UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended Commission File Number 0-10592 September 30, 2004 TRUSTCO BANK CORP NY (Exact name of registrant as specified in its charter) NEW YORK 14-1630287 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 SARNOWSKI DRIVE, GLENVILLE, NEW YORK 12302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 377-3311 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes.(x) No.( ) Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes (x) No.( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of Shares Outstanding Class of Common Stock as of October 31,2004 --------------------- ---------------------------- $1 Par Value 74,346,877
TrustCo Bank Corp NY INDEX Part I. FINANCIAL INFORMATION PAGE NO. Item 1. Interim Financial Statements (Unaudited): Consolidated 2 Statements of Income for the Three Months and Nine Months Ended September 30, 2004 and 2003 Consolidated Statements of Condition as of 3 September 30, 2004 and December 31, 2003 Consolidated Statements of Cash Flows for the Nine Months 4 - 5 Ended September 30, 2004 and 2003 Notes to Consolidated Interim Financial Statements 6 - 11 Report of Independent Registered Public Accounting Firm 12 Item 2. Management's Discussion and Analysis 13 - 29 Item 3. Quantitative and Qualitative Disclosures about Market Risk 30 Item 4. Controls and Procedures 30 Part II. OTHER INFORMATION Item 1. Legal Proceedings 31 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31 Item 3. Defaults Upon Senior Securities 31 Item 4. Submissions of Matters to Vote of Security Holders 31 Item 5. Other Information 31 Item 6. Exhibits 32 1
<TABLE> TRUSTCO BANK CORP NY Consolidated Statements of Income (Unaudited) (dollars in thousands, except share data) <CAPTION> 3 Months Ended 9 Months Ended September 30 September 30 ------------------------------- ---------------------- 2004 2003 2004 2003 ---- ---- ---- ---- <S> <C> <C> <C> <C> Interest income: Interest and fees on loans $ 18,644 20,892 55,854 68,200 Interest on U. S. Treasuries and agencies 9,926 5,984 30,653 15,078 Interest on states and political Subdivisions 2,071 2,482 6,582 8,400 Interest on mortgage-backed securities and collateralized mortgage obligations 2,066 848 4,916 2,853 Interest and dividends on other securities 446 392 1,262 3,076 Interest on federal funds sold and other short-term investments 1,798 1,443 4,198 4,580 ------------------------------------------------------------- Total interest income 34,951 32,041 103,465 102,187 ------------------------------------------------------------- Interest expense: Interest on deposits: Interest-bearing checking 408 391 1,193 1,281 Savings 2,042 1,922 5,947 6,865 Money market deposit accounts 326 423 1,154 1,484 Time deposits 6,765 6,435 19,648 20,976 Interest on short-term borrowings 254 133 633 739 Interest on long-term debt 2 3 7 14 ------------------------------------------------------------- Total interest expense 9,797 9,307 28,582 31,359 ------------------------------------------------------------- Net interest income 25,154 22,734 74,883 70,828 Provision for loan losses 150 300 450 900 ------------------------------------------------------------- Net interest income after provision for loan losses 25,004 22,434 74,433 69,928 ------------------------------------------------------------- Noninterest income: Trust department income 1,406 1,785 4,405 4,757 Fees for other services to customers 2,510 2,819 7,805 8,375 Net gain on securities transactions 4,620 4,737 12,394 10,067 Other 454 860 1,482 2,360 ------------------------------------------------------------- Total noninterest income 8,990 10,201 26,086 25,559 ------------------------------------------------------------- Noninterest expenses: Salaries and employee benefits 4,975 5,092 15,437 15,406 Net occupancy expense 1,464 1,432 4,968 4,616 Equipment expense 382 569 1,322 2,483 Professional services 900 884 2,657 2,281 Outsourced services 1,121 1,250 3,298 4,350 Other real estate expenses / (income) (111) (188) (332) (385) Other 2,752 2,561 8,340 8,097 ------------------------------------------------------------- Total noninterest expenses 11,483 11,600 35,690 36,848 ------------------------------------------------------------- Income before taxes 22,511 21,035 64,829 58,639 Income taxes 7,298 6,750 21,112 17,751 ------------------------------------------------------------- Net income $ 15,213 14,285 43,717 40,888 ============================================================= Net income per Common Share: - Basic $ 0.205 0.192 0.589 0.550 ============================================================= - Diluted $ 0.203 0.189 0.582 0.543 ============================================================= </TABLE> See accompanying notes to consolidated interim financial statements. 2
<TABLE> TRUSTCO BANK CORP NY Consolidated Statements of Condition (Unaudited) (dollars in thousands, except per share data) <CAPTION> 9/30/04 12/31/03 ----------- --------- <S> <C> <C> ASSETS: Cash and due from banks $ 52,950 56,425 Federal funds sold and other short-term investments 511,516 355,257 ----------- --------- Total cash and cash equivalents 564,466 411,682 ----------- --------- Securities available for sale: U. S. Treasuries and agencies 683,859 863,658 States and political subdivisions 173,220 191,727 Mortgage-backed securities and collateralized mortgage obligations 175,938 66,322 Other 23,831 55,219 ----------- --------- Total securities available for sale 1,056,848 1,176,926 ----------- --------- Loans: Commercial 198,726 193,613 Residential mortgage loans 789,985 783,591 Home equity line of credit 187,173 171,078 Installment loans 13,201 14,365 ----------- --------- Total loans 1,189,085 1,162,647 Less: Allowance for loan losses 48,685 48,739 Unearned income 382 381 ----------- --------- Net loans 1,140,018 1,113,527 ----------- --------- Bank premises and equipment 20,676 20,168 Other assets 55,317 55,816 ----------- --------- Total assets $ 2,837,325 2,778,119 =========== ========= LIABILITIES: Deposits: Demand $ 220,017 197,116 Interest-bearing checking 320,578 334,038 Savings 815,946 780,862 Money market deposit accounts 156,399 159,645 Certificates of deposit (in denominations of $100,000 or more) 180,556 170,423 Other time deposits 799,307 777,726 ----------- --------- Total deposits 2,492,803 2,419,810 Short-term borrowings 87,033 90,608 Long-term debt 120 239 Accrued expenses and other liabilities 33,206 40,700 ----------- --------- Total liabilities 2,613,162 2,551,357 ----------- --------- SHAREHOLDERS' EQUITY: Capital stock par value $1; 100,000,000 shares authorized, and 81,447,650 and 80,711,016 shares issued at September 30, 2004 and December 31, 2003, respectively 81,448 80,711 Surplus 108,144 103,611 Undivided profits 88,389 78,051 Accumulated other comprehensive income: Net unrealized gain on securities available for sale 9,930 21,042 Treasury stock at cost - 7,304,240 and 6,765,119 shares at September 30, 2004 and December 31, 2003, respectively (63,748) (56,653) ----------- --------- Total shareholders' equity 224,163 226,762 ----------- --------- Total liabilities and shareholders' equity $ 2,837,325 2,778,119 =========== ========= </TABLE> See accompanying notes to consolidated interim financial statements. 3
<TABLE> TRUSTCO BANK CORP NY Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) <CAPTION> INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS NINE MONTHS ENDED September 30, 2004 2003 ---------- ---------- <S> <C> <C> Cash flows from operating activities: Net income $ 43,717 40,888 ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,296 1,958 Net loss/(gain) on sales of bank premises and equipment 55 (255) Provision for loan losses 450 900 Net gain on securities transactions (12,394) (10,067) Deferred tax expense (benefit) 2,485 (4,825) (Increase)/decrease in taxes receivable (7,340) 19,220 Decrease/(increase) in interest receivable 360 (1,406) Decrease in interest payable (8) (559) Decrease in other assets 12,364 299 Decrease in accrued expenses and other liabilities (7,496) (3,113) ---------- ---------- Total adjustments (10,228) 2,152 ---------- ---------- Net cash provided by operating activities 33,489 43,040 ---------- ---------- Cash flows from investing activities: Proceeds from sales and calls of securities available for sale 932,618 769,347 Purchase of securities available for sale (819,296) (1,040,261) Proceeds from maturities of securities available for sale 668 2,366 Net (increase)/decrease in loans (26,941) 216,678 Proceeds from sales of bank premises and equipment 23 255 Proceeds from sales of real estate owned --- 608 Capital expenditures (1,882) (1,744) ---------- ---------- Net cash provided by (used in) investing activities 85,190 (52,751) ---------- ---------- Cash flows from financing activities: Net increase in deposits 72,993 109,834 Net decrease in short-term borrowings (3,575) (61,030) Repayment of long-term debt (119) (140) Proceeds from exercise of stock options 5,270 6,906 Proceeds from sale of treasury stock 5,883 5,683 Purchase of treasury stock (12,978) (18,663) Dividends paid (33,369) (33,820) ---------- ---------- Net cash provided by financing activities 34,105 8,770 ---------- ---------- Net increase/(decrease) in cash and cash equivalents 152,784 (941) Cash and cash equivalents at beginning of period 411,682 606,082 ---------- ---------- Cash and cash equivalents at end of period $ 564,466 605,141 ========== ========== </TABLE> See accompanying notes to consolidated interim financial statements. (Continued) 4
