UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
For the quarterly period ended June 30, 2020
OR
For the transition period from __________ to _________
Commission File Number 0-10592
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
Registrant's telephone number, including area code: |
( |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol (s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Accelerated filer ☐ |
Non-accelerated filer ☐ |
|
Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock |
Number of Shares Outstanding as of July 31, 2020 |
$1 Par Value |
TrustCo Bank Corp NY
Part I. |
FINANCIAL INFORMATION |
PAGE NO. |
Item 1. |
Consolidated Interim Financial Statements (Unaudited): |
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3 |
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4 |
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5 |
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6 |
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7 |
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8 – 40 |
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41 |
||
Item 2. |
42 – 66 |
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Item 3. |
67 |
|
Item 4. |
67 |
|
Part II. |
OTHER INFORMATION |
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Item 1. |
68 |
|
Item 1A. |
68 |
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Item 2. |
68 |
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Item 3. |
69 |
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Item 4. |
69 |
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Item 5. |
69 |
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Item 6. |
69 |
(dollars in thousands, except per share data)
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Interest and dividend income: |
||||||||||||||||
Interest and fees on loans |
$ |
|||||||||||||||
Interest and dividends on securities available for sale: |
||||||||||||||||
U. S. government sponsored enterprises |
||||||||||||||||
State and political subdivisions |
||||||||||||||||
Mortgage-backed securities and collateralized mortgage obligations |
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Corporate bonds |
||||||||||||||||
Small Business Administration-guaranteed participation securities |
||||||||||||||||
Other securities |
||||||||||||||||
Total interest and dividends on securities available for sale |
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Interest on held to maturity securities: |
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Mortgage-backed securities and collateralized mortgage obligations-residential |
||||||||||||||||
Total interest on held to maturity securities |
||||||||||||||||
Federal Reserve Bank and Federal Home Loan Bank stock |
||||||||||||||||
Interest on federal funds sold and other short-term investments |
||||||||||||||||
Total interest income |
||||||||||||||||
Interest expense: |
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Interest on deposits: |
||||||||||||||||
Interest-bearing checking |
||||||||||||||||
Savings accounts |
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Money market deposit accounts |
||||||||||||||||
Time deposits |
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Interest on short-term borrowings |
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Total interest expense |
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Net interest income |
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Provision (Credit) for loan losses |
( |
) |
( |
) |
||||||||||||
Net interest income after provision for loan losses |
||||||||||||||||
Noninterest income: |
||||||||||||||||
Trustco financial services income |
||||||||||||||||
Fees for services to customers |
||||||||||||||||
Net gain on securities transactions |
||||||||||||||||
Other |
||||||||||||||||
Total noninterest income |
||||||||||||||||
Noninterest expenses: |
||||||||||||||||
Salaries and employee benefits |
||||||||||||||||
Net occupancy expense |
||||||||||||||||
Equipment expense |
||||||||||||||||
Professional services |
||||||||||||||||
Outsourced services |
||||||||||||||||
Advertising expense |
||||||||||||||||
FDIC and other insurance |
||||||||||||||||
Other real estate (income) expense, net |
( |
) |
||||||||||||||
Other |
||||||||||||||||
Total noninterest expenses |
||||||||||||||||
Income before taxes |
||||||||||||||||
Income taxes |
||||||||||||||||
Net income |
$ |
$ |
||||||||||||||
Net income per share: |
||||||||||||||||
- Basic |
$ |
$ |
||||||||||||||
- Diluted |
$ |
$ |
||||||||||||||
See accompanying notes to unaudited consolidated interim financial statements.
(dollars in thousands)
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Net income |
$ |
|||||||||||||||
Net unrealized holding gain (loss) on securities available for sale |
||||||||||||||||
Reclassification adjustments for net gain recognized in income |
( |
) |
||||||||||||||
Tax effect |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Net unrealized gain on securities available for sale, net of tax |
||||||||||||||||
Amortization of net actuarial gain |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Amortization of prior service (credit) cost |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Tax effect |
||||||||||||||||
Amortization of net actuarial gain and prior service credit on pension and postretirement plans, net of tax |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Other comprehensive income, net of tax |
||||||||||||||||
Comprehensive income |
$ |
|||||||||||||||
See accompanying notes to unaudited consolidated interim financial statements.
TRUSTCO BANK CORP NY
(dollars in thousands, except per share data)
June 30, 2020 |
December 31, 2019 |
|||||||
ASSETS: |
||||||||
Cash and due from banks |
$ |
|||||||
Federal funds sold and other short term investments |
||||||||
Total cash and cash equivalents |
||||||||
Securities available for sale |
||||||||
Held to maturity securities (fair value 2020 $ |
||||||||
Federal Reserve Bank and Federal Home Loan Bank stock |
||||||||
Loans, net of deferred net costs |
||||||||
Less: |
||||||||
Allowance for loan losses |
||||||||
Net loans |
||||||||
Bank premises and equipment, net |
||||||||
Operating lease right-of-use assets |
||||||||
Other assets |
||||||||
Total assets |
$ |
|||||||
LIABILITIES: |
||||||||
Deposits: |
||||||||
Demand |
$ |
|||||||
Interest-bearing checking |
||||||||
Savings accounts |
||||||||
Money market deposit accounts |
||||||||
Time deposits |
||||||||
Total deposits |
||||||||
Short-term borrowings |
||||||||
Operating lease liabilities |
||||||||
Accrued expenses and other liabilities |
||||||||
Total liabilities |
||||||||
SHAREHOLDERS' EQUITY: |
||||||||
Capital stock par value $ |
||||||||
Surplus |
||||||||
Undivided profits |
||||||||
Accumulated other comprehensive loss, net of tax |
||||||||
Treasury stock at cost - |
( |
) |
( |
) |
||||
Total shareholders' equity |
||||||||
Total liabilities and shareholders' equity |
$ |
|||||||
See accompanying notes to unaudited consolidated interim financial statements.
(dollars in thousands, except per share data)
Capital Stock |
Surplus |
Undivided Profits |
Accumulated Other Comprehensive (Loss) Income |
Treasury Stock |
Total |
|||||||||||||||||||
Beginning balance, January 1, 2019 |
$ |
( |
) |
( |
) |
|||||||||||||||||||
Net income |
||||||||||||||||||||||||
Other comprehensive income, net of tax |
||||||||||||||||||||||||
Stock options exercised ( |
||||||||||||||||||||||||
Cash dividend declared, $ |
( |
) |
( |
) |
||||||||||||||||||||
Purchase of treasury stock ( |
( |
) |
( |
) |
||||||||||||||||||||
Sale of treasury stock ( |
( |
) |
||||||||||||||||||||||
Stock based compensation expense |
( |
) |
( |
) |
||||||||||||||||||||
Ending balance, March 31, 2019 |
$ |
( |
) |
( |
) |
|||||||||||||||||||
Net income |
||||||||||||||||||||||||
Other comprehensive income, net of tax |
||||||||||||||||||||||||
Cash dividend declared, $ |
( |
) |
( |
) |
||||||||||||||||||||
Sale of treasury stock ( |
( |
) |
||||||||||||||||||||||
Stock based compensation expense |
||||||||||||||||||||||||
Ending balance, June 30, 2019 |
$ |
( |
) |
( |
) |
|||||||||||||||||||
Beginning balance, January 1, 2020 |
$ |
( |
) |
|||||||||||||||||||||
Net income |
||||||||||||||||||||||||
Other comprehensive income, net of tax |
||||||||||||||||||||||||
Cash dividend declared, $ |
( |
) |
( |
) |
||||||||||||||||||||
Purchase of treasury stock ( |
( |
) |
( |
) |
||||||||||||||||||||
Stock based compensation expense |
||||||||||||||||||||||||
Ending balance, March 31, 2020 |
$ |
( |
) |
|||||||||||||||||||||
Net income |
||||||||||||||||||||||||
Other comprehensive income, net of tax |
||||||||||||||||||||||||
Cash dividend declared, $ |
( |
) |
( |
) |
||||||||||||||||||||
Stock based compensation expense |
||||||||||||||||||||||||
Ending balance, June 30, 2020 |
$ |
( |
) |
|||||||||||||||||||||
See accompanying notes to unaudited consolidated interim financial statements.
TRUSTCO BANK CORP NY
(dollars in thousands)
Six months ended June 30, |
||||||||
2020 |
2019 |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ |
|||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
||||||||
Amortization of right-of-use asset |
||||||||
Net gain on sale of other real estate owned |
( |
) |
( |
) |
||||
Writedown of other real estate owned |
||||||||
Provision (credit) for loan losses |
( |
) |
||||||
Deferred tax (benefit) expense |
( |
) |
||||||
Net amortization of securities |
||||||||
Stock based compensation expense |
( |
) |
||||||
Net gain on sale of bank premises and equipment |
( |
) |
||||||
Net gain on sales of securities |
( |
) |
||||||
Decrease in taxes receivable |
||||||||
Increase in interest receivable |
( |
) |
( |
) |
||||
(Decrease) increase in interest payable |
( |
) |
||||||
Increase in other assets |
( |
) |
( |
) |
||||
Decrease in operating lease liabilities |
( |
) |
( |
) |
||||
Decrease in accrued expenses and other liabilities |
( |
) |
( |
) |
||||
Total adjustments |
||||||||
Net cash provided by operating activities |
||||||||
Cash flows from investing activities: |
||||||||
Proceeds from sales and calls of securities available for sale |
||||||||
Proceeds from calls and maturities of held to maturity securities |
||||||||
Purchases of securities available for sale |
( |
) |
( |
) |
||||
Proceeds from maturities of securities available for sale |
||||||||
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock |
( |
) |
( |
) |
||||
Proceeds from redemption of Federal Reserve Bank stock |
||||||||
Net increase in loans |
( |
) |
( |
) |
||||
Proceeds from dispositions of other real estate owned |
||||||||
Proceeds from dispositions of bank premises and equipment |
||||||||
Purchases of bank premises and equipment |
( |
) |
( |
) |
||||
Net cash provided by (used in) investing activities |
( |
) |
||||||
Cash flows from financing activities: |
||||||||
Net increase in deposits |
||||||||
Net increase (decrease) in short-term borrowings |
||||||||
Proceeds from exercise of stock options |
||||||||
Proceeds from sale of treasury stock |
||||||||
Purchases of treasury stock |
( |
) |
( |
) |
||||
Dividends paid |
( |
) |
( |
) |
||||
Net cash provided by financing activities |
||||||||
Net increase in cash and cash equivalents |
||||||||
Cash and cash equivalents at beginning of period |
||||||||
Cash and cash equivalents at end of period |
$ |
|||||||
Supplemental Disclosure of Cash Flow Information: |
||||||||
Cash paid during the year for: |
||||||||
Interest paid |
$ |
|||||||
Income taxes paid |
||||||||
Other non cash items: |
||||||||
Transfer of loans to other real estate owned |
||||||||
Increase in dividends payable |
||||||||
Change in unrealized gain on securities available for sale-gross of deferred taxes |
||||||||
Change in deferred tax effect on unrealized (gain) loss on securities available for sale |
( |
) |
( |
) |
||||
Amortization of net actuarial gain and prior service cost on pension and postretirement plans |
( |
) |
( |
) |
||||
Change in deferred tax effect of amortization of net actuarial gain postretirement benefit plans |
||||||||
See accompanying notes to unaudited consolidated interim financial statements.
The unaudited Consolidated Interim Financial Statements of TrustCo Bank Corp NY (the “Company” or “TrustCo”) include the accounts of the Company’s subsidiary, Trustco Bank (also referred to as the “Bank”) and other 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 three and six months ended June 30, 2020 is not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or any interim periods. These financial statements consider events that occurred through the date of filing.
In the opinion of the management of the Company, the accompanying unaudited Consolidated Interim Financial Statements contain all recurring adjustments necessary to present fairly the financial position as of June 30, 2020, the results of operations for the three and six months ended June 30, 2020 and 2019, and the cash flows for the six months ended June 30, 2020 and 2019. The accompanying unaudited Consolidated Interim Financial Statements should be read in conjunction with the Company’s year-end audited Consolidated Financial Statements, including notes thereto, which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The accompanying Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States.
(2) Earnings Per Share
The Company computes earnings per share in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share (“ASC 260”). A reconciliation of the component parts of earnings per share for the three and six months ended June 30, 2020 and 2019 is as follows:
(in thousands, except per share data) |
For the three months ended June 30, |
For the six months ended June 30, |
||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Net income |
$ |
$ |
||||||||||||||
Weighted average common shares |
||||||||||||||||
Stock Options |
||||||||||||||||
Weighted average common shares including potential dilutive shares |
||||||||||||||||
Basic EPS |
$ |
$ |
||||||||||||||
Diluted EPS |
$ |
$ |
||||||||||||||
For the three and six months ended June 30, 2020 and 2019 the weighted average antidilutive stock options excluded from dilutive earnings were approximately 452 0
(3) Benefit Plans
The table below outlines the components of the Company's net periodic benefit recognized during the three and six months ended June 30, 2020 and 2019 for its pension and other postretirement benefit plans:
Three months ended June 30, |
||||||||||||||||
Pension Benefits |
Other Postretirement Benefits |
|||||||||||||||
(dollars in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
Service cost |
$ |
|||||||||||||||
Interest cost |
||||||||||||||||
Expected return on plan assets |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Amortization of net loss (gain) |
( |
) |
( |
) |
||||||||||||
Amortization of prior service cost |
( |
) |
( |
) |
||||||||||||
Net periodic benefit |
$ |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Six months ended June 30, |
||||||||||||||||
Pension Benefits |
Other Postretirement Benefits |
|||||||||||||||
(dollars in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
Service cost |
$ |
|||||||||||||||
Interest cost |
||||||||||||||||
Expected return on plan assets |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Amortization of net loss (gain) |
( |
) |
( |
) |
||||||||||||
Amortization of prior service cost |
( |
) |
( |
) |
||||||||||||
Net periodic benefit |
$ |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
The Company does not expect to make contributions to its pension and postretirement benefit plans in 2020. As of June 30, 2020, no contributions have been made, however, this decision is reviewed each quarter and is subject to change based upon market conditions.
Since 2003, the Company has not subsidized retiree medical insurance premiums. However, it continues to provide postretirement medical benefits to a limited number of current and retired executives in accordance with the terms of their employment contracts.
