UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number 0-10592
June 30, 2006
TRUSTCO BANK CORP NY
(Exact name of registrant as specified in its charter)
NEW YORK 4-1630287
State or other jurisdiction (I.R.S.
of incorporation or organization) Employer Identification No.)
5 SARNOWSKI DRIVE, GLENVILLE, NEW YORK 12302
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (518) 377-3311
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (x) Yes ( ) No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer (x) Accelerated filer ( ) Non-accelerated filer ( )
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
( )Yes (x) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding
Class of Common Stock as of August 1, 2006
--------------------------- ----------------------
$1 Par Value 75,024,213
TrustCo Bank Corp NY
INDEX
Part I. FINANCIAL INFORMATION PAGE NO.
------- --------------------- --------
Item 1. Interim Financial Statements (Unaudited): 1
Consolidated Statements of Income for the Three
Months and Six Months Ended June 30, 2006
and 2005
Consolidated Statements of Financial Condition 2
as of June 30, 2006 and December 31, 2005
Consolidated Statements of Cash Flows for the 3 - 4
Six Months Ended June 30, 2006 and 2005
Notes to Consolidated Interim Financial Statements 5 - 12
Report of Independent Registered Public Accounting Firm 13
Item 2. Management's Discussion and Analysis of 14 - 27
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 28
Market Risk
Item 4. Controls and Procedures 28 - 29
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and Use 31
of Proceeds
Item 3. Defaults Upon Senior Securities 31
Item 4. Submissions of Matters to a Vote of Security Holders 31 - 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 33
TRUSTCO BANK CORP NY
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)
3 Months Ended 6 Months Ended
June 30, June 30,
2006 2005 2006 2005
---------- ------ ------ ------
Interest and dividend income:
Interest and fees on loans $ 25,470 20,988 49,821 40,970
Interest on U.S. Treasuries and agencies 10,419 8,462 20,402 15,339
Interest on states and political
subdivisions 1,450 1,634 2,813 3,489
Interest on mortgage-backed securities
and collateralized mortgage obligations 2,231 2,468 4,525 4,701
Interest and dividends on other securities 101 267 327 402
Interest on federal funds sold and
other short term investments 2,271 3,197 4,763 7,000
--------------------------------------------------------------
Total interest income 41,942 37,016 82,651 71,901
--------------------------------------------------------------
Interest expense:
Interest on deposits:
Interest-bearing checking 360 380 644 767
Savings 2,732 1,493 5,098 3,207
Money market deposit accounts 2,415 571 4,256 1,011
Time deposits 10,549 7,443 20,477 14,532
Interest on short-term borrowings 961 419 1,739 813
Interest on long-term debt 1 2 2 3
--------------------------------------------------------------
Total interest expense 17,018 10,308 32,216 20,333
--------------------------------------------------------------
Net interest income 24,924 26,708 50,435 51,568
Provision (credit) for loan losses (1,775) (1,580) (3,575) (3,080)
--------------------------------------------------------------
Net interest income after provision
(credit)for loan losses 26,699 28,288 54,010 54,648
--------------------------------------------------------------
Noninterest income:
Trust department income 1,469 1,555 2,707 2,956
Fees for other services to customers 2,076 2,164 4,007 3,977
Net (loss) gain on securities transactions -- 1,255 (288) 4,907
Other 372 1,310 796 2,084
--------------------------------------------------------------
Total noninterest income 3,917 6,284 7,222 13,924
--------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 4,425 4,547 9,386 9,315
Net occupancy expense 1,879 1,905 3,853 3,755
Equipment expense 693 609 1,434 1,256
Professional services 852 980 1,676 1,776
Outsourced Services 1,058 978 2,109 2,163
Other real estate expenses / (income) 12 (62) 2 (394)
Other 3,067 2,650 5,451 4,968
--------------------------------------------------------------
Total noninterest expenses 11,986 11,607 23,911 22,839
--------------------------------------------------------------
Income before taxes 18,630 22,965 37,321 45,733
Income taxes 6,206 7,980 12,531 15,841
--------------------------------------------------------------
Net income $ 12,424 14,985 24,790 29,892
==============================================================
Net income per Common Share:
- Basic $ 0.166 0.200 0.331 0.399
==============================================================
- Diluted $ 0.165 0.199 0.330 0.396
==============================================================
See accompanying notes to unaudited consolidated interim financial statements.
1
TRUSTCO BANK CORP NY
Consolidated Statements of Financial Condition (Unaudited)
(dollars in thousands, except per share data)
06/30/06 12/31/05
----------- ----------
ASSETS:
Cash and due from banks $ 43,561 55,667
Federal funds sold and other
short term investments 171,708 257,196
----------- ----------
Total cash and cash equivalents 215,269 312,863
Securities available for sale:
U. S. Treasuries and agencies 763,347 743,763
States and political subdivisions 133,746 118,950
Mortgage-backed securities and collateralized
mortgage obligations 180,278 200,963
Other 12,876 20,400
----------- ----------
Total securities available for sale 1,090,247 1,084,076
----------- ----------
Loans:
Commercial 227,433 214,750
Residential mortgage loans 1,152,191 1,057,937
Home equity line of credit 224,481 192,291
Installment loans 5,781 5,741
----------- ----------
Total loans 1,609,886 1,470,719
----------- ----------
Less:
Allowance for loan losses 42,370 45,377
----------- ----------
Net loans 1,567,516 1,425,342
Bank premises and equipment 22,669 21,734
Other assets 72,088 68,744
----------- ----------
Total assets $ 2,967,789 2,912,759
=========== ==========
LIABILITIES:
Deposits:
Demand $ 249,686 251,012
Interest-bearing checking 290,239 309,668
Savings accounts 715,540 725,336
Money market deposit accounts 266,181 190,560
Certificates of deposit (in denominations
of $100,000 or more) 234,608 225,611
Time deposits 875,437 860,300
----------- ----------
Total deposits 2,631,691 2,562,487
Short-term borrowings 90,599 87,935
Long-term debt 73 87
Accrued expenses and other liabilities 31,266 33,589
----------- ----------
Total liabilities 2,753,629 2,684,098
---------- ----------
SHAREHOLDERS' EQUITY:
Capital stock par value $1; 150,000,000 and
100,000,000 shares authorized and 82,140,847
and 82,119,360 shares issued at June 30, 2006
and December 31, 2005, respectively 82,141 82,120
Surplus 118,688 117,770
Undivided profits 104,169 103,315
Accumulated other comprehensive income:
Net unrealized gain on securities
available for sale (21,725) (6,054)
Treasury stock at cost - 7,312,815 and
7,343,783 shares at June 30, 2006 and
December 31, 2005, respectively (69,113) (68,490)
----------- ----------
Total shareholders' equity 214,160 228,661
----------- ----------
Total liabilities and shareholders' equity $ 2,967,789 2,912,759
=========== ==========
See accompanying notes to unaudited consolidated interim financial statements.
2
TRUSTCO BANK CORP NY
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED JUNE 30,
2006 2005
-------- --------
Cash flows from operating activities:
Net income 24,790 29,892
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,286 1,285
Gain on sale of other real estate owned (34) (446)
Credit for loan losses (3,575) (3,080)
Deferred tax expense 1,017 3,404
Gain on sale of premises and equipment (29) (595)
Net loss (gain) on sale of securities
available for sale 288 (4,907)
Decrease in taxes receivable 10,080 9,784
Increase in interest receivable (1,576) (1,858)
Increase in interest payable 122 10
Increase in other assets (2,362) (5,308)
Decrease in accrued expenses and
other liabilities (2,445) (1,302)
------------------------
Total adjustments 2,772 (3,013)
------------------------
Net cash provided by operating activities 27,562 26,879
------------------------
Cash flows from investing activities:
Proceeds from sales and calls of securities
available for sale 51,725 165,194
Purchase of securities available for sale (94,922) (357,606)
Proceeds from maturities of securities
available for sale 10,594 594
Net increase in loans (138,652) (92,225)
Proceeds from dispositions of real estate owned 57 446
Proceeds from dispositions of bank premises
and equipment 73 2,226
Purchases of bank premises and equipment (2,265) (1,572)
------------------------
Net cash used in investing activities (173,390) (282,943)
------------------------
Cash flows from financing activities:
Net increase/(decrease) in deposits 69,204 (39,256)
Increase in short-term borrowings 2,664 6,425
Repayment of long-term debt (14) (14)
Proceeds from exercise of stock options 531 2,324
Proceeds from sale of treasury stock 4,740 6,139
Purchase of treasury stock (4,955) (7,320)
Dividends paid (23,936) (22,420)
------------------------
Net cash provided by/(used in)
financing activities 48,234 (54,122)
------------------------
Net decrease in cash and cash equivalents (97,594) (310,186)
Cash and cash equivalents at beginning of period 312,863 696,430
------------------------
Cash and cash equivalents at end of period 215,269 386,244
========================
See accompanying notes to unaudited consolidated interim financial statements.
