Item 1A. Risk Factors
The following are general risk factors affecting the Company. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially and adversely affect our business operations. Any of these risks could materially and adversely affect our business, financial condition or results of operations. In such cases, you may
lose all or part of your investment.
Risks Related to the COVID-19 Pandemic
The COVID-19 outbreak could adversely affect our business activities, financial condition and results of
operations.
Our banking business, and the business of our industry generally, is dependent upon the willingness and ability of customers to conduct banking and other financial
transactions. The spread of COVID-19 has caused, and we expect it to continue to cause, severe disruptions in the U.S. economy, including in the geographic areas in which we operate. Such economic disruptions
could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans, negatively impact national and regional economic conditions, result in declines in loan demand and originations, the value of loan collateral
(particularly in our home mortgage loan portfolio), and deposit availability, and negatively impact the implementation of our growth strategy. The spread of COVID-19 may result in a significant decrease in business and/or cause customers
to be unable to meet existing payment or other obligations. The effects of the economic disruptions created by the COVID-19 pandemic, depending on their extent, could materially and adversely affect our liquidity and financial condition, and the
results of our operations could be materially and adversely affected.
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While the spread of COVID-19 has minimally affected our operations as of December 31, 2020, we may experience temporary closures of offices and/or suspension of certain
services. Although we maintain contingency plans for a pandemic, the spread of COVID-19 could negatively affect key employees, including operational management personnel and those charged with preparing, monitoring, and evaluating our financial
reporting and internal controls. Such a spread or outbreak could also negatively impact the business and operations of third-party service providers who perform critical services for us. If COVID-19, or another highly infectious or contagious
disease, spreads or the response to contain COVID-19 is unsuccessful, we could experience a material adverse effect to our business, financial condition, and results of operations.
Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of Federal Reserve actions. Market interest rates have
declined significantly. Yields on the 30-year Treasury notes and 10-year Treasury notes, which significantly influence home mortgage interest rates, are at historic lows. On March 3, 2020, the Federal Reserve reduced the target federal funds rate
by 50 basis points to 1.00% to 1.25%, and on March 15, 2020, it further reduced the target federal funds rate by 100 basis points to 0.00% to 0.25% and announced a quantitative easing program in response to the expected economic downturn caused by
the COVID-19 pandemic. The Federal Reserve reduced the interest that it pays on excess reserves from 1.60% to 1.10% on March 3, 2020, and then to 0.10% on March 15, 2020. We expect that these reductions in interest rates, especially if prolonged,
could adversely affect net interest income and margins and profitability.
The extent to which the COVID-19 pandemic affects our business, results of operations and financial condition will depend on future developments, which
are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and
operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit,
adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
As a participating lender in the SBA’s Paycheck Protection Program, the Company and the Bank are subject to additional risks of litigation from the
Bank’s customers or other parties regarding the Bank’s processing of loans for the Payment Protection Program and risks that the SBA may not fund some or all Payment Protection Program loan guaranties.
The COVID-19 pandemic and its impact on the economy have led to actions including the enactment of the CARES Act, which included the establishment of a
loan program administered through the SBA referred to as the Payment Protection Program (“PPP”). Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders
that enroll in the program, subject to numerous limitations and eligibility criteria.
We have experienced increased volume of loan originations, particularly SBA loans pursuant to the PPP. Certain of these SBA loans have mandated interest
rates that are lower than our usual rates and may not be purchased by the SBA or other third parties within expected timeframes. In addition, borrowers may draw on existing lines of credit or seek additional loans to finance their businesses. These
factors may result in reduced levels of capital and liquidity being available to originate more profitable loans, which will negatively impact our ability to serve our existing customers and our ability to attract new customers.
We may be exposed to the risk of litigation, from both customers and non-customers that approached us regarding PPP loans, regarding our process and procedures used in
processing applications. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly,
regardless of outcome. Any financial liability, litigation costs or reputational damage caused by related litigation could have a material adverse impact on our business, financial condition and results of operations.
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We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated,
funded or serviced by us, such as an issue with the eligibility of the borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss
resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of
the guaranty, or, if it has already paid the guaranty, seek recovery of any loss related to the deficiency from us.
Risks Related to Our Business
Certain interest rate movements may hurt earnings and asset values.
Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest
earned on loans and investments, and interest paid on deposits and borrowings. Over any specific period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or
vice-versa. In addition, the individual market interest rates underlying our loan and deposit products may not change to the same degree over a given time period. In any event, if market interest rates should move contrary to our position, earnings
may be negatively affected. Interest rates have in recent years hit historical low levels. From December 2015 through December 2018, the U.S. Federal Reserve increased its federal funds target rate from a range of 0.00% - 0.25% to a range of 2.25%
- 2.50%. However, beginning in June 2019, the Federal Reserve began lowering the target rate in response to a slowing economy and in March 2020 quickly lowered the target rate back to 0.00% - 0.25% in response to the COVID-19 pandemic and the
objective of injecting liquidity into the banking system and stimulating the credit markets. Lower rates have helped lead to a lower cost of funds, but have also lowered the yields we earn on loans, securities, and short-term investments. To the
extent that the Federal Reserve or general market conditions for deposits change rates further, our cost of funds may rise faster than the rates we earn on loans and investments, potentially causing a compression of our interest rate spread and net
interest margin, which would have a negative effect on Trustco Bank’s profitability.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the
average life of loans and mortgage-related securities. Increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans. Decreases in interest rates often result in increased
prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from
such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Conversely, increases in interest rates often result in slowed prepayments of loans and
mortgage-related securities, reducing cash flows and reinvestment opportunities.
Changes in interest rates also affect the value of the Bank’s interest-earning assets,
and in particular the Bank’s securities portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for
sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on shareholders’
equity.
We are exposed to credit risk in our lending activities.
There are inherent risks associated with our lending and trading activities. Loans to individuals and business entities, our
single largest asset group, depend for repayment on the willingness and ability of borrowers to perform as contracted. A material adverse change in the ability of a significant portion of our borrowers to meet their obligation to us, due to changes
in economic conditions, interest rates, natural disaster, acts of war, or other causes over which we have no control, could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans,
and could have a material adverse impact on our earnings and financial condition.
If our allowance for loan losses (“ALLL”) is not sufficient to cover actual loan losses, our
earnings could decrease, and a new accounting standard may require us to increase our ALLL.
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Our borrowers may not repay their loans according to the terms of the loans, and, as a result of the declines in home prices, the
collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which could have a material adverse effect on our operating results. When determining the amount of the
ALLL, we make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our
loans. In deciding on the adequacy of the allowance for loan losses, management reviews past due information, historical charge-off and recovery data, and nonperforming loan activity. Also, there are a number of other factors that are taken into
consideration, including: the magnitude, nature and trends of recent loan charge-offs and recoveries, the growth in the loan portfolio and the implication that it has in relation to the economic climate in the Bank’s
market territories, and the economic environment in the Upstate New York territory primarily (the Company’s largest geographical area) over the last several years, as well as in the Company’s other market areas. A significant portion of the allowance is determined using qualitative factors. The determination of qualitative factors involves subjective judgement and subjective measurement. If our
assumptions and analysis prove to be incorrect, our ALLL may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance which is maintained through provisions for loan losses. Material additions to our
allowance would materially decrease our net income.
Additionally, TrustCo will adopt ASU No. 2016-13, Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments (“CECL”) effective January 1, 2022, as provided by the CARES Act and further extended under the COVID-19 Relief Bill, which became law in December 2020. This standard will
require financial institutions to determine periodic estimates of lifetime expected credit losses on financial instruments and other commitments to extend credit. This will change the current method of providing allowances for credit losses that
are probable, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses.
We may not be able to meet the cash flow requirements of our depositors or borrowers or meet our operating cash needs to fund corporate expansion and
other activities.
Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of Trustco Bank is used to make loans and to repay deposit
liabilities as they become due or are demanded by customers. Liquidity policies and limits have been established by our board of directors, and our management monitors the overall liquidity position of Trustco Bank to ensure that various
alternative strategies exist to cover unanticipated events that could affect liquidity. Trustco Bank is also a member of the Federal Home Loan Bank which provides funding to members through advances and other extensions of credit that are typically
collateralized with securities or mortgage-related assets. Our securities portfolio can be used as a secondary source of liquidity, and additional liquidity could be obtained from securities sold under repurchase agreements, non-core deposits, and
debt or equity securities issuances in public or private transactions. If we were unable to access any of these funding sources when needed, we might not be able to meet the needs of our customers, which could adversely affect our financial
condition, our results of operations, cash flows and our level of regulatory capital.
We are subject to claims and litigation pertaining to fiduciary responsibility and lender liability.