<TABLE> TRUSTCO BANK CORP NY Consolidated Statements of Cash Flows Continued (Unaudited) (dollars in thousands) <CAPTION> SUPPLEMENTAL INFORMATION: NINE MONTHS ENDED September 30, 2004 2003 --------- ------ <S> <C> <C> Interest paid $ 28,590 31,918 Income taxes paid 3,384 3,357 Increase/(decrease) in dividends payable 10 (411) </TABLE> See accompanying notes to consolidated interim financial statements. 5
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (Unaudited) 1. Financial Statement Presentation In the opinion of the management of TrustCo Bank Corp NY (the Company), the accompanying unaudited Consolidated Interim Financial Statements contain all adjustments necessary to present fairly the financial position as of September 30, 2004, the results of operations for the three months and nine months ended September 30, 2004 and 2003, and cash flows for the nine months ended September 30, 2004 and 2003. The accompanying Consolidated Interim Financial Statements should be read in conjunction with the TrustCo Bank Corp NY year-end Consolidated Financial Statements, including notes thereto, which are included in TrustCo Bank Corp NY's 2003 Annual Report to Shareholders on Form 10-K. 2. Earnings Per Share A reconciliation of the component parts of earnings per share for the three month and nine month periods ended September 30, 2004 and 2003 follows: <TABLE> <CAPTION> Weighted Average Shares (In thousands, Net Outstanding Per Share except per share data) Income Amounts ------------------------------------- <S> <C> <C> <C> For the quarter ended September 30, 2004: Basic EPS: Net income available to common shareholders $15,213 74,244 $0.205 Effect of Dilutive Securities: Stock options --- 736 (0.002) ------------------------------------- Diluted EPS $15,213 74,980 $0.203 ===================================== For nine months ended September 30, 2004: Basic EPS: Net income available to common shareholders $43,717 74,242 $0.589 Effect of Dilutive Securities: Stock options --- 817 (0.007) ------------------------------------- Diluted EPS $43,717 75,059 $0.582 ===================================== </TABLE> There were no antidilutive stock options as of September 30, 2004. 6
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (unaudited) continued 2. Earnings Per Share (continued) <TABLE> <CAPTION> Weighted Average Shares (In thousands, Net Outstanding Per Share except per share data) Income Amounts ------------------------------------- <S> <C> <C> <C> For the quarter ended September 30, 2003: Basic EPS: Net income available to common shareholders $14,285 74,400 $0.192 Effect of Dilutive Securities: Stock options --- 1,017 (0.003) ------------------------------------- Diluted EPS $14,285 75,417 $0.189 ===================================== For nine months ended September 30, 2003: Basic EPS: Net income available to common shareholders $40,888 74,339 $0.550 Effect of Dilutive Securities: Stock options --- 941 (0.007) ------------------------------------- Diluted EPS $40,888 75,280 $0.543 ===================================== </TABLE> There were no antidilutive stock options as of September 30, 2003. 7
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (unaudited) continued 3. Stock Option Plans The Company has stock option plans for officers and directors and has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123), as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure". The Company's stock option plans are accounted for in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and as such, no compensation expense has been recorded for these plans. Had compensation expense for the Company's stock option plans been determined consistent with Statement 123, the Company's net income and earnings per share for the periods ended September 30, 2004 and 2003 would have been as follows: (dollars in thousands except per share data) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ----------------------- 2004 2003 2004 2003 ------------------------ ----------------------- <S> <C> <C> <C> <C> Net income: As reported $15,213 14,285 43,717 40,888 Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (165) (232) (496) (694) ------------------------ ----------------------- Pro forma net income $15,048 14,053 43,221 40,194 ======================== ======================= Earnings per share: Basic - as reported $ .205 .192 .589 .550 Basic - pro forma .203 .189 .582 .541 Diluted - as reported .203 .189 .582 .543 Diluted - pro forma .201 .186 .576 .534 </TABLE> The weighted average fair value of each option as of the grant date was estimated using the Black-Scholes pricing model, and calculated in accordance with Statement 123. Pro forma expense reflects the recognition of the options' fair value as an expense over the applicable vesting period. No options were granted in the first nine months of 2004. 8
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (unaudited) continued 4. Comprehensive Income (Loss) Comprehensive income for the three months ended September 30, 2004 and 2003 was $21,219,000 and $10,526,000, respectively. Comprehensive income is comprised of net unrealized (losses)/gains, net of taxes, on available-for-sale securities, which were $6,006,000 and ($3,759,000) for the three months ended September 30, 2004 and 2003, respectively, together with net income. Comprehensive income for the nine months ended September 30, 2004 and 2003 was $32,605,000 and $38,370,000, respectively. Comprehensive income is comprised of net unrealized (losses)/gains, net of taxes, on available-for-sale securities, which were ($11,112,000) and ($2,518,000) for the nine months ended September 30, 2004 and 2003, respectively, along with net income. At September 30, 2004 and December 31, 2003, accumulated other comprehensive income totaled $9,930,000 and $21,042,000, respectively, and is reflected as a component of shareholders' equity. 9
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (unaudited) continued 5. Benefit Plans The table below outlines the components of the Company's net periodic expense (benefit) recognized during the periods ended September 30, 2004 and 2003 for its pension and other postretirement benefit plans: <TABLE> Components of Net Periodic Expense/(Benefit) for the three months ended September 30, <CAPTION> Pension Benefits Other Postretirement Benefits ------------------------- ----------------------------- 2004 2003 2004 2003 ------------------------- ----------------------------- <S> <C> <C> <C> <C> Service cost $ 216 174 1 1 Interest cost 410 352 8 12 Expected return on plan assets (348) (416) (58) (94) Amortization of prior service cost (credit) 38 6 (114) (101) Amortization of net actuarial gain - - - (11) ------------------------- ----------------------------- Net periodic expense/(benefit) $ 316 116 (163) (193) ========================= ============================= </TABLE> <TABLE> Components of Net Periodic Expense/(Benefit) for the nine months ended September 30, <CAPTION> Pension Benefits Other Postretirement Benefits ------------------------- ----------------------------- 2004 2003 2004 2003 ------------------------- ----------------------------- <S> <C> <C> <C> <C> Service cost $ 648 522 3 3 Interest cost 1,230 1,056 24 36 Expected return on plan assets (1,207) (1,248) (305) (282) Amortization of prior 114 18 (342) (303) service cost (credit) Amortization of net actuarial gain - - - (33) ------------------------- ----------------------------- Net periodic expense/(benefit) $ 785 348 (620) (579) ========================= ============================= </TABLE> 10
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (unaudited) continued 5. Benefit Plans (Continued) Contributions The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2003 , that it did not expect to make any contributions to its pension and other postretirement benefit plans in 2004. As of September 30, 2004, no contributions have been made. The Company presently anticipates that, in accordance with IRS limitations and accounting standards, it will not make any contributions in 2004. 6. Guarantees The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $ 3.5 million at September 30, 2004 and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of the Company's standby letters of credit at September 30, 2004 was insignificant. 11
Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders TrustCo Bank Corp NY: We have reviewed the consolidated statement of condition of TrustCo Bank Corp NY and subsidiaries (the Company) as of September 30, 2004, the related consolidated statements of income for the three month and nine month periods ended September 30, 2004 and 2003, and the related consolidated statements of cash flows for the nine month periods ended September 30, 2004 and 2003. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with the standards of by the Public Company Accounting Oversight Board (United States), the consolidated statement of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 2003, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 20, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of condition as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived. /s/ KPMG LLP - ----------------- KPMG LLP Albany, New York October 15, 2004 12