(Continued)
3
TRUSTCO BANK CORP NY
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
SIX MONTHS ENDED JUNE 30,
2006 2005
------- -------
Interest paid 32,094 20,323
Increase in due to broker, net -- 40,607
Income taxes paid 2,522 4,469
Transfer of loans to real estate owned 53 --
Increase in dividends payable -- 87
Change in unrealized loss on securities
available for sale-gross of deferred taxes (26,144) (229)
Change in deferred tax effect on unrealized
loss on securities available for sale 10,473 98
See accompanying notes to unaudited consolidated interim financial statements
4
TrustCo Bank Corp NY
Notes to Consolidated Interim Financial Statements
(Unaudited)
1. Financial Statement Presentation
The unaudited Consolidated Interim Financial Statements of TrustCo Bank Corp
NY ("TrustCo" or "Company") include the accounts of the subsidiaries after
elimination of all significant intercompany accounts and transactions.
Prior year amounts have been reclassified to conform to the current year
presentation.
In the opinion of the management of the Company, the accompanying unaudited
Consolidated Interim Financial Statements contain all adjustments necessary
to present fairly the financial position as of June 30, 2006 and the results
of operations for the three months and six months ended June 30, 2006 and
2005 and cash flows for the six months ended June 30, 2006 and 2005. The
accompanying Consolidated Interim Financial Statements should be read in
conjunction with the TrustCo Bank Corp NY year-end Consolidated Financial
Statements, including notes thereto, which are included in TrustCo Bank Corp
NY's 2005 Annual Report to Shareholders on Form 10K.
2. Earnings Per Share
A reconciliation of the component parts of earnings per share for the three and
six month periods ended June 30, 2006 and 2005 follows:
Weighted Average
(In thousands, Net Shares Per Share
except per share data) Income Outstanding Amounts
---------------- ------------------ --------------
For the quarter ended June 30, 2006:
Basic EPS:
Net income availble to
Common shareholders $ 12,424 74,894 $0.166
Effect of Dilutive Securities:
Stock options -- 218 (.001)
---------------- ------------------ --------------
Diluted EPS $ 12,424 75,112 $0.165
================ ================== ==============
For six months ended
June 30, 2006:
Basic EPS:
Net income availble to
Common shareholders $ 24,790 74,883 $0.331
Effect of Dilutive Securities:
Stock options -- 305 (.001)
---------------- ------------------ --------------
Diluted EPS $ 24,790 75,188 $0.330
================ ================== ==============
5
Weighted Average
(In thousands, Net Shares Per Share
except per share data) Income Outstanding Amounts
---------------- ------------------ --------------
For the quarter ended June 30, 2005:
Basic EPS:
Net income available to
Common shareholders $ 14,985 75,056 $0.200
Effect of Dilutive Securities:
Stock options -- 313 (0.001)
---------------- ------------------ --------------
Diluted EPS $ 14,985 75,369 $0.199
================ ================== ==============
For six months ended June 30, 2005:
Basic EPS:
Net income available to
Common shareholders $ 29,892 74,972 $0.399
Effect of Dilutive Securities:
Stock options -- 457 (0.003)
---------------- ------------------ -------------
Diluted EPS $ 29,892 75,429 $0.396
================ ================== ==============
There were approximately 1.9 million and 668 thousand stock options which, if
included, would have been antidilutive in the calculation of average shares
outstanding as of June 30, 2006 and 2005, respectively and were therefore
excluded from the earnings per share calculations.
3. Stock Option Plans
The Company has stock option plans for officers and directors. Effective
January 1, 2006 the Company adopted the provisions of FASB Statement No. 123R
("Statement 123R") using the modified prospective method. Previously the
Company had adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation-Transaction and Disclosure" ("Statement 148").
The Company's stock option plans were previously accounted for in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issured to Employees" ("APB Opinion 25") and as such, no compensation
expense was ordinarily recorded for these plans.
In the fourth quarter of 2005 the Board of Director's of the Company approved
the accelerated vesting of all outstanding unvested stock options to purchase
shares of common stock. These options were previously awarded to executive
officers and employees under the 1995 and 2004 Stock Option Plans. The
acceleration of vesting
6
was done in anticipation of the adoption of Statement 123R. By accelerating
the vesting of these options the Company estimated that approximately $1.3
million of future compensation expense, net of tax, would be eliminated.
Options to purchase 882,100 shares of the Company's common stock, which would
otherwise have vested from time to time over the next four years, became
immediately vested and exercisable as a result of this action. The number of
shares and exercise prices of the options subject to the acceleration
remained unchanged. Also, all of the other terms of the options remain the
same. The Company recorded $127 thousand of expense during the fourth quarter
of 2005 related to this acceleration based upon an analysis performed in
accordance with APB Opinion 25.
The accelerated options included 749,500 options held by executive officers
and 132,600 options held by other employees. Based upon the Company's closing
stock price of $12.76 per share on the date of accelerated vesting, certain
of the options were below and others above the closing market price as
follows:
Grant Accelerated Exercise
Date Vesting Shares Price
---- -------------- --------
2005 411,200 $12.15
2004 394,500 $13.55
2002 76,400 $11.83
--------
882,100
========
The decision to accelerate the vesting of these options was made primarily to
reduce non-cash compensation expense that would have been recorded in the
Company's income statement in future periods upon the adoption of FASB
Statement No. 123R.
Had compensation expense for the Company's stock option plans been determined
consistent with Statement 123, the Company's net income and earnings per
share for the three and six months ended June 30, 2005 would have been as
follows: (dollars in thousands except per share data)
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
------------------ -----------------
Net income:
As reported $14,985 $29,892
Deduct: total stock-based
compensation expense
determined under fair
value based method
for all awards, net of
related tax effects (191) (382)
------- -------
Pro forma net income $14,794 $29,510
======= =======
Earnings per share:
Basic - as reported .200 .399
Basic - pro forma .197 .394
Diluted - as reported .199 .396
Diluted - pro forma .196 .391
7
The weighted average fair value of each option as of the grant date, estimated
using the Black-Scholes pricing model, and calculated in accordance with
Statement 123 was as follows for options granted in the year indicated.
No options were granted in the first two quarters of 2006.
Employees' Directors'
Plan Plan
------------ ----------
2005 $1.675 1.480
The following assumptions were utilized in the calculation of the fair value
of the options under Statement 123:
Employees' Directors'
Plan Plan
------------ ----------
Expected dividend yield: 2005 4.95% 4.95
Risk-free interest rate: 2005 3.91 3.76
Expected volatility rate: 2005 21.25 19.76
Expected lives 7.5 years 6.0 years
Under the 2004 TrustCo Bank Corp NY Stock Option Plan, the Company may grant
options to its eligible employees for up to approximately 2.0 million shares
of common stock. Under the 1995 TrustCo Bank Corp NY Stock Option Plan, the
Company may grant options to its eligible employees for up to approximately
7.9 million shares of common stock. Under the 2004 Directors Stock Option
Plan, the Company may grant options to its directors for up to approximately
200 thousand shares of its common stock. Under the 1993 Directors Stock
Option Plan, the Company could have granted options to its directors for up
to approximately 531 thousand shares of its common stock. The source of shares
issued as a result of stock option exercises is authorized, but unissued
shares as well as treasury shares.
