-----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, UgXatSSRpHOLmTU/MGCWeuHo8S7IVBarpFadGrunRlo10k5RV6Lms2A9w7Vx3za+ zvXPRgQIwSyx1/w3IZTmJg== 0000906197-07-000006.txt : 20070228 0000906197-07-000006.hdr.sgml : 20070228 20070228143652 ACCESSION NUMBER: 0000906197-07-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070228 DATE AS OF CHANGE: 20070228 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: 07656999 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, 2006 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) ------------------- ------------------------------------- Common Stock, $1.00 Par Value The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None 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, 2006 was approximately $795,187,232 (based upon the closing price of $11.02 on June 30, 2006, as reported on the Nasdaq National Market). The number of shares outstanding of the registrant's common stock as of February 20, 2007 was 74,931,181. Documents Incorporated by Reference: (1) Portions of registrant's Annual Report to Shareholders for the fiscal year ended December 31, 2006 (Part I and Part II) and (2) Portions of registrant's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 14, 2007 (Part III). INDEX Description Page Use of Non-GAAP Financial Measures 3-4 PART I Item 1 Business 5-15 Item 1A Risk Factors 15-19 Item 1B Unresolved Staff Comments 19 Item 2 Properties 19 Item 3 Legal Proceedings 19 Item 4 Submission of Matters to a Vote of Security 19 Holders PART II Item 5 Market for the Registrant's Common Equity, 21-22 Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6 Selected Financial Data 22 Item 7 Management's Discussion and Analysis of 22 Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures about 22 Market Risk Item 8 Financial Statements and Supplementary Data 22 Item 9 Changes in and Disagreements with Accountants 23 On Accounting and Financial Disclosure Item 9A Controls and Procedures 23 Item 9B Other Information 23 PART III Item 10 Directors and Executive Officers of Registrant 23-24 Item 11 Executive Compensation 24 Item 12 Security Ownership of Certain Beneficial Owners 24 and Management and Related Stockholder Matters Item 13 Certain Relationships and Related Transactions 25 Item 14 Principal Accounting Fees and Services 25 PART IV Item 15 Exhibits, Financial Statement Schedules 25-29 Signatures 30-31 EXHIBITS INDEX 32 2 USE OF NON-GAAP FINANCIAL MEASURES The Securities and Exchange Commission ("SEC") has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain "non-GAAP financial measures." GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the company's reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. At the same time that the SEC issued Regulation G, it also made amendments to Item 10 of Regulation S-K, requiring companies to make the same types of supplemental disclosures whenever they include non-GAAP financial measures in their filings with the SEC. The SEC has exempted from the definition of "non-GAAP financial measures" certain specific types of commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures or SEC filings, supplemental information is not required. The following measures used in this Report which have not been specifically exempted by the SEC may nevertheless constitute "non-GAAP financial measures" within the meaning of the SEC's new rules, although we are unable to state with certainty that the SEC would so regard them. Tax-Equivalent Net Interest Income and Net Interest Margin: Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income will be exempt from taxation (e.g., was received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added back to the net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income (pre-tax) to that of another institution, as each will have a different proportion of tax-exempt items in their portfolios. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution. We follow these practices. The Efficiency Ratio: Financial institutions often use an "efficiency ratio" as a measure of expense control. The efficiency ratio typically is defined as noninterest expense divided by taxable equivalent net interest income plus noninterest income. As in the case of net interest income, generally, net interest income as utilized in calculating the efficiency ratio is typically expressed on a tax-equivalent basis. Moreover, most financial institutions, in calculating the efficiency ratio, also adjust both noninterest expense and noninterest income to 3 exclude from these items (as calculated under GAAP) certain component elements, such as non-recurring charges, and other real estate expense (deducted from noninterest expense) and securities transactions and other non-recurring income items (excluded from noninterest income). We follow these practices. 4 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 554 full-time equivalent employees of TrustCo at year-end 2006. TrustCo had 14,693 shareholders of record as of December 29, 2006 (the last business day in 2006) and the closing price of the TrustCo common stock on that date was $11.12. Subsidiaries Trustco Bank Trustco Bank is a federal savings bank engaged in providing general banking services to individuals, partnerships, and corporations. The Bank operates 89 automatic teller machines and 90 banking offices in Albany, Columbia, Dutchess, Greene, Rensselaer, Rockland, Saratoga, Schenectady, Schoharie, Ulster, Warren, Washington and Westchester counties of New York, Hillsborough, Lake, Orange, Sarasota and Seminole counties in Florida, Bennington County in Vermont, Berkshire County in Massachusetts 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 2006 consolidated net income and average assets. 5 The trust department of the Bank serves as executor of estates and trustee of personal trusts, provides asset and wealth management services, provides estate planning and related advice, provides custodial services, and acts as trustee for various types of employee benefit plans and corporate pension and profit sharing trusts. The aggregate market value of the assets under trust, custody, or management of the trust department of the Bank was approximately $901 million as of December 31, 2006. 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 In 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. In 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 Company 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 branch offices 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 of New York State. 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, 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 6 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 savings and loan holding company registered under the Home Owners' Loan Act (the "HOLA"), TrustCo is regulated and examined by the OTS. The HOLA 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, 2006, which appears in the footnotes theirin, contains information concerning restrictions on the Bank'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 16 to the consolidated financial statements contained in TrustCo's Annual Report to Shareholders for the year ended December 31, 2006, which appears in the footnotes theirin 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 HOLA. 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. 7 A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another financial institution or savings and loan holding company, without prior written approval of the Office of Thrift Supervision and from acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision considers the financial and managerial resources and future prospects of the Company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community and competitive factors. The Office of Thrift Supervision may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. Although savings and loan holding companies are not currently subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the Office of Thrift Supervision 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Office of Thrift Supervision and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. Securities Regulation and Corporate Governance The Company's common stock is registered with the Securities and Exchange Commission under Section 12(b) of the Securities Exchange Act of 1934, and the Company is subject to restrictions, reporting requirements and review procedures under federal securities laws and regulations. The Company is also subject to the rules and reporting requirements of The Nasdaq Stock Market LLC, on which its Common Stock is traded. Like other issuers of publicly traded securities, the Company must also comply with The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), which 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, Sarbanes-Oxley 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 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 8 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 has and will continue to 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. Federal Savings Institution Regulation Business Activities. Federal law and regulations govern the activities of federal savings banks such as the Bank. These laws and regulations delineate the nature and extent of the activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution's capital or assets. 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"), net of the adjustment to record the previously unrecognized overfunded position of employee benefit plans, 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 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 9 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. Insurance of Deposit Accounts. Deposits of Trustco Bank are insured by the Deposit Insurance Fund ("DIF") of the FDIC. The FDIC determines insurance premiums based on a number of factors, primarily the risk of loss that insured institutions pose to the DIF. Recent legislation eliminated the minimum 1.25% reserve ratio for the insurance funds, the mandatory assessments when the ratio falls below 1.25% and the prohibition on assessing the highest quality banks when the ratio is above 1.25%. The FDIC has the ability to adjust the new insurance fund's reserve ratio between 1.15% and 1.5%, depending on projected losses, economic changes and assessment rates at the end of a calendar year. The FDIC has adopted regulations that set assessment rates that took effect at the beginning of 2007. The new assessment rates for most banks vary between five cents and seven cents for every $100 of deposits. A change in insurance premiums could have an adverse effect on the operating expenses and results of operations of Trustco Bank. The Bank cannot predict what insurance assessment rates will be in the future. Assessment credits have been provided to institutions that paid high premiums in the past, and Trustco Bank will have credits of approximately $1.3 million to offset premiums in the future. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The Bank does not know of any practice, condition or violation that might lead to termination of its deposit insurance. In addition to the assessment for deposit insurance, institutions are required to make 10 payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. Limitation on Capital Distributions. Office of Thrift Supervision regulations impose limitations upon all capital distributions by Trustco Bank, including cash dividends, payments to repurchase its shares and payments to stockholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under Office of Thrift Supervision regulations (i.e., generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to Office of Thrift Supervision of the capital distribution if, like the Bank, it is a subsidiary of a holding company. In the event the Bank's capital fell below its regulatory requirements or the Office of Thrift Supervision notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determines that such distribution would constitute an unsafe or unsound practice. Assessments. The Bank is required to pay assessments to the Office of Thrift Supervision to fund the agency's operations. The general assessments, paid on a semi-annual basis, is computed upon the Bank's total assets, including consolidated subsidiaries, as reported in the Bank's latest quarterly thrift financial report. The assessments paid by the Bank for the year ended December 31, 2006 totaled approximately $500 thousand. 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 through lending activities; (ii) its qualified investments; and (iii) the 11 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, 2006 was as follows: Amount of transaction accounts Reserve Requirement $0 to $8.5 million 0 percent of amount. Over $8.5 million and 3 percent of amount. up to $45.8 million $1,119,000 plus 10 percent of Over $45.8 million amount over $45.8 million. 12 The Bank is in compliance with these requirements as of December 31, 2006. Gramm-Leach-Bliley Act Privacy Requirements The Gramm-Leach-Bliley Act of 1999 (the "GLB Act") generally provided for sweeping financial modernization for commercial banks, savings banks, securities firms, insurance companies, and other financial institutions operating in the United States. Among other matters, the GLB Act established 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 The USA PATRIOT Act ("Patriot Act"), which was enacted in the aftermath of the September 11, 2001 terrorist attacks, adopted 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. 