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, 2003 TRUSTCO BANK CORP NY (Exact name of registrant as specified in its charter) NEW YORK 14-1630287 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 SARNOWSKI DRIVE, GLENVILLE, NEW YORK 12302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 377-3311 Securities registered pursuant to Section 12(b) of the Act: Name of exchange on Title of each class which registered None None Securities registered pursuant to Section 12(g) of the Act: (Title of class) Common Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes.(x) No.( ) Indicate by check mark whether the registrant is 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, 2003 --------------------------- ---------------------- $1 Par Value 74,453,719
TrustCo Bank Corp NY INDEX Part I. FINANCIAL INFORMATION PAGE NO. Item 1. Interim Financial Statements (Unaudited): Consolidated Statements of Income for the Three Months and Nine Months Ended 1 September 30, 2003 and 2002 Consolidated Statements of Condition as of September 30, 2003 and December 31, 2002 2 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 3 - 4 Notes to Consolidated Interim Financial Statements 5 - 10 Independent Accountants' Review Report 11 Item 2. Management's Discussion and Analysis 12 - 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 Item 4. Controls and Procedures 26 Part II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities and use of Proceeds - None Item 3. Defaults Upon Senior Securities --None Item 4. Submissions of Matters to Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K 28 i
<TABLE> <CAPTION> TRUSTCO BANK CORP NY Consolidated Statements of Income (Unaudited) (dollars in thousands, except per share data) 3 Months Ended 9 Months Ended September 30 September 30 2003 2002 2003 2002 Interest and dividend income: <S> <C> <C> <C> <C> Interest and fees on loans $ 20,892 28,031 68,200 85,026 Interest on U. S. Treasuries and agencies 5,984 2,822 15,078 8,763 Interest on states and political subdivisions 2,482 3,012 8,400 8,913 Interest on mortgage-backed securities 848 1,030 2,853 3,573 Interest and dividends on other securities 392 1,204 3,076 3,684 Interest on federal funds sold and other short term investments 1,443 2,408 4,580 6,563 --------------------------------------------------------------- Total interest income 32,041 38,507 102,187 116,522 --------------------------------------------------------------- Interest expense: Interest on deposits: Interest-bearing checking 391 773 1,281 2,354 Savings 1,922 3,230 6,865 9,924 Money market deposit accounts 423 675 1,484 1,771 Time deposits 6,435 9,115 20,976 28,290 Interest on short-term borrowings 133 732 739 2,429 Interest on long-term debt 3 8 14 24 --------------------------------------------------------------- Total interest expense 9,307 14,533 31,359 44,792 --------------------------------------------------------------- Net interest income 22,734 23,974 70,828 71,730 Provision for loan losses 300 300 900 1,120 --------------------------------------------------------------- Net interest income after provision for loan losses 22,434 23,674 69,928 70,610 --------------------------------------------------------------- Noninterest income: Trust department income 1,785 1,374 4,757 5,256 Fees for other services to customers 2,819 2,470 8,375 7,705 Net gain on securities transactions 4,737 2,399 10,067 6,171 Other 860 621 2,360 2,220 --------------------------------------------------------------- Total noninterest income 10,201 6,864 25,559 21,352 --------------------------------------------------------------- Noninterest expenses: Salaries and employee benefits 5,092 5,639 15,406 16,920 Net occupancy expense 1,432 1,402 4,616 4,121 Equipment expense 569 691 2,483 2,222 FDIC insurance expense 97 91 285 271 Professional services 884 701 2,281 2,416 Charitable contributions 147 113 430 1,124 Outsourced services 1,250 119 4,350 1,427 Other real estate expenses / (income) (188) (113) (385) (137) Other 2,317 2,779 7,382 9,168 --------------------------------------------------------------- Total noninterest expenses 11,600 11,422 36,848 37,532 --------------------------------------------------------------- Income before taxes 21,035 19,116 58,639 54,430 Applicable income taxes 6,750 5,825 17,751 16,200 --------------------------------------------------------------- Net income $ 14,285 13,291 40,888 38,230 =============================================================== Net income per Common Share: - Basic $ 0.192 0.183 0.550 0.530 =============================================================== - Diluted $ 0.189 0.179 0.543 0.514 =============================================================== See accompanying notes to consolidated interim financial statements. </TABLE> 1
<TABLE> <CAPTION> TRUSTCO BANK CORP NY Consolidated Statements of Condition (Unaudited) (dollars in thousands, except share data) 09/30/03 12/31/02 ASSETS: <S> <C> <C> Cash and due from banks $ 63,376 63,957 Federal funds sold and other short term investments 541,765 542,125 --------------- ---------------- Total cash and cash equivalents 605,141 606,082 Securities available for sale: U. S. Treasuries and agencies 623,585 230,428 States and political subdivisions 184,426 235,495 Mortgage-backed securities 52,670 52,591 Other 60,604 134,649 --------------- ---------------- Total securities available for sale 921,285 653,163 --------------- ---------------- Loans: Commercial 207,765 202,707 Residential mortgage loans 815,804 1,063,375 Home equity line of credit 163,178 139,294 Installment loans 14,883 17,465 --------------- ---------------- Total loans 1,201,630 1,422,841 --------------- ---------------- Less: Allowance for loan losses 49,054 52,558 Unearned income 411 540 --------------- ---------------- Net loans 1,152,165 1,369,743 Bank premises and equipment 19,501 19,544 Other assets 41,464 47,556 --------------- ---------------- Total assets $ 2,739,556 2,696,088 =============== ================ LIABILITIES: Deposits: Demand $ 198,930 178,058 Interest-bearing checking 325,089 338,740 Savings accounts 775,869 715,349 Money market deposit accounts 151,930 130,914 Certificates of deposit (in denominations of $100,000 or more) 162,609 137,513 Time deposits 769,675 773,694 --------------- ---------------- Total deposits 2,384,102 2,274,268 Short-term borrowings 80,201 141,231 Long-term debt 287 427 Accrued expenses and other liabilities 41,235 45,318 --------------- ---------------- Total liabilities 2,505,825 2,461,244 --------------- ---------------- SHAREHOLDERS' EQUITY: Capital stock par value $1; 100,000,000 shares authorized, and 80,435,438 and 79,107,851 shares issued September 30, 2003 and December 31, 2002, respectively 80,435 79,108 Surplus 97,588 92,009 Undivided profits 77,032 69,553 Accumulated other comprehensive income: Net unrealized gain on securities available for sale 24,759 27,277 Treasury stock at cost - 6,070,875 and 4,930,300 shares at September 30, 2003 and December 31, 2002, respectively (46,083) (33,103) --------------- ---------------- Total shareholders' equity 233,731 234,844 --------------- ---------------- Total liabilities and shareholders' equity $ 2,739,556 2,696,088 =============== ================ See accompanying notes to consolidated interim financial statements. </TABLE> 2