Under each of these plans, the exercise price of each option equals the
market price of the Company's stock on the date of the grant, and an option's
maximum term is ten years. Options generally vest over five years from the
date the options are granted for the employees plans and they are immediately
vested under the directors' plan. A summary of the status of TrustCo's stock
option plans as of June 30, 2006, and changes during the quarter ended, are
as follows:
8
Outstanding Exercisable
Options Options
Weighted Weighted
Average Average
Option Option
Shares Price Shares Price
----------- ----------- --------- -----------
Balance, January 1, 2006 4,178,049 $ 10.85 4,178,049 $ 10.85
Exercised Options - 2006 (86,204) 6.16 (86,204) 6.16
Cancelled Options - 2006 (26,250) 12.86 (26,250) 12.86
--------------------------------------------------------------
Balance June 30, 2006 4,065,595 $ 10.94 4,065,595 $ 10.94
==============================================================
The total intrinsic value of stock options exercised during the first six
months of 2006 and 2005 was approximately $468 thousand and $3.0 million,
respectively. The shares used for the 2006 and 2005 stock option exercises
were issued from previously unissued shares as well as treasury shares.
The following table summarizes information about total stock options
outstanding and exercisable at June 30, 2006:
Weighted
Average Weighted
Range of Options Remaining Average
Exercise Outstanding Contractual Exercise
Price and Exercisable Life Price
-------- --------------- ----------- --------
Less than
$7.50 22,005 1.8 years $5.94
Between $7.51
and $10.00 2,125,340 4.7 years 9.58
Greater than
$10.00 1,918,250 8.5 years 12.50
--------- --------- ------
Total 4,065,595 6.5 years $10.94
--------- --------- ------
The aggregate intrinsic value of options outstanding and exercisable as of
June 30, 2006 was approximately $3.2 million.
The Company awarded 2.7 million performance bonus units to the executive
officers and directors. These units become vested and exercisable only under
a change of control as defined in the plan. The units were awarded based upon
the stock price at the time of grant and, if exercised under a change of
control, allow the holder to receive the increase in value offered in the
exchange over the stock price at the date of grant for each unit.
9
4. Comprehensive Income
Comprehensive income includes the reported net income of a company adjusted
for items that are accounted for as direct entries to equity, such as the
mark to market adjustment on securities available for sale, foreign currency
items, minimum pension liability adjustments, and certain derivative gains
and losses. At the Company, comprehensive income represents the sum of net
income and items of other comprehensive income or loss, which are reported
directly in shareholders' equity, net of tax, such as the change in net
unrealized gain or loss on securities available for sale. Accumulated other
comprehensive income or loss, which is a component of shareholders' equity,
represents the net unrealized gain or loss on securities available for sale,
net of tax.
Comprehensive income for the three month periods ended June 30, 2006 and 2005
was $4.4 million and $21.0 million, respectively, and $9.1 million and $29.8
million for the six month periods ended June 30, 2006 and 2005, respectively
The following summarizes the components of other comprehensive income (loss):
(dollars in thousands)
Three months ended June 30
2006 2005
-------- ------
Unrealized holding gains (losses) arising
during period, net of tax (pre-tax loss
of $13,394 for 2006 and pre-tax gain of
$11,328 for 2005) $(8,005) 6,816
Reclassification adjustment for net gain
realized in net income during the period,
net of tax (pre-tax gain of $1,255
for 2005) -- (755)
-------- ------
Other comprehensive income (loss) $(8,005) 6,061
======== ======
(dollars in thousands)
Six months ended June 30
2006 2005
-------- ------
Unrealized holding gains (losses) arising
during period, net of tax (pre-tax loss
of $26,433 for 2006 and pre-tax gain of
$4,678 for 2005) $(15,844) 2,820
Reclassification adjustment for net gain
(loss) realized in net income during the
period, net of tax (pre-tax loss of $288
for 2006 and pre-tax gain of $4,907
for 2005) 171 (2,952)
-------- ------
Other comprehensive loss $(15,673) (132)
======== ======
10
5. Benefit Plans
The table below outlines the component's of the Company's net periodic expense
(benefit) recognized during the three month and six month periods ended
June 30, 2006 and 2005 for its pension and other postretirement benefit plans:
Components of Net Periodic Expense/(Benefit) for the three months ended
June 30,
Other
Pension Benefits Postretirement Benefits
2006 2005 2006 2005
----- ----- ----- -----
Service cost $ 198 194 9 13
Interest cost 382 371 18 23
Expected return on
plan assets (448) (440) (102) (101)
Amortization of
prior service cost 26 26 (114) (134)
Curtailment gain, net (362) -- -- --
----- ----- ----- -----
Net periodic expense/(benefit) $(204) 151 (189) (199)
===== ===== ===== =====
Components of Net Periodic Expense/(Benefit) for the six months ended June 30,
Other
Pension Benefits Postretirement Benefits
2006 2005 2006 2005
----- ----- ----- -----
Service cost $ 389 402 18 19
Interest cost 770 759 36 36
Expected return on
plan assets (896) (903) (204) (202)
Amortization of
prior service cost 53 53 (228) (259)
Curtailment gain, net (362) -- -- --
----- ----- ----- -----
Net periodic expense/(benefit) $ (46) 311 (378) (406)
===== ===== ===== =====
Contributions
The Company previously disclosed in its consolidated financial statements for
the year ended December 31, 2005, that it did not expect to make any
contributions to its pension and postretirement benefit plans in 2006. As of
June 30, 2006, no contributions have been made. The Company presently
anticipates that in accordance with IRS limitations and accounting standards,
it will not make any contributions in 2006.
In June 2006, the Company recorded a $362 thousand non-cash curtailment
adjustment in accordance with SFAS No. 88, "Employer's Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", ("SFAS No. 88") in connection with freezing the
defined benefit pension plan, using actuarial assumptions consistent with
those used at December 31, 2005 and updated to June 30, 2006. SFAS No. 88
requires curtailment accounting if an event eliminates, for a significant
number of employees, the accrual of defined benefits for some or all of their
future services.
11
6. Impact of Changes in Accounting Standards
In 2004, the FASB issued a statement to revise Statement of Financial
Accounting Standards ("SFAS") No. 123 and SFAS No. 95, "Share-Based Payment,"
that addresses the accounting for share-based payment transactions in which
an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments that may be settled by the
issuance of such equity instruments. The Company adopted the provisions of
SFAS No. 123R using the modified prospective method of transition on January
1, 2006. Under this method, SFAS No. 123R will apply to new awards and to
awards that are outstanding on the effective date and are subsequently
modified or cancelled. Compensation expense for outstanding awards for which
the requisite service period had not been rendered as of the effective date
will be recognized over the remaining service period using the compensation
cost calculated for pro forma disclosure purposes under SFAS No. 123. See
Note 3, Stock Option Plans, for pro-forma earnings per share for stock-based
compensation and information on the acceleration of vesting periods that
occurred in 2005. The adoption of SFAS No. 123R did not have a significant
effect on the Company's consolidated financial condition or results of
operations.
In July, 2006 the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes". FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises' financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes". FIN 48 prescribes a recognition threshold and measurement
attributable for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosures and transitions. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently
analyzing the effects of FIN 48.
7. Guarantees
The Company does not issue any guarantees that would require
liability-recognition or disclosure, other than its standby letters of
credit. Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Standby
letters of credit generally arise in connection with lending relationships.
The credit risk involved in issuing these instruments is essentially the same
as that involved in extending loans to customers. Contingent obligations
under standby letters of credit totaled approximately $3.3 million at June
30, 2006 and represent the maximum potential future payments the Company
could be required to make. Typically, these instruments have terms of twelve
months or less and expire unused; therefore, the total amounts do not
necessarily represent future cash requirements. Each customer is evaluated
individually for creditworthiness under the same underwriting standards used
for commitments to extend credit and on-balance sheet instruments. Company
policies governing loan collateral apply to standby letters of credit at the
time of credit extension. Loan-to-value ratios are generally consistent with
loan-to-value requirements for other commercial loans secured by similar
types of collateral. The fair value of the Company's standby letters of
credit at June 30, 2006 was insignificant.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
TrustCo Bank Corp NY:
We have reviewed the consolidated statement of financial condition of TrustCo
Bank Corp NY and subsidiaries (the Company) as of June 30, 2006, the related
consolidated statements of income for the three and six-month periods ended
June 30, 2006 and 2005 and the related consolidated statements of cash flows
for the six-month periods ended June 30, 2006 and 2005. These consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
statement of financial condition of TrustCo Bank Corp NY and subsidiaries as
of December 31, 2005, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 24, 2006 we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated statement of
financial condition as of December 31, 2005 is fairly stated, in all material
respects, in relation to the consolidated statement of financial condition from
which it has been derived.
