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 March 31, 2002 TRUSTCO BANK CORP NY (Exact name of registrant as specified in its charter) NEW YORK 14-1630287 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 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 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 May 7, 2002 --------------------------- ---------------------- $1 Par Value 72,256,104 1
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 Ended March 31, 2002 and 2001 1 Consolidated Statements of Financial Condition 2 as of March 31, 2002 and December 31, 2001 Consolidated Statements of Cash Flows for the 3 - 4 Three Months Ended March 31, 2002 and 2001 Notes to Consolidated Interim Financial Statements 5 - 7 Independent Accountants' Review Report 8 Item 2. Management's Discussion and Analysis 10 - 17 Item 3. Quantitative and Qualitative Disclosures About 18 Market Risk 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 2
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - None (b) Reports on Form 8-K On April 16, 2002, TrustCo filed a Current Report on Form 8-K, regarding two press releases dated April 16, 2002, detailing first quarter financial results. 3
<TABLE> <CAPTION> TRUSTCO BANK CORP NY Consolidated Statements of Income (Unaudited) (dollars in thousands, except per share data) 3 Months Ended March 31, 2002 2001 Interest and dividend income: <S> <C> <C> Interest and fees on loans $ 28,720 30,042 Interest on U. S. Treasuries and agencies 2,949 3,194 Interest on states and political subdivisions 2,928 2,368 Interest on mortgage-backed securities 1,373 3,594 Interest and dividends on other securities 1,216 858 Interest on federal funds sold and other short-term investments 1,877 3,773 -------------------------------- Total interest income 39,063 43,829 Interest expense: Interest on deposits: Interest-bearing checking 770 717 Savings 3,253 3,940 Money market deposit accounts 445 399 Time deposits 9,819 12,488 Interest on short-term borrowings 856 2,372 Interest on long-term debt 9 13 -------------------------------- Total interest expense 15,152 19,929 -------------------------------- Net interest income 23,911 23,900 Provision for loan losses 520 1,495 -------------------------------- Net interest income after provision for loan losses 23,391 22,405 -------------------------------- Noninterest income: Trust department income 1,832 2,063 Fees for other services to customers 2,442 2,308 Net gain on securities transactions 1,868 1,142 Other 611 813 -------------------------------- Total noninterest income 6,753 6,326 Noninterest expenses: Salaries and employee benefits 5,814 6,623 Net occupancy expense 1,362 1,329 Equipment expense 718 1,348 FDIC insurance expense 90 94 Professional services 667 591 Other real estate expenses / (income) 71 (160) Other 3,671 2,436 -------------------------------- Total noninterest expenses 12,393 12,261 -------------------------------- Income before taxes 17,751 16,470 Applicable income taxes 5,383 5,172 -------------------------------- Net income $ 12,368 11,298 ================================ Net income per Common Share: - Basic $ 0.172 0.159 ================================ - Diluted $ 0.166 0.154 ================================ Per share data is adjusted for the effect of the 15% stock split declared August 2001. See accompanying notes to consolidated interim financial statements. </TABLE> 4
<TABLE> <CAPTION> TRUSTCO BANK CORP NY Consolidated Statements of Financial Condition (dollars in thousands, except share data) 3/31/02 12/31/01 ------- -------- ASSETS: (Unaudited) <S> <C> <C> Cash and due from banks $ 44,679 60,121 Federal funds sold and other short term investments 475,008 338,452 ---------------- ---------------- Total cash and cash equivalents 519,687 398,573 Securities available for sale: U. S. Treasuries and agencies 173,230 160,372 States and political subdivisions 225,010 216,566 Mortgage-backed securities 72,746 96,621 Other 121,609 113,541 ---------------- ---------------- Total securities available for sale 592,595 587,100 ---------------- ---------------- Loans: Commercial 206,506 212,423 Residential mortgage loans 1,177,634 1,201,723 Home equity line of credit 124,690 122,332 Installment loans 18,719 20,979 ---------------- ---------------- Total loans 1,527,549 1,557,457 ---------------- ---------------- Less: Allowance for loan losses 56,639 57,203 Unearned income 718 771 ---------------- ---------------- Net loans 1,470,192 1,499,483 Bank premises and equipment 18,564 18,312 Real