-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DZKU76QJw2SaGjoLf0mYa4YJm6mIPiLcnl+fsB2Ejo0dbMLRXL3brvidxiE3v5k1 30B+bdXiZP8glY2JhCnDrA== 0000357301-00-000012.txt : 20000327 0000357301-00-000012.hdr.sgml : 20000327 ACCESSION NUMBER: 0000357301-00-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRUSTCO BANK CORP N Y CENTRAL INDEX KEY: 0000357301 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 141630287 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10592 FILM NUMBER: 578207 BUSINESS ADDRESS: STREET 1: 192 ERIE BLVD CITY: SCHENECTADY STATE: NY ZIP: 12305 BUSINESS PHONE: 5183773311 10-K 1 10K 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 For the Fiscal Year Ended December 31, 1999 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 (I.R.S. Employer Identification No.) of incorporation or organization) 320 STATE STREET, SCHENECTADY, NEW YORK 12305 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 377-3311 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: 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.[ ] 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 10, 2000 $1 Par Value 53,454,924 The aggregate market value of registrant's common stock (based upon the closing price on March 10, 2000) held by non-affiliates was approximately $601,367,895. Documents Incorporated by Reference (1) Portions of registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1999 (Part I and Part II) (2) Portions of registrant's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 15, 2000 (Part III). INDEX Description Page PART I Item 1 Business 1 Item 2 Properties 6 Item 3 Legal Proceedings 6 Item 4 Submission of Matters to a Vote of Security 6 Holders PART II Item 5 Market for the Registrant's Common Equity and 8 Related Stockholder Matters Item 6 Selected Financial Data 8 Item 7 Management's Discussion and Analysis of 8 Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures about 8 Market Risk Item 8 Financial Statements and Supplementary Data 8 Item 9 Changes in and Disagreements with Accountants 8 On Accounting and Financial Disclosure PART III Item 10 Directors and Executive Officers of Registrant 8 Item 11 Executive Compensation 9 Item 12 Security Ownership of Certain Beneficial Owners 9 And Management Item 13 Certain Relationships and Related Transactions 9 PART IV Item 14 Exhibits, Financial Statement Schedules, and 9 Reports on Form 8-K EXHIBITS INDEX 16 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. On February 21, 2000, TrustCo entered into an agreement to acquire Landmark Financial Corp, and its subsidiary, Landmark Community Bank, Canajoharie New York, a federal savings bank with $26 million in assets as of December 31, 1999. The transaction is expected to be completed in the third quarter of 2000. Through policy and practice, TrustCo continues to emphasize that it is an equal opportunity employer. There were 451 full-time equivalent employees of TrustCo at year-end 1999. TrustCo had 11,252 shareholders of record as of December 31, 1999, and the closing price of the TrustCo common stock at that date was $13.25. Bank Subsidiary TrustCo's banking subsidiary, Trustco Bank, National Association (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 1999 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 $1.37 billion as of December 31, 1999. The daily operations of the Bank remain the responsibility of its Board of Directors and 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. 1 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. 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 2 for the year ended December 31, 1999, which appears on pages 32 and 33 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, 1999, which appears on page 41 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 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 3 shareholders. The Gramm-Leach-Bliley Act was signed into law on November 12, 1999. This major banking legislation expands the permissible activities of bank holding companies such as TrustCo by permitting them to engage in activities, or affiliate with entities that engage in activities, that are "financial in nature." Activities that the act expressly deems to be financial in nature include, among other things, securities and insurance underwriting and agency, investment management and merchant banking. The Federal Reserve and the Treasury Department, in cooperation with one another, must determine what additional activities are "financial in nature." With certain exceptions, the Gramm-Leach-Bliley Act similarly expands the authorized activities of subsidiaries of national banks. The provisions of the Gramm-Leach-Bliley Act authorizing the expanded powers became effective March 11, 2000. Bank holding companies that intend to engage in the newly authorized activities must elect to become "financial holding companies." Financial holding company status is only available to a bank holding company if all of its affiliated depository institutions are "well capitalized" and "well managed," based on applicable banking regulations, and have a Community Reinvestment Act rating of at least "a satisfactory record of meeting community credit needs." Financial holding companies and banks may continue to engage in activities that are financial in nature only if they continue to satisfy the well capitalized and well managed requirements. Bank holding companies that do not elect to be financial holding companies or that do not qualify for financial holding company status may engage only in non-banking activities deemed "closely related to banking" prior to adoption of the Gramm-Leach-Bliley Act. The Act also calls for "functional regulation" of financial services businesses in which functionally regulated subsidiaries of bank holding companies will continue to be regulated by the regulator that ordinarily has supervised their activities. As a result, state insurance regulators will continue to oversee the activities of insurance companies and agencies, and the Securities and Exchange Commission will continue to regulate the activities of broker-dealers and investment advisers, even where the companies or agencies are affiliated with a bank holding company. Federal Reserve authority to examine and adopt rules regarding functionally regulated subsidiaries is limited. The Act repeals some of the exemptions enjoyed by banks under federal securities laws relating to securities offered by banks and licensing of broker-dealers and investment advisers. The Gramm-Leach-Bliley Act imposes a new, "affirmative and continuing" obligation on all financial service providers (not just banks and their affiliates) to safeguard consumer privacy and requires federal and state regulators, including the Federal Reserve and the FDIC, to establish standards to implement this privacy obligation. With certain exceptions, the Act prohibits banks from disclosing to non-affiliated parties any non-public personal information about customers unless the bank has provided the customer with certain information and the customer has had the opportunity to prohibit the bank from sharing the information with non-affiliates. The new privacy obligations become effective six months after the federal banking agencies adopt regulations establishing the privacy standards. 4 Finally, the Act prevents companies engaged in commercial activities from acquiring savings institutions, requires public disclosure of any agreements between a depository institution and community groups regarding the institution's Community Reinvestment Act record, adopts amendments designed to modernize the Federal Home Loan Bank System and requires operators of automatic teller machines to disclose any fees charged to non-customers that use the machines. The Gramm-Leach-Bliley Act will be the subject of extensive rule making by federal banking regulators and others. The effects of this legislation will only begin to be understood over the next several years and at this time cannot be predicted with any certainty. 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 25 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1999, 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, 1999, 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 5 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. 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. 6 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, 1995 of TrustCo - ------------------------------------------------------------------------------- Robert A. McCormick, 63, President and Chief Executive Officer, 1981 President and Trustco Bank Corp NY since 1982. Chief Executive Officer President and Chief Executive Officer, Trustco Bank, National Association since 1984. Director of Trustco Bank Corp NY since 1981 and Trustco Bank, National Association since 1980. Robert T. Cushing, 44, Vice President and Chief Financial 1994 Vice President and Officer, Trustco Bank Corp NY since 1994. Chief Financial Officer Senior Vice President and Chief Financial Officer, Trustco Bank, National Association since 1994. Nancy A. McNamara, 50, Vice President, TrustCo Bank Corp NY 1992 Vice President since 1992. Senior Vice President, Trustco Bank, National Association since 1988. Director of Trustco Bank Corp NY and Trustco Bank, National Association since 1991. William F. Terry, 58 Secretary, TrustCo Bank Corp NY since 1990 Secretary 1990. Senior Vice President, Trustco Bank, National Association since 1987. Secretary, Trustco Bank, National Associ-ation since 1990. Director of Trustco Bank, National Association since 1991. Ralph A. Pidgeon, 57, 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. Retired January 3, 2000. 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. 7 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Page 1 and page 46 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1999, are incorporated herein by reference. TrustCo had 11,517 shareholders of record as of March 10, 2000, and the closing price of the Corporation's common stock on that date, was $11.25. Item 6. Selected Financial Data Page 24 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1999, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 6 through 25 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1999, 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, 1999, 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 30 through 42 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1999, 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 20 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 15, 2000, 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." 8 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 15, 2000, 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 19 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 15, 2000, 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 20 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 15, 2000 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, 1999 and 1998. Consolidated Statements of Income -- Years Ended December 31, 1999, 1998, and 1997. Consolidated Statements of Changes in Shareholders' Equity -- Years Ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows -- Years Ended December 31, 1999, 1998, and 1997. 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. 9 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 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. 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, 1999. 21 List of Subsidiaries of TrustCo. 23 Independent Auditors' Consent of KPMG LLP. 24 Power of Attorney. 27 Financial Data Schedules. 12 Reports on Form 8-K: On November 17, 1999, TrustCo filed a Current Report on Form 8-K reporting the November 16, 1999 declaration of a cash dividend. On January 18, 2000, TrustCo filed a Current Report on Form 8-K reporting the fourth quarter and year-end December 31, 1999, results. On February 15, 2000, TrustCo filed a Current Report on Form 8-K reporting the declaration of a cash dividend. On February 22, 2000, TrustCo filed a Current Report on Form 8-K reporting the February 21, 2000 announcement of a Merger Agreement between TrustCo Bank Corp NY and Landmark Financial Corp. 13 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 22, 2000 14 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date - --------------------------------- ----- * Director March 22, 2000 Barton A. Andreoli * Director March 22, 2000 Lionel O. Barthold * Director March 22, 2000 M. Norman Brickman * Director March 22, 2000 Joseph Lucarelli * Director March 22, 2000 Dr. Anthony J. Marinello * Director March 22, 2000 Robert A. McCormick * Director March 22, 2000 Nancy A. McNamara * Director March 22, 2000 Dr. John S. Morris * Director March 22, 2000 Dr. James H. Murphy * Director March 22, 2000 Richard J. Murray, Jr. * Director March 22, 2000 Kenneth C. Petersen * Director March 22, 2000 William D. Powers * Director March 22, 2000 William J. Purdy Director March 22, 2000 William F. Terry By: /s/ William F. Terry *William F. Terry, as Agent Pursuant to Power of Attorney 15 Reg S-K Item 601 Exhibits Index Exhibit No. Exhibit Page No. 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. 16 Reg S-K Item 601 Exhibit No. Exhibit Page No. 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. 17 Exhibits Index Reg S-K Item 601 Exhibit No. Exhibit Page No. 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. 18 Exhibits Index Reg S-K Item 601 Exhibit No. Exhibit Page No. 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 Exhibit 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 Exhibit 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. 19 Exhibits Index Reg S-K Item 601 Exhibit No. Exhibit Page No. 11 Computation of Net Income Per Common Share. Note 10 on 60 page 40 of TrustCo's Annual Report to Shareholders for the year ended December 31, 1999, is incorporated herein by reference. 13 Portions of Annual Report to Security Holders of TrustCo 21 for the year ended December 31, 1999, are filed herewith. GRAPHICS APPENDIX Cross Reference To Page Of Annual Omitted Charts Report ---------------------------------------------------------------------- 1 Return on Equity 6 2 Taxable Equivalent Net Interest 8 Income 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. 21 List of Subsidiaries of TrustCo, filed herewith 71 23 Independent Auditors' Consent of KPMG, LLP 72 filed herewith. 24 Power of Attorney, filed herewith. 73 27 Financial Data Schedules, filed herewith. 74 20 Trustco Bank Corp NY Annual Report 21 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 47 Automatic Teller Machines, throughout the Bank's market area. The Bank serves 9 counties with a broad range of community banking services. Financial Highlights
(dollars in thousands, except per share data) Years ended December 31, Percent 1999 1998 Change Income: Net interest income (TE)...................................................... $ 97,195 89,117 9.06% Net income.................................................................... 38,185 35,015 9.05 Per Share (1): Basic earnings................................................................ 0.71 0.65 9.23 Diluted earnings.............................................................. 0.68 0.63 7.94 Book value.................................................................... 3.11 3.47 (10.37) Average Balances: Assets........................................................................ 2,411,195 2,433,238 (0.91) Loans, net.................................................................... 1,329,458 1,311,967 1.33 Deposits...................................................................... 2,043,149 2,068,725 (1.24) Shareholders' equity.......................................................... 179,484 180,103 (0.34) Financial Ratios: Return on average assets...................................................... 1.58% 1.44 9.72 Return on average equity (2).................................................. 22.52 21.47 4.89 Tier 1 capital to: Total average assets (leverage)............................................ 7.15 6.89 3.77 Risk-adjusted assets....................................................... 13.55 12.78 6.03 Total capital to risk-adjusted assets......................................... 14.84 14.06 5.55 Net loans charged off to average loans........................................ .27 .28 (3.57) Allowance for loan losses as a coverage of nonperforming loans................ 5.6x 4.4x 28.13 Efficiency ratio.............................................................. 38.62 40.26 4.07 Dividend payout ratio......................................................... 79.16 75.97 4.20
--------------------------------------- Per share information of common stock (1)
Range of Stock Basic Diluted Cash Book Price Earnings Earnings Dividend Value High Low 1998 First quarter............................................. $.16 .15 .12 3.43 12.88 10.60 Second quarter............................................ .16 .16 .12 3.43 12.99 11.20 Third quarter............................................. .17 .16 .12 3.47 13.59 10.82 Fourth quarter............................................ .16 .16 .14 3.47 15.00 11.41 ------------------------------------------------------------ 1999 First quarter............................................. .17 .17 .14 3.44 15.00 12.47 Second quarter............................................ .18 .17 .14 3.29 14.50 12.50 Third quarter............................................. .19 .18 .14 3.21 15.28 13.32 Fourth quarter............................................ .18 17 .15 3.11 15.44 12.75 ------------------------------------------------------------ (1) Adjusted for a 2 for 1 stock split in 1999 and a 15% stock split in 1998. (2) Excludes the market adjustment on securities available for sale.
