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 144 community banking offices and 156 Automatic Teller Machines throughout the Bank’s market areas. The Company serves 5 states and 31 counties with a broad range of community banking services.

Financial Highlights
 
(dollars in thousands, except per share data)
 
Years ended December 31,
 
   
2014
   
2013
   
Percent Change
 
Income:
           
Net interest income (Taxable Equivalent)
 
$
141,583
   
$
136,094
     
4.03
%
Net Income
   
44,193
     
39,812
     
11.00
 
Per Share:
                       
Basic earnings
   
0.467
     
0.422
     
10.66
 
Diluted earnings
   
0.466
     
0.422
     
10.43
 
Tangible book value at period end
   
4.14
     
3.82
     
8.38
 
Average Balances:
                       
Assets
   
4,574,941
     
4,422,393
     
3.45
 
Loans, net
   
3,014,156
     
2,771,663
     
8.75
 
Deposits
   
3,978,968
     
3,863,420
     
2.99
 
Shareholders' equity
   
382,810
     
356,979
     
7.24
 
Financial Ratios:
                       
Return on average assets
   
0.97
%
   
0.90
%
   
7.78
 
Return on average equity
   
11.54
     
11.15
     
3.50
 
Consolidated tier 1 capital to:
                       
Total assets (leverage)
   
8.55
     
8.27
     
3.39
 
Risk-adjusted assets
   
17.04
     
16.74
     
1.79
 
Total capital to risk-adjusted assets
   
18.30
     
18.00
     
1.67
 
Net loans charged off to average loans
   
0.22
     
0.26
     
(17.30
)
Allowance for loan losses to nonperforming loans
   
1.36
x    
1.10
x    
23.82
 
Efficiency ratio
   
52.60
%
   
52.78
%    
0.34
 
Dividend Payout ratio
   
56.30
     
62.19
     
(9.47
)
 
Per Share information of common stock
 
               
Tangible
   
Range of Stock
 
   
Basic
   
Diluted
   
Cash
   
Book
   
Price
 
   
Earnings
   
Earnings
   
Dividend
   
Value
   
High
   
Low
 
                         
2014
                       
First quarter
 
$
0.116
   
$
0.116
   
$
0.0656
   
$
3.93
   
$
7.33
   
$
6.20
 
Second quarter
   
0.125
     
0.125
     
0.0656
     
4.06
     
7.19
     
6.35
 
Third quarter
   
0.113
     
0.113
     
0.0656
     
4.10
     
7.12
     
6.43
 
Fourth quarter
   
0.113
     
0.112
     
0.0656
     
4.14
     
7.50
     
6.42
 
                                                 
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
 

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
17
   
Glossary of Terms
35-37
   
Management’s Report on Internal Control Over Financial Reporting
38
   
Report of Independent Registered Public Accounting Firm
39
   
Consolidated Financial Statements and Notes
40-94
   
Branch Locations
95-99
   
Officers and Board of Directors
100-101
   
General Information
102
   
Share Price Information
103-104

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,

We had great results at Trustco Bank in 2014. Net income grew 11% to $44.2 million compared to $39.8 million for 2013.  We achieved these results by staying focused on our long standing philosophy of providing exceptional products and customer service.  We also believe our strategy of diversifying the branch network in upstate New York, downstate New York and Florida has provided us with a platform for growth and opportunity for years to come.

The growth in earnings was fueled by our growth in loans.  In 2014 average loans grew by a record $242 million with the majority of the growth coming in our residential mortgage portfolio.  We are proud to provide mortgage loans to so many first time home buyers and those upgrading to a new home as their families grow.  Our employees feel that being able to help these customers and communities prosper is truly one of the most rewarding aspects of working at our Company.

Our branch network continued to grow in 2014 as we opened a total of five new offices.   Two in New York; Warrensburgh in Warren County and Amsterdam in Montgomery County.  In Florida we opened three offices, Lake Nona in Orlando, Beneva Village in Sarasota and Stuart on the Treasure coast.  As previously indicated, our plans are not to branch into new markets but to fill in our existing service areas.  In 2015 we look forward to opening our 50th branch office in the state of Florida.  Our decision to open de novo offices over ten years ago has proven to be the right strategy as average deposits per branch in 2014 increased an impressive $715 thousand over 2013.

            Deposits also showed strong growth in 2014.  Deposits ended the year over $4 billion, an increase of $105 million compared to 2013.  The majority of this growth came in the form of low cost core checking and interest-bearing checking deposits.  This type of core customer provides us with the opportunity to cross sell additional products and services.

Our performance ratios continued to show significant improvement in 2014.  Return on average equity rose 39 basis points to 11.54%.  Non-performing assets fell $11.7 million or 22% and our efficiency ratio ended 2014 at 52.6%.  These numbers are a clear illustration of our exceptional performance in 2014.

In December of 2014, Bob Cushing our Chief Financial Officer for the past 20 years, announced his retirement effective May 31, 2015.  Bob has been an outstanding employee and friend for all these years and will be missed.  We were proud to announce that Mike Ozimek has been promoted to Senior Vice President and Chief Financial Officer.  Mike has been with TrustCo for over twelve years having reported to Bob over all those years.  We anticipate a seamless transition and wish Bob well in his retirement.   We would like to also congratulate Michael Ewell, who was promoted to Administrative Vice President in 2014.

3

Trustco Financial Services had another exceptional year in 2014.  Assets under management increased by $78 million to $918 million during the year.  Our new Trustco Bank Credit Card was launched in the fall of 2014.  The reception has been great, especially among our customers who were looking for a low rate and service they have grown to expect at Trustco Bank.