estate owned 303 603 Other assets 81,654 74,550 ---------------- ---------------- Total assets $ 2,682,995 2,578,621 ================ ================ LIABILITIES: Deposits: Demand $ 195,784 195,390 Interest-bearing checking 297,659 295,514 Savings accounts 691,642 649,081 Money market deposit accounts 97,574 75,620 Certificates of deposit (in denominations of $100,000 or more) 124,962 128,887 Time deposits 761,762 748,414 ---------------- ---------------- Total deposits 2,169,383 2,092,906 Short-term borrowings 243,641 218,219 Long-term debt 560 624 Accrued expenses and other liabilities 60,563 61,045 ---------------- ---------------- Total liabilities 2,474,147 2,372,794 ---------------- ---------------- SHAREHOLDERS' EQUITY: Capital stock par value $1; 100,000,000 shares authorized, and 76,998,655 and 76,168,795 shares issued March 31, 2002 and December 31, 2001, respectively 76,999 76,169 Surplus 77,410 75,355 Undivided profits 65,505 63,940 Accumulated other comprehensive income: Net unrealized gain on securities available for sale 22,307 21,668 Treasury stock at cost - 5,025,774 and 4,862,718 shares at March 31, 2002 and December 31, 2001, respectively (33,373) (31,305) ---------------- ---------------- Total shareholders' equity 208,848 205,827 ---------------- ---------------- Total liabilities and shareholders' equity $ 2,682,995 2,578,621 ================ ================ See accompanying notes to consolidated interim financial statements. </TABLE> 5
<TABLE> <CAPTION> TRUSTCO BANK CORP NY Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS THREE MONTHS ENDED March 31, 2002 2001 ---------------- ---------------- Cash flows from operating activities: Net income $12,368 11,298 ---------------- ---------------- Adjustments to reconcile net income to net cash provided by operating activities: <S> <C> <C> Depreciation and amortization 505 515 Provision for loan losses 520 1,495 Loss on sale of securities available for sale 452 118 Gain on sale of securities available for sale (2,320) (1,260) Provision for deferred tax expense/(benefit) 2,102 (1,297) Decrease in taxes receivable 2,493 5,854 Decrease in interest receivable 623 312 Decrease in interest payable (65) (192) Increase in other assets (12,657) (5,897) Decrease in accrued expenses (532) (2,687) ---------------- ---------------- Total adjustments (8,879) (3,039) ---------------- ---------------- Net cash provided by operating activities 3,489 8,259 ---------------- ---------------- Cash flows from investing activities: Proceeds from sales and calls of securities available for sale 59,025 67,257 Purchase of securities available for sale (71,877) (67,065) Proceeds from maturities and calls of securities available for sale 10,099 964 Net (increase)/decrease in loans 28,771 (20,080) Proceeds from dispositions of real estate owned 334 467 Capital expenditures (691) (1,349) ---------------- ---------------- Net cash provided by/(used in) investing activities 25,661 (19,806) ---------------- ---------------- Cash flows from financing activities: Net increase in deposits 76,477 8,638 Increase in short-term borrowings 25,422 16,811 Repayment of long-term debt (64) (70) Proceeds from exercise of stock options 2,885 2,036 Proceeds from sale of treasury stock 1,923 1,677 Purchase of treasury stock (3,991) (2,936) Dividends paid (10,688) (9,207) ---------------- ---------------- Net cash provided by financing activities 91,964 16,949 ---------------- ---------------- Net increase in cash and cash equivalents 121,114 5,402 Cash and cash equivalents at beginning of period 398,573 345,446 ---------------- ---------------- Cash and cash equivalents at end of period $519,687 350,848 ================ ================ See accompanying notes to consolidated interim financial statements. (Continued) </TABLE> 6
<TABLE> <CAPTION> TRUSTCO BANK CORP NY Consolidated Statements of Cash Flows Continued (Unaudited) (dollars in thousands) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: THREE MONTHS ENDED March 31, 2002 2001 ---------------- ---------------- <S> <C> <C> Interest paid $15,217 20,121 Income taxes paid 788 899 Transfer of loans to real estate owned --- 723 Increase/(decrease) in dividends payable 115 26 Change in unrealized gain on securities available for sale-gross of deferred taxes (874) (2,260) Change in deferred tax effect on unrealized gain on securities available for sale 235 933 See accompanying notes to consolidated interim financial statements. </TABLE> 7
