EX-13 4 anrp12312003.txt ANRP12312003 TRUSTCO BANK CORP NY ANNUAL REPORT 2003 (LOGO) TRUSTCO Bank Corp NY TrustCo Bank Corp NY is a one bank financial services company headquartered in Glenville, New York. The Company is the largest financial services company headquartered in the Capital Region of New York State. The Company's principal subsidiary, Trustco Bank, operates 69 community banking offices offering 50 drive-up windows and 64 Automatic Teller Machines throughout the Bank's market area. The Company serves three states and 16 counties with a broad range of community banking services. Financial Highlights (dollars in thousands, except per share data)
Years ended December 31, Percent 2003 2002 Change Income: Net interest income (Taxable Equivalent) $ 102,752 103,289 (0.52)% Net income 53,031 49,244 7.69 Per Share: Basic earnings .713 .678 5.16 Diluted earnings .704 .660 6.67 Tangible book value 3.06 3.16 (3.16) Average Balances: Assets 2,710,175 2,693,505 6.19 Loans, net 1,275,023 1,512,448 (15.70) Deposits 2,340,827 2,212,440 5.80 Shareholders' equity 225,045 214,963 4.69 Financial Ratios: Return on average assets 1.96% 1.83 7.10 Return on average equity 26.21 26.08 0.50 Tier 1 capital to: Total average assets (leverage) 7.53 7.78 (3.21) Risk-adjusted assets 16.54 15.48 6.85 Total capital to risk-adjusted assets 17.82 16.77 6.26 Net loans charged off to average loans .39 .40 (2.50) Allowance for loan losses as a coverage of nonperforming loans 15.0x 10.7 40.19 Efficiency ratio 38.33 36.66 (4.56) Dividend payout ratio 83.98 88.60 (5.21) Excludes the market adjustment on securities available for sale.
Per share information of common stock
Tangible Range of Stock Basic Diluted Cash Book Price Earnings Earnings Dividend Value High Low 2002 First quarter $.172 .166 .150 2.89 13.50 11.50 Second quarter .174 .169 .150 3.00 13.45 10.85 Third quarter .183 .179 .150 3.08 13.35 8.75 Fourth quarter .148 .146 .150 3.16 11.53 9.50 2003 First quarter .178 .175 .150 3.12 11.40 9.50 Second quarter .180 .178 .150 3.16 11.75 9.72 Third quarter .192 .189 .150 3.14 13.47 10.81 Fourth quarter .163 .161 .150 3.06 14.25 12.25
1 MAP OF BRANCH LOCATIONS OMITTED 2 (LOGO) TRUSTCO Bank Corp NY Table of Contents Financial Highlights 1 President's Message 4 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Average Balances, Yields and Net Interest Margins 13 Glossary of Terms 26 Management's Statement of Responsibilities 27 Independent Auditors' Report 28 Consolidated Financial Statements and Notes 29 Officers and Board of Directors 46 Officers of Trustco Bank 46 Branch Locations 47 General Information 48 TrustCo Mission Statement: TrustCo will be the low cost provider of high quality services to our customers in the communities we serve and return to our owners an above average return on their investment. 3 (LOGO) TRUSTCO Bank Corp NY President's Message Dear Shareholders: I am pleased to report that our 2003 annual report contains more of what you, our shareholders, have come to expect from TrustCo. We are continuing on our steady and deliberate path to increase shareholder value by delivering superior financial performance and by building a strong community banking franchise in New York and Florida. For 2003 TrustCo delivered record results and generated the kind of growth that will help sustain our performance into the future. In January 2004 the Board of Directors appointed me the President and Chief Executive Officer of TrustCo Bank Corp NY and Trustco Bank. Robert T. Cushing assumed the role of Executive Vice President and Chief Financial Officer and Scot R. Salvador became Executive Vice President and Chief Banking Officer. These changes position us for growth into the future, streamline decision making and allow each of us to focus on specific areas of the bank. Senior Vice President Nancy A. McNamara will be retiring in May of 2004. Outstanding customer service and strong deposit growth coupled with our solid revenue base and consistently strong credit quality drove our financial results. We are pleased by our New York and Florida branch expansion program which saw four branches opened in the Orlando, Florida region, two in the downstate New York region and one in Saratoga Springs, New York during 2003. We are excited about these opportunities and the challenge of delivering the TrustCo products and services to these new communities. We are pleased to be a part of these new communities while we expand the foundation and roots of our Company in Upstate New York. Thanks to the hard work of our employees and our unique ability to make decisions and adjust swiftly and resolutely to changing market conditions, our Company generated record earnings of $53.0 million. And we enter 2004 in a much better competitive position than most others in our industry. While the national economic recovery is beginning to show signs of strengthening this poses unique opportunities for us to expand our marketing and sales effort and to capitalize on the decisions we made in 2003 that prepared us for these more potentially robust conditions going forward. During 2003, TrustCo declared cash dividends of $0.60 per common share, which amounts to total dividends of $44.5 million to our shareholders. Over the last five years TrustCo paid cash dividends to shareholders representing approximately 84% of total net income earned during that time period. It continues to be our belief that excess capital should be returned to shareholders in the form of cash dividends. We also believe that it is prudent to retain sufficient capital so as to support our growth goals and to remain well capitalized for regulatory purposes. 4 (LOGO) TRUSTCO Bank Corp NY President's Message (continued) Financial Highlights Net income for the year was $53.0 million representing an increase of 7.7% over the $49.2 million earned in 2002. These results translate into diluted earnings per share of $0.704 in 2003 and $0.660 in 2002. Our return on shareholders' equity was 26.21% in 2003 and 26.08% in 2002. Cost controls are always an element of TrustCo's success and again in 2003 we achieved world class results. Our efficiency ratio of 38.3% in 2003 and 36.7% in 2002 placed us among the most efficient banking organizations in the nation. These results continue a long tradition at TrustCo of delivering high quality customer service at low cost. Our long-term objectives are for controlled growth and steady increases in earnings. To realize these objectives we will continue to refine our balance sheet, expand into new market territories and focus on the core principles of asset quality and cost controls. I would like to recognize the significant contributions of the people that make up this wonderful organization from our Board of Directors to all of the dedicated employees in each department and branch throughout the organization. It is with a great deal of pride that I announce another year of record earnings and look forward to meeting the opportunities and challenges of 2004. Thank you for your support. Sincerely, /s/ Robert J. McCormick Robert J. McCormick President & Chief Executive Officer TrustCo Bank Corp NY 5 (LOGO) TRUSTCO Bank Corp NY 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", "TrustCo" or the "Bank"), and Trustco Bank during 2003 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 2003 should be read in conjunction with this review. Certain amounts in years prior to 2003 have been reclassified to conform with the 2003 presentation. Overview TrustCo recorded net income of $53.0 million or $0.704 of diluted earnings per share for the year ended December 31, 2003, compared to $49.2 million or $0.660 per share for the year ended December 31, 2002. This represents an increase of 7.7% in net income between 2002 and 2003. During 2003, the following had a significant effect on net income: o an increase in the average balance of interest earning assets of $26.9 million offset by a reduction of six basis points ("bp") in the net interest margin between 2002 and 2003, o a reduction in the provision for loan loss from $1.4 million in 2002 to $1.2 million in 2003, o the recognition of net securities gains of $9.8 million in 2003 compared to $7.5 million recorded in 2002 and, o a decrease in noninterest expense of $6.8 million to $48.5 million for 2003 resulting in an efficiency ratio of 38.33%. Return on Equity 2001 25.31% 2002 26.08% 2003 26.21% MIX OF AVERAGE EARNING ASSETS
(dollars in thousands) 2003 2002 Components of vs. vs. Total Earning Assets 2003 2002 2001 2002 2001 2003 2002 2001 Loans, net of unearned income $1,275,023 1,512,448 1,518,768 (237,425) (6,320) 48.9% 58.6 63.9 Securities available for sale: U.S. Treasuries and agencies 506,608 185,462 167,348 321,146 18,114 19.4 7.2 7.0 States and political subdivisions 203,718 222,696 203,247 (18,978) 19,449 7.8 8.6 8.6 Mortgage-backed securities 60,248 62,494 134,472 (2,246) (71,978) 2.3 2.4 5.7 Other 63,331 97,404 76,602 (34,073) 20,802 2.5 3.8 3.2 Total securities available for sale 833,905 568,056 581,669 265,849 (13,613) 32.0 22.0 24.5 Federal funds sold 492,262 479,765 271,848 12,497 207,917 18.9 18.6 11.4 Other short-term investments 5,102 19,110 4,074 (14,008) 15,036 0.2 0.8 0.2 Total earning assets $2,606,292 2,579,379 2,376,359 26,913 203,020 100.0% 100.0 100.0
6 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) TrustCo has performed well with respect to a number of key performance ratios during 2003 and 2002, including: o return on average equity of 26.21% for 2003 and 26.08% for 2002, o return on average assets of 1.96% for 2003 and 1.83% for 2002, and o efficiency ratio of 38.33% for 2003 and 36.66% for 2002. In response to opportunities for growth, the Board of Directors announced a management reorganization during the fourth quarter of 2003. Effective January 1, 2004 Robert J. McCormick became President and Chief Executive Officer of both TrustCo Bank Corp NY and Trustco Bank. Robert T. Cushing was named Executive Vice President and Chief Financial Officer of TrustCo Bank Corp NY and Trustco Bank. Additionally, Scot R. Salvador has become Executive Vice President and Chief Banking Officer. As previously announced, Senior Vice President Nancy A. McNamara will retire in May 2004. TrustCo's operations focus on providing high quality service to the communities served by the branch-banking network. The financial results for the Company are influenced by economic events that affect those communities, as well as national economic trends, primarily interest rates, affecting the entire banking industry. Changes in net interest income have the greatest impact on net income. National economic policies have caused interest rates to drop dramatically in the Company's marketplace over the past two years. As a result, mortgage loan interest rates have decreased to historically low levels, providing TrustCo's existing mortgage loan customers the opportunity to refinance loans at significantly lower interest rates. TrustCo reinvested funds from loan refinancings into the securities available for sale portfolio. The improvement in the bond market provided an opportunity to reinvest these funds at attractive interest rates. The average balance of the residential real estate loan portfolio decreased by $257.4 million during the year while the average balance of securities available for sale increased by $265.8 million. In essence, this was a restructuring of the balance sheet from "loans" to "securities available for sale". As a result of its move to a federal savings bank thrift charter in 2002 Trustco Bank was required to divest of existing municipal deposit relationships. Since the conversion date, TrustCo has experienced an outflow of $64.0 million in municipal deposits. LOAN PORTFOLIO
(dollars in thousands) As of December 31, 2003 2002 2001 Amount Percent Amount Percent Amount Percent Commercial $ 190,501 16.4% $199,795 14.1% $212,246 13.6% Real estate - construction 7,476 0.6 7,252 0.5 12,214 0.8 Real estate - mortgage 779,227 67.0 1,059,035 74.4 1,189,686 76.4 Home equity lines of credit 171,078 14.7 139,294 9.8 122,332 7.9 Installment loans 14,365 1.3 17,465 1.2 20,979 1.3 Total loans 1,162,647 100.0% 1,422,841 100.0% 1,557,457 100.0% Less: Unearned income 381 540 771 Allowance for loan losses 48,739 52,558 57,203 Net loans $1,113,527 $1,369,743 $1,499,483
Average Balances 2003 2002 2001 2000 1999 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Commercial $ 199,729 15.7% $ 198,566 13.1% $ 195,152 12.8% $179,952 12.9% $174,434 13.1% Real estate - construction 6,684 0.5 9,752 0.7 14,526 1.0 18,338 1.3 17,440 1.3 Real estate - mortgage 899,415 70.5 1,156,779 76.4 1,161,521 76.4 1,040,127 74.5 973,336 73.2 Home equity lines of credit 155,185 12.2 129,847 8.6 125,778 8.3 134,459 9.6 141,488 10.6 Installment loans 14,460 1.1 18,181 1.2 22,687 1.5 23,471 1.7 23,725 1.8 Total loans 1,275,473 100.0% 1,513,125 100.0% 1,519,664 100.0% 1,396,347 100.0% 1,330,423 100.0% Less: Unearned income 450 677 896 933 965 Allowance for loan losses 51,311 56,525 57,398 56,362 56,449 Net loans $1,223,712 1,455,923 1,461,370 1,339,052 1,273,009
7 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) Taxable Equivalent Net Interest Income (dollars in millions) 2001 $102.4 2002 $103.3 2003 $102.8 Even with this outflow, the average balance of deposits increased by $128.4 million during the year. Also, during 2003 the average balance of short-term borrowings decreased by $102.6 million as a result of eliminating the Trustco Short Term Investment Account and moving those trust department funds to independent third party funds. The decision by the Trust Department was to move these overnight deposits to independent third parties so as to create additional opportunities for its customers. The funds that Trustco Bank received from the Short Term Investment Account were invested in overnight deposits. There was very little spread between the earnings on the investment and the interest expense on the account. Though both of these events caused an outflow of funds, total average interest bearing liabilities actually increased during the year by $29.5 million. TrustCo continues to open new branch locations. During 2003 seven new branches were added to the franchise - one in Saratoga County, New York, two in Westchester County, New York and four in Seminole County, Florida. The new branch locations continue the plan established several years ago to expand the franchise to areas experiencing economic growth. In 2004, this strategy will lead to the opening of eight to ten new branches. Management believes that expanding into central Florida and the lower-Hudson Valley region of New York State has been a success. The new branches have all of the same products and features found at the other sixty-two existing locations. Due to a combination of competitive rates, excellent service and convenient locations, management belives that each of the new branches has successfully attracted deposit and loan customers and has been a welcome addition to these communities. Asset/Liability Management In managing its balance sheet, TrustCo utilizes funding and capital sources within sound credit, investment, interest rate, and liquidity risk guidelines established by management and approved by the Board of Directors. Loans and securities (including federal funds sold) are the Company's primary earning assets. Average interest earning assets were 96.2% and 95.8% of average total assets for 2003 and 2002, 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 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 should provide 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. Interest Rates TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations, and rates paid on deposits and charged on loans. The absolute level of interest rates, changes in rates, and customers' expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular year. One of the most important interest rates used to control the economy is the "federal funds" rate. This is the rate utilized within the banking system for overnight borrowings for institutions of the highest credit quality. In 2002 the federal funds rate began the year at 1.75% and ended at 1.25%. The rate dropped another 25 bp during 2003 to end the year at 1%. The federal funds rate impacts other economic rates, one of which is the prime rate. The prime rate began 2002 at 4.75%, decreasing to 4.25% by year-end. It dropped another 25 bp during 2003 to end the year at 4%. The principal loan product for TrustCo is residential real estate loans. Interest rates on new residential real estate loan originations are influenced principally by the rates established by secondary market participants such as Freddie Mac and Fannie Mae. Because TrustCo is a portfolio lender and does not sell any loans into the secondary market, the Company establishes rates that management determines are 8 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
(dollars in thousands) December 31, 2003 After 1 Year In 1 Year But Within After or Less 5 Years 5 Years Total Commercial $ 80,619 52,364 57,518 190,501 Real estate construction 7,476 -- -- 7,476 Total 88,095 52,364 57,518 197,977 Predetermined rates 19,188 52,064 57,518 128,770 Floating rates 68,907 300 -- 69,207 Total $ 88,095 52,364 57,518 197,977
appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates. During 2003, the prevailing interest rates on residential real estate loans provided an opportunity for customers to refinance their loans at historically low rates. As a result of refinance activity, the average balance of the residential real estate loan portfolio decreased $257.4 million in 2003. Interest rates paid on deposits decreased as a result of the overall reductions in interest rates in the marketplace. TrustCo offered interest rates on deposit products that were competitive with other local financial institutions while at the same time keeping pace with the overall reduction in rates in the marketplace. As a result of the low interest rate environment, certain customers responded to these marketplace changes by opening short-term certificates of deposit or placing their funds in savings accounts. Earning Assets Average earning assets during 2003 were $2.61 billion, which was an increase of $26.9 million from the prior year. This increase was primarily the result of growth in the average balance of securities available for sale of $265.8 million offset by a $237.4 million decrease in the average balance of loans. As previously noted, these changes resulted from mortgage loan customers refinancing with other financial institutions and investment of the loan payoffs into investment securities. Total average assets were $2.71 billion for 2003 and $2.69 billion for 2002. 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. Loans Average loans decreased $237.4 million during 2003. Interest income on the loan portfolio also decreased to $87.7 million in 2003 from $112.1 million in 2002. The average yield decreased from 7.41% in 2002 to 6.88% in 2003. TrustCo has distinguished itself in the Upstate New York region as one of the principal originators of residential real estate loans. Through aggressive marketing and pricing and a customer-friendly service delivery network, TrustCo has attempted to limit the amount of mortgage loans refinanced with other institutions. The uniqueness of the loan products was highlighted by TrustCo in an effort to differentiate them from those of other lenders. Specifically, low closing costs, no escrow or payment insurance and quick loan approvals were identified and aggressively marketed. The fact that the Company holds mortgages in its loan portfolio rather than selling them into secondary markets was also highlighted. While management believes this policy ultimately benefits the borrower, it can result in slightly higher rates as compared to the local competition. Despite these efforts, certain existing and potential borrowers chose to refinance/originate their loans with institutions offering lower rates, resulting in a decline in the balance of this portfolio. The average balance of residential real estate loans was $899.4 million in 2003 and $1.16 billion in 2002. Income on residential real estate loans decreased to $64.9 million in 2003 from $87.7 million in 2002. The yield on the portfolio decreased to 7.22% for 2003 from 7.55% in 2002 due to general changes in retail rates in the marketplace. Though there remains a debate among nationally recognized economists, the Company believes the general tenor of the economy is for improvement and consequently, increases in long-term interest rates. As a result, the significant amount of refinancing that has occurred during 2002 and 9 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) 2003 may not continue in 2004. Assuming a slowdown in refinancing, TrustCo anticipates that the unique features of its mortgage loan products will once again attract customers. 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 both for marketing and collection purposes. During 2003, 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 respond quickly to customer and market needs by allowing TrustCo and the customers to interact on a one-to-one basis. The overall result is that TrustCo is able to develop long-term business relationships with customers and meet their needs quickly. The decrease in yields earned on the commercial and home equity loan portfolios is apparent in light of decreases in the benchmark interest rate indexes - primarily the federal funds rate and prime rate. The average yield earned on these loan portfolios during 2003 was 62 bp and 65 bp less than what was earned during 2002, respectively. Average commercial loans of $199.7 million in 2003 increased $1.1 million from $198.6 million in 2002. The average yield on the commercial loan portfolio decreased to 7.36% for 2003 compared to 8.10% for 2002. This resulted in income on commercial loans of $14.7 million in 2003 and $16.1 million in 2002. TrustCo strives to maintain strong asset quality in all segments of its loan portfolio, especially commercial loans. Competition for commercial loans continues to be very intense in Trustco Bank's market region. Trustco 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. TrustCo's commercial lending activities are focused on balancing the Company's commitment to meeting the credit needs of businesses in its market area with the necessity of 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 to any single borrower or industry. The commercial loan portfolio reflects the diversity of businesses 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 Company'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 Capital Region to aggressively market and originate this product, and has developed significant expertise with respect to its risks and rewards. During 2003, the average balance of home equity credit lines was $155.2 million, an increase from $129.8 million in 2002. The home equity credit line product has developed into a significant business line for most financial services companies. Trustco 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 customer service for these loans. TrustCo continuously reviews changes made by competitors with respect to the home equity credit line product and adjusts its offerings to remain competitive. The average yield decreased to 4.01% for 2003 from 4.66% in 2002. This resulted in interest income on home equity credit lines of $6.2 million in 2003, compared to $6.1 million in 2002. The average balance of installment loans, net of unearned income, decreased to $14.0 million in 2003 from $17.5 million in 2002. The yield on installment loans decreased 1 basis point to 12.82% in 2003, resulting in interest income of $1.8 million. Securities available for sale: The portfolio of securities available for sale is managed by the Company to take 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 are 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, 2003, securities available for sale amounted to $1.18 billion, compared to $653.2 million at year end 2002. For 2003, the average balance of securities available for sale was $833.9 million with an average yield of 6.01%, compared to an average balance in 2002 of $568.1 million with an average yield of 7.18%. The taxable equivalent income earned on the securities portfolio in 2003 was $50.2 million, compared to $40.8 million earned in 2002. Increases in both the 2003 average balance for the year and the actual balance at year end of securities available for sale were the result of efforts to invest the funds from mortgage refinancings and deposit inflows into 10 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) investment securities available for sale. The interest rates on the securities purchased during the year were attractive as compared to investing the funds in overnight federal funds and when compared to the Company's overall cost of funding. Federal funds sold and other short-term investments yielded an average rate of return of 1.14% for the year. Interest income was positively affected by choosing to invest the funds in the securities available for sale portfolio at significantly higher interest rates. The additional interest earned on these securities helped offset lower income on the mortgage loan portfolio. All security purchases continue to be made in accordance with management's long standing investment policies. Management believes these additional investments offer the best combination of yield and credit protection. During 2003, TrustCo recognized approximately $9.8 million of net gains from securities transactions, compared to approximately $7.5 million in 2002. In addition, throughout 2003, TrustCo sold securities to provide liquidity for potential reinvestment at higher interest rates. This created liquidity and eliminated lower yielding assets from the securities portfolio. At year end 2003, TrustCo continued to have significant liquidity in the form of $355.3 million of federal funds sold and other short-term investments. 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, 2003 and 2002, the market value of TrustCo's portfolio of securities available for sale carried net unrealized gains of approximately $35.0 million and $45.9 million, respectively. 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 to redeem the bonds prior to maturity at specified dates and at predetermined prices. Normally, securities are redeemed at the call date when the issuer can reissue the security 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 table below details the portfolio of securities available for sale by both maturity date and call date as of December 31, 2003. Mortgage-backed securities are SECURITIES AVAILABLE FOR SALE
(dollars in thousands) As of December 31, 2003 2002 2001 Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value U.S. Treasuries and agencies $863,528 863,659 224,576 230,428 155,902 160,372 States and political subdivisions 182,118 191,727 223,873 235,495 213,341 216,566 Mortgage-backed securities 64,718 66,322 49,537 52,591 93,626 96,621 Other 685 685 26,068 26,138 17,614 17,613 Total debt securities available for sale 1,111,049 1,122,393 524,054 544,652 480,483 491,172 Equity securities 30,880 54,533 83,246 108,511 69,984 95,928 Total securities available for sale $1,141,929 1,176,926 607,300 653,163 550,467 587,100
SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION Debt securities available for sale:
(dollars in thousands) As of December 31, 2003 Based on Based on Final Maturity Call Date Amortized Market Amortized Market Cost Value Cost Value Within 1 year $ 956 959 879,284 879,970 1 to 5 years 3,946 3,997 78,708 83,516 5 to 10 years 94,350 93,924 133,408 138,880 After 10 years 1,011,797 1,023,513 19,649 20,027 Total debt securities available for sale $1,111,049 1,122,393 1,111,049 1,122,393
11 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) reported using an estimate of average life; equity securities are excluded. The table, "Securities Portfolio Maturity Distribution and Yield," distributes the securities available for sale portfolio as of December 31, 2003, based on the final maturity of the securities. Mortgage-backed 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. Federal funds sold and other short-term investments: During 2003, the average balance of federal funds sold and other short-term investments was $497.4 million, a slight decrease from $498.9 million in 2002. The average rate earned on these assets was 1.70% in 2002 and 1.14% in 2003. TrustCo utilizes this category of earning assets as a means of maintaining strong liquidity as interest rates change. During 2002 and 2003, the target federal funds rate set by the Federal Open Market Committee (FOMC) changed significantly as described previously. The federal funds sold and other short-term investments portfolio is significantly affected by changes in the target federal funds rate as are all market instruments. Funding Sources TrustCo utilizes various traditional sources of funds to support its asset portfolio. The 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. Deposits: Average total deposits (including time deposits greater than $100 thousand) were $2.34 billion in 2003, compared to $2.21 billion in 2002, an increase of $128.4 million. Increases were noted in all categories of accounts, other than demand deposits. The average balance of interest bearing checking accounts increased by SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD Debt securities available for sale: (dollars in thousands) As of December 31, 2003 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 $ 499 499 74,870 787,660 863,528 Market value 499 502 73,882 788,776 863,659 Weighted average rate 2.00% 1.67 5.23 5.86 5.35 States and political subdivisions Amortized cost $ 455 2,384 9,515 169,764 182,118 Market value 458 2,404 9,908 178,957 191,727 Weighted average rate 4.35 5.03 5.44 5.36 5.35 Mortgage-backed securities Amortized cost $ 2 428 9,915 54,373 64,718 Market value 2 456 10,084 55,780 66,322 Weighted average rate 7.95% 7.92 4.56 5.83 5.65 Other Amortized cost $ -- 635 50 -- 685 Market value -- 635 50 -- 685 Weighted average rate --% 4.56 3.32 -- 4.47 Total debt securities available for sale Amortized cost $ 956 3,946 94,350 1,011,797 1,111,049 Market value 959 3,997 93,924 1,023,513 1,122,393 Weighted average rate 3.13% 4.84 5.18 5.78 5.72
Weighted average rates have not been adjusted for any tax-equivalent factor. 12 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS
(dollars in thousands) 2003 2002 2001 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 $1,275,023 87,669 6.88% 1,512,448 112,085 7.41% 1,518,768 119,507 7.87% Securities available for sale: U.S. Treasuries and agencies 506,608 25,989 5.13 185,462 11,669 6.29 167,348 12,083 7.22 States and political subdivisions 203,718 16,131 7.92 222,696 17,917 8.05 203,247 16,305 8.02 Mortgage-backed securities 60,248 3,618 6.01 62,494 4,483 7.17 134,472 10,653 7.92 Other 63,331 4,430 7.00 97,404 6,697 6.88 76,602 5,782 7.55 Total securities available for sale 833,905 50,168 6.015 68,056 40,766 7.18 581,669 44,823 7.71 Federal funds sold 492,262 5,607 1.14 479,765 8,027 1.67 271,848 10,755 3.96 Other short-term investments 5,102 47 0.93 19,110 431 2.26 4,074 94 2.30 Total interest earning assets 2,606,292 143,491 5.50% 2,579,379 161,309 6.25% 2,376,359 175,179 7.37% Allowance for loan losses (51,311) (56,525) (57,398) Cash and noninterest earning assets 155,194 170,651 169,208 Total assets $2,710,175 2,693,505 2,488,169 Liabilities and shareholders' equity Interest bearing deposits: Interest bearing checking accounts $ 320,179 1,678 0.52% 306,856 3,124 1.02% 283,165 3,004 1.06% Savings 759,308 8,795 1.16 701,966 12,758 1.82 617,024 15,574 2.52 Time deposits and money markets 1,072,078 29,370 2.74 1,010,529 39,268 3.89 946,332 47,485 5.02 Total interest bearing deposits 2,151,565 39,843 1.85 2,019,351 55,150 2.73 1,846,521 66,063 3.58 Short-term borrowings 107,799 877 0.81 210,363 2,840 1.35 205,821 6,655 3.23 Long-term debt 326 19 5.80 510 30 5.91 758 45 5.90 Total interest bearing liabilities 2,259,690 40,739 1.80% 2,230,224 58,020 2.60% 2,053,100 72,763 3.54% Demand deposits 189,262 193,089 181,129 Other liabilities 36,178 55,229 51,092 Shareholders' equity 225,045 214,963 202,848 Total liabilities and shareholders' equity $2,710,175 2,693,505 2,488,169 Net interest income 102,752 103,289 102,416 Net interest spread 3.70% 3.65% 3.83% Net interest margin (net interest income to total interest earning assets) 3.94 4.00 4.31
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 7.5%, for 2003, 35.0% and 8.0%, for 2002, and 35.0% and 8.5% for 2001. The average balances of securities available for sale were calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is $22.7 million, $26.1 million, and $23.0 million in 2003, 2002, and 2001, respectively, net of unrealized appreciation, net of tax, in the available for sale securities portfolio. Nonaccrual loans are included in average loans. 13 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) $13.3 million to $320.2 million in 2003. Money market accounts had an average balance of $117.5 million in 2002 compared to $149.5 million in 2003. Savings account balances increased from $702.0 million in 2002 to $759.3 million in 2003, an increase of 8.2%. Time deposits increased on average by $29.5 million and demand deposits decreased by $3.8 million during 2003 compared to 2002. The increase in deposits reflects the impact of new branches opened over the last several years, and the continuing focus at TrustCo on providing core banking services better, faster and cheaper than its competitors. Another contributing factor is the moving of funds by customers away from the stock and bond markets and back into the banking system. TrustCo, with its expanding branch network, is well positioned to attract these new deposits. The overall cost of interest bearing deposits was 1.85% in 2003 compared to 2.73% in 2002. The increase in the average balance of interest bearing deposits, offset by an 88 basis point decrease in the average cost, resulted in a decrease of approximately $15.3 million in interest expense to $39.8 million in 2003. 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. Other funding sources: The Company had $107.8 million of average short-term borrowings outstanding during 2003 compared to $210.4 million in 2002. The average cost of short-term borrowings was 0.81% in 2003 and 1.35% in 2002. This resulted in a decrease in interest expense of approximately $2.0 million. In years prior to 2003, the majority of average short-term borrowing consisted of the Trustco Short-Term Investment Account, which was developed by Trustco Bank to facilitate overnight deposits from the Company's Trust Department. Daily balances were transferred by the Trust Department into this account, and were collateralized by securities owned by Trustco Bank. During 2003, the decrease in short-term borrowing is due to the decision to move the Trust Department balances from the Trustco Short-Term Investment Account to independent third-party funds. MIX OF AVERAGE SOURCES OF FUNDING
(dollars in thousands) 2003 2002 Components of vs. vs. Total Funding 2003 2002 2001 2002 2001 2003 2002 2001 Demand deposits $ 189,262 193,089 181,129 (3,827) 11,960 7.7% 8.0 8.1 Retail deposits: Savings 759,308 701,966 617,024 57,342 84,942 31.0 29.0 27.6 Time deposits under $100 thousand 767,505 766,133 751,612 1,372 14,521 31.3 31.6 33.6 Interest bearing checking accounts 320,179 306,856 283,165 13,323 23,691 13.1 12.7 12.7 Money market deposits 149,520 117,478 64,350 32,042 53,128 6.1 4.8 2.9 Total retail deposits 1,996,512 1,892,433 1,716,151 104,079 176,282 81.5 78.1 76.8 Total core deposits 2,185,774 2,085,522 1,897,280 100,252 188,242 89.2 86.1 84.9 Time deposits over $100 thousand 155,053 126,918 130,370 28,135 (3,452) 6.4 5.2 5.9 Short-term borrowings 107,799 210,363 205,821 (102,564) 4,542 4.4 8.7 9.2 Long-term debt 326 510 758 (184) (248) -- -- -- Total purchased liabilities 263,178 337,791 336,949 (74,613) 842 10.8 13.9 15.1 Total sources of funding $2,448,952 2,423,313 2,234,229 25,639 189,084 100.0% 100.0 100.0
14 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) AVERAGE DEPOSITS BY TYPE OF DEPOSITOR
(dollars in thousands) Years Ended December 31, 2003 2002 2001 2000 1999 Individuals, partnerships and corporations $2,318,424 2,150,986 1,947,700 1,922,399 1,984,359 U.S. Government 73 35 83 79 92 States and political subdivisions 9,802 48,049 64,811 49,651 45,223 Other (certified and official checks, etc.) 12,528 13,370 15,056 13,674 13,475 Total average deposits by type of depositor $2,340,827 2,212,440 2,027,650 1,985,803 2,043,149
MATURITY OF TIME DEPOSITS OVER $100 THOUSAND (dollars in thousands) As of December 31, 2003 Under 3 months $ 22,805 3 to 6 months 13,118 6 to 12 months 19,674 Over 12 months 114,826 Total $170,423 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. 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, in VOLUME AND YIELD ANALYSIS
(dollars in thousands) 2003 vs. 2002 2002 vs. 2001 Increase Due to Due to Increase Due to Due to (Decrease) Volume Rate (Decrease) Volume Rate Interest income (TE): Federal funds sold $ (2,420) 204 (2,624) (2,728) 5,520 (8,248) Other short-term investments (392) (216) (176) 337 339 (2) Securities available for sale: Taxable 11,189 14,298 (3,109) (5,669) (2,548) (3,121) Tax-exempt (1,787) (1,507) (280) 1,612 1,564 48 Total securities available for sale 9,402 12,791 (3,389) (4,057) (984) (3,073) Loans (24,416) (18,178) (6,238) (7,422) (754) (6,668) Total interest income (17,826) (5,399) (12,427) (13,870) 4,121 (17,991) Interest expense: Interest bearing checking accounts (1,446) 131 (1,577) 120 245 (125) Savings (3,963) 980 (4,943) (2,816) 1,946 (4,762) Time deposits and money markets (9,898) 1,722 (11,620) (8,217) 1,689 (9,906) Short-term borrowings (1,963) (1,087) (876) (3,815) 144 (3,959) Long-term debt (11) (11) -- (15) (15) -- Total interest expense (17,281) 1,735 (19,016) (14,743) 4,009 (18,752) Net interest income (TE) $ (545) (7,134) 6,589 873 112 761
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. 15 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) the view of management, but not excessive. This philosophy has led to a dividend payout ratio of 84.0% of net income in 2003, 88.6% for 2002 and 84.6% for 2001. These are significant payouts to the Company's shareholders and are considered by management to be a prudent use of excess capital. As to the likelihood of future dividends, it is currently anticipated that the philosophy stated above will continue. However, at this time, the Board of Directors has decided they would not increase the common stock cash dividend from the $0.60 per share in 2003. The Board concluded that increasing capital of the Company is an important element to support the new assets generated as a result of branch expansion anticipated in the coming years. TrustCo's Tier 1 capital was 16.54% of risk-adjusted assets at December 31, 2003, and 15.48% of risk-adjusted assets at December 31, 2002. Tier 1 capital to average assets at December 31, 2002 was 7.78%, as compared to 7.53% at year end 2003. At December 31, 2003 and 2002, Trustco Bank met regulators' 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 anticipated 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 Dividends per Share 2001 $.541 2002 $.600 2003 $.600 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. Management has also developed policies and procedures to monitor the credit risk in relation to the federal funds sold portfolio. TrustCo monitors the credit rating and capital levels of the third party banks that they sell federal funds to. Only banks with the highest rating from the credit rating agency selected are included in the list for federal funds transactions. Nonperforming Assets Nonperforming assets include loans in nonaccrual status, loans that have been treated as troubled debt restructurings, loans past due three payments or more and still accruing interest, and foreclosed real estate properties. Nonperforming assets at year end 2003 totalled $3.3 million, a decrease of $1.7 million from the balance of $5.0 million at year end 2002. Nonperforming loans decreased from $4.9 million at year end 2002 to $3.3 million at year end 2003. Nonperforming loans as a percentage of the total loan portfolio were 0.28% in 2003 and 0.35% in 2002. Included in nonperforming loans at year end 2003 were no loans in nonaccrual status as compared to $615 thousand at year end 2002. There were no loans past due three payments or more and still accruing interest at year end 2003 and 2002. Restructured loans at year end 2002 were $4.3 million, compared to $3.3 million at year end 2003. Adherence to sound underwriting standards, vigorous loan collection efforts and timely charge-offs have been cornerstones of the operating philosophy of TrustCo. All of the $3.3 million of nonperforming loans at December 31, 2003 are residential real estate or retail consumer loans. A significant portion of the charge-offs for 2002 and 2003 occurred in the residential real estate and retail consumer loan portfolios. During 2003, gross charge-offs of these types of loans were $9.2 million (which represented 95% of total gross charge-offs). In 2002, charge-offs for these types of loans were $7.4 million. In the past several years there has been a shift of charge-offs to 16 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) the residential real estate and retail consumer loan portfolios for several reasons, including: o the overall emphasis within TrustCo on residential real estate originations, o the relatively weak economic environment in the Upstate New York market, and o the relative stagnation in realizable real estate values that has occurred in much of TrustCo's market area. Consumer defaults and bankruptcies have continued to increase 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 to minimize losses. TrustCo has a diversified loan portfolio that includes a significant balance of residential mortgage loans to borrowers in the Capital Region and avoids concentrations to any one borrower or any single industry. 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, 2003, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources. TrustCo has no advances to borrowers or projects located outside the United States. Allowance for Loan Losses The allowance for loan losses is available to absorb losses on loans that management determines are uncollectible. 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 allowance for loan losses, management reviews past due information, historical charge-off data, and nonperforming loan activity. Also, there are a number of other factors that are taken into consideration, including: o the magnitude and nature of recent loan charge offs and the shifting of charge-offs to the residential real estate loan portfolio, o 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, o significant growth in the level of losses associated with bankruptcies and the time period needed to foreclose, secure, and dispose of collateral, and o the relatively weak economic environment in the Upstate New York territory combined with declining real estate prices. Consumer bankruptcies, and defaults in general, rose significantly during the past 15 years. 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 2003 and are expected to continue in 2004. 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 2003 and 2002 were $9.6 million and $8.4 million, respectively. Recoveries were $4.6 million in 2003 and $2.3 million in 2002. The provision recorded in 2003 was $1.2 million compared to $1.4 million in 2002. Net charge-offs as a percentage of average loans were 0.39% and 0.40% in 2003 and 2002, respectively. NONPERFORMING ASSETS
(dollars in thousands) As of December 31, 2003 2002 2001 2000 1999 Loans in nonaccrual status $ -- 615 1,090 4,395 4,433 Loans past due 3 payments or more -- -- 801 896 509 Restructured loans 3,260 4,303 5,159 6,370 4,979 Total nonperforming loans 3,260 4,918 7,050 11,661 9,921 Foreclosed real estate -- 86 603 1,911 1,771 Total nonperforming assets $ 3,260 5,004 7,653 13,572 11,692 Allowance for loan losses $ 48,739 52,558 57,203 56,298 55,820 Allowance coverage of nonperforming loans 14.95x 10.69 8.11 4.83 5.63 Nonperforming loans as a % of total loans 0.28% 0.35 0.45 0.79 0.73 Nonperforming assets as a % of total assets 0.12 0.19 0.30 0.55 0.49
17 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) The allowance for loan losses as a percentage of loans outstanding was 4.17% at year end 2003 and 3.70% in 2002. The Company has a policy of recognizing problem loan charge-offs early and pursuing collection efforts aggressively. Management believes that this policy of early intervention has been 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. Allowance for Loan Losses (dollars in millions) 2001 $57.2 2002 $52.6 2003 $48.7 At year end 2003 and 2002, there were $3.1 and $4.1 million, respectively, of impaired loans. The average balances of impaired loans were $3.7 million during 2003 and $4.9 million during 2002.The Company recognized approximately $380 thousand of interest income on these loans in 2003 and $540 thousand in 2002. Allowance to Loans Outstanding 2001 3.67% 2002 3.70% 2003 4.17% 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. Quantitative and Qualitative Disclosure about Market Risk TrustCo realizes income principally from the difference or spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings. Loan volume and yield, as well as the volume of and rates on investments, deposits and borrowings are affected by market interest rates. Additionally, because of the terms and conditions of many of the loan documents and deposit accounts, a change in interest rates could also affect the projected maturities of the loan portfolio and/or the deposit base. Accordingly, TrustCo considers interest rate risk to be a significant market risk for the Company. Interest rate risk management focuses on maintaining consistent growth in net interest income and the fair value of capital in varying interest rate cycles within Board-approved policy limits. Interest rate risk management also must take into consideration, among other factors, the Company's overall credit, operating income, operating cost, and capital profile. The Asset Allocation Committee, which includes all members of senior management and reports quarterly to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of potential change in the fair value of capital as a result of changes in market interest rates. The Company uses an internal simulation model as the primary tool to identify, quantify and project changes in interest rates and the impact on the balance sheet. The model utilizes assumptions with respect to cash flows and prepayment speeds taken both from industry sources and internally generated based upon historical trends in the Bank's balance sheet. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in market interest rates are also incorporated into the model. This model assumes a fair value amount with respect to non-time deposit categories since these deposits are part of the core deposit products of the Company. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure the fair value of capital or precisely predict the impact of fluctuations in interest rates on the fair value of capital. Using this internal simulation model, the fair values of capital projections as of December 31, 2003 are referenced on the following page. The base case scenario shows the present estimate of the fair value of capital assuming no change in the operating 18 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued)
SUMMARY OF LOAN LOSS EXPERIENCE (dollars in thousands) 2003 2002 2001 2000 1999 Amount of loans outstanding at end of year (less unearned income) $ 1,162,266 1,422,301 1,556,686 1,475,048 1,349,809 Average loans outstanding during year (less average unearned income) 1,275,023 1,512,448 1,518,768 1,395,414 1,329,458 Balance of allowance at beginning of year 52,558 57,203 56,298 55,820 54,375 Loans charged off: Commercial 432 997 1,084 1,951 619 Real estate 8,651 6,648 5,383 2,992 6,534 Installment 515 705 561 557 635 Total 9,598 8,350 7,028 5,500 7,788 Recoveries of loans previously charged off: Commercial 1,393 803 1,664 847 2,811 Real estate 3,003 1,285 1,106 612 1,140 Installment 183 197 223 171 219 Total 4,579 2,285 2,993 1,630 4,170 Net loans charged off 5,019 6,065 4,035 3,870 3,618 Provision for loan losses 1,200 1,420 4,940 4,114 5,063 Allowance of acquired bank -- -- -- 234 -- Balance of allowance at end of year $ 48,739 52,558 57,203 56,298 55,820 Net charge offs as a percent of average loans outstanding during year (less average unearned income) .39% .40 .27 .28 .27 Allowance as a percent of loans outstanding at end of year 4.17 3.70 3.67 3.82 4.14
environment or operating strategies and no change in interest rates from those existing in the marketplace as of December 31, 2003. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp and 200 bp or to decrease by 100 bp. The decrease in interest rates was limited to a 100 bp decline in rates due to the relatively low interest rate environment at year end 2003. Estimated Percentage of Fair value of Capital to As of December 31, 2003 Fair value of Assets +200 BP 10.12% +100 BP 11.80 Current rates 12.96 -100 BP 13.61 At December 31, 2003 the book value of capital (excluding the market adjustment on securities available for sale) to assets was 7.45%. A secondary method to identify and manage the interest rate risk profile is the static gap analysis. Interest sensitivity gap analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time periods, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling rates. A liability-sensitive position would generally imply a negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates. Static gap analysis has limitations because it cannot measure precisely the effect of interest rate movements, and competitive pressures on the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. In addition, a significant portion of the interest sensitive assets are fixed rate securities with relatively long lives whereas the interest-bearing liabilities are not subject to these same limitations. As a result, certain assets and liabilities may in fact reprice at different times and at different volumes than the static gap analysis would indicate. The Company recognizes the relatively long-term nature of the fixed rate residential loan portfolio. To fund those long-term assets the Company cultivates long-term deposit relationships (often called core deposits). These core deposit relationships tend to be longer term in nature and not as susceptible to changes in interest rates. Core deposit balances allow the Company to take on certain interest rate risk with respect to the asset side of the balance sheet. 19 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) INTEREST RATE SENSITIVITY
(dollars in thousands) At December 31, 2003 Repricing, or able to be repriced, in: 0-90 91-365 1-5 Over 5 Rate days days years years Insensitive Total Total assets $678,744 132,670 386,789 1,481,923 97,993 2,778,119 Cumulative total assets $678,744 811,414 1,198,203 2,680,126 2,778,119 Total liabilities and shareholders' equity $ 90,608 221,485 430,263 1,345,604 690,159 2,778,119 Cumulative total liabilities and shareholders' equity $ 90,608 312,093 742,356 2,087,960 2,778,119 Cumulative interest sensitivity gap $588,136 499,321 455,847 592,166 Cumulative gap as a % of interest earning assets for the period 86.65% 61.54 38.04 22.09 Cumulative interest sensitive assets to liabilities 749.10 259.99 161.41 128.36
The table above presents an analysis of the interest-sensitivity gap position at December 31, 2003. All interest-earning assets and interest-bearing liabilities are shown based upon their contractual maturity or repricing date adjusted for forecasted prepayment rates. Asset prepayment and liability repricing periods are selected after considering the current rate environment, industry prepayment and rates specific to the Company. There are several significant shortcomings inherent in the gap analysis. 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. Management takes these factors, and others, into consideration when reviewing the Bank's gap position and establishing its 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. 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 develop. 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 and that are based as much on the level and quality of service as they are on interest rate. For 2003, average core deposits (total deposits less time deposits greater than $100 thousand) amounted to $2.19 billion, compared to $2.09 billion in 2002. Average balances of core deposits are detailed in the table "Mix of 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 "Mix of Average Sources of Funding." During 2003, the average balance of purchased liabilities was $263.2 million, compared with $337.8 million in 2002 and $336.9 million in 2001. TrustCo also has a line of credit available with the Federal Home Loan Bank of New York. Off-Balance Sheet Risk Commitments to extend credit: The Bank 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, 2003 and 2002, commitments to 20 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) extend credit in the form of loans, including unused lines of credit, amounted to $273.9 million and $253.0 million, respectively. In management's opinion, there are no material commitments to extend credit that represent unusual risk. The Company has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $3.9 million and $1.7 million at December 31, 2003 and 2002, respectively, and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on- balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of the Company's standby letters of credit at December 31, 2003 and 2002 was insignificant. Other off-balance sheet risk: TrustCo does not engage in activities involving interest rate swaps, forward placement contracts, or any other instruments commonly referred to as derivatives. Management believes these instruments pose a high degree of risk, and that investing in them is unnecessary. TrustCo has no off-balance sheet partnerships, joint ventures, or other risk sharing entities. 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 $29.6 million in 2003, $27.3 million in 2002 and $25.8 million in 2001. Included in the 2003 results are $9.8 million of net securities gains compared with net gains of approximately $7.5 million in 2002 and $4.5 million in 2001. Excluding securities transactions, noninterest income was $19.8 million, in 2003 and 2002, and $21.3 million in 2001. The Trust Department contributes a large recurring portion of noninterest income through fees generated by providing fiduciary and investment management services. Income from these fiduciary activities totalled $6.0 million in 2003, $6.8 million in 2002, and $7.8 million in 2001. Trust fees are generally calculated as a percentage of the assets under management by the Trust Department. Assets under management by the Trust Department are not included on the Company's consolidated financial statements because the Trust Department holds these assets in a fiduciary capacity. Average assets under management by the Trust Department of $845.8 million in 2003 decreased $220.8 million from $1.1 billion in 2002. At December 31, 2003 and 2002 assets under management by the Trust Department were approximately $970 million and $897 million, respectively. Changes in fees for services to customers reflect changes in the fee scale used for pricing the services and the volume of services customers utilized. Noninterest expense: Noninterest expense was $48.5 million in 2003, compared with $55.3 million in 2002 and $51.3 million in 2001. 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. A low ratio indicates highly efficient performance. TrustCo's efficiency ratio was 38.3% in 2003, 36.7% in 2002 and 39.0% in 2001. The general industry goal is to be below 60% efficiency ratio. TrustCo has consistently outperformed this industry goal by a wide margin since 1994. Salaries and employee benefits are the most significant component of noninterest expense. For 2003, these expenses amounted to $20.4 million, compared with $22.3 million in 2002, and $25.9 million in 2001. The reduction in salaries and employee benefit expense is the result of reductions NONINTEREST INCOME
(dollars in thousands) 2003 vs. 2002 2003 2002 2001 Amount Percent Trust department income $ 6,046 6,769 7,758 (723) (10.7)% Fees for services to customers 10,896 10,305 10,363 591 5.7 Net gain on securities transactions 9,807 7,499 4,517 2,308 30.8 Other 2,900 2,725 3,164 175 6.4 Total noninterest income $29,649 27,298 25,802 2,351 8.6%
21 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) NONINTEREST EXPENSE
(dollars in thousands) 2003 vs. 2002 2003 2002 2001 Amount Percent Salaries and employee benefits $20,449 22,338 25,879 (1,889) (8.5)% Net occupancy expense 6,265 5,594 5,523 671 12.0 Equipment expense 3,078 2,946 4,942 132 4.5 Professional services 3,040 8,987 2,717 (5,947) (66.2) Outsourced services 5,601 2,055 350 3,546 172.6 Charitable contributions 513 1,588 442 (1,075) (67.7) Other real estate income, net (457) (348) (748) (109) 31.3 Other 9,997 12,166 12,208 (2,169) (17.8) Total noninterest expense $48,486 55,326 51,313 (6,840) (12.4)%
in salary and bonus payments made to senior executives and the payment of a supplemental retirement expense for the former chief executive officer. Professional services expense decreased approximately $5.9 million as a result of expensing a $6.0 million consulting contract with the Company's former chief executive officer in 2002. TrustCo has entered into a multi-year contract with Fiserv Solutions, Inc. to perform certain operating procedures for the Bank. Services included with the contract are data and item processing for the Bank and trust operations. The annual cost of the contract is approximately $5 million. The cost of this contract is included in "outsourced services" above and has been offset by the elimination of certain other costs. The conversion to the Fiserv system was completed in the fourth quarter 2002. Charitable contributions expense decreased approximately $1.1 million as a result of an additional contribution made in 2002 in recognition of the 100 year anniversary of the Company. Changes in other components of noninterest expense are the results of normal banking activities and the increased activities associated with new branching facilities. Efficiency Ratio 2001 39.0% 2002 36.7% 2003 38.3% Income Tax In 2003, TrustCo recognized income tax expense of $23.3 million, as compared to $17.0 million in 2002 and $19.9 million in 2001. 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. Based primarily on the sufficiency of historical and future taxable income, management believes it is more likely than not that the net deferred tax assets of $36.2 million and $33.5 million at December 31, 2003 and 2002, respectively, will be realized. Contractual Obligations The Company is contractually obligated to make the following payments on long-term debt and leases as of December 31, 2003: (dollars in thousands) Payments Due by Period: Less Than 1-3 3-5 More Than 1 Year Years Years 5 Years Total Federal Home Loan Bank borrowings $ 125 55 59 -- 239 Operating leases 1,913 3,393 2,782 13,626 21,714 Total $2,038 3,448 2,841 13,626 21,953 In addition, the Company is contractually obligated to pay Fiserv Solutions, Inc. approximately $5 million per year through 2006. Impact of Inflation and Changing Prices The consolidated financial statements for years ended 2003, 2002 and 2001 have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing 22 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) 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, because interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Impact of New Accounting Standards In January 2003, the Financial Accounting Standards Board (FASB) issued FIN No. 46, "Consolidation of Variable Interest Entities" (FIN 46). The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the entity's expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. FIN 46 was effective for all VIEs created after January 31, 2003. For VIEs created prior to February 1, 2003, FIN 46 was to be effective for public companies on July 1, 2003. However, the FASB postponed that effective date to December 31, 2003. In December 2003, the FASB issued a revised FIN 46 (FIN 46R) which further delayed the effective date for public companies to March 31, 2004 for VIEs created prior to February 1, 2003, except for interests in special purpose entities for which a company must adopt either FIN 46 or FIN 46R as of December 31, 2003. The Company does not hold any interests in special purpose entities. Adoption of the requirements of FIN 46R is not expected to have a material impact on the Company's consolidated financial position, results of operations or liquidity. In April 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This statement amends and clarifies financial accounting and reporting for derivative instruments and hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" This statement is effective for contracts entered into or modified after June 30, 2003 and hedging relationships designated after June 30, 2003. The adoption of this statement did not have any impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This statement establishes standards for how an issuer clarifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period after June 15, 2003, except for certain mandatorily redeemable financial instruments for which the effective date has been deferred indefinitely. The Company currently does not have any financial instruments that are within the scope of this statement. The adoption of this statement did not have any impact on the Company's consolidated financial statements. In December 2003, the FASB issued a revision to SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an Amendment of FASB Statements No. 87, 88, and 106". This statement prescribes employers' disclosures about pension plans and other postretirement benefit plans; it does not change the measurement or recognition of those plans. The statement retains and revises the disclosure requirements contained in the original Statement 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. This statement generally is effective for fiscal years ending after December 15, 2003. The interim-period disclosures required by this statement are effective for interim periods beginning after December 15, 2003. The Company's disclosures in Note 9 to the consolidated financial statements incorporate the requirements of the revised Statement 132. In January 2004, the FASB issued FASB Staff Position (FSP) 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003". This FSP permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. The Company has elected to defer recognition of the effects of the Act. Specific authoritative guidance on the accounting for the federal subsidy is pending. The Company does not believe this Act will have a material impact on the Company's consolidated financial statements. 23 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION (dollars in thousands, except per share data)
2003 2002 Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Income statement: Interest income $35,401 34,745 32,041 34,943 137,130 39,063 38,952 38,507 37,213 153,735 Interest expense 11,706 10,346 9,307 9,380 40,739 15,152 15,107 14,533 13,228 58,020 Net interest income 23,695 24,399 22,734 25,563 96,391 23,911 23,845 23,974 23,985 95,715 Provision for loan losses 300 300 300 300 1,200 520 300 300 300 1,420 Net interest income after provision for loan losses 23,395 24,099 22,434 25,263 95,191 23,391 23,545 23,674 23,685 94,295 Noninterest income 7,850 7,508 10,201 4,090 29,649 6,753 7,735 6,864 5,946 27,298 Noninterest expense 12,669 12,579 11,600 11,638 48,486 12,393 13,717 11,422 17,794 55,326 Income before income taxes 18,576 19,028 21,035 17,715 76,354 17,751 17,563 19,116 11,837 66,267 Income tax expense 5,384 5,617 6,750 5,572 23,323 5,383 4,992 5,825 823 17,023 Net income $13,192 13,411 14,285 12,143 53,031 12,368 12,571 13,291 11,014 49,244 Per share data: Basic earnings $ .178 .180 .192 .163 .713 .172 .174 .183 .148 .678 Diluted earnings .175 .178 .189 .161 .704 .166 .169 .179 .146 .660 Cash dividends declared .150 .150 .150 .150 .600 .150 .150 .150 .150 .600
Critical Accounting Policies Pursuant to SEC guidance, management of the Company is encouraged to evaluate and disclose those accounting policies that are judged to be critical policies - those most important to the portrayal of the Company's financial condition and results, and that require management's most difficult subjective or complex judgments. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that such judgments can have on the results of operations. Included in the notes to the Consolidated Financial Statements is a description in Note 1 of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements. Forward-Looking Statements Statements included in this review and in future filings by TrustCo with the Securities and Exchange Commission, in TrustCo's press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect TrustCo's actual results, and could cause TrustCo's actual financial performance to differ materially from that expressed in any forward-looking statement: (1) credit risk, (2) interest rate risk, (3) competition, (4) changes in the regulatory environment, and (5) changes in general business and economic trends. The fore going 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. 24 (LOGO) TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) FIVE YEAR SUMMARY OF FINANCIAL DATA
(dollars in thousands, except per share data) Years Ended December 31, 2003 2002 2001 2000 1999 Statement of income data: Interest income $ 137,130 153,735 168,660 173,702 167,205 Interest expense 40,739 58,020 72,763 75,648 74,013 Net interest income 96,391 95,715 95,897 98,054 93,192 Provision for loan losses 1,200 1,420 4,940 4,114 5,063 Net interest income after provision for loan losses 95,191 94,295 90,957 93,940 88,129 Noninterest income 29,649 27,298 25,802 16,366 15,416 Noninterest expense 48,486 55,326 51,313 47,767 45,636 Income before income taxes 76,354 66,267 65,446 62,539 57,909 Income tax expense 23,323 17,023 19,936 20,837 19,724 Net income $ 53,031 49,244 45,510 41,702 38,185 Share data: Average equivalent diluted shares (in thousands) 75,306 74,618 73,673 73,044 73,940 Tangible book value $ 3.06 3.16 2.88 2.77 2.36 Cash dividends .600 .600 .541 .471 .425 Basic earnings .713 .678 .640 .590 .537 Diluted earnings .704 .660 .618 .571 .516 Financial: Return on average assets 1.96% 1.83 1.83 1.76 1.58 Return on average shareholders' equity 26.21 26.08 25.31 24.07 22.52 Cash dividend payout ratio 83.98 88.60 84.58 79.78 79.16 Tier 1 capital as a % of total risk adjusted assets 16.54 15.48 13.58 14.03 13.55 Total capital as a % of total risk adjusted assets 17.82 16.77 14.86 15.32 14.84 Efficiency ratio 38.33 36.66 38.96 38.06 38.62 Net interest margin 3.94% 4.00 4.31 4.47 4.16 Average balances: Total assets $2,710,175 2,693,505 2,488,169 2,372,926 2,411,195 Earning assets 2,606,292 2,579,379 2,376,359 2,292,094 2,335,682 Loans, net 1,275,023 1,512,448 1,518,768 1,395,414 1,329,458 Allowance for loan losses (51,311) (56,525) (57,398) (56,362) (56,449) Securities available for sale 833,905 568,056 581,669 654,454 683,790 Deposits 2,340,827 2,212,440 2,027,650 1,985,803 2,043,149 Short-term borrowings 107,799 210,363 205,821 164,114 146,667 Long-term debt 326 510 758 596 -- Shareholders' equity 225,045 214,963 202,848 175,973 179,484 Average shareholders' equity excludes the market adjustment for securities available for sale.
In the opinion of management, there are no accounting changes, acquisitions or uncertainties that materially affect the comparability of the above information. 25 (LOGO) TRUSTCO Bank Corp NY 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. Cash Dividends Per Share Total cash dividends for each share outstanding on the record dates. Comprehensive Income Net income plus the change in selected items recorded directly to capital such as the net change in unrealized market gains and losses on 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 any dilutive 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 goodwill amortization expense, 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 recurring total cost of operating the Company in relation to the recurring total income generated. Federal Funds Sold A one day investment of excess cash reserves 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 loan commitments, deposit withdrawals, and maturing borrowings 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-Adjusted Assets A regulatory calculation that assigns risk factors to various assets on the balance sheet. Risk-Based Capital The amount of capital required by federal regulatory standards, based on a risk-weighting of assets. Tangible Book Value Per Share Total shareholders' equity (less goodwill) divided by shares outstanding on the same date. This provides an indication of the tangible book value of a share of stock. 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. Tier 1 Capital Total shareholders' equity excluding the market value adjustment of securities available for sale. 26 (LOGO) TRUSTCO Bank Corp NY 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 of internal controls 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 auditing standards generally accepted in the United States of America 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 J. McCormick /s/ Robert T. Cushing Robert J. McCormick Robert T. Cushing President and Executive Vice President and Chief Executive Officer Chief Financial Officer TrustCo Bank Corp NY TrustCo Bank Corp NY February 20, 2004 27 (LOGO) TRUSTCO Bank Corp NY INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders TrustCo Bank Corp NY: We have audited the accompanying consolidated statements of condition of TrustCo Bank Corp NY and subsidiaries (the Company) as of December 31, 2003 and 2002, 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, 2003. 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 auditing standards generally accepted in the United States of America. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Albany, New York February 20, 2004 28 (LOGO) TRUSTCO Bank Corp NY Consolidated Statements of Income
(dollars in thousands, except per share data) Years Ended December 31, 2003 2002 2001 Interest income: Interest and fees on loans $ 87,614 111,993 119,370 Interest and dividends on: U.S. Treasuries and agencies 25,985 11,649 12,044 States and political subdivisions 10,718 11,905 11,008 Mortgage-backed securities 3,618 4,483 10,653 Other 3,541 5,247 4,736 Interest on federal funds sold and other short-term investments 5,654 8,458 10,849 Total interest income 137,130 153,735 168,660 Interest expense: Interest on deposits 39,843 55,150 66,063 Interest on short-term borrowings 877 2,840 6,655 Interest on long-term debt 19 30 45 Total interest expense 40,739 58,020 72,763 Net interest income 96,391 95,715 95,897 Provision for loan losses 1,200 1,420 4,940 Net interest income after provision for loan losses 95,191 94,295 90,957 Noninterest income: Trust department income 6,046 6,769 7,758 Fees for services to customers 10,896 10,305 10,363 Net gain on securities transactions 9,807 7,499 4,517 Other 2,900 2,725 3,164 Total noninterest income 29,649 27,298 25,802 Noninterest expense: Salaries and employee benefits 20,449 22,338 25,879 Net occupancy expense 6,265 5,594 5,523 Equipment expense 3,078 2,946 4,942 Professional services 3,040 8,987 2,717 Outsourced services 5,601 2,055 350 Charitable contributions 513 1,588 442 Other real estate income, net (457) (348) (748) Other 9,997 12,166 12,208 Total noninterest expense 48,486 55,326 51,313 Income before income taxes 76,354 66,267 65,446 Income taxes 23,323 17,023 19,936 Net income $ 53,031 49,244 45,510 Earnings per share: Basic $ .713 .678 .640 Diluted .704 .660 .618
See accompanying notes to consolidated financial statements. 29 (LOGO) TRUSTCO Bank Corp NY Consolidated Statements of Condition
(dollars in thousands, except share data) As of December 31, 2003 2002 ASSETS Cash and due from banks $ 56,425 63,957 Federal funds sold and other short-term investments 355,257 542,125 Total cash and cash equivalents 411,682 606,082 Securities available for sale 1,176,926 653,163 Loans 1,162,647 1,422,841 Less: Unearned income 381 540 Allowance for loan losses 48,739 52,558 Net loans 1,113,527 1,369,743 Bank premises and equipment 20,168 19,544 Real estate owned -- 86 Other assets 55,816 47,470 Total assets $2,778,119 2,696,088 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand $ 197,116 178,058 Savings 780,862 715,349 Interest bearing checking accounts 334,038 338,740 Money market deposit accounts 159,645 130,914 Certificates of deposit (in denominations of $100,000 or more) 170,423 137,513 Other time accounts 777,726 773,694 Total deposits 2,419,810 2,274,268 Short-term borrowings 90,608 141,231 Long-term debt 239 427 Accrued expenses and other liabilities 40,700 45,318 Total liabilities 2,551,357 2,461,244 Shareholders' equity: Capital stock; $1 par value. 100,000,000 shares authorized, 80,711,016 and 79,107,851 shares issued at December 31, 2003 and 2002, respectively 80,711 79,108 Surplus 103,611 92,009 Undivided profits 78,051 69,553 Accumulated other comprehensive income: Net unrealized gain on securities available for sale, net of tax 21,042 27,277 Treasury stock; 6,765,119 and 4,930,300 shares, at cost, at December 31, 2003 and 2002, respectively (56,653) (33,103) Total shareholders' equity 226,762 234,844 Total liabilities and shareholders' equity $2,778,119 2,696,088
See accompanying notes to consolidated financial statements. 30 (LOGO) TRUSTCO Bank Corp NY Consolidated Statements of Changes in Shareholders' Equity
(dollars in thousands, except per share data) Three Years Ended December 31, 2003 Accumulated Other Compre- Capital Undivided Comprehensive hensive Treasury Stock Surplus Profits Income/(Loss) Income Stock Total Beginning balance, January 1, 2001 $65,172 78,407 56,923 20,539 (25,198) 195,843 Comprehensive income Net income -- 2001 -- -- 45,510 -- 45,510 -- 45,510 Other comprehensive income, net of tax: Unrealized net holding gain arising during the year, net of tax (pre-tax gain $6,495) -- -- -- -- 3,801 -- -- Reclassification adjustment for net gain realized in net income during the year (pre-tax gain $4,517) -- -- -- -- (2,672) -- -- Other comprehensive income -- -- -- 1,129 1,129 -- 1,129 Comprehensive income 46,639 Cash dividend declared, $.541 per share -- -- (38,493) -- -- (38,493) Stock options exercised and related tax benefits 1,078 6,288 -- -- -- 7,366 15% stock split (9,918,991) 9,919 (9,919) -- -- -- -- Treasury stock purchased (973,622 shares) -- -- -- -- (12,238) (12,238) Sale of treasury stock (519,112 shares) -- 579 -- -- 6,131 6,710 Ending balance, December 31, 2001 76,169 75,355 63,940 21,668 (31,305) 205,827 Comprehensive income Net income -- 2002 -- -- 49,244 -- 49,244 -- 49,244 Other comprehensive income, net of tax: Unrealized net holding gain arising during the year, net of tax (pre-tax gain $16,729) -- -- -- -- 10,166 -- -- Reclassification adjustment for net gain realized in net income during the year (pre-tax gain $7,499) -- -- -- -- (4,557) -- -- Other comprehensive income -- -- -- 5,609 5,609 -- 5,609 Comprehensive income 54,853 Cash dividend declared, $.600 per share -- -- (43,631) -- -- (43,631) Stock options exercised and related tax benefits 2,939 15,946 -- -- -- 18,885 Treasury stock purchased (703,704 shares) -- -- -- -- (8,844) (8,844) Sale of treasury stock (636,122 shares) -- 708 -- -- 7,046 7,754 Ending balance, December 31, 2002 79,108 92,009 69,553 27,277 (33,103) 234,844 Comprehensive income Net income -- 2003 -- -- 53,031 -- 53,031 -- 53,031 Other comprehensive loss, net of tax: Unrealized net holding loss arising during the year, net of tax (pre-tax loss $1,059) -- -- -- -- (608) -- -- Reclassification adjustment for net gain realized in net income during the year (pre-tax gain $9,807) -- -- -- -- (5,627) -- -- Other comprehensive loss -- -- -- (6,235) (6,235) -- (6,235) Comprehensive income 46,796 Cash dividend declared, $.600 per share -- -- (44,533) -- -- (44,533) Stock options exercised and related tax benefits 1,603 10,481 -- -- -- 12,084 Treasury stock purchased (2,525,000 shares) -- -- -- -- (30,034) (30,034) Sale of treasury stock (690,181 shares) -- 1,121 -- -- 6,484 7,605 Ending balance, December 31, 2003 $80,711 103,611 78,051 21,042 (56,653) 226,762
See accompanying notes to consolidated financial statements. 31 (LOGO) TRUSTCO Bank Corp NY Consolidated Statements of Cash Flows
(dollars in thousands) Years Ended December 31, 2003 2002 2001 Increase/(decrease) in cash and cash equivalents Cash flows from operating activities: Net income $ 53,031 49,244 45,510 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,492 2,168 2,716 Net gain on sales of real estate owned (522) (726) (1,328) Net (gain)/loss on sales of bank premises and equipment (263) 4 (17) Provision for loan losses 1,200 1,420 4,940 Deferred tax (benefit)/expense (2,645) 10,500 (4,133) Net gain on securities transactions (9,807) (7,499) (4,517) Decrease/(increase) in taxes receivable 3,356 (8,296) (136) (Increase)/decrease in interest receivable (2,837) 3,605 (10) Decrease in interest payable (507) (295) (934) (Increase)/decrease in other assets (1,761) 17,573 (4,596) (Decrease)/increase in accrued expenses (3,636) (15,875) 4,940 Total adjustments (14,930) 2,579 (3,075) Net cash provided by operating activities 38,101 51,823 42,435 Cash flows from investing activities: Proceeds from sales and calls of securities available for sale 1,064,580 238,602 268,533 Proceeds from maturities of securities available for sale 3,573 180,332 158,906 Purchase of securities available for sale (1,592,974) (468,268) (402,763) Net decrease/(increase) in loans 255,016 128,093 (85,768) Proceeds from sales of real estate owned 608 1,282 3,344 Proceeds from sales of bank premises and equipment 271 25 113 Purchases of bank premises and equipment (2,953) (3,164) (3,451) Net cash (used in)/provided by investing activities (271,879) 76,902 (61,086) Cash flows from financing activities: Net increase in deposits 145,542 181,362 81,915 Net (decrease)/increase in short-term borrowings (50,623) (76,988) 25,321 Repayment of long-term debt (188) (197) (287) Proceeds from exercise of stock options and related tax benefits 12,084 18,885 7,366 Proceeds from sales of treasury stock 7,605 7,754 6,710 Payments to acquire treasury stock (30,034) (8,844) (12,238) Dividends paid (45,008) (43,188) (37,009) Net cash provided by financing activities 39,378 78,784 71,778 Net (decrease)/increase in cash and cash equivalents (194,400) 207,509 53,127 Cash and cash equivalents at beginning of year 606,082 398,573 345,446 Cash and cash equivalents at end of year $ 411,682 606,082 398,573 SUPPLEMENTAL INFORMATION: Interest paid $ 41,246 58,315 73,697 Income taxes paid 18,865 8,035 21,085 Transfer of loans to real estate owned -- 227 1,423 (Decrease)/increase in dividends payable (475) 443 1,484 Change in unrealized gain on securities available for sale -- gross 10,865 (9,230) (1,978) Change in deferred tax effect on unrealized gain on securities available for sale (4,630) 3,621 849
See accompanying notes to consolidated financial statements. 32 (LOGO) TRUSTCO Bank Corp NY 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., Trustco Bank (referred to as Trustco Bank or Bank), and its wholly owned subsidiary, Trustco Vermont Investment Company, conform to general practices within the banking industry and are in conformity with accounting principles generally accepted in the United States of America. A description of the more significant policies follows. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 approximate market value with any unrealized appreciation or depreciation of value, net of tax, included as an element of accumulated other comprehensive income in shareholders' equity. 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, are 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 debt 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 three 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 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. 33 (LOGO) TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) Real Estate Owned Real estate owned are assets acquired through foreclosures on loans. Foreclosed assets held for sale are recorded on an individual basis at the lower of (1) fair value minus estimated costs to sell or (2) "cost" (which is the fair value at initial foreclosure). When a property is acquired, the excess of the loan balance over fair value is charged to the allowance for loan losses. Subsequent write downs are included in noninterest expense. Income Taxes Deferred taxes are recorded for the future tax consequences of events that have been recognized in the financial statements or tax returns based upon enacted tax laws and rates. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. Dividend Restrictions Banking regulations restrict the amount of cash dividends which may be paid during a year by Trustco Bank to the Parent Company without the written consent of the appropriate bank regulatory agency. Based on these restrictions, during 2004 Trustco Bank could pay cash dividends to the Parent Company of $23.2 million plus 2004 year-to-date net profits. In addition, at December 31, 2003 the Parent Company has $52.8 million of assets available to pay dividends to shareholders. Benefit Plans 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. The Company has a postretirement benefit plan that permits retirees under age 65 to participate in the Company's medical plan by paying the same premium as active employees. At age 65, the Company provides a Medicare Supplemental program to retirees. Stock Option Plans The Company has stock option plans for officers and directors and has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123) and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" (Statement 148). Stock options were not issued in 2003 for officers or directors. The Company's stock option plans are accounted for in accordance with the provisions of 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. Had compensation expense for the Company's stock option plans been determined consistent with Statement 123, the Company's net income and earnings per share would have been as follows: (dollars in thousands, except per share data) 2003 2002 2001 Net income: As reported $53,031 49,244 45,510 Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (926) (1,207) (1,186) Pro forma net income $52,105 48,037 44,324 Earnings per share: Basic - as reported $ .713 .678 .640 Basic - pro forma .701 .661 .623 Diluted - as reported .704 .660 .618 Diluted - pro forma .692 .645 .603 The weighted average 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 as follows for options granted in the year indicated: Employees' Directors' Plan Plan 2002 $1.730 1.680 2001 1.791 1.800 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: 2002 4.45% 4.45 2001 5.07 5.07 Risk-free interest rate: 2002 4.10 3.79 2001 4.63 4.56 Expected volatility rate: 2002 21.75 22.41 2001 22.90 23.42 Expected lives 7.5 years 6.0 years 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 any dilutive stock options. 34 (LOGO) TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) 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 The Company's operations are exclusively in the financial services industry and include the provision of traditional banking services. Management evaluates the performance of the Company based on only one business segment, that of community banking. The Company operates primarily in the geographical region of Upstate New York. In the opinion of management, the Company does not have any other reportable segments as defined by Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information". Cash and Cash Equivalents The Company classifies cash on hand, cash due from banks, federal funds sold, and other short-term investments as cash and cash equivalents for disclosure purposes. Trust Assets Assets under management by the Trust Department are not included on the Company's consolidated financial statements because the Trust Department holds these assets in a fiduciary capacity. Intangible Assets Intangible assets consist of goodwill arising from the acquisition of Landmark Financial Corporation in a purchase business combination during 2000. Due to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002, goodwill is no longer being amortized. The Company considers this intangible asset to be unimpaired at December 31, 2003 and 2002. Goodwill at December 31, 2003 and 2002 was $553 thousand. Comprehensive Income Comprehensive income represents the sum of net income and items of other comprehensive income or loss, which are reported directly in shareholders' equity, net of tax, such as the change in net unrealized gain or loss on securities available for sale. The Company has reported comprehensive income and its components in the Consolidated Statement of Changes in Shareholders' Equity. Accumulated other comprehensive income or loss, which is a component of shareholders' equity, represents the net unrealized gain or loss on securities available for sale, net of tax. (2) Balances at Other Banks The Company 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 $16.3 million and $16.6 million at December 31, 2003 and 2002, 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, 2003 Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Treasuries and agencies $ 863,528 4,517 4,386 863,659 States and political subdivisions 182,118 9,722 113 191,727 Mortgage-backed securities 64,718 1,642 38 66,322 Other 685 -- -- 685 Total debt securities 1,111,049 15,881 4,537 1,122,393 Equity securities 30,880 23,768 115 54,533 Total securities available for sale $1,141,929 39,649 4,652 1,176,926 (dollars in thousands) December 31, 2002 Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Treasuries and agencies $224,576 5,852 -- 230,428 States and political subdivisions 223,873 11,672 50 235,495 Mortgage-backed securities 49,537 3,054 -- 52,591 Other 26,068 91 21 26,138 Total debt securities 524,054 20,669 71 544,652 Equity securities 83,246 25,337 72 108,511 Total securities available for sale $607,300 46,006 143 653,163 Federal Home Loan Bank stock and Federal Reserve Bank stock included in equity securities at December 31, 2003 and 2002, was $14.4 million and $16.0 million, respectively. 35 (LOGO) TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) The following table distributes the debt securities included in the available for sale portfolio as of December 31, 2003, 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 $ 956 959 Due after one year through five years 3,946 3,997 Due after five years through ten years 94,350 93,924 Due after ten years 1,011,797 1,023,513 $1,111,049 1,122,393 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. Gross unrealized losses on investment securities available for sale and the related fair values aggregated by the length of time that individual securities have been in an unrealized loss position, were as follows: (dollars in thousands) December 31, 2003 Less than 12 months 12 months or more Total Gross Gross Gross Fair Unreal. Fair Unreal. Fair Unreal. Value Loss Value Loss Value Loss U.S. Treasuries and agencies $321,188 4,386 -- -- 321,188 4,386 States and political subdivisions 4,661 113 -- -- 4,661 113 Mortgage-backed securities 19,393 38 -- -- 19,393 38 Equity securities 4,790 115 -- -- 4,790 115 Total $350,032 4,652 -- -- 350,032 4,652 U.S. Treasuries, agencies, States and political subdivisions: The unrealized losses on these investments have been in that position for less than 12 months and were caused by market interest rate increases. The contractual terms of these investments require the issuer to settle the securities at par upon maturity of the investment. Because the Company has the ability and intent to hold these investments until a market price recovery or possibly to maturity, these investments are not considered other-than-temporarily impaired. Mortgage-backed securities: The unrealized losses on investments in mortgage-backed securities have been in that position for less than 12 months and were caused by market interest rate increases. The contractual cash flows of these securities are guaranteed by various government agencies or government sponsored enterprises, such as GNMA, FNMA, and FHLMC. Because the decline in fair value is attributable to changes in market interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or possibly to maturity, these investments are not considered other-than-temporarily impaired. Equity securities: The investment in equity securities with an unrealized loss has been in that position for less than 12 months and is comprised of a U.S. Government sponsored entity's preferred stock purchased at a premium. The primary cause of this loss is a change in market interest rates. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold this investment until a market price recovery or possibly to maturity, this investment is not considered other-than-temporarily impaired. The proceeds from sales and calls of securities, gross realized gains and gross realized losses from sales and calls during 2003, 2002 and 2001 are as follows: (dollars in thousands) December 31, 2003 2002 2001 Proceeds $1,064,580 238,602 268,533 Gross realized gains 22,645 9,617 6,378 Gross realized losses 12,838 2,118 1,861 The amount of securities available for sale that have been pledged to secure short-term borrowings, public deposits, and for other purposes required by law amounted to $105.1 million and $282.9 million at December 31, 2003 and 2002, respectively. There are no securities of a single issuer (excluding issues of the U.S. government and its agencies or government sponsored enterprises and federal funds sold which are disclosed separately on the Consolidated Statements of Condition) that represent 10% or more of shareholders' equity at December 31, 2003 and 2002. (4) Loans and Allowance for Loan Losses A summary of loans by category is as follows: (dollars in thousands) December 31, 2003 2002 Commercial $ 190,501 199,795 Real estate - construction 7,476 7,252 Real estate mortgage 779,227 1,059,035 Home equity lines of credit 171,078 139,294 Installment loans 14,365 17,465 Total loans 1,162,647 1,422,841 Less: Unearned income 381 540 Allowance for loan losses 48,739 52,558 Net loans $1,113,527 1,369,743 36 (LOGO) TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) At December 31, 2003 and 2002, loans to executive officers, directors, and to associates of such persons aggregated $4.0 million and $4.9 million, respectively. During 2003, $1.7 million of new loans were made and repayments of loans totalled $2.6 million. In the opinion of management, such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions. These loans do not involve more than normal risk of collectibility or present other unfavorable features. TrustCo lends primarily in the Capital District region of New York State and in the geographic territory surrounding its borders. Although the loan portfolio is diversified, a portion of its debtors' ability to repay is dependent upon the economic conditions prevailing in New York State. The following table sets forth information with regard to nonperforming loans: (dollars in thousands) December 31, 2003 2002 2001 Loans in nonaccrual status $ -- 615 1,090 Loans contractually past due 3 payments or more and still accruing interest -- -- 801 Restructured loans 3,260 4,303 5,159 Total nonperforming loans $3,260 4,918 7,050 Interest on nonaccrual and restructured loans of $500 thousand in 2003, $700 thousand in 2002, and $900 thousand in 2001 would have been earned in accordance with the original contractual terms of the loans. Approximately $431 thousand, $649 thousand, and $524 thousand of interest on nonaccrual and restructured loans was collected and recognized as income in 2003, 2002, and 2001, 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, 2003 2002 2001 Balance at beginning of year $ 52,558 57,203 56,298 Provision for loan losses 1,200 1,420 4,940 Loans charged off (9,598) (8,350) (7,028) Recoveries on loans previously charged off 4,579 2,285 2,993 Balance at year end $ 48,739 52,558 57,203 The Company identifies impaired loans and measures the impairment in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (Statement 114), as amended. 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, 2003 and $118 thousand at December 31, 2002. Retail loans totalling $3.1 million as of December 31, 2003, and $4.1 million as of December 31, 2002, were restructured after the effective date of Statement 114 and, accordingly, are 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. During 2003, 2002, and 2001, the average balance of impaired loans was $3.7 million, $4.9 million, and $5.1 million, respectively, and there was approximately $380 thousand, $540 thousand, and $438 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, 2003 and 2002 follows: (dollars in thousands) 2003 2002 Land $ 2,786 2,959 Buildings 26,942 26,048 Furniture, fixtures and equipment 21,379 21,004 Leasehold improvements 6,072 4,564 57,179 54,575 Accumulated depreciation and amortization (37,011) (35,031) Total $ 20,168 19,544 Depreciation and amortization expense approximated $2.5 million, $2.2 million, and $2.7 million for the years 2003, 2002, and 2001, respectively. Occupancy expense of the Bank's premises included rental expense of $1.8 million in 2003, $1.6 million in 2002, and $1.7 million in 2001. 37 (LOGO) TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (6) Short-Term Borrowings Short-term borrowings consisted of the following: (dollars in thousands) 2003 Trustco Cash Short-Term Management Account Account Total Amount outstanding at December 31, 2003 $ -- 90,608 90,608 Maximum amount outstanding at any month end 91,184 90,608 181,792 Average amount outstanding 33,045 74,754 107,799 Weighted average interest rate: For the year 0.82% 0.84 0.83 As of year end -- 0.65 0.65 (dollars in thousands) 2002 Trustco Cash Short-Term Management Account Account Total Amount outstanding at December 31, 2002 $ 78,681 62,550 141,231 Maximum amount outstanding at any month end 180,226 71,880 252,106 Average amount outstanding 135,249 75,114 210,363 Weighted average interest rate: For the year 1.40% 1.26 1.35 As of year end 0.95 0.95 0.95 The Trustco Short-Term Investment Account balances were immediately withdrawable. All short-term borrowings were collateralized by securities of the Bank pledged for that purpose. The Cash Management Account represents retail deposits with customers for which the Bank has pledged certain assets as collateral. Trustco also has an available line of credit with the Federal Home Loan Bank. (7) Long-Term Debt Long-term debt at December 31, 2003 and 2002, of $239 thousand and $427 thousand consisted of FHLB term loans with interest rates ranging from 5.22% to 6.29% and maturities ranging from June 2004 to October 2008. This debt was assumed as part of an acquisition during 2000. The FHLB loans are collateralized by 1-4 family residential mortgages. (8) Income Taxes A summary of income tax expense/(benefit) included in the Consolidated Statements of Income follows: For the years ended December 31, (dollars in thousands) 2003 2002 2001 Current tax expense (benefit): Federal $ 25,104 8,398 22,129 State 864 (1,875) 1,940 Total Current tax expense 25,968 6,523 24,069 Deferred tax (benefit) expense (2,645) 10,500 (4,133) Total income tax expense $ 23,323 17,023 19,936 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2003 and 2002, are as follows: December 31, (dollars in thousands) 2003 2002 Deductible/ Deductible/ (taxable) (taxable) temporary temporary differences differences Bond accounting $ (630) (399) Benefits and deferred remuneration 2,104 813 Deferred loan fees, net 154 228 Difference in reporting the provision for loan losses, net 22,309 23,368 Other income or expense not yet reported for tax purposes 9,232 7,208 Depreciable assets 2,068 2,042 Other items 956 288 Net deferred tax asset at end of year 36,193 33,548 Net deferred tax asset at beginning of year 33,548 44,048 Deferred tax benefit/(expense) $ 2,645 (10,500) Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. Based primarily on the sufficiency of historical and expected future taxable income, management believes it is more likely than not that the remaining net deferred tax asset of $36.2 million and $33.5 million at December 31, 2003 and 2002, respectively, will be realized. In addition to the deferred tax items described in the preceding table, the Company also has deferred tax liabilities of $14.0 million and $18.6 million at December 31, 2003 and 2002, respectively, relating to the net unrealized gains on securities available for sale at the respective dates. 38 (LOGO) TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) The effective tax rates differ from the statutory federal income tax rate. The reasons for these differences are as follows: For the years ended December 31, 2003 2002 2001 Statutory federal income tax rate 35.0% 35.0 35.0 Increase/(decrease) in taxes resulting from: Tax exempt income (4.6) (5.8) (5.2) State income tax, net of federal tax benefit 0.8 0.5 1.1 Change in valuation allowance -- (1.8) -- Other items (0.6) (2.2) (0.4) Effective income tax rate 30.6% 25.7 30.5 During the fourth quarter 2002, Robert A. McCormick retired as President and Chief Executive Officer of TrustCo. As a result of his retirement the Company paid out his deferred compensation and supplemental retirement package. As a result of the timing of these payments, any uncertainty relative to the deductibility of these payments for tax purposes was eliminated and the tax valuation reserve of $1.1 million was recaptured. (9) 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 administered by Trustco Bank's Trust Department. The following tables set forth the plan's funded status as of a December 31 measurement date and amounts recognized in the Company's consolidated statements of condition at December 31, 2003 and 2002. Change in Projected Benefit Obligation: (dollars in thousands) 2003 2002 Projected benefit obligation at beginning of year $22,169 21,587 Service cost 695 651 Interest cost 1,409 1,359 Benefits paid (1,394) (1,301) Net actuarial loss (gain) 1,676 (127) Projected benefit obligation at end of year $24,555 22,169 Change in Plan Assets and Reconciliation of Funded Status: (dollars in thousands) 2003 2002 Fair value of plan assets at beginning of year $26,251 30,740 Actual gain (loss) on plan assets 3,617 (3,188) Benefits paid (1,394) (1,301) Fair value of plan assets at end of year 28,474 26,251 Funded status 3,919 4,082 Unrecognized net actuarial gain (544) (268) Unrecognized prior service cost 707 732 Net amount recognized $ 4,082 4,546 The accumulated benefit obligation for the plan was $21.5 million and $19.6 million at December 31, 2003 and 2002, respectively. Components of Net Periodic Pension Expense/(Benefit): For the years ended December 31, (dollars in thousands) 2003 2002 2001 Service cost $ 695 651 766 Interest cost 1,409 1,359 1,358 Expected return on plan assets (1,665) (2,184) (2,413) Amortization of net actuarial gain -- (213) (428) Amortization of unrecognized prior service cost 25 25 23 Net periodic pension expense/(benefit) $ 464 (362) (694) The assumptions used to determine benefit obligations at December 31 are as follows: 2003 2002 Discount rate 6.00% 6.50 Rate of increase in future compensation 5.00 5.00 39 (LOGO) TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) The assumptions used to determine net periodic pension expense/(benefit) for the years ended December 31 are as follows: 2003 2002 2001 Discount rate 6.50% 6.75 6.75 Rate of increase in future compensation 5.00 6.50 6.50 Expected long-term rate of return on assets 6.50 7.25 7.25 The Company also has a supplementary pension plan under which additional retirement benefits are accrued for eligible executive and senior officers. The expense recorded for this plan was $1.2 million, $1.6 million, and $4.4 million, in 2003, 2002, and 2001, respectively. Rabbi trusts have been established for certain benefit plans. These rabbi trust accounts are administered by the Company's Trust Department and invest primarily in money market instruments. These assets are recorded at their market value and are included as other assets in the December 31, 2003 and 2002, 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 individual stocks, index funds, and tax exempt bonds. The Company has amended the medical plan to reflect changes to the retiree medical insurance coverage portion. The Company's subsidy of the retiree medical insurance premiums will be reduced over time. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) became law in the United States. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In accordance with FASB Staff Position FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," the Company has elected to defer recognition of the effects of the Act in any measures of the benefit obligation or cost. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information. Currently, the Company does not believe it will need to amend its plan to recognize the benefit, if any, from the Act. The following tables show the plan's funded status as of a December 31 measurement date and amounts recognized in the Company's Consolidated Statements of Condition at December 31, 2003 and 2002. Change in Accumulated Benefit Obligation: (dollars in thousands) 2003 2002 Accumulated benefit obligation at beginning of year $10,677 6,763 Service cost 4 320 Retiree contributions 173 142 Interest cost 46 528 Benefits paid (360) (318) Plan amendments (7,990) -- Net actuarial (gain) loss (1,760) 3,242 Accumulated benefit obligation at end of year $ 790 10,677 Change in Plan Assets and Reconciliation of Funded Status: (dollars in thousands) 2003 2002 Fair value of plan assets at beginning of year $ 9,666 10,535 Actual gain (loss) on plan assets 1,507 (933) Retiree contributions 173 142 Taxes -- (240) Benefits paid (360) (318) Fair value of plan assets at end of year 10,986 9,666 Funded status 10,196 (1,011) Unrecognized net actuarial gain (2,866) (17) Unrecognized prior service credit (7,586) -- Net amount recognized $ (256) (1,028) Components of Net Periodic Expense/(Benefit): For the years ended December 31, (dollars in thousands) 2003 2002 2001 Service cost $ 4 320 250 Interest cost 46 528 408 Expected return on plan assets (377) (453) (502) Amortization of net actuarial gain (43) (113) (261) Amortization of prior service credit (403) -- -- Net periodic (benefit)/expense $(773) 282 (105) The assumptions used to determine benefit obligations at December 31 are as follows: 2003 2002 Discount rate 6.00% 6.50 The assumptions used to determine net periodic pension expense/(benefit) for the years ended December 31 are as follows: 2003 2002 2001 Discount rate 6.50% 6.75 6.75 Expected long-term rate of return on assets 3.90 4.30 4.30 40 (LOGO) TRUSTCO Bank Corp NY For measurement purposes, a graded annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 2004 and thereafter. Due to the plan amendment recognized in 2003 relating to the reimbursed portion of the retiree's medical insurance premiums, a one percentage point increase or decrease in the assumed health care cost in each year would have a negligible impact on the accumulated postretirement benefit obligation as of December 31, 2003, and the interest and service components of net periodic postretirement benefit cost for the year ended December 31, 2003. (c) Major Categories of Pension and Postretirement Benefit Plan Assets: The asset allocations of the Company's pension and postretirement benefit plans at December 31, were as follows: Pension Benefit Postretirement Benefit Plan Assets Plan Assets 2003 2002 2003 2002 Debt Securities 36.55% 48.73 57.24 25.44 Equity Securities 61.45 50.58 40.47 64.90 Other 2.00 .69 2.29 9.66 Total 100.00% 100.00 100.00 100.00 The expected long-term rate-of-return on plan assets, noted in sections (a) and (b) above, reflects long-term earnings expectations on existing plan assets. In estimating that rate, appropriate consideration was given to historical returns earned by plan assets and the rates of return expected to be available for reinvestment. Rates of return were adjusted to reflect current capital market assumptions and changes in investment allocations. The Company's investment policies and strategies for the pension benefit and postretirement benefit plans prescribe a target allocation of 60% equity securities and 40% debt securities for the asset categories. The Company's investment goals are to maximize returns subject to specific risk management policies. Its risk management policies permit direct investments in equity and debt securities and mutual funds while prohibiting direct investment in derivative financial instruments. The Company addresses diversification by the use of mutual fund investments whose underlying investments are in domestic and international debt and equity securities. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable. The Company does not expect to make any contributions to its pension and postretirement benefit plans in 2004. (d) 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 2003 and 2002, and $1.0 million in 2001. 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 $2.1 million, $3.3 million, and $3.9 million in 2003, 2002, and 2001, respectively. The Company has awarded 2.7 million performance bonus units to the executive officers and directors. These units become vested and exercisable only under a change of control as defined in the plan. 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. (e) Stock Option Plans Under the 1995 TrustCo Bank Corp NY Stock Option Plan, the Company may grant options to its eligible employees for up to approximately 9.9 million shares of common stock. Under the 1993 Directors Stock Option Plan, the Company could have granted options to its directors for up to approximately 531 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 years from the date the options are granted for the employee plan and they are immediately vested under the directors' plan. A summary of the status of TrustCo's stock option plans as of December 31, 2003, 2002 and 2001, and changes during the years then ended, are as follows: Outstanding Options Exercisable Options Weighted Weighted Average Average Option Option Shares Price Shares Price Balance, January 1, 2001 9,293,929 $5.81 7,669,948 $5.12 New options awarded - 2001 876,702 9.75 194,384 9.75 Cancelled options - 2001 (129,621) 9.73 (129,621) 9.73 Exercised options - 2001 (1,235,206) 3.65 (1,235,206) 3.65 Options became exercisable -- -- 928,162 8.73 Balance, December 31, 2001 8,805,804 6.44 7,427,667 5.85 New options awarded - 2002 837,750 11.83 182,950 11.83 Cancelled options - 2002 (45,430) 9.96 (45,430) 9.96 Exercised options - 2002 (2,952,304) 4.16 (2,952,304) 4.16 Options became exercisable -- -- 1,112,103 10.00 Balance, December 31, 2002 6,645,820 8.11 5,724,986 7.69 New options awarded - 2003 -- -- -- -- Cancelled options - 2003 (60,396) 11.07 (60,396) 11.07 Exercised options - 2003 (1,645,222) 5.42 (1,645,222) 5.42 Options became exercisable -- -- 382,752 10.49 Balance, December 31, 2003 4,940,202 $8.97 4,402,120 $8.74 41 (LOGO) TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) The following table summarizes information about total stock options outstanding at December 31, 2003: Weighted Average Weighted Range of Remaining Average Exercise Options Contractual Exercise Price Outstanding Life Price Less than $5.00 145,753 1.8 years $ 4.49 Between $5.01 and $7.50 950,432 3.8 years 5.77 Greater than $7.51 3,844,017 6.9 years 9.93 Total 4,940,202 6.2 years $ 8.97 The following table summarizes information about the exercisable stock options at December 31, 2003: Weighted Average Weighted Range of Remaining Average Exercise Options Contractual Exercise Price Exercisable Life Price Less than $5.00 145,753 1.8 years $ 4.49 Between $5.01 and $7.50 950,432 3.8 years 5.77 Greater than $7.51 3,305,935 6.7 years 9.78 Total 4,402,120 5.9 years $ 8.74 (10) 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) 2004 $ 1,913 2005 1,831 2006 1,562 2007 1,388 2008 1,394 2009 and after 13,626 $21,714 (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, 2003, the maturity of total time deposits is as follows: (dollars in thousands) Under 1 year $445,914 1 to 2 years 231,188 2 to 3 years 86,029 3 to 4 years 50,565 4 to 5 years 133,305 Over 5 years 1,148 $948,149 (d) Outsourced Services During the fourth quarter 2001, the Company contracted with Fiserv Solutions, Inc. to perform certain banking functions beginning 2002. The outsourced services include data and item processing for the Bank and trust operations. During the fourth quarter of 2002, Trustco Bank converted to the Fiserv system. The service expense can vary based upon volume and nature of transactions processed. Outsourced service expense was $5.6 million in 2003 and $2.1 million in 2002. (11) Earnings Per Share A reconciliation of the component parts of earnings per share for 2003, 2002 and 2001 follows: (dollars in thousands, Weighted except per share data) Average Shares Per share Income Outstanding Amounts For the year ended December 31, 2003: Basic EPS: Income available to common shareholders $53,031 74,337 $.713 Effect of Dilutive Securities: Stock Options -- 969 -- Diluted EPS $53,031 75,306 $.704 For the year ended December 31, 2002: Basic EPS: Income available to common shareholders $49,244 72,675 $.678 Effect of Dilutive Securities: Stock Options -- 1,943 -- Diluted EPS $49,244 74,618 $.660 For the year ended December 31, 2001: Basic EPS: Income available to common shareholders $45,510 71,154 $.640 Effect of Dilutive Securities: Stock Options -- 2,519 -- Diluted EPS $45,510 73,673 $.618 The number of antidilutive stock options excluded from diluted earnings per share for 2003, 2002, and 2001 was not significant. 42 (LOGO) TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (12) Off-Balance Sheet Financial Instruments Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a fee. Commitments sometimes expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Bank's normal credit policies, including obtaining collateral. The Bank's maximum exposure to credit loss for loan commitments, including unused lines of credit, at December 31, 2003 and 2002, was $273.9 million and $253.0 million, respectively. Approximately 66% of these commitments were for variable rate products at the end of 2003. FASB Interpretation No. 45 (FIN No. 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others; an Interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," requires certain disclosures and liability-recognition for the fair value at issuance of guarantees that fall within its scope. Under FIN No. 45, the Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $3.9 million and $1.7 million at December 31, 2003 and 2002, respectively, and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of the Company's standby letters of credit at December 31, 2003 and 2002 was insignificant. No losses are anticipated as a result of loan commitments or standby letters of credit. (13) 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 transactions. As of (dollars in thousands) December 31, 2003 Carrying Fair Value Value Financial assets: Cash and cash equivalents $ 411,682 411,682 Securities available for sale 1,176,926 1,176,926 Loans 1,113,527 1,207,958 Accrued interest receivable 17,535 17,535 Financial liabilities: Demand deposits 197,116 197,116 Interest bearing deposits 2,222,694 2,229,139 Short-term borrowings 90,608 90,608 Long-term debt 239 239 Accrued interest payable 1,470 1,470 As of (dollars in thousands) December 31, 2002 Carrying Fair Value Value Financial assets: Cash and cash equivalents $ 606,082 606,082 Securities available for sale 653,163 653,163 Loans 1,369,743 1,473,177 Accrued interest receivable 14,698 14,698 Financial liabilities: Demand deposits 178,058 178,058 Interest bearing deposits 2,096,210 2,112,523 Short-term borrowings 141,231 141,231 Long-term debt 427 427 Accrued interest payable 1,977 1,977 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 estimating fair values: Cash and Cash Equivalents The carrying values of these financial instruments approximate fair values. 43 (LOGO) TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) Securities Fair values for all securities portfolios are based upon quoted market prices, where available. The carrying value of certain local, unrated municipal obligations was used as an approximation of fair value. Loans The fair values of all loans are estimated using discounted cash flow analyses with discount rates equal to the interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Deposit Liabilities The fair values disclosed for noninterest bearing deposits, 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 approximates 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, Long-Term Debt and Other Financial Instruments The fair value of all short-term borrowings, long-term debt, and other financial instruments approximates 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. (14) Regulatory Capital Requirements Office of Thrift Supervision (OTS) capital regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2003 and 2002, Trustco Bank was required to maintain a minimum tangible capital of 1.5% of adjusted total assets, a minimum leverage ratio of core capital to adjusted total assets of 4.00% and a minimum ratio of total capital to risk weighted assets of 8.00%. Federal banking regulations also 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 leverage capital ratio of at least 5.0% (based on total adjusted quarterly average assets), a Tier 1 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 regulator about capital components, risk weighting and other factors. Management believes that as of December 31, 2003 and 2002, Trustco Bank met all capital adequacy requirements to which it was subject. Further, the most recent regulator 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 OTS 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 Bank 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, 2003 and 2002, for Trustco Bank: (dollars in thousands) As of December 31, 2003 Amount Ratio Leverage capital: $178,952 6.51% Tier 1 risk-based capital: 178,952 14.54 Total risk-based capital: 194,745 15.83 (dollars in thousands) As of December 31, 2002 Amount Ratio Leverage capital: $165,525 6.26% Tier 1 risk-based capital: 165,525 12.62 Total risk-based capital: 182,361 13.91 44 (LOGO) TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (15) 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: 2003 2002 2001 Dividends and interest from subsidiaries $31,096 35,898 38,220 Net gain on sales of securities 12,952 7,587 2,445 Income from other investments 1,110 1,394 1,155 Total income 45,158 44,879 41,820 Expense: Operating supplies 75 72 18 Professional services 63 6,173 188 Miscellaneous expense 95 1,167 372 Total expense 233 7,412 578 Income before income taxes and subsidiaries' undistributed earnings 44,925 37,467 41,242 Income tax expense 5,267 135 1,154 Income before subsidiaries' undistributed earnings 39,658 37,332 40,088 Equity in undistributed net income of subsidiaries 13,373 11,912 5,422 Net income $53,031 49,244 45,510 Statements of Condition (dollars in thousands) December 31, Assets: 2003 2002 Cash in subsidiary bank $ 17,363 18,682 Investments in subsidiaries 186,290 179,101 Securities available for sale 35,323 49,365 Other assets 1,741 172 Total assets $240,717 247,320 Liabilities and shareholders' equity: Accrued expenses and other liabilities $ 13,955 12,476 Total liabilities 13,955 12,476 Shareholders' equity 226,762 234,844 Total liabilities and shareholders' equity $240,717 247,320 Statements of Cash Flows (dollars in thousands) Years Ended December 31, 2003 2002 2001 Increase/(decrease) in cash and cash equivalents: Cash flows from operating activities: Net income $ 53,031 49,244 45,510 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (13,373) (11,912) (5,422) Net gain on sales of securities (12,952) (7,587) (2,445) Net change in other assets and accrued expenses 972 (5,677) (2,204) Total adjustments (25,353) (25,176) (10,071) Net cash provided by operating activities 27,678 24,068 35,439 Cash flows from investing activities: Proceeds from sale of securities available for sale 49,831 18,079 5,402 Purchase of securities available for sale (23,475) (12,834) (8,136) Investment in subsidiary -- -- (1,000) Net cash provided by/(used in) investing activities 26,356 5,245 (3,734) Cash flows from financing activities: Proceeds from exercise of stock options and related tax benefits 12,084 18,885 7,366 Dividends paid (45,008) (43,188) (37,009) Payments to acquire treasury stock (30,034) (8,844) (12,238) Proceeds from sale of treasury stock 7,605 7,754 6,710 Net cash used in financing activities (55,353) (25,393) (35,171) Net (decrease)/increase in cash and cash equivalents (1,319) 3,920 (3,466) Cash and cash equivalents at beginning of year 18,682 14,762 18,228 Cash and cash equivalents at end of year $ 17,363 18,682 14,762 Supplemental Information Increase (decrease) in dividends payable $ (475) 443 1,484 Change in unrealized (gain)/loss on available for sale securities--gross 638 1,340 (5,269) Change in deferred tax effect on unrealized gain/(loss) on securities available for sale (261) (547) 2,152 45 (LOGO) TRUSTCO Bank Corp NY TrustCo Bank Corp NY Officers and Board of Directors OFFICERS PRESIDENT AND CHIEF EXECUTIVE OFFICER Robert J. McCormick EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Robert T. Cushing EXECUTIVE VICE PRESIDENT AND CHIEF BANKING OFFICER Scot R. Salvador VICE PRESIDENT Nancy McNamara SECRETARY Robert M. Leonard ASSISTANT SECRETARY Thomas M. Poitras BOARD OF DIRECTORS Barton A. Andreoli President Towne Construction and Paving Corp. Construction Joseph Lucarelli President Bellevue Builders Supply, Inc. Building Supply Anthony J. Marinello, M.D., Ph.D. Physician Robert A. McCormick Chairman TrustCo Bank Corp NY William D. Powers Partner Powers, Crane &Co., LLC Consulting William J. Purdy President Welbourne & Purdy Realty, Inc. Real Estate Directors of TrustCo Bank Corp NY are also Directors of Trustco Bank HONORARY DIRECTORS Lionel O. Barthold M. Norman Brickman Bernard J. King William H. Milton, III John S. Morris, Ph.D. James H. Murphy, D.D.S. Richard J. Murray, Jr. Daniel J. Rourke, M.D. Anthony M. Salerno Edwin O. Salisbury William F. Terry Harry E. Whittingham, Jr. Trustco Bank Officers PRESIDENT AND CHIEF EXECUTIVE OFFICER Robert J. McCormick EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Robert T. Cushing EXECUTIVE VICE PRESIDENT AND CHIEF BANKING OFFICER Scot R. Salvador SENIOR VICE PRESIDENT Nancy A. McNamara AUDITOR Daniel R. Saullo ACCOUNTING/FINANCE Vice Presidents Richard M. Donovan Michael M. Ozimek BRANCH ADMINISTRATION/ MARKETING Vice Presidents Deborah K. Appel Christopher L. Cox Robert M. Leonard Officers Michael V. Pitnell Mary Jean Riley COMPLIANCE Vice President Thomas M. Poitras COMMERCIAL LENDING Senior Officer Patrick M. Canavan Officer Paul R. Steenburgh FACILITIES Vice President George W. Wickswat MORTGAGE LOANS Senior Officer Michael J. Lofrumento Officer Robert O. Breton, Esq. OPERATIONS Vice President Eric W. Schreck PERSONNEL/QUALITY CONTROL Vice President Cheri J. Parvis TRUST DEPARTMENT Vice Presidents Kevin M. Curley Patrick J. LaPorta, Esq. Officers Richard W. Provost Craig C. Chenevert 46 (LOGO) TRUSTCO Bank Corp NY Branch Locations Altamont Ave. Office 1400 Altamont Ave. Schenectady, NY Telephone: 356-1317 Altamont Ave. West Office 1900 Altamont Ave. Rotterdam, NY Telephone: 355-1900 Ballston Spa Office 235 Church Ave. Ballston Spa, NY Telephone: 885-1561 Bedford Hills Office 180 Harris Rd. Bedford Hills, NY 10507 Telephone: (914) 666-6230 Bennington Office 215 North St. Bennington, VT Telephone: (802) 447-4952 Brandywine Office State St. at Brandywine Ave. Schenectady, NY Telephone: 346-4295 Briarcliff Manor Office 64 Route 100 Briarcliff Manor, NY 10510 Telephone: (914) 762-7133 Canajoharie Office 211 Erie Blvd. Canajoharie, NY Telephone: 673-2012 Central Ave. Office 163 Central Ave. Albany, NY Telephone: 426-7291 Clifton Country Road Office 7 Clifton Country Rd. Clifton Park, NY Telephone: 371-5002 Clifton Park Office 1018 Route 146 Clifton Park, NY Telephone: 371-8451 Cobleskill Office RR #3, Rt. 7 Cobleskill, NY Telephone: 254-0290 Colonial Drive Office 4450 East Colonial Dr. Orlando, FL 32803 Telephone: (407) 895-6393 Colonie Office 1892 Central Ave. Colonie Plaza, Colonie, NY Telephone: 456-0041 Dean Road Office 3920 Dean Rd. Orlando, FL 32817 Telephone: (407) 657-8001 Delmar Office 167 Delaware Ave. Delmar, NY Telephone: 439-9941 East Greenbush Office 501 Columbia Turnpike Rensselaer, NY Telephone: 479-7233 Elmsford Office 100 Clearbrook Rd. Elmsford, NY Telephone: (914) 345-1808 Exit 8/Crescent Rd. Office CVS Plaza Clifton Park, NY Telephone: 383-0039 Fishkill Office 1542 Route 52 Fishkill, NY Telephone: 896-8260 Freemans Bridge Rd. Office Trustco Center Glenville, NY Telephone: 344-7510 Glens Falls Office 3 Warren Street Glens Falls, NY Telephone: 798-8131 Greenwich Office 131 Main St. Greenwich, NY Telephone: 692-2233 Guilderland Office 3900 Carman Rd. Schenectady, NY Telephone: 355-4890 Halfmoon Office Country Dollar Plaza Halfmoon, NY Telephone: 371-0593 Hoosick Falls Office 47 Main St. Hoosick Falls, NY Telephone: 686-5352 Hudson Office 507 Warren St. Hudson, NY Telephone: 828-9434 Hudson Falls Office 3376 Burgoyne Ave. Hudson Falls, NY Telephone: 747-0886 Lake Mary Office 350 West Lake Mary Blvd. Sanford, FL 32773 Telephone: (407) 330-7106 Latham Office 1 Johnson Rd. Latham, NY Telephone: 785-0761 Loudon Plaza Office 372 Northern Blvd. Albany, NY Telephone: 462-6668 Longwood Office 1400 West State Rd. Longwood, FL Telephone (407) 339-3396 Madison Ave. Office 1084 Madison Ave. Albany, NY Telephone: 489-4711 Malta 4 Corners Office 2471 Route 9 Malta, NY Telephone: 899-1056 Malta Mall Office 43 Round Lake Rd. Ballston Lake, NY Telephone: 899-1558 Mayfair Office 286 Saratoga Rd. Glenville, NY Telephone: 399-9121 Mechanicville Office 9 Price Chopper Plaza Mechanicville, NY Telephone: 664-1059 Milton Office 2 Trieble Ave. Ballston Spa, NY Telephone: 885-0498 Mont Pleasant Office Crane St. at Main Ave. Schenectady, NY Telephone: 346-1267 New Scotland Office 301 New Scotland Ave. Albany, NY Telephone: 438-7838 Newton Plaza Office 588 New Loudon Rd. Latham, NY Telephone: 786-3687 Niskayuna-Woodlawn Office 3461 State St. Schenectady, NY Telephone: 377-2264 Pomona Office 1581 Route 202 Pomona, NY Telephone: 354-0176 Poughkeepsie Office 2656 South Rd. (Route 9) Poughkeepsie, NY Telephone: 485-6419 Queensbury Office 118 Quaker Rd. Suite 9, Queensbury, NY Telephone: 798-7226 Rotterdam Office Curry Road Shopping Ctr. Rotterdam, NY Telephone: 355-8330 Rotterdam Square Office 93 W. Campbell Rd. Rotterdam, NY Telephone: 377-2393 Route 2 Office -- Latham 201 Troy-Schenectady Rd. Latham, NY Telephone: 785-7155 Route 7 Office 1156 Troy-Schenectady Rd. Latham, NY Telephone: 785-4744 Saratoga Office 34 Congress St. Saratoga Springs, NY12866 Telephone: 587-3500 Scotia Office 123 Mohawk Ave. Scotia, NY Telephone: 372-9416 Sheridan Plaza Office 1350 Gerling St. Schenectady, NY Telephone: 377-8517 Shoppers' World Office Old Rte. 146 and Plank Rd. Clifton Park, NY Telephone: 383-6850 South Glens Falls Office Glengate Shopping Plaza 133 Saratoga Road, Suite 1 South Glens Falls, NY Telephone: 793-7668 State Farm Rd. Office 2050 Western Ave. Guilderland, NY Telephone: 452-6913 State St. Albany Office 112 State St. Albany, NY Telephone: 436-9043 State St. Schenectady Office 320 State St. Schenectady, NY Telephone: 377-3311 Stuyvesant Plaza Office Western Ave. at Fuller Rd. Albany, NY Telephone: 489-2616 Tanners Main Office 345 Main St. Catskill, NY Telephone: 943-2500 Tanners West Side Office 238 West Bridge St. Catskill, NY Telephone: 943-5090 Troy Office 5th Ave. and State St. Troy, NY Telephone: 274-5420 Union Street East Office 1700 Union St. Schenectady, NY Telephone: 382-7511 Upper New Scotland Office 583 New Scotland Ave. Albany, NY Telephone: 438-6611 Upper Union Street Office 1620 Union St. Schenectady, NY Telephone: 374-4056 Ushers Road Office 308 Ushers Rd. Ballston Lake, NY Telephone: 877-8069 West Sand Lake Office 3707 NY Rt. 43 West Sand Lake, NY Telephone: 674-3327 Wilton Mall Office Route 50 Saratoga Springs, NY Telephone: 583-1716 Wolf Road Office 34 Wolf Rd. Albany, NY Telephone: 458-7761 Wynantskill Office 134-136 Main St., Rt. 66 Wynantskill, NY Telephone: 286-2674 47 (LOGO) TRUSTCO Bank Corp NY General Information ANNUAL MEETING Monday, May 17, 2004 10:00 AM Glen Sanders Mansion 1 Glen Avenue Scotia, NY 12302 CORPORATE HEADQUARTERS 5 Sarnowski Drive Glenville, NY 12302 (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 at (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 Robert M. Leonard, Secretary, TrustCo Bank Corp NY, P.O. Box 380, Schenectady, New York 12301-0380. CODE OF CONDUCT TrustCo Bank Corp NY will provide, without charge, a copy of its Code of Conduct upon written request. Requests and related inquiries should be directed to Cheri J. Parvis, Vice President-Personnel, 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 ORE Subsidiary Corp. Glenville, New York Schenectady, New York Member FDIC (and its wholly owned subsidiary, Trustco Vermont Investment Company Bennington, Vermont) TRANSFER AGENT Trustco Bank Securities Department P.O. Box 380 Schenectady, New York 12301-0380 Trustco Bank(R) is a registered service mark with the U.S. Patent & Trademark Office. 48