FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the Fiscal Year Ended December 31, 1996 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ____________________ to ____________________ Commission file number 0-10592 TRUSTCO BANK CORP NY (Exact name of registrant as specified in its charter) NEW YORK 14-1630287 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 320 STATE STREET, SCHENECTADY, NEW YORK 12305 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 377-3311 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: None None Common Stock, $1.00 Par Value None (Title of class) ______________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) None 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.(x) No.( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.[X] Indicate the number of shares outstanding of each of the registrant's classes of common stock: Number of Shares Outstanding Class of Common Stock as of March 17, 1997 $1 Par Value 20,395,288 The aggregate market value of registrant's common stock (based upon the closing price on March 17, 1997) held by non-affiliates was approximately $430,850,459. Documents Incorporated by Reference (1) Portions of registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1996 (Part I and Part II). (2) Portions of registrant's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 19, 1997 (Part III). -1-
INDEX - - ------------------------------------------------------------------------------ Description Page PART I Item 1 Business 1 Item 2 Properties 5 Item 3 Legal Proceedings 5 Item 4 Submission of Matters to a Vote of Security 5 Holders PART II Item 5 Market for the Registrant's Common Equity and 7 Related Stockholder Matters Item 6 Selected Financial Data 7 Item 7 Management's Discussion and Analysis of 7 Financial Condition and Results of Operations Item 8 Financial Statements and Supplementary Data 7 Item 9 Changes in and Disagreements with Accountants 7 On Accounting and Financial Disclosure PART III Item 10 Directors and Executive Officers of Registrant 7 Item 11 Executive Compensation 7 Item 12 Security Ownership of Certain Beneficial Owners 8 And Management Item 13 Certain Relationships and Related Transactions 8 PART IV Item 14 Exhibits, Financial Statement Schedules, and 8 Reports on Form 8-K EXHIBITS INDEX 15 -i-
PART I Item 1. Business General TrustCo Bank Corp NY ("TrustCo") is a one-bank holding company having its principal place of business at 320 State Street, Schenectady, New York 12305. TrustCo was incorporated under the laws of New York in 1981 to acquire all of the outstanding stock of Trustco Bank, National Association, formerly known as Trustco Bank New York, and prior to that The Schenectady Trust Company. Following receipt of necessary regulatory approvals, TrustCo commenced business on July 1, 1982. In 1991, TrustCo acquired, for a combination of cash and TrustCo common stock, Home & City Savings Bank ("Home & City") located in Albany, New York. At the time of the acquisition, Home & City operated 16 branches, and had total assets of approximately $ 848 million, deposits of $ 750 million and shareholders' equity of $ 93 million. Through policy and practice, TrustCo continues to emphasize that it is an equal opportunity employer. There were 448 full-time equivalent employees at year-end 1996. TrustCo had 5,897 shareholders of record as of December 31, 1996, and the closing price of the TrustCo common stock at that date was $21.375. Bank Subsidiary On November 16, 1994, TrustCo initiated the process to convert its banking subsidiary, Trustco Bank New York, a New York state chartered trust company, to a national banking association operating under the name Trustco Bank, National Association (the "Bank"). The conversion was undertaken to minimize duplicative federal/state compliance issues. The conversion became effective on February 1, 1995. The Bank is a national banking association engaged in a general commercial banking business serving individuals, partnerships, corporations, municipalities and governments of New York. The Bank operates 25 automatic teller machines and 48 banking offices in Albany, Columbia, Greene, Rensselaer, Saratoga, Schenectady, Warren, and Washington counties of New York State. The largest part of such business consists of accepting deposits and making loans and investments. The Bank provides a wide range of both personal and business banking services. The Bank is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation to the extent permitted by law. An operating subsidiary of the Bank, Trustco Realty Corp., holds certain mortgage assets which are serviced by the Bank. The Bank accounted for substantially all of TrustCo's 1996 consolidated net income and average assets. The trust department of the Bank serves as executor of estates and trustee of personal trusts, provides estate planning and related advice, provides custodial services and acts as trustee for various types of employee benefit plans and corporate pension and profit sharing trusts. The aggregate market value of the assets under trust, custody or management was approximately $950 million as of December 31, 1996. The daily operations of the Bank remain the responsibility of its Board of Directors and -1-
officers, subject to the overall supervision by TrustCo. TrustCo derives most of its income from dividends paid to it by its subsidiary Bank. The accounts of the Bank are included in TrustCo's consolidated financial statements. ORE Subsidiary During 1993, TrustCo created ORE Subsidiary Corp., a New York corporation, to hold and manage certain foreclosed properties acquired by the Bank. The accounts of this subsidiary are included in TrustCo's consolidated financial statements. Competition TrustCo faces strong competition in its market areas, both in attracting deposits and making loans. The Bank's most direct competition for deposits, historically, has come from other commercial banks, savings associations and credit unions, which are located, or have branches in those areas. The Bank also faces competition for deposits from national brokerage houses, short-term money market funds, and other corporate and government securities funds. Factors affecting the acquisition of deposits include pricing, office locations and hours of operation, the variety of deposit accounts offered, and the quality of customer service provided. Competition for loans has been especially keen during the last five years. Commercial banks, local thrift institutions, traditional mortgage brokers affiliated with local offices, and nationally franchised real estate brokers, are all active and aggressive competitors. The Bank competes in the environment by providing a full range of financial services based on a tradition of financial strength and integrity dating from its inception. It competes for loans, principally through the interest rates and loan fees it charges, and the efficiency and quality of services it provides to borrowers. TrustCo operates in a number of communities where the competition ranges from other locally based commercial and savings banks, to branches of the largest financial institutions in the United States. In the Capital District area of New York State, TrustCo's principal competitors are local operations of super regional banks, branch offices of money center banks, and locally based commercial and savings banks. The Bank is the largest commercial bank headquartered in the Capital District area. Supervision and Regulation Banking is a highly regulated industry, with numerous federal and state laws and regulations governing the organization and operation of banks and their affiliates. As a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "Act"), TrustCo is regulated and examined by the Board of Governors of the Federal Reserve System (the "Reserve Board"). The Act requires TrustCo to obtain prior Reserve Board approval for bank and non-bank acquisitions and restricts the business operations permitted to TrustCo. The Bank, as a national banking association, is subject to regulation and examination by the Office of the Comptroller of the Currency ("OCC"). Because the Federal Deposit Insurance Corporation ("FDIC") provides deposit insurance to the Bank, the Bank is also subject to its supervision and regulation even though the FDIC is not its primary federal regulator. Virtually all aspects of TrustCo's and the Bank's -2-
business are subject to regulation and examination by the Reserve Board, the FDIC and the OCC. Most of TrustCo's revenues consist of cash dividends paid to TrustCo by its subsidiary Bank, payment of which is subject to various regulatory limitations. (Note 1 of the consolidated financial statements contained in TrustCo's Annual Report to Shareholders for the year ended December 31, 1996, which appears on pages 33 and 34 thereof and contains information concerning restrictions of TrustCo's ability to pay dividends, is hereby incorporated by reference.) In addition, the FDIC and the Reserve Board have established guidelines with respect to the maintenance of appropriate levels of capital by a bank holding company under their jurisdictions. Compliance with the standards set forth in such guidelines could also limit the amount of dividends which a bank or a bank holding company may pay to its shareholders. The banking industry is also affected by the monetary and fiscal policies of the federal government, including the Reserve Board, which exerts considerable influence over the cost and availability of funds obtained for lending and investing. See Note 12 of the consolidated financial statements contained in TrustCo's Annual Report to Shareholders for the year ended December 31, 1996, which appears on page 43 thereof and contains information concerning regulatory capital requirements. Recent Legislation In September 1994, the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 was enacted. As of September 29, 1995, adequately capitalized and managed bank holding companies are permitted to acquire banks in any state subject to state deposit caps and a 10% nationwide deposit cap. In addition, this law provides for full interstate branching by bank merger commencing on June 1, 1997. States may "opt-out" of this branching provision prior to the effective date, and alternatively, states may "opt-in" earlier than June 1, 1997. New York "opted-in" prior to June 1, 1997, by allowing out-of-state banks with reciprocal branching laws to branch in New York through acquisition. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 was signed into law on September 30, 1996. This law streamlined the non-banking activities application process for well-capitalized and well-managed bank holding companies. Under this law, qualified bank holding companies may commence a regulatorily approved non-banking activity without prior notice to the Reserve Board although written notice is required within ten days after commencing the activity. Also under this law, the prior notice period is reduced to twelve days in the event of any non-banking acquisition or share purchase, assuming the size of the acquisition does not exceed 10% of risk-weighted assets of the acquiring bank holding company and the consideration does not exceed 15% of Tier 1 capital. This law also provides for the recapitalization of the Savings Association Insurance Fund which generally insures the deposits of thrift institutions, in order to bring it into parity with the Bank Insurance Fund. -3-
The references in this section to various aspects of supervision and regulation are brief summaries which do not purport to be complete and which are qualified in their entirety by reference to applicable laws, rules and regulations. Any change in applicable laws or regulations may have a material effect on the business and prospects of TrustCo. The operations of TrustCo may be affected by legislative changes and by the policies of various regulatory authorities. TrustCo is unable to predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic controls or new federal or state legislation may have in the future. Regulation by the federal and state banking authorities is designed to protect depositors rather than shareholders. Foreign Operations Neither TrustCo nor the Bank engage in material operations in foreign countries or have any outstanding loans to foreign debtors. Statistical Information Analysis The "Management's Discussion and Analysis" on pages 6 through 24 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1996, which contains a presentation and discussion of statistical data relating to TrustCo, is hereby incorporated by reference. This information should not be construed to imply any conclusion on the part of the management of TrustCo that the results, causes or trends indicated therein will continue in the future. The nature and effects of governmental monetary policy, supervision and regulation, future legislation, inflation and other economic conditions and many other factors which affect interest rates, investments, loans, deposits and other aspects of TrustCo's operations are extremely complex and could make historical operations, earnings, assets and liabilities not indicative of what may occur in the future. Forward-Looking Statements Statements included in the Management's Discussion and Analysis of Operations of TrustCo's Annual Report to Shareholders for the year ended December 31, 1996, and in future filings by TrustCo with the Securities and Exchange Commission, in TrustCo's press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect TrustCo's actual results and could cause TrustCo's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) credit risk; (ii) interest rate risk; (iii) competition; (iv) changes in the regulatory environment; and (v) changes in general business and economic trends. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements -4-
to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Item 2. Properties TrustCo's executive offices are located at 320 State Street, Schenectady, New York, 12305. The Bank operates 48 offices, of which 20 are owned and 28 are leased from others. The asset value of these properties, when considered in the aggregate, are not material to the operation of TrustCo. In the opinion of management, the physical properties of TrustCo and the Bank are suitable and adequate and are being fully utilized. 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 either 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 stockholders' equity and financial condition. Item 4. Submission of Matters to a Vote of Security Holders None. -5-
Executive Officers of TrustCo 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: Year First Name, Age and Principal Occupations Became Position Or Employment Since Executive With Trustco January 1, 1992 of TrustCo Robert A. McCormick, President and Chief Executive Officer, 60, President and TrustCo Bank Corp NY. President and 1984 Chief Executive Officer Chief Executive Officer, Trustco Bank, National Association Robert T. Cushing, Vice President and Chief Financial Officer, 41,Vice President and TrustCo Bank Corp NY since 1994. Senior 1994 Chief Financial Officer Vice President and Chief Financial Officer, Trustco Bank, National Association since 1994. Partner, KPMG Peat Marwick LLP (1987-1994). Nancy A. McNamara, Vice President, TrustCo Bank Corp NY 47, Vice President since 1992. Senior Vice President, Trustco 1992 Bank, National Association since 1988. William F. Terry, Secretary, TrustCo Bank Corp NY since 55, Secretary 1990. Senior Vice President, Trustco Bank, 1990 National Association since 1987. Secretary, Trustco Bank, National Association since 1990. Ralph A. Pidgeon, Vice President and Assistant Secretary, 54,Vice President TrustCo Bank Corp NY since 1995. Senior 1995 and Assistant Vice President, Trustco Bank, National Secretary Association since 1978. There are no family relationships among any of the named persons. Each executive officer is elected by the Board of Directors to serve until election of his or her successor. -6-
PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Page one of TrustCo's Annual Report to Shareholders for the year ended December 31, 1996, is incorporated herein by reference. The closing price for the Corporation's common stock on December 31, 1996, was $21.375. Item 6. Selected Financial Data Page 24 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1996, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 6 through 24 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1996, are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The financial statements, together with the report thereon of KPMG Peat Marwick LLP on pages 26 through 44 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1996, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of Registrant The information under the captions "Information on TrustCo Directors and Nominees" and "Information on TrustCo Executive Officers Not Listed Above" on pages 3 through 6, and Section 16(a) Beneficial Ownership Reporting Compliance" on page 21, of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 19, 1997, is incorporated herein by reference. 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 under the captions "TrustCo and Trustco Bank Executive Officer -7-
Compensation" and "TrustCo Retirement Plans" on pages 7 through 11 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 19, 1997, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information under the captions "Information on TrustCo Directors and Nominees," and "Information on TrustCo Executive Officers Not Listed Above," on pages 3 through 5 and "Ownership Of TrustCo Common Stock By Certain Beneficial Owners" on page 20 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 19, 1997, is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information under the caption "Transactions with TrustCo and Trustco Bank Directors, Executive Officers and Associates" on page 21 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 19, 1997, is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K The following financial statements of TrustCo and its consolidated subsidiaries, and the accountants' report thereon are incorporated herein by reference in item 8. Consolidated Statements of Condition -- December 31, 1996 and 1995. Consolidated Statements of Income -- Years Ended December 31, 1996, 1995, and 1994. Consolidated Statements of Changes in Shareholders' Equity -- Years Ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows -- Years Ended December 31, 1996, 1995 and 1994. 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. -8-
The following exhibits are incorporated herein by reference:* Reg S-K Exhibit No. Description 10(a) Employment Agreement dated January 1, 1992 and, Amendment No. 1 dated November 16, 1993, among TrustCo, the Bank and Robert A. McCormick. Amendment No. 2 dated September 1, 1994, Amendment No. 3 dated February 13, 1995, Amendment No. 4 dated December 1, 1995, among Trustco, the Bank and Robert A. McCormick, including Schedule A. 10(b) Employment Agreement dated June 21, 1994, and Amendment No. 1 dated February 14, 1995, including Schedule A, among TrustCo, the Bank and Robert T. Cushing. 10(c) Restated Employment Agreement dated June 21, 1994 and Amendment No.1 dated February 14, 1995, including Schedule A, among TrustCo, the Bank and Nancy A. McNamara. 10(d) Restated Employment Agreement dated June 21, 1994, and Amendment No. 1 dated February 14, 1995,including Schedule A, among TrustCo, the Bank and Ralph A. Pidgeon. 10(e) Restated Employment Agreement dated June 21, 1994, and Amendment No.1 dated February 14, 1995, including Schedule A, among TrustCo, the Bank and William F. Terry. 10(f) Restated 1985 TrustCo Bank Corp NY Stock Option Plan. 10(g) TrustCo Bank Corp NY Directors Stock Option Plan. 10(h) Restated Trustco Bank Supplemental Retirement Plan, dated June 24, 1994, Amendment No. 1, dated February 13, 1995 and Amendment No. 2, dated December 1, 1995. 10(i) Restated Agreement for Supplemental Retirement Benefits for Robert A. McCormick, dated June 24, 1994 and Amendment No. 1 dated December 1, 1995. -9-
The following exhibits are incorporated herein by reference:* Reg S-K Exhibit No. Description 10(j) Trustco Bank Executive Officer Incentive Plan dated December 22, 1993, Amendment No. 1, dated October 18, 1994, Amendment No. 2, dated February 13, 1995, and Amendment No. 3, dated December 1, 1995. 10(k) 1995 TrustCo Bank Corp NY Stock Option Plan. - - ---------------- *The exhibits included under Exhibit 10 constitute all management contracts, compensatory plans and arrangements required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. -10-
The following exhibits are filed herewith:* Reg S-K Exhibit No. Description 10(l) Amendment No. 2 to Restated Agreement for Supplemental Retirement Benefits for Robert A. McCormick, dated March 29, 1996. 10(m) Second Restatement of Trustco Bank Supplemental Retirement Plan among the Bank and each of Robert T. Cushing, Nancy A. McNamara, Ralph A. Pidgeon, and William F. Terry, dated March 29, 1996. 10(n) Restatement of Trustco Bank Executive Officer Incentive Plan, dated March 29, 1996. 11 Computation of Net Income Per Common Share. 13 Portions of Annual Report to Security Holders of TrustCo for the year ended December 31, 1996. 21 List of Subsidiaries of TrustCo. 23 Independent Auditors' Consent of KPMG Peat Marwick LLP. 24 Power of Attorney. 27 Financial Data Schedules. - - ---------------- *The exhibits included under Exhibit 10 constitute all management contracts, compensatory plans and arrangements required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. -11-
Reports on Form 8-K: On October 16, 1996, TrustCo filed a Current Report on Form 8-K reporting the third quarter 1996 results. On January 22, 1997, TrustCo filed a Current Report on Form 8-K reporting the fourth quarter and year-end December 31, 1996, results. On February 20, 1997, TrustCo filed a Current Report on Form 8-K reporting the declaration of a cash dividend. -12-
SIGNATURES Pursuant to the requirement 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 By/s/Robert A. McCormick Robert A. McCormick President and Chief Executive Officer (Principal Executive Officer) By/s/Robert T. Cushing Robert T. Cushing Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 19, 1997 -13-
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 date indicated. Signature Title Date * Director March 18, 1997 - - ------------------------------- Barton A. Andreoli * Director March 18, 1997 - - ------------------------------- Lionel O. Barthold * Director March 18, 1997 - - ------------------------------- M. Norman Brickman * Director March 18, 1997 - - ------------------------------- Robert A. McCormick * Director March 18, 1997 - - ------------------------------- Nancy A. McNamara * Director March 18, 1997 - - ------------------------------- Dr. Anthony J. Marinello * Director March 18, 1997 - - ------------------------------- Dr. John S. Morris * Director March 18, 1997 - - ------------------------------- Dr. James H. Murphy * Director March 18, 1997 - - ------------------------------- Richard J. Murray, Jr. * Director March 18, 1997 - - ------------------------------- Kenneth C. Petersen * Director March 18, 1997 - - ------------------------------- William D. Powers * Director March 18, 1997 - - ------------------------------- William J. Purdy /s/William F. Terry Director March 18, 1997 William F. Terry By:/s/William F. Terry *William F. Terry, as Agent Pursuant to Power of Attorney -14-
Exhibits Index Reg S-K Item 601 Exhibit No. Exhibit Page No. 10(a) Employment Agreement dated January 1, 1992 and, Amendment No. 1 dated November 16, 1993, among TrustCo, the Bank and Robert A. McCormick, filed as Exhibit 10(a); and Amendment No. 2 dated September 1, 1994, and Amendment No. 3 dated February 13, 1995, among TrustCo, the Bank and Robert A. McCormick, filed as Exhibit 10(b) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and Amendment No. 4 dated December 1, 1995, to the Employment Agreement dated January 1, 1992, among Trustco, the Bank and Robert A. McCormick, filed as exhibit 10(b) and Schedule A filed as Exhibit 10(c) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, are incorporated herein by reference. 10(b) Employment Agreement dated June 21, 1994, and Amendment No. 1 dated February 14, 1995, among TrustCo, the Bank and Robert T. Cushing filed as Exhibit 10(c) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and Schedule A updating the Employment Agreement dated June 21, 1994, among TrustCo, the Bank and Robert T. Cushing, filed as Exhibit 10(e) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the year ended December 31, 1995, are incorporated herein by reference. 10(c) Restated Employment Agreement dated June 21, 1994 and Amendment No. 1 dated February 14, 1995, among TrustCo, the Bank and Nancy A. McNamara, filed as Exhibit 10(d) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and Schedule A updating the Employment Agreement dated June 21, 1994, filed as Exhibit 10(i) to TrustCo Bank corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, are incorporated herein by reference. -15-
Exhibits Index Reg S-K Item 601 Exhibit No. Exhibit Page No. 10(d) Restated Employment Agreement dated June 21, 1994, and Amendment No. 1 dated February 14, 1995, among TrustCo, the Bank and Ralph A. Pidgeon, filed as. Exhibit 10(f) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and Schedule A updating the Employment Agreement dated June 21, 1994, filed as exhibit 10(i) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, are incorporated herein by reference. 10(e) Restated Employment Agreement dated June 21, 1994, and Amendment No. 1 dated February 14, 1995, among TrustCo, the Bank and William F. Terry, filed as. Exhibit 10(e) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and Schedule A updating the Employment Agreement dated June 21, 1994, filed as Exhibit 10(i) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, are incorporated herein by reference. 10(f) Restated 1985 TrustCo Bank Corp NY Stock Option Plan as amended and restated effective July 1, 1994, filed as Exhibit 10(h) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, is incorporated herein by reference. 10(g) TrustCo Bank Corp NY Directors Stock Option Plan filed as Exhibit 10(g) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, is incorporated herein by reference. 10(h) Restated Trustco Bank Supplemental Retirement Plan, dated June 24, 1994, Amendment No. 1, dated February 13, 1995 and Amendment No. 2, dated December 1, 1995, filed as exhibit 10(l) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, are incorporated herein by reference. 10(i) Restated Agreement for Supplemental Retirement Benefits for Robert A. McCormick, dated June 24, 1994 and Amendment No. 1 dated December 1, 1995, filed as Exhibit 10(m) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, are incorporated herein by reference. -16-
Exhibits Index Reg S-K Item 601 Exhibit No. Exhibit Page No. 10(j) Trustco Bank Executive Officer Incentive Plan dated December 22, 1993, Amendment No. 1, dated October 18, 1994, Amendment No. 2, dated February 13, 1995, and Amendment No. 3, dated December 1, 1995, filed as Exhibit 10(n) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, are incorporated herein by reference. 10(k) 1995 TrustCo Bank Corp NY Stock Option Plan, dated June 20, 1995, filed on Form S-8 (file No. 33-60409) dated June 20, 1995, is incorporated herein by reference. 10(l) Amendment No. 2 to Restated Agreement for Supplemental 19 Retirement Benefits for Robert A. McCormick, dated March 29, 1996, is filed herewith. 10(m) Second Restatement of Trustco Bank Supplemental Retirement Plan among the Bank and each of Robert T. 21 Cushing, Nancy A. McNamara, Ralph A. Pidgeon, and William F. Terry, dated March 29, 1996, is filed herewith. 10(n) Restatement of Trustco Bank Executive Officer Incentive Plan, 42 dated March 29, 1996, is filed herewith. 11 Computation of Net Income Per Common Share is filed herewith. 56 -17-
Exhibits Index Reg S-K Item 601 Exhibit No. Exhibit Page No. 13 Portions of Annual Report to Security Holders of TrustCo for the year ended December 31, 1996, is filed herewith. 57 GRAPHICS APPENDIX Cross Reference To Page Of Annual Omitted Charts Report 1 Taxable Equivalent Net Interest Income 7 2 Dividends Per Share 15 3 Allowance for Loan Losses 17 4 Allowance to Loans Outstanding 17 5 Efficiency Ratio 21 6 Noninterest Expense 21 The charts listed above were omitted from the EDGAR version of Exhibit 13; however, the information depicted in the charts was adequately discussed and/or displayed in the tabulation formation within Management's Discussion and Analysis section of the Annual Report. 21 List of Subsidiaries of TrustCo, filed herewith. 109 23 Independent Auditors' Consent of KPMG Peat Marwick LLP, 110 filed herewith. 24 Power of Attorney, filed herewith. 111 27 Financial Data Schedules, filed herewith. 112 -18-
AMENDMENT NO. 2 TO RESTATED AGREEMENT FOR SUPPLEMENTAL RETIREMENT BENEFITS FOR ROBERT A. McCORMICK WHEREAS, TrustCo Bank Corp NY, a New York corporation, Trustco Bank, National Association (herein referred to as the "Corporation"), and Robert A. McCormick (herein referred to as the "Executive") entered into an Agreement For Supplemental Retirement Benefits dated as of January 1, 1992 (herein referred to as the "Agreement"); and WHEREAS, the Corporation and the Executive desire to amend the Agreement; NOW, THEREFORE, the Agreement is hereby amended effective January 1, 1996, as follows: I. The following is hereby added at the end of Article III of the Agreement: "3.5. Notwithstanding Section 3.3, if the Executive's employment with the Corporation or one of its subsidiaries is terminated for any reason, the Corporation, upon the petition of the Executive, may pay to the Executive an amount equal to the Executive's Supplemental Account Balance. The Corporation will not unreasonably withhold its consent to the Executive's petition under this Section 3.5. 3.6. Notwithstanding Section 3.3, if the Executive becomes disabled and petitions the Corporation after demonstrating a financial hardship as a result of such disability, the Corporation will pay to the Executive an amount equal to the Executive's Supplemental Account Balance. In the event the Executive is so disabled as to be unable to care for his own affairs, the Executive's duly qualified guardian or other legal representative may petition the Corporation on the Executive's behalf. The Committee will have the sole discretion to determine financial hardship for purposes of this Section 3.6. 3.7. In the event that the Internal Revenue Service determines that all or a portion of the benefits payable under the Plan will be subject to federal income tax prior to distribution of such benefits, the Corporation will distribute to the Executive that portion of his benefit on which federal income tax is being imposed."