/s/ KPMG LLP
----------------
KPMG LLP
Albany, New York
August 4, 2006
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The review that follows focuses on the factors affecting the financial
condition and results of operations of TrustCo Bank Corp NY ("TrustCo" or
"Company") during the three month and six month periods ended June 30, 2006,
with comparisons to 2005 as applicable. Net interest income and net interest
margin are presented on a fully taxable equivalent basis in this discussion.
The consolidated interim financial statements and related notes, as well as
the 2005 Annual Report to Shareholders should be read in conjunction with
this review. Amounts in prior period consolidated interim financial
statements are reclassified whenever necessary to conform to the current
periods' presentation.
Forward-looking Statements
Statements included in this review and in future filings by TrustCo with the
Securities and Exchange Commission, in TrustCo's press releases, and in oral
statements made with the approval of an authorized executive officer, which
are not historical or current facts, are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, and are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. TrustCo cautions readers not to
place undue reliance on any such forward-looking statements, which speak only
as of the date made. The following important factors, among others, in some
cases have affected and in the future could affect TrustCo's actual results,
and could cause TrustCo's actual financial performance to differ materially
from that expressed in any forward-looking statement: (1) credit risk, (2)
interest rate risk, (3) competition, (4) changes in the regulatory environment,
and (5) changes in general business and economic trends. The foregoing list
should not be construed as exhaustive, and the Company disclaims any obligation
to subsequently revise any forward-looking statements to reflect events or
circumstances after the date of such statements, or to reflect the occurrence
of anticipated or unanticipated events.
Following this discussion is the table "Distribution of Assets, Liabilities
and Shareholders' Equity: Interest Rates and Interest Differential" which gives
a detailed breakdown of TrustCo's average interest earning assets and interest
bearing liabilities for the three months and six months ended June 30, 2006
and 2005.
Overview
TrustCo recorded net income of $12.4 million, or $0.165 of diluted earnings
per share for the three months ended June 30, 2006, as compared to net income
of $15.0 million or $0.199 of diluted earnings per share in the same period
in 2005. For the six month period ended June 30, 2006, TrustCo recorded net
income of $24.8 million, or $0.330 of diluted earnings per share, as compared
to $29.9 million, or $0.396 of diluted earnings per share for the comparable
period in 2005.
14
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
June 30, 2006
The primary factors accounting for the year to date changes were:
- A $88.9 million increase in the average balance of interest earning
assets from $2.76 billion for the six-month period Ended June 30, 2005
to $2.85 billion for the six-month period Ended June 30, 2006,
- A decrease in net interest margin from 3.87% for 2005 to 3.63% for 2006,
- An increase in the recapture of the provision for loan losses from $3.1
million in 2005 to $3.6 million in 2006,
- A decrease in total noninterest income from $13.9 million in 2005 to
$7.2 million in 2006. Within this category, securities transactions
resulted in $4.9 million of net gains in 2005 compared to $288 thousand
of net losses in 2006, and,
- An increase in total noninterest expense from $22.8 million for the six
months ended June 30, 2005 to $23.9 million for the comparable period in
2006.
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.
The following Management's Discussion and Analysis for the second quarter and
first six months of 2006 compared to the comparable periods in 2005 is
greatly affected by the change in interest rates in the marketplace in which
TrustCo competes. Included in the 2005 Annual Report to Shareholders is a
description of the effect interest rates had on the results for the year
2005 compared to 2004. Most of the same market factors discussed in the 2005
Annual Report also had a significant impact on the quarterly and year to date
2006 results.
TrustCo competes with other financial service providers based upon many factors
including quality of service, convenience of operations, and rates paid on
deposits and charged on loans. The absolute level of interest rates, changes in
rates and customers' expectations with respect to the direction of interest
rates have a significant impact on the volume of loan and deposit originations
in any particular period.
One of the most important interest rates used to control national economic
policy is the "federal funds" rate. This is the interest rate utilized for
institutions with the highest credit quality rating. The federal funds rate
increased from 2.25% at January 1, 2005 to
15
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
June 30, 2006
3.25% by June 30, 2005 and to 4.25% by year end 2005. For 2006 the federal
funds rate has increased from the 4.25% at the beginning of the year to 5.25%
as of June 30, 2006. These changes resulted in increases of 100 basis points
for the first six months of 2005 and another 100 basis points during the first
six months of 2006.
Over the same time period, for comparison purposes, the 10 year treasury rate
decreased from 4.21% at January 1, 2005 to 3.91% at June 30, 2005. For 2006
the 10 year treasury rate began the year at 4.36% and increased 78 basis points
to 5.14% by June 30, 2006.
The Federal Reserve has indicated their intention to continue to monitor
economic expansion and inflation in the United States economy which may
require additional changes to the federal funds target rate during the
remainder of 2006.
These changes in interest rates have an effect on the Company relative to the
interest income on loans, securities and federal funds sold as well as on
interest expense on deposits and borrowings. New originations of residential
real estate loans and new purchases of longer-term investments are most
affected by the changes in longer term market interest rates such as the 10
year treasury and rates established by secondary market participants. The
federal funds sold portfolio and other short term investments are affected
primarily by changes in the federal funds target rate. Deposit interest rates
are most affected by short term market interest rates. Also, changes in
interest rates have an effect on the recorded balance of the securities
available for sale portfolio, which is recorded at market value. Generally as
interest rates increase the market value of the securities available for sale
portfolio will decrease.
The principal loan product for TrustCo is residential real estate loans.
Interest rates on new residential real estate loan originations are
influenced by the rates established by secondary market participants such as
Freddie Mac and Fannie Mae. Because TrustCo is a portfolio lender and does
not sell loans into the secondary market, the Company establishes rates that
management determines are appropriate in relation to the long-term nature of
a residential real estate loan, while remaining competitive with the secondary
market rates.
For the second quarter of 2006 the net interest margin decreased to 3.56% from
3.98% for the second quarter of 2005. The quarterly results reflect the
following significant factors:
- The average balance of securities available for sale increased by $104.3
million and the average yield decreased to 5.30%.
- The average balance of federal funds sold and other short term
investments decreased by $260.7 million and the average yield increased
203 basis points to 4.90%. The increase in yield on federal funds sold
and other short-term investments is attributable to the increase in the
target federal funds rate during these time periods.
16
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
June 30, 2006
- The loan portfolio grew by $268.3 million to $1.57 billion and the
average yield increased 3 basis points to 6.50%.
- The average balance of interest bearing liabilities (primarily deposit
accounts) increased $100.9 million and the average yield increased 102
basis points to 2.78%.
These changes resulted in a net interest margin decrease of 42 basis points
from 3.98% for the second quarter of 2005 to 3.56% for the comparable period
in 2006.
During the second quarter of 2006 the Company's strategy was to expand the
loan portfolio by offering competitive interest rates as the rate environment
began to increase. The TrustCo residential real estate loan product is very
competitive compared to local and national competitors.
The strategy on the funding side of the balance sheet continues to be to
attract customers to the Company based upon a combination of service,
convenience and interest rate. The Company offered attractive long-term
deposit rates as part of a strategy to lengthen deposit lives. This strategy
has been successful but has also resulted in a portion of the increase in the
deposit costs.
Earning Assets
The total average balance of interest earning assets increased from $2.77
billion for the second quarter of 2005 to $2.88 billion for the second
quarter of 2006 with an average yield of 5.48% in 2005 and 5.93% in 2006.
Income on earning assets increased during this same time-period from $37.9
million in 2005 to $42.7 million in 2006.
For the six month period ended June 30, 2006, the average balance of interest
earning assets was $2.85 billion, an increase of $88.9 million from the
comparable period in 2005 of $2.76 billion. The average yield on interest
earning assets was 5.35% for 2005, compared to 5.91% in 2006. The increase in
the average balance of earning assets and the increase in the yield earned on
these assets, resulted in an increase in interest income of $10.4 million to
$84.2 million for the six months of 2006, compared to $73.8 million for the
six months to 2005.