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. 13 The proposed 2007 New York State budget bill contains a provision that would potentially increase the amount of state tax paid by the Company. The bill, if enacted as proposed, would be effective for taxable years beginning on or after January 1, 2007. 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" are included in TrustCo's Annual Report to Shareholders for the year ended December 31, 2006, 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 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. 14 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, 2006 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. 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 5.25%. 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. 15 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. 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 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. 16 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. Provisions in our articles of incorporation and bylaws and New York law may discourage or prevent takeover attempts, and these provisions may have the effect of reducing the market price of our stock. Our articles of incorporation and bylaws include several provisions that may have the effect of discouraging or preventing hostile takeover attempts, and therefore, making the removal of incumbent management difficult. The provisions include staggered terms for our board of directors and requirements of supermajority votes to approve certain business transactions. In addition, New York law contains several provisions that may make it more difficult for a third party to acquire control of us without the approval of the board of directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding stock. To the extent that these provisions are effective in discouraging or preventing takeover attempts, they may tend to reduce the market price for our stock. Changes in accounting standards could impact reported earnings. The accounting standard setting bodies, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change financial accounting and reporting standards that govern the preparation of our consolidated statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, we could be required to apply a new or revised accounting standard retroactively, which could effect beginning of period financial statement amounts. 17 The preparation of financial statements requires the use of estimates that may vary from actual results. Preparation of consolidated financial statements in conformity with accounting principles accepted in the United States of America requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the level of the allowance for loan losses. Due to the inherent nature of this estimate, we cannot provide absolute assurance that we will not significantly increase the allowance for loan losses higher than the current balance. We rely on communications, information, operating and financial control systems, and technology from third-party service providers, and we may suffer an interruption in those systems that may result in lost business. Further, we may not be able to substitute providers on terms that are as favorable if our relationships with our existing service providers are interrupted. We rely heavily on third-party service providers for much of our communications, information, operating and financial controls systems, and technology. Any failure or interruption or breach in security of these systems could result in failures or interruptions in our customer relationships management, general ledger, deposit, servicing and/or loan origination systems. We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. The occurrence of any failure or interruption could have a material adverse effect on our business, financial condition, results of operations and cash flows. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems, without the need to expend substantial resources, if at all. Any of these circumstances could have a material adverse effect on our business, financial condition, results of operations and cash flows. If the business continuity and disaster recovery plans that we have in place are not adequate to continue our operations in the event of a disaster, the business disruption can adversely impact our operations. External events, including terrorist or military actions, or an outbreak of disease, such as Asian Influenza, or "bird flu" and resulting political and social turmoil could cause unforeseen damage to our physical facilities or could cause delays or disruptions to operational functions, including information processing and financial market settlement functions. Additionally, our customers, vendors and counterparties could suffer from such events. Should these events affect us, or our customers, or vendors or counterparties with which we conduct business, our results of operations could be adversely affected. 18 Decline in home values in the Company's markets could adversely impact results from operations. Like all financial services providers, the Company is subject to the effects of any economic downturn, and in particular, a significant decline in home values in the Company's markets could have a negative effect on the results of operations. A significant decline in home values would likely lead to a decrease in new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and the residential real estate loan portfolios and result in increased losses in these portfolios. 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 90 offices, of which 23 are owned and 67 are leased from others. The asset value of these properties, when considered in the aggregate, is not material to the operation of TrustCo. In the opinion of management, the physical properties of TrustCo and the Bank are suitable and adequate and are being fully utilized. Item 3. Legal Proceedings The nature of TrustCo's business generates a certain amount of litigation against TrustCo and its subsidiaries involving matters arising in the ordinary course of business. In the opinion of management of TrustCo, there are no proceedings pending to which TrustCo or 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. 19 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 Became Position With Principal Occupations Or Employment Since Executive Trustco January 1, 2001 of TrustCo Robert J. McCormick, President and Chief Executive Officer of TrustCo since January 2000 Age 43, 2004, Executive Officer of TrustCo since 2001 and President President and Chief and Chief Executive Officer of Trustco Bank since November Executive Officer 2002. Director of TrustCo and Trustco Bank since 2005. Robert J. McCormick is the son of Robert A. McCormick. Robert T. Cushing, Executive Vice President and Chief Financial Officer of 1994 Age 51, TrustCo since January 2004, President and Chief Executive Executive Vice Officer of TrustCo from November 2002 to December 2003; President and Chief Executive Officer of TrustCo and Trustco Bank since 1994. Financial Officer Joined Trustco Bank in 1994. Scot R. Salvador, Executive Vice President and Chief Banking Officer of TrustCo 2004 Age 40, and Trustco Bank since January 2004. Executive Officer of Executive Vice TrustCo and Trustco Bank since 2004. Joined Trustco Bank in President and Chief 1995. Banking Officer Thomas M. Poitras, Secretary of TrustCo and Trustco Bank since 2006, 2005 Age 44, Assistant Secretary of Trustco and Trustco Bank from Vice President and March 2005 to November 2006. Vice President of Trustco Bank Secretary since 2001 and Executive Officer of TrustCo and Trustco Bank since 2005. Joined Trustco Bank in 1986. Robert M. Leonard, Assistant Secretary of TrustCo and Trustco Bank since 2003 Age 44, November 2006, Secretary of Trustco and Trustco Bank from Administrative Vice 2003 to November 2006. Administrative Vice President of President and TrustCo and Trustco Bank since 2004. Executive Officer of Assistant Secretary TrustCo and Trustco Bank since 2003. Joined Trustco Bank in 1986. Sharon J. Parvis, Assistant Secretary of TrustCo and Trustco Bank since March 2005 Age 56, 2005. Vice President of Trustco Bank since 1996 and Executive Vice President and Officer of TrustCo and Trustco Bank since 2005. Joined Assistant Secretary Trustco Bank in 1987.
Each executive officer is elected by the Board of Directors to serve until election of his successor. 20 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, LLC under the symbol "TRST." Information with respect to the range of high and low sales prices for TrustCo's common stock, and with respect to the frequency and amount of cash dividends declared on the common stock, is set forth on page [1] of TrustCo's Annual Report to Shareholders for the year ended December 31, 2006. TrustCo had 14,669 shareholders of record as of February 20, 2007, and the closing price of TrustCo's common stock on that date was $10.47. The following table provides information, as of December 31, 2006, 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 equity compensation outstanding of 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 by security 4,056,666 $10.95 1,173,250 holders Equity compensation plans not approved by security None None None holders Total 4,056,666 $10.95 1,173,250 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, 2006. 21 Purchases of Equity Securities Total Maximum Number of Number Shares Of Shares Purchased as That May Part of Yet Be Total Average Publicly Purchased Number of Price Announced Under the 2006 Shares Paid per Plans or Plans or Period Purchased Share Programs Programs October 1-31 22,500 11.03 0 N/A November 1-30 103,500 11.09 0 N/A December 1-31 24,000 11.10 0 N/A Total 150,000 11.08 0 N/A TrustCo's Annual Report to Shareholders for the year ended December 31, 2006, which is filed as Exhibit 13 hereto, contains a graph comparing the yearly percentage change in the Company's cumulative total shareholder return on its common stock with the cumulative return of the Russell 2000 and the SNL Superregional Banks. Such graph is incorporated herein by reference. All 150,000 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 TrustCo's Annual Report to Shareholders for the year ended December 31, 2006, 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 TrustCo's Annual Report to Shareholders for the year ended December 31, 2006, which is filed as Exhibit 13 hereto, are incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures about Market Risk TrustCo's Annual Report to Shareholders for the year ended December 31, 2006, 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 is included in the TrustCo's Annual Report to Shareholders for the year ended December 31, 2006, which is filed as Exhibit 13 hereto, are incorporated herein by reference. 22 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 is included in the TrustCo's Annual Report to Shareholders for the year ended December 31, 2006, which is filed as Exhibit 13 hereto, are incorporated herein by reference. Subsequent to the date of Management's evaluation and since September 30, 2006, 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 14, 2007 under the following captions is incorporated herein by reference: "Information on TrustCo Directors and Nominees" and "Information on TrustCo Executive Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance". 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. 23 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. Item 11. Executive Compensation The information under the captions "TrustCo and Trustco Bank Executive Officer Compensation" and "TrustCo Retirement Plans" included in TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 14, 2007, 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," and "Ownership Of TrustCo Common Stock By Certain Beneficial Owners" in TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 14, 2007, is incorporated herein by reference. Additional information concerning the Company's equity compensation plan is set forth in Item 5 hereof. 24 Item 13. Certain Relationships and Related Transactions The information under the caption "Transactions with TrustCo and Trustco Bank Directors, Executive Officers and Associates" included in TrustCo's Proxy Statement filed for its Annual Meeting of Shareholders to be held May 14, 2007 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, 2006 and 2005, and fees billed for other services provided by KPMG during 2006 and 2005. 2006 2005 Audit Fees $340,000 $308,500 Audit Related Fees(1) 12,000 79,400 Tax Fees(2) 117,600 144,700 All Other Fees(3) 87,950 86,969 Total Fees $557,550 $619,569 (1) For 2006 and 2005, audit related fees included audit and accounting related services. For 2005 audit related fees also included $23,500 for audits of certain employee benefits. (2) For 2006 and 2005, tax fees include tax return preparation services and other compliance services. (3) For 2006 and 2005, all other fees consisted of fees for tax planning 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. 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, 2006 and 2005. Consolidated Statements of Income -- Years Ended December 31, 2006, 2005, and 2004. 25 Consolidated Statements of Changes in Shareholders' Equity -- Years Ended December 31, 2006, 2005, and 2004. Consolidated Statements of Cash Flows -- Years Ended December 31, 2006, 2005, and 2004. 