The Agreement requires the Bank to take various actions, within prescribed time frames, with respect to certain areas of the Bank. These include, among others, (i) establishment of a committee of at least three Directors to monitor and coordinate the Bank’s response to the Agreement; (ii) adoption of compliance plans to respond to the Agreement with the assistance of an independent qualified consultant; (iii) evaluation and implementation of improvements in corporate governance with the assistance of an independent qualified consultant; (iv) evaluation and implementation of improvements in internal audit; (v) development of a strategic plan; (vi) development of a revised capital plan consistent with the strategic plan; (vii) development and implementation of improvements to the Bank’s loan review system; and (viii) such other necessary steps to address the issues and questions noted by the OCC in the Agreement.
| (9) New Accounting Pronouncements |
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” which implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In July 2015, FASB deferred the effective date of the ASU by one year which means ASU 2014-09 will be effective for the Company on January 1, 2018. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08 - Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10 - Identifying Performance Obligations and Licensing and ASU No. 2016-12 - Narrow-Scope Improvements and Practical Expedients. The ASU is not expected to significantly impact the Company’s consolidated financial statements.position or the results of operations.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” which amended existing guidance to improve accounting standards for financial instruments including clarification and simplification of accounting and disclosure requirements and the requirement for public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2017. The ASU is not expected to significantly impact the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” which amended existing guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2018. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date which will impact the financial position and capital ratios of the Company. As of December 31, 2016, the Company has approximately $69.7 million in minimum lease payments for existing operating leases of branch locations with varying expiration dates from 2017 and after. The Company is evaluatingdoes not expect the ASU to have a material impact on the Company’s results of ASU No. 2016-02 on its consolidated financial statements.operations.
In June 2016, the FASB released ASU No. 2016-13, “Financial Instruments – Credit Losses” which amended existing guidance to replace current generally accepted accounting principles used to measure a reporting entity’s credit losses. The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2019. The ASU represents a significant departure from current GAAP and the Company is evaluating the impact of the ASU on its consolidated financial statements, which includes developingstatements. The Company has established a roadmap for implementation of the new standard.and is currently evaluating vendor solutions that will assist in implementing required changes to loan loss estimation model.
In January 2017, the FASB issued ASU No.2017-04,No. 2017-04, “Intangibles-Goodwill and Other (Topic 350)” which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this ASU for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The ASU is not expected to significantly impact the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU No.2017No. 2017-07, “Compensation-Retirement Benefits (Topic 715)”. The amendments in this ASU require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The ASU is not expected to significantly impact the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU No.2017No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20)”. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is evaluating the impact of ASU No. 2017-08 on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation – Scope of Modification Accounting (Topic 718)”. The amendments in this ASU clarifies the application of the guidance in Topic 718, Compensation – Stock Compensation, by providing guidance about which changes in terms or conditions of a share-based payment award require and entity to apply modification accounting. An entity should account for the effects of a modification unless all the following are met: 1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; 2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; 3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The ASU is not expected to significantly impact the Company’s consolidated financial statements.
Crowe Horwath LLP | |
| Independent Member Crowe Horwath International |
The Board of Directors and Shareholders
TrustCo Bank Corp NY
Glenville, New York
We have reviewed the accompanying consolidated statements of financial condition of TrustCo Bank Corp NY as of March 31,June 30, 2017, and the related consolidated statements of income and comprehensive income, for the three-month and six-month periods ended June 30, 2017 and 2016 and the related changes in shareholders’ equity and cash flows for the three-monthsix-month periods ended March 31,June 30, 2017 and 2016. These interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, 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 reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
/s/ Crowe Horwath LLP
New York, New York
Forward-looking Statements
Statements included in this report and in future filings by TrustCo Bank Corp NY (“TrustCo” or the “Company”) 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. Forward-looking statements can be identified by the use of such words as may, will, should, could, would, estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. Examples of forward-looking statements include, among others, statements TrustCo makes regarding its expectations for complying with the new regulatory capital rules, costs associated with the Formal Agreement that the Company’s subsidiary, Trustco Bank (or the “Bank”) has entered into with the Office of the Comptroller of the Currency (“OCC”), the Company’s ability to grow its balance sheet and the profitability of such growth, the ability of its loan products to continue to attract customers if long-term rates rise and the ability to secure new sources of liquidity should the need arise. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.
In addition to factors described under Part II, Item 1A, Risk Factors, if any, and under the Risk Factor discussion in TrustCo’s Annual Report on Form 10-K for the year ended December 31, 2016, 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:
| · | TrustCo’s ability to continue to originate a significant volume of one- to- four family mortgage loans in its market areas and to otherwise maintain or increase its market share in the areas in which it operates; |
| · | TrustCo’s ability to continue to maintain noninterest expense and other overhead costs at reasonable levels relative to income; |
| · | TrustCo’s ability to comply with the Formal Agreement entered into with Trustco Bank’s regulator, the OCC, and potential regulatory actions if TrustCo or Trustco Bank fails to comply; |
| · | restrictions or conditions imposed by TrustCo’s and Trustco Bank’s regulators on their operations that may make it more difficult to achieve TrustCo’s and Trustco Bank’s goals; |
| · | the future earnings and capital levels of TrustCo and Trustco Bank and the continued receipt of approvals from TrustCo’s and Trustco Bank’s primary federal banking regulators under regulatory rules and the Formal Agreement to distribute capital from Trustco Bank to TrustCo, which could affect the ability of TrustCo to |
| · | the results of supervisory monitoring or examinations of Trustco Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our loss |
| · | TrustCo’s ability to make accurate assumptions and judgments regarding the credit risks associated with its lending and investing activities, including changes in the level and direction of loan delinquencies and chargeoffs, changes in property values, and changes in estimates of the adequacy of the allowance for loan |
| · | the effects of and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations; |
| · | adverse conditions in the securities markets that lead to impairment in the value of securities in TrustCo’s investment portfolio; |
| · | changes in law and policy accompanying the new presidential administration and uncertainty or speculation pending the enactment of such changes; |
| · | the perceived overall value of TrustCo’s products and services by users, including the features, pricing and quality compared to competitors’ products and services and the willingness of current and prospective customers to substitute competitors’ products and services for TrustCo’s products and services; |
| · | changes in consumer spending, borrowing and savings habits; |
| · | the effect of changes in financial services laws and regulations (including laws concerning taxation, banking and securities) and the impact of other governmental initiatives affecting the financial services industry, including new regulatory capital requirements that took effect |
| · | changes in management personnel; |
| · | real estate and collateral values; |
| · | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies Financial Accounting Standards Board (“FASB”) or the Public Company Accounting Oversight Board; |
| · | disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions; |
| · | technological changes and electronic, cyber and physical security breaches; |
| · | changes in local market areas and general business and economic trends, as well as changes in consumer spending and saving habits; |
| · | TrustCo’s success at managing the risks involved in the foregoing and managing its business; and |
| · | other risks and uncertainties included under “Risk Factors” in our Form 10-K for the year ended December 31, 2016. |
You should not rely upon forward-looking statements as predictions of future events. Although TrustCo believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. 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 are the tables "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 and six month periods ended March 31,June 30, 2017 and 2016.
Introduction
The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three and six month periodperiods ended March 31,June 30, 2017, with comparisons to the corresponding period in 2016, as applicable. Net interest margin is presented on a fully taxable equivalent basis in this discussion. The consolidated interim financial statements and related notes, as well as the 2016 Annual Report to Shareholders on Form 10-K, which was filed with the SEC on March 3, 2017, should also 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.
During the firstsecond quarter of 2017 financial markets were influenced by both underlying economic conditions and by political developments, in particular expectations arising from initiatives expected to be pursued by the Trump administration. Equity markets ended the firstsecond quarter up, with most of the gain coming early in the quarter. For the full firstsecond quarter, the S&P 500 Index was up 5.5%2.6% and the Dow Jones Industrial Average was up 4.6%3.3%. Credit markets continue to be driven by worldwide economic news and decreasing liquidity in some segments of the bond market. The shape of the yield curve continued to flatten during the quarter, with average yields declining for the firstsecond quarter as compared to the secondfirst quarter. The 10-year Treasury bond averaged 2.45%2.26% during Q1Q2 compared to 2.14%2.45% in Q4, an increaseQ1, a decrease of 3119 basis points. The 2-year Treasury bond average rate increased 236 basis points to 1.24%1.30%, resulting in a modest steepeningflattening of the curve. The spread between the 10-year and the 2-year Treasury bonds increasedcontracted from 1.13%1.20% on average in Q4Q1 to 1.20%0.96% in Q1.Q2. This spread had been declining over most of the last three years. Even with the modest improvementdepressed in Q1, the spread remains at only half of therecent years, and compares to 2.42% level averaged during its most recent peak in Q4 of 2013. Steeper yield curves are favorable for portfolio mortgage lenders like TrustCo. The table below illustrates the range of rate movements for both short term and longer term rates. The target Fed Funds range was increased by 25 basis points on March 15,June 14, 2017 to a range of 0.75%1.00% to 1.00%1.25%. This increase follows a similar 25 basis point increaseincreases announced onin December 14, 2016.of 2016 and March of 2017. Spreads of most asset classes, including agency securities, corporates, municipals and mortgage-backed securities, were flat to down by the end of the quarter as compared to the levels seen a year earlier, but generally roughly flat with levels seen at the end of 2016.the first quarter of 2017. Changes in rates and spreads during the current quarter were due to a number of factors; however, uncertainty about the timing of any actions that the Federal Reserve Board (“FRB”) would take in regard to the extraordinary accommodations that have influenced markets in recent years and further uncertainty regarding the economy and related issues were key factors. Low risk free rates in major nations have also caused investors to shift into alternative fixed income instruments, contributing to the compression of spreads over the risk free rate.