Remaining true to our motto as “Your Home Town Bank”, in 2014 we donated financial support to over 300 charitable organizations.  From rehabbing local parks to volunteering at charitable organizations our employees have also donated thousands of hours to hundreds of local community groups.

We are excited about our future and feel that your Company is poised for increased growth and profitability for years to come.  On behalf of the board of directors and employees, we thank you for your support.

 
Sincerely,

Robert J. McCormick
President and Chief Executive Officer
TrustCo Bank Corp NY
 

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 2014 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 2014 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 2014 despite a challenging operating environment for banks and mixed economic conditions. Among the key accomplishments for 2014, in management’s view:

Ÿ Net income was up 11.0% to $44.2 million in 2014 versus 2013;
Ÿ Average loans and average deposits were up $242 million and $116 million, respectively, for 2014 compared to the prior year;
Ÿ The average balance of non-maturity deposits grew $84 million in 2014 compared to 2013;
Ÿ Nonperforming assets declined $11.7 million or 22.4% to $40.5 million from year-end 2013 to year-end 2014;
Ÿ At less than 53%, the efficiency ratio remained at an industry leading level, and;
Ÿ The regulatory capital levels of both the Company and Trustco Bank improved at December 31, 2014 relative to the prior year.

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 11.54% in 2014 compared to 11.15% in 2013, while return on average assets was 0.97% in 2014 and 0.90% in 2013.

The economic and business environment remained mixed during 2014.  Real gross domestic product (“GDP”) increased 2.4% in 2014 compared with an increase of 2.2% in 2013, based on the advance estimate published on January 30, 2015.  Though an improvement versus the prior year, growth remains well below the range exhibited during more robust periods of economic activity.  Equity markets were generally up for the full year, with most of the positive performance coming in the second half of the year.  The Dow Jones Industrial Average was up 7.5%, the S&P 500 was up 11.4% and the Russell 2000 index was up 3.5%. United States Treasuries saw significant price changes over the course of 2014, with the slope of the yield curve shifting considerably.  Yields on maturities on the short end of the curve (through the 3 year point) moved higher during the year; for example the two year Treasury rose from 0.38% to 0.67% from year-end 2013 to year-end 2014.  From the five year point on out, yields declined, including the ten year falling from 3.04% at the end of 2013 to 2.17% at the end of 2014.  Overseas markets experienced more mixed conditions during 2014, with modest improvements in some areas but with slower growth in other areas, including China, and deterioration in much of Europe. 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.  Employment increased and the unemployment rate declined, although labor force participation remains weak.  Wage growth also remains weak, with much of the new job creation coming in low wage jobs.  Economic conditions vary significantly over geographic areas, with strength concentrated in and around major population centers on the coasts and in certain areas where economic activity has been driven by a specific factor, such as hydro fracking in the Bakken Shale region of North Dakota.   The unprecedented intervention by governments in markets and attempts to stimulate the economy, including the sharp easing of monetary policy during 2007-2008 are now in the early stages of being stabilized, and eventually reversed. 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. These regulatory changes have added significant operating expense and operational burden and fundamentally changed the way banks conduct business in many ways.

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 a downturn in the housing market in the areas we serve.
 

5

 
Overview

2014 results were marked by growth in the two key drivers of the Company’s long-term performance: deposits and loans. Deposits ended 2014 at $4.03 billion, an increase of $105.2 million or 2.7% from the prior year end, and the loan portfolio grew to a total of $3.16 billion, an increase of $249.5 million or 8.6% over the 2013 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.  The flexibility of the Company’s balance sheet also contributed to bottom line growth as a portion of the Company’s liquid investment portfolio was redeployed into higher yielding loans.

TrustCo recorded net income of $44.2 million or $0.466 of diluted earnings per share for the year ended December 31, 2014, compared to $39.8 million or $0.422 of diluted earnings per share for the year ended December 31, 2013. This represents an increase of 11.0% in net income and 10.4% in diluted earnings per share between 2013 and 2014.

During 2014, the following had a significant effect on net income:

Ÿ an increase of $5.7 million in net interest income from 2013 to 2014 as a result of 3.5% growth in average interest earning assets, coupled with a 2 basis point improvement in the net interest margin to 3.16%,
Ÿ a decrease in the provision for loan losses from $7.0 million in 2013 to $5.1 million in 2014,
Ÿ an increase of $1.0 million in non-interest income (excluding net gain on sales of securities) in 2014 as compared to 2013, which included a gain of $1.6 million on the sale of a property in Florida that was to be used as a regional headquarters,
Ÿ the recognition of net gains on securities transactions of $717 thousand in 2014 compared to net securities gains of $1.6 million recorded in 2013,
Ÿ a $2.6 million decline in other real estate expenses (net), which included a  gain of $2.4 million on the sale of one property that was recorded in the second quarter of 2014, and
Ÿ an increase of $3.7 million in income tax expense from $23.7 million in 2013 to $27.4 million in 2014.

TrustCo performed well in comparison to its peers with respect to a number of key performance ratios during 2014 and 2013, including:

Ÿ return on average equity of 11.54% for 2014 and 11.15% for 2013, compared to medians of 8.67% in 2014 and 8.97% in 2013 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
Ÿ an efficiency ratio of 52.60% for 2014 and 52.78% for 2013, compared to the peer group levels of 63.42% in 2014 and 63.79% in 2013.