Some of the services we provide, such as trust and investment services, require us to act as fiduciaries for our customers and others. In addition, loan workout and other
activities may expose us or Trustco Bank to legal actions, including lender liability or environmental claims. From time to time, third parties make claims and take legal action against us pertaining to the performance of our fiduciary
responsibilities or loan-related activities. If these claims and legal actions are not resolved in a manner favorable to us, we may be exposed to significant financial liability and/or our reputation could be damaged. Either of these results may
adversely impact demand for our products and services or otherwise have a harmful effect on our business and, in turn, on our financial condition, results of operations and prospects.
Risks Related to Market Conditions
A prolonged economic downturn, especially one affecting our geographic market area, will adversely affect our operations and financial
results.
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Our primary lending emphasis is the origination of one-to-four family first mortgage loans on residential properties; therefore,
we are particularly exposed to downturns in the U.S. housing market. The primary risks inherent in our one- to four-family loan portfolio are declines in economic conditions, elevated levels of unemployment or underemployment, and declines in
residential real estate values. Any one or a combination of these events may have an adverse impact on borrowers’ ability to repay their loans, which could result in increased delinquencies, non-performing
assets, loan losses, and future loan loss provisions.
Additionally, we have a concentration of loans secured in New York and Florida. Approximately 72.1% of our loan portfolio is
comprised of loans secured by property located in our markets in and around of New York, and approximately 27.9% is comprised of loans secured by property located in Florida. This makes us vulnerable to a downturn in the local economy and real
estate markets. Adverse conditions in the local economy such as inflation, unemployment, recession, natural disasters, or other factors beyond our control could impact the ability of our borrowers to repay their loans. Decreases in local real
estate values could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure. Currently, there is not a single employer or industry in the area on which the
majority of our customers are dependent.
Market volatility levels have experienced significant variations in recent years and a return to very high volatility levels could adversely affect us.
The stock and credit markets have been experiencing significant variations in volatility levels in recent years. In some cases, the markets have produced downward
pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. Current volatility levels have diminished significantly from the peak,
but a return to higher levels could cause the Company to experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition, and results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial
services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different counterparties, and we routinely execute transactions with counterparties in the financial services
industry, including brokers and dealers, banks, investment banks, mutual funds, and other institutional entities. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services
industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. Any such
losses could be material and could materially and adversely affect our business, financial condition and results of operations.
The trust wealth management fees we receive may decrease as a result of poor investment performance, in either relative or absolute terms, which could
decrease our revenues and net earnings.
Our Trustco Financial Services department derives its revenues primarily from investment management fees based on assets under management. Our ability to maintain or
increase assets under management is subject to a number of factors, including investors’ perception of our past performance, in either relative or absolute terms, market and economic conditions, and competition from investment management companies.
Financial markets are affected by many factors, all of which are beyond our control, including general economic conditions, securities market conditions, the level and volatility of interest rates and equity prices, competitive conditions, monetary
and fiscal policy and investor sentiment. A decline in the value of the assets under management would decrease our income. Further certain of our investment advisory and wealth management clients can terminate, with little or no notice, their
relationships with us, reduce their aggregate assets under management, or shift their funds to other types of accounts with different rate structures.
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Risks Related to Compliance and Regulation
The regulatory capital rules could slow our growth, cause us to seek to raise additional capital, or both.
As discussed under “Regulation and Supervision - Regulatory Capital Requirements and Prompt Corrective Action,” the Company and the Bank are subject to regulatory capital requirements. The new capital rules impose stringent capital requirements on the Company and the Bank and generally require banking organizations to
hold high-quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand periods of financial stress. The rules include required minimum capital ratios for all banking organizations and a “capital conservation buffer” that is in addition to each capital ratio.
The application of these stringent capital requirements for us could, among other things, result in lower returns on equity, require us to limit the growth we may
otherwise seek, require the raising of additional capital, and result in regulatory actions such as prohibitions on the payment of dividends, the payment of bonuses to employees or the repurchase of shares if we were unable to comply with such
requirements. If Trustco Bank fails to comply with its capital requirements, the OCC will have the authority to take “prompt corrective action,” depending on the Bank’s capital level. Currently, the Bank is considered “well-capitalized” for prompt
corrective action purposes. If it were 22 to be designated by the OCC in one of the lower capital levels - “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized” - the Bank would be required to raise additional
capital and also would be subject to progressively more severe restrictions on operations, management, and capital distributions; replacement of senior executive officers and directors; and, if it became “critically undercapitalized,” to the
appointment of a conservator or receiver.
We currently anticipate that we will continue to be well-capitalized in accordance with the regulatory standards.
Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.