Loans
The average balance of loans for the second quarter was $1.30 billion in 2005
and $1.57 billion in 2006. The yield on loans increased from 6.47% in 2005 to
6.50% in 2006. The combination of the increased average balances and the higher
rates resulted in an increase in the interest income on loans by $4.5 million.
For the six-month period ended June 30, 2006, the average balance in the loan
portfolio was $1.53 billion compared to $1.28 billion for the comparable
period in 2005. The average yield increased from 6.44% in 2005 to 6.52% in
2006. The increase in the average balance of loans outstanding and the impact
of the increase in the yield resulted in total interest income of $49.8
million in 2006 compared to $41.0 million in 2005.
17
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
June 30, 2006
TrustCo actively markets the residential loan products (which includes
residential real estate and, home equity credit loans) within its market
territory. Mortgage loan rates are affected by a number of factors including
the prime rate, the federal funds rate, rates set by competitors and secondary
market participants. As noted earlier, market interest rates have changed
significantly as a result of national economic policy in the United States.
During this period of changing interest rates TrustCo aggressively marketed the
unique aspects of its loan products thereby attempting to create a
differentiation from other lenders. These unique aspects include extremely
low closing costs, fast turn around time on loan approvals, no escrow or
mortgage insurance requirements and the fact that the Company holds these
loans in portfolio and does not sell them into the secondary markets.
Though there is debate among nationally recognized economists, the general
tenor of the national economy is for improvement and increases in interest
rates. Consequently, the significant amount of refinancing that occurred during
2003 and early 2004 may be completed with only residual effects into 2006.
Assuming a rise in long-term interest rates, the Company would anticipate that
the unique features of its loan product will continue to attract customers in
the residential mortgage loan area.
The impact of the increase in the benchmark interest rate indices (prime rate,
federal funds, etc.) is apparent in the change in the yield earned in the
commercial and home equity loan portfolios. The yields earned for the first
six months of 2006 were 39 basis points, and 141 basis points, respectively,
greater than in the first six months of 2005.
Securities Available for Sale
During the second quarter of 2006, the average balance of securities available
for sale was $1.13 billion with a yield of 5.30%, compared to $1.02 billion for
the second quarter of 2005 with a yield of 5.35%. The combination of the
increase in average balance and the decrease in the average yield caused an
increase in interest income on securities available for sale of approximately
$1.3 million between the second quarter of 2006 and 2005.
The six-month results reflect similar trends. The total average balance of
securities available for sale during the six months of 2005 was $949.9 million
with an average yield of 5.43% compared to an average balance for 2006 of
$1.11 billion with a yield of 5.31%.
The largest increase in the securities available for sale portfolio was within
the category of Government Sponsored Enterprises which are debt instruments
issued by FNMA, Freddie Mac and the Federal Home Loan Bank. The increase was
$136.3 million in the average balance between the second quarter of 2006 and
2005. During 2005 and 2006 the Company increased its investment in these
instruments as a means of deploying excess liquidity that had been invested in
federal funds sold and other short term investments. The yield on interest
earning assets was postively affected by these steps
18
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
June 30, 2006
because the rates earned on these investments were greater than the rates
earned on the Federal Funds and other short term investments portfolio.
For 2006 the long term interest rates as reflected by the 10 year Treasury have
increased over the levels for 2005. The securities available for sale portfolio
is reflected at fair value and therefore these investments reflected
unrecognized depreciation of $36.1 million. The Company has the ability and
intent to hold these securities to maturity or to the point that the unrealized
loss reverses. None of the depreciation in the value of this portfolio reflects
a deterioration of the credit worthiness of the issuers or a concern as to the
eventual repayment of all amounts due.
Federal Funds Sold and Other Short-term Investments
During the second quarter of 2006 the average balance of federal funds sold
and other short-term investments was $185.8 million with a yield of 4.90%,
compared to the average balance for the three month period ended June 30,
2005 of $446.5 million with an average yield of 2.87%. The $260.7 million
decrease in the average balance, offset by the 203 basis points increase in
the average yield, resulted in total interest income on federal funds sold
and other short-term investments of $2.3 million for 2006 compared to $3.2
million for 2005.
During the six-month period ended June 30, 2006, the average balance of
federal funds sold and other short-term investments was $205.6 million with a
yield of 4.66% compared to an average balance of $537.4 million in 2005 with
an average yield of 2.63%.
Changes in the yield on the federal funds and other short-term investment
portfolios resulted primarily from changes in the target rate set of the
Federal Reserve Board for federal funds sold. 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 portfolio.
Funding Opportunities
TrustCo utilizes various funding sources to support its earning asset
portfolio. The vast majority of the Company's funding comes from traditional
deposit vehicles such as savings, interest-bearing checking and time deposit
accounts.
During the second quarter, total average interest bearing liabilities were
$2.46 billion for 2006 and $2.35 billion for 2005. The rate paid on total
interest bearing liabilities was 2.78% for the second quarter of 2006 and
1.76% for the second quarter of 2005. Total interest expense for the second
quarter increased approximately $6.7 million to $17.0 million for 2006
compared to $10.3 million for 2005.
19
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
June 30, 2006
Total interest-bearing liabilities were $2.43 billion for the six-month periods
ended June 30, 2006 and $2.36 billion for 2005. The rate paid on total interest
bearing liabilities was 2.67% for 2006 and 1.74% for 2005 and total interest
expense was $32.2 million in 2006 and $20.3 million in 2005.
Demand deposit average balances increased $13.9 million for the second
quarter of 2006 compared to the second quarter of 2005. Demand deposits
averaged $233.1 million in the second quarter of 2005 and $247.0 million in
2006. On a year to date basis, average demand deposits were $229.8 million in
2005 compared to $244.5 million in 2005.
Interest bearing deposit balances have increased from an average of $2.28
billion for the first six months of 2005 to $2.33 billion for 2006. The
increase in overall deposits noted for the six months of 2006 compared to
2005 were the result of increases in the money market account of $76.3
million and time deposits of $108.9 million offset by reductions in savings
accounts of $96.0 million and interest bearing checking accounts of $31.4
million. Similar trends were also noted for the second quarter of 2006 compared
to 2005. TrustCo has experienced a deposit inflow primarily as a result of
customers moving funds back into the banking system from the stock and bond
market and from TrustCo's new branch openings. Also customers are moving
balances to higher yielding deposit accounts and away from the savings and
interest bearing checking accounts.
Short-term borrowings for the quarter averaged $99.2 million in 2006 compared
to $81.5 million in 2005. The average rate paid on these borrowings increased
during this time period from 2.06% to 3.88% for the second quarter of 2006.
On a year to date basis, short term borrowings averaged $95.5 million for the
six months ended June 30, 2006 compared to $82.0 million for the comparable
period in 2005. The average rate paid on these borrowings was 3.67% for the
six months of 2006 and 2.00% for 2005.
Net Interest Income
Taxable equivalent net interest income decreased by $1.9 million to
$25.7 million for the second quarter of 2006. The net interest spread decreased
57 basis points between 2005 and 2006 and the net interest margin decreased by
42 basis points.
Taxable equivalent net interest income for the first six months of 2006 was
$51.9 million, a decrease of approximately $1.5 million over the $53.5 million
for the first six months of 2005. Net interest spread decreased 37 basis points
to 3.24% and net interest margin decreased by 24 basis points to 3.63 for the
six-month period ended June 30, 2006.
20
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
June 30, 2006
Nonperforming Assets
Nonperforming assets include nonperforming loans which are those loans in a
nonaccrual status, loans that have been restructured, and loans past due three
payments or more and still accruing interest. Also included in the total of
nonperforming assets are foreclosed real estate properties, which are
categorized as real estate owned.
Impaired loans are considered to be those commercial and commercial real estate
loans in a nonaccrual status and loans restructured. The following describes
the nonperforming assets of TrustCo as of June 30, 2006.
Nonperforming loans: Total nonperforming loans were $5.1 million at
June 30, 2006, an increase from the $3.0 million of nonperforming loans at
June 30, 2005. There were $3.7 million of nonaccrual loans at June 30, 2006 and
$1.0 million at June 30, 2005. Restructured loans were $1.4 million at
June 30, 2006 compared to $2.0 million at June 30, 2005. There were $9 thousand
of loans past due three payments or more and still accruing interest at
June 30, 2006 and none at June 30, 2005.
