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 period ended Commission File Number 0-10592
June 30, 2007
TRUSTCO BANK CORP NY
(Exact name of registrant as specified in its charter)
NEW YORK 14-1630287
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 SARNOWSKI DRIVE, GLENVILLE, NEW YORK 12302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 377-3311
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 July 31, 2007
--------------------- ----------------------------
$1 Par Value 75,015,883
TrustCo Bank Corp NY
INDEX
Part I. FINANCIAL INFORMATION PAGE NO.
-------------------------------------------------------------------------------
Item 1. Interim Financial Statements (Unaudited):
Consolidated Statements of Income for the Three Months 1
and Six Months Ended June 30, 2007 and 2006
Consolidated Statements of Financial Condition as of 2
June 30, 2007 and December 31, 2006
Consolidated Statements of Changes in Shareholders' 3
Equity for the Six Months Ended June 30, 2007 and 2006
Consolidated Statements of Cash Flows for the Six Months 4-5
Ended June 30, 2007 and 2006
Notes to Consolidated Interim Financial Statements 6-13
Report of Independent Registered Public Accounting Firm 14
Item 2. Management's Discussion and Analysis of Financial 15-32
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 33-34
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3. Defaults Upon Senior Securities 35
Item 4. Submissions of Matters to a Vote of Security Holders 35
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 37
TRUSTCO BANK CORP NY
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
--------- --------- --------- ---------
Interest and dividend income:
Interest and fees on loans $ 29,566 25,470 58,197 49,821
Interest and dividends on
securities available for sale:
U.S. Treasuries and agencies and
government sponsored enterprises 2,753 10,419 5,609 20,402
States and political subdivisions 1,434 1,450 2,883 2,813
Mortgage-backed securities and
collateralized mortgage obligations 1,916 2,231 3,880 4,525
Other securities 176 101 315 327
--------- --------- --------- ---------
Total interest and dividends on
securities available for sale 6,279 14,201 12,687 28,067
--------- --------- --------- ---------
Interest on trading securities -
government sponsored enterprises 4,847 - 11,650 -
Interest on federal funds sold
and other short term investments 6,856 2,271 10,295 4,763
--------- --------- --------- ---------
Total interest income 47,548 41,942 92,829 82,651
--------- --------- --------- ---------
Interest expense:
Interest on deposits:
Interest-bearing checking 213 360 415 644
Savings 2,397 2,732 4,821 5,098
Money market deposit accounts 3,411 2,415 6,715 4,256
Time deposits 16,556 10,549 31,192 20,477
Interest on short-term borrowings 989 961 1,982 1,739
Interest on long-term debt - 1 1 2
--------- --------- --------- ---------
Total interest expense 23,566 17,018 45,126 32,216
--------- --------- --------- ---------
Net interest income 23,982 24,924 47,703 50,435
Provision (credit) for loan losses - (1,775) - (3,575)
--------- --------- --------- ---------
Net interest income after
provision (credit) for
loan losses 23,982 26,699 47,703 54,010
--------- --------- --------- ---------
Noninterest income:
Trust department income 1,441 1,469 2,894 2,707
Fees for other services
to customers 2,289 2,076 4,595 4,007
Net trading (losses) gains (2,844) - 601 -
Net gain (loss) on
securities transactions 3 - 3 (288)
Other 257 372 601 796
--------- --------- --------- ---------
Total noninterest income 1,146 3,917 8,694 7,222
--------- --------- --------- ---------
Noninterest expenses:
Salaries and employee benefits 4,893 4,425 9,802 9,386
Net occupancy expense 2,408 1,879 4,825 3,853
Equipment expense 811 693 1,555 1,434
Professional services 1,071 852 2,009 1,676
Outsourced Services 1,074 1,058 2,147 2,109
Other real estate expense 15 12 35 2
Other 3,186 3,067 5,791 5,451
--------- --------- --------- ---------
Total noninterest expenses 13,458 11,986 26,164 23,911
--------- --------- --------- ---------
Income before taxes 11,670 18,630 30,233 37,321
Income taxes 3,563 6,206 9,812 12,531
--------- --------- --------- ---------
Net income $ 8,107 12,424 20,421 24,790
========= ========= ========= =========
Net income per Common Share:
- Basic $ 0.108 0.166 0.272 0.331
========= ========= ========= =========
- Diluted $ 0.108 0.165 0.272 0.330
========= ========= ========= =========
See accompanying notes to unaudited consolidated interim financial statements.
1
TRUSTCO BANK CORP NY
Consolidated Statements of Condition
(dollars in thousands, except per share data)
June 30, 2007 December 31, 2006
-------------- -----------------
ASSETS:
Cash and due from banks $ 45,820 47,889
Federal funds sold and other
short term investments 470,174 243,449
-------------- -----------------
Total cash and cash equivalents 515,994 291,338
Trading securities:
Government sponsored enterprises 450,198 -
Securities available for sale:
Government sponsored enterprises 209,916 734,547
States and political subdivisions 129,560 132,879
Mortgage-backed securities and
collateralized mortgage obligations 150,526 167,899
Other 12,831 12,945
-------------- -----------------
Total securities available for sale 502,833 1,048,270
-------------- -----------------
Loans:
Commercial 271,618 263,041
Residential mortgage loans 1,339,082 1,250,427
Home equity line of credit 231,216 242,555
Installment loans 6,449 6,491
-------------- -----------------
Total loans 1,848,365 1,762,514
-------------- -----------------
Less:
Allowance for loan losses 35,085 35,616
-------------- -----------------
Net loans 1,813,280 1,726,898
Bank premises and equipment, net 27,858 24,050
Other assets 64,031 70,631
-------------- -----------------
Total assets $ 3,374,194 3,161,187
============== =================
LIABILITIES:
Deposits:
Demand $ 268,579 259,401
Interest-bearing checking 282,919 290,784
Savings accounts 647,331 662,310
Money market deposit accounts 343,962 310,719
Certificates of deposit
(in denominations of $100,000 or more) 369,720 299,813
Time deposits 1,110,025 976,356
-------------- -----------------
Total deposits 3,022,536 2,799,383
Short-term borrowings 93,855 95,507
Long-term debt 44 59
Accrued expenses and other liabilities 27,849 26,715
-------------- -----------------
Total liabilities 3,144,284 2,921,664
-------------- -----------------
SHAREHOLDERS' EQUITY:
Capital stock par value $1; 150,000,000
shares authorized and 82,168,851 and
82,149,776 shares issued at June 30, 2007
and December 31, 2006, respectively 82,169 82,150
Surplus 119,785 119,313
Undivided profits 98,140 110,304
Accumulated other comprehensive
loss, net of tax (1,860) (2,928)
Treasury stock at cost - 7,152,994 and
7,276,450 shares at June 30, 2007
and December 31, 2006, respectively (68,324) (69,316)
-------------- -----------------
Total shareholders' equity 229,910 239,523
-------------- -----------------
Total liabilities and
shareholders' equity $ 3,374,194 3,161,187
============== =================
See accompanying notes to unaudited consolidated interim financial statements.
2
TRUSTCO BANK CORP NY
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
(dollars in thousands, except per share data)
Accumulated
Other
Capital Undivided Comprehensive Comprehensive Treasury
Stock Surplus Profits Loss Income Stock Total
-------------------------------------------------------------------------------------------
Beginning balance, January 1, 2006 $82,120 117,770 103,315 (6,054) (68,490) 228,661
Adjustment to January 1, 2006
beginning balance for adoption
of SAB No. 108, net of tax - - 9,571 - - 9,571
-------------------------------------------------------------------------------------------
January 1, 2006 beginning balance,
as adjusted 82,120 117,770 112,886 (6,054) (68,490) 238,232
Comprehensive income:
Net Income - Six Months Ended
June 30, 2006 24,790 24,790 24,790
Other comprehensive loss,
net of tax:
Unrealized net holding loss on
securities available-for-sale
arising during the period, net
of tax (pretax loss of $26,433) (15,842)
Reclassification adjustment for
net gain realized in net income
during the year (pretax loss
$288) 171
-------
Other comprehensive loss (15,671) (15,671) (15,671)
-------
Comprehensive income 9,119
-------
Cash dividend declared, $.320 per
share (23,936) (23,936)
Stock options exercised and related
tax benefits 21 510 531
Treasury stock purchased
(380,765 shares) (4,955) (4,955)
Sale of treasury stock
(411,733 shares) 408 4,332 4,740
-------------------------------------------------------------------------------------------
Ending balance, June 30, 2006 $82,141 118,688 113,740 (21,725) (69,113) 223,731
-------------------------------------------------------------------------------------------
Beginning balance, January 1, 2007 $82,150 119,313 110,304 (2,928) (69,316) 239,523
Adjustment to initially apply
FAS No. 159, net of tax (8,606) 8,606 -
Comprehensive income:
Net Income - Six Months Ended
June 30, 2007 20,421 20,421 20,421
Other comprehensive loss,
net of tax:
Amortization of prior service
cost on pension and post
retirement plans, net of tax
(pretax of $242) (146)
Unrealized net holding loss on
securities available-for-sale
arising during the period, net
of tax (pretax loss of $12,295) (7,392)
-------
Other comprehensive loss (7,538) (7,538) (7,538)
-------
Comprehensive income 12,883
-------
Cash dividend declared,
$.320 per share (23,979) (23,979)
Stock options exercised and
related tax benefits 19 116 135
Treasury stock purchased
(280,497 shares) (2,862) (2,862)
Sale of treasury stock
(403,953 shares) 330 3,854 4,184
Stock based compensation expense 26 26
-------------------------------------------------------------------------------------------
Ending balance, June 30, 2007 $82,169 119,785 98,140 (1,860) (68,324) 229,910
-------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated interim financial statements.