During 2014, TrustCo’s results were positively affected by the growth of total deposits, including low-cost core deposits, strong loan growth and a shift in asset mix. The low short-term rate environment prevailing throughout 2014 allowed the Company to continue to attract deposits at relatively low yields. On average for 2014, non-maturity deposits were 71.2% of total deposits, the same as in 2013.  Overall, the cost of interest bearing liabilities declined 1 basis point to 0.40% in 2014 as compared to 2013.  Average loan balances increased 8.7% from 2013 to 2014, while the total of short term investments, available for sale securities and held to maturity securities decreased 5.8%, resulting in average loans growing to 67.2% of average earning assets in 2014 from 63.9% in 2013.  Given that loan yields were approximately 300 basis points above the yield on the total of short term investments and securities, this shift, combined with the growth of the balance sheet, contributed to the $5.7 million increase in net interest income from 2013 to 2014. 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 2014 resulted in maturing and called securities being reinvested at lower yields in some cases or being shifted to the higher yielding loan portfolio. The Federal Reserve Board’s (“FRB”) continued accommodative monetary policy, along with modest economic growth domestically and low rates in other nations, were key drivers of the rate environment during 2014. The 2007-2008 easing of monetary policy by the FRB 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 2013 and 2014 and continues to be in place at this time. The FRB Federal Open Market Committee (“FOMC”) eliminated further increases in the size of its quantitative easing program during 2014, but affirmed in its January 28, 2015 press release that it would continue to reinvest principal flows from its current holdings to maintain the existing size and that, “…the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.  In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation…Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.  However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.  Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”  Market interest rates moved in divergent directions during 2014.  Yields on shorter maturities, such as the two year Treasury, were roughly flat early in the year and then generally trended up, particularly during the fourth quarter.  The yield on the five year Treasury made a number of moves up and down over the course of the year, while the ten year Treasury yield generally trended down throughout the course of the year.  These trends caused a flattening of the yield curve when comparing the beginning of the year to the end of the year, despite the fact that on average the spread between the ten year Treasury and the two year Treasury of 208 basis points in 2014 changed little from the 204 basis point average in 2013.  However, the spread ended the year at 150 basis points, compared to 261 at the beginning of the year.  This effectively reversed the improvement in spread that occurred during 2013, when it rose from 159 basis points at the beginning of the year to 266 at year-end 2013.  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 Treasury bond interest rates during 2013 and 2014.
 

6

 
   
2014
 
   
3 Month
Yield (%)
   
2 Year
Yield (%)
   
5 Year
Yield (%)
   
10 Year
Yield (%)
   
10 Year - 2 Year
Spread (%)
 
                               
Beginning of Year
   
0.07
     
0.39
     
1.72
     
3.00
     
2.61
 
Peak
   
0.08
     
0.73
     
1.85
     
3.01
     
2.61
 
Trough
   
0.01
     
0.30
     
1.37
     
2.07
     
1.46
 
End of Year
   
0.04
     
0.67
     
1.65
     
2.17
     
1.50
 
Average
   
0.03
     
0.46
     
1.64
     
2.54
     
2.08
 

   
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 $7.0 million in 2013 to $5.1 million in 2014 positively affected net income. Net charge-offs decreased from $7.2 million in 2013 to $6.5 million in 2014. Nonperforming loans decreased from $43.4 million to $34.0 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 and economic conditions, with reductions in both nonperforming loans (“NPLs”) and charge-offs.

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.
 

7

 
TrustCo added five new branches in 2014, bringing the total to 144 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 costs associated with the major expansion program are expected to continue to stabilize and reduce the growth rate 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.

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 98.1% of average total assets for 2014, compared to 98.0% for 2013.

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, 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. As noted previously, 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 sustained improvement, specifically continued progress toward maximum employment and price stability.  Many economists believe the FRB may begin to move rates up later in 2015.
 

8

 
As noted previously, the yield on longer term financial instruments, including the ten year Treasury bond rate, generally trended down during 2014. The yield on the ten year Treasury decreased by 83 basis points from 3.00% at the beginning of 2014 to the year-end level of 2.17%. The rate on the ten year Treasury bond and other long-term interest rates have a significant influence on the rates offered for new residential real estate loans. These changes in interest rates have an effect on the Company relative to the interest income on loans, securities, and Federal Funds sold and other short term instruments as well as the 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 ten 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 interest rates also generally increase the value of retail deposits.

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 2014, while loan yields declined through most of the year and deposit costs were roughly stable.

Earning Assets

Average earning assets during 2014 were $4.49 billion, which was an increase of $152.3 million from the prior year. This increase was the result of growth in the average balance of net loans of $242.5 million, a $26.0 million decrease in held-to-maturity securities, a $151.8 million decrease in securities available for sale, and a $87.7 million increase in Federal Funds sold and other short-term investments between 2013 and 2014. The increase in the loan portfolio is the result of an increases in each loan category, with the bulk of the growth coming in the residential segment of the portfolio. This increase in real estate loans is a result of a strategic focus on growth of this product throughout the TrustCo branch network through an effective marketing campaign and competitive rates and closing costs.

Total average assets were $4.57 billion for 2014 and $4.42 billion for 2013.

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.
 

MIX OF AVERAGE EARNING ASSETS

(dollars in thousands)
             
2014
   
2013
   
Components of
 
               
vs.
   
vs.
   