TrustCo Bank Corp NY Management's Discussion and Analysis September 30, 2004 The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo Bank Corp NY ("TrustCo" or "Company") during the three month and nine month periods ended September 30, 2004, with comparisons to 2003 as applicable. Interest income, net interest income and net interest margin are presented on a fully taxable equivalent basis in this discussion. The consolidated interim financial statements and related notes, as well as the 2003 Annual Report to Shareholders should be read in conjunction with this review. Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation. Forward-looking Statements Statements included in this review and in future filings by TrustCo with the Securities and Exchange Commission, in TrustCo's press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect TrustCo's actual results, and could cause TrustCo's actual financial performance to differ materially from that expressed in any forward-looking statement: (1) credit risk, (2) interest rate risk, (3) competition, (4) changes in the regulatory environment, and (5) changes in general business and economic trends. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events. Following this discussion is the table "Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential" which gives a detailed breakdown of TrustCo's average interest earning assets and interest bearing liabilities for the three months and nine months ended September 30, 2004 and 2003. Overview TrustCo recorded net income of $15.2 million, or $0.203 of diluted earnings per share for the three months ended September 30, 2004, as compared to net income of $14.3 million or $0.189 of diluted earnings per share in the same period in 2003. For the nine month period ended September 30, 2004, TrustCo recorded net income of $43.7 million, or $0.582 of diluted earnings per share, as compared to $40.9 million, or $0.543 of diluted earnings per share for the comparable period in 2003. 13
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 The primary factors accounting for the year to date increases in net income are: * A $127.4 million increase in the average balance of interest earning assets between 2003 and 2004. * A reduction in the provision for loan losses from $900 thousand in 2003 to $450 thousand in 2004, * An increase in noninterest income from $25.6 million in 2003 to $26.1 million in 2004, which includes $10.1 million of net securities gains in 2003 and $12.4 million of net securities gains in 2004, and * A decrease of approximately $1.1 million in noninterest expense from $36.8 million in 2003 to $35.7 million in 2004. Partially offsetting these year to date positive factors was a decrease of 3 basis points in net interest margin from 3.88% in 2003 to 3.85% in 2004 and an increase of 2.30% in the Company's effective rate for income taxes from 30.3% in 2003 to 32.6% in 2004. Asset/Liability Management The Company strives to generate superior earnings capabilities through a mix of core deposits, funding a prudent mix of earning assets. This is, in its most fundamental form, the essence of asset/liability management. Additionally, TrustCo attempts to maintain adequate liquidity and reduce the sensitivity of net interest income to changes in interest rates to an acceptable level while enhancing profitability both on a short-term and long-term basis. The following Management's Discussion and Analysis for the third quarter and first nine months of 2004 compared to the comparable periods in 2003 is affected by the change in interest rates in the marketplace in which TrustCo competes. Included in the 2003 Annual Report to Shareholders is a description of the effect interest rates had on the results for the year 2003 compared to 2002. Most of the same market factors discussed in the 2003 Annual Report also had a significant impact on 2004 results. TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations, and rates paid on deposits and charged on loans. The absolute level of interest rates, changes in interest rates and customers' expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period. Interest rates have remained at relatively low levels during the third quarter of 2004 and for the nine months ended September 30,2004. The federal funds rate increased by a 14
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 total of 50 basis points during the third quarter of 2004 to 1.75%. The federal funds rate began 2004 at 1.00% and was increased by 25 basis points at the end of the second quarter. During this same period the 10-year treasury bond did not change consistently with the increased federal funds rate. The 10-year treasury was 4.38% at the beginning of 2004 as compared to 4.12% as of September 30, 2004. During the first nine months of 2004 the low in the 10-year treasury was during the first quarter at approximately 3.72% and the high was approximately 4.70% during the second quarter. These changes in interest rates have an effect on the Company relative to the interest income on loans, securities and federal funds sold as well as on interest expense on deposits and borrowings. Residential real estate loans and longer term investments are most affected by the changes in longer term market interest rates such as the ten-year treasury. The overnight deposits in federal funds sold and other short-term investments are affected primarily by changes in the federal funds target rate. Deposit interest rates are most influenced by short-term market interest rates. Also, changes in interest rates have an effect on the securities available for sale portfolio which is recorded at market value. For the third quarter of 2004 the net interest margin increased to 3.83% from 3.72% a year ago. For the nine months ended September 30, 2004 the net interest margin was 3.85% compared to 3.88% for the comparable period in 2003. The quarterly results reflect the following significant factors: - - The average balance of the securities available for sale portfolio increased by $270.1 million and the average yield increased by 36 basis points. The increase in balance reflects investments made of excess liquidity as rates were changing; the increase in the yield is due to the increased opportunity in the securities marketplace, - - the average balance of federal funds sold decreased by $53.7 million and the average yield increased by 39 basis points. The Company invested part of the excess liquidity into the securities portfolio while at the same time the increase in the yield is a result of the increased target federal funds rate, - - the average loan portfolio decreased by $59.7 million due to a significant residential real estate refinancing wave that occurred during 2003 and into 2004. These loan refinancings effectively decreased the average yield by 41 basis points on the portfolio, and - - the average balance of interest bearing liabilities increased by $135.8 million at the same overall rate as in the third quarter of 2003. These changes in balances and rates resulted in an 11 basis point increase in the 15
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 overall net interest margin for the third quarter of 2004. The Company's strategy during the third quarter was to attract deposit customers and to lock in longer-term certificates of deposits and other core deposit relationships. With these new funds the Company reduced slightly the federal funds position and invested the funds into the securities portfolio. The shift in assets from the loan portfolio to securities is in response to opportunities available in the securities marketplace during this time period. Due to the relatively low interest rate environment and the magnitude of the national refinancing trends in mortgage loans, there were large issuances of new securities by the various government agencies. These new issuances provided the opportunity for the Company to make additional portfolio purchases. The Company continues to stress the importance of the loan product and anticipates that as interest rates increase and the refinance market stabilizes there will be increased opportunity in the loan category. Earning Assets Total average interest earning assets increased from $2.60 billion for the third quarter of 2003 to $2.76 billion in 2004 with an average yield of 5.25% in 2004 and 5.14% in 2003. Income on earning assets increased by $2.8 million during this same time-period from $33.4 million in 2003 to $36.2 million in 2004. The increase in interest income on earning assets was attributable to the increase in yield on these assets and average balances outstanding. For the nine month period ended September 30, 2004, the average balance of interest earning assets was $2.72 billion, an increase of $127.4 million from the average balance for the comparable period in 2003 of $2.60 billion. The average yield on interest earning assets was 5.50% for 2003, compared to 5.25% in 2004. The increase in the average balance of earning assets offset the decrease in the yield earned on these assets, thereby resulting in interest income of $107.3 million for the nine months of 2004, compared to $107.2 million for the nine months of 2003. Loans The average balance of loans for the third quarter was $1.17 billion in 2004 and $1.23 billion in 2003. The yield on loans decreased from 6.76% in 2003 to 6.35% in 2004. The combination of the lower average balances coupled by lower rates resulted in a decrease of $2.3 million in interest income on loans. For the nine month period ended September 30, 2004, the average balance in the loan portfolio was $1.17 billion compared to $1.31 billion for the comparable period in 2003. The average yield decreased from 6.96% in 2003 to 6.39% in 2004. The decrease in the average balance of loans outstanding and the decrease in the yield resulted in total interest income of $55.9 million in 2004 compared to $68.2 million in 2003. During the third quarter and first nine months of 2004, the balance of the loan portfolio 16