(4) Investment Securities
(a) Securities available for sale
The amortized cost and fair value of the securities available for sale are as follows:
June 30, 2020 |
||||||||||||||||
(dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
U.S. government sponsored enterprises |
$ |
|||||||||||||||
State and political subdivisions |
||||||||||||||||
Mortgage backed securities and collateralized mortgage obligations - residential |
||||||||||||||||
Corporate bonds |
||||||||||||||||
Small Business Administration - guaranteed participation securities |
||||||||||||||||
Other |
||||||||||||||||
Total Securities Available for Sale |
$ |
|||||||||||||||
December 31, 2019 |
||||||||||||||||
(dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
U.S. government sponsored enterprises |
$ |
|||||||||||||||
State and political subdivisions |
||||||||||||||||
Mortgage backed securities and collateralized mortgage obligations - residential |
||||||||||||||||
Corporate bonds |
||||||||||||||||
Small Business Administration - guaranteed participation securities |
||||||||||||||||
Other |
||||||||||||||||
Total securities available for sale |
$ |
|||||||||||||||
The following table distributes the debt securities included in the available for sale portfolio as of June 30, 2020, based on the securities’ final maturity. Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty. Securities not due at a single maturity date are presented separately:
(dollars in thousands) |
Amortized Cost |
Fair Value |
||||||
Due in one year or less |
$ |
|||||||
Due in one year through five years |
||||||||
Due after five years through ten years |
||||||||
Mortgage backed securities and collateralized mortgage obligations |
||||||||
Small Business Administration - guaranteed participation securities |
||||||||
$ |
||||||||
Gross unrealized losses on securities available for sale and the related fair values aggregated by the length of time that individual securities have been in an unrealized loss position, were as follows:
June 30, 2020 |
||||||||||||||||||||||||
Less than 12 months |
12 months or more |
Total |
||||||||||||||||||||||
(dollars in thousands) |
Fair Value |
Gross Unreal. Loss |
Fair Value |
Gross Unreal. Loss |
Fair Value |
Gross Unreal. Loss |
||||||||||||||||||
Mortgage backed securities and collateralized mortgage obligations - residential |
$ |
|||||||||||||||||||||||
Corporate bonds |
||||||||||||||||||||||||
Total |
$ |
|||||||||||||||||||||||
December 31, 2019 |
||||||||||||||||||||||||
Less than 12 months |
12 months or more |
Total |
||||||||||||||||||||||
(dollars in thousands) |
Fair Value |
Gross Unreal. Loss |
Fair Value |
Gross Unreal. Loss |
Fair Value |
Gross Unreal. Loss |
||||||||||||||||||
U.S. government sponsored enterprises |
$ |
|||||||||||||||||||||||
Mortgage backed securities and collateralized mortgage obligations - residential |
||||||||||||||||||||||||
Corporate bonds |
||||||||||||||||||||||||
Small Business Administration - guaranteed participation securities |
||||||||||||||||||||||||
Total |
$ |
|||||||||||||||||||||||
The proceeds from sales and calls of securities available for sale, gross realized gains and gross realized losses from sales and calls during the three and six months ended June 30, 2020 and 2019 are as follows:
Three months ended June 30, |
||||||||
(dollars in thousands) |
2020 |
2019 |
||||||
Proceeds from sales |
$ |
$ |
||||||
Proceeds from calls/paydowns |
||||||||
Proceeds from maturities |
||||||||
Gross realized losses |
||||||||
Six months ended June 30, |
||||||||
(dollars in thousands) |
2020 |
2019 |
||||||
Proceeds from sales |
$ |
$ |
||||||
Proceeds from calls/paydowns |
||||||||
Proceeds from maturities |
||||||||
Gross realized gains |
||||||||
The current interest rate environment has significantly contributed to more bonds being called. There were no transfers of securities available for sale during the three and six months ended June 30, 2020 and 2019.
(b) Held to maturity securities
The amortized cost and fair value of the held to maturity securities are as follows:
June 30, 2020 |
||||||||||||||||
(dollars in thousands) |
Amortized Cost |
Gross Unrecognized Gains |
Gross Unrecognized Losses |
Fair Value |
||||||||||||
Mortgage backed securities and collateralized mortgage obligations - residential |
$ |
|||||||||||||||
Total held to maturity |
$ |
|||||||||||||||
December 31, 2019 |
||||||||||||||||
(dollars in thousands) |
Amortized Cost |
Gross Unrecognized Gains |
Gross Unrecognized Losses |
Fair Value |
||||||||||||
Mortgage backed securities and collateralized mortgage obligations - residential |
$ |
|||||||||||||||
Total held to maturity |
$ |
|||||||||||||||
The following table distributes the debt securities included in the held to maturity portfolio as of June 30, 2020, based on the securities’ final maturity. Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty. Securities not due at a single maturity date are presented separately:
(dollars in thousands) |
Amortized Cost |
Fair Value |
||||||
Mortgage backed securities and collateralized mortgage obligations - residential |
$ |
|||||||
$ |
||||||||
All held to maturity securities are held at cost on the financial statements. There were no
There were no
(c) Other-Than-Temporary Impairment
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio by type and applying the appropriate OTTI model.
In determining OTTI for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether any other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether management intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If management intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If management does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, the OTTI on debt securities shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
As of June 30, 2020, the Company’s security portfolio included certain securities which were in an unrealized loss position, and are discussed below.
Corporate Bonds: At June 30, 2020, corporate bonds held by the Company are investment grade quality. Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2020.
Mortgage backed securities and collateralized mortgage obligations – residential: At June 30, 2020, all mortgage backed securities and collateralized mortgage obligations held by the Company were issued by U.S. government sponsored entities and agencies, primarily Ginnie Mae, Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other‑than‑temporarily impaired at June 30, 2020.
(5) Loans and Allowance for Loan Losses
The following table presents the recorded investment in loans by loan class:
June 30, 2020 |
||||||||||||
(dollars in thousands) |
New York and other states* |
Florida |
Total |
|||||||||
Commercial: |
||||||||||||
Commercial real estate |
$ |
|||||||||||
Other |
||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||
First mortgages |
||||||||||||
Home equity loans |
||||||||||||
Home equity lines of credit |
||||||||||||
Installment |
||||||||||||
Total loans, net |
$ |
$ |
||||||||||
Less: Allowance for loan losses |
||||||||||||
Net loans |
$ |
|||||||||||
December 31, 2019 |
||||||||||||
(dollars in thousands) |
New York and other states* |
Florida |
Total |
|||||||||
Commercial: |
||||||||||||
Commercial real estate |
$ |
|||||||||||
Other |
||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||
First mortgages |
||||||||||||
Home equity loans |
||||||||||||
Home equity lines of credit |
||||||||||||
Installment |
||||||||||||
Total loans, net |
$ |
|||||||||||
Less: Allowance for loan losses |
||||||||||||
Net loans |
$ |
|||||||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
At June 30, 2020 and December 31, 2019, the Company had approximately $27.0 million and $28.5 million of real estate construction loans, respectively. Of the $27.0 million in real estate construction loans at June 30, 2020, approximately $9.7 million are secured by first mortgages to residential borrowers while approximately $17.3 million were to commercial borrowers for residential construction projects. Of the $28.5 million in real estate construction loans at December 31, 2019, approximately $10.7 million are secured by first mortgages to residential borrowers while approximately $17.8 million were to commercial borrowers for residential construction projects. The vast majority of construction loans are in the Company’s New York market.
TrustCo lends in the geographic territory of its branch locations in New York, Florida, Massachusetts, New Jersey and Vermont. Although the loan portfolio is diversified, a portion of its debtors’ ability to repay depends significantly on the economic conditions prevailing in the respective geographic territory.
The following tables present the recorded investment in non-accrual loans by loan class:
June 30, 2020 |
||||||||||||
(dollars in thousands) |
New York and other states* |
Florida |
Total |
|||||||||
Loans in non-accrual status: |
||||||||||||
Commercial: |
||||||||||||
Commercial real estate |
$ |
|||||||||||
Other |
||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||
First mortgages |
||||||||||||
Home equity loans |
||||||||||||
Home equity lines of credit |
||||||||||||
Installment |
||||||||||||
Total non-accrual loans |
||||||||||||
Restructured real estate mortgages - 1 to 4 family |
||||||||||||
Total nonperforming loans |
$ |
|||||||||||
December 31, 2019 |
||||||||||||
(dollars in thousands) |
New York and other states* |
Florida |
Total |
|||||||||
Loans in non-accrual status: |
||||||||||||
Commercial: |
||||||||||||
Commercial real estate |
$ |
|||||||||||
Other |
||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||
First mortgages |
||||||||||||
Home equity loans |
||||||||||||
Home equity lines of credit |
||||||||||||
Installment |
||||||||||||
Total non-accrual loans |
||||||||||||
Restructured real estate mortgages - 1 to 4 family |
||||||||||||
Total nonperforming loans |
$ |
|||||||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu). As of June 30, 2020 and December 31, 2019, other real estate owned included $472 thousand and $1.2 million of residential foreclosed properties, respectively. In addition, non-accrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $11.3 million and $8.7 million, respectively, as of June 30, 2020 and December 31, 2019.
The following tables present the aging of the recorded investment in past due loans by loan class and by region as of June 30, 2020 and December 31, 2019:
June 30, 2020 |
||||||||||||||||||||||||
New York and other states*: |
||||||||||||||||||||||||
(dollars in thousands) |
30-59 Days Past Due |
60-89 Days Past Due |
90 + Days Past Due |
Total 30+ days Past Due |
Current |
Total Loans |
||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||||||||||
Other |
||||||||||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||||||||||
First mortgages |
||||||||||||||||||||||||
Home equity loans |
||||||||||||||||||||||||
Home equity lines of credit |
||||||||||||||||||||||||
Installment |
||||||||||||||||||||||||
Total |
$ |
|||||||||||||||||||||||
Florida: |
||||||||||||||||||||||||
(dollars in thousands) |
30-59 Days Past Due |
60-89 Days Past Due |
90 + Days Past Due |
Total 30+ days Past Due |
Current |
Total Loans |
||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||||||||||
Other |
||||||||||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||||||||||
First mortgages |
||||||||||||||||||||||||
Home equity loans |
||||||||||||||||||||||||
Home equity lines of credit |
||||||||||||||||||||||||
Installment |
||||||||||||||||||||||||
Total |
$ |
|||||||||||||||||||||||
Total: |
||||||||||||||||||||||||
(dollars in thousands) |
30-59 Days Past Due |
60-89 Days Past Due |
90 + Days Past Due |
Total 30+ days Past Due |
Current |
Total Loans |
||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||||||||||
Other |
||||||||||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||||||||||
First mortgages |
||||||||||||||||||||||||
Home equity loans |
||||||||||||||||||||||||
Home equity lines of credit |
||||||||||||||||||||||||
Installment |
||||||||||||||||||||||||
Total |
$ |
|||||||||||||||||||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
December 31, 2019 |
||||||||||||||||||||||||
New York and other states*: |
||||||||||||||||||||||||
(dollars in thousands) |
30-59 Days Past Due |
60-89 Days Past Due |
90 + Days Past Due |
Total 30+ days Past Due |
Current |
Total Loans |
||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||||||||||
Other |
||||||||||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||||||||||
First mortgages |
||||||||||||||||||||||||
Home equity loans |
||||||||||||||||||||||||
Home equity lines of credit |
||||||||||||||||||||||||
Installment |
||||||||||||||||||||||||
Total |
$ |
|||||||||||||||||||||||
Florida: |
||||||||||||||||||||||||
(dollars in thousands) |
30-59 Days Past Due |
60-89 Days Past Due |
90 + Days Past Due |
Total 30+ days Past Due |
Current |
Total Loans |
||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||||||||||
Other |
||||||||||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||||||||||
First mortgages |
||||||||||||||||||||||||
Home equity loans |
||||||||||||||||||||||||
Home equity lines of credit |
||||||||||||||||||||||||
Installment |
||||||||||||||||||||||||
Total |
$ |
|||||||||||||||||||||||
Total: |
||||||||||||||||||||||||
(dollars in thousands) |
30-59 Days Past Due |
60-89 Days Past Due |
90 + Days Past Due |
Total 30+ days Past Due |
Current |
Total Loans |
||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||||||||||
Other |
||||||||||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||||||||||
First mortgages |
||||||||||||||||||||||||
Home equity loans |
||||||||||||||||||||||||
Home equity lines of credit |
||||||||||||||||||||||||
Installment |
||||||||||||||||||||||||
Total |
$ |
|||||||||||||||||||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
At June 30, 2020 and December 31, 2019, there were no loans that were 90 no
Activity in the allowance for loan losses by portfolio segment is summarized as follows:
For the three months ended June 30, 2020 |
||||||||||||||||
(dollars in thousands) |
Commercial |
Real Estate Mortgage- 1 to 4 Family |
Installment |
Total |
||||||||||||
Balance at beginning of period |
$ |
|||||||||||||||
Loans charged off: |
||||||||||||||||
New York and other states* |
||||||||||||||||
Florida |
||||||||||||||||
Total loan chargeoffs |
||||||||||||||||
Recoveries of loans previously charged off: |
||||||||||||||||
New York and other states* |
||||||||||||||||
Florida |
||||||||||||||||
Total recoveries |
||||||||||||||||
Net loans (recoveries) charged off |
( |
) |
( |
) |
||||||||||||
(Credit) provision for loan losses |
( |
) |
||||||||||||||
Balance at end of period |
$ |
|||||||||||||||
For the three months ended June 30, 2019 |
||||||||||||||||
(dollars in thousands) |
Commercial |
Real Estate Mortgage- 1 to 4 Family |
Installment |
Total |
||||||||||||
Balance at beginning of period |
$ |
|||||||||||||||
Loans charged off: |
||||||||||||||||
New York and other states* |
||||||||||||||||
Florida |
||||||||||||||||
Total loan chargeoffs |
||||||||||||||||
Recoveries of loans previously charged off: |
||||||||||||||||
New York and other states* |
||||||||||||||||
Florida |
||||||||||||||||
Total recoveries |
||||||||||||||||
Net loans (recoveries) charged off |
( |
) |
( |
) |
( |
) |
||||||||||
(Credit) provision for loan losses |
( |
) |
( |
) |
( |
) |
||||||||||
Balance at end of period |
$ |
|||||||||||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
Six months ended June 30, 2020 |
||||||||||||||||
Commercial |
Real Estate Mortgage- 1 to 4 Family |
Installment |
Total |
|||||||||||||
Balance at beginning of period |
$ |
|||||||||||||||
Loans charged off: |
||||||||||||||||
New York and other states* |
||||||||||||||||
Florida |
||||||||||||||||
Total loan chargeoffs |
||||||||||||||||
Recoveries of loans previously charged off: |
||||||||||||||||
New York and other states* |
||||||||||||||||
Florida |
||||||||||||||||
Total recoveries |
||||||||||||||||
Net loans charged off (recoveries) |
( |
) |
||||||||||||||
Provision for loan losses |
||||||||||||||||
Balance at end of period |
$ |
|||||||||||||||
Six months ended June 30, 2019 |
||||||||||||||||
Commercial |
Real Estate Mortgage- 1 to 4 Family |
Installment |
Total |
|||||||||||||
Balance at beginning of period |
$ |
|||||||||||||||
Loans charged off: |
||||||||||||||||
New York and other states* |
||||||||||||||||
Florida |
||||||||||||||||
Total loan chargeoffs |
||||||||||||||||
Recoveries of loans previously charged off: |
||||||||||||||||
New York and other states* |
||||||||||||||||
Florida |
||||||||||||||||
Total recoveries |
||||||||||||||||
Net loans charged off |
||||||||||||||||
(Credit) provision for loan losses |
( |
) |
( |
) |
( |
) |
||||||||||
Balance at end of period |
$ |
|||||||||||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
The Company has identified non-accrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring (“TDR”), as impaired loans. A loan is considered impaired when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured as a TDR.
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2020 and December 31, 2019:
June 30, 2020 |
||||||||||||||||
(dollars in thousands) |
Commercial Loans |
1-to-4 Family Residential Real Estate |
Installment Loans |
Total |
||||||||||||
Allowance for loan losses: |
||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||
Individually evaluated for impairment |
$ |
|||||||||||||||
Collectively evaluated for impairment |
||||||||||||||||
Total ending allowance balance |
$ |
|||||||||||||||
Loans: |
||||||||||||||||
Individually evaluated for impairment |
$ |
|||||||||||||||
Collectively evaluated for impairment |
||||||||||||||||
Total ending loans balance |
$ |
|||||||||||||||
December 31, 2019 |
||||||||||||||||
(dollars in thousands) |
Commercial Loans |
1-to-4 Family Residential Real Estate |
Installment Loans |
Total |
||||||||||||
Allowance for loan losses: |
||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||
Individually evaluated for impairment |
$ |
|||||||||||||||
Collectively evaluated for impairment |
||||||||||||||||
Total ending allowance balance |
$ |
|||||||||||||||
Loans: |
||||||||||||||||
Individually evaluated for impairment |
$ |
|||||||||||||||
Collectively evaluated for impairment |
||||||||||||||||
Total ending loans balance |
$ |
|||||||||||||||
A loan for which the terms have been modified, and for which the borrower is experiencing financial difficulties, is considered a TDR and is classified as impaired. TDR’s at June 30, 2020 and December 31, 2019 are measured at the present value of estimated future cash flows using the loan’s effective rate at inception or the fair value of the underlying collateral if the loan is considered collateral dependent.
