EX-13 3 ex13.htm EXHIBIT 13

Exhibit 13
 
TrustCo Bank Corp NY (the “Company,” or “TrustCo”) 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 (the “Bank” or “Trustco”), operates 146 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,
 
   
2015
   
2014
   
Percent Change
 
Income:
                 
Net interest income (Taxable Equivalent)
 
$
143,222
   
$
141,583
     
1.16
%
Net Income
   
42,238
     
44,193
     
(4.42
)
Per Share:
                       
Basic earnings
   
0.444
     
0.467
     
(4.93
)
Diluted earnings
   
0.444
     
0.466
     
(4.72
)
Tangible book value at period end
   
4.33
     
4.14
     
4.59
 
Average Balances:
                       
Assets
   
4,721,146
     
4,574,941
     
3.20
 
Loans, net
   
3,234,806
     
3,014,156
     
7.32
 
Deposits
   
4,103,505
     
3,978,968
     
3.13
 
Shareholders' equity
   
405,761
     
382,810
     
6.00
 
Financial Ratios:
                       
Return on average assets
   
0.89
%
   
0.97
%
   
(8.25
)
Return on average equity
   
10.41
     
11.54
     
(9.79
)
Consolidated tier 1 capital to:
                       
Total assets (leverage)
   
8.86
     
8.55
     
3.63
 
Risk-adjusted assets
   
17.71
     
17.04
     
3.93
 
Common equity tier 1 capital ratio
   
17.71
     
N/A
 
   
N/A
 
Total capital to risk-adjusted assets
   
18.97
     
18.30
     
3.66
 
Net loans charged off to average loans
   
0.16
     
0.22
     
(25.66
)
Allowance for loan losses to nonperforming loans
   
1.58
x
   
1.36
x
   
16.01
 
Efficiency ratio
   
55.08
%
   
52.60
%
   
(4.71
)
Dividend Payout ratio
   
59.13
     
56.30
     
5.02
 
 
Per Share information of common stock                              
         
Basic
Earnings
         
Diluted
Earnings
         
Cash
Dividend
       
Tangible
Book
Value
       
Range of Stock
Price
  
High
   
Low
 
                                     
2015
                                   
First quarter
 
$
0.113
   
$
0.113
   
$
0.0656
   
$
4.21
   
$
7.33
   
$
6.42
 
Second quarter
   
0.113
     
0.113
     
0.0656
     
4.23
     
7.19
     
6.60
 
Third quarter
   
0.112
     
0.111
     
0.0656
     
4.33
     
7.20
     
5.59
 
Fourth quarter
   
0.107
     
0.107
     
0.0656
     
4.33
     
6.63
     
5.60
 
                                                 
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
 
 
Certain of the financial measures used in this report, such as Tax-Equivalent Net Interest Income and Tax-Equivalent Net Interest Margin, Tangible Book Value Per Share and the Efficiency Ratio, are determined by methods other than in accordance with generally accepted accounting principles (“GAAP”). A reconciliation of these measures to the closest comparable GAAP financial measures is presented herein.
 
1

Financial Highlights
1
   
President’s Message
3-4
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
5
   
Glossary of Terms
34-36
   
Management’s Report on Internal Control Over Financial Reporting
37
   
Report of Independent Registered Public Accounting Firm
38-39
   
Consolidated Financial Statements and Notes
40-93
   
Branch Locations
94-98
   
Officers and Board of Directors
99-100
   
General Information
101
   
Share Price Information
102
 
TrustCo Bank Corp NY Mission

The Mission of TrustCo Bank Corp NY is to provide an above average return to our owners in a manner consistent with our commitment to all stakeholders of the Company and its primary subsidiary, Trustco Bank, including customers, employees, community, regulators and shareholders.
 
2

President’s Message
 
Dear fellow shareholders:

We are pleased to report Trustco Bank had great results in 2015.  Deposit and loan growth resulted in solid profits – all arising from our commitment to providing the best banking products and customer service in the industry.

As always, our first-mortgage product stands out among the Bank’s offerings and was responsible for the majority of our 2015 growth.  We pride ourselves on offering products that help people become homeowners in all parts of our community, including areas underserved by some segments of our industry.  In these, and all parts of our community, we offer prudent loans at a fair rate.  Simply put, we make good loans to good people in every part of our community.  Through these practices our loans outstanding reached a record high of $3.3 billion.

Not only are we actually lending in the communities we serve, we continue to open branches as the needs of our market area dictate. Our branch network is the platform for our growth and where most new business is generated.  In 2015, we opened two new branches in Central Florida, bringing our Florida branch count to 51.  Our average deposits per branch in 2015 increased $474 thousand over the 2014 average.  Deposits also showed strong growth in 2015 ending the year at $4.1 billion. Our low-cost core checking and interest-bearing checking deposit accounts were the main contributors to this growth.  Having this type of core customer provides the additional benefit of allowing us the opportunity to cross sell additional products and services.

Our performance ratios remained solid with a return on average equity of 10.41% and efficiency ratio of 55.1% for 2015, while our non-performing assets fell $5.7 million or 14% for the year.

Of course, 2015 was not without challenges.  As you probably know, we entered into a Formal Agreement with The Office of the Comptroller of the Currency.  As a result, we have sharpened our focus on legal compliance, articulated in a detailed action plan.  Everyone with management responsibility at the Bank works every day toward full implementation of that plan.  I am happy to report very substantial progress has been made and the focus of our organization is exactly where it must be – on serving our customers in full compliance with the law.  Our commitment to doing whatever needs to be done to meet the requirements of the Formal Agreement and remaining a fully compliant company has added significant costs to our bottom line in both one-time and ongoing expenses – mainly in personnel and professional services.  Our strong earnings including these costs is a testament to the solid foundation of our institution and the agility of our management team.  In short, we expect to emerge from this process not only stronger, but smarter and well positioned for future growth.
 