-19- II. The following is hereby added at the end of Article V of the Agreement: "5.8. All expenses (including, without limitation, legal fees and expenses) incurred by the Executive in connection with, or in prosecuting or defending, any claim or controversy arising out of or relating to this Agreement shall be paid by the Corporation." III. Section 6.1 of the Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "6.1. Notwithstanding Section 3.3, in the event the Executive's employment with the Corporation or one of its subsidiaries is terminated for any reason within one year prior to, or at any time after, a Change in Control, the Corporation will pay to the Executive or his Beneficiary, a single lump sum equal to his Supplemental Account Balance. In the event of a hostile Change in Control, the Corporation will pay to the Executive or his Beneficiary, within ten (10) days after such hostile Change in Control, a single lump sum equal to his Supplemental Account Balance. For purposes of this Section 6.1, a hostile Change in Control is defined as a transaction which the executive officers of the Corporation unanimously determine is a hostile Change of Control. IN WITNESS WHEREOF, the Corporation has caused this Amendment No. 2 to be executed this 29 day of March, 1996. TRUSTCO BANK CORP NY By: /s/William F. Terry ----------------------- WIlliam F. Terry Title: Sr. V.P. & Secretary TRUSTCO BANK, NATIONAL ASSOCIATION By: /s/William F. Terry ----------------------- WIlliam F. Terry Title: Sr. V.P. & Secretary /s/Robert A. Mccormick ---------------------------------- Robert A. McCormick -20-
TRUSTCO BANK SUPPLEMENTAL RETIREMENT PLAN 21
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS................................................... 1 SECTION 1.1. Actuarial Equivalent................................... 1 SECTION 1.2. Board of Directors..................................... 1 SECTION 1.3. Cause.................................................. 1 SECTION 1.4. Change in Control...................................... 1 SECTION 1.5. Code................................................... 2 SECTION 1.6. Committee.............................................. 2 SECTION 1.7. Corporation............................................ 2 SECTION 1.8. Credited Years of Service.............................. 2 SECTION 1.9. Determination Date..................................... 2 SECTION 1.10. Earnings............................................... 3 SECTION 1.11. Employee............................................... 3 SECTION 1.12. Final Average Earnings................................. 3 SECTION 1.13. Normal Retirement Date................................. 4 SECTION 1.14. Participant............................................ 4 SECTION 1.15. Plan................................................... 4 SECTION 1.16. Plan Year.............................................. 4 SECTION 1.17. Primary Social Security Benefit........................ 4 SECTION 1.18. Projected Accrued Benefit.............................. 4 SECTION 1.19. Projected Earnings..................................... 4 SECTION 1.20. Projected Final Average Earnings....................... 5 SECTION 1.21. Projected Primary Social Security Benefit............................................. 5 SECTION 1.22. Projected Total Retirement Benefit..................... 5 SECTION 1.23. Projected Years of Service............................. 5 SECTION 1.24. Retirement Plan........................................ 5 SECTION 1.25. Supplemental Account Balance........................... 5 SECTION 1.26. Supplemental Retirement Benefit........................ 5 SECTION 1.27. Total Retirement Benefit............................... 6 SECTION 1.28. Valuation Date......................................... 7 ARTICLE II PARTICIPATION................................................. 7 ARTICLE III BENEFITS...................................................... 7 SECTION 3.1. Benefit Amount......................................... 7 SECTION 3.2. Supplemental Account Balance at December 31, 1993................................... 7 SECTION 3.3. Redetermination of Supplemental Account Balance on or Before Normal Retirement Date..................................... 8 SECTION 3.4. Determination of Supplemental Account Balance After Normal Retirement Date................... 9 SECTION 3.5. Monthly Allocation Date................................ 10 SECTION 3.6. Reduction of Supplemental Account Balance................................................ 10 ARTICLE IV PAYMENT OF BENEFITS........................................... 10 i 22
ARTICLE V CLAIMS........................................................ 11 ARTICLE VI AMENDMENT AND TERMINATION..................................... 12 ARTICLE VII ADMINISTRATION................................................ 12 ARTICLE VIII MISCELLANEOUS................................................. 12 ARTICLE IX CHANGE OF CONTROL............................................. 13 ii 23
SECOND RESTATEMENT OF TRUSTCO BANK SUPPLEMENTAL RETIREMENT PLAN WHEREAS, Trustco Bank, National Association, a New York corporation (the "Corporation") established effective as of November 21, 1989, the Trustco Bank Supplemental Retirement Plan (the "Plan"); and WHEREAS, the Corporation desires to amend and restate the Plan effective as of January 1, 1996; NOW, THEREFORE, effective as of January 1, 1996, the Plan is hereby amended and restated in its entirety so that it shall read as follows: ARTICLE I DEFINITIONS Except as otherwise specified herein, all capitalized terms shall have the same meanings as such terms have under the Retirement Plan of Trustco Bank, National Association. SECTION 1.1. "Actuarial Equivalent" means equality in value of the aggregate amounts expected to be received under different forms of payment, based on the UP-1984 Mortality Table, with 7 1/2% interest. When determining the amount of a Participant's lump sum distribution or the present value of a Participant's Accrued Benefit under the Retirement Plan, the interest rates used to make an Actuarial Equivalent determination are the immediate and deferred annuity rates the Pension Benefit Guaranty Corporation ("PBGC") would use for a trusteed single employer plan to value a benefit upon termination of an insufficient trusteed single- employer plan. In the event of a distribution made during a calendar year, the applicable PBGC interest rates for the month of January preceding the distribution shall be used to make an Actuarial Equivalent determination. SECTION 1.2. "Board of Directors" means the Board of Directors of Trustco Bank, National Association. SECTION 1.3. "Cause" means conduct of a Participant which is finally adjudged to be knowingly fraudulent, deliberately dishonest or willful misconduct. The Committee shall have sole and uncontrolled discretion with respect to the application of the provisions of this Section 1.3 and any determination shall be conclusive and binding upon the Participant and all other persons. SECTION 1.4. "Change in Control" means any of the following events: (a) any individual, corporation (other than the Corporation), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the 24
Securities Exchange Act of 1934, of securities of the Corporation possessing twenty percent (20%) or more of the voting power for the election of Directors of the Corporation; (b) there shall be consummated any consolidation, merger or other business combination involving the Corporation or the securities of the Corporation in which holders of voting securities of the Corporation immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of the Corporation (or, if the Corporation does not survive such transaction, voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the total voting power in an election of Directors of the Corporation (or such other surviving corporation); (c) during any period of two consecutive years, individuals who at the beginning of such period constitute the Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Corporation's shareholders, of each new Director of the Corporation was approved by a vote of at least two-thirds of the Directors of the Corporation then still in office who were Directors of the Corporation at the beginning of any such period; (d) removal by the stockholders of all or any of the incumbent Directors of the Corporation other than a removal for Cause; or (e) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Corporation (on a consolidated basis) to a party which is not controlled by or under common control with the Corporation. SECTION 1.5. "Code" means the Internal Revenue Code of 1986, as amended. SECTION 1.6. "Committee" means the committee appointed by the Board of Directors to administer the Plan. SECTION 1.7. "Corporation" means Trustco Bank, National Association. SECTION 1.8. "Credited Years of Service" means (i) as of a Determination Date, a Participant's Years of Benefit Service, as calculated under the Retirement Plan without taking into account the maximum limit on Years of Benefit Service set forth in the Retirement Plan, and (ii) as of a Participant's Normal Retirement Date, a Participant's Years of Benefit Service, as calculated under the Retirement Plan without taking into account the maximum limit on Years of Benefit Service set forth in the Retirement Plan, plus the number of Plan Years (and fractions thereof) from the Determination Date to his Normal Retirement Date. SECTION 1.9. "Determination Date" means the date of termination of employment or the date the Corporation elects to distribute the present value of the Supplemental Retirement Benefit of the Participant or Beneficiary in a single lump sum. 25
SECTION 1.10. "Earnings" means the calendar year earned income, wages, salaries, and fees for professional services, and other amounts received for personal services actually rendered in the course of employment with the Corporation (including, but not limited to, commissions paid to salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses, and amounts paid under the Trustco Bank Executive Officer Incentive Plan and the Trustco Bank Executive Incentive Plan) paid or accrued to a Participant by the Company and excluding the following: (a) contributions by the Corporation to a plan of deferred compensation which are not included in a Participant's gross income for the taxable years in which contributed or contributions by the Corporation under a simplified employee pension plan to the extent the contributions are deductible by the Participant, or any distributions from a plan of deferred compensation; (b) amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by a Participant either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; (d) other amounts which received special tax benefits, or contributions made by the Corporation (whether or not under a salary reduction agreement) toward the purchase of an annuity described in Code Section 403(b) (whether or not the amounts are actually excludable from the gross income of a Participant); and (e) amounts paid from any supplemental retirement plan maintained by the Corporation. Earnings includes any amounts contributed by the Corporation or any related employer on behalf of a Participant pursuant to a salary reduction agreement which are not includable in the gross income of a Participant pursuant to Code Section 125, 401(a)(8), 401(k), 402(h) or 403(b). SECTION 1.11. "Employee" means any person, except Robert A. McCormick, who is employed as an executive officer by the Corporation or any of its subsidiaries. SECTION 1.12. "Final Average Earnings" as of any Determination Date shall be equal to the average of a Participant's highest five (5) consecutive Plan Years of Earnings out of the ten (10) consecutive Plan Years immediately preceding the Determination Date. 26
Provided, however, if a Participant's Earnings for the Plan Year in which his employment with the Corporation terminates for any reason is greater than his Earnings during the first Plan Year of the averaging period to be used, the first Plan Year Earnings shall be disregarded and the Earnings of the Participant during the Plan Year in which his employment terminates shall be taken into account. SECTION 1.13. "Normal Retirement Date" means the first day of the month coinciding with or next following the month in which a Participant attains age 65. SECTION 1.14. "Participant" means any Employee who is selected by the Board of Directors for participation in the Plan as provided in Article II. SECTION 1.15. "Plan" means the Trustco Bank Supplemental Retirement Plan as set forth herein and as the same may be amended from time to time. SECTION 1.16. "Plan Year" means the twelve (12) month period beginning on any January 1 and ending on the following December 31. SECTION 1.17. "Primary Social Security Benefit" means the annual amount that would be available to a Participant at social security retirement age under the provisions of Title II of the Social Security Act without regard to any changes in the wage base or benefit levels that take effect after that date, based on the assumption that he will continue to receive until social security retirement age compensation which would be treated as wages for purposes of the Social Security Act at the same rate as he received such compensation at the time of retirement, death, disability or termination of employment if such event precedes his attainment of social security retirement age. SECTION 1.18. "Projected Accrued Benefit" under the Retirement Plan means the Participant's Accrued Benefit under the Retirement Plan as of his Normal Retirement Date, based on Projected Earnings, Projected Final Average Earnings, Projected Primary Social Security Benefit, and Projected Years of Service. SECTION 1.19. "Projected Earnings" means the estimated annual earnings of a Participant for a future Plan Year and is equal to Earnings, excluding bonus, for the year ending on the Valuation Date increased by (a) the assumed future bonus payments, and (b) the assumed future cost of living increases for such year. 27
The rate of assumed future bonus payments and the rate of assumed future cost of living increases shall be determined as of each Valuation Date by the Committee. SECTION 1.20. "Projected Final Average Earnings" means the average of the highest five (5) consecutive Plan Year's Projected Earnings out of the ten (10) consecutive Plan Years immediately preceding the Normal Retirement Date. If the Participant is within ten (10) years of his Normal Retirement Date, his actual Earnings, including bonuses, will be used for any Plan Year prior to the Valuation Date. Provided, however, if the Participant's Earnings for the Plan Year in which his employment with the Corporation terminates for any reason is greater than his Earnings during the first Plan Year of the averaging period to be used, the first Plan Year Earnings shall be disregarded and the Earnings of the Participant during the Plan Year in which his employment terminates shall be taken into account. SECTION 1.21. "Projected Primary Social Security Benefit" means the Participant's estimated Primary Social Security Benefit as of the January 1st of the year during which he attains the Social Security retirement age assuming that the Social Security wage base and the Social Security cost of living increases are equal to the assumed future cost of living increases used for projecting earnings. SECTION 1.22. "Projected Total Retirement Benefit" means the Total Retirement Benefit of a Participant as of his Normal Retirement Date, based on Projected Earnings, Projected Final Average Earnings, Projected Primary Social Security Benefits, and Projected Years of Service. SECTION 1.23. "Projected Years of Service" means the completed Credited Years of Service at the Participant's Normal Retirement Date assuming the Participant continues to work forty (40) hours per week from the Valuation Date to his Normal Retirement Date. SECTION 1.24. "Retirement Plan" means the Retirement Plan of Trustco Bank, National Association. SECTION 1.25. "Supplemental Account Balance" means a bookkeeping account maintained by the Corporation which reflects a Participant's benefit under the Plan as calculated under Article III herein. SECTION 1.26. "Supplemental Retirement Benefit" means the benefit calculated in accordance with Article III of the Plan. 28
SECTION 1.27. "Total Retirement Benefit" for an individual who is a Participant in the Plan on December 31, 1993 means, as of any Determination Date, the greatest of the following formulas: (a) A career average pension equal to, for each year of employment: (i) 1.1% of the first $5,000 of Earnings, plus, (ii) 2.0% of Earnings in excess of $5,000, or (b) A pension equal to: (i) 1% times Final Average Earnings times Credited Years of Service at Normal Retirement Date up to a maximum of 40 years, times (ii) Credited Years of Service as of the Determination Date divided by Credited Years of Service at Normal Retirement Date, or (c) A pension equal to: (i) 2% times Final Average Earnings times Credited Years of Service at Normal Retirement Date up to a maximum of 40 years, less (ii) 2% times the Primary Social Security Benefit times Credited Years of Service at Normal Retirement Date up to a maximum of 25 years, times (iii) Credited Years of Service at the Determination Date divided by Credited Years of Service at Normal Retirement Date, or (d) A pension equal to: (i) the Accrued Benefit under the Retirement Plan as of December 31, 1988 which is not limited by the maximum benefit limit under Code Section 415 and the maximum compensation limit under Code Section 401(a)(17), plus (ii) 1.25% times Final Average Earnings times credited Years of Service after January 1, 1989 up to a maximum of X years at the Determination Date, plus (iii) .65% times Final Average Earnings in excess of the Covered Compensation level times Credited Years of Service after January 1, 1989 up to a maximum of X years at the Determination Date. 29
For purposes of subparagraphs (ii) and (iii), X is equal to 40 years minus the Credited Years of service at January 1, 1989. For an individual who becomes a Participant in the Plan on or after January 1, 1994, "Total Retirement Benefit" means the formula described in subparagraph (d) of this Section 1.27. SECTION 1.28. "Valuation Date" means December 31 of each year. ARTICLE II PARTICIPATION SECTION 2.1. Participation in the Plan shall be limited to a select group of Employees of the Corporation and its subsidiaries who are management or highly compensated Employees within the meaning of Section 201(2) of the Employee Retirement Income Security Act of 1974, as amended, and who have been selected by the Board of Directors to participate in the Plan; provided, however, that Robert A. McCormick shall not be a Participant in the Plan. SECTION 2.2. Each Employee selected by the Board of Directors to participate in the Plan shall indicate his agreement to the terms of the Plan by executing a Participation Agreement, a form of which is attached hereto as Exhibit A. Subject to Article VI, an Employee and the Corporation may agree to vary the terms of the Plan as to such Employee. ARTICLE III BENEFITS SECTION 3.1. Benefit Amount. Except in the case of termination for Cause, in which event no benefit shall be payable under the Plan, if a Participant's employment with the Corporation and all of its subsidiaries is terminated (a) by death or Disability, (b) after the Participant has completed five (5) years of Vesting Service, or (c) after the Participant has satisfied the requirements for early retirement under the Retirement Plan, the Participant will be entitled to a benefit in an amount equal to his Supplemental Account Balance payable at such time and in such manner as provided herein. SECTION 3.2. Supplemental Account Balance at December 31, 1993. The Participant's Supplemental Account Balance at December 31, 1993, is equal to the lump sum Actuarial Equivalent of the Participant's Supplemental Retirement Benefit payable under the provisions of the Plan in effect on December 31, 1993. The Actuarial Equivalent shall be determined based on the annual Supplemental Retirement Benefit beginning on the Participant's Normal Retirement Date but based on his Final Average Earnings and Credited Years of Service as of December 31, 1993. 30
SECTION 3.3. Redetermination of Supplemental Account Balance on or Before Normal Retirement Date. The Participant's Supplemental Account Balance shall be redetermined on each Valuation Date and on his Normal Retirement Date. (a) The Supplemental Account Balance on any Valuation Date after December 31, 1993 is equal to: (i) the Supplemental Account Balance as of the immediately preceding Valuation Date, plus (ii) the Account Balance Increment for the Plan Year ending on the Valuation Date; less (iii) the amount of his Supplemental Retirement Benefit distributed under the Plan pursuant to Section 4.4, or its successor, since the immediately preceding Valuation Date. (b) (1) The Account Balance Increment for the Plan Year ending December 31, 1994 shall be determined as of January 1, 1994 and is equal to: (i) the projected Supplemental Account Balance at Normal Retirement Date, measured as of December 31, 1993, minus (ii) the accrued pension expense as determined by the Retirement Plan actuary under the Statement of Financial Accounting Standards No. 87 as of December 31, 1993, divided by (iii) the number of years and months from December 31, 1993 to the Participant's Normal Retirement Date, minus (iv) the Supplemental Account Balance as of December 31, 1993, plus (v) the accrued pension expense as determined by the Retirement Plan actuary under the Statement of Financial Accounting Standards No. 87 as of December 31, 1993. Notwithstanding the above, no Account Balance Increment for the Plan Year ending December 31, 1994 shall be less than zero. (2) The Account Balance Increment for any Plan Year beginning on and after January 1, 1995 and through the Plan Year in which a Participant's Normal Retirement Date 31
occurs shall be determined on the immediately preceding Valuation Date and is equal to: (i) the projected Supplemental Account Balance at Normal Retirement Date, measured as of the immediately preceding Valuation Date, minus (ii) the Supplemental Account Balance as of the immediately preceding Valuation Date, divided by (iii) the number of years and months from the immediately preceding Valuation Date to the Participant's Normal Retirement Date. Notwithstanding the above, no Account Balance Increment for any Plan Year beginning on and after January 1, 1995 shall be less than zero. A portion of the Account Balance Increment constitutes interest which is determined by using the Pension Benefit Guaranty Corporation interest rate in effect as of the first day of the applicable Plan Year. (c) The Participant's projected Supplemental Account Balance at Normal Retirement Date is equal to the lump sum Actuarial Equivalent of: (i) his Projected Total Retirement Benefit, less (ii) the amount of his Projected Accrued Benefit under the Retirement Plan; less (iii) the amount of his Supplemental Retirement Benefit previously distributed under the Plan pursuant to Section 4.4, or its successor. SECTION 3.4. Determination of Supplemental Account Balance After Normal Retirement Date. If a Participant remains in the employment of the Corporation beyond his Normal Retirement Date, his Supplemental Account Balance shall be increased as of each Valuation Date subsequent to his Normal Retirement Date by an amount equal to: (a) the interest on the Supplemental Account Balance as of the immediately preceding Valuation Date (adjusted for any distributions made to the Participant in accordance with Section 4.4 since the immediately preceding Valuation Date) at the Pension Benefit Guaranty Corporation interest rate in effect on the Valuation Date, plus 32
(b) the same percentage of Earnings as is allocated as of such Valuation Date to participants under the Profit Sharing Plan of Trustco Bank, National Association. For the Valuation Date immediately following the Participant's Normal Retirement Date, his Account Balance Increment shall be the greater of the amount determined under Section 3.3 or the amount determined under this Section 3.4. SECTION 3.5. Monthly Allocation Date. The Supplemental Account Balance on the last day of any month during the Plan Year (the "Monthly Allocation Date") shall be equal to: (a) the Supplemental Account Balance as of the immediately preceding Valuation Date, plus (b) the Account Balance Increment, times the quotient of the number of months from the immediately preceding Valuation Date to the Monthly Allocation Date, divided by 12. SECTION 3.6. Reduction of Supplemental Account Balance. A Participant's Supplemental Account Balance will be reduced by the amount of any distribution made to the Participant pursuant to Sections 4.3 or 4.4. ARTICLE IV PAYMENT OF BENEFITS SECTION 4.1. Except in the case of termination for Cause, in which event no benefit shall be payable under the Plan, and except as otherwise provided in Sections 4.2 and 9.1, if a Participant's employment with the Corporation and all of its subsidiaries is terminated (a) after the Participant has completed five (5) years of Vesting Service, or (b) after the Participant has satisfied the requirements for early retirement under the Retirement Plan, the Participant will be entitled to his Supplemental Account Balance determined at the next Monthly Allocation Date. SECTION 4.2. If a Participant's employment with the Corporation or one of its subsidiaries is terminated (a) by retirement, (b) by disability, or (c) by death, the Participant or his Beneficiary will be entitled to his Supplemental Account Balance determined at the next Valuation Date. SECTION 4.3. The Supplemental Account Balance shall commence to be paid to a Participant or his Beneficiary at such time as benefits become payable to the Participant under the Retirement Plan. The Supplemental Account Balance may be paid in any one of the benefit forms provided under the Retirement Plan or in one lump sum or a series of installments, as elected by the Participant or his Beneficiary. 33
SECTION 4.4. Notwithstanding Section 4.3, the Corporation, in its discretion, may at any time elect to distribute to a Participant or his Beneficiary a single lump sum equal to the Supplemental Account Balance as of a date specified by the Corporation. The Actuarial Equivalent of any single lump sum distribution will be included in the amount offset under Section 3.3(c)(iii). SECTION 4.5. Notwithstanding Section 4.3, if a Participant's employment with the Corporation or one of its subsidiaries is terminated for any reason, the Corporation, upon the petition of the Participant, may pay to the Participant an amount equal to the Participant's Supplemental Account Balance. The Corporation will not unreasonably withhold its consent to a Participant's petition under this Section 4.5. SECTION 4.6. Notwithstanding Section 4.3, if a Participant becomes disabled and petitions the Corporation after demonstrating a financial hardship as a result of such disability, the Corporation will pay to the Participant an amount equal to the Participant's Supplemental Account Balance. In the event the Participant is so disabled as to be unable to care for his own affairs, the Participant's duly qualified guardian or other legal representative may petition the Corporation on the Participant's behalf. The Committee will have the sole discretion to determine financial hardship for purposes of this Section 4.6. SECTION 4.7. In the event that the Internal Revenue Service determines that all or a portion of the benefits payable under the Plan will be subject to federal income tax prior to distribution of such benefits, the Corporation will distribute to the Participant that portion of his benefit on which federal income tax is being imposed. ARTICLE V CLAIMS SECTION 5.1. If a claim for benefits under the Plan is denied, the Committee will provide a written notice of the denial setting forth the specific reasons for the denial, a description of any additional material or information necessary for a claimant to perfect a claim, and an explanation of why such material or information is necessary and appropriate information as to the steps to be taken for the claim to be submitted for review. A claimant may request a review of a denial. Such requests should be submitted to the Committee, in writing within 60 days after receipt of the denial notice, stating the reasons for requesting the review. A claimant may review pertinent documents and submit issues and comments in writing. A decision will be made on the review of the denial of a claim not later than 60 days after the Committee's receipt of a request for review unless special circumstances require an extension of time for processing, in which 34