3 Month Yield (%) | 2 Year Yield (%) | 5 Year Yield (%) | 10 Year Yield (%) | 10 - 2 Year Spread (%) | 3 Month Yield (%) | 2 Year Yield (%) | 5 Year Yield (%) | 10 Year Yield (%) | 10 - 2 Year Spread (%) | |||||||||||||||||||||||||||||||||||
| Q1/16 | Beg of Q1 | 0.16 | 1.06 | 1.76 | 2.27 | 1.21 | ||||||||||||||||||||||||||||||||||||||
| Peak | 0.36 | 1.06 | 1.76 | 2.27 | 1.23 | |||||||||||||||||||||||||||||||||||||||
| Trough | 0.16 | 0.64 | 1.11 | 1.63 | 0.95 | |||||||||||||||||||||||||||||||||||||||
| End of Q1 | 0.21 | 0.73 | 1.21 | 1.78 | 1.05 | |||||||||||||||||||||||||||||||||||||||
| Average in Q1 | 0.29 | 0.84 | 1.37 | 1.92 | 1.08 | |||||||||||||||||||||||||||||||||||||||
| Q2/16 | Beg of Q2 | 0.23 | 0.76 | 1.24 | 1.78 | 1.03 | Beg of Q2 | 0.23 | 0.76 | 1.24 | 1.78 | 1.03 | ||||||||||||||||||||||||||||||||
| Peak | 0.35 | 0.92 | 1.41 | 1.94 | 1.08 | Peak | 0.35 | 0.92 | 1.41 | 1.94 | 1.08 | |||||||||||||||||||||||||||||||||
| Trough | 0.19 | 0.58 | 1.00 | 1.46 | 0.85 | Trough | 0.19 | 0.58 | 1.00 | 1.46 | 0.85 | |||||||||||||||||||||||||||||||||
| End of Q2 | 0.26 | 0.58 | 1.01 | 1.49 | 0.91 | End of Q2 | 0.26 | 0.58 | 1.01 | 1.49 | 0.91 | |||||||||||||||||||||||||||||||||
| Average in Q2 | 0.26 | 0.77 | 1.24 | 1.75 | 0.98 | Average in Q2 | 0.26 | 0.77 | 1.24 | 1.75 | 0.98 | |||||||||||||||||||||||||||||||||
| Q3/16 | Beg of Q3 | 0.28 | 0.59 | 1.00 | 1.46 | 0.87 | Beg of Q3 | 0.28 | 0.59 | 1.00 | 1.46 | 0.87 | ||||||||||||||||||||||||||||||||
| Peak | 0.37 | 0.84 | 1.26 | 1.73 | 0.97 | Peak | 0.37 | 0.84 | 1.26 | 1.73 | 0.97 | |||||||||||||||||||||||||||||||||
| Trough | 0.18 | 0.56 | 0.94 | 1.37 | 0.76 | Trough | 0.18 | 0.56 | 0.94 | 1.37 | 0.76 | |||||||||||||||||||||||||||||||||
| End of Q3 | 0.29 | 0.77 | 1.14 | 1.60 | 0.83 | End of Q3 | 0.29 | 0.77 | 1.14 | 1.60 | 0.83 | |||||||||||||||||||||||||||||||||
| Average in Q3 | 0.30 | 0.73 | 1.13 | 1.56 | 0.84 | Average in Q3 | 0.30 | 0.73 | 1.13 | 1.56 | 0.84 | |||||||||||||||||||||||||||||||||
| Q4/16 | Beg of Q4 | 0.32 | 0.80 | 0.91 | 1.63 | 0.83 | Beg of Q4 | 0.32 | 0.80 | 0.91 | 1.63 | 0.83 | ||||||||||||||||||||||||||||||||
| Peak | 0.55 | 1.29 | 1.61 | 2.60 | 1.34 | Peak | 0.55 | 1.29 | 1.61 | 2.60 | 1.34 | |||||||||||||||||||||||||||||||||
| Trough | 0.30 | 0.80 | 0.91 | 1.63 | 0.83 | Trough | 0.30 | 0.80 | 0.91 | 1.63 | 0.83 | |||||||||||||||||||||||||||||||||
| End of Q4 | 0.51 | 1.20 | 1.47 | 2.45 | 1.25 | End of Q4 | 0.51 | 1.20 | 1.47 | 2.45 | 1.25 | |||||||||||||||||||||||||||||||||
| Average in Q4 | 0.43 | 1.01 | 1.24 | 2.14 | 1.13 | Average in Q4 | 0.43 | 1.01 | 1.24 | 2.14 | 1.13 | |||||||||||||||||||||||||||||||||
| Q1/17 | Beg of Q1 | 0.16 | 1.06 | 1.76 | 2.27 | 1.21 | Beg of Q1 | 0.16 | 1.06 | 1.76 | 2.27 | 1.21 | ||||||||||||||||||||||||||||||||
| Peak | 0.79 | 1.40 | 2.14 | 2.62 | 1.30 | Peak | 0.79 | 1.40 | 2.14 | 2.62 | 1.30 | |||||||||||||||||||||||||||||||||
| Trough | 0.50 | 1.12 | 1.80 | 2.31 | 1.11 | Trough | 0.50 | 1.12 | 1.80 | 2.31 | 1.11 | |||||||||||||||||||||||||||||||||
| End of Q1 | 0.76 | 1.27 | 1.93 | 2.40 | 1.13 | End of Q1 | 0.76 | 1.27 | 1.93 | 2.40 | 1.13 | |||||||||||||||||||||||||||||||||
| Average in Q1 | 0.60 | 1.24 | 1.95 | 2.45 | 1.20 | Average in Q1 | 0.60 | 1.24 | 1.95 | 2.45 | 1.20 | |||||||||||||||||||||||||||||||||
| Q2/17 | Beg of Q2 | 0.76 | 1.27 | 1.93 | 2.40 | 1.13 | ||||||||||||||||||||||||||||||||||||||
| Peak | 1.04 | 1.38 | 1.94 | 2.42 | 1.11 | |||||||||||||||||||||||||||||||||||||||
| Trough | 0.79 | 1.18 | 1.71 | 2.14 | 0.78 | |||||||||||||||||||||||||||||||||||||||
| End of Q2 | 1.03 | 1.38 | 1.89 | 2.31 | 0.93 | |||||||||||||||||||||||||||||||||||||||
| Average in Q2 | 0.91 | 1.30 | 1.81 | 2.26 | 0.96 | |||||||||||||||||||||||||||||||||||||||
The United States economy continues to show some modest improvements in some areas, but continues to face challenges. Employment metrics have generally improved, but remain inconsistent and not particularly robust. Economic conditions vary significantly over geographic areas, with strength concentrated in and around major population centers on the coasts and in certain areas where economic activity has been driven by specific regional factors. The unprecedented intervention by governments in markets and attempts to stimulate the economy, including the sharp easing of monetary policy during 2007-2008, will eventually be reversed. How and when the Federal Reserve resolves its own balance sheet expansion has becomebeen an increasingarea of significant focus of economists and market participants. During the second quarter, the FRB provided some insight on plans for shrinking its balance sheet but the start of that program remains uncertain. Economic activity in Europe, China and elsewhere has also improved in some aspects, but remains mixed. Finally, regulatory changes that have been enacted are expected to continue to impact the banking industry going forward. These regulatory changes have added significant operating expense and operational burden and have fundamentally changed the way banks conduct business. The new presidential administration has set policy initiatives that include attempts to reduce the regulatory burden; the timing and extent of any success on that front is yet to be determined. Fiscal policy initiatives, particularly a plan to significantly reduce corporate tax rates could have a major impact on the economy and on TrustCo, but there is no certainty that those initiatives will take effect at all or will result in any timely and/or significant change.
TrustCo believes that its long-term focus on traditional banking services and practices has enabled the Company to avoid significant impact from asset quality problems and that the Company’s strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with its past practice. TrustCo has not engaged in the types of high risk loans and investments that have led to the widely reported problems in the industry. Nevertheless, the Company may experience increases in nonperforming loans (“NPLs”) relative to historical levels from time to time. While the Company does not expect to see a significant change in the inherent risk of loss in its loan portfolio at March 31,June 30, 2017, should general housing prices and other economic measures, such as unemployment in the Company’s market areas, deteriorate, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans.
Overview
TrustCo recorded net income of $10.9$12.2 million, or $0.114$0.127 of diluted earnings per share, for the three months ended March 31,June 30, 2017, compared to net income of $10.4$10.5 million, or $0.109 of diluted earnings per share, in the same period in 2016. Return on average assets was 0.91%1.00% and 0.89%0.88%, respectively, for the three months ended March 31,June 30, 2017 and 2016. Return on average equity was 10.17%11.05% and 9.98%9.88%, respectively, for the three months ended March 31,June 30, 2017 and 2016.
For the six months ended June 30, 2017, net income was $23.2 million or $0.241 of diluted earnings per share, compared to $20.9 million and $0.219 per share, respectively, in the same period in 2016. Return on average assets was 0.96% and 0.88%, respectively, for the six months ended June 30, 2017 and 2016. Return on average equity was 10.62% and 9.93%, respectively, for the six months ended June 30, 2017 and 2016.
The primary factors accounting for the change in net income for the three months ended March 31,June 30, 2017 compared to the same period of the prior year were:
| · | An increase in the average balance of interest earning assets of |
| · | An increase in taxable equivalent net interest margin for the |
| · | A decrease of $668 thousand in securities gains for the second quarter of 2017 as compared to the prior year period. |
| · | An increase of $625 thousand in salaries and benefits expense for the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher staffing levels. |
| · | A decrease of $937 thousand in Federal Deposit Insurance Corporation (FDIC) and other insurance expense for the second quarter of 2017 compared to the second quarter of 2016 due to a change in premiums charged by the FDIC. |
| · | A decrease of $412 thousand in Equipment expense for the second quarter of 2017 compared to the second quarter of 2016 due to decreased equipment maintenance and depreciation expense. |
| · | A decrease of $427 thousand in Other Real Estate expense for the second quarter of 2017 compared to the second quarter of 2016. |
| · | An increase of |
The primary factors accounting for the change in net income for the six months ended June 30, 2017 compared to the same periods of the prior year were:
| · | An increase in the average balance of interest earning assets of $127.6 million to $4.79 billion for the first six months of 2017 compared to the same period in 2016. |
| · | An increase in taxable equivalent net interest margin for the first six months of 2017 to 3.17% from 3.11% in the prior year period. The increase in the margin coupled with the increase in average earning assets, resulted in an increase of $3.5 million in taxable equivalent net interest income in the first six months of 2017 compared to the same period in 2016. |
| · | A decrease of $668 thousand in securities gains for the first six months of 2017 as compared to the prior year period. |
| · | An increase of $1.8 million in salaries and benefits for the first six months of 2017 as compared to the prior year period. |
| · | A decrease of $1.9 million in FDIC and other insurance expense and a decrease of $447 thousand in net other real estate (“ORE”) expense, for the first six months of 2017 compared to the same period in 2016. |
| · | An increase of $1.5 million in income taxes, in the first six months of 2017 compared to the same period in 2016. |
Regulatory Agreement
On July 21, 2015 Trustco Bank, the wholly owned subsidiary of the Company, entered into a formal agreement with the OCC (the “Agreement”).
The Agreement relates to the findings of the OCC following its regularly scheduled examination of the Bank in January 2015. Since the completion of the examination and entry into the Agreement, the Bank believes it has been working diligently to address the findings of the examination and to develop and implement appropriate formal action plans.
The Agreement requires the Bank to take various actions, within prescribed time frames, with respect to certain activities of the Bank. These include, among others, (i) establishment of a committee of at least three Directors to monitor and coordinate the Bank’s response to the Formal Agreement; (ii) adoption of compliance plans to respond to the Formal Agreement with the assistance of an independent qualified consultant; (iii) evaluation and implementation of improvements in corporate governance with the assistance of an independent qualified consultant; (iv) evaluation and implementation of improvements in internal audit; (v) development of a strategic plan; (vi) development of a revised capital plan, including dividends, consistent with the strategic plan; (vii) development and implementation of improvements to the Bank’s loan review system; and (viii) such other necessary steps to address the issues and questions noted by the OCC in the Agreement. The costs to implement the recommendations in the agreement are expected to remain elevated, reflecting the Company’s investment in additional personnel and systems within the retail loan, deposit and regulatory compliance areas.