We are subject to extensive regulation, supervision, and examination by the OCC, FRB, and FDIC. These regulatory authorities have
extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s loss allowances, and determine the level of deposit insurance premiums assessed. The Dodd-Frank Act significantly affected the lending, deposit, investment, trading, and operating activities of financial
institutions and their holding companies and will continue to do so. Any change in banking regulations and oversight, and the regulation of other agencies, such as the BCFP and the U.S. Department of Housing and Urban Development, whether in the
form of regulatory policy, new regulations or legislation, or additional deposit insurance premiums, could have a material impact on our operations. New or revised rules may increase our regulatory compliance burden and costs and restrict the
financial products and services we offer to our customers.
Further, there may be additional laws and regulations, or changes in policy, affecting lending and funding practices, regulatory
capital limits, interest rate risk management, and liquidity standards and the legislative and regulatory responses to the COVID-19 pandemic have resulted, and future responses may result in significant changes. The federal bank regulatory agencies
may require us to maintain capital ratios in excess of regulatory requirements, and new laws and regulations may increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may
significantly affect the markets in which we do business, the markets for and value of our loans and investments, the products we offer, the fees we can charge and our ongoing operations, costs, and profitability.
Changes in tax laws may adversely affect us, and the Internal Revenue Service or a court may disagree with our
tax positions, which may result in adverse effects on our business, financial condition, results of operations or cash flows.
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The Company operates in an environment that imposes income taxes on its operations at both the federal and state levels to varying degrees. Strategies and operating
routines have been implemented to minimize the impact of these taxes. Consequently, any change in tax legislation could significantly alter the effectiveness of these strategies. The Tax Cuts and Jobs Act (which we refer to as the “Tax Act”),
enacted on December 22, 2017, significantly affected United States tax law, including by changing how the United States imposes tax on certain types of income of corporations and by reducing the United States federal corporate income tax rate to
21%. It also imposed new limitations on a number of tax benefits, including certain executive compensation deductions, deductions for certain transportation fringe benefits provided to employees and entertainment expenses, among others. There can
be no assurance that future tax law changes will not increase the rate of the corporate income tax significantly; impose new limitations on deductions, credits or other tax benefits; or make other changes that may adversely affect the performance
of an investment in our stock. In addition, we have taken and may in the future take positions with respect to a number of unsettled issues for which Internal Revenue Services (“IRS”) guidance is unavailable. There is no assurance that the IRS or a
court will agree with the positions taken by us, in which case tax penalties and interest may be imposed that could adversely affect our business, financial condition, results of operations and cash flows.
The recent changes in the federal tax laws may have an adverse effect on the market for, and the valuation of, residential properties, and on the
demand for such loans in the future, and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high
state and local taxes, like New York. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing
economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.
Our ability to pay dividends is subject to regulatory limitations and other limitations that may affect our ability to pay dividends to
our stockholders or to repurchase our common stock.
TrustCo is a separate legal entity from its subsidiary Trustco Bank, and does not have significant operations of its own. The
availability of dividends from Trustco Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors that the OCC or the Federal Reserve Board could assert that payment of
dividends or other payments may result in an unsafe or unsound practice. In addition, TrustCo is subject to consolidated capital requirements and is required to serve as a source of strength to Trustco Bank. If the Bank is unable to pay dividends
to TrustCo, or if TrustCo is required to retain capital or contribute capital to the Bank, we may not be able to pay dividends on our common stock or to repurchase shares of common stock.
We may be subject to a higher effective tax rate if Trustco Realty Corp. (“Trustco Realty”) fails to qualify as a real estate
investment trust (“REIT”).
Trustco Realty, a subsidiary of Trustco Bank, operates as a REIT for tax purposes. Trustco Realty was established to acquire, hold and manage mortgage assets and other
authorized investments to generate net income for distribution to its shareholders.
For an entity to qualify as a REIT, it must meet certain organizational tests and it must satisfy the following six asset tests under the Internal Revenue Code each
quarter: (1) at least 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other
than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of a taxable REIT subsidiary; (4)
not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of a taxable REIT subsidiary; (5) not more than 10% of the total value of the outstanding
securities of any one issuer may be held, other than those securities includible under the 75% test or securities of a taxable REIT subsidiary; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than
25% of the value of its total assets. At December 31, 2020, Trustco Realty met all six quarterly asset tests.
Also, a REIT must satisfy the following two gross income tests each year: (1) at least 75% of its gross income must be from qualifying income closely connected with real
estate activities; and (2) 95% of its gross income must be derived from sources qualifying for the 75% test and dividends, interest, and gains from the sale of securities. In addition, a REIT must distribute at least 90% of its taxable income for
the taxable year, excluding any net capital gains, to maintain its non-taxable status for federal income tax purposes. For 2020, Trustco Realty had met the two annual income tests and the distribution test.