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 decreased primarily as a result of residential mortgage loans. Decreases were also noted in other loan areas as well, with the exception of the increase noted in the home equity credit line product. The average balance of residential mortgage loans for the first nine months of 2004 was $780.8 million compared to $939.8 million for the comparable period in 2003, a decrease of 16.9%. The average yield on residential mortgage loans decreased by 50 basis points during this same period. The third quarter results were very similar to those for the nine months. The average balance of residential mortgage loans decreased from $855.6 million in the third quarter of 2003 to $782.9 million in 2004. The average yield for the third quarter was 7.09% for 2003 compared to 6.64% for 2004. TrustCo actively markets the residential mortgage loan products within its market territory. Mortgage loan rates are affected by a number of factors including the prime rate, the federal funds rate, rates set by competitors and secondary market participants. As noted previously, mortgage interest rates generally trended downward over the last several years as a result of national economic policy in the United States. During this period of low interest rates, TrustCo aggressively marketed the unique aspects of its loan products thereby attempting to create a differentiation from other lenders. These unique aspects include low closing costs, fast turnaround time on loan approvals, no escrow or mortgage insurance requirements and the fact that the Company holds these loans in portfolio and does not sell them into secondary markets. However, the decrease in the residential mortgage loan portfolio reflects the results of historical low interest rates in the residential loan area and the desire by loan customers to obtain these historic low rates. In light of TrustCo's decision to hold loans in portfolio, management made the decision to offer loans at slightly higher interest rates compared to the local competition. The end result was the decline in balances in this portfolio from a combination of lower origination's and higher prepayments from refinancings with other lenders. TrustCo was somewhat successful in its marketing efforts with respect to the unique aspects of its loan products, however, these successes were not enough to offset the amount of refinancings as a result of customers looking for the lowest interest rates being offered in the marketplace. During the third quarter 2004 TrustCo lowered its interest rates on new loan originations to match the loan market. This was done at a time when interest rates began to increase and loan refinancings were subsiding. Though there is debate among nationally recognized economists, the general tenor of the national economy is for improvement and increases in long-term interest rates. Consequently the significant amount of refinancing that has occurred may be substantially completed with only residual effects into the remainder of 2004. Assuming a rise in long-term interest rates, the Company would anticipate that the unique features of its loan product will once again attract customers in the residential mortgage loan area. 17
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 The impact of the changes in the benchmark interest rate indexes (prime rate, federal funds rate, etc.) effects the yield earned on the commercial and home equity loan portfolios. The average yield earned on these loan types for 2004 were 49 bp and 5 bp, respectively, less than the average yields earned during the first nine months of 2003. For 2003 and 2004 the prime rate ranged from 4% (for virtually all of 2003) to 4.75% (which was reached at the end of the third quarter 2004) thereby having only a slight effect on the yield earned during these time periods on home equity credit lines. The decrease in the commercial loan yield during the nine months of 2004 versus 2003 is the result of certain customers with fixed rate loans refinancing to lower rates during 2004. The average balance of home equity lines of credit increased to $183.9 million during the third quarter of 2004 compared to $158.9 million for the comparable period in 2003. The average yield increased from 3.89% in the third quarter of 2003 to 4.25% in 2004. During the third quarter of 2004 the prime rate, which the home equity product is tied to, increased by 50 basis points in addition to a 25 basis point increase at the end of the second quarter of 2004. This resulted in a prime rate of 4.75% at September 30, 2004 and 4.0% at September 30, 2003. The nine months results also reflect growth, with an average balance in 2004 of $179.2 million compared to $150.8 million in 2003. The average yield for these periods was 4.06% in 2003 and 4.01% in 2004. The increase in the average balance of home equity lines of credit reflects the consumers desire to obtain the lowest cost financing vehicles available. TrustCo's home equity line of credit is a discount to prime rate during an introductory period and then floats with prime over the life of the line. Closing costs are waived for these loans as long as the line remains active for a set period of time. Though rates on home equity lines of credit began to increase during the third quarter of 2004, overall yields were down 5 basis points for the year 2004 versus 2003. Securities Available for Sale During the third quarter of 2004, the average balance of securities available for sale was $1.08 billion with a yield of 5.82%, compared to $811.3 million for the third quarter of 2003 with a yield of 5.46%. The combination of the increase in average balance and the increase in the yields caused an increase in interest income on securities available for sale of $4.7 million between the third quarter of 2003 and 2004. The increase in average balance caused a $12.8 million increase in interest income on securities available for sale during the first nine months of 2004 versus the first nine months of 2003. The total average balance of securities available for sale during the 18
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 nine months of 2003 was $764.9 million with an average yield of 6.00% compared to an average balance for 2004 of $1.07 billion with a yield of 5.90%. The decrease of 10 basis points in the yield on securities available for sale for the nine months of 2004 compared to 2003 is the result of additional investments made in mortgage related securities and a reduction in the balance of state and political subdivision securities. Within the portfolio of securities available for sale, there was a $195.3 million increase in the average balance of US Treasury and agency obligations from $524.4 million in the third quarter of 2003 to $719.7 million for the comparable period in 2004. The yield on this category of securities increased from 4.56% in 2003 to 5.52% in 2004. The nine month balance for US Treasury and agency obligations increased from $418.7 million in 2003 to $730.2 million in 2004. The yield was 5.60% in 2004 as compared to 4.80% in 2003. The increased balances of securities available for sale were in response to the historical low yield available in the federal funds marketplace, increased cash flow as a result of loan refinancing and deposit inflows. Though the investment yields on 2004 purchases are overall lower than the yield earned on the existing securities portfolio, the new investments provide additional interest income and help to offset the loss of interest income from other areas. Virtually all of the new purchases of US Treasury and agency obligations were callable agency bonds and mortgage related securities issued by Freddie Mac and FNMA. These bonds have call features that allow the issuer to redeem the bonds at predetermined times. The average balance of mortgage-backed securities increased by $119.1 million during the third quarter of 2004 compared to 2003 with a yield of 4.69% in 2004 and 5.94% in 2003. During 2004 additional investments were made in short-term collateralized mortgage obligations to supplement the investment portfolio. The impact on the year to date results was also due to purchases of these collateralized mortgage obligations. As previously noted, during 2003 and into 2004 management decided to invest some of the additional cash flows coming from the loan portfolio refinancings into the securities available for sale portfolio so as to provide interest income and as a means of utilizing these funds other than in overnight investments. The securities purchased during this time period have been primarily collateralized mortgage obligations and US Treasury and agency obligations consistent with the Company's past practices. While this strategy provides the Company with additional interest income over the federal funds rate, it does subject these assets to a greater degree of interest rate risk. General market interest rate increases impact the market value of the securities available for sale portfolio thereby creating a reduction in the overall portfolio's unrealized gain position and lowering the Company's accumulated other comprehensive income (a 19