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, 2006 and 2005. The following exhibits are incorporated herein by reference:* Exhibit Description No. 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 February 20, 2007 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, 26 National Association, TrustCo Bank Corp NY and each of Robert T. Cushing and Robert J. McCormick 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. 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, dated October 11, 2002. 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) 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(p) 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(q) 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(r) 2005 Amended and Restated Trustco Bank Deferred Compensation Plans for Directors, dated December 20, 2005. 10(s) Amendment No. 1 to Amended and Restated 1995 TrustCo Bank Corp NY Stock Option Plan, dated December 20, 2005. 27 10(t) Amendment No. 2 to Amended and Restated 1995 TrustCo Bank Corp NY Stock Option Plan, dated December 28, 2005. 10(u) Amendment No. 1 to 2004 TrustCo Bank Corp NY Stock Option Plan, dated December 20, 2005. 10(v) Amendment No. 2 to 2004 TrustCo Bank Corp NY Stock Option Plan, dated December 28, 2005. 10(w) Amendment No. 1 to Amended and Restated TrustCo Bank Corp NY Directors Stock Option Plan, dated December 28, 2005. 10(x) Amendment No. 1 to 2004 TrustCo Bank Corp NY Directors Stock Option Plan, dated December 28, 2005. 10(y) Restatement of Trustco Bank Senior Incentive Plan dated December 20, 2005. 10(z) Amendment No. 3 to the Amended and Restated Trustco Bank Executive Officer Incentive Plan. 11 Computation of Net Income Per Common Share. *The exhibits included under Exhibit 10 constitute all management contracts, compensatory plans and arrangements required to be filed as an exhibit to this form pursuant to Item 15 of this report. 28 The following exhibits are filed herewith: Exhibit No. Description 10(aa) Amendment No. 1 to the Amended and Restated Trustco Bank Executive Officer Incentive Plan 10(bb) Amendment No. 2 to the Amended and Restated Trustco Bank Executive Officer Incentive Plan 13 Portions of Annual Report to Security Holders of TrustCo for the year ended December 31, 2006. 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. 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. 29 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: February 27, 2007 30 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. Name and Signature Title Date /s/ Robert J. McCormick President and Chief Executive February 20, 2007 - ----------------------- Officer (principal executive Robert J. McCormick officer) /s/ Robert T. Cushing Executive Vice President and February 20, 2007 - ----------------------- Chief Financial Officer Robert T. Cushing (principal financial and accounting officer) * Director February 20, 2007 - ----------------------- Joseph Lucarelli * Director February 20, 2007 - ----------------------- Thomas O. Maggs * Director February 20, 2007 - ----------------------- Dr. Anthony J. Marinello * Director February 20, 2007 - ----------------------- Robert A. McCormick * Director February 20, 2007 - ----------------------- William D. Powers * Director February 20, 2007 - ----------------------- William J. Purdy * By: /s/ Thomas Poitras ------------------ Thomas Poitras, as Agent Pursuant to Power of Attorney 31 Exhibit Index Exhibit No. Description 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 10-Q, for the quarter ended June 30, 2006. 3(ii) Amended and Restated Bylaws of TrustCo Bank Corp NY, dated February 20, 2007, incorporated by reference to Exhibit 3(ii) to TrustCo Bank Corp NY's Report on Form 8-K, filed February 20, 2007. 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 10-K, 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 10-K, 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 10-K, 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 10-K, for the year ended December 31, 2001. 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 10-K, 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 and Robert J. McCormick dated September 18, 2001 incorporated by reference to, Exhibit 10(i) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the year ended December 31, 2001. 32 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 10-K, 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 10-K, 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 10-K, 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 10-K, for the year ended December 31, 2001. 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 10-Q, 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 10-K, 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 10-Q, 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 10-Q, for the quarter ended March 31, 2004. 33 10(o) 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 10-Q, for the quarter ended June 30, 2004. 10(p) 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(q) 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(r) 2005 Amended and Restated Trustco Bank Deferred Compensation Plan for Directors, dated December 20, 2005, incorporated by reference to Exhibit 10(s) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the year ended December 31, 2005. 10(s) Amendment No. 1 to Amended and Restated 1995 TrustCo Bank Corp NY Stock Option Plan, dated December 20, 2005, incorporated by reference to Exhibit 10(v) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the year ended December 31, 2005. 10(t) Amendment No. 2 to Amended and Restated 1995 TrustCo Bank Corp NY Stock Option Plan, dated December 28, 2005, incorporated by reference to Exhibit 10(w) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the year ended December 31, 2005. 10(u) Amendment No. 1 to 2004 TrustCo Bank Corp NY Stock Option Plan, dated December 20, 2005, incorporated by reference to Exhibit 10(x) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the year ended December 31, 2005. 10(v) Amendment No. 2 to 2004 TrustCo Bank Corp NY Stock Option Plan, dated December 28, 2005, incorporated by reference to Exhibit 10(y) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the year ended December 31, 2005. 10(w) Amendment No. 1 to Amended and Restated TrustCo Bank Corp NY Directors Stock Option Plan, dated December 28, 2005, incorporated by reference to Exhibit 10(z) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the year ended December 31, 2005. 34 10(x) Amendment No. 1 to 2004 TrustCo Bank Corp NY Directors Stock Option Plan, dated December 28, 2005, incorporated by reference to Exhibit 10(aa) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the year ended December 31, 2005. 10(y) Restatement of Trustco Bank Senior Incentive Plan dated December 20, 2005, incorporated by reference to Exhibit 10(bb) to TrustCo Bank Corp NY's Annual Report on Form 10-K, for the year ended December 31, 2005. 10(z) Amendment No. 3 to the Amended and Restated Trustco Bank Executive Officer Incentive Plan, incorporated by Reference to Exhibit 99 to TrustCo Bank Corp NY's Report on Form 8-K, filed December 19, 2006. 10(aa) Amendment No. 1 to the Amended and Restated Trustco Bank Executive Officer Incentive Plan, filed herewith. 10(bb) Amendment No. 2 to the Amended and Restated Trustco Bank Executive Officer Incentive Plan, filed herewith. 11 Computation of Net Income Per Common Share. Note 13 of TrustCo's Annual Report to Shareholders for the year ended December 31, 2006 is incorporated herein by reference. 13 Portions of Annual Report to Security Holders of TrustCo for the year ended December 31, 2006, 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. 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. 35 GRAPHICS APPENDIX Cross Reference to Omitted Charts Page of Annual Report 1 Taxable Equivalent Net Interest Income 8 2 Efficiency Ratio 22 3 TrustCo 5 Year Chart 53 4 TrustCo 15 Year Chart 54 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. 36 EX-10 2 ex10aa.txt AMENDMENT NO. 1 TO TRUSTCO BANK EXECUTIVE OFFICER INCENTIVE PLAN Exhibit 10(aa) AMENDMENT NO. 1 TO TRUSTCO BANK EXECUTIVE OFFICER INCENTIVE PLAN, AS AMENDED AND RESTATED SEPTEMBER 18, 2001 WHEREAS, Trustco Bank, National Association (hereinafter referred to as (the "Corporation") maintains the Trustco Bank Executive Officer Incentive Plan (hereinafter referred to as the "Plan"); and WHEREAS, the Corporation desires to amend said Plan, effective as of July 24, 2002; NOW, THEREFORE, the Corporation does hereby amend the Plan, effective as of July 24, 2002, so that it will read as follows: I. The title of ARTICLE IV of the Plan is hereby deleted and the following is substituted in lieu thereof: "DEFERRAL OF INCENTIVE AWARDS" II. Section 4.5 of the Plan is hereby deleted in its entirety and amounts deferred pursuant to Section 4.5 will be paid to Plan participants as soon as practicable after the effective date of this amendment. IN WITNESS WHEREOF, the Corporation has caused this Amendment No. 1 to be executed by its duly authorized officer as of the 24th day of July, 2002. ATTEST: TRUSTCO BANK, NATIONAL ASSOCIATION /s/ Henry C. Collins By: /s/ Robert T. Cushing - -------------------- --------------------- Secretary EX-10 3 ex10bb.txt AMENDMENT NO. 2 TO TRUSTCO BANK EXECUTIVE OFFICER INCENTIVE PLAN Exhibit 10(bb) AMENDMENT NO. 2 TO TRUSTCO BANK EXECUTIVE OFFICER INCENTIVE PLAN, AS AMENDED AND RESTATED SEPTEMBER 18, 2001 WHEREAS, Trustco Bank, National Association (hereinafter referred to as (the "Corporation") maintains the Trustco Bank Executive Officer Incentive Plan (hereinafter referred to as the "Plan"); and WHEREAS, the Corporation desires to amend said Plan, effective as of January 1, 2006; NOW, THEREFORE, the Corporation does hereby amend the Plan, effective as of January 1, 2006, as follows: I. Section 1.17 of the Plan is hereby deleted and the following is substituted in lieu thereof: Section 1.17. "Return on Equity" means Net Income divided by the sum of Total Shareholder Equity exclusive of the balance of average accumulated other comprehensive income/loss minus any equity transaction directly in conjunction with a merger or acquisition. IN WITNESS WHEREOF, the Corporation has caused this Amendment No. 2 to be executed by its duly authorized officer as of the 19th day of September, 2006. ATTEST: TRUSTCO BANK, NATIONAL ASSOCIATION /s/ Robert M. Leonard By: /s/ Robert J. McCormick - --------------------- ----------------------- Secretary EX-13 4 ex13.txt ANNUAL REPORT TO SECURITY HOLDERS Exhibit 13 TRUSTCO Bank Corp NY Annual Report 2006 [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 and its principal subsidiary, Trustco Bank, operates 92 community banking offices and 90 Automatic Teller Machines throughout the Bank's market area. The Company serves five states and 21 counties with a broad range of community banking services. Financial Highlights (dollars in thousands, except per share data) Years ended December 31, Percent 2006 2005 Change Income: Net interest income (Taxable Equivalent) $ 101,370 107,948 (6.09)% Net income 45,325 58,989 (23.16) Per Share: Basic earnings .605 .787 (23.13) Diluted earnings .603 .782 (22.89) Tangible book value 3.19 3.05 4.59 Average Balances: Assets 2,973,952 2,844,974 4.53 Loans, net 1,611,355 1,336,899 20.53 Deposits 2,628,338 2,505,967 4.88 Shareholders' equity 230,259 226,571 1.63 Financial Ratios: Return on average assets 1.52% 2.07 (26.57) Return on average equity (1) 18.71 26.07 (28.23) Consolidated tier 1 capital to: Total average assets (leverage) 7.67 8.04 (4.60) Risk-adjusted assets 14.88 16.58 (10.25) Total capital to risk-adjusted assets 16.14 17.85 (9.58) Net loans charged off (recovered) to average loans (.09) (.17) 47.06 Allowance for loan losses to nonperforming loans 5.0x 14.1x (64.54) Efficiency ratio 42.03% 38.29 (9.77) Dividend payout ratio 105.70 77.46 36.46 Per share information of common stock Tangible Range of Stock Basic Diluted Cash Book Price Earnings Earnings Dividend Value High Low 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 2006 First quarter .165 .164 .160 2.96 13.00 11.88 Second quarter .166 .165 .160 2.86 12.30 10.50 Third quarter .149 .149 .160 3.03 11.25 10.40 Fourth quarter .125 .125 .160 3.19 11.48 10.59 (1) Excludes the effect of accumulated other comprehensive income. 