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If Trustco Realty fails to meet any of the required provisions and, therefore, does not qualify to be a REIT, our effective tax rate would increase.
Changes in accounting standards could impact reported earnings.
The accounting standard setting bodies, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies,
periodically change financial accounting and reporting standards that govern the preparation of our consolidated statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial condition
and results of operations. In some cases, we could be required to apply a new or revised accounting standard retroactively, which could affect beginning of period financial statement amounts.
Risks Related to Competition
Strong competition within the Bank’s market areas could hurt profits and slow growth.
The Bank faces intense competition both in making loans and attracting deposits. This competition comes principally from other banks, savings and loan associations,
credit unions, mortgage companies, other lenders, and institutions offering uninsured investment alternatives. Many of our competitors have competitive advantages, including greater financial resources and higher lending limits, a wider geographic
presence, more accessible branch office locations, more aggressive marketing campaigns and better brand recognition, and the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and
operating costs.
Competition has made it more difficult for the Bank to make new loans and at times has forced the Bank to offer higher deposit rates. Price competition for loans and
deposits might result in the Bank earning less on loans and paying more on deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits and to hire and retain experienced employees.
Management expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. The Bank’s
profitability depends upon its continued ability to compete successfully in its market areas.
Consumers and businesses are increasingly using non-banks to complete their financial
transactions, which could adversely affect our business and results of operations.
Technology and other changes are allowing consumers and businesses to complete financial transactions that historically have
involved banks through alternative methods. For example, the wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now
maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks. The diminishing role of banks as financial intermediaries has resulted and could continue to result in
the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the potential loss of lower cost deposits as a source of funds could have a material
adverse effect on our business, financial condition and results of operations.
Risks Related to Cybersecurity, Third Parties, and Technology
Our business could be adversely affected by third-party service providers, data breaches,
and cyber-attacks.
We face the risk of operational disruption, failure, or capacity constraints due to our dependency on third-party vendors for
components of our business infrastructure. While we have selected these third-party vendors through our vendor management process, we do not control their operations. As such, any failure on the part of these business partners to perform their
various responsibilities could also adversely affect our business and operations. Our assets that are at risk for cyber-attacks include financial assets and non-public information belonging to customers. We use several third-party vendors who
have access to our assets via electronic media. Certain cyber security risks arise due to this access, including cyber espionage, blackmail, ransom, and theft. We employ many preventive and detective controls to protect our assets and provide
recurring information security training to all employees. To date, we have not experienced any material losses relating to cyber-attacks or other information security breaches, but there can be no assurance that we will not suffer such attacks
or attempted breaches, or incur resulting losses, in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement Internet and
mobile banking to meet customer demand, and the current economic and political environment. As cyber and other data security threats continue to evolve, we may be required to expend significant additional resources to continue to modify and
enhance our protective measures or to investigate and remediate any security vulnerabilities.
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A failure in or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt our businesses, and
adversely impact our results of operations, liquidity and financial condition, as well as cause reputational harm.
The potential for operational risk exposure exists throughout our organization and, as a result of our interactions with, and
reliance on, third parties, is not limited to our own internal operational functions. Our operational and security systems, infrastructure, including our computer systems, data management, and internal processes, as well as those of third parties,
are integral to our performance. We rely on our employees and third parties in our day-to-day and ongoing operations, who may, as a result of human error, misconduct, malfeasance or failure, or breach of third-party systems or infrastructure,
expose us to risk. We have taken measures to implement backup systems and other safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom
we interact and rely. For example, strategic technology project implementation challenges may cause business interruptions. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more
limited than with respect to our own systems. Our financial, accounting, data processing, backup or other operating or security systems and infrastructure may fail to operate properly or become disabled or damaged as a result of a number of factors
including events that are wholly or partially beyond our control which could adversely affect our ability to process these transactions or provide these services. There could be sudden increases in customer transaction volume; electrical,
telecommunications, or other major physical infrastructure outages; natural disasters such as earthquakes, tornadoes, hurricanes, and floods; disease pandemics; and events arising from local or larger scale political or social matters, including
terrorist acts. We continuously update these systems to support our operations and growth and to remain compliant with all applicable laws, rules and regulations globally. This updating entails significant costs and creates risks associated with
implementing new systems and integrating them with existing ones, including business interruptions. Operational risk exposures could adversely impact our results of operations, liquidity and financial condition, as well as cause reputational harm.