<TABLE> <CAPTION> TRUSTCO BANK CORP NY Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS NINE MONTHS ENDED September 30, 2003 2002 ------------ ------------ Cash flows from operating activities: <S> <C> <C> Net income $ 40,888 38,230 ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,958 1,576 Gain on sales of fixed assets (255) (296) Provision for loan losses 900 1,120 Loss on sale of securities available for sale 8,120 1,349 Gain on sale of securities available for sale (18,187) (7,520) Deferred tax benefit (4,825) (3,740) Decrease in taxes receivable 19,220 19,164 (Increase)/decrease in interest receivable (1,406) 544 Decrease in interest payable (559) (427) Decrease in other assets 299 5,393 Decrease in accrued expenses (3,113) (4,559) ------------ ------------ Total adjustments 2,152 12,604 ------------ ------------ Net cash provided by operating activities 43,040 50,834 ------------ ------------ Cash flows from investing activities: Proceeds from sales and calls of securities available for sale 769,347 250,766 Purchase of securities available for sale (1,040,261) (308,882) Proceeds from maturities of securities available for sale 2,366 11,004 Net decrease in loans 216,678 49,728 Proceeds from dispositions of real estate owned 608 837 Proceeds from sales of fixed assets 255 342 Capital expenditures (1,744) (2,717) ------------ ------------ Net cash provided by/(used in) investing activities (52,751) 1,078 ------------ ------------ Cash flows from financing activities: Net increase in deposits 109,834 176,617 Decrease in short-term borrowing (61,030) (97,754) Repayment of long-term debt (140) (152) Proceeds from exercise of stock options 6,906 11,867 Proceeds from sale of treasury stock 5,683 5,812 Purchase of treasury stock (18,663) (7,933) Dividends paid (33,820) (32,324) ------------ ------------ Net cash provided by financing activities 8,770 56,133 ------------ ------------ Net increase/(decrease) in cash and cash equivalents (941) 108,045 Cash and cash equivalents at beginning of period 606,082 398,573 ------------ ------------ Cash and cash equivalents at end of period $ 605,141 506,618 ======== ======== See accompanying notes to consolidated interim financial statements. (Continued) </TABLE> 3
TRUSTCO BANK CORP NY Consolidated Statements of Cash Flows Continued (Unaudited) (dollars in thousands) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: NINE MONTHS ENDED September 30, 2003 2002 ------------ ------------ Interest paid $ 31,918 45,219 Income taxes paid 3,357 789 Transfer of loans to real estate owned ----- 227 Increase/(decrease) in dividends payable (411) 160 See accompanying notes to consolidated interim financial statements. 4
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (Unaudited) 1. Financial Statement Presentation In the opinion of the management of TrustCo Bank Corp NY (the Company), the accompanying unaudited Consolidated Interim Financial Statements contain all adjustments necessary to present fairly the financial position as of September 30, 2003, the results of operations for the three months and nine months ended September 30, 2003 and 2002, and the cash flows for the nine months ended September 30, 2003 and 2002. The accompanying Consolidated Interim Financial Statements should be read in conjunction with the TrustCo Bank Corp NY year-end Consolidated Financial Statements, including notes thereto, which are included in TrustCo Bank Corp NY's 2002 Annual Report to Shareholders on Form 10-K. 2. Earnings Per Share A reconciliation of the component parts of earnings per share for the three month and nine month periods ended September 30, 2003 and 2002 follows: <TABLE> <CAPTION> Weighted Average Shares (In thousands, Net Outstanding Per Share except per share data) Income Amounts ----------------- -------------------------- ------------------- For the three months ended September 30, 2003: Basic EPS: Net income available to <S> <C> <C> <C> common shareholders.............. $14,285 74,400 $0.192 Effect of Dilutive Securities: Stock options............................. ------ 1,017 ------- ----------------- -------------------------- ------------------- 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 ------- ----------------- -------------------------- ------------------- Diluted EPS $40,888 75,280 $0.543 ================= ========================== =================== There were no stock options that were antidilutive as of September 30, 2003. 5
Weighted Average Shares (In thousands, Net Outstanding Per Share except per share data) Income Amounts ----------------- -------------------------- ------------------- For the three months ended September 30, 2002: Basic EPS: Net income available to common shareholders.............. $13,291 72,499 $0.183 Effect of Dilutive Securities: Stock options............................. ------ 1,826 ------- ----------------- -------------------------- ------------------- Diluted EPS $13,291 74,325 $0.179 ================= ========================== =================== For nine months ended September 30, 2002: Basic EPS: Net income available to common shareholders.............. $38,230 72,146 $0.530 Effect of Dilutive Securities: Stock options............................. ------- 2,257 ------- ----------------- -------------------------- ------------------- Diluted EPS $38,230 74,403 $0.514 ================= ========================== =================== There were 837,750 stock options that were antidilutive as of September 30, 2002 and were therefore excluded from the September 30, 2002 calculations. </TABLE> 6
3. Comprehensive Income Comprehensive income for the three months ended September 30, 2003 and 2002 was $10,526,000 and $13,580,000, respectively. Comprehensive income is comprised of net unrealized (losses)/gains, net of taxes, on available-for-sale securities, which were ($3,759,000) and $289,000 for the three months ended September 30, 2003 and 2002, respectively, together with net income. Comprehensive income for the nine months ended September 30, 2003 and 2002 was $38,370,000 and $45,659,000, respectively. Comprehensive income is comprised of net unrealized (losses)/gains, net of taxes, on available-for-sale securities, which were ($2,518,000) and $7,429,000 for the nine months ended September 30, 2003 and 2002, respectively, along with net income. At September 30, 2003 and December 31, 2002, accumulated other comprehensive income totaled $24,759,000 and $27,277,000, respectively, and is reflected as a component of shareholders' equity. 7