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 March 31, 2002 and the results of operations and cash flows for the three months ended March 31, 2002 and 2001. 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 2001 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 period ended March 31, 2002 and 2001 follows: <TABLE> <CAPTION> Weighted Average Shares (In thousands, Net Outstanding Per Share except per share data) Income Amounts ----------------- -------------------------- ------------------- For the quarter ended March 31, 2002: Basic EPS: Net income available to <S> <C> <C> <C> Common shareholders $12,368 71,779 $0.172 Effect of Dilutive Securities: Stock options ------ 2,509 ------- ----------------- -------------------------- ------------------- Diluted EPS $12,368 74,288 $0.166 ================= ========================== =================== For quarter ended March 31, 2001: Basic EPS: Net income available to Common shareholders $11,298 70,831 $0.159 Effect of Dilutive Securities: Stock options ------- 2,594 ------- ----------------- -------------------------- ------------------- Diluted EPS $11,298 73,425 $0.154 ================= ========================== =================== Share and per share data have been adjusted for the 15% stock split declared in August 2001. </TABLE> 8
3. Comprehensive Income Comprehensive income includes the reported net income of a company adjusted for items that are accounted for as direct entries to equity, such as the mark to market adjustment on securities available for sale, foreign currency items, minimum pension liability adjustments, and certain derivative gains and losses. At the Company, comprehensive income represents net income plus other comprehensive income, which consists of the net change in unrealized gains or losses on securities available for sale for the period. Accumulated other comprehensive income represents the net unrealized gains or losses on securities available for sale as of the balance sheet dates. Comprehensive income for the three month period ended March 31, 2002 and 2001 was $13,007,000 and $12,625,000 respectively. The following summarizes the components of other comprehensive income: Unrealized gains on securities: (dollars in thousands) Unrealized net holding gains arising during the three months ended March 31, 2002, net of tax (pre-tax gain of $2,742). $1,759 Less reclassification adjustment for net gain realized in net income during the three months ended March 31, 2002, net of tax (pre-tax gain of $1,868). 1,120 -------------- Other comprehensive income - three months ended March 31, 2002 $ 639 ============== Unrealized net holding gains arising during the three months ended March 31, 2001, net of tax (pre-tax gain of $3,402). $2,002 Less reclassification adjustment for net gain realized in net income during the three months ended March 31, 2001 net of tax (pre-tax gain of $1,142). 675 -------------- Other comprehensive income - three months ended March 31, 2001 $1,327 ============== 9
4. Impact of Changes in Accounting Standards In July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations"(Statement 141) and Statement No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company was required to adopt the provisions of Statement 141 in July 2001 and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30,2001, will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. As of December 31, 2001, the Company had $553 thousand of unamortized goodwill, which is subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $62 thousand for the twelve months ended December 31, 2001. No impairment loss was required at adoption. The adoption of these Statements did not have a material effect on the Company's consolidated financial statements. 10
INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Shareholders TrustCo Bank Corp NY: We have reviewed the consolidated statement of financial condition of TrustCo Bank Corp NY and subsidiaries (the Company) as of March 31, 2002, and the related consolidated statements of income and cash flows for the three month periods ended March 31, 2002 and 2001. 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 to financial data 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 financial condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 2001 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 18, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of financial condition as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived. /s/KPMG LLP - ------------------------------ KPMG LLP Albany, New York April 11, 2002 11