While non accruing loans have increased, as noted above, these loans are
residential real estate loans which are generally placed on non-accrual status
at 3 payments past due, and are generally considered to be reasonably
well secured.
All of the nonperforming loans at June 30, 2006 and 2005 are residential real
estate or retail consumer loans. Since 2000, there has been a continued
shifting in the components of TrustCo's problem loans and chargeoffs from
commercial and commercial real estate to the residential real estate and retail
consumer loan portfolios.
TrustCo strives to identify borrowers that are experiencing financial
difficulties and to work aggressively with them so as to minimize losses or
exposures. Beginning in 2004 the number of new bankruptcy filings in the
Capital District area were lower than statewide trends. Also the demand for
housing in the Capital District area has increased which has resulted in
increased real estate prices in selected sectors of the marketplace. These
trends may be indicators of future economic stability for this region and a
continued lessening of loan chargeoffs.
Total impaired loans at June 30, 2006 of $1.4 million consisted of restructured
retail loans. During the first six months of 2006, there were no commercial
loan chargeoffs, $64 thousand of consumer loan chargeoffs and $1.0 million
of residential mortgage loan chargeoffs as compared with $379 thousand of
commercial loan chargeoffs, $159 thousand of consumer loan chargeoffs and
$650 thousand of residential mortgage loan chargeoffs in the first half of
2005. Recoveries during the first six months were $1.6 million in 2006 and
$2.9 million in 2005.
Though the economic climate in the Upstate New York area has suffered over the
last several years, resulting in moderate levels of bankruptcies and relatively
flat real estate
21
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
June 30, 2006
prices, overall economic trends in the last two years have been improving. As
noted previously, bankruptcies in the Capital District area have lagged
statewide trends and general housing prices have continued to increase. These
positive trends have helped marginal credits better manage their debt load.
The Company's net loan chargeoff (recovery) experience has been significantly
improving in recent years and was in a net loan recovery position in 2004 and
2005 and continues to be in a net loan recovery position on a year to date and
quarter to date basis in 2006. This positive trend is consistent with the
positive trends the Company has noted in general economic conditions in the
Company's market areas. Consideration of net loan chargeoff (recovery)
experience is factored into the Company's estimation of the required level of
the allowance for loan losses and the provision (credit) for loan losses. The
continuation of the positive trend in net loan chargeoff (recovery) experience
results in a reduction of the Company's estimate of the level of allowance for
loan losses that is necessary. Consideration of this positive trend in net loan
chargeoff (recovery) experience has resulted in the negative provision for
loan losses on a year to date and quarter to date basis in 2006 and 2005.
Real estate owned: There was $53 thousand real estate owned as of June 30, 2006
and none at June 30, 2005.
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 risk inherent in the loan portfolio.
At June 30, 2006, the allowance for loan losses was $42.4 million, which
represents a decrease from the $45.4 million in the allowance at December 31,
2005. The allowance represents 2.63% of the loan portfolio as of June 30, 2006
compared to 3.60% at June 30, 2005.
In deciding on the adequacy of the allowance for loan losses, management
reviews the current nonperforming loan portfolio as well as loans that are past
due and not yet categorized as nonperforming for reporting purposes. Also,
there are a number of other factors that are taken into consideration,
including:
- The magnitude and nature of the recent loan chargeoffs and recoveries,
- The growth in the loan portfolio and the implication that has in
relation to the economic climate in the bank's business territory, and
- The improving economic environment in the upstate New York territory
over the last two years.
Management continues to monitor these in determining future provisions for loan
losses or negative provisions for loan losses in relation to the economic
environment, loan chargeoffs, recoveries and the level and trends of
nonperforming loans. Should these trends continue, negative provisions foR
loan losses would, in all likelihood, also continue.
22
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
June 30, 2006
Liquidity and Interest Rate Sensitivity
TrustCo seeks to obtain favorable sources of funding and to maintain prudent
levels of liquid assets in order to satisfy varied liquidity demands. TrustCo's
earnings performance and strong capital position enable the Company to raise
funds easily in the marketplace and to secure new sources of funding. The
Company actively manages its liquidity through target ratios established under
its liquidity policies. Continual monitoring of both historical and prospective
ratios allows TrustCo to employ strategies necessary to maintain adequate
liquidity. Management has also defined various degrees of adverse liquidity
situations, which could potentially occur, and has prepared appropriate
contingency plans should such a situation arise.
Noninterest Income
Total noninterest income for the three months ended June 30, 2006 was $3.9
million a decrease of $2.4 million from the comparable period in 2005. During
the 2006 period, the Company recorded no gains or losses from net securities
transactions as compared to $1.3 million of net gains on securities
transactions for the comparable period in 2005. Excluding these securities
transactions, noninterest income decreased from $5.0 million in the second
quarter of 2005 to $3.9 million for the comparable period in 2006.
Total noninterest income was $7.2 million for the six months of 2006 compared
to $13.9 million for 2005. Excluding net securities losses of $288 thousand
in the six month period ended June 30, 2006 and $4.9 million of net securities
gains in the first half of 2005, in the balances for 2006 and 2005 would have
been $7.5 million and $9.0 million, respectively.
Trust department income decreased slightly to $1.5 million for the second
quarter of 2006. The decrease in trust fee income is the result of a decrease
in assets under management from $974 million as of June 30, 2005 to $863
million as of June 30, 2006. On a year to date basis trust fee income was
$2.7 million for 2006 and $3.0 million in 2005.
Fees for other services to customers are down slightly for the quarter and up
slightly on year to date basis between 2005 and 2006 due primarily to loan
volume.
The decrease in other income for the second quarter of 2006 is due to the
gain recognized in 2005 from the sale of the former operations center in
Schenectady. The gain was approximately $600 thousand. Also as a result of the
sale in late 2005 of the credit card portfolio there is approximately
$150 thousand of credit card income in the second quarter of 2005 that is not
reflected as income in 2006.
Noninterest Expenses
Total noninterest expense for the second quarter of 2006 was $12.0 million as
compared to $11.6 million for 2005. For the six months ended June 30, 2006
and 2005, total noninterest expense was $23.9 million and $22.8 million,
respectively.
23
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
June 30, 2006
Salaries and employee benefits cost decreased from $4.5 million for the second
quarter of 2005 to $4.4 million for the comparable period in 2006. Salaries and
benefits were up slightly for the six month period ended June 30, 2006 compared
to 2005. Total salaries and employee benefits were $9.4 million for the six
months ended June 30, 2006 and $9.3 million for the corresponding period in
2005. During the second quarter of 2006 the Company recognized a net gain of
$362 thousand as a result of curtailing the pension plan which will be
effective at year end 2006. The impact of the pension plan curtailment is that
estimated future expenses associated with the pension plan in subsequent
periods will be reduced.
Net occupancy expense decreased slightly for the second quarter of 2006
compared to 2005 due primarily to cost savings in the branch operations.
Other non-interest expense increased by $417 thousand for the second quarter
of 2006 compared to 2005 and by $483 thousand on a year to date basis for
2006 and 2005. The primary increase in other expenses is the result of
increased advertising and contributions during the second quarter of 2006
compared to 2005. The increase in these categories is connected to the branch
expansion program and the need to create an awareness of the Trustco Bank
branches in these market territories.
Income Taxes
In the second quarter of 2006 and 2005, TrustCo recognized income tax expense
of $6.2 million and $8.0 million, respectively. This resulted in an effective
tax rate of 33.3% for the second quarter of 2006 and 34.7% for the second
quarter of 2005. For the six months of 2006, total income tax expense was
$12.5 million compared to $15.8 million for 2005. This resulted in an effective
tax rate of 33.6% for 2006 and 34.6% for 2005. The reduction in income tax
expenses for the quarter and year to date reflect the lower amount of taxable
income generated in 2006 compared to 2005.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable
financial organization, TrustCo strives to maintain strong capital ratios. New
issues of equity securities have not been required since traditionally, most
of its Scapital requirements are met through capital retention.
Total shareholders' equity at June 30, 2006 was $214.2 million, a decrease of
$14.5 million from the year-end 2005 balance of $228.7 million. The change in
shareholders' equity between year-end 2005 and June 30, 2006 primarily reflects
net income retained by TrustCo ($854 thousand), a $15.7 million decrease in
accumulated other comprehensive income due to the unrealized loss on the
securities available for the sale portfolio and a $192 thousand increase in
treasury stock.