3
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, 2007 2006
-------------- --------------
Cash flows from operating activities:
Net income $ 20,421 24,790
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,366 1,286
Gain on sale of other real estate owned (89) (34)
Provision (credit) for loan losses - (3,575)
Stock based compensation expense 26 -
Net gain on sale of bank
premises and equipment - (29)
Net (gain) loss on sale of securities
available for sale (3) 288
Proceeds from sales of trading securities 502,944 -
Purchases of trading securities (450,296) -
Net trading gains (601) -
Decrease (increase) in interest receivable 3,511 (1,576)
Increase in interest payable 403 122
Increase in other assets 7,911 8,735
Increase (decrease) in accrued expenses
and other liabilities 731 (2,445)
-------------- --------------
Total adjustments 65,903 2,772
-------------- --------------
Net cash provided by operating activities 86,324 27,562
-------------- --------------
Cash flows from investing activities:
Proceeds from sales and calls of
securities available for sale 15,354 51,725
Purchases of securities available for sale (31,034) (94,922)
Proceeds from maturities of securities
available for sale 46,580 10,594
Net increase in loans (86,571) (138,652)
Proceeds from dispositions of other
real estate owned 213 57
Proceeds from dispositions of bank
premises and equipment - 73
Purchases of bank premises and equipment (5,174) (2,265)
-------------- --------------
Net cash used in investing activities (60,632) (173,390)
-------------- --------------
Cash flows from financing activities:
Net increase in deposits 223,153 69,204
Net increase in short-term borrowings (1,652) 2,664
Repayment of long-term debt (15) (14)
Proceeds from exercise of stock options
and related tax benefits 135 531
Proceeds from sale of treasury stock 4,184 4,740
Purchase of treasury stock (2,862) (4,955)
Dividends paid (23,979) (23,936)
-------------- --------------
Net cash provided by financing
activities 198,964 48,234
-------------- --------------
Net increase (decrease) in cash and
cash equivalents 224,656 (97,594)
Cash and cash equivalents at beginning
of period 291,338 312,863
-------------- --------------
Cash and cash equivalents at end of period $ 515,994 215,269
============== ==============
(continued)
See accompanying notes to unaudited consolidated interim financial statements.
4
TRUSTCO BANK CORP NY
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
YEAR ENDED June 30,
2007 2006
-------------- --------------
Cash paid during the year for:
Interest paid $ 44,723 32,094
Income taxes paid 411 2,522
Non cash investing and financing activities:
Transfer of loans to other real estate owned 189 53
Change in unrealized loss on securities
available for sale-gross of deferred taxes
(excluding $14,313 unrealized loss
transferred to undivided profits in 2007
from adoption of FASB statement No. 159) (12,295) (26,144)
Change in deferred tax effect on unrealized
loss on securities available for sale 4,903 10,473
Amortization of prior service cost on
pension and post retirement plans 242 -
Change in deferred tax effect of
amortization of prior service cost (96) -
Securities available for sale transferred
to trading securities 516,558 -
Cumulative effect of the adoption of
FASB Statement No.
No. 159-net of deferred taxes
($14,313 gross of deferred taxes) 8,606 -
Cumulative effect of the adoption of
Staff Accounting Bulletin
No. 108-gross of deferred taxes - 15,877
Deferred tax effect of the adoption
of Staff Accounting Bulletin No. 108 - (6,306)
See accompanying notes to unaudited consolidated interim financial statements.
5
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 (the Company) include the accounts of the subsidiaries after elimination
of all significant intercompany accounts and transactions. Prior period
amounts are reclassified when necessary to conform to the current period
presentation. The net income reported for the six months ended June 30, 2007
is not necessarily indicative of the results that may be expected for the
year ending December 31, 2007, or any other interim periods.
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, 2007 and the results
of operations for the three months and six months ended June 30, 2007 and
2006 and cash flows for the six months ended June 30, 2007 and 2006. 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 in-cluded in TrustCo Bank Corp
NY's 2006 Annual Report to Shareholders on Form 10-K.
2. Earnings Per Share
A reconciliation of the component parts of earnings per share (EPS) for the
three and six month periods ended June 30, 2007 and 2006 follows:
Weighted
Average
Net Shares Per Share
Income Outstanding Amounts
------- ----------- ---------
(In thousands,except per share data)
For the quarter ended June 30, 2007:
Basic EPS:
Net income available to
Common shareholders $8,107 75,040 $0.108
Effect of Dilutive Securities:
Stock options - 28 (.000)
------- ------ ------
Diluted EPS $8,107 75,068 $0.108
======= ====== ======
For six months ended
June 30, 2007:
Basic EPS:
Net income available to
Common shareholders $20,421 74,996 $0.272
Effect of Dilutive Securities:
Stock options - 65 (.000)
------- ------ ------
Diluted EPS $20,421 75,061 $0.272
======= ====== ======
6
Weighted
Average
Net Shares Per Share
Income Outstanding Amounts
------- ----------- ---------
(In thousands,except per share data)
For the quarter ended June 30, 2006:
Basic EPS:
Net income available 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 available 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
======= ====== ======
There were approximately 3.7 million and 1.9 million stock options which, if
included, would have been antidilutive in the calculation of average shares
outstanding for the quarters and six month periods ended June 30, 2007 and
2006, respectively and were therefore excluded from the earnings per share
calculations.
7
3. Benefit Plans
The table below outlines the components of the Company's net periodic expense
(benefit) recognized during the three month and six month periods ended June
30, 2007 and 2006 for its pension and other postretirement benefit plans:
Components of Net Periodic Expense/(Benefit) for the three months ended June
30, 2007 (dollars in thousands)
Pension Benefits Other Postretirement Benefits
---------------------- -----------------------------
2007 2006 2007 2006
----- ---- ---- ----
Service cost $ 22 198 8 9
Interest cost 347 382 13 18
Expected return on plan assets (515) (448) (98) (102)
Amortization of prior service cost - 26 (125) (114)
Curtailment gain, net - (362) - -
----- ---- ---- ----
Net periodic expense/(benefit) $(146) (204) (202) (189)
===== ==== ==== ====
Components of Net Periodic Expense/(Benefit) for the six months ended June
30, 2007 (dollars in thousands)
Pension Benefits Other Postretirement Benefits
---------------------- -----------------------------
2007 2006 2007 2006
----- ---- ---- ----
Service cost $ 22 389 15 18
Interest cost 701 770 27 36
Expected return on plan assets (975) (896) (205) (204)
Amortization of prior service cost - 53 (242) (228)
Curtailment gain, net - (362) - -
----- ---- ---- ----
Net periodic expense/(benefit) $(252) (46) (405) (378)
===== ==== ==== ====
The Company previously disclosed in its consolidated financial statements for
the year ended December 31, 2006, that it did not expect to make any
contributions to its pension and postretirement benefit plans in 2007. As of
June 30, 2007, 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 2007.
8
4. Adoption of New Accounting Pronouncements
(a.) Statements of Financial Accounting Standards No. 159 "The Fair Value
Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115", and No. 157 "Fair Value
Measurements".