3

We are happy to announce the appointment of Brian C. Flynn to our Board of Directors.  Brian worked for over 30 years with financial service companies prior to his recent retirement as a partner with KPMG.  We believe Brian will have a significant positive impact on the work of the Board and we look forward to his participation.  We would also like to thank Joseph A. Lucarelli, who resigned from our Board during 2015, for his contributions during his years on the Board.  Joe will certainly be missed.

Our Financial Services Department is a trusted resource for our customers needing more sophisticated services. Assets under management at year-end 2015 were $842 million.  We offer a wide range of investment products and assist in estate and retirement planning.  Please reach out if you need assistance. We have a very approachable team ready to help out.

Remaining true to being “Your Home Town Bank”, in 2015 Trustco donated to more than 300 charitable organizations.  As proud members of the communities where we do business, from rehabbing neighborhood parks to sponsoring and participating in events, our employees have also donated thousands of hours of their time to hundreds of local community groups.

It is with a mixture of pride and regret to report that my father, Robert A. McCormick, has decided that he will not run for re-election to our Board at the end of his current term, which expires at our annual meeting on May 19, 2016.  Long time shareholders know that since he joined Trustco’s predecessor, Schenectady Trust in 1977, we have grown from 12 branches and $210 million of assets to 145 branches and $4.7 billion of assets.  Trustco’s current size, financial strength and extensive branch network are testament to his leadership during his years as President, CEO and member of the Board. He will leave us well-positioned for the future upon his retirement.  As a final note, our belief in returning excess capital to shareholders is another legacy he will leave behind, with the dividend paid in January of this year adding to total dividends of approximately $545 million paid to shareholders since the beginning of 2000.  We thank him for all he has done for our Company and our communities.

We are proud of our team, enthusiastic about our future and confident that your Company is poised for significant profit and growth for years to come.  On behalf of the Board of Directors and our employees, we thank you for your support.

Sincerely,
 
/s/ 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 during 2015 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 2015 should be read in conjunction with this review. Reclassifications are made where necessary to conform to the current year’s presentation.

TrustCo continued to make progress in 2015 despite a challenging operating environment and mixed economic conditions. Among the key results for 2015, in management’s view:

Net income declined 4.4% to $42.2 million in 2015 versus 2014;
Average loans and average deposits were up $221 million and $125 million, respectively, for 2015 compared to the prior year;
The average balance of core deposits grew $96 million in 2015 compared to 2014;
Nonperforming assets declined $5.7 million or 14.2% to $34.7 million from year-end 2014 to year-end 2015;
At 55.1%, the efficiency ratio remained at an industry-leading level (see Non-GAAP Financial Measures Reconciliation), and;
The regulatory capital levels of both the Company and the Bank improved at December 31, 2015 relative to the prior year, and the Bank continues to meet the definition of “well capitalized” for regulatory purposes.

Management believes that the Company was able to achieve these accomplishments, despite a continued mixed economy and increased regulatory expectations, 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 10.41% in 2015 compared to 11.54% in 2014, while return on average assets was 0.89% in 2015 and 0.97% in 2014.

The economic and business environment remained mixed during 2015.  Real gross domestic product (“GDP”) increased 2.4% in both 2015 and 2014, based on the advance estimate published on January 29, 2016, with growth rates declining in late 2015.  This annual rate of growth remains well below the range exhibited during more robust periods of economic activity, such as the 4% to 6% range experienced during the 1990s.  Equity markets performed poorly during 2015 with the Dow Jones Industrial Average down 2.2%, the S&P 500 down 0.7% and the Russell 2000 index down 5.7%. United States Treasuries saw significant price changes over the course of 2015, with the slope of the yield curve shifting considerably.  Yields on maturities on the short end of the curve moved higher during the year, particularly in the fourth quarter.  For example the three month and two year Treasury securities rose from 0.04% to 0.16% and from 0.67% to 1.06%, respectively, from year-end 2014 to year-end 2015.  Longer term Treasury securities yields generally increased less, with the ten year rising from 2.17% at the end of 2014 to 2.27% at the end of 2015.  Most overseas markets experienced more difficult conditions than seen in the United States, particularly in the latter part of the year.  Economic growth slowed in many areas, especially in China.  While the United States economy did grow in 2015, it continues to face significant challenges.  Employment increased and the unemployment rate declined, although labor force participation remains an ongoing issue.  Wage growth also remains weak, although there has been some progress on this front in recent months.  The strong dollar provides some significant benefits, but also makes US goods and services less competitive overseas.  Significant declines in the price of oil and many basic commodities also provides a mix of benefits and potential risks.  Finally, the impact of regulatory changes that have been in response to the 2007-2008 financial crisis have not been fully 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 often led to industry problems in prior years. 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

Regulatory Agreement

Trustco Bank entered into an agreement with its primary regulator, the Office of the Comptroller of the Currency (OCC), on July 21, 2015.  The agreement calls for the Bank to take various actions in areas such as compliance, corporate governance, audit, capital planning including dividends, and strategic planning, among others.  The agreement followed the completion of the OCC’s regularly scheduled exam of the Bank.  Since the completion of the examination, the Bank has been working to address the issues raised. The Bank’s Board of Directors and management are committed to taking the necessary actions to fully address the provisions of the agreement and believe they have made significant progress towards that goal. Implementing the necessary action plans is currently expected to add annual expenses of approximately $5.0 million.  These expenses primarily include salaries and benefits for additional employees, third party consultants and costs associated with other tools and resources needed to fulfill the requirements of the agreement.