case a decision shall be rendered as soon as possible but not later than 120 days after receipt of a request for review. The decision on review will be in writing to the claimant and shall include specific reasons for the decision. ARTICLE VI AMENDMENT AND TERMINATION SECTION 6.1. The Board of Directors may amend or terminate the Plan at any time; provided, however, that no such amendment or termination shall have the effect of reducing a Participant's benefit accrued under the Plan as of the date of such amendment or termination and the Participant shall be entitled to receive such benefit as provided in Article III. ARTICLE VII ADMINISTRATION SECTION 7.1. The Plan shall be administered by the Committee in accordance with its terms, for the exclusive benefit of Participants. The powers and duties of the Committee shall be similar to those powers and duties granted to the Plan Administrator of the Retirement Plan. Any interpretation or construction of Plan terms or any determination by the Committee with respect to Plan benefits, etc., shall be conclusive and binding with respect to Participants and all other persons. ARTICLE VIII MISCELLANEOUS SECTION 8.1. The Company intends that the Plan constitute an unfunded plan maintained for the purposes of providing deferred compensation for a select group of management or highly compensated employees. SECTION 8.2. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall give the Participant the right to be retained in the employ of the Corporation or its subsidiaries or interfere with the right of the Corporation or its subsidiaries to discharge the Participant at any time, nor shall it give the Corporation or its subsidiaries the right to require the Participant to remain in their employ or interfere with the Participant's right to terminate his employment at any time. SECTION 8.3. No benefit payable at any time under this Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment or encumbrance of any kind. SECTION 8.4. All rights hereunder shall be governed by and construed according to the laws of the State of New York, except to the extent such laws are preempted by the laws of the United States 35
of America. In the event any provision of this Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. SECTION 8.5. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind or a fiduciary relationship between the Corporation or its subsidiaries and the Participant or any other person. To the extent that any person acquires the right to receive payment from the Corporation under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Corporation. SECTION 8.6. The terms of this Plan shall be binding upon and inure to the benefit of the Corporation, its successors and assigns, and the Participant and his heirs and legal representatives. SECTION 8.7. If a Participant becomes entitled to a distribution of benefits under the Plan, and if at such time the Participant has outstanding any debt, obligation, or other liability representing an amount owing to the Corporation or its subsidiaries, then the Corporation may offset such amount so owing against the amount of benefits otherwise distributable. Such determination shall be made by the Committee. SECTION 8.8. The Corporation shall, to the extent permitted by law, have the right to deduct from any payments of any kind with respect to the benefit otherwise due to the Participant any Federal, state or local taxes of any kind required by law to be withheld from such payments. SECTION 8.9. All expenses (including, without limitation, legal fees and expenses) incurred by a Participant in connection with, or in prosecuting or defending, any claim or controversy arising out of or relating to the Plan shall be paid by the Corporation. ARTICLE IX CHANGE OF CONTROL SECTION 9.1. Notwithstanding Section 4.3, in the event a Participant's employment with the Corporation or one of its subsidiaries is terminated for any reason within one year prior to, or at any time after, a Change in Control, the Corporation will pay to the Participant or his Beneficiary a single lump sum equal to his Supplemental Account Balance. In the event of a hostile Change in Control, the Corporation will pay to the Participant or his Beneficiary within 10 days after such hostile Change in Control, a single lump sum equal to his Supplemental Account Balance. For purposes of this Section 9.1, a hostile Change in Control is 36
defined as a transaction which the executive officers of the Corporation unanimously determine is a hostile Change of Control. IN WITNESS WHEREOF, the Corporation has caused this Second Restatement of the Plan to be executed this 29 day of March , 1996. TRUSTCO BANK, NATIONAL ASSOCIATION By: /s/William F. Terry ----------------------- William F. Terry Sr. V.P. & Secretary 37
EXHIBIT A TRUSTCO BANK SUPPLEMENTAL RETIREMENT PLAN PARTICIPATION AGREEMENT THIS AGREEMENT is made as of March 29, 1996 between Trustco Bank, National Association ("Corporation") and William F. Terry ("Participant"). The Corporation and the Participant mutually agree as follows: 1. The Participant has received a copy of the Trustco Bank Supplemental Retirement Plan ("Plan") and has read and understands the Plan. 2. By completion of this Agreement, the Participant agrees to comply with the terms of the Plan in all respects. 3. All provisions of the Plan are hereby made a part of this Agreement. 4. The following special provisions are applicable to the Participant's participation in the Plan: __________________________________ ____________________________________________________________________________ ____________________________________________________________________________ TRUSTCO BANK, NATIONAL ASSOCIATION 3/29/96 By: /s/Robert A. McCormick Date ------------------------ Robert A. McCormick Title: President 4/2/96 /s/William F. Terry Date ------------------- William F. Terry Participant 38
EXHIBIT A TRUSTCO BANK SUPPLEMENTAL RETIREMENT PLAN PARTICIPATION AGREEMENT THIS AGREEMENT is made as of March 29, 1996 between Trustco Bank, National Association ("Corporation") and Nancy A. McNamaara ("Participant"). The Corporation and the Participant mutually agree as follows: 1. The Participant has received a copy of the Trustco Bank Supplemental Retirement Plan ("Plan") and has read and understands the Plan. 2. By completion of this Agreement, the Participant agrees to comply with the terms of the Plan in all respects. 3. All provisions of the Plan are hereby made a part of this Agreement. 4. The following special provisions are applicable to the Participant's participation in the Plan: __________________________________ ____________________________________________________________________________ ____________________________________________________________________________ TRUSTCO BANK, NATIONAL ASSOCIATION 3/29/96 By: /s/William F. Terry Date --------------------- William F. Terry Title: Sr. V.P. & Secretary 4/8/96 /s/Nancy A. McNamara Date ------------------- Nancy A. McNamara Participant 39
EXHIBIT A TRUSTCO BANK SUPPLEMENTAL RETIREMENT PLAN PARTICIPATION AGREEMENT THIS AGREEMENT is made as of March 29, 1996 between Trustco Bank, National Association ("Corporation") and Ralph A. Pidgeon ("Participant"). The Corporation and the Participant mutually agree as follows: 1. The Participant has received a copy of the Trustco Bank Supplemental Retirement Plan ("Plan") and has read and understands the Plan. 2. By completion of this Agreement, the Participant agrees to comply with the terms of the Plan in all respects. 3. All provisions of the Plan are hereby made a part of this Agreement. 4. The following special provisions are applicable to the Participant's participation in the Plan: __________________________________ ____________________________________________________________________________ ____________________________________________________________________________ TRUSTCO BANK, NATIONAL ASSOCIATION 3/29/96 By: /s/William F. Terry Date --------------------- William F. Terry Title: Sr. V.P. & Secretary 4/2/96 /s/Ralph A. Pidgeon Date ------------------- Ralph A. Pidgeon Participant 40
EXHIBIT A TRUSTCO BANK SUPPLEMENTAL RETIREMENT PLAN PARTICIPATION AGREEMENT THIS AGREEMENT is made as of March 29, 1996 between Trustco Bank, National Association ("Corporation") and Robert T. Cushing ("Participant"). The Corporation and the Participant mutually agree as follows: 1. The Participant has received a copy of the Trustco Bank Supplemental Retirement Plan ("Plan") and has read and understands the Plan. 2. By completion of this Agreement, the Participant agrees to comply with the terms of the Plan in all respects. 3. All provisions of the Plan are hereby made a part of this Agreement. 4. The following special provisions are applicable to the Participant's participation in the Plan: Five year vesting requirement eliminated in the event of a change of control. TRUSTCO BANK, NATIONAL ASSOCIATION 3/29/96 By: /s/William F. Terry Date --------------------- William F. Terry Title: Sr. V.P. & Secretary 4/2/96 /s/Robert T. Cushing Date ------------------- Robert T. Cushing Participant 41
RESTATEMENT OF TRUSTCO BANK EXECUTIVE OFFICER INCENTIVE PLAN 42
TABLE OF CONTENTS Page No. ARTICLE I, DEFINITIONS 1 ARTICLE II, PARTICIPATION 5 ARTICLE III, INCENTIVE AWARDS 6 ARTICLE IV, DEFERRAL OF INCENTIVE AWARDS 7 ARTICLE V, PAYMENT OF DEFERRED INCENTIVE AWARDS 8 ARTICLE VI, CLAIMS 9 ARTICLE VII, AMENDMENT AND TERMINATION 10 ARTICLE VIII, ADMINISTRATION 10 ARTICLE IX, MISCELLANEOUS 10 43
RESTATEMENT OF TRUSTCO BANK EXECUTIVE OFFICER INCENTIVE PLAN WHEREAS, Trustco Bank, National Association (herein referred to as the "Corporation") maintains the Trustco Bank Executive Officer Incentive Plan (herein referred to as the "Plan"); and WHEREAS, the Corporation desires to amend the Plan and to restate the Plan in its entirety effective as of January 1, 1996; NOW, THEREFORE, the Company does hereby amend and restate the Plan in its entirety effective as of January 1, 1996, so that it shall read as follows: ARTICLE I DEFINITIONS Section 1.1. "Base Salary" means the annual salary payable to a Participant, including deferrals under Code Section 125 and exclusive of any bonuses, incentive awards, plan contributions or any other fringe benefit payable during the Plan Year. Section 1.2. "Beneficiary" means the person or persons designated by a Participant in writing to receive any benefits under this Plan upon the Participant's death. If a Participant fails to designate a Beneficiary, if no such Beneficiary is living upon the death of such Participant, or if such designation is legally ineffective, then "Beneficiary" shall mean the trustee of the Participant's revocable living trust, and if none the trustee of the Participant's testamentary trust, and if none the personal representative of the Participant's estate. 44
Section 1.3. "Board of Directors" means the Board of Directors of Trustco Bank, National Association. Section 1.4. "Cause" means conduct of a Participant which is finally adjudged to be knowingly fraudulent, deliberately dishonest or willful misconduct. The Committee shall have sole and uncontrolled discretion with respect to the application of the provisions of this Section 1.4 and any determination shall be conclusive and binding upon the Participant and all other persons. Section 1.5. "Change in Control" means any of the following events: (a) any individual, corporation (other than the Corporation), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, of securities of the Corporation possessing twenty percent (20%) or more of the voting power for the election of Directors of the Corporation; (b) there shall be consummated any consolidation, merger or other business combination involving the Corporation or the securities of the Corporation in which holders of voting securities of the Corporation immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of the Corporation (or, if the Corporation does not survive such transaction, voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the total voting power in an election of Directors of the Corporation (or such other surviving corporation); 45
(c) during any period of two consecutive years, individuals who at the beginning of such period constitute the Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Corporation's shareholders, of each new Director of the Corporation was approved by a vote of at least two-thirds of the Directors of the Corporation then still in office who were Directors of the Corporation at the beginning of any such period; (d) removal by the stockholders of all or any of the incumbent Directors of the Corporation other than a removal for Cause; or (e) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Corporation (on a consolidated basis) to a party which is not controlled by or under common control with the Corporation. Section 1.6. "Code" means the Internal Revenue Code of 1986, as amended. Section 1.7. "Committee" means the committee appointed by the Board of Directors to administer the Plan. Section 1.8. "Corporation" means Trustco Bank, National Association. Section 1.9. "Deferred Compensation Account" means the bookkeeping account established for each Participant pursuant to Section 4.2 herein. Section 1.10. "Incentive Award" means the awards made pursuant to Section 3.1 herein. 46
Section 1.11. "Net Income" means net income of the Corporation exclusive of any related restructure charges directly in conjunction with a merger or acquisition. Section 1.12. "Participant" means any executive officer of the Corporation who is approved by the Board of Directors for participation in the Plan as provided in Article II. Section 1.13. "Plan" means the Trustco Bank Executive Officer Incentive Plan as set forth herein and as the same may be amended from time to time. Section 1.14. "Plan Year" means the twelve (12) month period beginning on any January 1 and ending on the following December 31. Section 1.15. "Retirement" means termination on or after the earliest retirement date specified in the Retirement Plan of Trustco Bank, National Association. Section 1.16. "Return on Equity" means Net Income divided by the sum of Total Shareholder Equity plus or minus mark-to-market adjustments for securities minus any equity transaction directly in conjunction with a merger or acquisition. Section 1.17. "Total and Permanent Disability" has the same meaning as defined in the Retirement Plan of Trustco Bank, National Association. Section 1.18. "Total Shareholder Equity" means total equity of the Corporation exclusive of any equity transactions directly in conjunction with a merger or acquisition. 47
ARTICLE II PARTICIPATION Section 2.1. Prior to each Plan Year, the Chief Executive Officer of the Corporation will present to the Board of Directors a list of the executive officer positions recommended for participation in the Plan for the Plan Year. The Board of Directors shall act upon these recommendations and inform executive officers of their selection prior to the beginning of the Plan Year. Section 2.2. Subject to the provisions of Sections 2.3, 2.4, 2.5 and 2.6 herein, individuals assigned to a position designated for participation in the Plan during the course of a Plan Year will be eligible for receipt of Incentive Awards even if they are in such positions only part of the Plan Year. The Incentive Award to such Participants will be prorated based upon the number of full calendar months of service in the participating position. A Participant shall be one hundred percent (100%) vested at all times in each Incentive Award made to such Participant. Section 2.3. A Participant who terminates employment due to Total and Permanent Disability or Retirement will be entitled to an Incentive Award for the Plan Year based upon the portion of the Base Salary actually paid to such Participant during the Plan Year in which he terminates. Section 2.4. A Participant who dies prior to the end of the Plan Year will be entitled to an Incentive Award for the Plan Year as calculated under Section 3.1 herein. 48
Section 2.5. A Participant who terminates employment prior to the end of a Plan Year for reasons other than death, Total and Permanent Disability or Retirement, will cease to be a Participant in the Plan as of the date of termination of employment and will forfeit all rights to Incentive Awards accrued during the Plan Year in which the termination of employment occurs. Section 2.6. A Participant who terminates employment within two (2) years after a Change in Control will be entitled to an Incentive Award for the Plan Year based upon the portion of the Base Salary actually paid to such Participant during the Plan Year in which he terminates. ARTICLE III INCENTIVE AWARDS Section 3.1. A Participant will be entitled to an Incentive Award for each Plan Year in which the Return on Equity of the Corporation equals or exceeds 14%. The Incentive Award will be an amount equal to his Base Salary multiplied by a bonus percentage based on the Corporation's Return on Equity as set forth in the following table: Return on Equity Bonus Percentage 14% 40% 15% 50% 16% 60% 17% 75% 18% 90% 19% 105% 20% 125% Section 3.2. The Incentive Award for a Plan Year will be determined by the Board of Directors following a report to the 49
Board of Directors made no earlier than the December meeting of the Board of Directors for the Plan Year. Section 3.3. Unless the Participant elects to defer receipt of his Incentive Award as provided in Article IV, Incentive Awards will be paid in cash to Participants as soon as practicable following the determination of the Incentive Awards by the Board of Directors. ARTICLE IV DEFERRAL OF INCENTIVE AWARDS Section 4.1. On or before December 31, a Participant may elect in writing to defer receipt of all or a specific part of the Incentive Award that the Participant may earn the following Plan Year. Such deferral election continues in effect from Plan Year to Plan Year unless the Participant amends or terminates his deferral election by written request. Any amendment or termination of a deferral election will first become effective for the Incentive Award earned during the Plan Year commencing after the receipt of such written request. Section 4.2. The Corporation will establish a Deferred Compensation Account for each Participant who elects to defer all or part of an Incentive Award for any Plan Year. Incentive Awards deferred by a Participant pursuant to this Article IV will be credited to his Deferred Compensation Account as of the date the Incentive Award would have been payable to the Participant but for his deferral election. Such Deferred Compensation Account will be for bookkeeping purposes only. The Corporation will not be 50
required to segregate assets or otherwise establish a trust with respect to Incentive Awards deferred pursuant to this Article IV. Section 4.3. A Participant's Deferred Compensation Account will be credited at the end of each calendar quarter with an amount calculated by multiplying the Participant's Deferred Compensation Account as of the first day of the calendar quarter by a rate equal to one-fourth of the greater of (i) six percent (6%), or (ii) the ten-year U.S. Treasury Bond rate on the last business day of the quarter. Section 4.4. In the event that the Internal Revenue Service determines that all or a portion of the benefits payable under the Plan will be subject to federal income tax prior to distribution of such benefits, the Corporation will distribute to the Participant that portion of his benefit on which federal income tax is being imposed. ARTICLE V PAYMENT OF DEFERRED INCENTIVE AWARDS Section 5.1. Upon termination of employment of a Participant due to Retirement, Total and Permanent Disability or any reason other than death, his Deferred Compensation Account will be payable to him or his Beneficiary in a single lump sum as soon as practicable following his termination of employment. Section 5.2. Upon the death of a Participant, his Deferred Compensation Account will be payable to his Beneficiary in a single lump sum on the first day of the Plan Year following his death. 51
ARTICLE VI CLAIMS Section 6.1. If a claim for benefits under the Plan is denied, the Committee will provide a written notice of the denial setting forth the specific reasons for the denial, a description of any additional material or information necessary for a claimant to perfect a claim, an explanation of why such material or information is necessary and appropriate information as to the steps to be taken for the claim to be submitted for review. A claimant may request a review of a denial. Such requests should be submitted to the Committee, in writing, within 60 days after receipt of the denial notice stating the reasons for requesting the review. A claimant may review pertinent documents and submit issues and comments in writing. A decision will be made on the review of the denial of a claim not later than 60 days after the Committee's receipt of a request for review unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible but not later than 120 days after receipt of a request for review, provided that the claimant is given written notice of the extension of time within the original 60 day period. The decision on review will be in writing to the claimant and shall include specific reasons for the decision. 52
ARTICLE VII AMENDMENT AND TERMINATION Section 7.1. The Board of Directors may amend or terminate the Plan at any time; provided, however, that no such amendment or termination may alter or impair any Participant's rights previously granted under the Plan as of the date of such amendment or termination without his consent. Section 7.2. In the event of Plan termination, a Participant's Deferred Compensation Account will not be paid to him until he dies or otherwise terminates his employment with the Corporation. ARTICLE VIII ADMINISTRATION Section 8.1. The Plan shall be administered by the Committee, in accordance with its terms, for the exclusive benefit of Participants. ARTICLE IX MISCELLANEOUS Section 9.1. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall give the Participant the right to be retained in the employ of the Corporation or interfere with the right of the Corporation to discharge the Participant at any time. Section 9.2. No benefit payable at any time under this Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment or encumbrance of any kind except by 53
will, by the laws of descent and distribution or by Beneficiary designation herein. Section 9.3. All rights hereunder shall be governed by and construed according to the laws of the State of New York, except to the extent such laws are preempted by the laws of the United States of America. In the event any provision of this Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. Section 9.4. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind or a fiduciary relationship between the Corporation and the Participant or any other person. To the extent that any person acquires the right to receive payment from the Corporation under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Corporation. Section 9.5. The terms of this Plan shall be binding upon and inure to the benefit of the Corporation, its successors and assigns, and the Participant and his heirs and legal representatives. Section 9.6. All expenses (including, without limitation, legal fees and expenses) incurred by a Participant in connection with, or in prosecuting or defending, any claim or controversy arising out of or relating to the Plan shall be paid by the Corporation. 54
IN WITNESS WHEREOF, the Corporation has caused this Restatement of the Plan to be executed on this 29th day of March, 1996. TRUSTCO BANK, NATIONAL ASSOCIATION By: /s/Robert A. McCormick ---------------------- Robert A. McCormick Title: President 55
<TABLE> Exhibit 11 TRUSTCO BANK CORP NY 1996 FORM 10-K Computation of Net Income Per Common Share Year Ended December 31, <CAPTION> 1996 1995 1994 ------------ ----------- -------- Primary (1) <S> <C> <C> <C> Net Income............................................. $28,699,000 25,527,000 22,888,000 ========== ========== ========== Weighted daily average number of common shares outstanding........................... 20,369,000 20,249,000 20,162,000 Weighted average common stock equivalents due to the dilutive effect of stock options when utilizing the Treasury stock method. Per share market price is based on the average per share market price for the period. 653,000 491,000 380,000 ------- ------- ------- Total weighted average common shares and common stock equivalents outstanding 21,022,000 20,740,000 20,542,000 ========== ========== ========== Net Income per common share........................... $ 1.37 1.23 1.11 ==== ==== ==== Assuming Full Dilution (1)(2) Net Income............................................. $28,699,000 25,527,000 22,888,000 ========== ========== ========== Weighted daily average number of common shares outstanding.................... 20,369,000 20,249,000 20,162,000 Weighted average common stock equivalents due to the dilutive effect of stock options when utilizing the Treasury stock method. Per share market price used is the greater of the average price for the period or the end of period market price per share....................... 768,000 661,000 423,000 ------- ------- ------- Total weighted average common shares and common stock equivalents outstanding......... 21,137,000 20,910,000 20,585,000 ========== ========== ========== Net Income per common share assuming full dilution $ 1.36 1.22 1.11 ==== ==== ==== <FN> Notes: (1)Daily average shares outstanding for all years have been adjusted to reflect a 15% stock split in 1996, 6 for 5 stock split in 1995, an a 10% stock dividend in 1994. (2)This calculation is submitted in accordance with Regulation S-K item 601(b) (11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. </FN> </TABLE> -56-
(FRONT COVER) TrustCo Bank Corp NY 1996 Annual Report 57
(INSIDE FRONT COVER) (BLANK)
58 TrustCo Bank Corp NY is a one bank holding company headquartered in Schenectady, New York. The Company is the largest commercial banking enterprise headquartered in the Capital Region of New York State. The principal subsidiary of the Company, Trustco Bank, National Association, operates 48 community banking offices, which include 30 drive-up windows and 25 ATMs, throughout the Banks business territory. The Bank serves 8 counties with a broad range of community banking services. <TABLE> Financial Highlights <CAPTION> (dollars in thousands, except per share data) Years ended December 31, Percent 1996 1995 Change Income: <S> <C> <C> <C> Net interest income (TE) $ 87,007 83,451 4.26% Net income 28,699 25,527 12.43 Per Share (1): Net income 1.37 1.23 11.38 Book value 7.97 7.89 1.01 Average Balances: Assets 2,220,535 2,073,391 7.10 Loans, net 1,227,407 1,187,929 3.32 Deposits 1,936,445 1,859,070 4.16 Shareholders' equity 155,927 145,469 7.19 Financial Ratios: Return on average assets 1.29% 1.23 4.88 Return on average equity (2) 19.05 18.03 5.66 Tier 1 capital to: Total average assets (leverage) 7.04 6.88 2.33 Risk-adjusted assets 12.99 12.45 4.34 Total capital to risk-adjusted assets 14.28 13.73 4.01 As a percentage of average loans: Loans charged off, net of recoveries 0.27 0.27 -- Provision for loan losses 0.54 1.07 (49.53) Allowance for loan losses as a coverage of nonperforming loans 3.7x 3.1x 19.35 Efficiency ratio 39.51% 42.52 7.08 Dividend payout ratio 70.38 69.55 1.19 </TABLE> <TABLE> Per share information of common stock (1) <CAPTION> Range of Stock Net Cash Book Price Income Dividend Value High Low 1995 <S> <C> <C> <C> <C> <C> First quarter $.29 .20 7.06 15.04 13.22 Second quarter .30 .20 7.29 15.76 14.31 Third quarter .32 .24 7.39 20.00 15.40 Fourth quarter .33 .24 7.89 19.57 18.48 1996 First quarter .32 .24 7.60 19.24 17.61 Second quarter .33 .24 7.54 19.35 16.74 Third quarter .36 .24 7.74 21.30 16.30 Fourth quarter .36 .28 7.97 22.61 20.00 <FN> (1) Adjusted for a 15% stock split in 1996 and a 6 for 5 stock split in 1995. (2) Excludes the market adjustment on securities available for sale. </FN> </TABLE> 59