Total Earning Assets
 
   
2014
   
2013
   
2012
   
2013
   
2012
   
2014
   
2013
   
2012
 
Loans, net
 
$
3,014,156
     
2,771,663
     
2,572,983
     
242,493
     
198,680
     
67.2
%
   
64.0
     
60.7
 
Securities available for sale (1):
                                                               
U.S. government sponsored enterprises
   
113,563
     
221,028
     
568,425
     
(107,465
)
   
(347,397
)
   
2.5
     
5.1
     
13.4
 
State and political subdivisions
   
3,924
     
12,845
     
35,435
     
(8,921
)
   
(22,590
)
   
0.1
     
0.3
     
0.8
 
Mortgage-backed securities and collateralized mortgage obligations-residential
   
555,430
     
545,487
     
334,616
     
9,943
     
210,871
     
12.4
     
12.6
     
7.9
 
Corporate bonds
   
3,156
     
46,049
     
68,182
     
(42,893
)
   
(22,133
)
   
0.1
     
1.1
     
1.6
 
Small Business Administration-guaranteed participation securities
   
107,029
     
109,913
     
15,707
     
(2,884
)
   
94,206
     
2.4
     
2.5
     
0.4
 
Mortgage-backed securities and collateralized mortgage obligations-commercial
   
10,837
     
10,420
     
-
     
417
     
10,420
     
0.2
     
0.2
     
0.0
 
Other
   
674
     
625
     
660
     
49
     
(35
)
   
0.0
     
0.0
     
0.0
 
Total securities available for sale
   
794,613
     
946,367
     
1,023,025
     
(151,754
)
   
(76,658
)
   
17.7
     
21.8
     
24.1
 
Held-to-maturity securities:
                                                               
U.S. government sponsored enterprises
   
-
     
-
     
1,048
     
-
     
(1,048
)
   
0.0
     
0.0
     
0.0
 
Mortgage-backed securities and collateralized mortgage obligations - residential
   
68,404
     
90,360
     
131,092
     
(21,956
)
   
(40,732
)
   
1.5
     
2.1
     
3.2
 
Corporate bonds
   
9,952
     
14,011
     
39,570
     
(4,059
)
   
(25,559
)
   
0.2
     
0.3
     
0.9
 
Total held-to-maturity securities
   
78,356
     
104,371
     
171,710
     
(26,015
)
   
(67,339
)
   
1.7
     
2.4
     
4.1
 
Federal Reserve Bank and Federal Home Loan Bank stock
   
10,135
     
10,266
     
9,425
     
(131
)
   
841
     
0.2
     
0.2
     
0.2
 
Federal funds sold and other short-term investments
   
589,873
     
502,136
     
461,495
     
87,737
     
40,641
     
13.1
     
11.6
     
10.9
 
                                                                 
Total earning assets
 
$
4,487,133
   
$
4,334,803
   
$
4,238,638
     
152,330
     
96,165
     
100.0
%
   
100.0
     
100.0
 

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

9

 
Loans

In 2014, the Company experienced another year of significant loan growth. The $249.5 million of increase in the Company’s gross loan portfolio from December 31, 2013 to December 31, 2014 came throughout its marketing territories.  Average loans increased $242.5 million during 2014 to $3.01 billion. Interest income on the loan portfolio increased to $136.0 million in 2014 from $128.0 million in 2013. The average yield declined 11 basis points to 4.51% in 2014 compared to 2013.
 
LOAN PORTFOLIO

(dollars in thousands)
 
As of December 31,
 
   
2014
   
2013
   
2012
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Commercial
 
$
202,469
     
6.4
%
 
$
202,038
     
6.9
%
 
$
198,750
     
7.4
%
Real estate - construction
   
38,522
     
1.2
     
35,358
     
1.2
     
37,205
     
1.4
 
Real estate - mortgage
   
2,557,613
     
81.0
     
2,325,029
     
80.0
     
2,110,290
     
78.6
 
Home equity lines of credit
   
352,134
     
11.1
     
340,489
     
11.7
     
333,909
     
12.4
 
Installment loans
   
7,594
     
0.2
     
5,895
     
0.2
     
4,579
     
0.2
 
                                                 
Total loans
   
3,158,332
     
100.0
%
   
2,908,809
     
100.0
%
   
2,684,733
     
100.0
%
Less: Allowance for loan losses
   
46,327
             
47,714
             
47,927
         
                                                 
Net loans (1)
 
$
3,112,005
           
$
2,861,095
           
$
2,636,806
         
 
   
Average Balances
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Commercial
 
$
201,317
     
6.7
%
 
$
193,065
     
7.0
%
 
$
209,323
     
8.1
%
 
$
242,256
     
10.0
%
 
$
261,621
     
11.3
%
Real estate - construction
   
35,109
     
1.2
     
36,689
     
1.3
     
34,387
     
1.3
     
18,666
     
0.8
     
12,971
     
0.6
 
Real estate - mortgage
   
2,428,383
     
80.6
     
2,201,348
     
79.4
     
2,004,059
     
77.9
     
1,859,797
     
76.8
     
1,755,791
     
75.6
 
Home equity lines of credit
   
343,264
     
11.4
     
335,409
     
12.1
     
321,299
     
12.5
     
298,996
     
12.3
     
285,416
     
12.3
 
Installment loans
   
6,083
     
0.2
     
5,152
     
0.2
     
3,915
     
0.2
     
3,622
     
0.1
     
4,211
     
0.2
 
                                                                                 
Total loans
   
3,014,156
     
100.0
%
   
2,771,663
     
100.0
%
   
2,572,983
     
100.0
%
   
2,423,337
     
100.0
%
   
2,320,010
     
100.0
%
                                                                                 
Less: Allowance for loan losses
   
47,409
             
48,452
             
49,148
             
46,210
             
40,846
         
                                                                                 
Net loans (1)
 
$
2,966,747
           
$
2,723,211
           
$
2,523,835
           
$
2,377,127
           
$
2,279,164
         

(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 by highlighting the uniqueness of its loan products. Specifically, low closing costs, no escrow or private mortgage insurance, quick loan decisions and fast closings 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 $2.44 billion in 2014 and $2.22 billion in 2013. Income on real estate loans increased to $111.7 million in 2014 from $104.6 million in 2013. The yield on the portfolio decreased from 4.72% for 2013 to 4.57% in 2014 due to changes in retail rates in the marketplace. Residential real estate loans at December 31, 2014 were $2.58 billion compared to $2.34 billion at year-end 2013, an increase of $236.3 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.
 