Unauthorized disclosure of sensitive or confidential client or customer information, whether
through a breach of our computer systems or otherwise, could severely harm our business.
As part of our financial institution business, we collect, process, and retain sensitive and confidential customer information.
Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or
human errors, or other similar events. If information security is breached, information can be lost or misappropriated, resulting in financial loss or costs to us. Any security breach involving confidential customer information, whether by us or by
our vendors, could severely damage our reputation, expose us to the risks of litigation and liability or disrupt our operations and have a material adverse effect on our business.
We could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, our
computer systems.
We rely heavily on information systems to conduct our business and to process, record, and monitor our transactions. Risks to the
systems result from a variety of factors, including the potential for bad acts on the part of hackers, criminals, employees and others. As one example, in recent years, some banks have experienced denial of service attacks in which individuals or
organizations flood the bank’s website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. We are also at risk for the
impact of natural disasters, terrorism, and international hostilities on our systems or for the effects of outages or other failures involving power or communications systems operated by others. These risks also arise from the same types of threats
to businesses with which we deal.
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Potential adverse consequences of attacks on our computer systems or other threats include damage to our reputation, loss of
customer business, litigation, and increased regulatory scrutiny, which might also result in financial loss and require additional efforts and expense to attempt to prevent such adverse consequences in the future.
We rely on communications, information, operating and financial control systems, and technology from third-party service providers, and
we may suffer an interruption in those systems that may result in lost business. Further, we may not be able to substitute providers on terms that are as favorable if our relationships with our existing service providers are interrupted.
We rely heavily on third-party service providers for much of our communications, information, operating and financial controls
systems, and technology. Any failure or interruption or breach in security of these systems could result in failures or interruptions in our customer relationships management, general ledger, deposit, servicing, and/or loan origination systems. We
cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. The occurrence of any failure or interruption could have a material
adverse effect on our business, financial condition, results of operations, and cash flows. If any of our third-party service providers experience financial, operational, or technological difficulties, or if there is any other disruption in our
relationships with them, we may be required to locate alternative sources of such services, We cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing
systems, without the need to expend substantial resources, if at all. Any of these circumstances could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Other Risks
Our proposed reverse stock split may not result in a proportional
increase in the per share price of our common stock.
On February 16, 2021, we announced that our Board of Directors plans to seek approval
at our 2021 annual shareholder meeting for a reverse stock split of our common stock at a ratio of 1 for 5, as determined by our Board of Directors, and to reduce the number of authorized shares of our common stock from 150,000,000 to 30,000,000.
The effect of the reverse stock split on the market price for our common stock cannot be accurately predicted. In particular, we cannot assure you that, if our Board of Directors decides to proceed with the reverse stock split, the price of
shares of the common stock after the reverse stock split will increase proportionately to the price of shares of our common stock immediately before the reverse stock split. The market price of our common stock may also be affected by other
factors which may be unrelated to the reverse stock split or the number of shares issued and outstanding.
Furthermore, even if the market price of our common stock does rise following the reverse stock split, we cannot assure you
that the market price of our common stock immediately after the proposed reverse stock split will be maintained for any period of time. Moreover, because some investors may view the reverse stock split negatively, we cannot assure you that the
reverse stock split will not adversely impact the market price of our common stock. There is also the possibility that liquidity may be adversely affected by the reduced number of shares which would be issued and outstanding when the reverse
stock split is effected. Accordingly, our total market capitalization after the reverse stock split may be lower than the market capitalization before the reverse stock split.
New lines of business or new products and services may subject us to additional risks.
From time to time, we may develop and grow new lines of business or offer new products and services within our existing lines of
business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may
invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External
factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business
and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or
services could have a material adverse effect on our business, results of operations and financial condition. All service offerings, including current offerings and those which may be provided in the future, may become more risky due to changes in
economic, competitive and market conditions beyond our control.
Provisions in our articles of incorporation and bylaws and New York law may discourage or
prevent takeover attempts, and these provisions may have the effect of reducing the market price of our stock.
Our articles of incorporation and bylaws include several provisions that may have the effect of discouraging or preventing
hostile takeover attempts, and therefore, making the removal of incumbent management difficult. The provisions include requirements of supermajority votes to approve certain business transactions. In addition, New York law contains several
provisions that may make it more difficult for a third party to acquire control of us without the approval of the board of directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding stock. To
the extent that these provisions are effective in discouraging or preventing takeover attempts, they may tend to reduce the market price for our stock.