Table of Contents Contents Financial Highlights................................................. 1 Executive and Senior Officers of Trustco Bank........................ 3 President's Message.................................................. 4 Management's Discussion and Analysis of Operations................... 6 Average Balances, Yields and Net Interest Margins.................... 12 Glossary of Terms.................................................... 25 Management's Statement of Responsibilities........................... 26 Independent Auditors' Report......................................... 27 Consolidated Financial Statements and Notes.......................... 28 Officers and Board of Directors...................................... 45 Officers............................................................. 46 Branch Locations..................................................... 47 General Information.................................................. 48 TrustCo Mission Statement: TrustCo will be the low cost provider of high quality services to our customers in the communities we serve and return to our owners an above average return on their investment. 60
Executive and Senior Officers of Trustco Bank 61
President's Message Dear Shareholder: 1996 was another record year at TrustCo. In the overall, our industry had a very successful year, and TrustCo was no exception, posting results that are competitive by any standards. We are grateful to our employees and Board of Directors for their strong support and enthusiasm, ensuring our consistent strong performance. During 1996, shareholder values continued in the right direction with net income at $28.7 million, up a significant 12.4% over 1995. TrustCo's most important ratio, return on shareholders' equity, was 19.05%, up from 18.03% in 1995. We are committed to insuring that return on equity compares favorably in any peer group, and we are comfortable that it does. TrustCo's five year ROE was 17.07% and we plan an increase to 20% for the current fiscal year. During 1996, we issued a 15% stock split maintaining the cash dividend level on the newly issued shares, effectively increasing dividend income for TrustCo owners by 15%. The quarterly cash dividend has increased at a 21% compound annual rate over the last five years, a major accomplishment. It is our intention to continue monitoring our internal generation of capital; should excess capital exist, we would recommend steps to the Board to correct that situation. These steps could include any measures that would return excess capital to TrustCo's owners. We note with sorrow the passing of Philip J. Thompson and the retirement of Charles W. Carl, Jr. Chuck served with distinction on our Board for 46 years. His counsel will be missed. During 1996 Anthony J. Marinello, M.D., joined the Boards of the Bank and Holding Company. TrustCo's branch expansion program continues, and we opened one additional branch during 1996. Our plans call for two to three branch openings a year until we have filled the gaps in our market territory. The targeted upgrading continues with each branch receiving a major review and renovation at approximately seven year intervals. During 1996, we evaluated and discussed a number of acquisition opportunities. Unfortunately, our discussions were not successful. Our approach to acquisitions is quite simple -- we are extremely careful to avoid damage to shareholder value in the existing TrustCo franchise. TrustCo's Affordable Housing Program, which was designed to assist with homeownership, continues to be a success in new markets. We consider this program a model for community reinvestment and one of the most effective in the state. 1996 was another year in which TrustCo avoided most of the industry difficulties while moving forward to new records. We intend to continue this "boring" path to the benefit of the owners, employees, and community for the foreseeable future. 1997 will provide income and growth success with emphasis continuing on the home equity loan, home equity credit line, and first mortgage products and our improved NOW and savings accounts on the deposit side. Our Trust department, which currently manages assets in excess of $950 million, has ambitious expectations, and is moving forward under the new management team. 1997 and beyond should benefit from the solid performance of the superb employee team here at TrustCo. For 1996 the often quoted efficiency ratio for our Company was below 40.00% at a time when most banking companies would like to see 60.00%. This level of performance efficiency will benefit us through reduced operating expense for years to come. 62
1996 was a year of significant asset growth from average assets of $2.07 billion to $2.22 billion, an increase of 7.1%, in a time of continuing deposit outflows from banks. This solid performance will provide us with investment opportunities going forward. Our loan portfolio continued to grow during 1996, increasing by 3.3%, with continued emphasis on the retail side of the product mix. The quality of the loan portfolio is excellent, and our allowance for loan loss has a coverage ratio 3.7 times nonperforming loans, an important area of reserve. Community needs have expanded and TrustCo has responded appropriately. TrustCo has provided employee and management participation in charitable and community organizations, and increased its corporate charitable contributions throughout the Capital District, and our Affordable Housing Program continues to grow. TrustCo continues to receive solid external comment. During 1996 we received favorable mention in the 1997 edition of America's Finest Companies as one of sixty-five of 16,000 public companies with an unbroken record of annual earnings and dividend increases since at least 1985. We are enthusiastic about TrustCo's future. It is the intention at every level in the Company to continue our past success into the future. Our products are tailored to the needs of our community, we have an unmatched employee team to deliver them, and a management style that can adapt to any change the marketplace may bring almost immediately. We expect the combination mentioned above and enthusiastic commitment of the Board of Directors will ensure our continuing success in the years ahead, whatever the banking environment. Sincerely, Robert A. McCormick, President and Chief Executive Officer 63
Management's Discussion and Analysis of Operations The financial review which follows will focus on the factors affecting the financial condition and results of operations of TrustCo Bank Corp NY (the "Company" or "TrustCo") and Trustco Bank, National Association (the "Bank" or "Trustco") during 1996 and, in summary form, the preceding two years. Net interest income and net interest margin are presented in this discussion on a taxable equivalent basis. Balances discussed are daily averages unless otherwise described. The consolidated financial statements and related notes and the quarterly reports to shareholders for 1996 should be read in conjunction with this review. Certain amounts in years prior to 1996 have been reclassified to conform with the 1996 presentation. All per share information has been adjusted for the 15% stock split in 1996. Overview TrustCo recorded net income of $28,699,000 or $1.37 per share for the year ended December 31, 1996, compared to $25,527,000 or $1.23 per share for the year ended December 31, 1995. This represents an increase of 12.4% in full year earnings and an 11.4% increase in per share results. During 1996 TrustCo achieved: - taxable equivalent net interest income of $87.0 million, an increase of 4.3% over 1995, - a reserve for loan losses that provides a coverage ratio of 3.7 times nonperforming loans. The allowance set aside for problem loans reached 4.15% of total loans at year end 1996, compared to 3.94% for 1995, - an efficiency ratio of only 39.51% for the year when the industry target is the attainment of a 60% efficiency ratio. TrustCo significantly outperformed this target level for 1994, 1995 and 1996, and - growth in average deposits, earning assets and total assets of $77.4 million, $142.6 million and $147.1 million, respectively. Asset/Liability Management TrustCo's objectives in managing its balance sheet are to monitor the sensitivity of net interest income in relation to actual or potential changes in interest rates, and to enhance profitability through strategies that promise sufficient reward for understood and controlled risk. The Company has established guidelines for liquidity to maintain adequate levels in light of loan and deposit demands. TrustCo does not engage in any high risk investing activities, nor does it invest in financial derivatives. The Company relies on traditional banking investment instruments and its large base of "core" deposits to help in asset/liability management. <TABLE> MIX OF AVERAGE EARNING ASSETS (dollars in thousands) <CAPTION> Components of 96-95 95-94 Total Earning Assets 1996 1995 1994 Change Change 1996 1995 1994 <S> <C> <C> <C> <C> <C> <C> <C> <C> Loans, net of unearned income $1,227,407 1,187,929 1,122,698 39,478 65,231 57.4% 59.6 58.9 Securities available for sale: U.S. Treasuries and agencies 409,590 255,244 269,378 154,346 (14,134) 19.2 12.8 14.1 States and political subdivisions 78,921 15,926 -- 62,995 15,926 3.7 0.8 -- Mortgage-backed securities 53,844 8,731 35,172 45,113 (26,441) 2.5 0.4 1.8 Other 38,564 21,179 28,430 17,385 (7,251) 1.8 1.1 1.5 Total securities available for sale 580,919 301,080 332,980 279,839 (31,900) 27.2 15.1 17.4 Investment securities: U.S. Treasuries and agencies -- 119,989 98,380 (119,989) 21,609 -- 6.0 5.1 States and political subdivisions -- 40,068 27,120 (40,068) 12,948 -- 2.0 1.4 Mortgage-backed securities -- 119,113 111,691 (119,113) 7,422 -- 6.0 5.8 Other -- 13,738 13,621 (13,738) 117 -- 0.7 0.7 Total investment securities -- 292,908 250,812 (292,908) 42,096 -- 14.7 13.0 Federal funds sold 328,500 212,323 203,878 116,177 8,445 15.4 10.6 10.7 Total earning assets $2,136,826 1,994,240 1,910,368 142,586 83,872 100.0% 100.0 100.0 </TABLE> 64
Earning Assets Average earning assets during 1996 were $2.14 billion,which is $142.6 million, or 7.1%, greater than the prior year. The increase in average earning assets reflected the following: - growth in funding sources (deposits and short-term borrowings) of $136.8 million, or 7.2%, over the 1995 average balance, and - the internal generation of capital retained by the Company of $10.5 million. Total average assets for 1996 were $2.22 billion, compared to $2.07 billion in 1995. The table, "Mix of Average Earning Assets" shows how the mix of the earning assets has changed over the last three years. While growth in earning assets is critical to improved profitability, changes in the mix can also have a significant impact on income levels. The most significant shift in the mix of earning assets between 1995 and 1996 was the increase in federal funds sold as a percentage of average earning assets. This shift in investment mix was taken by management to develop significant levels of liquidity during 1996 to take advantage in 1997 of reinvestment opportunities in the loan and securities portfolios. Loans: Average total loans increased $39.1 million, or 3.3%, during 1996. Interest income on the loan portfolio remained essentially unchanged in 1996 at $107.5 million. The increase in the average balances outstanding during 1996 was offset by a reduction in the average yield on the loan portfolio from 9.05% in 1995 to 8.76% in 1996. The steady growth of the loan portfolio as a component of the Company's assets, as well as the continued high quality of the portfolio, contributed significantly to the Company's superior operating results for 1996. Loan products related to residential real estate continued to exhibit significant growth during 1996. Average residential mortgage loans rose $68.3 million, or 9.6%, during 1996. TrustCo continued to outpace the competition by offering mortgage loan products with a quick credit decision, low closing costs, and no escrow requirement. <TABLE> Taxable Equivalent Net Interest Income (in millions) <CAPTION> <S> <C> 1994 $81.1 1995 83.5 1996 87.0 </TABLE> The overwhelming majority of TrustCo's real estate loans are secured by properties within the Bank's market area. Management's specific knowledge of local market conditions and trends enhances the quality of the loan portfolio. During 1996, management continued its established practice of retaining all new loans originated in the Bank's portfolio rather than packaging them for sale in the secondary mortgage market. The yield on the residential mortgage loan portfolio decreased from 8.41% in 1995 to 8.30% in 1996 due principally to the effect of new loan production. As a result of the increase in average balances, total interest income on residential mortgage loans increased by 8.2% to $65.0 million in 1996. <TABLE> Loan portfolio (dollars in thousands) Average Balances <CAPTION> 1996 1995 1994 1993 1992 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Residential $ 783,094 63.7% 714,804 60.1% 652,837 58.0% 555,317 52.9% 506,362 49.2% Commercial 224,949 18.3 237,165 19.9 237,994 21.2 255,265 24.4 287,524 27.9 Home equity line of credit 187,652 15.3 202,647 17.0 203,756 18.1 201,013 19.2 183,539 17.8 Installment 33,299 2.7 35,269 3.0 30,242 2.7 36,185 3.5 52,790 5.1 Total loans 1,228,994 100.0% 1,189,885 100.0% 1,124,829 100.0% 1,047,780 100.0% 1,030,215 100.0% Less: Unearned income 1,587 1,956 2,131 2,925 4,735 Allowance for loan losses 51,233 45,086 37,334 30,214 23,735 Net loans $1,176,174 1,142,843 1,085,364 1,014,641 1,001,745 </TABLE> 65
The average balance of commercial loans decreased by $12.2 million, from $237.2 million in 1995 to $224.9 million in 1996. In addition,the yield on this portfolio decreased by 15 basis points, thereby creating an overall reduction in interest income on commercial loans of $1.5 million. TrustCo strives to maintain strong asset quality in all aspects of its loan portfolio, especially with respect to commercial loans. During 1996, the Company experienced an excess of repayments and troubled loan resolutions over new commercial loans. Rather than reduce desired interest rates on the portfolio or compromise overall asset quality, TrustCo's operating philosophy is to maintain its strong loan underwriting standards, even if that results in fewer new loans. This philosophy has been very successful over the years for the Company in avoiding loan underwriting problems while maintaining a portfolio of high quality commercial loans. TrustCo's commercial lending activities are focused on balancing the Company's commitment to meeting the credit needs of businesses in its market area with the necessity of maintaining a high quality loan portfolio. In accordance with these ideals, the Bank has consistently emphasized the origination of loans within its market area. The portfolio contains no foreign loans, nor does it contain any concentrations of credit extended to any single borrower or industry. The Bank's commercial portfolio reflects the diversity found in the Capital Region's economy. TrustCo has a long standing leadership position in the home equity credit line product in its market. TrustCo was one of the first financial institutions in the Upstate New York region to aggressively market and originate this product and has developed significant expertise with respect to its risks and rewards. During 1996 the average balance of home equity credit lines was $187.7 million, down from the 1995 average balance of $202.6 million. The average yield on this portfolio decreased from 10.19% in 1995 to 9.21% in 1996. The decrease in yield during 1996 was directly attributable to changes in the prime rate of interest (home equity credit lines reprice with changes in prime) and to changes made by the Company in the margin above prime that was charged on these loans. The average balance of the installment loan portfolio, net of unearned income, decreased to $31.7 million for 1996, compared to $33.3 million in 1995. This portfolio continues to decrease because many consumers have shifted their borrowing patterns from direct placement installment credits to home equity loan products, which may offer an income tax deduction. <TABLE> MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES (in thousands) <CAPTION> December 31, 1996 After 1 Year In 1 Year But Within After or Less 5 Years 5 Years Total <S> <C> <C> <C> <C> Commercial $150,555 58,183 8,625 217,363 Real estate construction 7,055 -- -- 7,055 Total $157,610 58,183 8,625 224,418 Predetermined rates $ 35,724 47,684 8,625 92,033 Floating rates 121,886 10,499 -- 132,385 Total $157,610 58,183 8,625 224,418 </TABLE> Securities available for sale: During 1996 and 1995, the portfolio of securities available for sale was actively managed by the Company to take full advantage of changes in interest rates occurring during those time periods. At December 31, 1996, securities available for sale amounted to $618.7 million, compared to $640.2 million at year end 1995. As more fully described in the footnotes to the consolidated financial statements, due to changes in the accounting for investment securities, in December 1995 TrustCo transferred the held to maturity securities portfolio to the securities available for sale portfolio, and determined that all of its securities portfolio would be designated as available for sale. In the fourth quarter of 1995, the accounting regulatory authorities allowed a one time transfer of securities from the held to maturity category to the available for sale category. Approximately $288.5 million of securities were transferred to the available for sale portfolio as a result of this opportunity. 66
Securities classified as available for sale are utilized as an integral element in the asset/liability management process of the Company. These securities are actively managed to take advantage of changes in interest rates or other banking opportunities that become available. The decision to transfer the held to maturity securities into the category of securities available for sale allows TrustCo to manage these newly transferred assets similarly. Sales of securities from the held to maturity portfolio are allowed only under very limited circumstances and, therefore,active portfolio management is not allowed. For 1996, the average balance of securities available for sale was $580.9 million with an average yield of 7.61%, compared to $301.1 million with an average yield of 7.49% in 1995. As noted above, the accounting for investment securities changed during 1995, and there were certain securities classified as held to maturity during some periods in 1995. For the remainder of this analysis, the 1995 figures will be for both the balance of securities available for sale and securities held to maturity. The 1995 average balance for total securities (securities available for sale and securities held to maturity) was $594.0 million, and the average yield on this portfolio was 7.33%. TrustCo invests in high quality securities with approximately 80% of the average investments for 1996 comprised of securities issued or guaranteed by the U.S. Treasury or its agencies. In addition, approximately 14% of the average securities portfolio is invested in securities issued by states and political subdivisions. The taxable equivalent income earned on the securities portfolio in 1996 was $44.2 million, versus $43.6 million in 1995. The average balance in the securities portfolio decreased by $13.1 million between 1995 and 1996. This decrease in balance was offset by an increase in the average yield to 7.61% in 1996 from an average of 7.33% in 1995. During 1996, TrustCo also recognized $4.5 million of net losses from securities transactions, compared to a net gain of $240 thousand in 1995. Throughout 1996 TrustCo sold securities to provide liquidity for potential reinvestment at higher interest rates. This created a situation where losses were being recognized in 1996 with the expectation that, upon reinvestment of the proceeds, interest income in future periods would be enhanced sufficiently to more than offset the loss that was recognized. At year end 1996, TrustCo continued to have significant liquidity in the form of $310 million of federal funds sold. Management believes that the Company will have the opportunity to reinvest these funds in the securities or loan portfolios as enhanced opportunities develop in 1997. TrustCo does not invest in any exotic investment products such as interest rate swaps, forward placement contracts, options, or any other instruments commonly referred to as derivatives. By actively managing a portfolio of high quality securities, the objectives of asset/liability management and liquidity can be met, while at the same time producing a constant earnings stream that meets or exceeds alternative rates offered in the marketplace. <TABLE> Securities available for sale and investment securities (in thousands) <CAPTION> As of December 31, 1996 1995 1994 Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value Securities available for sale: <S> <C> <C> <C> <C> <C> <C> U.S. Treasuries and agencies $404,885 406,933 432,710 447,343 102,947 102,919 States and political subdivisions 94,954 96,918 68,151 70,371 -- -- Mortgage-backed securities 75,492 76,493 78,481 80,284 -- -- Other 4,276 4,276 15,690 17,290 675 675 Total debt securities available for sale 579,607 584,620 595,032 615,288 103,622 103,594 Equity securities 30,139 34,050 24,118 24,918 13,906 13,864 Total securities available for sale $609,746 618,670 619,150 640,206 117,528 117,458 Investment securities: U.S. Treasuries and agencies $ -- -- -- -- 145,542 141,117 States and political subdivisions -- -- -- -- 44,222 43,827 Mortgage-backed securities -- -- -- -- 143,082 134,902 Other -- -- -- -- 15,012 14,609 Total investment securities $ -- -- -- -- 347,858 334,455 </TABLE> 67
Securities available for sale are recorded at their fair value with any unrealized gains or losses, net of taxes, recognized as a component of shareholders' equity. At December 31, 1996 and 1995, the market value of TrustCo's portfolio of securities available for sale resulted in unrealized gains of approximately $8.9 million and $21.1 million, respectively. The table "Securities Portfolio Maturity Distribution and Yield," distributes the securities available for sale portfolio as of December 31, 1996, based on the final maturity of the securities. Mortgage-backed securities are stated using average life, and equity securities are excluded. <TABLE> SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD Debt securities available for sale: (dollars in thousands) <CAPTION> As of December 31, 1996 Maturing: After 1 After 5 Within But Within But Within After 1 Year 5 Years 10 Years 10 Years Total U.S. Treasuries and agencies <S> <C> <C> <C> <C> <C> Amortized cost $25,114 20,117 237,854 121,800 404,885 Market value 25,397 20,787 239,708 121,041 406,933 Yield 7.92% 8.06 7.67 7.87 7.77 States and political subdivisions Amortized cost $ 9,636 18,149 2,198 64,971 94,954 Market value 9,697 18,705 2,271 66,245 96,918 Yield 6.88% 8.03 7.90 8.37 8.14 Mortgage-backed securities Amortized cost $ 652 8,828 39,168 26,844 75,492 Market value 676 9,097 39,834 26,886 76,493 Yield 9.45% 8.19 7.60 7.74 7.73 Other Amortized cost $ 3,626 -- 650 -- 4,276 Market value 3,626 -- 650 -- 4,276 Yield 6.74% -- 6.90 -- 6.76 Total debt securities available for sale Amortized cost $39,028 47,094 279,870 213,615 579,607 Market value 39,396 48,589 282,463 214,172 584,620 Yield 7.58% 8.07 7.66 8.01 7.82 </TABLE> 68
Maturity and call dates of securities: Many of the securities in the investment portfolio have a call date in addition to the stated maturity date. Call dates allow the issuer of the bond to redeem the bond prior to maturity at selected dates and at predetermined prices. Normally, securities are redeemed at the call date because the issuer can reissue the bond at a lower yield. Therefore, for cash flow, liquidity, and interest rate management purposes, it is important to monitor both maturity dates and call dates. The following table details the portfolio of securities available for sale, for both the maturity date and call date as of December 31, 1996. Mortgage-backed securities are reported according to average life, and equity securities are excluded. <TABLE> SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION Debt securities available for sale: (in thousands) <CAPTION> As of December 31, 1996 Based on Based on Final Maturity Call Date Amortized Market Amortized Market Cost Value Cost Value <S> <C> <C> <C> <C> Within 1 year $ 39,028 39,396 244,915 244,389 1 to 5 years 47,094 48,589 194,683 197,129 5 to 10 years 279,870 282,463 102,335 105,130 After 10 years 213,615 214,172 37,674 37,972 Total debt securities available for sale $579,607 584,620 579,607 584,620 </TABLE> Federal funds sold: During 1996, the average balance of federal funds sold was $328.5 million, up from $212.3 million in 1995. The average rate earned on these assets was 5.37% for 1996 and 5.91% for 1995. TrustCo utilized this category of earning assets during 1996 as a means of keeping strong liquidity as interest rates in the securities markets changed. Rather than invest excess liquidity during 1996, the Company chose to place these funds in overnight federal funds sold. This decision had the short-term effect of suppressing earnings for 1996, but positioned TrustCo to take advantage of other banking opportunities as they emerge in 1997. The average yield on federal funds sold decreased during 1996 as a result of changes made by the Federal Reserve Board in setting the target federal funds rate. 69
<TABLE> Average Balances, Yields and Net Interest Margins (dollars in thousands) <CAPTION> 1996 1995 1994` Interest Interest Interest Average Income/ Average Average Income/ Average Average Income/ Average Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Loans, net of unearned income $1,227,407 107,517 8.76% 1,187,929 107,544 9.05% 1,122,698 94,432 8.41% Securities available for sale: U.S. Treasuries and agencies 409,590 31,647 7.73 255,244 19,490 7.64 269,378 17,142 6.36 States and political subdivisions 78,921 6,235 7.90 15,926 1,277 8.02 -- -- -- Mortgage-backed securities 53,844 4,114 7.64 8,731 597 6.84 35,172 2,122 6.03 Other 38,564 2,202 5.71 21,179 1,185 5.60 28,430 1,994 7.02 Total securities available for sale 580,919 44,198 7.61 301,080 22,549 7.49 332,980 21,258 6.38 Investment securities: U.S. Treasuries and agencies -- -- -- 119,989 8,968 7.47 98,380 7,128 7.24 States and political subdivisions -- -- -- 40,068 2,963 7.39 27,120 1,661 6.13 Mortgage-backed securities -- -- -- 119,113 8,005 6.72 111,691 7,254 6.50 Other -- -- -- 13,738 1,079 7.86 13,621 1,024 7.52 Total investment securities -- -- -- 292,908 21,015 7.17 250,812 17,067 6.81 Federal funds sold 328,500 17,634 5.37 212,323 12,543 5.91 203,878 9,058 4.44 Total interest earning assets 2,136,826 169,349 7.93% 1,994,240 163,651 8.21% 1,910,368 141,815 7.42% Allowance for loan losses (51,233) (45,086) (37,334) Cash and non-interest earning assets 134,942 124,237 121,463 Total assets $2,220,535 2,073,391 1,994,497 Liabilities and shareholders' equity Interest-bearing deposits: NOW accounts $ 233,340 3,591 1.54% 230,291 4,356 1.89% 246,357 3,636 1.48% Savings 667,447 23,012 3.45 618,933 24,248 3.92 726,295 21,725 2.99 Time deposits and money markets 923,082 51,146 5.54 911,906 49,751 5.46 741,862 34,673 4.67 Total interest-bearing deposits 1,823,869 77,749 4.26 1,761,130 78,355 4.45 1,714,514 60,034 3.50 Short-term borrowings 98,324 4,593 4.67 38,090 1,776 4.66 18,129 461 2.54 Long-term debt -- -- -- 788 69 8.75 2,840 203 7.15 Total interest-bearing liabilities 1,922,193 82,342 4.28 1,800,008 80,200 4.46 1,735,483 60,698 3.50 Demand deposits 112,576 97,940 93,822 Other liabilities 29,839 29,974 28,215 Shareholders' equity 155,927 145,469 136,977 Total liabilities and shareholders' equity $2,220,535 2,073,391 1,994,497 Net interest income 87,007 83,451 81,117 Net interest spread 3.65% 3.75% 3.92% Net interest margin(net interest income to total interest earning assets) 4.07 4.18 4.25 Portions of income earned on certain commercial loans, U.S. Government obligations,obligations of states and political subdivisions, and equity securities are exempt from federal and/or state taxation. Appropriate adjustments have been made to reflect the equivalent amount of taxable income that would have been necessary to generate an equal amount of after tax income. Federal and New York State tax rates used to calculate income on a tax equivalent basis were 35.0 percent and 9.23 percent for 1996, 35.0 percent and 9.68 percent for 1995, and 35.0 percent and 10.13 percent for 1994. The average balances of securities available for sale is calculated using amortized costs for these securities. Included in the balance of shareholders' equity is $5.3 million, $3.9 million, and $2.4 million in 1996, 1995, and 1994, respectively, of unrealized appreciation, net of tax, in the available for sale securities portfolio. </TABLE> 70