Overview

2015 results were marked by growth in the two key drivers of the Company’s long-term performance: deposits and loans. Deposits ended 2015 at $4.10 billion, an increase of $68.1 million or 1.7% from the prior year end, but more importantly the mix of deposits reflects an increase of $124 million or 4.3% increase in lower cost core deposits year over year.  The loan portfolio grew to a total of $3.29 billion, an increase of $135.0 million or 4.3% over the 2014 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 newer 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 net interest income growth as a portion of the Company’s liquid investment portfolio was redeployed into higher yielding loans.

TrustCo recorded net income of $42.2 million or $0.444 of diluted earnings per share for the year ended December 31, 2015, compared to $44.2 million or $0.466 of diluted earnings per share for the year ended December 31, 2014. 2014 net income included non-recurring items of $2.7 million, compared to $37 thousand in 2015.

During 2015, the following had a significant effect on net income:

an increase of $1.7 million in net interest income from 2014 to 2015 as a result of 3.2% growth in average interest earning assets, partially offset by a 7 basis point decline in the net interest margin to 3.09%,
a decrease in the provision for loan losses from $5.1 million in 2014 to $3.7 million in 2015,
an increase of $1.1 million in non-interest income (excluding net gain on sales of securities and non-recurring items) in 2015 as compared to 2014,
the recognition of net gains on securities transactions of $251 thousand in 2015 compared to net securities gains of $717 thousand recorded in 2014,
a $2.7 million decline in non-recurring items in 2015 as compared to 2014,
an increase of $4.9 million in non-interest expense (excluding other real estate expense, net),
a $992 thousand increase in other real estate expenses (net), and
a decrease of $2.9 million in income tax expense from $27.4 million in 2014 to $24.5 million in 2015.

TrustCo performed well in comparison to its peers with respect to a number of key performance ratios during 2015 and 2014, including:

return on average equity of 10.41% for 2015 and 11.54% for 2014, compared to medians of 8.84% in 2015 and 8.67% in 2014 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 55.08% for 2015 and 52.60% for 2014, compared to the peer group levels of 61.99% in 2015 and 63.06% in 2014.
 
6

During 2015, 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 2015 allowed the Company to continue to attract deposits at relatively low yields. On average for 2015, non-maturity deposits were 71.4% of total deposits, up from 71.2% in 2014.  Overall, the cost of interest bearing liabilities increased 1 basis point to 0.41% in 2015 as compared to 2014.  Average loan balances increased 7.3% from 2014 to 2015, while the total of short term investments, available for sale securities and held to maturity securities decreased 5.2%, resulting in average loans growing to 69.9% of average earning assets in 2015 from 67.2% in 2014.  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 $1.7 million increase in net interest income from 2014 to 2015. 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 2015 resulted in maturing and called securities being reinvested at low 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 2015. 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 2014 and most of 2015.  On December 16, 2015, the FRB increased the target range to 0.25% to 0.50%. The FRB Federal Open Market Committee (“FOMC”) affirmed in its January 27, 2016 press release that it would maintain “…its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the Federal Funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”  In regard to the future path of rates, the Committee noted, “In determining the timing and size of future adjustments to the target range for the Federal Funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the Federal Funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the Federal Funds rate will depend on the economic outlook as informed by incoming data.”  Given recent economic softness, most economists currently believe that there is a very limited likelihood of near term rate increases.  Market interest rates moved in divergent directions during 2015.  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 up through most 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 reversing a widening that occurred mid-year.  Overall, the average spread between the ten year Treasury and the two year Treasury was 145 basis points in 2015, down from an average of 208 basis points in 2014.  The spread ended the year at 121 basis points, compared to 150 at the beginning of the year. 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 2014 and 2015.

    
3 Month T
Bill (BEY)
Yield(%)
   
2 Year T
Note
Yield(%)
   
5 Year T
Note
Yield(%)
   
10 Year T
Note
Yield(%)
   
10 Year -
2 Year
Spread(%)
 
2015
                             
Beginning of Year
   
0.04
     
0.67
     
1.65
     
2.17
     
1.50
 
Peak
   
0.29
     
1.09
     
1.81
     
2.50
     
1.77
 
Trough
   
0.00
     
0.44
     
1.18
     
1.68
     
1.19
 
End of Year
   
0.16
     
1.06
     
1.76
     
2.27
     
1.21
 
Average
   
0.05
     
0.69
     
1.53
     
2.14
     
1.45
 
Median
   
0.02
     
0.66
     
1.54
     
2.16
     
1.43
 
                                         
2014
                                       
Beginning of Year
   
0.07
     
0.38
     
1.75
     
3.04
     
2.66
 
Peak
   
0.08
     
0.73
     
1.85
     
3.04
     
2.66
 
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
 
Median
   
0.03
     
0.45
     
1.65
     
2.56
     
2.09
 

Source: SNL Financial
 
In addition to changes in interest rates, economic conditions have a significant impact on the allowance for loan losses.  The decrease in the provision for loan losses from $5.1 million in 2014 to $3.7 million in 2015 positively affected net income. Net charge-offs decreased from $6.5 million in 2014 to $5.3 million in 2015. Nonperforming loans decreased from $34.0 million to $28.3 million and the nature of these loans changed slightly in terms of both geographic location and, to a lesser degree, loan type. Details on nonperforming loans and net charge-offs are included in the notes to the financial statements.  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.
 
7

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 two new branches in 2015, bringing the total to 146 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 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 Bank 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. Generally, new bank branches continue to grow for years after being opened, although there is no specific time frame that could be characterized as typical . 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 have stabilized. 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 2015 and for 2014.

