale was $946.4 million with an average yield of 1.90%, compared to an average balance in 2012 of $1.02 billion with an average yield of 1.89%. The taxable equivalent income earned on the securities available for sale portfolio in 2013 was $18.0 million, compared to $19.4 million earned in 2012.

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, 2013, the fair value of TrustCo’s portfolio of securities available for sale carried unrealized gains of approximately $467 thousand and unrealized losses of approximately $30.5 million. At December 31, 2012, the fair value of the company’s portfolio of securities available for sale carried unrealized gains of approximately $6.9 million and unrealized losses of approximately $657 thousand.  In both periods, unrealized losses were related to market interest rate levels and were not credit related.

Held to Maturity Securities: At December 31, 2013 the Company held $86.2 million of held to maturity securities, compared to $143.4 million at December 31, 2012. For 2013, the average balance of held to maturity securities was $104.4 million, compared to $171.7 million in 2012. Cash flow from calls and maturities of these securities has been reinvested in higher yielding assets, such as loans, or temporarily held in Federal Funds sold and other short term investments to fund future loan growth.  The average yield on held to maturity securities increased from 3.48% in 2012 to 3.52% in 2013 as the mix within the portfolio changed. Interest income on held to maturity securities declined from $6.0 million in 2012 to $3.7 million in 2013, reflecting the decline in average balances. Held to maturity securities are recorded at amortized cost. The fair value of these securities as of December 31, 2013 was $90.3 million.

The designation of “held to maturity” is made at the time of purchase, based upon management’s intent and ability to hold the securities until final maturity.  At December 31, 2013 some securities in this portfolio had fair values that were less than the amortized cost due to changes in interest rates and market conditions and not related to the credit condition of the issuers. At December 31, 2013, the Company has the intent and ability to hold these securities until maturity.  Accordingly, at December 31, 2013, the Company did not consider any of the unrecognized losses to be other than temporary.

Securities Gains & Losses: During 2013, TrustCo recognized approximately $1.6 million of net gains from securities transactions, compared to net gains of $2.2 million in 2012 and $1.4 million in 2011.  There were no sales of held to maturity securities in 2013, 2012 and 2011.

TrustCo has not invested in any exotic investment products such as interest rate swaps, forward placement contracts, or other instruments commonly referred to as derivatives. In addition, the Company has not invested in securities backed by subprime mortgages or in collateralized debt obligations (CDOs). By actively managing a portfolio of high quality securities, TrustCo believes it can meet the objectives of asset/liability management and liquidity, while at the same time producing a reasonably predictable earnings stream.
14

 

SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD

(dollars in thousands)
 
As of December 31, 2013
 
 
Maturing:
 
 
   
After 1
   
After 5
   
   
 
 
 
Within
   
But Within
   
But Within
   
After
   
 
 
 
1 Year
   
5 Years
   
10 Years
   
10 Years
   
Total
 
 
 
   
   
   
   
 
Securities available for sale:
 
   
   
   
   
 
U. S. government sponsored enterprises
 
   
   
   
   