Interest bearing sources of funds: TrustCo utilizes various traditional sources of funds to support its asset portfolio. The following table "Average Sources of Funding" presents the various categories of funds used and the corresponding average balances for each of the last three years. <TABLE> Average Sources of Funding (dollars in thousands) <CAPTION> Components of 96-95 95-94 Total Funding 1996 1995 1994 Change Change 1996 1995 1994 <S> <C> <C> <C> <C> <C> <C> <C> <C> Demand deposits $ 112,576 97,940 93,822 14,636 4,118 5.5% 5.2 5.1 Retail deposits: Savings 667,447 618,933 726,295 48,514 (107,362) 32.8 32.6 39.7 Time deposits under $100 thousand 768,240 750,141 589,573 18,099 160,568 37.8 39.5 32.2 NOW accounts 233,340 230,291 246,357 3,049 (16,066) 11.5 12.1 13.5 Money market deposits 68,130 79,618 103,622 (11,488) (24,004) 3.3 4.2 5.7 Total retail deposits 1,737,157 1,678,983 1,665,847 58,174 13,136 85.4 88.4 91.1 Total core deposits 1,849,733 1,776,923 1,759,669 72,810 17,254 90.9 93.6 96.2 Time deposits over $100 thousand 86,712 82,147 48,667 4,565 33,480 4.3 4.3 2.7 Short-term borrowings 98,324 38,090 18,129 60,234 19,961 4.8 2.0 1.0 Long-term debt -- 788 2,840 (788) (2,052) -- 0.1 0.1 Total purchased liabilities 185,036 121,025 69,636 64,011 51,389 9.1 6.4 3.8 Total sources of funding $2,034,769 1,897,948 1,829,305 136,821 68,643 100.0% 100.0 100.0 </TABLE> <TABLE> Average Deposits by Type of Depositor (in thousands) <CAPTION> Years Ended December 31, 1996 1995 1994 1993 1992 <S> <C> <C> <C> <C> <C> Individuals, partnerships and corporations $1,880,798 1,802,455 1,752,163 1,706,530 1,605,191 U.S. Government 45 261 542 540 525 States and political subdivisions 44,555 46,091 44,289 48,145 58,439 Other (certified and official checks, etc.) 11,047 10,263 11,342 12,316 11,324 Total average deposits by type of depositor $1,936,445 1,859,070 1,808,336 1,767,531 1,675,479 </TABLE> Deposits: Average total deposits (including time deposits greater than $100 thousand) were $1.94 billion in 1996 compared to $1.86 billion in 1995, an increase of $77.4 million or 4.2%. Increases were concentrated in the savings deposit category, which increased by $48.5 million or 7.8% between 1995 and 1996, the core time deposit category, which increased by $18.1 million or 2.4%, and the demand deposit category, which increased by $14.6 million or 14.9%. The overall increase in deposits is very noteworthy in light of the significant outflow of deposits in the banking industry nationally and locally. For 1996, the average balance of interest-bearing deposits was $1.82 billion, with an average yield of 4.26%, compared to an average balance of $1.76 billion and an average yield of 4.45% for 1995. During 1996 the Company experienced strong contributions from each of the new branches opened during 1995 and 1996 as well as overall deposit inflows from the existing branch network. The 14.9% increase in the demand deposit category during 1996 is extremely important because customers tend to identify their primary banking relationship with the bank that has their demand deposit account. The Company strives to maintain competitive rates on deposit accounts and to attract customers through a combination of competitive interest rates, strong customer service, and convenient banking locations. In this fashion, TrustCo is able to attract deposit customers looking for a long-term banking relationship, and to cross sell banking services utilizing the deposit account relationship as the starting point. Interest expense on deposits decreased from $78.4 million in 1995 to $77.7 million in 1996. The decrease in interest expense of $610 thousand was due to a decrease of 19 basis points in the rates paid on deposits in 1996 to 4.26%, which more than offset the increase in the average balance of interest-bearing deposits of $62.7 million. Total interest expense decreased on NOW, money market, and savings accounts, while interest expense increased on certificates of deposit over $100,000 and on core 71
time deposit accounts. The decrease in interest expense associated with savings deposits was the result of a decrease to the rates paid early in 1996. The increase in interest expense associated with the certificates of deposit over $100,000 was a result of the increase in the average balances of $4.6 million, which was to some extent offset by a reduction in the average yield of 22 basis points to 5.75%. The increase in interest expense on core time deposits was due to both an increase in the average balances of $18.1 million and an increase of 8 basis points in the average yield to 5.75% in 1996. <TABLE> Maturity of Time deposits over $100 thousand (in thousands) As of December 31, 1996 <CAPTION> <S> <C> Under 3 months $28,007 3 to 6 months 9,297 6 to 12 months 21,348 Over 12 months 31,141 Total $89,793 </TABLE> Other funding sources: The Company had $98.3 million of average short-term borrowings outstanding during 1996, an increase of $60.2 million from the 1995 average of $38.1 million. Total purchased liabilities (which includes time deposits over $100 thousand) were $185.0 million in 1996, compared to $121.0 million in 1995. The increase in purchased liabilities during 1996 was due to the effect for the full year of the Trustco Short-Term Investment Account, which had been introduced during 1995. This account was developed by the Bank's Trust Department as an investment vehicle for trust customers. Balances are transferred daily by the Trust Department into this account, and are collateralized by securities owned by the Bank. Purchased liabilities as a percentage of total funding sources (which includes all deposits, borrowings and equity) averaged 8.4% in 1996, and 5.9% in 1995. The average rate on short-term borrowings was 4.67% in 1996 and 4.66% in 1995. <TABLE> Volume and Yield Analysis (in thousands) <CAPTION> 1996 vs. 1995 1995 vs. 1994 Increase Due to Due to Increase Due to Due to (Decrease) Volume Rate (Decrease) Volume Rate Interest income (TE): <S> <C> <C> <C> <C> <C> <C> Federal funds sold $ 5,091 6,326 (1,235) 3,485 389 3,096 Securities available for sale: Taxable 16,623 16,296 327 13 (3,164) 3,177 Tax-exempt 5,026 5,045 (19) 1,278 1,278 -- Total securities available for sale 21,649 21,341 308 1,291 (1,886) 3,177 Investment securities: Taxable (18,052) (18,052) -- 2,647 2,112 535 Tax-exempt (2,963) (2,963) -- 1,301 907 394 Total investment securities (21,015) (21,015) -- 3,948 3,019 929 Loans (27) 2,860 (2,887) 13,112 5,662 7,450 Total interest income 5,698 9,512 (3,814) 21,836 7,184 14,652 Interest expense: NOW accounts (765) 57 (822) 720 (250) 970 Money market deposits (308) (335) 27 (181) (637) 456 Savings (1,236) 1,811 (3,047) 2,523 (3,532) 6,055 Time deposits under $100 thousand 1,627 1,035 592 12,936 8,773 4,163 Time deposits over $100 thousand 76 266 (190) 2,323 1,966 357 Short-term borrowings 2,817 2,814 3 1,315 747 568 Long-term debt (69) (69) -- (134) (171) 37 Total interest expense 2,142 5,579 (3,437) 19,502 6,896 12,606 Net interest income (TE) $ 3,556 3,933 (377) 2,334 288 2,046 Increases and decreases in interest income and interest expense due to both rate and volume have been allocated to the two categories of variances (volume and rate) based on the percentage relationship of such variances to each other. </TABLE> 72
Capital Resources Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios. New issues of equity securities have not been required, since most of the Company's capital requirements have been provided through retained earnings. Part of TrustCo's operating philosophy is that the Company will not retain excess capital. All capital that is generated by the Company that is in excess of the levels considered by management to be necessary for the safe and sound operations of the Company has been distributed to the shareholders in the form of cash dividends. Consequently, the capital ratios that are maintained are adequate but not excessive. This philosophy has led to a cash dividend payout ratio for 1996 of 70.38%, for 1995 of 69.55%, and for 1994 of 62.52%. These are significant payouts to the Company's shareholders and are considered by management to be a prudent use of the retained capital in TrustCo. As to the likelihood of future dividends, the philosophy stated above will continue into 1997 and, where appropriate, the Board of Directors will declare dividends consistent with that operating philosophy. <TABLE> Dividends Per Share <CAPTION> <S> <C> 1994 $0.71 1995 0.88 1996 0.99 </TABLE> At December 31, 1996, TrustCo's Tier 1 capital was $157.2 million or 12.99% of risk-adjusted assets. Tier 1 capital to total average assets (the leverage ratio) at December 31, 1996 was 7.04% as compared to 6.88% in 1995. At December 31, 1996 the subsidiary bank, Trustco Bank, met the regulatory definition of a "well capitalized" institution. The Bank converted to a nationally chartered bank in early 1995 and changed its legal name to Trustco Bank, National Association. All of the operations of the Bank were consistent with those of a nationally chartered bank. The national charter allowed the Bank to streamline its regulatory process by having the Office of the Comptroller of the Currency as the primary bank regulator. As stated earlier, TrustCo plans to expand its branch network in 1997. It is not anticipated that additional capital will be required to support this expansion program. Likewise, operating costs during 1997 can be expected to rise modestly as a result of these new branches, but will be offset by the additional revenue generated by the new branches. Net Interest Income Net interest income is the principal contributor to net income. Therefore, growth in net income is directly dependent upon the ability of the Company to increase net interest income. TrustCo's 1996 increase in net interest income was primarily the result of increased average balances of earning assets invested at somewhat lower interest rates in 1996 than in 1995. Taxable equivalent net interest income for 1996 was $87.0 million, up $3.6 million or 4.3% over 1995. The average balance of interest earning assets increased by $142.6 million or 7.1% to $2.14 billion in 1996 compared to $1.99 billion for 1995. The yield on average earning assets decreased 28 basis points to 7.93% in 1996 compared to 8.21% in 1995, while the average yield on interest-bearing liabilities decreased 18 basis points in 1996 to 4.28% from 4.46% in 1995. However, the increase in the average balance of interest earning assets more than offset the reduction in net interest spread. Total interest income increased by $5.7 million between 1995 and 1996. This increase was caused by the net effect of the decrease in interest rates, offset by the increase in the average balance of interest earning assets. Total interest-bearing liabilities increased from $1.80 billion with an average yield of 4.46% in 1995 to $1.92 billion with an average yield of 4.28% in 1996. Total interest expense increased from $80.2 million in 1995 to $82.3 million in 1996. The increase in interest expense was the net result of the increase in balances offset by a reduction in rates. Net interest income increased by $3.6 million due to the effects of the reduction in interest rates, offset by the increase in average balances outstanding. The changes between 1996 and 1995, as illustrated in the table "Volume and Yield Analysis," resulted in an increase in interest on earning assets of $5.7 million and an increase in interest expense of $2.1 million. Risk Management The responsibility for balance sheet risk management oversight is the function of the Asset Allocation Committee. This committee meets monthly and includes the executive officers of the Company as well as other department managers as appropriate. The meetings include a review of the balance sheet structure, formulation of strategy in light of expected economic conditions, and a review of performance against established guidelines to control exposure to various types of risk. 73
Credit Risk Credit risk is managed through a network of loan officer authorities, review committees, loan policies, and oversight from the senior executives of the Company. Management follows a policy of continually identifying, analyzing, and evaluating the credit risk inherent in the loan portfolio. As a result of management's ongoing review of the loan portfolio, loans are placed in nonaccrual status, either due to the delinquent status of principal and/or interest payments, or based on a judgment by management that, although payment of principal and/or interest is current, such action is prudent. Loans are generally placed in nonaccrual status when principal and/or interest is 90 days past due. Thereafter, no interest is taken into income unless received in cash or until such time as the borrower demonstrates the sustained ability to make scheduled payments of interest and principal. Nonperforming Assets Nonperforming assets include loans in nonaccrual status, loans which have been treated as troubled debt restructurings, loans past due 90 days or more and still accruing interest, and foreclosed real estate properties. Nonperforming assets at year end 1996 totalled $20.6 million, an increase of $1.2 million from the balance at year end 1995. Nonperforming loans decreased from $15.7 million in 1995 to $14.0 million in 1996. Nonperforming loans as a percentage of total loans were 1.28% in 1995 and decreased to 1.13% in 1996. Included in nonperforming loans at year end 1996 are $10.7 million of loans in nonaccrual status, a reduction of $2.1 million, or 16.2%, from the year end 1995 balance. Loans past due 90 days or more and still accruing interest of $790 thousand are down from the year end 1995 balance of $1.7 million, and restructured loans of $2.5 million increased by $1.4 million from 1995. Adherence to strong underwriting standards and vigorous loan collection efforts have been cornerstones of the operating philosophy of TrustCo, and have assisted the Company in avoiding many of the pitfalls that others in the banking community have experienced. TrustCo has a very diversified loan portfolio with no concentrations to any one borrower or in any one industry. Nonperforming assets at year end 1996 included $6.5 million of foreclosed properties compared to $3.7 million in 1995. Once it is determined that a borrower is unable to repay the loan balance, TrustCo takes appropriate action with respect to the collateral supporting the loan balance. The increase in the foreclosed properties balance is the result of efforts by the Company to complete collection efforts on nonperforming loans. Once included in the foreclosed property category, management takes decisive action to quickly dispose of the property. Management believes that the $6.5 million balance of foreclosed properties is realizable through the normal course of disposing of these properties. As of December 31, 1996, 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 no advances to borrowers or projects that are located outside of the United States. <TABLE> Nonperforming Assets (dollars in thousands) <CAPTION> As of December 31, 1996 1995 1994 1993 1992 <S> <C> <C> <C> <C> <C> Loans in nonaccrual status $10,748 12,832 6,370 10,227 17,448 Loans past due 90 days or more 792 1,696 4,436 6,567 10,634 Restructured loans 2,495 1,130 910 -- -- Total nonperforming loans 14,035 15,658 11,716 16,794 28,082 Foreclosed real estate 6,518 3,732 5,080 4,309 5,946 Total nonperforming assets $20,553 19,390 16,796 21,103 34,028 Allowance for loan losses $51,561 48,320 38,851 34,087 26,919 Allowance coverage of nonperforming loans 3.67X 3.09 3.32 2.03 0.96 Nonperforming loans as a % of total loans 1.13% 1.28 1.01 1.56 2.68 Nonperforming assets as a % of total assets 0.91 0.89 0.85 1.07 1.75 </TABLE> Allowance for Loan Losses The balance in the allowance for loan losses has been accumulated over the years through periodic provisions, and is available to absorb losses on loans 74
which have been determined to be uncollectible. The adequacy of the allowance is evaluated continuously, with emphasis on nonperforming and other loans that management believes warrant special attention. The balance of the allowance is maintained at a level that is, in management's judgment, representative of the loan portfolio's inherent risk given present and anticipated future conditions. <TABLE> Allowance for Loan Losses (in millions) <CAPTION> <S> <C> 1994 $38.9 1995 48.3 1996 51.6 </TABLE> The table"Summary of Loan Loss Experience" includes an analysis of the changes to the allowance for the past five years. Loans charged off in 1996 were $5.6 million, compared to $7.3 million in 1995. Recoveries were $2.3 million in 1996 and $4.1 million in 1995. Provisions recorded in 1996 and 1995 were $6.6 million and $12.7 million, respectively. Net charge offs as a percentage of average loans were 0.27% in both 1996 and 1995. The allowance as a percentage of loans outstanding grew to 4.15% in 1996 from 3.94% in 1995. The Company has a policy of recognizing problem loan charge offs early and aggressively pursuing collection efforts. This policy of early intervention has proven to be a cornerstone of the strong lending performance that TrustCo has achieved. TrustCo adopted the provisions of Statement of Financial Accounting Standards No. 114 (Statement 114), "Accounting by Creditors for Impairment of a Loan," and Statement of Financial Accounting Standards No. 118 (Statement 118), "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure," as of January 1, 1995. The enclosed consolidated financial statements have been presented in accordance with these new accounting pronouncements. The footnotes to the consolidated financial statements provide additional details with respect to the adoption and accounting requirements of these pronouncements. TrustCo has classified nonaccrual commercial and commercial real estate loans as impaired loans, as well as all loans restructured under a troubled debt restructuring since the adoption of new accounting requirements as of January 1, 1995. At year end 1996 and 1995, there were $8.6 million and $10.0 million, respectively, of impaired loans. The average balance of impaired loans during 1996 and 1995 was $8.5 million and $10.5 million, respectively. The Company recognized approximately $560 thousand and $400 thousand of interest income on these loans in 1996 and 1995, respectively. <TABLE> Allowance to Loans Outstanding <CAPTION> <S> <C> 1994 3.34% 1995 3.94 1996 4.15 </TABLE> Statement 114 substantially modified the definition of "in-substance foreclosure" loans. Consequently, certain loans identified at year end 1994 as being in-substance foreclosure loans and classified as real estate owned have been reclassified as of January 1, 1995 to the loan portfolio. At January 1, 1995, $9.2 million of loans previously included in real estate owned were reclassified to the loan balance. Prior to adoption of Statements 114 and 118, in-substance foreclosed properties included those properties where the borrower had little or no remaining equity in the property, considering its fair value; where repayment was expected to come only from the operation or sale of the property; and where the borrower had effectively abandoned control of the property or it was doubtful the borrower would be able to rebuild equity in the property. 75
<TABLE> Summary of Loan Loss Experience (dollars in thousands) <CAPTION> 1996 1995 1994 1993 1992 <S> <C> <C> <C> <C> <C> Amount of loans outstanding at end of year (less unearned income) $1,241,882 1,226,142 1,161,789 1,075,564 1,049,215 Average loans outstanding during year (less average unearned income) 1,227,407 1,187,929 1,122,698 1,044,855 1,025,480 Balance of allowance at beginning of year 48,320 38,851 34,087 26,919 19,049 Loans charged off: Commercial 3,213 4,823 3,864 5,866 4,857 Real estate 1,498 1,694 53 199 125 Installment 937 821 907 676 1,015 Total 5,648 7,338 4,824 6,741 5,997 Recoveries of loans previously charged off: Commercial 1,963 3,504 1,125 1,810 327 Real estate 110 258 -- -- -- Installment 239 347 407 523 847 Total 2,312 4,109 1,532 2,333 1,174 Net loans charged off 3,336 3,229 3,292 4,408 4,823 Additions to allowance charged to operating expense 6,577 12,698 8,056 11,576 12,693 Balance of allowance at end of year $ 51,561 48,320 38,851 34,087 26,919 Net charge offs as a percent of average loans outstanding during year (less average unearned income) 0.27% 0.27 0.29 0.42 0.47 Allowance as a percent of loans outstanding at end of year 4.15 3.94 3.34 3.17 2.57 Interest Rate Risk Management of interest rate risk involves continual monitoring of the relative sensitivity of asset and liability portfolios to changes in rates due to maturities or repricing. Forecasting models are utilized to quantify the impact of changes in rates on the Company's net income. Specific targets for interest rate sensitivity have been established by the Company. The objective of interest rate management is to maintain an appropriate balance between income growth and the risk associated with maximizing income through the mismatch of the timing of interest rate changes between assets and liabilities. Perfectly matching this funding can eliminate interest rate risk but net interest income is not always enhanced by this action. One measure of interest rate risk, the so called "gap," is illustrated in the table "Interest Rate Sensitivity." The table measures the incremental and cumulative gap, or the difference between assets and liabilities subject to repricing/maturity during the periods indicated. For purposes of this analysis the maturity and repricing of loans is based on the expected cash flows or earliest repricing date. For securities available for sale, mortgage-backed securities are stated using anticipated cash flows over their average life and debt securities are stated at final maturity. Equity securities that the Bank is required to hold are categorized in the rate insensitive column for this presentation. NOW, money market, demand, and savings accounts are presented with a maturity or repricing cycle over the full interest rate cycle and TrustCo's actual experience, even though they are subject to immediate withdrawal. Time deposit accounts are presented based upon their maturity dates. At December 31, 1996, the Company's gap position indicates an excess of assets repricing in the 0 to 90 day period of $314.7 million. This positive gap position is the result of management's decision to retain $310 million of federal funds sold at year end 1996 for potential reinvestment in 1997. The gap position turns negative (an excess of liabilities subject to repricing over assets that can reprice during that time period) in the 91 to 365 day period by $217.8 million. This situation occurs as a result of the amount of deposits that are subject to repricing during this time period. However, for the period from 0 days to 1 year, the Company has a cumulative positive gap position of 76
$96.8 million. Interest rate sensitivity using gap analysis is most useful for the period less than one year. </TABLE> <TABLE> Interest Rate Sensitivity (dollars in thousands) <CAPTION> At December 31, 1996 Repricing, or able to be repriced, in: 0-90 91-365 1-5 Over 5 Rate Days Days Years Years Insensitive Total Assets: <S> <C> <C> <C> <C> <C> <C> Federal funds sold $310,000 -- -- -- -- 310,000 Securities available for sale 28,642 34,608 70,479 472,606 12,335 618,670 Loans, net of unearned income 314,641 170,124 146,866 599,503 10,748 1,241,882 Noninterest rate sensitive assets -- -- -- -- 91,228 91,228 Total assets 653,283 204,732 217,345 1,072,109 114,311 2,261,780 Cumulative total assets 653,283 858,015 1,075,360 2,147,469 2,261,780 2,261,780 Liabilities and shareholdersO equity: Deposits: Interest bearing deposits 221,513 404,145 799,699 404,236 -- 1,829,593 Noninterest bearing deposits 5,424 18,435 34,743 64,951 -- 123,553 Total deposits 226,937 422,580 834,442 469,187 -- 1,953,146 Borrowings 111,662 -- -- -- -- 111,662 Noninterest rate sensitive liabilities -- -- -- -- 34,572 34,572 Shareholders' equity -- -- -- -- 162,400 162,400 Total liabilities and shareholders' equity 338,599 422,580 834,442 469,187 196,972 2,261,780 Cumulative total liabilities and shareholders' equity $338,599 761,179 1,595,621 2,064,808 2,261,780 2,261,780 Incremental gap: Interest sensitivity gap $314,684 (217,848) (617,097) 602,922 Gap as a % of earning assets 14.50% (10.04) (28.43) 27.78 Interest sensitive assets to liabilities 196.08 50.66 27.18 265.22 Cumulative gap: Interest sensitivity gap $314,684 96,836 (520,261) 82,661 Gap as a % of earning assets 14.50% 4.46 (23.97) 3.81 Interest sensitive assets to liabilities 196.08 116.37 69.96 110.62 </TABLE> The Company's gap position in relation to products, services, and the marketplace, is constantly under evaluation by the Asset Allocation Committee. There are several significant shortcomings inherent in the method of analysis presented in the Interest Rate Sensitivity table. For example, although certain assets and liabilities have similar periods to maturity or to repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while other interest rates may lag behind changes in market rates. Additionally, certain assets have features which restrict changes in interest rates on a short-term basis and over the life of the asset (certain annual caps and lifetime caps). Further, in the event of significant changes in interest rates, prepayment and early withdrawal levels would be likely to deviate significantly from those assumed in the table. Some borrowers' ability to service their debt may be hampered by a significant interest rate increase. Management takes these factors into account when reviewing the Bank's gap position and establishing future asset/liability strategy. Liquidity Risk TrustCo seeks to obtain favorable funding sources and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. In addition to serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer initiated needs. Many factors affect the ability to meet liquidity needs, including changes in the markets served by the Bank's network of branches, the mix of assets and liabilities, and general economic conditions. The Company actively manages its liquidity position through target ratios established under its Asset/Liability Management policies.Continual monitoring of these ratios, both historically and through forecasts under 76