The following tables present impaired loans by loan class as of June 30, 2020 and December 31, 2019:
June 30, 2020 |
||||||||||||||||
New York and other states*: |
||||||||||||||||
(dollars in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
||||||||||||
Commercial: |
||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||
Other |
||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||
First mortgages |
||||||||||||||||
Home equity loans |
||||||||||||||||
Home equity lines of credit |
||||||||||||||||
Total |
$ |
|||||||||||||||
Florida: |
||||||||||||||||
(dollars in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
||||||||||||
Commercial: |
||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||
Other |
||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||
First mortgages |
||||||||||||||||
Home equity loans |
||||||||||||||||
Home equity lines of credit |
||||||||||||||||
Total |
$ |
|||||||||||||||
Total: |
||||||||||||||||
(dollars in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
||||||||||||
Commercial: |
||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||
Other |
||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||
First mortgages |
||||||||||||||||
Home equity loans |
||||||||||||||||
Home equity lines of credit |
||||||||||||||||
Total |
$ |
|||||||||||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
December 31, 2019 |
||||||||||||||||
New York and other states*: |
||||||||||||||||
(dollars in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
||||||||||||
Commercial: |
||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||
Other |
||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||
First mortgages |
||||||||||||||||
Home equity loans |
||||||||||||||||
Home equity lines of credit |
||||||||||||||||
Total |
$ |
|||||||||||||||
Florida: |
||||||||||||||||
(dollars in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
||||||||||||
Commercial: |
||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||
Other |
||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||
First mortgages |
||||||||||||||||
Home equity loans |
||||||||||||||||
Home equity lines of credit |
||||||||||||||||
Total |
$ |
|||||||||||||||
Total: |
||||||||||||||||
(dollars in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
||||||||||||
Commercial: |
||||||||||||||||
Commercial real estate |
$ |
|||||||||||||||
Other |
||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||
First mortgages |
||||||||||||||||
Home equity loans |
||||||||||||||||
Home equity lines of credit |
||||||||||||||||
Total |
$ |
|||||||||||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as impaired. Interest income recognized on impaired loans was not material during the three and six months ended June 30, 2020 and 2019.
As of June 30, 2020 and December 31, 2019 impaired loans included approximately $10.8 million and $11.1 million of loans in accruing status that were identified as TDR’s in accordance with regulatory guidance related to Chapter 7 bankruptcy loans, respectively.
Management evaluates impairment on impaired loans on a quarterly basis. If, during this evaluation, impairment of the loan is identified, a charge off is taken at that time. As a result, as of June 30, 2020 and December 31, 2019, based upon management’s evaluation and due to the sufficiency of charge-offs taken, none of the allowance for loan losses has been allocated to a specific impaired loan(s).
The following table presents, by class, loans that were modified as TDR’s:
Three months ended 6/30/2020 |
Three months ended 6/30/2019 |
|||||||||||||||||||||||
New York and other states*: |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
||||||||||||||||||
(dollars in thousands) |
||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial real estate |
$ |
$ |
||||||||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||||||||||
First mortgages |
||||||||||||||||||||||||
Home equity loans |
||||||||||||||||||||||||
Home equity lines of credit |
||||||||||||||||||||||||
Total |
$ |
$ |
||||||||||||||||||||||
Florida: (dollars in thousands) |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial real estate |
$ |
$ |
||||||||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||||||||||
First mortgages |
||||||||||||||||||||||||
Home equity loans |
||||||||||||||||||||||||
Home equity lines of credit |
||||||||||||||||||||||||
Total |
$ |
$ |
||||||||||||||||||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
Six months ended 6/30/2020 |
Six months ended 6/30/2019 |
|||||||||||||||||||||||
New York and other states*: |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
||||||||||||||||||
(dollars in thousands) |
||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial real estate |
$ |
$ |
||||||||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||||||||||
First mortgages |
||||||||||||||||||||||||
Home equity loans |
||||||||||||||||||||||||
Home equity lines of credit |
||||||||||||||||||||||||
Total |
$ |
$ |
||||||||||||||||||||||
Florida: (dollars in thousands) |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial real estate |
$ |
$ |
||||||||||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||||||||||
First mortgages |
||||||||||||||||||||||||
Home equity loans |
||||||||||||||||||||||||
Home equity lines of credit |
||||||||||||||||||||||||
Total |
$ |
$ |
||||||||||||||||||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
The addition of these TDR’s did not have a significant impact on the allowance for loan losses.
In situations where the Company considers a loan modification, management determines whether the borrower is experiencing financial difficulty by performing an evaluation of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s underwriting policy.
Generally, the modification of the terms of loans was the result of the borrower filing for bankruptcy protection. Chapter 13 bankruptcies generally include the deferral of all past due amounts for a period of generally 60 months in accordance with the bankruptcy court order. In the case of Chapter 7 bankruptcies, as previously noted, even though there is no modification of terms, the borrowers’ debt to the Company was discharged and they did not reaffirm the debt.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In situations involving a borrower filing for Chapter 13 bankruptcy protection, however, a loan is considered to be in payment default once it is 30 days contractually past due, consistent with the treatment by the bankruptcy court.
During the three months ended June 30, 2020 and 2019 there were no
Six months ended 6/30/2020 |
Six months ended 6/30/2019 |
|||||||||||||||
New York and other states*: |
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
||||||||||||
(dollars in thousands) |
||||||||||||||||
Commercial: |
||||||||||||||||
Commercial real estate |
$ |
$ |
||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||
First mortgages |
||||||||||||||||
Home equity loans |
||||||||||||||||
Home equity lines of credit |
||||||||||||||||
Total |
$ |
$ |
||||||||||||||
Florida: (dollars in thousands) |
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
||||||||||||
Commercial: |
||||||||||||||||
Commercial real estate |
$ |
$ |
||||||||||||||
Real estate mortgage - 1 to 4 family: |
||||||||||||||||
First mortgages |
||||||||||||||||
Home equity lines of credit |
||||||||||||||||
Total |
$ |
$ |
||||||||||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
The TDR’s that subsequently defaulted described above did not have a material impact on the allowance for loan losses.
Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of troubled debt restructurings (“TDR”) classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period. Loans not meeting the CARES ACT or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures. Loan Modifications and payment deferrals made pursuant to COVID 19 as of June 30, 2020 totaled approximately $190 million, which included $45 million of commercial loans and $145 million of residential loans.
The Company categorizes non-homogenous loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. On at least an annual basis, the Company’s loan grading process analyzes non-homogeneous loans, such as commercial and commercial real estate loans, individually by grading the loans based on credit risk. The loan grades assigned to all loan types are tested by the Company’s internal loan review department in accordance with the Company’s internal loan review policy.
The Company uses the following definitions for classified loans:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as such have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those loans classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. All doubtful loans are considered impaired.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “pass” rated loans.
As of June 30, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
June 30, 2020 |
||||||||||||
New York and other states*: |
||||||||||||
(dollars in thousands) |
Pass |
Classified |
Total |
|||||||||
Commercial: |
||||||||||||
Commercial real estate |
$ |
|||||||||||
Other |
||||||||||||
$ |
||||||||||||
Florida: |
||||||||||||
(dollars in thousands) |
Pass |
Classified |
Total |
|||||||||
Commercial: |
||||||||||||
Commercial real estate |
$ |
|||||||||||
Other |
||||||||||||
$ |
||||||||||||
Total: |
||||||||||||
(dollars in thousands) |
Pass |
Classified |
Total |
|||||||||
Commercial: |
||||||||||||
Commercial real estate |
$ |
|||||||||||
Other |
||||||||||||
$ |
||||||||||||
* Includes New York, New Jersey and Massachusetts.
December 31, 2019 |
||||||||||||
New York and other states*: |
||||||||||||
(dollars in thousands) |
Pass |
Classified |
Total |
|||||||||
Commercial: |
||||||||||||
Commercial real estate |
$ |
|||||||||||
Other |
||||||||||||
$ |
||||||||||||
Florida: |
||||||||||||
(dollars in thousands) |
Pass |
Classified |
Total |
|||||||||
Commercial: |
||||||||||||
Commercial real estate |
$ |
|||||||||||
Other |
||||||||||||
$ |
||||||||||||
Total: |
||||||||||||
(dollars in thousands) |
Pass |
Classified |
Total |
|||||||||
Commercial: |
||||||||||||
Commercial real estate |
$ |
|||||||||||
Other |
||||||||||||
$ |
||||||||||||
* Includes New York, New Jersey and Massachusetts.
Included in classified loans in the above tables are impaired loans of $808 thousand and $816 thousand at June 30, 2020 and December 31, 2019, respectively.
For homogeneous loan pools, such as residential mortgages, home equity lines of credit, and installment loans, the Company uses payment status to identify the credit risk in these loan portfolios. Payment status is reviewed on a daily basis by the Company’s collection area and on a monthly basis with respect to determining the adequacy of the allowance for loan losses. The payment status of these homogeneous pools as of June 30, 2020 and December 31, 2019 is included in the aging of the recorded investment of the past due loans table. In addition, the total nonperforming portion of these homogeneous loan pools as of June 30, 2020 and December 31, 2019 is presented in the non-accrual loans table.
(6) Fair Value of Financial Instruments
FASB Topic 820, Fair Value Measurements ("ASC 820") defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the value that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of assets and liabilities:
Securities Available for Sale: The fair value of securities available for sale is determined utilizing an independent pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. This results in a Level 1 or Level 2 classification of the inputs for determining fair value. Interest and dividend income is recorded on the accrual method and is included in the Consolidated Statements of Income in the respective investment class under total interest and dividend income. The Company does not have any securities that would be designated as Level 3.
Other Real Estate Owned: Assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. This results in a Level 3 classification of the inputs for determining fair value.
Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally have had a charge off through the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. When obtained, non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Indications of value for both collateral-dependent impaired loans and other real estate owned are obtained from third party providers or the Company’s internal Appraisal Department. All indications of value are reviewed for reasonableness by a member of the Appraisal Department for the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value via comparison with independent data sources such as recent market data or industry-wide statistics.
Assets and liabilities measured at fair value under ASC 820 on a recurring basis are summarized below:
There were no
Fair Value Measurements at |
||||||||||||||||
June 30, 2020 Using: |
||||||||||||||||
(dollars in thousands) |
Carrying Value |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
State and political subdivisions |
$ |
$ |
$ |
|||||||||||||
Mortgage backed securities and collateralized mortgage obligations - residential |
||||||||||||||||
Corporate bonds |
||||||||||||||||
Small Business Administration- guaranteed participation securities |
||||||||||||||||
Other securities |
||||||||||||||||
Total securities available for sale |
$ |
$ |
$ |
$ |
||||||||||||
Fair Value Measurements at |
||||||||||||||||
December 31, 2019 Using: |
||||||||||||||||
(dollars in thousands) |
Carrying Value |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Securities available for sale: |
||||||||||||||||
U.S. government sponsored enterprises |
$ |
$ |
$ |
$ |
||||||||||||
State and political subdivisions |
||||||||||||||||
Mortgage backed securities and collateralized mortgage obligations - residential |
||||||||||||||||
Corporate bonds |
||||||||||||||||
Small Business Administration- guaranteed participation securities |
||||||||||||||||
Other securities |
||||||||||||||||
Total securities available for sale |
$ |
$ |
$ |
$ |
||||||||||||
Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at |
||||||||||||||||||||||
June 30, 2020 Using: |
||||||||||||||||||||||
(dollars in thousands) |
Carrying Value |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Valuation technique |
Unobservable inputs |
Range (Weighted Average) |
|||||||||||||||
Other real estate owned |
$ |
$ |
$ |
$ |
%) |
|||||||||||||||||
Impaired loans: |
||||||||||||||||||||||
Real estate mortgage -1 to 4 family |
%) |
|||||||||||||||||||||
Fair Value Measurements at |
||||||||||||||||||||||
December 31, 2019 Using: |
||||||||||||||||||||||
(dollars in thousands) |
Carrying Value |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Valuation technique |
Unobservable inputs |
Range (Weighted Average) |
|||||||||||||||
Other real estate owned |
$ |
$ |
$ |
$ |
%) |
|||||||||||||||||
Impaired loans: |
||||||||||||||||||||||
Real estate mortgage -1 to 4 family |
%) |
|||||||||||||||||||||
Other real estate owned, that is carried at fair value less costs to sell was approximately $830 thousand at June 30, 2020 and consisted of $358 thousand of commercial real estate and approximately $472 million of residential real estate properties. Valuation charges of $23 thousand and $103 thousand are included in earnings for the three and six months ended June 30, 2020, respectively .
Of the total impaired loans of $20.4 million at June 30, 2020, $297 thousand are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at June 30, 2020. Gross charge offs related to residential impaired loans included in the table above were $77 thousand for the six months ended June 30, 2020, there were no gross charge offs related to residential impaired loans for the three months ended June 30, 2020.
Other real estate owned, that is carried at fair value less costs to sell, was approximately $1.6 million at December 31, 2019 and consisted of $358 thousand of commercial real estate and $1.2 million of residential real estate properties. A valuation charge of $366 thousand is included in earnings for the year ended December 31, 2019.
Of the total impaired loans of $21.0 million at December 31, 2019, $120 thousand are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at December 31, 2019. Gross charge offs related to residential impaired loans included in the table above amounted to $22 thousand.
In accordance with FASB Topic 825, Financial Instruments (“ASC 825”), the carrying amounts and estimated fair values of financial instruments, at June 30, 2020 and December 31, 2019 are as follows:
(dollars in thousands) |
Fair Value Measurements at |
|||||||||||||||||||
Carrying |
June 30, 2020 Using: |
|||||||||||||||||||
Value |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ |
|||||||||||||||||||
Securities available for sale |
||||||||||||||||||||
Held to maturity securities |
||||||||||||||||||||
Federal Home Loan Bank stock |
N/A |
N/A |
N/A |
N/A |
||||||||||||||||
Net loans |
||||||||||||||||||||
Accrued interest receivable |
||||||||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Demand deposits |
||||||||||||||||||||
Interest bearing deposits |
||||||||||||||||||||
Short-term borrowings |
||||||||||||||||||||
Accrued interest payable |
||||||||||||||||||||
(dollars in thousands) |
Fair Value Measurements at |
|||||||||||||||||||
Carrying |
December 31, 2019 Using: |
|||||||||||||||||||
Value |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ |
|||||||||||||||||||
Securities available for sale |
||||||||||||||||||||
Held to maturity securities |
||||||||||||||||||||
Federal Reserve Bank and Federal |
||||||||||||||||||||
Home Loan Bank stock |
N/A |
N/A |
N/A |
N/A |
||||||||||||||||
Net loans |
||||||||||||||||||||
Accrued interest receivable |
||||||||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Demand deposits |
||||||||||||||||||||
Interest bearing deposits |
||||||||||||||||||||
Short-term borrowings |
||||||||||||||||||||
Accrued interest payable |
||||||||||||||||||||
(7) Accumulated Other Comprehensive Income (Loss)
The following is a summary of the accumulated other comprehensive (loss) income balances, net of tax:
Three months ended 6/30/2020 |
||||||||||||||||||||
(dollars in thousands) |
Balance at 4/1/2020 |
Other Comprehensive Income (loss)- Before Reclassifications |
Amount reclassified from Accumulated Other Comprehensive Income |
Other Comprehensive Income (loss)- Three months ended 6/30/2020 |
Balance at 6/30/2020 |
|||||||||||||||
Net unrealized holding loss on securities available forsale, net of tax |
$ |
|||||||||||||||||||
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax |
||||||||||||||||||||
Net change in net actuarial loss and prior service credit on pension and postretirement benefit plans, net of tax |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||
Accumulated other comprehensive loss, net of tax |
$ |
( |
) |
|||||||||||||||||
Three months ended 6/30/2019 |
||||||||||||||||||||
(dollars in thousands) |
Balance at 4/1/2019 |
Other Comprehensive Income (loss)- Before Reclassifications |
Amount reclassified from Accumulated Other Comprehensive Income |
Other Comprehensive Income (loss)- Three months ended 6/30/2019 |
Balance at 6/30/2019 |
|||||||||||||||
Net unrealized holding (gain) loss on securities available for sale, net of tax |
$ |
( |
) |
( |
) |
|||||||||||||||
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax |
||||||||||||||||||||
Net change in net actuarial (gain) loss and prior service cost on pension and postretirement benefit plans, net of tax |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||
Accumulated other comprehensive income (loss), net of tax |
$ |
( |
) |
( |
) |
|||||||||||||||
Six months ended 6/30/2020 |
||||||||||||||||||||
(dollars in thousands) |
Balance at 1/1/2020 |
Other Comprehensive Income (loss)- Before Reclassifications |
Amount reclassified from Accumulated Other Comprehensive Income |
Other Comprehensive Income (loss)- Three months ended 6/30/2020 |
Balance at 6/30/2020 |
|||||||||||||||
Net unrealized holding loss on securities available for sale, net of tax |
$ |
( |
) |
|||||||||||||||||
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax |
||||||||||||||||||||
Net change in net actuarial loss and prior service credit on pension and postretirement benefit plans, net of tax |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||
Accumulated other comprehensive loss, net of tax |
$ |
( |
) |
|||||||||||||||||
Six months ended 6/30/2019 |
||||||||||||||||||||
(dollars in thousands) |
Balance at 1/1/2019 |
Other Comprehensive Income (loss)- Before Reclassifications |
Amount reclassified from Accumulated Other Comprehensive Income |
Other Comprehensive Income (loss)- Three months ended 6/30/2019 |
Balance at 6/30/2019 |
|||||||||||||||
Net unrealized holding (gain) loss on securities available for sale, net of tax |
$ |
( |
) |
( |
) |
|||||||||||||||
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax |
||||||||||||||||||||
Net change in net actuarial (gain) loss and prior service cost on pension and postretirement benefit plans, net of tax |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||
Accumulated other comprehensive income (loss), net of tax |
$ |
( |
) |
( |
) |
|||||||||||||||
The following represents the reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2020 and 2019:
(dollars in thousands) |
Three months ended |
Six months ended |
|||||||||||||||
June 30, |
June 30, |
||||||||||||||||
2020 |
2019 |
2020 |
2019 |
Affected Line Item in Financial Statements |
|||||||||||||
Net unrealized holding gain on securities available for sale |
|||||||||||||||||
Realized gain on securities transactions |
$ |
$ |
Net gain on securities transactions |
||||||||||||||
Income tax effect |
( |
) |
Income taxes |
||||||||||||||
Net of tax |
|||||||||||||||||
Amortization of pension and postretirement benefit items: |
|||||||||||||||||
Amortization of net actuarial gain (loss) |
$ |
$ |
Salaries and employee benefits |
||||||||||||||
Amortization of prior service cost |
( |
) |
( |
) |
Salaries and employee benefits |
||||||||||||
Income tax benefit |
( |
) |
( |
) |
( |
) |
( |
) |
Income taxes |
||||||||
Net of tax |
|||||||||||||||||
Total reclassifications, net of tax |
$ |
$ |
|||||||||||||||
(8) Revenue from Contracts with Customers
All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income. The following table presents the Company’s sources of Non-Interest Income for the three months and six months ended June 30, 2020 and 2019. Items outside the scope of ASC 606 are noted as such.