Asset/Liability Management
The Company strives to generate its earnings capabilities through a mix of core deposits funding a prudent mix of earning assets. 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.
TrustCo’s results are affected by a variety of factors including competitive and economic conditions in the specific markets in which the Company operates and, more generally, in the national economy, financial market conditions and the regulatory environment. Each of these factors is dynamic, and changes in any area can have an impact on TrustCo’s results. Included in the Annual Report to Shareholders on Form 10-K for the year ended December 31, 2016 is a description of the effect interest rates had on the results for the year 2016 compared to 2015. Many of the same market factors discussed in the 2016 Annual Report continued to have a significant impact on results through the firstsecond quarter of 2017.
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. In the experience of management, the absolute level of interest rates, changes in interest rates and customers’ expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period.
Interest rates have a significant impact on the operations and financial results of all financial services companies. One of the most important interest rates used to implement national economic policy is the Federal Funds rate. This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating. The Federal Funds target rate decreased from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008. In December 2015, the target increased to a range of 0.25% to 0.50%, and 25 basis point increases in the target range were also announced in December of 2016 and March and June of 2017, producing the current range of 0.75%1.00% to 1.00%1.25%. While FRB officials have pointed repeatedly to additionalAdditional increases in 2017 and beyond will largely be dependent on the comments have not been completely consistent or clear in regard to expectations; any increases are likely to be supported only ifstrength of economic conditions continue to improve.conditions. In the MarchJuly statement from the Federal Open Market Committee, it was noted that, “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
Traditionally, interest rates on bank deposit accounts are heavily influenced by the Federal Funds rate. The average rate on interest bearing deposits was 4 basis points lower in the firstsecond quarter of 2017 relative to the prior year period. Rates were flat or lower on all deposit categories as compared to the same period in 2016. Please refer to the statistical disclosures in the table below entitled “Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential.”
The interest rate on the 10-year Treasury bond and other long-term interest rates have significant influence on the rates for new residential real estate loans. The FRB has attempted to influence rates on mortgage loans by means other than targeting a lower Federal Funds rate, including direct intervention in the mortgage-backed securities market through purchasing these securities in an attempt to raise prices and reduce yields. In recent periods this includes the reinvestment of principal payments received on its holdings of agency securities, agency mortgage-backed securities and Treasury securities. While no longer increasing its holdings of these securities, the reinvestment of principal means that the existing holdings are not being unwound. Eventually, management believes, theThe FRB will havehas stated its intent to unwind these positions, which would likely put upward pressure on rates, although other factors may mitigate this pressure. These changes in interest rates can have an effect on the Company relative to the interest income on loans, securities and Federal Funds sold and other short term instruments, as well as on interest expense on deposits and borrowings. The timing of the FRB plan to reduce its holdings has not been set, but is generally expected to begin in the fall of 2017.
TrustCo’s principal loan products are residential real estate loans. As noted above, residential real estate loans and longer-term investments are most affected by the changes in longer term market interest rates such as the 10-year Treasury. As noted, theThe 10-year Treasury yield was up 31down 19 basis points, on average, during the firstsecond quarter of 2017 compared to the fourthfirst quarter of 2016 and by 532017 but was up 51 basis points as compared to the firstsecond quarter of 2016.
Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae. As a portfolio lender, TrustCo does not sell loans into the secondary market in the normal course of business and is able to establish rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates. Financial market volatility and the problems faced by the financial services industry have lessened the influence of the secondary market; however, various programs initiated by arms of the federal government have had an impact on rate levels for certain products. Most importantly, a government goal of keeping mortgage rates low has been supported by targeted buying of certain securities, thus supporting prices and constraining yields, as noted above. Very low interest rates in many markets around the world have also increased demand for US fixed income assets, which has also contributed to the decline of ratesyields on these assets.
The Federal Funds sold and other short term investments portfolios are affected primarily by changes in the Federal Funds target rate. Also, changes in interest rates have an effect on the recorded balance of the securities available for sale portfolio, which is recorded at fair value. Generally, as interest rates increase the fair value of these securities will decrease.
Interest rates generally remained below historic norms on both short term and longer term investments during the firstsecond quarter of 2017 despite the increases seen during the quarter.
While TrustCo has been affected by aspects of the overall changes in financial markets itover time, the impact of the financial crisis that began in 2007 was not affectedmitigated by the Company’s generally conservative approach to the degree the mortgage crisis affected some banks and financial institutions in the United States beginning in 2007. Generally, the crisis revolved around actual and future levels of delinquencies and defaults on mortgage loans, in many cases arising, in management’s view, from lenders with overly liberal underwriting standards, changes in the types of mortgage loans offered, significant upward resets on adjustable rate loans and fraud, among other factors.banking. The Company utilizes a traditional underwriting process in evaluating loan applications, and since originated loans are retained in the portfolio, there is a strong incentive to be conservative in making credit decisions. For additional information concerning TrustCo’s loan portfolio and nonperforming loans, please refer to the discussions under “Loans” and “Nonperforming Assets,” respectively. Further, the Company does not rely on borrowed funds to support its assets and maintains a significant level of liquidity on the asset side of the balance sheet. These characteristics provide the Company with increased flexibility and stability during periods of market disruption and interest rate volatility.
A fundamental component of TrustCo’s strategy has been to grow customer relationships and the deposits and loans that are part of those relationships. The Company has significant capacity to grow its balance sheet given its existing infrastructure. The Company expects that growth to be profitable. The current interest rate environment, however, has narrowed the margin on incremental balance sheet expansion. While the Company has not changed its fundamental long term strategy in regard to utilizing its excess capacity, management continually evaluates changing conditions and may seek to limit growth or reduce the size of the balance sheet if its analysis indicates that doing so would be beneficial.
For the firstsecond quarter of 2017, the net interest margin was 3.14%3.21%, up 112 basis pointpoints versus the prior year’s quarter. The quarterly results reflect the following significant factors:
The average balance of Federal Funds sold and other short-term investments decreased by $34.5$24.8 million while the average yield increased 2857 basis points in the firstsecond quarter of 2017 compared to the same period in 2016. The decrease in the average balance helped to fund increases in investments and loans.
The average balance of securities available for sale increaseddecreased by $51.9$9.7 million while the average yield remained flat at 1.97%increased 7 basis points to 1.96%. The average balance of held to maturity securities decreased by $10.8$10.0 million and the average yield increased 22 basis points to 4.24%4.27% for the firstsecond quarter of 2017 compared to 4.03% for the same period in 2016, with the increase due to a combination of slower prepayment speeds on mortgage-backed securities and the fact that corporate securities, which have higher yields, comprised a larger component of the portfolio in the 2017 period than in the 2016 period.
The average loan portfolio grew by $142.5$150.1 million to $3.44$3.47 billion and the average yield decreased 146 basis points to 4.19%4.23% in the firstsecond quarter of 2017 compared to the same period in 2016. The decline in the average yield primarily reflects the decline in market interest rates on new loan originations as older, higher rate loans pay down or are paid off, as well as declines in higher yielding commercial and installment loans.
The average balance of interest bearing liabilities (primarily deposit accounts) increased $115.5$71.4 million and the average rate paid decreased 4 basis points to 0.36%0.35% in the firstsecond quarter of 2017 compared to the same period in 2016.
During the firstsecond quarter of 2017, the Company continued to focus on its strategy to expand the loan portfolio by offering competitive interest rates. Management believes the TrustCo residential real estate loan product is very competitive compared to local and national competitors. Competition remains strong in the Company’s market areas.
The strategy on the funding side of the balance sheet continues to be to attract and retain deposit customers to the Company based upon a combination of service, convenience and interest rate.
Earning Assets
Total average interest earning assets increased from $4.63$4.70 billion in the firstsecond quarter of 2016 to $4.78$4.81 billion in the same period of 2017 with an average yield of 3.44%3.50% in the firstsecond quarter of 2017 and 3.47%3.42% in the firstsecond quarter of 2016. The shift in the mix of assets towards a higher proportion of loans, along with the increase in yield on cash, partly offset the declining yields on loans. Interest income on average earning assets increased from $40.0$40.2 million in the firstsecond quarter of 2016 to $41.1$42.1 million in the firstsecond quarter of 2017, on a tax equivalent basis. The increase was the result of higher volume more than offsetting the decline inand yield.
Loans
The average balance of loans was $3.44$3.47 billion in the firstsecond quarter of 2017 and $3.30$3.32 billion in the comparable period in 2016. The yield on loans decreased 146 basis points to 4.19%4.23%. The higher average balances more than offset the lower yield, leading to an increase in the interest income on loans from $35.6$35.7 million in the firstsecond quarter of 2016 to $36.1$36.7 million in the firstsecond quarter of 2017.
Compared to the firstsecond quarter of 2016, the average balance of residential mortgage loans increased, however other loan categories decreased. The average balance of residential mortgage loans was $2.91$2.96 billion in 2017 compared to $2.73$2.76 billion in 2016, an increase of 6.8%7.2%. The average yield on residential mortgage loans decreased by 1813 basis points to 4.17%4.18% in the firstsecond quarter of 2017 compared to 2016.
TrustCo actively markets the residential loan products within its market territories. Mortgage loan rates are affected by a number of factors including rates on Treasury securities, the Federal Funds rate and rates set by competitors and secondary market participants. TrustCo aggressively markets the unique aspects of its loan products thereby attempting to create a differentiation from other lenders. These unique aspects include low closing costs, fast turn-around time on loan approvals, no escrow or mortgage insurance requirements for qualified borrowers and the fact that the Company typically holds these loans in portfolio and does not sell them into the secondary markets. Assuming a rise in long-term interest rates, the Company would anticipate that the unique features of its loan products will continue to attract customers in the residential mortgage loan area.
Commercial loans, which consist primarily of loans secured by commercial real estate, decreased $13.8$15.6 million to an average balance of $187.6$183.4 million in the firstsecond quarter of 2017 compared to the same period in the prior year. The average yield on this portfolio was down 2up 9 basis points to 5.18%,5.24% compared to 5.20% in the prior year period.period, primarily reflecting the increase in the prime rate. The Company has been selective in underwriting commercial loans in recent periods as the apparent risk/reward balance has been less favorable in many cases.
The average yield on home equity credit lines increased 1832 basis points to 3.74%3.90% during the firstsecond quarter of 2017 compared to 3.56% in the year earlier period. The increase in yield is the result of prime rate increases which impacted some loans and a smaller proportion of lower yielding initial rate balances. The average balances of home equity lines decreased 7.9%9.6% to $330.3$320.9 million in the firstsecond quarter of 2017 as compared to the prior year. Some customers with home equity lines have refinanced their balances into fixed rate mortgage loans.
