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Item 1A.
Risk Factors
An investment in the Company involves risks, including the risks discussed in Item 1A. Risk Factors of the Companys 2023 Form 10-K, which risk factors have not materially changed except as set forth below. The risk factors below supersede the similarly captioned risk factors set forth in the 2023 Form 10-K and supplement the other risk factors in the 2023 Form 10-K. The risk factors below reflect modifications to the nature of the risks that have developed since the date on which the 2023 Form 10-K was filed.
Changes in interest rates have impacted and may continue tomay significantly impact our financial condition and results of operations.
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. The level of net interest income is primarily a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the FRB (the FOMC), and market interest rates.
Over certain peany specific periods of time, our interest-earning assets have been and may in the future 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 domay not always change to the same degree over thea given time period. In any event, our earnings have been and may in the future be negatively affected when if market interest rates should move contrary to our position, earnings may be negatively affected. The FOMC increased the target range for the fFederal fFunds rate seeleven times in 2022 and four times in 2023, by a total of 525 basis points, to a range of 5.25% to 5.50%, which is whthen lowered it remains as of June 30, in September 2024. All of these increases were expressly made in response to inflationary pressures. by 50 basis points to a range of 4.75% to 5.00%. In its September and October August 20234 Beige Books, the FRB noted that overall eeconomic growth was modest during Juactivity grew slightly and August and that there has been little to no change in overall economicin three districts, while the number of districts that reported flat or declining activity since then. Regional banks continued to report ongoing declinesrose from five in the prior period to nine in loan demand, tighter credit conditions, and narrowing loan spreads. Furtthe current period. Regional small-to-medium-sized banks in second district (whermore, while most banks repore the Companys New York branches are located higher d) reposit rates, delinquency rates edged up. In addition, inflationary pressures moderated somewhat but remained widespread while conditions in the broad finance sector weakerted no change in loan demand, though demand for refinancing picked up from low levels. Economic activity in the sixth district (where the Companys Florida branches are located) declined slightly duringsince the lastprior reporting period, and loan volumes grew slowly in the sixth district.
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There can be no assurances as to any future FOMC conduct. If the FOMC further increases the targeted federal funds rates, overall interest rates likely will rise, which will positively impact our interest income but may further negatively impact the entire national economy, including the housing industry in the markets we serve, by reducing refinancing activity and new home purchases. In addition, deflationary pressures, while possibly lowering our operational costs, could have a significant negative effect on our borrowers and the values of collateral securing loans, which could negatively affect our financial performance. A significant portion of our loans have fixed interest rates (or, if adjustable, are initially fixed for periods of five to 10 years) and longer terms than our deposits and borrowings. Our net interest income has been and may in the future could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates have affected and may in the future affect the average life of loans and mortgage-related securities. Increases in interest rates have and may in the future 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 Banks interest-earning assets, and in particular the Banks 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 have had and may in the future have an adverse effect on shareholders equity.
Ongoing inflationary pressures and continued elevated prices could have affected and may continue to affect our results of operations and financial condition.
Inflation rose sharply at the end of 2021 and has remained at an elevated level through the date of this filing. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business customers to repay their loans has and may continue to deteriorate, and in some cases this deterioration has occurred and may in the future occur n adverse effect on shareholders equickly, which can adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation has caused and may continue to cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial conditionty.
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We have been and may in the future be 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.