4. Stock Option Plans The Company has stock option plans for officers and directors and has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123) and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" (Statement 148). The Company's stock option plans are accounted for in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion 25) and as such, no compensation expense has been recorded for these plans. Had compensation expense for the Company's stock option plans been determined consistent with Statement 123, the Company's net income and earnings per share for the periods ended September 30, 2003 and 2002 would have been as follows: (dollars in thousands except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 -------------------- ---------------------- Net income: As reported $14,285 13,291 $40,888 38,230 Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (232) (302) (694) (905) -------------------- ----------------------- Pro forma net income $14,053 12,989 $40,194 37,325 -------------------- ----------------------- Earnings per share: Basic - as reported $ .192 .183 .550 .530 Basic - pro forma .189 .179 .541 .517 Diluted - as reported .189 .179 .543 .514 Diluted - pro forma .186 .175 .534 .502 The weighted average fair value of each option as of the grant date was estimated using the Black-Scholes pricing model, and calculated in accordance with Statement 123. No options were granted in the first nine months of 2003. The estimated fair values of options granted in 2002 was as follows: Employees' Directors' Plan Plan $1.730 1.680 8
The following assumptions were utilized in the calculation of the fair value of the 2002 options under Statement 123: Employees' Directors' Plan Plan Expected dividend yield: 4.45% 4.45% Risk-free interest rate: 4.10 3.79 Expected volatility rate: 21.75 22.41 Expected lives 7.5 years 6.0 years 5. Impact of Changes in Financial Standards In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This interpretation provides guidance on how to identify variable interest entities and how to determine whether or not those entities should be consolidated. The interpretation requires the primary beneficiaries of variable interest entities to consolidate the variable interest entities if they are subject to a majority of the risk of loss or are entitled to receive a majority of the residual returns. It also requires that both the primary beneficiary and all other enterprises with a significant variable interest in a variable interest entity make certain disclosures. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The provisions of FIN 46 are not expected to have a material effect on the Company's consolidated financial statements. In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (Statement 149). This statement amends and clarifies financial accounting and reporting for derivative instruments and hedging activities under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133). This statement is effective for contracts entered into or modified after June 30, 2003 and hedging relationships designated after June 30, 2003. The adoption of this statement did not have a material impact on the Company's consolidated financial statements. In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (Statement 150). This statement establishes standards for how an issuer clarifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period after June 15, 2003. The adoption of this statement did not have a material impact on the Company's consolidated financial statements. 9
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 $3.9 million at September 30, 2003 and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of the Company's standby letters of credit at September 30, 2003 was insignificant. 10
INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Shareholders TrustCo Bank Corp NY: We have reviewed the consolidated statement of condition of TrustCo Bank Corp NY and subsidiaries (the Company) as of September 30, 2003, and the related consolidated statements of income for the three month and nine month periods ended September 30, 2003 and 2002, and the consolidated statements of cash flows for the nine month periods ended September 30, 2003 and 2002. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 2002, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 17, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of condition as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived. /s/KPMG LLP - ------------------------------ KPMG LLP Albany, New York October 15, 2003 11
TrustCo Bank Corp NY Management's Discussion and Analysis September 30, 2003 The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo Bank Corp NY ("TrustCo" or "Company") during the three month and nine month periods ended September 30, 2003, with comparisons to 2002 as applicable. Net interest income and net interest margin are presented on a fully taxable equivalent basis in this discussion. The consolidated interim financial statements and related notes, as well as the 2002 Annual Report to Shareholders should be read in conjunction with this review. Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation. Forward-looking Statements Statements included in this review and in future filings by TrustCo with the Securities and Exchange Commission, in TrustCo's press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect TrustCo's actual results, and could cause TrustCo's actual financial performance to differ materially from that expressed in any forward-looking statement: (1) credit risk, (2) interest rate risk, (3) competition, (4) changes in the regulatory environment, and (5) changes in general business and economic trends. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events. 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, 2003 and 2002. Overview TrustCo recorded net income of $14.3 million, or $0.189 of diluted earnings per share for the three months ended September 30, 2003, as compared to net income of $13.3 million or $0.179 of diluted earnings per share in the same period in 2002. For the nine month period ended September 30, 2003, TrustCo recorded net income of $40.9 million, or $0.543 of diluted earnings per share, as compared to $38.2 million, or $0.514 of diluted earnings per share for the comparable period in 2002. 12
The primary factors accounting for the year to date increases are: . A $10.9 million increase in the average balance of interest earning assets between 2002 and 2003, . A reduction in the provision for loan losses from $1.1 million in 2002 to $900 thousand in 2003, . An increase in noninterest income from $21.4 million in 2002 to $25.6 million in 2003, which includes $10.1 million of securities gains in 2003 and $6.2 million of securities gains in 2002 and . A decrease of approximately $680 thousand in noninterest expense from $37.5 million in 2002 to $36.8 million in 2003. These increases were partially offset by: . A decrease of 9 basis points in the net interest margin from 3.97% in 2002 to 3.88% in 2003. 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 2003 compared to the comparable periods in 2002 is greatly affected by the trends and changes in interest rates in the marketplace in which TrustCo competes. Included in the 2002 Annual Report to Shareholders is a description of the effect interest rates had on the results of the year 2002 compared to 2001. Most of the same market factors discussed in the 2002 Annual Report also had a significant impact on 2003 results. TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations, and rates paid on deposits and charged on loans. The absolute level of interest rates and changes in rates and customers' expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period. Interest rates have changed dramatically in response to the slowing economic conditions. One of the most important interest rates utilized to control economic activity is the "federal funds" rate. This is the rate utilized within the banking system for overnight borrowings for the highest credit quality institutions. The federal funds rate was 1.75% at the beginning of 2002 and decreased to 1.25% by the end of 2002. In 2003 the federal funds rates was reduced another 25 bp to 1% during the second quarter. The federal funds rate affects the level of other interest rates in the economy, most specifically the prime rate. The prime rate was 4.75% at the beginning of 2002 and had decreased 50 bp to 4.25%% by the end of 2002. Similar to the change in 2003 for the federal funds rate, the prime rate was reduced to 4% in the second quarter and no further changes have occurred in 2003. 13