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 component of shareholders' equity). As market interest rates increased during 2004, the accumulated other comprehensive income decreased from $21.0 to $9.9 million during the first nine months of 2004. Federal Funds Sold and Other Short-Term Investments During the third quarter of 2004, the average balance of federal funds sold and other short-term investments was $500.2 million with an average yield of 1.43%, compared to the average balance for the three month period ended September 30, 2003 of $554.0 million with an average yield of 1.04%. The decrease in the average balance and the increase in the average yield resulted in total interest income on federal funds sold and other short-term investments of $1.8 million for 2004 compared to $1.4 million for 2003. During the nine month period ended September 30, 2004, the average balance of federal funds sold and other short-term investments was $490.9 million with a yield of 1.14% compared to an average balance of $523.4 million in 2003 with an average yield of 1.17%. The federal funds sold and other short-term investments portfolio is utilized to generate additional interest income and liquidity as funds are waiting to be deployed into the loan and securities portfolios. Funding Opportunities TrustCo utilizes various funding sources to support its earning asset portfolio. The vast majority of the Company's funding comes from traditional deposit vehicles such as savings, interest bearing checking and time deposit accounts. During the quarter, total average interest bearing liabilities were $2.38 billion for 2004 and $2.25 billion for 2003. The rate paid on total interest bearing liabilities was 1.64% for both 2004 and 2003. Total interest expense for the third quarter increased approximately $490 thousand to $9.8 million for 2004 compared to $9.3 million for 2003. Similar changes in interest bearing liabilities were noted for the nine-month period as was discussed for the quarter except the average yield decreased from 1.86% in 2003 to 1.61% in 2004. The decrease in yield for the nine months of 2004 versus 2003 of 37 basis points is due primarily to the decrease in interest rates on certificates of deposits, money market and savings accounts. These deposit yields decreased due to general trends in market rate indexes during this time period. Total average interest bearing liabilities were $2.36 billion for the nine-month period ended September 30, 2004 and $2.25 billion for 2003. Demand deposit balances increased during the third quarter of 2004 compared to the third quarter of 2003. Demand deposits averaged $218.4 million in 2004 and $197.6 20
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 million in 2003. On a year to date basis, demand deposits were $207.4 million compared to $186.4 million in 2003. Interest bearing deposit balances have increased from $2.17 billion for the third quarter of 2003 to $2.28 billion for the same period in 2004. Each of the deposit categories experienced increases, except money market accounts, with notable increases in the savings account category that increased by $50.1 million on a quarter to quarter basis between 2003 and 2004. Likewise, the average balance of interest bearing deposit accounts for the nine-month periods have also increased. For the nine months of 2004 the average balance of interest bearing deposits was $2.26 billion compared to $2.14 billion in 2003. The increases in the average balance of interest bearing deposits is attributable to movement by customers of funds back into the banking system and away from the stock and bond markets. This reinvestment of funds back into the banking system by customers is also supplemented by the expanded branch network and the new deposits that are being attracted to TrustCo in these new territories. Short-term borrowings for the quarter were $107.5 million in 2004 compared to $75.6 million in 2003. The average rate increased during this time period from 0.70% to 0.94% for the third quarter of 2004, reflecting recent increases in the federal funds rate. For the nine months ended September 30, 2004 the average balance of short term borrowings was $106.4 million as compared to $115.8 million in 2003. The average yield was 0.79% in 2004 and 0.85% in 2003. Net Interest Income Taxable equivalent net interest income increased to $26.4 million for the third quarter of 2004. The net interest spread increased 11 basis points between 2003 and 2004 and the net interest margin increased by 11 basis points. Similar changes were noted in taxable equivalent net interest income, net interest spread and net interest margin for the nine-month period ended September 30, 2004, compared to the same period in 2003. Net interest income for the first nine months of 2004 was $78.7 million, an increase of $2.9 million from the $75.9 million for the first nine months of 2003. Net interest spread was 3.64% for both September 30, 2004 and 2003, while net interest margin decreased 3 basis points to 3.85% for the nine month period ended September 30, 2004, compared to the nine month period ended September 30, 2003. Nonperforming Assets Nonperforming assets include nonperforming loans which are those loans in a nonaccrual status, loans that have been restructured, and loans past due three payments or more and still accruing interest. Also included in the total of nonperforming assets are foreclosed real estate properties, which are categorized as real estate owned. 21
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 Impaired loans are considered to be those commercial and commercial real estate loans in a nonaccrual status and loans restructured since January 1, 1995, when the accounting standards required the identification, measurement and reporting of impaired loans. The following will describe the nonperforming assets of TrustCo as of September 30, 2004. Nonperforming loans: Total nonperforming loans were $3.1 million at September 30, 2004, a decrease from the $3.6 million of nonperforming loans at September 30, 2003. Nonaccrual loans were $338 thousand at September 30, 2004 and zero at September 30, 2003. Loans past due 3 payments or more and still accruing interest were $8 thousand at September 30, 2004 and zero at September 30, 2003. Restructured loans were $2.8 million at September 30, 2004 compared to $3.6 million at September 30, 2003. Of the $3.1 million of nonperforming loans at September 30, 2004, all are residential real estate or retail consumer loans. The vast majority of nonperforming loans in the past were concentrated in the commercial and commercial real estate portfolios. Since 2000, there has been a continued shifting in the components of TrustCo's problem loans and charge offs from commercial and commercial real estate to the residential real estate and retail consumer loan portfolios. Contributing factors to this shift include: * The overall emphasis within TrustCo for residential real estate originations, * The relatively weak economic environment in the upstate New York territory, and * The relative depression in real estate values in many of the Company's market areas that has occurred since the middle of the 1990's, thereby causing a reduction in the collateral that supports the real estate loans. Consumer loan defaults and bankruptcies have increased over the last several years and this has led to an increase in defaults on loans. TrustCo strives to identify borrowers that are experiencing financial difficulties and works aggressively to minimize losses or exposures. Total impaired loans at September 30, 2004 of $2.6 million, consisted of restructured retail loans. During the first nine months of 2004, there have been $335 thousand of commercial loan charge offs and $5.1 million of mortgage and consumer loan charge offs as compared with $146 thousand of commercial loan charge offs and $7.8 million of mortgage and consumer loan charge offs in the first nine months of 2003. Recoveries during the first nine month periods have been $4.9 million in 2004 and $3.5 million in 2003. 22