Securities Available for Sale
The average balance of the securities available for sale portfolio for the firstsecond quarter of 2017 was $642.3$642.4 million compared to $590.3$652.1 million for the comparable period in 2016. The increased balances reflectbalance reflects routine paydowns, calls maturities and sales,maturities, offset by new investment purchases. The average yield was 1.97%1.96% for the firstsecond quarter of 2017 and 2016compared to 1.89% for the available for sale portfolio.second quarter of 2016. This portfolio is primarily comprised of agency issued residential mortgage backed securities, bonds issued by government sponsored enterprises (such as Fannie Mae, the Federal Home Loan Bank, and Freddie Mac), agency-issued commercial mortgage backed securities, Small Business Administration participation certificates, corporate bonds and municipal bonds. These securities are recorded at fair value with any adjustment in fair value included in other comprehensive income (loss), net of tax.
The net unrealized loss in the available for sale securities portfolio was $6.1$6.7 million as of March 31,June 30, 2017 compared to a net unrealized loss of $6.8$11.3 million as of December 31, 2016. The unrealized loss in the portfolio is primarily the result of changes in market interest rate levels.
Held to Maturity Securities
The average balance of held to maturity securities was $44.3$42.2 million for the firstsecond quarter of 2017 compared to $55.1$52.2 million in the firstsecond quarter of 2016. The decrease in balances reflects routine paydowns and calls. No new securities were added to this portfolio during the period. The average yield was 4.24%4.27% for the firstsecond quarter of 2017 compared to 4.03%4.05% for the year earlier period. The higher yield reflects a modest change in mix and slower prepayments on mortgage-backed securities (MBS), which reduced premium amortization. TrustCo expects to hold the securities in this portfolio until they mature or are called.
As of March 31,June 30, 2017, the securities in this portfolio include residential mortgage-backed securities and corporate bonds. The balances for these securities are recorded at amortized cost.
Federal Funds Sold and Other Short-term Investments
The 2017 firstsecond quarter average balance of Federal Funds sold and other short-term investments was $641.1$643.6 million, a $34.5$24.8 million decrease from the $675.6$668.4 million average for the same period in 2016. The yield was 0.78%1.07% for the firstsecond quarter of 2017 and 0.50% for the comparable period in 2016. Interest income from this portfolio increased $402$895 thousand from $844$832 thousand in 2016 to $1.2$1.7 million in 2017, reflecting the target rate increaseincreases that took effect in December of 2016 and March of 2017, as well as the partial impact of the MarchJune 2017 target rate increase, partly offset by the decreased in balances.
The Federal Funds sold and other short-term investments portfolio is utilized to generate additional interest income and liquidity as funds are waiting to be deployed into the loan and securities portfolios.
Funding Opportunities
TrustCo utilizes various funding sources to support its earning asset portfolio. The vast majority of the Company’s funding comes from traditional deposit vehicles such as savings, demand deposits, interest-bearing checking, money market and time deposit accounts.
Total average interest bearing deposits (which includes interest bearing checking, money market accounts, savings and certificates of deposit) increased $61.9$26.2 million to $3.80$3.82 billion for the firstsecond quarter of 2017 versus the firstsecond quarter in the prior year, and the average rate paid decreased from 0.390.38% for 2016 to 0.35%0.34% for 2017. Total interest expense on these deposits decreased $284$429 thousand to $3.3$3.2 million in the firstsecond quarter of 2017 compared to the year earlier period. From the firstsecond quarter of 2016 to the firstsecond quarter of 2017, interest bearing demand account average balances were up 10.1%11.9%, certificates of deposit average balances were flat,down 6.3%, non-interest demand average balances were up 3.4%2.7%, average savings balances increased 1.0% and money market balances were down 3.9%0.5%.
The Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet. The Bank is a member of the Federal Home Loan Bank of New York (FHLBNY) and is an eligible borrower at the Federal Reserve Bank of New York (FRBNY) and has the ability to borrow utilizing securities and/or loans as collateral in regard to the FHLBNY and against securities in regard to the FRBNY.at either. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a contingent funding source within its Asset/Liability Policy. Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.
At March 31,June 30, 2017, the maturity of total time deposits is as follows:
| (dollars in thousands) | ||||||||
| Under 1 year | $ | 933,108 | $ | 801,777 | ||||
| 1 to 2 years | 126,530 | 241,916 | ||||||
| 2 to 3 years | 50,320 | 40,857 | ||||||
| 3 to 4 years | 2,768 | 2,508 | ||||||
| 4 to 5 years | 950 | 1,547 | ||||||
| Over 5 years | 216 | 219 | ||||||
| $ | 1,113,892 | $ | 1,088,824 | |||||
Average short-term borrowings for the quarter were $229.7$226.5 million in 2017 compared to $176.1$181.2 million in 2016. The average rate increased during this time period from 0.59%0.58% in 2016 to 0.61%0.62% in 2017. The short-term borrowings of the Company are cash management accounts, which represent retail accounts with customers for which the Bank has pledged certain assets as collateral.
Net Interest Income
Taxable equivalent net interest income increased by $1.2$2.2 million to $37.4$38.6 million in the firstsecond quarter of 2017 compared to the same period in 2016. The net interest spread was up 112 basis pointpoints to 3.08%3.15% in the firstsecond quarter of 2017 compared to the same in 2016. As previously noted, the net interest margin was up 112 basis points to 3.14%3.21 for the firstsecond quarter of 2017 compared to the same period in 2016.
Nonperforming Assets
Nonperforming assets include nonperforming loans (“NPLs”), which are those loans in a non-accrual status 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 included in other assets and categorized as other real estate owned.
The following describes the nonperforming assets of TrustCo as of March 31,June 30, 2017:
Nonperforming loans and foreclosed real estate: Total NPLs were $26.4$24.5 million at March 31,June 30, 2017, compared to $25.1 million at December 31, 2016 and $30.4$28.2 million at March 31,June 30, 2016. There were $26.4$24.5 million of non-accrual loans at March 31,June 30, 2017 compared to $25.0 million at December 31, 2016 and $30.3$28.2 million at March 31,June 30, 2016. There were no loans at March 31,June 30, 2017 and 2016 and December 31, 2016 that were past due 90 days or more and still accruing interest.
At March 31,June 30, 2017, nonperforming loans primarily include a mix of commercial and residential loans. Of total nonperforming loans of $26.4$24.5 million at March 31,June 30, 2017, $24.5$22.8 million were residential real estate loans, $1.9$1.7 million were commercial mortgages and $41$25 thousand were installment loans, compared to $23.1 million, $1.8 million and $48 thousand, respectively at December 31, 2016.
A significant percentage of nonperforming loans are residential real estate loans, which are historically lower-risk than most other types of loans. Annualized net chargeoffs were 0.04%0.05% of average residential real estate loans (including home equity lines of credit) for the firstsecond quarter of 2017 compared to 0.11%0.13% for the firstsecond quarter of 2016. Management believes that these loans have been appropriately written down where required.
Ongoing portfolio management is intended to result in early identification and disengagement from deteriorating credits. TrustCo has a diversified loan portfolio that includes a significant balance of residential mortgage loans to borrowers in the Capital Region of New York and avoids concentrations to any one borrower or any single industry. TrustCo has no advances to borrowers or projects located outside the United States. TrustCo continues to identify delinquent loans as quickly as possible and to move promptly to resolve problem loans. Efforts to resolve delinquencies begin immediately after the payment grace period expires, with repeated, automatically generated notices, as well as personalized phone calls and letters. Loans are placed in nonaccrual status once they are 90 days past due, or earlier if management has determined that such classification is appropriate. Once in nonaccrual status, loans are either brought current and maintained current, at which point they may be returned to accrual status, or they proceed through the foreclosure process. The collateral on nonaccrual loans is evaluated periodically, and the loan value is written down if the collateral value is insufficient.
The Company originates loans throughout its deposit franchise area. At March 31,June 30, 2017, 78.0%77.6% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 22.0%22.4% were in Florida. Those figures compare to 78.5% and 21.5%, respectively at December 31, 2016. Within these two geographic regions, commercial loans constitute a larger component of the local outstandings in New York than in Florida, at 6.4%6.3% and 1.5%, respectively, as of March 31,June 30, 2017.
Economic conditions vary widely by geographic location. Florida experienced a more significant downturn than New York during the recession. Consequently, nonperforming loans (NPLs as a percentage of the portfolio) had generally been more heavily weighted towards Florida in recent years. Howeverrecession, however conditions in Florida have improved more than in New York in recent periods andperiods. As a percentage of the total nonperforming loans as of March 31,June 30, 2017, 6.5% of nonperforming loans8.6% were to Florida borrowers, compared to 93.5%91.4% to borrowers in New York and surrounding areas. For the three months ended March 31,June 30, 2017, New York and surrounding areas experienced net chargeoffs of approximately $356$371 thousand, compared to $86$65 thousand in Florida.
Other than loans currently identified as nonperforming, management is aware of no other loans in the Bank’s portfolio that pose material risk of the eventual non-collection of principal and interest. Also as of March 31,June 30, 2017, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources.
TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring (TDR), as impaired loans. There were $2.4$4.0 million of commercial mortgages and commercial loans classified as impaired as of March 31,June 30, 2017 compared to $2.4 million at December 31, 2016. There were $23.0$21.8 million of impaired residential loans at March 31,June 30, 2017 and $21.6 million at December 31, 2016. The average balances of all impaired loans were $24.2$25.1 million for the threesix months of 2017 and $22.4 million for the full year 2016.
As of March 31,June 30, 2017 and December 31, 2016, the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.
At March 31,June 30, 2017 there was $3.2$3.6 million of foreclosed real estate compared to $4.3 million at December 31, 2016.
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 probable incurred losses in the loan portfolio.
| (dollars in thousands) | As of March 31, 2017 | As of December 31, 2016 | ||||||||||||||
| Amount | Percent of Loans to Total Loans | Amount | Percent of Loans to Total Loans | |||||||||||||
| Commercial | $ | 4,687 | 5.07 | % | $ | 4,820 | 5.32 | % | ||||||||
| Real estate - construction | $ | 307 | 0.69 | % | 318 | 0.72 | % | |||||||||
| Real estate mortgage - 1 to 4 family | $ | 32,924 | 84.54 | % | 32,452 | 83.94 | % | |||||||||
| Home equity lines of credit | $ | 5,473 | 9.46 | % | 5,570 | 9.76 | % | |||||||||
| Installment Loans | $ | 657 | 0.24 | % | 730 | 0.26 | % | |||||||||
| $ | 44,048 | 100.00 | % | $ | 43,890 | 100.00 | % | |||||||||
Allocation of the Allowance for Loan Losses
The allocation of the allowance for loans losses is as follows:
| (dollars in thousands) | As of June 30, 2017 | As of December 31, 2016 | ||||||||||||||
| Amount | Percent of Loans to Total Loans | Amount | Percent of Loans to Total Loans | |||||||||||||
| Commercial | $ | 4,480 | 4.96 | % | $ | 4,820 | 5.32 | % | ||||||||
| Real estate - construction | $ | 300 | 0.68 | % | 318 | 0.72 | % | |||||||||
| Real estate mortgage - 1 to 4 family | $ | 33,204 | 85.09 | % | 32,452 | 83.94 | % | |||||||||
| Home equity lines of credit | $ | 5,483 | 9.03 | % | 5,570 | 9.76 | % | |||||||||
| Installment Loans | $ | 695 | 0.24 | % | 730 | 0.26 | % | |||||||||
| $ | 44,162 | 100.00 | % | $ | 43,890 | 100.00 | % | |||||||||
At March 31,June 30, 2017, the allowance for loan losses was $44.0$44.2 million, compared to $44.4$44.1 million at March 31,June 30, 2016 and $43.9 million at December 31, 2016. The allowance represents 1.28%1.26% of the loan portfolio as of March 31,June 30, 2017 compared to 1.34%1.32% at March 31,June 30, 2016 and 1.28% at December 31, 2016.