22 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 25 Management's Statement of Responsibilities 26 Independent Auditors' Report 27 Consolidated Financial Statements and Notes 28 Officers and Board of Directors 43 Officers of Trustco Bank 44 Branch Locations 45 General Information 46 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. 23 Executive and Senior Officers of Trustco Bank Executive Officers: Standing from Left to Right: Robert T. Cushing, Senior Vice President and Chief Financial Officer, Bank/Trust Operations, Accounting/Finance, Purchasing; Nancy A. McNamara, Senior Vice President, Branch Administration, Retirement/Government Accounts, Trust Department, Marketing and Community Relations; William F. Terry, Senior Vice President, Data Processing, Legal Counsel. Seated: Robert A. McCormick, President and Chief Executive Officer. Senior Officers: Standing Left to Right: Linda C. Christensen, Vice President, Accounting/Finance; Jeffrey S. Farbaniec, Vice President, Robert Scribner, Vice President, Trust Department; George W. Wickswat, Vice President, Commercial Loans; Scot R. Salvador, Vice President, Branch Administration; William M. McCartan, Administrative Vice President, Trust Department; Robert J. McCormick, Administrative Vice President, Loan Division, Installment Loans/Credit Cards, Premises; Seated Left to right: Ann M. Noble, Vice President, Bank Operations; Patrick S. LaPorta, Vice President, Trust Department; Donald J. Csaposs, Vice President, Compliance; Henry C. Collins, Administrative Vice President, Legal Counsel; Kevin M. Curley, Vice President, Bank Operations; John C. Fay, Auditor; Cheri J. Parvis, Vice President, Human Resources. 24 President's Message Dear Shareholder: 1999 was another record year at TrustCo. Although others in our industry did well, few can match the TrustCo record of sustained superior performance. We thank our Directors and employees for their contributions in achieving this result. Net income of $38.2 million was 9% greater than the net income produced in 1998. Return on average equity (ROE), our most important measurement, was 22.5% for 1999, an increase from 21.5% in 1998. TrustCo's enviable five-year ROE was 20.3%, and we have aggressive plans to produce a 23% ROE in 2000. TrustCo's world-class efficiency ratio was 38.6% for 1999, compared to 40.3% for 1998. This measurement is one of the best tests to identify effective expense controls and productivity. During the fourth quarter of 1999, shareholders received a two for one stock split and a 9% increase in cash dividends. The quarterly cash dividend has increased at an 18.5% compound annual rate over the last ten years, resulting in TrustCo's recognition in Mood's 1999 Handbook of Dividend Achievers as one of 334 companies of a universe of 10,000 U.S.-based firms providing increased dividend payments over the past ten consecutive years. We have often discussed our philosophy of returning any excess capital to the shareholders, while maintaining sufficient capital to meet the regulatory definition of "well capitalized." Therefore, in 1999, 79% of net income was paid to shareholders in cash dividends. As the result of an enormous effort by the staff, TrustCo's customers were not impacted by any inconveniences relating to the Y2K issue. During 1999, the average balance of total assets at TrustCo decreased by $22 million to $2.4 billion. For 1999, we developed a plan to eliminate a significant percentage of the high cost deposits that had accumulated in the Bank, while at the same time increasing our overall net interest margin. We decreased deposits on average by $26 million during 1999 by changing our deposit pricing philosophy, and increased our net interest margin by 35 basis points to 4.16% for the year. The increased margin was especially important because it resulted from 63 basis points reduction in deposit cost and an increase in the relative balance of our funds invested in higher yielding investments and loans in 1999 versus 1998. The increase in net interest margin resulted in an increase in the taxable equivalent net interest income of $8.1 million for 1999. The quality of the loan portfolio continues to be excellent, with the coverage ratio (allowance for loan losses divided by total nonperforming loans) increasing from 4.4 times at December 31, 1998 to 5.6 times at December 31, 1999, while the residential loan portfolio grew by $21 million. On January 3, 2000, Ralph A. Pidgeon, Senior Vice President of Trustco Bank, retired. Ralph served the companies well for over thirty-five years. Most recently, he was in charge of deposit gathering, branch administration, and several other functions. He will be missed. 25 President's Message (continued) While our retail product emphasis on our traditional deposit and loan banking services will continue, we recognize the growing number of our customers who are seeking service delivery through the Internet. Previously, we announced a new division of Trustco Bank, TrustcoBankUSA, to be our vehicle for electronic service delivery. We are presently on schedule to offer an Internet-based service during the first half of 2000. Initially, TrustcoBankUSA will focus on providing deposit products and bill paying services to new customers interested in web access. During the past year, we developed plans that include the establishment of a subsidiary with a charter that would allow us to move more easily into new geographies. We also identified the initial locations that would provide the company significant growth potential. During 1999, we pursued various merger opportunities which culminated in the February 21, 2000 announcement of the signing of a merger agreement with Landmark Financial Corp. Once completed, this acquisition extends our market coverage into western Montgomery County. Our plans are that Landmark will remain a separate subsidiary of TrustCo and expand its operations. We look forward to welcoming the Landmark employees to our staff. Our Trust Department, currently managing $1.37 billion, continues to prosper. We have identified significant potential for increased revenue generation from this function, and the 16% increase in 1999 gross revenue from 1998 demonstrates the progress made to date. Our community relations efforts have become more effective. Our staff involvement with hundreds of nonprofit agencies throughout our market area, coupled with financial support from TrustCo, has received increased public awareness. I continue to be very enthusiastic about the vitality of the Company and the prospects for future increases in shareholder value. Sincerely, /S/Robert A. Mccormick - ---------------------- Robert A. McCormick, President and Chief Executive Officer 26 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 1999 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 1999 should be read in conjunction with this review. Certain amounts in years prior to 1999 have been reclassified to conform with the 1999 presentation. All per share information has been adjusted for the two for one stock split in 1999. Overview TrustCo recorded net income of $38.2 million or $0.68 of diluted earnings per share for the year ended December 31, 1999, compared to $35.0 million or $0.63 per share for the year 1998. This represents an increase of 9.1% in net income between 1999 and 1998. During 1999 the following had a significant effect on net income: - an increase of 35 basis points in net interest margin from 3.81% in 1998 to 4.16% in 1999, resulting in an increase in taxable equivalent net interest income of $8.1 million, - a 10.5% increase in the average balance of noninterest bearing demand deposits to $153.4 million for 1999, - a $3.1 million reduction in noninterest expense between 1998 and 1999, - a $3.2 million reduction in interest earning assets between 1998 and 1999, and - a reduction of $260 thousand in recurring noninterest income. Return on Equity (CHART OMITTED)
1997 20.23% 1998 21.47% 1999 22.52%
TrustCo has performed well with respect to a number of key performance ratios during 1999 and 1998, including: - return on equity of 22.52% for 1999 and 21.47% for 1998, - return on assets of 1.58% for 1999 and 1.44% for 1998, and - operating efficiency ratio of 38.62% for 1999 and 40.26% for 1998. MIX OF AVERAGE EARNING ASSETS (dollars in thousands) Components of
99-98 98-97 Total Earning Assets 1999 1998 1997 Change Change 1999 1998 1997 Loans, net of unearned income..... $1,329,458 1,311,967 1,260,771 17,491 51,196 56.9% 56.1 57.2 Securities available for sale: U.S. Treasuries and agencies.... 172,411 204,694 352,301 (32,283) (147,607) 7.4 8.7 16.0 States and political subdivisions 134,447 112,077 102,206 22,370 9,871 5.7 4.8 4.6 Mortgage-backed securities...... 242,217 186,239 134,509 55,978 51,730 10.4 8.0 6.1 Other........................... 134,715 108,947 33,985 25,768 74,962 5.8 4.7 1.5 Total securities available ----------------------------------------------------------------------------------------- for sale....................... 683,790 611,957 623,001 71,833 (11,044) 29.3 26.2 28.2 ----------------------------------------------------------------------------------------- Federal funds sold................ 321,422 414,162 320,953 (92,740) 93,209 13.8 17.7 14.6 Other short-term investments...... 1,012 752 -- 260 752 -- -- -- ----------------------------------------------------------------------------------------- Total earning assets.............. $2,335,682 2,338,838 2,204,725 (3,156) 134,113 100.0% 100.0 100.0 -----------------------------------------------------------------------------------------
27 Management's Discussion and Analysis (continued) The average balance of interest bearing deposits decreased from $1.93 billion in 1998 to $1.89 billion in 1999, a decrease of $40.2 million or 2.1%. This decrease is the result of a plan during 1999 to reduce the balances of high yield deposit accounts that had accumulated in the Bank over the last several years. The strategic decision was to reduce these deposits during 1999 to better focus on core deposit relationships. As a result of executing this strategy the deposit balances decreased. However, the average cost of deposits also decreased by 63 basis points to 3.60% between 1998 and 1999. This resulted in the total cost of interest bearing liabilities decreasing to 3.63%, resulting in an overall increase in net interest spread and net interest margin. Additional funds were also deployed during 1999 into the loan and securities portfolio, away from the lower yielding overnight investments. The Company had been maintaining additional liquidity in the form of overnight investments during 1998 and 1997 to be in a position to make additional investments once market interest rates began to rise. During 1999 such an opportunity became available in the marketplace as interest rates increased on loans and investments. The average balance of the loan portfolio increased by $17.5 million and the securities portfolio increased by $71.8 million. 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 96.9% and 96.1% of average total assets for 1999 and 1998, 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 with both 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 1999 were $2.34 billion, which was a decrease of $3.2 million from the prior year. The decrease in the average balance of earning assets was a result of growth in the average balance of loans and securities, offset by a $92.7 million reduction in the average balance of federal funds sold. Total average assets were $2.41 billion for 1999 and $2.43 billion for 1998. 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 also have a significant impact on income levels. Loan portfolio (dollars in thousands) Average Balances
1999 1998 1997 1996 1995 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Residential.................. $ 975,803 73.3% $937,094 71.4% $848,105 67.2% $783,094 63.7% $714,804 60.1% Commercial................... 189,407 14.3 189,542 14.4 204,502 16.2 224,949 18.3 237,165 19.9 Home equity line of credit... 141,488 10.6 158,939 12.1 178,597 14.1 187,652 15.3 202,647 17.0 Installment.................. 23,725 1.8 27,530 2.1 30,931 2.5 33,299 2.7 35,269 3.0 ---------------------------------------------------------------------------------------------------- Total loans.................. $1,330,423 100.0% 1,313,105 100.0% 1,262,135 100.0% 1,228,994 100.0% 1,189,885 100.0% ---------------------------------------------------------------------------------------------------- Less:Unearned income......... 965 1,138 1,364 1,587 1,956 Allowance for loan losses 56,449 55,208 53,173 51,233 45,086 ---------------------------------------------------------------------------------------------------- Net loans.................... $1,273,009 1,256,759 1,207,598 1,176,174 1,142,843 ----------------------------------------------------------------------------------------------------
28 Management's Discussion and Analysis (continued) Tax Equivalent Net Interest Income (dollars in millions) (CHART OMITTED)
1997 $88.7 1998 $89.1 1999 $97.2
Loans: Average total loans increased $17.5 million, or 1.3%, during 1999. Interest income on the loan portfolio decreased to $106.9 million in 1999 from $111.0 million in 1998. The average yield decreased from 8.46% in 1998 to 8.04% in 1999. The steady growth of the loan portfolio as a component of the Company's assets contributed significantly to the superior earnings results for 1999. 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 $975.8 million, an increase of $38.7 million, or 4.1%. Income on residential real estate loans increased to $76.0 million in 1999 from $75.5 million in 1998. The yield on this loan portfolio decreased to 7.79% for 1999 from 8.05% in 1998 due to general changes on retail rates in the marketplace. 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 1999, management continued its established practice of retaining all new loan originations in the Bank's portfolio rather than selling them in 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 of $189.4 million in 1999 remained virtually equal to the $189.5 million for 1998. The average yield on the commercial loan portfolio decreased to 8.84% for 1999 compared to 9.40% for 1998. This resulted in income on commercial loans of $16.8 million in 1999 and $17.8 million in 1998. TrustCo strives to maintain strong asset quality in all aspects of its loan portfolio, especially with respect to commercial loans. Competition for commercial loans continues to be 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. TrustCo's commercial lending activities are focused on balancing the Company's commitment to meeting the credit needs of business in its market area with the necessity of managing its credit risk. 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 businesses located in the Bank's market area. TrustCo has a long-standing leadership position in the home equity credit line product in its market area. 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 1999 the average balance of home equity credit lines was $141.5 million, down from $158.9 million in 1998. The home equity credit line product has developed into 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 product and adjusts the Bank's offerings to remain competitive. The average yield decreased to 7.95% for 1999 from 9.02% in 1998. This decrease resulted in interest income on home equity credit lines of $11.2 million in 1999, compared to $14.3 million in 1998. The average balance of installment loans, net of unearned income,decreased to $22.8 million in 1999 from $26.4 million in 1998. The yield on installment loans increased 19 basis points to 12.87% in 29 Management's Discussion and Analysis (continued) MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES (dollars in thousands) December 31, 1999
After 1 Year In 1 Year But Within After or Less 5 Years 5 Years Total Commercial........................................... $ 90,778 62,554 40,198 193,530 Real estate construction............................. 15,867 -- -- 15,867 -------------------------------------------------------------- Total................................................ $106,645 62,554 40,198 209,397 -------------------------------------------------------------- Predetermined rates.................................. $ 46,076 61,995 40,198 148,269 Floating rates....................................... 60,569 559 -- 61,128 -------------------------------------------------------------- Total................................................ $106,645 62,554 40,198 209,397 --------------------------------------------------------------
1999, resulting in interest income of $2.9 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. Securities available for sale: 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, 1999, securities available for sale amounted to $640.8 million, compared to $717.4 million at year end 1998. For 1999, the average balance of securities available for sale was $683.8 million with an average yield of 7.05%, compared to an average balance in 1998 of $612.0 million with an average yield of 7.18%. During the latter half of 1999, market interest rates on investment securities were beginning to recover from historic lows experienced in 1998 and the early parts of 1999. This created a situation wherein reinvestment opportunities were generally at lower interest rates than those on maturing securities. The impact was the reduction in the overall yield on the securities portfolio during 1999 compared to 1998. The taxable equivalent income earned on the securities portfolio in 1999 was $48.2 million, compared to $43.9 million earned in 1998. The average balance of the securities portfolio increased by $71.8 million between 1998 and 1999, while the average yield on the portfolio decreased by 13 basis points during the same time period. During 1999, TrustCo recognized approximately $5.4 million of net losses from securities transactions, compared to approximately $1 million of net gains in 1998. Throughout 1999, 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 1999, TrustCo continued to have significant liquidity in the form of $266.0 million of federal funds sold and $10.0 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 2000. TrustCo has not invested in any exotic investment products such as interest rate swaps, forward placement contracts, 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, 1999 and 1998, the market value of TrustCo's portfolio of securities available for sale produced net unrealized gains/(losses) of approximately ($4.1) million and $31.5 million, respectively. During 1999 and 1998, the Bank invested in short-term asset-backed securities as a means of supplementing the income from other short-term investments. 30 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.