1 [LOGO] TRUSTCO Bank Corp NY [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 2006 was a year of challenges and growth for our Bank. We posted increases in deposits, loans and new branch offices. As expected net income was down last year primarily due to the yield curve and the resulting pressure of our margins. We continued our branch office expansion during 2006, opening a total of 12 new offices. In Florida, we currently have 18 offices with additional branches pending. Our downstate New York region also has shown impressive growth over the past several years. We currently have thirteen branch offices with additional branches pending. In 2006 we opened an office in Pittsfield, MA, and have plans to open a few additional in the Berkshires. This is our first office in Massachusetts, which represents an extension of our existing territory and not a major move eastward (much like Bennington, VT and Ramsey, NJ). The expansion of our branch network has resulted in the continued growth of our loan and deposit base. As of December 31, 2006, loans grew by an impressive $291.8 million or 19.84% compared to December 31, 2005. This is the second straight year loans have shown double digit increases. Deposits also saw strong growth, up $236.9 million or 9.24% compared to year-end 2005. TrustCo has proudly received national recognition throughout the years; however, the recognition we received in 2006 was especially rewarding. SNL Financial, a leading financial service firm, listed the top 100 Savings Banks in the Country based on various performance measures. Trustco was ranked number one. It is gratifying that Trustco continues to be recognized as one of the best performing banks in the United States. TrustCo's efficiency ratio of 42.03% continues to stand at industry leading levels. This ratio is the best indicator of expense controls at a banking company. Our continued low level is especially impressive since it has been maintained while the Company has undergone such significant growth in our branch network. Cost control has always been a hallmark of TrustCo's success. While we have seen excellent growth in our loan portfolio, we continue to be mindful of loan quality. As of year-end 2006, TrustCo had just $7.1 million in nonperforming loans, which is a mere 0.4% of our loan portfolio. As of year- end 2006, our loan loss reserve was $35.6 million or 5x nonperforming loans. TrustCo's most important ratio, return on average equity (ROE), was 18.71% for 2006, despite a difficult banking environment. We are committed to insuring that our ROE compares favorably with any peer group, and I am confident that our current 18.71% ratio ranks well compared to our banking peers. 4 [LOGO] TRUSTCO Bank Corp NY President's Message (continued) Our Trust Department, which currently manages over $900 million in assets, continues to move forward. With their "personal hands-on approach" to money, estate and trust management and their new Gallery Accounts, which cater to individual investors and IRA's, 2007 should be a great year for the Trust area. Also during 2006 we adopted new required accounting standards that had the affect of increasing our capital by 16.8 million. These standards address the issues that many companies face with respect to their employee benefit plans and recording prior period immaterial items. At TrustCo our employee benefit plans are fully funded and these new standards actually resulted in an increase to our capital. Also, we had an increase to our capital as a result of recording these prior period items. Shareholders have inquired about our plans relating to dividends. We understand the importance of dividends to our shareholders. The dividend level is reviewed on an annual basis, it continues to be our belief that excess capital should be returned to our shareholders. We are mindful of our mission statement to give our owners an above average return on your investment. We also believe that it is prudent to retain enough capital to support our growth and to remain well capitalized. We are very enthusiastic about TrustCo's future. Our superior products, efficient delivery system, and continued expansion of our branch network give us a great platform for future growth and success. On behalf of the Board of Directors and employees of our Bank, I would like to thank our shareholders for your continued support of our Company. 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 2006 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 2006 should be read in conjunction with this review. Certain amounts in years prior to 2006 have been reclassified to conform with the 2006 presentation. Overview TrustCo recorded net income of $45.3 million or $0.603 of diluted earnings per share for the year ended December 31, 2006, compared to $59.0 million or $0.782 of diluted earnings per share for the year ended December 31, 2005. This represents a decrease of 23.2% in net income between 2005 and 2006. During 2006, the following had a significant effect on net income: o a decrease of $6.6 million in taxable equivalent net interest income compared to 2005, because an increase in the average balance of interest earning assets of $133.0 million was offset by an increase in interest bearing liabilities and a decrease of 40 basis points ("bp") in the net interest margin, o a reduction in the credit provision for loan losses from $6.3 million in 2005 to a $3.6 million credit in 2006, o the recognition of net securities gains of $6.0 million in 2005 compared to net securities losses of $596 thousand recorded in 2006, o a reduction in total noninterest income (excluding the impact of net securities transactions) of $3.8 million resulting primarily from certain transactions in 2005 related to the sale of the credit card portfolio, the sale of the Canajoharie Branch and the sale of the former operations center which did not recur, and o an increase of $2.8 million in total noninterest expense from $46.2 million in 2005 to $49.1 million in 2006. TrustCo has performed well with respect to a number of key performance ratios during 2006 and 2005, including: o return on average equity of 18.71% for 2006 and 26.07% for 2005, o return on average assets of 1.52% for 2006 and 2.07% for 2005, and o an efficiency ratio of 42.03% for 2006 and 38.29% for 2005. During 2006, TrustCo's results were negatively affected by the continued impact of the inverted yield curve and its impact on deposit and loan pricing. An inverted yield curve exists when market interest rates are higher for short term funds than for longer term funds. As an example, at year end 2006 the overnight rate paid between banks of the highest MIX OF AVERAGE EARNING ASSETS
(dollars in thousands) 2006 2005 Components of vs. vs. Total Earning Assets 2006 2005 2004 2005 2004 2006 2005 2004 Loans, net $1,611,355 1,336,899 1,176,856 274,456 160,043 55.6% 48.3 43.1 Securities available for sale: U.S. Treasuries and agencies 926 1,059 634 (133) 425 -- -- -- Government sponsored enterprises . 783,485 667,967 713,969 115,518 (46,002) 27.0 24.2 26.2 States and political subdivisions 127,173 127,704 168,723 (531) (41,019) 4.4 4.6 6.2 Mortgage-backed securities and collateralized mortgage obligations 184,721 210,720 149,298 (25,999) 61,422 6.4 7.6 5.5 Other . 12,326 16,734 25,221 (4,408) (8,487) 0.4 0.6 0.9 Total securities available for sale 1,108,631 1,024,184 1,057,845 84,447 (33,661) 38.2 37.0 38.8 Federal funds sold and other short-term investments 180,267 406,131 494,579 (225,864) (88,448) 6.2 14.7 18.1 Total earning assets $2,900,253 2,767,214 2,729,280 133,039 37,934 100.0% 100.0 100.0
The average balances of securities available for sale are presented using amortized cost for these securities. 6 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) quality rating (the federal fund rate) was 5.25% while the 10 year United States Treasury rate was 4.70%. This has a negative impact on banks because most of the deposit products offered to customers are priced based upon the short term rates (primarily the federal funds rate or a comparable short term rate) whereas the loan products are priced utilizing the longer term treasury (or other long term high quality investments). This can be seen in both the net interest income decrease as well as the affect on net interest margin. During 2006 Trustco also opened 12 new branches. These branches were primarily located in Florida and downstate New York. Also at year end 2006 TrustCo adopted new accounting requirements as stipulated in SEC Staff Accounting Bulletin No. 108. SAB No. 108 changes the method of quantifying prior year misstatements. In accordance with the transition provisions of SAB No. 108, the Company recorded a cumulative effect adjustment to its January 1, 2006 undivided profits, net of tax, which had the impact of increasing capital by $9.6 million and decreasing return on average equity by approximately 1% for 2006. See section "Recently Adopted Accounting Changes" for more information. In addition, the Company adopted new accounting standards with respect to pension and post retirement benefit plans. As a result of this change TrustCo recorded an increase in capital of $7.3 million. See the section "Recently Adopted Accounting Changes" for more details. TrustCo's operations focus on providing high quality service to the communities served by its 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 2006 a net increase of eleven 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 2007, this strategy will lead to the opening of seven to ten new branches. Management believes that expanding into central Florida and the downstate region of New York has been a success. The new branches have the same products and features found at other TrustCo locations. With a combination of competitive rates, excellent service and convenient locations, LOAN PORTFOLIO
(dollars in thousands) As of December 31, 2006 2005 2004 Amount Percent Amount Percent Amount Percent Commercial $ 247,622 14.0% $ 202,570 13.8% $ 193,188 15.6% Real estate - construction 25,534 1.4 22,123 1.5 20,148 1.6 Real estate - mortgage 1,240,312 70.4 1,047,994 71.2 822,103 66.3 Home equity lines of credit 242,555 13.8 192,291 13.1 191,242 15.4 Installment loans 6,491 0.4 5,741 0.4 13,384 1.1 Total loans 1,762,514 100.0% 1,470,719 100.0% 1,240,065 100.0% Less: Allowance for loan losses 35,616 45,377 49,384 Net loans (1) $1,726,898 $1,425,342 $1,190,681
Average Balances 2006 2005 2004 2003 2002 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Commercial $ 221,527 13.8% $ 192,378 14.4% $ 189,179 16.1% $ 199,729 15.7% $ 198,566 13.1% Real estate - construction 21,784 1.4 18,893 1.4 12,430 1.1 6,684 0.5 9,752 0.6 Real estate - mortgage 1,144,378 71.0 922,875 69.0 780,777 66.3 899,415 70.5 1,156,779 76.5 Home equity lines of credit 218,297 13.5 192,819 14.4 181,948 15.5 155,185 12.2 129,847 8.6 Installment loans 5,369 0.3 9,934 0.8 12,522 1.0 14,010 1.1 17,504 1.2 Total loans 1,611,355 100.0% 1,336,899 100.0% 1,176,856 100.0% 1,275,023 100.0% 1,512,448 100.0% Less: Allowance for loan losses 35,538 47,653 49,299 51,311 56,525 Net loans (1) $ 1,575,817 $1,289,246 $1,127,557 $1,223,712 $1,455,923
(1) Presented net of deferred direct loan origination fees and costs. 7 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) Taxable Equivalent Net Interest Income (dollars in millions) 2004 $105.0 2005 $107.9 2006 $101.4 management believes that the new branches will attract deposit and loan customers and be a welcome addition to these communities. Overall, 2006 was marked by growth in each of the key drivers of performance. Deposits ended 2006 at $2.80 billion, an increase from the prior year of $236.9 million or 9.2%, and the loan portfolio grew to a total of $1.76 billion, an increase of $291.8 million over the 2005 year end balance. 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 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 97.5% and 97.3% of average total assets for 2006 and 2005, 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 100 basis points during 2006 from 4.25% at the beginning of the year to 5.25% by year end. For 2005 the federal funds rate began the year at 2.25% and ended 2005 at 4.25%, an increase of 200 basis points. Therefore the federal funds rate has increased by a total of 300 basis points between January 1, 2005 and December 31, 2006. Traditionally interest rates on 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 4.36% at the beginning of 2006 and ended the year at 4.70%. Likewise in 2005 the 10 year treasury began the year at 4.22% and ended 2005 at 4.36%. Therefore for the period from January 1, 2005 to December 31, 2006 the 10 year treasury increased by 48 basis points as compared to the 300 basis points increase in the federal funds rate. The rate on the 10 year treasury bond and other long-term interest rates has 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 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, 2006 After 1 Year In 1 Year But Within After or Less 5 Years 5 Years Total Commercial $71,336 85,841 90,445 247,622 Real estate construction 25,534 -- -- 25,534 Total 96,870 85,841 90,445 273,156 Predetermined rates 29,789 85,841 90,445 206,075 Floating rates 67,081 -- -- 67,081 Total $96,870 85,841 90,445 273,156