10

 
Average commercial loans of $221.3 million in 2014 increased by $6.5 million from $214.8 million in 2013. The average yield on the commercial loan portfolio decreased to 5.12% for 2014 from 5.22% in 2013 as a result of declining market rates. This resulted in interest income on commercial loans of $11.3 million in 2014 and $11.2 million in 2013.

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 most of 2014.

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.

TrustCo has a strong position in the home equity credit line product in its 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 2014, the average balance of home equity credit lines was $343.3 million, an increase from $335.4 million in 2013. 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 3.57% for 2014 and 3.41% in 2013. This resulted in interest income on home equity credit lines of $12.3 million in 2014, compared to $11.5 million in 2013.  The increase in yield during 2014 as compared to 2013 is the result of loans with introductory rates repricing to the product floor during the year as well as the introductory rate offered being higher in 2014.
 

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGE IN INTEREST RATES

(dollars in thousands)
 
December 31, 2014
 
       
After 1 Year
         
   
In 1 Year
   
But Within
   
After
     
   
or Less
   
5 Years
   
5 Years
   
Total
 
Commercial
 
$
62,560
     
67,310
     
72,599
     
202,469
 
Real estate construction
   
38,522
     
-
     
-
     
38,522
 
                                 
Total
   
101,082
     
67,310
     
72,599
     
240,991
 
                                 
Predetermined rates
   
36,298
     
67,310
     
72,599
     
176,207
 
Floating rates
   
64,784
     
-
     
-
     
64,784
 
                                 
Total
 
$
101,082
     
67,310
     
72,599
     
240,991
 
 

 
At December 31, 2014 and 2013, the Company had approximately $38.5 million and $35.4 million of real estate construction loans. As of December 31, 2014, approximately $17.6 million are secured by first mortgages to residential borrowers while approximately $20.9 million were to commercial borrowers for residential constructions projects. Of the $35.4 million in real estate construction loans at December 31, 2013, approximately $13.9 million were secured by first mortgages to residential borrowers with the remaining $21.5 million were to commercial borrowers for residential construction projects. The vast majority of construction loans are in the Company’s New York market.

As of December 31, 2014 and 2013, the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.
 
 
11

 
INVESTMENT SECURITIES

(dollars in thousands)
 
As of December 31,
 
   
2014
   
2013
   
2012
 
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
 
Securities available for sale:
                       
U. S. government sponsored enterprises
 
$
78,420
     
77,800
     
200,531
     
198,829
     
262,063
     
263,108
 
State and political subdivisions
   
2,232
     
2,271
     
7,623
     
7,758
     
25,815
     
26,457
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
486,107
     
483,560
     
552,230
     
532,449
     
515,322
     
518,776
 
Corporate bonds
   
1,500
     
1,500
     
10,429
     
10,471
     
26,312
     
26,529
 
Small Business Adminstration-guaranteed participation securities
   
103,273
     
100,496
     
111,383
     
103,029
     
75,674
     
76,562
 
Mortgage backed securities and collateralized mortgage obligations-commercial
   
10,696
     
10,447
     
10,965
     
10,558
     
-
     
-
 
Other
   
650
     
650
     
650
     
650
     
650
     
650
 
Total debt securities available for sale
   
682,878
     
676,724
     
893,811
     
863,744
     
905,836
     
912,082
 
Equity securities
   
35
     
35
     
10
     
10
     
10
     
10
 
Total securities available for sale
   
682,913
     
676,759
     
893,821
     
863,754
     
905,846
     
912,092
 
Held to maturity securities:
                                               
Mortgage backed securities and collateralized mortgage obligations-residential
   
60,986
     
64,320
     
76,270
     
78,876
     
108,471
     
114,195
 
Corporate bonds
   
9,960
     
11,022
     
9,945
     
11,429
     
34,955
     
36,931
 
Total held to maturity securities
   
70,946
     
75,342
     
86,215
     
90,305
     
143,426
     
151,126
 
Total investment securities
 
$
753,859
     
752,101
     
980,036
     
954,059
     
1,049,272
     
1,063,218
 
 
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 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 recent years 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 the economy 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.

Proceeds from sales, calls and maturities of securities available for sale have been invested in higher yielding assets, such as loans, or temporarily held in Federal Funds sold and other short term investments until deployed to fund future loan growth or FUTURE INVESTMENT OPPoRtunities.
 

12

 
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, 2014 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, 2014, 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, 2014 the Company did not consider any of the unrealized losses to be other than temporary.

At December 31, 2014, the carrying value of securities available for sale amounted to $676.8 million, compared to $863.8 million at year end 2013. For 2014, the average balance of securities available for sale was $794.6 million with an average yield of 2.04%, compared to an average balance in 2013 of $946.4 million with an average yield of 1.90%. The taxable equivalent income earned on the securities available for sale portfolio in 2013 was $18.0 million, compared to $16.2 million earned in 2014.

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, 2014, the fair value of TrustCo’s portfolio of securities available for sale carried gross unrealized gains of approximately $1.1 million and gross unrealized losses of approximately $7.3 million. At December 31, 2013, the fair value of the company’s portfolio of securities available for sale carried gross unrealized gains of approximately $467 thousand and gross unrealized losses of approximately $30.5 million. In both periods, unrealized losses were related to market interest rate levels and were not credit related.