Securities available for sale (dollars in thousands) As of December 31, 1999 1998 1997 Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value U.S. Treasuries and agencies................. $189,207 185,978 163,244 167,825 273,517 278,823 States and political subdivisions............ 136,203 132,560 124,390 129,745 109,210 113,787 Mortgage-backed securities................... 211,450 205,558 246,531 249,489 151,989 155,080 Other........................................ 81,834 80,732 126,183 126,348 15,430 15,451 ------------------------------------------------------------------------ Total debt securities available for sale... 618,694 604,828 660,348 673,407 550,146 563,141 Equity securities............................ 26,274 36,002 25,610 44,003 24,955 38,758 ------------------------------------------------------------------------ Total securities available for sale........ $644,968 640,830 685,958 717,410 575,101 601,899
The table "Securities Portfolio Maturity Distribution and Yield," distributes the securities available for sale portfolio as of December 31, 1999 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. SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD Debt securities available for sale:
(dollars in thousands) As of December 31, 1999 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 Amortized cost........................ $ 9,801 4,994 169,412 5,000 189,207 Market value.......................... 9,791 4,994 166,373 4,820 185,978 Weighted average rate................. 5.45% 6.32 7.48 7.54 7.34 States and political subdivisions Amortized cost........................ $ 5,107 4,040 5,181 121,875 136,203 Market value.......................... 5,148 4,089 5,211 118,112 132,560 Weighted average rate................. 7.71% 7.85 8.19 8.20 8.17 Mortgage-backed securities Amortized cost........................ $ 53 36,178 142,996 32,223 211,450 Market value.......................... 53 35,084 139,675 30,746 205,558 Weighted average rate................. 6.50% 6.86 7.16 6.61 7.03 Other Amortized cost........................ $33,843 47,991 -- -- 81,834 Market value.......................... 33,640 47,092 -- -- 80,732 Weighted average rate................. 6.35% 6.23 -- -- 6.28 ------------------------------------------------------------------------------- Total debt securities available for sale Amortized cost........................ $48,804 93,203 317,589 159,098 618,694 Market value.......................... 48,632 91,259 311,259 153,678 604,828 Weighted average rate................. 6.31% 6.55 7.35 7.86 7.28 -------------------------------------------------------------------------------
31 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 interest 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, 1999. Mortgage-backed, asset-backed, and collateralized mortgage obligation securities are reported using an estimate of average life; equity securities are excluded. SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION Debt securities available for sale:
(dollars in thousands) As of December 31, 1999 Based on Based on Final Maturity Call Date Amortized Market Amortized Market Cost Value Cost Value Within 1 year.................................................... $ 48,804 48,632 143,475 140,790 1 to 5 years..................................................... 93,203 91,259 190,110 186,470 5 to 10 years.................................................... 317,589 311,259 243,014 237,066 After 10 years................................................... 159,098 153,678 42,095 40,502 ------------------------------------------------------- Total debt securities available for sale....................... $618,694 604,828 618,694 604,828 -------------------------------------------------------
Federal funds sold: During 1999, the average balance of federal funds sold was $321.4 million, a $92.7 million decrease from $414.2 million in 1998. The average rate earned on these assets was 4.99% in 1999 and 5.44% in 1998. TrustCo utilizes this category of earning assets as a means of maintaining strong liquidity as interest rates change. Rather than invest excess liquidity during 1999, the Company chose to place these funds in overnight federal funds sold. This decision had the short-term effect of suppressing earnings for 1999, but positioned TrustCo to take advantage of other banking opportunities as they emerge in 2000. The decrease in average yield during 1999 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. During 1999, the Federal Reserve Bank began a process of increasing rates on federal funds which eventually established a target rate of 5.50% at December 31, 1999. 32 Management's Discussion and Analysis (continued) Average Balances, Yields and Net Interest Margins
(dollars in thousands) 1999 1998 1997 Interest Interest Interest Average Income/ Average Average Income/ Average Average Income/ Average Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets Loans, net of unearned income........ $1,329,458 106,933 8.04% 1,311,967 110,952 8.46% 1,260,771 109,690 8.70% ------------------------------------------------------------------------------------- Securities available for sale: U.S. Treasuries and agencies....... 172,411 12,530 7.27 204,694 15,408 7.53 352,30 1 27,436 7.79 States and political subdivisions.. 134,447 10,724 7.98 112,077 9,056 8.08 102,206 8,249 8.07 Mortgage-backed securities......... 242,217 16,322 6.74 186,239 12,692 6.81 134,509 10,094 7.50 Other.............................. 134,715 8,613 6.39 108,947 6,781 6.22 33,985 1,975 5.81 ------------------------------------------------------------------------------------- Total securities available for sale 683,790 48,189 7.05 611,957 43,937 7.18 623,001 47,754 7.67 ------------------------------------------------------------------------------------- Federal funds sold 321,422 16,031 4.99 414,162 22,536 5.44 320,953 17,761 5.53 Other short-term investments......... 1,012 55 5.41 752 39 5.17 -- -- -- ------------------------------------------------------------------------------------- Total interest earning assets...... 2,335,682 171,208 7.33% 2,338,838 177,464 7.59% 2,204,725 175,205 7.95% ------------------------------------------------------------------------------------- Allowance for loan losses.............. (56,449) (55,208) (53,173) Cash and noninterest earning assets.. 131,962 149,608 151,046 ------------------------------------------------------------------------------------- Total assets....................... $2,411,195 2,433,238 2,302,598 ------------------------------------------------------------------------------------- Liabilities and shareholders' equity Interest bearing deposits: Interest bearing checking accounts. $ 264,742 2,818 1.06% 243,888 3,585 1.47% 233,644 3,596 1.54% Savings............................ 661,888 17,887 2.70 657,793 20,382 3.10 658,750 22,622 3.43 Time deposits and money markets.... 963,145 47,336 4.91 1,028,258 57,629 5.60 967,864 54,728 5.65 ------------------------------------------------------------------------------------- Total interest bearing deposits.... 1,889,775 68,041 3.60 1,929,939 81,596 4.23 1,860,258 80,946 4.35 ------------------------------------------------------------------------------------- Short-term borrowings.................. 146,667 5,972 4.07 143,337 6,751 4.71 117,184 5,574 4.76 ------------------------------------------------------------------------------------- Total interest bearing liabilities. 2,036,442 74,013 3.63% 2,073,276 88,347 4.26% 1,977,442 86,520 4.38% ------------------------------------------------------------------------------------- Demand deposits...................... 153,374 138,786 120,965 Other liabilities...................... 41,895 41,073 36,918 Shareholders' equity.................. 179,484 180,103 167,273 ------------------------------------------------------------------------------------- Total liabilities and shareholders'equity $2,411,195 2,433,238 2,302,598 ------------------------------------------------------------------------------------- Net interest income.................... 97,195 89,117 88,685 Net interest spread.................... 3.70% 3.33% 3.57% Net interest margin (net interest income to total interest earning assets).... 4.16 3.81 4.02
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 1999, 1998, and 1997. The average balances of securities available for sale were calculated using amortized costs for these securities. Included in the balance of shareholders' equity is $9.9 million, $17.0 million, and $8.2 million in 1999, 1998, and 1997, respectively, of unrealized appreciation, net of tax, in the available for sale securities portfolio. Nonaccrual loans are included in average loans. 33 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. mix of Average Sources of Funding
(dollars in thousands) Components of 99-98 98-97 Total Funding 1999 1998 1997 Change Change 1999 1998 1997 Demand deposits........................ $ 153,374 138,786 120,965 14,588 17,821 7.0% 6.3 5.8 Retail deposits: Savings.............................. 661,888 657,793 658,750 4,095 (957) 30.2 29.7 31.4 Time deposits under $100 thousand.... 785,151 841,915 806,866 (56,764) 35,049 35.9 38.1 38.5 Interest bearing checking accounts... 264,742 243,888 233,644 20,854 10,244 12.1 11.0 11.1 Money market deposits................ 59,953 56,754 59,707 3,199 (2,953) 2.7 2.6 2.8 ------------------------------------------------------------------------------------- Total retail deposits................. 1,771,734 1,800,350 1,758,967 (28,616) 41,383 80.9 81.4 83.8 ------------------------------------------------------------------------------------- Total core deposits.................. 1,925,108 1,939,136 1,879,932 (14,028) 59,204 87.9 87.7 89.6 ------------------------------------------------------------------------------------- Time deposits over $100 thousand....... 118,041 129,589 101,291 (11,548) 28,298 5.4 5.8 4.8 Short-term borrowings.................. 146,667 143,337 117,184 3,330 26,153 6.7 6.5 5.6 ------------------------------------------------------------------------------------- Total purchased liabilities.......... 264,708 272,926 218,475 (8,218) 54,451 12.1 12.3 10.4 ------------------------------------------------------------------------------------- Total sources of funding.............. $2,189,816 2,212,062 2,098,407 (22,246) 113,655 100.0% 100.0 100.0 -------------------------------------------------------------------------------------
Average Deposits by Type of Depositor
(dollars in thousands) Years Ended December 31, 1999 1998 1997 1996 1995 Individuals, partnerships and corporations............... $1,984,359 2,009,296 1,924,606 1,880,798 1,802,455 U.S. Government.......................................... 92 100 62 45 261 States and political subdivisions........................ 45,223 45,715 44,839 44,555 46,091 Other (certified and official checks, etc.).............. 13,475 13,614 11,716 11,047 10,263 --------------------------------------------------------------- Total average deposits by type of depositor............ $2,043,149 2,068,725 1,981,223 1,936,445 1,859,070 ---------------------------------------------------------------
Deposits: Average total deposits (including time deposits greater than $100 thousand) were $2.04 billion in 1999 compared to $2.07 billion in 1998, a decrease of $25.6 million. Increases were noted in interest bearing checking accounts, money market, savings, and demand deposit accounts. Average interest bearing checking accounts increased by $20.9 million between 1998 and 1999, money market accounts increased by $3.2 million, savings account balances increased by $4.1 million and demand deposits increased by $14.6 million. The increase in demand deposits is noteworthy because these accounts represent the principal banking relationship for most customers. The increase in demand 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. These increases were offset by a $68.3 million decrease in time deposit accounts during the same time period. The decrease in time deposits during 1999 was the result of a decision to reduce the amount of high rate deposits that had accumulated in the Bank over the last several years. To accomplish this objective, interest rates on these products were decreased significantly as the identified deposit accounts were maturing. The anticipation was that these funds would leave as interest rates were reduced. As a result of executing this strategy, the average balance of time deposits decreased to $903.2 million in 1999, compared to $971.5 million in 1998. The average yield on time deposits also decreased from 5.76% in 1998 to 5.06% in 1999. This resulted in a reduction in interest expense on time deposits of $10.3 million or 18.4%. 34 Management's Discussion and Analysis (continued) For 1999, TrustCo had an average of $118.0 million of time deposits with balances greater than $100 thousand. 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 3.60% in 1999 compared to 4.23% in 1998. The decrease in the average balance of interest bearing deposits, coupled with a 63 basis point decrease in the average cost, resulted in a decrease of approximately $13.6 million in interest expense to $68.0 million in 1999. The Company strives to maintain competitive rates on deposit accounts and to attract customers through a combination of competitive interest rates, quality 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. Maturity of Time deposits over $100 thousand
(dollars in thousands) As of December 31, 1999 Under 3 months.............................. $ 39,773 3 to 6 months .............................. 13,464 6 to 12 months ............................. 29,552 Over 12 months.............................. 32,847 -------- Total....................................... $115,636 --------
Other funding sources: The Company had $146.7 million of average short-term borrowings outstanding during 1999 compared to $143.3 million in 1998. The average cost of short-term borrowings was 4.07% in 1999 and 4.71 % in 1998. This resulted in a decrease in interest expense of approximately $780 thousand. 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. Volume and Yield Analysis
(dollars in thousands) 1999 vs. 1998 1998 vs. 1997 Increase Due to Due to Increase Due to Due to (Decrease) Volume Rate (Decrease) Volume Rate Interest income (TE): Federal funds sold................... $(6,505) (4,739) (1,766) 4,775 5,077 (302) Other short-term investments......... 16 14 2 39 39 -- Securities available for sale: Taxable............................ 2,584 3,055 (471) (4,556) (2,854) (1,702) Tax-exempt......................... 1,668 1,785 (117) 739 764 (25) ------------------------------------------------------------------------------------ Total securities available for sale......................... 4,252 4,840 (588) (3,817) (2,090) 1,727) Loans................................ (4,019) 1,097 (5,116) 1,262 3,596 (2,334) ------------------------------------------------------------------------------------ Total interest income.............. (6,256) 1,212 (7,468) 2,259 6,622 (4,363) ------------------------------------------------------------------------------------ Interest expense: Interest bearing checking accounts... (767) 287 (1,054) (11) 154 (165) Savings.............................. (2,495) 126 (2,621) (2,240) (33) (2,207) Time deposits and money markets. (10,293) (3,672) (6,621) 2,901 3,555 (654) Short-term borrowings................ (779) 154 (933) 1,177 1,232 (55) ------------------------------------------------------------------------------------ Total interest expense............. (14,334) (3,105) (11,229) 1,827 4,908 (3,081) ------------------------------------------------------------------------------------ Net interest income (TE)........... $ 8,078 4,317 3,761 432 1,714 (1,282) ------------------------------------------------------------------------------------
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. 35 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 1999 increase in net interest income was primarily the result of decreased cost of funding sources and a redeployment of assets from low yielding overnight investments to the higher yielding loan and investment portfolios. Taxable equivalent net interest income for 1999 was $97.2 million, up $8.1 million over 1998. The average balance of interest earning assets decreased by $3.2 million in 1999. The yield on average interest earning assets decreased by 26 basis points to 7.33% in 1999, compared to 7.59% in 1998, while the average cost of interest bearing liabilities decreased 63 basis points during 1999 to 3.63% from 4.26% in 1998. Likewise, the average balance of interest bearing liabilities decreased from $2.07 billion in 1998 to $2.04 billion in 1999. Total interest expense for 1999 was $74.0 million, a decrease of $14.3 million over the 1998 expense of $88.3 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. Dividends per Share (CHART OMITTED)