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 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 2006 were $2.90 billion, which was an increase of $133.0 million from the prior year. This increase was primarily the result of growth in the average balance of loans by $274.5 million, an $84.5 million increase in securities available for sale and a decrease of $225.9 million of federal funds sold and other short term investments between 2005 and 2006. The increase in the loan portfolio is primarily the result of the $224.4 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 $2.97 billion for 2006 and $2.84 billion for 2005. 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 $274.5 million during 2006. Interest income on the loan portfolio also increased to $104.4 million in 2006 from $86.6 million in 2005. The average yield remained unchanged at 6.48% in 2006 and 2005. Historically, TrustCo has distinguished itself as a principal originator of residential real estate loans. Through marketing, pricing and a customer-friendly service delivery network, TrustCo has attempted to distinguish itself from other mortgage lenders. 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 $1.15 billion in 2006. Income on real estate loans increased to $71.6 million in 2006 from $58.9 million in 2005. The yield on the portfolio decreased from 6.33% for 2005 to 6.21% in 2006 due to changes in retail rates in the marketplace. Residential real estate loans at December 31, 2006 were $1.25 billion compared to $1.06 billion at year end 2005, an increase of $192.5 million. The majority of TrustCo's real estate loans are secured by properties within the Bank's market area. During 2006, management continued its established practice of retaining all new loan originations in the 9 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) Bank's portfolio rather than selling them in the secondary market. Average commercial loans of $234.7 million in 2006 increased by $31.3 million from $203.4 million in 2005. The average yield on the commercial loan portfolio increased to 7.55% for 2006 from 7.26% in 2005. This resulted in income on commercial loans of $17.7 million in 2006 and $14.8 million in 2005. TrustCo strives to maintain strong asset quality in all segments of its loan portfolio, especially commercial loans. Competition for commercial loans continues to be very intense in 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 2006, the average balance of home equity credit lines was $218.3 million, an increase from $192.8 million in 2005. 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 6.59% for 2006 from 6.11% in 2005. This resulted in interest income on home equity credit lines of $14.4 million in 2006, compared to $11.8 million in 2005. The average balance of installment loans, net, decreased to $5.4 million in 2006 from $9.9 million in 2005. The yield on installment loans increased to 14.25% in 2006 from 12.26% in 2005, resulting in interest income of $765 thousand. 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, 2005, securities available for sale amounted to $1.08 billion, compared to $1.05 billion at year end 2006. For 2006, the average balance of securities available for sale was $1.11 billion with an average yield of 5.32%, compared to an average balance in 2005 of $1.02 billion with an average yield of 5.36%. The taxable equivalent income earned on the securities portfolio in 2005 was $54.9 million, compared to $59.0 million earned in 2006. During 2005, TrustCo recognized approximately $6.0 million of net gains from securities transactions, compared to net losses from securities transactions of $596 thousand in 2006. TrustCo has not invested in any exotic investment products such as interest rate swaps, forward placement contracts, or other instruments commonly referred to as derivatives. By actively managing a portfolio of high quality securities, TrustCo can meet the objectives of asset/liability management and liquidity, while at the same time producing a 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, 2006 and 2005, the market value of TrustCo's portfolio of securities available for sale carried net unrealized losses of approximately $17.0 million and $10.1 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 10 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) dates. The table below details the portfolio of securities available for sale by both maturity date and call date as of December 31, 2006. 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, 2006, 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 2006, the average balance of federal funds sold and other short-term investments was $180.3 million, a decrease from $406.1 million in 2005. The average rate earned on these assets was 2.96% in 2005 and 4.94% in 2006. TrustCo utilizes this category of earning assets as a means of maintaining strong liquidity as interest rates change. During 2006, 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 $243.4 million for 2006 compared to $257.2 million for year end 2005. Management anticipates evaluating the overall level of the federal funds sold and other short term investments portfolio for 2007 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 $2.63 billion in 2006, compared to $2.51 billion in 2005, an increase of $122.4 million. Increases were noted primarily in the demand deposits, time deposits and SECURITIES AVAILABLE FOR SALE
(dollars in thousands) As of December 31, 2006 2005 2004 Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value U.S. Treasuries and agencies $ 999 999 499 498 500 500 Government sponsored enterprises 751,539 733,549 756,525 743,265 521,078 517,061 States and political subdivisions 129,633 132,880 115,010 118,950 147,988 154,939 Mortgage-backed securities and collateralized mortgage obligations 170,450 167,896 202,007 200,963 201,579 201,623 Other 680 672 685 681 685 685 Total debt securities available for sale 1,053,301 1,035,996 1,074,726 1,064,357 871,830 874,808 Equity securities 11,933 12,274 19,418 19,719 16,741 21,181 Total securities available for sale $ 1,065,234 1,048,270 1,094,144 1,084,076 888,571 895,989
SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION Debt securities available for sale:
(dollars in thousands) As of December 31, 2006 Based on Based on Final Maturity Call Date Amortized Fair Amortized Fair Cost Value Cost Value Within 1 year $ 66,648 66,445 754,018 736,097 1 to 5 years 350,083 345,905 234,967 234,105 5 to 10 years 70,748 69,754 59,827 61,168 After 10 years 565,822 553,892 4,489 4,626 Total debt securities available for sale $ 1,053,301 1,035,996 1,053,301 1,035,996
11 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) money market account categories. The average balance of interest bearing checking accounts decreased by $30.8 million to $287.4 million in 2006. Savings account balances decreased from $783.4 million in 2005 to $702.8 million in 2006. Time deposits increased on average by $117.2 million, money market accounts increased by an average of $106.9 million and demand deposits increased by $9.7 million during 2006 compared to 2005. 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 categories of money market and time deposits which carry 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 are attracting customers away from other investment opportunities such as stocks or bonds. 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 2.82% in 2006. The increase in the average balance of interest bearing deposits, coupled with a 90 basis point increase in the average cost, resulted in an increase of approximately $23.6 million in interest expense to $67.2 million in 2006. 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. SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD Debt securities available for sale:
(dollars in thousands) As of December 31, 2006 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 $ 999 -- -- -- 999 Fair value 999 -- -- -- 999 Weighted average yield 4.59% -- -- -- 4.59 Government sponsored enterprises Amortized cost $ 59,993 164,158 54,900 472,488 751,539 Fair value 59,811 162,468 54,157 457,113 733,549 Weighted average yield 4.66% 4.93 5.34 5.42 5.24 States and political subdivisions Amortized cost $ 275 35,484 1,458 92,416 129,633 Fair value 275 35,253 1,473 95,879 132,880 Weighted average yield 4.70% 3.42 5.20 4.85 4.46 Mortgage-backed securities and collateralized mortgage obligations Amortized cost $ 5,351 149,791 14,390 918 170,450 Fair value 5,330 147,542 14,124 900 167,896 Weighted average yield 5.02% 4.70 4.79 6.87 4.73 Other Amortized cost $ 30 650 -- -- 680 Fair value 30 642 -- -- 672 Weighted average yield 3.00% 4.60 -- -- 4.84 Total debt securities available for sale Amortized cost $ 66,648 350,083 70,748 565,822 1,053,301 Fair value 66,445 345,905 69,754 553,892 1,035,996 Weighted average yield 4.69% 4.68 5.23 5.33 5.05
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 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) 2006 2005 2004 Interest Interest Interest Average Income/ Average Average Income/ Average Average Income/ Average Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets Loans, net $1,611,355 104,437 6.48% 1,336,899 86,669 6.48% 1,176,856 75,232 6.39% Securities available for sale: U.S. Treasuries and agencies 926 42 4.56 1,059 28 2.64 634 11 1.74 Government sponsored enterprises 783,485 40,816 5.21 667,967 34,478 5.16 713,969 39,785 5.57 States and political subdivisions 127,173 8,766 6.89 127,704 9,658 7.56 168,723 13,302 7.88 Mortgage-backed securities and collateralized mortgage obligations 184,721 8,661 4.69 210,720 9,738 4.62 149,298 7,032 4.71 Other 12,326 676 5.48 16,734 1,025 6.12 25,221 1,744 6.92 Total securities available for sale 1,108,631 58,961 5.32 1,024,184 54,927 5.36 1,057,845 61,874 5.85 Federal funds sold and other short-term investments 180,267 8,912 4.94 406,131 12,009 2.96 494,579 6,675 1.35 Total interest earning assets 2,900,253 172,310 5.94% 2,767,214 153,605 5.55% 2,729,280 143,781 5.27% Allowance for loan losses (35,538) (47,653) (49,299) Cash and noninterest earning assets 109,237 125,413 148,214 Total assets $2,973,952 2,844,974 2,828,195 Liabilities and shareholders' equity Interest bearing deposits: Interest bearing checking accounts $ 287,406 1,303 0.45% 318,167 1,376 0.43% 328,804 1,586 0.48% Savings 702,790 10,800 1.54 783,410 6,769 0.86 809,438 7,968 0.98 Time deposits and money markets 1,393,081 55,125 3.96 1,169,018 35,481 3.04 1,123,474 28,223 2.51 Total interest bearing deposits 2,383,277 67,228 2.82 2,270,595 43,626 1.92 2,261,716 37,777 1.67 Short-term borrowings 95,239 3,708 3.89 83,381 2,026 2.43 100,855 972 0.96 Long-term debt 72 4 5.22 99 5 5.22 151 8 5.40 Total interest bearing liabilities 2,478,588 70,940 2.86% 2,354,075 45,657 1.94% 2,362,722 38,757 1.64% Demand deposits 245,061 235,372 212,463 Other liabilities 20,044 28,956 29,291 Shareholders' equity 230,259 226,571 223,719 Total liabilities and shareholders' equity $2,973,952 2,844,974 2,828,195 Net interest income 101,370 107,948 105,024 Taxable equivalent adjustment 3,103 3,431 4,995 Net interest income $ 98,267 $104,517 $100,029 Net interest spread 3.08% 3.61% 3.63% Net interest margin (net interest income to total interest earning assets) 3.50 3.90 3.85
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 2006, 2005, and 2004. 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 $(12.0) million, $0.3 million, and $11.5 million in 2006, 2005, and 2004, respectively, net of unrealized (depreciation) appreciation, net of tax, in the available for sale securities portfolio. The gross amounts of the net unrealized (depreciation) appreciation has been included in cash and noninterest earning assets. Nonaccrual loans are included in average loans. 13 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) MATURITY OF TIME DEPOSITS OVER $100 THOUSAND (dollars in thousands) As of December 31, 2006 Under 3 months $ 27,776 3 to 6 months 59,147 6 to 12 months 86,775 Over 12 months 126,115 Total $ 299,813 Other funding sources: The Company had $95.2 million of average short-term borrowings outstanding during 2006 compared to $83.4 million in 2005. The average cost of short-term borrowings was 3.89% in 2006 and 2.43% in 2005. This resulted in interest expense of approximately $3.7 million in 2006. The increase in the rate paid on these funds is a result of the increase in the target federal funds rate during 2005 and 2006. 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 the view of management, but not excessive. This philosophy has led to a dividend payout ratio of 105.7% of net income in 2006, 77.5% of net income in 2005, and 78.8% for 2004. 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 14.88% of risk-adjusted assets at December 31, 2006, and 16.58% of risk-adjusted assets at December 31, 2005. Tier 1 capital to average assets at December 31, 2006 was 7.67%, as compared to 8.40% at year end 2005. At December 31, 2006 and 2005, 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 MIX OF AVERAGE SOURCES OF FUNDING
(dollars in thousands) 2006 2005 Components of vs. vs. Total Funding 2006 2005 2004 2005 2004 2006 2005 2004 Demand deposits $ 245,061 235,372 212,463 9,689 22,909 9.0% 9.1 8.3 Retail deposits: Savings 702,790 783,410 809,438 (80,620) (26,028) 25.8 30.3 31.4 Time deposits under $100 thousand 882,280 813,751 789,211 68,529 24,540 32.4 31.4 30.6 Interest bearing checking accounts 287,406 318,167 328,802 (30,761) (10,637) 10.6 12.3 12.8 Money market deposits 260,751 153,838 157,418 106,913 (3,580) 9.5 5.9 6.1 Total retail deposits 2,133,227 2,069,166 2,084,869 64,061 (15,705) 78.3 79.9 80.9 Total core deposits 2,378,288 2,304,538 2,297,334 73,750 7,204 87.3 89.0 89.2 Time deposits over $100 thousand 250,050 201,429 176,845 48,621 24,584 9.2 7.8 6.9 Short-term borrowings 95,239 83,381 100,855 11,858 (17,474) 3.5 3.2 3.9 Long-term debt 72 99 151 (27) (52) -- -- -- Total purchased liabilities 345,361 284,909 277,851 60,452 7,058 12.7 11.0 10.8 Total sources of funding $ 2,723,649 2,589,447 2,575,185 134,202 14,262 100.0% 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, 2006 2005 2004 2003 2002 Individuals, partnerships and corporations $2,609,596 2,485,922 2,453,843 2,318,424 2,150,986 U.S. Government 19 72 70 73 35 States and political subdivisions 4,585 4,875 5,539 9,802 48,049 Other (certified and official checks, etc.) 14,138 15,098 14,727 12,528 13,370 Total average deposits by type of depositor $2,628,338 2,505,967 2,474,179 2,340,827 2,212,440
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 2006 and 2005 totaled $7.2 million and $3.2 million respectively. Nonperforming loans as a percentage of the total loan portfolio were 0.40% in 2006 and 0.22% in 2005. Included in nonperforming loans at year end 2006 were $5.7 million of loans in nonaccrual status as VOLUME AND YIELD ANALYSIS
(dollars in thousands) 2006 vs. 2005 2005 vs. 2004 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 $(3,097) (8,707) 5,610 5,334 (941) 6,275 Securities available for sale: Taxable 4,926 4,552 374 (3,302) (153) (3,149) Tax-exempt (892) (40) (852) (3,665) (3,123) (522) Total securities available for sale 4,034 4,512 (478) (6,947) (3,276) (3,671) Loans, net 17,768 17,151 617 11,437 9,596 1,841 Total interest income 18,705 12,956 5,749 9,824 5,379 4,445 Interest expense: Interest bearing checking accounts (73) (141) 68 (210) (50) (160) Savings 4,031 (763) 4,794 (1,199) (249) (950) Time deposits and money markets 19,644 7,206 12,438 7,258 1,376 5,882 Short-term borrowings 1,682 322 1,360 1,054 (134) 1,188 Long-term debt (1) (1) -- (3) (3) -- Total interest expense 25,283 6,623 18,660 6,900 940 5,960 Net interest income (TE) $(6,578) 6,333 (12,911) 2,924 4,439 (1,515)
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) compared to $1.7 million at year end 2005. There were $211 thousand of loans past due three payments or more and still accruing interest at year end 2006 and $35 thousand at year end 2005. Restructured loans at year end 2006 were $1.2 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. Virtually all of the $7.1 million of nonperforming loans at December 31, 2006 are residential real estate or retail consumer loans. A significant portion of the charge-offs for 2006 and 2005 occurred in the residential real estate loan portfolio. During 2006, gross charge-offs of this type of loan was $1.9 million (which represented 88% of total gross charge-offs). In 2005, charge-offs for this type of loan was $1.6 million. 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 of New York 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, 2006, 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 under a troubled debt restructuring, as impaired loans. At year end 2006 and 2005, there were $1.2 and $1.5 million, respectively, of impaired loans. The average balances of impaired loans were $1.3 million during 2006 and $1.9 million during 2005. The Company recognized approximately $150 thousand of interest income on these loans in 2006 and $201 thousand in 2005. At year end 2006 there were $92 thousand of foreclosed real estate as compared to $23 thousand in 2005. 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. In deciding on the adequacy of the allowance for loan losses, management reviews past due information, historical charge-off (recovery) data, and nonperforming loan activity. Also, there are a number of other factors that are taken into consideration, including: o the magnitude, nature and trends of recent loan charge-offs, and recoveries, o the growth in the loan portfolio and the implication that it has in relation to the economic climate in the Bank's business territory, and o the economic environment in the Upstate New York territory (the Company's largest geographical area) over the last several years. 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 2006 and 2005 were $2.1 million and $2.5 million, respectively. Recoveries were $3.5 million in 2006 and $4.7 million in 2005. The Company recorded a $3.6 million credit for loan losses in 2006 compared to $6.3 million in 2005. The credit for loan losses recorded in 2006 and 2005 was the result of the significant net recoveries in those years and the lessening impact of prior year net charge off percentages in relation to the allowance methodology, partially offset by growth in the loan portfolio. At year end 2006 TrustCo implemented new accounting requirements as stipulated in SEC Staff Accounting Bulletin No. 108 which changed the method of quantifying prior year misstatements. As a result of the adoption of SAB No. 108, the Company reduced the allowance for loan losses by $7.6 million which represented an overaccrual from prior years. The reduction in the allowance was recorded as of the beginning of 2006 and prior periods were not restated. See Recently Adopted Accounting Changes. Market Risk The Company's principal exposure to market risk is with respect to interest rate risk. Interest rate risk is the potential for economic loss due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current market value. Quantitative and Qualitative Disclosure about Market Risk TrustCo realizes income principally from the difference or spread between the interest earned on loans, investments and other interest-earning assets 16 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) 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 evaluating the 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, 2006 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, 2006. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp and 300 bp or to decrease by 100 bp and 200 bp. Estimated Percentage of Fair value of Capital to As of December 31, 2006 Fair value of Assets +300 BP 9.98% +200 BP 11.07 +100 BP 12.53 Current rates 14.05 - -100 BP 13.64 - -200 BP 12.24 At December 31, 2006 the book value of capital (excluding the impact of accumulated other comprehensive income) to assets was 7.67%. 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 14.05% of the fair value of assets whereas the current book value of capital to assets is 7.67% at December 31, 2006. 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. NONPERFORMING ASSETS
(dollars in thousands) As of December 31, 2006 2005 2004 2003 2002 Loans in nonaccrual status $ 5,713 1,662 557 -- 615 Loans contractually past due 3 payments or more and still accruing interest 211 35 -- -- -- Restructured loans 1,189 1,518 2,610 3,260 4,303 Total nonperforming loans 7,113 3,215 3,167 3,260 4,918 Foreclosed real estate 92 23 -- -- 86 Total nonperforming assets $ 7,205 3,238 3,167 3,260 5,004 Allowance for loan losses $ 35,616 45,377 49,384 48,739 52,558 Allowance coverage of nonperforming loans 5.01x 14.11 15.59 14.95 10.69 Nonperforming loans as a % of total loans 0.40% 0.22 0.26 0.28 0.35 Nonperforming assets as a % of total assets 0.23 0.11 0.11 0.12 0.19
17 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) Interest sensitivity gap analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time periods, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling rates. A liability-sensitive position would generally imply a negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates. Static gap analysis has limitations because it cannot measure precisely the effect of interest rate movements, and competitive pressures on the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. In addition, a significant portion of the interest sensitive assets are fixed rate securities with relatively long lives whereas the interest-bearing liabilities are not subject to these same limitations. As a result, certain assets and liabilities may in fact reprice at different times and at different volumes than the static gap analysis would indicate. The Company recognizes the relatively long-term nature of the fixed rate residential loan portfolio. To fund those long-term assets the Company cultivates long-term deposit relationships (often called core deposits). These core deposit relationships tend to be longer term in nature and not as susceptible to changes in interest rates. Core deposit balances allow the Company to take on certain interest rate risk with respect to the asset side of the balance sheet. The table "Interest Rate Sensitivity" presents an analysis of the interest-sensitivity gap position at December 31, 2006. 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 in the period 0-90 days and in the period over 5 years. The table indicates that TrustCo is liability sensitive in the other time periods. 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. Likewise in those time periods that the Company is liability sensitive the impact on interest income would be the opposite of that described above for the asset sensitive time periods. 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 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 $2.38 billion in 2006 and $2.30 billion in 2005. 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 2006, the average balance of purchased liabilities was $345.4 million, compared with $284.9 million in 2005. TrustCo also has a line of credit available with the Federal Home Loan Bank of New York. 18 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands) 2006 2005 2004 2003 2002 Amount of loans outstanding at end of year (less unearned income) $1,762,514 1,470,719 1,240,065 1,162,266 1,422,301 Average loans outstanding during year (less average unearned income) 1,611,355 1,336,899 1,176,856 1,275,023 1,512,448 Balance of allowance at beginning of year 45,377 49,384 48,739 52,558 57,203 Adjustment upon adoption of Staff Accounting Bulletin No. 108 (7,600) -- -- -- -- Loans charged off: Commercial 19 656 335 432 997 Real estate 1,863 1,561 5,054 8,651 6,648 Installment 235 247 408 515 705 Total 2,117 2,464 5,797 9,598 8,350 Recoveries of loans previously charged off: Commercial 599 440 446 1,393 803 Real estate 2,767 4,121 5,334 3,003 1,285 Installment 165 156 212 183 197 Total 3,531 4,717 5,992 4,579 2,285 Net loans charged off (recovered) (1,414) (2,253) (195) 5,019 6,065 Provision (credit) for loan losses (3,575) (6,260) 450 1,200 1,420 Balance of allowance at end of year $ 35,616 45,377 49,384 48,739 52,558 Net charge offs (recoveries) as a percent of average loans outstanding during year (less average unearned income) (.09)% (.17) (.02) .39 .40 Allowance as a percent of loans outstanding at end of year 2.02 3.09 3.98 4.17 3.70
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, 2006 and 2005, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $297.6 million and $306.7 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 $4.3 million and $2.8 million at December 31, 2006 and 2005, 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, 2006 and 2005 was insignificant. Other off-balance sheet risk: TrustCo does not engage in activities involving interest rate swaps, forward placement contracts, or any other instruments commonly referred to as "derivatives". Management believes these instruments pose a high degree of risk, and that investing in them is unnecessary. TrustCo has no off-balance sheet partnerships, joint ventures, or other risk sharing entities. Noninterest Income and Expense Noninterest income: Noninterest income is a significant source of revenue for the Company and an important factor in overall results. Total noninterest income was $14.9 million in 2006, $25.3 19 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) INTEREST RATE SENSITIVITY
(dollars in thousands) At December 31, 2006 Repricing in: 0-90 91-365 1-5 Over 5 Rate days days years years Insensitive Total Total assets $641,015 257,992 998,767 1,151,328 112,085 3,161,187 Cumulative total assets $641,015 899,007 1,897,774 3,049,102 3,161,187 Total liabilities and shareholders' equity $317,030 786,189 1,352,738 438,992 266,238 3,161,187 Cumulative total liabilities and shareholders' equity $317,030 1,103,219 2,455,957 2,894,949 3,161,187 Cumulative interest sensitivity gap $323,985 (204,212) (558,183) 154,153 Cumulative gap as a % of interest earning assets for the period 50.54% (22.72) (29.41) 5.06 Cumulative interest sensitive assets to liabilities 202.79 81.49 77.27 105.32
million in 2005 and $32.0 million in 2004. Included in the 2006 results are $596 thousand of net securities losses compared with net gains of approximately $6.0 million in 2005 and $13.7 million in 2004. Excluding securities transactions, noninterest income was $15.5 million in 2006, and $19.3 million in 2005 and $18.3 million in 2004. 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 $5.5 million in 2006, $6.0 million in 2005, and $5.9 million in 2004. 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, 2006 and 2005 assets under management by the Trust Department were approximately $901.4 million and $886.5 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 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. Similar items did not recur in 2006. Noninterest expense: Noninterest expense was $49.1 million in 2006, compared with $46.2 million in 2005 and $48.2 million in 2004. 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 42.0% in 2006, 38.3% in 2005 and 38.8% in 2004. Excluded from the efficiency ratio calculation was $22 thousand, $3.2 million, and $248 thousand of non-recurring income primarily consisting of gain on sale of various assets and $56 thousand, $812 thousand and $1.2 million of non-recurring expenses primarily consisting of computer consulting costs for 2006, 2005 and 2004, respectively. Salaries and employee benefits are the most significant component of noninterest expense. For 2006, these expenses amounted to $18.4 million, compared with $18.7 million in 2005, and $20.7 million in 2004. Net occupancy expense increased $639 thousand between 2005 and 2006 due primarily to new branch openings during 2005 and 2006. Equipment expense, increased $321 thousand for 2006 to $3.0 million as compared to $2.7 million in 2005. The increase in net occupancy expense and equipment expense is the result of new equipment purchased for the branch expansion program. Professional services expense increased to $3.9 million in 2006 compared to $3.4 million in 2005 and $3.7 million in 2004. The increase in professional service expense is due primarily to additional expenditures with respect to the TrustCo Chairman's consulting contract, additional fees for accounting and tax advice and fees paid for enhancements to 20 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) deposit products, including internet banking services. Outsourced service expense was $4.2 million in 2006 compared to $4.1 million in 2005. The increase is the result of increased volumes in 2006. Advertising expense for 2006 was $2.3 million and $1.4 million for 2005 and 2004. The increase in 2006 was the result of expenses for advertising and promotional programs with respect to new branch openings and increased efforts throughout the various areas TrustCo operates. 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 2006, TrustCo recognized income tax expense of $22.3 million, as compared to $30.8 million in 2005 and $26.8 million in 2004. 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 $22.8 million and $30.2 million at December 31, 2006 and 2005, respectively, will be realized. In addition to the deferred tax asset described above, the Company has a $6.8 million and $4.0 million at December 31, 2006 and 2005, respectively of a deferred tax asset relative to the net unrealized losses on securities available for sale and a deferred tax liability at December 31, 2006 of $4.8 million as a result of the overfunded portion in the Company's pension and post retirement benefit plans. Certain tax strategies utilized by the Company prior to 2007 may be negatively effected by proposed New York State budget proposals. Should these budget proposals be implemented, future tax expense would be expected to increase. Contractual Obligations The Company is contractually obligated to make the following payments on long-term debt and leases as of December 31, 2006: (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 $ 30 29 -- -- 59 Operating leases 3,385 6,574 6,373 30,117 46,449 Total $3,415 6,603 6,373 30,117 46,508 In addition, the Company is contractually obligated to pay data processing vendors approximately $4 million to $5 million per year through 2013. Also, the Company is obligated under its various employee benefit plans to make certain payments in the future. The payments vary from $1.6 million to $1.7 million through 2016. Additionally, the Company is obligated to pay the accumulated benefits under the supplementary pension plan which amounted to $4.7 million as of December 31, 2006. Actual payments under the plan would be made in accordance with the plan provisions. Impact of Inflation and Changing Prices The consolidated financial statements for the years ended 2006, 2005 and 2004 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. NONINTEREST INCOME
(dollars in thousands) For the year ended December 31, 2006 vs. 2005 2006 2005 2004 Amount Percent Trust department income $ 5,463 6,009 5,869 (546) (9.1)% Fees for services to customers 8,572 8,171 10,486 401 4.9 Net gain (loss) on securities transactions (596) 5,999 13,712 (6,595) (109.9) Other 1,420 5,110 1,898 (3,690) (72.2) Total noninterest income $ 14,859 25,289 31,965 (10,430) (41.2)%
21 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) NONINTEREST EXPENSE
(dollars in thousands) For the year ended December 31, 2006 vs. 2005 2006 2005 2004 Amount Percent Salaries and employee benefits $18,427 18,663 20,697 (236) (1.3)% Net occupancy expense 7,947 7,308 6,601 639 8.7 Equipment expense 3,042 2,721 2,283 321 11.8 Professional services 3,925 3,372 3,685 553 16.4 Outsourced services 4,246 4,093 4,348 153 3.7 Advertising expense 2,277 1,415 1,367 862 60.9 Other real estate expense (income), net 27 (617) (739) 644 (104.4) Other 9,171 9,277 9,923 (106) (1.1) Total noninterest expense $49,062 46,232 48,165 2,830 6.1%
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, was eliminated which would have been recorded under FAS 123R subsequent to its adoption on January 1, 2006. The stock option accelerations were done in anticipation of the adoption of FASB Statement 123R on 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 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 price 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. No options were granted in 2006. Recently Adopted Accounting Changes (a) Accounting for Defined Benefit Pension and Other Post Retirement Plans In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 158, Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) ("Statement 158"). For defined benefit and post retirement plans, Statement 158 requires that the funded status be recognized in the statement of financial condition, that assets and obligations that determine funded status be measured as of the end of the employer's fiscal year, and that changes in funded status be measured as of the end of the employer's fiscal year, and that changes in funded status be recognized in comprehensive income in the year the changes occur. Statement No. 158 does not change the amount of net periodic benefit cost included in net income or address measurement issues related to defined benefit or post-retirement plans. The requirement to recognize funded status is effective for fiscal years ending after December 15, 2006. The requirement Efficiency Ratio 2004 38.8% 2005 38.3% 2006 42.0% 22 [LOGO] TRUSTCO Bank Corp NY Management's Discussion and Analysis (continued) to measure assets and obligations as of the employer's fiscal year is effective for fiscal years ending after December 15, 2008. The unrecognized overfunded pre-tax components of the defined benefit pension plan and the retiree medical plan of $12.1 million were recorded on the balance sheet at December 31, 2006. Balances previously recognized in the financial statements were adjusted to reflect those overfunded positions with the offset as an adjustment to the deferred income tax accounts and to accumulated other comprehensive income, as an element of shareholder's equity. (b) Prior Year Immaterial Uncorrected Misstatements In September 2006, the Staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 108 "Considering the Effects of Prior Year Misstatements in Current Year Financial Statements." SAB No. 108 requires quantification of prior year immaterial uncorrected misstatements under both the "rollover approach" and the "iron curtain approach." The "rollover approach" quantifies a misstatement based on the amount of the error originating in the current year income statement, but ignores the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. The "iron curtain approach" quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement's year(s) of origination. Prior to SAB No. 108, the Company utilized the rollover approach when quantifying misstatements. The provisions of SAB No. 108 must be applied to financial statements for fiscal years ending after November 15, 2006. As a result of the adoption of SAB No. 108, TrustCo recognized a reduction in other liabilities and a decrease in the allowance for loan losses, as described below. These entries were recorded as adjustments of the beginning of the year 2006 opening balances for these accounts and the impact, net of tax, was reflected in shareholders' equity as a cumulative effect adjustment to undivided profits, a component of shareholders' equity. The entries to reduce other liabilities were in connection with the following items: Approximately $3.0 million of unused accrued interest for potential tax settlements related to certain tax positions, including the timing of loan charge offs for tax return purposes, in connection with mergers in 1985 and 1991. Approximately $1.9 million of unused accrued expenses related to credit risk on long term letters of credit acquired in a 1991 acquisition. These letters of credit generally expired through the mid 1990s. Approximately $1.4 million in unused accrued expenses related to the anticipated termination of a computer services contract in the early 1990s. Negotiations subsequently resolved the matter with out requiring full payment. Approximately $2.0 million in unused accrued expenses related to credit risk associated with unadvanced amounts on credit cards, not reversed as this portfolio was paid down. These misstatements were not material to the consolidated financial statements in each of the respective years affected. The reduction of the allowance for loan losses was the result of excess provisions for loan losses recorded primarily in the 1990s. This misstatement primarily occurred as a result of the Company's extrapolation of historical loan loss experience over the future expected lives of the respective loan portfolios (also known as "life of the loan" approach), and the Company did not consider qualitative factors which impact credit quality. The misstatement of the provision for loan losses was not considered material to the Company's consolidated financial statements in any of the respective years impacted by these misstatements. Under the rollover approach described above, management did not consider these items to be material to the consolidated financial statements. However, under the dual approach required by SAB No. 108, these items are being adjusted effective as of January 1, 2006. In accordance with the transition provisions of SAB No. 108, the Company recorded the cumulative effect of these items as an adjustment to its opening undivided profits for fiscal 2006, net of their respective tax effects. 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 2006 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. Pending Accounting Pronouncements In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, Fair Value Measurements ("SFAS 157"). This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, however, it is not expected to have a material effect on the Company's financial statements. In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments,' which eliminates the exemption from applying SFAS 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. 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) 2006 2005 Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Income statement: Interest income $40,709 41,942 42,842 43,714 169,207 34,885 37,016 38,433 39,840 150,174 Interest expense 15,198 17,018 18,479 20,245 70,940 10,025 10,308 11,501 13,823 45,657 Net interest income 25,511 24,924 24,363 23,469 98,267 24,860 26,708 26,932 26,017 104,517 Provision (credit) for loan losses (1,800) (1,775) -- -- (3,575) (1,500) (1,580) (1,680) (1,500) (6,260) Net interest income after provision for loan losses 27,311 26,699 24,363 23,469 101,842 26,360 28,288 28,612 27,517 110,777 Noninterest income 3,305 3,917 3,895 3,742 14,859 7,641 6,283 6,435 4,930 25,289 Noninterest expense 11,925 11,986 11,699 13,452 49,062 11,233 11,606 10,814 12,579 46,232 Income before income taxes 18,691 18,630 16,559 13,759 67,639 22,768 22,965 24,233 19,868 89,834 Income tax expense 6,325 6,206 5,380 4,403 22,314 7,861 7,980 8,514 6,490 30,845 Net income $12,366 12,424 11,179 9,356 45,325 14,097 14,985 15,719 13,378 58,989 Per share data: Basic earnings $ .165 .166 .149 .125 .605 .199 .200 .210 .179 .787 Diluted earnings .164 .165 .149 .125 .603 .197 .199 .208 .178 .782 Cash dividends declared .160 .160 .160 .160 .640 .150 .150 .150 .160 .610
SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event. Adoption is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. This statement will be effective in 2007, however, it is not expected to have a material effect on the Company's financial statements. In July 2006, FASB issued Financial Accounting Standards Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes". FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises' financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently analyzing the effects of FIN 48. 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, 2006 2005 2004 2003 2002 Statement of income data: Interest income $ 169,207 150,174 138,786 137,130 153,735 Interest expense 70,940 45,657 38,757 40,739 58,020 Net interest income 98,267 104,517 100,029 96,391 95,715 Provision (credit) for loan losses (3,575) (6,260) 450 1,200 1,420 Net interest income after provision for loan losses 101,842 110,777 99,579 95,191 94,295 Noninterest income 15,455 19,290 18,253 19,842 19,799 Net (loss) gain on securities transactions (596) 5,999 13,712 9,807 7,499 Noninterest expense 49,062 46,232 48,165 48,486 55,326 Income before income taxes 67,639 89,834 83,379 76,354 66,267 Income taxes 22,314 30,845 26,839 23,323 17,023 Net income $ 45,325 58,989 56,540 53,031 49,244 Share data: Average equivalent diluted shares (in thousands) 75,149 75,397 75,081 75,306 74,618 Tangible book value $ 3.19 3.05 3.02 3.06 3.16 Cash dividends .640 .610 .600 .600 .600 Basic earnings .605 .787 .761 .713 .678 Diluted earnings .603 .782 .753 .704 .660 Financial: Return on average assets 1.52% 2.07 2.00 1.96 1.83 Return on average shareholders' equity 18.71 26.07 26.65 26.21 26.08 Cash dividend payout ratio 105.70 77.46 78.83 83.98 88.60 Tier 1 capital to average assets (leverage ratio) 7.67 8.04 7.74 7.53 7.78 Tier 1 capital as a % of total risk adjusted assets 14.88 16.58 17.09 16.54 15.48 Total capital as a % of total risk adjusted assets 16.14 17.85 18.37 17.82 16.77 Efficiency ratio 42.03 38.29 38.78 38.33 36.66 Net interest margin 3.50% 3.90 3.85 3.94 4.00 Average balances: Total assets $ 2,973,952 2,844,974 2,828,195 2,710,175 2,693,505 Earning assets 2,900,253 2,767,214 2,729,280 2,606,292 2,579,379 Loans, net 1,611,355 1,336,899 1,176,856 1,275,023 1,512,448 Allowance for loan losses (35,538) (47,653) (49,299) (51,311) (56,525) Securities available for sale 1,108,631 1,024,184 1,057,845 833,905 568,056 Deposits 2,628,338 2,505,967 2,474,179 2,340,827 2,212,440 Short-term borrowings 95,239 83,381 100,855 107,799 210,363 Long-term debt 72 99 151 326 510 Shareholders' equity 230,259 226,571 223,719 225,045 214,963