 
Amortized cost
 
$
785
     
199,746
     
-
     
-
     
200,531
 
Fair Value
   
807
     
198,022
     
-
     
-
     
198,829
 
Weighted average yield
   
1.10
%
   
1.19
     
-
     
-
     
1.19
 
State and political subdivisions
                                       
Amortized cost
 
$
7
     
381
     
4,930
     
2,305
     
7,623
 
Fair Value
   
6
     
381
     
5,033
     
2,338
     
7,758
 
Weighted average yield
   
5.39
%
   
5.72
     
4.36
     
4.35
     
4.43
 
Mortgage-backed securities and collateralized mortgage obligations-residential
                                       
Amortized cost
 
$
-
     
158,787
     
393,443
     
-
     
552,230
 
Fair Value
   
-
     
156,674
     
375,775
     
-
     
532,449
 
Weighted average yield
   
-
%
   
2.37
     
2.23
     
-
     
2.27
 
Corporate bonds
                                       
Amortized cost
 
$
10,429
     
-
     
-
     
-
     
10,429
 
Fair Value
   
10,471
     
-
     
-
     
-
     
10,471
 
Weighted average yield
   
2.97
%
   
-
     
-
     
-
     
2.17
 
Small Business Administration-
                                       
guaranteed participation securities
                                       
Amortized cost
 
$
-
     
-
     
111,383
     
-
     
111,383
 
Fair Value
   
-
     
-
     
103,029
     
-
     
103,029
 
Weighted average yield
   
-
%
   
-
     
2.03
     
-
     
2.03
 
Mortgage-backed securities and collateralized mortgage obligations-commercial
                                       
Amortized cost
 
$
-
     
-
     
10,965
     
-
     
10,965
 
Fair Value
   
-
     
-
     
10,558
     
-
     
10,558
 
Weighted average yield
   
-
%
   
-
     
1.39
     
-
     
1.39
 
Other
                                       
Amortized cost
 
$
-
     
650
     
-
     
-
     
650
 
Fair Value
   
-
     
650
     
-
     
-
     
650
 
Weighted average yield
   
-
%
   
2.49
     
-
     
-
     
2.49
 
Total securities available for sale
                                       
Amortized cost
 
$
11,221
     
359,564
     
520,721
     
2,305
     
893,811
 
Fair Value
   
11,284
     
355,727
     
494,395
     
2,338
     
863,744
 
Weighted average yield
   
2.84
%
   
1.72
     
2.19
     
4.35
     
2.01
 
 
                                       
Held to maturity securities:
                                       
Mortgage-backed securities and collateralized mortgage obligations
                                       
Amortized cost
 
$
-
     
76,270
     
-
     
-
     
76,270
 
Fair Value
   
-
     
78,876
     
-
     
-
     
78,876
 
Weighted average yield
   
-
%
   
3.90
     
-
     
-
     
3.90
 
Corporate bonds
                                       
Amortized cost
 
$
-
     
9,945
     
-
     
-
     
9,945
 
Fair Value
   
-
     
11,429
     
-
     
-
     
11,429
 
Weighted average yield
   
-
%
   
6.17
     
-
     
-
     
6.17
 
Total held to maturity securities
                                       
Amortized cost
 
$
-
     
86,215
     
-
     
-
     
86,215
 
Fair Value
   
-
     
90,305
     
-
     
-
     
90,305
 
Weighted average yield
   
-
%
   
4.16
     
-
     
-
     
4.16
 

Weighted average yields have not been adjusted for any tax-equivalent factor.
15

 
Maturity and call dates of securities: Many of the securities in the Company’s portfolios 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. During the early part of 2013 and during most of 2012, the level of securities called was elevated due to the volatile interest rate environment.  The rising interest rate environment in the second half of 2013 has reduced the probability of future calls. The tables labeled “Securities Portfolio Maturity and Call Date Distribution,” show the distribution, based on both final maturity and call date of each security, broken out by the available for sale and held to maturity portfolios as of December 31, 2013. Mortgage-backed securities and collateralized mortgage obligations are reported using an estimate of average life. 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. The table “Securities Portfolio Maturity Distribution and Yield,” shows the distribution of maturities for each of the securities portfolios, based on final maturity, as well as the average yields at December 31, 2013 on each type/maturity grouping.
 

SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION

Debt securities available for sale:

(dollars in thousands)
 
As of December 31, 2013
 
 
 
Based on
   
Based on
 
 
 
Final Maturity
   
Call Date
 
 
 
Amortized
   
Fair
   
Amortized
   
Fair
 
 
 
Cost
   
Value
   
Cost
   
Value
 
Within 1 year
 
$
11,221
   
$
11,284
     
216,681
     
215,093
 
1 to 5 years
   
359,564
     
355,727
     
160,928
     
158,831
 
5 to 10 years
   
520,721
     
494,395
     
516,176
     
489,794
 
After 10 years
   
2,305
     
2,338
     
26
     
26
 
Total debt securities available for sale
 
$
893,811
     
863,744
     
893,811
     
863,744
 

Held to maturity securities:

(dollars in thousands)
 
As of December 31, 2013
 
 
 
Based on
   
Based on
 
 
 
Final Maturity
   
Call Date
 
 
 
Amortized
   
Fair
   
Amortized
   
Fair
 
 
 
Cost
   
Value
   
Cost
   
Value
 
Within 1 year
 
$
-
     
-
     
-
     
-
 
1 to 5 years
   
86,215
     
90,305
     
86,215
     
90,305
 
5 to 10 years
   
-
     
-
     
-
     
-
 
Total held to maturity securities
 
$
86,215
     
90,305
     
86,215
     
90,305
 


Federal Funds Sold and Other Short-term Investments

During 2013, the average balance of Federal Funds sold and other short-term investments was $502.1 million, an increase from $461.5 million in 2012. The average rate earned on these assets was 0.25% in both 2012 and 2013. TrustCo utilizes this category of earning assets as a means of maintaining strong liquidity.