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 Real estate owned: Total real estate owned was zero at September 30, 2004 and at September 30, 2003. Allowance for loan losses: The balance of the allowance for loan losses is maintained at a level that is, in management's judgment, representative of the amount of the risk inherent in the loan portfolio. At September 30, 2004, the allowance for loan losses was $48.7 million, a decrease from the allowance at September 30, 2003 of $49.1 million. The allowance represents 4.10% of the loan portfolio as of September 30, 2004 compared to 4.08% at September 30, 2003. For the nine month periods, the provision charged to expense was $450 thousand for 2004 and $900 thousand for 2003. In deciding on the adequacy of the allowance for loan losses, management reviews the current nonperforming loan portfolio as well as loans that are past due and not yet categorized as nonperforming for reporting purposes. Also, there are a number of other factors that are taken into consideration, including: * The magnitude and nature of the recent loan charge offs, * The change in the loan portfolio and the implication that has in relation to the economic climate in the bank's business territory, * Changes in underwriting standards in the competitive environment in which TrustCo operates, * Significant growth in the level of losses associated with bankruptcies in New York State and the time period needed to foreclose, secure and dispose of collateral, and * The relatively weak economic environment in the upstate New York territory combined with depressed real estate prices in many of the Company's market areas. In the Company's primary market area, consumer bankruptcies and defaults in general have risen significantly since the 1990's. This trend appears to be continuing as a result of economic strife and the relative ease of access by consumers to additional credit. Job growth in the upstate New York area has been modest to declining and there continues to be a shifting of higher paying jobs in manufacturing and government to lower paying service jobs. Management continues to monitor these and other asset quality trends as part of the review of the allowance adequacy. 23
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 Liquidity and Interest Rate Sensitivity TrustCo seeks to obtain favorable sources of funding and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. TrustCo's earnings performance and strong capital position enable the Company to raise funds easily in the marketplace and to secure new sources of funding. The Company actively manages its liquidity through target ratios established under its liquidity policies. Continual monitoring of both historical and prospective ratios allows TrustCo to employ strategies necessary to maintain adequate liquidity. Management has also defined various degrees of adverse liquidity situations, which could potentially occur, and has prepared appropriate contingency plans should such a situation arise. Noninterest Income Total noninterest income for the three months ended September 30, 2004 was $9.0 million, as compared to $10.2 million for the comparable period in 2003. During these periods, the Company recorded net securities gains of $4.7 million for 2003 and $4.6 million for 2004. Excluding these securities transactions, noninterest income decreased from $5.5 million in the third quarter of 2003 to $4.4 million in 2004. Similar results were also recognized for the nine months of 2004 compared to 2003. Total noninterest income was $26.1 million for 2004 compared to $25.6 million for 2003. Excluding net securities transactions, noninterest income was $13.7 million for 2004 and $15.5 million for 2003. Gross realized gains on securities transactions have been significant for both the nine month and quarterly results in 2004 and 2003. Gross realized losses on securities transactions were immaterial during the nine months ended September 30, 2004 and 2003. The level of these transactions reflect management's decision to liquidate certain investments as interest rates were at historically low levels and therefore the gains on security sales were high. These sales provide the Company with additional liquidity for potential reinvestment at higher interest rates later in 2004 or in 2005. Management also has begun liquidating certain equity investments that had accumulated over the last several years as part of the expansion program to acquire other companies. Proposed changes in accounting standards relative to investment securities may limit the Company's ability to record similar transactions in the future (see "Proposed Accounting Standards"). Trust department income decreased by $379 thousand to $1.4 million for the third quarter of 2004. The reduction in trust fee income is the result of additional nonrecurring estate fee income recognized in 2003. Service fees and other income are also down between 2004 and 2003 due primarily to loan volume reductions and refinancing activities. 24
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 Noninterest Expenses Total noninterest expense for the third quarter of 2004 was $11.5 million, down slightly from $11.6 million in the third quarter of 2003. For the nine months ended September 30, 2004, total noninterest expense was $35.7 million compared to $36.8 million in 2003. Salaries and employee benefits expense decreased from $5.1 million for the third quarter of 2003 to $5.0 million for the comparable period in 2004. Total salaries and employee benefits were $15.4 million in both 2004 and 2003. Net occupancy expense increased slightly during the quarter from $1.4 million in 2003 to $1.5 million in 2004 due primarily to the new branch operations and the cost of utilities. Similar increases were also noted during the nine month period with net occupancy expense of $5.0 million for 2004 compared to $4.6 million in 2003. Equipment expense decreased during the quarter by approximately $187 thousand from $569 thousand in 2003 to $382 thousand in 2004 as a result of reduced computer expense due to contracts not being renewed in 2004 as a result of the data processing conversion. On a year to date basis, equipment expense decreased by $1.2 million due to the non renewal of computer contracts and the write-offs in 2003 of equipment and software no longer utilized. Professional service expenses for the third quarter of 2004 were $900 thousand, an increase of $16 thousand from the comparable period in 2003. On a year to date basis, professional service expenses were $2.7 million in 2004 compared to $2.3 million in 2003. Included in the 2004 expense were additional fees paid for consultants to assist in the upcoming 2004 computer software conversion. Those expenses were not incurred in 2003. Outsourced services decreased from $1.3 million in the third quarter of 2003 to $1.1 million for the third quarter of 2004. On a year to date basis, outsourced services were $3.3 million in 2004 compared to $4.4 million in 2003. These costs are for data processing, item processing and certain back office operations that were transferred to a third party vendor in the fourth quarter of 2002. The decrease in outsourced services expense between 2003 and 2004 was the elimination of a data input outsourced service in the latter part of 2003 that was brought back in-house. There was a reduction in the fees paid to the third party vendor as a result of this change, however the additional work was absorbed by the existing TrustCo employees. Income Taxes In the third quarter of 2004 and 2003, TrustCo recognized income tax expense of $7.3 million and $6.8 million, respectively. This resulted in an effective tax rate of 32.4% for 25
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 2004 and 32.1% for 2003. For the nine months of 2004, total income tax expense was $21.1 million compared to $17.8 million for 2003. This resulted in an effective tax rate of 32.6% for 2004 and 30.3% for 2003. This increase was primarily the result of a reduction in the amount invested in tax advantaged states and political subdivisions during these time periods. Capital Resources Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios. New issues of equity securities have not been required since traditionally, most of its capital requirements are met through the capital retained in the Company (after the dividends on the common stock). Total shareholders' equity at September 30, 2004 was $224.2 million, a decrease of $2.6 million from the year-end 2003 balance of $226.8 million. The change in total shareholders' equity between year-end 2003 and September 30, 2004 reflects net income of $10.3 million retained by TrustCo (net income of $43.7 million less dividends to shareholders of $33.4 million) and a $5.3 million increase as a result of stock option exercises partially offset by an $11.1 million reduction in the net unrealized gain on securities available for sale, net of tax, and a $7.1 million net increase in treasury stock. TrustCo declared dividends of $0.450 per share during the first nine months of 2004 and 2003. These resulted in a dividend payout ratio of 81.7% in 2003 and 76.4% in 2004. The Company achieved the following capital ratios as of September 30, 2004 and 2003: September 30, Minimum Regulatory 2004 2003 Guidelines ---------------------------------------------- Tier 1 risk adjusted capital 16.80% 16.60% 4.00% Total risk adjusted capital 18.08% 17.89% 8.00% In addition, at September 30, 2004 and 2003, the consolidated equity to total assets ratio (excluding the mark to market effect of securities available for sale) was 7.58% and 7.70%, respectively. Proposed Accounting Standards On September 30, 2004, the Financial Accounting Standards Board ("FASB") issued Staff Position No. EITF Issue 03-01-1, "Effective Date of Paragraphs 10-20 of EITF 26