Earning Assets Total average interest earning assets decreased from $2.64 billion for the third quarter of 2002 to $2.60 billion in 2003 with an average yield of 6.14% in 2002 and 5.14% in 2003. Income on earning assets decreased by $6.9 million during this same time-period from $40.4 million in 2002 to $33.4 million in 2003. The decrease in interest income on earning assets was attributable to the decrease in yield on these assets. For the nine month period ended September 30, 2003, the average balance of interest earning assets was $2.60 billion, an increase of $10.9 million from the average balance for the comparable period in 2002 of $2.59 billion. The average yield on interest earning assets was 6.28% for 2002, compared to 5.50% in 2003. The increase in the average balance of earning assets did not offset the decrease in the yield earned on these assets, thereby resulting in interest income of $107.2 million for the nine months of 2003, compared to $122.0 million for the nine months of 2002. During the third quarter of 2003 the average balance sheet of the Company decreased by $44.6 million from average assets of $2.70 billion in 2003 compared to $2.75 billion in 2002. This decrease, which includes the decrease in interest earning assets, was primarily the result of repaying the Trustco Short Term Investment Account with the trust department. During the quarter total short term borrowings decreased from $217.7 million in 2002 to $75.6 million in 2003 as a result of this action. Trust department overnight deposits were transferred from accounts at the Bank to independent third party investment funds that were offering higher overnight rates. Loans The average balance of loans for the third quarter was $1.23 billion in 2003 and $1.52 billion in 2002. The yield on loans decreased from 7.38% in 2002 to 6.76% in 2003. The combination of the lower average balances coupled with lower rates resulted in a decrease of $7.1 million in interest income on loans. For the nine month period ended September 30, 2003, the average balance in the loan portfolio was $1.31 billion compared to $1.53 billion for the comparable period in 2002. The average yield decreased from 7.43% in 2002 to 6.96% in 2003. The decrease in the average balance of loans outstanding and the decrease in the yield resulted in total interest income of $68.2 million in 2003 compared to $85.1 million in 2002. During the third quarter and first nine months of 2003 the balance of the loan portfolio decreased primarily as a result of residential mortgage loans, though decreases were also noted in other loan areas as well. The average balance of residential mortgage loans for the first nine months of 2003 was $939.8 million compared to $1.18 billion for the comparable period in 2002, a decrease of 20.2%. The average yield on residential mortgage loans decreased by 31 bp during this same period. The third quarter results were very similar to that for the nine months. The average balance of residential mortgage loans decreased from $1.17 billion in the third quarter of 2002 to $ 855.6 million in 2003. The average yield on residential mortgage loans for the third quarter was 7.09% for 2003 compared to 7.51% for 2002. 14
TrustCo actively markets the residential loan products within its market territory. Mortgage loan rates are affected by a number of factors including the prime rate, the federal funds rate, rates set by competitors and secondary market participants. As noted earlier, market interest rates have dropped significantly as a result of national economic policy in the United States. During this time TrustCo aggressively marketed the unique aspects of its loan products thereby attempting to create a differentiation from other lenders. These unique aspects include extremely low closing costs, fast turn around time on loan approvals, no escrow or PMI requirements and the fact that the Company holds these loans in portfolio and does not sell them into the 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 originations and higher prepayments from refinancings with other lenders. TrustCo was 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 absolutely the lowest interest rates being offered in the marketplace. 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 during 2003 may be completed with only residual effects into the fourth quarter of 2003. Assuming that trend continues the Company would anticipate that the unique features of its loan product will once again attract customers in the residential mortgage loan area. The impact of the decrease in the benchmark interest rate indexes (prime rate, federal funds rate, etc.) is apparent in the decrease in the yield earned in the commercial and home equity loan portfolios. The average yield earned on these loan types for 2003 were 60 bp and 69 bp, respectively, less than the average yields earned during the first nine months of 2002. The average balance of home equity lines of credit increased to $158.9 million during the third quarter of 2003 compared to $131.0 million for the comparable period in 2002. The average yield decreased from 4.69% in the third quarter of 2002 to 3.89% in 2003. The nine months results reflect these same trends with an average balance in 2003 of $150.8 million compared to $127.1 million in 2002. The average yield for these periods was 4.06% in 2003 and 4.75% in 2002. 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 prime rate based product with very low, and in some cases no, closing costs. 15