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 remained at that level until December 2015 when the range was increased to 0.25% to 0.50%.
 
8

The yield on the ten year Treasury decreased by 10 basis points from 2.27% at the beginning of 2015 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 and the reverse is also generally applicable. 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 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 2015, while loan yields declined through most of the year and deposit costs were roughly stable.

Earning Assets

Average earning assets during 2015 were $4.63 billion, which was an increase of $143.3 million from the prior year. This increase was the result of growth in the average balance of net loans of $220.7 million, a $14.6 million decrease in held-to-maturity securities, a $136.7 million decrease in securities available for sale, and a $74.6 million increase in Federal Funds sold and other short-term investments between 2014 and 2015. The increase in the loan portfolio is the result of increases in each loan category except commercial loans, 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 Bank branch network through an effective marketing campaign and competitive rates and closing costs.

Total average assets were $4.72 billion for 2015 and $4.57 billion for 2014.

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)
   2015
vs.
   
2014
vs.
   
Components of
Total Earning Assets
 
    
2015
   
2014
   
2013
   
2014
   
2013
   
2015
   
2014
   
2013
 
Loans, net
 
$
3,234,806
     
3,014,156
     
2,771,663
     
220,650
     
242,493
     
69.9
%
   
67.2
     
64.0
 
                                                                 
Securities available for sale (1):
                                                               
U.S. government sponsored enterprises
   
107,436
     
113,563
     
221,028
     
(6,127
)
   
(107,465
)
   
2.3
     
2.5
     
5.1
 
State and political subdivisions
   
1,812
     
3,924
     
12,845
     
(2,112
)
   
(8,921
)
   
0.0
     
0.1
     
0.3
 
Mortgage-backed securities and collateralized mortgage obligations-residential
   
439,343
     
555,430
     
545,487
     
(116,087
)
   
9,943
     
9.5
     
12.4
     
12.6
 
Corporate bonds
   
613
     
3,156
     
46,049
     
(2,543
)
   
(42,893
)
   
0.0
     
0.1
     
1.1
 
Small Business Administration-guaranteed participation securities
   
97,496
     
107,029
     
109,913
     
(9,533
)
   
(2,884
)
   
2.1
     
2.4
     
2.5
 
Mortgage-backed securities and collateralized mortgage obligations-commercial
    10,566       10,837      
10,420
     
(271
)
   
417
     
0.2
     
0.2
     
0.2
 
Other
   
685
     
674
     
625
     
11
     
49
     
0.0
     
0.0
     
0.0
 
Total securities available for sale
   
657,951
     
794,613
     
946,367
     
(136,662
)
   
(151,754
)
   
14.2
     
17.7
     
21.8
 
                                                                 
Held-to-maturity securities:
                                                               
Mortgage-backed securities and collateralized mortgage obligations
   
53,763
     
68,404
     
90,360
     
(14,641
)
   
(21,956
)
   
1.2
     
1.5
     
2.1
 
Corporate bonds
   
9,967
     
9,952
     
14,011
     
15
     
(4,059
)
   
0.2
     
0.2
     
0.3
 
Total held-to-maturity securities
   
63,730
     
78,356
     
104,371
     
(14,626
)
   
(26,015
)
   
1.4
     
1.7
     
2.4
 
                                                                 
Federal Reserve Bank and Federal Home Loan Bank stock
   
9,414
     
10,135
     
10,266
     
(721
)
   
(131
)
   
0.2
     
0.2
     
0.2
 
Federal funds sold and other short-term investments
   
664,516
     
589,873
     
502,136
     
74,643
     
87,737
     
14.4
     
13.1
     
11.6
 
                                                                 
Total earning assets   $ 4,630,417     $ 4,487,133     $ 4,334,803      
143,284
     
152,330
     
100.0
%
   
100.0
     
100.0
 
 
(1) The average balances of securities available for sale are presented using amortized cost for these securities.
 
Loans

In 2015, the Company experienced another year of significant loan growth. The $135.0 million increase in the Company’s gross loan portfolio from December 31, 2014 to December 31, 2015 came throughout its marketing territories.  Average loans increased $220.7 million during 2015 to $3.23 billion. Interest income on the loan portfolio increased to $141.9 million in 2015 from $136.0 million in 2014. The average yield declined 12 basis points to 4.39% in 2015 compared to 2014.

LOAN PORTFOLIO
 
(dollars in thousands)
 
As of December 31,
 
   
2015
   
2014
   
2013
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Commercial
 
$
192,789
     
5.9
%
 
$
202,469
     
6.4
%
 
$
202,038
     
6.9
%
Real estate - construction
   
26,594
     
0.8
     
38,522
     
1.2
     
35,358
     
1.2
 
Real estate - mortgage
   
2,705,205
     
82.1
     
2,557,613
     
81.1
     
2,325,029
     
80.0
 
Home equity lines of credit
   
359,325
     
10.9
     
352,134
     
11.1
     
340,489
     
11.7
 
Installment loans
   
9,391
     
0.3
     
7,594
     
0.2
     
5,895
     
0.2
 
Total loans
   
3,293,304
     
100.0
%
   
3,158,332
     
100.0
%
   
2,908,809
     
100.0
%
Less: Allowance for loan losses
   
44,762
             
46,327
             
47,714
         
Net loans (1)
 
$
3,248,542
           
$
3,112,005
           
$
2,861,095
         
 
   