Held to Maturity Securities: At December 31, 2014 the Company held $70.9 million of held to maturity securities, compared to $86.2 million at December 31, 2013. For 2014, the average balance of held to maturity securities was $78.4 million, compared to $104.4 million in 2013.  Similar to securities available for sale, 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 OR FUTURE INVESTMENT OPPURTUNITIES. The average yield on held to maturity securities increased from 3.52% in 2013 to 3.67% in 2014 as the mix within the portfolio changed due to calls, maturities and amortization/accretion. Interest income on held to maturity securities declined from $3.7 million in 2013 to $2.9 million in 2014, 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, 2014 was $75.3 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, 2014 none of the securities in this portfolio had fair values that were less than the amortized cost. At December 31, 2014, the Company has the intent and ability to hold these securities until maturity.

Securities Gains & Losses: During 2014, TrustCo recognized approximately $717 thousand of net gains from securities transactions, compared to net gains of $1.6 million in 2013 and $2.2 million in 2012. There were no sales or transfers of held to maturity securities in 2014, 2013 and 2012.

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.
 
13

 
SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD

(dollars in thousands)
 
As of December 31, 2014
 
   
Maturing:
 
       
After 1
   
After 5
         
   
Within
   
But Within
   
But Within
   
After
     
   
1 Year
   
5 Years
   
10 Years
   
10 Years
   
Total
 
                     
Debt securities available for sale:
                   
U. S. government sponsored enterprises
                   
Amortized cost
 
$
2,020
     
76,400
     
-
     
-
     
78,420
 
Fair Value
   
2,010
     
75,790
     
-
     
-
     
77,800
 
Weighted average yield
   
0.88
%
   
1.15
     
-
     
-
     
1.14
 
State and political subdivisions
                                       
Amortized cost
 
$
7
     
382
     
1,531
     
312
     
2,232
 
Fair Value
   
7
     
382
     
1,568
     
314
     
2,271
 
Weighted average yield
   
5.39
%
   
5.71
     
4.53
     
4.30
     
4.70
 
Mortgage backed securities and collateralized mortgage obligations-residential
                                       
Amortized cost
 
$
632
     
326,936
     
158,539
     
-
     
486,107
 
Fair Value
   
646
     
325,789
     
157,125
     
-
     
483,560
 
Weighted average yield
   
4.48
%
   
2.14
     
2.25
     
-
     
2.18
 
Corporate bonds
                                       
Amortized cost
 
$
1,500
     
-
     
-
     
-
     
1,500
 
Fair Value
   
1,500
     
-
     
-
     
-
     
1,500
 
Weighted average yield
   
0.09
%
   
-
     
-
     
-
     
0.09
 
Small Business Administration- guaranteed participation securities
                                       
Amortized cost
 
$
-
     
-
     
103,273
     
-
     
103,273
 
Fair Value
   
-
     
-
     
100,496
     
-
     
100,496
 
Weighted average yield
   
-
%
   
-
     
2.04
     
-
     
2.04
 
Mortgage backed securities and collateralized mortgage obligations-commercial
                                       
Amortized cost
 
$
-
     
10,696
     
-
     
-
     
10,696
 
Fair Value
   
-
     
10,447
     
-
     
-
     
10,447
 
Weighted average yield
   
-
%
   
1.40
     
-
     
-
     
1.40
 
Other
                                       
Amortized cost
 
$
-
     
650
     
-
     
-
     
650
 
Fair Value
   
-
     
650
     
-
     
-
     
650
 
Weighted average yield
   
-
%
   
2.49
     
-
     
-
     
2.49
 
Total securities available for sale
                                       
Amortized cost
 
$
4,159
     
415,064
     
263,343
     
312
     
682,878
 
Fair Value
   
4,163
     
413,058
     
259,189
     
314
     
676,724
 
Weighted average yield
   
1.15
%
   
1.94
     
2.18
     
4.30
     
2.03
 
                                         
Held to maturity securities:
                                       
Mortgage backed securities and collateralized mortgage obligations-residential
                                       
Amortized cost
 
$
-
     
59,638
     
1,348
     
-
     
60,986
 
Fair Value
   
-
     
62,873
     
1,447
     
-
     
64,320
 
Weighted average yield
   
-
%
   
3.81
     
4.10
     
-
     
3.81
 
Corporate bonds
                                       
Amortized cost
 
$
-
     
9,960
     
-
     
-
     
9,960
 
Fair Value
   
-
     
11,022
     
-
     
-
     
11,022
 
Weighted average yield
   
-
%
   
6.17
     
-
     
-
     
6.17
 
Total held to maturity securities
                                       
Amortized cost
 
$
-
     
69,598
     
1,348
     
-
     
70,946
 
Fair Value
   
-
     
73,895
     
1,447
     
-
     
75,342
 
Weighted average yield
   
-
%
   
4.15
     
4.10
     
-
     
4.14
 

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

14

 
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 2012 the level of securities called was elevated due to the volatile interest rate environment. The level of calls in 2013 and 2014 declined relative to the 2012 level.  The probability of future calls will change depending on market interest rate levels. 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, 2014. 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, 2014 on each type/maturity grouping.
 
SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION

Debt securities available for sale:
(dollars in thousands)
 
As of December 31, 2014
 
   
Based on
   
Based on
 
   
Final Maturity
   
Call Date
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
 
Within 1 year
 
$
4,159
   
 
4,163
     
81,527
     
80,933
 
1 to 5 years
   
415,064
     
413,058
     
339,379
     
337,992
 
5 to 10 years
   
263,343
     
259,189
     
261,954
     
257,781
 
After 10 years
   
312
     
314
     
18
     
18
 
Total debt securities available for sale
 
$
682,878
     
676,724
     
682,878
     
676,724
 

Held to maturity securities:

(dollars in thousands)
 
As of December 31, 2014
 
   
Based on
   
Based on
 
   
Final Maturity
   
Call Date
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
 
1 to 5 years
  $
69,598
     
73,895
     
69,598
     
73,895
 
5 to 10 years
   
1,348
     
1,447
     
1,348
     
1,447
 
Total held to maturity securities
 
$
70,946
     
75,342
     
70,946
     
75,342
 
 

Federal Funds Sold and Other Short-term Investments

During 2014, the average balance of Federal Funds sold and other short term investments was $589.9 million, an increase from $502.1 million in 2013. The average rate earned on these assets was 0.25% in both 2013 and 2014. 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 2014. The Federal Funds sold and other short-term investments portfolio is significantly affected by changes in the target Federal Funds rate as are virtually all interest sensitive instruments.

The year-end balance of Federal Funds sold and other short term investments was $627.9 million for 2014, compared to $536.6 million at year end 2013.  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 2015 and will make appropriate adjustments based upon market opportunities and interest rates.
 

15

 
Funding Sources

TrustCo utilizes various traditional sources of funds to support its earning 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 $3.98 billion in 2014, compared to $3.86 billion in 2013, an increase of $115.5 million. Increases in deposit categories included: demand deposits up $17.0 million, interest-bearing checking deposits up $57.6 million, savings up $8.8 million, money market up $455 thousand and time deposits up $31.6 million. 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)
             
2014
   
2013
   
Components of
 
               
vs.
   
vs.
   
Total Funding
 
   
2014
   
2013
   
2012
   
2013
   
2012
   
2014
   
2013
   
2012
 
Demand deposits
 
$
319,458
     
302,437
     
278,179
     
17,021
     
24,258
     
7.7
%
   
7.5
     
7.0
 
Retail deposits:
                                                               
Savings
   
1,227,473
     
1,218,655
     
1,115,151
     
8,818
     
103,504
     
29.4
     
30.1
     
28.1
 
Time deposits under $100 thousand
   
704,249
     
721,498
     
833,358
     
(17,249
)
   
(111,860
)
   
16.9
     
17.8
     
21.0
 
Interest bearing checking accounts
   
636,140
     
578,531
     
515,062
     
57,609
     
63,469
     
15.3
     
14.3
     
13.0
 
Money market deposits
   
650,779
     
650,324
     
649,452
     
455
     
872
     
15.6
     
16.1
     
16.4
 
Total retail deposits
   
3,218,641
     
3,169,008
     
3,113,023
     
49,633
     
55,985
     
77.2
     
78.3
     
78.5
 
Total core deposits
   
3,538,099
     
3,471,445
     
3,391,202
     
66,654
     
80,243
     
84.9
     
85.8
     
85.5
 
Time deposits over $100 thousand (1)
   
440,869
     
391,975
     
418,488
     
48,894
     
(26,513
)
   
10.6
     
9.7
     
10.6
 
Short-term borrowings
   
189,430
     
180,275
     
152,982
     
9,155
     
27,293
     
4.5
     
4.5
     
3.9
 
Total purchased liabilities
   
630,299
     
572,250
     
571,470
     
58,049
     
780
     
15.1
     
14.2
     
14.5
 
Total sources of funding
 
$
4,168,398
     
4,043,695
     
3,962,672
     
124,703
     
81,023
     
100.0
%
   
100.0
     
100.0
 

(1) Included in time deposits over $100 thousand was $85.3 million and $70.8 million in time deposits with balances in excess of $250 thousand as of December 31, 2014 and 2013, respectively.
 

16

 

AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS

(dollars in thousands)
 
2014
   
2013
   
2012
 
   
Average
Balance
   
Interest
Income/
Expense
   
Average
Rate
   
Average
Balance
   
Interest
Income/
Expense
   
Average
Rate
   
Average
Balance
   
Interest
Income/
Expense
   
Average
Rate
 
Assets
                                   
Loans, net
 
$
3,014,156
     
135,989
     
4.51
%
 
$
2,771,663
     
127,974
     
4.62
%
 
$
2,572,983
     
128,663
     
5.00
%
                                                                         
Securities available for sale:
                                                                       
U.S. government sponsored enterprises
   
113,563
     
1,417
     
1.25
     
221,028
     
2,600
     
1.18
     
568,425
     
8,097
     
1.42
 
State and political subdivisions
   
3,924
     
280
     
7.14
     
12,845
     
862
     
6.71
     
35,435
     
2,012
     
5.68
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
555,430
     
12,150
     
2.19
     
545,487
     
11,385
     
2.09
     
334,616
     
6,697
     
2.00
 
Corporate bonds
   
3,156
     
65
     
2.04
     
46,049
     
812
     
1.76
     
68,182
     
2,231
     
3.27
 
Small Business Administration- guaranteed participation securities
   
107,029
     
2,154
     
2.01
     
109,913
     
2,180
     
1.98
     
15,707
     
319
     
2.03
 
Mortgage backed securities and collateralized mortgage obligations-commercial
   
10,837
     
151
     
1.40
     
10,420
     
144
     
1.38
     
-
     
-
     
-
 
Other
   
674
     
16
     
2.37
     
625
     
17
     
2.72
     
660
     
19
     
2.88
 
Total securities available for sale
   
794,613
     
16,233
     
2.04
     
946,367
     
18,000
     
1.90
     
1,023,025
     
19,375
     
1.89
 
Held to maturity securities:
                                                                       