Securities Available for Sale During the third quarter of 2003, the average balance of securities available for sale was $811.3 million with a yield of 5.46%, compared to $569.0 million for the third quarter of 2002 with a yield of 6.95%. The combination of the increase in average balance and the decrease in the yields caused an increase in interest income on securities available for sale of $1.2 million between the third quarter of 2002 and 2003. The nine month results reflect the same principal trends noted for the third quarter. The total average balance of securities available for sale during the nine months of 2002 was $559.6 million with an average yield of 7.23% compared to an average balance for 2003 of $764.9 million with a yield of 6.00%. The securities available for sale portfolio has traditionally been utilized to help fund or retain funding for the loan and deposit portfolios. Funding for loan growth either comes from new sources of deposits/borrowings or through the reallocation of existing assets. During 2003 additional cash flow coming from the reduction in the loan portfolio and deposit increases were invested into the securities available for sale portfolio versus overnight investments in order to provide additional interest income and as a means of utilizing these funds other than in overnight federal funds investments. The securities purchased during this time period have been primarily federal agency bonds and municipal securities consistent with the Company's past practices. While this strategy provides the Company with additional interest income over the federal funds rate, it does subject these assets to a greater degree of interest rate risk. Subsequent increases in market interest rates will negatively affect the market price of these new purchases and the overall portfolio thereby potentially reducing or eliminating the current unrealized appreciation in this portfolio. Overall short-term liquidity at TrustCo is extremely strong and therefore the strategy will be to continue to invest in the loan and securities portfolio as market interest rates begin to increase. This will insure that the overall portfolio reflects these changes in market interest rates while at the same time meeting the needs for interest income and net income goals. TrustCo is a member of the Federal Home Loan Bank of New York and as such has invested approximately $12.4 million in the common stock of the FHLBNY. During the third quarter of 2003 the FHLBNY announced that they would recognize significant losses on the sale of certain bonds in their portfolio. These losses resulted in the FHLBNY noting that they would not pay a dividend on their common stock for the third quarter. They indicated that corrective action was being taken with respect to balance sheet management at the FHLBNY and that they would reevaluate in the fourth quarter the potential to reintroduce a quarterly cash dividend. For TrustCo the quarterly cash dividend from the investment in the FHLBNY stock would have been approximately $170 thousand. There has not been a rating downgrade on the FHLBNY, however, increased monitoring of this investment by TrustCo is warranted. TrustCo has $287 thousand of borrowings from the FHLBNY and does not take advantage of other services that they offer other than a back up line of credit for TrustCo. 16
Federal Funds Sold and Other Short-Term Investments During the third quarter of 2003, the average balance of federal funds sold was $554.0 million with a yield of 1.04%, compared to the average balance for the three month period ended September 30, 2002 of $547.7 million with an average yield of 1.75%. The increase in the average balance was more than offset by the decrease in the average yield, resulting in total interest income on federal funds sold of $1.4 million for 2003 compared to $2.4 million for 2002. During the nine month period ended September 30, 2003, the average balance of federal funds was $523.4 million with a yield of 1.17% compared to an average balance of $498.6 million in 2002 with an average yield of 1.76%. The federal funds 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 $2.25 billion for 2003 and $2.28 billion for 2002. The rate paid on total interest bearing liabilities was 2.53% for the third quarter of 2002, and 1.64% for 2003. Total interest expense for the third quarter decreased approximately $5.2 million to $9.3 million for 2003 compared to $14.5 million for 2002. 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 2.67% in 2002 to 1.86% in 2003. Total average interest bearing liabilities were $2.24 billion for the nine-month period ended September 30, 2002 and $2.25 billion for 2003. Demand deposit balances increased slightly during the third quarter of 2003 compared to the third quarter of 2002. Demand deposits averaged $196.3 million in 2002 and $197.6 million in 2003. On a year to date basis, demand deposits were $186.4 million compared to $192.3 million in 2002. Interest bearing deposit balances have increased from $2.06 billion for the third quarter of 2002 to $2.17 billion for the same period in 2003. Each of the deposit categories experienced increases with the most notable being the increase in the savings account category that increased by $52.5 million on a quarter to quarter basis between 2002 and 2003. Likewise, the average balance of interest bearing deposit accounts for the nine-month periods have also increased. For the nine months of 2003 the average balance of interest bearing deposits was $2.14 billion compared to $2.00 billion in 2002. 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. 17
Short-term borrowings for the quarter were $217.7 million in 2002 compared to $75.6 million in 2003. The average rate decreased during this time period from 1.33% to 0.70% for the third quarter of 2003. The largest component of short-term borrowings is the Trustco Short Term Investments, which was only available to Trustco Trust Department customers. As noted earlier, the decrease in the average balance of short-term borrowings is due to the decision to move the funds from the Trustco Short Term Investment account to independent third party funds. Net Interest Income Taxable equivalent net interest income decreased to $24.1 million for the third quarter of 2003. The net interest spread decreased 11 basis points between 2002 and 2003 and the net interest margin decreased by 21 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, 2003, compared to the same period in 2002. Net interest income for the first nine months of 2003 was $75.9 million, a decrease of $1.3 million from the $77.2 million for the first nine months of 2002. Net interest spread increased 3 basis points to 3.64% and net interest margin decreased 9 basis points to 3.88% for the nine month period ended September 30, 2003, compared to the nine month period ended September 30, 2002. Nonperforming Assets Nonperforming assets include nonperforming loans which are those loans in a nonaccrual status, loans that have been restructured, and loans past due three payments or more and still accruing interest. Also included in the total of nonperforming assets are foreclosed real estate properties, which are categorized as real estate owned. Impaired loans are considered to be those commercial and commercial real estate loans in a nonaccrual status and loans restructured since January 1, 1995, when the accounting standards required the identification, measurement and reporting of impaired loans. The following will describe the nonperforming assets of TrustCo as of September 30, 2003. Nonperforming loans: Total nonperforming loans were $3.6 million at September 30, 2003, a decrease from the $6.3 million of nonperforming loans at September 30, 2002. Nonaccrual loans were zero at September 30, 2003 down from the $1.3 million at September 30, 2002. Loans past due 3 payments or more and still accruing interest were zero at September 30, 2003 compared to $452 thousand at September 30, 2002. Restructured loans were $3.6 million at September 30, 2003 compared to $4.6 million at September 30, 2002. 18