TrustCo Bank Corp NY Management's Discussion and Analysis - continued September 30, 2004 Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," which delays the effective date for the measurement and recognition guidance contained in Emerging Issues Task Force ("EITF") Issue No. 03-1. EITF Issue No. 03-1 provides guidance for evaluating whether an investment is other- than-temporarily impaired and was originally effective for evaluations made in periods beginning after June 15, 2004 (July 1, 2004 for the Company). This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. Also, the disclosure guidance in paragraphs 21 and 22 of EITF Issue No. 03-1 remains effective. The delay will be suspended concurrent with the final issuance of Staff Position No. EITF 03-1-a, which is expected to provide implementation guidance on matters such as impairment evaluations for declines in value caused by increases in interest rates and/or sector spreads. The impact of the final issuance of Staff Position No. EITF 03-01-a on the Company's financial condition and results of operations cannot be determined at the present time. In March 2004, the FASB issued an Exposure Draft, "Share-Based Payment, an amendment of FASB Statements No. 123 and 95." The Exposure Draft proposes changes in accounting that would replace existing requirements under FASB Statement No. 123 and Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date and recognized over the vesting period. Current accounting literature relating to so-called fixed plan employee stock options permits an election to disclose the associated expense in the notes to the financial statements without recognition in the income statement. The proposal would permit either prospective or retrospective adoption and presently is proposed to be effective for public companies beginning July 1, 2005. Critical Accounting Policies: Pursuant to recent SEC guidance, management of the Company is encouraged to evaluate and disclose those accounting policies that are judged to be critical policies - those most important to the portrayal of the Company's financial condition and results, and that require management's most difficult subjective or complex judgments. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in the Company's 2003 Annual Report on Form 10-K is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements. 27
<TABLE> TrustCo Bank Corp NY Management's Discussion and Analysis STATISTICAL DISCLOSURE I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following table summarizes the component distribution of average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale are calculated using amortized costs for these securities. Included in the balance of shareholders' equity is unrealized appreciation, net of tax, in the available for sale portfolio of $7.4 million in 2004 and $16.4 million in 2003. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. <CAPTION> Three Three Months Months 2004 2003 ----------- ----------- Average Interest Average Average Interest Average (dollars in thousands) Balance Rate Balance Rate ----------- ----------- ----- ----------- -------- ----- <S> <C> <C> <C> <C> <C> <C> Assets Commercial loans $ 195,705 $ 3,330 6.80% $ 206,440 $ 3,727 7.22% Residential mortgage loans 782,855 12,993 6.64% 855,608 15,175 7.09% Home equity lines of credit 183,941 1,967 4.25% 158,882 1,557 3.89% Installment loans 12,443 364 11.63% 13,746 445 12.85% ----------- -------------------- ----------- ----------------- Loans, net of unearned income 1,174,944 18,654 6.35% 1,234,676 20,904 6.76% Securities available for sale: U.S. Treasuries and agencies 719,707 9,927 5.52% 524,408 5,984 4.56% Mortgage-backed securities and collateralized mtg. obligations 176,255 2,066 4.69% 57,142 848 5.94% States and political subdivisions 161,884 3,161 7.81% 190,708 3,735 7.83% Other 23,561 577 9.80% 39,041 509 5.21% ----------- -------------------- ----------- ----------------- Total securities available for sale 1,081,407 15,731 5.82% 811,299 11,076 5.46% Federal funds sold and other short-term investments 500,249 1,798 1.43% 553,974 1,446 1.04% ----------- -------------------- ----------- ----------------- Total Interest earning assets 2,756,600 36,183 5.25% 2,599,949 33,426 5.14% -------------------- ----------------- Allowance for loan losses (49,445) (50,490) Cash and non-interest earning assets 141,112 154,335 ----------- ----------- Total assets $ 2,848,267 $ 2,703,794 =========== =========== Liabilities and shareholders' equity Deposits: Interest bearing checking $ 334,792 408 0.48% $ 321,309 391 0.48% Money market accounts 142,061 326 0.91% 149,830 423 1.12% Savings 825,879 2,042 0.98% 775,782 1,922 0.98% Time deposits 972,350 6,765 2.77% 924,024 6,435 2.76% ----------- -------------------- ----------- ----------------- Total interest bearing deposits 2,275,082 9,541 1.67% 2,170,945 9,171 1.68% Short-term borrowings 107,495 254 0.94% 75,606 133 0.70% Long-term debt 122 2 5.19% 303 3 5.86% ----------- -------------------- ----------- ----------------- Total interest bearing liabilities 2,382,699 9,797 1.64% 2,246,854 9,307 1.64% ----------- -------- Demand deposits 218,372 197,572 Other liabilities 28,853 42,009 Shareholders' equity 218,343 217,359 ----------- ----------- Total liab. & shareholders' equity $ 2,848,267 $ 2,703,794 =========== =========== Net interest income 26,386 24,119 ----------- -------- Net interest spread 3.61% 3.50% Net interest margin (net interest Income to total interest earning assets) 3.83% 3.72% Tax equivalent adjustment 1,232 1,385 ----------- -------- Net interest income per book $ 25,154 $ 22,734 =========== ======== </TABLE> <TABLE> <CAPTION> Change in Variance Variance Interest Balance Rate Income/ Change Change (dollars in thousands) Expense -------- -------- -------- <S> <C> <C> <C> Assets Commercial loans $ (397) $ (136) $ (261) Residential mortgage loans (2,182) (1,712) (470) Home equity lines of credit 410 966 (556) Installment loans (81) (43) (38) --------------------------------------------- Loans, net of unearned income (2,250) (925) (1,325) Securities available for sale: U.S. Treasuries and agencies 3,943 3,812 131 Mortgage-backed securities and collateralized mtg. obligations 1,218 3,036 (1,818) States and political subdivisions (574) (497) (77) Other 68 53 15 --------------------------------------------- Total securities available for sale 4,655 6,404 (1,749) Federal funds sold and other short-term investments 352 145 207 --------------------------------------------- Total Interest earning assets 2,757 5,624 (2,867) --------------------------------------------- Allowance for loan losses Cash and non-interest earning assets Total assets Liabilities and shareholders' equity Deposits: Interest bearing checking 17 142 (125) Money market accounts (97) 384 (481) Savings 120 1,624 (1,504) Time deposits 330 2,916 (2,586) --------------------------------------------- Total interest bearing deposits 370 5,066 (4,696) Short-term borrowings 121 69 52 Long-term debt (1) (1) --- --------------------------------------------- Total interest bearing liabilities 490 5,134 (4,644) --------------------------------------------- Demand deposits Other liabilities Shareholders' equity Total liab. & shareholders' equity Net interest income 2,267 490 1,777 --------------------------------------------- Net interest spread Net interest margin (net interest Income to total interest earning assets) Tax equivalent adjustment Net interest income per book </TABLE> 28