multiple interest rate scenarios, allows TrustCo to employ strategies necessary to maintain adequate liquidity levels. Management has also developed various liquidity alternatives should abnormal situations arise. The Company achieves its liability-based liquidity objectives in a variety of ways. Net liabilities can be classified into three categories for the purposes of managing liability-based liquidity: net core deposits, purchased money, and capital market funds. TrustCo seeks deposits that are dependable and predictable, ones that are based as much on the level and quality of service as they are on interest rate. At December 31, 1996, core deposits (total deposits less those time deposits greater than $100,000) amounted to $1.86 billion. Average balances of core deposits are detailed in the table "Average Sources of Funding." In addition to core deposits, another source of liability-based funding available to TrustCo is purchased money, which consists of long-term and short- term borrowings, federal funds purchased, securities sold under repurchase agreements, and time deposits greater than $100,000. The average balances of these purchased liabilities are detailed in the table "Average Sources of Funding." During 1996, the average balance in purchased liabilities was $185.0 million, compared with $121.0 million in 1995, and $69.6 million in 1994. In addition, TrustCo has approximately $200 million of available lines of credit with the Federal Home Loan Bank. Off-Balance Sheet Risk Commitments to extend credit: TrustCo makes contractual commitments to extend credit, and extends lines of credit which are subject to the Bank's credit approval and monitoring procedures. At December 31, 1996 and 1995, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $222.5 million and $220.8 million respectively. In management's opinion, there are no material commitments to extend credit that represent unusual risk. Letters of credit and standby letters of credit: TrustCo guarantees the obligations or performance of customers by issuing letters of credit and standby letters of credit to third parties. These letters of credit are used to support third party debt, such as corporate debt issuances, industrial revenue bonds, and municipal securities. The risk involved in letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same credit standards, and management procedures in effect to monitor other credit risks. At December 31, 1996 and 1995, outstanding letters of credit were approximately $12.0 million and $19.0 million, respectively. Other Off-Balance Sheet Risk: TrustCo does not engage in activities involving interest rate swaps, forward placement contracts, options, or any other instrument commonly referred to as "derivatives." Management believes these instruments pose a high degree of risk, and that investing in them is unnecessary. Noninterest Income and Expense Noninterest income: Noninterest income is a significant source of revenue for the Company and an important factor in overall results. Total noninterest income was $10.3 million for 1996, compared to $14.1 million in 1995, and $4.6 million in 1994. Included in the 1996 results are $4.5 million of securities losses compared to securities gains of $240 thousand in 1995. Excluding securities transactions, noninterest income would have been $14.8 million and $13.8 million in 1996 and 1995, respectively. As noted earlier, securities losses for 1996 were realized to create available liquidity with the intent of reinvesting the net sales proceeds at higher interest rates. Future performance should benefit from these enhanced rates. <TABLE> Noninterest income (dollars in thousands) <CAPTION> 1996 vs. 1995 1996 1995 1994 Amount Percent <S> <C> <C> <C> <C> <C> Trust department income $ 5,556 4,890 4,850 666 13.6% Fees for other services to customers 6,981 7,003 7,007 (22) (.3) Net gain (loss) on securities transactions (4,536) 243 (8,877) (4,779) (1,966.7) Other 2,312 1,931 1,580 381 19.7 Total noninterest income $ 10,313 14,067 4,560 (3,754) (26.7)% </TABLE> 78
<TABLE> Noninterest Expense (dollars in thousands) <CAPTION> 1996 vs. 1995 1996 1995 1994 Amount Percent <S> <C> <C> <C> <C> <C> Salaries and employee benefits $21,532 19,895 18,323 1,637 8.2% Net occupancy expense of bank premises 4,178 4,562 3,479 (384) (8.4) Equipment expense 3,289 3,403 3,363 (114) (3.3) FDIC insurance expense 7 2,101 4,071 (2,094) (99.7) Professional services 3,676 3,585 2,548 91 2.5 Other real estate expenses 718 3,120 1,016 (2,402) (77.0) Other 8,615 7,774 7,760 841 10.8 Total noninterest expense $42,015 44,440 40,560 (2,425) (5.5)% </TABLE> The Trust Department contributes the largest recurring portion of noninterest income through fees generated for the performance of fiduciary services. Income from these fiduciary activities totalled $5.6 million in 1996 and $4.9 million in 1995. Trust fees are calculated as a percentage of the assets under management by the Trust Department. During 1996, assets under management increased to $950 million from $777 million at year end 1995. The increase in asset balances is due both to the Trust Department's success at attracting new customer accounts and to market appreciation. Changes in the other categories of noninterest income reflect the fee scale used by the Bank for pricing its services and the volume of services utilized. Noninterest expense: Noninterest expense was $42.0 million in 1996, $44.4 million in 1995, and $40.6 million in 1994. TrustCo's operating philosophy stresses the importance of monitoring and controlling the level of noninterest expense. The efficiency ratio is a strong indicator of how well controlled and monitored these expenses are for a banking enterprise.TrustCo's efficiency ratio was 39.51% for 1996, 42.52% for 1995, and 41.82% for 1994. The industry goal is the attainment of a 60% efficiency ratio. TrustCo outperformed the industry on this ratio for 1994, 1995, and 1996 by a wide margin. <TABLE> Efficiency Ratio <CAPTION> <S> <C> 1994 41.82% 1995 42.52 1996 39.51 </TABLE> Salaries and employee benefits are the most significant component of noninterest expense. At year end 1996, these expenses amounted to $21.5 million, compared to $19.9 million and $18.3 million for 1995 and 1994, respectively. The increase in salaries and employee benefits reflects the addition of new branches during 1995 and 1996, and salary adjustments given to the Bank staff. Increased costs for benefits, such as health insurance and retirement benefits, account for the remainder of the increase. <TABLE> Noninterest Expense (in millions) <CAPTION> <S> <C> 1994 $40.6 1995 44.4 1996 42.0 </TABLE> During 1996, FDIC insurance premiums decreased by $2.1 million compared to 1995 as a result of the reduction and eventual elimination of the insurance premium on TrustCo deposits. Other real estate expense is down by $2.4 million between 1995 and 1996 due to certain costs incurred in 1995 relative to property dispositions. 79
Income Tax In 1996, TrustCo recognized income tax expense of $17.3 million as compared to $12.8 million in 1995, and $12.6 million in 1994. The tax expense on the Company's income was different than tax expense at the statutory rate of 35% due primarily to tax exempt income, the effect of New York State income taxes, and the reduction in 1995 of the deferred tax asset valuation reserve. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. During 1995, the valuation reserve was reduced as a result of the resolution of several tax return audits and management's reassessment of the realization of certain deferred tax assets. The valuation allowance of $2.1 million at December 31, 1996 and 1995, is primarily reserved for federal and state tax law restrictions on the deductibility of certain temporary differences. Based primarily on the sufficiency of historical and future taxable income, management believes it is more likely than not that the remaining net deferred tax asset of $34.5 million and $30.4 million at December 31, 1996 and 1995, respectively, will be realized. Financial Results The discussion included in Management's Discussion and Analysis is by its nature a review of 1996 actual performance. Projection of the historical 1996 results to future periods may not be appropriate due to changes in the business environment outside the Company's control. Impact of Inflation and Changing Prices The consolidated financial statements have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increasing costs of operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary. As a result, changes in interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation, since interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Impact of Changes in Accounting Standards Accounting by Creditors for Impairment of a Loan: The Company adopted Statements 114 and 118 effective as of January 1, 1995. These statements require that an impaired loan be measured at the present value of expected cash flows. The Statements also narrow the application of the concept of in-substance foreclosure to situations where the creditor has received physical possession of the debtor's collateral. The adoption of Statements 114 and 118 did not have a material impact on the financial condition or results of operations of the Company. Accounting for Certain Investments in Debt and Equity Securities: The Company adopted Statement of Financial Accounting Standards No. 115 (Statement 115), "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994. Upon adoption of Statement 115, the Company identified securities that are "available for sale" and those that are "held to maturity" (the Company has no trading account assets as prescribed by Statement 115). Securities classified as available for sale are those that can be sold in response to changes in market interest rates, liquidity requirements, or other investment alternatives. Securities classified as held to maturity are not available for sale and are held until contractual maturity or call. Securities available for sale are recorded at market value with the unrealized appreciation and depreciation, net of tax, recorded as an element of shareholders' equity. Securities identified as held to maturity are recorded at amortized cost. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of: The Company adopted Statement of Financial Accounting Standards No. 121 (Statement 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," as of January 1, 1996. Various assets are excluded from the scope of Statement 121, including financial instruments which constitute the majority of the Company's assets. For long- lived assets included in the scope of Statement 121, such as premises and equipment, an impairment loss must be recognized when the estimate of total undiscounted future cash flows attributable to the asset is less than the asset's carrying amount. The adoption of Statement 121 did not have a material effect on the Company's consolidated financial statements. 80
<TABLE> Summary of unaudited quarterly financial information (dollars in thousands, except per share data) <CAPTION> 1996 1995 Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Income statement: <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Interest income $41,508 41,822 41,590 41,727 166,647 38,104 39,959 41,506 41,983 161,552 Interest expense 20,377 20,290 20,785 20,890 82,342 17,210 19,873 21,407 21,710 80,200 Net interest income 21,131 21,532 20,805 20,837 84,305 20,894 20,086 20,099 20,273 81,352 Provision for loan losses 3,110 854 943 1,670 6,577 3,573 3,045 3,120 2,960 12,698 Net interest income after provision for loan losses 18,021 20,678 19,862 19,167 77,728 17,321 17,041 16,979 17,313 68,654 Noninterest income 3,127 1,025 2,409 3,752 10,313 3,449 3,986 3,647 2,985 14,067 Noninterest expense 10,446 10,675 10,248 10,646 42,015 11,751 11,862 10,695 10,132 44,440 Income before income taxes 10,702 11,028 12,023 12,273 46,026 9,019 9,165 9,931 10,166 38,281 Income tax expense 4,017 4,115 4,556 4,639 17,327 3,114 3,059 3,335 3,246 12,754 Net income 6,685 6,913 7,467 7,634 28,699 5,905 6,106 6,596 6,920 25,527 Per share data: Net income .32 .33 .36 .36 1.37 .29 .30 .32 .33 1.23 Cash dividends declared .24 .24 .24 .28 .99 .20 .20 .24 .24 .88 </TABLE> Accounting for Stock-Based Compensation: In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (Statement 123), "Accounting for Stock-Based Compensation," which establishes a fair value based method of accounting for stock options, such as the Company's stock option plans. Under Statement 123, entities can recognize stock-based compensation expense in the basic financial statements using either (1) the intrinsic value based approach set forth in the Accounting Principles Board Opinion No. 25 (APB Opinion 25), or (2) the fair value based method introduced in Statement 123. Companies electing to remain with the accounting in APB Opinion 25 must make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting defined in Statement 123 had been applied. Under the method currently utilized by TrustCo (APB Opinion 25), compensation expense is determined based upon the option's intrinsic value. Under the fair value based method introduced by Statement 123, compensation expense is based on the estimate of the option's fair value at the grant date and is generally recognized over the vesting period. The Company adopted the provisions of Statement 123 as of January 1, 1996, and has elected to continue to measure stock-based compensation cost in accordance with APB Opinion 25. Therefore, the pro forma disclosures required by Statement 123 have been included in the footnotes to the consolidated financial statements. Transfer of Financial Assets and Extinguishment of Liabilities: In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125 (Statement 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on a financial- components approach that focuses on control. Statement 125 extends the "available for sale" and "trading" approach of Statement 115 to non-security financial assets that can be contractually prepaid or otherwise settled in such a way that the holder of the asset would not recover substantially all of its recorded investment. In addition, Statement 125 amends Statement 115 with respect to the classification as held to maturity of a security that can be prepaid or settled at a loss to the holder of the security. Statement 125 is effective for financial assets held on or acquired after January 1, 1997. Certain aspects of Statement 125 were amended by Statement of Financial Accounting Standards No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." Management believes the adoption of Statement 125 will not have a material impact on the Company's consolidated financial statements. 80
<TABLE> Five Year Summary of Financial Data (dollars in thousands, except per share data) <CAPTION> Years Ended December 31, 1996 1995 1994 1993 1992 Statement of income data: <S> <C> <C> <C> <C> <C> Interest income $ 166,647 161,552 140,282 133,657 143,260 Interest expense 82,342 80,200 60,698 61,619 76,401 Net interest income 84,305 81,352 79,584 72,038 66,859 Provision for loan losses 6,577 12,698 8,056 11,576 12,693 Net interest income after provision for loan losses 77,728 68,654 71,528 60,462 54,166 Noninterest income 10,313 14,067 4,560 19,176 15,433 Noninterest expense 42,015 44,440 40,560 43,502 42,771 Income before income taxes 46,026 38,281 35,528 36,136 26,828 Income tax expense 17,327 12,754 12,640 12,516 9,325 Income before cumulative effect of change in accounting principle 28,699 25,527 22,888 23,620 17,503 Cumulative effect of a change in accounting principle -- -- -- (3,295) -- Net income $ 28,699 25,527 22,888 20,325 17,503 Share data: Average equivalent shares outstanding (in thousands) 21,022 20,740 20,542 20,429 20,156 Book value $ 7.97 7.89 6.90 6.47 6.03 Cash dividends 0.99 0.88 0.71 0.58 0.45 Net income 1.37 1.23 1.11 0.99 0.87 Financial: Return on average assets 1.29% 1.23 1.15 1.04 0.95 Return on average shareholders' equity (1) 19.05 18.03 17.01 16.18 15.06 Cash dividend payout ratio 70.38 69.55 62.52 56.88 51.05 Tier 1 capital as a % of total risk adjusted assets 12.99 12.45 12.08 12.18 11.39 Total capital as a % of total risk adjusted assets 14.28 13.73 13.35 13.45 12.64 Efficiency ratio 39.51 42.52 41.82 44.63 51.96 Net interest margin 4.07 4.18 4.25 3.99 3.94 Average balances: Total assets $2,220,535 2,073,391 1,994,497 1,946,715 1,852,180 Earning assets 2,136,826 1,994,240 1,910,368 1,857,722 1,763,450 Loans, net 1,227,407 1,187,929 1,122,698 1,044,855 1,025,480 Allowance for loan losses (51,233) (45,086) (37,334) (30,214) (23,735) Securities available for sale 580,919 301,080 332,980 192,433 55,716 Investment securities -- 292,908 250,812 455,136 568,825 Deposits 1,936,445 1,859,070 1,808,336 1,767,531 1,675,479 Short-term borrowings 98,324 38,090 18,129 17,447 25,520 Long-term debt -- 788 2,840 3,870 5,000 Shareholders' equity 155,927 145,469 136,977 125,648 116,238 <FN> (1) Average shareholders' equity excludes the market adjustment for securities available for sale. </FN> </TABLE> 82
Glossary of Terms Allowance for Loan Losses A balance sheet account which has been accumulated over a period of years as a reserve against losses from problem loans. The provision for loan losses is added to the allowance account, charge offs of loans decrease the allowance balance and recoveries on previously charged off loans serve to increase the balance. Book Value Per Share Total shareholders' equity divided by shares outstanding on the same date. This provides an indication of the book value of a share of stock. Cash Dividends Per Share Total cash dividends declared divided by average shares outstanding for the period. Core Deposits Deposits that are traditionally stable, including all deposits other than time deposits of $100,000 or more. Derivative Investments Investments in futures contracts, forwards, swaps, or option contracts, or other investments with similar characteristics. Earning Assets The sum of interest-bearing deposits with banks, securities available for sale, investment securities, loans, net of unearned income, and federal funds sold. Earnings Per Share Net income divided by the average number of shares of common stock outstanding during the period including the effect of stock options. Efficiency Ratio Noninterest expense (excluding nonrecurring charges and other real estate expense) divided by taxable equivalent net interest income plus noninterest income (excluding securities transactions). This is an indicator of the total cost of operating the Company in relation to recurring total income generated. Federal Funds Sold A one day investment of excess cash reserves as required under banking regulations from one bank to another. Impaired Loans Loans, principally commercial, where it is probable that the borrower will be unable to make the principal and interest payments according to the contractual terms of the loan, and all loans restructured subsequent to January 1, 1995. Interest-Bearing Liabilities The sum of interest-bearing deposits, federal funds purchased, securities sold under agreements to repurchase, other short-term borrowings, and long-term debt. Interest Rate Spread The difference between the taxable equivalent yield on earning assets and the rate paid on interest-bearing liabilities. Liquidity The ability to meet both loan commitments and deposit withdrawals as they come due. Net Interest Income The difference between income on earning assets and interest expense on interest-bearing liabilities. Net Interest Margin Fully taxable equivalent net interest income as a percentage of average earning assets. Net Loans Charged Off Reductions to the allowance for loan losses written off as losses, net of the recovery of loans previously charged off. Nonaccrual Loans Loans for which no periodic accrual of interest income is recognized. Nonperforming Assets The sum of nonperforming loans plus foreclosed real estate properties. Nonperforming Loans The sum of loans in a nonaccrual status (for purposes of interest recognition) plus loans whose repayment criteria have been renegotiated to less than market terms due to the inability of the borrowers to repay the loan in accordance with its original terms plus accruing loans 90 days or more past due as to principal or interest payments. Parent Company A company that owns or controls a subsidiary through the ownership of voting stock. Real Estate Owned Real estate acquired through foreclosure proceedings. Restructured Loans A refinanced loan in which the bank allows the borrower certain concessions that would normally not be considered. The concessions are made in light of the borrower's financial difficulties and the bank's objective to maximize recovery on the loan. Return on Average Assets Net income as a percentage of average total assets. Return on Average Equity Net income as a percentage of average equity, excluding the impact of the mark to market adjustment for securities available for sale. Risk-Based Capital The amount of capital required by federal regulatory standards, based on a risk-weighting of assets. Taxable Equivalent (TE) Tax exempt income that has been adjusted to an amount that would yield the same after tax income had the income been subject to taxation at the statutory Federal and/or state income tax rates. 83
Management's Statement of Responsibilities Responsibility for the financial information presented in the Annual Report rests with TrustCo Bank Corp NY's management. The Company believes that the consolidated financial statements reflect fairly the substance of transactions and present fairly the Company's financial position and results of operations in conformity with generally accepted accounting principles appropriate in the circumstances, applying certain estimates and judgments as required. In meeting its responsibilities for the reliability of the consolidated financial statements, the Company depends on its system of internal accounting controls. The system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with the appropriate corporate authorization and recorded properly to permit the preparation of the consolidated financial statements in accordance with generally accepted accounting principles. Although accounting control procedures are designed to achieve these objectives, it must be recognized that errors or irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. The Company believes that its accounting controls provide reasonable assurance that errors or irregularities that could be material to the consolidated financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions. An important element of the system is a continuing and extensive internal audit program. The Board of Directors of the Company has an Audit Committee composed entirely of directors who are not officers or employees of the Company. The Committee meets periodically and privately with management, the internal auditors, and the independent public accountants to consider audit results and to discuss internal accounting controls, auditing and financial reporting matters. KPMG Peat Marwick LLP, independent public accountants, have been engaged to render an independent professional opinion on the Company's consolidated financial statements. Their audit is conducted in accordance with generally accepted auditing standards and forms the basis for their report as to the fair presentation, in the consolidated financial statements, of the Company's financial position, operating results and cash flows. /s/Robert A. McCormick - - ---------------------- Robert A. McCormick President and Chief Executive Officer /s/Robert T. Cushing - - -------------------- Robert T. Cushing Vice President and Chief Financial Officer January 24, 1997 84
Independent Auditors' Report The Board of Directors and Shareholders of TrustCo Bank Corp NY: We have audited the accompanying consolidated statements of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TrustCo Bank Corp NY and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in note 4 to the consolidated financial statements, effective January 1,1995, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - - -- Income Recognition and Disclosures" which prescribe recognition criteria for loan impairment and measurement methods for impaired loans. As discussed in note 3 to the consolidated financial statements, in 1994 the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which changed its method of accounting for certain investments in debt and equity securities. /s/KPMG Peat Marwick LLP - - ------------------------ KPMG Peat Marwick LLP Albany, New York January 24, 1997 85
<TABLE> Consolidated Statements of Income (dollars in thousands, except per share data) <CAPTION> Years Ended December 31, 1996 1995 1994 Interest income: <S> <C> <C> <C> Interest and fees on loans $ 107,111 107,060 93,873 Interest and dividends on: U.S. Treasuries and agencies 31,466 28,193 23,841 States and political subdivisions 4,254 2,902 1,129 Mortgage-backed securities 4,114 8,602 9,376 Other 2,068 2,252 3,005 Interest on federal funds sold 17,634 12,543 9,058 Total interest income 166,647 161,552 140,282 Interest expense: Interest on deposits 77,749 78,355 60,034 Interest on short-term borrowings 4,593 1,776 461 Interest on long-term debt -- 69 203 Total interest expense 82,342 80,200 60,698 Net interest income 84,305 81,352 79,584 Provision for loan losses 6,577 12,698 8,056 Net interest income after provision for loan losses 77,728 68,654 71,528 Noninterest income: Trust department income 5,556 4,890 4,850 Fees for other services to customers 6,981 7,003 7,007 Net gain/(loss) on securities transactions (4,536) 243 (8,877) Other 2,312 1,931 1,580 Total noninterest income 10,313 14,067 4,560 Noninterest expense: Salaries and employee benefits 21,532 19,895 18,323 Net occupancy expense 4,178 4,562 3,479 Equipment expense 3,289 3,403 3,363 FDIC insurance expense 7 2,101 4,071 Professional services 3,676 3,585 2,548 Other real estate expenses 718 3,120 1,016 Other 8,615 7,774 7,760 Total noninterest expense 42,015 44,440 40,560 Income before income taxes 46,026 38,281 35,528 Income taxes 17,327 12,754 12,640 Net income $ 28,699 25,527 22,888 Net income per common share $ 1.37 1.23 1.11 Average equivalent shares outstanding were 21,022,000 for 1996, 20,740,000 for 1995, and 20,542,000 for 1994. Per share data has been adjusted for a 15% stock split in 1996, a 6 for 5 stock split in 1995, and a 10% stock dividend in 1994. See accompanying notes to consolidated financial statements. </TABLE> 86
<TABLE> Consolidated Statements of Condition (dollars in thousands, except share data) <CAPTION> As of December 31, 1996 1995 ASSETS <S> <C> <C> Cash and due from banks $ 45,779 50,889 Federal funds sold 310,000 239,000 Total cash and cash equivalents 355,779 289,889 Securities available for sale 618,670 640,206 Loans 1,243,335 1,227,926 Less: Unearned income 1,453 1,784 Allowance for loan losses 51,561 48,320 Net loans 1,190,321 1,177,822 Bank premises and equipment 23,098 25,008 Real estate owned 6,518 3,732 Other assets 67,394 39,528 Total assets $2,261,780 2,176,185 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand $ 123,553 111,743 Savings 661,915 649,033 NOW accounts 236,264 231,107 Money market deposit accounts 61,131 69,434 Certificates of deposit (in denominations of $100,000 or more) 89,793 84,210 Other time accounts 780,490 785,122 Total deposits 1,953,146 1,930,649 Short-term borrowings 111,662 56,654 Accrued expenses and other liabilities 34,572 28,783 Total liabilities 2,099,380 2,016,086 Shareholders' equity: Capital stock; $1 par value. 50,000,000 and 25,000,000 shares authorized at December 31,1996 and 1995, respectively, and 20,959,376 and 18,134,708 shares issued at December 31, 1996 and 1995, respectively 20,959 18,135 Surplus 114,228 116,128 Undivided profits 23,221 14,720 Net unrealized gain on securities available for sale 5,239 12,363 Treasury stock; 571,142 and 496,646 shares, at cost, at December 31, 1996 and 1995, respectively (1,247) (1,247) Total shareholders' equity 162,400 160,099 Total liabilities and shareholders' equity $2,261,780 2,176,185 See accompanying notes to consolidated financial statements. </TABLE> 87