Of the $3.6 million of nonperforming loans at September 30, 2003, all are residential real estate or retail consumer loans. In the past the majority of nonperforming loans were concentrated in the commercial and commercial real estate portfolios. Since 2000, there has been a continued shifting in the components of TrustCo's problem loans and charge offs from commercial and commercial real estate to the residential real estate and retail consumer loan portfolios. Contributing factors to this shift include: . The overall emphasis within TrustCo for residential real estate originations, . The relatively weak economic environment in the upstate New York territory, and . The relative reduction in real estate values in TrustCo's market area that has occurred since the middle of the 1990's, thereby causing a reduction in the collateral that supports the real estate loans. Consumer loan defaults and bankruptcies have increased dramatically over the last several years and this has lead to an increase in defaults on loans. TrustCo strives to identify borrowers that are experiencing financial difficulties and to work aggressively with them to minimize losses or exposures. Total impaired loans at September 30, 2003 of $3.4 million, consisted of restructured retail loans. During the first nine months of 2003, there have been $146 thousand of commercial loan charge offs and $7.8 million of mortgage and consumer loan charge offs as compared with $874 thousand of commercial loan charge offs and $5.2 million of mortgage and consumer loan charge offs in the first nine months of 2002. Recoveries during the first nine month periods have been $3.5 million in 2003 and $2.0 million in 2002. Real estate owned: Total real estate owned of $298 thousand at September 30, 2002 decreased to zero 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, 2003, the allowance for loan losses was $49.1 million, a decrease from the allowance at September 30, 2002 of $54.3 million. The allowance represents 4.08% of the loan portfolio as of September 30, 2003 compared to 3.61% at September 30, 2002. For the nine month periods, the provision charged to expense was $900 thousand for 2003 and $1.1 million for 2002. 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: 19
. The magnitude and nature of the recent loan charge offs and the movement of charge offs to the residential real estate loan portfolio, . The change in the loan portfolio and the implication that has in relation to the economic climate in the bank's business territory, . Changes in underwriting standards in the competitive environment in which TrustCo operates, . Significant growth in the level of losses associated with bankruptcies 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 declining real estate prices. 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 and ongoing loan loss provision requirements. 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, 2003 was $10.2 million, a $3.3 million increase from the comparable period in 2002. During these periods, the Company recorded net securities gains of $4.7 million for 2003 and $2.4 million for the comparable period in 2002. Excluding these securities transactions, noninterest income increased from $4.5 million in the third quarter of 2002 to $5.5 million in 2003. The increase is the result of an increase in Trust fee income and other service charges to customers. The increase in Trust fee income is the result of market conditions that have positively affected the underlying trust assets and approximately $400 thousand of non-recurring trust estate fees. 20
Similar results were also recognized for the nine months of 2003 compared to 2002. Total noninterest income was $25.6 million for 2003 compared to $21.4 million for 2002. Excluding net securities transactions, noninterest income was $15.5 million for 2003 and $15.2 million for 2002. Net gains on securities transactions have been significant for both the nine month and quarterly results in 2003 and 2002. The level of these transactions reflects management's decision to liquidate certain investments as interest rates were at historically low levels and therefore the gains on security sales were high. These sales provide the Company with additional liquidity for potential reinvestment at higher interest rates later in 2003 or in 2004. 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. Noninterest Expenses Total noninterest expense for the third quarter of 2003 was $11.6 million up slightly from $11.4 million in the third quarter of 2002. For the nine months ended September 30, 2003 and 2002, total noninterest expense was $36.8 million compared to $37.5 million. Salaries and employee benefits expense decreased from $5.6 million for the third-quarter of 2002 to $5.1 million for the comparable period in 2003. The reduction in salaries and employee benefits is primarily the result of the reduction in salary due to the retirement of the former Chief Executive Officer. Similar reductions in salaries and benefits were also noted for the nine month period ended September 30, 2003 compared to 2002. Total salaries and employee benefits were $15.4 million in 2003 and $16.9 million in 2002. Net occupancy expense increased slightly during the quarter from $1.40 million in 2002 to $1.43 million in 2003 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 $4.62 million for 2003 compared to $4.12 million in 2002. Equipment expense decreased during the quarter by approximately $122 thousand from $691 thousand in 2002 to $569 thousand in 2003 as a result of reduced computer expense due to contracts not being renewed in 2003 as a result of the data processing conversion. On a year to date basis, equipment expense increased by $261 thousand due to additional branch cost and certain write-offs of equipment and software that are no longer utilized. Professional services are up $183 thousand for the third quarter of 2003 compared to the third quarter of 2002 to $884 thousand as a result of fees paid for assistance in responding to tax return audits as well as for developing new tax saving strategies. On a year to date basis professional services are down $135 thousand as a result of cost incurred for computer consultants in 2002 that were not utilized in 2003. 21