As noted, the target Federal Funds rate set by the Federal Open Market Committee (FOMC) did not change during 2013. 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.
16

 
The year-end balance of Federal Funds sold and other short term investments was $536.6 million for 2013, compared to $488.2 million at year end 2012. Yields on investment securities with acceptable risk characteristics were insufficient to justify shifting overnight liquidity into other investments despite the low return on Federal Funds. Management will continue to evaluate the overall level of the Federal Funds sold and other short term investments portfolio in 2013 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 were $3.86 billion in 2013, compared to $3.81 billion in 2012, an increase of $53.7 million. Increases in deposit categories included: demand deposits up $24.3 million, interest-bearing checking deposits up $63.5 million, savings up $103.5 million and money market up $872 thousand, partly offset by a decline of $111.9 million in time deposits under $100 thousand, and a decline of $26.5 million in time deposits over $100 thousand. 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.
 

MIX OF AVERAGE SOURCES OF FUNDING

(dollars in thousands)
 
   
   
   
2013
   
2012
   
Components of
 
 
 
   
   
   
vs.
   
vs.
   
Total Funding
 
 
 
2013
   
2012
   
2011
   
2012
   
2011
   
2013
   
2012
   
2011
 
Demand deposits
 
$
302,437
     
278,179
     
255,327
     
24,258
     
22,852
     
7.5
%
   
7.0
     
6.8
 
Retail deposits
                                                               
Savings
   
1,218,655
     
1,115,151
     
889,773
     
103,504
     
225,378
     
30.1
     
28.1
     
23.6
 
Time deposits under $100 thousand
   
721,498
     
833,358
     
945,761
     
(111,860
)
   
(112,403
)
   
17.8
     
21.0
     
25.1
 
Interest bearing checking accounts
   
578,531
     
515,062
     
456,397
     
63,469
     
58,665
     
14.3
     
13.0
     
12.1
 
Money market deposits
   
650,324
     
649,452
     
632,786
     
872
     
16,666
     
16.1
     
16.4
     
16.8
 
Total retail deposits
   
3,169,008
     
3,113,023
     
2,924,717
     
55,985
     
188,306
     
78.4
     
78.5
     
77.6
 
Total core deposits
   
3,471,445
     
3,391,202
     
3,180,044
     
80,243
     
211,158
     
85.8
     
85.5
     
84.4
 
Time deposits over $100 thousand
   
391,975
     
418,488
     
457,551
     
(26,513
)
   
(39,063
)
   
9.7
     
10.6
     
12.1
 
Short-term borrowings
   
180,275
     
152,982
     
133,803
     
27,293
     
19,179
     
4.5
     
3.9
     
3.5
 
Total purchased liabilities
   
572,250
     
571,470
     
591,354
     
780
     
(19,884
)
   
14.2
     
14.5
     
15.6
 
Total sources of funding
 
$
4,043,695
     
3,962,672
     
3,771,398
     
81,023
     
191,274
     
100.0
%
   
100.0
     
100.0
 
17

 

AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS

(dollars in thousands)
 
2013
   
2012
   
 
   
2011
   
 
 
 
   
Interest
   
   
   
Interest
   
   
   
Interest
   
 
 
 
Average
   
Income/
   
Average
   
Average
   
Income/
   
Average
   
Average
   
Income/
   
Average
 
 
 
Balance
   
Expense
   
Rate
   
Balance
   
Expense
   
Rate
   
Balance
   
Expense
   
Rate
 
Assets
 
   
   
   
   
   
   
   
   
 
Loans, net
 
$
2,771,663
     
127,974
     
4.62
%
 
$
2,572,983
     
128,663
     
5.00
%
 
$
2,423,337
     
129,271
     
5.33
%
 
                                                                       
Securities available for sale:
                                                                       