TrustCo declared dividends of $0.320 per share during the first six months of
2006 and $0.300 per share for 2005. These resulted in a dividend payout ratio
of 96.6% in 2006 and 75.3% in 2005. The Company achieved the following ratios
as of June 30, 2005 and 2004:
24
TrustCo Bank Corp NY
Management's Discussion and Analysis - continued
June 30, 2006
June 30, Minimum Regulatory
2006 2005 Guidelines
------------------- ------------------
Tier 1 risk adjusted
capital 15.45% 17.03% 4.00%
Total risk adjusted
capital 16.72% 18.31% 8.00%
In addition, at June 30, 2006 and 2005, the consolidated equity to total assets
ratio (excluding the mark to market effect of securities available for sale)
was 7.89% and 8.00%, respectively, compared to a minimum regulatory requirement
of 4.00%.
25
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of average balance
sheet, related interest income and expense and the average annualized yields
on interest earning assets and annualized rates on interest bearing liabilities
of TrustCo (adjusted for tax equivalency) for each of the reported periods.
Nonaccrual loans are included in loans for this analysis. The average balances
of securities available for sale is calculated using amortized costs for these
securities. Included in the balance of shareholders' equity is unrealized
(depreciation) appreciation, net of tax, in the available for sale portfolio
of ($17.0) million in 2006 and 1.5 million in 2005. The subtotals contained
in the following table are the arithmetic totals of the items contained in
that category.
Three Months 2006 Three Months 2005
Average Interest Average Average Interest Average Change in Variance Variance
(dollars in thousands) Balance Rate Balance Rate Interest Balance Rate
Income/ Change Change
Expense
---------- -------- ------ ---------- -------- ------ --------- -------- --------
Assets
Securities available for sale:
U.S. Treasuries $ 989 $ 12 4.70% $ 1,324 $ 10 3.23% 2 (13) 15
Gov't Sponsored Enterprises 799,158 10,408 5.21% 662,840 8,452 5.10% 1,956 1,770 186
Mortgage-backed securities and
collateralized mortgage
obligations 188,503 2,231 4.73% 213,930 2,468 4.61% (237) (616) 379
States and political subdivisions 128,081 2,205 6.89% 130,524 2,508 7.69% (303) (46) (257)
Other 12,302 115 3.78% 16,150 276 6.85% (161) (56) (105)
---------- -------- ------ ---------- -------- ------ --------- -------- --------
Total securities available
for sale 1,129,033 14,971 5.30% 1,024,768 13,714 5.35% 1,257 1,039 218
Federal funds sold and other
short-term Investments 185,824 2,270 4.90% 446,500 3,197 2.87% (927) (8,616) 7,689
Commercial Loans 228,142 4,292 7.52% 201,471 3,634 7.22% 658 501 157
Residential mortgage loans 1,124,412 17,425 6.20% 892,638 14,207 6.37% 3,218 5,670 (2,452)
Home equity lines of credit 209,592 3,575 6.84% 193,126 2,806 5.83% 769 254 515
Installment loans 5,388 189 14.08% 12,049 350 11.65% (161) (542) 381
---------- -------- ------ ---------- -------- ------ --------- -------- --------
Loans, net 1,567,534 25,481 6.50% 1,299,284 20,997 6.47% 4,484 5,883 (1,399)
Total interest earning assets 2,882,391 42,722 5.93% 2,770,552 37,908 5.48% 4,814 (1,694) 6,508
-------- ------ -------- ------ --------- -------- --------
Allowance for loan losses (43,229) (48,108)
Cash & non-interest earning assets 107,278 122,043
---------- ----------
Total assets $2,946,440 $2,844,487
========== ==========
Liabilities and
shareholders' equity
Deposits:
Interest Bearing
Checking Accounts $ 292,651 359 0.49% $ 325,898 380 0.47% (21) (107) 86
Money market accounts 239,855 2,416 4.04% 143,104 571 1.60% 1,845 567 1,278
Savings 718,170 2,732 1.53% 810,579 1,493 0.74% 1,239 (1,116) 2,355
Time deposits 1,105,608 10,549 3.83% 993,519 7,443 3.01% 3,106 910 2,196
---------- -------- ------ ---------- -------- ------ --------- -------- --------
Total interest bearing deposits 2,356,284 16,056 2.73% 2,273,100 9,887 1.74% 6,169 253 5,916
Short-term borrowings 99,213 961 3.88% 81,499 419 2.06% 542 107 435
Long-term debt 75 1 5.24% 103 2 5.24% (1) (1) --
---------- -------- ------ ---------- -------- ------ --------- -------- --------
Total Interest Bearing
Liabilities 2,455,572 17,018 2.78% 2,354,702 10,308 1.76% 6,710 359 6,351
Demand deposits 247,029 233,138
Other liabilities 28,427 28,518
Shareholders' equity 215,412 228,129
Total liab. & shareholders' equity $2,946,440 $2,844,487
========== ==========
Net Interest Income 25,704 27,600 (1,896) (2,054) 158
-------- -------- --------- -------- --------
Net Interest Spread 3.15% 3.72%
Net Interest margin
(net interest income to total
interest earning assets) 3.56% 3.98%
Tax equivalent adjustment (780) (892)
-------- --------
Net Interest Income per book 24,924 26,708
======== ========
26
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of average
balance sheet, related interest income and expense and the average annualized
yields on interest earning assets and annualized rates on interest bearing
liabilities of TrustCo (adjusted for tax equivalency) for each of the reported
periods. Nonaccrual loans are included in loans for this analysis. The average
balances of securities available for sale is calculated using amortized costs
for these securities. Included in the balance of shareholders' equity is
unrealized (depreciation) appreciation, net of tax, in the available for sale
portfolio of ($12.1) million in 2006 and $2.3 million in 2005. The subtotals
contained in the following table are the arithmetic totals of the items
contained in that category.