(dollars in thousands) |
Three months ended |
Six months ended |
||||||||||||||
June 30, |
June 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Non-interest income |
||||||||||||||||
Service Charges on Deposits |
||||||||||||||||
Overdraft fees |
$ |
$ |
$ |
$ |
||||||||||||
Other |
||||||||||||||||
Interchange Income |
||||||||||||||||
Net gain on securities transactions (a) |
||||||||||||||||
Wealth management fees |
||||||||||||||||
Other (a) |
||||||||||||||||
Total non-interest income |
$ |
$ |
$ |
$ |
||||||||||||
(a) Not within the scope of ASC 606.
A description of the Company’s revenue streams accounted in accordance with ASC 606 as follows:
Service charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.
Interchange Income: Interchange revenue primarily consists of interchange fees, volume-related incentives and ATM charges. As the card-issuing bank, interchange fees represent our portion of discount fees paid by merchants for credit/debit card transactions processed through the interchange network. The levels and structure of interchange rates are set by the card processing companies and are based on cardholder purchase volumes. The Company earns interchange income as cardholder transactions occur and interchange fees are settled on a daily basis concurrent with the transaction processing services provided to the cardholder.
Wealth Management fees: Trustco Financial Services provides a comprehensive suite of trust and wealth management products and services, including financial and estate planning, trustee and custodial services, investment management, corporate retirement plan recordkeeping and administration of which a fee is charged to manage assets for investment or transact on accounts. These fees are earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed over the period in which services are performed based on a percentage of the fair value of assets under management or administration. Other services are based on a fixed fee for certain account types, or based on transaction activity and are recognized when services are rendered. Fees are withdrawn from the customer’s account balance.
Gains/Losses on Sales of Other real Estate Owned “OREO”: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain/ (loss) on sale if a significant financing component is present.
(9) Operating Leases
The Company adopted Topic 842 “Leases” effective January 1, 2019 and has applied the guidance to all operating leases within the scope of Topic 842 at that date. The company elected to adopt practical expedients, which among other things, does not require reassessment of lease classification.
The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the Company’s balance sheets.
Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company’s leases do not provide an implicit rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine present value of operating lease liabilities. Additionally, the Company does allocate the consideration between lease and non-lease components. The Company’s lease terms may include options to extend when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease components, such as fair market value adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. As of June 30, 2020 the Company did not have any leases with terms of twelve months or less.
As of June 30, 2020 the Company does not have leases that have not yet commenced. At June 30, 2020 lease expiration dates ranged from six months to 24.3 years and have a weighted average remaining lease term of 9.0 years. Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements. As mentioned above the leases generally also include variable lease components which include real estate taxes, insurance, and common area maintenance (“CAM”) charges in the annual rental payments.
Other information related to leases was as follows:
(dollars in thousands) |
Three months ended June 30, |
|||||||
2020 |
2019 |
|||||||
Operating lease cost |
$ |
$ |
||||||
Variable lease cost |
||||||||
Total Lease costs |
$ |
$ |
||||||
(dollars in thousands) |
Six months ended June 30, |
|||||||
2020 |
2019 |
|||||||
Operating lease cost |
$ |
$ |
||||||
Variable lease cost |
||||||||
Total Lease costs |
$ |
$ |
||||||
(dollars in thousands) |
Six months ended June 30, |
|||||||
2020 |
2019 |
|||||||
Supplemental cash flows information: |
||||||||
Cash paid for amounts included in the measurement of lease liabilities: |
||||||||
Operating cash flows from operating leases |
$ |
$ |
||||||
Right-of-use assets obtained in exchange for lease obligations: |
$ |
|||||||
Weighted average remaining lease term |
||||||||
Weighted average discount rate |
% |
% |
||||||
Future minimum lease payments under non-cancellable leases as of June 30, 2020 were as follows:
(dollars in thousands) |
||||
Year ending December 31, |
||||
2020(a) |
$ |
|||
2021 |
||||
2022 |
||||
2023 |
||||
2024 |
||||
Thereafter |
||||
Total lease payments |
$ |
|||
Less: Interest |
||||
Present value of lease liabilities |
$ |
|||
(a) Excluding the six months ended June 30, 2020.
Future minimum lease payments under non-cancellable leases as of June 30, 2019 were as follows:
(dollars in thousands) |
||||
Year ending December 31, |
||||
2019(a) |
$ |
|||
2020 |
||||
2021 |
||||
2022 |
||||
2023 |
||||
Thereafter |
||||
Total lease payments |
$ |
|||
Less: Interest |
||||
Present value of lease liabilities |
$ |
|||
(a) Excluding the six months ended June 30, 2019.
(10) Regulatory Capital Requirements
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy regulations and, additionally for banks, the prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and became fully phased in on January 1, 2019. The capital rules include a capital conservation buffer that is designed to absorb losses during periods of economic stress and to require increased capital levels before capital distributions and certain other payments can be made. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers. The buffer was fully implemented at 2.5% as of January 1, 2019. As of June 30, 2020, the Company and Bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is not classified as well capitalized, regulatory approval is required to accept brokered deposits. If a bank is undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. The federal banking agencies are required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution or its holding company. Such actions could have a direct material effect on an institution’s or its holding company’s financial statements. As of June 30, 2020 and December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Bank and the Company reported the following capital ratios as of June 30, 2020 and December 31, 2019:
(Bank Only) |
||||||||||||||||
Minimum for Capital Adequacy plus Capital Conservation |
||||||||||||||||
As of June 30, 2020 |
Well |
|||||||||||||||
(dollars in thousands) |
Amount |
Ratio |
Capitalized(1) |
Buffer (1)(2) |
||||||||||||
Tier 1 leverage ratio |
$ |
% |
% |
% |
||||||||||||
Common equity tier 1 capital |
||||||||||||||||
Tier 1 risk-based capital |
||||||||||||||||
Total risk-based capital |
||||||||||||||||
As of December 31, 2019 |
Well |
Minimum for Capital Adequacy plus Capital Conservation |
||||||||||||||
(dollars in thousands) |
Amount |
Ratio |
Capitalized(1) |
Buffer (1)(2) |
||||||||||||
Tier 1 leverage ratio |
$ |
% |
% |
% |
||||||||||||
Common equity tier 1 capital |
||||||||||||||||
Tier 1 risk-based capital |
||||||||||||||||
Total risk-based capital |
||||||||||||||||
(Consolidated) |
As of June 30, 2020 2019 |
Minimum for Capital Adequacy plus Capital Conservation |
||||||||||
(dollars in thousands) |
Amount |
Ratio |
Buffer (1)(2) |
|||||||||
Tier 1 leverage ratio |
$ |
% |
% |
|||||||||
Common equity Tier 1 capital |
% |
% |
||||||||||
Tier 1 risk-based capital |
% |
% |
||||||||||
Total risk-based capital |
% |
% |
||||||||||
As of December 31, 2019 |
Minimum for Capital Adequacy plus Capital Conservation |
|||||||||||
(dollars in thousands) |
Amount |
Ratio |
Buffer (1)(2) |
|||||||||
Tier 1 leverage ratio |
$ |
% |
% |
|||||||||
Common equity Tier 1 capital |
||||||||||||
Tier 1 risk-based capital |
||||||||||||
Total risk-based capital |
||||||||||||
| (1) |
| (2) |
(11) New Accounting Pronouncements
In September 2016, the FASB released ASU 2016-13, “Financial Instruments - Credit Losses” which amended existing guidance to replace current generally accepted accounting principles used to measure a reporting entity’s credit losses. The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
As previously disclosed, the Company formed a cross-functional team to work through its implementation of the plan. The Company has selected the Discounted Cash Flow modeling method and is running parallel processes and is working to finalize assessment and documentation of processes, data and model validation testing, qualitative factors and forecast periods. The company has selected a third party software solution to assist in the application of the new standard. The Company has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act) until the date on which the National Emergency concerning COVID-19 is terminated or December 31, 2020, whichever occurs first. Upon adoption of ASU 2016-13, the Company will recognize a one-time cumulative effect adjustment through retained earnings to increase its allowance for credit loss and to increase its unfunded loan commitment liability as of January 1, 2020.
(12) Risks and Uncertainties
Beginning in March 2020, the Company experienced negative impacts to our business in the form of requests for loan deferrals of principal and interest due to the business disruption caused by COVID-19. In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. At this time, it is difficult to quantify the impact COVID-19 will have on the rest of 2020. The Company has evaluated the impact of the effects of COVID-19 and determined that there were no material or systematic adverse impacts on the Company’s first and second quarter 2020 balance sheets and results of operations except for an increase in provision for loan losses and related allowance for loan losses.
On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company’s financial condition and results of operations. As a result of the spread of COVID-19, economic uncertainties have arisen which are likely to continue to negatively impact net interest income, provision for loan losses, and noninterest income. Other financial impact could occur though such potential impact is unknown at this time.
As of June 30, 2020, the Company and Bank capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios, as well as the ability of the Company and the Bank to pay dividends or make other distributions, could be adversely impacted by further credit losses.
Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of troubled debt restructurings (“TDR”) classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period. Loans not meeting the CARES ACT or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures. Loan Modifications and payment deferrals made pursuant to COVID 19 as of June 30, 2020 totaled approximately $190 million, which included $45 million of commercial loans and $145 million of residential loans.
At this time, we do not believe there exists any impairment to our goodwill, long-lived assets, right of use assets, held to maturity investment securities, or available-for-sale investment securities due to the COVID-19 pandemic. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets.
 |
Crowe LLP Independent Member Crowe Global |
Shareholders and the Board of Directors of TrustCo Bank Corp NY
Glenville, New York
Results of Review of Interim Financial Information
We have reviewed the consolidated statement of financial condition of TrustCo Bank Corp NY (the "Company") as of June 30, 2020, and the related consolidated statements of income and comprehensive income for the three and six-month periods ended June 30, 2020 and June 30, 2019 and the related changes in shareholders’ equity and cash flows for the six-month periods ended June 30, 2020 and June 30, 2019, and the related notes (collectively referred to as the "interim financial information or statements"). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated statement of financial condition of the Company as of December 31, 2019, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2020, 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, 2019, is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the PCAOB. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
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 PCAOB, 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.
/s/ Crowe LLP |
|
New York, New York |
|
August 6, 2020 |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Forward-looking Statements
Statements included in this report 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, including statements regarding the effect of the novel coronavirus disease (“COVID-19”) pandemic on our business, financial condition and results of operations and our continuing response to the COVID-19 pandemic, that are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Forward-looking statements can be identified by the use of such words as may, will, should, could, would, estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.
In addition to factors described under Part II, Item 1A, Risk Factors, and under the Risk Factor discussion in TrustCo’s Annual Report on Form 10-K for the year ended December 31, 2019, the factors listed below, 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. Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic.
| • | As a result of the current pandemic related to COVID-19, TrustCo may experience a decline in the demand for products and services; an increase in loan delinquencies; problem assets and foreclosures; a decline in collateral value; a work stoppage, forced quarantine, or other interruption or the unavailability of key employees; an increase in the allowance for loan losses; a reduction in wealth management revenues; an increase in Federal Deposit Insurance Corporation premiums; a reduction in the value of the securities portfolio; and a decline in the net worth and liquidity of loan guarantors; |
| • | TrustCo’s ability to continue to originate a significant volume of one- to- four family mortgage loans in its market areas and to otherwise maintain or increase its market share in the areas in which it operates; |
| • | TrustCo’s ability to continue to maintain noninterest expense and other overhead costs at reasonable levels relative to income; |
| • | TrustCo’s ability to make accurate assumptions and judgments regarding the credit risks associated with its lending and investing activities, including changes in the level and direction of loan delinquencies and charge-offs, changes in property values, and changes in estimates of the adequacy of the allowance for loan and lease losses; |
| • | the effects of and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations; |
| • | restrictions or conditions imposed by TrustCo’s and Trustco Bank’s regulators on their operations that may make it more difficult to achieve TrustCo’s and Trustco Bank’s goals; |
| • | the future earnings and capital levels of TrustCo and Trustco Bank and the continued non objection from TrustCo’s and Trustco Bank’s primary federal banking regulators under regulatory rules to distribute capital from Trustco Bank to TrustCo, which could affect the ability of TrustCo to pay dividends; |
| • | the results of supervisory monitoring or examinations of Trustco Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our loss allowances or to take other actions that reduce capital or income; |
| • | adverse conditions in the securities markets that lead to impairment in the value of securities in TrustCo’s investment portfolio; |
| • | the perceived overall value of TrustCo’s products and services by users, including the features, pricing and quality compared to competitors’ products and services and the willingness of current and prospective customers to substitute competitors’ products and services for TrustCo’s products and services; |
| • | changes in consumer spending, borrowing and savings habits; |
| • | the effect of changes in financial services laws and regulations (including laws concerning taxation, banking and securities) and the impact of other governmental initiatives affecting the financial services industry, including regulatory capital requirements; |
| • | changes in management personnel; |
| • | real estate and collateral values; |
| • | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, Financial Accounting Standards Board (“FASB”) or the Public Company Accounting Oversight Board; |
| • | disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions; |
| • | technological changes and electronic, cyber and physical security breaches; |
| • | changes in local market areas and general business and economic trends; |
| • | TrustCo’s success at managing the risks involved in the foregoing and managing its business; and |
| • | other risks and uncertainties included under “Risk Factors” in our Form 10-K for the year ended December 31, 2019 and in our Form 10-Q for the quarter ended March 31, 2020. |
You should not rely upon forward-looking statements as predictions of future events. Although TrustCo believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Following this discussion are the tables "Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential" which gives a detailed breakdown of TrustCo's average interest earning assets and interest bearing liabilities for the three-month and six‑month periods ended June 30, 2020 and 2019.