U.S. government sponsored enterprises
   
221,028
     
2,600
     
1.18
     
568,425
     
8,097
     
1.42
     
667,037
     
12,998
     
1.95
 
State and political subdivisions
   
12,845
     
862
     
6.71
     
35,435
     
2,012
     
5.68
     
58,725
     
3,625
     
6.17
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
545,487
     
11,385
     
2.09
     
334,616
     
6,697
     
2.00
     
112,504
     
3,091
     
2.75
 
Corporate bonds
   
46,049
     
812
     
1.76
     
68,182
     
2,231
     
3.27
     
108,513
     
4,059
     
3.74
 
Small Business Administration-guaranteed participation securities
   
109,913
     
2,180
     
1.98
     
15,707
     
319
     
2.03
     
-
     
-
     
-
 
Mortgage backed securities and collateralized mortgage obligations-commercial
   
10,420
     
144
     
1.38
     
-
     
-
     
-
     
-
     
-
     
-
 
Other
   
625
     
17
     
2.72
     
660
     
19
     
2.88
     
703
     
20
     
2.84
 
Total securities available for sale
   
946,367
     
18,000
     
1.90
     
1,023,025
     
19,375
     
1.89
     
947,482
     
23,793
     
2.51
 
Held to maturity securities:
                                                                       
U.S. government sponsored enterprises
   
-
     
-
     
-
     
1,048
     
25
     
2.43
     
11,035
     
261
     
2.36
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
90,360
     
2,840
     
3.14
     
131,092
     
4,287
     
3.27
     
114,296
     
4,765
     
4.17
 
Corporate bonds
   
14,011
     
833
     
5.95
     
39,570
     
1,666
     
4.21
     
56,253
     
2,465
     
4.38
 
Total held to maturity securities
   
104,371
     
3,673
     
3.52
     
171,710
     
5,978
     
3.48
     
181,584
     
7,491
     
4.13
 
Federal Reserve Bank and Federal Home Loan Bank stock
   
10,266
     
490
     
4.77
     
9,425
     
486
     
5.16
     
6,898
     
304
     
4.41
 
Federal funds sold and other short-term investments
   
502,136
     
1,240
     
0.25
     
461,495
     
1,142
     
0.25
     
432,631
     
1,102
     
0.25
 
Total interest earning assets
   
4,334,803
     
151,377
     
3.49
%
   
4,238,638
     
155,644
     
3.67
%
   
3,991,932
     
161,961
     
4.06
%
Allowance for loan losses
   
(48,452
)
                   
(49,148
)
                   
(46,210
)
               
Cash and noninterest earning assets
   
136,042
                     
143,303
                     
144,068
                 
Total assets
 
$
4,422,393
                   
$
4,332,793
                   
$
4,089,790
                 
Liabilities and shareholders' equity
                                                                       
Interest bearing deposits:
                                                                       
Interest bearing checking accounts
 
$
578,531
     
329
     
0.06
%
 
$
515,062
     
315
     
0.06
%
 
$
456,397
     
285
     
0.06
%
Savings
   
1,218,655
     
3,333
     
0.27
     
1,115,151
     
3,872
     
0.35
     
889,773
     
3,788
     
0.43
 
Time deposits and money markets
   
1,763,797
     
10,138
     
0.57
     
1,901,298
     
14,313
     
0.75
     
2,036,098
     
20,597
     
1.01
 
Total interest bearing deposits
   
3,560,983
     
13,800
     
0.39
     
3,531,511
     
18,500
     
0.52
     
3,382,268
     
24,670
     
0.73
 
Short-term borrowings
   
180,275
     
1,483
     
0.82
     
152,982
     
1,475
     
0.96
     
133,803
     
1,574
     
1.18
 
Total interest bearing liabilities
   
3,741,258
     
15,283
     
0.41
%
   
3,684,493
     
19,975
     
0.54
%
   
3,516,071
     
26,244
     
0.75
%
Demand deposits
   
302,437
                     
278,179
                     
255,327
                 
Other liabilities
   
21,719
                     
19,441
                     
18,653
                 
Shareholders' equity
   
356,979
                     
350,680
                     
299,739
                 
Total liabilities and shareholders' equity
 
$
4,422,393
                   
$
4,332,793
                   
$
4,089,790
                 
Net interest income
           
136,094
                     
135,669
                     
135,717
         
Taxable equivalent adjustment
           
(330
)
                   
(681
)
                   
(1,213
)
       
Net interest income
           
135,764
                     
134,988
                     
134,504