TrustCo Bank Corp NY Management's Discussion and Analysis March 31, 2002 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 period ended March 31, 2002, with comparisons to 2001 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 2001 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. Per share results have been adjusted for the 15% stock split declared in August 2001. 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 ended March 31, 2002 and 2001. Overview TrustCo recorded net income of $12.4 million, or $0.166 of diluted earnings per share for the three months ended March 31, 2002, as compared to net income of $11.3 million or $0.154 of diluted earnings per share in the same period in 2001. The primary factors accounting for the year to date increases were: . Increase in interest earning assets of $179.2 million to $2.51 billion in 2002 as compared to $2.33 billion in 2001, . Reduction in the provision for loan losses from $1.5 million in 2001 to $520 thousand in 2002, and 12
. Increases in noninterest income from $6.3 million to $6.8 million in 2002. These positive factors affecting net income were partially offset by: . Decrease in net interest margin from 4.28% in 2001 to 4.07% in 2002, and . Increase in noninterest expense from $12.3 million in 2001 to $12.4 million in 2002. 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 first quarter of 2002 compared to the comparable period in 2001 is greatly affected by the change in interest rates in the marketplace in which TrustCo competes. Included in the 2001 Annual Report to Shareholders is a description of the effect interest rates had on the results for the year 2001 compared to 2000. Most of the same market factors discussed in the 2001 Annual Report also had a significant impact on the first quarter 2002 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 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 6% at the beginning of 2001 and had decreased to 5% by the end of the first quarter of 2001. In 2002 the federal funds rate was consistent from the beginning of the year and throughout the quarter at 1.75%. The federal funds rate affects the level of other interest rates in the economy, most specifically the prime rate. The prime rate was 9% at the beginning of 2001 and had decreased to 8% by the end of the first quarter of 2001. By the end of 2001, the prime rate had declined to 4.75% and has remained there for the first four months of 2002. 13
Earning Assets Total interest earning assets increased to $2.51 billion in 2002 from $2.33 billion in 2001 with an average yield of 7.74% in 2001 and 6.51% in 2002. Income on earning assets decreased by $4.2 million during this same time-period from $45.1 million in 2001 to $40.9 million in 2002. The decrease in interest income on earning assets was attributable to the decrease in yield on these assets offset by the increase in average balances. Loans The average balance of loans was $1.54 billion in 2002 and $1.48 billion in 2001. The yield on loans decreased from 8.12% in 2001 to 7.49% in 2002. The combination of the higher average balances and the lower rates resulted in a decrease in the interest income on loans by $1.3 million. During the first quarter of 2002 the balance of the loan portfolio increased primarily as a result of the increase in the residential mortgages. The average balance of residential mortgage loans was $1.13 billion in 2001 compared to $1.19 billion in 2002, an increase of 5.1%. The average yield on residential mortgage loans decreased by 26 basis points in 2002 compared to 2001. 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. Though interest rates on the residential mortgage loan products decreased during this time period they did not decrease as much as the reduction in the target federal funds rate or the prime rate. Also during this time TrustCo aggressively marketed the unique features of its loan products thereby differentiating itself from other lenders. These differences include extremely low closing costs, quick turnaround on credit decisions, no required escrow payments or private mortgage insurance and the fact that the loans are held in portfolio. The combination of competitive interest rates and the product differentiation are the principal reasons for the increase in the balance of the residential loans outstanding. The impact of the decrease in the benchmark interest rate indexes (prime rate, federal funds, etc.) is apparent in the decrease in the yield earned in the commercial and home equity loan portfolios. The rates earned in 2002 were 83 bp, and 383 bp, respectively, less than in the first three months of 2001. Securities Available for Sale Securities available for sale had an average balance of $543.2 million during the quarter ended March 31, 2002, as compared to $582.3 million in 2001. These balances earned an average yield of 7.55% in 2002 and 7.72% in 2001. This resulted in interest income on the securities available for sale of $10.3 million in 2002 and $11.2 million in 2001. The decrease in average balances during the quarter and the decrease in the average rates caused a $983 thousand decrease in interest income to $10.3 million in 2002. 14