Introduction
The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three-month and six-month month periods ended June 30, 2020, with comparisons to the corresponding period in 2019, 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 2019 Annual Report to Shareholders on Form 10-K, which was filed with the SEC on February 28, 2020, should also be read in conjunction with this review. Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation.
COVID-19 Impact
Beginning in March 2020, we experienced negative impacts to our business in the form of requests for loan deferrals of principal and interest due to the business disruption caused by COVID-19. In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. At this time, it is difficult to quantify the impact COVID-19 will have on the rest of 2020. The Company has evaluated the impact of the effects of COVID-19 and determined that there were no material or systematic adverse impacts on the Company’s first and second quarter 2020 balance sheets and results of operations except for an increase in the provision for loan losses as a result of the increased risk inherent in the loan portfolio resulting from the pandemic.
The following is a description of the impact the COVID-19 global pandemic is having our business:
Loan modifications
We began receiving requests from our borrowers for loan deferrals in March 2020. Modifications include the deferral of principal and/or interest payments for terms generally up to 90 days. Requests are evaluated individually and approved modifications are based on the unique circumstances of each borrower. We are committed to working with our clients to allow time to work through the challenges of this pandemic. At this time, it is uncertain what future impact loan modifications related to COVID-19 difficulties will have on our financial condition, results of operations and provision for loan losses. Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of troubled debt restructuring (“TDR”) classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period. Loans not meeting the CARES Act or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures.
As of July 10, 2020, the initial deferral period had expired for 231 loans, totaling $43.3 million. Of the $43.3 million, approximately 74% have begun repayment and the remaining 26% are being evaluated by management for an additional extension.
The following table shows the number of loans and the outstanding loan balances at the time the principal and interest deferrals were approved as of June 30, 2020:
(Dollars In Thousands) |
||||||||
New York and Other states*: |
Number of loans |
Outstanding loan balance |
||||||
Commercial |
79 |
$ |
39,630 |
|||||
Residential mortgage loans |
441 |
94,028 |
||||||
Home equity line of credit |
13 |
641 |
||||||
Installment loans |
5 |
150 |
||||||
Total |
538 |
$ |
134,449 |
|||||
Florida: |
Number of loans |
Outstanding loan balance |
||||||
Commercial |
5 |
$ |
5,392 |
|||||
Residential mortgage loans |
205 |
49,745 |
||||||
Home equity line of credit |
1 |
9 |
||||||
Installment loans |
3 |
86 |
||||||
Total |
214 |
$ |
55,232 |
|||||
Total: |
Number of loans |
Outstanding loan balance |
||||||
Commercial |
84 |
$ |
45,022 |
|||||
Residential mortgage loans |
646 |
143,773 |
||||||
Home equity line of credit |
14 |
650 |
||||||
Installment loans |
8 |
236 |
||||||
Total |
752 |
$ |
189,681 |
|||||
* Includes New York, New Jersey, Vermont and Massachusetts.
The commercial loans that are deferred include various types of businesses. The following table shows the number of commercial loans and the outstanding loan balances, by industry, at the time the principal and interest deferrals were approved as of June 30, 2020:
(Dollars In Thousands) |
||||||||
New York and Other states* |
Number of loans |
Outstanding loan balance |
||||||
Fitness and Recreational Sports Centers |
7 |
$ |
11,534 |
|||||
Lessors and Property Managers of Nonresidential Buildings |
7 |
6,551 |
||||||
Lessors and Property Managers of Residential Buildings |
31 |
9,818 |
||||||
Other various businesses |
14 |
2,558 |
||||||
Lessors of Nonresidential Buildings - Self Storage Units |
2 |
2,238 |
||||||
New Single-Family Housing Construction |
3 |
1,921 |
||||||
Food Service |
5 |
1,351 |
||||||
Retail |
4 |
1,349 |
||||||
New Single-Family Housing Construction - Land Development |
3 |
1,260 |
||||||
Commercial Construction |
3 |
1,050 |
||||||
79 |
$ |
39,630 |
||||||
Florida: |
Number of loans |
Outstanding loan balance |
||||||
Fitness and Recreational Sports Centers |
- |
$ |
- |
|||||
Lessors and Property Managers of Nonresidential Buildings |
2 |
4,533 |
||||||
Lessors and Property Managers of Residential Buildings |
1 |
46 |
||||||
Other various businesses |
1 |
319 |
||||||
Lessors of Nonresidential Buildings - Self Storage Units |
1 |
494 |
||||||
New Single-Family Housing Construction |
- |
- |
||||||
Food Service |
- |
- |
||||||
Retail |
- |
- |
||||||
New Single-Family Housing Construction - Land Development |
- |
- |
||||||
Commercial Construction |
- |
- |
||||||
5 |
$ |
5,392 |
||||||
Total: |
Number of loans |
Outstanding loan balance |
||||||
Fitness and Recreational Sports Centers |
7 |
$ |
11,534 |
|||||
Lessors and Property Managers of Nonresidential Buildings |
9 |
11,084 |
||||||
Lessors and Property Managers of Residential Buildings |
32 |
9,864 |
||||||
Other various businesses |
15 |
2,877 |
||||||
Lessors of Nonresidential Buildings - Self Storage Units |
3 |
2,732 |
||||||
New Single-Family Housing Construction |
3 |
1,921 |
||||||
Food Service |
5 |
1,351 |
||||||
Retail |
4 |
1,349 |
||||||
New Single-Family Housing Construction - Land Development |
3 |
1,260 |
||||||
Commercial Construction |
3 |
1,050 |
||||||
84 |
$ |
45,022 |
||||||
* Includes New York, New Jersey, Vermont and Massachusetts.
Paycheck Protection Program (PPP) and Liquidity
As part of the CARES Act, approved by the President on March 27, 2020, the Small Business Administration (SBA) has been authorized to guarantee loans under the PPP through August 8, 2020 for small businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll. The Company began accepting applications on April 3, 2020. As of June 30, 2020, 663 PPP loans totaling $45.7 million have been processed. The Company received loan origination fees which are being recognized over the life of the loan using the effective yield method.
On April 9, 2020, the FDIC, Federal Reserve and OCC created the Paycheck Protection Program Liquidity Facility (PPPLF) to bolster the effectiveness of the PPP by providing liquidity to and neutralizing the regulatory capital effects on participating financial institutions. We do not intend to utilize the liquidity relief offered by the PPPLF as we do not expect our participation in the PPP to have a negative impact on our liquidity position, capital resources, financial condition or results of operations.
Asset impairment
At this time, we do not believe there exists any impairment to our goodwill, long-lived assets, right of use assets, held to maturity investment securities, or available-for-sale investment securities due to the COVID-19 pandemic. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets.
Provision for loan losses
See “Allowance for Loan Losses” for more information.
Preventative measures
The Company has instituted preventative measures at branch and back office locations to protect the health of both the customers and our employees, including regular deep cleaning of facilities, adhering to CDC guidelines, and practicing “social distancing.” These additional expenses did not have a material impact on the Company for the second quarter of 2020.
Federal Reserve Actions
The Federal Reserve Board has taken several actions to support the flow of credit to households and businesses. Some of these pertinent actions include:
| • | The establishment of the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, and the Primary Dealer Credit Facility; |
| • | The expansion of central bank liquidity swap lines; |
| • | Steps to enhance the availability and ease terms for borrowing at the discount window; |
| • | The elimination of reserve requirements; |
| • | Guidance encouraging banks to be flexible with customers experiencing financial challenges related to the coronavirus and to utilize their liquidity and capital buffers in doing so; |
| • | expanding access to its Paycheck Protection Program Liquidity Facility (PPPLF) for additional SBA-qualified lenders |
| • | Statements encouraging the use of daylight credit at the Federal Reserve. |
Economic Overview
During the second quarter of 2020 financial markets continued to be influenced by the economic conditions that resulted from the COVID-19 pandemic. After a dismal first quarter, stocks rebounded in the second quarter, with the S&P 500 Index recording its best quarterly performance since 1998 up 20.0% from the first quarter of 2020, and the Dow Jones Industrial Average jumped the most since 1987, up 17.8% from the first quarter of 2020. Credit markets continue to be driven by worldwide economic news, effects of COVID-19, and demand shifts. The shape of the yield curve remained consistent during the quarter as compared to prior quarters. The 10-year Treasury bond averaged .69% during the second quarter compared to 1.37% in the first quarter of 2020 a decrease of 68 basis points. The 2-year Treasury bond average rate decreased 89 basis points to .19% resulting in a steepening of the yield curve. The spread between the 10-year and the 2-year Treasury bonds expanded from 0.28% on average in the first quarter to 0.49% in the second quarter of 2020. This spread had been depressed in recent years and compares to 2.42% during its most recent peak in the fourth quarter of 2013. Steeper yield curves are generally favorable for portfolio mortgage lenders like TrustCo. The table below illustrates the range of rate movements for both short term and longer term rates. The target Federal Funds rate remained flat at 0.00% to %0.25 for the quarter. Spreads for most asset classes, including agency securities, corporates, municipals and mortgage‑backed securities, were down by the end of the quarter as compared to the levels of a year earlier. Changes in rates and spreads during the current quarter were primarily due to the effects of the COVID-19 pandemic.
3 Month |
2 Year |
5 Year |
10 Year |
10 - 2 Year |
|||
Yield (%) |
Yield (%) |
Yield (%) |
Yield (%) |
Spread (%) |
|||
Q2/19 |
Beg of Q2 |
2.40 |
2.27 |
2.23 |
2.41 |
0.14 |
|
Peak |
2.47 |
2.41 |
2.41 |
2.60 |
0.30 |
||
Trough |
2.11 |
1.71 |
1.73 |
2.00 |
0.14 |
||
End of Q2 |
2.12 |
1.75 |
1.76 |
2.00 |
0.25 |
||
Average in Q2 |
2.35 |
2.13 |
2.12 |
2.34 |
0.21 |
||
Q3/19 |
Beg of Q3 |
2.12 |
1.75 |
1.76 |
2.00 |
0.25 |
|
Peak |
2.26 |
1.92 |
1.88 |
2.13 |
0.28 |
||
Trough |
1.80 |
1.43 |
1.32 |
1.47 |
-0.04 |
||
End of Q3 |
1.88 |
1.63 |
1.55 |
1.68 |
0.05 |
||
Average in Q3 |
2.03 |
1.69 |
1.63 |
1.80 |
0.11 |
||
Q4/19 |
Beg of Q4 |
1.88 |
1.63 |
1.55 |
1.68 |
0.05 |
|
Peak |
1.82 |
1.68 |
1.75 |
1.94 |
0.34 |
||
Trough |
1.52 |
1.39 |
1.34 |
1.52 |
0.09 |
||
End of Q4 |
1.55 |
1.58 |
1.69 |
1.92 |
0.34 |
||
Average in Q4 |
1.61 |
1.59 |
1.61 |
1.79 |
0.20 |
||
Q1/20 |
Beg of Q1 |
1.55 |
1.58 |
1.69 |
1.92 |
0.34 |
|
Peak |
1.59 |
1.58 |
1.67 |
1.88 |
0.68 |
||
Trough |
0.00 |
0.23 |
0.37 |
0.54 |
0.12 |
||
End of Q1 |
0.11 |
0.23 |
0.37 |
0.70 |
0.47 |
||
Average in Q1 |
1.10 |
1.08 |
1.14 |
1.37 |
0.28 |
||
Q2/20 |
Beg of Q2 |
0.11 |
0.23 |
0.37 |
0.70 |
0.47 |
|
Peak |
0.26 |
0.28 |
0.48 |
0.91 |
0.69 |
||
Trough |
0.09 |
0.13 |
0.28 |
0.58 |
0.38 |
||
End of Q2 |
0.16 |
0.16 |
0.29 |
0.66 |
0.50 |
||
Average in Q2 |
0.14 |
0.19 |
0.36 |
0.69 |
0.49 |
The United States economy continued to show some modest improvements in various areas heading into 2020 until the COVID-19 uncertainty began to gain momentum. Economic conditions vary significantly over geographic areas, with strength concentrated in and around major population centers on the coasts and in certain areas where economic activity has been driven by specific regional factors.
TrustCo believes that its long-term focus on traditional banking services and practices has enabled the Company to avoid significant impact from asset quality problems and that the Company’s strong liquidity and well capitalized positions have allowed the Company to continue to conduct business in a manner consistent with its past practice. TrustCo has not engaged in the types of high risk loans and investments that have led to the widely reported problems in the industry, particularly those arising during the 2008-2010 financial crisis. Nevertheless, the Company may experience increases in nonperforming loans (“NPLs”) relative to historical levels from time to time. Should general housing prices and other economic measures, such as unemployment in the Company’s market areas, deteriorate as a result of the COVID-19 pandemic, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans.
In a direct response to the COVID-19 pandemic, on March 27, 2020 Congress passed the CARES Act. Included in the CARES Act is support for small businesses, direct payments to lower and middle income families, expanded unemployment insurance, additional funding for health care providers, as well as support for other industries. The Federal Reserve Board, in an attempt to increase liquidity and promote the normal functioning of financial markets, also provided support by increasing purchases of Treasury securities and agency mortgage-backed securities.
Financial Overview
TrustCo recorded net income of $11.3 million, or $0.117 of diluted earnings per share, for the three months ended June 30, 2020, compared to net income of $14.7 million, or $0.151 of diluted earnings per share, in the same period in 2019. Return on average assets was 0.82% and 1.14%, respectively, for the three-months ended June 30, 2020 and 2019. Return on average equity was 8.21% and 11.60%, respectively, for the three-months ended June 30, 2020 and 2019.
The primary factors accounting for the change in net income for the three months ended June 30, 2020 compared to the same period of the prior year were:
| • | An increase in the average balance of interest earning assets of $310.1 million or 6.1% to $5.35 billion for the second quarter of 2020 compared to the same period in 2019. |
| • | A decrease in taxable equivalent net interest margin for the second quarter of 2020 to 2.81% from 3.11% in the prior year period. The decrease in the margin, offset with the increase in average earning assets, resulted in a decrease of $1.5 million in taxable equivalent net interest income in the second quarter of 2020 compared to the second quarter of 2019. |
| • | An increase of $2.3 million in provision for loan losses for the second quarter of 2020 compared to the second quarter 2019. This increase is primarily driven by the uncertainty surrounding the current pandemic. |
| • | A decrease of $1.5 million in noninterest income for the second quarter of 2020 compared to the second quarter 2019. The decrease is primarily driven by less financial services income due to lower market values of managed asset balances, as well as less overdraft fees from customers. |
| • | A decrease of $1.0 million in noninterest expense for the second quarter of 2020 compared to the second quarter 2019. This decrease is primarily driven by ongoing efforts to control costs. |
TrustCo recorded net income of $24.6 million, or $0.254 of diluted earnings per share, for the six‑months ended June 30, 2020, compared to net income of $29.2 million, or $0.302 of diluted earnings per share, in the same period in 2019. Return on average assets was 0.92% and 1.15%, respectively, for the six-months ended June 30, 2020 and 2019. Return on average equity was 9.04% and 11.76%, respectively, for the six-months ended June 30, 2020 and 2019.
Asset/Liability Management
The Company strives to generate its earnings capabilities through a mix of core deposits funding a prudent mix of earning assets. Additionally, TrustCo attempts to maintain adequate liquidity and reduce the sensitivity of net interest income to changes in interest rates to an acceptable level while enhancing profitability both on a short-term and long-term basis.
TrustCo’s results are affected by a variety of factors including competitive and economic conditions in the specific markets in which the Company operates and, more generally, by the national economy, financial market conditions and the regulatory environment. Each of these factors is dynamic, and changes in any area can have an impact on TrustCo’s results. Included in the Annual Report to Shareholders on Form 10-K for the year ended December 31, 2019 is a description of the effect interest rates had on the results for the year 2019 compared to 2018. Many of the same market factors discussed in the 2019 Annual Report continued to have a significant impact on results through the second quarter of 2020, as well as the economic effect of COVID-19.
TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations and rates paid on deposits and charged on loans. In the experience of management, the absolute level of interest rates, changes in interest rates and customers’ expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period.
Interest rates have a significant impact on the operations and financial results of all financial services companies. One of the most important interest rates used to control national economic policy is the “Federal Funds” rate. This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating. During 2007‑2008 the FRB aggressively reduced the Federal Funds rate, including a decrease from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008. The target range remained at that level until December 2015 when the range was increased to 0.25% to 0.50%. Subsequent increases resulted in the range of 2.25% to 2.50% until the second half of 2019 when the rate was cut several times before the end of 2019. During the first quarter of 2020 the rate was significantly decreased again as a result of the global pandemic related to COVID-19, and has returned the range of 0.00% to 0.25%.
The interest rate on the ten-year Treasury bond and other long-term interest rates have significant influence on the rates for new residential real estate loans. These changes in interest rates have an effect on the Company relative to the interest income on loans, securities, and Federal Funds sold and other short-term instruments as well as the interest expense on deposits and borrowings. Residential real estate loans and longer‑term investments are most affected by the changes in longer term market interest rates such as the 10‑year Treasury. The Federal Funds sold portfolio and other short‑term investments are affected primarily by changes in the Federal Funds target rate. Deposit interest rates are most affected by short term market interest rates. Also, changes in interest rates have an effect on the recorded balance of the securities available for sale portfolio, which are recorded at fair value. Generally, as market interest rates increase, the fair value of the securities will decrease and the reverse is also generally applicable. Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae. Because TrustCo is a portfolio lender and does not sell loans into the secondary market, the Company establishes rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates. Higher market interest rates also generally increase the value of retail deposits.
TrustCo’s principal loan products are residential real estate loans. As noted above, residential real estate loans and longer‑term investments are most affected by the changes in longer term market interest rates such as the ten-year Treasury. The 10‑year Treasury yield was down 110 basis points, on average, during the second quarter of 2020 compared to the fourth quarter of 2019 and was down 165 basis points as compared to the second quarter of 2019.
While TrustCo has been affected by changes in financial markets over time, the impacts have been mitigated by the Company’s generally conservative approach to banking. The Company utilizes a traditional underwriting process in evaluating loan applications, and since originated loans are retained in the portfolio, there is a strong incentive to be conservative in making credit decisions. For additional information concerning TrustCo’s loan portfolio and nonperforming loans, please refer to the discussions under “Loans” and “Nonperforming Assets,” respectively. Further, the Company does not rely on borrowed funds to support its assets and maintains a significant level of liquidity on the asset side of the balance sheet. These characteristics provide the Company with increased flexibility and stability during periods of market disruption and interest rate volatility.
A fundamental component of TrustCo’s strategy has been to grow customer relationships and the deposits and loans that are part of those relationships. The Company has significant capacity to grow its balance sheet given its extensive branch network. The Company expects that growth to be profitable. The current interest rate environment, however, has narrowed the margin on incremental balance sheet expansion. While the Company has not changed its fundamental long term strategy in regard to utilizing its excess capacity, management continually evaluates changing conditions and may seek to limit growth or reduce the size of the balance sheet if its analysis indicates that doing so would be beneficial.
For the second quarter of 2020, the net interest margin was 2.81%, down 30 basis points versus the prior year’s quarter. The quarterly results reflect the following significant factors:
| • | The average balance of Federal Funds sold and other short-term investments increased by $181.3 million while the average yield decreased 230 basis points in the second quarter of 2020 compared to the same period in 2019. |
| • | The average balance of securities available for sale decreased by $137.8 million while the average yield decreased 31 basis points to 2.08%. The average balance of held to maturity securities decreased by $4.0 million and the average yield decreased 20 basis points to 3.75% for the second quarter of 2020 compared to the same period in 2019. |
| • | The average loan portfolio grew by $270.5 million to $4.15 billion and the average yield decreased 26 basis points to 4.02% in the second quarter of 2020 compared to the same period in 2019. |
| • | The average balance of interest bearing liabilities (primarily time deposits) increased $156.4 million and the average rate paid decreased 27 basis points to 0.64% in the second quarter of 2020 compared to the same period in 2019. |
During the second quarter of 2020, the Company continued to focus on its strategy to expand the loan portfolio by offering competitive interest rates. Management believes the TrustCo residential real estate loan product is very competitive compared to local and national competitors. Competition remains strong in the Company’s market areas.
The strategy on the funding side of the balance sheet is to offer competitive shorter term rates which allowed the Bank to gain market share as well as retain our existing time deposits. This strategy drove growth at a relatively low cost that will sustain TrustCo’s strong liquidity position and continue to allow us to cross sell new relationships and take advantage of opportunities as they arise.
Earning Assets
Total average interest earning assets increased from $5.04 billion in the second quarter of 2019 to $5.35 billion in the same period of 2020 with an average yield of 3.33% in the second quarter of 2020 and 3.86% in the second quarter of 2019. There was a shift in the mix of assets towards a higher proportion of federal funds sold and other short-term investments from securities available for sale. The sharp decrease in the federal funds rate during the last month of the first quarter of 2020 significantly decreased the average yield on the federal funds sold and other short-term investments from 2.41% in the second quarter of 2019 to 0.11% in the second quarter of 2020, which drove down the overall yield on interest earning assets. Interest income on average earning assets decreased from $48.7 million in the second quarter of 2019 to $44.6 million in the second quarter of 2020, on a tax equivalent basis, and was primarily driven by the lower federal funds rate as mentioned above.
Loans
The average balance of loans was $4.15 billion in the second quarter of 2020 and $3.88 billion in the comparable period in 2019. The yield on loans was down 26 basis points to 4.02%. Interest income on loans was $41.7 million in the second quarter of 2020 up $233 thousand from the same period in 2019. The higher average balances was slightly more than enough to offset the decrease in yield.
Compared to the second quarter of 2019, the average balance of residential mortgage loans and commercial loans increased. The average balance of residential mortgage loans was $3.65 billion in the second quarter of 2020 compared to $3.40 billion in 2019, an increase of 7.6%. The average yield on residential mortgage loans decreased by 16 basis points to 3.98% in the second quarter of 2020 compared to 2019.
TrustCo actively markets the residential loan products within its market territories. Mortgage loan rates are affected by a number of factors including rates on Treasury securities, the Federal Funds rate and rates set by competitors and secondary market participants. TrustCo aggressively markets the unique aspects of its loan products thereby attempting to create a differentiation from other lenders. These unique aspects include low closing costs, fast turn-around time on loan approvals, no escrow or mortgage insurance requirements for qualified borrowers and the fact that the Company typically holds these loans in portfolio and does not sell them into the secondary markets. Assuming an eventual a rise in long-term interest rates, the Company would anticipate that the unique features of its loan products will continue to attract customers in the residential mortgage loan area.
Commercial loans, which consist primarily of loans secured by commercial real estate, increased $33.1 million to an average balance of $223.0 million in the second quarter of 2020 compared to the same period in the prior year, primarily as a result of the issuance of the PPP loans. The average yield on this portfolio was down 68 basis points to 4.68% compared to the prior year period, primarily as a result of the 1% interest rate on the PPP Loans. The Company remains selective in underwriting commercial loans in recent periods as the apparent risk/reward balance has been less favorable in many cases.
The average yield on home equity credit lines decreased 112 basis points to 3.89% during the second quarter of 2020 compared to the year earlier period. The decrease in yield is the result of prime rate decreases which impacted some loans as well as a smaller percentage of lower yielding initial rate balances. The average balances of home equity lines decreased 7.0% to $260.0 million in the second quarter of 2020 as compared to the prior year. Customers with home equity lines continue to refinance their balances into fixed rate mortgage loans.
Securities Available for Sale
The average balance of the securities available for sale portfolio for the second quarter of 2020 was $454.0 million compared to $591.8 million for the comparable period in 2019. The declining balance reflects routine sales, paydowns, calls and maturities, partially offset by new investment purchases. The current interest rate environment has significantly contributed to more bonds being called. The average yield was 2.08% for the second quarter of 2020 compared to 2.39% for the second quarter of 2019. This portfolio is primarily comprised of bonds issued by government sponsored enterprises (such as Fannie Mae, the Federal Home Loan Bank, and Freddie Mac), Small Business Administration participation certificates, corporate bonds and municipal bonds. These securities are recorded at fair value with any adjustment in fair value included in accumulated other comprehensive loss, net of tax.
The net unrealized gain in the available for sale securities portfolio was $10.9 million as of June 30, 2020 compared to a net unrealized gain of $391 thousand as of December 31, 2019. The unrealized gain in the portfolio is primarily the result of changes in market interest rate levels.
Held to Maturity Securities
The average balance of held to maturity securities was $17.2 million for the second quarter of 2020 compared to $21.2 million in the second quarter of 2019. The decrease in balances reflects routine paydowns and calls. No new securities were added to this portfolio during the period. The average yield was 3.75% for the second quarter of 2020 compared to 3.95% for the year earlier period. TrustCo expects to hold the securities in this portfolio until they mature or are called.
As of June 30, 2020, this portfolio consisted solely of agency issued mortgage-backed securities. The balances for these securities are recorded at amortized cost.
Federal Funds Sold and Other Short-term Investments
The 2020 second quarter average balance of Federal Funds sold and other short‑term investments was $727.0 million, a $181.3 million increase from the $545.7 million average for the same period in 2019. The yield was 0.11% for the second quarter of 2020 and 2.41% for the comparable period in 2019. Interest income from this portfolio decreased $3.1 million from $3.3 million in 2019 to $193 thousand in 2020. The higher average balances was not enough to offset several target rate decreases.
The Federal Funds sold and other short-term investments portfolio is utilized to generate additional interest income and liquidity as funds are waiting to be deployed into the loan and securities portfolios.
Funding Opportunities
TrustCo utilizes various funding sources to support its earning asset portfolio. The vast majority of the Company’s funding comes from traditional deposit vehicles such as savings, demand deposits, interest-bearing checking, money market and time deposit accounts.
Total average interest bearing deposit accounts (which includes interest bearing checking, money market accounts, savings, and time deposits) increased $146.2 million to $4.15 billion for the second quarter of 2020 versus the second quarter in the prior year, and the average rate paid decreased from 0.91% for 2019 to 0.64% for 2020. Total interest expense on these deposits decreased from $9.1 million to $6.7 million in the second quarter of 2020 compared to the year earlier period. From the second quarter of 2019 to the second quarter of 2020, interest bearing demand account average balances were up 8.4%, certificates of deposit average balances were down 3.1%, non-interest demand average balances were up 31.1%, average savings balances increased 2.6% and money market balances were up 15.9%. Our growth in deposits came at relatively low cost and continues to be offset by higher earnings on loan yields and returns in the investment portfolio. Because we offered competitive shorter term CD rates in the past, we expect cost of interest bearing liabilities to continue to decrease as these reprice at lower rates.
At June 30, 2020, the maturity of total time deposits is as follows:
(dollars in thousands) |
||||
Under 1 year |
$ |
1,304,284 |
||
1 to 2 years |
72,695 |
|||
2 to 3 years |
10,380 |
|||
3 to 4 years |
3,152 |
|||
4 to 5 years |
2,062 |
|||
Over 5 years |
196 |
|||
$ |
1,392,769 |
|||
Average short-term borrowings for the second quarter were $172.8 million in 2020 compared to $162.7 million in 2019. The average rate decreased during this time period from 0.94% in 2019 to 0.55% in 2020. The short-term borrowings of the Company are cash management accounts, which represent retail accounts with customers for which the Bank has pledged certain assets as collateral.
The Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet. The Bank is a member of the Federal Home Loan Bank of New York (FHLBNY) and is an eligible borrower at the Federal Reserve Bank of New York (FRBNY) and has the ability to borrow utilizing securities and/or loans as collateral at either. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a potential contingent funding source within its Asset/Liability Management Policy. Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.
Net Interest Income
Taxable equivalent net interest income decreased by $1.5 million to $37.7 million in the second quarter of 2020 compared to the same period in 2019. The net interest spread was down 26 basis points to 2.69% in the second quarter of 2020 compared to the same period in 2019. As previously noted, the net interest margin was down 30 basis points to 2.81% for the second quarter of 2020 compared to the same period in 2019.
Taxable equivalent net interest income decreased by $2.7 million to $76.2 million in the first six-months of 2020 compared to the same period in 2019. The net interest spread was down 23 basis points to 2.80% in the first six-months of 2020 compared to the same period in 2019. Net interest margin was down 24 basis points to 2.93% for the first six‑months of 2020 compared to the same period in 2019.
Nonperforming Assets
Nonperforming assets include nonperforming loans (“NPLs”), which are those loans in a non‑accrual status and loans past due three payments or more and still accruing interest. Also included in the total of nonperforming assets are foreclosed real estate properties, which are included in other assets and categorized as other real estate owned. As of June 30, 2020, there were no pandemic related deferrals that have been recorded as NPLs or troubled debt restructurings (“TDRs”).
The following describes the nonperforming assets of TrustCo as of June 30, 2020:
Nonperforming loans and foreclosed real estate: Total NPLs were $21.9 million at June 30, 2020, compared to $20.9 million at December 31, 2019 and $22.1 million at June 30, 2019. There were $21.9 million of non-accrual loans at June 30, 2020 compared to $20.8 million at December 31, 2019 and $22.1 million at June 30, 2019. There were no loans at June 30, 2020 and 2019 and December 31, 2019 that were past due 90 days or more and still accruing interest.
At June 30, 2020, nonperforming loans primarily include a mix of commercial and residential loans. Of total nonperforming loans of $21.9 million at June 30, 2020, $21.3 million were residential real estate loans, $571 thousand were commercial loans and mortgages and $6 thousand were installment loans, compared to $20.0 million, $816 thousand and $3 thousand, respectively, at December 31, 2019.
A significant percentage of nonperforming loans are residential real estate loans, which are historically lower-risk than most other types of loans. Net recoveries were $27 thousand on residential real estate loans (including home equity lines of credit) for the second quarter of 2020 compared to net recoveries $79 thousand for the second quarter of 2019. Management believes that these loans have been appropriately written down where required.
Ongoing portfolio management is intended to result in early identification and disengagement from deteriorating credits. TrustCo has a diversified loan portfolio that includes a significant balance of residential mortgage loans to borrowers in the Capital Region of New York and avoids concentrations to any one borrower or any single industry. TrustCo has no advances to borrowers or projects located outside the United States. TrustCo continues to identify delinquent loans as quickly as possible and to move promptly to resolve problem loans. Efforts to resolve delinquencies begin immediately after the payment grace period expires, with repeated, automatically generated notices, as well as personalized phone calls and letters. Loans are placed in nonaccrual status once they are 90 days past due, or earlier if management has determined that such classification is appropriate. Once in nonaccrual status, loans are either brought current and maintained current, at which point they may be returned to accrual status, or they proceed through the foreclosure process. Due to the recent COVID-19 pandemic, the Bank is monitoring recent regulatory mandates by state in regards to a moratorium on foreclosures. The collateral on nonaccrual loans is evaluated periodically, and the loan value is written down if the collateral value is insufficient.
The Company originates loans throughout its branch franchise area. At June 30, 2020, 73.2% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 26.8% were in Florida. Those figures compare to 74.4% and 25.6%, respectively, at December 31, 2019.
Economic conditions vary widely by geographic location. As a percentage of the total nonperforming loans as of June 30, 2020, 5.1% were to Florida borrowers, compared to 94.9% to borrowers in New York and surrounding areas. For the three months ended June 30, 2020, New York and surrounding areas experienced net chargeoffs of approximately $11 thousand. There were no chargeoffs or recoveries in Florida for the second quarter of 2020.
Other than loans currently identified as nonperforming, management is aware of no other loans in the Bank’s portfolio that pose material risk of the eventual non-collection of principal and interest. Also as of June 30, 2020, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources.
TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured under a TDR, as impaired loans. There were $1.0 million of commercial mortgages and commercial loans classified as impaired as of June 30, 2020 compared to $1.4 million at December 31, 2019. There were $19.3 million of impaired residential loans at June 30, 2020 and $19.5 million at December 31, 2019. The average balances of all impaired loans were $20.6 million for the six months of 2020 and $21.0 million for the full year 2019.
As of June 30, 2020 and December 31, 2019, the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.
At June 30, 2020 there was $830 thousand of foreclosed real estate compared to $1.6 million at December 31, 2019.
Allowance for loan losses: The balance of the allowance for loan losses is maintained at a level that is, in management’s judgment, representative of the amount of probable incurred losses in the loan portfolio.
(dollars in thousands) |
As of June 30, 2020 |
As of December 31, 2019 |
||||||||||||||
Amount |
Percent of Loans to Total Loans |
Amount |
Percent of Loans to Total Loans |
|||||||||||||
Commercial |
$ |
4,167 |
5.12 |
% |
$ |
3,805 |
4.47 |
% |
||||||||
Real estate - construction |
314 |
0.65 |
% |
311 |
0.70 |
% |
||||||||||
Real estate mortgage - 1 to 4 family |
39,349 |
87.90 |
% |
35,632 |
87.96 |
% |
||||||||||
Home equity lines of credit |
3,810 |
6.09 |
% |
3,999 |
6.60 |
% |
||||||||||
Installment Loans |
504 |
0.24 |
% |
570 |
0.27 |
% |
||||||||||
$ |
48,144 |
100.00 |
% |
$ |
44,317 |
100.00 |
% |
|||||||||
At June 30, 2020, the allowance for loan losses was $48.1 million, compared to $44.4 million at June 30, 2019 and $44.3 million at December 31, 2019. The allowance represents 1.15% of the loan portfolio as of June 30, 2020 compared to 1.14% at June 30, 2019 and 1.09% at December 31, 2019.
The provision for loan losses was $2 million for the quarter ended June 30, 2020 and a credit of $341 thousand for the quarter ended June 30, 2019. The increase is primarily driven by the uncertainty in the current economic environment resulting from COVID-19. Net chargeoffs for the three-month period ended June 30, 2020 were $11 thousand compared to net recoveries of $35 thousand for the prior year period.
During the second quarter of 2020, there were $6 thousand of commercial loan net recoveries, $27 thousand of net residential mortgage recoveries offset by $44 thousand of consumer loan chargeoffs, compared with $1 thousand of net commercial loan recoveries, $54 thousand of residential mortgage recoveries, and $45 thousand of consumer loan chargeoffs for the same period prior year.
In determining the adequacy of the allowance for loan losses, management reviews the current nonperforming loan portfolio as well as loans that are past due and not yet categorized as nonperforming for reporting purposes. Also, there are a number of other factors that are taken into consideration, including:
| • | The magnitude and nature of recent loan chargeoffs and recoveries; |
| • | The growth in the loan portfolio and the implication that it has in relation to the economic climate in the Bank’s market territories; |
| • | The economic environment in the Upstate New York and Florida territories over the last several years, as well as in the Company’s other market areas; and |
| • | The economic environment as a result of the global pandemic. |
Management continues to monitor these factors in determining the provision for loan losses in relation to loan chargeoffs, recoveries, the level and trends of nonperforming loans and overall economic conditions in the Company’s market territories.
Liquidity and Interest Rate Sensitivity
TrustCo seeks to obtain favorable sources of funding and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Management believes that TrustCo’s earnings performance and strong capital position enable the Company to easily secure new sources of liquidity. The Company actively manages its liquidity through target ratios established under its liquidity policies. Continual monitoring of both historical and prospective ratios allows TrustCo to employ strategies necessary to maintain adequate liquidity. Management has also defined various degrees of adverse liquidity situations which could potentially occur and has prepared appropriate contingency plans should such a situation arise. As noted, the Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet. As previously stated, the Bank is a member of the FHLBNY and is an eligible borrower at the FRBNY and has the ability to borrow utilizing securities and/or loans as collateral at either institution. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a contingent funding source within its Asset/Liability Management Policy. Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.
The Company uses an industry standard external model as the primary tool to identify, quantify and project changes in interest rates and prepayment speeds taken both from industry sources and internally generated data based upon historical trends in the Bank’s balance sheet. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in market interest rates are also incorporated into the model. This model calculates an economic or fair value amount with respect to non-time deposit categories since these deposits are part of the core deposit products of the Company. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the fair value of capital or precisely predict the impact of fluctuations in interest rates on the fair value of capital.
Using this model, the fair value of capital projections as of June 30, 2020 are referenced below. The base case (current rates) scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of June 30, 2020. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp.
As of June 30, 2020 |
Estimated Percentage of Fair value of Capital to Fair value of Assets |
|||
+400 BP |
17.40 |
% |
||
+300 BP |
17.60 |
|||
+200 BP |
17.70 |
|||
+100 BP |
18.00 |
|||
Current rates |
17.30 |
|||
-100 BP |
13.30 |
|||
Noninterest Income
Total noninterest income for the second quarter of 2019 was $3.4 million compared to $4.9 million for the same period in the prior year. Financial services income was down $315 thousand to $1.4 million in the second quarter of 2020 as compared to the year-ago period, primarily as a result of lower asset market values under management. Fees for services to customers were down $804 thousand over the same period in the prior year, primarily as a result of less overdraft fees. The fair value of assets under management was $880 million at June 30, 2020, $927.5 million as of December 31, 2019, and $886 million at June 30, 2019.
For the six months ended June 30, 2020 total noninterest income was $8.8 million, down $791 thousand compared to the prior year period. The decrease is also primarily the result of less financial services income as a result of lower asset market values under management, less fees for services to customers which is also driven by lower overdraft fees due to higher deposit balances, and a gain on the sale of the credit card portfolio in the second quarter of 2019, partially offset by a net gain on securities transactions.
Noninterest Expenses
Total noninterest expenses were $23.9 million for the three-months ended June 30, 2020, compared to $24.9 million for the three-months ended June 30, 2019. Significant changes included a $379 thousand increase in net occupancy expense, offset by a $103 thousand decrease in equipment expense, a $386 thousand decrease in professional services, a $177 thousand decrease in advertising expense, a $242 thousand decrease in net other real estate (income) expense, and a $389 thousand decrease in other expenses. Full time equivalent headcount was 858 as of June 30, 2019, 814 as of December 31, 2019, and 806 as of June 30, 2020. The decrease in FTE’s in the period presented was not due to the effects of the pandemic. The Company constantly hires qualified candidates and from time-to-time experiences fluctuations in head count.
Total noninterest expenses were $48.2 million for the six-months ended June 30, 2020, compared to $49.8 million for the six-months ended June 30, 2019. Significant changes included an increase of $518 thousand in net occupancy expense, offset by a $203 thousand decrease in equipment expense, a $555 thousand decrease in professional services, a $474 thousand decrease in advertising expense, a decrease of $343 thousand in FDIC and other insurance, and a decrease of $497 thousand in other expenses. The overall decrease is primarily as result of the Company’s continued efforts to control costs.
Income Taxes
In the second quarter of 2020, TrustCo recognized income tax expense of $3.9 million compared to $4.9 million for the second quarter of 2019. The effective tax rates were 25.8% and 25.0% for the second quarters of 2020 and 2019, respectively. For the first six-months, income taxes were $8.2 million and $9.5 million in 2020 and 2019, respectively. The effective tax rates were 25.1% and 24.6% of 2020 and 2019, respectively.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios.
Banking regulators have moved towards higher required capital requirements due to the standards included in the Basel III reform measures and the Dodd-Frank Act, as well as a general trend towards reducing risk in the banking system by providing a greater capital margin.
Total shareholders’ equity at June 30, 2020 was $553.4 million compared to $515.6 million at June 30, 2019. TrustCo declared a dividend of $0.068125 per share in the second quarter of 2020. This results in a dividend payout ratio of 58.37% based on second quarter 2020 earnings of $11.3 million.
The Bank and the Company reported the following capital ratios as of June 30, 2020 and December 31, 2019:
(Bank Only) |
As of June 30, 2020 |
Well |
Minimum for Capital Adequacy plus Capital Conservation |
|||||||||||||
(dollars in thousands) |
Amount |
Ratio |
Capitalized(1) |
Buffer (1)(2) |
||||||||||||
Tier 1 leverage ratio |
527,145 |
9.603 |
% |
5.000 |
% |
4.000 |
% |
|||||||||
Common equity tier 1 capital |
527,145 |
18.320 |
6.500 |
7.000 |
||||||||||||
Tier 1 risk-based capital |
527,145 |
18.320 |
8.000 |
8.500 |
||||||||||||
Total risk-based capital |
563,265 |
19.576 |
10.000 |
10.500 |
||||||||||||
As of December 31, 2019 |
Well |
Minimum for Capital Adequacy plus Capital Conservation |
||||||||||||||
(dollars in thousands) |
Amount |
Ratio |
Capitalized(1) |
Buffer (1)(2) |
||||||||||||
Tier 1 leverage ratio |
$ |
516,775 |
9.940 |
% |
5.000 |
% |
4.000 |
% |
||||||||
Common equity tier 1 capital |
516,775 |
18.412 |
6.500 |
7.000 |
||||||||||||
Tier 1 risk-based capital |
516,775 |
18.412 |
8.000 |
8.500 |
||||||||||||
Total risk-based capital |
551,975 |
19.666 |
10.000 |
10.500 |
||||||||||||
(Consolidated) |
||||||||||||
As of June 30, 2020 |
Minimum for Capital Adequacy plus Capital Conservation |
|||||||||||
(dollars in thousands) |
Amount |
Ratio |
Buffer (1)(2) |
|||||||||
Tier 1 leverage ratio |
$ |
540,932 |
9.852 |
% |
4.000 |
% |
||||||
Common equity tier 1 capital |
540,932 |
18.794 |
7.000 |
|||||||||
Tier 1 risk-based capital |
540,932 |
18.794 |
8.500 |
|||||||||
Total risk-based capital |
577,061 |
20.050 |
10.500 |
|||||||||
As of December 31, 2019 |
Minimum for Capital Adequacy plus Capital Conservation |
|||||||||||
(dollars in thousands) |
Amount |
Ratio |
Buffer (1)(2) |
|||||||||
Tier 1 leverage ratio |
$ |
533,243 |
10.254 |
% |
4.000 |
% |
||||||
Common equity Tier 1 capital |
533,243 |
18.988 |
7.000 |
|||||||||
Tier 1 risk-based capital |
533,243 |
18.988 |
8.500 |
|||||||||
Total risk-based capital |
568,463 |
20.242 |
10.500 |
|||||||||
(1) Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized
(2) The June 30, 2020 and December 31, 2019 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a capital conservation buffer of 2.50 percent
In addition, at June 30, 2020, the consolidated equity to total assets ratio was 9.75%, compared to 10.43% at December 31, 2019 and 9.86% at June 30, 2019.
Both TrustCo and Trustco Bank are subject to regulatory capital requirements. On January 1, 2015, a new capital rule took effect that revised the federal bank regulatory agencies’ risk-based capital requirements and, for the first time, subjected the Company to consolidated regulatory capital requirements. Among other matters, the rule also established a new common equity Tier 1 minimum capital requirement of 4.5% of risk-weighted assets, increased the minimum Tier 1 capital to risk-based assets requirement from 4.0% to 6.0% of risk-weighted assets, changed the risk-weightings of certain assets, and changed what qualifies as capital for purposes of meeting the various capital requirements. In addition, the Company and the Bank are required to maintain additional levels of Tier 1 common equity (the capital conservation buffer) over the minimum risk-based capital levels before they may pay dividends, repurchase shares, or pay discretionary bonuses. The new rule was phased-in over several years and is fully in effect in 2020.
As of June 30, 2020, the capital levels of both TrustCo and the Bank exceeded the minimum standards, including with the current and also fully phased-in capital conservation buffer is taken into account.
Under the Office of the Comptroller of the Currency’s (“OCC”) “prompt corrective action” regulations, a bank is deemed to be “well-capitalized” when its CET1, Tier 1, total risk-based, and leverage capital ratios are at least 6.5%, 8%, 10%, and 5%, respectively. A bank is deemed to be “adequately capitalized” or better if its capital ratios meet or exceed the minimum federal regulatory capital requirements, and “undercapitalized” if it fails to meet these minimal capital requirements. A bank is “significantly undercapitalized” if its CET1, Tier 1, total risk-based and leverage capital ratios fall below 3%, 4%, 6%, and 3%, respectively and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. At June 30, 2020 and 2019, Trustco Bank met the definition of “well-capitalized.”
As noted, the Company’s dividend payout ratio was 58.37% of net income for the second quarter of 2020 and 44.94% of net income for the second quarter of 2019. The per-share dividend paid in the second quarter of 2020 and 2019 was $0.068125. The Company’s ability to pay dividends to its shareholders is dependent upon the ability of the Bank to pay dividends to the Company. The payment of dividends by the Bank to the Company is subject to continued compliance with minimum regulatory capital requirements. The OCC may disapprove a dividend if: the Bank would be undercapitalized following the distribution; the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statue, regulation or agreement.
TrustCo maintains a dividend reinvestment plan (DRP) with approximately 11,192 participants. The DRP allows participants to reinvest dividends in shares of the Company. The DRP also allows for additional purchases by participants and has a discount feature (up to a 5% for safe harbor provisions) that can be activated by management as a tool to raise capital. To date, the discount feature has not been utilized.
Share Repurchase Program
On June 7, 2019 the Company’s Board of Directors authorized a share repurchase program of up to 1,000,000 shares. During the three months ended March 31, 2020, the Company repurchased a total of 489 thousand shares at an average price per share of $7.11 for a total of $3.5 million under its Board authorized share repurchase program. The shares purchased as of March 31, 2020 represent .51% of our common shares outstanding. On April 16, 2020 the Company announced that it has suspended its share repurchase program.
Critical Accounting Policies and Estimates
Pursuant to Securities and Exchange Commission (“SEC”) guidance, management of the Company is encouraged to evaluate and disclose those accounting policies judged to be critical policies ‑ those most important to the portrayal of the Company’s financial condition and results, and that require management’s most difficult subjective or complex judgments.
Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover the inherent risk of losses in the loan portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2019 is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.
Recent Accounting Pronouncements
Please refer to Note 11 to the consolidated financial statements for a detailed discussion of new accounting pronouncements and their impact on the Company. As indicated in Note 11, as allowed by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) the Bank elected to delay the adoption of ASU 2016-13, “Financial Instruments – Credit Losses,” until the earlier of the termination of the national emergency concerning COVID-19 or December 31, 2020.
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is the unrealized gain (loss), net of tax, in the available for sale portfolio of $8.2 million in 2020 and ($5.0) million in 2019. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.