The provision for loan losses was $600$550 thousand for the quarter ended March 31,June 30, 2017 and $800 thousand for the quarter ended March 31,June 30, 2016. Net chargeoffs for the three-month period ended March 31,June 30, 2017 were $442$436 thousand and were $1.2$1.1 million in the prior year period.
During the firstsecond quarter of 2017, there were $72 thousand of grossno commercial loan chargeoffs and $557$627 thousand of gross residential mortgage and consumer loan chargeoffs as compared with $264$68 thousand of gross commercial loan chargeoffs and $1.1$1.2 million of residential mortgage and consumer loan chargeoffs in the firstsecond quarter of 2016. Gross recoveries during the firstsecond quarter of 2017 were $8 thousandzero for commercial loans and $179$191 thousand for residential mortgage and consumer loans, compared to $40$1 thousand for commercial loans and $130$133 thousand for residential and consumer in the firstsecond quarter of 2016.
In determining 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 recent loan chargeoffs and recoveries; |
| · | The growth in the loan portfolio and the implication that it has in relation to the economic climate in the Bank’s market territories, and; |
| · | The economic environment in the Upstate New York and Florida territories over the last several years, as well as in the Company’s other market areas. |
Management continues to monitor these factors in determining the provision for loan losses in relation to loan chargeoffs, recoveries, the level and trends of nonperforming loans and overall economic conditions in the Company’s market territories.
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. Management believes that TrustCo’s earnings performance and strong capital position enable the Company to easily secure new sources of liquidity. 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. As noted, the Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet. As previously stated, the Bank is a member of the FHLBNY and is an eligible borrower at the FRBNY and has the ability to borrow utilizing securities and/or loans as collateral in regard to the FHLBNY and against securities in regard to the FRBNY.at either institution. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a contingent funding source within its Asset/Liability Policy. Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.
The Company uses an industry standard external model as the primary tool to identify, quantify and project changes in interest rates and prepayment speeds taken both from industry sources and internally generated data based upon historical trends in the Bank’s balance sheet. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in market interest rates are also incorporated into the model. This model calculates an economic or fair value amount with respect to non-time deposit categories since these deposits are part of the core deposit products of the Company. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the fair value of capital or precisely predict the impact of fluctuations in interest rates on the fair value of capital.
Using this model, the fair value of capital projections as of March 31,June 30, 2017 are referenced below. The base case (current rates) scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of March 31,June 30, 2017. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp.
| As of | Estimated Percentage of Fair value of Capital to Fair value of Assets | |||
| +400 BP | % | |||
| +300 BP | ||||
| +200 BP | ||||
| +100 BP | ||||
| Current rates | ||||
| -100 BP | ||||
Noninterest Income
Total noninterest income for the firstsecond quarter of 2017 was $4.7$4.5 million, compared to $4.6$5.2 million in the prior year period. The increasedecrease of $364$695 thousand was due to an increasea decrease in Trustco Financial Services income.gains on net gains on securities transactions. There were no securities gains in either quarter. The increasethe second quarter of 2017, compared to gains of $668 thousand in the prior year period. A nominal decrease in Trustco Financial Services income was primarily dueapproximately offset by an increase in fees for services to higher tax preparation fees.customers. The fair value of assets under management was $845 million at June 30, 2017 and $846 million at both March 31, 2017 andas of December 31, 2016 and $844$851 million at March 31,June 30, 2016. The
For the six months through June 30, 2017 total of fees for other services to customers plus othernoninterest income was $2.9$9.2 million, in the first quarter of 2017, down $98 thousand versuscompared to $9.8 million for the prior year quarter.period. The decline was due to the same decrease in net gains on securities transactions noted above. Excluding gains, noninterest income was up $128 thousand due to a $166 thousand in Financial Services revenue increase.
Allocation of the Allowance for Loan Losses
The allocation of the allowance for loans losses is as follows:
| (dollars in thousands) | As of June 30, 2017 | As of December 31, 2016 | ||||||||||||||
| Amount | Percent of Loans to Total Loans | Amount | Percent of Loans to Total Loans | |||||||||||||
| Commercial | $ | 4,480 | 4.96 | % | $ | 4,820 | 5.32 | % | ||||||||
| Real estate - construction | $ | 300 | 0.68 | % | 318 | 0.72 | % | |||||||||
| Real estate mortgage - 1 to 4 family | $ | 33,204 | 85.09 | % | 32,452 | 83.94 | % | |||||||||
| Home equity lines of credit | $ | 5,483 | 9.03 | % | 5,570 | 9.76 | % | |||||||||
| Installment Loans | $ | 695 | 0.24 | % | 730 | 0.26 | % | |||||||||
| $ | 44,162 | 100.00 | % | $ | 43,890 | 100.00 | % | |||||||||
At June 30, 2017, the allowance for loan losses was $44.2 million, forcompared to $44.1 million at June 30, 2016 and $43.9 million at December 31, 2016. The allowance represents 1.26% of the three months ended March 31,loan portfolio as of June 30, 2017 compared to $23.4 million1.32% at June 30, 2016 and 1.28% at December 31, 2016.
The provision for loan losses was $550 thousand for the three monthsquarter ended March 31, 2016. The largest cause ofJune 30, 2017 and $800 thousand for the increase in expenses was a $1.2quarter ended June 30, 2016. Net chargeoffs for the three-month period ended June 30, 2017 were $436 thousand and were $1.1 million increase in salaries and benefits, which was mostly offset by a $943 thousand decrease in FDIC and other insurance expenses. The latter change was due to a change in the premium charged byprior year period.
During the FDIC. Going forward we expect that the quarterly FDIC expense will approximate the level recorded in the firstsecond quarter of 2017, excluding the impactthere were no commercial loan chargeoffs and $627 thousand of balance sheet growth. The only expense category to see a meaningful increase was the “other” line, which was up $558gross residential mortgage and consumer loan chargeoffs compared with $68 thousand of gross commercial loan chargeoffs and $1.2 million of residential mortgage and consumer loan chargeoffs in the firstsecond quarter of 2016. Gross recoveries during the second quarter of 2017 aswere zero for commercial loans and $191 thousand for residential mortgage and consumer loans, compared to $1 thousand for commercial loans and $133 thousand for residential and consumer in the year-ago period. Full time equivalent headcount increased from 784 as of March 31, 2016 to 802 as of March 31, 2017.
| (dollars in thousands) | As of March 31, 2017 | Well | Adequately | |||||||||||||
| Amount | Ratio | Capitalized(1) | Capitalized(1)(2) | |||||||||||||
| Tier 1 leverage capital | $ | 429,771 | 8.844 | % | 5.000 | % | 4.000 | |||||||||
| Common equity tier 1 capital | 429,771 | 17.338 | 6.500 | 5.750 | ||||||||||||
| Tier 1 risk-based capital | 429,771 | 17.338 | 8.000 | 7.250 | ||||||||||||
| Total risk-based capital | 460,920 | 18.595 | 10.000 | 9.250 | ||||||||||||
| (dollars in thousands) | As of December 31, 2016 | Well | Adequately | |||||||||||||
| Amount | Ratio | Capitalized(1) | Capitalized(1)(3) | |||||||||||||
| Tier 1 (core) capital | $ | 424,802 | 8.829 | % | 5.000 | % | 4.000 | % | ||||||||
| Common equity tier 1 capital | 424,802 | 17.238 | 6.500 | 5.125 | ||||||||||||
| Tier 1 risk-based capital | 424,802 | 17.238 | 8.000 | 6.625 | ||||||||||||
| Total risk-based capital | 455,772 | 18.492 | 10.000 | 8.625 | ||||||||||||
| (dollars in thousands) | As of March 31, 2017 | |||||||
| Amount | Ratio | |||||||
| Tier 1 leverage capital | $ | 443,714 | 9.117 | % | ||||
| Common equity tier 1 capital | 443,714 | 17.891 | ||||||
| Tier 1 risk-based capital | 443,714 | 17.891 | ||||||
| Total risk-based capital | 474,880 | 19.147 | ||||||
| (dollars in thousands) | As of December 31, 2016 | |||||||
| Amount | Ratio | |||||||
| Leverage capital | $ | 438,426 | 9.110 | % | ||||
| Common equity tier 1 capital | 438,426 | 17.782 | ||||||
| Tier 1 risk-based capital | 438,426 | 17.782 | ||||||
| Total risk-based capital | 469,411 | 19.038 | ||||||
| · | The magnitude and nature of recent loan chargeoffs and recoveries; |
| · | The growth in the loan portfolio and the implication that it has in relation to the economic climate in the Bank’s market territories, and; |
| · | The economic environment in the Upstate New York and Florida territories over the last several years, as well as in the Company’s other market areas. |
Management continues to be a critical accounting policy givenmonitor these factors in determining the inherent uncertainty in evaluating the levels of the allowance required to cover the inherent risk ofprovision for loan losses in relation to loan chargeoffs, recoveries, the loan portfoliolevel and the material effect that such judgments can have on the resultstrends of operations. Included in Note 1 to the Consolidated Financial Statements containednonperforming loans and overall economic conditions in the Company’s Annual Reportmarket territories.
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. Management believes that TrustCo’s earnings performance and strong capital position enable the Company to easily secure new sources of liquidity. 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. As noted, the Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on Form 10-K forits balance sheet. As previously stated, the year ended December 31, 2016Bank is a descriptionmember of the significant accounting policies that are utilized byFHLBNY and is an eligible borrower at the FRBNY and has the ability to borrow utilizing securities and/or loans as collateral at either institution. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a contingent funding source within its Asset/Liability Policy. Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.