<TABLE> TrustCo Bank Corp NY Management's Discussion and Analysis STATISTICAL DISCLOSURE I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following table summarizes the component distribution of average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale are calculated using amortized costs for these securities. Included in the balance of shareholders' equity is unrealized appreciation, net of tax, in the available for sale portfolio of $12.7 million in 2004 and $23.5 million in 2003. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. <CAPTION> Nine Nine Months Months 2004 2003 ----------- ----------- Average Interest Average Average Interest Average (dollars in thousands) Balance Rate Balance Rate ----------- --------- ----- ----------- --------- ----- <S> <C> <C> <C> <C> <C> <C> Assets Commercial loans $ 193,745 $ 9,938 6.84% $ 203,577 $ 11,205 7.33% Residential mortgage loans 780,841 39,474 6.74% 939,841 51,065 7.24% Home equity lines of credit 179,225 5,379 4.01% 150,751 4,575 4.06% Installment loans 12,528 1,092 11.65% 14,261 1,398 13.12% ----------- ------------------ ----------- ------------------ Loans, net of unearned income 1,166,339 55,883 6.39% 1,308,430 68,243 6.96% Securities available for sale: U.S. Treasuries and agencies 730,167 30,653 5.60% 418,707 15,082 4.80% Mortgage-backed securities and collateralized mtg. obligations 138,648 4,916 4.73% 61,334 2,853 6.20% States and political subdivisions 170,471 10,104 7.90% 211,881 12,642 7.96% Other 27,634 1,571 7.58% 72,950 3,842 7.02% ----------- ------------------ ----------- ------------------ Total securities available for sale 1,066,920 47,244 5.90% 764,872 34,419 6.00% Federal funds sold and other short-term investments 490,874 4,198 1.14% 523,385 4,586 1.17% ----------- ------------------ ----------- ------------------ Total Interest earning assets 2,724,133 107,325 5.25% 2,596,687 107,248 5.50% ------------------ ------------------ Allowance for loan losses (49,321) (51,828) Cash and non-interest earning assets 148,867 158,721 ----------- ----------- Total assets $ 2,823,679 $ 2,703,580 =========== =========== Liabilities and shareholders' equity Deposits: Interest bearing checking $ 330,664 1,193 0.48% $ 318,090 1,281 0.54% Money market accounts 157,260 1,154 0.98% 147,548 1,484 1.34% Savings 807,514 5,947 0.98% 754,185 6,865 1.22% Time deposits 962,082 19,648 2.73% 915,735 20,976 3.06% ----------- ------------------ ----------- ------------------ Total interest bearing deposits 2,257,520 27,942 1.65% 2,135,558 30,606 1.92% Short-term borrowings 106,425 633 0.79% 115,844 739 0.85% Long-term debt 162 7 5.46% 349 14 5.46% ----------- ------------------ ----------- ------------------ Total interest bearing liabilities 2,364,107 28,582 1.61% 2,251,751 31,359 1.86% --------- --------- Demand deposits 207,387 186,406 Other liabilities 31,442 38,141 Shareholders' equity 220,743 227,282 ----------- ----------- Total liab. & shareholders' equity $ 2,823,679 $ 2,703,580 =========== =========== Net interest income 78,743 75,889 --------- --------- Net interest spread 3.64% 3.64% Net interest margin (net interest Income to total interest earning assets) 3.85% 3.88% Tax equivalent adjustment 3,860 5,061 --------- --------- Net interest income per book $ 74,883 $ 70,828 ========= ========= </TABLE> <TABLE> <CAPTION> Change in Variance Variance Interest Balance Rate Income/ Change Change (dollars in thousands) Expense --------- -------- -------- <S> <C> <C> <C> Assets Commercial loans $ (1,267) $ (434) $ (833) Residential mortgage loans (11,591) (9,094) (2,497) Home equity lines of credit 804 1,163 (359) Installment loans (306) (163) (143) ---------------------------------------- Loans, net of unearned income (12,360) (8,528) (3,832) Securities available for sale: U.S. Treasuries and agencies 15,571 15,054 517 Mortgage-backed securities and collateralized mtg. obligations 2,063 3,344 (1,281) States and political subdivisions (2,538) (2,198) (340) Other (2,271) (1,771) (500) ---------------------------------------- Total securities available for sale 12,825 14,429 (1,604) Federal funds sold and other short-term investments (388) (160) (228) ---------------------------------------- Total Interest earning assets 77 5,741 (5,664) ---------------------------------------- Allowance for loan losses Cash and non-interest earning assets Total assets Liabilities and shareholders' equity Deposits: Interest bearing checking (88) 89 (177) Money market accounts (330) 267 (597) Savings (918) 1,105 (2,023) Time deposits (1,328) 2,087 (3,415) ---------------------------------------- Total interest bearing deposits (2,664) 3,548 (6,212) Short-term borrowings (106) (69) (37) Long-term debt (7) (7) --- ---------------------------------------- Total interest bearing liabilities (2,777) 3,472 (6,249) ---------------------------------------- Demand deposits Other liabilities Shareholders' equity Total liab. & shareholders' equity Net interest income 2,854 2,269 585 ---------------------------------------- Net interest spread Net interest margin (net interest Income to total interest earning assets) Tax equivalent adjustment Net interest income per book </TABLE> 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk As detailed in the Annual Report to Shareholders as of December 31, 2003, the Company is subject to interest rate risk as its principal market risk. As noted in Item 2 (Management's Discussion and Analysis for the nine months ended September 30, 2004), the Company continues to respond to changes in interest rates in a fashion to position the Company to meet both short term earning goals but to also allow the Company to respond to changes in interest rates in the future. The average balance of federal funds sold and other short-term investments has decreased from $523.4 million in 2003 to $490.9 million in 2004. As investment opportunities presented themselves, management began investing funds from the federal funds sold and other short-term investment portfolio into the securities available for sale and loan portfolios. This trend is expected to continue into the fourth quarter. The Company believes there was no significant change to its interest rate risk during the third quarter of 2004. Item 4. Controls and Procedures The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 ("Exchange Act") designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon this evaluation of those disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer of the Company concluded, as of the end of the period covered by this report, that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected. There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting. 30
PART II OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds <TABLE> <CAPTION> Total Maximum Number of Number Shares of Shares Purchased as that May Part of Yet Be Total Average Publicly Purchased Number of Price Announced Under the 2004 Shares Paid per Plans or Plans or Period Purchased Share Programs Programs <S> <C> <C> <C> <C> July 1 - July 31 33,600 $ 12.60 0 N/A August 1 - August 31 163,400 $ 12.74 0 N/A Sept. 1 - Sept. 30 3,000 $ 12.79 0 N/A Total 200,000 $ 12.72 0 N/A </TABLE> All 200,000 shares were purchased by other than through a publicly announced plan or program. All purchases were made in open-market transactions to provide shares for issuance upon exercise of outstanding stock options issued by the Company and to provide shares for issuance under the Company's dividend reinvestment plan. Item 3. Defaults Upon Senior Securities None. Item 4. Submissions of Matters to Vote of Security Holders None. Item 5. Other Information None. 31
Exhibits Item 6. Reg S-K (Item 601) Exhibit No. Description - ---------------------------------------------------------------------------- 31(a) Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer. 31(b) Rule 13a-15(e)/15d-15(e) Certification of Robert T. Cushing, principal financial officer. 32 Section 1350 Certifications of Robert J. McCormick, principal executive officer and Robert T. Cushing, principal financial officer. 32
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TrustCo Bank Corp NY By: /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer By: /s/ Robert T. Cushing --------------------------- Robert T. Cushing Executive Vice President and Chief Financial Officer Date: November 9, 2004 33
Exhibits Exhibits Index Reg S-K Exhibit No. Description - ---------------------------------------------------------------------------- 31(a) Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer. 31(b) Rule 13a-15(e)/15d-15(e) Certification of Robert T. Cushing, principal financial officer. 32 Section 1350 Certifications of Robert J. McCormick, principal executive officer and Robert T. Cushing, principal financial officer. 34
Exhibits Exhibit 31(a) Certification I, Robert J. McCormick, the principal executive officer of TrustCo Bank Corp NY ("registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of TrustCo Bank Corp NY; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 35
Exhibits 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2004 /s/ Robert J. McCormick - ----------------------- President and Chief Executive Officer 36
Exhibits Exhibit 31(b) Certification I, Robert T. Cushing, the principal financial officer of TrustCo Bank Corp NY ("registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of TrustCo Bank Corp NY; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 37
Exhibits 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2004 /s/ Robert T. Cushing - ---------------------------- Executive Vice President and Chief Financial Officer 38
Exhibits Exhibit 32 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of TrustCo Bank Corp NY (the "Company") on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer /s/ Robert T. Cushing --------------------------- Robert T. Cushing Executive Vice President and Chief Financial Officer November 9, 2004 39