-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BIxOOZT4tiUKfEUMxgB+c2XqvAreUqEKIy7rnk3/upy6dCkvvBjAdMo1nYKlfx1f Oyj56NCMweOTIb0CJrm7WQ== 0000906197-06-000015.txt : 20060310 0000906197-06-000015.hdr.sgml : 20060310 20060310151932 ACCESSION NUMBER: 0000906197-06-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060310 DATE AS OF CHANGE: 20060310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRUSTCO BANK CORP N Y CENTRAL INDEX KEY: 0000357301 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 141630287 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10592 FILM NUMBER: 06679127 BUSINESS ADDRESS: STREET 1: 5 SARNOWSKI DRIVE CITY: GLENVILLE STATE: NY ZIP: 12302 BUSINESS PHONE: 5183773311 MAIL ADDRESS: STREET 1: 5 SARNOWSKI DRIVE CITY: GLENVILLE STATE: NY ZIP: 12302 10-K 1 form10k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2005 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________________ to ____________________ Commission file number 0-10592 TRUSTCO BANK CORP NY (Exact name of registrant as specified in its charter) NEW YORK 14-1630287 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 5 SARNOWSKI DRIVE, GLENVILLE, NEW YORK 12302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 377-3311 Securities registered pursuant to Section 12(b)of the Act: Title of each class Name of exchange on which registered None None Securities registered pursuant to Section 12(g)of the Act: Common Stock, $1.00 Par Value (Title of class) ---------------- Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes. (x) No. ( ) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes. ( ) No. (x) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes. (x) No. ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. (x) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large Accelerated Filer (x) Accelerated Filer ( ) Non-Accelerated Filer ( ) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes. ( ) No. (x) The aggregate market value of the common stock held by non-affiliates as of June 30, 2005 was approximately $939,000,000 (based upon the closing price of $13.06 on June 30, 2005, as reported on the Nasdaq National Market). The number of shares outstanding of the registrant's common stock as of March 1, 2006 was 74,863,654. Documents Incorporated by Reference: (1) Portions of registrant's Annual Report to Shareholders for the fiscal year ended December 31, 2005 (Part I and Part II). (2) Portions of registrant's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 15, 2006 (Part III). INDEX Description Page - --------------------------------------------------------------------- PART I Item 1 Business 1 Item 1A Risk Factors 8 Item 1B Unresolved Staff Comments 10 Item 2 Properties 10 Item 3 Legal Proceedings 10 Item 4 Submission of Matters to a 11 Vote of Security Holders PART II Item 5 Market for the Registrant's Common Equity, 13 Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6 Selected Financial Data 14 Item 7 Management's Discussion and Analysis of 14 Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures 14 about Market Risk Item 8 Financial Statements and Supplementary Data 14 Item 9 Changes in and Disagreements with 14 Accountants On Accounting and Financial Disclosure Item 9A Controls and Procedures 14 Item 9B Other Information 15 PART III Item 10 Directors and Executive Officers of 15 Registrant Item 11 Executive Compensation 16 Item 12 Security Ownership of Certain Beneficial 16 Owners and Management and Related Stockholder Matters Item 13 Certain Relationships and Related 16 Transactions Item 14 Principal Accounting Fees and Services 16 PART IV Item 15 Exhibits, Financial Statement Schedules 17 Signatures 22 EXHIBITS INDEX 24 PART I Item 1. Business General TrustCo Bank Corp NY ("TrustCo" or the "Company") is a savings and loan holding company having its principal place of business at 5 Sarnowski Drive, Glenville, New York 12302. TrustCo was incorporated under the laws of New York in 1981 to acquire all of the outstanding stock of Trustco Bank, National Association, formerly known as Trustco Bank New York, and prior to that, The Schenectady Trust Company. On July 28, 2000 TrustCo acquired Landmark Financial Corp. and its subsidiary Landmark Community Bank, Canajoharie, New York, a federal savings bank with assets of approximately $26 million. Landmark Community Bank was subsequently renamed Trustco Savings Bank, and, on November 15, 2002, Trustco Savings Bank and Trustco Bank, National Association merged under the charter of Trustco Savings Bank. In that merger, the resulting bank changed its name to Trustco Bank (sometimes referred to in this report as the "Bank"). Through policy and practice, TrustCo continues to emphasize that it is an equal opportunity employer. There were 512 full-time equivalent employees of TrustCo at year-end 2005. TrustCo had 14,652 shareholders of record as of December 31, 2005 and the closing price of the TrustCo common stock at that date was $12.42. Subsidiaries Trustco Bank Trustco Bank is a federal savings bank engaged in providing general banking services to individuals, partnerships, and corporations. The Bank operates 81 automatic teller machines and 83 banking offices in Albany, Columbia, Dutchess, Greene, Rensselaer, Rockland, Saratoga, Schenectady, Schoharie, Ulster, Warren, Washington and Westchester counties of New York, Sarasota, Seminole and Orange counties in Florida, Bennington County in Vermont and Bergen County in New Jersey. The largest part of such business consists of accepting deposits and making loans and investments. The Bank provides a wide range of both personal and business banking services. The Bank is supervised and regulated by the federal Office of Thrift Supervision ("OTS") and is a member of the Federal Reserve System. Its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent permitted by law. The Bank established an operating subsidiary, Trustco Vermont Investment Company, in September 2003 for the purposes of holding all of the shares of the capital stock of the Bank's existing subsidiary, Trustco Realty Corp., that were held by the Bank and of acquiring and managing other investments. Trustco Realty Corp. holds certain mortgage assets which are serviced by the Bank. The Bank accounted for substantially all of TrustCo's 2005 consolidated net income and average assets. The trust department of the Bank serves as executor of estates and trustee of personal trusts, provides estate planning and related advice, provides custodial services, and acts as trustee for various types of employee benefit plans and corporate pension and 1 profit sharing trusts. The aggregate market value of the assets under trust, custody, or management of the trust department of the Bank was approximately $886 million as of December 31, 2005. The daily operations of the Bank remain the responsibility of its officers, subject to the oversight of its Board of Directors and overall supervision by TrustCo. The accounts of the Bank are included in TrustCo's consolidated financial statements. ORE Subsidiary During 1993, TrustCo created ORE Subsidiary Corp., a New York corporation, to hold and manage certain foreclosed properties acquired by the Bank. The accounts of this subsidiary are included in TrustCo's consolidated financial statements. TrustCo Charitable Foundation, Inc. During 2005, TrustCo founded TrustCo Charitable Foundation, Inc., a New York corporation, for the purpose of making charitable contributions to the communities it serves. The accounts of this subsidiary are not included in TrustCo's consolidated financial statements. Competition TrustCo faces strong competition in its market areas, both in attracting deposits and making loans. The Company's most direct competition for deposits, historically, has come from commercial banks, savings associations, and credit unions that are located or have branches in the Bank's market areas. The competition ranges from other locally based commercial banks, savings banks and credit unions to branches of the largest financial institutions in the United States. In the Capital District area of New York State, TrustCo's principal competitors are local operations of super regional banks, branch offices of money center banks, and locally based commercial and savings banks. The Bank is the largest depository institution headquartered in the Capital District area. The Company also faces competition for deposits from national brokerage houses, short-term money market funds, and other corporate and government securities funds. Factors affecting the acquisition of deposits include pricing, office locations and hours of operation, the variety of deposit accounts offered, and the quality of customer service provided. Competition for loans has been especially keen during the last several years. Commercial banks, local thrift institutions, traditional mortgage brokers affiliated with local offices, and nationally franchised real estate brokers are all active and aggressive competitors. The Company competes in this environment by providing a full range of financial services based on a tradition of financial strength and integrity dating from its inception. The Company competes for loans, principally through the interest rates and loan fees it charges, and the efficiency and quality of services it provides to borrowers. Supervision and Regulation Banking is a highly regulated industry, with numerous federal and state laws and regulations governing the organization and operation of banks and their affiliates. As a 2 savings and loan holding company registered under the Home Owners' Loan Act (the "Act"), TrustCo is regulated and examined by the OTS. The Act requires TrustCo to obtain prior OTS approval for acquisitions and restricts the business operations permitted to TrustCo. Because the FDIC provides deposit insurance to the Bank, the Bank is also subject to its supervision and regulation even though the FDIC is not the Bank's primary federal regulator. Most of TrustCo's revenues consist of cash dividends paid to TrustCo by the Bank, payment of which is subject to various regulatory limitations. (Note 1 to the consolidated financial statements contained in TrustCo's Annual Report to Shareholders for the year ended December 31, 2005, which appears on page 35 thereof, contains information concerning restrictions on TrustCo's ability to pay dividends and is hereby incorporated by reference.) Compliance with the standards set forth in the OTS rules regarding capital distribution by savings associations and savings banks could also limit the amount of dividends that TrustCo may pay to its shareholders. The banking industry is also affected by the monetary and fiscal policies of the federal government, including the Federal Reserve Board, which exerts considerable influence over the cost and availability of funds obtained for lending and investing. See Note 15 to the consolidated financial statements contained in TrustCo's Annual Report to Shareholders for the year ended December 31, 2005, which appears on page 46 thereof and contains information concerning regulatory capital requirements. The following summary of laws and regulations applicable to the Company and the Bank is not intended to be a complete description of those laws and regulations or their effects on the Company and the Bank, and it is qualified in its entirety by reference to the particular statutory and regulatory provisions described. Holding Company Activities The activities of savings and loan holding companies are governed by the Act. Since TrustCo became a savings and loan holding company in 2002, its activities are limited to those permissible for "multiple" savings and loan holding companies (that is, savings and loan holding companies owning more than one savings association subsidiary) as of March 5, 1987, activities permitted for bank holding companies as of November 12, 1999 and activities permissible for "financial holding companies" (which are described below). "Savings associations" include federal savings banks such as the Bank. TrustCo must obtain approval from the appropriate bank regulatory agencies before acquiring control of any insured depository institution. Regulatory Capital Requirements OTS capital regulations require thrifts to satisfy three capital ratio requirements: tangible capital, Tier 1 core (leverage) capital, and risk-based capital. In general, an association's tangible capital, which must be at least 1.5% of adjusted total assets, is the sum of common shareholders' equity adjusted for the effects of other comprehensive income ("OCI"), less goodwill and other disallowed assets. An association's ratio of Tier 1 core capital to adjusted total assets (the "core capital" or "leverage" ratio) must be at least 3% for the most highly rated associations and 4% for others. Higher capital ratios may be required if warranted by the particular 3 circumstances or risk profile of a given association. Under the risk-based capital requirement, a savings association must have total capital (core capital plus supplementary capital) equal to at least 8% of risk-weighted assets. Tier 1 capital must represent at least 50% of total capital and consists of core capital elements, which include common shareholders' equity, qualifying noncumulative nonredeemable perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries, but exclude goodwill and certain other intangible assets. Supplementary capital mainly consists of qualifying subordinated debt and portions of allowance for loan losses. The above capital requirements are viewed as minimum standards by the OTS. The OTS regulations also specify minimum requirements for a savings association to be considered a "well-capitalized institution" as defined in the "prompt corrective action" regulation described below. A "well-capitalized" savings association must have a total risk-based capital ratio of 10% or greater, and a leverage ratio of 5% or greater. Additionally, to qualify as a "well-capitalized institution," a savings association's Tier 1 risk-based capital, defined as core capital plus supplementary capital less portions of the association's allowance for loan losses, must be equal to at least 6% of risk-weighted assets. The Bank currently meets all of the requirements of a "well-capitalized institution." The OTS regulations contain prompt corrective action provisions that require certain mandatory remedial actions and authorize certain other discretionary actions to be taken by the OTS against a savings association that falls within specified categories of capital deficiency. The relevant regulations establish five categories of capital classification for this purpose, ranging from "well-capitalized" or "adequately capitalized" through "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." In general, the prompt corrective action regulations prohibit an OTS-regulated institution from declaring any dividends, making any other capital distributions, or paying a management fee to a controlling person, such as its parent holding company, if, following the distribution or payment, the institution would be within any of the three undercapitalized categories. Community Reinvestment Act The Community Reinvestment Act ("CRA") requires each savings institution, as well as commercial banks and certain other lenders, to identify the communities served by the institution's offices and to identify the types of credit the institution is prepared to extend within those communities. The CRA also requires the OTS to assess an institution's performance in meeting the credit needs of its identified communities as part of its examination of the institution, and to take such assessments into consideration in reviewing applications with respect to branches, mergers and other business combinations, including acquisitions by savings and loan holding companies. An unsatisfactory CRA rating may be the basis for denying such an application and community groups have successfully protested applications on CRA grounds. In connection with its assessment of CRA performance, the OTS assigns CRA ratings of "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance." The Bank was rated "satisfactory" in its last CRA examination. Institutions are evaluated based on (i) its record of helping to meet the credit needs of its assessment area 4 through lending activities; (ii) its qualified investments; and (iii) the availability and effectiveness of the institution's system for delivering retail banking services. An institution that is found to be deficient in its performance in meeting its community's credit needs may be subject to enforcement actions, including cease and desist orders and civil money penalties. Qualified Thrift Lender Test Like all OTS-regulated institutions, the Bank is required to meet a Qualified Thrift Lender ("QTL") test or the Internal Revenue Code's Domestic Building and Loan Association ("DBLA") test to avoid certain restrictions on its operations, including restrictions on its ability to branch interstate and the Company's mandatory registration as a savings and loan holding company under the Act. A savings association satisfies the QTL test if: (i) on a monthly average basis in at least nine months out of each twelve month period, at least 65% of a specified asset base of the savings association consists of loans to small businesses, credit card loans, educational loans, or certain assets related to domestic residential real estate, including residential mortgage loans and mortgage securities; or (ii) at least 60% of the savings association's total assets consist of cash, U.S. government or government agency debt or equity securities, fixed assets, or loans secured by deposits, real property used for residential, educational, church, welfare, or health purposes, or real property in certain urban renewal areas. To be a QTL under the DBLA test, a savings association must meet a "business operations test" and a "60 percent of assets test." The business operations test requires the business of a DBLA to consist primarily of acquiring the savings of the public and investing in loans. An institution meets the public savings requirement when it meets one of two conditions: (i) The institution acquires its savings accounts in conformity with OTS rules and regulations and (ii) The general public holds more than 75 percent of its deposits, withdrawable shares, and other obligations. An institution meets the investing in loans requirement when more than 75 percent of its gross income consists of interest on loans and government obligations, and various other specified types of operating income that financial institutions ordinarily earn. The 60 percent of assets test requires that at least 60 percent of a DBLA's assets must consist of assets that thrifts normally hold, except for consumer loans that are not educational loans. The Bank is currently, and expects to remain, in compliance with these standards. Federal Reserve System Federal Reserve Board regulations require savings institutions to maintain non-interest bearing reserves against their transaction accounts. The reserve for transaction accounts as of December 31, 2005 was 0% of the first $7.8 million of such accounts, 3% of the next $48.3 million of such accounts and 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) of the balance of such accounts. The Bank is in compliance with these requirements as of December 31, 2005. Gramm-Leach-Bliley Act On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 (the "GLB Act") was signed into law. The GLB Act made significant changes to the operations of financial services companies. It repealed prohibitions on affiliations among banks, securities firms and insurance companies. It authorized a broad range of financial services to be conducted by these types of companies within a new structure known as a "financial 5 holding company." A financial holding company may engage in a number of activities deemed to be new activities, such as securities underwriting and dealing activities, insurance underwriting and sales activities, merchant banking and equity investment activities, and "incidental" and "complementary" non-financial activities. While the GLB Act specifies so-called "functional regulation," various federal and state regulators have continued authority over certain activities of financial holding companies and other regulated financial institutions. The GLB Act establishes a federal right to the confidential treatment of nonpublic personal information about consumers. These provisions of the GLB Act require disclosure of privacy policies to consumers and, in some circumstances, will allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. Compliance with the rules was mandatory starting on July 1, 2001. These rules affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Because the Company does not sell customer information or give customer information to outside third parties or its affiliates except under very limited circumstances (e.g., providing customer information to the Company's data processing provider), the rules have not had a significant impact on the Company's results of operations or financial condition. Other Legislation On October 26, 2001, President Bush signed into law the USA PATRIOT Act ("Patriot Act"). The Patriot Act includes numerous provisions designed to fight international money laundering and to block terrorist access to the U.S. financial system. Under Title III of the Patriot Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions, including the Company and the Bank, are required to take certain measures to identify their customers, prevent money laundering, monitor certain customer transactions and report suspicious activity to U.S. law enforcement agencies, and scrutinize or prohibit altogether certain transactions of special concern. Financial institutions also are required to respond to requests for information from federal banking regulatory agencies and law enforcement agencies concerning their customers and their transactions. Information-sharing among financial institutions concerning terrorist or money laundering activities is encouraged by an exemption provided from the privacy provisions of the GLB Act and other laws. Further, the effectiveness of a financial institution in combating money laundering activities is a factor to be considered in applications submitted by a financial institution under the Bank Merger Act. The Company has in place a Bank Secrecy Act compliance program, and it engages in very few transactions of any kind with foreign financial institutions or foreign persons. On July 30, 2002, the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") was signed into law. Sarbanes-Oxley implemented legislative reforms intended to address corporate and accounting fraud and contains reforms of various business practices and numerous aspects of corporate governance. For example, this new legislation addresses accounting oversight and corporate governance matters, including the creation of a five-member oversight board appointed by the Securities and Exchange Commission to set and enforce auditing, quality control and independence standards for accountants and 6 have investigative and disciplinary powers; increased responsibilities and codified requirements relating to audit committees of public companies and how they interact with a company's public accounting firm; the prohibition of accounting firms from providing various types of consulting services to public clients and requiring accounting firms to rotate partners among public client assignments every five years; expanded disclosure of corporate operations and internal controls and certification by chief executive officers and chief financial officers to the accuracy of periodic reports filed with the SEC; and prohibitions on public company insiders from trading during retirement plan "blackout" periods, restrictions on loans to company executives and enhanced controls on and reporting of insider trading. Although the Company will incur additional expense in complying with the provisions of Sarbanes-Oxley and the resulting regulations, management does not expect that such compliance will have a material impact on the Company's financial condition or results of operations. The Company operates a wholly owned real estate investment trust ("REIT") subsidiary, which was formed to acquire, hold and manage real estate mortgage assets, including, but not limited to residential mortgage loans and mortgage-backed securities. The income earned on these assets, net of expenses, is distributed in the form of dividends. Under current New York State tax law, 60% of the dividends received from the REIT are excluded from total taxable income. The proposed 2006 New York State budget bill contains a provision that would disallow the exclusion of dividends paid by a real estate investment trust subsidiary. The bill, if enacted as proposed, would be effective for taxable years beginning on or after April 1, 2006. Assuming that the provision is passed as proposed, the Company would lose the tax benefit associated with the REIT. Foreign Operations Neither TrustCo nor the Bank engage in any operations in foreign countries or have outstanding loans to foreign debtors. Statistical Information Analysis The "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 6 through 25 of TrustCo's Annual Report to Shareholders for the year ended December 31, 2005, which contains a presentation and discussion of statistical data relating to TrustCo, is hereby incorporated by reference. This information should not be construed to imply any conclusion on the part of the management of TrustCo that the results, causes, or trends indicated therein will continue in the future. The nature and effects of governmental monetary policy, supervision and regulation, future legislation, inflation and other economic conditions and many other factors which affect interest rates, investments, loans, deposits, and other aspects of TrustCo's operations are extremely complex and could make historical operations, earnings, assets, and liabilities not indicative of what may occur in the future. Critical Accounting Policies Pursuant to recent SEC guidance, management of the Company is encouraged to 7 evaluate and disclose those accounting policies that are judged to be critical policies, or those most important to the portrayal of the Company's financial condition and results of operations, 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 subjectivity and uncertainty in estimating 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 Note 1 to the consolidated financial statements contained in TrustCo's Annual Report to Shareholders is a description of this critical policy and the other significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements. Availability of Reports This annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge from our Internet site, www.trustcobank.com. Forward-Looking Statements Statements included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" of TrustCo's Annual Report to Shareholders for the year ended December 31, 2005 and in future filings by TrustCo with the Securities and Exchange Commission, in TrustCo's press releases, and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect TrustCo's actual results and could cause TrustCo's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) credit risk; (ii) interest rate risk; (iii) competition; (iv) changes in the regulatory environment; and (v) changes in local market area and general business and economic trends. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Item 1A. Risk Factors These are general risk factors affecting the Company. They are further described under Item 1. "Business" and in "Management's Discussion and Analysis of Financial Condition and Results of Operations". Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business operations. Any of these risks could materially and adversely affect our business, financial condition or results of operations. In such cases, you may lose all or part of your investment. 8 Certain interest rate movements may hurt earnings and asset value. Interest rates have recently been at historically low levels. However, since June 30, 2004, the U.S. Federal Reserve has increased its target for the federal funds rate from 1.00% to 4.50%. While these short-term market interest rates (which are used as a guide to price the Bank's deposits) have increased, longer-term market interest rates (which are used as a guide to price the Bank's longer-term loans) have not. This "flattening" of the market yield curve has had a negative impact on the Bank's interest rate spread and net interest margin to date, and if short-term interest rates continue to rise, and if rates on the Bank's deposits and borrowings continue to reprice upwards faster than rates on the Bank's long-term loans and investments, the Bank would experience further compression of its interest rate spread and net interest margin, which would have a negative effect on the Bank's profitability. Changes in interest rates also affect the value of the Bank's interest-earning assets, and in particular the Bank's securities portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on shareholders' equity. Strong competition within the Bank's market areas could hurt profits and slow growth. The Bank faces intense competition both in making loans and attracting deposits. This competition has made it more difficult for the Bank to make new loans and at times has forced the Bank to offer higher deposit rates. Price competition for loans and deposits might result in the Bank earning less on loans and paying more on deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits and to hire and retain experienced employees. Some of the institutions with which the Bank competes have substantially greater resources and lending limits than the Bank has and may offer services that the Bank does not provide. Management expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. The Bank's profitability depends upon its continued ability to compete successfully in its market area. The Company operates in a highly regulated environment and may be adversely affected by changes in laws, regulations and tax policies. As described earlier, the Bank is subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, its primary federal regulator, and by the Federal Deposit Insurance Corporation, as insurer of our deposits. In addition, the Company is subject to regulation and supervision by the Office of Thrift Supervision. Such regulation and supervision govern the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of the Bank rather than for holders of the Company's common stock. Regulatory authorities have extensive discretion in their 9 supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of the Bank's assets and determination of the level of allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on operations. Likewise, the Company operates in an environment that imposes income taxes on its operations at both the federal and state levels to varying degrees. Strategies and operating routines have been implemented to minimize the impact of these taxes. Consequently, any change in tax legislation could significantly alter the effectiveness of these strategies. Negative events in certain geographic areas could adversely affect us. Negative conditions in the real estate markets where collateral for our mortgage loans is located could adversely affect our borrower's ability to repay and the value of the collateral. Real estate values are affected by various factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as hurricanes. We are dependent upon the services of our management team. We are dependent upon the ability and experience of a number of our key management personnel who have substantial experience with our operations, the financial services industry and the markets in which we offer our services. It is possible that the loss of the services of one or more of our senior executives or key managers would have an adverse effect on our operations. Our success also depends on our ability to continue to attract, manage and retain other qualified middle management personnel as we grow. We cannot assure you that we will continue to attract or retain such personnel. Item 1B. Unresolved Staff Comments None. Item 2. Properties TrustCo's executive offices are located at 5 Sarnowski Drive, Glenville, New York, 12302. The Company operates 83 offices, of which 23 are owned and 60 are leased from others. The asset value of these properties, when considered in the aggregate, is not material to the operation of TrustCo. In the opinion of management, the physical properties of TrustCo and the Bank are suitable and adequate and are being fully utilized. Item 3. Legal Proceedings The nature of TrustCo's business generates a certain amount of litigation against TrustCo and its subsidiaries involving matters arising in the ordinary course of business. 10 In the opinion of management of TrustCo, there are no proceedings pending to which TrustCo or any of its subsidiaries is a party, or of which its property is the subject which, if determined adversely to TrustCo or such subsidiaries, would be material in relation to TrustCo's consolidated shareholders' equity and financial condition. Item 4. Submission of Matters to a Vote of Security Holders None. 11 Executive Officers of TrustCo The following is a list of the names and ages of the executive officers of TrustCo and their business history for the past five years: Year First Name, Age and Principal Occupations Became Position Or Employment Since Executive With Trustco January 1, 2000 of TrustCo - ------------------------------------------------------------------------------- Robert J. McCormick, Age 42, President and Chief Executive 2000 President and Chief Officer of TrustCo since January Executive Officer 2004, Executive Officer of TrustCo since 2001 and President and Chief Executive Officer of Trustco Bank since November 2002. Director of TrustCo and Trustco Bank since 2005. Robert J. McCormick is the son of Robert A. McCormick. Robert T. Cushing, Age 50, Executive Vice President and Chief 1994 Executive Vice President Financial Officer of TrustCo since and Chief Financial Officer January 2004, President and Chief Executive Officer of TrustCo from November 2002 to December 2003; Executive Officer of TrustCo and Trustco Bank since 1994. Joined Trustco Bank in 1994. Scot R. Salvador, Age 39, Executive Vice President and Chief 2004 Executive Vice President Banking Officer of TrustCo and and Chief Banking Officer Trustco Bank since January 2004. Executive Officer of TrustCo and Trustco Bank since 2004. Joined Trustco Bank in 1995. Robert M. Leonard, Age 43, Secretary of TrustCo and Trustco 2003 Administrative Vice President Bank since 2003. Administrative and Secretary Vice President of TrustCo and Trustco Bank since 2004. Executive Officer of TrustCo and Trustco Bank since 2003. Joined Trustco Bank in 1986. Sharon J. Parvis, Age 55, Assistant Secretary of TrustCo 2005 Vice President and Assistant and Trustco Bank since 2005. Secretary Vice President of Trustco Bank since 1996 and Executive Officer of TrustCo and Trustco Bank since 2005. Joined Trustco Bank in 1987. Thomas M. Poitras, Age 43, Assistant Secretary of TrustCo 2005 Vice President and Assistant and Trustco Bank since 2005. Secretary Vice President of Trustco Bank since 2001 and Executive Officer of TrustCo and Trustco Bank since 2005. Joined Trustco Bank in 1986. Each executive officer is elected by the Board of Directors to serve until election of his successor. 12 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities TrustCo's common stock is traded on The Nasdaq Stock Market under the symbol "TRST." Information with respect to the range of high and low bid information for TrustCo's common stock, and with respect to the frequency and amount of cash dividends declarded on the common stock, is set forth on page 1 of TrustCo's Annual Report to Shareholders for the year ended December 31, 2005. TrustCo had 14,668 shareholders of record as of March 1, 2006, and the closing price of TrustCo's common stock on that date was $12.60. The following table provides information, as of December 31, 2005, regarding securities authorized for issuance under TrustCo's equity compensation plans. - ------------------------------------------------------------------------------- Number of securities Number of remaining securities to be available for future issued upon Weighted-average issuance under exercise of exercise price of equity compensation outstanding outstanding plans (excluding options, warrants options, warrants securities reflected and rights and rights in column (a)) Plan category (a) (b) (c) - ------------------------------------------------------------------------------- Equity compensation plans approved 4,178,049 $10.85 1,158,500 by security holders - ------------------------------------------------------------------------------- Equity compensation plans not None None None approved by security holders - ------------------------------------------------------------------------------- Total 4,178,049 $10.85 1,158,500 - ------------------------------------------------------------------------------- The following table provides information with respect to purchases of shares of TrustCo's common stock made by or on behalf of TrustCo in the fourth quarter of the year ended December 31, 2005. Purchases of Equity Securities - ------------------------------------------------------------------------------- Total Number of Maximum Shares Number Purchased as Of Shares Part of That May Total Average Publicly Yet Be Number of Price Announced Purchased 2005 Shares Paid per Plans or Under the Period Purchased Share Programs Plans or Programs - ------------------------------------------------------------------------------- October 1-31 0 $ 0 0 N/A - ------------------------------------------------------------------------------- November 1-30 90,000 $13.18 0 N/A - ------------------------------------------------------------------------------- December 1-31 40,426 $13.12 0 N/A - ------------------------------------------------------------------------------- Total 130,426 $13.16 0 N/A - ------------------------------------------------------------------------------- 13 All 130,426 shares were purchased by other than through a publicly announced plan or program. All purchases were made in open-market transactions to provide shares for issuance upon exercise of outstanding stock options issued by the Company and to provide shares for issuance under the Company's dividend reinvestment plan. Item 6. Selected Financial Data Page 25 of TrustCo's Annual Report to Shareholders for the year ended December 31, 2005, which is filed as Exhibit 13 hereto, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 6 through 25 of TrustCo's Annual Report to Shareholders for the year ended December 31, 2005, which is filed as Exhibit 13 hereto, are incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Pages 18 through 21 of TrustCo's Annual Report to Shareholders for the year ended December 31, 2005, which is filed as Exhibit 13 hereto, are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The consolidated financial statements, together with the report thereon of KPMG LLP on pages 28 through 47 of TrustCo's Annual Report to Shareholders for the year ended December 31, 2005, which is filed as Exhibit 13 hereto, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures are procedures that are designed with the objective of ensuring that information required to be disclosed in the Company's reports filed under the Securities Exchange Act of 1934, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to satisfy the objectives for which they are designed. Management's Report on Internal Control over Financial Reporting, together with the report thereon of KPMG LLP on pages 27 and 28 of TrustCo's Annual Report to Shareholders for the year ended December 31, 2005, which is filed as Exhibit 13 hereto, are incorporated herein by reference. 14 Subsequent to the date of Management's evaluation, there were no significant changes in the Company's internal controls, including internal controls over financial reporting, or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 9B. Other Information None. PART III Item 10. Directors and Executive Officers of Registrant The information in TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 15, 2006 under the following captions is incorporated herein by reference: "Information on TrustCo Directors and Nominees" and "Information on TrustCo Executive Officers" on pages 5 through 11, and "Section 16(a) Beneficial Ownership Reporting Compliance" on page 46. TrustCo has adopted a code of conduct that applies to all employees, including its principal executive, financial and accounting officers. A copy of this code of conduct will be provided without charge upon written request. Requests and inquiries should be directed to: Sharon J. Parvis, Vice President, TrustCo Bank Corp NY, P.O. Box 1082, Schenectady, New York 12301-1082. The required information regarding TrustCo's executive officers is contained in PART I in the item captioned "Executive Officers of TrustCo." Under rules adopted by the SEC, TrustCo is required to disclose whether it has an "audit committee financial expert" serving on its Audit Committee. The Board has determined that none of the members of the Audit Committee meet the definition of "audit committee financial expert" as defined in those rules. The Board believes that in order to fulfill all the functions of the Board and the Audit Committee, each member of the Board and the Audit Committee should meet all the criteria that have been established by the Board for Board membership and that it is not in the best interests of the Company to nominate as a director someone who does not have all the experience, attributes and qualifications that TrustCo seeks. Further, the Board believes that the present members of the Audit Committee have sufficient knowledge and experience in financial affairs to effectively perform their duties. TrustCo's Audit Committee consists of five non-employee directors, each of whom has been selected for the Audit Committee by the Board based on a determination that they are fully qualified to monitor the performance of management, the public disclosures by the Company of its financial condition and performance, the Company's internal accounting operations and our independent auditors. Members of the committee include William D. Powers (Chairman), Joseph Lucarelli, Thomas O. Maggs, Anthony J. Marinello, M.D.,Ph.D., and William J. Purdy. The Audit Committee has the ability on its own to retain independent accountants or other consultants whenever it deems appropriate, and has, in fact, retained Marvin & Co., an independent accounting firm, as a consultant to the committee. Further, the Audit Committee receives directly or has access to extensive information from reviews and examinations by the Company's internal auditor, independent auditor and the various banking regulatory agencies having jurisdiction over the Company and its subsidiaries. 15 Item 11. Executive Compensation The information under the captions "TrustCo and Trustco Bank Executive Officer Compensation" and "TrustCo Retirement Plans" on pages 15 through 23 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 15, 2006, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information under the captions "Information on TrustCo Directors and Nominees," and "Information on TrustCo Executive Officers," on pages 5 through 11 and "Ownership Of TrustCo Common Stock By Certain Beneficial Owners" on page 44 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 15, 2006, is incorporated herein by reference. Additional information concerning the Company's equity compensation plan is set forth in Item 5 hereof. Item 13. Certain Relationships and Related Transactions The information under the caption "Transactions with TrustCo and Trustco Bank Directors, Executive Officers and Associates" on page 45 of TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 15, 2006 is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The following table presents fees for professional audit services rendered by KPMG LLP ("KPMG") for the audit of TrustCo's annual consolidated financial statements for the fiscal years ended December 31, 2005 and 2004, and fees billed for other services provided by KPMG during 2005 and 2004. 2005 2004 -------- -------- Audit Fees $308,500 $315,000 Audit Related Fees(1) 79,400 23,500 Tax Fees(2) 144,700 148,110 All Other Fees(3) 86,969 85,700 -------- -------- Total Fees $619,569 $572,310 ======== ======== (1) For 2005, audit related fees included $23,500 for audits of certain employee benefit plan financial statements and $55,900 for audit and accounting related services. (2) For 2005 and 2004, tax fees include tax return preparation services and other compliance services. (3) For 2005, all other fees consisted of fees for tax planning services. For 2004, all other fees included $79,000 for tax planning services and $6,700 for other tax services. The Audit Committee preapproves all audit and nonaudit services provided by the Company's independent auditors. As such, all of the services described above were approved by the Audit Committee. 16 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K The following financial statements of TrustCo and its consolidated subsidiaries, and the accountants' report thereon are filed as a part of this report. Consolidated Statements of Condition -- December 31, 2005 and 2004. Consolidated Statements of Income -- Years Ended December 31, 2005, 2004, and 2003. Consolidated Statements of Changes in Shareholders' Equity -- Years Ended December 31, 2005, 2004, and 2003. Consolidated Statements of Cash Flows -- Years Ended December 31, 2005, 2004, and 2003. Notes to Consolidated Financial Statements. Financial Statement Schedules Not Applicable. All required schedules for TrustCo and its subsidiaries have been included in the consolidated financial statements or related notes thereto. Supplementary Financial Information Summary of Unaudited Quarterly Financial Information for the years ended December 31, 2005 and 2004. 17 The following exhibits are incorporated herein by reference:* Reg S-K Exhibit No. Description - ------------------------------------------------------------------------------- 3(i) Amended and Restated Certificate of Incorporation of TrustCo Bank Corp NY, dated July 27, 1993, as amended. 3(ii) Amended and Restated ByLaws of TrustCo Bank Corp NY, dated September 17, 2002. 10(a) Amended and Restated Trust For Deferred Benefits Provided under Employment Agreements of Trustco Bank, National Association and TrustCo Bank Corp NY, dated September 18, 2001. 10(b) Amended and Restated Trust Under Non-Qualified Deferred Compensation Plans of Trustco Bank, National Association and TrustCo Bank Corp NY, dated September 18, 2001. 10(c) Amended and Restated Trustco Bank, National Association and TrustCo Bank Corp NY Supplemental Retirement Plan, dated September 18, 2001. 10(d) Amended and Restated TrustCo Bank Corp NY Performance Bonus Plan, dated September 18, 2001. 10(e) Amended and Restated Trustco Bank, National Association Executive Officer Incentive Plan, dated September 18, 2001. 10(f) Amended and Restated Employment Agreements Between Trustco Bank, National Association, TrustCo Bank Corp NY and each of Robert T. Cushing, Robert J. McCormick, and Nancy A. McNamara, dated September 18, 2001. 10(g) Amended and Restated TrustCo Bank Corp NY 1995 Stock Option Plan, dated September 18, 2001. 10(h) Amended and Restated TrustCo Bank Corp NY Directors Stock Option Plan, dated September 18, 2001. 10(i) Amended and Restated TrustCo Bank Corp NY Directors Performance Bonus Plan, dated September 18, 2001. 18 Reg S-K Exhibit No. Description - ------------------------------------------------------------------------------- 10(j) Amended and Restated Trustco Bank, National Association Deferred Compensation Plan for Directors, dated September 18, 2001. 10(k) Consulting Agreement Between TrustCo Bank Corp NY and Robert A. McCormick. 10(l) Amendment No.1 to Amended and Restated TrustCo Bank Corp NY Performance Bonus Plan, dated November 25, 2003. 10(m) Amended and Restated Employment Agreement between Trustco Bank, TrustCo Bank Corp NY and Scot R. Salvador, dated January 1, 2004. 10(n) Service Bureau Processing Agreement by and between Fidelity Information Services, Inc. and TrustCo Bank Corp NY, dated March 3, 2004. 10(o) Amendment No. 2 to Amended and Restated Retirement Plan of Trustco Bank, dated March 16, 2004. 10(p) Master Service Agreement by and between Sungard Wealth Management Services, LLC and TrustCo Bank Corp NY dated April 1, 2004 (portions omitted pursuant to a request for confidential treatment). 10(q) 2004 TrustCo Directors Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (File No. 333-115689), filed May 20, 2004). 10(r) 2004 TrustCo Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (File No. 333-115674), filed May 20, 2004). 11 Computation of Net Income Per Common Share. - ------------------------------------------------------------------------------- *The exhibits included under Exhibit 10 constitute all management contracts, compensatory plans and arrangements required to be filed as an exhibit to this form pursuant to Item 15 of this report. 19 The following exhibits are filed herewith: Reg S-K Exhibit No. Description - ------------------------------------------------------------------------------- 10(s) 2005 Amended and Restated Trustco Bank Deferred Compensation Plans for Directors, dated December 20, 2005. 10(t) Amendment No. 4 to Amended and Restated Retirement Plan of Trustco Bank, dated December 20, 2005. 10(u) Amendment No. 6 to Third Restatement of Profit Sharing Plan of Trustco Bank, dated December 20, 2005. 10(v) Amendment No. 1 to Amended and Restated 1995 TrustCo Bank Corp NY Stock Option Plan, dated December 20, 2005. 10(w) Amendment No. 2 to Amended and Restated 1995 TrustCo Bank Corp NY Stock Option Plan, dated December 28, 2005. 10(x) Amendment No. 1 to 2004 TrustCo Bank Corp NY Stock Option Plan, dated December 20, 2005. 10(y) Amendment No. 2 to 2004 TrustCo Bank Corp NY Stock Option Plan, dated December 28, 2005. 10(z) Amendment No. 1 to Amended and Restated TrustCo Bank Corp NY Directors Stock Option Plan, dated December 28, 2005. 10(aa) Amendment No. 1 to 2004 TrustCo Bank Corp NY Directors Stock Option Plan, dated December 28, 2005. 10(bb) Restatement of Trustco Bank Senior Incentive Plan dated December 20, 2005. 13 Portions of Annual Report to Security Holders of TrustCo for the year ended December 31, 2005. 21 List of Subsidiaries of TrustCo. 23 Consent of Independent Registered Public Accounting Firm. 24 Power of Attorney. 31(i)(a) Rule 13a-14(a)/15d-14(a) Certification of Robert J. McCormick, principal executive officer. 20 31(i)(b) Rule 13a-14(a)/15d-14(a) Certification of Robert T. Cushing, principal financial officer. 32 Section 1350 Certifications of Robert J. McCormick, principal executive officer and Robert T. Cushing, principal financial officer. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TrustCo Bank Corp NY By: /s/ Robert T. Cushing ------------------------- Robert T. Cushing Executive Vice President and Chief Financial Officer Date: March 8, 2006 22 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date - ------------------------------------------------------------------------------- /s/ Robert J. McCormick President and March 8, 2006 - ----------------------- Chief Executive Officer Robert J. McCormick (principal executive officer) /s/ Robert T. Cushing Executive Vice President and March 8, 2006 - ------------------------ Chief Financial Officer Robert T. Cushing (principal financial and accounting officer) * Director March 8, 2006 - ------------------------ Joseph Lucarelli * Director March 8, 2006 - ------------------------ Thomas O. Maggs * Director March 8, 2006 - ------------------------ Dr. Anthony J. Marinello * Director March 8, 2006 - ------------------------ Robert A. McCormick * Director March 8, 2006 - ------------------------ William D. Powers * Director March 8, 2006 - ------------------------ William J. Purdy By: /s/ Robert M. Leonard --------------------- *Robert M. Leonard, as Agent Pursuant to Power of Attorney 23 Exhibits Index Reg S-K Item 601 Exhibit No. - ------------------------------------------------------------------------------- 3(i) Amended and Restated Certificate of Incorporation of TrustCo Bank Corp NY, as amended, incorporated by reference to, Exhibit 3(i)a to TrustCo Bank Corp NY's Quarterly Report on Form 10Q, for the quarter ended June 30, 2004. 3(ii) Amended and Restated ByLaws of TrustCo Bank Corp NY, dated September 17, 2002, incorporated by reference to, Exhibit 3(ii)a to TrustCo Bank Corp NY's Quarterly Report on Form 10Q, for the quarter ended September 30, 2002. 10(a) Amended and Restated Trust For Deferred Benefits Provided under Employment Agreements of Trustco Bank, National Association and TrustCo Bank Corp NY, dated September 18, 2001 incorporated by reference to Exhibit 10(b) to TrustCo Bank Corp NY's Annual Report on Form 10K, for the year ended December 31, 2001. 10(b) Amended and Restated Trust Under Non-Qualified Deferred Compensation Plans of Trustco Bank, National Association and TrustCo Bank Corp NY, dated September 18, 2001, incorporated by reference to, Exhibit 10(c) to TrustCo Bank Corp NY's Annual Report on Form 10K, for the year ended December 31, 2001. 10(c) Amended and Restated Trustco Bank, National Association and TrustCo Bank Corp NY Supplemental Retirement Plan, dated September 18, 2001 incorporated by reference to, Exhibit 10(f) to TrustCo Bank Corp NY's Annual Report on Form 10K, for the year ended December 31, 2001. 10(d) Amended and Restated TrustCo Bank Corp NY Performance Bonus Plan, dated September 18, 2001 incorporated by reference to, Exhibit 10(g) to TrustCo Bank Corp NY's Annual Report on Form 10K, for the year ended December 31, 2001. 24 Exhibits Index Reg S-K Item 601 Exhibit No. - ------------------------------------------------------------------------------- 10(e) Amended and Restated Trustco Bank, National Association Executive Officer Incentive Plan, dated September 18, 2001 incorporated by reference to, Exhibit 10(h) to TrustCo Bank Corp NY's Annual Report on Form 10K, for the year ended December 31, 2001. 10(f) Amended and Restated Employment Agreements Between Trustco Bank, National Association, TrustCo Bank Corp NY and each of Robert T. Cushing, Robert J. McCormick, and Nancy A. McNamara, dated September 18, 2001 incorporated by reference to, Exhibit 10(i) to TrustCo Bank Corp NY's Annual Report on Form 10K, for the year ended December 31, 2001. 10(g) Amended and Restated TrustCo Bank Corp NY 1995 Stock Option Plan, dated September 18, 2001 incorporated by reference to, Exhibit 10(k) to TrustCo Bank Corp NY's Annual Report on Form 10K, for the year ended December 31, 2001. 10(h) Amended and Restated TrustCo Bank Corp NY Directors Stock Option Plan, dated September 18, 2001 incorporated by reference to, Exhibit 10(l) to TrustCo Bank Corp NY's Annual Report on Form 10K, for the year ended December 31, 2001. 10(i) Amended and Restated TrustCo Bank Corp NY Directors Performance Bonus Plan, dated September 18, 2001 incorporated by reference to, Exhibit 10(m) to TrustCo Bank Corp NY's Annual Report on Form 10K, for the year ended December 31, 2001. 10(j) Amended and Restated Trustco Bank Deferred Compensation Plan for Directors, dated September 18, 2001 incorporated by reference to, Exhibit 10(n) to TrustCo Bank Corp NY's Annual Report on Form 10K, for the year ended December 31, 2001. 25 Exhibits Index Reg S-K Item 601 Exhibit No. - ------------------------------------------------------------------------------- 10(k) Consulting Agreement Between TrustCo Bank Corp NY and Robert A. McCormick, dated October 11, 2002 incorporated by reference to, Exhibit 10(a) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q, for the quarter ended September 30, 2002. 10(l) Amendment No. 1 to Amended and Restated TrustCo Bank Corp NY Performance Bonus Plan, dated November 25, 2003 incorporated by reference to, Exhibit 10(m) to TrustCo Bank Corp NY's Annual Report on Form 10K, for the year ended December 31, 2003. 10(m) Amended and Restated Employment Agreement between Trustco Bank, TrustCo Bank Corp NY, and Scot R. Salvador, dated January 1, 2004 incorporated by reference to, Exhibit 10(a) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q, for the quarter ended March 31, 2004. 10(n) Service Bureau Processing Agreement by and between Fidelity Information Services, Inc. and TrustCo Bank Corp NY dated March 3, 2004 incorporated by reference to, Exhibit 10(b) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q, for the quarter ended March 31, 2004. 10(o) Amendment No. 2 to Amended and Restated Retirement Plan of Trustco Bank, dated March 16, 2004 incorporated by reference to, Exhibit 10(c) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q, for the quarter ended March 31, 2004. 10(p) Master Service Agreement by and between Sungard Wealth Management Services, LLC and TrustCo Bank Corp NY dated April 1, 2004 (portions omitted pursuant to a request for confidential treatment) incorporated by reference to Exhibit 10(a) to TrustCo Bank Corp NY's Quarterly Report on Form 10Q, for the quarter ended June 30, 2004. 10(q) 2004 TrustCo Directors Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (File No. 333-115689), filed May 20, 2004). 10(r) 2004 TrustCo Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (File No. 333-115674), filed May 20, 2004). 10(s) 2005 Amended and Restated Trustco Bank Deferred Compensation Plan for Directors, dated December 20, 2005, filed herewith. 26 Exhibits Index Reg S-K Item 601 Exhibit No. - ------------------------------------------------------------------------------- 10(t) Amendment No. 4 to Amended and Restated Retirement Plan of Trustco Bank, dated December 20, 2005, filed herewith. 10(u) Amendment No. 6 to Third Restatement of Profit Sharing Plan of Trustco Bank, dated December 20, 2005, filed herewith. 10(v) Amendment No. 1 to Amended and Restated 1995 TrustCo Bank Corp NY Stock Option Plan, dated December 20, 2005, filed herewith. 10(w) Amendment No. 2 to Amended and Restated 1995 TrustCo Bank Corp NY Stock Option Plan, dated December 28, 2005, filed herewith. 10(x) Amendment No. 1 to 2004 TrustCo Bank Corp NY Stock Option Plan, dated December 20, 2005, filed herewith. 10(y) Amendment No. 2 to 2004 TrustCo Bank Corp NY Stock Option Plan, dated December 28, 2005, filed herewith. 10(z) Amendment No. 1 to Amended and Restated TrustCo Bank Corp NY Directors Stock Option Plan, dated December 28, 2005, filed herewith. 10(aa) Amendment No. 1 to 2004 TrustCo Bank Corp NY Directors Stock Option Plan, dated December 28, 2005, filed herewith. 10(bb) Restatement of Trustco Bank Senior Incentive Plan dated December 20, 2005, filed herewith. 11 Computation of Net Income Per Common Share. Note 12 on page 44 of TrustCo's Annual Report to Shareholders for the year ended December 31, 2005 is incorporated herein by reference. 13 Portions of Annual Report to Security Holders of TrustCo for the year ended December 31, 2005, filed herewith. 21 List of Subsidiaries of TrustCo, filed herewith 23 Consent of Independent Registered Public Accounting Firm, filed herewith. 24 Power of Attorney, filed herewith. 27 Exhibits Index - ------------------------------------------------------------------------------- 31(i)(a) Rule 13a-14(a)/15d-14(a) Certification of Robert J. McCormick, principal executive officer, filed herewith. 31(i)(b) Rule 13a-14(a)/15d-14(a) Certification of Robert T. Cushing, principal financial officer, filed herewith. 32 Section 1350 Certifications of Robert J. McCormick, principal executive officer and Robert T. Cushing, principal financial officer, filed herewith. GRAPHICS APPENDIX - ------------------------------------------------------------------------------- Cross Reference To Page of Omitted Charts Annual Report - ------------------------------------------------------------------------------- 1 Return on Equity 6 2 Taxable Equivalent Net Interest Income 8 3 Allowance for Loan Losses 17 4 Efficiency Ratio 22 The charts listed above were omitted from the EDGAR version of Exhibit 13; however, the information depicted in the charts was adequately discussed and/or displayed in the tabular information within Management's Discussion and Analysis section of the Annual Report. 28 EX-10 2 ex10s.txt EXHIBIT 10(S) Exhibit 10(s) 2005 AMENDED AND RESTATED TRUSTCO BANK DEFERRED COMPENSATION PLAN FOR DIRECTORS 2005 AMENDED AND RESTATED TRUSTCO BANK DEFERRED COMPENSATION PLAN FOR DIRECTORS WHEREAS, on November 24, 1981, the Board of Directors of Trustco Bank (herein referred to as the "Bank") adopted the Trustco Bank National Association Deferred Compensation Plan for Directors (hereinafter referred to as the "Plan"); and WHEREAS, the Bank desires to amend and restate the Plan, effective as of January 1, 2005; NOW, THEREFORE, the Bank hereby amends and restates the Plan in its entirety, effective as of January 1, 2005, to read as follows: The Amended and Restated Trustco Bank, National Association Deferred Compensation effective January 1, 2001 (the "Previous Plan") a copy of which is attached hereto and incorporated herein, will remain in full force and effect for all deferrals of compensation made prior to January 1, 2005. The Previous Plan is frozen and no further deferrals shall be credited to deferral accounts maintained under the Previous Plan, but such accounts shall continue to receive interest credits as provided in paragraph 2 of the Previous Plan. The Previous Plan is intended to be maintained without material modifications so as to be "grandfathered" by The American Jobs Creation Act of 2004 (the "Act"), and not subject to the provisions of Code Section 409A and other relevant sections of the Act. The 2005 Plan is intended to meet the requirements of the Act, and to be subject to Code Section 409A. Both the 2005 Plan and the Previous Plan are unfunded arrangements providing deferred compensation to Directors. The 2005 Plan, which is in effect for all deferrals on and after January 1, 2005, is as follows: 1 1. Any Director may elect by written election filed with the Bank on or before December 31 of any year to defer receipt of all or a specific part of his annual fees for the following calendar year, which election to defer fees continues from year to year unless the Director amends or terminates such election by written request filed with the Bank or ceases to be a Director. An election applicable to a calendar year may not be amended or terminated during that calendar year. In the event of a termination of an election, the amount already deferred by the Director cannot be paid to him until he ceases to be a Director and shall be paid in accordance with paragraph 3 hereof. 2. The Bank will not fund its liability for deferred fees or interest thereon but general ledger accounts will be maintained, supported by memorandum accounts for each Director. The compensation deferred will be credited to the Director's deferred compensation account as of the date it would otherwise have been payable. A Director's deferred compensation account shall be credited at the end of each calendar quarter with a credit on the balance at the beginning of the quarter equal to the number of days in the quarter times one-fourth of the greater of (i) 6%, or (ii) the ten-year U.S. Treasury Bond rate on the last business day of the quarter. 3. In the event a Director ceases to be a Director of the Bank, the entire balance of his deferred fees, including interest credited thereon, shall be paid to the Director in a lump sum, paid as of the last day of the month following the date which is twelve months after the date the Director ceases to be a Director of the Bank. The determination of whether an individual has ceased to be a Director of the Bank shall be subject to Section 409A of the Code and regulations promulgated thereunder. 4. Upon the death of a Director, the balance of his account shall be payable to a beneficiary designated by him or her on the first day of the calendar year following the year in 2 which he or she dies, in a lump sum, or if no beneficiary is named, to the trustee of the Director's revocable living trust, and if none of the trustee of the Director's testamentary trust, and if none to the personal representative of the Director's estate. 5. The right to receive payment of deferred compensation shall not be transferable or assignable by a Director or named beneficiary, except by will or by the laws of descent and distribution. 6. A Director may prior to December 31, 2005, by written notice to the Bank cancel a deferral election made for 2005 and, in the event of such cancellation, all amounts attributable to the cancelled deferral shall be paid to the Director on or prior to December 31, 2005, and included in the income of the Director in calendar year 2005. 7. The Board of Directors of the Bank reserves the right to amend, suspend or terminate this Plan at any time. However, no amendment, suspension or termination of this Plan may alter or impair any Director's rights previously granted under the Plan, without his consent. IN WITNESS WHEREOF, the Bank has caused this amended and restated Plan to be executed this 20th day of December, 2005. TRUSTCO BANK CORP NY By: /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer 3 EX-10 3 ex10t.txt EXHIBIT 10(T) Exhibit 10(t) AMENDMENT NO. 4 TO AMENDED AND RESTATED RETIREMENT PLAN OF TRUSTCO BANK WHEREAS, Trustco Bank, a federal savings bank (hereinafter referred to as "Bank"), maintains the Retirement Plan of Trustco Bank (hereinafter referred to as the "Plan"); and WHEREAS, the Plan Sponsor reserves the right to amend the Plan; and WHEREAS, the Bank desires to amend said Plan effective as of January 1, 2006 to modify the benefit formula for new employees and to eliminate the suspension of benefits provision; NOW, THEREFORE, the Bank does hereby amend the Plan, effective January 1, 2006, as follows: I. Section 1.28 of the Plan defining Year of Vesting Service shall be amended by the addition of the following: An Employee who was an employee of Landmark Community Bank on July 27, 2000 and continued to be employed by the Company on July 28, 2000 (the acquisition date by the Company) shall have all employment with Landmark Community Bank deemed employment with the Company for determining Vesting Service under the Plan. II. Section 3.2 of the Plan relating to the Postponed Retirement Date shall be deleted in its entirety and replaced with the following: Section 3.2 Postponed Retirement Date. A Participant may continue in employment of the Company after his Normal Retirement Date; provided, however, that a Participant who meets the following requirements must retire on the first day of the month coinciding or next following the date on which he attains age 70: Page 1 of 3 (a) during the two-year period immediately before retirement such Participant is employed in a bona fide executive or high policy making position; and (b) such Participant is entitled to an immediate nonforfeitable annual retirement benefit from a pension, profit sharing, savings or deferred compensation plan, including this Plan, or any combination of such plans of the Company which equal, in the aggregate, at least $44,000. A Participant who does continue in the employment of the Company after his Normal Retirement Date will have a Postponed Retirement Date which will be the first day of the month coinciding with or next following his termination of employment with the Company. The payment of the Accrued Benefit to such Participant who continues his employment beyond his Normal Retirement Date shall commence on this Postponed Retirement Date. The benefits payable on his Postponed Retirement Date shall be equal to the greater of: 1) the amount which is based on the Accrued Benefit formula using his Years of Benefit Service and Compensation through his Postponed Retirement Date, reduced (but not below zero) by the Actuarial Equivalent of any earlier benefit payments, and 2) the Actuarial Equivalent of his Accrued Benefit at his Normal Retirement Date, reduced (but not below zero) by the Actuarial Equivalent of any earlier benefit payments. III. Section 4.1(A) of the Plan relating to the Accrued Benefit shall be amended by the addition of the following: Effective for employees hired on or after January 1, 2006, the monthly Accrued Benefit of a Participant, payable on or after such Participant's Normal Retirement Date, shall be equal to one-twelfth of the sum of the following: Regular Benefit: .5% of the Participant's Final Average Earnings multiplied by his Years of Benefit Service earned on and after January 1, 2006 up to a maximum of 30 years, plus Supplemental Benefit: .325% of the Participant's Final Average Earnings in excess of Covered Compensation multiplied by his Years of Benefit Service earned on and after January 1, 2006 up to a maximum of 30 Years of Benefit Service. Page 2 of 3 IV. Section 4.5 of the Plan relating to Employment After Retirement shall be deleted in its entirety and replaced with the following: Section 4.5. Employment After Retirement. If a Participant is reemployed after commencement of his retirement benefit, benefit payments shall be stopped if the Participant has not incurred a One Year Break-in Service. Payments shall resume upon termination of employment. Benefits payable on his subsequent termination of employment shall be calculated in accordance with the Postponed Retirement Date provisions of Section 3.2 and reduced by the Actuarial Equivalent of any earlier payments. IN WITNESS WHEREOF, the Bank has caused this Amendment No. 4 to be executed by its duly authorized officer this 20th day of December, 2005. TRUSTCO BANK By: /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer Page 3 of 3 EX-10 4 ex10u.txt EXHIBIT 10(U) Exhibit 10(u) AMENDMENT NO. 6 TO THIRD RESTATEMENT OF PROFIT SHARING PLAN OF TRUSTCO BANK WHEREAS, Trustco Bank, (hereinafter called "the Company"), maintains the Profit Sharing Plan of Trustco Bank (hereinafter called "Plan"); and WHEREAS, the Plan Sponsor reserves the right to amend the Plan; and WHEREAS, the Bank desires to amend said Plan effective as of January 1, 2006 to change the Plan name, add a salary deferral contribution and Company matching contribution to the Plan, add loan, financial hardship withdrawal provisions, and in-service withdrawals at age 59 1/2 and change the Plan's valuation to daily valuation; NOW, THEREFORE, the Bank does hereby amend the Plan, effective January 1, 2006, except as otherwise provided, by the addition of the following new ARTICLE XV as follows: I. The Preamble of the Plan shall be deleted in its entirety and replaced with the following: WHEREAS, TRUSTCO BANK, (formerly The Schenectady Trust Company), a national bank duly organized and existing under the laws of the United States (hereinafter referred to as the "Company"), established the Profit Sharing Plan of The Schenectady Trust Company which was subsequently known as the Profit Sharing Plan of Trustco Bank, shall be known as Trustco Bank Profit Sharing/401(k) Plan II. Section 1.07 of the Plan shall be amended by the addition of the following: Compensation for testing purposes shall be Annual Compensation as defined in Section 13.02(b) of the Plan. III. Section 1.08 of the Plan shall be amended by the addition of the following: For purposes of the salary deferral contribution, an executive officer designated for participation in the Trustco Bank Executive Officer Incentive Plan shall be considered an Employee. Page 1 of 28 VI. Section 1.18 of the Plan shall be deleted in its entirety and replaced with the following: 1.18 "Plan" shall mean the profit sharing plan set forth in this document and any and all amendments thereto, which Plan shall be known as the "Trustco Bank Profit Sharing/401(k) Plan". V. Section 1.23 of the Plan shall be deleted in its entirety and replaced with the following: 1.23 "Valuation Date" means the last day of the Plan Year and may include any other date or dates deemed necessary or appropriate by the Administrator for the valuation of the Participants' accounts during the Plan Year, which may include any day that the Trustee, any transfer agent appointed by the Trustee or the Company or any stock exchange used by such agent, are open for business. VI. Section 3.02 of the Plan shall be amended by the addition of the following: With respect to salary deferral elections and Company matching contributions pursuant to Article XV, any Eligible Employee shall be eligible to participant and become a Participant on the date of such Employee's employment with the Company. VII. The first paragraph of Section 6.01 of the Plan shall be deleted in its entirety and replaced with the following: Each Participant shall direct the manner in which his Participant Account (including salary deferral contributions and company matching contributions), his Rollover Account and Participant Forfeiture Account, if any, are to be invested. A Participant shall notify the Committee in writing of the percentage of each such Account to be invested in each Fund. Such percentage must be in one percent (1%) increments. If a Participant does not provide investment direction of his Accounts, such Accounts shall be invested in Option Fund A. VIII. Section 7.06A of the Plan shall be amended by the addition of the following: Page 2 of 28 The following vesting schedule shall apply to Company Matching Contributions made pursuant to Section 15.01 and Company Contributions made for any Plan Year beginning December 31, 2006 pursuant to Section 4.01: Vesting Schedule Matching Contribution and Company Contribution made after 2006 Years of Service Percentage Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 100% The computation of a Participant's nonforfeitable percentage of such Participant's interest in the Plan shall not be reduced as the result of this amendment to the Plan. With respect to the Company Contribution pursuant to Section 4.01, each Participant with at least three (3) Years of Service shall have such Participant's nonforfeitable percentage computed under the Plan without regard to this amendment. IX. Article VIII of the Plan shall be amended by the addition of the following new Section 8.04: 8.04 At such time as a Participant shall have attained the age of 59 1/2, the Administrator, at the election of the Participant, who has not severed employment with the Company, shall direct the Trustee to distribute all or a portion of the amount then credited to the salary deferral account and company matching account maintained on behalf of the Participant. However, distributions from the company matching account shall be limited to the vested portion of the company matching account. In the event that the Administrator makes such a distribution, the Participant shall continue to be eligible to participate in the Plan on the same basis as any other Employee. Any distribution made pursuant to this Section shall be made in a manner consistent with Article VII, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. X. The Plan shall be amended by the addition of the following new ARTICLE XV as follows: Page 3 of 28 ARTICLE XV SALARY DEFERRAL CONTRIBUTION, COMPANY MATCHING CONTRIBUTION AND ALLOCATION 15.01 FORMULA FOR DETERMINING COMPANY CONTRIBUTION For each Plan Year, the Company shall contribute to the Plan: (a) The amount of the total salary reduction elections of all Participants made pursuant to Section 15.02(a), which amount shall be deemed a Company Elective Contribution. (b) On behalf of each Participant who is eligible to share in matching contributions for the Plan Year, a matching contribution equal to 100% of each such Participant's Deferred Compensation of the first 3% of annual Compensation plus 50% of each such Participant's Deferred Compensation on the next 3% of annual Compensation, which amount shall be deemed an Company Non-Elective Contribution. 15.02 PARTICIPANT'S SALARY REDUCTION ELECTION (a) Effective January 1, 2006, each Participant may elect to defer a portion of Compensation which would have been received in the Plan Year (except for the deferral election) by up to the maximum amount which will not cause the Plan to violate the provisions of Sections 15.04(a) and 5.04. Each executive officer designated for participation in the Trustco Bank Executive Officer Incentive Plan may elect to defer his Compensation which would have been received in the Plan Year, but for the deferral election, by up to 0%. A deferral election (or modification of an earlier election) may not be made with respect to Compensation which is currently available on or before the date the Participant executed such election. For purposes of this Section, Compensation shall be determined prior to any reductions made pursuant to Code Sections 125, 132(f)(4), 402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Company contributions. The amount by which Compensation is reduced shall be that Participant's Deferred Compensation and be treated as an Company Elective Contribution and allocated to that Participant's Elective Account. (b) The balance in each Participant's Elective Account shall be fully Vested at all times and, except as otherwise provided herein, shall not be subject to Forfeiture for any reason. Page 4 of 28 (c) Notwithstanding anything in the Plan to the contrary, amounts held in the Participant's Elective Account may not be distributable earlier than: (1) a Participant's separation from service, Total and Permanent Disability, or death; (2) a Participant's attainment of age 59 1/2; (3) the termination of the Plan without the existence at the time of Plan termination of another defined contribution plan or the establishment of a successor defined contribution plan by the Company within the period ending twelve months after distribution of all assets from the Plan maintained by the Company. For this purpose, a defined contribution plan does not include an employee stock ownership plan (as defined in Code Section 4975(e)(7) or 409), a simplified employee pension plan (as defined in Code Section 408(k)), or a simple individual retirement account plan (as defined in Code Section 408(p)); (4) the date of disposition by the Company to an entity that is not an affiliated company of substantially all of the assets (within the meaning of Code Section 409(d)(2)) used in a trade or business of such corporation if such corporation continues to maintain this Plan after the disposition with respect to a Participant who continues employment with the corporation acquiring such assets; or (5) the date of disposition by the Company who maintains the Plan of its interest in a subsidiary (within the meaning of Code Section 409(d)(3)) to an entity which is not an affiliated company but only with respect to a Participant who continues employment with such subsidiary. (d) For each Plan Year, a Participant's Deferred Compensation made under this Plan and all other plans, contracts or arrangements of the Company maintaining this Plan shall not exceed, during any taxable year of the Participant, the limitation imposed by Code Section 402(g), as in effect at the beginning of such taxable year. If such dollar limitation is exceeded, a Participant will be deemed to have notified the Administrator of such excess amount which shall be distributed in a manner consistent with Section 15.02(f). The dollar limitation shall be adjusted annually pursuant to the method provided in Code Section 415(d) in accordance with Regulations. Page 5 of 28 (e) In the event a Participant has received a hardship distribution pursuant to Regulation 1.401(k)-1(d)(2)(iv)(B) from any other plan maintained by the Company, then such Participant shall not be permitted to elect to have Deferred Compensation contributed to the Plan for a period of six (6) months following the receipt of the distribution. Furthermore, the dollar limitation under Code Section 402(g) shall be reduced, with respect to the Participant's taxable year following the taxable year in which the hardship distribution was made, by the amount of such Participant's Deferred Compensation, if any, pursuant to this Plan (and any other plan maintained by the Company) for the taxable year of the hardship distribution. (f) If a Participant's Deferred Compensation under this Plan together with any elective deferrals (as defined in Regulation 1.402(g)-1(b)) under another qualified cash or deferred arrangement (as described in Code Section 401(k)), a simplified employee pension (as described in Code Section 408(k)(6)), a simple individual retirement account plan (as described in Code Section 408(p)), a salary reduction arrangement (within the meaning of Code Section 3121(a)(5)(D)), a deferred compensation plan under Code Section 457(b), or a trust described in Code Section 501(c)(18) cumulatively exceed the limitation imposed by Code Section 402(g) (as adjusted annually in accordance with the method provided in Code Section 415(d) pursuant to Regulations) for such Participant's taxable year, the Participant may, not later than March 1 following the close of the Participant's taxable year, notify the Administrator in writing of such excess and request that the Participant's Deferred Compensation under this Plan be reduced by an amount specified by the Participant. In such event, the Administrator may direct the Trustee to distribute such excess amount (and any Income allocable to such excess amount) to the Participant not later than the first April 15th following the close of the Participant's taxable year. Any distribution of less than the entire amount of Excess Deferred Compensation and Income shall be treated as a pro rata distribution of Excess Deferred Compensation and Income. The amount distributed shall not exceed the Participant's Deferred Compensation under the Plan for the taxable year (and any Income allocable to such excess amount). Any distribution on or before the last day of the Participant's taxable year must satisfy each of the following conditions: (1) the distribution must be made after the date on which the Plan received the Excess Deferred Compensation; (2) the Participant shall designate the distribution as Excess Deferred Compensation; and Page 6 of 28 (3) the Plan must designate the distribution as a distribution of Excess Deferred Compensation. Any distribution made pursuant to this Section 15.02(f) shall be made first from unmatched Deferred Compensation and, thereafter, from Deferred Compensation which is matched. Matching contributions which relate to such Deferred Compensation shall be forfeited. (g) Notwithstanding Section 15.02(f) above, a Participant's Excess Deferred Compensation shall be reduced, but not below zero, by any distribution of Excess Contributions pursuant to Section 15.05(a) for the Plan Year beginning with or within the taxable year of the Participant. (h) At Normal Retirement Date, or such other date when the Participant shall be entitled to receive benefits, the fair market value of the Participant's Elective Account shall be used to provide additional benefits to the Participant or the Participant's Beneficiary. (i) Company Elective Contributions made pursuant to this Section may be segregated into a separate account for each Participant in a federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate, or other short-term debt security acceptable to the Trustee until such time as the allocations pursuant to Section 15.03 have been made. (j) The Company and the Administrator shall implement the salary reduction elections provided for herein in accordance with the following: (1) A Participant must make an initial salary deferral election within a reasonable time, not to exceed thirty (30) days, after entering the Plan pursuant to Section 3.02. If the Participant fails to make an initial salary deferral election within such time, then such Participant may thereafter make an election in accordance with the rules governing modifications. The Participant shall make such an election by entering into a written salary reduction agreement with the Company and filing such agreement with the Administrator. Such election shall initially be effective beginning with the pay period following the acceptance of the salary reduction agreement by the Administrator, shall not have retroactive effect and shall remain in force until revoked. (2) A Participant may modify a prior election during the Plan Year and concurrently make a new election by filing a written notice with the Administrator within a reasonable time before the Page 7 of 28 pay period for which such modification is to be effective. Modifications to a salary deferral election shall be permitted any pay period, during election periods established by the Administrator. Any modification shall not have retroactive effect and shall remain in force until revoked. (3) A Participant may elect to prospectively revoke the Participant's salary reduction agreement in its entirety at any time during the Plan Year by providing the Administrator with thirty (30) days written notice of such revocation (or upon such shorter notice period as may be acceptable to the Administrator). Such revocation shall become effective as of the beginning of the first pay period coincident with or next following the expiration of the notice period. Furthermore, the termination of the Participant's employment, or the cessation of participation for any reason, shall be deemed to revoke any salary reduction agreement then in effect, effective immediately following the close of the pay period within which such termination or cessation occurs. 15.03 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS (a) The Administrator shall establish and maintain an account in the name of each Participant to which the Administrator shall credit as of each Anniversary Date, or other Valuation Date, all amounts allocated to each such Participant as set forth herein. (b) The Company shall provide the Administrator with all information required by the Administrator to make a proper allocation of the Company contributions for each Plan Year. Within a reasonable period of time after the date of receipt by the Administrator of such information, the Administrator shall allocate such contribution as follows: (1) With respect to the Company Elective Contribution made pursuant to Section 15.01(a), to each Participant's Elective Account in an amount equal to each such Participant's Deferred Compensation for the year. (2) With respect to the Company Non-Elective Contribution made pursuant to Section 15.01(b), to each Participant's Account in accordance with Section 15.01(b). Any Participant actively employed during the Plan Year shall be eligible to share in the matching contribution for the Plan Year. Page 8 of 28 (c) On or before each Anniversary Date any amounts which became Forfeitures since the last Anniversary Date may be used to pay any administrative expenses of the Plan or may be used to reduce the contribution of the Company hereunder for the Plan Year in which such Forfeitures occur or the next following Plan Year. 15.04 ACTUAL DEFERRAL PERCENTAGE TESTS4. (a) Maximum Annual Allocation: For each Plan Year, the annual allocation derived from Company Elective Contributions to a Highly Compensated Participant's Elective Account shall satisfy one of the following tests: (1) The "Actual Deferral Percentage" for the Highly Compensated Participant group shall not be more than the "Actual Deferral Percentage" of the Non-Highly Compensated Participant group (for the preceding Plan Year if the prior year testing method is used to calculate the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group) multiplied by 1.25, or (2) The excess of the "Actual Deferral Percentage" for the Highly Compensated Participant group over the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group (for the preceding Plan Year if the prior year testing method is used to calculate the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group) shall not be more than two percentage points. Additionally, the "Actual Deferral Percentage" for the Highly Compensated Participant group shall not exceed the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group (for the preceding Plan Year if the prior year testing method is used to calculate the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group) multiplied by 2. The provisions of Code Section 401(k)(3) and Regulation 1.401(k)-1(b) are incorporated herein by reference. However, in order to prevent the multiple use of the alternative method described in (2) above and in Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make elective deferrals pursuant to Section 15.02 and to make Employee contributions or to receive matching contributions under this Plan or under any other plan maintained by the Company shall have a combination of such Participant's Elective Contributions and Company matching contributions reduced pursuant to Section 15.05(a) and Regulation 1.401(m)-2, the provisions of which are incorporated herein by reference. Page 9 of 28 Notwithstanding the above, for the first Plan Year, the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group shall be deemed to be three percent (3%). However, the Plan shall not have a first Plan Year (1) if the Plan is aggregated under Regulation 1.401(k)-1(g)(11) with any other plan that was or that included a Code Section 401(k) plan in the prior year, or (2) the Plan is a "successor plan" as defined in Internal Revenue Service Notice 98-1, Section V and any superseding guidance. (b) For the purposes of this Section "Actual Deferral Percentage" means, with respect to the Highly Compensated Participant group and Non-Highly Compensated Participant group for a Plan Year, the average of the ratios, calculated separately for each Participant in such group, of the amount of Company Elective Contributions allocated to each Participant's Elective Account for such Plan Year, to such Participant's "414(s) Compensation" for such Plan Year. The actual deferral ratio for each Participant and the "Actual Deferral Percentage" for each group shall be calculated to the nearest one-hundredth of one percent. Company Elective Contributions allocated to each Non-Highly Compensated Participant's Elective Account shall be reduced by Excess Deferred Compensation to the extent such excess amounts are made under this Plan or any other plan maintained by the Company. Notwithstanding the above, if the prior year test method is used to calculate the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group for the first Plan Year of this amendment and restatement, the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group for the preceding Plan Year shall be calculated pursuant to the provisions of the Plan then in effect. (c) For the purposes of Sections 15.04(a) and 15.05, a Highly Compensated Participant and a Non-Highly Compensated Participant shall include any Employee eligible to make a deferral election pursuant to Section 15.02, whether or not such deferral election was made or suspended pursuant to Section 15.02. Notwithstanding the above, if the prior year testing method is used to calculate the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group for the first Plan Year of this amendment and restatement, for purposes of Section 15.04(a) and 15.05, a Non-Highly Compensated Participant shall include any such Employee eligible to make a deferral election, whether or not such deferral election was made or suspended, pursuant to the provisions of the Plan in effect for the preceding Plan Year. Page 10 of 28 (d) For the purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(k), if two or more plans which include cash or deferred arrangements are considered one plan for the purposes of Code Section 401(a)(4) or 410(b) (other than Code Section 410(b)(2)(A)(ii)), the cash or deferred arrangements included in such plans shall be treated as one arrangement. In addition, two or more cash or deferred arrangements may be considered as a single arrangement for purposes of determining whether or not such arrangements satisfy Code Sections 401(a)(4), 410(b) and 401(k). In such a case, the cash or deferred arrangements included in such plans and the plans including such arrangements shall be treated as one arrangement and as one plan for purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(k). Any adjustment to the Non-Highly Compensated Participant actual deferral ratio for the prior year shall be made in accordance with Internal Revenue Service Notice 98-1 and any superseding guidance. Plans may be aggregated under this paragraph (d) only if they have the same plan year. Notwithstanding the above, if two or more plans which include cash or deferred arrangements are permissively aggregated under Regulation 1.410(b)-7(d), all plans permissively aggregated must use either the current year testing method or the prior year testing method for the testing year. Notwithstanding the above, an employee stock ownership plan described in Code Section 4975(e)(7) or 409 may not be combined with this Plan for purposes of determining whether the employee stock ownership plan or this Plan satisfies this Section and Code Sections 401(a)(4), 410(b) and 401(k). (e) For the purposes of this Section, if a Highly Compensated Participant is a Participant under two or more cash or deferred arrangements (other than a cash or deferred arrangement which is part of an employee stock ownership plan as defined in Code Section 4975(e)(7) or 409) of the Company, all such cash or deferred arrangements shall be treated as one cash or deferred arrangement for the purpose of determining the actual deferral ratio with respect to such Highly Compensated Participant. However, if the cash or deferred arrangements have different plan years, this paragraph shall be applied by treating all cash or deferred arrangements ending with or within the same calendar year as a single arrangement. (f) For the purpose of this Section, when calculating the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group, the prior year testing method shall be used. Any change from the current year testing method to the prior year testing method shall be made pursuant to Internal Revenue Service Notice 98-1, Section VII (or Page 11 of 28 superseding guidance), the provisions of which are incorporated herein by reference. (g) Notwithstanding anything in this Section to the contrary, the provisions of this Section and Section 15.05 may be applied separately (or will be applied separately to the extent required by Regulations) to each plan within the meaning of Regulation 1.401(k)-1(g)(11). Furthermore, the provisions of Code Section 401(k)(3)(F) may be used to exclude from consideration all Non-Highly Compensated Employees who have not satisfied the minimum age and service requirements of Code Section 410(a)(1)(A). 15.05 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS In the event (or if it is anticipated) that the initial allocations of the Company Elective Contributions made pursuant to Section 15.03 do (or might) not satisfy one of the tests set forth in Section 15.04(a), the Administrator shall adjust Excess Contributions pursuant to the options set forth below: (a) On or before the fifteenth day of the third month following the end of each Plan Year, but in no event later than the close of the following Plan Year, the Highly Compensated Participant having the largest dollar amount of Elective Contributions shall have a portion of such Participant's Elective Contributions distributed until the total amount of Excess Contributions has been distributed, or until the amount of such Participant's Elective Contributions equals the Elective Contributions of the Highly Compensated Participant having the second largest dollar amount of Elective Contributions. This process shall continue until the total amount of Excess Contributions has been distributed. In determining the amount of Excess Contributions to be distributed with respect to an affected Highly Compensated Participant as determined herein, such amount shall be reduced pursuant to Section 15.02(f) by any Excess Deferred Compensation previously distributed to such affected Highly Compensated Participant for such Participant's taxable year ending with or within such Plan Year. (1) With respect to the distribution of Excess Contributions pursuant to (a) above, such distribution: (i) may be postponed but not later than the close of the Plan Year following the Plan Year to which they are allocable; (ii) shall be adjusted for Income; and Page 12 of 28 (iii) shall be designated by the Company as a distribution of Excess Contributions (and Income). (2) Any distribution of less than the entire amount of Excess Contributions shall be treated as a pro rata distribution of Excess Contributions and Income. (3) Matching contributions which relate to Excess Contributions shall be forfeited unless the related matching contribution is distributed as an Excess Aggregate Contribution pursuant to Section 15.07. (b) Notwithstanding the above, within twelve (12) months after the end of the Plan Year, the Company may make a special Qualified Non-Elective Contribution in accordance with one of the following provisions which contribution shall be allocated to the Participant's Elective Account of each Non-Highly Compensated Participant eligible to share in the allocation in accordance with such provision. The Company shall provide the Administrator with written notification of the amount of the contribution being made and for which provision it is being made pursuant to: (1) A special Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 15.04(a). Such contribution shall be allocated in the same proportion that each Non-Highly Compensated Participant's 414(s) Compensation for the year (or prior year if the prior year testing method is being used) bears to the total 414(s) Compensation of all Non-Highly Compensated Participants for such year. (2) A special Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 15.04(a). Such contribution shall be allocated in the same proportion that each Non-Highly Compensated Participant electing salary reductions pursuant to Section 15.02 in the same proportion that each such Non-Highly Compensated Participant's Deferred Compensation for the year (or at the end of the prior Plan Year if the prior year testing method is being used) bears to the total Deferred Compensation of all such Non-Highly Compensated Participants for such year. (3) A special Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an Page 13 of 28 amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 15.05(a). Such contribution shall be allocated in equal amounts (per capita). (4) A special Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants electing salary reductions pursuant to Section 15.02 in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 15.05(a). Such contribution shall be allocated for the year (or at the end of the prior Plan Year if the prior year testing method is used) to each Non-Highly Compensated Participant electing salary reductions pursuant to Section 15.02 in equal amounts (per capita). (5) A special Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 15.05(a). Such contribution shall be allocated to the Non-Highly Compensated Participant having the lowest 414(s) Compensation, until one of the tests set forth in Section 15.05(a) is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "annual addition" pursuant to Section 5.04. This process shall continue until one of the tests set forth in Section 15.04(a) is satisfied (or is anticipated to be satisfied). Notwithstanding the above, at the Company's discretion, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the prior year testing method is being used) shall not be eligible to receive a special Qualified Non-Elective Contribution and shall be disregarded. Notwithstanding the above, if the testing method changes from the current year testing method to the prior year testing method, then for purposes of preventing the double counting of Qualified Non-Elective Contributions for the first testing year for which the change is effective, any special Qualified Non-Elective Contribution on behalf of Non-Highly Compensated Participants used to satisfy the "Actual Deferral Percentage" or "Actual Contribution Percentage" test under the current year testing method for the prior year testing year shall be disregarded. (c) If during a Plan Year, it is projected that the aggregate amount of Elective Contributions to be allocated to all Highly Compensated Participants under this Plan would cause the Plan to fail the tests set forth in Section 15.04(a), then the Administrator may automatically reduce the deferral amount of affected Highly Compensated Page 14 of 28 Participants, beginning with the Highly Compensated Participant who has the highest deferral ratio until it is anticipated the Plan will pass the tests or until the actual deferral ratio equals the actual deferral ratio of the Highly Compensated Participant having the next highest actual deferral ratio. This process may continue until it is anticipated that the Plan will satisfy one of the tests set forth in Section 15.04(a). Alternatively, the Company may specify a maximum percentage of Compensation that may be deferred. (d) Any Excess Contributions (and Income) which are distributed on or after 2 1/2 months after the end of the Plan Year shall be subject to the ten percent (10%) Company excise tax imposed by Code Section 4979. 15.06 ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) The "Actual Contribution Percentage" for the Highly Compensated Participant group shall not exceed the greater of: (1) 125 percent of such percentage for the Non-Highly Compensated Participant group (for the preceding Plan Year if the prior year testing method is used to calculate the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group); or (2) the lesser of 200 percent of such percentage for the Non-Highly Compensated Participant group (for the preceding Plan Year if the prior year testing method is used to calculate the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group), or such percentage for the Non-Highly Compensated Participant group (for the preceding Plan Year if the prior year testing method is used to calculate the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group) plus 2 percentage points. However, to prevent the multiple use of the alternative method described in this paragraph and Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make elective deferrals pursuant to Section 15.02 or any other cash or deferred arrangement maintained by the Company and to make Employee contributions or to receive matching contributions under this Plan or under any plan maintained by the Company shall have a combination of Elective Contributions and Company matching contributions reduced pursuant to Regulation 1.401(m)-2 and Section 15.07(a). The provisions of Code Section 401(m) and Regulations 1.401(m)-1(b) and 1.401(m)-2 are incorporated herein by reference. Page 15 of 28 Notwithstanding the above, for the first Plan Year, the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group shall be deemed to be three percent (3%). However, the Plan shall not have a first Plan Year (1) if the Plan is aggregated under Regulation 1.401(m)-1(g)(14) with any other plan that was or that included a Code Section 401(m) plan in the prior year, or (2) the Plan is a "successor plan" as defined in Internal Revenue Service Notice 98-1, Section V and any superseding guidance. (b) For the purposes of this Section and Section 15.07, "Actual Contribution Percentage" for a Plan Year means, with respect to the Highly Compensated Participant group and Non-Highly Compensated Participant group (for the preceding Plan Year if the prior year testing method is used to calculate the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group), the average of the ratios (calculated separately for each Participant in each group and rounded to the nearest one-hundredth of one percent) of: (1) the sum of Company matching contributions made pursuant to Section 15.01(b) on behalf of each such Participant for such Plan Year; to (2) the Participant's "414(s) Compensation" for such Plan Year. Notwithstanding the above, if the prior year testing method is used to calculate the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group for the first Plan Year of this amendment and restatement, for purposes of Section 15.06(a), the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group for the preceding Plan Year shall be determined pursuant to the provisions of the Plan then in effect. (c) For purposes of determining the "Actual Contribution Percentage," only Company matching contributions contributed to the Plan prior to the end of the succeeding Plan Year shall be considered. In addition, the Administrator may elect to take into account, with respect to Employees eligible to have Company matching contributions pursuant to Section 15.01(b) allocated to their accounts, elective deferrals (as defined in Regulation 1.402(g)-1(b)) and qualified non-elective contributions (as defined in Code Section 401(m)(4)(C)) contributed to any plan maintained by the Company. Such elective deferrals and qualified non-elective contributions shall be treated as Company matching contributions subject to Regulation 1.401(m)-1(b)(5) which is incorporated herein by reference. However, the Plan Year must be the same as the plan year of the plan to Page 16 of 28 which the elective deferrals and the qualified non-elective contributions are made. (d) For purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(m), if two or more plans of the Company to which matching contributions, Employee contributions, or both, are made are treated as one plan for purposes of Code Sections 401(a)(4) or 410(b) (other than the average benefits test under Code Section 410(b)(2)(A)(ii)), such plans shall be treated as one plan. In addition, two or more plans of the Company to which matching contributions, Employee contributions, or both, are made may be considered as a single plan for purposes of determining whether or not such plans satisfy Code Sections 401(a)(4), 410(b) and 401(m). In such a case, the aggregated plans must satisfy this Section and Code Sections 401(a)(4), 410(b) and 401(m) as though such aggregated plans were a single plan. Any adjustment to the Non-Highly Compensated Participant actual contribution ratio for the prior year shall be made in accordance with Internal Revenue Service Notice 98-1 and any superseding guidance. Plans may be aggregated under this paragraph (d) only if they have the same plan year. Notwithstanding the above, if two or more plans which include cash or deferred arrangements are permissively aggregated under Regulation 1.410(b)-7(d), all plans permissively aggregated must use either the current year testing method or the prior year testing method for the testing year. Notwithstanding the above, an employee stock ownership plan described in Code Section 4975(e)(7) or 409 may not be aggregated with this Plan for purposes of determining whether the employee stock ownership plan or this Plan satisfies this Section and Code Sections 401(a)(4), 410(b) and 401(m). (e) If a Highly Compensated Participant is a Participant under two or more plans (other than an employee stock ownership plan as defined in Code Section 4975(e)(7) or 409) which are maintained by the Company to which matching contributions, Employee contributions, or both, are made, all such contributions on behalf of such Highly Compensated Participant shall be aggregated for purposes of determining such Highly Compensated Participant's actual contribution ratio. However, if the plans have different plan years, this paragraph shall be applied by treating all plans ending with or within the same calendar year as a single plan. (f) For purposes of Sections 15.06(a) and 15.07, a Highly Compensated Participant and Non-Highly Compensated Participant shall include any Employee eligible to have Company matching contributions (whether or not a deferral election was made or suspended) allocated to the Participant's account for the Plan Year. Page 17 of 28 Notwithstanding the above, if the prior year testing method is used to calculate the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group for the first Plan Year of this amendment and restatement, for the purposes of Section 15.06(a), a Non-Highly Compensated Participant shall include any such Employee eligible to have Company matching contributions (whether or not a deferral election was made or suspended) allocated to the Participant's account for the preceding Plan Year pursuant to the provisions of the Plan then in effect. (g) For the purpose of this Section, when calculating the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group, the prior year testing method shall be used. Any change from the current year testing method to the prior year testing method shall be made pursuant to Internal Revenue Service Notice 98-1, Section VII (or superseding guidance), the provisions of which are incorporated herein by reference. (h) Notwithstanding anything in this Section to the contrary, the provisions of this Section and Section 15.07 may be applied separately (or will be applied separately to the extent required by Regulations) to each plan within the meaning of Regulation 1.401(k)-1(g)(11). Furthermore, the provisions of Code Section 401(k)(3)(F) may be used to exclude from consideration all Non-Highly Compensated Employees who have not satisfied the minimum age and service requirements of Code Section 410(a)(1)(A). 15.07 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) In the event (or if it is anticipated) that the "Actual Contribution Percentage" for the Highly Compensated Participant group exceeds (or might exceed) the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group pursuant to Section 15.06(a), the Administrator (on or before the fifteenth day of the third month following the end of the Plan Year, but in no event later than the close of the following Plan Year) shall direct the Trustee to distribute to the Highly Compensated Participant having the largest dollar amount of contributions determined pursuant to Section 4.7(b)(1), the Vested portion of such contributions (and Income allocable to such contributions) and, if forfeitable, forfeit such non-Vested contributions attributable to Company matching contributions (and Income allocable to such forfeitures) until the total amount of Excess Aggregate Contributions has been distributed, or until the Participant's remaining amount equals the amount of contributions determined pursuant to Section 15.06(b)(1) of the Highly Compensated Participant having the second largest dollar amount of Page 18 of 28 contributions. This process shall continue until the total amount of Excess Aggregate Contributions has been distributed. If the correction of Excess Aggregate Contributions attributable to Company matching contributions is not in proportion to the Vested and non-Vested portion of such contributions, then the Vested portion of the Participant's Account attributable to Company matching contributions after the correction shall be subject to Section 7.06. (b) Any distribution and/or forfeiture of less than the entire amount of Excess Aggregate Contributions (and Income) shall be treated as a pro rata distribution and/or forfeiture of Excess Aggregate Contributions and Income. Distribution of Excess Aggregate Contributions shall be designated by the Company as a distribution of Excess Aggregate Contributions (and Income). Forfeitures of Excess Aggregate Contributions shall be treated in accordance with Section 15.03. (c) Excess Aggregate Contributions, including forfeited matching contributions, shall be treated as Company contributions for purposes of Code Sections 404 and 415 even if distributed from the Plan. Forfeited matching contributions that are reallocated to Participants' Accounts for the Plan Year in which the forfeiture occurs shall be treated as an "annual addition" pursuant to Section 5.04 for the Participants to whose Accounts they are reallocated and for the Participants from whose Accounts they are forfeited. (d) The determination of the amount of Excess Aggregate Contributions with respect to any Plan Year shall be made after first determining the Excess Contributions, if any, to be treated as after-tax voluntary Employee contributions due to recharacterization for the plan year of any other qualified cash or deferred arrangement (as defined in Code Section 401(k)) maintained by the Company that ends with or within the Plan Year or which are treated as after-tax voluntary Employee contributions due to recharacterization pursuant to Section 15.06(a). (e) If during a Plan Year the projected aggregate amount of Company matching contributions to be allocated to all Highly Compensated Participants under this Plan would, by virtue of the tests set forth in Section 15.07(a), cause the Plan to fail such tests, then the Administrator may automatically reduce proportionately or in the order provided in Section 15.08(a) each affected Highly Compensated Participant's projected share of such contributions by an amount necessary to satisfy one of the tests set forth in Section 15.07(a). Page 19 of 28 (f) Notwithstanding the above, within twelve (12) months after the end of the Plan Year, the Company may make a special Qualified Non-Elective Contribution in accordance with one of the following provisions which contribution shall be allocated to the Participant's Account of each Non-Highly Compensated eligible to share in the allocation in accordance with such provision. The Company shall provide the Administrator with written notification of the amount of the contribution being made and for which provision it is being made pursuant to: (1) A special Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 15.07. Such contribution shall be allocated in the same proportion that each Non-Highly Compensated Participant's 414(s) Compensation for the year (or prior year if the prior year testing method is being used) bears to the total 414(s) Compensation of all Non-Highly Compensated Participants for such year. (2) A special Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 15.07. Such contribution shall be allocated in the same proportion that each Non-Highly Compensated Participant electing salary reductions pursuant to Section 15.02 in the same proportion that each such Non-Highly Compensated Participant's Deferred Compensation for the year (or at the end of the prior Plan Year if the prior year testing method is being used) bears to the total Deferred Compensation of all such Non-Highly Compensated Participants for such year. (3) A special Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 15.07. Such contribution shall be allocated in equal amounts (per capita). (4) A special Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants electing salary reductions pursuant to Section 15.02 in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 15.07. Such contribution shall be allocated for the year (or at the end of the prior Plan Year if the prior year testing method is used) to each Non-Highly Compensated Page 20 of 28 Participant electing salary reductions pursuant to Section 15.02 in equal amounts (per capita). (5) A special Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 15.07. Such contribution shall be allocated to the Non-Highly Compensated Participant having the lowest 414(s) Compensation, until one of the tests set forth in Section 15.07 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "annual addition" pursuant to Section 15.09. This process shall continue until one of the tests set forth in Section 15.07 is satisfied (or is anticipated to be satisfied). Notwithstanding the above, at the Company's discretion, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the prior year testing method is being used) shall not be eligible to receive a special Qualified Non-Elective Contribution and shall be disregarded. Notwithstanding the above, if the testing method changes from the current year testing method to the prior year testing method, then for purposes of preventing the double counting of Qualified Non-Elective Contributions for the first testing year for which the change is effective, any special Qualified Non-Elective Contribution on behalf of Non-Highly Compensated Participants used to satisfy the "Actual Deferral Percentage" or "Actual Contribution Percentage" test under the current year testing method for the prior year testing year shall be disregarded. (g) Any Excess Aggregate Contributions (and Income) which are distributed on or after 2 1/2 months after the end of the Plan Year shall be subject to the ten percent (10%) Company excise tax imposed by Code Section 4979. 15.08 DEFINITIONS: (a) "Deferred Compensation" with respect to any Participant means the amount of the Participant's total Compensation which has been contributed to the Plan in accordance with the Participant's deferral election pursuant to Section 15.02 excluding any such amounts distributed as excess "annual additions" pursuant to Section 4.10(a) (b) "Elective Contribution" means the Company contributions to the Plan of Deferred Compensation excluding any such amounts distributed as excess "annual Page 21 of 28 additions" pursuant to Section 5.04. In addition, any Company Qualified Non-Elective Contribution made pursuant to Section 15.5(b) which is used to satisfy the "Actual Deferral Percentage" tests shall be considered an Elective Contribution for purposes of the Plan. Any contributions deemed to be Elective Contributions (whether or not used to satisfy the "Actual Deferral Percentage" tests or the "Actual Contribution Percentage" tests) shall be subject to the requirements of Sections 15.02(b) and 15.02(c) and shall further be required to satisfy the nondiscrimination requirements of Regulation 1.401(k)-1(b)(5) and Regulation 1.401(m)-1(b)(5), the provisions of which are specifically incorporated herein by reference. (c) "Excess Aggregate Contributions" means, with respect to any Plan Year, the excess of the aggregate amount of the Company matching contributions made pursuant to Section 15.01(b) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 15.06(c) on behalf of Highly Compensated Participants for such Plan Year, over the maximum amount of such contributions permitted under the limitations of Section 15.06(a) (determined by hypothetically reducing contributions made on behalf of Highly Compensated Participants in order of the actual contribution ratios beginning with the highest of such ratios). Such determination shall be made after first taking into account corrections of any Excess Deferred Compensation pursuant to Section 15.02 and taking into account any adjustments of any Excess Contributions pursuant to Section 15.05. (d) "Excess Contributions" means, with respect to a Plan Year, the excess of Elective Contributions used to satisfy the "Actual Deferral Percentage" tests made on behalf of Highly Compensated Participants for the Plan Year over the maximum amount of such contributions permitted under Section 15.04(a) (determined by hypothetically reducing contributions made on behalf of Highly Compensated Participants in order of the actual deferral ratios beginning with the highest of such ratios). Excess Contributions shall be treated as an "annual addition" pursuant to Section 5.04. (e) "Excess Deferred Compensation" means, with respect to any taxable year of a Participant, the excess of the aggregate amount of such Participant's Deferred Compensation and the elective deferrals pursuant to Section 15.02(f) actually made on behalf of such Participant for such taxable year, over the dollar limitation provided for in Code Section 402(g), which is incorporated herein by reference. Excess Deferred Compensation shall be treated as an "annual addition" pursuant to Section 5.04(b) when contributed to the Plan unless distributed to the affected Participant not later than the first April 15th following the close of the Participant's taxable year. Additionally, for purposes of Article XIII and 15.04(g), Excess Deferred Compensation shall continue to be treated as Company contributions even if distributed pursuant to Section 15.02(f). However, Excess Deferred Compensation of Non-Highly Compensated Participants is not taken into account for purposes of Section 15.05(a) to the extent such Excess Deferred Compensation occurs pursuant to Section 15.02(d). Page 22 of 28 (f) "Highly Compensated Employee" means an Employee described in Code Section 414(q) and the Regulations thereunder, and generally means any Employee who: (1) was a "five percent owner" as defined in Section 1.32(c) at any time during the "determination year" or the "look-back year"; or (2) for the "look-back year" had "415 Compensation" from the Company in excess of $80,000 and was in the Top-Paid Group for the "look-back year." The $80,000 amount is adjusted at the same time and in the same manner as under Code Section 415(d), except that the base period is the calendar quarter ending September 30, 1996. The "determination year" means the Plan Year for which testing is being performed, and the "look-back year" means the immediately preceding twelve (12) month period. A highly compensated former Employee is based on the rules applicable to determining Highly Compensated Employee status as in effect for the "determination year," in accordance with Regulation 1.414(q)-1T, A-4 and IRS Notice 97-45 (or any superseding guidance). In determining who is a Highly Compensated Employee, Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)(2)) from the Company constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, all affiliated companies shall be taken into account as a single Company and Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Company. The exclusion of Leased Employees for this purpose shall be applied on a uniform and consistent basis for all of the Company's retirement plans. Highly Compensated Former Employees shall be treated as Highly Compensated Employees without regard to whether they performed services during the "determination year." (g) "Highly Compensated Participant" means any Highly Compensated Employee who is eligible to participate in the component of the Plan being tested. (h) "Non-Highly Compensated Participant" means any Participant who is not a Highly Compensated Employee. However, for purposes of Section 15.04(a) and Section 15.05, if the prior year testing method is used, a Non-Highly Compensated Participant shall be determined using the definition of Highly Compensated Employee in effect for the preceding Plan Year. (i) "Participant's Elective Account" means the account established and maintained by the Administrator for each Participant with respect to the Participant's total Page 23 of 28 interest in the Plan and Trust resulting from the Company Elective Contributions used to satisfy the "Actual Deferral Percentage" tests. A separate accounting shall be maintained with respect to that portion of the Participant's Elective Account attributable to such Elective Contributions pursuant to Section 15.02 and any Company Qualified Non-Elective Contributions. (j) "Qualified Non-Elective Contribution" means any Company contributions made pursuant to Section 15.05(b) and Section 15.07(f). Such contributions shall be considered an Elective Contribution for the purposes of the Plan and used to satisfy the "Actual Deferral Percentage" tests or the "Actual Contribution Percentage" tests. 15.09 CATCH-UP CONTRIBUTIONS All Employees who are eligible to make salary reductions under this Plan and who have attained age 50 before the close of the Plan Year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Code Section 414(v). Such catch-up contribution shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of Code Sections 402(g) and 415. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of Code Section 401(k)(3), 401(k)(11), 401(k)(12), 410(b), or 416, as applicable by reason of the making of such catch-up contributions. XI. The Plan shall be amended by the addition of the following new ARTICLE XVI as follows: ARTICLE XVI ADVANCE DISTRIBUTION FOR HARDSHIP 16.01 The Administrator, at the election of the Participant, shall direct the Trustee to distribute to any Participant in any one Plan Year up to the lesser of 100% of the Vested Participant's Elective Account and Participant's Account and Participant's Transfer/Rollover Account valued as of the last Valuation Date or the amount necessary to satisfy the immediate and heavy financial need of the Participant. Any distribution made pursuant to this Section shall be deemed to be made as of the first day of the Plan Year or, if later, the Valuation Date immediately preceding the date of distribution, and the Participant's Elective Account and Participant's Account and Participant's Transfer/Rollover Account shall be reduced accordingly. Withdrawal under this Section is deemed to be on Page 24 of 28 account of an immediate and heavy financial need of the Participant only if the withdrawal is for: (a) Medical expenses described in Code Section 213(d) incurred by the Participant, the Participant's spouse, or any of the Participant's dependents (as defined in Code Section 152) or necessary for these persons to obtain medical care as described in Code Section 213(d); (b) The costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Participant; (c) Payment of tuition, related educational fees, and room and board expenses for the next twelve (12) months of post-secondary education for the Participant and the Participant's spouse, children, or dependents; or (d) Payments necessary to prevent the eviction of the Participant from the Participant's principal residence or foreclosure on the mortgage on that residence. 16.02 No distribution shall be made pursuant to this Section unless the Administrator, based upon the Participant's representation and such other facts as are known to the Administrator, determines that all of the following conditions are satisfied: (a) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant. The amount of the immediate and heavy financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution; (b) The Participant has obtained all distributions, other than hardship distributions, and all nontaxable (at the time of the loan) loans currently available under all plans maintained by the Company; (c) The Plan, and all other plans maintained by the Company, provide that the Participant's elective deferrals and after-tax voluntary Employee contributions will be suspended for at least six (6) months after receipt of the hardship distribution or, the Participant, pursuant to a legally enforceable agreement, will suspend elective deferrals and after-tax voluntary Employee contributions to the Plan and all other plans maintained by the Company for at least six (6) months after receipt of the hardship distribution; and Page 25 of 28 (d) The Plan, and all other plans maintained by the Company, provide that the Participant may not make elective deferrals for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Code Section 402(g) for such next taxable year less the amount of such Participant's elective deferrals for the taxable year of the hardship distribution. 16.03 Notwithstanding the above, distributions from the Participant's Elective Account pursuant to this Section shall be limited solely to the Participant's total Deferred Compensation as of the date of distribution, reduced by the amount of any previous distributions pursuant to this Section and Article VIII. 16.04 Any distribution made pursuant to this Section shall be made in a manner which is consistent with and satisfies the provisions of Article VII, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. XII. The Plan shall be amended by the addition of the following new ARTICLE XVII as follows: ARTICLE XVII LOANS TO PARTICIPANTS 17.01 The Trustee may, in the Trustee's discretion, make loans to Participants and Beneficiaries under the following circumstances: (1) loans shall be made available to all Participants and Beneficiaries on a reasonably equivalent basis; (2) loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Participants and Beneficiaries; (3) loans shall bear a reasonable rate of interest; (4) loans shall be adequately secured; and (5) loans shall provide for periodic repayment over a reasonable period of time. Page 26 of 28 17.02 Loans made pursuant to this Section (when added to the outstanding balance of all other loans made by the Plan to the Participant) may, in accordance with a uniform and nondiscriminatory policy established by the Administrator, be limited to the lesser of: (a) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans from the Plan to the Participant during the one year period ending on the day before the date on which such loan is made, over the outstanding balance of loans from the Plan to the Participant on the date on which such loan was made, or (b) one-half (1/2) of the present value of the non-forfeitable accrued benefit of the Participant under the Plan. For purposes of this limit, all plans of the Company shall be considered one plan. 17.03 Loans shall provide for level amortization with payments to be made not less frequently than quarterly over a period not to exceed five (5) years. However, loans used to acquire any dwelling unit which, within a reasonable time, is to be used (determined at the time the loan is made) as a "principal residence" of the Participant shall provide for periodic repayment over a reasonable period of time that may exceed five (5) years. For this purpose, a "principal residence" has the same meaning as a "principal residence" under Code Section 1034. Loan repayments may be suspended under this Plan as permitted under Code Section 414(u)(4). 17.04 Any loans granted or renewed shall be made pursuant to a Participant loan program. Such loan program shall be established in writing and must include, but need not be limited to, the following: (a) the identity of the person or positions authorized to administer the Participant loan program; (b) a procedure for applying for loans; (c) the basis on which loans will be approved or denied; (d) limitations, if any, on the types and amounts of loans offered; (e) the procedure under the program for determining a reasonable rate of interest; Page 27 of 28 (f) the types of collateral which may secure a Participant loan; and (g) the events constituting default and the steps that will be taken to preserve Plan assets. Such Participant loan program shall be contained in a separate written document which, when properly executed, is hereby incorporated by reference and made a part of the Plan. Furthermore, such Participant loan program may be modified or amended in writing from time to time without the necessity of amending this Section. 17.05 Notwithstanding anything in this Plan to the contrary, if a Participant or Beneficiary defaults on a loan made pursuant to this Section, then the loan default will be a distributable event to the extent permitted by the Code and Regulations. 17.06 Notwithstanding anything in this Section to the contrary, any loans made prior to the date this amendment and restatement is adopted shall be subject to the terms of the plan in effect at the time such loan was made. IN WITNESS WHEREOF, the Company has caused this Amendment No. 6 to be executed by its duly authorized officer this 20th day of December, 2005. TRUSTCO BANK By: /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer Page 28 of 28 EX-10 5 ex10v.txt EXHIBIT 10(V) Exhibit 10(v) AMENDMENT NO. 1 AMENDED AND RESTATED 1995 TRUSTCO BANK CORP NY STOCK OPTION PLAN WHEREAS, TrustCo Bank Corp NY (the "Company") previously established the Amended and Restated 1995 TrustCo Bank Corp NY Stock Option Plan ("Plan") and; NOW, THEREFORE, TrustCo Bank Corp NY does, effective as of January 1, 2005, amend the Plan as follows: I. Paragraph 4 of Section 8 of the Plan is deleted in its entirety and replaced with the following: 4. Acceleration and the immediate right to exercise options in full will occur upon a Change in Control of the Company, which is defined to include any one or more the following: (a) any individual, corporation (other than TrustCo Bank Corp NY or Trustco Bank hereinafter collectively referred to as the "Companies"), partnership, trust, association, pool, syndicate, or any other entity or group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, of securities of either of the Companies possessing 20% or more of the voting power for the election of directors of either of the Companies; or (b) there shall be consummated any consolidation, merger or other business combination involving either of the Companies or the securities of either of the Companies in which holders of voting securities immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of either of the Companies (or, if either of the Companies does not survive such transaction, voting securities of the entity or entities surviving such transaction) having 60% or less of the total voting power in an election of directors of either of the Companies (or such other surviving entity or entities); or (c) during any period of two consecutive years, individuals who at the beginning of such period constitute the directors of either of the Companies cease for any reason to constitute at least a majority thereof unless the election, or nomination for election by either of the Companies' shareholders, of each new director of either of the Companies was approved by a vote of at least two-thirds of the directors of either of the Companies then still in office who were directors of either of the Companies at the beginning of any such period; or (d) removal by the stockholders of all or any of the incumbent directors of either of the Companies other than a removal for cause; or (e) there shall be consummated at any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of either of the Companies to a party which is not controlled by or under common control with either of the Companies; or (f) an announcement of any of the events described in paragraphs (a) through (e) above, including but not limited to a press release, public statement or filing with federal or state regulators. Upon exercise of an Option during the 30-day period prior to the anticipated date of consummation of a Change in Control, the Participant exercising the Option may, in lieu of the receipt of Stock upon the exercise of the Option, elect by written notice to the Company to receive an amount in cash equal to the excess of the aggregate Value (as defined below) of the shares of Stock covered by the Option or portion thereof surrendered determined on the date the Option is exercised, over the aggregate exercise price of the Option (such excess is referred to herein as the "Aggregate Spread") which amount, in the event of a Change in Control as described in (f) above, will be paid no later than 15 days prior to the date of consummation of such Change in Control and such election may be revoked up to that date; provided, however, and notwithstanding any other provision of this Plan, if the end of such 30-day period prior to the anticipated date of consummation of a Change in Control is within six months of the date of grant of an Option held by a Participant who is an officer of the Company (for purposes of Section 16(b) of the Exchange Act), such Option shall be canceled in exchange for a cash payment to the Participant equal to the Aggregate Spread on the day which is six months and one day after the date of grant of such Option. As used in this Section 12(a)(iii) the term "Value" means the higher of (i) the highest Fair Market Value during the 30-day period prior to the anticipated date of consummation of a Change in Control, and (ii) if the Change in Control is the result of a transaction or series of transactions described in paragraphs (a) or (b) above, the highest price per share of the Stock paid in such transaction or series of transactions (which in the case of paragraph (b) shall be the highest price per share 2 of the Stock as reflected in a Schedule 13D by the person having made the acquisition). IN WITNESS WHEREOF, the Company has caused this Amendment to be adopted on this 20th day of December, 2005. TRUSTCO BANK CORP NY By: /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer EX-10 6 ex10w.txt EXHIBIT 10(W) Exhibit 10(w) AMENDMENT NO. 2 AMENDED AND RESTATED 1995 TRUSTCO BANK CORP NY STOCK OPTION PLAN WHEREAS, TrustCo Bank Corp NY (the "Company") previously established the Amended and Restated 1995 TrustCo Bank Corp NY Stock Option Plan ("Plan") and; NOW, THEREFORE, TrustCo Bank Corp NY does, effective as of January 1, 2005, amend the Plan as follows: I. Paragraph 4 of Section 8 of the Plan is deleted in its entirety and replaced with the following: 4. Acceleration and the immediate right to exercise options in full will occur upon a Change in Control of the Company, which is defined to include any one or more the following: (a) any individual, corporation (other than TrustCo Bank Corp NY or Trustco Bank hereinafter collectively referred to as the "Companies"), partnership, trust, association, pool, syndicate, or any other entity or group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, of securities of either of the Companies possessing 20% or more of the voting power for the election of directors of either of the Companies; or (b) there shall be consummated any consolidation, merger or other business combination involving either of the Companies or the securities of either of the Companies in which holders of voting securities immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of either of the Companies (or, if either of the Companies does not survive such transaction, voting securities of the entity or entities surviving such transaction) having 60% or less of the total voting power in an election of directors of either of the Companies (or such other surviving entity or entities); or (c) during any period of two consecutive years, individuals who at the beginning of such period constitute the directors of either of the Companies cease for any reason to constitute at least a majority thereof unless the election, or nomination for election by either of the Companies' shareholders, of each new director of either of the Companies was approved by a vote of at least two-thirds of the directors of either of the Companies then still in office who were directors of either of the Companies at the beginning of any such period; or (d) removal by the stockholders of all or any of the incumbent directors of either of the Companies other than a removal for cause; or (e) there shall be consummated at any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of either of the Companies to a party which is not controlled by or under common control with either of the Companies; or (f) an announcement of any of the events described in paragraphs (a) through (e) above, including but not limited to a press release, public statement or filing with federal or state regulators. Upon exercise of an Option during the 30-day period prior to the anticipated date of consummation of a Change in Control, the Participant exercising the Option may request by written notice to the Company to receive, in lieu of the receipt of Stock upon the exercise of the Option, an amount in cash equal to the excess of the aggregate Value (as defined below) of the shares of Stock covered by the Option or portion thereof surrendered determined on the date the Option is exercised, over the aggregate exercise price of the Option (such excess is referred to herein as the "Aggregate Spread") which amount, in the event of a Change in Control as described in (f) above, would be paid no later than 15 days prior to the date of consummation of such Change in Control and such request may be revoked up to that date; provided, however, and notwithstanding any other provision of this Plan, if the end of such 30-day period prior to the anticipated date of consummation of a Change in Control is within six months of the date of grant of an Option held by a Participant who is an officer of the Company (for purposes of Section 16(b) of the Exchange Act), such Option would be canceled in exchange for a cash payment to the Participant equal to the Aggregate Spread on the day which is six months and one day after the date of grant of such Option. The Company, in its sole and absolute discretion, may elect whether to grant or deny such request, and if it grants such request, such Participant will be deemed to have elected to receive cash in lieu of the receipt of Stock upon exercise of his or her Option. As used in this Section 12(a)(iii) the term "Value" means the higher of (i) the highest Fair Market Value during the 30-day period prior to the anticipated date of consummation of a Change in Control, and (ii) if the Change in Control is the result of a transaction or series of 2 transactions described in paragraphs (a) or (b) above, the highest price per share of the Stock paid in such transaction or series of transactions (which in the case of paragraph (b) shall be the highest price per share of the Stock as reflected in a Schedule 13D by the person having made the acquisition). II. Notwithstanding any other provision of the Plan to the contrary, if any provision of the Plan permits a Participant, at his or her election, to receive a cash settlement of Options or other awards under the Plan, or requires the Company to pay a cash settlement of Options or awards under the Plan, the Participant shall be entitled to receive the cash settlement, and the Company shall be obligated to pay the cash settlement, only if the Company determines, in its sole and absolute discretion, to make such payment. IN WITNESS WHEREOF, the Company has caused this Amendment to be adopted as of this 28th day of December, 2005. TRUSTCO BANK CORP NY By: /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer EX-10 7 ex10x.txt EXHIBIT 10(X) Exhibit 10(x) AMENDMENT NO. 1 2004 TRUSTCO BANK CORP NY STOCK OPTION PLAN WHEREAS, TrustCo Bank Corp NY (the "Company") previously established the 2004 TrustCo Bank Corp NY Stock Option Plan ("Plan") and; NOW, THEREFORE, TrustCo Bank Corp NY does, effective as of January 1, 2005, amend the Plan as follows: I. Paragraph 4 of Section 8 of the Plan is deleted in its entirety and replaced with the following: 4. Acceleration and the immediate right to exercise options in full will occur upon a Change in Control of the Company, which is defined to include any one or more the following: (a) any individual, corporation (other than TrustCo Bank Corp NY or Trustco Bank hereinafter collectively referred to as the "Companies"), partnership, trust, association, pool, syndicate, or any other entity or group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, of securities of either of the Companies possessing 20% or more of the voting power for the election of directors of either of the Companies; or (b) there shall be consummated any consolidation, merger or other business combination involving either of the Companies or the securities of either of the Companies in which holders of voting securities immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of either of the Companies (or, if either of the Companies does not survive such transaction, voting securities of the entity or entities surviving such transaction) having 60% or less of the total voting power in an election of directors of either of the Companies (or such other surviving entity or entities); or (c) during any period of two consecutive years, individuals who at the beginning of such period constitute the directors of either of the Companies cease for any reason to constitute at least a majority thereof unless the election, or nomination for election by either of the Companies' shareholders, of each new director of either of the Companies was approved by a vote of at least two-thirds of the directors of either of the Companies then still in office who were directors of either of the Companies at the beginning of any such period; or (d) removal by the stockholders of all or any of the incumbent directors of either of the Companies other than a removal for cause; or (e) there shall be consummated at any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of either of the Companies to a party which is not controlled by or under common control with either of the Companies; or (f) an announcement of any of the events described in paragraphs (a) through (e) above, including but not limited to a press release, public statement or filing with federal or state regulators. Upon exercise of an Option during the 30-day period prior to the anticipated date of consummation of a Change in Control, the Participant exercising the Option may, in lieu of the receipt of Stock upon the exercise of the Option, elect by written notice to the Company to receive an amount in cash equal to the excess of the aggregate Value (as defined below) of the shares of Stock covered by the Option or portion thereof surrendered determined on the date the Option is exercised, over the aggregate exercise price of the Option (such excess is referred to herein as the "Aggregate Spread") which amount, in the event of a Change in Control as described in (f) above, will be paid no later than 15 days prior to the date of consummation of such Change in Control and such election may be revoked up to that date; provided, however, and notwithstanding any other provision of this Plan, if the end of such 30-day period prior to the anticipated date of consummation of a Change in Control is within six months of the date of grant of an Option held by a Participant who is an officer of the Company (for purposes of Section 16(b) of the Exchange Act), such Option shall be canceled in exchange for a cash payment to the Participant equal to the Aggregate Spread on the day which is six months and one day after the date of grant of such Option. As used in this Section 12(a)(iii) the term "Value" means the higher of (i) the highest Fair Market Value during the 30-day period prior to the anticipated date of consummation of a Change in Control, and (ii) if the Change in Control is the result of a transaction or series of transactions described in paragraphs (a) or (b) above, the highest price per share of the Stock paid in such transaction or series of transactions (which in the case of paragraph (b) shall be the highest price per share 2 of the Stock as reflected in a Schedule 13D by the person having made the acquisition). IN WITNESS WHEREOF, the Company has caused this Amendment to be adopted on this 20th day of December, 2005. TRUSTCO BANK CORP NY By: /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer 3 EX-10 8 ex10y.txt EXHIBIT 10(Y) Exhibit 10(y) AMENDMENT NO. 2 2004 TRUSTCO BANK CORP NY STOCK OPTION PLAN WHEREAS, TrustCo Bank Corp NY (the "Company") previously established the 2004 TrustCo Bank Corp NY Stock Option Plan ("Plan") and; NOW, THEREFORE, TrustCo Bank Corp NY does, effective as of January 1, 2005, amend the Plan as follows: I. Paragraph 4 of Section 8 of the Plan is deleted in its entirety and replaced with the following: 4. Acceleration and the immediate right to exercise options in full will occur upon a Change in Control of the Company, which is defined to include any one or more the following: (a) any individual, corporation (other than TrustCo Bank Corp NY or Trustco Bank hereinafter collectively referred to as the "Companies"), partnership, trust, association, pool, syndicate, or any other entity or group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, of securities of either of the Companies possessing 20% or more of the voting power for the election of directors of either of the Companies; or (b) there shall be consummated any consolidation, merger or other business combination involving either of the Companies or the securities of either of the Companies in which holders of voting securities immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of either of the Companies (or, if either of the Companies does not survive such transaction, voting securities of the entity or entities surviving such transaction) having 60% or less of the total voting power in an election of directors of either of the Companies (or such other surviving entity or entities); or (c) during any period of two consecutive years, individuals who at the beginning of such period constitute the directors of either of the Companies cease for any reason to constitute at least a majority thereof unless the election, or nomination for election by either of the Companies' shareholders, of each new director of either of the Companies was approved by a vote of at least two-thirds of the directors of either of the Companies then still in office who were directors of either of the Companies at the beginning of any such period; or (d) removal by the stockholders of all or any of the incumbent directors of either of the Companies other than a removal for cause; or (e) there shall be consummated at any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of either of the Companies to a party which is not controlled by or under common control with either of the Companies; or (f) an announcement of any of the events described in paragraphs (a) through (e) above, including but not limited to a press release, public statement or filing with federal or state regulators. Upon exercise of an Option during the 30-day period prior to the anticipated date of consummation of a Change in Control, the Participant exercising the Option may request by written notice to the Company to receive, in lieu of the receipt of Stock upon the exercise of the Option, an amount in cash equal to the excess of the aggregate Value (as defined below) of the shares of Stock covered by the Option or portion thereof surrendered determined on the date the Option is exercised, over the aggregate exercise price of the Option (such excess is referred to herein as the "Aggregate Spread") which amount, in the event of a Change in Control as described in (f) above, would be paid no later than 15 days prior to the date of consummation of such Change in Control and such request may be revoked up to that date; provided, however, and notwithstanding any other provision of this Plan, if the end of such 30-day period prior to the anticipated date of consummation of a Change in Control is within six months of the date of grant of an Option held by a Participant who is an officer of the Company (for purposes of Section 16(b) of the Exchange Act), such Option would be canceled in exchange for a cash payment to the Participant equal to the Aggregate Spread on the day which is six months and one day after the date of grant of such Option. The Company, in its sole and absolute discretion, may elect whether to grant or deny such request, and if it grants such request, such Participant will be deemed to have elected to receive cash in lieu of the receipt of Stock upon exercise of his or her Option. As used in this Section 12(a)(iii) the term "Value" means the higher of (i) the highest Fair Market Value during the 30-day period prior to the anticipated date of consummation of a Change in Control, and (ii) if the Change in Control is the result of a transaction or series of 2 transactions described in paragraphs (a) or (b) above, the highest price per share of the Stock paid in such transaction or series of transactions (which in the case of paragraph (b) shall be the highest price per share of the Stock as reflected in a Schedule 13D by the person having made the acquisition). II. Notwithstanding any other provision of the Plan to the contrary, if any provision of the Plan permits a Participant, at his or her election, to receive a cash settlement of Options or other awards under the Plan, or requires the Company to pay a cash settlement of Options or awards under the Plan, the Participant shall be entitled to receive the cash settlement, and the Company shall be obligated to pay the cash settlement, only if the Company determines, in its sole and absolute discretion, to make such payment. IN WITNESS WHEREOF, the Company has caused this Amendment to be adopted as of this 28th day of December, 2005. TRUSTCO BANK CORP NY By: /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer 3 EX-10 9 ex10z.txt EXHIBIT 10(Z) Exhibit 10(z) AMENDMENT NO. 1 AMENDED AND RESTATED TRUSTCO BANK CORP NY DIRECTORS STOCK OPTION PLAN WHEREAS, TrustCo Bank Corp NY (the "Company") previously established the Amended and Restated TrustCo Bank Corp NY Directors Stock Option Plan ("Plan") and WHEREAS, the Company desires to amend the Plan; NOW, THEREFORE, the Company does, effective as of January 1, 2005, amend the Plan as follows: I. Notwithstanding any other provision of the Plan to the contrary, if any provision of the Plan permits a Director, at his or her election, to receive a cash settlement of Options or other awards under the Plan, or requires the Company to pay a cash settlement of Options or awards under the Plan, the Director shall be entitled to receive the cash settlement, and the Company shall be obligated to pay the cash settlement, only if the Company determines, in its sole and absolute discretion, to make such payment. IN WITNESS WHEREOF, the Company has caused this Amendment to be adopted as of this 28th day of December, 2005. TRUSTCO BANK CORP NY By: /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer EX-10 10 ex10aa.txt EXHIBIT 10(AA) Exhibit 10(aa) AMENDMENT NO. 1 2004 TRUSTCO BANK CORP NY DIRECTORS STOCK OPTION PLAN WHEREAS, TrustCo Bank Corp NY (the "Company") previously established the 2004 TrustCo Bank Corp NY Directors Stock Option Plan ("Plan") and WHEREAS, the Company desires to amend the Plan; NOW, THEREFORE, the Company does, effective as of January 1, 2005, amend the Plan as follows: I. Notwithstanding any other provision of the Plan to the contrary, if any provision of the Plan permits a Director, at his or her election, to receive a cash settlement of Options or other awards under the Plan, or requires the Company to pay a cash settlement of Options or awards under the Plan, the Director shall be entitled to receive the cash settlement, and the Company shall be obligated to pay the cash settlement, only if the Company determines, in its sole and absolute discretion, to make such payment. IN WITNESS WHEREOF, the Company has caused this Amendment to be adopted as of this 28th day of December, 2005. TRUSTCO BANK CORP NY By: /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer EX-10 11 ex10bb.txt EXHIBIT 10(BB) Exhibit 10(bb) RESTATEMENT OF TRUSTCO BANK SENIOR INCENTIVE PLAN (Formerly, Trustco Bank Executive Incentive Plan) January 1, 2006 TRUSTCO BANK SENIOR INCENTIVE PLAN Table of Contents Page No. ARTICLE I, PLAN OBJECTIVES 1 ARTICLE II, ELIGIBILITY FOR PLAN PARTICIPATION 2 ARTICLE III, PERFORMANCE INCENTIVE FUNDS 3 ARTICLE IV, DEVELOPMENT OF PERFORMANCE INCENTIVE FUND 3 ARTICLE V, DISTRIBUTION OF FUNDS 4 ARTICLE VI, PAYMENT OF INCENTIVE AWARDS 4 ARTICLE VII, PLAN ADMINISTRATION 6 RESTATEMENT OF TRUSTCO BANK SENIOR INCENTIVE PLAN (Formerly, Trustco Bank Executive Incentive Plan) WHEREAS, Trustco Bank (herein referred to as the "Bank") maintains the Trustco Bank Executive Incentive Plan (herein referred to as the "Plan"); and WHEREAS, the Bank desires to amend the Plan and to restate the Plan in its entirety effective as of January 1, 2006; NOW, THEREFORE, the Bank does hereby amend and restate the Plan in its entirety effective as of January 1, 2006, to change the name to Trustco Bank Senior Incentive Plan and so that it shall read as follows: ARTICLE I PLAN OBJECTIVES Section 1.1. The underlying objective of this Plan is to assist the Bank to attract, retain and motivate senior personnel by providing outstanding incentive award opportunities and by linking incentive awards to accomplishment of the Bank's overall business plans and objectives. The senior incentive plan was developed in light of this central objective, as well as the following specific objectives: o To foster and reward teamwork, cohesiveness and collaboration among senior officers in the performance of their assigned responsibilities. o To clearly identify expected performance levels and to provide a mechanism for evaluating and acknowledging the collective effort. o To maximize and focus effectiveness by providing incentives based on a high level of performance. 1 o To ensure that the Bank's profit plan is used as an operational plan in the management of the Bank. o To ensure stability among the Bank's senior executive positions. Section 1.2. The Plan is designed to provide participants with the opportunity for annual incentive awards for achievement of objectives as established by the Chief Executive Officer ("CEO") of the Bank. In addition, prior to payment of any annual incentive awards, a suitable return upon assets will be required. Incentive award opportunities, therefore, are contingent upon the attainment of performance targets, as well as a reasonable return on equity. In this manner, the Plan is equitable to both shareholders and the Bank's management team. ARTICLE II ELIGIBILITY FOR PLAN PARTICIPATION Section 2.1. Participation in this Plan is limited to the following employee positions: 1. Managers 2. Officers and Senior Officers 3. Administrative Vice Presidents and Vice Presidents Executive officers of the Bank selected for participation in the Trustco Bank Executive Officer Incentive Plan are not eligible to participate in this Plan. Section 2.2. Individuals assigned to a position included within the Plan, during the course of a Plan year, will be eligible for receipt of incentive awards even if they are in such positions only part of the year. The incentive awarded to such participants will be prorated based upon the number of months' service in each included position. This rule will also apply in cases where Plan participants are promoted to a higher level position, such promotion to this position would affect the size of the incentive award. 2 Section 2.3. Plan participants who leave the employ of the Bank prior to the end of a Plan year (except in the case of retirement or disability) forfeit all rights to incentive awards accrued during the Plan year in which the termination occurs. Participants terminated because of retirement or disability will receive all incentive awards proportionate to base compensation paid or accrued during the course of the Plan year. ARTICLE III PERFORMANCE INCENTIVE FUNDS Section 3.1. The percentage of the incentive award for a participant for a Plan year (January 1st through December 31st) will be at the discretion of the Chief Executive Officer. The dollar amount of the incentive award is determined by multiplying the participant's base salary for the Plan year by the percentage. ARTICLE IV DEVELOPMENT OF PERFORMANCE INCENTIVE FUND Section 4.1. The profit plan of the Bank for a Plan year is developed and submitted to the Board of Directors for approval prior to the commencement of the year. As part of the profit plan development process, a return on assets shall be included, as well as asset targets, deposit targets and net income objectives. The amount of a participant's incentive award for a Plan year shall be determined prior to the end of the year in the sole discretion of the CEO, and such determination shall take into account the Bank's performance in the year just ended against targeted profit and goals in the profit plan and the participant's contribution to such performance. The determination by the CEO shall be final and conclusive. 3 ARTICLE V DISTRIBUTION OF FUNDS Section 5.1. An amount equal to the incentive award shall be paid in a single sum to Plan participants receiving the same as soon as practicable following the end of the Plan year to which the award is attributable; provided, however, in no event shall the payments be made later than two and half months following the end of the Plan year for which the awards are payable. ARTICLE VI PAYMENT OF INCENTIVE AWARDS Section 6.1. In lieu of the single sum payment of the incentive award, an Administrative Vice President or Vice President may elect on or before December 31st of any year to defer receipt of all or a specific part of the incentive award that he or she may earn the following Plan year. Any such election must be in writing on forms provided by the Bank. In the event of a Plan termination, the amount already deferred by the participant cannot be paid to him until the participant ceases to be in the employ of the Bank and shall be paid in accordance with Section 6.4. The deferral feature of this Plan is an unfunded arrangement providing deferred compensation for a select group of management or highly compensated employees of the Bank and is intended to meet the requirements of The American Job Creation Act of 2004 and to be subject to Internal Revenue Code Section 409A. From its inception through 2005 there will have been no deferrals made under the Plan. Section 6.2. The Bank will maintain general ledger accounts to reflect its liability for deferred incentive awards, supported by memorandum accounts for each Plan participant. The incentive awards deferred will be credited to the Plan participant's deferred compensation account as of the date it would have been payable. A Plan participant's deferred compensation 4 account shall be credited at the end of each calendar quarter with an amount calculated by multiplying the Participant's deferred compensation account as of the first day of the calendar quarter by a rate equal to one-fourth of the greater of (i) six percent (6%), or (ii) the ten-year U.S. Treasury Bond rate on the last business day of the quarter. Nothing contained in the Plan and no action taken pursuant to the provisions of the Plan shall create or be construed to create a trust of any kind or a fiduciary relationship between the Bank and the Participant or any other person. To the extent that any person acquires the right to receive payment from the Bank under the Plan such right shall be no greater than the right of any unsecured general creditor of the Bank. This Plan is unfunded and any amounts that become payable hereunder are payable from the general assets of the Bank. Section 6.4. In the event a Plan participant ceases to be an employee of the Bank, an amount equal to the entire balance of his deferred incentive account awards, including interest credited thereon, as of end of the month in which his employment ceased shall be paid to the participant in a single sum no later than sixty days following such cessation of employment; provided, however, if such participant is a "specified employee" as defined in Section 409A of the Internal Revenue Code, as amended, ("Code") such amount shall be paid as of the last day of the month which is six months after such participant's termination of employment. The determination of whether a participant ceases to be an employee of the Bank shall be subject to Section 409A of the Code and regulations promulgated thereunder. Section 6.5. Upon the death of a Plan participant, an amount equal to the balance of his account shall be payable to the beneficiary designated by him in the election filed with the Bank by such participant, or if no beneficiary is named, to the trustee of the participant's revocable living trust, and if none, to the trustee of the participant's testamentary trust, and if none, to the 5 personal representative of the participant's estate. Such amount shall be paid on the first business day of the calendar year following the year in which the participant died. Section 6.6. The right to receive payment of deferred incentive awards shall not be transferable or assignable by a Plan participant or named beneficiary, except by will. or by the laws of descent and distribution. Section 6.7. The Board of Directors reserves the right to amend, suspend or terminate this Plan at any time. However, no amendment, suspension or termination of the Plan may alter or impair any Plan participant's rights previously granted under the Plan without his consent. Any such Amendment shall be effective immediately upon adoption by the Board of Directors. ARTICLE VII PLAN ADMINISTRATION Section 7.1. Overall policy direction shall be provided by the Board of Directors. Plan administration shall be provided by the CEO. Section 7.2. During the course of the Plan year, monthly accruals will be established for estimated incentive award payments. IN WITNESS WHEREOF, the Bank has caused this Restatement of the Plan to be executed this 20th day of December, 2005. TRUSTCO BANK By: /s/ Robert J. McCormick --------------------------- Robert J. McCormick President and Chief Executive Officer 6 EX-13 12 ex13.txt EXHIBIT 13 Exhibit 13 TRUSTCO Bank Corp NY Annual Report 2005 [LOGO] TRUSTCO Bank Corp NY TrustCo Bank Corp NY is a savings and loan holding 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 83 community banking offices and 81 Automatic Teller Machines throughout the Bank's market area. The Company serves four states and 18 counties with a broad range of community banking services. Financial Highlights
(dollars in thousands, except per share data) Years ended December 31, Percent 2005 2004 Change Income: Net interest income (Taxable Equivalent)...................................... $ 107,948 105,024 2.78% Net income.................................................................... 58,989 56,540 4.33 Per Share: Basic earnings................................................................ .787 .761 3.42 Diluted earnings.............................................................. .782 .753 3.85 Tangible book value........................................................... 3.05 3.02 0.99 Average Balances: Assets........................................................................ 2,844,974 2,828,195 0.59 Loans, net.................................................................... 1,336,899 1,176,856 13.60 Deposits...................................................................... 2,505,967 2,474,179 1.28 Shareholders' equity.......................................................... 226,571 223,719 1.27 Financial Ratios: Return on average assets...................................................... 2.07% 2.00 3.50 Return on average equity (1).................................................. 26.07 26.65 (2.18) Consolidated tier 1 capital to: Total average assets (leverage)............................................. 8.04 7.74 3.88 Risk-adjusted assets........................................................ 16.58 17.09 (2.98) Total capital to risk-adjusted assets......................................... 17.85 18.37 (2.83) Net loans charged off (recovered) to average loans............................ (.17) (.02) 750.00 Allowance for loan losses to nonperforming loans.............................. 14.1x 15.6x (9.62) Efficiency ratio.............................................................. 38.29% 38.78 1.26 Dividend payout ratio......................................................... 77.46 78.83 (1.74)
Per share information of common stock
Tangible Range of Stock Basic Diluted Cash Book Price Earnings Earnings Dividend Value High Low 2004 First quarter.......................................... $ .191 .188 .150 3.15 14.00 12.64 Second quarter......................................... .193 .191 .150 2.89 13.79 11.87 Third quarter.......................................... .205 .203 .150 3.02 13.21 12.17 Fourth quarter......................................... .172 .171 .150 3.02 14.18 12.80 2005 First quarter.......................................... .199 .197 .150 2.99 13.87 11.20 Second quarter......................................... .200 .199 .150 3.12 13.25 10.73 Third quarter.......................................... .210 .208 .150 3.07 13.66 12.15 Fourth quarter......................................... .179 .178 .160 3.05 13.47 11.40 (1) Excludes the market adjustment on securities available for sale.
1 [GRAPHIC - MAP] 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 Report on Internal Control Over Financial Reporting.............................................. 27 Reports of Independent Registered Public Accounting Firm............. 28-29 Consolidated Financial Statements and Notes............................. 30 Branch Locations..................................................... 48-49 Officers and Board of Directors......................................... 50 General Information..................................................... 51 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 Shareholder: We are pleased to report that 2005 marked another year of record results at TrustCo. Our net income reached a new all-time high and we continued to grow our branch network. We are grateful to our shareholders, board of directors, and employees for their support and enthusiasm, ensuring our continued strong performance. TrustCo's branch office expansion continues. We have now opened twenty-three offices in new markets since announcing our growth plans. These openings have been concentrated in downstate New York and Florida. We currently have fourteen offices in Florida, nine in downstate New York and recently celebrated the simultaneous grand openings of four locations. This brings our total branch offices to 83. We plan an aggressive branch expansion program in both of these markets along with a continued evaluation of opportunities in the upstate New York region. The excellent reception we have received at our new offices gives us confidence that our expansion into these areas positions TrustCo very well for the future. During 2005, we made an offer to purchase Ballston Spa Bancorp, Inc., which was rejected. We continue to evaluate acquisition opportunities as they arise, careful to avoid diluting shareholder value of the existing TrustCo franchise. TrustCo continues to receive positive external recognition in the financial industry. In a recent Barron's article (a leading financial publication), our Company has been recognized as one of the top companies maintaining over ten straight years of uninterrupted growth in earnings per share. During 2005, the board of directors approved a 7% increase to our quarterly cash dividend. Our total annual dividend is now $0.64 resulting in a 5.1% annual yield based on 2005's average stock price. It continues to be our philosophy to return excess capital to shareholders in the form of dividends. We also believe that it is prudent to retain sufficient capital to support our growth goals and to remain well-capitalized for regulatory purposes. Despite a difficult overall banking environment, given the flattening interest rate yield curve, TrustCo's operating results nonetheless continued in the right direction in 2005 with net income increasing to $59 million. TrustCo's most important ratio, return on average equity, was 26.07% for 2005. We are committed to ensuring that our return on average equity compares favorably with any peer group. In 2005, TrustCo showed impressive growth in its loan portfolio. Loans grew by $230.7 million, a strong 18.6% compared to 2004. The majority of this growth occurred in our residential mortgage portfolio. Customers in our new markets have commented that our competitive rates, combined with a simple application process and great customer service, make Trustco Bank an outstanding choice when purchasing or refinancing their home. 4 [LOGO] TRUSTCO Bank Corp NY President's Message (continued) Two members were added to the Board of Directors in 2005. The addition of Thomas O. Maggs, President of Maggs & Associates and myself brings the total number of directors to seven. There were also a number of other senior staff changes during the year. Eric W. Schreck was elevated to Administrative Vice President and Paul D. Matthews was named Vice President. Our future should continue to benefit from the solid performance of the employee team at TrustCo, which has always been a hallmark of our success. For 2005, the often quoted efficiency ratio of our Company was 38.3% at a time when many banking companies struggle to reach 60.0%. This level of performance in efficiency will benefit us through reduced operating expenses for years to come. Community needs continue to expand and TrustCo has responded. We established, in 2005, a new charitable entity called the Trustco Charitable Foundation, and through our Winter Warmth Fund, TrustCo was able to help hundreds of families with heating assistance during the winter months. TrustCo also increased its overall charitable contributions in 2005, and our employees donated thousands of hours of community services in all of the areas we serve. We are very proud of our results last year. As we look forward to 2006, a difficult year is expected. In 2005, we made several moves resulting in one-time gains. These included securities transactions, and the sale of our Trust Building, Canajoharie office, and credit card portfolio. In all likelihood, events of this nature will not be repeated in 2006. The second item we are concerned over is the difficult rate environment all banks are facing. The previously referenced flat/inverted yield curve has resulted in tight loan and deposit pricing. This causes margin pressure and stress on net income. We should rest assured our Company is well positioned for these difficulties. The plans we have in place, combined with our hawkish approach to expense control, will see us through these times. On behalf of the board of directors and employees of our Bank, we thank our shareholders for their continued support. We are proud of the 2005 results and look forward to seeing our Company through a challenging 2006. 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"), during 2005 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 2005 should be read in conjunction with this review. Certain amounts in years prior to 2005 have been reclassified to conform with the 2005 presentation. Overview TrustCo recorded net income of $59.0 million or $0.782 of diluted earnings per share for the year ended December 31, 2005, compared to $56.5 million or $0.753 of diluted earnings per share for the year ended December 31, 2004. This represents an increase of 4.3% in net income between 2004 and 2005. During 2005, the following had a significant effect on net income: o an increase of $2.9 million in taxable equivalent net interest income compared to 2004, as a result of an increase in the average balance of interest earning assets of $37.9 million coupled with an increase of five basis points ("bp") in the net interest margin, o a reduction in the provision for loan losses from $450,000 expense in 2004 to $6.3 million credit in 2005 and, o the recognition of net securities gains of $6.0 million in 2005 compared to $13.7 million recorded in 2004. Return on Equity 2003 26.21% 2004 26.65% 2005 26.07% MIX OF AVERAGE EARNING ASSETS
(dollars in thousands) 2005 2004 Components of vs. vs. Total Earning Assets 2005 2004 2003 2004 2003 2005 2004 2003 Loans, net of unearned income..... $1,336,899 1,176,856 1,275,023 160,043 (98,167) 48.3% 43.1% 48.9 Securities available for sale: U.S. Treasuries and agencies.... 1,059 634 2,930 425 (2,296) -- -- 0.1 Government sponsored enterprises................... 667,967 713,969 503,678 (46,002) 210,291 24.2 26.2 19.3 States and political subdivisions.................. 127,704 168,723 203,718 (41,019) (34,995) 4.6 6.2 7.8 Mortgage-backed securities and collateralized mortgage obligations................... 210,720 149,298 60,248 61,422 89,050 7.6 5.5 2.3 Other........................... 16,734 25,221 63,331 (8,487) (38,110) 0.6 0.9 2.5 Total securities available for sale...................... 1,024,184 1,057,845 833,905 (33,661) 223,940 37.0 38.8 32.0 Federal funds sold and other short-term investments........ 406,131 494,579 497,364 (88,448) (2,785) 14.7 18.1 19.1 Total earning assets.............. $2,767,214 2,729,280 2,606,292 37,934 122,988 100.0% 100.0 100.0
6 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) In addition to these items the Company recognized certain non-recurring transactions that had a significant impact on the net income for 2005. These items include the sale of the former operations center in Schenectady at a net gain of approximately $600 thousand, the sale of the credit card portfolio for a net gain of approximately $1.4 million and the sale of the Canajoharie Branch for a net gain of approximately $600 thousand. These items are not expected to re-occur in 2006. TrustCo has performed well with respect to a number of key performance ratios during 2005 and 2004, including: o return on average equity of 26.07% for 2005 and 26.65% for 2004, o return on average assets of 2.07% for 2005 and 2.00% for 2004, and o an efficiency ratio of 38.29% for 2005 and 38.78% for 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. TrustCo continues to open new branch locations. During 2005 a net increase of five new branches were added to the franchise. The new branch locations continue the plan established several years ago to expand the franchise to areas experiencing economic growth. In 2006, this strategy will lead to the opening of seven to ten new branches. Management believes that expanding into central and western Florida and the downstate region of New York has been a success. The new branches have the same products and features found at our other locations. With a combination of competitive rates, excellent service and convenient locations, management believes that the new branches will attract deposit and loan customers and be a welcome addition to these communities. Overall, 2005 was marked by growth in each of the key drivers of performance. Deposits ended 2005 at $2.56 billion, an increase from the prior year, and the loan portfolio grew to a total of $1.47 billion, an increase of $230.7 million over the 2004 year end balance. Likewise there was an increase of $188.1 million in the year end balance of securities available for sale. The increase in deposits and loans reflect the success the Company has had in attracting new customers to the Bank both in new branch locations LOAN PORTFOLIO
(dollars in thousands) As of December 31, 2005 2004 2003 Amount Percent Amount Percent Amount Percent Commercial................... $ 202,570 13.8% $ 193,188 15.6% $ 190,501 16.4% Real estate -- construction.. 22,123 1.5 20,148 1.6 7,476 0.6 Real estate -- mortgage...... 1,047,994 71.2 822,103 66.3 779,227 67.0 Home equity lines of credit.. 192,291 13.1 191,242 15.4 171,078 14.7 Installment loans............ 5,741 0.4 13,384 1.1 13,984 1.3 Total loans.................. 1,470,719 100.0% 1,240,065 100.0% 1,162,266 100.0% Less: Allowance for loan losses................ 45,377 49,384 48,739 Net loans $1,425,342 $1,190,681 $1,113,527
Average Balances 2005 2004 2003 2002 2001 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Commercial................... $ 192,378 14.4% $ 189,179 16.1% $ 199,729 15.7% $ 198,566 13.1% $ 195,152 12.8% Real estate -- construction.. 18,893 1.4 12,430 1.1 6,684 0.5 9,752 0.6 14,526 1.0 Real estate -- mortgage...... 922,875 69.0 780,777 66.3 899,415 70.5 1,156,779 76.5 1,161,521 76.5 Home equity lines of credit.. 192,819 14.4 181,948 15.5 155,185 12.2 129,847 8.6 125,778 8.3 Installment loans............ 9,934 0.8 12,522 1.0 14,010 1.1 17,504 1.2 21,791 1.4 Total loans.................. 1,336,899 100.0% 1,176,856 100.0% 1,275,023 100.0% 1,512,448 100.0% 1,518,768 100.0% Less: Allowance for loan losses................ 47,653 49,299 51,311 56,525 57,398 Net loans.................... $1,289,246 $1,127,557 $1,223,712 $1,455,923 $1,461,370
7 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) Taxable Equivalent Net Interest Income (dollars in millions) 2003 $102.8 2004 $105.0 2005 $107.9 as well as overall. Management believes that TrustCo's success is predicated on providing core banking services to a wider number of customers. 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 97.3% and 96.5% of average total assets for 2005 and 2004, 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. Interest rates have a significant impact on the operations and financial results of all financial services companies. One of the most important interest rates used to control national economic policy is the "federal funds" rate. This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating. The federal funds rate increased by 200 basis points during 2005 from 2.25% at the beginning of the year to 4.25% by year end. For 2004 the federal funds rate began the year at 1.00% and ended 2004 at 2.25%, an increase of 125 basis points. Therefore the federal funds rate has increased by a total of 325 basis points between January 1,2004 and December 31, 2005. Traditionally bank deposit accounts are heavily influenced by the federal funds rate. Consequently the cost of deposits during this time period also increased. During this same time period the 10 year treasury bond rate did not change consistent with the increased federal funds rate. The 10 year treasury was 4.22% at the beginning of 2005 and ended the year at 4.36%. Likewise in 2004 the 10 year treasury began the year at 4.25% and ended 2004 at 4.22%. Therefore for the period from January 1, 2004 to December 31, 2005 the 10 year treasury increased by 11 basis points as compared to the 325 basis points increase in the federal funds rate. The rate on the 10 year treasury bond is a significant influence on the rates for new residential real estate loans. These changes in interest rates have an effect on the Company relative to the interest income on loans, securities and federal funds sold and other short term instruments as well as on interest expense on deposits and borrowings. Residential real estate loans and longer-term investments are most affected by the changes in longer term market interest rates such as the 10 year treasury. The federal funds sold portfolio and other short term investments are affected primarily by changes in the federal funds target rate. Deposit interest rates are most affected by short term market interest rates. Also, changes in interest rates have an effect on the recorded balance of securities available for sale portfolio, which is recorded at fair market value. Generally, as interest rates increase the fair market value of the securities available for sale portfolio will decrease. Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants 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, 2005 After 1 Year In 1 Year But Within After or Less 5 Years 5 Years Total Commercial................................................ $ 72,513 68,720 61,337 202,570 Real estate construction.................................. 22,123 -- -- 22,123 Total..................................................... 94,636 68,720 61,337 224,693 Predetermined rates....................................... 25,390 68,699 61,337 155,426 Floating rates............................................ 69,246 21 -- 69,267 Total..................................................... $ 94,636 68,720 61,337 224,693
such as Freddie Mac and Fannie Mae. Because TrustCo is a portfolio lender and does not sell loans into the secondary market, the Company establishes rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates. The net effect of these interest rate changes is that the yields earned on short term investments have increased while longer term investment yields have remained relatively flat, and deposit costs have risen. Earning Assets Average earning assets during 2005 were $2.77 billion, which was an increase of $37.9 million from the prior year. This increase was primarily the result of growth in the average balance of loans by $160.0 million offset by a $33.7 million decrease in securities available for sale and a decrease of $88.4 million of federal funds sold and other short term investments between 2004 and 2005. The increase in the loan portfolio is primarily the result of the $148.6 million increase in real estate loans. This increase in real estate loans is a result of aggressive marketing of this product throughout the TrustCo branch network, an effective marketing campaign and competitive rates and closing costs. Total average assets were $2.84 billion for 2005 and $2.83 billion for 2004. 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, as discussed below. Loans Average loans increased $160.0 million during 2005. Interest income on the loan portfolio also increased to $86.7 million in 2005 from $75.2 million in 2004. The average yield increased from 6.39% in 2004 to 6.48% in 2005. Historically, TrustCo has distinguished itself as a principal originator of residential real estate loans. Through 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 private mortgage insurance and quick loan approvals were identified and marketed. The fact that the Company holds mortgages in its loan portfolio rather than selling them into secondary markets was also highlighted. The average balance of residential real estate loans was $930.7 million in 2005 and $787.3 million in 2004. Income on real estate loans increased to $58.9 million in 2005 from $52.7 million in 2004. The yield on the portfolio decreased from 6.69% for 2004 to 6.33% in 2005 due to changes in retail rates in the marketplace. Residential real estate loans at December 31, 2005 were $1.06 billion compared to $833.7 million at year end 2004, an increase of $224.2 million. The overwhelming majority of TrustCo's real estate loans are secured by properties within the Bank's market area. During 2005, management continued its established practice of retaining all new loan originations in the Bank's portfolio rather than selling them in the secondary market. Average commercial loans of $203.4 million in 2005 increased by $8.4 million from $195.1 million in 2004. The average yield on the commercial loan portfolio increased to 7.26% for 2005 from 6.88% in 2004. This resulted in income on commercial loans of $14.8 million in 2005 and $13.4 million in 2004. TrustCo strives to maintain strong asset quality in all segments of its loan portfolio, especially commercial loans. Competition for commercial loans 9 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) continues to be very intense in the Bank's market region. The Bank competes with large money center and regional banks as well as with smaller locally based banks and thrifts. Over the last several years, competition for commercial loans has intensified as smaller banks and thrifts have tried to develop commercial loan portfolios. 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 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 management believes, has developed significant expertise with respect to its risks and rewards. During 2005, the average balance of home equity credit lines was $192.8 million, an increase from $181.9 million in 2004. 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 increased to 6.11% for 2005 from 4.23% in 2004. This resulted in interest income on home equity credit lines of $11.8 million in 2005, compared to $7.7 million in 2004. The average balance of installment loans, net of unearned income, decreased to $9.9 million in 2005 from $12.5 million in 2004. The yield on installment loans increased to 12.26% in 2005 from 11.63% in 2004, resulting in interest income of $1.2 million. During the third quarter of 2005 the Company sold approximately $7.4 million of credit card receivables and entered into a marketing arrangement with a third party credit card servicer. As a result of this sale the Company recognized a net gain of $1.4 million and will have continuing income from credit cards for new card originations. Securities available for sale: The portfolio of securities available for sale is designed to provide a stable source of interest income and liquidity. The portfolio is also managed by the Company to take advantage of changes in interest rates. The securities available for sale portfolio is 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. The Company currently has no intent to sell securities with temporary impairment. 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, 2004, securities available for sale amounted to $896.0 million, compared to $1.08 billion at year end 2005. For 2005, the average balance of securities available for sale was $1.02 billion with an average yield of 5.36%, compared to an average balance in 2004 of $1.06 billion with an average yield of 5.85%. The taxable equivalent income earned on the securities portfolio in 2004 was $61.9 million, compared to $54.9 million earned in 2005. Yields earned on securities available for sale were down for 2005 compared to 2004 due primarily to additional investments made in the mortgage-backed securities and collateralized mortgage obligations portfolio. These additional investments were made at relatively low interest rates as compared to the remainder of the portfolio and have an anticipated shorter average life. Increases in the year-end 2005 balance of securities available for sale were the result of efforts to invest federal funds sold and other short term investments along with deposit inflows into relatively higher yielding assets. The interest rates on the securities purchased during the year were attractive as compared to investing the funds in overnight federal funds and other short term investments and compared to the Company's overall cost of funding. Federal funds sold and other short-term investments yielded an average rate of return of 2.96% for the year. Interest income was positively affected by investing the funds in the securities available for sale portfolio at higher interest rates. All security purchases are made in accordance with management's long standing investment policies. Management believes these additional investments offered the best combination of yield and credit protection. During 2005, TrustCo recognized approximately $6.0 million of net gains from securities transactions, compared to approximately $13.7 million in 2004. The Company recognized these transactions in response to lower interest rates in the marketplace, which had the effect of increasing the value of these securities. TrustCo has not invested in any exotic investment products such as interest rate swaps, forward 10 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) 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 reasonably predictable earnings stream. 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, 2005 and 2004, the market value of TrustCo's portfolio of securities available for sale carried net unrealized losses of approximately $10.1 million and net unrealized gains of approximately $7.4 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, 2005. Mortgage-backed securities are 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, 2005, 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 2005, the average balance of federal funds sold and other short-term investments was $406.1 million, a decrease from $494.6 million in 2004. The average rate earned on these assets was 2.96% in 2005 and 1.35% in 2004. TrustCo utilizes this category of earning assets as a means of SECURITIES AVAILABLE FOR SALE
(dollars in thousands) As of December 31, 2005 2004 2003 Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value U.S. Treasuries and agencies................. $ 499 498 500 500 998 1,001 Government sponsored enterprises............. 756,525 743,265 521,078 517,061 862,530 862,658 States and political subdivisions............ 115,010 118,950 147,988 154,939 182,118 191,727 Mortgage-backed securities and collateralized mortgage obligations....................... 202,007 200,963 201,579 201,623 64,718 66,322 Other........................................ 685 681 685 685 685 685 Total debt securities available for sale... 1,074,726 1,064,357 871,830 874,808 1,111,049 1,122,393 Equity securities............................ 19,418 19,719 16,741 21,181 30,880 54,533 Total securities available for sale........ $1,094,144 1,084,076 888,571 895,989 1,141,929 1,176,926
SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION Debt securities available for sale:
(dollars in thousands) As of December 31, 2005 Based on Based on Final Maturity Call Date Amortized Fair Amortized Fair Cost Value Cost Value Within 1 year.................................................... $ 26,490 26,347 772,215 758,952 1 to 5 years..................................................... 341,367 338,942 195,854 195,510 5 to 10 years.................................................... 138,355 136,778 100,598 103,574 After 10 years................................................... 568,514 562,290 6,059 6,321 Total debt securities available for sale....................... $ 1,074,726 1,064,357 1,074,726 1,064,357
11 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) maintaining strong liquidity as interest rates change. During 2005, 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 virtually all interest sensitive instruments. The year end balance of federal funds sold and other short term investments was $257.2 million for 2005 compared to $642.2 million for year end 2004. The year end balance for 2004 is significantly higher than the average balance for the year of $494.6 million due to the proceeds of sales of securities available for sale executed near year end 2004. Management anticipates evaluating the overall level of the federal funds sold and other short term investments portfolio for 2006 and will make appropriate adjustments based upon market opportunities and interest rates. 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 $2.51 billion in 2005, compared to $2.47 billion in 2004, an increase of $31.8 million. Increases were noted primarily in the demand deposits and time account categories. The average balance of interest bearing checking accounts decreased by $10.6 million to $318.2 million in 2005. Money market accounts had an average balance of $157.4 million in 2004 compared to $153.8 million in 2005. Savings account balances decreased from $809.4 million in 2004 to $783.4 million in 2005. Time deposits increased on average by $49.1 million and demand deposits increased by $22.9 million during 2005 compared to 2004. SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD Debt securities available for sale:
(dollars in thousands) As of December 31, 2005 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 Fair value............................ 498 -- -- -- 498 Weighted average yield................ 1.63% -- -- -- 1.63 Government sponsored enterprises Amortized cost........................ $15,000 159,155 109,883 472,487 756,525 Fair value............................ 14,951 157,530 108,542 462,242 743,265 Weighted average yield................ 3.48% 4.57 5.11 5.41 5.15 States and political subdivisions Amortized cost........................ $ 285 16,988 2,635 95,102 115,010 Fair value............................ 286 16,859 2,686 99,119 118,950 Weighted average yield................ 4.50% 3.39 5.35 4.89 4.68 Mortgage-backed securities and collateralized mortgage obligations Amortized cost........................ $10,706 164,589 25,787 925 202,007 Fair value............................ 10,612 163,922 25,500 929 200,963 Weighted average yield................ 4.62% 4.70 4.58 6.85 4.69 Other Amortized cost........................ $ -- 635 50 -- 685 Fair value............................ -- 631 50 -- 681 Weighted average yield................ --% 4.43 5.49 -- 4.50 Total debt securities available for sale Amortized cost........................ $26,490 341,367 138,355 568,514 1,074,726 Fair value............................ 26,347 338,942 136,778 562,290 1,064,357 Weighted average yield................ 3.95% 4.57 5.02 5.33 5.01
Weighted average yields have not been adjusted for any tax-equivalent factor. Government sponsored enterprises maturing after 10 years have final maturities of less than 15 years. States and political subdivisions maturing after 10 years generally have final maturities of less than 20 years. 12 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS
(dollars in thousands) 2005 2004 2003 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........ $1,336,899 86,669 6.48% 1,176,856 75,232 6.39% 1,275,023 87,669 6.88% Securities available for sale: U.S. Treasuries and agencies....... 1,059 28 2.64 634 11 1.74 2,930 209 7.13 Government sponsored enterprises... 667,967 34,478 5.16 713,969 39,785 5.57 503,678 25,780 5.12 States and political subdivisions.. 127,704 9,658 7.56 168,723 13,302 7.88 203,718 16,131 7.92 Mortgage-backed securities and collateralized mortgage obligations...................... 210,720 9,738 4.62 149,298 7,032 4.71 60,248 3,618 6.01 Other.............................. 16,734 1,025 6.12 25,221 1,744 6.92 63,331 4,430 7.00 Total securities available for sale......................... 1,024,184 54,927 5.36 1,057,845 61,874 5.85 833,905 50,168 6.01 Federal funds sold and other short-term investments........... 406,131 12,009 2.96 494,579 6,675 1.35 497,364 5,654 1.14 Total interest earning assets...... 2,767,214 153,605 5.55% 2,729,280 143,781 5.27% 2,606,292 143,491 5.50% Allowance for loan losses............ (47,653) (49,299) (51,311) Cash and noninterest earning assets.. 125,413 148,214 155,194 Total assets....................... $2,844,974 2,828,195 2,710,175 Liabilities and shareholders' equity Interest bearing deposits: Interest bearing checking accounts. $ 318,167 1,376 0.43% 328,804 1,586 0.48% 320,179 1,678 0.52% Savings............................ 783,410 6,769 0.86 809,438 7,968 0.98 759,308 8,795 1.16 Time deposits and money markets.... 1,169,018 35,481 3.04 1,123,474 28,223 2.51 1,072,078 29,370 2.74 Total interest bearing deposits.... 2,270,595 43,626 1.92 2,261,716 37,777 1.67 2,151,565 39,843 1.85 Short-term borrowings................ 83,381 2,026 2.43 100,855 972 0.96 107,799 877 0.81 Long-term debt....................... 99 5 5.22 151 8 5.40 326 19 5.80 Total interest bearing liabilities. 2,354,075 45,657 1.94% 2,362,722 38,757 1.64% 2,259,690 40,739 1.80% Demand deposits...................... 235,372 212,463 189,262 Other liabilities.................... 28,956 29,291 36,178 Shareholders' equity................. 226,571 223,719 225,045 Total liabilities and shareholders' equity............. $2,844,974 2,828,195 2,710,175 Net interest income.................... 107,948 105,024 102,752 Net interest spread.................... 3.61% 3.63% 3.70% Net interest margin (net interest income to total interest earning assets).... 3.90 3.85 3.94
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 2005, 2004, and 2003. 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 $0.3 million, $11.5 million, and $22.7 million in 2005, 2004, and 2003, 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) 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. Management believes that another contributing factor to the increase in deposits is the overall increase in the rates paid on deposit accounts. As noted previously the largest growth in deposits is in the category of time deposits which carries the highest cost in terms of interest rates while at the same time the Company experienced a deposit outflow in savings accounts which is a relatively low cost source of deposits. The increasing rates on time deposits is attracting customers away from other investment opportunitites. TrustCo, with its expanding branch network, is well positioned to attract these new deposits. The overall cost of interest bearing deposits was 1.92% in 2005 compared to 1.67% in 2004. The increase in the average balance of interest bearing deposits, coupled with a 25 basis point increase in the average cost, resulted in an increase of approximately $5.9 million in interest expense to $43.6 million in 2005. 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, management believes, TrustCo is able to attract deposit customers looking for a long-term banking relationship, and to cross sell banking services utilizing the deposit account relationship as the starting point. MATURITY OF TIME DEPOSITS OVER $100 THOUSAND (dollars in thousands) As of December 31, 2005 Under 3 months.............................. $ 22,981 3 to 6 months .............................. 10,909 6 to 12 months ............................. 55,891 Over 12 months.............................. 135,830 Total....................................... $225,611 Other funding sources: The Company had $83.4 million of average short-term borrowings outstanding during 2005 compared to $100.9 million in 2004. The average cost of short-term borrowings was 2.43% in 2005 and 0.96% in 2004. This resulted in interest expense of approximately $2.0 million in 2005. The increase in the rate paid on these funds is a result of the increase in the target federal funds rate during 2004 and 2005. 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. 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 MIX OF AVERAGE SOURCES OF FUNDING
(dollars in thousands) 2005 2004 Components of vs. vs. Total Funding 2005 2004 2003 2004 2003 2005 2004 2003 Demand deposits........................ $ 235,372 212,463 189,262 22,909 23,201 9.1% 8.3 7.7 Retail deposits: Savings.............................. 783,410 809,438 759,308 (26,028) 50,130 30.3 31.4 31.0 Time deposits under $100 thousand.... 813,751 789,211 767,505 24,540 21,706 31.4 30.6 31.3 Interest bearing checking accounts... 318,167 328,804 320,179 (10,637) 8,625 12.3 12.8 13.1 Money market deposits................ 153,838 157,418 149,520 (3,580) 7,898 5.9 6.1 6.1 Total retail deposits................ 2,069,166 2,084,871 1,996,512 (15,705) 88,359 79.9 80.9 81.5 Total core deposits.................. 2,304,538 2,297,334 2,185,774 7,204 111,560 89.0 89.2 89.2 Time deposits over $100 thousand....... 201,429 176,845 155,053 24,584 21,792 7.8 6.9 6.4 Short-term borrowings.................. 83,381 100,855 107,799 (17,474) (6,944) 3.2 3.9 4.4 Long-term debt......................... 99 151 326 (52) (175) -- -- -- Total purchased liabilities.......... 284,909 277,851 263,178 7,058 14,673 11.0 10.8 10.8 Total sources of funding............. $2,589,447 2,575,185 2,448,952 14,262 126,233 100.0% 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, 2005 2004 2003 2002 2001 Individuals, partnerships and corporations............... $2,485,922 2,453,843 2,318,424 2,150,986 1,947,700 U.S. Government.......................................... 72 70 73 35 83 States and political subdivisions........................ 4,875 5,539 9,802 48,049 64,811 Other (certified and official checks, etc.).............. 15,098 14,727 12,528 13,370 15,056 Total average deposits by type of depositor............ $2,505,967 2,474,179 2,340,827 2,212,440 2,027,650
the view of management, but not excessive. This philosophy has led to a dividend payout ratio of 77.5% of net income in 2005, 78.8% of net income in 2004, and 84.0% for 2003. 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. TrustCo's Tier 1 capital was 16.58% of risk-adjusted assets at December 31, 2005, and 17.09% of risk-adjusted assets at December 31, 2004. Tier 1 capital to average assets at December 31, 2005 was 8.04%, as compared to 7.74% at year end 2004. At December 31, 2005 and 2004, TrustCo and Trustco Bank met their respective 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 VOLUME AND YIELD ANALYSIS
(dollars in thousands) 2005 vs. 2004 2004 vs. 2003 Increase Due to Due to Increase Due to Due to (Decrease) Volume Rate (Decrease) Volume Rate Interest income (TE): Federal funds sold and other short-term investments........... $ 5,334 (941) 6,275 1,021 (32) 1,053 Securities available for sale: Taxable........................... (3,302) (153) (3,149) 14,535 12,791 1,744 Tax-exempt........................ (3,665) (3,123) (522) (2,829) (2,756) (73) Total securities available for sale........................ (6,947) (3,276) (3,671) 11,706 10,035 1,671 Loans............................... 11,437 9,596 1,841 (12,437) (7,553) (4,884) Total interest income............. 9,824 5,379 4,445 290 2,450 (2,160) Interest expense: Interest bearing checking accounts.. (210) (50) (160) (92) 55 (147) Savings............................. (1,199) (249) (950) (827) 640 (1,467) Time deposits and money markets................ 7,258 1,376 5,882 (1,147) 1,654 (2,801) Short-term borrowings............... 1,054 (134) 1,188 95 (49) 144 Long-term debt...................... (3) (3) -- (11) (10) (1) Total interest expense............ 6,900 940 5,960 (1,982) 2,290 (4,272) Net interest income (TE).......... $ 2,924 4,439 (1,515) 2,272 160 2,112
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) continually identifying, analyzing, and evaluating the credit risk inherent in the loan portfolio. As a result of management's ongoing reviews of the loan portfolio, loans are placed in nonaccrual status, either due to the delinquent status of the principal and/or interest payments, or based on a judgment by management that, although payment of principal and/or interest is current, such action is prudent. 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 2005 and 2004 totaled $3.2 million. Nonperforming loans as a percentage of the total loan portfolio were 0.22% in 2005 and 0.26% in 2004. Included in nonperforming loans at year end 2005 were $1.7 million of residential mortgage loans in nonaccrual status as compared to $557 thousand at year end 2004. There were no loans past due three payments or more and still accruing interest at year end 2004 and $35 thousand at year end 2005. Restructured loans at year end 2004 were $2.6 million, compared to $1.5 million at year end 2005. 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 $3.2 million of nonperforming loans at December 31, 2005 are residential real estate or retail consumer loans. A significant portion of the charge-offs for 2005 and 2004 occurred in the residential real estate and retail consumer loan portfolios. During 2005, gross charge-offs of these types of loans were $1.6 million (which represented 63% of total gross charge-offs). In 2004, charge-offs for these types of loans were $5.5 million. The reduction in gross charge offs in the residential real estate portfolio between 2004 and 2005 reflects the economic improvements in this area and the positive effect of prior collection actions. Since 2000, there has been a shift of charge-offs to 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 territory, and o the relative slow growth in real estate values in many of TrustCo's lending areas that has occurred since the middle of the 1990's, thereby limiting the collateral value that supports the real estate loans. Consumer defaults and bankruptcies had increased over the last several years, and this led to an increase in defaults on loans. However, beginning in 2004 the number of new bankruptcy filings in the Capital District area decreased from the prior year as compared to state wide trends which continued to show increases year over year in new bankruptcy filings. This trend, along with the decrease in residential real estate and consumer loan charge-offs may be indicators of future economic stability for this region and a continued lessening of charge-offs in the residential real estate portfolio. Ongoing portfolio management is intended to result in early identification and disengagement from deteriorating credits. 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, 2005, 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. TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured since 1995 under a troubled debt restructuring, as impaired loans. At year end 2005 and 2004, there were $1.5 and $2.6 million, respectively, of impaired loans. The average balances of impaired loans were $1.9 million during 2005 and $2.9 million during 2004. The Company recognized approximately $201 thousand of interest income on these loans in 2005 and $314 thousand in 2004. Allowance for Loan Losses The allowance for loan losses is available to absorb losses on loans that management determines are uncollectible. The balance of the allowance is maintained at a level that is, in management's judgment, representative of the loan portfolio's inherent risk. 16 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) In deciding on the adequacy of 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 loan charge-offs, and recoveries, Allowance for Loan Losses (dollars in millions) 2003 $48.7 2004 $49.4 2005 $45.4 o the change in the loan portfolio and the implication that it has in relation to the economic climate in the Bank's business territory, o significant growth in the level of losses associated with bankruptcies in New York State over the last several years 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 over the last several years. Though the economic climate in the upstate New York area has suffered over the last several years, resulting in higher bankruptcies and relatively flat real estate prices, overall economic trends in the last two years have been improving. As noted previously, bankruptcies in the Capital District area have decreased relative to state wide trends recently and general housing prices have continued to increase. These positive trends have helped marginal credits better manage their debt load. Because of continued improvements in nearly all of the indicators of the Company's credit quality and management's assessment of economic conditions and risk, combined with the significant increase in the level of net recoveries from $195 thousand in 2004 to $2.3 million in 2005, as well as the impact of the sale of the credit card portfolio in 2005, a negative provision of $6.3 million was recognized in 2005. Management continues to monitor these trends in determining future provisions or credits for loan losses in relation to loan charge offs, recoveries and the level and trends of nonperforming loans. 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 2005 and 2004 were $2.5 million and $5.8 million, respectively. Recoveries were $4.7 million in 2005 and $6.0 million in 2004. The provision recorded in 2004 was $450,000 compared to a recovery of this provision of $6.3 million in 2005. The reduction in the provision for loan losses over the last several years is a result of the allowance for loan losses being considered adequate by management in relation to the overall loan portfolio. The level of loan charge offs decreased by approximately $3.3 million between 2004 and 2005 while at the same time the level of nonperforming loans remained relatively constant between the two years. Market Risk The Company's principal exposure to market risk is with respect to interest rate risk. Interest rate risk NONPERFORMING ASSETS
(dollars in thousands) As of December 31, 2005 2004 2003 2002 2001 Loans in nonaccrual status........................... $ 1,662 557 -- 615 1,090 Loans contractually past due 3 payments or more and still accruing interest........................ 35 -- -- -- 801 Restructured loans................................... 1,518 2,610 3,260 4,303 5,159 Total nonperforming loans............................ 3,215 3,167 3,260 4,918 7,050 Foreclosed real estate............................... 23 -- -- 86 603 Total nonperforming assets........................... $ 3,238 3,167 3,260 5,004 7,653 Allowance for loan losses............................ $45,377 49,384 48,739 52,558 57,203 Allowance coverage of nonperforming loans............ 14.11x 15.59 14.95 10.69 8.11 Nonperforming loans as a % of total loans............ 0.22% 0.26 0.28 0.35 0.45 Nonperforming assets as a % of total assets.......... 0.11 0.11 0.12 0.19 0.30
17 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) 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 market risk for the Company. Interest rate risk management focuses on maintaining adequate levels of 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 executive 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 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 data 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 model, the fair values of capital projections as of December 31, 2005 are referenced below. The base case scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of December 31, 2005. 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 and 200 bp. Estimated Percentage of Fair value of Capital to As of December 31, 2005 Fair value of Assets +200 BP 13.58% +100 BP 14.85 Current rates 16.22 - -100 BP 15.09 - -200 BP 13.37 At December 31, 2005 the book value of capital (excluding the market adjustment on securities available for sale) to assets was 8.04%. The fair value of capital is calculated as the fair value of assets less the fair value of liabilities in the interest ratio scenario presented. The fair value of capital in the current rate environment is 16.22% of assets whereas the current book value of capital to assets is 8.04% at December 31, 2005. The significant difference between these two capital ratios reflects the impact that a fair value calculation can have on the capital ratios of a company. The fair value of capital calculations take into consideration the fair value of deposits, including those deposits considered core deposits, along with the fair value of assets such as the loan portfolio. 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 18 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands) 2005 2004 2003 2002 2001 Amount of loans outstanding at end of year (less unearned income).......................... $1,470,719 1,240,065 1,162,266 1,422,301 1,556,686 Average loans outstanding during year (less average unearned income).................. 1,336,899 1,176,856 1,275,023 1,512,448 1,518,768 Balance of allowance at beginning of year......... 49,384 48,739 52,558 57,203 56,298 Loans charged off: Commercial...................................... 656 335 432 997 1,084 Real estate..................................... 1,561 5,054 8,651 6,648 5,383 Installment..................................... 247 408 515 705 561 Total......................................... 2,464 5,797 9,598 8,350 7,028 Recoveries of loans previously charged off: Commercial...................................... 440 446 1,393 803 1,664 Real estate..................................... 4,121 5,334 3,003 1,285 1,106 Installment..................................... 156 212 183 197 223 Total......................................... 4,717 5,992 4,579 2,285 2,993 Net loans charged off (recovered)................. (2,253) (195) 5,019 6,065 4,035 Provision (credit) for loan losses ............... (6,260) 450 1,200 1,420 4,940 Balance of allowance at end of year............... $ 45,377 49,384 48,739 52,558 57,203 Net charge offs (recoveries) as a percent of average loans outstanding during year (less average unearned income).................. (.17)% (.02) .39 .40 .27 Allowance as a percent of loans outstanding at end of year.................................. 3.09 3.98 4.17 3.70 3.67
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. The table "Interest Rate Sensitivity" presents an analysis of the interest-sensitivity gap position at December 31, 2005. 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 data specific to the Company. The interest rate sensitivity table indicates that TrustCo is asset sensitive throughout virtually all of the time periods presented. The effect of being asset sensitive is that should interest rates increase the Company would be able to reinvest these assets at higher rates. Conversely, should interest rates fall, the Company would record less interest income due to reinvesting the assets in a lower interest rate environment. 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 assets and liabilities 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 19 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) INTEREST RATE SENSITIVITY
(dollars in thousands) At December 31, 2005 Repricing in: 0-90 91-365 1-5 Over 5 Rate days days years years Insensitive Total Total assets........................ $617,305 260,134 923,273 998,401 113,646 2,912,759 Cumulative total assets............. $617,305 877,439 1,800,712 2,799,113 2,912,759 Total liabilities and shareholders' equity........... $274,633 533,844 1,273,199 497,115 333,968 2,912,759 Cumulative total liabilities and shareholders' equity........... $274,633 808,477 2,081,676 2,578,791 2,912,759 Cumulative interest sensitivity gap.................... $342,672 68,962 (280,964) 220,322 Cumulative gap as a % of interest earning assets for the period...... 55.51% 7.86 (15.60) 7.87 Cumulative interest sensitive assets to liabilities.............. 224.77 108.53 86.50 108.54
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. Average core deposits (total deposits less time deposits greater than $100 thousand) amounted to $2.30 billion in 2005 and 2004. 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 2005, the average balance of purchased liabilities was $284.9 million, compared with $277.9 million in 2004. 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, 2005 and 2004, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $306.7 million and $313.3 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 $2.8 million and $3.6 million at December 31, 2005 and 2004, 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, 2005 and 2004 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. 20 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) 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 $27.6 million in 2005, $32.0 million in 2004 and $29.6 million in 2003. Included in the 2005 results are $6.0 million of net securities gains compared with net gains of approximately $13.7 million in 2004 and $9.8 million in 2003. Excluding securities transactions, noninterest income was $21.6 million in 2005, and $18.3 million in 2004 and $19.8 million in 2003. 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 2005, $5.9 million in 2004, and $6.0 million in 2003. 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. At December 31, 2005 and 2004 assets under management by the Trust Department were approximately $886.5 million and $992.3 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. Included in the category of other noninterest income are certain non-recurring transactions that occurred in 2005 as follows: o the sale of the former operations center in Schenectady at a net gain of approximately $600 thousand, o the sale of the credit card portfolio for a net gain of approximately $1.4 million and o the sale of the Canajoharie Branch for a net gain of approximately $600 thousand. These items are not expected to recur in 2006. Noninterest expense: Noninterest expense was $48.6 million in 2005, compared with $48.2 million in 2004 and $48.5 million in 2003. 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 2005, 38.8% in 2004 and 38.3% in 2003. Excluded from the efficiency ratio calculation was $3.2 million, $248 thousand, and $255 thousand of non-recurring income and $812 thousand, $1.2 million, and $1.9 million of non-recurring expenses for 2005, 2004 and 2003, respectively. Salaries and employee benefits are the most significant component of noninterest expense. For 2005, these expenses amounted to $20.6 million, compared with $20.7 million in 2004, and $20.4 million in 2003. Net occupancy expense increased $707 thousand between 2004 and 2005 due primarily to new branch openings during 2004 and 2005. Equipment expense, increased $438 thousand for 2005 to $2.7 million as compared to $2.3 million in 2004. The increase in net occupancy expense is the result of new equipment purchased for the branch expansion program and upgrades to the ATM equipment. Professional services expense decreased to $3.4 million in 2005 compared to $3.7 million in 2004 and $3.0 million in 2003. Decrease in professional service expense is due primarily to contract negotiations in 2004 related to computer services. Outsourced service expense was $4.1 million in 2005 compared to $4.3 million in 2004. The decrease is the result of new processing contracts in 2004. Changes in other components of noninterest expense are the results of normal banking activities and the increased activities associated with new branching facilities. Income Tax In 2005, TrustCo recognized income tax expense of $30.8 million, as compared to $26.8 million in 2004 and $23.3 million in 2003. The tax expense on the Company's income was different than tax expense at the federal statutory rate of 35%, due primarily to tax exempt income and, to a lesser extent, 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 $30.2 million and $33.1 million at December 31, 2005 and 2004, respectively, will be realized. NONINTEREST INCOME
(dollars in thousands) For the year ended December 31, 2005 vs. 2004 2005 2004 2003 Amount Percent Trust department income............................. $ 6,009 5,869 6,046 140 2.4% Fees for services to customers...................... 10,529 10,486 10,896 43 0.4 Net gains on securities transactions................ 5,999 13,712 9,807 (7,713) (56.3) Other............................................... 5,110 1,898 2,900 3,212 169.2 Total noninterest income.......................... $27,647 31,965 29,649 (4,318) (13.5)%
21 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) NONINTEREST EXPENSE
(dollars in thousands) For the year ended December 31, 2005 vs. 2004 2005 2004 2003 Amount Percent Salaries and employee benefits...................... $20,622 20,697 20,449 (75) (0.4)% Net occupancy expense............................... 7,308 6,601 6,265 707 10.7 Equipment expense................................... 2,721 2,283 3,078 438 19.2 Professional services............................... 3,372 3,685 3.040 (313) (8.5) Outsourced services................................. 4,093 4,348 5,601 (255) (5.9) Other real estate income, net....................... (617) (739) (457) 122 (16.5) Other............................................... 11,091 11,290 10,510 (199) (1.8) Total noninterest expense......................... $48,590 48,165 48,486 425 0.9%
Contractual Obligations The Company is contractually obligated to make the following payments on long-term debt and leases as of December 31, 2005: (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........ $ 28 59 -- -- 87 Operating leases.... 2,534 5,473 5,482 31,879 45,368 Total............... $ 2,562 5,532 5,482 31,879 45,455 In addition, the Company is contractually obligated to pay data processing vendors approximately $4 million to $5 million per year through 2013. Impact of Inflation and Changing Prices The consolidated financial statements for the years ended 2005, 2004 and 2003 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 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. Stock Options In the fourth quarter of 2005 the Board of Director's of the Company approved the accelerated vesting of all outstanding unvested stock options to purchase shares of common stock. These options were previously awarded to executive officers and employees under the 1995 and 2004 Stock Option Plans. By accelerating the vesting of these options the Company estimates that approximately $1.3 million of future compensation expense, net of tax, will be eliminated in anticipation of the adoption of FASB Statement 123R which the Company will adopt as of January 1, 2006. Options to purchase 882,100 shares of the Company's common stock, which would otherwise have vested from time to time over the next four years, became immediately exercisable as a result of this action. The number of shares and the exercise prices of the options subject to the acceleration remained unchanged. Also, all of the other terms of the options remain the same. The Company recorded $127,000 of expense related to this acceleration based upon an analysis performed in accordance with APB Opinion 25. The accelerated options included 749,500 options held by executive officers and 132,600 options held by other employees. Based upon the Company's closing stock price of $12.76 price per share on the date of accelerated vesting certain of the options were below and other above the closing market price as follows: Efficiency Ratio 2003 38.3% 2004 38.8% 2005 38.3% 22 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) Grant Accelerated Exercise Date Vesting Shares Price 2005 411,200 $12.15 2004 394,500 $13.55 2002 76,400 $11.83 ------- 882,100 The decision to accelerate the vesting of these options was made primarily to reduce non-cash compensation expense that would have been recorded in its income statement in future periods upon the adoption of FASB Statement No. 123R (Share-Based Payment) in January 2006. Impact of New Accounting Standards SFAS No. 123R In 2004, the FASB issued a statement to revise Statement of Financial Accounting Standards ("SFAS") No. 123 and SFAS No. 95, "Share-Based Payment," that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The Statement will eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued to Employees," and will require instead that such transactions be accounted for using a fair-value-based method. The FASB had indicated that the Statement would be effective for any interim or annual period beginning after June 15, 2005, meaning that an entity should apply the statement to all employee awards of share-based payment granted, modified, or settled in any interim or annual period beginning after June 15, 2005. On April 14, 2005, the Securities and Exchange Commission (SEC) announced the adoption of a new rule that amends the compliance dates for SFAS No. 123R. The SEC's new rule allows companies to implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. The Company will adopt the provisions of SFAS No. 123R using the modified prospective method of transition beginning January 1, 2006. Under this method, SFAS No. 123R will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service period had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS No. 123. Based on stock-based compensation plans outstanding as of December 31, 2005, management does not expect that the impact of SFAS No. 123R will be material to the Company's consolidated financial condition or results of operations. See Note 1, Stock Option Plans, for pro-forma earnings per share for stock-based compensation and information on the acceleration of vesting periods that occurred in 2005. EITF Issue No. 03-1 The Emerging Issues Task Force ("EITF") reached consensus in March 2004 regarding guidance provided in EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. The purpose of EITF Issue No. 03-1 is to determine the meaning of other-than-temporary impairment and its application to certain securities, including debt and equity securities that are within the scope of SFAS No. 115. Guidance in EITF Issue No. 03-1 should be used to determine when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impaired loss. This guidance also includes accounting considerations for securities subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary. Portions of this guidance were effective for reporting periods beginning after June 15, 2004 and other portions will be deliberated further. This delay does not suspend the current requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The Company has not identified any other-than-temporary impairment in its securities portfolio as of December 31, 2005. Subsequent to the FASB final deliberations, the Company will evaluate the potential impact on its process of identifying other-than-temporary declines in value of its debt and equity securities. Management does not believe that the provisions, as currently written, will have a material impact on the results of future operations. SFAS No. 150 In 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. SFAS No. 150 has not had a significant impact on the Company's consolidated financial condition or results of operations. SFAS No. 154 In 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections." This statement replaces Accounting Principles Board Opinion No. 20 "Accounting Changes", and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements" and changes the requirements for the accounting for and reporting of 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)
2005 2004 Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Income statement: Interest income........ $34,885 37,016 38,433 39,840 150,174 34,409 34,105 34,951 35,320 138,786 Interest expense....... 10,025 10,308 11,501 13,823 45,657 9,346 9,439 9,797 10,174 38,757 Net interest income ... 24,860 26,708 26,932 26,017 104,517 25,063 24,666 25,154 25,146 100,029 Provision (credit) for loan losses.......... (1,500) (1,580) (1,680) (1,500) (6,260) 150 150 150 -- 450 Net interest income after provision for loan losses.......... 26,360 28,288 28,612 27,517 110,777 24,913 24,516 25,004 25,146 99,579 Noninterest income..... 8,138 6,900 7,102 5,507 27,647 8,721 8,375 8,990 5,879 31,965 Noninterest expense.... 11,730 12,223 11,481 13,156 48,590 12,508 11,699 11,483 12,475 48,165 Income before income taxes......... 22,768 22,965 24,233 19,868 89,834 21,126 21,192 22,511 18,550 83,379 Income tax expense..... 7,861 7,980 8,514 6,490 30,845 6,993 6,821 7,298 5,727 26,839 Net income............. $14,907 14,985 15,719 13,378 58,989 14,133 14,371 15,213 12,823 56,540 Per share data: Basic earnings......... $ .199 .200 .210 .179 .787 .191 .193 .205 .172 .761 Diluted earnings....... .197 .199 .208 .178 .782 .188 .191 .203 .171 .753 Cash dividends declared............. .150 .150 .150 .160 .610 .150 .150 .150 .150 .600
a change in accounting principle. SFAS No. 154 shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Therefore, the Company will adopt this statement, as applicable, on January 1, 2006. Critical Accounting Policies Pursuant to recent 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 Note 1 to the Consolidated Financial Statements contained in the Company's 2005 Annual Report on Form 10-K is a description 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 local market area and general business and economic trends. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events. 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, 2005 2004 2003 2002 2001 Statement of income data: Interest income................................. $ 150,174 138,786 137,130 153,735 168,660 Interest expense................................ 45,657 38,757 40,739 58,020 72,763 Net interest income............................. 104,517 100,029 96,391 95,715 95,897 Provision (credit) for loan losses.............. (6,260) 450 1,200 1,420 4,940 Net interest income after provision for loan losses............................... 110,777 99,579 95,191 94,295 90,957 Noninterest income.............................. 21,648 18,253 19,842 19,799 21,285 Net gain on securities transactions............. 5,999 13,712 9,807 7,499 4,517 Noninterest expense............................. 48,590 48,165 48,486 55,326 51,313 Income before income taxes...................... 89,834 83,379 76,354 66,267 65,446 Income taxes.................................... 30,845 26,839 23,323 17,023 19,936 Net income...................................... $ 58,989 56,540 53,031 49,244 45,510 Share data: Average equivalent diluted shares (in thousands)................................ 75,397 75,081 75,306 74,618 73,673 Tangible book value............................. $ 3.05 3.02 3.06 3.16 2.88 Cash dividends.................................. .610 .600 .600 .600 .541 Basic earnings.................................. .787 .761 .713 .678 .640 Diluted earnings................................ .782 .753 .704 .660 .618 Financial: Return on average assets........................ 2.07% 2.00 1.96 1.83 1.83 Return on average shareholders' equity ......... 26.07 26.65 26.21 26.08 25.31 Cash dividend payout ratio...................... 77.46 78.83 83.98 88.60 84.58 Tier 1 capital to average assets (leverage ratio).............................. 8.04 7.74 7.53 7.78 7.72 Tier 1 capital as a % of total risk adjusted assets........................................ 16.58 17.09 16.54 15.48 13.58 Total capital as a % of total risk adjusted assets........................................ 17.85 18.37 17.82 16.77 14.86 Efficiency ratio................................ 38.29 38.78 38.33 36.66 38.96 Net interest margin............................. 3.90% 3.85 3.94 4.00 4.31 Average balances: Total assets.................................... $2,844,974 2,828,195 2,710,175 2,693,505 2,488,169 Earning assets.................................. 2,767,214 2,729,280 2,606,292 2,579,379 2,376,359 Loans, net...................................... 1,336,899 1,176,856 1,275,023 1,512,448 1,518,768 Allowance for loan losses....................... (47,653) (49,299) (51,311) (56,525) (57,398) Securities available for sale................... 1,024,184 1,057,845 833,905 568,056 581,669 Deposits........................................ 2,505,967 2,474,179 2,340,827 2,212,440 2,027,650 Short-term borrowings........................... 83,381 100,855 107,799 210,363 205,821 Long-term debt.................................. 99 151 326 510 758 Shareholders' equity............................ 226,571 223,719 225,045 214,963 202,848
25 [LOGO] TRUSTCO Bank Corp NY Glossary of Terms Allowance for Loan Losses A balance sheet account which represents management's estimate of probable credit losses in 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 and other short term investments. Efficiency Ratio Noninterest expense (excluding nonrecurring charges, and other real estate expense) divided by taxable equivalent net interest income plus noninterest income (excluding securities transactions and other non-recurring income items). 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 short term (generally one business day) investment of excess cash reserves from one bank to another. Government Sponsored Enterprises (GSE) Government Sponsored Enterprises are corporations sponsored by the United States government and include the Federal Home Loan Bank (FHLB), the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), and the Federal National Mortgage Association (FNMA or Fannie Mae). Obligations of these enterprises are not guaranteed by the full faith and credit of the United States. 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, 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 Report on Internal Control over Financial Reporting The management of TrustCo Bank Corp NY is responsible for establishing and maintaining adequate internal control over financial reporting. TrustCo's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has completed an assessment of TrustCo Bank Corp NY's internal control over financial reporting as of December 31, 2005. In making this assessment, we used the criteria set forth by the "Internal Control -- Integrated Framework" promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the "COSO" criteria. Based on our assessment, we believe that, as of December 31, 2005, the Company maintained effective internal control over financial reporting. Management's assessment of the effectiveness of TrustCo Bank Corp NY's internal control over financial reporting and the effectiveness of the Company's internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, the Company's independent registered public accounting firm, as stated in their attestation report which is included herein. /s/ Robert J. McCormick Robert J. McCormick President and Chief Executive Officer /s/ Robert T. Cushing Robert T. Cushing Executive Vice President and Chief Financial Officer /s/ Scot R. Salvador Scot R. Salvador Executive Vice President and Chief Banking Officer February 24, 2006 27 [LOGO] TRUSTCO Bank Corp NY Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders TrustCo Bank Corp NY: We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that TrustCo Bank Corp NY (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that TrustCo Bank Corp NY maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 2005 and 2004, 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, 2005, and our report dated February 24, 2006, expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Albany, New York February 24, 2006 28 [LOGO] TRUSTCO Bank Corp NY Report of Independent Registered Public Accounting Firm 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 as of December 31, 2005 and 2004, 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, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2006, expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP Albany, New York February 24, 2006 29 [LOGO] TRUSTCO Bank Corp NY Consolidated Statements of Income
(dollars in thousands, except per share data) Years Ended December 31, 2005 2004 2003 Interest income: Interest and fees on loans...................................................... $ 86,636 75,194 87,614 Interest and dividends on: U.S. Treasuries and agencies.................................................. 34,506 39,795 25,985 States and political subdivisions............................................. 6,301 8,666 10,718 Mortgage-backed securities and collateralized mortgage obligations............ 9,738 7,032 3,618 Other......................................................................... 984 1,424 3,541 Interest on federal funds sold and other short-term investments................. 12,009 6,675 5,654 Total interest income....................................................... 150,174 138,786 137,130 Interest expense: Interest on deposits............................................................ 43,626 37,777 39,843 Interest on short-term borrowings............................................... 2,026 972 877 Interest on long-term debt.................................................... 5 8 19 Total interest expense...................................................... 45,657 38,757 40,739 Net interest income......................................................... 104,517 100,029 96,391 Provision (credit) for loan losses................................................ (6,260) 450 1,200 Net interest income after provision for loan losses......................... 110,777 99,579 95,191 Noninterest income: Trust department income......................................................... 6,009 5,869 6,046 Fees for services to customers.................................................. 10,529 10,486 10,896 Net gain on securities transactions............................................. 5,999 13,712 9,807 Other........................................................................... 5,110 1,898 2,900 Total noninterest income.................................................... 27,647 31,965 29,649 Noninterest expense: Salaries and employee benefits.................................................. 20,622 20,697 20,449 Net occupancy expense........................................................... 7,308 6,601 6,265 Equipment expense............................................................... 2,721 2,283 3,078 Professional services........................................................... 3,372 3,685 3,040 Outsourced services............................................................. 4,093 4,348 5,601 Other real estate income, net................................................... (617) (739) (457) Other........................................................................... 11,091 11,290 10,510 Total noninterest expense................................................... 48,590 48,165 48,486 Income before income taxes ....................................................... 89,834 83,379 76,354 Income taxes...................................................................... 30,845 26,839 23,323 Net income........................................................................ $ 58,989 56,540 53,031 Earnings per share: Basic........................................................................... $ .787 .761 .713 Diluted......................................................................... .782 .753 .704
See accompanying notes to consolidated financial statements. 30 [LOGO] TRUSTCO Bank Corp NY Consolidated Statements of Condition
(dollars in thousands, except share data) As of December 31, 2005 2004 ASSETS Cash and due from banks................................................................. $ 55,667 54,222 Federal funds sold and other short-term investments..................................... 257,196 642,208 Total cash and cash equivalents................................................... 312,863 696,430 Securities available for sale........................................................... 1,084,076 895,989 Loans................................................................................... 1,470,719 1,240,065 Less: Allowance for loan losses....................................................... 45,377 49,384 Net loans....................................................................... 1,425,342 1,190,681 Bank premises and equipment............................................................. 21,734 22,479 Other assets............................................................................ 68,744 58,255 Total assets...................................................................... $2,912,759 2,863,834 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand................................................................................ $ 251,012 237,423 Savings .............................................................................. 725,336 820,593 Interest bearing checking accounts.................................................... 309,668 336,538 Money market deposit accounts......................................................... 190,560 155,299 Certificates of deposit (in denominations of $100,000 or more)........................ 225,611 178,021 Other time accounts................................................................... 860,300 799,228 Total deposits.................................................................... 2,562,487 2,527,102 Short-term borrowings................................................................... 87,935 77,979 Long-term debt.......................................................................... 87 114 Accrued expenses and other liabilities.................................................. 33,589 32,807 Total liabilities................................................................. 2,684,098 2,638,002 Shareholders' equity: Capital stock; $1 par value. 100,000,000 shares authorized, 82,119,360 and 81,727,754 shares issued at December 31, 2005 and 2004, respectively................ 82,120 81,728 Surplus............................................................................... 117,770 114,218 Undivided profits..................................................................... 103,315 90,018 Accumulated other comprehensive income/(loss): Net unrealized (loss)/gain on securities available for sale, net of tax............. (6,054) 4,459 Treasury stock; 7,343,783 and 7,187,784 shares, at cost, at December 31, 2005 and 2004, respectively.............................................................. (68,490) (64,591) Total shareholders' equity........................................................ 228,661 225,832 Total liabilities and shareholders' equity........................................ $2,912,759 2,863,834
See accompanying notes to consolidated financial statements. 31 [LOGO] TRUSTCO Bank Corp NY Consolidated Statements of Changes in Shareholders' Equity
(dollars in thousands, except per share data) Three Years Ended December 31, 2005 Accumulated Other Compre- Capital Undivided Comprehensive hensive Treasury Stock Surplus Profits Income (Loss) Income Stock Total Beginning balance, January 1, 2003 $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 Comprehensive income Net income -- 2004...................... -- -- 56,540 -- 56,540 -- 56,540 Other comprehensive loss, net of tax: Unrealized net holding loss arising during the year, net of tax (pre-tax loss of $13,868).. -- -- -- -- (8,335) -- -- Reclassification adjustment for net gain realized in net income during the year (pre-tax gain $13,712)................ -- -- -- -- (8,248) -- -- Other comprehensive loss................ -- -- -- (16,583) (16,583) -- (16,583) Comprehensive income...................... 39,957 Cash dividend declared, $.600 per share... -- -- (44,573) -- -- (44,573) Stock options exercised and related tax benefits................ 1,017 8,264 -- -- -- 9,281 Treasury stock purchased (1,021,397 shares)...................... -- -- -- -- (13,482) (13,482) Sale of treasury stock (598,732 shares)... -- 2,343 -- -- 5,544 7,887 Ending balance, December 31, 2004......... 81,728 114,218 90,018 4,459 (64,591) 225,832 Comprehensive income Net income -- 2005...................... -- -- 58,989 -- 58,989 -- 58,989 Other comprehensive loss, net of tax: Unrealized net holding loss arising during the year, net of tax (pre-tax loss $11,487)..... -- -- -- -- (6,905) -- -- Reclassification adjustment for net gain realized in net income during the year (pre-tax gain $5,999)................. -- -- -- -- (3,608) -- -- Other comprehensive loss................ -- -- -- (10,513) (10,513) -- (10,513) Comprehensive income...................... 48,476 Cash dividend declared, $.610 per share... -- -- (45,692) -- -- (45,692) Stock options exercised and related tax benefits.................... 392 3,426 -- -- -- 3,818 Non-cash stock based compensation expense net of tax...................... -- 77 -- -- -- 77 Treasury stock purchased (1,172,366 shares)...................... -- -- -- -- (14,846) (14,846) Sale of treasury stock (1,016,367 shares)...................... -- 49 -- -- 10,947 10,996 Ending balance, December 31, 2005......... $82,120 117,770 103,315 (6,054) (68,490) 228,661
See accompanying notes to consolidated financial statements. 32 [LOGO] TRUSTCO Bank Corp NY Consolidated Statements of Cash Flows
(dollars in thousands) Years Ended December 31, 2005 2004 2003 Increase/(decrease) in cash and cash equivalents Cash flows from operating activities: Net income................................................................... $ 58,989 56,540 53,031 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................................... 2,690 1,898 2,492 Net gain on sales of real estate owned.................................. (690) (893) (522) Net (gain)/loss on sales of bank premises and equipment................. (665) 55 (263) (Credit)/provision for loan losses...................................... (6,260) 450 1,200 Deferred tax expense/(benefit).......................................... 2,874 3,106 (2,645) Net gain on securities transactions..................................... (5,999) (13,712) (9,807) Decrease/(increase) in taxes receivable................................. 2,760 (2,424) 3,356 (Increase)/decrease in interest receivable.............................. (3,761) 2,864 (2,837) Increase/(decrease) in interest payable................................. 659 75 (507) (Increase)/decrease in other assets..................................... (5,289) 5,011 (1,761) Decrease in accrued expenses............................................ (665) (8,037) (3,636) Total adjustments.................................................... (14,346) (11,607) (14,930) Net cash provided by operating activities............................ 44,643 44,933 38,101 Cash flows from investing activities: Proceeds from sales and calls of securities available for sale............. 275,855 1,155,807 1,064,580 Proceeds from maturities of securities available for sale.................. 1,781 881 3,573 Purchases of securities available for sale................................. (477,210) (889,618) (1,592,974) Net (increase)/decrease in loans .......................................... (228,457) (77,604) 255,016 Proceeds from sales of real estate owned .................................. 723 893 608 Proceeds from sales of bank premises and equipment......................... 2,576 23 271 Purchases of bank premises and equipment................................... (3,855) (4,287) (2,953) Net cash (used in) provided by investing activities........................ (428,587) 186,095 (271,879) Cash flows from financing activities: Net increase in deposits................................................... 35,385 107,292 145,542 Net increase (decrease) in short-term borrowings........................... 9,956 (12,629) (50,623) Repayment of long-term debt................................................ (27) (125) (188) Proceeds from exercise of stock options and related tax benefits........... 3,818 9,281 12,084 Proceeds from sales of treasury stock...................................... 10,996 7,887 7,605 Payments to acquire treasury stock......................................... (14,846) (13,482) (30,034) Dividends paid............................................................. (44,905) (44,504) (45,008) Net cash provided by financing activities.................................. 377 53,720 39,378 Net (decrease)/increase in cash and cash equivalents......................... (383,567) 284,748 (194,400) Cash and cash equivalents at beginning of year............................... 696,430 411,682 606,082 Cash and cash equivalents at end of year..................................... $ 312,863 696,430 411,682 SUPPLEMENTAL INFORMATION: Interest paid................................................................ $ 44,998 38,681 41,246 Income taxes paid............................................................ 27,388 24,038 18,865 Transfer of loans to real estate owned....................................... 56 -- -- Increase/(decrease) in dividends payable..................................... 787 69 (475) Change in unrealized gain on securities available for sale -- gross.......... (17,486) (27,579) 10,865 Change in deferred tax effect on unrealized gain on securities available for sale......................................................... 6,973 10,996 (4,630) Non-cash stock-based compensation expense, net of tax........................ 77 -- --
See accompanying notes to consolidated financial statements. 33 [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 Charitable Foundation, Inc., Trustco Bank (referred to as Trustco Bank or Bank), and its wholly owned subsidiary, Trustco Vermont Investment Company, and its subsidiary Trustco Realty Corporation 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 or loss 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 using the level yield method. Gains and losses on the sale of securities available for sale are based on the amortized cost of the specific security sold at trade date. Loans Loans are carried at the principal amount outstanding net of unearned income and unamortized loan fees and costs, which are recognized as adjustments to interest 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. Income recognition for impaired loans is consistent with income recognition for nonaccruing 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, or decreased by credits added to income, and reduced/increased by net charge offs/recoveries. 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. 34 [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 and gains on sale 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 Company without the written consent of the appropriate bank regulatory agency. Based on these restrictions, during 2006 Trustco Bank could pay cash dividends to the Company of $52.5 million plus 2006 year-to-date net profits. 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 which retirees pay all of their premiums. At age 65, the Company provides access to a Medicare Supplemental program for 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). 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 is ordinarily recorded for these plans. In the fourth quarter of 2005 the Board of Director's of the Company approved the accelerated vesting of all outstanding unvested stock option to purchase shares of common stock. These options were previously awarded to executive officers and employees under the 1995 and 2004 Stock Option Plans. By accelerating the vesting of these options the Company estimates that approximately $1.3 million of future compensation expense, net of tax, will be eliminated in anticipation of the adoption of Statement 123R which the Company will adopt as of January 1, 2006. Options to purchase 882,100 shares of the Company's common stock, which would otherwise have vested from time to time over the next four years, became immediately vested and exercisable as a result of this action. The number of shares and exercise prices of the options subject to the acceleration remained unchanged. Also, all of the other terms of the options remain the same. The Company recorded $127 thousand of expense related to this acceleration based upon an analysis performed in accordance with APB Opinion 25. The accelerated options included 749,500 options held by executive officers and 132,600 options held by other employees. Based upon the Company's closing stock price of $12.76 per share on the date of accelerated vesting certain of the options were below and others above the closing market price as follows: Grant Accelerated Exercise Date Vesting Shares Price 2005 411,200 $12.15 2004 394,500 $13.55 2002 76,400 $11.83 ------- 882,100 The decision to accelerate the vesting of these options was made primarily to reduce non-cash compensation expense that would have been recorded in its income statement in future periods upon the adoption of FASB Statement No. 123R (Share-Based Payment) in January 2006. 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) 2005 2004 2003 Net income: As reported................ $58,989 56,540 53,031 Deduct: total stock-based compensation expense, net of related tax effects..... (2,035) (868) (926) Pro forma net income....... $56,954 55,672 52,105 Earnings per share: Basic -- as reported....... $ .787 .761 .713 Basic -- pro forma......... .760 .750 .701 Diluted -- as reported..... .782 .753 .704 Diluted -- pro forma....... .755 .742 .692 35 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) 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 2005............................. $1.675 1.480 2004............................. 2.090 1.870 Stock options were not issued in 2003 for officers or directors. 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: 2005........................ 4.95% 4.95 2004........................ 4.32 4.32 Risk-free interest rate: 2005........................ 3.91 3.76 2004........................ 3.89 3.71 Expected volatility rate: 2005........................ 21.25 19.76 2004........................ 21.42 20.38 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. 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 with new Company operations in Florida and the mid-Hudson valley region of 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, 2005 and 2004. Goodwill at December 31, 2005 and 2004 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 Statements 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 $20.5 million and $19.6 million at December 31, 2005 and 2004, respectively. 36 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (3) Securities Available for Sale The amortized cost and market value of the securities available for sale are as follows:
(dollars in thousands) December 31, 2005 Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Treasuries and agencies..................... $ 499 -- 1 498 Government sponsored enterprises...................... 756,525 -- 13,260 743,265 States and political subdivisions..................... 115,010 4,143 203 118,950 Mortgage-backed securities and collateralized mortgage obligations...................... 202,007 593 1,637 200,963 Other.............................. 685 -- 4 681 Total debt securities....................... 1,074,726 4,736 15,105 1,064,357 Equity securities.................. 19,418 301 -- 19,719 Total securities available for sale............................. $1,094,144 5,037 15,105 1,084,076
(dollars in thousands) December 31, 2004 Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Treasuries and agencies..................... $ 500 -- -- 500 Government sponsored enterprises...................... 521,078 98 4,115 517,061 States and political subdivisions..................... 147,988 7,033 82 154,939 Mortgage-backed securities and collateralized mortgage obligations...................... 201,579 1,466 1,422 201,623 Other.............................. 685 -- -- 685 Total debt securities....................... 871,830 8,597 5,619 874,808 Equity securities.................. 16,741 4,440 -- 21,181 Total securities available for sale............................. $888,571 13,037 5,619 895,989
Federal Home Loan Bank stock and Federal Reserve Bank stock included in equity securities at December 31, 2005 and 2004, was $4.7 million and $12.1 million, respectively. The following table distributes the debt securities included in the available for sale portfolio as of December 31, 2005, based on the securities' final maturity (mortgage-backed securities and collateralized mortgage obligations are stated using an estimated average life): (dollars in thousands) Amortized Market Cost Value Due in one year or less.................. $ 26,490 26,347 Due after one year through five years.... 341,367 338,942 Due after five years through ten years... 138,355 136,778 Due after ten years...................... 568,514 562,290 $1,074,726 1,064,357 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, 2005 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........... $ 498 1 -- -- 498 1 Government sponsored enterprises............ 653,612 10,413 89,653 2,847 743,265 13,260 States and political subdivisions........... 18,024 156 2,808 47 20,832 203 Mortgage-backed securities and collateralized mortgage obligations............ 40,623 537 107,329 1,100 147,952 1,637 Other.................... 596 4 -- -- 596 4 Total.................... $713,353 11,111 199,790 3,994 913,143 15,105
37 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued)
(dollars in thousands) December 31, 2004 Less than 12 months 12 months or more Total Gross Gross Gross Fair Unreal. Fair Unreal. Fair Unreal. Value Loss Value Loss Value Loss Government sponsored enterprises............ $381,738 3,248 82,133 867 463,871 4,115 States and political subdivisions........... 3,046 63 908 19 3,954 82 Mortgage-backed securities and collateralized mortgage obligations............ 125,090 1,419 1,433 3 126,523 1,422 Total.................... $509,874 4,730 84,474 889 594,348 5,619
U.S. Treasuries and agencies,Government sponsored enterprises, and States and political subdivisions: The unrealized losses on these investments 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 to hold these investments until a market price recovery or possibly to maturity and the Company has no current intent to sell these securities, these investments are not considered other-than-temporarily impaired. Mortgage-backed securities and collateralized mortgage obligations: The unrealized losses on investments in mortgage-backed securities and collateralized mortgage obligations were caused by market interest rate increases. The contractual cash flows of these securities or the underlying loans are guaranteed by various government agencies or government sponsored enterprises. 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 to hold these investments until a market price recovery or possibly to maturity and the Company has no current intent to sell these securities, these investments are 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 2005, 2004 and 2003 are as follows: (dollars in thousands) December 31, 2005 2004 2003 Proceeds............................ $275,855 1,155,807 1,064,580 Gross realized gains................ 6,297 25,006 22,645 Gross realized losses............... 298 11,294 12,838 The amount of securities available for sale that have been pledged to secure short-term borrowings and for other purposes required by law amounted to $104.7 million and $96.3 million at December 31, 2005 and 2004, respectively. The Company has the following balances of securities available for sale as of December 31, 2005 that represent greater than 10% of shareholders equity: Amortized Market Cost Value Federal Home Loan Bank.............. $211,158 207,726 Federal National Mortgage Association.............. 217,850 215,144 Federal Home Loan Mortgage Corporation.............. 474,167 466,435 Federal Farm Credit Bank............ 24,900 24,469 (4) Loans and Allowance for Loan Losses A summary of loans by category is as follows: (dollars in thousands) December 31, 2005 2004 Commercial.......................... $ 202,570 193,188 Real estate -- construction......... 22,123 20,148 Real estate mortgage................ 1,047,994 822,103 Home equity lines of credit......... 192,291 191,242 Installment loans................... 5,741 13,384 Total loans......................... 1,470,719 1,240,065 Less: Allowance for loan losses..... 45,377 49,384 Net loans........................... $1,425,342 1,190,681 At December 31, 2005 and 2004, loans to executive officers, directors, and to associates of such persons aggregated $3.0 million and $2.0 million, respectively. During 2005, approximately $1.2 million of new loans were made and repayments of loans totalled approximately $263 thousand. 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, and to a lesser extent, in Florida and the mid-Hudson Valley region of New York. Although the loan portfolio is diversified, a portion of its debtors' ability to repay depends significantly on the economic conditions prevailing in New York State. 38 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) The following table sets forth information with regard to nonperforming loans: (dollars in thousands) December 31, 2005 2004 2003 Loans in nonaccrual status.......... $1,662 557 -- Loans contractually past due 3 payments or more and still accruing interest............... 35 -- -- Restructured loans.................. 1,518 2,610 3,260 Total nonperforming loans........... $3,215 3,167 3,260 Interest on nonaccrual and restructured loans of $250 thousand in 2005, $377 thousand in 2004, and $500 thousand in 2003 would have been earned in accordance with the original contractual terms of the loans. Approximately $201 thousand, $329 thousand, and $431 thousand of interest on nonaccrual and restructured loans was collected and recognized as income in 2005, 2004, and 2003, 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, 2005 2004 2003 Balance at beginning of year........ $49,384 48,739 52,558 Provision (credit) for loan losses.. (6,260) 450 1,200 Loans charged off................... (2,464) (5,797) (9,598) Recoveries on loans previously charged off............ 4,717 5,992 4,579 Balance at year end................. $45,377 49,384 48,739 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. 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, 2005 and 2004. Retail loans totaling $1.5 million as of December 31, 2005, and $2.6 million as of December 31, 2004, 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 retail loans. During 2005, 2004, and 2003, the average balance of impaired loans was $1.9 million, $2.9 million, and $3.7 million, respectively, and there was approximately $201 thousand, $314 thousand, and $380 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, 2005 and 2004 follows: (dollars in thousands) 2005 2004 Land......................................... $ 2,413 2,786 Buildings.................................... 23,208 28,038 Furniture, fixtures and equipment............ 25,231 23,318 Leasehold improvements....................... 6,467 6,260 57,319 60,402 Accumulated depreciation and amortization............................... (35,585) (37,923) Total........................................ $ 21,734 22,479 Depreciation and amortization expense approximated $2.7 million, $1.9 million, and $2.5 million for the years 2005, 2004, and 2003, respectively. Occupancy expense of the Bank's premises included rental expense of $2.4 million in 2005, $2.1 million in 2004, and $1.8 million in 2003. (6) Deposits Interest expense on deposits was as follows: (dollars in thousands) For the years ended December 31, 2005 2004 2003 Interest bearing checking accounts................. $ 1,376 1,586 1,678 Savings accounts.................... 6,769 7,968 8,795 Time deposits and money market accounts............. 35,481 28,223 29,370 Total............................... $43,626 37,777 39,843 At December 31, 2005, the maturity of total time deposits is as follows: (dollars in thousands) Under 1 year................................. $538,982 1 to 2 years................................. 172,089 2 to 3 years................................. 183,354 3 to 4 years................................. 109,354 4 to 5 years................................. 79,576 Over 5 years................................. 2,556 $1,085,911 39 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (7) Short-Term Borrowings Short-term borrowings of the Company were cash management accounts as follows: (dollars in thousands) 2005 2004 Amount outstanding at December 31,...................... $87,935 77,979 Maximum amount outstanding at any month end......................... 87,935 115,681 Average amount outstanding....................... 83,381 100,855 Weighted average interest rate: For the year...................... 2.43 0.96 As of year end.................... 3.32 2.00 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 which approximates the balance of securities pledged against such borrowings. (8) Long-Term Debt Long-term debt at December 31, 2005 and 2004, of $87 thousand and $114 thousand consisted of a FHLB term loan with an interest rate of 5.22% maturing in 2008. This debt was assumed as part of an acquisition during 2000. The FHLB loan is collateralized by approximately $500 thousand in deposits at the FHLB. (9) 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) 2005 2004 2003 Current tax expense: Federal........................... $ 26,161 23,337 25,104 State............................. 1,810 396 864 Total current tax expense........... 27,971 23,733 25,968 Deferred tax expense (benefit)...... 2,874 3,106 (2,645) Total income tax expense............ $ 30,845 26,839 23,323 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2005 and 2004, are as follows: December 31, (dollars in thousands) 2005 2004 Deductible Deductible temporary temporary differences differences Benefits and deferred remuneration.................... $ 460 1,632 Deferred loan fees, net............. 15 79 Difference in reporting the allowance for loan losses, net.. 21,676 22,565 Other income or expense not yet reported for tax purposes.................... 5,254 6,633 Depreciable assets.................. 2,253 1,502 Other items......................... 555 676 Net deferred tax asset at end of year.................. 30,213 33,087 Net deferred tax asset at beginning of year............... 33,087 36,193 Deferred tax expense................ $ 2,874 3,106 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 deferred tax asset of $30.2 million and $33.1 million at December 31, 2005 and 2004, respectively, will be realized. In addition to the deferred tax items described in the preceding table, the Company has a deferred tax asset of $4.0 million and a deferred tax liability of $3.0 million at December 31, 2005 and 2004, relating to the net unrealized losses/gains on securities available for sale, respectively. 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, 2005 2004 2003 Statutory federal income tax rate... 35.0% 35.0 35.0 Increase/(decrease) in taxes resulting from: Tax exempt income................ (2.3) (3.5) (4.6) State income tax, net of federal tax benefit............. 1.7 0.8 0.8 Other items...................... (0.1) (0.1) (0.6) Effective income tax rate........... 34.3% 32.2 30.6 40 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (10) 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, 2005 and 2004. Change in Projected Benefit Obligation: (dollars in thousands) 2005 2004 Projected benefit obligation at beginning of year.............. $27,581 24,555 Service cost........................ 804 784 Interest cost....................... 1,519 1,499 Benefits paid....................... (1,567) (1,411) Net actuarial loss.................. 205 2,154 Projected benefit obligation at end of year.................... $28,542 27,581 Change in Plan Assets and Reconciliation of Funded Status: (dollars in thousands) 2005 2004 Fair value of plan assets at beginning of year................. $29,242 28,474 Actual gain on plan assets.......... 1,323 2,179 Benefits paid....................... (1,567) (1,411) Fair value of plan assets at end of year.................... 28,998 29,242 Funded status....................... 457 1,661 Unrecognized net actuarial loss..... 746 14 Unrecognized prior service cost..... 1,595 1,702 Net amount recognized............... $2,798 3,377 The accumulated benefit obligation for the plan was $25.8 million and $24.4 million at December 31, 2005 and 2004, respectively. Components of Net Periodic Pension Expense: For the years ended December 31, (dollars in thousands) 2005 2004 2003 Service cost........................ $ 804 784 695 Interest cost....................... 1,519 1,499 1,409 Expected return on plan assets...... (1,850) (1,669) (1,665) Amortization of unrecognized prior service cost................ 106 90 25 Net periodic pension expense........ $ 579 704 464 Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: (dollars in thousands) Year Pension Benefits 2006................................ $1,537 2007................................ 1,500 2008................................ 1,480 2009................................ 1,462 2010................................ 1,467 2011 -- 2015........................ 7,806 The assumptions used to determine benefit obligations at December 31 are as follows: 2005 2004 Discount rate................................ 5.50% 5.75 Rate of increase in future compensation...... 4.00 5.00 The assumptions used to determine net periodic pension expense for the years ended December 31 are as follows: 2005 2004 2003 Discount rate....................... 5.75% 6.00 6.50 Rate of increase in future compensation...................... 4.50 5.00 5.00 Expected long-term rate of return on assets......................... 6.50 6.00 6.50 The Company also has a supplementary pension plan under which additional retirement benefits are accrued for eligible executive officers. The expense recorded for this plan was $581 thousand, $662 thousand, and $1.2 million, in 2005, 2004, and 2003, respectively. This plan supplements the defined benefit retirement plan for eligible employees that are negatively affected by the Internal Revenue Service limit on the amount of pension payments that are allowed from a retirement plan. The supplemental plan provides eligible employees with total benefit payments as calculated by the retirement plan without regard to this limitation. Benefits under this plan are calculated using the same actuarial assumptions and interest rates as used for the retirement plan calculations. 41 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) Rabbi trusts have been established for certain benefit plans. These 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 Consolidated Statements of Condition. As of December 31, 2005 and 2004, the trusts had assets totaling $5.7 million and $5.0 million, respectively. (b) Postretirement Benefits The Company permits retirees under age 65 to participate in the Company's medical plan by making certain payments. 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. In 2003, the Company amended the medical plan to reflect changes to the retiree medical insurance coverage portion. The Company's subsidy of the retiree medical insurance premiums has been eliminated. The Company continues to provide postretirement medical benefits for a limited number of retired executives in accordance with their employment contracts. 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, 2005 and 2004. Change in Accumulated Benefit Obligation: (dollars in thousands) 2005 2004 Accumulated benefit obligation at beginning of year....................... $ 891 790 Service cost................................. 35 12 Retiree contributions........................ 176 230 Interest cost................................ 65 31 Benefits paid................................ (221) (324) Net actuarial loss........................... 326 152 Accumulated benefit obligation at end of year............................. $1,272 891 Change in Plan Assets and Reconciliation of Funded Status: (dollars in thousands) 2005 2004 Fair value of plan assets at beginning of year.......................... $11,726 10,986 Actual gain on plan assets................... 491 834 Retiree contributions........................ 176 230 Benefits paid................................ (221) (324) Fair value of plan assets at end of year..... 12,172 11,726 Funded status................................ 10,901 10,835 Unrecognized net actuarial gain.............. (2,680) (3,014) Unrecognized prior service credit............ (6,780) (7,182) Net amount recognized........................ $ 1,441 639 Components of Net Periodic Benefit: For the years ended December 31, (dollars in thousands) 2005 2004 2003 Service cost........................ $ 35 12 4 Interest cost....................... 65 31 46 Expected return on plan assets...... (405) (428) (377) Amortization of net actuarial gain.................... (75) (107) (43) Amortization of prior service credit.................... (403) (403) (403) Net periodic benefit................ $(783) (895) (773) Expected Future Benefit Payments The following benefit payments are expected to be paid: (dollars in thousands) Year Postretirement Benefits 2006................................ $ 43 2007................................ 45 2008................................ 47 2009................................ 48 2010................................ 50 2011 -- 2015........................ 271 The discount rate assumption used to determine benefit obligations at December 31 is as follows: 2005 2004 Discount rate................................ 5.50% 5.75 The assumptions used to determine net periodic pension benefit for the years ended December 31 are as follows: 2005 2004 2003 Discount rate....................... 5.75% 6.00 6.50 Expected long-term rate of return on assets, net of tax............. 3.45 3.90 3.90 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 2006 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, 2005, and the interest and service components of net periodic postretirement benefit cost for the year ended December 31, 2005. 42 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (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 2005 2004 2005 2004 Debt Securities............. 33.00% 33.20 30.72 36.61 Equity Securities........... 64.37 64.52 64.01 61.81 Other....................... 2.63 2.28 5.27 1.58 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 2006. (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, and is subject to board approval, amounted to $1.3 million in 2005 and 2004 and $1.1 million in 2003. 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 $2.0 million in 2005 and $2.1 million in 2004 and 2003. 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 2004 TrustCo Bank Corp NY Stock Option Plan, the Company may grant options to its eligible employees for up to approximately 2.0 million shares of common stock. Under the 1995 TrustCo Bank Corp NY Stock Option Plan, the Company may grant options to its eligible employees for up to approximately 7.9 million shares of common stock. Under the 2004 Directors Stock Option Plan, the Company may grant options to its directors for up to approximately 200 thousand shares of its 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 each of these 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 employees plans and they are immediately vested under the directors' plan. A summary of the status of TrustCo's stock option plans as of December 31, 2005, 2004 and 2003, 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, 2003.................. 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 New options awarded -- 2004............... 677,500 13.55 145,100 13.55 Cancelled options -- 2004................. (28,987) 10.38 (28,987) 10.38 Exercised options -- 2004................. (1,143,605) 7.63 (1,143,605) 7.63 Options became exercisable................ -- -- 333,394 10.63 Balance, December 31, 2004................ 4,445,110 10.00 3,708,022 9.42 New options awarded -- 2005............... 526,000 12.15 114,800 12.15 Cancelled options -- 2005................. (12,000) 13.55 (12,000) 13.55 Exercised options -- 2005................. (781,061) 6.87 (781,061) 6.87 Options became exercisable................ -- -- 1,148,288 12.65 Balance, December 31, 2005................ 4,178,049 $10.85 4,178,049 $10.85
43 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) The following table summarizes information about total stock options outstanding and exercisable at December 31, 2005: Weighted Average Weighted Range of Options Remaining Average Exercise Outstanding Contractual Exercise Price and Exercisable Life Price Less than $7.50.......... 97,232 1.7 years $ 5.75 Between $7.51 and $10.00...... 2,136,317 4.7 years 9.58 Greater than $10.00......... 1,944,500 8.5 years 12.51 Total............... 4,178,049 6.4 years $10.85 As described in Note 1, the Company accelerated all unvested options in December 2005, accordingly there are no unvested options as of December 31, 2005. The decision to accelerate the vesting of these options was made primarily to reduce the non-cash compensation expense that would have been recorded in the Company's consolidated income statement in future periods under the adoption of SFAS 123R. (11) 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) 2006......................................... $ 2,534 2007......................................... 2,732 2008......................................... 2,741 2009......................................... 2,743 2010......................................... 2,739 2011 and after............................... 31,879 $45,368 (b) Litigation Existing litigation arising in the normal course of business is not expected to result in any material loss to the Company. (c) Outsourced Services During the fourth quarter 2001, the Company contracted with third-party service providers to perform certain banking functions beginning 2002. The outsourced services include data and item processing for the Bank and trust operations. The service expense can vary based upon volume and nature of transactions processed. Outsourced service expense was $4.1 million in 2005, $4.3 million in 2004 and $5.6 million in 2003. The Company is contractually obligated to pay these third-party service providers approximately $4 million to $5 million per year through 2013. (12) Earnings Per Share A reconciliation of the component parts of earnings per share for 2005, 2004 and 2003 follows: (dollars in thousands, Weighted except per share data) Average Shares Per share Income Outstanding Amounts For the year ended December 31, 2005: Basic EPS: Income available to common shareholders............ $58,989 74,928 $.787 Effect of Dilutive Securities: Stock Options.................. -- 469 (.005) Diluted EPS...................... $58,989 75,397 $.782 For the year ended December 31, 2004: Basic EPS: Income available to common shareholders............ $56,540 74,278 $.761 Effect of Dilutive Securities: Stock Options.................. -- 803 (.008) Diluted EPS...................... $56,540 75,081 $.753 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 (.009) Diluted EPS...................... $53,031 75,306 $.704 As of December 31, 2005, the number of antidulitive stock options excluded from diluted earnings per share was approximately 665 thousand. The number of antidilutive stock options excluded from diluted earnings per share for 2004 and 2003 was not significant. (13) 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, 2005 and 2004, was $306.7 million and $313.3 million, respectively. Approximately 75% of these commitments were for variable rate products at the end of 2005. 44 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) The Company does not issue any guarantees that 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 $2.8 million and $3.6 million at December 31, 2005 and 2004, 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, 2005 and 2004 was insignificant. No losses are anticipated as a result of loan commitments or standby letters of credit. (14) 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, 2005 Carrying Fair Value Value Financial assets: Cash and cash equivalents......... $ 312,863 312,863 Securities available for sale..... 1,084,076 1,084,076 Loans............................. 1,425,342 1,462,679 Accrued interest receivable....... 18,432 18,432 Financial liabilities: Demand deposits................... 251,012 251,012 Interest bearing deposits......... 2,311,475 2,311,475 Short-term borrowings............. 87,935 87,935 Long-term debt.................... 87 87 Accrued interest payable.......... 2,204 2,204 As of (dollars in thousands) December 31, 2004 Carrying Fair Value Value Financial assets: Cash and cash equivalents......... $ 696,430 696,430 Securities available for sale..... 895,989 895,989 Loans............................. 1,190,681 1,254,986 Accrued interest receivable....... 14,671 14,671 Financial liabilities: Demand deposits................... 237,423 237,423 Interest bearing deposits ........ 2,289,679 2,289,679 Short-term borrowings............. 77,979 77,979 Long-term debt.................... 114 114 Accrued interest payable.......... 1,545 1,545 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. 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. 45 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) Deposit Liabilities The fair values disclosed for noninterest bearing deposits, interest bearing checking accounts, savings accounts, and money market accounts are, by definition, equal to the amount payable on demand at the balance sheet date. The carrying value of all variable rate certificates of deposit 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 creditworthiness 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. (15) 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, 2005 and 2004, 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, 2005 and 2004, 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, 2005 and 2004, for Trustco Bank: (dollars in thousands) As of December 31, 2005 Amount Ratio Leverage capital:................ $222,327 7.82% Tier 1 risk-based capital:....... 222,327 15.81 Total risk-based capital:........ 240,244 17.09 (dollars in thousands) As of December 31, 2004 Amount Ratio Leverage capital:................ $203,177 7.24% Tier 1 risk-based capital:....... 203,177 15.79 Total risk-based capital:........ 219,668 17.08 The following is a summary of actual capital amounts and ratios as of December 31, 2005 and 2004 for TrustCo on a consolidated basis: (dollars in thousands) As of December 31, 2005 Amount Ratio Leverage capital:................ $234,162 8.04% Tier 1 risk-based capital:....... 234,162 16.58 Total risk-based capital:........ 252,160 17.85 (dollars in thousands) As of December 31, 2004 Amount Ratio Leverage capital:................ $220,819 7.74% Tier 1 risk-based capital:....... 220,819 17.09 Total risk-based capital:........ 237,378 18.37 46 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (16) 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: 2005 2004 2003 Dividends and interest from subsidiaries................ $37,733 19,403 31,096 Net gain on sales of securities.... 4,068 21,157 12,952 Income from other investments...... 131 424 1,110 Total income................... 41,932 40,984 45,158 Expense: Operating supplies................. 67 61 75 Professional services.............. 276 203 63 Miscellaneous expense.............. 277 85 95 Total expense................. 620 349 233 Income before income taxes and subsidiaries' undistributed earnings............ 41,312 40,635 44,925 Income tax expense.................. 1,485 8,303 5,267 Income before subsidiaries' undistributed earnings............ 39,827 32,332 39,658 Equity in undistributed earnings of subsidiaries........... 19,162 24,208 13,373 Net income.......................... $58,989 56,540 53,031 Statements of Condition (dollars in thousands) December 31, 2005 2004 Assets: Cash in subsidiary bank..................... $ 12,603 20,530 Investments in subsidiaries................. 216,647 205,522 Securities available for sale............... 6,841 9,106 Other assets................................ 3 824 Total assets............................ $236,094 235,982 Liabilities and shareholders' equity: Accrued expenses and other liabilities..................... 7,433 10,150 Total liabilities....................... 7,433 10,150 Shareholders' equity......................... 228,661 225,832 Total liabilities and shareholders' equity.................. $236,094 235,982 Statements of Cash Flows (dollars in thousands) Years Ended December 31, 2005 2004 2003 Increase/(decrease) in cash and cash equivalents: Cash flows from operating activities: Net income.............................. $58,989 56,540 53,031 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries.......... (19,162) (24,208) (13,373) Net gain on sales of securities...... (4,068) (21,157) (12,952) Net change in other assets and accrued expenses............. (943) 4,764 972 Total adjustments.................. (24,173) (40,601) (25,353) Net cash provided by operating activities........................... 34,816 15,939 27,678 Cash flows from investing activities: Proceeds from sales of securities available for sale................... 14,360 57,997 49,831 Purchases of securities available for sale............................. (12,166) (29,951) (23,475) Net cash provided by investing activities............. 2,194 28,046 26,356 Cash flows from financing activities: Proceeds from exercise of stock options and related tax benefits...... 3,818 9,281 12,084 Dividends paid......................... (44,905) (44,504) (45,008) Payments to acquire treasury stock..... (14,846) (13,482) (30,034) Proceeds from sales of treasury stock................................. 10,996 7,887 7,605 Net cash used in financing activities....................... (44,937) (40,818) (55,353) Net increase/(decrease) in cash and cash equivalents................... (7,927) 3,167 (1,319) Cash and cash equivalents at beginning of year..................... 20,530 17,363 18,682 Cash and cash equivalents at end of year........................... $12,603 20,530 17,363 Supplemental Information Increase (decrease) in dividends payable..................... $ 787 69 (475) Change in unrealized gain on securities available for sale -- gross................................ 4,139 19,328 638 Change in deferred tax effect on unrealized gain on securities available for sale................... (1,651) (7,707) (261) 47 [LOGO] TRUSTCO Bank Corp NY Branch Locations NEW YORK Altamont Ave. Office 1400 Altamont Ave. Schenectady, NY Telephone: (518) 356-1317 Altamont Ave. West Office 1900 Altamont Ave. Rotterdam, NY Telephone: (518) 355-1900 Ballston Spa Office 235 Church Ave. Ballston Spa, NY Telephone: (518) 885-1561 Bedford Hills Office 180 Harris Rd. Bedford Hills, NY Telephone: (914) 666-6230 Brandywine Office State St. at Brandywine Ave. Schenectady, NY Telephone: (518) 346-4295 Briarcliff Manor Office 64 Route 100 Briarcliff Manor, NY Telephone: (914) 762-7133 Central Ave. Office 163 Central Ave. Albany, NY Telephone: (518) 426-7291 Clifton Country Road Office 7 Clifton Country Rd. Clifton Park, NY Telephone: (518) 371-5002 Clifton Park Office 1018 Route 146 Clifton Park, NY Telephone: (518) 371-8451 Cobleskill Office RR #3, Rt. 7 Cobleskill, NY Telephone: (518) 254-0290 Colonie Office 1892 Central Ave. Colonie Plaza, Colonie, NY Telephone: (518) 456-0041 Delmar Office 167 Delaware Ave. Delmar, NY Telephone: (518) 439-9941 East Greenbush Office 501 Columbia Turnpike Rensselaer, NY Telephone: (518) 479-7233 Elmsford Office 100 Clearbrook Rd. Elmsford, NY Telephone: (914) 345-1808 Exit 8/Crescent Rd. Office CVS Plaza Clifton Park, NY Telephone: (518) 383-0039 Fishkill Office 1542 Route 52 Fishkill, NY Telephone: (518) 896-8260 Freemans Bridge Rd. Office Trustco Center Glenville, NY Telephone: (518) 344-7510 Glens Falls Office 3 Warren Street Glens Falls, NY Telephone: (518) 798-8131 Greenwich Office 131 Main St. Greenwich, NY Telephone: (518) 692-2233 Guilderland Office 3900 Carman Rd. Schenectady, NY Telephone: (518) 355-4890 Halfmoon Office Country Dollar Plaza Halfmoon, NY Telephone: (518) 371-0593 Highland Office 3580 Route 9W Highland, NY Telephone: (845) 691-7023 Hoosick Falls Office 47 Main St. Hoosick Falls, NY Telephone: (518) 686-5352 Hudson Office 507 Warren St. Hudson, NY Telephone: (518) 828-9434 Hudson Falls Office 3376 Burgoyne Ave. Hudson Falls, NY Telephone: (518) 747-0886 Latham Office 1 Johnson Rd. Latham, NY Telephone: (518) 785-0761 Loudon Plaza Office 372 Northern Blvd. Albany, NY Telephone: (518) 462-6668 Madison Ave. Office 1084 Madison Ave. Albany, NY Telephone: (518) 489-4711 Malta 4 Corners Office 2471 Route 9 Malta, NY Telephone: (518) 899-1056 Malta Mall Office 43 Round Lake Rd. Ballston Lake, NY Telephone: (518) 899-1558 Mayfair Office 286 Saratoga Rd. Glenville, NY Telephone: (518) 399-9121 Mechanicville Office 9 Price Chopper Plaza Mechanicville, NY Telephone: (518) 664-1059 Milton Office 2 Trieble Ave. Ballston Spa, NY Telephone: (518) 885-0498 Mont Pleasant Office Crane St. at Main Ave. Schenectady, NY Telephone: (518) 346-1267 New Scotland Office 301 New Scotland Ave. Albany, NY Telephone: (518) 438-7838 Newton Plaza Office 588 New Loudon Rd. Latham, NY Telephone: (518) 786-3687 Niskayuna-Woodlawn Office 3461 State St. Schenectady, NY Telephone: (518) 377-2264 Northern Pines Road Office 647 Maple Ave. (Route 9) Wilton, NY Telephone: (518) 583-2634 Pomona Office 1581 Route 202 Pomona, NY Telephone: (518) 354-0176 Poughkeepsie Office 2656 South Rd. (Route 9) Poughkeepsie, NY Telephone: (518) 485-6419 Queensbury Office 118 Quaker Rd. Suite 9, Queensbury, NY Telephone: (518) 798-7226 Rotterdam Office Curry Road Shopping Ctr. Rotterdam, NY Telephone: (518) 355-8330 Rotterdam Square Office 93 W. Campbell Rd. Rotterdam, NY Telephone: (518) 377-2393 Route 2 Office -- Latham 201 Troy-Schenectady Rd. Latham, NY Telephone: (518) 785-7155 Route 7 Office 1156 Troy-Schenectady Rd. Latham, NY Telephone: (518) 785-4744 Saratoga Office 34 Congress St. Saratoga Springs, NY Telephone: (518) 587-3500 Scotia Office 123 Mohawk Ave. Scotia, NY Telephone: (518) 372-9416 Sheridan Plaza Office 1350 Gerling St. Schenectady, NY Telephone: (518) 377-8517 Shoppers' World Office Old Rte. 146 and Plank Rd. Clifton Park, NY Telephone: (518) 383-6850 Slingerlands Office 1569 New Scotland Avenue Slingerlands, NY Telephone: (518) 439-9352 South Glens Falls Office Glengate Shopping Plaza 133 Saratoga Road, Suite 1 South Glens Falls, NY Telephone: (518) 793-7668 State Farm Rd. Office 2050 Western Ave. Guilderland, NY Telephone: (518) 452-6913 State St. Albany Office 112 State St. Albany, NY Telephone: (518) 436-9043 State St. Schenectady Office 320 State St. Schenectady, NY Telephone: (518) 377-3311 Stuyvesant Plaza Office Western Ave. at Fuller Rd. Albany, NY Telephone: (518) 489-2616 Tanners Main Office 345 Main St. Catskill, NY Telephone: (518) 943-2500 48 [LOGO] TRUSTCO Bank Corp NY Branch Locations Tanners West Side Office 238 West Bridge St. Catskill, NY Telephone: (518) 943-5090 Troy Office 5th Ave. and State St. Troy, NY Telephone: (518) 274-5420 Union Street East Office 1700 Union St. Schenectady, NY Telephone: (518) 382-7511 Upper Union Street Office 1620 Union St. Schenectady, NY Telephone: (518) 374-4056 Ushers Road Office 308 Ushers Rd. Ballston Lake, NY Telephone: (518) 877-8069 Valatie Office 2929 Route 9 Valatie, NY Telephone: (518) 758-2265 Wappingers Falls Office 1490 Route 9 Wappingers Falls, NY Telephone: (845) 298-9315 West Sand Lake Office 3707 NY Rt. 43 West Sand Lake, NY Telephone: (518) 674-3327 Wilton Mall Office Route 50 Saratoga Springs, NY Telephone: (518) 583-1716 Wolf Road Office 34 Wolf Rd. Albany, NY Telephone: (518) 458-7761 Wynantskill Office 134-136 Main St., Rt. 66 Wynantskill, NY Telephone: (518) 286-2674 FLORIDA Colonial Drive Office 4450 East Colonial Dr. Orlando, FL Telephone: (407) 895-6393 Curry Ford Road Office Shoppes at Andover, Suite 116 3020 Lamberton Boulevard Orlando, FL Telephone: (407) 277-9663 Dean Road Office 3920 Dean Rd. Orlando, FL Telephone: (407) 657-8001 East Colonial Office 12901 East Colonial Drive Orlando, FL Telephone: (407) 275-3075 Lake Mary Office 350 West Lake Mary Blvd. Sanford, FL Telephone: (407) 330-7106 Longwood Office 1400 West State Rd. Longwood, FL Telephone (407) 339-3396 Maitland Office 9400 US Rt. 17/92, Suite 1008 Maitland, FL Telephone: (407) 332-6071 Osprey Office 1300 South Tamiami Trail Osprey, FL Telephone: (941) 918-9380 Oviedo Office 1875 West County Road 419 Suite 600 Oviedo, FL Telephone: (407) 365-1145 Rinehart Road Office 1185 Rinehart Road Sanford, FL Telephone: (407) 268-3720 Sarasota Office 2704 Bee Ridge Road Sarasota, FL Telephone: (941) 929-9451 South Clermont Office 16908 High Grove Blvd. Clermont, FL Telephone: (352) 243-9511 Tuskawilla Road Office 1295 Tuskawilla Road Winter Springs, FL Telephone: (407) 695-5558 Villaggio Office 851 SR 434 Winter Springs, FL Telephone: (407) 327-6064 NEW JERSEY Ramsey Office 385 N. Franklin Turnpike Ramsey, NJ Telephone: (201) 934-1429 VERMONT Bennington Office 215 North St. Bennington, VT Telephone: (802) 447-4952 49 [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 SECRETARY Robert M. Leonard ASSISTANT SECRETARIES Cheri J. Parvis Thomas M. Poitras Directors of TrustCo Bank Corp NY are also Directors of Trustco Bank BOARD OF DIRECTORS Joseph Lucarelli President Traditional Builders Thomas O. Maggs President Maggs & Associates Anthony J. Marinello, M.D., Ph.D. Physician Robert A. McCormick Chairman TrustCo Bank Corp NY Robert J. McCormick President and Chief Executive Officer Trustco Bank William D. Powers Partner Powers & Co., LLC Consulting William J. Purdy President Welbourne & Purdy Realty, Inc. Real Estate HONORARY DIRECTORS Lionel O. Barthold M. Norman Brickman Bernard J. King Nancy A. McNamara 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 AUDITOR Kenneth E. Hughes, Jr. ACCOUNTING/FINANCE Vice Presidents Michael M. Ozimek Daniel R. Saullo BRANCH ADMINISTRATION Administrative Vice President Eric W. Schreck Vice Presidents Deborah K. Appel Paul D. Matthews Officers John R. George Colleen A. Meliski Michael V. Pitnell Mary Jean Riley COMPLIANCE Vice President Thomas M. Poitras COMMERCIAL LENDING Vice President Patrick M. Canavan Officers Bradley T. Delarm James M. Poole Paul R. Steenburgh MARKETING/PC GROUP/ FACILITIES Administrative Vice President Robert M. Leonard Vice President George W. Wickswat MORTGAGE LOANS Vice President Michael J. Lofrumento Officer Robert O. Breton, Esq. OPERATIONS Administrative Vice President Kevin M. Curley Vice President Christopher L. Cox PERSONNEL/QUALITY CONTROL Vice President Cheri J. Parvis TRUST DEPARTMENT Vice President Patrick J. LaPorta, Esq. Officers Craig C. Chenevert Stephanie A. Duma Richard W. Provost 50 [LOGO] TRUSTCO Bank Corp NY General Information ANNUAL MEETING Monday, May 15, 2006 10:00 AM Mallozzi's Restaurant 1930 Curry Road Schenectady, NY 12303 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 has certain 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 MarketSM under the symbol TRST. SUBSIDIARIES: Trustco Bank ORE Subsidiary Corp. Glenville, New York Glenville, New York Member FDIC (and its wholly owned subsidiary, Trustco Vermont Investment Company Trustco Charitable Foundation, Inc. Bennington, Vermont) Glenville, New York 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. 51 EX-21 13 ex21.txt EXHIBIT 21 Exhibit 21 LIST OF SUBSIDIARIES OF TRUSTCO Trustco Bank Federally chartered savings bank Trustco Charitable Foundation, Inc. New York corporation ORE Subsidiary Corp. New York corporation Trustco Vermont Investment Company Vermont corporation (Subsidiary of Trustco Bank) Trustco Realty Corp. New York corporation (Subsidiary of Trustco Vermont Investment Company) Each subsidiary does business under its own name. The activities of each are described in Part I, Item 1 of Form 10-K. EX-23 14 ex23.txt EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors TrustCo Bank Corp NY: We consent to incorporation by reference in the registration statements Form S-8 (No. 33-60409), Form S-8 (No. 333-78811), Form S-8 (No. 333-115689), Form S-8 (No. 333-115674), Form S-3 (No. 333-99687) and Form S-3 (No. 333-123988) of TrustCo Bank Corp NY and subsidiaries of our reports dated February 24, 2006, with respect to the consolidated statements of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 2005 and 2004, 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, 2005, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financial reporting as of December 31, 2005 which reports appear in the December 31, 2005 Annual Report on Form 10-K of TrustCo Bank Corp NY. /s/ KPMG LLP Albany, New York March 8, 2006 EX-24 15 ex24.txt EXHIBIT 24 Exhibit 24 POWER OF ATTORNEY The undersigned persons do hereby appoint Robert M. Leonard or Robert T. Cushing as a true and lawful Attorney In Fact for the sole purpose of affixing their signatures to the 2005 Annual Report (Form 10-K) of TrustCo Bank Corp NY to the Securities and Exchange Commission. /s/ Joseph Lucarelli /s/ Robert J. McCormick - -------------------------- ----------------------- Joseph Lucarelli Robert J. McCormick /s/ Thomas O. Maggs /s/ William D. Powers - -------------------------- ----------------------- Thomas O. Maggs William D. Powers /s/ Anthony J. Marinello /s/ William J. Purdy - -------------------------- ----------------------- Dr. Anthony J. Marinello William J. Purdy /s/ Robert A. McCormick - -------------------------- Robert A. McCormick Sworn to before me this 15th day of February 2006. /s/ Joan Clark - -------------------------------- Notary Public Joan Clark Notary Public, State of New York Qualified in Albany County No. 01CL4822282 Commission Expires Nov. 30, 2006 EX-31 16 ex31ia.txt EXHIBIT 31(I)(A) Exhibit 31(i)(a) Certification I, Robert J. McCormick, principal executive officer of TrustCo Bank Corp NY ("registrant"), certify that: 1. I have reviewed this report on Form 10-K of TrustCo Bank Corp NY; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 8, 2006 /s/ Robert J. McCormick - ----------------------- Robert J. McCormick President and Chief Executive Officer EX-31 17 ex31ib.txt EXHIBIT 31(I)(B) Exhibit 31(i)(b) Certification I, Robert T. Cushing, principal financial officer of TrustCo Bank Corp NY ("registrant"), certify that: 1. I have reviewed this report on Form 10-K of TrustCo Bank Corp NY; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 8, 2006 /s/ Robert T. Cushing - --------------------- Robert T. Cushing Executive Vice President and Chief Financial Officer EX-32 18 ex32.txt EXHIBIT 32 Exhibit 32 Section 1350 Certifications In connection with the Annual Report of TrustCo Bank Corp NY (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that : 1. The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Robert J. McCormick ----------------------- Robert J. McCormick President and Chief Executive Officer /s/ Robert T. Cushing ----------------------- Robert T. Cushing Executive Vice President and Chief Financial Officer March 8, 2006 -----END PRIVACY-ENHANCED MESSAGE-----