The Company uses an industry standard external model as the primary tool to identify, quantify and project changes in interest rates and prepayment speeds taken both from industry sources and internally generated data based upon historical trends in the preparationBank’s balance sheet. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in market interest rates are also incorporated into the model. This model calculates an economic or fair value amount with respect to non-time deposit categories since these deposits are part of the Consolidated Financial Statements.core deposit products of the Company. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the fair value of capital or precisely predict the impact of fluctuations in interest rates on the fair value of capital.
| As of June 30, 2017 | Estimated Percentage of Fair value of Capital to Fair value of Assets | |||
| +400 BP | 20.31 | % | ||
| +300 BP | 21.47 | |||
| +200 BP | 22.58 | |||
| +100 BP | 23.53 | |||
| Current rates | 23.66 | |||
| -100 BP | 22.09 | |||
Noninterest Income
Total noninterest income for the second quarter of 2017 was $4.5 million, compared to $5.2 million in the prior year period. The decrease of $695 thousand was due to a decrease in gains on net gains on securities transactions. There were no securities gains in the second quarter of 2017, compared to gains of $668 thousand in the prior year period. A nominal decrease in Trustco Financial Services income was approximately offset by an increase in fees for services to customers. The fair value of assets under management was $845 million at June 30, 2017 and $846 million as of December 31, 2016 and $851 million at June 30, 2016.
For the six months through June 30, 2017 total noninterest income was $9.2 million, compared to $9.8 million for the prior year period. The decline was due to the same decrease in net gains on securities transactions noted above. Excluding gains, noninterest income was up $128 thousand due to a $166 thousand in Financial Services revenue increase.
Management's Discussion and Analysis
Allocation of the Allowance for Loan Losses
The allocation of the allowance for loans losses is as follows:
| (dollars in thousands) | As of June 30, 2017 | As of December 31, 2016 | ||||||||||||||
| Amount | Percent of Loans to Total Loans | Amount | Percent of Loans to Total Loans | |||||||||||||
| Commercial | $ | 4,480 | 4.96 | % | $ | 4,820 | 5.32 | % | ||||||||
| Real estate - construction | $ | 300 | 0.68 | % | 318 | 0.72 | % | |||||||||
| Real estate mortgage - 1 to 4 family | $ | 33,204 | 85.09 | % | 32,452 | 83.94 | % | |||||||||
| Home equity lines of credit | $ | 5,483 | 9.03 | % | 5,570 | 9.76 | % | |||||||||
| Installment Loans | $ | 695 | 0.24 | % | 730 | 0.26 | % | |||||||||
| $ | 44,162 | 100.00 | % | $ | 43,890 | 100.00 | % | |||||||||
At June 30, 2017, the allowance for loan losses was $44.2 million, compared to $44.1 million at June 30, 2016 and $43.9 million at December 31, 2016. The allowance represents 1.26% of the loan portfolio as of June 30, 2017 compared to 1.32% at June 30, 2016 and 1.28% at December 31, 2016.
The provision for loan losses was $550 thousand for the quarter ended June 30, 2017 and $800 thousand for the quarter ended June 30, 2016. Net chargeoffs for the three-month period ended June 30, 2017 were $436 thousand and were $1.1 million in the prior year period.
During the second quarter of 2017, there were no commercial loan chargeoffs and $627 thousand of gross residential mortgage and consumer loan chargeoffs compared with $68 thousand of gross commercial loan chargeoffs and $1.2 million of residential mortgage and consumer loan chargeoffs in the second quarter of 2016. Gross recoveries during the second quarter of 2017 were zero for commercial loans and $191 thousand for residential mortgage and consumer loans, compared to $1 thousand for commercial loans and $133 thousand for residential and consumer in the second quarter of 2016.
In determining 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 recent loan chargeoffs and recoveries; |
| · | The growth in the loan portfolio and the implication that it has in relation to the economic climate in the Bank’s market territories, and; |
| · | The economic environment in the Upstate New York and Florida territories over the last several years, as well as in the Company’s other market areas. |
Management continues to monitor these factors in determining the provision for loan losses in relation to loan chargeoffs, recoveries, the level and trends of nonperforming loans and overall economic conditions in the Company’s market territories.
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. Management believes that TrustCo’s earnings performance and strong capital position enable the Company to easily secure new sources of liquidity. 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. As noted, the Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet. As previously stated, the Bank is a member of the FHLBNY and is an eligible borrower at the FRBNY and has the ability to borrow utilizing securities and/or loans as collateral at either institution. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a contingent funding source within its Asset/Liability Policy. Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.
The Company uses an industry standard external model as the primary tool to identify, quantify and project changes in interest rates and prepayment speeds taken both from industry sources and internally generated data based upon historical trends in the Bank’s balance sheet. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in market interest rates are also incorporated into the model. This model calculates an economic or fair value amount with respect to non-time deposit categories since these deposits are part of the core deposit products of the Company. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the fair value of capital or precisely predict the impact of fluctuations in interest rates on the fair value of capital.
Using this model, the fair value of capital projections as of June 30, 2017 are referenced below. The base case (current rates) scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of June 30, 2017. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp.
| As of June 30, 2017 | Estimated Percentage of Fair value of Capital to Fair value of Assets | |||
| +400 BP | 20.31 | % | ||
| +300 BP | 21.47 | |||
| +200 BP | 22.58 | |||
| +100 BP | 23.53 | |||
| Current rates | 23.66 | |||
| -100 BP | 22.09 | |||
Noninterest Income
Total noninterest income for the second quarter of 2017 was $4.5 million, compared to $5.2 million in the prior year period. The decrease of $695 thousand was due to a decrease in gains on net gains on securities transactions. There were no securities gains in the second quarter of 2017, compared to gains of $668 thousand in the prior year period. A nominal decrease in Trustco Financial Services income was approximately offset by an increase in fees for services to customers. The fair value of assets under management was $845 million at June 30, 2017 and $846 million as of December 31, 2016 and $851 million at June 30, 2016.
For the six months through June 30, 2017 total noninterest income was $9.2 million, compared to $9.8 million for the prior year period. The decline was due to the same decrease in net gains on securities transactions noted above. Excluding gains, noninterest income was up $128 thousand due to a $166 thousand in Financial Services revenue increase.
Noninterest Expenses
Total noninterest expenses were $22.9 million for the three months ended June 30, 2017, compared to $24.0 million for the three months ended June 30, 2016. The largest cause of the decrease in expenses was a $937 thousand decrease in FDIC and other insurance expenses. This change was due to a change in the premium charged by the FDIC beginning in the third quarter of 2016. Going forward we expect that the quarterly FDIC expense will approximate the level recorded in the second quarter of 2017, excluding the impact of balance sheet growth. Other significant decreases were other real estate expense and equipment expense, down $427 thousand and $412 thousand, respectively. The only expense categories to see meaningful increases were salaries and benefits, up $625 thousand in the second quarter of 2017 compared to the year-ago period and net occupancy expense, up $349 thousand over the same periods. Full time equivalent headcount increased from 801 as of June 30, 2016 to 813 as of June 30, 2017, which was the primary cause of the increase.
For the six months through June 30, 2017 total noninterest expense was $46.9 million, compared to $47.4 million for the prior year period. The largest cause of the decrease in expenses was a $1.9 million decrease in FDIC and other insurance expenses, as described above. Decreases in other real estate expense, equipment expense and professional services expense also contributed. These were mostly offset by an increase of $1.8 million in salaries and benefits, as well as smaller increases in net occupancy expense and other expense.
Income Taxes
In the second quarter of 2017, TrustCo recognized income tax expense of $7.3 million compared to $6.3 million for the second quarter of 2016. The effective tax rates were 37.5% and 37.4% for the second quarters of 2017 and 2016, respectively. For the six month periods through June 30, income taxes increased $1.5 million, with effective tax rates of 37.5% and 37.2%, respectively, for the six months ended June 30, 2017 and 2016.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios.
Banking regulators have moved towards higher required capital requirements due to the standards included in the Basel III reform measures and the Dodd-Frank Act, as well as a general trend towards reducing risk in the banking system by providing a greater capital margin.
Trustco Bank’s Agreement with the OCC requires the Bank to develop and comply with a capital plan, and the Bank may declare or pay a dividend or make a capital distribution only (a) when the Bank is in compliance with its approved written capital plan, and would remain in compliance with such capital plan immediately following the declaration or payment of any dividend or capital distribution and (b) following OCC approval under OCC capital distribution rules.
Total shareholders’ equity at June 30, 2017 was $447.4 million compared to $430.3 million at June 30, 2016. TrustCo declared a dividend of $0.065625 per share in the second quarter of 2017. This results in a dividend payout ratio of 51.48% based on second quarter 2017 earnings of $12.2 million.
The Bank and the Company reported the following capital ratios as of June 30, 2017 and December 31, 2016:
| (Bank Only) | ||||||||||||||||
| (dollars in thousands) | As of June 30, 2017 | Well | Adequately | |||||||||||||
| Amount | Ratio | Capitalized(1) | Capitalized(1)(2) | |||||||||||||
| Tier 1 leverage capital | $ | 436,264 | 8.911 | % | 5.000 | % | 4.000 | % | ||||||||
| Common equity tier 1 capital | 436,264 | 17.363 | 6.500 | 5.750 | ||||||||||||
| Tier 1 risk-based capital | 436,264 | 17.363 | 8.000 | 7.250 | ||||||||||||
| Total risk-based capital | 467,832 | 18.620 | 10.000 | 9.250 | ||||||||||||
| (dollars in thousands) | As of December 31, 2016 | Well | Adequately | |||||||||||||
| Amount | Ratio | Capitalized(1) | Capitalized(1)(3) | |||||||||||||
| Tier 1 (core) capital | $ | 424,802 | 8.829 | % | 5.000 | % | 4.000 | % | ||||||||
| Common equity tier 1 capital | 424,802 | 17.238 | 6.500 | 5.125 | ||||||||||||
| Tier 1 risk-based capital | 424,802 | 17.238 | 8.000 | 6.625 | ||||||||||||
| Total risk-based capital | 455,772 | 18.492 | 10.000 | 8.625 | ||||||||||||
| (1) | Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized |
| (2) | The June 30, 2017 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 1.25 percent |
| (3) | The December 31, 2016 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 0.625 percent |
(Consolidated)
| (dollars in thousands) | As of June 30, 2017 | |||||||
| Amount | Ratio | |||||||
| Tier 1 leverage capital | $ | 450,406 | 9.194 | % | ||||
| Common equity tier 1 capital | 450,406 | 17.921 | ||||||
| Tier 1 risk-based capital | 450,406 | 17.921 | ||||||
| Total risk-based capital | 481,984 | 19.178 | ||||||
| (dollars in thousands) | As of December 31, 2016 | |||||||
| Amount | Ratio | |||||||
| Leverage capital | $ | 438,426 | 9.110 | % | ||||
| Common equity tier 1 capital | 438,426 | 17.782 | ||||||
| Tier 1 risk-based capital | 438,426 | 17.782 | ||||||
| Total risk-based capital | 469,411 | 19.038 | ||||||
In addition, at June 30, 2017, the consolidated equity to total assets ratio was 9.09%, compared to 8.89% at December 31, 2016 and 8.91% at June 30, 2016.