Effective January 1, 2007 TrustCo elected early adoption of Statements of
Financial Accounting Standards ("SFAS") No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115" (SFAS No. 159), and No. 157 "Fair Value Measurements"
(SFAS No. 157). SFAS No. 159, which was issued in February 2007, generally
permits the measurement of selected eligible financial instruments at fair
value at specified election dates. SFAS No. 157 generally establishes the
definition of fair value and expands disclosures about fair value
measurement. This statement establishes a hierarchy of the levels of fair
value measurement techniques. Upon adoption of SFAS No. 159, TrustCo elected
to apply the fair value option for certain government sponsored enterprises
securities with lower yields, which generally had longer duration, that were
classified in the available for sale portfolio totaling approximately $517
million ($502 million at fair value). Prior to the adoption of SFAS No. 159,
the Company intended to hold these securities until a market price recovery
or possibly to maturity. The Company changed its intent with respect to these
securities to enable the Company to recorded these losses directly to
undivided profits rather than current income based on the transition
provisions of SFAS No. 159 by electing the fair value option for these
securities. As a result, unrealized losses, net of taxes, of $8.6 million
were directly recorded to undivided profits. This charge to undivided profits
had no overall impact on total shareholders' equity because the fair value
adjustment had previously been included as an element of shareholders' equity
in the accumulated other comprehensive income (loss) account, net of tax.
As a result of TrustCo's fair value measurement election for the above
financial instruments, TrustCo recorded $3.4 million of pre-tax unrealized
trading gains in its first quarter earnings for the change in fair value of
such instruments from the effective election date of January 1, 2007 to March
31, 2007. Additionally, TrustCo sold in the second quarter all of these
securities and recognized pre-tax trading losses of $2.8 million in the
second quarter. While the proceeds from this sale were initially invested in
federal funds sold, the Company re-invested these proceeds by purchasing
securities, primarily government sponsored enterprises, for its trading
portfolio. As of June 30, 2007 $450 million of government sponsored
enterprises securities were purchased for the trading portfolio. TrustCo
believes that its adoption of the standard will have a positive impact on its
ability to manage its investment portfolio because it will enable the Company
to sell the securities that it has elected the fair value option for without
recording other-than-temporary impairment on the remainder of the
available-for-sale portfolio. Additionally, recording the unrealized losses
on these securities directly to undivided profits as part of the transition
adjustment will benefit net income because the loss will not be realized in
the income statement when the security is sold.
9
As already stated, the Company recorded a $8.6 million charge, net of tax, to
undivided profits as a result of adopting SFAS No. 159 as of January 1, 2007.
Had the Company not adopted this new accounting standard and reclassified the
available for sale securities to trading account assets as of that date, the
charge to capital would have been recorded as a charge to net income.
In determining the fair for the trading account securities the Company
utilized an independent bond pricing service.
The following table presents information relative to the assets identified
for the fair value option of accounting as of the initial implementation date
of January 1, 2007:
Statement Net Loss Statement of
of Condition Recognized Condition
12/31/06 in Undivided After Adoption
Prior to Profits Upon of Fair
Adoption Adoption Value Option
------------ ------------ --------------
($ in thousands)
Securities available for sale
transferred to trading
account assets:
Amortized cost $516,558 (14,313) 502,245
Unrealized depreciation (14,313) 14,313 -
-------- ------- -------
Net transferred to trading
account assets $502,245 - 502,245
======== ======= =======
The securities transferred to trading account assets as of January 1, 2007
were included previously in the available for sale portfolio as Government
sponsored enterprises.
TrustCo determined that it would be appropriate to account for certain of the
Government sponsored enterprises securities at fair value based upon the
relatively low interest rate on these bonds. Government sponsored enterprises
bonds held by Trustco Bank in the available for sale portfolio as of January
1, 2007 under a predetermined interest rate (generally 5.45% or below) were
identified as bonds to be recorded at fair value (the bonds also had an
average life to maturity of approximately 9 years). Interest on trading
account securities are recorded in the Consolidated Statements of Income
based upon the coupon of the underlying bond and the par value of the
securities. Unrealized gains and losses on the trading account securities are
recognized based upon the fair value at period end compared to the beginning
of that period.
After the adoption of SFAS 159 as of January 1, 2007 there were $232.3
million of remaining Government sponsored enterprises obligations classified
as available for sale securities which had gross unrealized losses of $3.3
million. These securities are primarily higher yielding assets and generally
had shorter terms to final maturity. It is management's intention that
Government sponsored enterprises securities that remain in the Available for
Sale portfolio after the adoption of SFAS 159 will be held to generate
relatively higher yields or provide liquidity in the form of maturing or
called securities. The yield on the securities in the available for sale
portfolio ranged from 4.30% to 5.82%, and had an average term to maturity of
7 years ranging from 2007 - 2019 final maturity.
10
The following tables presents the financial instruments recorded at fair
value by the Company as of June 30, 2007 and for the three and six month
periods ended June 30, 2007.
(in thousands)
Fair Value Measurements at June 30, 2007 using:
---------------------------------------------------------------------------
Total Carrying
Amount in Quoted Prices
Statement of Statement 107 in Active Significant
Financial Fair Value Fair Value Markets for other
Position Estimate Measurement Identical Observable
As of As of As of Assets input
Description 6/30/2007 6/30/2007 6/30/2007 (Level 1) (Level 2)
----------- -------------- ------------- ----------- -------------- -----------
Assets
available
for sale 502,833 502,833 502,833 411,803 91,030
Trading
account
assets 450,198 450,198 450,198 450,198 -
Other
real
estate
owned 157 157 157 - 157
(in thousands)
Change in fair value for Change in fair value for
the 3 month period from the 6 month period from
April 1, 2007 to June 30, 2007 January 1, 2007 to June 30, 2007
for items measured at fair value for items measured at fair value
pursuant to election of the pursuant to election of the
Fair Value Option Fair Value Option
-------------------------------- --------------------------------
Total Changes Total Changes
Unrealized Included in Unrealized Included in
Trading Values Included in Trading Values Included in
Losses Period Earnings Losses Period Earnings
---------- ------------------ ---------- ------------------
Assets
available
for sale - - - -
Trading
account
assets (2,841) (2,841) 601 601
Other
real
estate
owned - - - -
11
Assets available for sale and trading account securities are fair valued
utilizing an independent bond pricing service for identical assets or
significantly similar securities.
Other real estate owned fair value is determined by observable comparable
sales and property valuation techniques.
(b.) FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes"
TrustCo adopted Financial Accounting Standards Board Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48") as of January 1,
2007. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken
or expected to be taken on a tax return. As a result of the Company's
adoption of FIN 48, there were no required adjustments to the Company's
consolidated financial statements.
TrustCo has implemented certain tax return positions that have not been fully
recognized for financial statement purposes based upon management's
evaluation of the probability of the benefit being realized. For 2007 the
Company has recognized interest expense on the potential settlement amount as
an element of other expenses and nothing for potential tax penalties.
For the six months ended June 30, 2007 the unrecognized tax benefit and
change in that benefit from the beginning of the year is as follows:
(Dollars in thousands)
Balance January 1, 2007 $3,392
Additional unrecognized benefit
for the period from 1/1/07 to 6/30/07 438
------
Balance June 30, 2007 $3,830
======
If the unrecognized tax benefit were to be recognized for financial reporting
purposes the impact would be to decrease total tax expense by the balance not
previously recognized (as of June 30, 2007 that amount would be $2.5 million,
after tax). Interest expense of $60 thousand has been recorded during 2007
and included in accrued expenses and other liabilities (no penalties have
been accrued). The total accrual for interest expense included in the
statement of financial condition is $449 thousand and is included in accrued
expenses and other liabilities.
The New York State tax returns are currently under audit for the periods that
the unrecognized tax return position was initiated. Open Federal tax years
are 2003, 2004 and 2005, and for NYS they are 2002 through 2005. The 2006
state and federal tax returns have not been filed.
12
The Company does not believe the unrecognized tax benefit will significantly
increase or decrease within the next twelve months except if the New York
State tax return audits are completed. It is reasonably possible that a
reduction in the estimate may occur, however, a quantification of a
reasonable range cannot be determined.
(c.) Prior Year Immaterial Uncorrected Misstatements
As described in the Company Annual Report on Form 10-K in 2006, the Company
adopted the Staff Accounting Bulletin (SAB) No. 108 "Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements." As a result of the Adoption of SAB No. 108, TrustCo
recognized a reduction in other liabilities of $8.3 million and a decrease in
the allowance for loan losses of $7.6 million. These entries were recorded as
adjustments of the beginning of the year 2006 opening balances for these
accounts and the impact, net of tax, was reflected in shareholders' equity as
an adjustment to January 1, 2006 undivided profits.