Federal Funds Sold The 2002 first quarter average balance of federal funds sold was $423.7 million, $155.5 million more than the $268.2 million in 2001. The portfolio yield decreased to 1.75% in 2002, compared to 5.71% in 2001. Changes in the yield resulted from changes in the target rate set by the Federal Reserve Board for federal funds sold. Interest income on this portfolio decreased by approximately $1.9 million from $3.8 million in 2001 to $1.8 million in 2002. The increase in federal funds balances between the first quarter of 2001 and 2002 reflects a decision to hold funds in overnight deposits versus making longer-term investments in loans or securities available for sale. The decision to retain additional liquidity in the form of federal fund balances is a result of the relatively low interest rates in the market for such alternative investments while keeping the balances available for investment once rates change. The effect of this decision by TrustCo is to have significantly more funds invested in the federal funds portfolio at significantly lower interest rates during the first quarter of 2002 with the expectation that opportunities for reinvestment at higher yields will be available later in 2002. 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. Total interest-bearing deposits (which includes interest bearing checking, money market accounts, savings, and certificates of deposit) increased to $1.94 billion during 2002, and the average rate paid decreased to 2.99% for 2002 from 3.91% for 2001. Total interest expense on these deposits decreased $3.3 million to $14.3 million. Short-term borrowings, primarily the Trustco Short-Term Investment Account, increased by $39.4 million between the first quarter of 2001 and 2002. Total interest expense on this account decreased by $1.5 million in 2002, and the average rate paid decreased 337 basis points to 1.45%. Demand deposit balances increased by 7.6% during the period from the first quarter of 2001 to the first quarter of 2002. The average balance was $189.6 million in 2002, and $176.1 million in 2001. Net Interest Income Taxable equivalent net interest income increased to $25.7 million in 2002. The net interest spread decreased 5 basis points between 2001 and 2002 and the net interest margin decreased by 21 basis points. Nonperforming Assets Nonperforming assets include nonperforming loans which are those loans in a nonaccrual status, loans that have been restructured, and loans past due 90 days 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. 15
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 describes the nonperforming assets of TrustCo as of March 31, 2002. Nonperforming loans: Total nonperforming loans were $8.1 million at March 31, 2002, a decrease from the $11.2 million of nonperforming loans at March 31, 2001. Nonaccrual loans were $2.4 million at March 31, 2002 a decrease from the $5.5 million at March 31, 2001. Restructured loans were $5.5 million at March 31, 2002 compared to $5.1 million at March 31, 2001. Virtually all of the nonperforming loans at March 31, 2002 and 2001 are residential real estate or retail consumer loans. Historically the vast majority of nonperforming loans were concentrated in the commercial and commercial real estate portfolios. There has been a dramatic shifting of nonperforming loans to the residential real estate and retail consumer loan portfolio for several factors, including: . The overall emphasis within TrustCo for residential real estate originations, . The relatively weak economic environment in the upstate New York territory, and . The 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 value that supports the real estate loans. Consumer 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 so as to minimize losses or exposures. Total impaired loans at March 31 2002 of $5.3 million, consisted of restructured retail loans. During the first quarter of 2002, there were $837 thousand of commercial loan charge offs, $148 thousand of consumer loan charge offs and $440 thousand of residential mortgage loan charge offs as compared with $248 thousand of commercial loan charge offs, $140 thousand of consumer loan charge offs and $1.2 million of residential mortgage loan charge offs in the first quarter of 2001. Recoveries during the quarter were $341 thousand in 2002 and $559 thousand in 2001. Real estate owned: Total real estate owned of $303 thousand at March 31, 2002 decreased by $1.9 million since March 31, 2001. 