Both TrustCo and Trustco Bank are subject to regulatory capital requirements. On January 1, 2015, a new capital rule took effect that revised the federal bank regulatory agencies’ risk-based capital requirements and subjected the Company to consolidated regulatory capital requirements. Among other matters, the rule also established a new common equity Tier 1 minimum capital requirement of 4.5% of risk-weighted assets, increased the minimum Tier 1 capital to risk-based assets requirement from 4.0% to 6.0% of risk-weighted assets, changed the risk-weightings of certain assets, and changed what qualifies as capital for purposes of meeting the various capital requirements. In addition, the Company and the Bank are required to maintain additional levels of Tier 1 common equity (the capital conservation buffer) over the minimum risk-based capital levels before they may pay dividends, repurchase shares, or pay discretionary bonuses. The new rule will be phased-in over several years and will be fully in effect in 2019. Calendar year 2016 was the second year of implementation of the new capital rules. Prior to January 2015, the Company had not been subject to consolidated regulatory capital requirements.
As of June 30, 2017, the capital levels of both TrustCo and the Bank exceeded the minimum standards, including if the current (and also if the fully phased-in) capital conservation buffer is taken into account.
Under the OCC’s “prompt corrective action” regulations, a bank is deemed to be “well-capitalized” when its CET1, Tier 1, total risk-based, and leverage capital ratios are at least 6.5%, 8%, 10%, and 5%, respectively. A bank is deemed to be “adequately capitalized” or better if its capital ratios meet or exceed the minimum federal regulatory capital requirements, and “undercapitalized” if it fails to meet these minimal capital requirements. A bank is “significantly undercapitalized” if its CET1, Tier 1, total risk-based and leverage capital ratios fall below 3%, 4%, 6%, and 3%, respectively and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. At June 30, 2017 and 2016, Trustco Bank met the definition of “well-capitalized.”
As noted, the Company’s dividend payout ratio was 51.48% of net income for the second quarter of 2017 and 59.89% of net income for the second quarter of 2016. The per-share dividend paid in both the second quarters of 2016 and 2017 was $0.065625. The Company’s ability to pay dividends to its shareholders is dependent upon the ability of the Bank to pay dividends to the Company. The payment of dividends by the Bank to the Company is subject to continued compliance with minimum regulatory capital requirements and the Bank’s compliance with the capital plan required under the terms of the Agreement. Under the OCC agreement, the Bank may declare or pay a dividend or make a capital distribution only (a) when the Bank is in compliance with its approved written capital plan, and would remain in compliance with such capital plan immediately following the declaration or payment of any dividend or capital distribution, and (b) following OCC approval under OCC capital distribution rules. The OCC may disapprove a dividend if: the Bank would be undercapitalized following the distribution; the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statue, regulation or agreement. In addition, under the Agreement, the payment of dividends by the Bank are subject to prior approval.
TrustCo maintains a dividend reinvestment plan (DRP) with approximately 12,000 participants. The DRP allows participants to reinvest dividends in shares of the Company. The DRP also allows for additional purchases by participants and has a discount feature (up to a 5% for safe harbor provisions) that can be activated by management as a tool to raise capital. To date, the discount feature has not been utilized.
Critical Accounting Policies
Pursuant to Securities and Exchange Commission (SEC) guidance, management of the Company is encouraged to evaluate and disclose those accounting policies 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 the inherent risk of losses in the loan 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 Annual Report on Form 10-K for the year ended December 31, 2016 is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.
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 the 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 and held to maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is the unrealized (loss) gain, (loss), net of tax, in the available for sale portfolio of ($5.8)3.6) million in 2017 and ($2.2)$0.7 million in 2016. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.
Three months ended March 31, 2017 | Three months ended March 31, 2016 | Three months ended June 30, 2017 | Three months ended June 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Change in InterestIncome/ Expense | Variance BalanceChange | Variance RateChange | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Change in Interest Income/ Expense | Variance Balance Change | Variance Rate Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U. S. government sponsored enterprises | $ | 142,495 | 595 | 1.67 | % | $ | 75,031 | 255 | 1.36 | % | $ | 340 | (168 | ) | 508 | $ | 153,552 | 607 | 1.58 | % | $ | 107,190 | 404 | 1.51 | % | $ | 203 | 56 | 147 | |||||||||||||||||||||||||||||||||||||||||||
| Mortgage backed securities and collateralized mortgage obligations-residential | 367,956 | 1,958 | 2.13 | % | 412,499 | 2,116 | 2.05 | % | (158 | ) | (247 | ) | 89 | 359,085 | 1,944 | 2.17 | % | 445,162 | 2,169 | 1.95 | % | (225 | ) | (1,364 | ) | 1,139 | ||||||||||||||||||||||||||||||||||||||||||||||
| State and political subdivisions | 873 | 19 | 8.71 | % | 1,114 | 22 | 7.90 | % | (3 | ) | (14 | ) | 11 | 816 | 16 | 7.84 | % | 955 | 19 | 7.96 | % | (3 | ) | (1 | ) | (2 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | 41,580 | 151 | 1.45 | % | - | - | 0.00 | % | 151 | 151 | - | 42,699 | 154 | 1.44 | % | - | - | - | % | 154 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Small Business Administration-guaranteed participation securities | 78,591 | 415 | 2.11 | % | 90,611 | 476 | 2.10 | % | (61 | ) | (76 | ) | 15 | 75,561 | 394 | 2.09 | % | 87,801 | 450 | 2.05 | % | (56 | ) | (106 | ) | 50 | ||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage backed securities and collateralized mortgage obligations-commercial | 10,089 | 23 | 0.91 | % | 10,394 | 36 | 1.40 | % | (13 | ) | (8 | ) | (5 | ) | 10,003 | 21 | 0.84 | 10,321 | 38 | 1.47 | (17 | ) | (9 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Other | 685 | 4 | 2.34 | % | 685 | 4 | 2.34 | % | - | - | - | 685 | 4 | 2.34 | % | 677 | 4 | 2.36 | % | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total securities available for sale | 642,269 | 3,165 | 1.97 | % | 590,334 | 2,909 | 1.97 | % | 256 | (363 | ) | 619 | 642,401 | 3,140 | 1.96 | % | 652,106 | 3,084 | 1.89 | % | 56 | (1,423 | ) | 1,325 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Federal funds sold and other short-term Investments | 641,126 | 1,246 | 0.78 | % | 675,586 | 844 | 0.50 | % | 402 | (40 | ) | 442 | 643,557 | 1,727 | 1.07 | % | 668,395 | 832 | 0.50 | % | 895 | (30 | ) | 925 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Held to maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | 9,992 | 154 | 6.16 | % | 9,977 | 154 | 6.17 | % | - | 1 | (1 | ) | 9,996 | 154 | 6.16 | % | 9,981 | 154 | 6.17 | % | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage backed securities and collateralized mortgage obligations-residential | 34,303 | 316 | 3.68 | % | 45,112 | 402 | 3.56 | % | (86 | ) | (170 | ) | 84 | 32,188 | 296 | 3.68 | % | 42,188 | 374 | 3.55 | % | (78 | ) | (162 | ) | 84 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total held to maturity securities | 44,295 | 470 | 4.24 | % | 55,089 | 556 | 4.03 | % | (86 | ) | (169 | ) | 83 | 42,184 | 450 | 4.27 | % | 52,169 | 528 | 4.05 | % | (78 | ) | (162 | ) | 84 | ||||||||||||||||||||||||||||||||||||||||||||||
| Federal Reserve Bank and Federal Home Loan Bank stock | 9,579 | 134 | 5.60 | % | 9,480 | 120 | 5.06 | % | 14 | 1 | 13 | 9,709 | 134 | 5.52 | % | 9,576 | 118 | 4.93 | % | 16 | 2 | 14 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial loans | �� | 187,590 | 2,429 | 5.18 | % | 201,367 | 2,617 | 5.20 | % | (188 | ) | (114 | ) | (74 | ) | 183,382 | 2,401 | 5.24 | % | 198,938 | 2,563 | 5.15 | % | (162 | ) | (418 | ) | 256 | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage loans | 2,911,987 | 30,367 | 4.17 | % | 2,726,811 | 29,622 | 4.35 | % | 745 | 6,563 | (5,818 | ) | 2,958,994 | 30,943 | 4.18 | % | 2,759,024 | 29,725 | 4.31 | % | 1,218 | 5,850 | (4,632 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Home equity lines of credit | 330,338 | 3,085 | 3.74 | % | 358,817 | 3,179 | 3.56 | % | (94 | ) | (846 | ) | 752 | 320,872 | 3,131 | 3.90 | % | 354,897 | 3,179 | 3.58 | % | (48 | ) | (819 | ) | 771 | ||||||||||||||||||||||||||||||||||||||||||||||
| Installment loans | 8,228 | 169 | 8.22 | % | 8,659 | 193 | 8.94 | % | (24 | ) | (163 | ) | 139 | 8,029 | 194 | 9.66 | % | 8,316 | 191 | 9.19 | % | 3 | (30 | ) | 33 | |||||||||||||||||||||||||||||||||||||||||||||||
| Loans, net of unearned income | 3,438,143 | 36,050 | 4.19 | % | 3,295,654 | 35,611 | 4.33 | % | 439 | 5,439 | (5,000 | ) | 3,471,277 | 36,669 | 4.23 | % | 3,321,175 | 35,658 | 4.29 | % | 1,011 | 4,582 | (3,571 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total interest earning assets | 4,775,412 | 41,065 | 3.44 | % | 4,626,143 | 40,040 | 3.47 | % | 1,025 | 4,868 | (3,843 | ) | 4,809,128 | 42,120 | 3.50 | % | 4,703,421 | 40,220 | 3.42 | % | 1,900 | 2,970 | (1,224 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | (44,236 | ) | (45,271 | ) | (44,429 | ) | (44,754 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash & non-interest earning assets | 130,186 | 135,532 | 130,998 | 136,724 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 4,861,362 | $ | 4,716,404 | $ | 4,895,697 | $ | 4,795,391 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and shareholders' equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposits: | �� | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest bearing checking accounts | $ | 809,039 | 124 | 0.06 | % | $ | 735,098 | 114 | 0.06 | % | 10 | 10 | - | $ | 849,965 | 134 | 0.06 | % | $ | 759,546 | 116 | 0.06 | % | 18 | 13 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||
| Money market accounts | 580,006 | 466 | 0.32 | % | 603,774 | 496 | 0.33 | % | (30 | ) | (17 | ) | (13 | ) | 577,464 | 468 | 0.32 | % | 580,100 | 467 | 0.32 | % | 1 | (1 | ) | 2 | ||||||||||||||||||||||||||||||||||||||||||||||
| Savings | 1,274,757 | 430 | 0.13 | % | 1,262,467 | 604 | 0.19 | % | (174 | ) | 40 | (214 | ) | 1,286,282 | 435 | 0.14 | % | 1,273,575 | 604 | 0.19 | % | (169 | ) | 41 | (210 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | 1,133,942 | 2,283 | 0.81 | % | 1,134,459 | 2,373 | 0.84 | % | (90 | ) | (1 | ) | (89 | ) | 1,102,777 | 2,181 | 0.79 | % | 1,177,084 | 2,460 | 0.84 | % | (279 | ) | 11,224 | (11,503 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Total interest bearing deposits | 3,797,744 | 3,303 | 0.35 | % | 3,735,798 | 3,587 | 0.39 | % | (284 | ) | 32 | (316 | ) | 3,816,488 | 3,218 | 0.34 | % | 3,790,305 | 3,647 | 0.38 | % | (429 | ) | 11,277 | (11,706 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 229,719 | 349 | 0.61 | % | 176,119 | 257 | 0.59 | % | 92 | 83 | 9 | 226,455 | 349 | 0.62 | % | 181,247 | 262 | 0.58 | % | 87 | 69 | 18 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total interest bearing liabilities | 4,027,463 | 3,652 | 0.36 | % | 3,911,917 | 3,844 | 0.40 | % | (192 | ) | 115 | (307 | ) | 4,042,943 | 3,567 | 0.35 | % | 3,971,552 | 3,909 | 0.39 | % | (342 | ) | 11,347 | (11,689 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Demand deposits | 370,552 | 358,224 | 380,611 | 370,781 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 26,781 | 26,917 | 28,026 | 27,121 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders' equity | 436,566 | 419,346 | 444,117 | 425,937 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 4,861,362 | $ | 4,716,404 | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income , tax equivalent | 37,413 | 36,196 | $ | 1,217 | 4,753 | (3,536 | ) | 38,553 | 36,311 | $ | 2,242 | (8,377 | ) | 10,465 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest spread | 3.08 | % | 3.07 | % | 3.15 | % | 3.03 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest margin (net interest income to total interest earning assets) | 3.14 | % | 3.13 | % | 3.21 | % | 3.09 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax equivalent adjustment | (13 | ) | (14 | ) | (12 | ) | (12 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | 37,400 | 36,182 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 the 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 and held to maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is the unrealized loss, net of tax, in the available for sale portfolio of ($4.8) million in 2017 and ($0.5) million in 2016. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.