Average Balances
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Commercial
 
$
195,265
     
6.0
%
 
$
201,317
     
6.7
%
 
$
193,065
     
7.0
%
 
$
209,323
     
8.1
%
 
$
242,256
     
10.0
%
Real estate - construction
   
29,101
     
0.9
     
35,109
     
1.2
     
36,689
     
1.3
     
34,387
     
1.3
     
18,666
     
0.8
 
Real estate - mortgage
   
2,647,265
     
81.8
     
2,428,383
     
80.6
     
2,201,348
     
79.4
     
2,004,059
     
77.9
     
1,859,797
     
76.7
 
Home equity lines of credit
   
354,718
     
11.0
     
343,264
     
11.4
     
335,409
     
12.1
     
321,299
     
12.5
     
298,996
     
12.3
 
Installment loans
   
8,457
     
0.3
     
6,083
     
0.2
     
5,152
     
0.2
     
3,915
     
0.2
     
3,622
     
0.1
 
Total loans
   
3,234,806
     
100.0
%
   
3,014,156
     
100.0
%
   
2,771,663
     
100.0
%
   
2,572,983
     
100.0
%
   
2,423,337
     
100.0
%
Less: Allowance for loan losses
   
46,023
             
47,409
             
48,452
             
49,148
             
46,210
         
Net loans (1)
 
$
3,188,783
           
$
2,966,747
           
$
2,723,211
           
$
2,523,835
           
$
2,377,127
         
 
(1) Presented net of deferred direct loan origination fees and costs.
 
10

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 $2.65 billion in 2015 and $2.43 billion in 2014. Income on real estate loans increased to $117.8 million in 2015 from $111.7 million in 2014. The yield on the portfolio decreased from 4.57% for 2014 to 4.43% in 2015 due to changes in retail rates in the marketplace. Residential real estate loans at December 31, 2015 were $2.72 billion compared to $2.58 billion at year-end 2014, an increase of $146.0 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 $210.2 million in 2015 decreased by $11.0 million from $221.3 million in 2014. The average yield on the commercial loan portfolio increased to 5.17% for 2015 from 5.12% in 2014. This resulted in interest income on commercial loans of $10.9 million in 2015 and $11.3 million in 2014.

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.  The Company does not have any direct exposure to oil or gas producers.  Market conditions in the central Florida market area continued to improve during 2015.

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.

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 2015, the average balance of home equity credit lines was $354.7 million, an increase from $343.3 million in 2014. 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 3.53% for 2015 and 3.57% in 2014. This resulted in interest income on home equity credit lines of $12.5 million in 2015, compared to $12.3 million in 2014.
 
11

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGE IN INTEREST RATES
 
(dollars in thousands)
 
December 31, 2015
 
   
In 1 Year
or Less
   
After 1 Year
But Within
5 Years
   
After
5 Years
   
Total
 
Commercial
 
$
63,381
     
52,487
     
76,921
     
192,789
 
Real estate construction
   
26,594
     
-
     
-
     
26,594
 
                                 
Total
   
89,975
     
52,487
     
76,921
     
219,383
 
                                 
Predetermined rates
   
39,822
     
52,487
     
76,921
     
169,230
 
Floating rates
   
50,153
     
-
     
-
     
50,153
 
                                 
Total
 
$
89,975
     
52,487
     
76,921
     
219,383
 
 

At December 31, 2015 and 2014, the Company had approximately $26.6 million and $38.5 million of real estate construction loans. As of December 31, 2015, approximately $16.0 million are secured by first mortgages to residential borrowers while approximately $10.6 million were to commercial borrowers for residential constructions projects. Of the $38.5 million in real estate construction loans at December 31, 2014, approximately $17.6 million were secured by first mortgages to residential borrowers with the remaining $20.9 million were to commercial borrowers for residential construction projects. The vast majority of construction loans are in the Company’s New York market.

INVESTMENT SECURITIES
 
(dollars in thousands)
 
As of December 31,
 
   
2015
   
2014
   
2013
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
Securities available for sale:
                                   
U. S. government sponsored enterprises
 
$
86,899
     
86,737
     
78,420
     
77,800
     
200,531
     
198,829
 
State and political subdivisions
   
1,270
     
1,290
     
2,232
     
2,271
     
7,623
     
7,758
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
416,625
     
411,729
     
486,107
     
483,560
     
552,230
     
532,449
 
Corporate bonds
   
-
     
-
     
1,500
     
1,500
     
10,429
     
10,471
 
Small Business Adminstration-guaranteed participation securities
   
92,620
     
90,416
     
103,273
     
100,496
     
111,383
     
103,029
 
Mortgage backed securities and collateralized mortgage obligations-commercial
   
10,422
     
10,180
     
10,696
     
10,447
     
10,965
     
10,558
 
Other
   
650
     
650
     
650
     
650
     
650
     
650
 
Total debt securities available for sale
   
608,486
     
601,002
     
682,878
     
676,724
     
893,811
     
863,744
 
Equity securities
   
35
     
35
     
35
     
35
     
10
     
10
 
Total securities available for sale
   
608,521
     
601,037
     
682,913
     
676,759
     
893,821
     
863,754
 
Held to maturity securities:
                                               
Mortgage backed securities and collateralized mortgage obligations-residential
   
46,490
     
48,798
     
60,986
     
64,320
     
76,270
     
78,876
 
Corporate bonds
   
9,975
     
10,641
     
9,960
     
11,022
     
9,945
     
11,429
 
Total held to maturity securities
   
56,465
     
59,439
     
70,946
     
75,342
     
86,215
     
90,305
 
Total investment securities
 
$
664,986
     
660,476
     
753,859
     
752,101
     
980,036
     
954,059
 
 
12

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 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.  Callable agency securities 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.  Holdings of both municipal and corporate securities are subject to additional monitoring requirements under current regulations, adding to the costs of owning those securities.

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.

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, 2015 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, 2015, 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, 2015 the Company did not consider any of the unrealized losses to be other than temporary.