5. 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 $3.8 million at June
30, 2007 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, 2007 was insignificant.
13
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, 2007, and the
related consolidated statements of income for the three and six month periods
ended June 30, 2007 and 2006 and the related changes in shareholders' equity
and cash flows for the six-month periods ended June 30, 2007 and 2006. 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.
As discussed in Note 4 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 159 "The Fair Value
Option for Financial Assets and Financial Liabilities, including an amendment
of FASB Statement No. 115" as of January 1, 2007, and Staff Accounting
Bulletin No. 108 "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatement In Current Year Financial Statements" as of January
1, 2006.
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, 2006, 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 27, 2007, 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, 2006 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 3, 2007
14
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, 2007,
with comparisons to 2006 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 2006 Annual Report to
Shareholders should be read in conjunction with this review. Amounts in prior
period consolidated interim financial statements are reclassified whenever
necessary to conform to the current period's presentation.
Forward-looking Statements
Statements included in this review and in future filings by TrustCo with the
Securities and Exchange Commission, in TrustCo's press releases, and in oral
statements made with the approval of an authorized executive officer, which
are not historical or current facts, are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, and are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. TrustCo wishes to caution readers
not to place undue reliance on any such forward-looking statements, which
speak only as of the date made. The following important factors, among
others, in some cases have affected and in the future could affect TrustCo's
actual results, and could cause TrustCo's actual financial performance to
differ materially from that expressed in any forward-looking statement: (1)
credit risk, (2) interest rate risk, (3) competition, (4) changes in the
regulatory environment, and (5) changes in market area and 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, 2007 and 2006.
15
Recently Adopted Fair Value Accounting
Adoption of New Accounting Pronouncements
(a.) Statements of Financial Accounting Standards No. 159 "The Fair Value
Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115", and No. 157 "Fair Value
Measurements".
Effective January 1, 2007 TrustCo elected early adoption of Statements of
Financial Accounting Standards ("SFAS") No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115" (SFAS No. 159), and No. 157 "Fair Value Measurements"
(SFAS No. 157). SFAS No. 159, which was issued in February 2007, generally
permits the measurement of selected eligible financial instruments at fair
value at specified election dates. SFAS No. 157 generally establishes the
definition of fair value and expands disclosures about fair value
measurement. This statement establishes a hierarchy of the levels of fair
value measurement techniques. Upon adoption of SFAS No. 159, TrustCo elected
to apply the fair value option for certain government sponsored enterprises
securities with lower yields, which generally had longer duration, that were
classified as the available for sale portfolio totaling approximately $517
million ($502 million at fair value). Prior to the adoption of SFAS No. 159,
the Company intended to hold these securities until a market price recovery
or possibly to maturity. The Company changed its intent with respect to these
securities to enable the Company to recorded these losses directly to
undivided profits rather than current income based on the transition
provisions of SFAS 159 by electing the fair value option for these
securities. As a result, unrealized losses of $8.6 million were directly
recorded to undivided profits. This charge to undivided profits had no
overall impact on total shareholders' equity because the fair value
adjustment had previously been included as an element of shareholders' equity
in the accumulated other comprehensive income (loss) account, net of tax.
As a result of TrustCo's fair value measurement election for the above
financial instruments, TrustCo recorded $3.4 million of pre-tax unrealized
trading gains in its first quarter earnings for the change in fair value of
such instruments from the effective election date of January 1, 2007 to March
31, 2007. Additionally, TrustCo sold in the second quarter all of these
securities and recognized pre-tax trading losses of $2.7 million in the
second quarter. While the proceeds from this sale were initially invested in
federal funds sold, the Company re-invested these proceeds by purchasing
securities, primarily government sponsored enterprises, for its trading
portfolio. As of June 30, 2007 $450 million of government sponsored
enterprises securities were purchased for the trading portfolio. TrustCo
believes that its adoption of the standard will have a positive impact on its
ability to manage its investment portfolio because it will enable the Company
to sell the securities that it has elected the fair value option for without
recording other-than-temporary impairment on the remainder of the
available-for-sale portfolio. Additionally, recording the unrealized losses
on these securities directly to undivided profits as part of the transition
adjustment will benefit net income because the loss will not be realized in
the income statement when the security is sold.
As already stated, the Company recorded a $8.6 million charge to undivided
profits as a result of adopting SFAS No. 159 as of January 1, 2007. Had the
Company not adopted this new accounting standard and reclassified the
available for sale securities to trading account assets as of that date, the
charge to capital would have been recorded as a charge to net income.
16
In determining the fair for the trading account securities the Company
utilized an independent bond pricing service.
The following table presents information relative to the assets identified
for the fair value option of accounting as of the initial implementation date
of January 1, 2007:
Statement Net Loss Statement of
of Condition Recognized Condition
12/31/06 in Undivided After Adoption
Prior to Profits Upon of Fair
Adoption Adoption Value Option
------------ ------------ --------------
($ in thousands)
Securities available for sale
transferred to trading
account assets:
Amortized cost $516,558 (14,313) 502,245
Unrealized depreciation (14,313) 14,313 -
-------- ------- -------
Net transferred to trading
account assets $502,245 - 502,245
======== ======= =======
The securities transferred to trading account assets as of January 1, 2007
were included previously in the available for sale portfolio as Government
sponsored enterprises.
TrustCo determined that it would be appropriate to account for certain of the
Government sponsored enterprises securities at fair value based upon the
relatively low interest rate on these bonds. Government sponsored enterprises
bonds held by Trustco Bank in the available for sale portfolio as of January
1, 2007 under a predetermined interest rate (generally 5.45% or below) were
identified as bonds to be recorded at fair value (the bonds also had an
average life to maturity of approximately 9 years). Interest on trading
account securities are recorded in the Consolidated Statements of Income
based upon the coupon of the underlying bond and the par value of the
securities. Unrealized gains and losses on the trading account securities are
recognized based upon the fair value at period end compared to the beginning
of that period.
After the adoption of SFAS 159 as of January 1, 2007 there were $232.3
million of remaining Government sponsored enterprises obligations classified
as available for sale securities which had gross unrealized losses of $3.3
million. These securities are primarily higher yielding assets and generally
had shorter terms to final maturity. It is management's intention that
Government sponsored enterprises securities that remain in the Available for
Sale portfolio after the adoption of SFAS 159 will be held to generate
relatively higher yields or provide liquidity in the form of maturing or
called securities. The yield on the securities in the available for sale
portfolio ranged from 4.30% to 5.82%, and had an average term to maturity of
7 years ranging from 2007 - 2019 final maturity.
The following tables presents the financial instruments recorded at fair
value by the Company as of June 30, 2007 and for the three and six month
periods ended June 30, 2007.
17
(in thousands)
Fair Value Measurements at June 30, 2007 using:
---------------------------------------------------------------------------
Total Carrying
Amount in Quoted Prices
Statement of Statement 107 in Active Significant
Financial Fair Value Fair Value Markets for other
Position Estimate Measurement Identical Observable
As of As of As of Assets input
Description 6/30/2007 6/30/2007 6/30/2007 (Level 1) (Level 2)
----------- -------------- ------------- ----------- -------------- -----------
Assets
available
for sale 502,833 502,833 502,833 411,803 91,030
Trading
account
assets 450,198 450,198 450,198 450,198 -
Other
real
estate
owned 157 157 157 - 157
(in thousands)
Change in fair value for Change in fair value for
the 3 month period from the 6 month period from
April 1, 2007 to June 30, 2007 January 1, 2007 to June 30, 2007
for items measured at fair value for items measured at fair value
pursuant to election of the pursuant to election of the
Fair Value Option Fair Value Option
-------------------------------- --------------------------------
Total Changes Total Changes
Unrealized Included in Unrealized Included in
Trading Values Included in Trading Values Included in
Losses Period Earnings Losses Period Earnings
---------- ------------------ ---------- ------------------
Assets
available
for sale - - - -
Trading
account
assets (2,841) (2,841) 601 601
Other
real
estate
owned - - - -
Assets available for sale and trading account securities are fair valued
utilizing an independent bond pricing service for identical assets or
significantly similar securities. Other real estate owned fair value is
determined by observable comparable sales and property valuation techniques.