1997 $.43 1998 $.50 1999 $.56
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 79.2% of net income for 1999, 76.0% for 1998, and 72.3% for 1997. These are significant payouts to the Company's shareholders and are considered by management to be a prudent use of the excess capital in TrustCo. As to the likelihood of future dividends, the philosophy stated above will continue in 2000 and, where appropriate, the Board of Directors will declare dividends consistent with that operating philosophy. TrustCo's Tier 1 capital was $168.8 million or 13.55% of risk-adjusted assets at December 31, 1999, and $167.2 million or 12.78% of risk-adjusted assets at December 31, 1998. Tier 1 capital to average assets at December 31, 1999 was 7.15%, as compared to 6.89% at year end 1998. At December 31, 1999 and 1998, 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. 36 Management's Discussion and Analysis (continued) Nonperforming assets at year end 1999 totalled $11.7 million, a decrease of $5.9 million from the balance of $17.6 million at year end 1998. Nonperforming loans decreased from $12.4 million in 1998 to $9.9 million at year end 1999. Nonperforming loans as a percentage of the total loan portfolio were 0.73% in 1999 and 0.94% in 1998. Given the trends in bankruptcies and real estate values which secure much of the Bank's real estate loan portfolio, there continues to be concern relative to the level of nonperforming loans in the future. Included in nonperforming loans at year end 1999 are $4.4 million of loans in nonaccrual status, a decrease of $2.7 million from the 1998 balance of $7.1 million. Loans past due three payments or more and still accruing interest amounted to $500 thousand, down $900 thousand from the 1998 year end balance. Restructured loans in 1998 were $3.8 million, compared to $5.0 million in 1999. Adherence to sound 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 but $100 thousand of the $9.9 million of nonperforming loans at December 31, 1999 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. Likewise, virtually all charge offs for 1999 occurred in the residential real estate and retail consumer loan portfolios. During 1999, gross charge offs of these types of loans were $7.2 million (which represented 92% of total gross charge offs), up 42% from 1998. In 1998, charge offs for these types of loans were $5.1 million, 65% higher than in 1997. There has been a dramatic shift of nonperforming loans and charge offs 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 that has occurred in much of TrustCo's market area 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 led to an increase in defaults on loans. TrustCo strives to identify borrowers that are experiencing financial difficulties, and to work aggressively so as to minimize losses. TrustCo has a diversified loan portfolio with no concentrations to any one borrower or any single industry, and which includes a significant balance of residential mortgage loans to borrowers in the Capital District. Nonperforming assets at year end 1999 include $1.8 million of foreclosed properties, compared to $5.2 million in 1998. 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 $1.8 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, 1999, 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. Nonperforming Assets
(dollars in thousands) As of December 31, 1999 1998 1997 1996 1995 Loans in nonaccrual status........................... $ 4,433 7,147 6,298 10,748 12,832 Loans past due 3 payments or more.................... 509 1,454 1,060 792 1,696 Restructured loans................................... 4,979 3,782 3,294 2,495 1,130 ------------------------------------------------------------------ Total nonperforming loans............................ 9,921 12,383 10,652 14,035 15,658 Foreclosed real estate............................... 1,771 5,174 9,309 6,518 3,732 ------------------------------------------------------------------ Total nonperforming assets........................... $11,692 17,557 19,961 20,553 19,390 ------------------------------------------------------------------ Allowance for loan losses............................ $55,820 54,375 53,455 51,561 48,320 Allowance coverage of nonperforming loans............ 5.63x 4.39 5.02 3.67 3.09 Nonperforming loans as a % of total loans............ 0.73% 0.94 0.82 1.13 1.28 Nonperforming assets as a % of total assets.......... 0.49 0.71 0.84 0.91 0.89
37 Management's Discussion and Analysis (continued) Allowance For Loan Losses (dollars in millions) (CHART OMITTED)
1997 $53.5 1998 $54.4 1999 $55.8
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 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 consumers' easy access 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 in 1999. 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 1999 and 1998 were $7.8 million and $6.6 million, respectively. As noted above, the mix of loan types giving rise to loan charge offs has shifted to the residential real estate portfolio. Recoveries were $4.2 million in 1999 and $2.9 million in 1998. The provision recorded on the consolidated income statement in 1999 was $5.1 million compared to $4.6 million in 1998. Net charge offs as a percentage of average loans were 0.27% and 0.28% in 1999 and 1998, respectively. The allowance for loan losses as a percentage of loans outstanding was 4.14% in 1999 and 4.11% in 1998. 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 since 1995 under a troubled debt restructuring, as impaired loans. At year end 1999 and 1998, there were $4.7 million of impaired loans. The average balances of Allowance to Loans Outstanding (CHART OMITTED)
1997 4.12% 1998 4.11% 1999 4.14%
impaired loans were $5.0 million during 1999 and $4.0 million during 1998. The Company recognized approximately $400 thousand of interest income on these loans in each of 1999 and 1998. 38 Management's Discussion and Analysis (continued) Summary of Loan Loss Experience
(dollars in thousands) 1999 1998 1997 1996 1995 Amount of loans outstanding at end of year (less unearned income).......................... $1,349,809 1,322,703 1,298,276 1,241,882 1,226,142 Average loans outstanding during year (less average unearned income).................. 1,329,458 1,311,967 1,260,771 1,227,407 1,187,929 --------------------------------------------------------------------- Balance of allowance at beginning of year......... 54,375 53,455 51,561 48,320 38,851 Loans charged off: Commercial...................................... 619 1,498 3,506 3,213 4,823 Real estate..................................... 6,534 3,883 2,014 1,498 1,694 Installment..................................... 635 1,180 1,059 937 821 --------------------------------------------------------------------- Total........................................ 7,788 6,561 6,579 5,648 7,338 --------------------------------------------------------------------- Recoveries of loans previously charged off: Commercial...................................... 2,811 2,308 2,718 1,963 3,504 Real estate..................................... 1,140 362 169 110 258 Installment..................................... 219 201 172 239 347 Total........................................ 4,170 2,871 3,059 2,312 4,109 --------------------------------------------------------------------- Net loans charged off............................. 3,618 3,690 3,520 3,336 3,229 --------------------------------------------------------------------- Additions to allowance charged to operating expense............................... 5,063 4,610 5,414 6,577 12,698 --------------------------------------------------------------------- Balance of allowance at end of year............... $ 55,820 54,375 53,455 51,561 48,320 --------------------------------------------------------------------- Net charge offs as a percent of average loans outstanding during year (less average unearned income).................. 0.27% 0.28% 0.28 0.27 0.27 Allowance as a percent of loans outstanding at end of year................................. 4.14 4.11 4.12 4.15 3.94 ---------------------------------------------------------------------
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 to 90 days category. All securities available for sale are presented at fair market value. 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, 1999, the Company's gap position indicated an excess of assets repricing in the 0 to 90 day period of $170.0 million. This positive gap position is the result of management's decision to retain $276.0 million of federal funds sold and other short-term investments at year end 1999 for potential reinvestment in 2000. The gap position turns negative (an excess of liabilities subject to repricing over 39 Management's Discussion and Analysis (continued) Interest Rate Sensitivity
(dollars in thousands) At December 31, 1999 Repricing, or able to be repriced, in: 0-90 91-366 1-5 Over 5 Rate Days Days Years Years Years Insensitive Total Assets: Federal funds sold.......................... $266,000 -- -- -- -- 266,000 Other short-term investments................ 9,970 -- -- -- -- 9,970 Securities available for sale............... 60,968 60,632 132,975 371,318 14,937 640,830 Loans, net of unearned income............... 203,529 118,599 204,771 818,477 4,433 1,349,809 Noninterest rate sensitive assets........... -- -- -- -- 97,413 97,413 -------------------------------------------------------------------------- Total assets............................ 540,467 179,231 337,746 1,189,795 116,783 2,364,022 -------------------------------------------------------------------------- Cumulative total assets....................... $540,467 719,698 1,057,444 2,247,239 2,364,022 -------------------------------------------------------------------------- Liabilities and shareholders' equity: Deposits: Interest bearing deposits................. $209,762 466,489 736,899 426,446 -- 1,839,596 Noninterest bearing deposits.............. 7,876 17,877 58,226 71,335 -- 155,313 -------------------------------------------------------------------------- Total deposits.......................... 217,638 484,366 795,125 497,781 -- 1,994,909 Borrowings.................................. 152,782 -- -- -- -- 152,782 Noninterest rate sensitive liabilities...... -- -- -- -- 49,975 49,975 Shareholders' equity........................ -- -- -- -- 166,356 166,356 -------------------------------------------------------------------------- Total liabilities and shareholders' equity 370,420 484,366 795,125 497,781 216,331 2,364,022 -------------------------------------------------------------------------- Cumulative total liabilities and shareholders' equity....................... $370,420 854,785 1,649,910 2,147,691 2,364,022 -------------------------------------------------------------------------- Incremental gap: Interest sensitivity gap.................... $170,047 (305,135) (457,379) 692,014 Gap as a % of earning assets................ 7.50% (13.46) (20.18) 30.53 Interest sensitive assets to liabilities.... 149.08 38.42 45.83 279.00 Cumulative gap: Interest sensitivity gap.................... $170,047 (135,087) (592,466) 99,548 Gap as a % of earning assets................ 7.50% (5.96) (26.14) 4.39 Interest sensitive assets to liabilities.... 149.08 86.81 67.53 112.79 --------------------------------------------------------------------------
assets that can reprice during that time period) in the 91 to 366 day period by $305.1 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 $135.1 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 in~interest rates on a short-term basis and over the life of the asset (certain annual caps and lifetime caps). Further, in the event of significant changes in interest rates, prepayment and early withdrawal levels would be likely to deviate significantly from those assumed in the table. Some borrowers' ability to service their debt may be hampered by a significant interest rate increase. Management takes these factors into account when reviewing the Bank's gap position and establishing future asset/liability strategy. Liquidity Risk TrustCo seeks to obtain favorable funding sources and to maintain prudent levels of liquid assets in order to satisfy various 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. 40 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. For 1999, average core deposits (total deposits less time deposits greater than $100 thousand) amounted to $1.93 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 thousand. The average balances of these purchased liabilities are detailed in the table "Average Sources of Funding." During 1999, the average balance of purchased liabilities was $264.7 million, compared with $272.9 million in 1998, and $218.5 million in 1997. 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, 1999 and 1998, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $232.1 million and $230.2 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, 1999 and 1998, outstanding standby letters of credit were approximately $2.1 million and $2.0 million, respectively. Other off-balance sheet risk: TrustCo does not engage in activities involving interest rate swaps, forward placement contracts, 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 $15.4 million in 1999, $22.1 million in 1998 and $17.2 million in 1997. Included in the 1999 results are $5.4 million of net securities losses compared with net gains of approximately $1 million in 1998 and net losses of $200 thousand in 1997. Excluding securities transactions, noninterest income would have been $20.9 million, $21.1 million, and $17.4 million in 1999, 1998 and 1997, 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 $8.1 million in 1999, $7.0 million in 1998 and $6.6 million in 1997. Trust fees are generally calculated as a percentage of the assets under management by the Trust Department. Noninterest income
(dollars in thousands) 1999 vs. 1998 1999 1998 1997 Amount Percent Trust department income............................. $ 8,065 6,973 6,554 1,092 15.7% Fees for services to customers...................... 8,795 8,799 7,671 (104) (1.2) Net gain/(loss) on securities transactions.......... (5,446) 998 (166) (6,444) (645.7) Letter of credit reserve recapture.................. -- 2,398 -- (2,398) (100.0) Other............................................... 4,102 2,954 3,163 1,148 38.9 ------------------------------------------------------------------ Total noninterest income.......................... $15,416 22,122 17,222 (6,706) (30.3)% ------------------------------------------------------------------
41 Management's Discussion and Analysis (continued) Noninterest Expense
(dollars in thousands) 1999 vs. 1998 1999 1998 1997 Amount Percent Salaries and employee benefits....................... $24,994 23,367 23,162 1,627 7.0% Net occupancy expense................................ 4,004 5,898 5,270 (1,894) (32.1) Equipment expense.................................... 5,359 5,292 4,165 67 1.3 FDIC insurance expense............................... 242 244 246 (2) (0.8) Professional services................................ 2,651 2,664 3,489 (13) (0.5) Other real estate expenses/(income).................. (700) 1,856 1,056 (2,556) (137.7) Other................................................ 9,086 9,444 8,838 (358) (3.8) ----------------------------------------------------------------- Total noninterest expense.......................... $45,636 48,765 46,226 (3,129) (6.4)% -----------------------------------------------------------------
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 $1.2 million in 1999 and $600 thousand in 1998. Proceeds from the sale of these fixed assets were approximately $2.1 million in 1999 and $1.5 million in 1998. Noninterest Expense: Noninterest expense was $45.6 million in 1999, compared with $48.8 million in 1998 and $46.2 million in 1997. 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 38.6% in 1999, 40.3% in 1998 and 40.6% in 1997. The general industry goal is the attainment of a 60% efficiency ratio. TrustCo has consistently outperformed this industry goal by a wide margin since 1994. Efficiency Ratio (CHART OMITTED)
1997 40.61% 1998 40.26% 1999 38.62%
Salaries and employee benefits are the most significant component of noninterest expense. For 1999, these expenses amounted to $25.0 million, compared with $23.4 million in 1998. The increase in salaries and employee benefits reflects the addition of new branches and salary adjustments given to employees. Net occupancy costs decreased to $4.0 million in 1999 from $5.9 million in 1998 and $5.3 million in 1997. The reduction in net occupancy cost is the result of reversing a $750 thousand environmental loss accrual during the fourth quarter of 1999 that had been established in 1998. During 1999 the Company completed the required investigative work associated with the site and received clearance from the regulatory authorities that no further clean up efforts were required at this time. Equipment expense increased to $5.4 million from $5.3 million for 1998 due primarily to the costs associated with the Year 2000 project. All direct costs of consultants and equipment are categorized as a component of computer equipment expense. Other real estate expenses decreased to income of $700 thousand in 1999 from $1.9 million expense in 1998. The reduction in expense is the result of gains recognized on the liquidation of various foreclosed properties during the year. This reflects the Company's policy of early recognition of problem loan charge offs and aggressive pursuit of recoveries on these nonperforming assets. Income Tax In 1999, TrustCo recognized income tax expense of $19.7 million, as compared to $19.4 million in 1998 and $18.9 million in 1997. 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 $1.2 million at December 31, 1999 and $2.1 million at December 31, 1998 is reserved primarily for federal and state tax 42 Management's Discussion and Analysis (continued) law restrictions on the deductibility of certain temporary differences. Based primarily on the sufficiency of historical and future taxable income, management believes it is more likely than not that the remaining net deferred tax assets of $38.7 million and $36.8 million at December 31, 1999 and 1998, respectively, will be realized. Year 2000 Update During 1999 the Company completed its preparation for the century date change. Testing continued during 1999 for both the mainframe and personal computer-based systems. The contingency plan was tested to ensure that, should mission-critical systems fail as a result of the date change or for other environmental reasons, continued processing would occur at the disaster recovery site. Customer contacts and evaluations were completed to ensure that their businesses would not be seriously affected by the century date change. All of the efforts expended from 1995 to 1999 resulted in a successful transition to the new century date and TrustCo experienced no disruption of services or inconvenience to its customers. It is anticipated that operating costs for 2000 will be approximately $1 million less than in 1999. 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 cost 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 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. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" (Statement 137), which deferred the effective date of Statement 133 by one year, from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. Management is currently evaluating the impact, if any, on the Company's consolidated financial statements. 43 Management's Discussion and Analysis (continued) Summary of unaudited quarterly financial information
(dollars in thousands, except per share data) 1999 1998 Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Income statement: Interest income........ $41,666 41,598 42,091 41,850 167,205 43,403 43,814 44,174 42,659 174,050 Interest expense....... 19,239 18,613 18,271 17,890 74,013 21,755 22,458 22,805 21,329 88,347 ------------------------------------------------------------------------------------------------- Net interest income ... 22,427 22,985 23,820 23,960 93,192 21,648 21,356 21,369 21,330 85,703 Provision for loan losses 1,513 1,500 1,000 1,050 5,063 1,372 1,558 450 1,230 4,610 ------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses.......... 20,914 21,485 22,820 22,910 88,129 20,276 19,798 20,919 20,100 81,093 Noninterest income..... 5,420 4,250 3,898 1,848 15,416 4,554 5,347 4,715 7,506 22,122 Noninterest expense.... 12,202 11,353 11,500 10,581 45,636 11,529 11,299 11,757 14,180 48,765 ------------------------------------------------------------------------------------------------- Income before income taxes......... 14,132 14,382 15,218 14,177 57,909 13,301 13,846 13,877 13,426 54,450 Income tax expense..... 4,809 4,890 5,246 4,779 19,724 4,923 5,180 4,668 4,664 19,435 ------------------------------------------------------------------------------------------------- Net income............. 9,323 9,492 9,972 9,398 38,185 8,378 8,666 9,209 8,762 35,015 ------------------------------------------------------------------------------------------------- Per share data (1): Basic earnings......... .17 .18 .19 .18 .71 .16 .16 .17 .16 .65 Diluted earnings....... .17 .17 .18 .17 .68 .15 .16 .16 .16 .63 Cash dividends declared .14 .14 .14 .15 .56 .12 .12 .12 .14 .50 ------------------------------------------------------------------------------------------------- (1) Per share data have been adjusted for a 2 for 1 stock split in 1999 and a 15% stock split in 1998.
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. TrustCo's New Initiatives TrustCo has enjoyed tremendous success in providing superior financial results to its shareholders by delivering world-class service and convenience to its customers. Going into the new millennium, TrustCo recognizes the need to continue to evolve and change as customer and business needs change. The Company has developed a number of new initiatives that mark the direction for the future. TrustcoBankUSA.com The Internet has changed virtually every aspect of our lives from how we purchase books to ordering airline tickets. The Internet has also made banking an on-line commodity. TrustCo has established a plan to launch a web-based banking site under the banner TrustcoBankUSA. Customers of TrustcoBankUSA will enjoy access to their account information 24 hours a day, 7 days a week. They will be able to review activity in their accounts, make funds transfers, and pay bills. We anticipate launching TrustcoBankUSA during the first half of 2000 and begin seeing new deposit balances shortly thereafter. Landmark Financial Corporation In February 2000, TrustCo entered into an agreement to acquire Landmark Financial Corp. and its wholly-owned subsidiary, Landmark Community Bank. This acquisition is subject to regulatory and shareholder approval and is anticipated to be completed during the third quarter of 2000. Landmark shareholders will receive cash in the amount of $21.00 for each 44 Management's Discussion and Analysis (continued) share. With the Landmark acquisition, TrustCo's marketing territory will extend into Montgomery County. Geographic Opportunities Though we have always focused on our home in the Capital District Region of New York State, and while that will never change, we have identified other geographic territories that resemble Upstate New York but are enjoying economic expansion greater than our own. Therefore, TrustCo will be completing evaluations during 2000 regarding branch or buy opportunities in these new geographic territories. Our plans call for us to have a number of branch locations in these new territories so as to provide our new customers with easy banking access. We would offer the range of banking products that are currently offered by Trustco Bank, including all of the leading edge product features that have been designed into our residential real estate and home equity loan products. We expect that these products will be as well received in these new territories as they are here in Upstate New York. Five Year Summary of Financial Data
(dollars in thousands, except per share data) Years Ended December 31, 1999 1998 1997 1996 1995 Statement of income data: Interest income................................. $ 167,205 174,050 172,005 166,647 161,552 Interest expense................................ 74,013 88,347 86,520 82,342 80,200 -------------------------------------------------------------------- Net interest income............................. 93,192 85,703 85,485 84,305 81,352 Provision for loan losses....................... 5,063 4,610 5,414 6,577 12,698 -------------------------------------------------------------------- Net interest income after provision for loan losses 88,129 81,093 80,071 77,728 68,654 Noninterest income.............................. 15,416 22,122 17,222 10,313 14,067 Noninterest expense............................. 45,636 48,765 46,226 42,015 44,440 -------------------------------------------------------------------- Income before income taxes...................... 57,909 54,450 51,067 46,026 38,281 Income tax expense.............................. 19,724 19,435 18,892 17,327 12,754 -------------------------------------------------------------------- Net income...................................... $ 38,185 35,015 32,175 28,699 25,527 -------------------------------------------------------------------- Share data (1): Average equivalent diluted shares outstanding (in thousands)................................ 55,910 55,907 55,849 55,197 54,665 Book value...................................... $ 3.11 3.47 3.32 3.01 2.98 Cash dividends.................................. 0.56 0.50 0.43 0.38 0.33 Basic earnings.................................. 0.71 0.65 0.59 0.53 0.48 Diluted earnings................................ 0.68 0.63 0.58 0.52 0.47 -------------------------------------------------------------------- Financial: Return on average assets........................ 1.58% 1.44 1.40 1.29 1.23 Return on average shareholders' equity (2)...... 22.52 21.47 20.23 19.05 18.03 Cash dividend payout ratio...................... 79.16 75.97 72.34 70.38 69.55 Tier 1 capital as a % of total risk adjusted assets....................................... 13.55 12.78 13.43 12.99 12.45 Total capital as a % of total risk adjusted assets........................................ 14.84 14.06 14.72 14.28 13.73 Efficiency ratio................................ 38.62 40.26 40.61 39.51 42.52 Net interest margin............................. 3.82 3.81 4.02 4.07 4.18 -------------------------------------------------------------------- Average balances: Total assets.................................... $2,411,195 2,433,238 2,302,598 2,220,535 2,073,391 Earning assets.................................. 2,335,682 2,338,838 2,204,725 2,136,826 1,994,240 Loans, net...................................... 1,329,458 1,311,967 1,260,771 1,227,407 1,187,929 Allowance for loan losses....................... (56,449) (55,208) (53,173) (51,233) (45,086) Securities available for sale................... 683,790 611,957 623,001 580,919 301,080 Investment securities........................... -- -- -- -- 292,908 Deposits........................................ 2,043,149 2,068,725 1,981,223 1,936,445 1,859,070 Short-term borrowings........................... 146,667 143,337 117,184 98,324 38,090 Long-term debt.................................. -- -- -- -- 788 Shareholders' equity............................ 179,484 180,103 167,273 155,927 145,469 (1) Share and per share data have been adjusted for a 2 for 1 stock split in 1999, a 15% stock split in 1998, 1997 and 1996, and a 6 for 5 stock split in 1995. (2) Average shareholders' equity excludes the market adjustment for securities available for sale.
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 the inherent risk of loss on the loan portfolio. 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 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. /s/Robert A. McCormick - --------------------- Robert A. McCormick President and Chief Executive Officer /s/Robert T.Cushing - ------------------- Robert T. Cushing Vice President and Chief Financial Officer January 18, 2000 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/KPMG LLP ------------- Albany, New York January 18, 2000 48 Consolidated Statements of Income
dollars in thousands, except per share data) Years Ended December 31, 1999 1998 1997 Interest income: Interest and fees on loans...................................................... $106,734 110,635 109,346 Interest and dividends on: U.S. Treasuries and agencies.................................................. 12,490 15,358 27,356 States and political subdivisions............................................. 7,231 6,177 5,637 Mortgage-backed securities.................................................... 16,323 12,692 10,094 Other......................................................................... 8,396 6,652 1,811 Interest on federal funds sold.................................................. 16,031 22,536 17,761 -------------------------------------- Total interest income....................................................... 167,205 174,050 172,005 -------------------------------------- Interest expense: Interest on deposits............................................................ 68,041 81,596 80,946 Interest on short-term borrowings............................................... 5,972 6,751 5,574 -------------------------------------- Total interest expense...................................................... 74,013 88,347 86,520 -------------------------------------- Net interest income......................................................... 93,192 85,703 85,485 Provision for loan losses......................................................... 5,063 4,610 5,414 -------------------------------------- Net interest income after provision for loan losses......................... 88,129 81,093 80,071 -------------------------------------- Noninterest income: Trust department income......................................................... 8,065 6,973 6,554 Fees for services to customers.................................................. 8,695 8,799 7,671 Net gain/(loss) on securities transactions...................................... (5,446) 998 (166) Letter of credit reserve recapture.............................................. -- 2,398 -- Other........................................................................... 4,102 2,954 3,163 -------------------------------------- Total noninterest income.................................................... 15,416 22,122 17,222 -------------------------------------- Noninterest expense: Salaries and employee benefits.................................................. 24,994 23,367 23,162 Net occupancy expense........................................................... 4,004 5,898 5,270 Equipment expense............................................................... 5,359 5,292 4,165 FDIC~insurance expense.......................................................... 242 244 246 Professional services........................................................... 2,651 2,664 3,489 Other real estate expenses/(income)............................................. (700) 1,856 1,056 Other........................................................................... 9,086 9,444 8,838 -------------------------------------- Total noninterest expense................................................... 45,636 48,765 46,226 -------------------------------------- Income before income taxes ....................................................... 57,909 54,450 51,067 Income taxes...................................................................... 19,724 19,435 18,892 -------------------------------------- Net income........................................................................ $ 38,185 35,015 32,175 -------------------------------------- Earnings per share: Basic........................................................................... $ 0.71 0.65 0.59 Diluted......................................................................... 0.68 0.63 0.58 -------------------------------------- Per share data has been adjusted for a 2 for 1 stock split in 1999 and a 15% stock split in 1998 and 1997. See accompanying notes to consolidated financial statements.
49 Consolidated Statements of Condition
(dollars in thousands, except share data) As of December 31, 1999 1998 ASSETS Cash and due from banks......................................................... $ 54,542 41,950 Federal funds sold.............................................................. 266,000 358,000 Other short-term investments.................................................... 9,970 24,979 --------------------------------- Total cash and cash equivalents......................................... 330,512 424,929 Securities available for sale................................................... 640,830 717,410 Loans........................................................................... 1,350,768 1,323,769 Less: Unearned income......................................................... 959 1,066 Allowance for loan losses............................................... 55,820 54,375 --------------------------------- Net loans............................................................... 1,293,989 1,268,328 Bank premises and equipment..................................................... 16,209 17,022 Real estate owned............................................................... 1,771 5,174 Other assets.................................................................... 80,711 52,217 --------------------------------- Total assets............................................................ $2,364,022 2,485,080 --------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand........................................................................ $ 155,313 154,358 Savings....................................................................... 641,650 660,376 Interest-bearing checking accounts............................................ 272,384 266,027 Money market deposit accounts................................................. 58,557 58,061 Certificates of deposit (in denominations of $100,000 or more)................ 115,636 139,310 Other time accounts........................................................... 751,369 829,282 --------------------------------- Total deposits.......................................................... 1,994,909 2,107,414 Short-term borrowings........................................................... 152,782 147,924 Accrued expenses and other liabilities.......................................... 49,975 43,900 --------------------------------- Total liabilities....................................................... 2,197,666 2,299,238 --------------------------------- Shareholders' equity: Capital stock; $1 par value. 100,000,000 shares authorized, and 56,410,787 and 27,976,793 shares issued at December 31, 1999 and 1998, respectively........ 56,411 27,977 Surplus....................................................................... 85,784 110,398 Undivided profits............................................................. 48,491 40,533 Accumulated other comprehensive income: Net unrealized gain/loss on securities available for sale, net of tax....... (2,452) 18,603 Treasury stock; 3,002,378 and 1,184,525 shares, at cost, at December 31, 1999 and 1998, respectively...................................................... (21,878) (11,669) --------------------------------- Total shareholders' equity.............................................. 166,356 185,842 --------------------------------- Total liabilities and shareholders' equity.............................. $2,364,022 2,485,080 ---------------------------------
See accompanying notes to consolidated financial statements. 50 Consolidated Statements of Changes in Shareholders'Equity
(dollars in thousands, except per share data) Three Years Ended December 31, 1999 Accumulated Other Compre- Capital Undivided Comprehensive hensive Treasury Stock Surplus Profits Income/(Loss) Income Stock Beginning balance, January 1, 1997...................... 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, $.43 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, $.50 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) Comprehensive income Net income - 1999..................................... -- -- 38,185 -- 38,185 -- ------ Other comprehensive income/(loss), net of tax: Unrealized net holding loss arising during the year, net of tax (pre-tax loss $30,150)................... -- -- -- -- (17,834) -- Reclassification adjustment for net loss realized in net income during the year (pre-tax loss $5,446). -- -- -- -- 3,221 -- ------ Other comprehensive loss.............................. -- -- -- (21,055) (21,055) -- ------ Comprehensive income.................................... -- -- -- 17,130 -- ------ Cash dividend declared, $.5625 per share................ -- -- (30,227) -- -- Stock options exercised................................. 241 2,339 -- -- -- 2 for 1 stock split (28,193,407 shares)................. 28,193 (28,193) -- -- -- Treasury stock purchased................................ -- -- -- -- (15,961) Sale of treasury stock.................................. -- 1,240 -- -- 5,752 ------------------------------------------------------------------- Ending balance, December 31, 1999....................... $56,411 85,784 48,491 (2,452) (21,878) ------------------------------------------------------------------- Per share data has been adjusted for a 2 for 1 stock split in 1999 and a 15% stock split in 1998 and 1997. See accompanying notes to consolidated financial statements.
51 Consolidated Statements of Cash Flows
(dollars in thousands) Years Ended December 31, 1999 1998 1997 Increase/(decrease) in cash and cash equivalents Cash flows from operating activities: Net income................................................................... $ 38,185 35,015 32,175 -------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................ 2,229 2,532 3,342 Gain on sales of fixed assets............................................ (1,249) (591) (460) Provision for loan losses................................................ 5,063 4,610 5,414 Provision for deferred tax (benefit)/expense............................. (1,882) 1,405 (3,693) Net (gain)/loss on sale or call of securities available for sale......... 5,446 (998) 166 (Increase)/decrease in taxes receivable.................................. 395 (540) 730 Decrease in interest receivable.......................................... 196 1,189 1,599 Increase/(decrease) in interest payable.................................. (358) (293) 191 (Increase)/decrease in other assets...................................... (11,198) 8,416 5,386 Increase/(decrease) in accrued expenses.................................. 5,776 (464) 8,125 -------------------------------------------- Total adjustments.................................................... 4,418 15,266 20,800 -------------------------------------------- Net cash provided by operating activities............................ 42,603 50,281 52,975 -------------------------------------------- Cash flows from investing activities: Proceeds from sales of securities available for sale....................... 228,600 32,785 179,342 Proceeds from maturities and calls of securities available for sale........ 167,830 229,362 205,256 Purchase of securities available for sale.................................. (360,891) (372,006) (350,118) Net increase in loans ..................................................... (33,583) (32,904) (70,148) Proceeds from sales of real estate owned .................................. 4,797 4,220 3,665 Proceeds from sales of fixed assets........................................ 2,099 1,478 3,967 Capital expenditures....................................................... (2,266) (1,832) (2,360) --------------------------------------------- Net cash provided by/(used in) investing activities........................ 6,586 (138,897) (30,396) --------------------------------------------- Cash flows from financing activities: Net increase/(decrease) in deposits........................................ (112,505) 85,551 68,717 Net increase in short-term borrowing....................................... 4,858 20,074 16,188 Proceeds from exercise of stock options.................................... 2,580 895 1,624 Proceeds from sale of treasury stock....................................... 6,992 5,395 3,026 Payments to acquire treasury stock......................................... (15,961) (10,439) (7,735) Dividends paid............................................................. (29,570) (25,671) (22,438) --------------------------------------------- Net cash (used in)/provided by financing activities........................ (143,606) 75,805 59,382 --------------------------------------------- Net increase/(decrease) in cash and cash equivalents......................... (94,417) (12,811) 81,961 Cash and cash equivalents at beginning of year............................... 424,929 437,740 355,779 --------------------------------------------- Cash and cash equivalents at end of year..................................... $330,512 424,929 437,740 --------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid................................................................ $ 74,371 88,640 86,329 Income taxes paid............................................................ 20,281 18,273 21,615 Transfer of loans to real estate owned....................................... 2,859 4,787 10,234 Increase in dividends payable................................................ 657 930 839 Change in unrealized (gain)/loss on securities available for sale - gross.... 35,595 (4,654) (17,875) Change in deferred tax effect on unrealized gain/(loss) on securities available for sale (14,540) 1,902 7,263 --------------------------------------------
See accompanying notes to consolidated financial statements. 52 Notes to Consolidated Financial Statements (1) Basis of Presentation The accounting and financial reporting policies of TrustCo Bank Corp NY (Company or TrustCo), ORE Subsidiary Corp., 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 for sale in response to changes in market interest rates, related changes in liquidity needs, or changes in the availability of and yield on alternative investments. Unrealized losses on securities that reflect a decline in value which is other than temporary, if any, are charged to income. Nonmarketable equity securities (principally stock of the Federal Reserve Bank and the Federal Home Loan Bank, 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 The 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 change 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. 53 Notes to Consolidated Financial Statements (continued) Income Taxes Deferred taxes are recorded for the future tax consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. Dividend Restrictions Banking regulations restrict the amount of cash dividends which may be paid during a year by the Bank to the Parent Company without the written consent of the appropriate bank regulatory agency. Based on these restrictions, the Company could pay $18.7 million plus 2000 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 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. 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 $11.5 million and $10.0 million at December 31, 1999 and 1998, respectively. (3)Securities Available for Sale The amortized cost and approximate market value of the securities available for sale are as follows:
(dollars in thousands) December 31, 1999 Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Treasuries and agencies................ $189,207 745 3,974 185,978 States and political subdivisions................ 136,203 864 4,507 132,560 Mortgage-backed securities.................. 211,450 302 6,194 205,558 Other......................... 81,834 0 1,102 80,732 ---------------------------------------------------- Total debt securities.................. 618,694 1,911 15,777 604,828 Equity securities............. 26,274 9,728 -- 36,002 ---------------------------------------------------- Total securities available for sale $644,968 11,639 15,777 640,830 ---------------------------------------------------- (dollars in thousands) December 31, 1998 Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Treasuries 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 ----------------------------------------------------
54 Notes to Consolidated Financial Statements (continued) The following table distributes the debt securities included in the available for sale portfolio as of December 31, 1999, based on the securities' final maturity (mortgage-backed securities are stated using an estimated average life):
(dollars in thousands) Approximate Amortized Market Cost Value Due in one year or less........................ $ 48,804 48,632 Due after one year through five years.......... 93,203 91,259 Due after five years through ten years......... 317,589 311,259 Due after ten years............................ 159,098 153,678 --------------------------- $618,694 604,828 ---------------------------
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 1999, 1998 and 1997 are as follows:
(dollars in thousands) December 31, 1999 1998 1997 Proceeds....................................... $228,600 32,785 179,342 Gross realized gains........................... 1,204 1,000 828 Gross realized losses.......................... 6,650 2 994
The amount of securities available for sale that have been pledged to secure public deposits and for other purposes required by law amounted to $274.5 million and $269.2 million at December 31, 1999 and 1998, 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, 1999 and 1998. (4) Loans and Allowance for Loan Losses A summary of loans by category is as follows:
(dollars in thousands) December 31, 1999 1998 Commercial................................... $ 193,530 187,308 Construction................................. 15,867 12,782 Residential mortgage loans................... 980,141 949,524 Home equity line of credit................... 138,339 147,581 Installment loans............................ 22,891 26,574 ------------------------ Total loans.................................. 1,350,768 1,323,769 Less: Unearned income........................ 959 1,066 Allowance for loan losses.............. 55,820 54,375 ------------------------ Net loans....................................$1,293,989 1,268,328 ------------------------
At December 31, 1999 and 1998, loans to executive officers, directors, and to associates of such persons aggregated $3.9 million and $3.8 million, respectively. During 1999, new loans of $2.3 million were made and repayments of loans totalled $2.2 million. In the opinion of management, such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions. These loans do not involve more than normal risk of collectibility or present other unfavorable features. TrustCo lends primarily in the Capital District region of New York State and in the geographic territory surrounding its borders. Although the loan portfolio is diversified, a portion of its debtors' ability to repay is dependent upon the economic conditions prevailing in New York State. The following table sets forth the information with regard to nonperforming loans:
(dollars in thousands) December 31, 1999 1998 1997 Loans in nonaccrual status................... $4,433 7,147 6,298 Loans contractually past due 3 payments or more and still accruing interest.......................... 509 1,454 1,060 Restructured loans........................... 4,979 3,782 3,294 ----------------------------- Total nonperforming loans.................... $9,921 12,383 10,652 -----------------------------
Interest on nonaccrual and restructured loans of $1.1 million in 1999 and $1.0 million in each of 1998 and 1997 would have been earned in accordance with the original contractual terms of the loans. Approximately $562 thousand, $498 thousand, and $519 thousand of interest on nonaccrual and restructured loans was collected and recognized as income in 1999, 1998, and 1997, respectively. There are no commitments to extend further credit on nonaccrual or restructured loans. Transactions in the allowance for loan losses account are summarized as follows:
(dollars in thousands) For the years ended December 31, 1999 1998 1997 Balance at beginning of year........... $54,375 53,455 51,561 Provision for loan losses.............. 5,063 4,610 5,414 Loans charged off...................... (7,788) (6,561) (6,579) Recoveries on loans previously charged off............... 4,170 2,871 3,059 ------------------------------- Balance at year end.................... $55,820 54,375 53,455 -------------------------------
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, 1999 and 1998. There were newly restructured retail loans totalling $4.7 million as of December 31, 1999 and 1998 identified as impaired loans. None of the allowance for loan losses has been specifically 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 1999, 1998, and 1997, the average balance of impaired loans was $5.0 million, $4.0 million, and $6.0 million, respectively, and there was approximately $433 thousand, $412 thousand, and $350 thousand of interest income recorded on these loans in the accompanying consolidated statements of income. (5) Bank Premises and Equipment A summary of premises and equipment at December 31, 1999 and 1998 follows:
(dollars in thousands) 1999 1998 Land.............................. $ 2,915 2,877 Buildings ........................ 20,805 21,537 Furniture, fixtures and equipment. 17,740 16,892 Leasehold improvements............ 3,920 3,692 ----------------- 45,380 44,998 Accumulated depreciation and amortization.................... (29,171) (27,976) ----------------- Total............................. $16,209 17,022 -----------------
Depreciation and amortization expense approximated $2.2 million, $2.5 million, and $3.3 million for the years 1999, 1998, and 1997, respectively. Occupancy expense of Bank premises included rental expense of $1.5 million in 1999, $1.4 million in 1998 and $1.3 million in 1997. (6) Short-Term Borrowings Short-term borrowings, consisting primarily of the Trustco Short-Term Investment Account, were as follows:
1999 (dollars in thousands) Trustco Other Short-Term Short-Term Account Borrowings Total Amount outstanding at December 31, 1999.............. $ 87,096 65,686 152,782 Maximum amount outstanding at any month end.................... 106,250 69,656 153,155 Average amount outstanding.................. 93,450 53,217 146,667 Weighted average interest rate: For the year................. 4.49% 3.34 4.07 As of year end............... 4.83 3.62 4.31
1998 (dollars in thousands) Trustco Other Short-Term Short-Term Account Borrowings Total Amount outstanding at December 31, 1998..............$104,107 43,817 147,924 Maximum amount outstanding at any month end.................... 128,562 48,266 169,254 Average amountoo 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
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. (7) Income Taxes A summary of income tax expense/(benefit) included in the consolidated statements of income follows:
(dollars in thousands) For the years ended December 31, 1999 1998 1997 Current tax expense: Federal......................$18,248 14,498 17,642 State........................ 3,358 3,532 4,943 ----------------------------- Total current tax expense..... 21,606 18,030 22,585 Deferred tax expense/(benefit) (1,882) 1,405 (3,693) ----------------------------- Total income tax expense......$19,724 19,435 18,892 -----------------------------
56 Notes to Consolidated Financial Statements (continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 is as follows:
December 31, (dollars in thousands) 1999 1998 Deductible/ Deductible/ (taxable) (taxable) temporary temporary differences differences Bond accounting.................... $ (380) (185) Benefits and deferred remuneration 5,013 4,438 Deferred loan fees, net............ 447 553 Difference in reporting the provision for loan losses,net.... 23,982 24,460 Other income or expense not utilized for tax purposes.... 8,390 6,934 Depreciable assets................. 1,546 1,395 Other items........................ 888 1,278 --------------------------- Total........................ 39,886 38,873 Valuation reserve.................. (1,182) (2,051) --------------------------- Net deferred tax asset at end of year................... 38,704 36,822 Net deferred tax asset at beginning of year................ 36,822 38,227 --------------------------- Deferred tax expense/(benefit)..... $(1,882) 1,405
Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. The valuation allowance of $1.2 million and $2.1 million at December 31, 1999 and 1998, respectively, is primarily reserved for federal and state tax law restrictions on the deductibility of certain temporary differences. The decrease in the valuation reserve is the result of a reduction of the New York State deferred tax asset caused by the enactment of legislation in 1999 which lowered the state tax rate for banks. 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 $38.7 million and $36.8 million at December 31, 1999 and 1998, respectively, will be realized. In addition to the deferred tax items described in the preceding table, the Company also has a deferred tax asset of $1.7 million at December 31,1999, and a deferred tax liability of $12.8 million at December 31, 1998, relating to the net unrealized gains/(losses) on securities available for sale at the respective dates. The effective tax rates differ from the statutory federal income tax rate. The reasons for these differences are as follows:
1999 1998 1997 Statutory federal income tax rate........... 35.0% 35.0 35.0 Increase/(decrease) in taxes resulting from: Tax exempt income....................... (4.0) (3.7) (3.7) State income tax, net of federal tax benefit.................... 3.3 4.6 5.3 Reduction in the tax rates.............. 1.5 --- --- Change in valuation reserve............. (1.5) --- --- Other items............................. (0.2) (0.2) 0.4 ------------------------ Effective income tax rate.................. 34.1% 35.7 37.0 ------------------------
(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, 1999 and 1998:
Change in Projected Benefit Obligation: Projected Pension Benefits (dollars in thousands) 1999 1998 Projected benefit obligation at beginning of year......................... $21,422 19,405 Service cost................................... 1,012 798 Interest cost.................................. 1,339 1,215 Benefits paid.................................. (1,212) (1,445) Assumption changes and other................... (1,198) 1,449 ------------------- Projected benefit obligation at end of year............................... $21,363 21,422 -------------------
Assumption changes in 1999 and 1998 primarily consisted of the change in discount rate used to measure the projected pension obligation. 57 Notes to Consolidated Financial Statements (continued)
Change in Plan Assets: (dollars in thousands) 1999 1998 Fair value of plan assets at beginning of year.............................. $33,794 29,776 Actual return on plan assets..................... 4,604 5,463 Benefits paid.................................... (1,212) (1,445) ------------------ Fair value of plan assets at end of year......... 37,186 33,794 Funded status.................................... 15,823 12,372 Unrecognized net actuarial gain.................. (14,202) (9,783) Unrecognized prior service cost/(benefit)........ 791 (329) Unrecognized transition asset.................... (147) (295) ------------------ Prepaid benefit cost............................. $ 2,265 1,965 ------------------
Components of Net Pension Benefit: For the years ended December 31, (dollars in thousands) 1999 1998 1997 Service cost................................ $ 1,012 798 712 Interest cost............................... 1,339 1,215 1,054 Expected return on plan assets.............. (2,159) (1,902) (1,603) Amortization of net gain.................... (368) (308) (220) Amortization of unrecognized prior service cost/(benefit)............... 24 (45) (45) Amortization of unrecognized transition asset........................... (148) (148) (148) ----------------------- Net periodic pension benefit................ $ (300) (390) (250) -----------------------
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:
1999 1998 1997 Weighted average discount rate ................ 6.75% 6.00 6.50 Rate of increase in future compensation................................. 6.50 6.00 6.00 Expected long-term rate of return on assets...................................... 6.50 6.50 6.50
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 $4.3 million, $3.4 million, and $3.0 million in 1999, 1998, and 1997, 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 Investment Account. These assets are reflected as other assets in the December 31, 1999 and 1998, consolidated statements 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. 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 shows the plan's funded status and amounts recognized in the Company's consolidated statements of condition at December 31, 1999 and 1998.
Change in Projected Benefit Obligation: Projected Post- Retirement Benefits (dollars in thousands) 1999 1998 Projected benefit obligation at beginning of year......................... $6,183 8,807 Service cost.................................... 262 203 Retiree contributions........................... 87 70 Interest cost................................... 369 336 Benefits paid................................... (172) (193) Assumption changes and other.................... (159) (3,040) ----------------- Projected benefit obligation at end of year................................ $6,570 6,183 -----------------
Assumption changes reflected the change in discount rate used to measure the projected benefit obligation in both 1999 and 1998, and the effect of changes to the company's health insurance plans in 1998.
Change in Plan Assets: (dollars in thousands) 1999 1998 Fair value of plan assets at beginning of year............................ $11,881 10,414 Actual return on plan assets.................... 1,836 2,049 Employer contribution........................... --- 4 Retiree contributions........................... 87 70 Taxes........................................... (419) (463) Benefits paid................................... (172) (193) ------------------ Fair value of plan assets at end of year........ 13,213 11,881 ------------------ Funded status................................... 6,643 5,698 Unrecognized net actuarial gain................. (7,815) (6,970) ------------------- Accrued benefit cost............................ $(1,172) (1,272) -------------------
Components of Net Periodic Benefit Cost/(Benefit):
For the years ended December 31, (dollars in thousands) 1999 1998 1997 Service cost..................................... $ 262 203 378 Interest cost.................................... 369 336 513 Expected return on plan assets................... (454) (398) (336) Amortization of net gain......................... (277) (260) (40) -------------------- Net periodic pension (benefit)/expense........... $(100) (119) 515 --------------------
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 1999 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, 1999, by approximately $1.1 million, 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, 1999, by approximately $156 thousand. The weighted average assumptions used to determine the projected benefit obligation at December 31, 1999, 1998, and 1997 were:
1999 1998 1997 Discount rate 6.75% 6.00 6.50 After tax return on plan assets 3.84 3.84 3.84
(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 $1.1 million in 1999, and $1.4 million in both 1998 and 1997. 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 $3.3 million, $3.0 million, and $2.6 million in 1999, 1998, and 1997, respectively. The Company has awarded 2.9 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 At December 31, 1999, 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:
(dollars in thousands except per share data) 1999 1998 1997 Net income: As reported......................... $38,185 35,015 32,175 Pro forma........................... 37,143 34,239 31,672 Basic earnings per share: As reported......................... $ 0.71 0.65 0.59 Pro forma........................... 0.69 0.64 0.58 Diluted earnings per share: As reported......................... 0.68 0.63 0.58 Proforma............................ 0.66 0.61 0.57
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 pro forma net income and earnings per share amounts presented above because compensation cost is reflected over the options' expected life and compensation cost for options granted prior to January 1, 1995 is not considered. Under the 1995 TrustCo Bank Corp NY Stock Option Plan, the Company may grant options to its eligible employees for up to approximately 6.0 million shares of common stock. Under the 1993 Directors Stock Option Plan, the Company may grant options to its directors for up to approximately 402 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 five periods from the date the options are granted for the employee plan and they are immediately exercisable for the directors' plan. A summary of the status of TrustCo's stock option plans as of December 31, 1999, 1998 and 1997 and changes during the years ended on those dates are as follows:
Outstanding Options Exercisable Options Weighted Weighted Average Average Option Option Shares Price Shares Price Balance, January 1, 1997............. 5,418,013 $ 5.05 3,544,518 $ 4.53 New options awarded - 1997........... 920,460 7.90 205,252 7.90 Cancelled options - 1997............. 71,919 6.40 --- --- Exercised options - 1997............. 377,504 4.31 377,504 4.31 Options became exercisable........... --- --- 709,796 5.73 -------------------------------------- Balance, December 31, 1997........... 5,889,050 5.53 4,082,062 4.93 New options awarded - 1998........... 792,350 11.52 176,870 11.52 Cancelled options - 1998............. 18,210 6.79 --- --- Exercised options - 1998............. 169,320 4.19 169,320 4.19 Options became exercisable........... --- --- 717,040 6.42 -------------------------------------- Balance, December 31, 1998........... 6,493,870 6.29 4,806,652 5.42 New options awarded - 1999........... 715,000 13.22 159,000 13.22 Exercised options - 1999............. 477,875 4.07 477,875 4.07 Options became exercisable........... --- --- 683,807 7.95 -------------------------------------- Balance, December 31, 1999........... 6,730,995 $ 7.18 5,171,584 $ 6.12 --------------------------------------
59 Notes to Consolidated Financial Statements (continued) There are approximately 5.2 million, 4.8 million and 4.1 million of options that are exercisable at year end 1999, 1998 and 1997, 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:
Employees' Directors' Plan Plan 1999...................................$2.71 2.63 1998................................... 2.37 2.22 1997................................... 1.38 1.25
The following assumptions were utilized in the calculation of the fair value of the options under Statement 123:
Employees' Directors' Plan Plan Expected dividend yield: 1999............................ 4.17% 4.17 1998............................ 4.12 4.12 1997............................ 5.15 5.15 Risk-free interest rate: 1999............................ 5.96 5.92 1998............................ 5.43 5.44 1997............................ 6.39 6.35 Expected volatility rate: 1999............................ 20.91 21.95 1998............................ 19.41 18.87 1997............................ 20.20 19.31 Expected lives....................... 7.5 years 6.0 years
The following table summarizes information about the stock option plans for options outstanding at December 31, 1999:
Weighted Average Weighted Range of Remaining Average Exercise Options Contractual Exercise Price Outstanding Life Price ----------------------------------------------- Less than $5.00............... 1,694,198 3.6 years $4.06 Between $5.01 and $10.00........... 3,529,447 6.3 years 6.49 Greater than $10.01............... 1,507,350 9.5 years 12.33 --------------------------------------------- Total 6,730,995 6.3 years $ 7.18 ---------------------------------------------
The following table summarizes information about the exercisable stock options at December 31, 1999:
Weighted Average Weighted Range of Remaining Average Exercise Options Contractual Exercise Price Outstanding Life Price ------------------------------------------------------ Less than $5.00................ 1,694,198 3.6 years $ 4.06 Between $5.01 and $10.00........... 2,987,646 6.1 years 6.31 Greater than $10.01............... 489,740 9.3 years 12.07 ---------------------------------------------------- Total.................. 5,171,584 5.6 years $ 6.12 ----------------------------------------------------
(9) Commitments and Contingent Liabilities (a) Leases The Bank leases certain banking premises. These leases are accounted for as operating leases with minimum rental commitments in the amounts presented below. The majority of these leases contain options to renew.
(dollars in thousands) 2000.............................................. $1,227 2001.............................................. 1,157 2002.............................................. 965 2003.............................................. 881 2004.............................................. 825 2005 and after.................................... 4,353 ------- $9,408 -------
(b) Litigation Existing litigation arising in the normal course of business is not expected to result in any material loss to the Company. (c) Time Deposits At December 31, 1999, the maturity of total time deposits is as follows:
(dollars in thousands) Under 1 year.................................... $557,460 1 to 2 years.................................... 236,465 2 to 3 years.................................... 29,555 3 to 4 years.................................... 26,490 4 to 5 years.................................... 14,691 over 5 years.................................... 2,344 --------- $867,005 ---------
60 Notes to Consolidated Financial Statements (continued) (10) Earnings Per Share A reconciliation of the component parts of earnings per share for 1999, 1998 and 1997 follows:
(dollars in thousands, Weighted except per share data) Average Shares Per share Income Outstanding Amounts For the year ended December 31, 1999: Basic EPS: Income available to common shareholders............... $38,185 53,696 $0.71 Effect of Diluted Securities: Stock Options....................... --- 2,214 --- ----------------------------------- Diluted EPS......................... $38,185 55,910 $0.68 ----------------------------------- For the year ended December 31, 1998: Basic EPS: Income available to common shareholders............... $35,015 53,627 $0.65 Effect of Diluted Securities: Stock Options....................... --- 2,280 --- ----------------------------------- Diluted EPS......................... $35,015 55,907 $0.63 ----------------------------------- For the year ended December 31, 1997: Basic EPS: Income available to common shareholders............... $32,175 54,147 $0.59 Effect of Diluted Securities: Stock Options....................... --- 1,702 --- ----------------------------------- Diluted EPS......................... $32,175 55,849 $0.58 -----------------------------------
(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. Commit-ments 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, 1999 and 1998 was $232.1 million and $230.2 million, respectively. Approximately one third of these commitments were for variable rate products at the end of 1999. 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, 1999 and 1998 was $2.1 million and $2.0 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.