At December 31, 2015, the carrying value of securities available for sale amounted to $601.0 million, compared to $676.8 million at year end 2014. For 2015, the average balance of securities available for sale was $658.0 million with an average yield of 1.95%, compared to an average balance in 2014 of $794.6 million with an average yield of 2.04%. The taxable equivalent income earned on the securities available for sale portfolio in 2014 was $16.2 million, compared to $12.9 million earned in 2015.

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, 2015, the fair value of TrustCo’s portfolio of securities available for sale carried gross unrealized gains of approximately $469 thousand and gross unrealized losses of approximately $8.0 million. At December 31, 2014, the fair value of the company’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. As previously noted, in both periods, unrealized losses were related to market interest rate levels and were not credit related.

Held to Maturity Securities: At December 31, 2015 the Company held $56.5 million of held to maturity securities, compared to $70.9 million at December 31, 2014. For 2015, the average balance of held to maturity securities was $63.7 million, compared to $78.4 million in 2014.  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 opportunities. The average yield on held to maturity securities increased from 3.67% in 2014 to 3.86% in 2015 as the mix within the portfolio changed due to calls, maturities and amortization/accretion. Interest income on held to maturity securities declined from $2.9 million in 2014 to $2.5 million in 2015, 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, 2015 was $59.4 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, 2015 none of the securities in this portfolio had fair values that were less than the amortized cost. At December 31, 2015, the Company has the intent and ability to hold these securities until maturity.

Securities Gains & Losses: During 2015, TrustCo recognized approximately $251 thousand of net gains from securities transactions, compared to net gains of $717 thousand in 2014 and $1.6 million in 2013. There were no sales or transfers of held to maturity securities in 2015, 2014 and 2013.
 
13

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.

SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD

(dollars in thousands)
 
As of December 31, 2015
 
    
Maturing:
 
   
Within
1 Year
   
After 1
But Within
5 Years
   
After 5
But Within
10 Years
   
After
10 Years
   
Total
 
                               
Debt securities available for sale:
                             
U. S. government sponsored enterprises
                             
Amortized cost
 
$
1,399
     
85,500
     
-
     
-
     
86,899
 
Fair Value
   
1,397
     
85,340
     
-
     
-
     
86,737
 
Weighted average yield
   
0.62
%
   
1.47
     
-
     
-
     
1.14
 
State and political subdivisions
                                       
Amortized cost
 
$
7
     
382
     
872
     
9
     
1,270
 
Fair Value
   
7
     
382
     
892
     
9
     
1,290
 
Weighted average yield
   
5.37
%
   
5.71
     
4.76
     
5.29
     
4.70
 
Mortgage backed securities and collateralized mortgage obligations-residential
                                       
Amortized cost
 
$
298
     
168,678
     
247,649
     
-
     
416,625
 
Fair Value
   
306
     
167,762
     
243,661
     
-
     
411,729
 
Weighted average yield
   
4.48
%
   
2.28
     
2.26
     
-
     
2.18
 
Small Business Administration-guaranteed participation securities
                                       
Amortized cost
 
$
-
     
-
     
92,620
     
-
     
92,620
 
Fair Value
   
-
     
-
     
90,416
     
-
     
90,416
 
Weighted average yield
   
-
%
   
-
     
2.05
     
-
     
2.04
 
Mortgage backed securities and collateralized mortgage obligations-commercial
                                       
Amortized cost
 
$
-
     
10,422
     
-
     
-
     
10,422
 
Fair Value
   
-
     
10,180
     
-
     
-
     
10,180
 
Weighted average yield
   
-
%
   
1.41
     
-
     
-
     
1.40
 
Other
                                       
Amortized cost
 
$
50
     
600
     
-
     
-
     
650
 
Fair Value
   
50
     
600
     
-
     
-
     
650
 
Weighted average yield
   
1.36
%
   
2.58
     
-
     
-
     
2.49
 
Total securities available for sale
                                       
Amortized cost
 
$
1,754
     
265,582
     
341,141
     
9
     
608,486
 
Fair Value
   
1,760
     
264,264
     
334,969
     
9
     
601,002
 
Weighted average yield
   
1.31
%
   
1.99
     
2.21
     
5.29
     
2.00
 
                                         
Held to maturity securities:
                                       
 
                                       
Mortgage backed securities and collateralized mortgage obligations-residential
                                       
Amortized cost
 
$
-
     
46,490
     
-
     
-
     
46,490
 
Fair Value
   
-
     
48,798
     
-
     
-
     
48,798
 
Weighted average yield
   
-
%
   
4.32
     
-
     
-
     
3.81
 
Corporate bonds
                                       
Amortized cost
 
$
-
     
9,975
     
-
     
-
     
9,975
 
Fair Value
   
-
     
10,641
     
-
     
-
     
10,641
 
Weighted average yield
   
-
%
   
6.14
     
-
     
-
     
6.17
 
Total held to maturity securities
                                       
Amortized cost
 
$
-
     
56,465
     
-
     
-
     
56,465
 
Fair Value
   
-
     
59,439
     
-
     
-
     
59,439
 
Weighted average yield
   
-
%
   
4.64
     
4.10
     
-
     
4.23
 
 

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. The level of calls in 2015 declined modestly  relative to the 2014 and 2013 levels.  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, 2015. 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, 2015 on each type/maturity grouping.
 
SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION
 
Debt securities available for sale:
 
(dollars in thousands)
 
As of December 31, 2015
 
   
Based on
Final Maturity
   
Based on
Call Date
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
Within 1 year
 
$
1,754
     
1,760
     
87,982
     
87,833
 
1 to 5 years
   
265,582
     
264,264
     
180,187
     
179,045
 
5 to 10 years
   
341,141
     
334,969
     
340,308
     
334,116
 
After 10 years
   
9
     
9
     
9
     
9
 
Total debt securities available for sale
 
$
608,486
     
601,002
     
608,486
     
601,002
 
 
Held to maturity securities:
 
(dollars in thousands)
 
As of December 31, 2015
 
   
Based on
Final Maturity
   
Based on
Call Date
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
Within 1 year
 
$
-
     
-
     
-
     
-
 
1 to 5 years
   
56,465
     
59,439
     
56,465
     
59,439
 
5 to 10 years
   
-
     
-
     
-
     
-
 
Total held to maturity securities
 
$
56,465
     
59,439
     
56,465
     
59,439
 
 
Federal Funds Sold and Other Short-term Investments

During 2015, the average balance of Federal Funds sold and other short term investments was $664.5 million, an increase from $589.9 million in 2014. The average rate earned on these assets was 0.25% in 2014 and 0.26% in 2015.  The increase in the Federal Funds target range had a minimal impact on the yield for the year because it occurred so late in the year.  TrustCo utilizes this category of earning assets as a means of maintaining strong liquidity.  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 $676.5 million for 2015, compared to $627.9 million at year end 2014.  Yields on investment securities with acceptable risk characteristics were insufficient to justify shifting overnight liquidity into other investment types 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 2016 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 $4.10 billion in 2015, compared to $3.98 billion in 2014, an increase of $124.5 million. Changes in deposit categories included: demand deposits up $29.1 million, interest-bearing checking deposits up $72.2 million, savings up $17.6 million, money market down $22.7 million and time deposits up $28.3 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)
                   
2015
vs.
   
2014
vs.
   
Components of
Total Funding
 
 
2015
2014
2013
2014
2013
   
2015
2014
2013
 
Demand deposits
 
$
348,552
     
319,458
     
302,437
     
29,094
     
17,021
     
8.1
%
   
7.7
     
7.5
 
Retail deposits
                                                               
Savings
   
1,245,100
     
1,227,473
     
1,218,655
     
17,627
     
8,818
     
29.0
     
29.4
     
30.1
 
Time deposits under $100 thousand
    691,774      
704,249
     
721,498
     
(12,475
)
   
(17,249
)
   
16.1
     
16.9
     
17.8
 
Interest bearing checking accounts
    708,331      
636,140
     
578,531
     
72,191
     
57,609
     
16.5
     
15.3
     
14.3
 
Money market deposits
   
628,096
     
650,779
     
650,324
     
(22,683
)
   
455
     
14.6
     
15.6
     
16.1
 
Total retail deposits
   
3,273,301
     
3,218,641
     
3,169,008
     
54,660
     
49,633
     
76.3
     
77.2
     
78.3
 
Total core deposits
   
3,621,853
     
3,538,099
     
3,471,445
     
83,754
     
66,654
     
84.5
     
84.9
     
85.8
 
Time deposits over $100 thousand (1)
    481,652      
440,869
     
391,975
     
40,783
     
48,894
     
11.2
     
10.6
     
9.7
 
Short-term borrowings
   
184,725
     
189,430
     
180,275
     
(4,705
)
   
9,155
     
4.3
     
4.5
     
4.5
 
Total purchased liabilities
   
666,377
     
630,299
     
572,250
     
36,078
     
58,049
     
15.5
     
15.1
     
14.2
 
Total sources of funding
 
$
4,288,230
     
4,168,398
     
4,043,695
     
119,832
     
124,703
     
100.0
%
   
100.0
     
100.0
 
 
(1) Included in time deposits over $100 thousand was $98.7 million and $85.3 million in time deposits with balances in excess of $250 thousand as of December 31, 2015 and 2014, respectively.
 
16

AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS
 
(dollars in thousands)
 
2015
   
2014
   
2013
 
     
Average
Balance
   
Interest
Income/
Expense
   
Average
Rate
   
Average
Balance
   
Interest
Income/
Expense
   
Average
Rate
   
Average
Balance
   
Interest
Income/
Expense
   
Average
Rate
 
Assets
                                                     
Loans, net
 
$
3,234,806
     
141,915
     
4.39
%
 
$
3,014,156
     
135,989
     
4.51
%
 
$
2,771,663
     
127,974
     
4.62
%
                                                                         
Securities available for sale:
                                                                       
U.S. government sponsored enterprises
   
107,436
     
1,418
     
1.32
     
113,563
     
1,417
     
1.25
     
221,028
     
2,600
     
1.18
 
State and political subdivisions
   
1,812
     
133
     
7.40
     
3,924
     
280
     
7.14
     
12,845
     
862
     
6.71
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
439,343
     
9,132
     
2.08
     
555,430
     
12,150
     
2.19
     
545,487
     
11,385
     
2.09
 
Corporate bonds
   
613
     
1
     
0.16
     
3,156
     
65
     
2.04
     
46,049
     
812
     
1.76
 
Small Business Administration-guaranteed participation securities
   
97,496
     
2,004
     
2.06
     
107,029
     
2,154
     
2.01
     
109,913
     
2,180
     
1.98
 
Mortgage backed securities and collateralized mortgage obligations-commercial
   
10,566
     
149
     
1.41
     
10,837
     
151
     
1.40
     
10,420
     
144
     
1.38
 
Other
   
685
     
16
     
2.34
     
674
     
16
     
2.37
     
625
     
17
     
2.72
 
Total securities available for sale
   
657,951
     
12,853
     
1.95
     
794,613
     
16,233
     
2.04
     
946,367
     
18,000
     
1.90
 
Held to maturity securities:
                                                                       