Six months ended June 30, 2017 | Six months ended June 30, 2016 | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Change in Interest Income/ Expense | Variance Balance Change | Variance Rate Change | |||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||||||||||||||
| U. S. government sponsored enterprises | $ | 148,054 | 1,202 | 1.62 | % | $ | 91,111 | 659 | 1.45 | % | $ | 543 | 280 | 263 | ||||||||||||||||||||||
| Mortgage backed securities and collateralized mortgage obligations-residential | 363,496 | 3,902 | 2.15 | % | 428,831 | 4,285 | 2.00 | % | (383 | ) | (740 | ) | 357 | |||||||||||||||||||||||
| State and political subdivisions | 844 | 35 | 8.29 | % | 1,034 | 41 | 7.93 | % | (6 | ) | (11 | ) | 5 | |||||||||||||||||||||||
| Corporate bonds | 42,143 | 305 | 1.45 | % | - | - | - | % | 305 | - | - | |||||||||||||||||||||||||
| Small Business Administration-guaranteed participation securities | 77,068 | 809 | 2.10 | % | 89,206 | 926 | 2.08 | % | (117 | ) | (142 | ) | 25 | |||||||||||||||||||||||
| Mortgage backed securities and collateralized mortgage obligations-commercial | 10,046 | 44 | 0.88 | % | 10,357 | 74 | 1.43 | % | (30 | ) | (7 | ) | (23 | ) | ||||||||||||||||||||||
| Other | 685 | 8 | 2.34 | % | 682 | 8 | 2.35 | % | - | - | - | |||||||||||||||||||||||||
| Total securities available for sale | 642,336 | 6,305 | 1.96 | % | 621,221 | 5,993 | 1.93 | % | 312 | (619 | ) | 626 | ||||||||||||||||||||||||
| Federal funds sold and other short-term Investments | 642,348 | 2,973 | 0.93 | % | 671,990 | 1,677 | 0.50 | % | 1,296 | (70 | ) | 1,366 | ||||||||||||||||||||||||
| Held to maturity securities: | ||||||||||||||||||||||||||||||||||||
| Corporate bonds | 9,994 | 308 | 6.16 | % | 9,979 | 308 | 6.17 | % | - | 1 | (1 | ) | ||||||||||||||||||||||||
| Mortgage backed securities and collateralized mortgage obligations-residential | 33,240 | 612 | 3.68 | % | 43,650 | 775 | 3.55 | % | (163 | ) | (240 | ) | 77 | |||||||||||||||||||||||
| Total held to maturity securities | 43,234 | 920 | 4.26 | % | 53,629 | 1,083 | 4.04 | % | (163 | ) | (239 | ) | 76 | |||||||||||||||||||||||
| Federal Reserve Bank and Federal Home Loan Bank stock | 9,645 | 268 | 5.56 | % | 9,527 | 238 | 5.00 | % | 30 | 3 | 27 | |||||||||||||||||||||||||
| Commercial loans | 185,474 | 4,830 | 5.21 | % | 200,152 | 5,180 | 5.18 | % | (350 | ) | (431 | ) | 81 | |||||||||||||||||||||||
| Residential mortgage loans | 2,935,620 | 61,310 | 4.18 | % | 2,742,918 | 59,348 | 4.33 | % | 1,962 | 6,891 | (4,929 | ) | ||||||||||||||||||||||||
| Home equity lines of credit | 325,579 | 6,216 | 3.82 | % | 356,857 | 6,358 | 3.56 | % | (142 | ) | (1,087 | ) | 945 | |||||||||||||||||||||||
| Installment loans | 8,128 | 363 | 8.93 | % | 8,488 | 383 | 9.02 | % | (20 | ) | (7 | ) | (13 | ) | ||||||||||||||||||||||
| Loans, net of unearned income | 3,454,801 | 72,719 | 4.21 | % | 3,308,415 | 71,269 | 4.31 | % | 1,450 | 5,366 | (3,916 | ) | ||||||||||||||||||||||||
| Total interest earning assets | 4,792,364 | 83,185 | 3.47 | % | 4,664,782 | 80,260 | 3.44 | % | 2,925 | 4,441 | (1,821 | ) | ||||||||||||||||||||||||
| Allowance for loan losses | (44,333 | ) | (45,013 | ) | ||||||||||||||||||||||||||||||||
| Cash & non-interest earning assets | 130,575 | 136,138 | ||||||||||||||||||||||||||||||||||
| Total assets | $ | 4,878,606 | $ | 4,755,907 | ||||||||||||||||||||||||||||||||
| Liabilities and shareholders' equity | ||||||||||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||||||||||
| Interest bearing checking accounts | $ | 829,615 | 258 | 0.06 | % | $ | 747,322 | 230 | 0.06 | % | 28 | 21 | 7 | |||||||||||||||||||||||
| Money market accounts | 578,728 | 934 | 0.32 | % | 591,937 | 962 | 0.33 | % | (28 | ) | (14 | ) | (14 | ) | ||||||||||||||||||||||
| Savings | 1,280,552 | 865 | 0.14 | % | 1,268,021 | 1,208 | 0.19 | % | (343 | ) | 35 | (378 | ) | |||||||||||||||||||||||
| Time deposits | 1,118,274 | 4,464 | 0.80 | % | 1,155,773 | 4,833 | 0.84 | % | (369 | ) | (146 | ) | (223 | ) | ||||||||||||||||||||||
| Total interest bearing deposits | 3,807,169 | 6,521 | 0.34 | % | 3,763,053 | 7,233 | 0.38 | % | (712 | ) | (104 | ) | (608 | ) | ||||||||||||||||||||||
| Short-term borrowings | 228,078 | 698 | 0.61 | % | 178,683 | 519 | 0.58 | % | 179 | 152 | 27 | |||||||||||||||||||||||||
| Total interest bearing liabilities | 4,035,247 | 7,219 | 0.36 | % | 3,941,736 | 7,752 | 0.39 | % | (533 | ) | 47 | (580 | ) | |||||||||||||||||||||||
| Demand deposits | 375,610 | 364,503 | ||||||||||||||||||||||||||||||||||
| Other liabilities | 27,408 | 27,019 | ||||||||||||||||||||||||||||||||||
| Shareholders' equity | 440,341 | 422,649 | ||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 4,878,606 | $ | 4,755,907 | ||||||||||||||||||||||||||||||||
| Net interest income , tax equivalent | 75,966 | 72,508 | $ | 3,458 | 4,394 | (1,241 | ) | |||||||||||||||||||||||||||||
| Net interest spread | 3.11 | % | 3.05 | % | ||||||||||||||||||||||||||||||||
| Net interest margin (net interest income to total interest earning assets) | 3.17 | % | 3.11 | % | ||||||||||||||||||||||||||||||||
| Tax equivalent adjustment | (25 | ) | (26 | ) | ||||||||||||||||||||||||||||||||
| Net interest income | 75,941 | 72,482 | ||||||||||||||||||||||||||||||||||
As detailed in the Annual Report to Shareholders as of December 31, 2016, the Company is subject to interest rate risk as its principal market risk. As noted in the Management’s Discussion and Analysis for the three and six month periods ended March 31,June 30, 2017 and 2016, the Company continues to respond to changes in interest rates in such a fashion to positionway that positions the Company to meet short term earning goals and to also allowallows the Company to respond to changes in interest rates in the future. Consequently, for the firstsecond quarter of 2017, the Company had an average balance of Federal Funds sold and other short-term investments of $641.1$643.6 million compared to $675.6$668.4 million in the firstsecond quarter of 2016. As investment opportunities present themselves, management plans to invest funds from the Federal Funds sold and other short-term investment portfolio into the securities available for sale, securities held to maturity and loan portfolios. Additional disclosure of interest rate risk can be found under “Liquidity and Interest Rate Sensitivity” and “Asset/Liability Management” in the Management’s Discussion and Analysis section of this document.
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)) designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon this evaluation of those disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer of the Company concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.
There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.
| PART II | OTHER INFORMATION |
None.
There were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
None.
None.
None.
None.
Reg S-K Exhibit No. | Description |
| 15 | Crowe Horwath LLP Letter Regarding Unaudited Interim Financial Information |
| 31(a) | Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer. |
| 31(b) | Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer. |
| 32 | Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer. |
| 101.INS | Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | XBRLTaxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TrustCo Bank Corp NY | ||
By: /s/ Robert J. McCormick | ||
| Robert J. McCormick | ||
| President and Chief Executive Officer | ||
By: | ||
| Michael M. Ozimek | ||
| Senior Vice President and Chief Financial Officer | ||
Date: August 4, 2017
Exhibits Index
Reg S-K
Description | |
| Crowe Horwath LLP Letter Regarding Unaudited Interim Financial Information | |
| Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer. | |
| Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer. | |
Section 1350 Certifications of Robert J. McCormick, principal executiveofficer and Michael M. Ozimek, principal financial officer. | |
| 101.INS | Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE |