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, 1998 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 incorporation or organization) (I.R.S. Employer Identification No.) 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: Common Stock, $1.00 Par Value (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) 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 1, 1999 $1 Par Value 26,886,140 The aggregate market value of registrant's common stock (based upon the closing price on March 1, 1999) held by non-affiliates was approximately $722,565,013. Documents Incorporated by Reference(1) Portions of registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1998 (Part I and Part II). (2) Portions of registrant's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 17, 1999 (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 7A Quantitative and Qualitative Disclosures about 7 Market Risk 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 8 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 2
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 480 full-time equivalent employees at year-end 1998. TrustCo had 8,941 shareholders of record as of December 31, 1998, and the closing price of the TrustCo common stock at that date was $30.00. 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 33 automatic teller machines and 53 banking offices in Albany, Columbia, Greene, Rensselaer, Saratoga, Schenectady, Schoharie, 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 1998 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 $1.24 billion as of December 31, 1998. The daily operations of the Bank remain the responsibility of its Board of Directors and 1 3
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 business are subject to regulation and examination by the Reserve Board, the FDIC and the OCC. 2 4
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, 1998, which appears on pages 34 and 35 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 13 of the consolidated financial statements contained in TrustCo's Annual Report to Shareholders for the year ended December 31, 1998, 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 were authorized to "opt-out" of this branching provision prior to the effective date, and, alternatively, states were authorized to "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 activity 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. 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 3 5
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 26 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1998, 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, 1998, 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) certain vendors of critical systems or services failing to comply with Year 2000 programming issues; (v) changes in the regulatory environment; and (vi) changes in general business and economic trends. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 4 6
Item 2. Properties TrustCo's executive offices are located at 320 State Street, Schenectady, New York, 12305. The Bank operates 53 offices, of which 20 are owned and 33 are leased from others. The asset value of these properties, when considered in the aggregate, is 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 7
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,62 President and Chief Executive Officer, 1984 President and Trustco Bank Corp NY. President and Chief Executive Officer Chief Executive Officer, Trustco Bank, National Association Robert T. Cushing, 43, Vice President and Chief Financial Officer, 1994 Vice President and Trustco Bank Corp NY since 1994. Chief Financial Officer Senior Vice President and Chief Financial Officer, Trustco Bank, National Association since 1994. Partner, KPMG Peat Marwick LLP (1987-1994). Nancy A. McNamara, 49, Vice President, TrustCo Bank Corp NY 1992 Vice President since 1992. Senior Vice President, Trustco Bank, National Association since 1988. William F. Terry, 57, Secretary, TrustCo Bank Corp NY since 1990 Secretary 1990. Senior Vice President, Trustco Bank, National Association since 1987. Secretary, Trustco Bank, National Association since 1990. Ralph A. Pidgeon, 56, Vice President and Assistant Secretary, 1995 Vice President and TrustCo Bank Corp NY since 1995. Assistant Secretary Senior Vice President, Trustco Bank, National 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 8
PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Page 1 and page 48 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1998, are incorporated herein by reference. TrustCo had 9,120 shareholders of record as of March 1, 1999, and the closing price of the Corporation's common stock on that date was $26.875. Item 6. Selected Financial Data Page 24 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1998, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 6 through 26 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1998, are incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Pages 18 through 20 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1998, are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The financial statements, together with the report thereon of KPMG LLP on pages 29 through 44 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1998, 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 5, and Section 16(a) "Beneficial Ownership Reporting Compliance" on page 26, of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 17, 1999, 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." 9
Item 11. Executive Compensation The information under the captions "TrustCo and Trustco Bank Executive Officer Compensation" and "TrustCo Retirement Plans" on pages 7 through 12 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 17, 1999, 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 6 and "Ownership Of TrustCo Common Stock By Certain Beneficial Owners" on page 25 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 17, 1999, 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 26 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 17, 1999 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, 1998 and 1997. Consolidated Statements of Income -- Years Ended December 31, 1998, 1997, and 1996. Consolidated Statements of Changes in Shareholders' Equity -- Years Ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows -- Years Ended December 31, 1998, 1997 and 1996. 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. 10
The following exhibits are incorporated herein by reference:* Reg S-K Exhibit No. Description 3(i)a Amended and Restated Certificate of Incorporation of TrustCo Bank Corp NY, dated July 27, 1993. 3(i)b Certificate of Amendment of the Certificate of Incorporation of TrustCo Bank Corp NY, dated May 28, 1996. 3(i)c Certificate of Amendment of the Certificate of Incorporation of TrustCo Bank Corp NY, dated May 19, 1997. 3(ii)a Amended and Restated By-Laws of TrustCo Bank Corp NY, dated August 18, 1998. 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, including Schedule A, and Amendment No. 5, dated May 1, 1997. 10(b)Employment Agreement dated June 21, 1994, Amendment No. 1 dated February 14, 1995, including Schedule A, and Amendment No. 2, dated May 1, 1997, 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, and Amendment No. 2, dated May 1, 1997, 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, and Amendment No. 2, dated May 1, 1997, 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, and Amendment No. 2, dated May 1, 1997, 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)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, and Amendment No. 1, dated September 15, 1998. 10(i)Restated Agreement for Supplemental Retirement Benefits for Robert A. McCormick, dated June 24, 1994, Amendment No. 1 dated December 1, 1995, and Amendment No. 2 dated March 29, 1996, and Amendment No. 3, dated September 15, 1998. 10(j)Restatement of Trustco Bank Executive Officer Incentive Plan, dated March 29, 1996, Amendment No. 1, dated October 21, 1997, and Amendment No. 2, dated September 15, 1998. 10(k) 1995 TrustCo Bank Corp NY Stock Option Plan. 10(l)TrustCo Bank Corp NY Performance Bonus Plan, dated May 19, 1997, and Performance Unit Agreement Under TrustCo Bank Corp NY Performance Bonus Plan. 10(m)TrustCo Bank Corp NY Directors Performance Bonus Plan, dated May 19, 1997, and Performance Bonus Unit Agreement Under TrustCo Bank Corp NY Directors Performance Bonus Plan. 11 Computation of Net Income Per Common Share. - ---------------- *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 11
The following exhibits are filed herewith:* Reg S-K Exhibit No. Description 13 Portions of Annual Report to Security Holders of TrustCo for the year ended December 31, 1998. 21 List of Subsidiaries of TrustCo. 23 Independent Auditors' Consent of KPMG LLP. 24 Power of Attorney. 27 Financial Data Schedules. 11
Reports on Form 8-K: On November 17, 1998, TrustCo filed a Current Report on Form 8-K reporting the declaration of a cash dividend. On January 19, 1999, TrustCo filed a Current Report on Form 8-K reporting the fourth quarter and year-end December 31, 1998, results. On February 16, 1999, TrustCo filed a Current Report on Form 8-K reporting the declaration of a cash dividend. 12 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, 1999 13 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 February 16, 1999 - ------------------------ Barton A. Andreoli * Director February 16, 1999 - ------------------------ Lionel O. Barthold * Director February 16, 1999 - ------------------------ M. Norman Brickman * Director February 16, 1999 - ------------------------ Robert A. McCormick * Director February 16, 1999 - ------------------------ Nancy A. McNamara * Director February 16, 1999 - ------------------------ Dr. Anthony J. Marinello * Director February 16, 1999 - ------------------------ Dr. John S. Morris * Director February 16, 1999 - ------------------------ Dr. James H. Murphy * Director February 16, 1999 - ------------------------ Richard J. Murray, Jr. * Director February 16, 1999 - ------------------------ Kenneth C. Petersen * Director February 16, 1999 - ------------------------ William D. Powers * Director February 16, 1999 - ------------------------ William J. Purdy Director February 16, 1999 William F. Terry By: /s/ William F. Terry *William F. Terry, as Agent Pursuant to Power of Attorney 14 14
Exhibits Index Reg S-K Item 601 Exhibit No. Exhibit Page No. Exhibits Index 3(i)a Amended and Restated Certificate of Incorporation of TrustCo Bank Corp NY, dated July 27, 1993, filed as Exhibit 3(i)a to TrustCo Bank Corp NY's Quarterly Report on Form 10Q, for the quarter ended June 30, 1997, is incorporated herein by reference. 3(i)b Certificate of Amendment of the Certificate of Incorporation of TrustCo Bank Corp NY, dated May 28, 1996, filed as Exhibit 3(i)b to TrustCo Bank Corp NY's Quarterly Report on Form 10Q, for the quarter ended June 30, 1997, is incorporated herein by reference. 3(i)c Certificate of Amendment of the Certificate of Incorporation of TrustCo Bank Corp NY, dated May 19, 1997, filed as Exhibit 3(i)c to TrustCo Bank Corp NY's Quarterly Report on Form 10Q, for the quarter ended June 30, 1997, is incorporated herein by reference. 3(ii)a Amended and Restated By-Laws of TrustCo Bank Corp NY dated August 18, 1998, filed as Exhibit 3(ii)a to TrustCo Bank Corp NY's Quarterly Report on Form 10Q for the quarter ended September 30, 1998, are incorporated herein by reference. 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, 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, 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, and Amendment No. 5, dated May 1, 1997, filed as Exhibit 10(e) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q for the quarter ended June 30, 1997 are incorporated herein by reference. 15 15
Reg S-K Item 601 Exhibit No. Exhibit Page No. Exhibits Index 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, filed as Exhibit 10(e) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the year ended December 31, 1995, and Amendment No. 2, dated May 1, 1997, filed as Exhibit 10(f) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q for the quarter ended June 30, 1997, 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, and Amendment No. 2, dated May 1, 1997, filed as Exhibit 10(f) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q for the quarter ended June 30, 1997, are incorporated herein by reference. 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, and Amendment No. 2 dated May 1, 1997, filed as Exhibit 10(f) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q for the quarter ended June 30, 1997, are incorporated herein by reference. 16 16
Reg S-K Item 601 Exhibit No. Exhibit Page Exhibits Index 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, and Amendment No. 2 dated May 1, 1997, filed as Exhibit 10(f) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q for the quarter ended June 30, 1997, 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) 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, filed as Exhibit 10(m) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and Amendment No. 1, dated September 15, 1998, filed as Exhibit 10(a) to TrustCo Bank Corp NY's Quarterly Report on form 10Q for the quarter ended September 30, 1998, are incorporated herein by reference. 17 17
Reg S-K Item 601 Exhibit No. Exhibit Page Exhibits Index 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, and Amendment No. 2, dated March 29, 1996, filed as Exhibit 10(l) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and Amendment No. 3, dated September 15, 1998, filed as Exhibit 10(c) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q for the quarter ended September 30, 1998, are incorporated herein by reference. 10(j) Restatement of Trustco Bank Executive Officer Incentive Plan, dated March 29, 1996, filed as Exhibit 10(n) to TrustCo Bank Corp NY's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Amendment No. 1, to Restatement of Trustco Bank Executive Officer Incentive Plan, dated October 21, 1997, filed as Exhibit 10(n) to TrustCo Bank Corp NY's Annual Report on Form 10K for the fiscal year ended December 31, 1997, and Amendment No. 2, dated September 15, 1998, filed as Exhibit 10(b) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q, for the quarter ended September 30, 1998, 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) Trustco Bank Corp NY Performance Bonus Plan, dated May 19, 1997, filed as Exhibit 10(a) and Performance Bonus Unit Agreement Under Trustco Bank Corp NY Performance Bonus Plan, filed as Exibit 10(b) to Trustco Bank Corp NY's Quarterly Report on Form 10Q for the quarter ended June 30, 1997, are incorporated herein by reference. 10(m) Trustco Bank Corp NY Directors Performance Bonus Plan, dated May 19, 1997, filed as Exhibit 10(c) and Performance Bonus Unit Agreement Under Trustco Bank Corp NY Directors Performance Bonus Plan, filed as Exibit 10(d) to Trustco Bank Corp NY's Quarterly Report on Form 10Q for the quarter ended June 30, 1997, are incorporated herein by reference. 18 18
Reg S-K Item 601 Exhibit No. Exhibit Page Exhibits Index 11 Computation of Net Income Per Common Share. Note 10 on 62 page 42 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1998, is incorporated herein by reference. 13 Portions of Annual Report to Security Holders of TrustCo for the 20 year ended December 31, 1998, are filed herewith. GRAPHICS APPENDIX Cross Reference To Page Of Annual Omitted Charts Report 1 Return on Equity 6 2 Taxable Equivalent Net Interest Income 7 3 Dividends Per Share 15 4 Allowance for Loan Losses 17 5 Allowance to Loans Outstanding 17 6 Efficiency Ratio 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. Exhibits Index 21 List of Subsidiaries of TrustCo, filed herewith 71 23 Independent Auditor's Consent of KPMG, LLP, filed herewith. 72 24 Power of Attorney, filed herewith. 73 27 Financial Data Schedules, filed herewith. 74 19 19
Exibit 13:Annual Report to Shareholders 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 53 community banking offices offering 36 drive-up windows and 33 Automatic Teller Machines, throughout the Bank's market area. The Bank serves 9 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 1998 1997 Change Income: <S> <C> <C> <C> Net interest income (TE)........................................ $ 89,117 88,685 0.49% Net income...................................................... 35,015 32,175 8.83 Per Share (1): Basic earnings.................................................. 1.31 1.19 10.08 Diluted earnings................................................ 1.25 1.15 8.70 Book value...................................................... 6.94 6.64 4.52 Average Balances: Assets.......................................................... 2,433,238 2,302,598 5.67 Loans, net...................................................... 1,311,967 1,260,771 4.06 Deposits........................................................ 2,068,725 1,981,223 4.42 Shareholders' equity............................................ 180,103 167,273 7.67 Financial Ratios: Return on average assets........................................ 1.44% 1.40 2.86 Return on average equity (2).................................... 21.47 20.23 6.13 Tier 1 capital to: Total average assets (leverage)............................... 6.89 7.00 (1.57) Risk-adjusted assets.......................................... 12.78 13.43 (4.84) Total capital to risk-adjusted assets............................. 14.06 14.72 (4.48) Net loans charged off to average loans............................ .28 .28 -- Allowance for loan losses as a coverage of nonperforming loans.... 4.4x 5.0x (12.00) Efficiency ratio.................................................. 40.26 40.61 0.86 Dividend payout ratio............................................. 75.97 72.34 5.02 </TABLE> <TABLE> Per share information of common stock (1) <CAPTION> Range of Stock Basic Diluted Cash Book Price Earnings Earnings Dividend Value High Low 1997 <S> <C> <C> <C> <C> <C> <C> First quarter.............................$ .28 .27 .21 5.98 16.82 15.50 Second quarter............................ .29 .28 .21 6.26 16.26 15.12 Third quarter............................. .31 .30 .21 6.51 21.55 15.60 Fourth quarter............................ .31 .29 .24 6.64 25.22 19.24 1998 First quarter............................. .31 .30 .24 6.86 25.76 21.20 Second quarter............................ .32 .31 .24 6.86 25.98 22.39 Third quarter............................. .34 .33 .24 6.93 27.17 21.63 Fourth quarter............................ .33 .31 .28 6.94 30.00 22.83 (1) Adjusted for a 15% stock split in 1998 and 1997. (2) Excludes the market adjustment on securities available for sale. </TABLE> 20
Table of Contents Financial Highlights.......................................................... 1 Executive and Senior Officers of Trustco Bank............................................................... 3 President's Message........................................................... 4 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 6 Average Balances, Yields and Net Interest Margins..................................................... 12 Glossary of Terms............................................................ 27 Management's Statement of Responsibilities................................... 28 Independent Auditors' Report................................................. 29 Consolidated Financial Statements and Notes.................................. 30 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. 21
Executive and Senior Officers of Trustco Bank Executive Officers: From Left to Right: William F. Terry, Senior Vice President & Secretary, Bank Operations, Legal Counsel, Purchasing, and Trust Operations; Nancy A. McNamara, Senior Vice President, Loan Division, Trust Department, Marketing, and Community Relations; Robert A. McCormick, President & Chief Executive Officer; Ralph A. Pidgeon, Senior Vice President, Branches, Installment Loans/Credit Cards, Retirement/Government Accounts, and Compliance; Robert T. Cushing, Senior Vice President and Chief Financial Officer, Accounting/Finance, Data Processing, and Premises. Senior Officers: Standing Left to Right: George W. Wickswat, Vice President, Commercial Loans; James Niland, Vice President, Trust Department; Jeffrey S. Farbaniec, Vice President, Accounting/Finance; Linda C. Christensen, Vice President, Accounting/Finance; Kevin M. Curley, Vice President, Branch Administration; Daniel R. Saullo, Vice President, Mortgage Loans; Robert J. McCormick, Administrative Vice President, Commercial/Mortgage Loans; Scot R. Salvadore, Vice President, Branch Administration; William M. McCartan, Vice President, Trust Department. Seated Left to Right: Cheri J. Parvis, Vice President, Human Resources; John C. Fay, Auditor; Robert Scribner, Vice President, Trust Department; Donald J. Csaposs, Vice President, Compliance; Henry C. Collins, Administrative Vice President, Legal Counsel; Michael R. Bonesteel, Vice President, Data Processing; James D. McLoughlin, Administrative Vice President, Bank Operations; Ann M. Noble, Vice President, Bank Operations. 22
President's Message Dear Shareholder: 1998 was another record year at TrustCo. 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 support and enthusiasm, ensuring our continuing strong performance. During 1998, shareholder values continued in the right direction with net income at $35.0 million, up a significant 8.8% over 1997. TrustCo's most important ratio, return on shareholders' equity, was 21.47%, up from 20.23% in 1997. We are committed to ensuring that our return on equity compares favorably in any peer group, and we are comfortable that it does. TrustCo's five year ROE was 19.16% and we plan an increase to 22% for the current fiscal year. During 1998, 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 17% 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. TrustCo's branch expansion program continues. We opened two additional branches during 1998. 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 1998, we evaluated a number of acquisition opportunities. Unfortunately, we 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. It is interesting to note during 1998 two of our strongest competitors, Albank and Evergreen, were acquired by out of state banking companies. 1998 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. No report would be complete without a status update on Y2K. Our Company was at it very early in the game. All critical systems have been modified, tested, and put into production. We will complete the third party interface testing in the first quarter of 1999, and continue testing and monitoring of the entire Y2K system changes throughout 1999. There is nothing that we can define as beneficial that we have not addressed. 1999 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 interest bearing checking, savings, and free checking accounts on the deposit side. Our Trust department, which currently manages assets in excess of $1.2 billion, has ambitious expectations and continues moving forward strongly with gross income up 6.4% in 1998. The future should benefit from the solid performance of the superb employee team here at TrustCo. For 1998 the often quoted efficiency ratio for our Company was 40.26% 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. 23
President's Message (continued) 1998 was a year in which average assets of $2.4 billion grew by $130.6 million, an increase of 5.7%, 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 1998, increasing on average by 4.1%, 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 grew to $54.4 million. It is important to note that during 1998 our residential portfolio grew $89 million, or 10.5%. 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. TrustCo continues to receive solid external comment. During 1998 we again received favorable mention in America's Finest Companies as one of forty of the 16,000 U.S. companies which have delivered higher earnings per share for at least 20 consecutive years. From time to time it is nice to look at a longer term perspective. A look at our cover should define clearly the significant benefits of TrustCo ownership over the last 15 years. 1998 was another great year for the shareholders with TrustCo's total return at 31.68%, which beat the S&P 500 and the Dow Industrial Average. And, during the course of the year, TrustCo was included in the S&P SmallCap 600 Index. During 1998 we had three additions to our senior staff with the appointments to Vice President of Kevin Curley, Cheri Parvis, and Dan Saullo. We are enthusiastic about TrustCo's future. It is our intention at every level of 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 in the marketplace 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 24
Management's Discussion and Analysis of Financial Condition and Results 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") and its operating subsidiary Trustco Realty Corp. during 1998 and, in summary form, the two preceding 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 1998 should be read in conjunction with this review. Certain amounts in years prior to 1998 have been reclassified to conform with the 1998 presentation. All per share information has been adjusted for the 15% stocksplit in 1998. Overview TrustCo recorded net income of $35.0 million or $1.25 of diluted earnings per share for the year ended December 31, 1998, compared to $32.2 million or $1.15 per share for the year 1997. This represents an increase of 8.8% in net income between 1998 and 1997. Significant contributors to the increase in net income for 1998 were as follows: * an increase of $134.1 million in the average balance of interest earning assets between 1997 and 1998, * a 14.7% increase in the average balance of noninterest bearing demand deposits to $138.8 million, * securities transactions resulted in a net gain of $1.0 million in 1998 compared to net losses from securities transactions of $200 thousand in 1997, and * an increase of $3.7 million in noninterest income, excluding securities transactions, in 1998. <TABLE> Return on Equity (CHART OMITTED) <CAPTION> <S> <C> 1996 19.05% 1997 20.23% 1998 21.47% </TABLE> During 1998 the following also had a significant effect on net income: a reduction in the net interest margin to 3.81% in 1998 from 4.02% in 1997, and a increase of $2.5 million in noninterest expense to $48.8 million in 1998. <TABLE> MIX OF AVERAGE EARNING ASSETS (dollars in thousands) <CAPTION> Components of 98-97 97-96 Total Earning Assets 1998 1997 1996 Change Change 1998 1997 1996 <S> <C> <C> <C> <C> <C> <C> <C> <C> Loans, net of unearned income.........$1,311,967 1,260,771 1,227,407 51,196 33,364 56.1% 57.2 57.4 Securities available for sale: U.S. Treasuries and agencies......... 204,694 352,301 409,590 (147,607) (57,289) 8.7 16.0 19.2 States and political subdivisions.... 112,077 102,206 78,921 9,871 23,285 4.8 4.6 3.7 Mortgage-backed securities........... 186,239 134,509 53,844 51,730 80,665 8.0 6.1 2.5 Other................................ 108,947 33,985 38,564 74,962 (4,579) 4.7 1.5 1.8 ----------------------------------------------------------------------------- Total securities available for sale.. 611,957 623,001 580,919 (11,044) 42,082 26.2 28.2 27.2 ----------------------------------------------------------------------------- Federal funds sold.................... 414,162 320,953 328,500 93,209 (7,547) 17.7 14.6 15.4 Other short-term investments.......... 752 -- -- 752 -- -- -- -- ----------------------------------------------------------------------------- Total earning assets..................$2,338,838 2,204,725 2,136,826 134,113 67,899 100.0% 100.0 100.0 ----------------------------------------------------------------------------- </TABLE> 25
Management's Discussion and Analysis (continued) TrustCo has performed well with respect to a number of key performance ratios during 1998 and 1997 including * return on equity of 21.47%for 1998 and 20.23% for 1997, * return on assets of 1.44% for 1998 and 1.40% for 1997, and * operating efficiency ratio of 40.26% for 1998 and 40.61% for 1997. Asset/Liability Management In managing its balance sheet portfolios, TrustCo utilizes funding and capital sources within sound credit, investment, interest rate and liquidity risk guidelines. Loans and securities (including federal funds sold) are the Company's primary earning assets. Average interest earning assets were 96.1% and 95.7% of average total assets for 1998 and 1997, respectively. TrustCo, through its management of liabilities, attempts to provide stable and flexible sources of funding within established liquidity and interest rate risk guidelines. This is accomplished through core deposit banking products offered within the markets served by the Company. TrustCo does not actively seek to attract out-of-area deposits or so called hot money; rather the Company focuses on the value of core relationships both with depositors and borrowers. TrustCo's objectives in managing its balance sheet are to limit the sensitivity of net interest income 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 is deliberate in its effort to maintain adequate liquidity under prevailing and projected economic conditions, and to maintain an efficient and appropriate mix of core deposit relationships. The Company relies on traditional banking investment instruments and its large base of core deposits to help in asset/liability management. Earning Assets Average earning assets during 1998 were $2.3 billion, which was an increase of $134.1 million or 6.1% over the prior year. The increase in the average balance of earning assets was a result of growth in the average balance of loans and federal funds sold, which increased $51.2 million and $93.2 million respectively. These increases were offset by an $11.0 million reduction in the average balance of securities available for sale. Total average assets were $2.4 billion for 1998 and $2.3 billion for 1997. The table "Mix of Average Earning Assets," shows how the mix of the earning assets has changed over the last three years. While the growth in earning assets is critical to improved profitability, changes in the mix can also have a significant impact on income levels. <TABLE> Tax Equivalent Net Interest Income (CHART OMITTED) <CAPTION> <S> <C> 1996 $87.0 1997 $88.7 1998 $89.1 </TABLE> Loans: Average total loans increased $51.2 million, or 4.1%, during 1998. Interest income on the loan portfolio increased to $111.0 million in 1998 from <TABLE> Loan portfolio (dollars in thousands) Average Balances <CAPTION> 1998 1997 1996 1995 1994 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Residential..................$ 937,094 71.4% 848,105 67.2% 783,094 63.7% 714,804 60.1% 652,837 58.0% Commercial................... 189,542 14.4 204,502 16.2 224,949 18.3 237,165 19.9 237,994 21.2 Home equity line of credit... 158,939 12.1 178,597 14.1 187,652 15.3 202,647 17.0 203,756 18.1 Installment.................. 27,530 2.1 30,931 2.5 33,299 2.7 35,269 3.0 30,242 2.7 Total loans.................. 1,313,105 100.0% 1,262,135 100.0% 1,228,994 100.0% 1,189,885 100.0% 1,124,829 100.0% ---------------------------------------------------------------------------------------- Less:Unearned income 1,138 1,364 1,587 1,956 2,131 Allowance for loan losses 55,208 53,173 51,233 45,086 37,334 ---------------------------------------------------------------------------------------- Net loans....................$1,256,759 1,207,598 1,176,174 1,142,843 1,085,364 ---------------------------------------------------------------------------------------- </TABLE> 26
Management's Discussion and Analysis (continued) $109.7 million in 1997. The average yield decreased to 8.46% in 1998, from 8.70% in 1997. The steady growth of the loan portfolio as a component of the Company's assets contributed significantly to the superior earnings results for 1998. TrustCo has distinguished itself in the Upstate New York region as one of the principal originators of residential real estate mortgage loans. Through aggressive marketing and pricing and a customer-friendly service delivery network, TrustCo has increased the average balance of the residential real estate loan portfolio to $937.1 million, an increase of $89.0 million, or 10.5%. Income on residential real estate loans increased to $75.5 million in 1998 from $69.8 million in 1997. The yield on this loan portfolio decreased slightly to 8.05% for 1998 from 8.23% in 1997. 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 is considered a benefit for both marketing and collection purposes. During 1998, management continued its established practice of retaining all new loan originations in the Bank's portfolio rather than selling them into the secondary market. This practice positions TrustCo to be able to respond quickly to customer and market needs by allowing TrustCo and the customers to deal on a one to one basis to resolve conflicts and to meet individual needs. This practice also allows TrustCo to respond quickly to changes in interest rates or closing costs by competitors. The overall effect is that TrustCo is able to develop long term business relations with customers and meet their needs quickly. Average commercial loans decreased to $189.5 million in 1998 from $204.5 million in 1997. The average yield on the commercial loan portfolio also decreased to 9.40% for 1998 compared to 9.47% for 1997. This has resulted in income on commercial loans of $17.8 million in 1998 and $19.4 million in 1997. TrustCo strives to maintain strong asset quality in all aspects of its loan portfolio, especially with respect to commercial loans. Competition for commercial loans is very intense in the Bank's market region. The Bank competes with large money center and regional banks as well as with smaller locally based banks and thrifts. Over the last several years competition for commercial loans has intensified as smaller banks and thrifts have tried to develop commercial loan portfolios. To do this, some are reducing interest rates and underwriting standards. Rather than reduce desired loan interest rates or negatively affect asset quality by changing the underwriting standards, the Bank has decided to forego the potentially higher volume of new loan originations in order to maintain a stronger quality commercial loan portfolio. 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 goals the Company has consistently emphasized the origination of loans within its market area. The portfolio contains no foreign loans, nor does it contain any significant concentrations of credit extended to any single borrower or industry. The Bank's commercial loan portfolio reflects the diversity of business found in the Capital Region's economy. Light manufacturing, retail, service and real estate related business are a few examples of the types of business located in the Bank's marketing region. TrustCo has a long-standing leadership position in the home equity credit line product in its market territory. 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 1998 the average balance of home equity credit lines was $158.9 million, down from $178.6 million in 1997. The home equity credit line product has developed a significant business line for virtually all financial services companies. The Bank competes with both regional and national concerns for these lines of credit and faces stiff competition with respect to interest rates, closing costs and service for these loans. TrustCo continuously reviews changes made by competitors with respect to the home equity credit line products and adjusts, where needed, the Bank's offerings so as to remain competitive for this product. The average yield decreased to 9.02% for 1998 from 9.34% in 1997. These decreases resulted in interest income on home equity credit lines of $14.3 million in 1998, compared to $16.7 million in 1997. The average balance of installment loans, net of unearned income, decreased to $26.4 million in 1998 from $29.6 million in 1997. The yield on installment loans decreased 18 basis points to 12.68% in 1998, resulting in interest income of $3.3 million. This portfolio continues to decrease because many consumers have shifted their borrowing patterns from direct installment credit to home equity loan products which may provide an income tax benefit. 27
Management's Discussion and Analysis (continued) <TABLE> MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES (dollars in thousands) <CAPTION> December 31, 1998 After 1 Year In 1 Year But Within After or Less 5 Years 5 Years Total <S> <C> <C> <C> <C> Commercial $117,670 54,798 14,840 187,308 Real estate construction 12,782 -- -- 12,782 ------------------------------------------- Total $130,452 54,798 14,840 200,090 ------------------------------------------- Predetermined rates....... $ 49,618 52,901 14,840 117,359 Floating rates............ 80,834 1,897 -- 82,731 ------------------------------------------- Total..................... $130,452 54,798 14,840 200,090 ------------------------------------------- </TABLE> Securities available forsale: The portfolio of securities available for sale was actively managed by the Company to take full advantage of changes in interest rates. Securities available for sale are used primarily for liquidity purposes while simultaneously producing earnings, and are managed under a policy detailing the types, duration and interest rates acceptable in the portfolio. The designation of "available for sale" is made at the time of purchase, based upon management's intent to hold the securities for an indefinite period of time. However, these securities would be available for sale in response to changes in market interest rates, related changes in prepayment risk, needs for liquidity, or changes in the availability of and yield on alternative investments. At December 31, 1998, securities available for sale amounted to $717.4 million, compared to $601.9 million at year end 1997. For 1998, the average balance of securities available for sale was $612.0 million with an average yield of 7.18%, compared to an average balance in 1997 of $623.0 million with an average yield of 7.67%. During 1998, market interest rates on investment securities were at historical lows. This created a situation wherein reinvestment opportunities were generally at lower interest rates than for maturing securities. The impact was the reduction in the overall yield on the securities portfolio during 1998 compared to 1997. The taxable equivalent income earned on the securities portfolio in 1998 was $43.9 million, compared to $47.8 million earned in 1997. The average balance of the securities portfolio decreased by $11.0 million between 1997 and 1998, and the average yield on the portfolio decreased by 49 basis points during the same time period. During 1998, TrustCo recognized approximately $1 million of net gains from securities transactions, compared to $200 thousand of net losses in 1997. Throughout 1998, TrustCo sold securities to provide liquidity for potential reinvestment at higher interest rates. This created additional liquidity and eliminated lower yielding assets from the securities portfolio. At year end 1998, TrustCo continued to have significant liquidity in the form of $358.0 million of federal funds sold and $25.0 million of other short-term investments. Management believes that the Company will have the opportunity to reinvest these funds in the securities or loan portfolios as enhanced opportunities develop in 1999. TrustCo does not invest in any exotic investment products such as interest rate swaps, forward placement contracts, options or other instruments commonly referred to as derivatives. By actively managing a portfolio of high quality securities, TrustCo can meet the objectives of asset/liability management and liquidity, while at the same time producing a constant earnings stream that meets or exceeds alternative rates offered in the marketplace. 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. Average balances of securities available for sale are stated at amortized cost. At December 31, 1998 and 1997, the market value of TrustCo's portfolio of securities available for sale produced net unrealized gains of approximately $31.5 million and $26.8 million, respectively. During 1998, the Bank invested in short-term asset-backed securities as a means of supplementing the income from other short-term investments. 28
Management's Discussion and Analysis (continued) These bonds are all secured by underlying real estate type assets and are AAA rated credits. These securities are classified as other securities for the following analysis. <TABLE> Securities available for sale (dollars in thousands) As of December 31, <CAPTION> 1998 1997 1996 Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value <S> <C> <C> <C> <C> <C> <C> U.S. Treasuries and agencies.................. $163,244 167,825 273,517 278,823 404,885 406,933 States and political subdivisions............. 124,390 129,745 109,210 113,787 94,954 96,918 Mortgage-backed securities.................... 246,531 249,489 151,989 155,080 75,492 76,493 Other......................................... 126,183 126,348 15,430 15,451 4,276 4,276 -------------------------------------------------------------- Total debt securities available for sale.. 660,348 673,407 550,146 563,141 579,607 584,620 Equity securities............................. 25,610 44,003 24,955 38,758 30,139 34,050 -------------------------------------------------------------- Total securities available for sale....... $685,958 717,410 575,101 601,899 609,746 618,670 -------------------------------------------------------------- </TABLE> The table "Securities Portfolio Maturity Distribution and Yield," distributes the securities available for sale portfolio as of December 31, 1998 based on the final maturity of the securities. Mortgage-backed, asset-backed, and collateralized mortgage obligation securities are stated using estimated average life, and equity securities are excluded. Actual maturities may differ from contractual maturities because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty. <TABLE> SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD Debt securities available for sale: <CAPTION> (dollars in thousands) As of December 31, 1998 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......................$20,035 10 115,417 27,782 163,244 Market value........................ 20,233 10 119,240 28,342 167,825 Weighted average rate............... 6.60% 5.38 7.39 8.22 7.43 States and political subdivisions Amortized cost......................$ 8,323 7,608 5,492 102,967 124,390 Market value........................ 8,427 7,867 5,730 107,721 129,745 Weighted average rate............... 7.59% 8.05 7.96 8.16 8.11 Mortgage-backed securities Amortized cost......................$ -- 160,172 79,979 6,380 246,531 Market value........................ -- 162,354 80,785 6,350 249,489 Weighted average rate............... -- 6.79 6.58 6.42 6.71 Other Amortized cost..........................$18,393 107,790 -- -- 126,183 Market value............................ 18,386 107,962 -- -- 126,348 Weighted average rate................... 6.21% 6.23 -- -- 6.23 ------------------------------------------------ Total debt securities available for sale Amortized cost.........................$46,751 275,580 200,888 137,129 660,348 Market value........................... 47,046 278,193 205,755 142,413 673,407 Weighted average rate.................. 6.62% 6.61 7.08 8.09 7.05 </TABLE> 29
Management's Discussion and Analysis (continued) Maturity and call dates of securities: Many of the securities in the investment portfolio have a call date in addition to the stated maturity date. Call dates allow the issuer of the bond to redeem the bond prior to maturity at specified dates and at predetermined prices. Normally, securities are redeemed at the call date when the issuer can reissue the bond at a lower rate. Therefore, for cash flow, liquidity and interest rate management purposes, it is important to monitor both maturity dates and call dates. The following table details the portfolio of securities available for sale, by both maturity date and call date as of December 31, 1998. Mortgage-backed, asset-backed, and collateralized mortgage obligation securities are reported using an estimate of average life; equity securities are excluded. <TABLE> SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION Debt securities available for sale: <CAPTION> (dollars in thousands) As of December 31, 1998 Based on Based on Final Maturity Call Date Amortized Market Amortized Market Cost Value Cost Value <S> <C> <C> <C> <C> <C> Within 1 year......................................$ 46,751 47,046 132,611 133,877 1 to 5 years....................................... 275,580 278,193 335,792 340,680 5 to 10 years...................................... 200,888 205,755 170,451 176,935 After 10 years..................................... 137,129 142,413 21,494 21,915 -------------------------------------- Total debt securities available for sale.......$660,348 673,407 660,348 673,407 -------------------------------------- </TABLE> Federal Funds Sold: During 1998, the average balance of federal funds sold was $414.2 million, a $93.2 million increase from $321.0 million in 1997. The average rate earned on these assets was 5.44% in 1998 and 5.53% in 1997. TrustCo utilized this category of earning assets as a means of maintaining strong liquidity as interest rates changed. Rather than invest the excess liquidity during 1998, the Company chose to place these funds in overnight federal funds sold. This decision had the short term effect of suppressing earnings for 1998, but positioned TrustCo to take advantage of other banking opportunities as they emerge in 1999. The decrease in average yield during 1998 was primarily the result of a 75 basis point decrease in the target federal funds rate set by the Federal Reserve Bank during 1998. All of the decreases made by the Federal Reserve Bank in the target federal funds rate were made in the second half of 1998, therefore the yield earned on this asset for 1999 can be expected to be less than that earned in 1998. The target federal funds rate at year end 1998 was 4.75%. Other Short Term Investments: During 1998, the Company purchased $25 million of federal agency discount bonds to supplement the yield on federal funds. The bonds matured shortly after year end 1998 and carried a yield of approximately 40 basis points higher than the target rate on federal funds. 30
Management's Discussion and Analysis (continued) <TABLE> AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS <CAPTION> (dollars in thousands) 1998 1997 1996 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 $1,311,967 110,952 8.46% 1,260,771 109,690 8.70% 1,227,407 107,517 8.76% --------------------------------------------------------------------------------- Securities available for sale: U.S. Treasuries and agencies........ 204,694 15,408 7.53 352,301 27,436 7.79 409,590 31,647 7.73 States and political subdivisions... 112,077 9,056 8.08 102,206 8,249 8.07 78,921 6,235 7.90 Mortgage-backed securities.......... 186,239 12,692 6.81 134,509 10,094 7.50 53,844 4,114 7.64 Other............................... 108,947 6,781 6.22 33,985 1,975 5.81 38,564 2,202 5.71 --------------------------------------------------------------------------------- Total securities available for sale. 611,957 43,937 7.18 623,001 47,754 7.67 580,919 44,198 7.61 --------------------------------------------------------------------------------- Federal funds sold...................... 414,162 22,536 5.44 320,953 17,761 5.53 328,500 17,634 5.37 Other short-term investments........... 752 39 5.17 -- -- -- -- -- -- --------------------------------------------------------------------------------- Total interest earning assets....... 2,338,838 177,464 7.59% 2,204,725 175,205 7.95% 2,136,826 169,349 7.93% --------------------------------------------------------------------------------- Allowance for loan losses.............. (55,208) (53,173) (51,233) Cash and noninterest earning assets..... 149,608 151,046 134,942 --------------------------------------------------------------------------------- Total assets........................ $2,433,238 2,302,598 2,220,535 --------------------------------------------------------------------------------- Liabilities and shareholders' equity Interest bearing deposits: Interest bearing checking accounts... $243,888 3,585 1.47% 233,644 3,596 1.54% 233,340 3,591 1.54% Savings.............................. 657,793 20,382 3.10 658,750 22,622 3.43 667,447 23,012 3.45 Time deposits and money markets....... 1,028,258 57,629 5.60 967,864 54,728 5.65 923,082 51,146 5.54 --------------------------------------------------------------------------------- Total interest bearing deposits....... 1,929,939 81,596 4.23 1,860,258 80,946 4.35 1,823,869 77,749 4.26 --------------------------------------------------------------------------------- Short-term borrowings.................. 143,337 6,751 4.71 117,184 5,574 4.76 98,324 4,593 4.67 --------------------------------------------------------------------------------- Total interest bearing liabilities.... 2,073,276 88,347 4.26% 1,977,442 86,520 4.38% 1,922,193 82,342 4.28% --------------------------------------------------------------------------------- Demand deposits........................ 138,786 120,965 112,576 Other liabilities...................... 41,073 36,918 29,839 Shareholders' equity................... 180,103 167,273 155,927 --------------------------------------------------------------------------------- Total liabilities and shareholders'equity $2,433,238 2,302,598 2,220,535 --------------------------------------------------------------------------------- Net interest income..................... 89,117 88,685 87,007 --------------------------------------------------------------------------------- Net interest spread..................... 3.33% 3.57% 3.65% --------------------------------------------------------------------------------- Net interest margin (net interest income to total interest earning assets)....... 3.81 4.02 4.07 --------------------------------------------------------------------------------- </TABLE> 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% and 9.0%, respectively, for 1998 and 1997, and 35.0% and 9.23%, respectively, for 1996. The average balances of securities available for sale were calculated using amortized costs for these securities. Included in the balance of shareholders' equity is $17.0 million, $8.2 million, and $5.3 million in 1998, 1997, and 1996, respectively, of unrealized appreciation, net of tax, in the available for sale securities portfolio. Nonaccrual loans are included in average loans. 31
Management's Discussion and Analysis (continued) Funding Sources TrustCo utilizes various traditional sources of funds to support its asset portfolio. The following table, "Mix of Average Sources of Funding," presents the various categories of funds used and the corresponding average balances for each of the last three years. <TABLE> Mix of Average Sources of Funding <CAPTION> (dollars in thousands) Components of 98-97 97-96 Total Funding 1998 1997 1996 Change Change 1998 1997 1996 <S> <C> <C> <C> <C> <C> <C> <C> <C> Demand deposits $ 138,786 120,965 112,576 17,821 8,389 6.3% 5.8 5.5 Retail deposits: Savings................................$ 657,793 658,750 667,447 (957) (8,697) 29.7 31.4 32.8 Time deposits under $100 thousand...... 841,915 806,866 768,240 35,049 38,626 38.1 38.5 37.8 Interest bearing checking accounts..... 243,888 233,644 233,340 10,244 304 11.0 11.1 11.5 Money market deposits.................. 56,754 59,707 68,130 (2,953) (8,423) 2.6 2.8 3.3 ----------------------------------------------------------------- Total retail deposits..................1,800,350 1,758,967 1,737,157 41,383 21,810 81.4 83.8 85.4 ----------------------------------------------------------------- Total core deposits....................1,939,136 1,879,932 1,849,733 59,204 30,199 87.7 89.6 90.9 ----------------------------------------------------------------- Time deposits over $100 thousand....... 129,589 101,291 86,712 28,298 14,579 5.8 4.8 4.3 Short-term borrowings........... ...... 143,337 117,184 98,324 26,153 18,860 6.5 5.6 4.8 ----------------------------------------------------------------- Total purchased liabilities............ 272,926 218,475 185,036 54,451 33,439 12.3 10.4 9.1 ----------------------------------------------------------------- Total sources of funding...............2,212,062 2,098,407 2,034,769 113,655 63,638 100.0%100.0 100.0 ----------------------------------------------------------------- </TABLE> <TABLE> Average Deposits by Type of Depositor <CAPTION> (dollars in thousands) Years Ended December 31, <S> <C> <C> <C> <C> <C> Individuals, partnerships and corporations............. $2,009,296 1,924,606 1,880,798 1,802,455 1,752,163 U.S. Government........................................ 100 62 45 261 542 States and political subdivisions...................... 45,715 44,839 44,555 46,091 44,289 Other (certified and official checks, etc.)............ 13,614 11,716 11,047 10,263 11,342 ------------------------------------------------------ Total average deposits by type of depositor........ $2,068,725 1,981,223 1,936,445 1,859,070 1,808,336 ------------------------------------------------------ </TABLE> Deposits: Average total deposits (including time deposits greater than $100 thousand) were $2.07 billion in 1998 compared to $1.98 billion in 1997, an increase of $87.5 million. Increases were noted in interest bearing checking accounts, time deposits, and demand deposit accounts. Average interest bearing checking accounts increased by $10.2 million between 1997 and 1998. Time deposits increased by $63.4 million, and average demand deposits increased by $17.8 million between 1997 and 1998. These increases were offset in part by a $3.0 million decrease in money market accounts and a decrease of $1.0 million in savings accounts during the same time period. The increases in time deposits reflect the continuing trend among customers to seek higher interest rates by moving funds primarily from regular savings accounts into this deposit vehicle. The increase in demand deposits is noteworthy because these accounts represent the principal banking relationship for most customers. The increase in deposits reflects the impact of the new branch offices opened since 1995 and the continuing focus at TrustCo on providing core banking services faster, cheaper and better than its competitors. The TrustCo demand deposit account has one of the lowest minimum balance requirements of any financial institution operating in the same banking territory. For 1998, TrustCo had an average of $129.6 million of time deposits with balances greater than $100,000. The vast majority of these accounts are retail in nature and represent traditional TrustCo customers attracted to the Bank by the same factors as other banking customers. TrustCo does not offer these depositors any differential in interest rates, services or terms. The overall cost of interest bearing deposits was 4.23% in 1998 compared to 4.35% in 1997. The increase in the average balance of interest bearing deposits, offset by a 12 basis point decrease in the average cost, resulted in an increase of approximately $700 thousand in interest expense to $81.6 million in 1998. 32
Management's Discussion and Analysis (continued) 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. <TABLE> Maturity of Time deposits over $100 thousand <CAPTION> (dollars in thousands)..........As of December 31, 1998 <S> <C> Under 3 months..................................$ 65,193 3 to 6 months ................................. 22,401 6 to 12 months ................................. 18,546 Over 12 months.................................. 33,170 -------- Total...........................................$139,310 -------- </TABLE> Other funding sources: The Company had $143.3 million of average short-term borrowings outstanding during 1998 compared to $117.2 million in 1997. The average cost of short-term borrowings was 4.71% in 1998 and 4.76% in 1997. This resulted in an increase in interest expense of approximately $1.2 million. A majority of short- term borrowing consists of the Trustco Short-Term Investment Account, which was developed by the Bank to facilitate overnight deposits from the Company's Trust Department. Daily balances are transferred by the Trust Department into this account, and are collateralized by securities owned by the Bank. <TABLE> VOLUME AND YIELD ANALYSIS <CAPTION> (dollars in thousands) 1998 vs. 1997 1997 vs. 1996 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.................... $ 4,775 5,077 (302) 127 (411) 538 Other short-term investments.......... 39 39 -- -- -- -- Securities available for sale: Taxable............................... (4,556) (2,854) (1,702) 1,542 1,329 213 Tax-exempt............................ 739 764 (25) 2,014 1,876 138 ---------------------------------------------------------------- Total securities available for sale....................... (3,817) (2,090) (1,727) 3,556 3,205 351 Loans..................................... 1,262 3,596 (2,334) 2,173 2,303 (130) ---------------------------------------------------------------- Total interest income................ 2,259 6,622 (4,363) 5,856 5,097 759 ---------------------------------------------------------------- Interest expense: Interest bearing checking accounts........ (11) 154 (165) 5 5 -- Savings................................... (2,240) (33) (2,207) (390) (298) (92) Time deposits and money markets.................. 2,901 3,555 (654) 3,582 2,847 735 Short-term borrowings..................... 1,177 1,232 (55) 981 896 85 ---------------------------------------------------------------- Total interest expense.............. 1,827 4,908 (3,081) 4,178 3,450 728 ---------------------------------------------------------------- Net interest income (TE)........... $ 432 1,714 (1,282) 1,678 1,647 31 ---------------------------------------------------------------- </TABLE> 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. 33
Management's Discussion and Analysis (continued) 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 1998 increase in net interest income was primarily the result of increases in the average balance of earning assets. Taxable equivalent net interest income for 1998 was $89.1 million, up $400 thousand over 1997. The average balance of interest earning assets increased by $134.1 million or 6.1% over 1997. The yield on average interest earning assets decreased by 36 basis points to 7.59% in 1998, compared to 7.95% in 1997, while the average cost of interest bearing liabilities decreased 12 basis points during 1998 to 4.26% from 4.38% in 1997. Likewise the average balance of interest bearing liabilities increased from $1.98 billion in 1997 to $2.07 billion in 1998. Total interest expense for 1998 was $88.3 million, an increase of $1.8 million over the 1997 expense of $86.5 million. Capital Resources Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios and to qualify as a "well capitalized" bank in accordance with federal regulatory requirements. Historically most of the Company's capital requirements have been provided through retained earnings generated. New issues of equity securities have not been required to support the Company's growth. <TABLE> Dividends per Share (CHART OMITTED) <CAPTION> <S> <C> 1996 $.75 1997 $.86 1998 $.99 </TABLE> A basic element of TrustCo's operating philosophy is that the Company will not retain excess capital. All capital generated by the Company that is in excess of the levels considered by management to be necessary for the safe and sound operation 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 of 76.0% of net income for 1998, 72.3% for 1997, and 70.4% for 1996. These are significant payouts to the Company's shareholders and are considered by management to be a prudent use for the excess capital in TrustCo. As to the likelihood of future dividends, the philosophy stated above will continue in 1999 and, where appropriate, the Board of Directors will declare dividends consistent with that operating philosophy. TrustCo's Tier 1 capital was $167.2 million or 12.78% of risk-adjusted assets at December 31, 1998, and $163.0 million or 13.43% of risk-adjusted assets at December 31, 1997. Tier 1 capital to average assets at December 31, 1998 was 6.89%, as compared to 7.00% at year end 1997. At December 31, 1998 and 1997, the subsidiary bank, Trustco, met the regulatory definition of a "well capitalized" institution. 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 balance sheet structure, formulation of strategy in light of expected economic conditions, and comparison to established guidelines to control exposures to various types of risk. 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 reviews of the loan portfolio, loans are placed in nonaccrual status, either due to the delinquent status of the 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 three payments past due. Thereafter, no interest is taken into income unless received in cash or until such time as the borrower demonstrates a 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 three payments or more and still accruing interest, and foreclosed real estate properties. Nonperforming assets at year end 1998 totalled $17.6 million, a decrease of $2.4 million from the balance of $20.0 million at year end 1997. Nonperforming loans increased from $10.7 million in 1997 34
Management's Discussion and Analysis (continued) to $12.4 million at year end 1998. Nonperforming loans as a percentage of the total loan portfolio were 0.94% in 1998 and 0.82% in 1997. Included in nonperforming loans at year end 1998 are $7.1 million of loans in nonaccrual status, an increase of $800 thousand over the 1997 balance of $6.3 million. Loans past due three payments or more and still accruing interest of $1.5 million are up $400 thousand from the 1997 year end balance. Restructured loans in 1997 were $3.3 million, compared to $3.8 million in 1998. 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. All of the $12.4 million of nonperforming loans at December 31, 1998 are residential real estate or retail consumer loans. In prior years the vast majority of nonperforming loans were concentrated in the commercial and commercial real estate portfolios. There has been a dramatic shift of nonperforming loans to the residential real estate and retail consumer loan portfolios for several reasons, including: *The overall emphasis within TrustCo on residential real estate originations, *The relatively weak economic environment in the upstate New York market, and *The reduction in real estate values in much of TrustCo's market area that has occurred since the middle of the 1990's, resulting in a reduction in the value of the collateral that supports the real estate loans. Consumer defaults and bankruptcies have increased dramatically over the last several years and this has lead to an increase in defaults on loans. TrustCo strives to identify borrowers that are experiencing financial difficulties and to work aggressively with them so as to minimize losses. TrustCo has a diversified loan portfolio with no concentrations to any one borrower or in any single industry, and which includes a significant balance of residential mortgage loans to borrowers in the Capital District. Nonperforming assets at year end 1998 include $5.2 million of foreclosed properties, compared to $9.3 million in 1997. Once it is determined that a borrower is unable to repay the loan balance, TrustCo takes appropriate action with respect to the collateral securing the loan balance. The decrease in the foreclosed properties balance is the result of efforts by the Company to complete collection efforts on nonperforming loans. Once properties are included in the foreclosed properties category, management takes decisive action to dispose of them quickly. Management believes that the $5.2 million balance of foreclosed properties is realizable through the normal course of liquidating these properties. Management is aware of no other loans in the Bank's portfolio that pose significant risk of the eventual non-collection of principal and interest. As of December 31, 1998, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources. TrustCo has no advances to borrowers or projects located outside the United States. Allowance for Loan Losses The balance in the allowance for loan losses has been accumulated over the years through periodic provisions, and is available to absorb losses on loans which management determines are uncollectible. The adequacy of the allowance is evaluated continuously, with emphasis on nonperforming and other loans that management believes warrant special attention. The balance of the allowance is maintained <TABLE> Nonperforming Assets <CAPTION> (dollars in thousands) As of December 31, 1998 1997 1996 1995 1994 <S> <C> <C> <C> <C> <C> Loans in nonaccrual status................$ 7,147 6,298 10,748 12,832 6,370 Loans past due 3 payments or more......... 1,454 1,060 792 1,696 4,436 Restructured loans........................ 3,782 3,294 2,495 1,130 910 --------------------------------------------- Total nonperforming loans................. 12,383 10,652 14,035 15,658 11,716 Foreclosed real estate.................... 5,174 9,309 6,518 3,732 5,080 --------------------------------------------- Total nonperforming assets................$ 17,557 19,961 20,553 19,390 16,796 --------------------------------------------- Allowance for loan losses.................$ 54,375 53,455 51,561 48,320 38,851 Allowance coverage of nonperforming loans. 4.39x 5.02 3.67 3.09 3.32 Nonperforming loans as a % of total loans. 0.94% 0.82 1.13 1.28 1.01 Nonperforming assets as a % of total assets 0.71 0.84 0.91 0.89 0.85 --------------------------------------------- </TABLE> 35
Management's Discussion and Analysis (continued) <TABLE> Allowance For Loan Losses (dollars in millions) (CHART OMITTED) <CAPTION> <S> <C> 1996 $51.6 1997 $53.5 1998 $54.4 </TABLE> at a level that is, in management's judgment, representative of the loan portfolio's inherent risk. In determining the adequacy of the allowance for loan losses, management reviews the current nonperforming loan portfolio as well as loans that are past due and not yet categorized as nonperforming for reporting purposes. Also, there are a number of other factors that are taken into consideration, including: *The magnitude and nature of recent loan charge offs and the shifting of charge offs to the residential real estate loan portfolio, *The growth in the loan portfolio and the risks associated with the absolute balance of the loan portfolio in relation to the economic climate in the Bank's business territory, *Changes in underwriting standards in the competitive environment that TrustCo operates in, *Significant growth in the level of losses associated with bankruptcies and the time period needed to foreclose, secure and dispose of collateral, and *The relatively weak economic environment in the Upstate New York territory combined with declining real estate prices. Consumer bankruptcies and defaults in general have risen significantly during the 1990's. This trend appears to be continuing as a result of economic turmoil and the relative ease of access by consumers to large amounts of credit. Job growth in the Upstate New York area has been modest to declining and there continues to be a shifting of higher paying jobs in manufacturing and government to lower paying service jobs. These trends continued during 1998; however, there has been some early indication of a stabilization in the economic climate for the Upstate New York region. Consequently, the provision for loan losses of $4.6 million, $5.4 million, and $6.6 million for 1998, 1997, and 1996, respectively, reflects these factors. 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 both 1998 and 1997 were $6.6 million. Recoveries were $2.9 million in 1998 and $3.1 million in 1997. The provision recorded on the consolidated income statement in 1998 was $4.6 million compared to $5.4 million in 1997. Net charge offs as a percentage of average loans were 0.28% in both 1998 and 1997. The allowance for loan losses as a percentage of loans outstanding was 4.11% in 1998 and 4.12% in 1997. The Company has a policy of recognizing problem loan charge offs early and pursuing collection efforts aggressively. This policy of early intervention has proven to be a cornerstone of the strong lending performance that TrustCo has achieved. TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring, as impaired loans since the adoption of these accounting requirements. At year end 1998 and 1997, there were $4.7 million and $3.7 million, respectively, of impaired loans. <TABLE> Allowance to Loans Outstanding (CHART OMITTED) <CAPTION> <S> <C> 1996 4.15% 1997 4.12% 1998 4.11% </TABLE> The average balances of impaired loans were $4.0 million during 1998 and $6.0 million during 1997. The Company recognized approximately $400 thousand and $350 thousand of interest income on these loans in 1998 and 1997, respectively. 36
Management's Discussion and Analysis (continued) <TABLE> Summary of Loan Loss Experience <CAPTION> (dollars in thousands) 1998 1997 1996 1995 1994 Amount of loans outstanding at end of year <S> <C> <C> <C> <C> <C> (less unearned income).................... $1,322,703 1,298,276 1,241,882 1,226,142 1,161,789 Average loans outstanding during year (less average unearned income)............ 1,311,967 1,260,771 1,227,407 1,187,929 1,122,698 -------------------------------------------------------- Balance of allowance at beginning of year. 53,455 51,561 48,320 38,851 34,087 Loans charged off: Commercial .............................. 1,498 3,506 3,213 4,823 3,864 Real estate.............................. 3,883 2,014 1,498 1,694 53 Installment.............................. 1,180 1,059 937 821 907 -------------------------------------------------------- Total.................................... 6,561 6,579 5,648 7,338 4,824 -------------------------------------------------------- Recoveries of loans previously charged off: Commercial................................ 2,308 2,718 1,963 3,504 1,125 Real estate............................... 362 169 110 258 -- Installment............................... 201 172 239 347 407 -------------------------------------------------------- Total................................... 2,871 3,059 2,312 4,109 1,532 -------------------------------------------------------- Net loans charged off..................... 3,690 3,520 3,336 3,229 3,292 -------------------------------------------------------- Additions to allowance charged to operating expense..................... 4,610 5,414 6,577 12,698 8,056 -------------------------------------------------------- Balance of allowance at end of year....... $ 54,375 53,455 51,561 48,320 38,851 -------------------------------------------------------- Net charge offs as a percent of average loans outstanding during year (less average unearned income).......... 0.28% 0.28 0.27 0.27 0.29 Allowance as a percent of loans outstanding at end of year............................ 4.11 4.12 4.15 3.94 3.34 -------------------------------------------------------- </TABLE> Market Risk The Company's principal exposure to market risk is with respect to interest rate risk. Interest rate risk is the potential for economic loss due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current market value. 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, asset-backed securities, and collateralized mortgage obligations 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. Other equity securities are shown in the 0-90 days category. Interest bearing checking, 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, 1998, the Company's gap position indicated an excess of assets repricing in the 0 to 90 day period of $175.9 million. This positive gap position is the result of management's decision to retain $383.0 million of federal funds sold and other short-term investments at year end 1998 for potential reinvestment in 1999. The gap position turns negative 37
Management's Discussion and Analysis (continued) <TABLE> Interest Rate Sensitivity <CAPTION> (dollars in thousands)... At December 31, 1998 Repricing, or able to be repriced in: 0-90 91-365 1-5 Over 5 Rate Days Days Years Years Insensitive Total ----------------------------------------------------------------------- Assets: <S> <C> <C> <C> <C> <C> <C> Federal funds sold............................$ 358,000 -- -- -- -- 358,000 Other short-term investments.................. 24,979 -- -- -- -- 24,979 Securities available for sale................. 74,284 117,347 213,442 298,224 14,113 717,410 Loans, net of unearned income................. 226,533 142,132 187,828 759,063 7,147 1,322,703 Noninterest rate sensitive assets............. -- -- -- -- 61,988 61,988 ----------------------------------------------------------------------- Total assets.............................. 683,796 259,479 401,270 1,057,287 83,248 2,485,080 ----------------------------------------------------------------------- Cumulative total assets.......................$ 683,796 943,275 1,344,545 2,401,832 2,485,080 2,485,080 ----------------------------------------------------------------------- Liabilities and shareholders' equity: Deposits: Interest bearing deposits....................$ 353,284 457,156 711,655 430,961 -- 1,953,056 Noninterest bearing deposits................. 6,699 19,603 60,817 67,239 -- 154,358 ----------------------------------------------------------------------- Total deposits............................ 359,983 476,759 772,472 498,200 -- 2,107,414 Borrowings................................... 147,924 -- -- -- -- 147,924 Noninterest rate sensitive liabilities....... -- -- -- -- 43,900 43,900 Shareholders' equity......................... -- -- -- -- 185,842 185,842 ----------------------------------------------------------------------- Total liabilities and shareholders' equity. 507,907 476,759 772,472 498,200 229,742 2,485,080 ----------------------------------------------------------------------- Cumulative total liabilities andoo shareholders$507,907 984,666 1,757,138 2,255,338 2,485,080 2,485,080 ----------------------------------------------------------------------- Incremental gap: Interest sensitivity gap.....................$ 175,889 (217,280) (371,202) 559,087 Gap as a % of earning assets................. 7.26% 8.97 (15.32) 23.07 Interest sensitive assets to liabilities..... 136.43 56.76 56.39 245.33 Cumulative gap: Interest sensitivity gap......................$ 175,889 (41,391) (412,593) 146,494 Gap as a % of earning assets.................. 7.26% 1.71 (17.03) 6.05 Interest sensitive assets to liabilities...... 136.43 98.43 80.51 114.32 ----------------------------------------------------------------------- </TABLE> (an excess of liabilities subject to repricing over assets that can reprice during that time period) in the 91 to 365 day period by $217.3 million. This situation occurs as a result of the amount of deposits that are subject to repricing during this time period. For the period from 0 days to 1 year, the Company has a cumulative negative gap position of $41.4 million. Interest rate sensitivity using gap analysis is most useful for the period of less than one year. The Company's gap position in relation to products, services, and the marketplace is under constant 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 interest 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 interest rates. Additionally, certain assets have features which restrict changes ininterest 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. 38
Management's Discussion and Analysis (continued) 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 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. Liabilities can be classified into three categories for the purposes of managing liability-based liquidity: 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, 1998, core deposits (total deposits less time deposits greater than $100,000) amounted to $2.0 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 1998, the average balance of purchased liabilities was $272.9 million, compared with $218.5 million in 1997, and $185.0 million in 1996. In addition, TrustCo has approximately $250 million available under lines of credit with the Federal Home Loan Bank of New York. 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, 1998 and 1997, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $230.2 million and $223.8 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 credit risk involved in letters of credit is essentially the same as the risk involved in extending loan facilities to customers, and they are subject to the same standards and management procedures in effect to monitor other credit risks. At December 31, 1998 and 1997, outstanding standby letters of credit were approximately $2.0 million and $7.7 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 $22.1 million in 1998, $17.2 million in 1997 and $10.3 million in 1996. Included in the 1998 results are approximately $1 million of net securities gains compared with net losses of $200 thousand in 1997 and net losses of $4.5 million in 1996. Excluding securities transactions, noninterest income would have been $21.1 million, $17.4 million, and $14.8 million in 1998, 1997 and 1996, respectively. The Trust Department contributes the largest recurring portion of noninterest income through fees generated from the performance of fiduciary and investment management services. Income from these fiduciary activities totalled $7.0 million in 1998, $6.6 million in 1997 and $5.6 million in 1996. Trust fees are generally calculated as a percentage of the assets under management by the Trust Department. <TABLE> Noninterest income <CAPTION> (dollars in thousands) 1998 vs. 1997 --------------------- 1998 1997 1996 Amount Percent ---------------------------------------------------- <S> <C> <C> <C> <C> <C> Trust department income................... $ 6,973 6,554 5,556 419 6.4% Fees for services to customers............ 8,799 7,671 6,981 1,128 14.7 Net gain/(loss) on securities transactions 998 (166) (4,536) 1,164 701.2 Letter of credit reserve recapture........ 2,398 -- -- 2,398 100.0 Other..................................... 2,954 3,163 2,312 (209) (6.6) ---------------------------------------------------- Total noninterest income......... $22,122 17,222 10,313 4,900 28.5% ---------------------------------------------------- </TABLE> 39
Management's Discussion and Analysis (continued) <TABLE> NONINTEREST EXPENSE <CAPTION> (dollars in thousands) 1998 vs. 1997 --------------------- 1998 1997 1996 Amount Percent -------------------------------------------------- <S> <C> <C> <C> <C> <C> Salaries and employee benefits........... $23,367 23,162 21,532 205 0.9% Net occupancy expense.................... 5,898 5,270 4,178 628 11.9 Equipment expense........................ 5,292 4,165 3,289 1,127 27.1 FDIC insurance expense................... 244 246 7 (2) (0.8) Professional services.................... 2,664 3,489 3,676 (825) (23.6) Other real estate expenses............... 1,856 1,056 718 800 75.8 Other.................................... 9,444 8,838 8,615 606 6.9 -------------------------------------------------- Total noninterest expense....... $48,765 46,226 42,015 2,539 5.5% -------------------------------------------------- </TABLE> Changes in fees for services to customers reflect the fee scale used by the Bank for pricing its services and the volume of services customers utilized. Included in other noninterest income for 1998 is approximately $2.4 million of nonrecurring income that occurred in the fourth quarter. A reserve against a credit enhancement standby letter of credit was recaptured because the underlying credit facility was terminated. Other noninterest income included gains on sales of premises and equipment of approximately $600 thousand in 1998 and $500 thousand in 1997. Proceeds from the sale of these fixed assets were approximately $1.5 million in 1998 and $4.0 million in 1997. Noninterest Expense: Noninterest expense was $48.8 million in 1998, compared with $46.2 million in 1997 and $42.0 million in 1996. 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 40.3% in 1998, 40.6% in 1997 and 39.5% in 1996. The general industry goal is the attainment of a 60% efficiency ratio. <TABLE> Efficiency Ratio (CHART OMITTED) <CAPTION> <S> <C> 1996 39.51% 1997 40.61% 1998 40.26% </TABLE> TrustCo has consistently outperformed this industry goal by a wide margin since 1994. Salaries and employee benefits are the most significant component of noninterest expense. For 1998, these expenses amounted to $23.4 million, compared with $23.2 million in 1997. The increase in salaries and employee benefits reflects the addition of new branches and salary adjustments given to employees. Net occupancy costs increased to $5.9 million in 1998 from $5.3 million in 1997 and $4.2 million in 1996. The increased occupancy costs are primarily the result of expenses associated with the new branch facilities. Equipment expense increased to $5.3 million from $4.2 million for 1997 due primarily to the cost associated with the Year 2000 project. All direct costs of consultants and equipment are categorized as a component of computer equipment expense. Professional fees are down by $800 thousand due primarily to a reduction in legal expense. Other real estate expense increased by $800 thousand due to charge offs associated with writing down properties in this portfolio to their fair values. During the fourth quarter 1998 the Company established a loss accrual of $750 thousand associated with an environmental contamination remediation program at one of its facilities. At this time, management does not believe material additional cost for remediation will be required at this site. Income Tax In 1998, TrustCo recognized income tax expense of $19.4 million, as compared to $18.9 million in 1997 and $17.3 million in 1996. The tax expense on the Company's income was different than tax expense at the statutory rate of 35% due primarily to tax exempt income and the effect of New York State income taxes. 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, 1998 and 1997 is reserved primarily for federal and state tax law restrictions on the 40
Management's Discussion and Analysis (continued) deductibility of certain temporary differences, including the lack of state carry backs and carry forwards. 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 assets of $36.8 million and $38.2 million at December 31, 1998 and 1997, respectively, will be realized. Year 2000 Update General: Management believes that TrustCo's company-wide Year 2000 project is proceeding on schedule. The Year 2000 project is addressing the issue of computer software, hardware, and embedded computer chips being unable to distinguish between the years 1900 and 2000. TrustCo operates its principal financial accounting and record keeping systems using software purchased from Alltel. Beginning in 1995, TrustCo began a project to upgrade this software to the most current release available and to work with Alltel to make the appropriate changes so as to be ready to process Year 2000 transactions. A timetable was established for these upgrades to occur which would culminate in the installation of a final set of upgrades that would be Year 2000 ready. Since 1995, TrustCo has worked closely with Alltel to ensure that they are making the appropriate remediation efforts required to have their programs Year 2000 ready. While these activities were ongoing, TrustCo directed its efforts to installing the upgrades and making the other changes required to be positioned to handle the Year 2000 programs from Alltel once they were completed. In addition to the Alltel programs, there are a limited number of mainframe application programs that were purchased from Kirchman Corporation. TrustCo worked directly with the technical support staff at Kirchman to evaluate the programs for any program changes required to accommodate Year 2000 processing requirements. In light of the program structure and the fact that these programs already utilize the full century date in their processing, it is not anticipated that there will be any difficulties with these programs accepting Year 2000 data. Throughout the organization, TrustCo utilizes other computer systems to process various activities. Some of the functionality provided by these systems is of a routine nature and is not critical to the operations of TrustCo. The critical non-mainframe applications are the ATM application, which runs on an IBM AS400 system; Trust Accounting, which runs on an Alpha system from Digital Equipment Corporation (DEC); and Payroll, which is a server-based application. The Year 2000 project also addresses the increasing speculation regarding short- and long-term unavailability of certain consumer goods, which may prompt people to accumulate or hoard cash in quantities sufficient to meet their personal needs for a period of time. The Year 2000 project also has provisions dealing with the need for additional cash in the branches later in 1999 and into the year 2000. Arrangements have been made to obtain and transport additional cash to the branches should the demand increase during those time periods. Mainframe Operations: Alltel software: The vast majority of all transactions processed by TrustCo are performed using Alltel software. Beginning in 1995, the Company inventoried all of the applications that are processed on the mainframe and identified the program release that TrustCo needed in order to be Year 2000 ready. A schedule was developed and outside consulting resources were engaged to assist the in-house programming staff to have all applications operating Year 2000 ready programs upgraded by mid-1998. That schedule has been accomplished and all Alltel Year 2000 ready programs have been installed. Kirchman programs: TrustCo utilizes three programs purchased from Kirchman that operate on the mainframe computer. The TrustCo in-house programming staff and outside consultants have reviewed these programs and have concluded that the programs are currently Year 2000 ready. Testing for Year 2000 readiness has been completed. IBM operating system: The IBM operating system also required an upgrade to a new version to ensure that it would also be Year 2000 ready. This software has been obtained and installed. ATM application: A second system, identical to the system in place being used for daily production, has been installed for ATM Year 2000 testing. The system software for the platform has been upgraded to IBM's Year 2000 release. The application software for both TrustCo and non-TrustCo ATM transactions has been installed and placed into service. Testing for Year 2000 readiness has been completed. Trust Accounting: A second system, identical to the system being used for daily production, has been installed for Trust Department Year 2000 testing. The operating system software has been upgraded to DEC's Year 2000 release. The application software has been upgraded to the vendor's Year 2000 release. Year 2000 readiness testing for the Trust accounting systems has been completed. Non-information Technology: In addition to computer systems utilized for information technology, TrustCo is also dependent upon certain computerized operations for such things as electrical services, heating and communications. As part of the Year 2000 project, TrustCo has taken steps to evaluate the magnitude of the computer dependency of these systems and the potential disruption of services should these systems fail. Third-party vendors that support these systems have been contacted and are being monitored by TrustCo in relation to their Year 2000 implementation plan. Significant dependencies exist with respect to utilities such as the electric companies. 41
Management's Discussion and Analysis (continued) <TABLE> Summary of unaudited quarterly financial information <CAPTION> (dollars in thousands, except per share data) 1998 1997 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.............$43,403 43,814 44,174 42,659 174,050 41,895 42,863 43,646 43,601 172,005 Interest expense............ 21,755 22,458 22,805 21,329 88,347 20,888 21,377 22,034 22,221 86,520 ---------------------------------------------------------------------------------------- Net interest income......... 21,648 21,356 21,369 21,330 85,703 21,007 21,486 21,612 21,380 85,485 Provision for loan losses... 1,372 1,558 450 1,230 4,610 1,210 1,185 1,345 1,674 5,414 ---------------------------------------------------------------------------------------- Net interest income after provision for loan losses................. 20,276 19,798 20,919 20,100 81,093 19,797 20,301 20,267 19,706 80,071 Noninterest income......... 4,554 5,347 4,715 7,506 22,122 3,536 3,809 4,326 5,551 17,222 Noninterest expense........ 11,529 11,299 11,757 14,180 48,765 11,204 11,587 11,111 12,324 4,226 ----------------------------------------------------------------------------------------- Income before income taxes............... 13,301 13,846 13,877 13,426 54,450 12,129 12,523 13,482 12,933 51,067 Income tax expense......... 4,923 5,180 4,668 4,664 19,435 4,536 4,670 4,999 4,687 18,892 ----------------------------------------------------------------------------------------- Net income................. 8,378 8,666 9,209 8,762 35,015 7,593 7,853 8,483 8,246 32,175 ----------------------------------------------------------------------------------------- Per share data: Basic earnings.............. 0.31 0.32 0.34 0.33 1.31 0.28 0.29 0.31 0.31 1.19 Diluted earnings............ 0.30 0.31 0.33 0.31 1.25 0.27 0.28 0.30 0.29 1.15 Cash dividends declared..... 0.24 0.24 0.24 0.28 0.99 0.21 0.21 0.21 0.24 0.86 ----------------------------------------------------------------------------------------- </TABLE> TrustCo has obtained the Year 2000 project plans for these utilities and is monitoring the continued compliance with their plans. The TrustCo contingency plan also provides for generator back up power at key sites to allow for minimum functionality should the primary electric providers be inoperative in Year 2000. Personal Computers: TrustCo reviewed all programs and departmental functions that utilize personal computers. This inventory was then prioritized to identify critical programs that needed to be Year 2000 ready. All of the critical programs have been rewritten or have had new software installed so that they are Year 2000 ready. Testing: To ensure that each of the systems that TrustCo operates will be Year 2000 ready, a testing plan has been developed. To assist in testing, TrustCo has purchased redundant equipment for all of the hardware. This will facilitate extended hours for testing and will ensure that none of the testing will in any way affect production programs. As part of the test plan, TrustCo has identified several dates that need to be tested. These include year end 1998, 1999 and 2000 and other critical dates during 1999 and 2000. Detailed test scripts have been developed to determine that once the computer clocks have been rolled forward to the test dates, specific transactions and processes are performed to validate operational integrity. Data aging software has also been obtained that will assist in identifying all of the data fields and warping them to the future date as required for the test. The test plan requires each application to be tested initially on a stand-alone basis to ensure that it is operational in current date mode and will support production. Once that is completed, the plan calls for each application to be tested in future date mode on a stand-alone basis. The test plan is designed to help identify and isolate problems, if any exist, in future date mode testing. The individual application testing will then lead to entity-wide testing in future date mode to ensure that all of the applications function properly in the future date environment. TrustCo has substantially completed testing of the mission-critical systems in future date mode. Test data and test scripts have been completed for selected dates and all output and processing was completed. Further testing will continue in 1999 as TrustCo interfaces with third-party vendors and service providers. The detailed test plan covers all aspects of TrustCo's operations on the mainframe, as well as all other mission-critical platforms. Customer Evaluations: TrustCo has completed a review of its significant customer relationships and their dependency on computerized systems. In addition, significant new customer relationships will also be subject to this evaluation. TrustCo has established an ongoing assessment as part of the credit granting and review process. Vendor Monitoring: In addition to the main application software vendors, TrustCo has numerous interfaces and data exchanges with third parties and vendors. 42
Management's Discussion and Analysis (continued) <TABLE> Five Year Summary of Financial Data (dollars in thousands, except per share data) Years Ended December 31, 1998 1997 1996 1995 1994 Statement of income data: <S> <C> <C> <C> <C> <C> Interest income............................... $ 174,050 172,005 166,647 161,552 140,282 Interest expense.............................. 88,347 86,520 82,342 80,200 60,698 --------------------------------------------------------- Net interest income............................ 85,703 85,485 84,305 81,352 79,584 Provision for loan losses...................... 4,610 5,414 6,577 12,698 8,056 --------------------------------------------------------- Net interest income after provision for loan losses...................... 81,093 80,071 77,728 68,654 71,528 Noninterest income............................. 22,122 17,222 10,313 14,067 4,560 Noninterest expense............................ 48,765 46,226 42,015 44,440 40,560 --------------------------------------------------------- Income before income taxes.................... 54,450 51,067 46,026 38,281 35,528 Income tax expense............................ 19,435 18,892 17,327 12,754 12,640 --------------------------------------------------------- Net income.................................... $ 35,015 32,175 28,699 25,527 22,888 --------------------------------------------------------- Share data (1): Average equivalent diluted shares outstanding (in thousands)................................ 27,954 27,924 27,598 27,333 27,097 Book value.................................... $ 6.94 6.64 6.02 5.97 5.22 Cash dividends................................ 0.99 0.86 0.75 0.66 0.54 Basic earnings................................ 1.31 1.19 1.07 0.95 0.86 Diluted earnings.............................. 1.25 1.15 1.04 0.93 0.84 --------------------------------------------------------- Financial: Return on average assets...................... 1.44% 1.40 1.29 1.23 1.15 Return on average shareholders' equity (2).... 21.47 20.23 19.05 18.03 17.01 Cash dividend payout ratio.................... 75.97 72.34 70.38 69.55 62.52 Tier 1 capital as a % of total risk adjusted assets................................ 12.77 13.43 12.99 12.45 12.08 Total capital as a % of total risk adjusted assets................................ 14.06 14.72 14.28 13.73 13.35 Efficiency ratio............................. 40.26 40.61 39.51 42.52 41.82 Net interest margin.......................... 3.81 4.02 4.07 4.18 4.25 --------------------------------------------------------- Average balances: Total assets.................................. $2,433,238 2,302,598 2,220,535 2,073,391 1,994,497 Earning assets................................ 2,338,838 2,204,725 2,136,826 1,994,240 1,910,368 Loans, net.................................... 1,311,967 1,260,771 1,227,407 1,187,929 1,122,698 Allowance for loan losses..................... (55,208) (53,173) (51,233) (45,086) (37,334) Securities available for sale................. 611,957 623,001 580,919 301,080 332,980 Investment securities......................... -- -- -- 292,908 250,812 Deposits...................................... 2,068,725 1,981,223 1,936,445 1,859,070 1,808,336 Short-term borrowings......................... 143,337 117,184 98,324 38,090 18,129 Long-term debt................................ -- -- -- 788 2,840 Shareholders' equity.......................... 180,103 167,273 155,927 145,469 136,977 </TABLE> (1) Share and per share data have been adjusted for a 15% stock split in 1998, 1997 and 1996, a 6 for 5 stock split in 1995, and a 10% stock dividend in 1994. (2) Average shareholders' equity excludes the market adjustment for securities available for sale. Each of the critical interfaces and vendors has been contacted to determine that their Year 2000 plans are adequate and will meet the timetables required by TrustCo. When such plans are not provided or do not adequately address Year 2000 concerns, alternate vendors or data exchange methods have been identified. These interfaces and data exchanges with third parties and vendors occur utilizing numerous types of programs and computer systems. Their Year 2000 projects require them to be compliant in accordance with timetables that are acceptable to TrustCo and in accordance with guidelines established by bank regulators. Due to the number of such interfaces and data exchanges with third parties and vendors, there is a risk that some may not meet their schedules. TrustCo is monitoring these activities and will take appropriate action should the need arise. Contingency Planning: All of the mainframe application software is currently operational on software that the vendors have identified as being Year 2000 ready. Likewise, all of the critical PC programs 43
Management's Discussion and Analysis (continued) have been updated or rewritten to be Year 2000 ready. Substantially all future date testing has been completed and the results provided assurance to management that the system will be functional in Year 2000. As problems are identified, the affected programming code is analyzed and rewritten or replaced if needed. The contingency plan that has been developed is to ensure that all the testing and remediation efforts are completed in order to provide adequate time for final corrections to software prior to Year 2000. Plans are also being developed to identify and plan for unanticipated disruption of services after Year 2000. These plans include timetables for moving operations to disaster recovery sites, the availability of additional programming staff during the critical time periods and back-up for program and data files. Initial plans have been developed and will be updated continuously. Cost: The total cost associated with required modifications to become Year 2000 compliant is not expected to be material to the Company's financial statements. Most of the costs associated with this project are for programming services paid to third-party consultants. Internal costs have not been captured, since they are relatively fixed costs and are a reallocation of existing resources to this project. Costs paid to third-party vendors during the Year 2000 project are for the following services: *Installation of upgrades to software so as to utilize the most recent version released by the vendor, *Applying the Year 2000 code, *Applying custom code that is utilized by TrustCo in its operations, and, *Providing production support to the Company as these upgrades are being installed. The cost of applying the Year 2000 remediation code to the upgraded programs is not separately determinable from the other services that the third-party consultants have been providing. The professional service cost for the services noted above is estimated to be approximately $2 million for the Year 2000 project. Through year end 1998, approximately 70% of these costs have been expensed. Risk: The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party exchange partners and vendors, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Year 2000 project is expected to significantly reduce the Company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness of its material third-party data exchange partners and vendors. The Company believes that, with the implementation of the modifications of all the software and the monitoring of third-party data exchange partners and vendors, the possibility of significant interruptions of normal operations should be reduced. The most likely worst case scenario is that certain interfaces and data exchanges with third parties and vendors may not be fully functional at or after the century date change. Because it is impossible to predict the nature of the failure, the length of time that it takes to correct, and the extent of the failure, it is not possible to reasonably estimate the impact on TrustCo. Management's plan for testing with third parties and vendors will be completed during the first half of 1999. This worst case scenario could increase the overall cost of the Year 2000 project; however, management believes that this scenario, though possible, has only a minor likelihood of occurring. Readers are cautioned that forward-looking statements contained in the Year 2000 update should be read in conjunction with the Company's disclosures under the heading "Forward-Looking Statements" dealing with cautionary statements for the purpose of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. 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 Comprehensive Income: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130), which establishes standards for reporting and display of comprehensive income. Statement 130 states that comprehensive income includes the reported net income of a company adjusted for items 44
Management's Discussion and Analysis (continued) that are currently accounted for as direct entries to equity, such as the unrealized gain or loss on securities available for sale, foreign currency items and minimum pension liability adjustments. This statement is effective for fiscal years beginning after December 15, 1997. Management has provided the required information in the annual report. Segment Reporting: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (Statement 131), which establishes standards for reporting by public companies about operating segments of their business. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement is effective for periods beginning after December 15, 1997. Management has adopted this statement as of December 31, 1998. Derivative Instruments and Hedging Activities: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," (Statement 133), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management is currently evaluating the impact of this Statement on the Company's consolidated financial statements. Forward-Looking Statements Statements included in this review and in future filings by TrustCo with the Securities and Exchange Commission, in TrustCo's press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect TrustCo's actual results, and could cause TrustCo's actual financial performance to differ materially from that expressed in any forward-looking statement: (1) credit risk, (2) interest rate risk, (3) competition, (4) certain vendors of critical systems or services failing to comply with Year 2000 programming issues, (5) changes in the regulatory environment, and (6) changes in general business and economic trends. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events. 45
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. Basic Earnings Per Share Net income divided by the weighted average number of common shares outstanding during the period. 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. Comprehensive Income Net income plus the change in selected items recorded directly to capital such as the change in market value of securities available for sale. 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. Diluted Earnings Per Share Net income divided by the weighted average number of common shares outstanding during the period, taking into consideration the effect of stock options. 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. 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 three payments 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. 46
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 authorizations and recorded properly to permit the preparation of 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 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. Robert A. McCormick President and Chief Executive Officer Robert T. Cushing Vice President and Chief Financial Officer January 22, 1999 47
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Albany, New York January 22, 1999 48
<TABLE> Consolidated Statements of Income <CAPTION> (dollars in thousands, except per share data) Years ended December 31, 1998 1997 1996 Interest income: <S> <C> <C> <C> Interest and fees on loans $110,635 109,346 107,111 Interest and dividends on: U. S. Treasuries and agencies 15,358 27,356 31,466 States and political subdivisions 6,177 5,637 4,254 Mortgage-backed securities 12,692 10,094 4,114 Other 6,652 1,811 2,068 Interest on federal funds sold 22,536 17,761 17,634 --------------------------- Total interest income 174,050 172,005 166,647 --------------------------- Interest expense: Interest on deposits: 81,596 80,946 77,749 Interest on short-term borrowings 6,751 5,574 4,593 --------------------------- Total interest expense 88,347 86,520 82,342 --------------------------- Net interest income 85,703 85,485 84,305 Provision for loan losses 4,610 5,414 6,577 --------------------------- Net interest income after provision for loan losses 81,093 80,071 77,728 --------------------------- Noninterest income: Trust department income 6,973 6,554 5,556 Fees for services to customers 8,799 7,671 6,981 Net gain/(loss) on securities transactions 998 (166) (4,536) Letter of credit reserve recapture 2,398 -- -- Other 2,954 3,163 2,312 --------------------------- Total noninterest income 22,122 17,222 10,313 --------------------------- Noninterest expenses: Salaries and employee benefits 23,367 23,162 21,532 Net occupancy expense 5,898 5,270 4,178 Equipment expense 5,292 4,165 3,289 FDIC insurance expense 244 246 7 Professional services 2,664 3,489 3,676 Other real estate expenses 1,856 1,056 718 Other 9,444 8,838 8,615 --------------------------- Total noninterest expenses 48,765 46,226 42,015 --------------------------- Income before taxes 54,450 51,067 46,026 Applicable income taxes 19,435 18,892 17,327 --------------------------- Net income $35,015 32,175 28,699 =========================== Basic earnings per share $1.31 1.19 1.07 Diluted earnings per share 1.25 1.15 1.04 =========================== </TABLE> Per share data has been adjusted for a 15% stock split in 1998,1997 and 1996. See accompanying notes to consolidated financial statements. 49
Consolidated Statements of Condition <TABLE> (dollars in thousands, except share data) As of December 31, <CAPTION> 1998 1997 ASSETS: <S> <C> <C> Cash and due from banks................... $ 41,950 42,740 Federal funds sold........................ 358,000 395,000 Other short-term funds.................... 24,979 -- ----------------------------------- Total cash and cash equivalents......... 424,929 437,740 Securities available for sale............. 717,410 601,899 Loans..................................... 1,323,769 1,299,492 Less:Unearned income...................... 1,066 1,216 Allowance for loan losses................ 54,375 53,455 ----------------------------------- Net loans................................ 1,268,328 1,244,821 Bank premises and equipment............... 17,022 18,609 Real estate owned......................... 5,174 9,309 Other assets.............................. 52,217 59,887 ----------------------------------- Total assets $2,485,080 2,372,265 ----------------------------------- LIABILITIES AND SHAREHOLDER'S EQUITY Deposits: Demand................................... $ 154,358 130,345 Savings accounts......................... 660,376 650,601 Interest-bearing checking................ 266,027 240,699 Money market deposit accounts............ 58,061 57,021 Certificates of deposit (in denominations of $100,000 or more)....................... 139,310 112,599 Other time............................... 829,282 830,598 ----------------------------------- Total deposits.......................... 2,107,414 2,021,863 Short-term borrowings..................... 147,924 127,850 Accrued expenses and other liabilities.... 43,900 43,727 ----------------------------------- Total liabilities....................... 2,299,238 2,193,440 ----------------------------------- Shareholders' Equity: Capital stock par value $1; 50,000,000 shares authorized, and 27,976,793 and 24,257,382 shares issued December 31, 1998 and December 31, 1997, respectively..... 27,977 24,257 Surplus................................... 110,398 112,702 Undivided profits......................... 40,533 32,119 Accumulated other comprehensive income: Net unrealized gain on securities available for sale, net of tax 18,603 15,851 Treasury stock at cost - 1,184,525 and 855,850 shares at December 31, 1998 and December 31, 1997, respectively (11,669) (6,104) ----------------------------------- Total shareholders' equity.............. 185,842 178,825 ----------------------------------- Total liabilities and shareholders' equity $2,485,080 2,372,265 ----------------------------------- </TABLE> See accompanying notes to consolidated interim financial statements. 50
Consolidated Statements of Changes in Shareholders' Equity <TABLE> (dollars in thousands, except per share data) <CAPTION> Three Years Ended December 31, 1998 Accumulated Other Compre- Capital Undivided Comprehensive hensive Treasury Stock Surplus Profits Income Income Stock <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 1996 $18,135 116,128 14,720 12,363 (1,247) Comprehensive income Net income 1996 -- -- 28,699 -- 28,699 -- -------- Other comprehensive income, net of tax: Unrealized net holding loss arising during the year, net of tax (pre-tax loss $16,670) -- -- -- -- (9,807) -- Reclassification adjustment for net loss realized in net income during the year (pre-tax loss $4,536) -- -- -- -- 2,683 -- ------- Other comprehensive income -- -- -- (7,124) (7,124) -- ------- Comprehensive income -- -- -- 21,575 -- ------- Cash dividend declared, $.75 per share -- -- (20,198) -- -- Stock options exercised 91 844 -- -- -- 15% stock split (2,733,786 shares) 2,733 (2,733) -- -- -- Treasury stock purchased -- -- -- -- (805) Sale of treasury stock -- (11) -- -- 805 --------------------------------------------------------------- Ending balance, December 31, 1996 20,959 114,228 23,221 5,239 (1,247) Comprehensive income Net income 1997 -- -- 32,175 -- 32,175 -- ------- Other comprehensive income, net of tax: Unrealized net holding gain arising during the year, net of tax (pre-tax gain $17,709) -- -- -- -- 10,514 -- Reclassification adjustment for net loss realized in net income during the year (pre-tax loss $166) -- -- -- -- 98 -- ------- Other comprehensive income -- -- -- 10,612 10,612 -- ------- Comprehensive income -- -- -- 42,787 -- ------- Cash dividend declared, $.86 per share -- -- (23,277) -- -- Stock options exercised 139 1,485 -- -- -- 15% stock split (3,158,906 shares) 3,159 (3,159) -- -- -- Treasury stock purchased -- -- -- -- (7,735) Sale of treasury stock -- 148 -- -- 2,878 ---------------------------------------------------------------- Ending balance, December 31, 1997 24,257 112,702 32,119 15,851 (6,104) Comprehensive income Net income 1998 -- -- 35,015 -- 35,015 -- ------- Other comprehensive income, net of tax: Unrealized net holding gain arising during the year, net of tax (pre-tax gain $5,652) -- -- -- -- 3,342 -- Reclassification adjustment for net gain realized in net income during the year (pre-tax gain $998) -- -- -- -- (590) -- ------- Other comprehensive income -- -- -- 2,752 2,752 -- ------- Comprehensive income -- -- -- 37,767 -- ------- Cash dividend declared, $.99 per share -- -- (26,601) -- -- Stock options exercised 73 822 -- -- -- 15% stock split (3,646,672 shares) 3,647 (3,647) -- -- -- Treasury stock purchased -- -- -- -- (10,439) Sale of treasury stock -- 521 -- -- 4,874 ---------------------------------------------------------------- Ending balance, December 31, 1998 $27,977 110,398 40,533 18,603 (11,669) ---------------------------------------------------------------- </TABLE> Per share data has been adjusted for a 15% stock split in 1998, 1997 and 1996. See accompanying notes to consolidated financial statements. 51
<TABLE> Consolidated Statements of Cash Flows <CAPTION> (dollars in thousands) Years Ended December 31, 1998 1997 1996 ----------------------------------------- Increase/(decrease) in cash and cash equivalents Cash flows from operating activities: <S> <C> <C> <C> Net income.............................................................$ 35,015 32,175 28,699 ----------------------------------------- Adjustments to reconcile net income to net cash provided by/ (used in) operating activities: Depreciation and amortization......................................... 2,532 3,342 2,951 Gain on sales of fixed assets......................................... (591) (460) --- Provision for loan losses............................................. 4,610 5,414 6,577 Provision for deferred tax (benefit)/expense.......................... 1,405 (3,693) (4,088) Net (gain)/loss on sale or call of securities available for sale...... (998) 166 4,536 (Increase)/decrease in taxes receivable............................... (540) 730 (1,115) Decrease in interest receivable....................................... 1,189 1,599 856 Increase/(decrease) in interest payable............................... (293) 191 144 (Increase)/decrease in other assets................................... 8,416 5,386 (17,098) Increase/(decrease) in accrued expenses............................... (464) 8,125 4,894 ----------------------------------------- Total adjustments..................................................... 15,266 20,800 (2,343) ----------------------------------------- Net cash provided by operating activities............................. 50,281 52,975 26,356 ----------------------------------------- Cash flows from investing activities: Proceeds from sales of securities available for sale.................. 32,785 179,342 382,780 Proceeds from maturities and calls of securities available for sale... 229,362 205,256 125,978 Purchase of securities available for sale............................. (372,006) (350,118) (503,892) Net increase in loans................................................. (32,904) (70,148) (27,469) Proceeds from sales of real estate owned.............................. 4,220 3,665 4,196 Proceeds from sales of fixed assets................................... 1,478 3,967 --- Capital expenditures.................................................. (1,832) (2,360) (1,041) ----------------------------------------- Net cash used in investing activities................................. (138,897) (30,396) (19,448) ----------------------------------------- Net increase in deposits.............................................. 85,551 68,717 22,497 Increase in short-term borrowing...................................... 20,074 16,188 55,008 Proceeds from exercise of stock options............................... 895 1,624 935 Proceeds from sale of treasury stock.................................. 5,395 3,026 794 Payments to acquire treasury stock.................................... (10,439) (7,735) (805) Dividends paid........................................................ (25,671) (22,438) (19,447) ------------------------------------------ Net cash provided by financing activities............................. 75,805 59,382 58,982 ------------------------------------------ Net increase/(decrease) in cash and cash equivalents.................... (12,811) 81,961 65,890 Cash and cash equivalents at beginning of year.......................... 437,740 355,779 289,889 ------------------------------------------ Cash and cash equivalents at end of year...............................$ 424,929 437,740 355,779 ------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid..................,.....................................$ 88,640 86,329 82,198 Income taxes paid..................................................... 18,273 21,615 22,363 Transfer of loans to real estate owned................................ 4,787 10,234 8,393 Increase in dividends payable......................................... 930 839 751 Change in unrealized (gain)/loss on securities available for sale-gross (4,654) (17,875) 12,134 Change in deferred tax effect on unrealized gain/(loss) on securities available for sale.................................................. 1,902 7,263 (5,010) ------------------------------------------ </TABLE> 52
(1) 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 balance sheet management. The designation of available for sale is made at the time of purchase based upon management's intent to hold the securities for an indefinite period of time. These securities, however, would be available fo 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, both of which are required holdings for the Company) 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. 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 3 payments 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. Loans may be removed from nonaccrual status when they become current as to principal and interest and have demonstrated a sustained ability to make loan payments in accordance with the contractual terms of the loan. Loans may also be removed from nonaccrual status when, in the opinion of management, the loan is expected to be fully collectable as to principal and interest. Impaired loans have been defined since January 1, 1995 as commercial and commercial real estate loans in nonaccrual status and restructured loans. Allowance for Loan Losses An allowance for loan losses is maintained at a level considered adequate by management to provide for probable 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. 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 53
Notes to Consolidated Financial Statements(continued) 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 $20.1 million plus 1999 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 "Accounting for Stock Issued to Employees" (APB Opinion 25) and as such no compensation expense has been recorded for these plans. Earnings Per Share The Company computes and presents earnings per share (EPS) in accordance with the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 128, "Earnings per Share" (Statement 128), which requires dual presentation of basic and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period, taking into consideration the effect of stock options. All prior period EPS data has been restated to conform to the provisions of Statement 128. 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. Segment Reporting During 1998, the Company adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Related Information" (Statement 131). This statement requires the Company to report financial and other information about operating segments meeting certain quantitative and other requirements as defined by this statement. The Company's operations are solely in the financial services industry and include the provision of traditional banking services. The Company operates solely in the geographical region of Upstate New York. In the opinion of management, the Company does not have any reportable segments as defined by Statement 131. (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 $10.0 million and $9.8 million at December 31, 1998 and 1997, respectively. <TABLE> (3) Securities Available for Sale The amortized cost and approximate market value of the securities available for sale are as follows: <CAPTION> (dollars in thousands) At December 31, 1998 Gross Gross Approximate Amortized Unrealized Unrealized Market Value Cost Gains Losses U.S. Treasuries <S> <C> <C> <C> <C> and agencies............ $163,244 4,581 -- 167,825 States and political subdivisions............ 124,390 5,598 243 129,745 Mortgage-backed securities............... 246,531 3,390 432 249,489 Other...................... 126,183 303 138 126,348 ---------------------------------------------------------- Total debt securities............. 660,348 13,872 813 673,407 Equity securities.......... 25,610 18,393 -- 44,003 ---------------------------------------------------------- Total securities available for sale............... $685,958 32,265 813 717,410 ---------------------------------------------------------- </TABLE> <TABLE> (dollars in thousands) At December 31, 1997 Gross Gross Approximate Amortized Unrealized Unrealized Market Value Cost Gains Losses U.S. Treasuries <S> <C> <C> <C> <C> and agencies...... $273,517 5,354 48 278,823 States and political subdivisions...... 109,210 4,577 -- 113,787 Mortgage-backed securities......... 151,989 3,196 105 155,080 Other................ 15,430 26 5 15,451 ---------------------------------------------------------- Total debt securities....... 550,146 13,153 158 563,141 Equity securities.... 24,955 13,803 -- 38,758 ---------------------------------------------------------- Total securities available for sale.......... $575,101 26,956 158 601,899 ---------------------------------------------------------- </TABLE> 54
Notes to Consolidated Financial Statements(continued) <TABLE> The following table distributes the debt securities available for sale portfolio as of December 31, 1998, based on the securities' final maturity (mortgage-backed securities are stated using an estimated average life): <CAPTION> (dollars in thousands) Approximate Amortized Market Cost Value -------------------- <S> <C> <C> Due in one year or less................$ 46,751 47,046 Due after one year through five years.. 275,580 278,193 Due after five years through ten years. 200,888 205,755 Due after ten years.................... 137,129 142,413 -------------------- $660,348 673,407 -------------------- </TABLE> <TABLE> Actual maturities may differ from contractual maturities because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty. The proceeds from sales of securities, gross realized gains and gross realized losses from sales and calls during 1998, 1997 and 1996 are as follows: <CAPTION> (dollars in thousands) At December 31, 1998 1997 1996 <S> <C> <C> <C> Proceeds...............$ 32,785 179,342 382,780 Gross realized gains... 1,000 828 3,214 Gross realized losses.. 2 994 7,750 </TABLE> The amount of securities available for sale that have been pledged to secure public deposits and for other purposes required by law amounted to $269.2 million and $288.9 million at December 31, 1998 and 1997, respectively. There are no securities of a single issuer (excluding issues of the U.S. government and its agencies) that represent 10% or more of shareholders' equity at December 31, 1998 and 1997. <TABLE> (4) Loans and Allowance for Loan Losses A summary of loans by category is as follows: <CAPTION> (dollars in thousands) At December 31, 1998 1997 <S> <C> <C> Commercial............................$ 187,308 183,855 Construction.......................... 12,782 7,902 Residential mortgage loans............ 949,524 905,298 Home equity line of credit............ 147,581 172,448 Installment loans..................... 26,574 29,989 ---------------------------- Total loans........................... 1,323,769 1,299,492 Less: Unearned income................. 1,066 1,216 Allowance for loan losses....... 54,375 53,455 ---------------------------- Net Loans.............................$ 1,268,328 1,244,821 ---------------------------- </TABLE> At December 31, 1998 and 1997, loans to executive officers, directors, and to associates of such persons aggregated $3.8 million and $6.8 million, respectively. During 1998, new loans of $1.9 million were made and repayments of loans totalled $4.9 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. <TABLE> The following table sets forth the information with regard to nonperforming loans: <CAPTION> (dollars in thousands) At December 31, 1998 1997 1996 <S> <C> <C> <C> Loans in nonaccrual status.........$7,147 6,298 10,748 Loans contractually past due 3 payments or more and still accruing interest............. 1,454 1,060 792 Restructured loans ............... 3,782 3,294 2,495 ------------------------ Total nonperforming loans..........$12,383 10,652 14,035 ------------------------ </TABLE> Interest on nonaccrual and restructured loans of $1.0 million in each of 1998 and 1997, and $1.3 million in 1996 would have been earned in accordance with the original contractual terms of the loans. Approximately $498 thousand, $519 thousand, and $834 thousand of interest on nonaccrual and restructured loans was collected and recognized as income in 1998, 1997, and 1996, respectively. There are no commitments to extend further credit on nonaccrual or restructured loans. <TABLE> Transactions in the allowance for loan losses account are summarized as follows: <CAPTION> 1998 1997 1996 <S> <C> <C> <C> Balance at beginning of year...$53,455 51,561 48,320 Provision for loan losses...... 4,610 5,414 6,577 Loans charged off.............. (6,561) (6,579) (5,648) Recoveries on loans previously charged off........ 2,871 3,059 2,312 ---------------------------- Balance at year end............$54,375 53,455 51,561 ---------------------------- </TABLE> 55
Notes to Consolidated Financial Statements(continued) The Company identifies impaired loans and measures the impairment in accordance with 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." A loan is considered impaired when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured in a troubled debt restructuring subsequent to January 1, 1995. These standards are applicable principally to commercial and commercial real estate loans; however, certain provisions dealing with restructured loans also apply to retail loan products. There were no nonaccrual commercial and commercial real estate loans classified as impaired loans at December 31, 1998 and 1997. There were newly restructured retail loans totalling $4.7 million and $3.7 million that as of December 31, 1998 and 1997 respectively, were identified as impaired loans. None of the allowance for loan losses has been allocated to these impaired loans because management believes 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 1998, 1997, and 1996, the average balance of impaired loans was $4.0 million, $6.0 million, and $8.5 million, respectively, and there was approximately $412 thousand, $350 thousand, and $562 thousand of interest income recorded on these loans in the accompanying consolidated statements of income. There were $1.4 million of loans pledged for various purposes at December 31, 1997. No loans were pledged at December 31, 1998. <TABLE> (5) Bank Premises and Equipment A summary of premises and equipment at December 31, 1998 and 1997 follows: <CAPTION> (dollars in thousands) 1998 1997 <S> <C> <C> Land............................. $ 2,877 2,511 Buildings ....................... 21,537 22,461 Furniture, fixtures and equipment. 16,892 16,229 Leasehold improvements 3,692 3,679 ----------------- 44,998 44,880 Accumulated depreciation and amortization....... (27,976) (26,271) ----------------- Total..................................$17,022 18,609 ----------------- </TABLE> Depreciation and amortization expense approximated $2.5 million, $3.3 million, and $3.0 million for the years 1998, 1997, and 1996, respectively. Occupancy expense of Bank premises included rental expense of $1.4 million in 1998, $1.3 million in 1997 and $1.2 million in 1996. <TABLE> (6) Short-Term Borrowings Short-term borrowings, consisting primarily of the Trustco Short-Term Investment Account, were as follows: <CAPTION> 1998 (dollars in thousands) Trustco Other Short-Term Short-Term Account Borrowings Total Amount outstanding at <S> <C> <C> <C> December 31, 1998...............$104,107 43,817 147,924 Maximum amount outstanding at any month end................ 128,562 48,266 169,254 Average amount outstanding.................... 106,660 36,677 143,337 Weighted average interest rate: For the year................... 5.12% 3.53 4.71 As of year end................. 4.45 3.29 4.11 </TABLE> <TABLE> 1997 (dollars in thousands) Trustco Other Short-Term Short-Term Account Borrowings Total Amount outstanding at <S> <C> <C> <C> December 31, 1997..............$ 94,848 33,002 127,850 Maximum amount outstanding at any month end.................... 95,062 34,136 129,198 Average amountoo outstanding.... 90,633 26,551 117,184 Weighted average interest rate: For the year................. 5.15% 3.43 4.76 As of year end............... 5.30 3.59 4.86 </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 $250 million of available lines of credit with the Federal Home Loan Bank. <TABLE> (7) Income Taxes A summary of income tax expense/(benefit) included in the consolidated statements of income follows: <CAPTION> (dollars in thousands) For the years ended December 31, 1998 1997 1996 Current tax expense: <S> <C> <C> <C> Federal......................$14,498 17,642 16,705 State........................ 3,532 4,943 4,710 ----------------------------- Total current tax expense..... 18,030 22,585 21,415 Deferred tax expense/(benefit) 1,405 (3,693) (4,088) ----------------------------- Total income tax expense..... $19,435 18,892 17,327 ----------------------------- </TABLE> 56
Notes to Consolidated Financial Statements(continued) <TABLE> The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 is as follows: <CAPTION> (dollars in thousands)December 31, 1998 1997 Deductible/ Deductible/ (taxable) (taxable) temporary temporary differences differences <S> <C> <C> Bond accounting......................$ (185) (54) Benefits and deferred remuneration.................... 4,438 4,354 Deferred loan fees, net.............. 553 642 Difference in reporting the provision for loan losses,net...... 24,460 26,605 Other income or expense not utilized for tax purposes....... 6,934 6,540 Depreciable assets................... 1,395 1,294 Other items.......................... 1,278 897 ------------------------ Total.......................... 38,873 40,278 Valuation reserve.................... (2,051) (2,051) ------------------------ Net deferred tax asset at end of year.................... 36,822 38,227 Net deferred tax asset at beginning of year................ 38,227 34,534 ------------------------ Deferred tax expense/(benefit).......$ 1,405 (3,693) ------------------------ </TABLE> 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, 1998 and 1997 is primarily reserved for federal and state tax law restrictions on the deductibility of certain temporary differences, including the lack of state carrybackwards and carryforwards. 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 $36.8 million and $38.2 million at December 31, 1998 and 1997, 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 $12.8 million at December 31,1998, and $10.9 million at December 31, 1997, 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> 1998 1997 1996 <S> <C> <C> <C> Statutory federal income tax rate.. 35.0% 35.0 35.0 Increase/(decrease) in taxes resulting from: Tax exempt income.................. (3.7) (3.7) (3.3) State income tax, net of federal tax benefit............... 4.6 5.3 5.4 Other items....................... (0.2) 0.4 0.6 ---------------------------- Effective income tax rate.......... 35.7% 37.0 37.7 ---------------------------- </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, 1998 and 1997: <TABLE> Change in Projected Benefit Obligation: <CAPTION> Projected Pension Benefits (dollars in thousands)................ 1998 1997 Projected benefit obligation <S> <C> <C> at beginning of year.............. $19,405 16,336 Service cost.......................... 798 712 Interest cost......................... 1,215 1,054 Benefits paid......................... (1,445) (1,025) Assumption changes and other.......... (200) 2,328 -------------------- Projected benefit obligation at end of year...................... $19,773 19,405 -------------------- </TABLE> Assumption changes in 1997 included the effect of new mortality tables on the plan's projected benefit obligation. 57
Notes to Consolidated Financial Statements(continued) <TABLE> Change in Plan Assets: <CAPTION> (dollars in thousands) 1998 1997 Fair value of plan assets at <S> <C> <C> beginning of year....................... $29,776 25,170 Actual return on plan assets............. 5,463 5,631 Benefits paid............................ (1,445) (1,025) ------------------------ Fair value of plan assets at end of year. 33,794 29,776 Funded status............................ 14,020 10,371 Unrecognized net actuarial gain.......... (11,431) (7,979) Unrecognized prior service cost.......... (329) (375) Unrecognized transition asset............ (295) (442) ------------------------ Prepaid benefit cost..................... $ 1,965 1,575 ------------------------ </TABLE> <TABLE> Components of Net Pension Benefit: <CAPTION> For the years ended December 31, (dollars in thousands) 1998 1997 1996 <S> <C> <C> <C> Service cost.............................$ 798 712 653 Interest cost............................ 1,215 1,054 995 Expected return on plan assets........... (1,902) (1,603) (1,383) Amortization of net gain................. (308) (220) (125) Amortization of unrecognized prior service cost...................... (45) (45) (45) Amortization of unrecognized transition asset........................ (148) (148) (148) ------------------------------- Net periodic pension benefit.............$ (390) (250) (53) ------------------------------- </TABLE> <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, are as follows: <CAPTION> 1998 1997 1996 <S> <C> <C> <C> Weighted average discount rate ........... 6.50% 6.50 6.50 Rate of increase in future compensation ......................... 6.00 6.00 6.00 Expected long-term rate of return on assets .............................. 6.50 6.50 6.50 </TABLE> The Company also has a defined contribution supplementary pension plan under which additional retirement benefits are accrued for eligible executive and senior officers. The expense recorded for this plan was $3.4 million, $3.0 million, and $2.6 million in 1998, 1997, and 1996, respectively. Rabbi trusts have been established for certain benefit plans in 1996. These rabbi trust accounts are administered by the Company's Trust Department and invest primarily in the Trustco Short-Term Investmen t Account. These assets are reflected as other assets in the December 31, 1998 and 1997, consolidated statement of condition. (b) Postretirement Benefits The Company permits retirees under age 65 to participate in the Company's medical plan by paying the same premium as the active employees. At age 65, the Bank provides a Medicare Supplemental program to retirees. The following table shows the plan's funded status and amounts recognized in the Company's consolidated statements of condition at December 31, 1998 and 1997. <TABLE> Change in Projected Benefit Obligation: <CAPTION> Projected Post- Retirement Benefits (dollars in thousands) 1998 1997 Projected benefit obligation <S> <C> <C> at beginning of year................$ 8,807 7,706 Service cost............................ 203 378 Retiree contributions................... 70 69 Interest cost........................... 336 513 Benefits paid........................... (194) (162) Assumption changes and other............ (3,504) 303 Projected benefit obligation ----------------- at end of year.......................$ 5,718 8,807 ----------------- </TABLE> Assumption changes included the effect of changes to the Company's health insurance plans. <TABLE> Change in Plan Assets: <CAPTION> (dollars in thousands) 1998 1997 Fair value of plan assets at <S> <C> <C> beginning of year....................$ 10,414 8,860 Actual return on plan assets.............. 2,049 1,877 Employer contribution..................... 4 5 Retiree contributions..................... 70 69 Taxes..................................... (463) (235) Benefits paid............................. (193) (162) ------------------- Fair value of plan assets at end of year.. 11,881 10,414 ------------------- Funded status............................. 6,163 1,607 Unrecognized net actuarial gain........... (7,435) (3,002) ------------------- Accrued benefit cost.....................$ 1,272 (1,395) ------------------- </TABLE> <TABLE> Components of Net Periodic Benefit Cost: <CAPTION> For the years ended December 31, (dollars in thousands) 1998 1997 1996 <S> <C> <C> <C> Service cost..........................$ 203 378 323 Interest cost............................336 513 444 Expected return on plan assets..........(398) (336) (304) Amortization of net gain................(260) (40) (31) ------------------- Net periodic pension (benefit)/expense$ (119) 515 432 ------------------- </TABLE> 58
Notes to Consolidated Financial Statements(continued) For measurement purposes, a 7.0% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 1998 and thereafter. A one percentage point increase in the assumed health care cost in each year would increase the accumulated postretirement benefit obligation, as of December 31, 1998, by approximately $845 thousand, and would increase the aggregate of the service and the interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1998, by approximately $125 thousand. <TABLE> The weighted average assumptions used to determine the projected benefit obligation at December 31, 1998, 1997, and 1996 were: <CAPTION> 1998 1997 1996 <S> <C> <C> <C> Discount rate..............................6.50% 6.50 6.50 After tax return on plan assets............3.84 3.84 3.84 </TABLE> (c) 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 $1.4 million in both 1998 and 1997 and $1.3 million in 1996. 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 for this plan was $3.0 million, $2.6 million, and $2.1 million in 1998, 1997 and 1996 respectively. The Company has awarded 1.5 million performance bonus units to the executive officers and directors. These units become vested and exercisable only under a change of control as defined. The units were awarded based upon the stock price at the time of grant and, if exercised under a change of control allow the holder to receive the increase in value offered in the exchange over the stock price at the date of grant for each unit. (d) Stock Option Plans <TABLE> At December 31, 1998, the Company has 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 as follows: <CAPTION> (dollars in thousands except per share data) 1998 1997 1996 Net income: <S> <C> <C> <C> As reported.................$35,015 32,175 28,699 Pro forma................... 34,239 31,672 28,364 Basic earnings per share: As reported ................$ 1.31 1.19 1.07 Pro forma................... 1.28 1.17 1.05 Diluted earnings per share: As reported................... 1.25 1.15 1.04 Pro forma 1.23 1.14 1.02 </TABLE> Proforma net income and earnings per share reflect options granted since 1995. The full impact of calculating compensation cost for all stock options under Statement 123 is not reflected in the proforma 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 1.8 million shares of common stock. Under the 1993 Directors Stock Option Plan, the Company may grant options to its directors for up to approximately 200 thousand 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. <TABLE> A summary of the status of TrustCo's stock option plans as of December 31, 1998, 1997 and 1996 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, 1996..... 2,338,389 $ 9.11 1,441,872 $8.14 New options awarded - 1996... 521,659 13.41 117,716 13.63 Cancelled options - 1996..... 10,951 11.80 -- -- Exercised options - 1996..... 140,091 5.71 140,091 5.71 Options became exercisable... -- -- 352,764 9.94 ------------------------------------------- Balance, December 31, 1996... 2,709,006 10.10 1,772,261 9.05 New options awarded - 1997... 460,230 15.80 102,626 15.80 Cancelled options - 1997..... 35,959 12.80 -- -- Exercised options - 1997..... 188,752 8.62 188,752 8.62 Options became exercisable... -- -- 354,900 11.47 ------------------------------------------ Balance, December 31, 1997... 2,944,525 11.05 2,041,035 9.85 New options awarded - 1998... 396,175 23.03 88,435 23.03 Cancelled options - 1998..... 9,105 13.57 -- -- Exercised options - 1998..... 84,660 8.38 84,660 8.38 Options became exercisable... -- -- 358,519 12.84 ------------------------------------------ Balance, December 31, 1998... 3,246,935 $12.58 2,403,329 $10.84 ------------------------------------------ </TABLE> 59
<TABLE> There are approximately 2.4 million, 2.0 million and 1.8 million of options that are exercisable at year end 1998, 1997 and 1996, respectively. 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 <S> <C> <C> 1998...................................$4.73 4.45 1997................................... 2.76 2.50 1996................................... 2.46 2.76 </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 Expected dividend yield: <S> <C> <C> 1998............................ 4.12% 4.12 1997............................ 5.15 5.15 1996............................ 5.06 5.06 Risk-free interest rate: 1998............................ 5.43 5.44 1997............................ 6.39 6.35 1996............................ 6.65 6.62 Expected volatility rate: 1998............................ 19.41 18.87 1997............................ 20.20 19.31 1996............................ 20.65 21.23 Expected lives....................... 7.5 years 6.0 years </TABLE> <TABLE> The following table summarizes information about the stock option plans for options outstanding at December 31, 1998: <CAPTION> Weighted Options Average Weighted Range of Outstanding Remaining Average Exercise Year End Contractual Exercise Price 1998 Life Price ----------------------------------------------- Less than <S> <C> <C> <C> $10.00 1,026,152 4.4 years $7.94 Between $10.01 and $15.00 1,354,663 6.7 years 11.93 Greater than $15.01 866,120 9.4 years 19.10 ----------------------------------------------- Total 3,246,935 6.7 years $12.58 ----------------------------------------------- </TABLE> <TABLE> The following table summarizes information about the exercisable stock options at December 31, 1998: <CAPTION> Weighted Options Average Weighted Range of Outstanding Remaining Average Exercise Year End Contractual Exercise Price 1998 Life Price ----------------------------------------------- Less than <S> <C> <C> <C> $10.00 1,026,152 4.4 years $7.94 Between $10.01 and $15.00 1,084,619 6.5 years 11.66 Greater than $15.01 292,558 9.3 years 17.97 ----------------------------------------------- Total 2,403,329 5.9 years $10.84 ----------------------------------------------- </TABLE> <TABLE> (a) Leases The Bank leases certain banking premises. These leases are accounted for as operating leases with minimum rental commitments in the amounts presented below. The majority of these leases contain options to renew. <CAPTION> (dollars in thousands) <S> <C> 1999...............................................$ 1,236 2000............................................... 1,158 2001............................................... 1,082 2002............................................... 899 2003............................................... 815 2004 and after..................................... 4,986 ------- $10,176 ------- </TABLE> (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, 1998, the maturity of total time deposits is as follows: <CAPTION> (dollars in thousands) <S> <C> Under 1 year..................................... $693,721 1 to 2 years..................................... 194,262 2 to 3 years..................................... 34,818 3 to 4 years..................................... 17,593 4 to 5 years..................................... 24,135 over 5 years..................................... 4,063 -------- $968,592 -------- </TABLE> (d) Contingent Liability The Company established a loss accrual of $750 thousand associated with an environmental contamination remediation program at one of its facilities. At this time, management does not believe material additional cost for remediation will be required at this site. 60
Notes to Consolidated Financial Statements(continued) (10) Earnings Per Share <TABLE> A reconciliation of the component parts of earnings per share for 1998, 1997 and 1996 follows: <CAPTION> (dollars in thousands, Weighted except per share data) Average Shares Per share Income Outstanding Amounts For the year ended December 31, 1998: Basic EPS: Income available to common <S> <C> <C> <C> shareholders...............$35,015 26,813 $1.31 Effect of Diluted Securities: Stock Options............... -- 1,141 -- ------------------------------------- Diluted EPS.................$35,015 27,954 $1.25 ------------------------------------- For the year ended December 31, 1997: Basic EPS: Income available to common shareholders...............$32,175 27,074 $1.19 Effect of Diluted Securities: Stock Options.............. -- 850 -- ------------------------------------- Diluted EPS.................$32,175 27,924 $1.15 ------------------------------------- For the year ended December 31, 1996: Basic EPS: Income available to common shareholders...............$28,699 26,937 $1.07 Effect of Diluted Securities: Stock Options.............. -- 661 -- ------------------------------------ Diluted EPS.................$28,699 27,598 $1.04 ------------------------------------ </TABLE> (11) 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 Bank's normal credit policies, including obtaining collateral. The Bank's exposure to credit loss for loan commitments, including unused lines of credit, at December 31, 1998 and 1997 was $230.2 million and $223.8 million respectively. Approximately five-eights of these commitments were for variable rate products at the end of 1998. Letters of credit and standby 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 Bank's normal credit policies, including obtaining collateral. The Bank's exposure to credit loss for standby letters of credit at December 31, 1998 and 1997 was $2.0 million and $7.7 million, respectively. No losses are anticipated as a result of loan commitments or standby letters of credit. (12) Fair Value of Financial Instruments The fair values shown below represent management's estimates of values at which the various types of financial instruments could be exchanged in transactions between willing, unrelated parties. They do not necessarily represent amounts that would be received or paid in actual trades of specific financial instruments. <TABLE> (dollars in thousands) As of December 31, 1998 Carrying Fair value value <CAPTION> Financial assets: <S> <C> <C> Cash and cash equivalents ......$ 424,929 424,929 Securities available for sale .. 717,410 717,410 Loans........................... 1,268,328 1,349,153 Accrued interest receivable..... 14,632 14,632 Financial liabilities: Demand deposits ................ 154,358 154,358 Interest-bearing deposits ...... 1,953,056 1,960,520 Borrowings ..................... 147,924 147,924 Accrued interest payable........ 2,839 2,839 </TABLE> <TABLE> (dollars in thousands)........... As of December 31, 1997 Carrying Fair value value <CAPTION> Financial assets: <S> <C> <C> Cash and cash equivalents ......$ 437,740 437,740 Securities available for sale .. 601,899 601,899 Loans........................... 1,244,821 1,333,220 Accrued interest receivable..... 15,821 15,821 Financial liabilities: Demand deposits ................ 130,345 130,345 Interest-bearing deposits ...... 1,891,518 1,895,457 Borrowings ..................... 127,850 127,850 Accrued interest payable........ 3,132 3,132 </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. 61
Notes to Financial Statements(continued) Deposit Liabilities The fair values disclosed for noninterest bearing deposits, interest bearing checking 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 standby letters of credit. 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. (13) 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, 1998 and 1997, 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, 1998 and 1997, the Bank and Company met all capital adequacy requirements to which they were 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 as of December 31, 1998 and 1997 for the Bank and the Company (on a consolidated basis): <TABLE> (dollars in thousands)........ As of December 31, 1998 <CAPTION> Amount Ratio Tier I (leverage) capital: <S> <C> <C> Trustco Bank, NA............ $148,077 6.13% TrustCo Bank Corp NY........ 167,239 6.89 Tier I risk based capital: Trustco Bank, NA............ 148,077 11.45 TrustCo Bank Corp NY........ 167,239 12.78 Total risk based capital: Trustco Bank, NA............ 164,718 12.73 TrustCo Bank Corp NY........ 184,069 14.06 (dollars in thousands)........ As of December 31, 1997 Amount Ratio Tier I (leverage) capital: Trustco Bank, NA............ $143,935 6.22% TrustCo Bank Corp NY........ 162,974 7.00 Tier I risk based capital: Trustco Bank, NA............ 143,935 12.02 TrustCo Bank Corp NY........ 162,974 13.43 Total risk based capital: Trustco Bank, NA............ 159,383 13.31 TrustCo Bank Corp NY........ 178,610 14.72 </TABLE> 62
Notes to Consolidated Financial Statements(continued) <TABLE> (14) Parent Company Only The following statements pertain to TrustCo Bank Corp NY (Parent Company): <CAPTION> Statements of Income (dollars in thousands) Years Ended December 31, Income: 1998 1997 1996 Dividends and interest <S> <C> <C> <C> from subsidiaries............$30,378 27,227 20,418 Gain on sale of securities... 862 -- -- Income from other investments 453 379 301 ----------------------------- Total income................. 31,693 27,606 20,719 ----------------------------- Expense: Operating supplies.......... 78 98 120 Professional services ...... 17 33 222 Miscellaneous expense....... 107 110 308 ----------------------------- Total expense...... 202 241 650 ----------------------------- Income before income taxes and undistributed net income of subsidiaries.. 31,491 27,365 20,069 Income tax expense/(benefit).. 420 45 (98) ------------------------------ Income before equity in undistributed net income of subsidiaries...... 31,071 27,320 20,167 Equity in undistributed net income of subsidiaries...... 3,944 4,855 8,532 ------------------------------ Net income....................$35,015 32,175 28,699 ------------------------------ </TABLE> <TABLE> Statements of Condition (dollars in thousands) December 31, <CAPTION> Assets: 1998 1997 <S> <C> <C> Cash in subsidiary bank..............$ 13,938 10,480 Noninterest bearing note receivable from subsidiary.................... -- 1,117 Investments in subsidiaries.......... 156,660 152,692 Securities available for sale........ 29,889 26,205 Other assets......................... 304 463 ----------------------- Total assets................. $200,791 190,957 ----------------------- Liabilities and shareholders' equity: Accrued expenses and other liabilities $ 14,949 12,132 ----------------------- Total liabilities............... 14,949 12,132 ----------------------- Shareholders' equity................... 185,842 178,825 Total liabilities and shareholders' ---------------------- equity.................................$ 200,791 190,957 ---------------------- </TABLE> <TABLE> Statements of Cash Flows (dollars in thousands) Years Ended December 31, <CAPTION> 1998 1997 1996 Increase/(decrease) in cash and cash equivalents: Cash flows from operating activities: <S> <C> <C> <C> Net income........................... $35,015 32,175 28,699 ------------------------------------ Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries.......... (3,944) (4,855) (8,532) Gain on sales of securities... (862) -- -- (Increase)/decrease in other assets................ 159 833 (874) Increase/(decrease) in accrued expenses............................ 24 14 (19) ------------------------------------ Total adjustments................... (4,623) (4,008) (9,425) ------------------------------------ Net cash provided by operating activities.................. 30,392 28,167 19,274 ------------------------------------ Cash flows from investing activities: Proceeds from sale of securities available for sale............. 3,530 -- -- Purchase of securities available for sale....................... (1,761) (349) (253) Decrease in noninterest bearing note receivable from subsidiary . 1,117 -- 500 Net cash provided by/(used in) ----------------------------------- investing activities......... 2,886 (349) 247 ----------------------------------- Cash flows from financing activities: Proceeds from exercise of stock options........................... 895 1,624 935 Dividends paid..................... (25,671) (22,438) (19,447) Payments to acquire treasury stock. (10,439) (7,735) (805) Proceeds from sale of treasury stock............................. 5,395 3,026 794 ----------------------------------- Net cash used in financing activities.................... (29,820) (25,523) (18,523) ----------------------------------- Net increase in cash and cash equivalents................... 3,458 2,295 998 Cash and cash equivalents at beginning of year................. 10,480 8,185 7,187 Cash and cash equivalents at ----------------------------------- end of year.......................$ 13,938 10,480 8,185 ----------------------------------- Supplemental disclosure of cash flow information: Increase in dividends payable......$ 930 839 751 Equity contribution to subsidiary.. -- 1,000 1,000 Change in unrealized gain on available for sale securities-- gross........................... (4,591) (9,891) (3,111) Change in deferred tax effect on unrealized gain on securities available for sale 1,876 4,008 1,285 ----------------------------------- </TABLE> 63
TrustCo Bank Corp NY Officers and Board of Directors Officers PRESIDENT AND CHIEF EXECUTIVE OFFICER Robert A. McCormick VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Robert T. Cushing VICE PRESIDENT Nancy A. McNamara VICE PRESIDENT AND ASSISTANT SECRETARY Ralph A. Pidgeon SECRETARY William F. Terry Board of Directors Barton A. Andreoli President Towne Construction and Paving Corp. Lionel O. Barthold Retired 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. Interim President, New England College James H. Murphy, D.D.S. Orthodontist Richard J. Murray, Jr. Chief Executive Officer R.J. Murray Co., Inc. Kenneth C. Petersen President and Chief Operating Officer 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. 64
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 HUMAN RESOURCES AND QUALITY CONTROL Vice President Cheri J. Parvis ACCOUNTING/FINANCE, DATA PROCESSING, PREMISES Senior Vice President and Chief Financial Officer Robert T. Cushing ACCOUNTING/FINANCE Vice Presidents Linda C. Christensen Jeffrey S. Farbaniec DATA PROCESSING Vice President Michael R. Bonesteel Senior Programming Officer Nancy M. Holsberger LOAN DIVISION, TRUST DEPARTMENT, MARKETING, AND COMMUNITY RELATIONS Senior Vice President Nancy A. McNamara LOAN DIVISION COMMERCIAL/MORTGAGE LOANS Administrative Vice President Robert J. McCormick COMMERCIAL LOANS Vice President George W. Wickswat Senior Commercial Loan Officer Eric W. Schreck Commercial Loan Officer Deborah K. Appel MORTGAGE LOANS Vice President Daniel R. Saullo TRUST DEPARTMENT Vice Presidents William M. McCartan James Niland Robert Scribner Trust Officers John P. Fulgan Richard W. Provost Investment Officer Peter L. Gregory MARKETING Marketing Officer Robert M. Leonard BRANCHES, INSTALLMENT LOANS/CREDIT CARDS, RETIREMENT/GOVERNMENT ACCOUNTS, COMPLIANCE Senior Vice President Ralph A. Pidgeon Vice Presidents Kevin M. Curley Scot R. Salvador BRANCHES Branch Officer Thomas H. Lauster COMPLIANCE Vice President Donald J. Csaposs BANK OPERATIONS, LEGAL COUNSEL, PURCHASING, TRUST OPERATIONS Senior Vice President and Secretary William F. Terry LEGAL COUNSEL Administrative Vice President Henry C. Collins BANK/TRUST OPERATIONS Administrative Vice President James D. McLoughlin Vice President Ann M. Noble 65
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 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 Cobleskill Office RR #3, Rt. 7 Cobleskill Telephone: 254-0290 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: 383-0039 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 Rd Suite 9, Queensbury Office 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 -- 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 South Glens Falls Office Glengate Shopping Plaza 133 Saratoga Road, Suite 1South Glens Falls Telephone: 793-7668 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 Ushers Road Office 308 Ushers Road Ballston Lake Telephone: 877-8069 West Sand Lake Office 3707 NY Rt. 43 West Sand Lake Telephone: 674-3327 Wilton Mall Office Route 50 Saratoga Springs Telephone: 583-1716 Wolf Road Office 34 Wolf Road Albany Telephone: 458-7761 Wynantskill Office 134-136 Main Street, Rt. 66 Wynantskill Telephone: 286-2674 66
General Information ANNUAL MEETING Monday, May 17, 1999 10:00 AM 192 Erie Boulevard Schenectady,NY 12305-1808 CORPORATE HEADQUARTERS 320 State Street Schenectady, New York 12305-2356 (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 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 the Corporate Secretary at the corporate headquarters address 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 corporate headquarters 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. Request 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 Stock MarketSM under the symbol TRST. SUBSIDIARIES: Trustco Bank, National Association ORE Subsidiary Corp Trustco Realty Corp. Schenectady, New York Schenectady, New York Schenectady, New York Member FDIC TRANSFER AGENT Trustco BankSecurities Department P.O. Box 380 Schenectady, New York 12301-0380 Trustco Bank is a registered service mark with the U.S. Patent & Trademark Office. 67
Exhibits Exhibit 21 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 are described in Part I, Item 1 of Form 10-K. 68
KPMG, LLP Exibit 23 515 Broadway 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), Form S-8 (No. 33-67176), Form S-8 (No. 33-60409), and Form S-3 (No. 333-35153), of TrustCo Bank Corp NY and subsidiaries, of our report dated January 22, 1999, relating to the consolidated statements of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 1998 and 1997, 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, 1998, which report appears in the December 31, 1998 Annual Report on Form 10-K of TrustCo Bank Corp NY. /s/ KPMG LLP March 19, 1999 69
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 1998 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 16th day of February 1999. /s/Joan Clark - ------------------------- Notary Public Joan Clark Notary Public, State of New York Qualified in Albany County No. 01CL4822282 Commission Expires Nov. 30, 2000 70