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. 16
At March 31, 2002, the allowance for loan losses was $56.6 million, which represents a slight decrease from the $57.2 million in the allowance at December 31, 2001. The allowance represents 3.71% of the loan portfolio as of March 31, 2002 compared to 3.80% at March 31, 2001. The provision charged to expense was $520 thousand compared to $1.5 million for 2001. The allowance has reached an overall level that Management feels is appropriate given current market conditions. 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 and the movement of charge offs to the residential real estate loan portfolio, . The growth 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 that TrustCo operates in, . Significant growth in the level of losses associated with bankruptcies 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 during 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. In light of these trends, management believes the allowance for loan losses is reasonable in relation to the risk that is present in its current loan portfolio. 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. 17
Noninterest Income Total noninterest income for the first quarter was $6.8 million, compared to $6.3 million in 2001. Included in both the 2002 and 2001 first quarter results are net securities gains of $1.9 million in 2002, and $1.1 million in 2001. Noninterest Expenses Total noninterest expense increased slightly from $12.3 million for the three months ended March 31, 2001 to $12.4 million for the three months ended March 31, 2002. Within the category of noninterest expense, salaries and employee benefits decreased by approximately $809 thousand due primarily to the reduction in salary and benefits by the chief executive officer. The Chief Executive Officer's salary was reduced by $450,000 which in turn affected the amount reserved for the incentive bonus plans. In addition the supplemental executive retirement plan for the Chief Executive Officer was also capped at the level of the accrual as of December 31, 2001. Equipment expense decreased by approximately $630 thousand primarily as a result of reduced computer expense due to contracts not being renewed in 2002 as a result of the anticipated conversion to Fiserv. Other expenses increased by $1.2 million from $2.4 million in 2001 to $3.7 million in 2002. Of the $1.2 million increased expense, approximately $460 thousand relates to the additional cost of the Fiserv conversion, and $400 thousand was the result of various equipment and other asset write offs. Income Taxes In the first quarter of 2002 and 2001, TrustCo recognized income tax expense of $5.4 million and $5.2 million, respectively. The effective tax rate for the first quarter of 2002 was 30.3% compared to 31.4% for the same period of 2001. 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 capital retention. Total shareholders' equity at March 31, 2002 was $208.8 million, an increase from the $205.8 million at year-end 2001. TrustCo declared dividends of $0.150 in 2002, compared with $0.130 in 2001. These results represent a dividend payout ratio of 87.36% in 2002 and 81.72% in 2001. 18
The Company achieved the following ratios as of March 31, 2002 and 2001: March 31, Minimum Regulatory 2002 2001 Guidelines -------------------------------------------- Tier 1 risk adjusted capital 13.36% 13.75 4.00 Total risk adjusted capital 14.65 15.04 8.00 In addition, at March 31, 2002 and 2001, the consolidated equity to total assets ratio (excluding the mark to market effect of securities available for sale) was 7.01% and 7.24% 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 the notes to the Consolidated Financial Statements is a description in Note 1 of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements. 19