Six Months 2006 Six Months 2005
Average Interest Average Average Interest Average Change in Variance Variance
(dollars in thousands) Balance Rate Balance Rate Interest Balance Rate
Income/ Change Change
Expense
---------- -------- ------ ---------- -------- ------ --------- -------- --------
Assets
Securities available for sale:
U.S. Treasuries $ 859 $ 19 4.38% $ 1,092 $ 17 3.17% 2 (9) 11
Gov't Sponsored Enterprises 785,030 20,385 5.19% 590,318 15,322 5.19% 5,063 5,063 --
Mortgage-backed securities
and collateralized mortgage
obligations 193,077 4,524 4.69% 204,491 4,701 4.60% (177) (404) 227
States and political
subdivisions 123,031 4,279 6.96% 138,717 5,347 7.71% (1,068) (574) (494)
Other 12,115 355 5.89% 15,239 411 5.42% (56) (140) 84
---------- -------- ------ ---------- -------- ------ --------- -------- --------
Total securities
available for sale 1,114,112 29,562 5.31% 949,857 25,798 5.43% 3,764 3,936 (172)
Federal funds sold and other
short-term Investments 205,631 4,763 4.66% 537,365 7,000 2.63% (2,237) (10,689) 8,452
Commercial Loans 223,336 8,363 7.50% 199,739 7,099 7.11% 1,264 863 401
Residential mortgage loans 1,101,660 34,111 6.19% 871,031 27,853 6.40% 6,258 8,823 (2,565)
Home equity lines of credit 201,547 6,988 6.99% 192,630 5,328 5.58% 1,660 257 1,403
Installment loans 5,355 378 14.25% 12,150 707 11.74% (329) (679) 350
---------- -------- ------ ---------- -------- ------ --------- -------- --------
Loans, net 1,531,898 49,840 6.52% 1,275,550 40,987 6.44% 8,853 9,264 (411)
Total interest earning assets 2,851,641 84,165 5.91% 2,762,772 73,785 5.35% 10,380 2,511 7,869
-------- ------ -------- ------ --------- -------- --------
Allowance for loan losses (43,875) (48,493)
Cash & non-interest earning
assets 114,759 129,127
---------- ----------
Total assets $2,922,525 $2,843,406
========== ==========
Liabilities and shareholders' equity
Deposits:
Interest Bearing
Checking Accounts $ 293,574 644 0.44% $ 324,940 767 0.48% (123) (66) (57)
Money market accounts 221,457 4,256 3.88% 145,179 1,011 1.40% 3,245 742 2,503
Savings 718,505 5,098 1.43% 814,538 3,207 0.79% 1,891 (1,084) 2,975
Time deposits 1,100,398 20,477 3.75% 991,494 14,532 2.96% 5,945 1,733 4,212
---------- -------- ------ ---------- -------- ------ --------- -------- --------
Total interest bearing
deposits 2,333,934 30,475 2.63% 2,276,151 19,517 1.73% 10,958 1,325 9,633
Short-term borrowings 95,503 1,739 3.67% 81,978 813 2.00% 926 153 773
Long-term debt 79 2 5.27% 106 3 5.27% (1) (1) --
---------- -------- ------ ---------- -------- ------ --------- -------- --------
Total Interest Bearing
Liabilities 2,429,516 32,216 2.67% 2,358,235 20,333 1.74% 11,883 1,477 10,406
-------- -------- --------- -------- --------
Demand deposits 244,480 229,789
Other liabilities 28,336 27,050
Shareholders' equity 220,194 228,332
Total liab. &
shareholders' equity $2,922,526 $2,843,406
========== ==========
Net Interest Income 51,949 53,452 (1,503) 1,034 (2,537)
-------- -------- --------- -------- --------
Net Interest Spread 3.24% 3.61%
Net Interest margin
(net interest income to
total interest earning assets) 3.63% 3.87%
Tax equivalent adjustment (1,514) (1,884)
-------- --------
Net Interest Income per book 50,435 51,568
======== ========
27
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
As detailed in the Annual Report to Shareholders as of December 31, 2005, the
Company is subject to interest rate risk as its principal market risk. As noted
in detail throughout this Management's Discussion and Analysis, for the three
months and six months ended June 30, 2006, the Company continues to respond to
changes in interest rates to position the Company to meet both short term
earning goals but to also allow the Company to respond to changes in interest
rates in the future. Consequently the year-to-date average balance of federal
funds sold and other short-term investments has decreased to $205.6 million in
2006 from $537.4 million in 2005. As investment opportunities present
themselves, management plans to continue to invest funds from the federal funds
sold and other short-term investment portfolio into the securities available
for sale and loan portfolios. This trend is expected to continue into the third
quarter. The Company believes there was no significant change to its interest
rate risk during the second quarter of 2006.
Item 4.
Controls and Procedures
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, as amended ("Exchange Act")) designed to ensure that information required
to be disclosed in the reports that the Company files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon this evaluation of those disclosure controls and
procedures, the Chief Executive and Chief Financial Officer of the Company
concluded, as of the end of the period covered by this report, that the
Company's disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required.
In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Further, no evaluation of a cost-effective system of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, will be detected.
28
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.
29
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
While there are no material changes to the Company's risk factors as
Discussed in the Annual Report on Form 10-K for the year ended
December 31, 2005, management believes the following risks should also
be considered:
Changes in accounting standards. Our accounting policies and methods
are fundamental to how we record and report our financial condition
and results of operations. From time to time the Financial Accounting
Standards Board ("FASB") changes the financial accounting and
reporting standards that govern the preparation of our financial
statements. These changes can be hard to predict and can materially
impact how we record and report our financial condition and results of
operations. In some cases, we could be required to apply a new or
revised standard retroactively, resulting in our restating prior
period financial statements.
Operational risks. The potential for operational risk exposure exists
throughout the Company. Integral to our continued efficacy of our
technical systems, operational infrastructure, relationships with
third parties and the vast array of associates and key executives in
our day-to-day and ongoing operations. Failure by any or all of
these resources subjects us to risks that may vary in size, scale and
scope. This includes but is not limited to operational or technical
failures, ineffectiveness or exposure due to interruption in third
party support as expected, as well as, the loss of key individuals or
failure on the part of the key individuals to perform properly.
30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Total
Number of
Shares Maximum Number
Purchased as of Shares that
Total Part of Publicly May Yet Be
Number of Average Announced Purchases Under
Shares Price Paid Plans or the Plans
Period Purchased per Share Programs or Programs
--------------------------------------------------------------------------------------
April 1 - April 30 15,000 $11.61 0 N/A
--------------------------------------------------------------------------------------
May 1 - May 31 210,000 $11.39 0 N/A
--------------------------------------------------------------------------------------
June 1 - June 30 -- $ -- 0 N/A
--------------------------------------------------------------------------------------
Total 225,000 $11.41 0 N/A
--------------------------------------------------------------------------------------
All 225,000 shares were purchased by other than through a publicly
announced plan or program. All purchases were made in open-market
transactions in satisfaction of the Company's obligations upon
exercise of outstanding stock options issued by the Company and for
quarterly sales to the dividend reinvestment plan.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submissions of Matters to Vote of Security Holders
At the annual meeting held May 15, 2006, shareholders of the Company
were asked to consider the Company's nominees for directors and to
elect three (3) directors. The Company's nominees for director were
Thomas O. Maggs (three-year term), Robert J. McCormick (three-year
term) and William J. Purdy (three-year term).
The results of shareholder voting are as follows:
1. Election of Directors:
Director For Withheld
-------- --- --------
Thomas O. Maggs 58,955,053 2,214,504
Robert J. McCormick 55,079,434 6,090,123
William J. Purdy 59,363,837 1,805,720
Directors continuing in office are Joseph A. Lucarelli,
Dr. Anthony J. Marinello, Robert A. McCormick, and William D. Powers.
31
2. Proposal to adopt an amendment to TrustCo's Amended and Restated
Certificate of Incorporation to increase the authorized shares
of common stock from 100 million to 150 million.
For Against Abstain
--- ------- -------
56,829,600 3,736,087 603,867
3. Proposal to ratify the appointment of KPMG LLP as the independent
certified public accountants of TrustCo for the fiscal year
ending December 31, 2006.
For Against Abstain
--- ------- -------
60,017,093 749,027 403,458
Item 5. Other Information
None.
32
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Reg S-K (Item 601)
Exhibit No. Description
---------- ----------------------------------------------------
3 Amended and Restated Certificate of Incorporation of
TrustCo Bank Corp NY, as amended.
31(a) Rule 13a-15(e)/15d-15(e) Certification of Robert J.
McCormick, principal executive officer.
31(b) Rule 13a-15(e)/15d-15(e) Certification of Robert T.
Cushing, principal financial officer.
32 Section 1350 Certifications of Robert J. McCormick,
principal executive officer and Robert T. Cushing,
principal financial officer.
(b) Reports on Form 8-K
During the quarter ended June 30, 2006, TrustCo filed the following
reports on Form 8-K:
April 18, 2006, regarding a press release dated April 18, 2006,
detailing 2006 first quarter financial results.
April 27, 2006, correcting a typographical error contained in the
definitive proxy statement filed on April 4, 2006.
May 8, 2006, announcing TrustCo Bank Corp NY ranking as number one
savings bank in the nation by SNL Financial LC.
May 16, 2006, regarding a press release dated May 16, 2006, announcing
the results of the Annual Meeting held May 15, 2006 and declaring a
cash dividend of $0.16 per share payable on July 3, 2006, to
shareholders of record at the close of business on June 2, 2006.
May 16, 2006, regarding presentation materials presented at the Annual
Meeting of Shareholders held May 15, 2006.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TrustCo Bank Corp NY
By: /s/ Robert J. McCormick
---------------------------
Robert J. McCormick
President
and Chief Executive Officer
By: /s/ Robert T. Cushing
---------------------------
Robert T. Cushing
Executive Vice President
and Chief Financial Officer
Date: August 4, 2006
34
Exhibits Index
Reg S-K
Exhibit No. Description
------------------------------------------------------------------
3 Amended and Restated Certificate of Incorporation of
TrustCo Bank Corp NY, as amended.
31(a) Rule 13a-15(e)/15d-15(e) Certification of Robert J.
McCormick, principal executive officer.
31(b) Rule 13a-15(e)/15d-15(e) Certification of Robert T.
Cushing, principal financial officer.
32 Section 1350 Certifications of Robert J. McCormick,
principal executive officer and Robert T. Cushing,
principal financial officer.
35