(dollars in thousands) As of December 31, 1999 Carrying Fair Value Value Financial assets: Cash and cash equivalents .................... $ 330,512 330,512 Securities available for sale ................ 640,830 640,830 Loans......................................... 1,293,989 1,331,776 Accrued interest receivable................... 15,704 15,704 Financial liabilities: Demand deposits .............................. 155,313 155,313 Interest-bearing deposits .................... 1,839,596 1,841,050 Borrowings ................................... 152,782 152,782 Accrued interest payable...................... 3,119 3,119
(dollars in thousands) As of December 31, 1998 Carrying Fair Value Value Financial assets: 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
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 61 Notes to Consolidated Financial Statements (continued) to the interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Deposit Liabilities The fair values disclosed for noninterest bearing deposits, 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 does not engage in activities involving interest rate swaps, forward placement contracts, or any other instruments commonly referred to as derivatives. 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, 1999 and 1998, the Bank was required to maintain a minimum leverage ratio of Tier I (leverage) capital to total adjusted quarterly 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 quarterly 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, 1999 and 1998, 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, 1999 and 1998 for the Bank and the Company (on a consolidated basis):
(dollars in thousands) As of December 31, 1999 Amount Ratio Tier I (leverage) capital: Trustco Bank, NA........... $147,518 6.24% TrustCo Bank Corp NY....... 168,808 7.15 Tier I risk-based capital: Trustco Bank, NA........... 147,518 11.95 TrustCo Bank Corp NY....... 168,808 13.55 Total risk-based capital: Trustco Bank, NA........... 163,443 13.24 TrustCo Bank Corp NY....... 184,877 14.84 (dollars in thousands) As of December 31, 1998 Amount Ratio Tier I (leverage) capital: 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
62 Notes to Consolidated Financial Statements (continued)
(14) Parent Company Only The following statements pertain to TrustCo Bank Corp NY (Parent Company): Statements of Income (dollars in thousands) Years Ended December 31, Income: 1999 1998 1997 Dividends and interest from subsidiaries.............. $38,654 30,378 27,227 Gain on sale of securities....... 1,173 862 -- Income from other investments.... 689 453 379 --------------------------- Total income................. 40,516 31,693 27,606 --------------------------- Expense: Operating supplies............... 57 78 98 Professional services ........... 37 17 33 Miscellaneous expense............ 312 107 110 --------------------------- Total expense................ 406 202 241 --------------------------- Income before income taxes and undistributed net income of subsidiaries....... 40,110 31,491 27,365 Income tax expense................ 523 420 45 --------------------------- Income before equity in undistributed net income of subsidiaries........... 39,587 31,071 27,320 (Distributions in excess of)/equity in undistributed net income of subsidiaries..................... (1,402) 3,944 4,855 --------------------------- Net income........................ $38,185 35,015 32,175 ---------------------------
Statements of Condition (dollars in thousands) December 31, Assets: 1999 1998 Cash in subsidiary bank............ $ 16,990 13,938 Investments in subsidiaries........ 139,316 156,660 Securities available for sale...... 21,066 29,889 Other assets....................... 212 304 --------------------- Total assets................... $177,584 200,791 --------------------- Liabilities and shareholders' equity: Accrued expenses and other liabilities $ 11,228 14,949 --------------------- Total liabilities.............. 11,228 14,949 --------------------- Shareholders' equity................ 166,356 185,842 --------------------- Total liabilities and shareholders' equity $177,584 200,791 ---------------------
Statements of Cash Flows (dollars in thousands) Years Ended December 31,
1999 1998 1997 Increase/(decrease) in cash and cash equivalents: Cash flows from operating activities: Net income........................... $ 38,185 35,015 32,175 -------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Distributions in excess of/(equity in undistributed net income) of subsidiaries............... 1,402 (3,944) (4,855) Gain on sales of securities....... (1,173) (862) -- (Increase)/decrease in other assets........................ 92 159 833 Increase/(decrease) in accrued expenses...................... (825) 24 14 -------------------------- Total adjustments............... (504) (4,623) (4,008) -------------------------- Net cash provided by operating activities........................ 37,681 30,392 28,167 -------------------------- Cash flows from investing activities: Proceeds from sale of securities available for sale.............. 3,715 3,530 -- Purchase of securities available for sale.......................... (2,385) (1,761) (349) Decrease in noninterest bearing note receivable from subsidiary.... -- 1,117 -- -------------------------- Net cash provided by/(used in) investing activities........... 1,330 2,886 (349) -------------------------- Cash flows from financing activities: Proceeds from exercise of stock options............................ 2,580 895 1,624 Dividends paid...................... (29,570)(25,671) (22,438) Payments to acquire treasury stock.. (15,961)(10,439) (7,735) Proceeds from sale of treasury stock............................. 6,992 5,395 3,026 --------------------------- Net cash used in financing activities..................... (35,959) (29,820) (25,523) --------------------------- Net increase in cash and cash equivalents.................... 3,052 3,458 2,295 Cash and cash equivalents at beginning of year............... 13,938 10,480 8,185 --------------------------- Cash and cash equivalents at end of year..................... $ 16,990 13,938 10,480 --------------------------- Supplemental disclosure of cash flow information: Increase in dividends payable........ $ 657 930 839 Equity contribution to subsidiary -- -- 1,000 Change in unrealized (gain)/loss on available for sale securities - gross............................... 8,666 (4,591) (9,891) Change in deferred tax effect on unrealized (gain)/loss on securities available for sale.................. (3,540) 1,876 4,008 ----------------------------
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 SECRETARY William F. Terry ASSISTANT SECRETARIES Robert J. McCormick Henry C. Collins Board of Directors Barton A. Andreoli President Towne Construction and Paving Corp. Lionel O. Barthold Retired Chairman Power Technologies, Inc. M. Norman Brickman Vice President D. Brickman, Inc. Joseph Lucarelli President Bellevue Builders Supply 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, Cazenovia College James H. Murphy, D.D.S. Orthodontist Richard J. Murray, Jr. Chief Executive Officer R.J. Murray Co., Inc. Kenneth C. Petersen Retired President Schenectady International, Inc. William D. Powers Chairman New York Republican State Committee William J. Purdy President Welbourne & Purdy Realty, Inc. William F. Terry Senior Vice President and Secretary Trustco Bank Directors of TrustCo Bank Corp NY are also Directors of Trustco Bank HONORARY DIRECTORS Charles W. Carl, Jr. Caryl P. Haskins, Ph.D. Bernard J. King 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 AND SECRETARY William F. Terry ADMINISTRATIVE VICE PRESIDENT Robert J. McCormick AUDITOR John C. Fay HUMAN RESOURCES AND QUALITY CONTROL Vice President Cheri J. Parvis BANK AND TRUST OPERATIONS, ACCOUNTING/FINANCE, PURCHASING, COMPLIANCE Senior Vice President and Chief Financial Officer Robert T.Cushing ACCOUNTING/FINANCE Vice Presidents Linda C. Christensen Jeffrey S. Farbaniec BANK/TRUST OPERATIONS Vice Presidents Kevin M. Curley Ann M. Noble COMPLIANCE Vice President Donald J. Csaposs BRANCH ADMINISTRATION, RETIREMENT/GOVERNMENT ACCOUNTS, TRUST DEPARTMENT, MARKETING AND COMMUNITY RELATIONS Senior Vice President Nancy A. McNamara BRANCH ADMINISTRATION Vice President Scot R. Salvador Senior Officer Eric W. Schreck TRUST DEPARTMENT Administrative Vice President William M. McCartan Vice Presidents Patrick S. LaPorta Robert Scribner Trust Officers John P. Fulgan Richard W. Provost Senior Investment Officer Peter L. Gregory Investment Officer Michael E. Barringer MARKETING/COMMUNITY RELATIONS Marketing Officer Robert M. Leonard DATA PROCESSING, LEGAL COUNSEL Senior Vice President and Secretary William F. Terry LEGAL COUNSEL Administrative Vice President Henry C. Collins Data Processing Thomas Mangum LOAN DIVISION, INSTALLMENT LOANS/ CREDIT CARDS, PREMISES Administrative Vice President Robert J. McCormick COMMERCIAL LOANS Vice President George W. Wickswat Senior Commercial Loan Officers Deborah K. Appel Commercial Loan Officer Patrick M. Canavan Paul R. Steenburgh MORTGAGE LOANS Officers Robert O. Breton Thomas M. Poitras 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 Road Suite 9, Queensbury Telephone: 798-7226 Rotterdam Office Curry Road Shopping Ctr. Rotterdam Telephone: 355-8330 Rotterdam Square Office 93 W. Campbell Road Rotterdam Telephone: 377-2393 Route 9 Office - 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 1 South 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 15, 2000 10:00 AM TrustCo Bank Corp NY 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 TrustCo Shareholder Services Department 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. Requests and related inquiries should be directed to William F. Terry, Secretary, TrustCo Bank Corp NY, P.O. Box 1082, Schenectady, New York 12301-1082. NASDAQ SYMBOL: TRST The Corporation's common stock trades on The Nasdaq Stock Market[sm] 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 Bank Securities Department P.O. Box 380 Schenectady, New York 12301-0380 Trustco Bank is a registered service mark with the U.S. Patent & Trademark Office. 67 68 69 70 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. 71 Exhibits Exhibit 23 KPMG, LLP 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. 333-78811), and Form S-3 (No. 333-75035), of TrustCo Bank Corp NY and subsidiaries, of our report dated January 18, 2000, relating to the consolidated statements of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 1999 and 1998, 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, 1999, which report appears in the December 31, 1999 Annual Report on Form 10-K of TrustCo Bank Corp NY. /s/ KPMG LLP March 22, 2000 72 Exhibits 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 1999 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/Joseph Lucarelli __________________________ _____________________ M. Norman Brickman Joseph Lucarelli /s/Anthony J. Marinello /s/Robert A. McCormick __________________________ _____________________ Dr. Anthony J. Marinello Robert A. McCormick /s/Nancy A. McNamara /s/Dr. John S. Morris __________________________ _________________________ Nancy A. McNamara Dr. John S. Morris /s/James H. Murphy /s/Richard J. Murray, Jr. _____________________ __________________________ Dr. James H. Murphy Richard J. Murray, Jr. /s/Kenneth C. Petersen /s/ William D. Powers _____________________ __________________________ Kenneth C. Petersen William D. Powers /s/William J. Purdy /s/William F. Terry _____________________ __________________________ William J. Purdy William F. Terry Sworn to before me this 15th day of February 2000. /s/Joan Clark - ------------------------- Notary Public Joan Clark Notary Public, State of New York Qualified in Albany County No. 01CL4822282 Commission Expires Nov. 30, 2000 73 EX-27 2 ARTICLE 9 FDS FOR 10-K
9 This schedule contains summary financial information extracted from the accompanying financial statements and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 54,484 58 266,000 0 650,800 0 0 1,349,809 55,820 2,364,022 1,994,909 152,782 49,975 0 0 0 56,411 109,945 2,364,022 106,734 44,440 16,031 167,205 68,041 74,013 93,192 5,063 (5,446) 45,636 57,909 38,185 0 0 38,185 0.71 0.68 4.16 4,433 509 4,979 0 54,375 7,788 4,170 55,820 0 0 55,820 EPS primary and EPS diluted have been restated to reflect a two-for-one stock split in November 1999. Prior Financial Data Schedules have been restated.
EX-27 3 ARTICLE 9 FDS FOR 10-K
9 This schedule contains restated primary EPS and diluted EPS which have been restated to reflect a two-for-one stock split in November 1999. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 41,669 86 265,000 0 703,276 0 0 1,336,578 55,719 2,385,360 2,013,444 151,774 48,036 0 0 0 28,185 143,921 2,385,360 79,732 33,293 12,330 125,355 51,722 56,123 69,232 4,013 (2,230) 35,055 43,732 14,945 0 0 14,945 0.54 0.51 4.09 4,654 1,109 4,178 0 54,375 6,186 3,517 55,719 0 0 55,719 EPS primary and EPS diluted have been restated to reflect a two-for-one stock split in November 1999. Prior Financial Data Schedules have been restated.
EX-27 4 ARTICLE 9 FDS FOR 10-K
9 This schedule contains restated primary EPS and diluted EPS which have been restated to reflect a two-for-one stock split in November 1999. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 42,185 45 293,000 0 713,174 0 0 1,325,549 55,656 2,409,016 2,044,731 142,178 45,579 0 0 0 28,164 148,364 2,409,016 53,026 21,840 8,398 83,264 34,923 37,852 45,412 3,013 (1,077) 23,555 28,514 18,815 0 0 18,815 0.35 0.34 4.01 5,437 1,915 4,116 0 54,375 4,677 2,945 55,656 0 0 55,656 EPS primary and EPS diluted have been restated to reflect a two-for-one stock split in November 1999. Prior Financial Data Schedules have been restated.
EX-27 5 ARTICLE 9 FDS FOR 10-K
9 This schedule contains restated primary EPS and diluted EPS which have been restated to reflect a two-for-one stock split in November 1999. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 37,341 892 364,000 0 681,160 0 0 1,318,188 54,772 2,434,163 2,060,558 144,350 44,038 0 0 0 28,163 157,054 2,434,163 26,560 10,890 4,216 41,666 17,791 19,239 22,427 1,513 (420) 12,202 14,132 9,323 0 0 9,323 0.17 0.17 3.94 7,801 401 3,905 0 54,375 2,282 1,166 54,772 0 0 54,772 EPS primary and EPS diluted have been restated to reflect a two-for-one stock split in November 1999. Prior Financial Data Schedules have been restated.
EX-27 6 ARTICLE 9 FDS FOR 10-K
9 This schedule contains restated primary EPS and diluted EPS which have been restated to reflect a two-for-one stock split in November 1999. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 41,867 83 358,000 0 742,389 0 0 1,322,703 54,375 2,485,080 2,107,414 147,924 43,900 0 0 0 27,977 157,865 2,485,080 110,635 40,879 22,536 174,050 81,596 88,347 85,703 4,610 998 48,765 54,450 35,015 0 0 35,015 0.65 0.63 3.81 7,147 1,454 3,782 0 53,455 6,561 2,871 54,375 0 0 54,375 EPS primary and EPS diluted have been restated to reflect a two-for-one stock split in November 1999. Prior Financial Data Schedules have been restated.
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