<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 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 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 $23.6 million in 2002 and $21.4 million in 2001. The subtotals contained In the following table are the arithmetic totals of the items contained in that category. First 2002 First 2001 Quarter Quarter --------- --- ------- ----- --- -------- --- ------ ------ ------- --------- ------- Average Interest Average Average Interest Average Change in Variance Variance Rate Balance Rate Interest Balance Rate (dollars in thousands) Income/ Change Change Expense Assets <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial loans $ 208,976 $ 4,156 7.98% $ 202,992 $ 4,459 8.81% (303) 732 (1,035) Residential mortgage loans 1,185,714 22,482 7.58% 1,128,368 22,113 7.84% 369 3,731 (3,362) Home equity lines of credit 123,477 1,470 4.83% 129,339 2,761 8.66% (1,291) (120) (1,171) Installment loans 18,828 635 13.67% 23,777 749 12.77% (114) (406) 292 ----------- ------------------- ------------- ----------------------------------------------- Loans, net of unearned income 1,536,995 28,743 7.49% 1,484,476 30,082 8.12% (1,339) 3,937 (5,276) Securities available for sale: U.S. Treasuries and agencies 161,164 2,957 7.34% 166,373 3,204 7.70% (247) (98) (149) Mortgage-backed securities 76,461 1,373 7.18% 193,456 3,594 7.43% (2,221) (2,104) (117) States and political subdivisions 218,206 4,337 7.95% 174,297 3,485 8.00% 852 994 (142) Other 87,383 1,584 7.26% 48,132 951 7.93% 633 1,159 (526) ----------- ------------------ ------------- ----------------------------------------------- Total securities available 543,214 10,251 7.55% 582,258 11,234 7.72% (983) (49) (934) for sale Federal funds sold 423,670 1,826 1.75% 268,162 3,773 5.71% (1,947) 8,780 (10,727) Other short-term investments 10,209 51 2.02% --- --- --- 51 51 --- ----------- ------------------ ------------- ----------------------------------------------- Total Interest earning assets 2,514,088 40,871 6.51% 2,334,896 45,089 7.74% (4,218) 12,719 (16,937) ------------------- ------------------------------------------------- Allowance for loan losses (57,748) (57,024) Cash and non-interest earning assets 174,804 163,655 ----------- ---------- Total assets $ 2,631,144 $ 2,441,527 =========== =========== Liabilities and shareholders'equity Deposits: Interest bearing checking 294,142 770 1.06% $ 273,690 717 1.06% 53 53 --- Money market accounts 85,835 445 2.10% 59,310 399 2.73% 46 524 (478) Savings 669,842 3,253 1.97% 591,545 3,940 2.70% (687) 2,613 (3,300) Time deposits 888,655 9,819 4.48% 893,426 12,488 5.67% (2,669) (66) (2,603) ----------- --------------------------------- ------------------------------------------------ Total interest bearing deposits 1,938,474 14,287 2.99% 1,817,971 17,544 3.91% (3,257) 3,124 (6,381) Short-term borrowings 239,065 856 1.45% 199,622 2,372 4.82% (1,516) 2,629 (4,145) Long-term debt 582 9 5.95% 873 13 5.91% (4) (4) --- ----------- ---------------------------------- ------------------------------------------------ Total interest bearing liabilities 2,178,121 15,152 2.82% 2,018,466 19,929 4.00% (4,777) 5,749 (10,526) ------- ------ ------------------------------ Demand deposits 189,582 176,129 Other liabilities 53,966 48,661 Shareholders' equity 209,475 198,271 ----------- -------- Total liab. & shareholders' equity $ 2,631,144 $ 2,441,527 =========== ============ Net interest income 25,719 25,160 559 6,970 (6,411) -------- ------- ------------------------------ Net interest spread 3.69% 3.74% Net interest margin (net interest income to total interest earning assets) 4.07% 4.28% Tax equivalent adjustment 1,808 1,260 ------ ------ Net interest income per book $ 23,911 $ 23,900 ========= ========= </TABLE> 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk As detailed in the Annual Report to Shareholders as of December 31, 2001 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 three months ended March 31, 2002 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. Consequently the average balance of federal funds sold and other short-term investments has increased from $268.2 million in 2001 to $433.9 million in 2002. 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. 21
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: May 10, 2002 By: /s/Robert A. McCormick ----------------------------------- Robert A. McCormick President and Chief Executive Officer Date: May 10, 2002 By: /s/ Robert T. Cushing ----------------------------------- Robert T. Cushing Vice President and Chief Financial Officer 22
(a) Exhibits - None 23