<TABLE> Consolidated Statements of Changes in Shareholders' Equity (dollars in thousands, except per share data) <CAPTION> Three Years Ended December 31, 1996 Net Unrealized Gain/(Loss) On Securities Capital Undivided Available Treasury Stock Surplus Profits For Sale Stock <S> <C> <C> <C> <C> <C> Beginning balance, January 1, 1994 $ 13,588 91,955 25,331 -- (994) Net income -- 1994 -- -- 22,888 -- -- Cash dividend declared, $.71 per share -- -- (14,310) -- -- Stock options exercised, 65,282 shares 65 801 -- -- -- Net unrealized loss on securities available for sale -- -- -- (41) -- 10% stock dividend (1,365,122 shares) 1,365 25,596 (26,961) -- -- Ending balance, December 31, 1994 15,018 118,352 6,948 (41) (994) Net income -- 1995 -- -- 25,527 -- -- Cash dividend declared, $.88 per share -- -- (17,755) -- -- Stock options exercised, 99,544 shares 100 793 -- -- -- 6 for 5 stock split (3,016,716 shares) 3,017 (3,017) -- -- -- Treasury stock purchased -- -- -- -- (253) Change in net unrealized gain/(loss) on securities available for sale -- -- -- 12,404 -- Ending balance, December 31, 1995 18,135 116,128 14,720 12,363 (1,247) Net income -- 1996 -- -- 28,699 -- -- Cash dividend declared, $.99 per share -- -- (20,198) -- -- Stock options exercised, 90,882 shares 91 844 -- -- -- 15% stock split (2,733,786 shares) 2,733 (2,733) -- -- -- Treasury stock purchased -- -- -- -- (805) Sale of treasury stock -- (11) -- -- 805 Change in net unrealized gain/(loss) on securities available for sale -- -- -- (7,124) -- Ending balance, December 31, 1996 $ 20,959 114,228 23,221 5,239 (1,247) Per share data has been adjusted for a 15% stock split in 1996, a 6 for 5 stock split in 1995, and a 10% stock dividend in 1994. See accompanying notes to consolidated financial statements. </TABLE> 88
<TABLE> Consolidated Statements of Cash Flows (in thousands) <CAPTION> For the Years Ended December 31, 1996 1995 1994 Increase/(decrease) in cash and cash equivalents Cash flows from operating activities: <S> <C> <C> <C> Net income $ 28,699 25,527 22,888 Adjustments to reconcile net income to net cash provided by/ (used in) operating activities: Depreciation and amortization 2,951 3,640 2,749 Provision for loan losses 6,577 12,698 8,056 Provision for deferred tax benefit (3,644) (9,811) (2,981) Net (gain)/loss on sale or call of securities available for sale 4,536 (284) 8,883 Net (gain)/loss on maturities and calls of investment securities and trading assets -- 41 (6) (Increase)/decrease in taxes receivable (1,559) 4,044 (1,003) (Increase)/decrease in interest receivable 856 (3,586) 488 Increase in interest payable 144 954 318 (Increase)/decrease in other assets (17,098) 6,711 1,551 Increase/(decrease) in accrued expenses 4,894 (3,300) 3,154 Total adjustments (2,343) 11,107 21,209 Net cash provided by operating activities 26,356 36,634 44,097 Cash flows from investing activities: Proceeds from sales of securities available for sale 382,780 243,597 1,015,688 Proceeds from maturities and calls of securities available for sale 125,978 48,106 42,558 Purchase of securities available for sale (503,892) (504,525) (770,617) Proceeds from maturities and calls of investment securities -- 62,514 80,717 Purchase of investment securities -- (3,212) (182,981) Net increase in loans (27,469) (75,287) (99,396) Proceeds from sales of real estate owned 4,196 3,931 9,109 Capital expenditures (1,041) (2,271) (1,733) Net cash provided by/(used in) investing activities (19,448) (227,147) 93,345 Cash flows from financing activities: Net increase/(decrease) in deposits 22,497 140,818 (4,401) Net increase/(decrease) in short-term borrowings 55,008 43,941 (5,610) Repayment of long-term debt -- (3,550) -- Proceeds from issuance of long-term debt -- -- 800 Proceeds from issuance of common stock 935 893 866 Proceeds from sale of treasury stock 794 -- -- Payments to acquire treasury stock (805) (253) -- Dividends paid (19,447) (16,926) (13,595) Net cash provided by/(used in) financing activities 58,982 164,923 (21,940) Net increase/(decrease) in cash and cash equivalents 65,890 (25,590) 115,502 Cash and cash equivalents at beginning of year 289,889 315,479 199,977 Cash and cash equivalents at end of year $ 355,779 289,889 315,479 (continued) </TABLE> 89
<TABLE> Consolidated Statements of Cash Flows(continued) (in thousands) <CAPTION> For the Years Ended December 31, 1996 1995 1994 Supplemental disclosure of cash flow information: <S> <C> <C> <C> Interest paid $ 82,198 79,246 60,380 Income taxes paid 22,363 18,521 16,624 Reclassification of investment securities to securities available for sale upon adoption of Statement 115 -- -- 384,416 Transfer of investment securities to securities available for sale upon adoption of the FASB special report on Statement 115 -- 288,515 -- Transfer to investment securities from securities available for sale -- -- 213,199 Transfer of loans to real estate owned 8,393 7,705 9,880 Transfer of building from real estate owned to premises -- 2,500 -- Increase in dividends payable 751 829 715 Reclassification of trading securities to securities available for sale upon adoption of Statement 115 -- -- 2,106 Unrealized gain on securities available for sale on January 1, 1994 -- -- 14,037 Deferred tax on unrealized gain on securities available for sale on January 1, 1994 -- -- 5,816 Change in unrealized (gain)/loss on securities available for sale -- gross 12,134 (21,127) (14,107) Change in deferred tax effect on unrealized gain/(loss) on securities available for sale (5,010) 8,723 (5,787) See accompanying notes to consolidated financial statements. </TABLE> 90
Notes to Consolidated Financial Statements Basis of Presentation The accounting and financial reporting policies of TrustCo Bank Corp NY (Company or TrustCo) and Trustco Bank, National Association (Bank or Trustco) and its operating subsidiary Trustco Realty Corp., conform to general practices within the banking industry and are in accordance with generally accepted accounting principles. A description of the more significant policies follows. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidation The consolidated financial statements of the Company include the accounts of the subsidiaries after elimination of all significant intercompany accounts and transactions. Securities Available for Sale Securities available for sale are carried at market value with any unrealized appreciation or depreciation of value, net of tax, included as an element of the capital accounts. Management maintains an available for sale portfolio in order to provide maximum flexibility in future balance sheet management. The designation of available for sale is made at the time of purchase based upon managementOs intent to hold the securities for an indefinite period of time. These securities, however, would be available for sale in response to changes in market interest rates, related changes in liquidity needs, or changes in the availability of and yield on alternative investments. Unrealized losses on securities that reflect a decline in value which is other than temporary, if any, are charged to income. Nonmarketable equity securities (principally stock of the Federal Reserve Bank and the Federal Home Loan Bank) are included in securities available for sale at cost since there is no readily available market value. The cost of securities available for sale is adjusted for amortization of premium and accretion of discount on a method that equates to the level yield. Gains and losses on the sale of securities available for sale are based on the amortized cost of the specific security sold. Investment Securities Securities classified as investment securities are carried at cost and are held to maturity to meet longer term investment objectives, including yield and liquidity purposes. At the time of purchase, securities are identified as held for investment based upon the Company's intention and ability to hold the securities to maturity. Unrealized losses on securities that reflect a decline in value which is other than temporary, if any, are charged to income. There were no securities classified as investment securities as of December 31, 1996 and 1995. Loans Loans are carried at the principal amount outstanding net of unearned income and unamortized loan fees and costs, which are recognized as income over the applicable loan term. Nonperforming loans include nonaccrual loans, restructured loans, and loans which are 90 days or more past due and still accruing interest. Generally, loans are placed in nonaccrual status, either due to the delinquent status of principal and/or interest payments, or a judgment by management that, although payments of principal and/or interest are current, such action is prudent. Future payments received on nonperforming loans are recorded as interest income or principal reductions based upon management's ultimate expectation for collection. Impaired loans are commercial and commercial real estate loans in nonaccrual status and loans restructured in a troubled debt restructuring since January 1, 1995. Allowance for Loan Losses An allowance for loan losses is maintained at a level considered adequate by management to provide for potential loan losses based on consideration of the credit risk of the loan portfolio, including a review of past experience, current economic conditions, and underlying collateral value. The allowance is increased by provisions charged against income and reduced by net charge offs. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. 91
Bank Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization computed on either the straight-line or accelerated methods over the remaining useful lives of the assets. Real Estate Owned Real estate owned are assets taken through foreclosures on loans. Foreclosed assets held for sale are recorded on an individual basis at the lower of (1) fair value minus estimated costs to sell or (2) "cost" (which is the fair value at initial foreclosure). When a property is acquired, the excess of the loan balance over fair value is charged to the allowance for loan losses. Subsequent write downs are included in noninterest expense. Income Taxes Deferred taxes are recorded for the future tax consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. Dividend Restrictions Banking regulations restrict the amount of cash dividends which may be paid during a year by the Bank to the Parent Company without the written consent of the appropriate bank regulatory agency. Based on these restrictions, the Bank could pay $19.2 million plus 1997 net profits. For all practical purposes, TrustCo could not declare dividends to shareholders materially in excess of the aggregate amount of dividends that could be paid by the Bank. Pension Plan The Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation. Stock Option Plans The Company's stock option plans are accounted for in accordance with the provisions of the Accounting Principles Board Opinion No. 25 (APB Opinion 25) "Accounting for Stock Issued to Employees" and as such no compensation expense has been recorded for these plans. Reclassification of Prior Year Statements It is the Company's policy to reclassify prior year consolidated financial statements to conform to the current year presentation. (2) Balances at Other Banks The Bank is required to maintain certain reserves of vault cash and/or deposits with the Federal Reserve Bank. The amount of this reserve requirement, included in cash and due from banks, was approximately $12.7 million and $15.6 million at December 31, 1996 and 1995, respectively. (3) Securities Available for Sale The amortized cost and approximate market value of the securities available for sale are as follows: <TABLE> (in thousands) <CAPTION> At December 31, 1996 Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value <S> <C> <C> <C> <C> U.S. Treasuries and agencies $404,885 3,564 1,516 406,933 States and political subdivisions 94,954 2,135 171 96,918 Mortgage-backed securities 75,492 1,114 113 76,493 Other 4,276 -- -- 4,276 Total debt securities 579,607 6,813 1,800 584,620 Equity securities 30,139 3,911 -- 34,050 Total securities available for sale $609,746 10,724 1,800 618,670 </TABLE> <TABLE> (in thousands) <CAPTION> At December 31, 1995 Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value <S> <C> <C> <C> <C> U.S. Treasuries and agencies $432,710 14,806 173 447,343 States and political subdivisions 68,151 2,256 36 70,371 Mortgage-backed securities 78,481 1,934 131 80,284 Other 15,690 1,600 -- 17,290 Total debt securities 595,032 20,596 340 615,288 Equity securities 24,118 800 -- 24,918 Total securities available for sale $619,150 21,396 340 640,206 </TABLE> 92
The following table distributes the debt securities available for sale portfolio as of December 31, 1996, based on the securities' final maturity (mortgage-backed securities are stated using average life): <TABLE> (in thousands) <CAPTION> Approximate Amortized Market Cost Value <S> <C> <C> Due in one year or less $ 39,028 39,396 Due after one year through five years 47,094 48,589 Due after five years through ten years 279,870 282,463 Due after ten years 213,615 214,172 $579,607 584,620 The proceeds from sales of securities, gross realized gains and gross realized losses from sales and calls during 1996, 1995 and 1994 are as follows: </TABLE> <TABLE> (in thousands) <CAPTION> At December 31, 1996 1995 1994 <S> <C> <C> <C> Proceeds from sales $382,780 243,597 1,015,688 Gross realized gains 3,214 1,220 5,805 Gross realized losses 7,750 977 14,682 </TABLE> The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as of January 1, 1994. The Company classified certain of the investment securities as being available for sale and reclassified these balances to a separate line on the consolidated statement of condition. In December 1995, the Company reclassified the entire portfolio of investment securities to the category of securities available for sale. This reclassification was made in response to a one-time transfer allowed by the Financial Accounting Standards Board and the various federal banking regulators. The amortized cost of securities available for sale that have been pledged to secure public deposits and for other purposes required by law amounted to $299.7 million and $250.1 million at December 31, 1996 and 1995 respectively. There are no securities of a single issuer (excluding issues of the U.S. government and its agencies) that represent 10% or more of shareholders' equity at December 31, 1996 and 1995. <TABLE> (4) Loans and Allowance for Loan Losses A summary of loans by category is as follows: (in thousands) <CAPTION> At December 31, 1996 1995 <S> <C> <C> Commercial $ 217,363 225,174 Real estate Construction 7,055 11,239 Residential mortgage loans 801,826 760,276 Home equity line of credit 183,832 194,744 Installment loans 33,259 36,493 Total loans 1,243,335 1,227,926 Less: Unearned income 1,453 1,784 Allowance for loan losses 51,561 48,320 Net loans $1,190,321 1,177,822 </TABLE> At December 31, 1996 and 1995, loans to executive officers, directors, and to associates of such persons aggregated $6.9 million and $7.7 million, respectively. During 1996, new loans of $3.8 million were made and repayments of loans totalled $4.6 million. In the opinion of management, such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions. These loans do not involve more than normal risk of collectibility or present other unfavorable features. TrustCo lends primarily in the Capital District region of New York State and in the geographic territory surrounding its borders. Although the loan portfolio is diversified, a portion of its debtors' ability to repay is dependent upon the economic conditions prevailing in New York State. The following table sets forth the information with regard to nonperforming loans: <TABLE> (in thousands) <CAPTION> At December 31, 1996 1995 1994 <S> <C> <C> <C> Loans in nonaccrual status $10,748 12,832 6,370 Loans contractually past due 90 days or more and still accruing interest 792 1,696 4,436 Restructured loans 2,495 1,130 910 Total nonperforming loans $14,035 15,658 11,716 </TABLE> 93
Interest on nonaccrual and restructured loans of $1.3 million in each of 1996 and 1995, and $639 thousand in 1994, would have been earned in accordance with the original contractual terms of the loans. Approximately $834 thousand, $607 thousand and $292 thousand of interest on nonaccrual and restructured loans was collected and recognized as income in 1996, 1995, and 1994, respectively. There are no commitments to extend further credit on nonaccrual or restructured loans. Transactions in the allowance for loan losses account are summarized as follows: <TABLE> (in thousands) <CAPTION> For the years ended December 31, 1996 1995 1994 <S> <C> <C> <C> Balance at beginning of year $ 48,320 38,851 34,087 Provision for loan losses 6,577 12,698 8,056 Loans charged off (5,648) (7,338) (4,824) Recoveries on loans previously charged off 2,312 4,109 1,532 Balance at year end $ 51,561 48,320 38,851 </TABLE> Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114 (Statement 114), "Accounting by Creditors for Impairment of a Loan." Statement 114 was amended by Statement of Financial Accounting Standards No. 118 (Statement 118), "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." These new accounting standards prescribe recognition criteria for loan impairment and measurement methods for impaired loans, and loans whose terms are modified in a troubled debt restructuring subsequent to the adoption of these new standards. 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. These new standards are applicable principally to commercial and commercial real estate loans, however, certain provisions dealing with restructured loans also apply to the retail loan products. Once a loan is identified as impaired, the new accounting standards require measurement of the loan at the lower of fair value of the anticipated proceeds to be received or the recorded investment in the loan. The accounting standards provide certain guidelines as to how fair value is to be determined. In addition, Statement 114 substantially modified the definition of "in-substance foreclosure" loans. Consequently, certain loans identified at year end 1994 as being in-substance foreclosure loans, and classified as real estate owned, have been reclassified into the loan portfolio. At January 1, 1995, $9.2 million of loans previously included in real estate owned have been reclassified to the loan balance. At December 31, 1996 and 1995, there were $5.7 million and $9.4 million, respectively, of commercial and commercial real estate loans that were in non- accrual status and were classified as impaired loans. In addition, there were newly restructured retail loans totalling $2.9 million and $600 thousand that as of December 31, 1996 and 1995 respectively, were identified as impaired loans. None of the allowance for loan losses has been allocated to these impaired loans because of the significant charge offs that have been taken in prior years, and the fact that the collateral values support the loan balances. Cash payments received are normally applied to reduce the outstanding loan balance on the impaired loans (exclusive of cash payments received on restructured loans). During 1996 and 1995 the average balance of impaired loans was $8.5 million and $10.5 million, respectively, and there was approximately $562 thousand and $400 thousand of interest income recorded on these loans in the accompanying consolidated statements of income for 1996 and 1995, respectively. There were $2.6 million and $7.1 million of loans pledged for various purposes at December 31, 1996 and 1995, respectively. <TABLE> (5) Bank Premises and Equipment A summary of premises and equipment at December 31, 1996 and 1995 follows: (in thousands) <CAPTION> 1996 1995 <S> <C> <C> Land $ 3,585 3,593 Buildings 25,214 25,075 Furniture, fixtures and equipment 15,761 15,611 Leasehold improvements 3,711 3,458 48,271 47,737 Accumulated depreciation and amortization (25,173) (22,729) Total $ 23,098 25,008 </TABLE> 94
Depreciation and amortization expense approximated $3.0 million, $3.6 million, and $2.7 million for the years 1996, 1995, and 1994, respectively. Occupancy expense included rental expense of $1.2 million in 1996, and $1.1 million in each of 1995 and 1994. 6) Short-Term Borrowings Short-term borrowings, consisting primarily of the Trustco Short-Term Investment Account, were as follows: <TABLE> (in thousands) <CAPTION> 1996 Trustco Other Short-Term Short-Term Account Borrowings Total <S> <C> <C> <C> Amount outstanding at December 31, 1996 $ 94,298 17,364 111,662 Maximum amount outstanding at any month end 106,441 20,217 124,961 Average amount outstanding 79,583 18,741 98,324 Weighted average interest rate: For the year 5.01% 3.25 4.67 As of year end 4.99 3.33 4.73 </TABLE> <TABLE> (in thousands) <CAPTION> 1995 Trustco Other Short-Term Short-Term Account Borrowings Total <S> <C> <C> <C> Amount outstanding at December 31, 1995 $ 42,250 14,404 56,654 Maximum amount outstanding at any month end 45,066 19,375 62,164 Average amount outstanding 20,812 17,278 38,090 Weighted average interest rate: For the year 5.40% 3.78 4.66 As of year end 5.33 3.38 4.83 </TABLE> The Trustco Short-Term Investment Account balances are immediately withdrawable. All short-term borrowings are collateralized by securities of the Bank pledged for that purpose. Trustco has approximately $200 million of available lines of credit with the Federal Home Loan Bank. (7) Income Taxes A summary of income tax expense/(benefit) included in the consolidated statements of income follows: <TABLE> (in thousands) <CAPTION> For the years ended December 31, 1996 1995 1994 Current tax expense: <S> <C> <C> <C> Federal $ 16,705 16,919 12,412 State 4,710 5,646 3,209 Total current tax expense 21,415 22,565 15,621 Deferred tax benefit (4,088) (9,811) (2,981) Total income tax expense $ 17,327 12,754 12,640 </TABLE> The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996, 1995 and 1994 is as follows: <TABLE> Deferred Tax Benefits and Liabilities (in thousands) <CAPTION> December 31, 1996 1995 1994 Deductible/ Deductible/ Deductible/ (Taxable) (Taxable) (Taxable) Temporary Temporary Temporary Differences Differences Differences <S> <C> <C> <C> Bond accounting $ 43 18 107 Benefits and deferred remuneration 4,034 2,433 2,326 Deferred loan fees, net 840 1,085 1,391 Difference in reporting the provision for loan losses,net 25,247 23,477 18,301 Other income or expense not utilized for tax purposes 4,527 4,386 2,174 Depreciable assets 1,319 651 561 Other items 575 447 481 Total 36,585 32,497 25,341 Valuation reserve (2,051) (2,051) (4,706) Net deferred tax asset at end of year 34,534 30,446 20,635 Net deferred tax asset at beginning of year 30,446 20,635 17,654 Deferred tax benefit $ (4,088) (9,811) (2,981) </TABLE> 95
Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. The valuation allowance of $2.1 million at December 31, 1996 and December 31, 1995 is primarily reserved for federal and state tax law restrictions on the deductibility of certain temporary differences. During 1995, the valuation reserve was reduced as a result of the resolution of several tax return audits and management's reassessment of the realization of certain deferred tax assets. Based primarily on the sufficiency of historical and future taxable income, management believes it is more likely than not that the remaining net deferred tax asset of $34.5 million and $30.4 million at December 31, 1996 and 1995, respectively, will be realized. In addition to the deferred tax items described in the preceding table, the Company also has a deferred tax liability of $3.7 million at December 31,1996, and $8.7 million at December 31, 1995, relating to the net unrealized gains on securities available for sale. <TABLE> The effective tax rates differ from the statutory federal income tax rate. The reasons for these differences are as follows: <CAPTION> 1996 1995 1994 <S> <C> <C> <C> Statutory federal income tax rate 35.0% 35.0 35.0 Increase/(decrease) in taxes resulting from: Tax exempt income (3.3) (3.1) (1.9) State income tax, net of federal tax benefit 5.4 9.6 4.9 Effect of decrease in tax rate on deferred tax benefit -- -- 1.1 Reduction in valuation reserve -- (6.9) (3.5) Other items 0.6 (1.3) -- Effective income tax rate 37.7% 33.3 35.6 </TABLE> (8) Benefit Plans (a) Retirement Plan The Company maintains a trusteed non-contributory pension plan covering employees that have completed one year of employment and 1,000 hours of service. The benefits are based on the sum of (a) a benefit equal to a prior service benefit plus the average of the employees' highest five consecutive years' compensation in the ten years preceding retirement multiplied by a percentage of service after a specified date plus (b) a benefit based upon career average compensation. The amounts contributed to the plan are determined annually on the basis of (a) the maximum amount that can be deducted for federal income tax purposes or (b) the amount certified by a consulting actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Assets of the plan are invested primarily in common stock and fixed income common funds administered by the Bank's Trust Department. The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated statements of condition at December 31, 1996 and 1995: <TABLE> Actuarial Present Value of Benefit Obligations: (in thousands) <CAPTION> 1996 1995 <S> <C> <C> Accumulated benefit obligation, including vested benefits of $14,186 and $13,513 in 1996 and 1995, respectively $ (14,370) (13,715) Projected benefit obligation for service rendered to date (16,336) (15,037) Plan assets at fair value 25,170 22,621 Plan assets in excess of projected benefit obligation 8,834 7,584 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (6,499) (5,110) Unrecognized prior service cost (420) (465) Unrecognized net asset at transition being recognized over 4 remaining years (590) (737) Prepaid pension expense $ 1,325 1,272 </TABLE> <TABLE> Net Pension Benefit for the years ended December 31: (in thousands) <CAPTION> 1996 1995 1994 <S> <C> <C> <C> Service cost -- benefits earned during the period $ 653 511 518 Interest cost on projected benefit obligation 995 920 874 Actual return on plan assets (3,653) (5,080) (39) Net amortization and deferral 1,952 3,639 (1,478) Net periodic pension benefit $ (53) (10) (125) </TABLE> 96
<TABLE> The weighted average discount rate, the rate of increase in future compensation levels, and the expected long-term rate of return used in determining the actuarial present value of projected benefit obligations, were as follows: <CAPTION> 1996 1995 1994 <S> <C> <C> <C> Weighted average discount rate 6.50% 6.50 7.00 Rate of increase in future compensation 6.00 6.00 6.00 Expected long-term rate of return on assets 6.50 6.25 6.75 </TABLE> The Company also has actuarily determined supplemental pension plans under which additional retirement benefits are accrued for eligible executive and senior officers. The expense recorded for these plans were $2.6 million, $2.0 million, and $1.8 million in 1996, 1995, and 1994, respectively. Rabbi trusts have been established for certain benefit plans in 1996. These rabbi trust accounts are administered by the Bank's Trust department and invest primarily in the Trustco Short-Term Investment Account. These assets are reflected as other assets in the December 31, 1996, consolidated statement of condition. (b) Incentive and Bonus Plans The Company provides a profit-sharing plan for substantially all employees. The expense of this plan, which is based on management discretion as defined in the plan, amounted to $1.3 million in 1996 and 1995, and $1.2 million in 1994. The Company also has an executive incentive plan. The expense of this plan is based on the Company's performance and estimated distributions to participants are accrued during the year and generally paid in the following year. The expense recorded fo this plan was $2.1 million, $1.7 million, and $1.3 million in 1996, 1995, and 1994, respectively. <TABLE> (c) Stock Option Plans At December 31, 1996, the Company had stock option plans for officers and directors as described below. TrustCo applies APB Opinion No. 25 and related Interpretations in accounting for these plans. Accordingly, no compensation cost has been recognized for these fixed stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined consistent with Statement of Financial Accounting Standards No. 123 (Statement 123), "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: <CAPTION> 1996 1995 Net income <S> <C> <C> As reported $28,699 25,527 Pro forma 28,364 25,373 Earnings per share As reported 1.37 1.23 Pro forma 1.35 1.22 </TABLE> Pro forma net income and earnings per share reflect options granted in 1996 and 1995. The full impact of calculating compensation cost for all stock options under Statement 123 is not reflected in the pro forma net income and earnings per share amounts presented above because compensation cost is reflected over the options' expected life and compensation cost for options granted prior to January 1, 1995 is not considered. Under the 1995 TrustCo Bank Corp NY Stock Option Plan, the Company may grant options to its eligible employees for up to approximately 1.4 million shares of common stock. Under the 1993 Directors Stock Option Plan, the Company may grant options to its directors for up to approximately 152,000 shares of its common stock. Under both plans, the exercise price of each option equals the market price of the Company's stock on the date of grant, and an option's maximum term is ten years. Options vest over a five year period from the date the options are granted for the employee plan and they are immediately exercisable for the directors plan. 97