We are dependent upon the services of our management team.
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We are dependent upon the ability and experience of a number of our key management personnel who have substantial experience with
our operations, the financial services industry and the markets in which we offer our services. It is possible that the loss of the services of one or more of our senior executives or key managers would have an adverse effect on our operations. Our
success also depends on our ability to continue to attract, manage and retain other qualified middle management personnel as we grow. We cannot assure you that we will continue to attract or retain such personnel.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by TrustCo in
reports we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the SEC’s
rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system
are met.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. Accordingly, because of the inherent
limitations in our control system, misstatements due to error or fraud may occur and not be detected.
If the business continuity and disaster recovery plans that we have in place are not adequate to continue our operations in the event
of a disaster, the business disruption can adversely impact our operations.
External events, including terrorist or military actions, or an outbreak of disease, and resulting political and social turmoil
could cause unforeseen damage to our physical facilities or could cause delays or disruptions to operational functions, including information processing and financial market settlement functions. Additionally, our customers, vendors and
counterparties could suffer from such events. Should these events affect us, or our customers, or vendors or counterparties with which we conduct business, our results of operations could be adversely affected.
The Company’s risk management framework may not be effective in mitigating risk and loss.
The Company maintains an enterprise risk management program that is designed to identify, quantify, monitor, report, and control
the risks that it faces. These risks include interest rate, credit, liquidity, operations, reputation, compliance, and litigation. While the Company assesses and improves this program on an ongoing basis, there can be no assurance that its approach
and framework for risk management and related controls will effectively mitigate all risk and limit losses in its business. If conditions or circumstances arise that expose flaws or gaps in the Company’s
risk management program, or if its controls break down, the performance and value of its business could be adversely affected.
Item 1B Unresolved Staff Comments
None.
Item 2. Properties
TrustCo’s executive offices are located at 5 Sarnowski Drive, Glenville, New York, 12302, in a facility owned by the Company.
The Company operates 148 banking offices, of which 25 are owned and 123 are leased from others on market terms.
In the opinion of management, the physical properties of TrustCo and the Bank are suitable and adequate to meet our requirements and are being fully utilized. These
properties are located in New York, New Jersey, Vermont, Massachusetts and Florida.
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Item 3. Legal Proceedings
The nature of TrustCo’s business generates a certain amount of litigation against TrustCo and its subsidiaries involving matters
arising in the ordinary course of business. In the opinion of management of TrustCo, there are no proceedings pending to which TrustCo or any of its subsidiaries is a party, or of which its property is the subject which, if determined adversely to
TrustCo or such subsidiaries, would be material in relation to TrustCo’s consolidated shareholders’ equity and financial condition.
Item 4. Mine Safety Disclosure
Not applicable.
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Information about our Executive Officers
The following is a list of the names and ages of the executive officers of TrustCo and their business history for the past five years:
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PART II
TrustCo’s common stock is traded on The NASDAQ Stock Market, LLC under the symbol “TRST.” TrustCo had approximately 11,014 shareholders of record as of February 22, 2021, and the closing price of TrustCo’s common stock on that date was $6.95.
The following details the purchase of shares of TrustCo’s common stock made by or on
behalf of TrustCo in the fourth quarter of the year ended December 31, 2020.
Issuer Purchases of Equity Securities
October 1 to October 31, 2020 - $ - - -
November 1 to November 30, 2020 - $ - - -
December 1 to December 31, 2020 - $ - - -
Total - $ - - -
*Purchase relates to an employee exercise of incentive stock options.
The TrustCo Annual Report to Shareholders for the year ended December 31, 2020, which is filed as Exhibit 13 hereto, contains a graph comparing the yearly percentage
change in the Company’s cumulative total shareholder return on its common stock with the cumulative return of the Russell 2000 and the SNL Bank and Thrift indices. Such graph is incorporated herein by
reference.
Item 6. Selected Financial Data
The information required by this this Item 6 is incorporated herein by reference from the table captioned “FIVE YEAR SUMMARY OF
FINANCIAL DATA” in TrustCo’s Annual Report to Shareholders for the year ended December 31, 2020, which is filed as Exhibit 13 hereto.
The information required by this this Item 7 is contained in TrustCo’s Annual Report to Shareholders for the year ended
December 31, 2020, which is filed as Exhibit 13 hereto and incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by this Item 7A is contained in TrustCo’s Annual Report to Shareholders for the year ended December 31,
2020, which is filed as Exhibit 13 hereto and incorporated herein by reference.