18
(b.) FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes"
TrustCo adopted Financial Accounting Standards Board Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48") as of January 1,
2007. FIN 48 presribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken
or expected to be taken on a tax return. As a result of the Company's
adoption of FIN 48, there were no required adjustments to the Company's
consolidated financial statements.
TrustCo has implemented certain tax return positions that have not been fully
recognized for financial statement purposes based upon management's
evaluation of the probability of the benefit being realized. For 2007 the
Company has recognized interest expense on the potential settlement amount as
an element of other expenses and nothing for potential tax penalties.
For the six month ended June 30, 2007 the unrecognized tax benefit and change
in that benefit from the beginning of the year is as follows:
(Dollars in thousands)
Balance January 1, 2007 $3,392
Additional unrecognized benefit
for the period from 1/1/07 to 6/30/07 438
------
Balance June 30, 2007 $3,830
======
If the unrecognized tax benefit were to be recognized for financial reporting
purposes the impact would be to decrease total tax expense by the balance not
previously recognized (as of June 30, 2007 that amount would be $2.5 million,
after tax). Interest expense of $60 thousand has been recorded during 2007
and included in accrued expenses and other liabilities (no penalties have
been accrued). The total accrual for interest expense included in the
statement of financial condition is $449 thousand and is included in accrued
expenses and other liabilities.
The New York State tax returns are currently under audit for the periods that
the unrecognized tax return position was initiated. Open Federal tax years
are 2003, 2004 and 2005, and for NYS they are 2002 through 2005. The 2006
state and federal tax returns have not been filed.
The Company does not believe the unrecognized tax benefit will significantly
increase or decrease within the next twelve months except if the New York
State tax return audits are completed. It is reasonably possible that a
reduction in the estimate may occur, however, a quantification of a
reasonable range cannot be determined.
19
(c.) Prior Year Immaterial Uncorrected Misstatements
As described in the Company Annual Report on Form 10-K in 2006 the Company
adopted the Staff Accounting Bulletin (SAB) No. 108 "Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements." As a result of the Adoption of SAB No. 108 TrustCo
recognized a reduction in other liabilities of $8.3 million and a decrease in
the allowance for loan losses of $7.6 million. These entries were recorded as
adjustments of the beginning of the year 2006 opening balances for these
accounts and the impact, net of tax, was reflected in shareholders' equity as
an adjustment to January 1, 2006 undivided profits.
Overview
TrustCo recorded net income of $8.1 million, or $0.108 of diluted earnings
per share for the three months ended June 30, 2007, as compared to net income
of $12.4 million or $0.165 of diluted earnings per share in the same period
in 2006. For the six month period ended June 30, 2007, TrustCo recorded net
income of $20.4 million, or $0.272 per diluted earnings per share as compared
to $24.8 million, or $0.330 of diluted earnings per share for the comparable
period in 2006.
The primary factors accounting for the year to date changes were:
o Increase in the average balance of interest earning assets by
$298.8 million to $3.15 billion for the first six months of 2007
compared to the comparable period in 2006,
o Increase in the average balance of interest bearing liabilities by
$308.0 million to $2.74 billion for the first half of 2007 as
compared to 2006,
o Decrease in net interest margin from 3.63% for the first half of
2006 to 3.11% for the first half of 2007,
o Decrease in the credit for loan losses from $3.6 million for the
first six months of 2006 to $-0- million in the comparable period
in 2007,
o Increase in noninterest income from $7.2 million for the first half
of 2006 to $8.7 million for the comparable period in 2007. Included
in noninterest income were $288 thousand of net losses on
securities transactions for 2006 and none for 2007 and $604 million
of net unrealized gains on trading account assets in 2007 and none
in 2006, and
o An increase of $2.3 million in noninterest expense for the first
half of 2007 as compared to the first half of 2006.
20
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 half of 2007 compared to the comparable periods in 2006 is greatly
affected by the change in interest rates in the marketplace in which TrustCo
competes. Included in the 2006 Annual Report to Shareholders is a description
of the effect interest rates had on the results for the year 2006 compared to
2005. Most of the same market factors discussed in the 2006 Annual Report
also had a significant impact on the second quarter and year-to-date 2007
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 4.25% at January 1, 2006 to 5.25% by June 30, 2007, a 100
basis point increase. Over the same period, for comparison purposes, the 10
year treasury rate increased from 4.11% at January 1, 2006 to 5.03% by June
30, 2007, an increase of 92 basis points. During this period of time, the
yield curve has generally been flat or mildly inverted. The Federal Reserve
has indicated its intention to continue to monitor economic expansion in the
United States economy which may require additional changes in the federal
funds rate subsequent to June 30, 2007.
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. The federal funds sold portfolio and other short term
investments along with short term securities classified as trading are
affected primarily by changes in the federal funds target rate. Deposit
interest rates are most affected by the short term market interest rates.
Also, changes in interest rates have an effect on the recorded balance of the
securities available for sale portfolio (with the offset to accumulated other
comprehensive income) and trading portfolio (with the offset to earnings),
which are recorded at fair value.
21
Generally as interest rates increase the fair value of these securities
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 typically 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 2007, the net interest margin decreased to 3.07%
from 3.56% for the second quarter of 2006. The quarterly results reflect the
following significant factors:
o The average balance of securities available for sale and trading
securities decreased by $247.7 million and the average yield increased
to 5.40% from 5.34% in the second quarter of 2006.
o The average balance of federal funds sold and other short-term
investments increased by $333.8 million and the average yield increased
39 basis points to 5.29%. 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 this time period.
o The average loan portfolio grew by $253.5 million to $1.82 billion and
the average yield remained flat at 6.50%.
o The average balance of interest bearing liabilities (primarily deposit
accounts) increased $342.7 million and the average rate paid increased
60 basis points to 3.38%.
During the second quarter of 2007 the Company's strategy was to expand the
loan portfolio by offering competitive interest rates as the rate environment
changed. The TrustCo residential real estate loan product is very competitive
compared to local and national competitors. The securities available-for-sale
and trading securities portfolios in total were down on an average basis
because the reinvestment of proceeds from the sale of longer duration trading
securities occurred over time rather than instantaneously. The average
balance of federal funds sold and other short-term investments increased,
partly reflecting the gradual reinvestment noted above and partly reflecting
strong deposit growth.
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 part of the increase in the
deposit costs.
22
Earning Assets
Total average interest earning assets increased from $2.88 billion in the
second quarter of 2006 to $3.22 billion in the same period of 2007 with an
average yield of 5.93% in 2006 and 6.00% in 2007. Income on average earning
assets increased during this same time-period from $42.7 million in 2006 to
$48.3 million in 2007.
Loans
The average balance of loans was $1.82 billion in the second quarter of 2007
and $1.57 billion in the comparable period in 2006. The yield on loans
remained unchanged at 6.50%. The higher average balances resulted in an
increase in the interest income on loans of $4.1 million.
For the first half of 2007, average loans increased $269.4 million to $1.80
billion and the average yield declined by 5 basis points to 6.47%.
Compared to the second quarter of 2006, the average balance of the loan
portfolio during the second quarter of 2007 increased in all loan categories.
The average balance of residential mortgage loans was $1.12 billion in 2006
compared to $1.31 billion in 2007, an increase of 16.2%. The average yield on
residential mortgage loans increased by 1 basis point to 6.21% in 2007
compared to 2006.
TrustCo actively markets the residential loan products within its market
territory. 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. 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 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 product will
continue to attract customers in the residential mortgage loan area.
The average yield on the home equity credit loan product decreased 15 basis
points to 6.69% during the second quarter of 2007 compared to 2006 primarily
as a result of the number of new equity credit lines that have been
originated at lower introductory rates. These credit lines are initially
offered to customers at a rate lower than the fully indexed rate so as to
attract the new business and to provide the Company an opportunity to have
the line extension become fully indexed after the introductory period. The
Company believes the expansion of the home equity credit line business
represents an opportunity to introduce more variable rate loan products into
the portfolio and provide an opportunity to increase rates as the underlying
index rates increase.
23
Securities Available-for-Sale
As discussed previously, TrustCo adopted the accounting requirements of SFAS
No. 159 and, as a result, reclassified assets from the available-for-sale
portfolio to the trading securities portfolio as of January 1, 2007. As a
result of this reclassification, there was a significant change in the
balances of these portfolios between the second quarter of 2007 and the
second quarter of 2006.