For the third quarter of 2003 compared to 2002 charitable contributions were up slightly to $147 thousand. On a year to date basis they are down from $1.1 million in 2002 to $430 thousand in 2003 due primarily to an additional contribution made in 2002 in recognition of the Company's 100th anniversary. Outsourced services increased from $119 thousand in the third quarter of 2002 to $1.3 million for 2003. On a year to date basis outsourced services were $4.4 million in 2003 compared to $1.4 million in 2002. These costs are for data processing, item processing and certain back room operations that were transferred to a third party vendor in the later half of 2002. Income Taxes In the third quarter of 2003 and 2002, TrustCo recognized income tax expense of $6.8 million and $5.8 million, respectively. This resulted in an effective tax rate of 32.1% for 2003 and 30.5% for 2002. For the nine months of 2003, total income tax expense was $17.8 million compared to $16.2 million for 2002. Capital Resources Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios. New issues of equity securities have not been required since traditionally, most of its capital requirements are met through the capital retained in the Company (after the dividends on the common stock). Total shareholders' equity at September 30, 2003 was $233.7 million, a decrease of $1.1 million from the year-end of 2002 balance of $234.8 million. The change in the shareholders' equity between year-end 2002 and September 30, 2003 reflects the net income retained by TrustCo and a $6.9 million increase as a result of stock option exercises offset by a $2.5 million reduction in the net unrealized gain on securities available for sale, net of tax, and a $13.0 million increase in treasury stock. TrustCo declared dividends of $0.450 per share during the first nine months of 2003 and 2002. These resulted in a dividend payout ratio of 81.7% in 2003 and 85.0% in 2002. The Company achieved the following capital ratios as of September 30, 2003 and 2002: September 30, Minimum Regulatory 2003 2002 Guidelines ------------------------------------------ Tier 1 risk adjusted capital 16.60% 14.43% 4.00 Total risk adjusted capital 17.89% 15.71% 8.00 22
In addition, at September 30, 2003 and 2002, the consolidated equity to total assets ratio (excluding the mark to market effect of securities available for sale) was 7.70% and 7.54%, respectively. 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 2002 Annual Report on Form 10-K is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements. 23
<TABLE> <CAPTION> INTEREST RATES AND INTEREST DIFFERENTIAL The following table summarizes the component distribution of average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing libilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Non- accrual loans are included in loans for this analysis. The average balances of sec- urities available for sale is calculated using amortized costs for these securities. Included in the balance of shareholders' equity is unrealized appreciation ,net of tax, in the available for sale portfolio of $16.4 million and $29.0 Million in the third quarter of 2003 and 2002, respectively. The subtotals contained in the following table are the arithmetic totals of the items in that category. Third Quarter Third Quarter 2003 2002 ____________________________ ___________________________ _____________________________ Average Average Average Average Change in Variance Variance (dollars in thousands) Balance Interest Rate Balance Interest Rate Interest Balance Rate Income/ Change Change Assets Expense <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial loans......................$ 206,440 $ 3,727 7.22% $ 200,162 $ 3,946 7.88% (219) 662 (881) Residential mortgage loans............. 855,608 15,175 7.09% 1,171,384 22,007 7.51% (6,832) (5,658) (1,174) Home equity lines of credit ........... 158,882 1,557 3.89% 131,006 1,549 4.69% 8 1,171 (1,163) Installment loans...................... 13,746 445 12.85% 17,006 550 12.84% (105) (110) 5 --------- ------- --------- ------- ----- ----- ----- Loans, net of unearned income.......... 1,234,676 20,904 6.76% 1,519,558 28,052 7.38% (7,148) (3,935) (3,213) Securities available for sale: U.S. Treasuries and agencies.......... 524,408 5,984 4.56% 192,805 2,827 5.87% 3,157 7,242 (4,085) Mortgage-backed securities............ 57,142 848 5.94% 57,548 1,030 7.16% (182) (7) (175) States and political subdivisions..... 190,708 3,735 7.83% 225,598 4,460 7.91% (725) (683) (42) Other ................................ 39,041 509 5.21% 93,076 1,570 6.74% (1,061) (762) (299) --------- ------- --------- ------- ----- ----- ----- Total securities available for sale. 811,299 11,076 5.46% 569,027 9,887 6.95% 1,189 5,790 (4,601) Federal funds sold and other short-term investments........... 553,974 1,446 1.04% 547,678 2,411 1.75% (965) 187 (1,152) --------- ------- --------- ------- ----- ----- ----- Total Interest earning assets........ 2,599,949 33,426 5.14% 2,636,263 40,350 6.14% (6,924) 2,042 (8,966) Allowance for loan losses.............. (50,490) ------- (56,570) ------- ----- ----- ----- Cash and noninterest earning assets.... 154,335 168,713 --------- --------- Total assets........................$ 2,703,794 $ 2,748,406 ========= ========= Liabilities and shareholders' equity Deposits: Interest bearing checking..........$ 321,309 391 0.48% $ 308,167 773 0.99% (382) 213 (595) Money market accounts............... 149,830 423 1.12% 133,763 675 2.00% (252) 452 (704) Savings............................. 775,782 1,922 0.98% 723,321 3,230 1.77% (1,308) 1,415 (2,723) Time deposits....................... 924,024 6,435 2.76% 895,306 9,115 4.04% (2,680) 1,859 (4,539) --------- ------- --------- ------- ----- ----- ----- Total interest bearing deposits....... 2,170,945 9,171 1.68% 2,060,557 13,793 2.66% (4,622) 3,939 (8,561) Short-term borrowings.................. 75,606 133 0.70% 217,725 732 1.33% (599) (346) (253) Long-term debt......................... 303 3 5.86% 487 8 5.86% (5) (5) --- --------- ------- --------- ------- ----- ----- ----- Total interest bearing liabilities... 2,246,854 9,307 1.64% 2,278,769 14,533 2.53% (5,226) 3,588 (8,814) Demand deposits........................ 197,572 ------- 196,291 ------- ----- ----- ----- Other liabilities...................... 42,009 52,659 Shareholders' equity................... 217,359 220,687 --------- --------- Total liab. & shareholders' equity..$ 2,703,794 $ 2,748,406 ========= ========= Net interest income.................... 24,119 25,817 (1,698) (1,546) (152) ------- ------- ----- ----- ----- Net interest spread.................... 3.50% 3.61% Net interest margin (net interest income to total interest earning assets)............................. 3.72% 3.93% Tax equivalent adjustment 1,385 1,843 ------- ------- Net interest income per book........ $ 22,734 $ 23,974 ======= ======= </TABLE> 24