<TABLE> A summary of the status of TrustCo's stock option plans as of December 31,1996, 1995 and 1994 and changes during the years ended on those dates are as follows: <CAPTION> Outstanding Options Exercisable Options Average Average Option Option Shares Price Shares Price <S> <C> <C> <C> <C> Balance, January 1, 1994 1,377,802 $ 9.06 647,493 $ 8.68 New options awarded 389,367 13.32 91,232 13.55 Cancelled options 123,185 12.64 1,518 13.30 Exercised options 98,809 8.78 98,809 8.78 Options became exercisable -- -- 222,236 8.41 Balance, December 31, 1994 1,545,175 10.66 860,634 9.57 New options awarded 352,820 16.29 80,684 16.44 Exercised options 129,837 6.97 129,837 6.97 Options became exercisable -- -- 278,780 11.05 Balance, December 31, 1995 1,768,158 12.05 1,090,261 10.76 New options awarded 394,450 17.73 89,010 18.03 Cancelled options 8,280 15.61 -- -- Exercised options 105,929 7.55 105,929 7.55 Options became exercisable -- -- 266,739 13.14 Balance, December 31, 1996 2,048,399 $13.36 1,340,081 $11.97 </TABLE> <TABLE> Options are exercisable for approximately 1.3 million shares at year end 1996 and 1.1 million shares at year end 1995. The fair value of each option as of the grant date, estimated using the Black-Scholes pricing model, and calculated in accordance with Statement 123 was: <CAPTION> Employees' Directors' Plan Plan <C> <C> <C> 1996 $3.25 3.64 1995 2.72 2.93 </TABLE> <TABLE> The following assumptions were utilized in the calculation of the fair value of the options under Statement 123: <CAPTION> Employees' Directors' Plan Plan <S> <C> <C> Expected dividend yield 1996 and 1995 5.06% 5.06 Risk-free interest rate: 1996 6.65 6.62 1995 5.97 6.27 Expected volatility rate: 1996 20.65 21.23 1995 20.29 20.47 Expected lives 1996 and 1995 7.5 years 6.0 years </TABLE> <TABLE> The following table summarizes information about the stock option plans for options outstanding at December 31, 1996: <CAPTION> Weighted Options Average Weighted Range of Outstanding Remaining Average Exercise Year End Contractual Exercise Price 1996 Life Price <S> <C> <C> <C> Less than $10.00 612,889 5.4 years $ 8.93 Between $10.01 and $15.00 696,060 7.5 years 13.34 Greater than $15.01 739,450 9.5 years 17.05 Total 2,048,399 7.6 years $13.36 </TABLE> <TABLE> The following table summarizes information about the exercisable stock options at December 31, 1996: <CAPTION> Weighted Options Average Weighted Range of Exercisable Remaining Average Exercise Year End Contractual Exercise Price 1996 Life Price <S> <C> <C> <C> Less than $10.00 612,889 5.4 years $ 8.93 Between $10.01 and $15.00 492,040 7.5 years 13.36 Greater than $15.01 235,152 9.4 years 16.98 Total 1,340,081 6.9 years $11.97 </TABLE> (d) Postretirement Benefits The Company permits retiree's under age 65 to participate in the Company's medical plan by paying the same premium as the active employees. At age 65, the Bank provides a Medicare Supplemental Program to retirees. 98
<TABLE> Accumulated postretirement benefit obligations at December 31, 1996 and 1995: (in thousands) <CAPTION> 1996 1995 <S> <C> <C> Retirees $ 4,628 4,000 Fully eligible active plan participants 657 651 Other active plan participants 2,421 1,929 Accumulated postretirement benefit obligation 7,706 6,580 Plan assets, at fair value 8,860 8,058 Plan assets in excess of accumulated postretirement benefit obligation 1,154 1,478 Unrecognized gain (2,039) (1,937) Accrued postretirement benefit cost $ (885) (459) </TABLE> <TABLE> Net periodic postretirement benefit costs for 1996, 1995, and 1994 includes the following components: (in thousands) <CAPTION> 1996 1995 1994 <S> <C> <C> <C> Service cost $ 323 325 362 Interest cost 444 445 462 Return on plan assets (304) (248) (429) Deferral of unrecognized net gain (31) -- -- Net period postretirement benefit cost $ 432 522 395 </TABLE> The Company funded the prior service cost of the plan in full through the use of a benefit trust during the first quarter of 1993. Assets of the plan are invested primarily in common stock and fixed income common funds administered by the Bank's Trust Department. The trust holding the plan assets is subject to federal income taxes at a 35.0% rate. The expected long-term rate of return on plan assets, after estimated income taxes, was 3.8%, 4.0%, and 4.2% for the years ended December 31, 1996, 1995, and 1994, respectively. For measurement purposes, a 7% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 1996 and thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by approximately $1.1 million, and increase the aggregate of the service and the interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1996, by approximately $185 thousand. The weighted average discount rate used in determining the accumulated post- retirement benefit obligation was 6.50 percent at December 31, 1996 and December 31, 1995, and 6.75 percent at December 31, 1994. <TABLE> (9) Commitments and Contingent Liabilities (a) Leases The Bank leases certain banking premises. These leases are accounted for as operating leases with minimum rental commitments in the amounts presented below. The majority of these leases contain options to renew. (in thousands) <CAPTION> <S> <C> 1997 $1,121 1998 1,064 1999 1,040 2000 964 2001 887 2002 and after 4,672 </TABLE> $9,748 (b) Litigation Existing litigation arising in the normal course of business is not expected to result in any material loss to the Company. <TABLE> (c) Time Deposits At December 31, 1996, the maturity of all time deposits is as follows: (in thousands) <CAPTION> <S> <C> <C> Under 1 year $507,187 1 to 2 years 194,815 2 to 3 years 126,390 3 to 4 years 30,365 4 to 5 years 8,243 over 5 years 3,283 $870,283 </TABLE> 99
(10) Off-Balance Sheet Financing Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a fee. Commitments sometimes expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the BankOs normal credit policies, including obtaining collateral. The Bank's exposure to credit loss for loan commitments, including unused lines of credit, at December 31, 1996 and 1995 was $222.5 million and $220.8 million, respectively. Approximately three-fifths of these commitments were for variable rate products at the end of 1996. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the BankOs normal credit policies, including obtaining collateral. The BankOs exposure to credit loss for standby letters of credit at December 31, 1996 and 1995 was $12.0 million and $19.0 million, respectively. No losses are anticipated as a result of loan commitments or standby letters of credit. (11) Fair Value of Financial Instruments The fair values shown below represent management's estimates of values at which the various types of financial instruments could be exchanged in transactions between willing, unrelated parties. They do not necessarily represent amounts that would be received or paid in actual trades of specific financial instruments. <TABLE> (in thousands) <CAPTION> As of December 31, 1996 Carrying Fair value value Financial assets: <S> <C> <C> Cash and cash equivalents $ 355,779 355,779 Securities available for sale 618,670 618,670 Loans 1,190,321 1,237,297 Accrued interest receivable 17,372 17,372 Financial liabilities: Demand deposits 123,553 123,553 Interest-bearing deposits 1,829,593 1,832,956 Borrowings 111,662 111,662 Accrued interest payable 2,941 2,941 </TABLE> <TABLE> (in thousands) <CAPTION> As of December 31, 1995 Carrying Fair value value Financial assets: <S> <C> <C> Cash and cash equivalents $ 289,889 289,889 Securities available for sale 640,206 640,206 Loans 1,177,822 1,242,507 Accrued interest receivable 18,276 18,276 Financial liabilities: Demand deposits 111,743 111,743 Interest-bearing deposits 1,818,906 1,829,052 Borrowings 56,654 56,654 Accrued interest payable 2,797 2,797 </TABLE> The specific estimation methods and assumptions used can have a substantial impact on the resulting fair values of financial instruments. Following is a brief summary of the significant methods and assumptions used in the previous table: Cash and Cash Equivalents The carrying value of these financial instruments approximates fair values. Securities Fair values for all securities portfolios are based upon quoted market prices, where available. The carrying value of certain local, unrated municipal obligations was used as an approximation of fair value. Loans The fair values of all loans are estimated using discounted cash flow analyses with discount rates equal to the interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Deposit Liabilities The fair values disclosed for noninterest-bearing deposits, NOW accounts, savings accounts and money market accounts are, by definition, equal to the amount payable on demand at the balance sheet date. The carrying value of all variable rate certificates of deposit is assumed to approximate fair value. The fair value of fixed rate certificates of deposit is estimated using discounted cash flow analyses with discount rates equal to the interest rates currently being offered on certificates of similar size and remaining maturity. Short-Term Borrowings and Other Financial Instruments The fair value of all short-term borrowings and other financial instruments is assumed to be the carrying value. Financial Instruments with Off-Balance Sheet Risk The Company is a party to financial instruments with off-balance sheet risk. Such financial instruments consist of commitments to extend financing and letters of credit. 100
If the commitments are exercised by the prospective borrowers, these financial instruments will become interest-earning assets of the Company. If the commitments expire, the Company retains any fees paid by the prospective borrower. The fair value of commitments is estimated based upon fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the present credit worthiness of the borrower. For fixed rate commitments, the fair value estimation takes into consideration an interest rate risk factor. The fair value of these off-balance sheet items approximates the recorded amounts of the related fees, which are considered to be immaterial. The Company has no derivative investment products nor has the Company ever invested in such investment vehicles. Therefore, the disclosures as required by Statement of Financial Accounting Standards No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments," are not presented except as it relates to fair value disclosures in this footnote. (12) Regulatory Capital Requirements Office of the Comptroller of the Currency (OCC) capital regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 1996, the Bank was required to maintain a minimum leverage ratio of Tier I (leverage) capital to total adjusted average assets of 4.00% and minimum ratios of Tier I capital and total capital to risk weighted assets of 4.00% and 8.00%, respectively. The Federal Reserve Board has adopted similar requirements for the consolidated capital of bank holding companies. The regulations establish a framework for the classification of banks into five categories: well capitalized, adequately capitalized, under capitalized, significantly under capitalized and critically under capitalized. Generally, an institution is considered well capitalized if it has a Tier I (leverage) capital ratio of at least 5.0% (based on total adjusted average assets), a Tier I risk based capital ratio of at least 6.0%, and a total risk based capital ratio of at least 10.0%. The foregoing capital ratios are based on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OCC about capital components, risk weighting and other factors. Management believes that, as of December 31, 1996, the Bank and Company meet all capital adequacy requirements to which they are subject. Further, the most recent OCC notification categorized the Bank as a well capitalized institution. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification. Under its prompt corrective action regulations, the OCC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on an institution's financial statements. As stated above, the Company has been classified as well capitalized for regulatory purposes, and therefore, these regulations do not apply. The following is a summary of actual capital amounts and ratios for the Bank and the Company (on a consolidated basis): <TABLE> (dollars in thousands) <CAPTION> As of December 31, 1996 Amount Ratio Tier I (leverage) capital: <S> <C> <C> Trustco Bank, NA $138,982 6.27% TrustCo Bank Corp NY 157,161 7.04 Tier I risk based capital: Trustco Bank, NA 138,982 11.64 TrustCo Bank Corp NY 157,161 12.99 Total risk based capital: Trustco Bank, NA 154,363 12.92 TrustCo Bank Corp NY 172,735 14.28 </TABLE> (13) Parent Company Only The following statements pertain to TrustCo Bank Corp NY (Parent Company): <TABLE> Statements of Income (in thousands) <CAPTION> Years Ended December 31, Income: 1996 1995 1994 <S> <C> <C> <C> Dividends and interest from subsidiaries $ 20,418 28,416 14,820 Gain on sale of securities -- 92 133 Income from other investments 301 66 66 Total income 20,719 28,574 15,019 Expense: Operating supplies 120 126 129 Professional services 222 200 145 Miscellaneous expense . 308 70 48 Total expense 650 396 322 Income before income taxes and undistributed net income of subsidiaries 20,069 28,178 14,697 Income tax expense/(benefit) (98) (32) 1 Income before equity in undistributed net income of subsidiaries 20,167 28,210 14,696 (Distributions in excess of)/equity in undistributed net income of subsidiaries 8,532 (2,683) 8,192 Net income $ 28,699 25,527 22,888 </TABLE> 101
<TABLE> Statements of Condition (in thousands) <CAPTION> December 31, Assets: 1996 1995 <S> <C> <C> Cash in subsidiary bank $ 8,185 7,187 Noninterest bearing note receivable from subsidiary 2,117 3,617 Investments in subsidiaries 142,108 141,526 Securities available for sale 15,965 12,601 Other assets . 1,296 422 Total assets $ 169,671 165,353 Liabilities and shareholders' equity: Accrued expenses and other liabilities $ 7,271 5,254 Total liabilities 7,271 5,254 Shareholders' equity . 162,400 160,099 Total liabilities and shareholders' equity $ 169,671 165,353 </TABLE> <TABLE> Statements of Cash Flows (in thousands) <CAPTION> Years Ended December 31, 1996 1995 1994 Increase/(decrease) in cash and cash equivalents: Cash flows from operating activities: <S> <C> <C> <C> Net income $ 28,699 25,527 22,888 Adjustments to reconcile net income to net cash provided by operating activities: Distributions in excess of/(equity in undistributed net income) of subsidiaries (8,532) 2,683 (8,192) Gain on sales of securities -- (92) (133) (Increase)/decrease in other assets (874) 78 1 Increase/(decrease) in accrued expenses (19) 31 34 Total adjustments (9,425) 2,700 (8,290) Net cash provided by operating activities 19,274 28,227 14,598 Cash flows from investing activities: Proceeds from sale of securities available for sale -- 1,285 1,603 Purchase of securities available for sale (253) (10,651) (1,668) (Increase)/decrease in noninterest bearing note receivable from subsidiary 500 (3,617) -- Net cash provided by/(used in)investing activities 247 (12,983) (65) Cash flows from financing activities: Proceeds from issuance of common stock 935 893 866 Dividends paid (19,447) (16,926) (13,595) Payments to acquire treasury stock (805) (253) -- Proceeds from sale of treasury stock 794 -- -- Net cash used in financing activities (18,523) (16,286) (12,729) Net increase/(decrease) in cash and cash equivalents 998 (1,042) (1,804) Cash and cash equivalents at beginning of year 7,187 8,229 6,425 Cash and cash equivalents at end of year $ 8,185 7,187 8,229 Supplemental disclosure of cash flow information: Increase in dividends payable $ 751 829 715 Equity contribution to subsidiary 1,000 -- -- Reclassification of trading securities to securities available for sale upon adoption of Statement 115 -- -- 2,106 Change in unrealized (gain)/loss on available for sale securities -- gross (3,111) (843) 42 Reclassification of fixed assets to other assets -- 389 -- Change in deferred tax effect on unrealized gain/(loss) on securities available for sale 1,285 348 (18) </TABLE> 102
TrustCo Bank Corp NY Officers and Board of Directors Officers Robert A. McCormick President and Chief Executive Officer Robert T. Cushing Vice President and Chief Financial Officer Nancy A. McNamara Vice President Ralph A. Pidgeon Vice President and Assistant Secretary William F. Terry Secretary Board of Directors Barton A. Andreoli President Towne Construction and Paving Corp. Lionel O. Barthold Chairman Power Technologies, Inc. M. Norman Brickman President D. Brickman, Inc. Anthony J. Marinello, M.D., Ph.D. Physician Robert A. McCormick President and Chief Executive Officer Trustco Bank Nancy A. McNamara Senior Vice President Trustco Bank John S. Morris, Ph.D. President Emeritus, Union College and Former Chancellor, Union University James H. Murphy, D.D.S. Orthodontist Richard J. Murray, Jr. President R.J. Murray Co., Inc. Kenneth C. Petersen President Schenectady International, Inc. William D. Powers Chairman New York Republican State Committee William J. Purdy President Welbourne & Purdy Realty, Inc. William F. Terry Senior Vice President and Secretary Trustco Bank Directors of TrustCo Bank Corp NY are also Directors of Trustco Bank HONORARY DIRECTORS Charles W. Carl, Jr. Caryl P. Haskins, Ph.D. Bernard J. King H. Gladstone McKeon William H. Milton, III Daniel J. Rourke, M.D. Anthony M. Salerno Edwin O. Salisbury Harry E. Whittingham, Jr. 103
Trustco Bank Officers PRESIDENT AND CHIEF EXECUTIVE OFFICER Robert A. McCormick SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Robert T. Cushing SENIOR VICE PRESIDENT Nancy A. McNamara SENIOR VICE PRESIDENT Ralph A. Pidgeon SENIOR VICE PRESIDENT AND SECRETARY William F. Terry AUDITOR John C. Fay ACCOUNTING/FINANCE, DATA PROCESSING, GENERAL SERVICES, MANAGEMENT INFORMATION SYSTEMS Senior Vice President and Chief Financial Officer Robert T. Cushing ACCOUNTING/FINANCE Vice Presidents Linda C. Christensen Jeffrey S. Farbaniec Management Information Officer Lynn D. Hackler DATA PROCESSING Administrative Vice President William H. Milton Senior Information Services Officer Daneille M. Eddy COMMUNITY RELATIONS, LEGAL COUNSEL, LOAN DIVISION, TRUST Senior Vice President Nancy A. McNamara LEGAL COUNSEL Administrative Vice President Henry C. Collins LOAN DIVISION COMMERCIAL/MORTGAGE LOANS Administrative Vice President Robert J. McCormick COMMERCIAL LOANS Vice Presidents Donald J. Csaposs Scot R. Salvador George W. Wickswat Commercial Loan Officers Peter L. Gregory Eric W. Schreck Joseph F. Scriver MORTGAGE LOANS Senior Loan Officer Elinore J. Vine TRUST DEPARTMENT Vice Presidents Ann Marie Franke James Niland Ann M. Noble Robert Scribner Trust Officers John P. Fulgan Richard W. Provost J. Jeffrey Underhill Investment Officer William M. McCartan BRANCHES, INSTALLMENT LOANS/CREDIT CARDS, RETIREMENT/GOVERNMENT ACCOUNTS Senior Vice President Ralph A. Pidgeon BRANCH OFFICERS Richard E. Bailey Thomas H. Lauster Eleanor G. Moran INSTALLMENT LOANS/ CREDIT CARDS Senior Installment Loan Officer Thomas M. Poitras BANK OPERATIONS, MARKETING Senior Vice President and Secretary William F. Terry BANK OPERATIONS Administrative Vice President James D. McLoughlin Deposit Operations Officer Kevin M. Curley MARKETING Vice President Madeline S. Busch HUMAN RESOURCES Senior Personnel Officer Cheri J. Parvis 104
Branch Locations Altamont Ave. Office 1400 Altamont Ave. Schenectady Telephone: 356-1317 Altamont Ave. West Office 1900 Altamont Ave. Rotterdam Telephone: 355-1900 Bay Road Office 345 Bay Road, Suite 1 Queensbury Telephone: 792-2691 Brandywine Office State St. at Brandywine Ave. Schenectady Telephone: 346-4295 Central Avenue Office 163 Central Ave. Albany Telephone: 426-7291 Clifton Country Road Office 7 Clifton Country Road Clifton Park Telephone: 371-5002 Clifton Park Office 1018 Route 146 Clifton Park Telephone: 371-8451 Colonie Office 1892 Central Ave. Colonie Plaza, Colonie Telephone: 456-0041 Delmar Office 167 Delaware Ave. Delmar Telephone: 439-9941 East Greenbush Office 501 Columbia Turnpike Rensselaer Telephone: 479-7233 Exit 8/Crescent Rd. Office CVS Plaza Clifton Park Telephone: 383-0113 Glens Falls Office 3 Warren Street Glens Falls Telephone: 798-8131 Greenwich Office 131 Main St. Greenwich Telephone: 692-2233 Guilderland Office 3900 Carman Road Schenectady Telephone: 355-4890 Halfmoon Office Country Dollar Plaza Halfmoon Telephone: 371-0593 Hoosick Falls Office 47 Main St. Hoosick Falls Telephone: 686-5352 Hudson Office 507 Warren St. Hudson Telephone: 828-9434 Hudson Falls Office 3376 Burgoyne Avenue Hudson Falls Telephone: 747-0886 Latham Office 1 Johnson Road Latham Telephone: 785-0761 Loudon Plaza Office 372 Northern Blvd. Albany Telephone: 462-6668 Madison Avenue Office 1084 Madison Ave. Albany Telephone: 489-4711 Main Office 320 State St. Schenectady Telephone: 377-3311 Malta 4 Corners Office 2471 Route 9 Malta Telephone: 899-1056 Malta Mall Office 43 Round Lake Road Ballston Lake Telephone: 899-1558 Mayfair Office Saratoga Road at Mayfair Glenville Telephone: 399-9121 Mechanicville Office 9 Price Chopper Plaza Mechanicville Telephone: 664-1059 Mont Pleasant Office Crane St. at Main Ave. Schenectady Telephone: 346-1267 New Scotland Office 301 New Scotland Ave. Albany Telephone: 438-7838 Newton Plaza Office 588 New Loudon Road Latham Telephone: 786-3687 Niskayuna-Woodlawn Office 3461 State St. Schenectady Telephone: 377-2264 Plaza Seven Office 1208 Troy-Schenectady Road Latham Telephone: 785-4744 Queensbury Office 118 Quaker Road Suite 9, Queensbury Telephone: 798-7226 Rotterdam Office Curry Road Shopping Ctr. Rotterdam Telephone: 355-8330 Rotterdam Square Office 93 W. Campbell Road Rotterdam Telephone: 377-2393 Route 9 Office N Latham 754 New Loudon Rd. Latham Telephone: 786-8816 Sheridan Plaza Office 1350 Gerling St. Schenectady Telephone: 377-8517 Shoppers' World Office Old Rte. 146 and Plank Rd. Clifton Park Telephone: 383-6850 State Farm Road Office 2050 Western Ave. Guilderland Telephone: 452-6913 State Street Office 112 State St. Albany Telephone: 436-9043 Stuyvesant Plaza Office Western Ave. at Fuller Road Albany Telephone: 489-2616 Tanners Main Office 345 Main Street Catskill Telephone: 943-2500 Tanners West Side Office 238 West Bridge St. Catskill Telephone: 943-5090 Troy Office 5th Ave. and State St. Troy Telephone: 274-5420 Union Street East Office 1700 Union St. Schenectady Telephone: 382-7511 Upper New Scotland Office 583 New Scotland Ave. Albany Telephone: 438-6611 Upper Union Street Office 1620 Union St. Schenectady Telephone: 374-4056 Wilton Mall Office Route 50 Saratoga Springs Telephone: 583-1716 Wolf Road Office 34 Wolf Road Albany Telephone: 458-7761 105
General Information ANNUAL MEETING Monday, May 19, 1997 10:00 AM TrustCo Bank Corp NY 192 Erie Boulevard Schenectady, NY 12305 CORPORATE HEADQUARTERS 320 State Street Schenectady, New York 12305 (518) 377-3311 DIVIDEND REINVESTMENT PLAN A Dividend Reinvestment Plan is available to shareholders of TrustCo Bank Corp NY. It provides for the reinvestment of cash dividends and optional cash payments to purchase additional shares of TrustCo stock. The Plan is free of administrative charges, and provides a convenient method of acquiring additional shares. Trustco Bank, our wholly owned bank subsidiary, acts as administrator for this service, and is the agent for shareholders in these transactions. Shareholders who want additional information may contact the TrustCo Shareholder Services Department (518) 381-3601. DIRECT DEPOSIT OF DIVIDENDS Electronic deposit of dividends, which offers safety and convenience, is available to TrustCo shareholders who wish to have dividends deposited directly to personal checking, savings or other accounts. Electing direct deposit will not affect the mailing of annual and quarterly reports and proxy materials. If you would like to arrange direct deposit, please write or call the Corporate Secretary at the address or the telephone number listed on this page. DUPLICATE MAILING NOTIFICATION If you are a shareholder of record and are currently receiving multiple copies of TrustCo's annual and quarterly reports, please contact the TrustCo Shareholder Services Department at (518) 381-3601, or at the address listed on this page. EQUAL OPPORTUNITY AT TRUSTCO Trustco Bank is an Affirmative Action Equal Opportunity Employer. FORM 10-K TrustCo Bank Corp NY will provide without charge a copy of its Form 10-K upon written request. Requests and related inquiries should be directed to William F. Terry, Secretary, TrustCo Bank Corp NY, P.O. Box 1082, Schenectady, New York 12301-1082. NASDAQ SYMBOL: TRST The Corporation's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol TRST. SUBSIDIARIES: Trustco Bank, National Association Schenectady, New York Member FDIC ORE Subsidiary Corp. Schenectady, New York Trustco Realty Corp. Schenectady, New York TRANSFER AGENT Trustco Bank Securities Department P.O. Box 380 Schenectady, New York 12301-0380 Trustco Bank is a registered service mark with the U.S. Patent & Trademark Office. 106
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LIST OF SUBSIDIARIES OF TRUSTCO Trustco Bank, National Association Nationally chartered banking association ORE Subsidiary Corp New York corporation Trustco Realty Corp. New York corporation (Subsidiary of Trustco Bank, National Association) Each subsidiary does business under its own name. The activities of each is described in Part I, Item 1 of Form 10-K. -109-
Exhibit 23 KPMG Peat Marwick LLP 74 North Pearl Street Albany, NY 12207 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors TrustCo Bank Corp NY: We consent to incorporation by reference in the Registration Statements, Form S-8 (No. 33-43153) filed on October 3, 1991, Form S-8 (No. 33-67176) filed on August 6, 1993, Form S-8 (No. 33-43153) filed on March 21, 1995, Form S-8 (No. 33-60409) filed on June 20, 1995, Form S-3 (No. 33-46044) filed on September 20, 1995 of TrustCo Bank Corp NY and subsidiaries of our report dated January 24, 1997, relating to the consolidated statements of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 Annual Report on Form 10-K of TrustCo Bank Corp NY. Our report refers to the adoption of the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." /s/ KPMG Peat Marwick LLP ------------------------- KPMG Peat Marwick LLP March 21, 1997 -110-
Exhibit 24 POWER OF ATTORNEY The undersigned persons do hereby appoint William F. Terry or Robert T. Cushing as a true and lawful Attorney In Fact for the sole purpose of affixing their signatures to the 1996 Annual Report (Form 10-K) of TrustCo Bank Corp NY to the Securities and Exchange Commission. /s/Barton A. Andreoli /s/Lionel O. Barthold -------------------------- --------------------- Barton A. Andreoli Lionel O. Barthold /s/M. Norman Brickman /s/Anthony J. Marinello -------------------------- --------------------- M. Norman Brickman Dr. Anthony J. Marinello /s/Robert A. McCormick /s/Nancy A. McNamara -------------------------- --------------------- Robert A. McCormick Nancy A. McNamara /s/Dr. John S. Morris /s/James H. Murphy -------------------------- --------------------- Dr. John S. Morris Dr. James H. Murphy /s/Richard J. Murray, Jr. /s/Kenneth C. Petersen -------------------------- --------------------- Richard J. Murray, Jr. Kenneth C. Petersen /s/ William D. Powers /s/William J. Purdy -------------------------- --------------------- William D. Powers William J. Purdy /s/William F. Terry -------------------------- William F. Terry Sworn to before me this 18th day of March 1997. /s/Joan Clark ------------------------- Notary Public Joan Clark Notary Public, State of New York Qualified in Albany County No. 01CL4822282 Commission Expires Nov. 30, 1998 -111-