U.S. government sponsored enterprises
   
-
     
-
     
-
     
-
     
-
     
-
     
1,048
     
25
     
2.43
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
68,404
     
2,259
     
3.30
     
90,360
     
2,840
     
3.14
     
131,092
     
4,287
     
3.27
 
Corporate bonds
   
9,952
     
615
     
6.18
     
14,011
     
833
     
5.95
     
39,570
     
1,666
     
4.21
 
Total held to maturity securities
   
78,356
     
2,874
     
3.67
     
104,371
     
3,673
     
3.52
     
171,710
     
5,978
     
3.48
 
Federal Reserve Bank and Federal Home Loan Bank stock
   
10,135 
     
511 
     
5.04 
     
10,266 
     
490 
     
4.77 
     
9,425 
     
486 
     
5.16 
 
Federal funds sold and other short-term investments
   
589,873
     
1,464
     
0.25
     
502,136
     
1,240
     
0.25
     
461,495
     
1,142
     
0.25
 
Total interest earning assets
   
4,487,133
     
157,071
     
3.50
%
   
4,334,803
     
151,377
     
3.49
%
   
4,238,638
     
155,644
     
3.67
%
Allowance for loan losses
   
(47,409
)
                   
(48,452
)
                   
(49,148
)
               
Cash and noninterest earning assets
   
135,217
                     
136,042
                     
143,303
                 
Total assets
 
$
4,574,941
                   
$
4,422,393
                   
$
4,332,793
                 
Liabilities and shareholders' equity
                                                                       
Interest bearing deposits:
                                                                       
Interest bearing checking accounts
 
$
636,140
     
365
     
0.06
%
 
$
578,531
     
329
     
0.06
%
 
$
515,062
     
315
     
0.06
%
Savings
   
1,227,473
     
2,662
     
0.22
     
1,218,655
     
3,333
     
0.27
     
1,115,151
     
3,872
     
0.35
 
Time deposits and money markets
   
1,795,897
     
11,064
     
0.62
     
1,763,797
     
10,138
     
0.57
     
1,901,298
     
14,313
     
0.75
 
Total interest bearing deposits
   
3,659,510
     
14,091
     
0.39
     
3,560,983
     
13,800
     
0.39
     
3,531,511
     
18,500
     
0.52
 
Short-term borrowings
   
189,430
     
1,397
     
0.74
     
180,275
     
1,483
     
0.82
     
152,982
     
1,475
     
0.96
 
Total interest bearing liabilities
   
3,848,940
     
15,488
     
0.40
%
   
3,741,258
     
15,283
     
0.41
%
   
3,684,493
     
19,975
     
0.54
%
Demand deposits
   
319,458
                     
302,437
                     
278,179
                 
Other liabilities
   
23,733
                     
21,719
                     
19,441
                 
Shareholders' equity
   
382,810
                     
356,979
                     
350,680
                 
Total liabilities and shareholders' equity
 
$
4,574,941
                   
$
4,422,393
                   
$
4,332,793
                 
Net interest income
           
141,583
                     
136,094
                     
135,669
         
Taxable equivalent adjustment
           
(130
)
                   
(330
)
                   
(681
)
       
Net interest income
           
141,453
                     
135,764
                     
134,988
         
Net interest spread
                   
3.10
%
                   
3.08
%
                   
3.13
%
Net interest margin (net interest income to total interest earnings assets)
                   
3.16
                     
3.14
                     
3.20
 

Portions of income earned on certain commercial loans, obligations of states and political subdivisions, and equity securities are exempt from federal and/or state taxation. Appropriate adjustments have been made to reflect the equivalent amount of taxable income that would have been necessary to generate an equal amount of after tax income. Federal and state tax rates used to calculate income on a tax equivalent basis were 35.0% and 7.5% for 2014, 2013, and 2012. The average balances of securities available for sale and held to maturity were calculated using amortized costs. Included in the average balance of shareholders’ equity is ($5.0) million, ($8.1) million, and $3.1 million in 2014, 2013, and 2012, respectively, of net unrealized (loss) gain, net of tax, in the available for sale securities portfolio. The gross amounts of the net unrealized (loss) gain has been included in cash and noninterest earning assets. Nonaccrual loans are included in average loans.

 
The overall cost of interest bearing deposits was 0.39% in 2014, unchanged from 2013. The increase in the average balance of interest bearing deposits resulted in an increase of approximately $291 thousand in interest expense on deposits to $14.1 million in 2014.

The Company strives to maintain competitive rates on deposit accounts and to attract customers through a combination of competitive interest rates, quality customer service, and convenient banking locations. In this fashion, management believes, TrustCo is able to attract deposit customers looking for a long-term banking relationship and to cross sell banking services utilizing the deposit account relationship as the starting point.
 

17


 
Other funding sources: The Company had $189.4 million of average short-term borrowings outstanding during 2014 compared to $180.3 million in 2013. These borrowings represent customer repurchase accounts, which behave more like deposit accounts than traditional borrowings. The average cost of short-term borrowings was 0.74% in 2014 and 0.82% in 2013. This resulted in interest expense of approximately $1.4 million in 2014 compared to $1.5 million in 2013.
 

AVERAGE DEPOSITS BY TYPE OF DEPOSITOR

(dollars in thousands)
 
Years Ended December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
Individuals, partnerships and corporations
 
$
3,965,716
     
3,847,392
     
3,791,616
     
3,621,718
     
3,387,976
 
U.S. government
   
2
     
-
     
-
     
3
     
5
 
State and political subdivisions
   
2,141
     
1,826
     
1,748
     
1,584