The average balance of the securities available-for-sale portfolio for the
second quarter of 2007 was $511.8 million compared to $1.13 billion for the
comparable period in 2006. The average yield was 5.50% for the second quarter
of 2007 and 5.30% for the second quarter of 2006. The increase in yield is a
result of the higher yielding assets in the securities available-for-sale
portfolio after the transfer of assets to trading securities. The changes in
balances between the two time periods was primarily due to the transfer of
bonds to the trading portfolio and to a lesser degree due to paydowns on
mortgage backed securities, the purchase of certain bonds during the
remainder of 2006 that are affecting the second quarter 2007 balances and
calls and maturities on bonds.
Similar to the second quarter, for the first six months of 2007, average
securities available-for-sale were $520.1 million, compared to $1.11 billion
in the comparable 2006 period. The average yield increased from 5.31% to
5.47%
Trading Securities
The average balance of trading securities for the second quarter of 2007 was
$369.5 There were no trading securities in 2006. The average yield was 5.26%
for 2007.
For the first half of 2007, average trading securities were $435.5 million.
The average year-to-date yield was 5.35%.
All of the securities in this portfolio are bonds issued by Government
Sponsored Enterprises (FNMA, FHLB, and Freddie Mac issued bonds). The
balances for these bonds are recorded at fair value.
In the first quarter of 2007, the Company recorded an increase of $3.4
million in the fair value of these securities between the implementation date
of the new accounting standard on January 1, 2007 and quarter end March 31,
2007 in its consolidated statement of income. During April 2007, the Company
sold this portfolio and recorded a realized loss of $2.8 million in second
quarter earnings. Proceeds from the sale of these securities were initially
invested in federal funds sold and other short term investments. As of June
30, 2007 $450.2 million of Government sponsored enterprises securities were
purchased for the trading portfolio. Unrealized losses related to the trading
portfolio were not significant in the current period.
24
Federal Funds Sold and Other Short-term Investments
The 2007 second quarter average balance of federal funds sold and other
short-term investments was $519.7 million, $333.8 million more than the
$185.8 million average in 2006. The portfolio yield increased from 4.90% in
2006 to 5.29% in 2007. Changes in the yield resulted from changes in the
target rate set by the Federal Reserve Board for federal funds sold. Interest
income on this portfolio increased by approximately $4.6 million from $2.3
million in 2006 to $6.9 million in 2007.
For the first six months of 2007, average federal funds sold and other
short-term investments averaged $393.6 million, compared to $205.6 million in
the prior year. The yield improved to 5.26% from 4.66%, reflecting the change
in the fed funds target rate.
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
and time deposit accounts.
Total average interest-bearing deposits (which includes interest bearing
checking, money market accounts, savings, and certificates of deposit)
increased from $2.36 billion during the second quarter of 2006 to $2.70
billion in the second quarter of 2007, and the average rate paid increased
from 2.73% for 2006 to 3.35% for 2007. Total interest expense on these
deposits increased $6.5 million to $22.6 million.
For the first half of 2007 average interest-bearing deposits were $2.64
billion, an increase of $306.4 million over the prior year and the cost of
these funds increased to 3.30% from 2.63% over this time frame.
Average short-term borrowings for the quarter were $96.5 million in 2007
compared to $99.3 million in 2006. The average rate increased during this
time period from 3.89% in 2006 to 4.12% in 2007. Rates on short-term
borrowings tend to change with the rates on the target Federal Funds.
For the first half of 2007, average short-term borrowings were $97.2 million
in 2007 compared to $95.6 million in 2006. The average rate increased during
this time period from 3.67% in 2006 to 4.12% in 2007.
25
Net Interest Income
Taxable equivalent net interest income decreased by $952 thousand to $24.8
million in the second quarter of 2007 as compared to the same period in 2006.
The net interest spread decreased from 3.15% in the second quarter of 2006 to
2.63% in 2007. The net interest margin decreased by 49 basis points to 3.07%
for the second quarter of 2007.
Net interest income was $49.3 million in the first half of 2007, a decline of
$2.7 million versus the comparable period in 2006. The net interest spread
declined 56 basis points to 2.68%, while the net interest margin declined 52
basis points to 3.11%.
Nonperforming Assets
Nonperforming assets include nonperforming loans which are those loans in a
nonaccrual status, loans that have been restructured in a troubled debt
restructuring, 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 restructured loans. The following
describes the nonperforming assets of TrustCo as of June 30, 2007:
Nonperforming loans: Total nonperforming loans were $9.3 million at June 30,
2007, an increase from the $7.1 million of nonperforming loans at December
31, 2006 and the $5.1 million of nonperforming loans at June 30, 2006. There
were $8.2 million nonaccrual loans at June 30, 2007 compared to the $5.7
million at December 31, 2006 and $3.7 million at June 30, 2006. Restructured
loans were $1.0 million at June 30, 2007 compared to the $1.2 million at
December 31, 2006 and $1.4 million at June 30, 2006. There were $6 thousand
of loans at June 30, 2007 and the $211 thousand at December 31, 2006 and $9
thousand at June 30, 2006 that are past due 90 days or more and still
accruing interest.
All of the nonperforming loans at June 30, 2007 and 2006 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 charge-offs 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 remains stable. TrustCo also makes loans
in its newer market areas including downstate New York and Florida. As of
June 30, 2007, the Company had residential real estate loans (including first
mortgage loans and home equity loans and lines of credit) of $123.9 million
and commercial real estate loans of $35.1 million in Florida.
26
Total impaired loans at June 30, 2007 of $1.0 million, consisted of
restructured retail loans. During the second quarter of 2007, there were $345
thousand of commercial loan charge offs, $253 thousand of consumer loan
charge offs and $316 thousand of residential mortgage loan charge-offs as
compared with no commercial loan charge-offs, $52 thousand of consumer loan
charge-offs and $647 thousand of residential mortgage loan charge-offs in the
second quarter of 2006. Recoveries during the quarter were $641 thousand in
2007 and $816 thousand in 2006.
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, 2007, the allowance for loan losses was $35.1 million, which
represents a decrease from the $35.6 million in the allowance at December 31,
2006. The allowance represents 1.90% of the loan portfolio as of June 30,
2007 compared to 2.16% at June 30, 2006. The provision for loan losses was
zero for the quarter ended June 30, 2007 due to the continuation of the
positive credit quality indicators, offset to a degree by loan growth. The
change in the credit for loan losses from the second quarter of 2006 of $1.8
million to no provision (credit) for loan losses in 2007 is due to the
reduction in recoveries, increase in nonperforming loans and the growth in
the loan portfolio.
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:
o The magnitude and nature of the recent loan charge offs and
recoveries,
o The growth in the loan portfolio and the implication that has in
relation to the economic climate in the bank's business territory,
and
o The improving economic environment in the Company's upstate New
York territory over the last two years.
Management continues to monitor these factors in determining future
provisions or credits for loan losses in relation to the economic
environment, loan charge-offs, recoveries and the level and trends of
nonperforming loans.
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.
27
Noninterest Income
Total noninterest income for the second quarter was $1.1 million, compared to
$3.9 million in 2006. As previously noted, included in the 2007 second
quarter results are net trading losses of $2.8 million in 2007. For the first
half of 2007, noninterest income totaled $8.7 million, compared to $7.2
million in the comparable 2006 period.
Trust department income declined nominally to $1.4 million for the second
quarter of 2007. Trust department assets under management were $914 million
at June 30, 2007 compared to $863 million at June 30, 2006. On a year-to-date
basis, trust income was up 6.9% to $2.9 million, due primarily to higher
average valuation of assets under management in the first of the current year
compared to the same period in 2006.
Fees for other services to customers increased by $213 thousand between the
second quarter of 2006 and the comparable period in 2007, to $2.3 million.
The increase is the result of changes in fee policies as well as fees being
charged on a larger customer base. For the first six months, fees were up
14.7% to $4.6 million.
As noted, the Company recognized $2.8 million of net trading losses in the
second quarter of 2007. The losses were the result of the sale of longer
duration securities following the Company's adoption of SFAS 159 (see note on
recently adopted accounting pronouncements) and an insignificant amount of
unrealized losses on the trading portfolio. The losses partly offset the
unrealized gains reported in the first quarter resulting from the
appreciation in values of the trading account securities during that period.
On a year-to-date basis, the impact of net gains in the available for sale
and trading portfolios, relative to the same period in 2006, resulted in an
improvement of $892 thousand in non-interest income, accounting for more than
half of the total increase over the period.
Noninterest Expenses
Total noninterest expense increased from $12.0 million for the three months
ended June 30, 2006 to $13.5 million for the three months ended June 30,
2007, with increases in each expense category. Salaries and employee benefits
increased $468 thousand to $4.9 million for 2007. Net occupancy expense
increased $529 thousand to $2.4 million during the second quarter of 2007.
The increase is the result of new branch lease costs and the increased cost
of utilities and taxes on branch locations.
For the first six months of 2007, noninterest expense rose to $26.2 million
from $23.9 million in the comparable 2006 period, with increases in each expense
category. The bulk of the increase was in compensation and occupancy, both
substantially reflecting the increase in the number of branches and the
former also impacted by new extended service hours.
28
Income Taxes
In the second quarter of 2007, TrustCo recognized income tax expense of $3.6
million as compared to $6.2 million for 2006. The effective tax rates were
30.5% and 33.3% for the second quarter of 2007 and 2006, respectively. The
decline in the effective tax rate in the second quarter of 2007 reflected the
decline in income before taxes and the resulting larger proportion of tax
exempt income as compared to the same period in 2006. The tax expense on the
Company's income was different than tax expense at the statutory rate of 35%,
due primarily to tax exempt income and the effect of state income taxes.
For the first half of 2007, income taxes were $9.8 million, compared to $12.5
million in 2006 and the tax rate declined from 33.6% to 32.5%.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable
financial organization, TrustCo strives to maintain strong capital ratios.
New issues of equity securities have not been required since traditionally,
most of its capital requirements are met through capital retention.
Total shareholders' equity at June 30, 2007 was $229.9 million, a decrease
from the $239.5 million at year-end 2006. TrustCo declared dividends of
$0.160 per share in the second quarter of 2007. This results in a dividend
payout ratio of 117.4% in 2007. TrustCo expects to manage this ratio down. A
dividend payout ratio in excess of 100% is not sustainable indefinitely,
particularly given growth in the Company's asset base.
The Company achieved the following ratios as of June 30, 2007 and 2006:
June 30, Minimum Regulatory
2007 2006 Guidelines
----- ----- ------------------
Tier 1 risk adjusted capital 13.29% 16.07% 4.00%
Total risk adjusted capital 14.55% 17.33% 8.00%
In addition, at June 30, 2007 and 2006, the consolidated equity to total
assets ratio (excluding the mark to market effect of securities available for
sale) was 6.87% and 8.21%, respectively, compared to a minimum regulatory
requirement of 4.00%.
The decrease in capital ratios primarily reflects growth in the overall
consolidated balance sheet as well as the decline in stockholders' equity.
29
Critical Accounting Policies:
Pursuant to SEC guidance, management of the Company is encouraged to evaluate
and disclose those accounting policies that are judged to be critical
policies - those most important to the portrayal of the Company's financial
condition and results, and that require management's most difficult
subjective or complex judgments.
Management considers the accounting policy relating to the allowance for loan
losses to be a critical accounting policy given the inherent uncertainty in
evaluating the levels of the allowance required to cover the inherent risk of
losses in the portfolio and the material effect that such judgments can have
on the results of operations. Included in Note 1 to the Consolidated
Financial Statements contained in the Company's 2006 Annual Report on Form
10-K is a description of the significant accounting policies that are
utilized by the Company in the preparation of the Consolidated Financial
Statements.
The Company considers the adoption of SFAS No. 157 and 159 and the resulting
fair value accounting requirements to be considered critical accounting
policies which effect the Company's financial position and results of
operations. See Footnote 4 "Adoption of New Accounting Pronouncements" for a
description of the Company's implementation.
30
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of average balance
sheet, related interest income and expense and the average annualized yields
on interest earning assets and annualized rates on interest bearing
liabilities of TrustCo (adjusted for tax equivalency) for each of the
reported periods. Nonaccrual loans are included in loans for this analysis.
The average balances of securities available for sale are calculated using
amortized costs for these securities. The average balance of trading
securities is calculated using fair value for these securities. Included in
the average balance of shareholders' equity is unrealized depreciation, net
of tax, in the available for sale portfolio of $5.4 million in 2007 and $17.0
million in 2006. 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 allocared to the categories of variances (volume and rate) based on the
percentage relationship of such variances to each other.
Three Months 2007 Three Months 2006
----------------------------- -----------------------------
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 $ 247 $ 3 4.95% $ 989 $ 12 4.70% (9) (13) 4
Gov't Sponsored Enterprises 206,385 2,751 5.33% 799,158 10,408 5.21 (7,657) (9,287) 1,630
Mortgage-backed securities
and collateralized
mortgage obligations 163,979 1,916 4.67% 188,503 2,231 4.73% (315) (287) (28)
States and political
subdivisions 128,145 2,182 6.81% 128,081 2,205 6.89% (23) 8 (31)
Other 13,023 190 5.84% 12,302 115 3.78% 75 7 68
---------- ------- ----- ---------- ------- ----- ------- ------- ------
Total securities
available for sale 511,779 7,042 5.50% 1,129,033 14,971 5.30% (7,929) (9,572) 1,643
Federal funds sold and other
short-term Investments 519,651 6,856 5.29% 185,824 2,270 4.90% 4,586 4,391 195
Trading Securities 369,540 4,847 5.26% 0 0 0.00% 4,847 2,423 2,424
Commercial Loans 271,618 5,113 7.53% 228,142 4,292 7.52% 821 815 6
Residential mortgage loans 1,306,371 20,293 6.21% 1,124,412 17,425 6.20% 2,868 2,840 28
Home equity lines of credit 237,337 3,960 6.69% 209,592 3,575 6.84% 385 870 (485)
Installment loans 5,699 207 14.61% 5,388 189 14.08% 18 11 7
---------- ------- ----- ---------- ------- ----- ------- ------- ------
Loans, net of unearned income 1,821,025 29,573 6.50% 1,567,534 25,481 6.50% 4,092 4,536 (444)
Total interest
earning assets 3,221,995 48,318 6.00% 2,882,391 42,722 5.93% 5,596 1,778 3,818
------- ----- ------- ----- ------- ------- ------
Allowance for loan losses (35,229) (35,629)
Cash & non-interest
earning assets 123,727 100,973
---------- ----------
Total assets $3,310,493 $2,947,735
========== ==========
Liabilities and
shareholders' equity
Deposits:
Interest Bearing
Checking Accounts $ 282,670 213 0.30% $ 292,651 359 0.49% (146) (12) (134)
Money market accounts 331,303 3,411 4.13% 239,855 2,416 4.04% 995 940 55
Savings 652,324 2,398 1.47% 718,170 2,732 1.53% (334) (234) (100)
Time deposits 1,435,504 16,555 4.63% 1,105,608 10,549 3.83% 6,006 3,533 2,473
---------- ------- ----- ---------- ------- ----- ------- ------- ------
Total interest
bearing deposits 2,701,801 22,577 3.35% 2,356,284 16,056 2.73% 6,521 4,227 2,294
Short-term borrowings 96,417 989 4.12% 99,213 961 3.88% 28 (140) 168
Long-term debt 46 0 5.24% 75 1 5.24% (1) (1) 0
---------- ------- ----- ---------- ------- ----- ------- ------- ------
Total Interest
Bearing Liabilities 2,798,264 23,566 3.38% 2,455,572 17,018 2.78% 6,548 4,086 2,462
------- ------- ------- ------- ------
Demand deposits 254,920 247,029
Other liabilities 23,977 20,149
Shareholders' equity 233,332 224,985
---------- ----------
Total liab. &
shareholders' equity $3,310,493 $2,947,735
========== ==========
Net Interest Income,
tax equivalent 24,752 25,704 (952) (2,308) 1,356
------- ------- ------- ------- ------
Net Interest Spread 2.63% 3.15%
Net Interest margin
(net interest income to
total interest earning
assets) 3.07% 3.56%
Tax equivalent adjustment (770) (780)
------- -------
Net Interest Income 23,982 24,924
======= =======
31
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of average balance
sheet, related interest income and expense and the average annualized yields
on interest earning assets and annualized rates on interest bearing
liabilities of TrustCo (adjusted for tax equivalency) for each of the
reported periods. Nonaccrual loans are included in loans for this analysis.
The average balances of securities available for sale are calculated using
amortized costs for these securities. The average balance of trading
securities is calculated using fair value for these securities. Included in
the average balance of shareholders' equity is unrealized depreciation, net
of tax, in the available for sale portfolio of $7.0 million in 2007 and $12.1
million in 2006. 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 allocared to the categories of variances (volume and rate) based on the
percentage relationship of such variances to each other.