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Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, together with the report thereon of Crowe LLP, and the required supplementary financial data are included in TrustCo’s Annual Report to Shareholders for the year ended December 31, 2020, which is filed as Exhibit 13 hereto and incorporated herein by reference.
None.
Item 9A. 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. Disclosure controls and procedures
are procedures that are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, such as this Form 10-K, is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded
that the Company’s disclosure controls and procedures are effective to satisfy the objectives for which they are designed.
Management’s Report on
Internal Control over Financial Reporting, together with the report thereon of Crowe LLP is included in TrustCo’s Annual Report to
Shareholders for the year ended December 31, 2020, which is filed as Exhibit 13 hereto, are incorporated herein by reference.
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934) that occurred during the Company’s quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 is incorporated herein by reference to the disclosure under the headings “Information
on TrustCo Directors and Nominees” and “Information on TrustCo Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement (Schedule 14A) for its 2021 Annual Meeting of Shareholders
to be filed with the SEC within 120 days of the Company’s fiscal year-end. TrustCo has adopted a code of conduct that applies to all employees, including its principal executive, financial and accounting
officers. A copy of this code of conduct will be provided without charge upon written request. Requests and inquiries should be directed to: Robert M. Leonard, Executive Vice President, TrustCo Bank Corp NY, P.O. Box 1082, Schenectady, New York
12301-1082. The required information regarding TrustCo’s executive officers is contained in PART I in the item captioned “Executive Officers of TrustCo.”
Item 11. Executive Compensation
The information required by this Item 11 is incorporated herein by reference to the Company’s Proxy Statement (Schedule 14A) for
its 2021 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the Company’s fiscal year-end.
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The information required by this Item 12 is incorporated herein by reference to the Company’s Proxy Statement (Schedule 14A) for
its 2021 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the Company’s fiscal year-end. Additional information concerning the Company’s
equity compensation plans is set forth in Part II, Item 5 hereof.
The following table provides information, as of December 31, 2020, regarding securities authorized for issuance under TrustCo’s
equity compensation plans.
Equity compensation plan not approved by security holders N/A N/A N/A
Item 13. Certain Relationships, Related Transactions and Director Independence
The information required by this Item 13 is incorporated herein by reference to the Company’s Proxy Statement (Schedule 14A) for
its 2021 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the Company’s fiscal year-end.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 is incorporated herein by reference to the Company’s Proxy Statement (Schedule 14A) for
its 2021 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the Company’s fiscal year-end.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
The following financial statements of TrustCo and its consolidated subsidiaries, and the accountants’ report thereon are filed
as a part of this report.
Consolidated Statements of Condition -- December 31, 2020 and 2019.
Consolidated Statements of Income -- Years Ended December 31, 2020, 2019 and 2018.
Consolidated Statements of Comprehensive Income -- Years Ended December 31, 2020, 2019 and 2018.
Consolidated Statements of Changes in Shareholders’ Equity -- Years Ended December 31, 2020, 2019 and 2018.
Consolidated Statements of Cash Flows -- Years Ended December 31, 2020, 2019 and 2018.
Notes to Consolidated Financial
Statements.
Financial Statement Schedules
Not Applicable. All required schedules for TrustCo and its subsidiaries have been included in the consolidated financial statements or related notes thereto.
Supplementary Financial Information
Summary of Unaudited Quarterly Financial Information for the years ended December 31, 2020 and 2019.
Exhibits
Exhibit No. Description
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21** List of Subsidiaries of TrustCo.
23** Consent of Independent Registered Public Accounting Firm.
24** Power of Attorney.
101.INS XBRL Instance Document.
101.SCH Inline XBRL Taxonomy Extension Schema Document.
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.
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* Management contract or compensatory plan or arrangement.
** Filed herewith.
Item 16. Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TrustCo Bank Corp NY
Date: February 26, 2021 By: /s/ Michael M. Ozimek
Michael M. Ozimek
Executive Vice President and Chief Financial Officer
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name and Signature Title Date
/s/ Robert J. McCormick
/s/ Michael M. Ozimek
*
Dennis A. DeGennaro Chairman February 26, 2021
*
Brian C. Flynn Director February 26, 2021
*
Thomas O. Maggs Director February 26, 2021
*
Dr. Anthony J. Marinello Director February 26, 2021
*
Kimberly A. Russell Director February 26, 2021
*
Lisa M. Lucarelli Director February 26, 2021
*
Frank B. Silverman Director February 26, 2021
* By: /s/ Robert M. Leonard
Robert M. Leonard, as Agent
Pursuant to Power of Attorney
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