<TABLE> <CAPTION> TrustCo Bank Corp NY Management's Discussion and Analysis STATISTICAL DISCLOSURE I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following table summarizes the component distribution of average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing libilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Non- accrual loans are included in loans for this analysis. The average balances of sec- urities available for sale is calculated using amortized costs for these securities. Included in the balance of shareholders' equity is unrealized appreciation net of tax, in the available for sale portfolio of $23.5 million and $25.8 million for the nine months ended September 30, 2003 and 2002,respectively. The subtotals contained in the following table are the arithmetic totals of the items in that category. Nine Months Nine Months 2003 2002 ___________________________ ________________________ ___________________________ Average Average Average Average Change in Variance Variance (dollars in thousands) Balance Interest Rate Balance Interest Rate Interest Balance Rate Income/ Change Change Assets Expense <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial loans................. $ 203,577 $11,205 7.33% $ 205,003 $12,208 7.93% (1,003) (84) (919) Residential mortgage loans....... 939,841 51,065 7.24% 1,177,606 66,662 7.55% (15,597) (13,008) (2,589) Home equity lines of credit....... 150,751 4,575 4.06% 127,081 4,516 4.75% 59 1,022 (963) Installment loans................. 14,261 1,398 13.12% 17,870 1,713 12.83% (315) (377) 62 --------- ------- --------- ------ ----- ----- ----- Loans, net of unearned income....... 1,308,430 68,243 6.96% 1,527,560 85,099 7.43% (16,856) (12,447) (4,409) Securities available for sale: U.S. Treasuries and agencies.......... 418,707 15,082 4.80% 178,727 8,780 6.55% 6,302 10,468 (4,166) Mortgage-backed securities............ 61,334 2,853 6.20% 66,105 3,573 7.21% (720) (246) (474) States and political subdivisions..... 211,881 12,642 7.96% 222,121 13,203 7.93% (561) (642) 81 Other ................................ 72,950 3,842 7.02% 92,669 4,773 6.87% (931) (1,102) 171 --------- ------- -------- ------ ----- ----- ----- Total securities available for sale. 764,872 34,419 6.00% 559,622 30,329 7.23% 4,090 8,478 (4,388) Federal funds sold and other short-term investments........... 523,385 4,586 1.17% 498,568 6,569 1.76% (1,983) 505 (2,488) --------- ------- --------- ------- ----- ----- ----- Total Interest earning assets........2,596,687 107,248 5.50% 2,585,750 121,997 6.28% (14,749) (3,464) (11,285) Allowance for loan losses.............. (51,828) ------- (57,231) ------- ----- ----- ----- Cash and noninterest earning assets.... 158,721 172,007 --------- --------- Total assets........................$2,703,580 $2,700,526 ========= ========= Liabilities and shareholders' equity Deposits: Interest bearing checking..........$ 318,090 1,281 0.54% $ 302,312 2,354 1.04% (1,073) 191 (1,264) Money market accounts............... 147,548 1,484 1.34% 114,629 1,771 2.07% (287) 616 (903) Savings............................... 754,185 6,865 1.22% 698,173 9,924 1.90% (3,059) 1,182 (4,241) Time deposits......................... 915,735 20,976 3.06% 889,722 28,290 4.25% (7,314) 1,310 (8,624) --------- ------- --------- ------- ----- ----- ----- Total interest bearing deposits......2,135,558 30,606 1.92% 2,004,836 42,339 2.82% (11,733) 3,299 (15,032) Short-term borrowings.................. 115,844 739 0.85% 233,704 2,429 1.39% (1,690) (957) (733) Lond-term debt......................... 349 14 5.46% 533 24 5.92% (10) (8) (2) --------- ------- --------- ------- ----- ----- ----- Total interest bearing liabilities...2,251,751 31,359 1.86% 2,239,073 44,792 2.67% (13,433) 2,334 (15,767) Demand deposits........................ 186,406 ------- 192,298 ------- ----- ----- ----- Other liabilities...................... 38,141 54,427 Shareholders' equity................... 227,282 214,728 --------- --------- Total liab. & shareholders' equity..$2,703,580 $2,700,526 ========= ========= Net interest income.................... 75,889 77,205 (1,316) (5,798) 4,482 ------- ------- ----- ----- ----- Net interest spread.................... 3.64% 3.61% Net interest margin (net interest income to total interest earning assets)............................. 3.88% 3.97% Tax equivalent adjustment 5,061 5,475 ------- ------- Net interest income per book........ $70,828 $71,730 ======= ======= </TABLE> 25
Item 3. Quantitative and Qualitative Disclosures about Market Risk As detailed in the Annual Report to Shareholders as of December 31, 2002 the Company is subject to interest rate risk as it is principal market risk. As noted in detail throughout this Management's Discussion and Analysis for the nine months ended September 30, 2003 the Company continues to respond to changes in interest rates in a fashion to position the Company to meet both short term earning goals but to also allow the Company to respond to changes in interest rates in the future. The average balance of federal funds sold and other short-term investments has increased from $498.6 million in 2002 to $523.4 million in 2003. These increases in federal funds sold and short term investments position the Company with added funds available for investment in the securities and loan portfolios if rates rise. Investment opportunity began to be realized in the later part of the second quarter. Management began investing funds from federal funds sold and the other short-term investment portfolio into the securities available for sale and loan portfolios. This trend continued into the fourth quarter of 2003. Item 4. Controls and Procedures The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 ("Exchange Act") designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon this evaluation of those disclosure controls and procedures, the Chief Executive and Chief Financial Officer of the Company concluded, as of the end of the period covered by this report, that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected. 26
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. 27
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Reg S-K (Item 601) Exhibit No. Description Page No. 31 Certification Pursuant to Section 302 of The 31 Sarbanes-Oxley Act of 2002 32 Certification Pursuant to 18 U.S.C. Section 1350, 33 As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K Filing of Form 8-K on August 19, 2003, regarding a press release dated August 19, 2003, declaring a cash dividend of $0.15 per share payable on October 1, 2003, to shareholders of record September 5, 2003, is incorporated herein by reference. Filing of Form 8-K on October 21, 2003, regarding two press releases dated October 21, 2003, detailing third quarter financial results for 2003, is incorporated herein by reference. 28
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TrustCo Bank Corp NY Date: November 12, 2003 By: /S/ Robert T. Cushing -------------------------------------- Robert T. Cushing Chief Executive Office and Chief Financial Officer 29
Exhibits Index Reg S-K Exhibit No. Description Page No. 31 Certification Pursuant to Section 302 of The 31 Sarbanes-Oxley Act of 2002 32 Certification Pursuant to 18 U.S.C. Section 1350, 33 As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 30
Exhibit 31 Certification Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002 I, Robert T. Cushing, the principal executive officer and principal financial officer of TrustCo Bank Corp NY, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TrustCo Bank Corp NY; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 31
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 12, 2003 /S/ Robert T. Cushing Robert T. Cushing Chief Executive Officer and Chief Financial Officer 32
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, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of the undersigned's knowledge and belief: 1. The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /S/ Robert T. Cushing ------------------------------- Robert T. Cushing Chief Executive Officer and Chief Financial Officer November 12, 2003 33