Mortgage backed securities and collateralized mortgage obligations-residential
   
53,763
     
1,844
     
3.43
     
68,404
     
2,259
     
3.30
     
90,360
     
2,840
     
3.14
 
Corporate bonds
   
9,967
     
615
     
6.17
     
9,952
     
615
     
6.18
     
14,011
     
833
     
5.95
 
Total held to maturity securities
   
63,730
     
2,459
     
3.86
     
78,356
     
2,874
     
3.67
     
104,371
     
3,673
     
3.52
 
Federal Reserve Bank and Federal Home Loan Bank stock
   
9,414
     
467
     
4.96
     
10,135
     
511
     
5.04
     
10,266
     
490
     
4.77
 
Federal funds sold and other short-term investments
   
664,516
     
1,725
     
0.26
     
589,873
     
1,464
     
0.25
     
502,136
     
1,240
     
0.25
 
Total interest earning assets
   
4,630,417
     
159,419
     
3.44
%
   
4,487,133
     
157,071
     
3.50
%
   
4,334,803
     
151,377
     
3.49
%
Allowance for loan losses
   
(46,023
)
                   
(47,409
)
                   
(48,452
)
               
Cash and noninterest earning assets
   
136,752
                     
135,217
                     
136,042
                 
Total assets
 
$
4,721,146
                   
$
4,574,941
                   
$
4,422,393
                 
Liabilities and shareholders' equity
                                                                       
Interest bearing deposits:
Interest bearing checking accounts
 
$
708,331
     
448
     
0.06
%
 
$
636,140
     
365
     
0.06
%
 
$
578,531
     
329
     
0.06
%
Savings
   
1,245,100
     
2,468
     
0.20
     
1,227,473
     
2,662
     
0.22
     
1,218,655
     
3,333
     
0.27
 
Time deposits and money markets
   
1,801,522
     
12,067
     
0.67
     
1,795,897
     
11,064
     
0.62
     
1,763,797
     
10,138
     
0.57
 
Total interest bearing deposits
   
3,754,953
     
14,983
     
0.40
     
3,659,510
     
14,091
     
0.39
     
3,560,983
     
13,800
     
0.39
 
Short-term borrowings
   
184,725
     
1,214
     
0.66
     
189,430
     
1,397
     
0.74
     
180,275
     
1,483
     
0.82
 
Total interest bearing liabilities
   
3,939,678
     
16,197
     
0.41
%
   
3,848,940
     
15,488
     
0.40
%
   
3,741,258
     
15,283
     
0.41
%
Demand deposits
   
348,552
                     
319,458
                     
302,437
                 
Other liabilities
   
27,155
                     
23,733
                     
21,719
                 
Shareholders' equity
   
405,761
                     
382,810
                     
356,979
                 
Total liabilities and shareholders' equity
 
$
4,721,146
                   
$
4,574,941
                   
$
4,422,393
                 
Net interest income
           
143,222
                     
141,583
                     
136,094
         
Taxable equivalent adjustment
           
(74
)
                   
(130
)
                   
(330
)
       
Net interest income
           
143,148
                     
141,453
                     
135,764
         
Net interest spread
                   
3.03
%
                   
3.10
%
                   
3.08
%
Net interest margin (net interest income to total interest earnings assets)
                   
3.09
                     
3.16
                     
3.14
 

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%, respectively, for 2015, 2014, and 2013. 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 ($3.1) million, ($5.0) million, and ($8.1) million in 2015, 2014, and 2013, 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 0.40% in 2015, up one basis point from 2014. The increase in the average balance of interest bearing deposits resulted in an increase of approximately $892 thousand in interest expense on deposits to $15.0 million in 2015.

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 $184.7 million of average short-term borrowings outstanding during 2015 compared to $189.4 million in 2014. These borrowings represent customer repurchase accounts, which behave more like deposit accounts than traditional borrowings. The average cost of short-term borrowings was 0.66% in 2015 and 0.74% in 2014. This resulted in interest expense of approximately $1.2 million in 2015 compared to $1.4 million in 2014.
 

AVERAGE DEPOSITS BY TYPE OF DEPOSITOR
(dollars in thousands)
 
Years Ended December 31,
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
Individuals, partnerships and corporations
 
$
4,085,491
     
3,965,716
     
3,847,392
     
3,791,616
     
3,621,718
 
U.S. Government
   
-
     
2
     
-
     
-
     
3
 
States and political subdivisions
   
2,654
     
2,141
     
1,826
     
1,748
     
1,584
 
Other (certified and official checks, etc.)
   
15,360
     
11,109
     
14,202
     
16,326
     
14,290
 
Total average deposits by type of depositor
 
$
4,103,505
     
3,978,968
     
3,863,420
     
3,809,690
     
3,637,595
 


MATURITY OF TIME DEPOSITS OVER $100 THOUSAND

(dollars in thousands)
     
   
As of December 31, 2015
 
       
Under 3 months
 
$
135,889
 
3 to 6 months
   
59,601
 
6 to 12 months
   
130,314
 
Over 12 months
   
135,167
 
         
Total
 
$
460,971
 

VOLUME AND YIELD ANALYSIS
 
(dollars in thousands)
 
2015 vs. 2014
   
2014 vs. 2013
 
    
Increase
(Decrease)
   
Due to
Volume
   
Due to
Rate
   
Increase
(Decrease)
   
Due to
Volume
   
Due to
Rate
 
Interest income (TE):
                                   
Federal funds sold and other short-term investments
 
$
261
     
198
     
63
   
$
224
     
224
     
-
 
Securities available for sale:
                                               
Taxable
   
(3,233
)
   
(2,745
)
   
(488
)
   
(1,185
)
   
(2,029
)