(dollars in thousands) |
Three months ended June 30, 2020 |
Three months ended June 30, 2019 |
||||||||||||||||||||||||||||||||||
Average Balance |
Interest |
Average Rate |
Average Balance |
Interest |
Average Rate |
Change in Interest Income/ |
Variance Balance Change |
Variance Rate Change |
||||||||||||||||||||||||||||
Assets |
Expense |
|||||||||||||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||||||||||||||
U. S. government sponsored enterprises |
$ |
23,291 |
106 |
1.83 |
% |
$ |
160,197 |
821 |
2.05 |
% |
$ |
(715 |
) |
(635 |
) |
(80 |
) |
|||||||||||||||||||
Mortgage backed securities and collateralized mortgage obligations-residential |
333,122 |
1,527 |
1.83 |
% |
342,678 |
2,152 |
2.51 |
% |
(625 |
) |
(58 |
) |
(567 |
) |
||||||||||||||||||||||
State and political subdivisions |
110 |
2 |
7.90 |
% |
168 |
4 |
9.52 |
% |
(2 |
) |
(1 |
) |
(1 |
) |
||||||||||||||||||||||
Corporate bonds |
51,494 |
488 |
3.79 |
% |
33,793 |
272 |
3.22 |
% |
216 |
161 |
55 |
|||||||||||||||||||||||||
Small Business Administration-guaranteed participation securities |
45,260 |
229 |
2.03 |
% |
54,254 |
289 |
2.13 |
% |
(60 |
) |
(47 |
) |
(13 |
) |
||||||||||||||||||||||
Other |
685 |
5 |
2.92 |
% |
686 |
5 |
2.92 |
% |
- |
- |
- |
|||||||||||||||||||||||||
Total securities available for sale |
453,962 |
2,357 |
2.08 |
% |
591,776 |
3,543 |
2.39 |
% |
(1,186 |
) |
(580 |
) |
(606 |
) |
||||||||||||||||||||||
Federal funds sold and other short-term Investments |
727,006 |
193 |
0.11 |
% |
545,724 |
3,282 |
2.41 |
% |
(3,089 |
) |
5,684 |
(8,773 |
) |
|||||||||||||||||||||||
Held to maturity securities: |
||||||||||||||||||||||||||||||||||||
Mortgage backed securities and collateralized mortgage obligations-residential |
17,199 |
162 |
3.75 |
% |
21,155 |
209 |
3.95 |
% |
(47 |
) |
(37 |
) |
(10 |
) |
||||||||||||||||||||||
Total held to maturity securities |
17,199 |
162 |
3.75 |
% |
21,155 |
209 |
3.95 |
% |
(47 |
) |
(37 |
) |
(10 |
) |
||||||||||||||||||||||
Federal Reserve Bank and Federal Home Loan Bank stock |
9,332 |
192 |
8.23 |
% |
9,173 |
199 |
8.68 |
% |
(7 |
) |
19 |
(26 |
) |
|||||||||||||||||||||||
Commercial loans |
223,002 |
2,610 |
4.68 |
% |
189,870 |
2,546 |
5.36 |
% |
64 |
1,532 |
(1,468 |
) |
||||||||||||||||||||||||
Residential mortgage loans |
3,653,342 |
36,365 |
3.98 |
% |
3,396,149 |
35,179 |
4.14 |
% |
1,186 |
7,981 |
(6,795 |
) |
||||||||||||||||||||||||
Home equity lines of credit |
260,029 |
2,515 |
3.89 |
% |
279,622 |
3,503 |
5.01 |
% |
(988 |
) |
(236 |
) |
(752 |
) |
||||||||||||||||||||||
Installment loans |
10,044 |
175 |
7.02 |
% |
10,310 |
204 |
7.91 |
% |
(29 |
) |
(5 |
) |
(24 |
) |
||||||||||||||||||||||
Loans, net of unearned income |
4,146,417 |
41,665 |
4.02 |
% |
3,875,951 |
41,432 |
4.28 |
% |
233 |
9,272 |
(9,039 |
) |
||||||||||||||||||||||||
Total interest earning assets |
5,353,916 |
44,569 |
3.33 |
% |
5,043,779 |
48,665 |
3.86 |
% |
(4,096 |
) |
14,358 |
(18,454 |
) |
|||||||||||||||||||||||
Allowance for loan losses |
(46,832 |
) |
(44,841 |
) |
||||||||||||||||||||||||||||||||
Cash & non-interest earning assets |
195,815 |
177,019 |
||||||||||||||||||||||||||||||||||
Total assets |
$ |
5,502,899 |
$ |
5,175,957 |
||||||||||||||||||||||||||||||||
Liabilities and shareholders' equity |
||||||||||||||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||||||||||||||
Interest bearing checking accounts |
$ |
953,299 |
26 |
0.01 |
% |
$ |
879,732 |
94 |
0.04 |
% |
(68 |
) |
46 |
(114 |
) |
|||||||||||||||||||||
Money market accounts |
641,593 |
862 |
0.54 |
% |
553,708 |
1,119 |
0.81 |
% |
(257 |
) |
882 |
(1,139 |
) |
|||||||||||||||||||||||
Savings |
1,167,844 |
166 |
0.06 |
% |
1,138,107 |
367 |
0.13 |
% |
(201 |
) |
64 |
(265 |
) |
|||||||||||||||||||||||
Time deposits |
1,392,136 |
5,599 |
1.62 |
% |
1,437,097 |
7,512 |
2.09 |
% |
(1,913 |
) |
(234 |
) |
(1,679 |
) |
||||||||||||||||||||||
Total interest bearing deposits |
4,154,872 |
6,653 |
0.64 |
% |
4,008,644 |
9,092 |
0.91 |
% |
(2,439 |
) |
758 |
(3,197 |
) |
|||||||||||||||||||||||
Short-term borrowings |
172,834 |
235 |
0.55 |
% |
162,690 |
381 |
0.94 |
% |
(146 |
) |
147 |
(293 |
) |
|||||||||||||||||||||||
Total interest bearing liabilities |
4,327,706 |
6,888 |
0.64 |
% |
4,171,334 |
9,473 |
0.91 |
% |
(2,585 |
) |
905 |
(3,490 |
) |
|||||||||||||||||||||||
Demand deposits |
548,178 |
418,215 |
||||||||||||||||||||||||||||||||||
Other liabilities |
75,603 |
79,056 |
||||||||||||||||||||||||||||||||||
Shareholders' equity |
551,412 |
507,352 |
||||||||||||||||||||||||||||||||||
Total liabilities and shareholders' equity |
$ |
5,502,899 |
$ |
5,175,957 |
||||||||||||||||||||||||||||||||
Net interest income , tax equivalent |
37,681 |
39,192 |
$ |
(1,511 |
) |
13,453 |
(14,964 |
) |
||||||||||||||||||||||||||||
Net interest spread |
2.69 |
% |
2.95 |
% |
||||||||||||||||||||||||||||||||
Net interest margin (net interest income to total interest earning assets) |
2.81 |
% |
3.11 |
% |
||||||||||||||||||||||||||||||||
Tax equivalent adjustment |
- |
(1 |
) |
|||||||||||||||||||||||||||||||||
Net interest income |
37,681 |
39,191 |
||||||||||||||||||||||||||||||||||
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is the unrealized gain (loss), net of tax, in the available for sale portfolio of $6.6 million in 2020 and ($7.1) million in 2019. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.
(dollars in thousands) |
Six months ended June 30, 2020 |
Six months ended June 30, 2019 |
||||||||||||||||||||||||||||||||||
Average Balance |
Interest |
Average Rate |
Average Balance |
Interest |
Average Rate |
Change in Interest Income/ |
Variance Balance Change |
Variance Rate Change |
||||||||||||||||||||||||||||
Assets |
Expense |
|||||||||||||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||||||||||||||
U. S. government sponsored enterprises |
$ |
57,830 |
527 |
1.82 |
% |
$ |
157,244 |
1,604 |
2.04 |
% |
$ |
(1,077 |
) |
(920 |
) |
(157 |
) |
|||||||||||||||||||
Mortgage backed securities and collateralized mortgage obligations-residential |
352,445 |
3,640 |
2.07 |
% |
308,034 |
3,707 |
2.41 |
% |
(67 |
) |
1,025 |
(1,092 |
) |
|||||||||||||||||||||||
State and political subdivisions |
112 |
4 |
7.74 |
% |
168 |
6 |
7.14 |
% |
(2 |
) |
(3 |
) |
1 |
|||||||||||||||||||||||
Corporate bonds |
39,913 |
726 |
3.64 |
% |
30,347 |
480 |
3.16 |
% |
246 |
166 |
80 |
|||||||||||||||||||||||||
Small Business Administration-guaranteed participation securities |
46,339 |
474 |
2.05 |
% |
55,648 |
586 |
2.11 |
% |
(112 |
) |
(96 |
) |
(16 |
) |
||||||||||||||||||||||
Other |
685 |
11 |
3.21 |
% |
685 |
10 |
2.92 |
% |
1 |
- |
1 |
|||||||||||||||||||||||||
Total securities available for sale |
497,324 |
5,382 |
2.16 |
% |
552,126 |
6,393 |
2.32 |
% |
(1,011 |
) |
172 |
(1,183 |
) |
|||||||||||||||||||||||
Federal funds sold and other short-term Investments |
569,541 |
1,460 |
0.52 |
% |
524,468 |
6,291 |
2.40 |
% |
(4,831 |
) |
1,472 |
(6,303 |
) |
|||||||||||||||||||||||
Held to maturity securities: |
||||||||||||||||||||||||||||||||||||
Mortgage backed securities and collateralized mortgage obligations-residential |
17,671 |
337 |
3.81 |
% |
21,594 |
426 |
3.95 |
% |
(89 |
) |
(74 |
) |
(15 |
) |
||||||||||||||||||||||
Total held to maturity securities |
17,671 |
337 |
3.81 |
% |
21,594 |
426 |
3.95 |
% |
(89 |
) |
(74 |
) |
(15 |
) |
||||||||||||||||||||||
Federal Reserve Bank and Federal Home Loan Bank stock |
9,258 |
274 |
5.92 |
% |
9,064 |
284 |
6.27 |
% |
(10 |
) |
15 |
(25 |
) |
|||||||||||||||||||||||
Commercial loans |
210,524 |
5,152 |
4.89 |
% |
191,793 |
5,129 |
5.35 |
% |
23 |
951 |
(928 |
) |
||||||||||||||||||||||||
Residential mortgage loans |
3,627,535 |
72,826 |
4.02 |
% |
3,385,628 |
70,043 |
4.14 |
% |
2,783 |
7,760 |
(4,977 |
) |
||||||||||||||||||||||||
Home equity lines of credit |
262,745 |
5,383 |
4.12 |
% |
282,892 |
7,040 |
4.98 |
% |
(1,657 |
) |
(484 |
) |
(1,173 |
) |
||||||||||||||||||||||
Installment loans |
10,380 |
367 |
7.11 |
% |
11,099 |
473 |
8.52 |
% |
(106 |
) |
(30 |
) |
(76 |
) |
||||||||||||||||||||||
Loans, net of unearned income |
4,111,184 |
83,728 |
4.08 |
% |
3,871,412 |
82,685 |
4.27 |
% |
1,043 |
8,198 |
(7,155 |
) |
||||||||||||||||||||||||
Total interest earning assets |
5,204,978 |
91,181 |
3.51 |
% |
4,978,664 |
96,079 |
3.86 |
% |
(4,898 |
) |
9,783 |
(14,681 |
) |
|||||||||||||||||||||||
Allowance for loan losses |
(45,676 |
) |
(44,894 |
) |
||||||||||||||||||||||||||||||||
Cash & non-interest earning assets |
194,718 |
176,518 |
||||||||||||||||||||||||||||||||||
Total assets |
$ |
5,354,020 |
$ |
5,110,288 |
||||||||||||||||||||||||||||||||
Liabilities and shareholders' equity |
||||||||||||||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||||||||||||||
Interest bearing checking accounts |
$ |
912,226 |
42 |
0.01 |
% |
$ |
880,101 |
215 |
0.05 |
% |
(173 |
) |
23 |
(196 |
) |
|||||||||||||||||||||
Money market accounts |
627,897 |
1,958 |
0.63 |
% |
535,950 |
1,945 |
0.73 |
% |
13 |
603 |
(590 |
) |
||||||||||||||||||||||||
Savings |
1,142,201 |
399 |
0.07 |
% |
1,149,064 |
744 |
0.13 |
% |
(345 |
) |
(4 |
) |
(341 |
) |
||||||||||||||||||||||
Time deposits |
1,381,025 |
11,990 |
1.75 |
% |
1,395,361 |
13,488 |
1.93 |
% |
(1,498 |
) |
(149 |
) |
(1,349 |
) |
||||||||||||||||||||||
Total interest bearing deposits |
4,063,349 |
14,389 |
0.71 |
% |
3,960,476 |
16,392 |
0.83 |
% |
(2,003 |
) |
473 |
(2,476 |
) |
|||||||||||||||||||||||
Short-term borrowings |
163,251 |
557 |
0.69 |
% |
160,893 |
762 |
0.95 |
% |
(205 |
) |
32 |
(237 |
) |
|||||||||||||||||||||||
Total interest bearing liabilities |
4,226,600 |
14,946 |
0.71 |
% |
4,121,369 |
17,154 |
0.83 |
% |
(2,208 |
) |
505 |
(2,713 |
) |
|||||||||||||||||||||||
Demand deposits |
503,327 |
407,926 |
||||||||||||||||||||||||||||||||||
Other liabilities |
77,303 |
79,814 |
||||||||||||||||||||||||||||||||||
Shareholders' equity |
546,790 |
501,179 |
||||||||||||||||||||||||||||||||||
Total liabilities and shareholders' equity |
$ |
5,354,020 |
$ |
5,110,288 |
||||||||||||||||||||||||||||||||
Net interest income , tax equivalent |
76,235 |
78,925 |
$ |
(2,690 |
) |
9,278 |
(11,968 |
) |
||||||||||||||||||||||||||||
Net interest spread |
2.80 |
% |
3.03 |
% |
||||||||||||||||||||||||||||||||
Net interest margin (net interest income to total interest earning assets) |
2.93 |
% |
3.17 |
% |
||||||||||||||||||||||||||||||||
Tax equivalent adjustment |
(1 |
) |
(2 |
) |
||||||||||||||||||||||||||||||||
Net interest income |
76,234 |
78,923 |
||||||||||||||||||||||||||||||||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
As detailed in the Annual Report to Shareholders as of December 31, 2019, the Company is subject to interest rate risk as its principal market risk. As noted in the Management’s Discussion and Analysis for the three-month and six-month month periods ended June 30, 2020 and 2019, the Company continues to respond to changes in interest rates in such a way that positions the Company to meet short term earning goals and also allows the Company to respond to changes in interest rates in the future. Consequently, for the second quarter of 2020, the Company had an average balance of Federal Funds sold and other short-term investments of $727.0 million compared to $545.7million in the second quarter of 2019. As investment opportunities present themselves, management plans to invest funds from the Federal Funds sold and other short-term investment portfolio into the securities available for sale, securities held to maturity and loan portfolios. Additional disclosure of interest rate risk can be found under “Liquidity and Interest Rate Sensitivity” and “Asset/Liability Management” in the Management’s Discussion and Analysis section of this document.
Market disruptions brought about by the COVID-19 pandemic may adversely affect our sensitivity to market interest rates. We could experience an increase in the cost of funding on our balance sheet. We could also experience increased pricing competition for our existing loans or future borrower prospects, which could decrease rates earned on our earning assets.
| 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 Officer and Chief Financial Officer of the Company concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.
There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.
| PART II | OTHER INFORMATION |
| Item 1. | Legal Proceedings |
None.
| Item 1A. | Risk Factors |
There were no material changes to the risk factors as previously disclosed in response to Item 1A to Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, or in response to Item 1A to Part II of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Share Repurchase Program
The following table provides certain information with respect to the Company’s purchases of its common shares during the three months ended June 30, 2020:
Period |
Total numbers of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs |
Maximum number of shares that may yet be purchased under the plans or programs (1) |
April 1, 2020 through April 30, 2020 |
- |
N/A |
- |
- |
May 1, 2020 through May 31, 2020 |
- |
N/A |
- |
- |
June 1, 2020 through June 30, 2020 |
- |
N/A |
- |
- |
Total |
- |
N/A |
- |
511,000 |
| (1) | On June 7, 2019, the Company announced that its board of directors approved a stock repurchase program under which the Company was authorized to repurchase over the following twelve months up to 1,000,000 shares of Company common stock, or approximately 1% of its outstanding shares. The Company commenced repurchases under the program during the quarter ended March 31, 2020. On April 16, 2020, the Company announced that it had chosen to suspend the repurchase program. |
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety |
None.
| Item 5. | Other Information |
None.
| Item 6. | Exhibit |
Reg S-K (Item 601) |
|
Exhibit No. |
Description |
Crowe LLP Letter Regarding Unaudited Interim Financial Information |
|
Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer. |
|
Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer. |
|
Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer. |
|
101.INS |
Instance Document |
101.SCH |
XBRL Taxonomy Extension Schema Document |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
XBRLTaxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TrustCo Bank Corp NY |
||
By: /s/ Robert J. McCormick |
||
Robert J. McCormick |
||
Chairman, President and Chief Executive Officer |
||
By: /s/ Michael M. Ozimek |
||
Michael M. Ozimek |
||
Executive Vice President and Chief Financial Officer |
||
Date: August 6, 2020 |
71