Six Months 2007 Six Months 2006
----------------------------- -----------------------------
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 $ 455 $ 11 4.71% $ 859 $ 19 4.38% (8) (12) 4
Gov't Sponsored Enterprises 211,958 5,599 5.28% 785,030 20,385 5.19 (14,786) (15,823) 1,037
Mortgage-backed securities
and collateralized
mortgage obligations 166,087 3,880 4.67% 193,077 4,524 4.69% (644) (625) (19)
States and political
subdivisions 128,761 4,386 6.81% 123,031 4,279 6.96% 107 325 (218)
Other 12,825 350 5.48% 12,115 355 5.89% (5) 43 (48)
---------- ------- ----- ---------- ------- ----- ------- ------- ------
Total securities
available for sale 520,086 14,226 5.47% 1,114,112 29,562 5.31% (15,336) (16,092) 756
Federal funds sold and other
short-term Investments 393,555 10,295 5.26% 205,631 4,763 4.66% 5,532 4,849 683
Trading Securities 435,545 11,650 5.35% 0 0 0.00% 11,650 5,825 5,825
Commercial Loans 269,029 10,135 7.54% 223,336 8,363 7.50% 1,772 1,727 45
Residential mortgage loans 1,286,135 39,978 6.22% 1,101,660 34,111 6.19% 5,867 5,702 165
Home equity lines of credit 240,488 7,697 6.45% 201,547 6,988 6.99% 709 2,061 (1,352)
Installment loans 5,636 403 14.43% 5,355 378 14.25% 25 20 5
---------- ------- ----- ---------- ------- ----- ------- ------- ------
Loans, net of unearned income 1,801,288 58,213 6.47% 1,531,898 49,840 6.52% 8,373 9,510 (1,137)
Total interest
earning assets 3,150,474 94,384 6.00% 2,851,641 84,165 5.91% 10,219 4,092 6,127
------- ----- ------- ----- ------- ------- ------
Allowance for loan losses (35,409) (36,275)
Cash & non-interest
earning assets 130,095 108,454
---------- ----------
Total assets $3,245,160 $2,923,820
========== ==========
Liabilities and
shareholders' equity
Deposits:
Interest Bearing
Checking Accounts $ 280,443 415 0.30% $ 293,574 644 0.44% (229) (28) (201)
Money market accounts 327,797 6,715 4.13% 221,457 4,256 3.88% 2,459 2,168 291
Savings 654,255 4,821 1.49% 718,505 5,098 1.43% (277) (775) 498
Time deposits 1,377,866 31,192 4.57% 1,100,398 20,477 3.75% 10,715 5,739 4,976
---------- ------- ----- ---------- ------- ----- ------- ------- ------
Total interest
bearing deposits 2,640,361 43,143 3.30% 2,333,934 30,475 2.63% 12,668 7,104 5,564
Short-term borrowings 97,146 1,982 4.11% 95,503 1,739 3.67% 243 30 213
Long-term debt 50 1 5.27% 79 2 5.27% (1) (1) 0
---------- ------- ----- ---------- ------- ----- ------- ------- ------
Total Interest
Bearing Liabilities 2,737,557 45,126 3.32% 2,429,516 32,216 2.67% 12,910 7,133 5,777
------- ------- ------- ------- ------
Demand deposits 249,493 244,480
Other liabilities 23,190 20,057
Shareholders' equity 234,920 229,767
---------- ----------
Total liab. &
shareholders' equity $3,245,160 $2,923,820
========== ==========
Net Interest Income,
tax equivalent 49,258 51,949 (2,691) (3,041) 350
------- ------- ------- ------- ------
Net Interest Spread 2.68% 3.24%
Net Interest margin
(net interest income to
total interest earning
assets) 3.11% 3.63%
Tax equivalent adjustment (1,555) (1,514)
------- -------
Net Interest Income 47,703 50,435
======= =======
32
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
As detailed in the Annual Report to Shareholders as of December 31, 2006 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, 2007, the Company continues to
respond to changes in interest rates in a fashion to position the Company to
meet both short term earning goals but to also allow the Company to respond
to changes in interest rates in the future. Consequently the quarter-to-date
average balance of federal funds sold and other short-term investments has
increased to $519.7 million in 2007 from $185.8 million in 2006. This change
also reflects the impact of the changes resulting from the SFAS 159 adoption.
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 trading securities, securities available for sale and loan
portfolios. This trend is expected to continue into the third quarter.
The Company has $450.2 million of trading account assets at June 30, 2007 and
none for the prior period. These trading account assets have been recorded at
their fair value as determined by quoted market prices from a third party
pricing service. The trading account securities at June 30, 2007 were all
fixed rate callable bonds issued by Government Sponsored Enterprises with a
final average maturity of approximately 5 months and weighted average yield
of 5.25%. Changes in market interest rates could affect the fair value of
this portfolio and net trading gains and losses recorded in periodic earnings
results.
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 ("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.
33
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 systems 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.
34
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There are no material changes to the Company's risk factors as discussed in
The Annual Report on Form 10K for the year ended December 31, 2006.
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 Average Part of Publicly May Yet Be
Number of Price Announced Purchases Under
Shares Paid per Plans or the Plans
Period Purchased Share Programs or Programs
------ --------- -------- ---------------- ---------------
April 1 -
April 30 20,000 $ 9.58 0 N/A
May 1 -
May 31 80,000 $ 9.57 0 N/A
June 1 -
June 30 0 $ 0 0 N/A
Total 100,000 $ 9.57 0 N/A
All 100,000 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 14, 2007, shareholders of the Company were
asked to consider the Company's nominees for directors and to elect two (2)
directors. The Company's nominees for director were Robert A. McCormick
(three-year term) and Joseph A. Lucarelli (three-year term).
35
The results of shareholder voting are as follows:
1. Election of Directors:
Director For Withheld
------------------- ---------- ---------
Joseph A. Lucarelli 58,909,832 2,890,537
Robert A. McCormick 52,699,816 9,100,553
Directors continuing in office are Thomas O. Maggs, Dr. Anthony J. Marinello,
Robert J. McCormick, William D. Powers and William J. Purdy.
2. Proposal to ratify the appointment of KPMG LLP as the independent
certified public accountants of TrustCo for the fiscal year ending
December 31, 2007.
For Against Abstain
---------- --------- -------
60,138,617 1,260,151 401,599
Item 5. Other Information
None.
36
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Reg S-K (Item 601)
Exhibit No. Description
-------------------------------------------------------------------------
31(a) Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick,
principal executive officer.
31(b) Rule 13a-15(e)/15d-15(e) Certification of Robert T. Cushing,
principal financial officer.
32 Section 1350 Certifications of Robert J. McCormick, principal
executive officer and Robert T. Cushing, principal financial
officer.
(b) Reports on Form 8-K
During the quarter ended June 30, 2007, TrustCo filed the following reports
on Form 8-K:
April 9, 2007 stating US Banker, an industry publication, listed the top 200
mid-tier banks according to three year average return on equity for the years
ended 2004, 2005 and 2006, TrustCo was ranked 6th.
April 11, 2007 stating that effective January 1, 2007, TrustCo has elected
early Adoption of Statement of Financial Accounting Standards ("SFAS") No.
159 The Fair Value Option for Financial Assets and Financial Liabilities,
including an Amendment of SFAS No. 115 and No. 157 Fair Value Measurements.
April 17, 2007, regarding a press release dated April 17, 2007, detailing
first quarter and year to date results for the period ending March 31, 2007.
April 17, 2007 announcing that Kevin T. Timmons will be joining the Company
as Vice President/Treasurer.
May 14, 2007, regarding presentation materials presented at the Annual
Meeting of Shareholders held May 14, 2007.
May 15, 2007, regarding a press release dated May 15, 2007, announcing
results of the Annual Meeting held May 14, 2007 and declaring a cash dividend
of $0.16 per share payable on July 2, 2007, to shareholders of record at the
close of business on June 8, 2007.
37
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 7, 2007
38
Exhibits Index
Reg S-K
Exhibit No. Description
-------------------------------------------------------------------------
31(a) Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick,
principal executive officer.
31(b) Rule 13a-15(e)/15d-15(e) Certification of Robert T. Cushing,
principal financial officer.
32 Section 1350 Certifications of Robert J. McCormick, principal
executive officer and Robert T. Cushing, principal financial
officer.
39