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 and the overfunded/underfunded positions in the retirement plans. 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 accumulated other comprehensive income. 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 accumulated other comprehensive income. 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, 2006. 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, 2006, 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, 2006 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 27, 2007 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, 2006, 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, 2006, 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, 2006, 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, 2006 and 2005, 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, 2006, and our report dated February 27, 2007, expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Albany, New York February 27, 2007 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 (the Company) as of December 31, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)" as of December 31, 2006, and Staff Accounting Bulletin No. 108 "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" as of January 1, 2006. 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, 2006, 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 27, 2007, 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 27, 2007 29 [LOGO] TRUSTCO Bank Corp NY Consolidated Statements of Income (dollars in thousands, except per share data) Years Ended December 31, 2006 2005 2004 Interest income: Interest and fees on loans $ 104,400 86,636 75,194 Interest and dividends on: U.S. Treasuries and agencies and government sponsored enterprises 40,858 34,506 39,795 States and political subdivisions 5,762 6,301 8,666 Mortgage-backed securities and collateralized mortgage obligations 8,661 9,738 7,032 Other 614 984 1,424 Interest on federal funds sold and other short-term investments 8,912 12,009 6,675 Total interest income 169,207 150,174 138,786 Interest expense: Interest on deposits 67,228 43,626 37,777 Interest on short-term borrowings 3,708 2,026 972 Interest on long-term debt 4 5 8 Total interest expense 70,940 45,657 38,757 Net interest income 98,267 104,517 100,029 Provision (credit) for loan losses (3,575) (6,260) 450 Net interest income after provision (credit) for loan losses 101,842 110,777 99,579 Noninterest income: Trust department income 5,463 6,009 5,869 Fees for services to customers 8,572 8,171 10,486 Net (loss) gain on securities transactions (596) 5,999 13,712 Other 1,420 5,110 1,898 Total noninterest income 14,859 25,289 31,965 Noninterest expense: Salaries and employee benefits 18,427 18,663 20,697 Net occupancy expense 7,947 7,308 6,601 Equipment expense 3,042 2,721 2,283 Professional services 3,925 3,372 3,685 Outsourced services 4,246 4,093 4,348 Advertising expense 2,277 1,415 1,367 Other real estate expense (income), net 27 (617) (739) Other 9,171 9,277 9,923 Total noninterest expense 49,062 46,232 48,165 Income before income taxes 67,639 89,834 83,379 Income taxes 22,314 30,845 26,839 Net income $ 45,325 58,989 56,540 Earnings per share: Basic $ .605 .787 .761 Diluted .603 .782 .753 See accompanying notes to consolidated financial statements. 30 [LOGO] TRUSTCO Bank Corp NY Consolidated Statements of Condition (dollars in thousands, except per share data) As of December 31, 2006 2005 ASSETS Cash and due from banks $ 47,889 55,667 Federal funds sold and other short-term investments 243,449 257,196 Total cash and cash equivalents 291,338 312,863 Securities available for sale 1,048,270 1,084,076 Loans, net 1,762,514 1,470,719 Less: Allowance for loan losses 35,616 45,377 Net loans 1,726,898 1,425,342 Bank premises and equipment 24,050 21,734 Other assets 70,631 68,744 Total assets $ 3,161,187 2,912,759 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand $ 259,401 251,012 Savings 662,310 725,336 Interest bearing checking accounts 290,784 309,668 Money market deposit accounts 310,719 190,560 Certificates of deposit (in denominations of $100,000 or more) 299,813 225,611 Other time accounts 976,356 860,300 Total deposits 2,799,383 2,562,487 Short-term borrowings 95,507 87,935 Long-term debt 59 87 Accrued expenses and other liabilities 26,715 33,589 Total liabilities 2,921,664 2,684,098 Shareholders' equity: Capital stock; $1 par value. 150,000,000 shares authorized, 82,149,776 and 82,119,360 shares issued at December 31, 2006 and 2005, respectively 82,150 82,120 Surplus 119,313 117,770 Undivided profits 110,304 103,315 Accumulated other comprehensive loss, net of tax (2,928) (6,054) Treasury stock; 7,276,450 and 7,343,783 shares, at cost, at December 31, 2006 and 2005, respectively (69,316) (68,490) Total shareholders' equity 239,523 228,661 Total liabilities and shareholders' equity $ 3,161,187 2,912,759 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, 2006 Accumulated Other Compre- Capital Undivided Comprehensive hensive Treasury Stock Surplus Profits Income (Loss) Income Stock Total Beginning balance, January 1, 2004 $ 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 $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 -- -- -- (15,583) (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 of $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 Adjustment to January 1, 2006 beginning balance for adoption of SAB No. 108 -- -- 9,571 -- -- 9,571 January 1, 2006 beginning balance, as adjusted 82, 120 117,770 112,886 (6,054) (68,490) 238,232 Comprehensive income: Net income -- 2006 -- -- 45,325 -- 45,325 -- 45,325 Other comprehensive loss, net of tax: Previously unrecognized overfunded position in pension and post retirement benefit plans, net of tax (pre-tax overfunded of $12,096) -- -- -- 7,272 -- -- 7,272 Unrealized net holding loss arising during the year, net of tax (pre-tax loss $7,492) -- -- -- -- (4,504) -- -- Reclassification adjustment for net loss realized in net income during the year (pre-tax loss $596) -- -- -- -- 358 -- -- Other comprehensive loss -- -- -- (4,146) (4,146) -- (4,146) Comprehensive income 41,179 Cash dividend declared, $.640 per share -- -- (47,907) -- -- (47,907) Stock options exercised and related tax benefits 30 554 -- -- -- 584 Treasury stock purchased (733,413 shares) -- -- -- -- (8,801) (8,801) Sale of treasury stock (800,746 shares) -- 989 -- -- 7,975 8,964 Ending balance, December 31, 2006 82,150 119,313 110,304 (2,928) (69,316) 239,523
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, 2006 2005 2004 Increase/(decrease) in cash and cash equivalents Cash flows from operating activities: Net income 45,325 58,989 56,540 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,671 2,690 1,898 Net gain on sales of real estate owned (47) (690) (893) Net loss/(gain) on sales of bank premises and equipment 131 (665) 55 (Credit)/provision for loan losses (3,575) (6,260) 450 Deferred tax expense 1,105 2,874 3,106 Net loss (gain) on securities transactions 596 (5,999) (13,712) Decrease/(increase) in taxes receivable 7,265 2,760 (2,424) (Increase)/decrease in interest receivable (2,159) (3,761) 2,864 Increase in interest payable 825 659 75 Decrease/(increase) in other assets (4,313) (5,289) 5,011 Increase/(decrease) in accrued expenses 561 (665) (8,037) Total adjustments 3,060 (14,346) (11,607) Net cash provided by operating activities 48,385 44,643 44,933 Cash flows from investing activities: Proceeds from sales and calls of securities available for sale 97,842 275,855 1,155,807 Proceeds from maturities of securities available for sale 25,786 1,781 881 Purchases of securities available for sale (95,314) (477,210) (889,618) Net increase in loans (290,581) (228,457) (77,604) Proceeds from sales of real estate owned 178 723 893 Proceeds from sales of bank premises and equipment 73 2,576 23 Purchases of bank premises and equipment (5,191) (3,855) (4,287) Net cash (used in) provided by investing activities (267,207) (428,587) 186,095 Cash flows from financing activities: Net increase in deposits 236,896 35,385 107,292 Net increase (decrease) in short-term borrowings 7,572 9,956 (12,629) Repayment of long-term debt (28) (27) (125) Proceeds from exercise of stock options and related tax benefits 584 3,818 9,281 Proceeds from sales of treasury stock 8,964 10,996 7,887 Payments to acquire treasury stock (8,801) (14,846) (13,482) Dividends paid (47,890) (44,905) (44,504) Net cash provided by financing activities 197,297 377 53,720 Net (decrease)/increase in cash and cash equivalents (21,525) (383,567) 284,748 Cash and cash equivalents at beginning of year 312,863 696,430 411,682 Cash and cash equivalents at end of year 291,338 312,863 696,430 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest 70,115 44,998 38,681 Income taxes 14,999 27,388 24,038 Non cash transactions: Transfer of loans to real estate owned 200 56 -- Increase in dividends payable 17 787 69 Change in unrealized loss on securities available for sale -- gross (6,896) (17,486) (27,579) Change in deferred tax effect on unrealized loss on securities available for sale 2,750 6,973 10,996 Non-cash stock-based compensation expense, net of tax -- 77 -- Cumulative effect of the adoption of FASB Statement No 158 -- Gross 12,096 -- -- Deferred tax effect of cumulative effect of the adoption of FASB Statement No. 158 (4,824) -- -- Cumulative effect of the adoption of SEC Staff Accounting Bulletin No. 108 -- Gross 15,875 -- -- Deferred tax effect of the adoption of Staff Accounting Bulletin No. 108 (6,304) -- --
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 (the Company or TrustCo), ORE Subsidiary Corp., Trustco Bank (referred to as Trustco Bank or the 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 U.S. generally accepted accounting principles. A description of the more significant policies follows. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidation The consolidated financial statements of the Company include the accounts of the subsidiaries after elimination of all significant intercompany accounts and transactions. Securities Available for Sale Securities available for sale are carried at 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. Depreciation is computed on either the straight-line or accelerated methods over the remaining useful lives of the assets; generally 20 to 40 years for premises and leasehold improvements and 3 to 7 years for furniture and equipment. 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 2007 Trustco Bank could pay cash dividends to the Company of $18.1 million plus 2007 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. This plan was frozen as of December 31, 2006. 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. As of December 31, 2006 the Company adopted Statement of Financial Accounting Standards No. 158 "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" that required the Company to recognize on the Statement of Condition the funded status of the pension plan and post retirement plan. This resulted in an increase in accumulated other comprehensive income of $7.3 million and an increase in other assets of $12.1 million. Stock Option Plans The Company has stock option plans for officers and directors. Effective January 1, 2006 the Company adopted the provisions of FASB Statement No. 123R ("Statement 123R") using the modified prospective method. Previously the Company had adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transaction and Disclosure" ("Statement 148"). The Company's stock option plans were previously 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 was 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, was eliminated which would have been recorded under FAS 123R subsequent to its adoption on January 1, 2006. The stock option accelerations were done in anticipation of FAS 123R on 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 the statement of income in future periods upon the adoption of FASB Statement No. 123R (Share-Based Payment). Had compensation expense for 2005 and 2004 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: 35 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (dollars in thousands, except per share data) 2005 2004 Net income: As reported $ 58,989 56,540 Deduct: total stock-based compensation expense, net of related tax effects (2,035) (868) Pro forma net income $ 56,954 55,672 Earnings per share: Basic - as reported $ .787 .761 Basic - pro forma .760 .750 Diluted - as reported .782 .753 Diluted - pro forma .755 .742 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 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, 2005 and 2004 7.5 years 6.0 years Earnings Per Share Basic earnings per share (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. 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 and the overfunded position of the pension and post retirement benefit plans. 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 and the overfunded position in the Company's pension plan and post retirement benefit plans, net of tax, not previously recorded. (2) Adoption of New Accounting Pronouncements (a) Accounting for Defined Benefit Pension and Other Post Retirement Plans In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 158, Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) ("Statement 158"). For defined benefit and post retirement plans, Statement 158 requires that the funded status be recognized in the statement of financial condition, that assets and obligations that determine funded status be measured as of the end of the employer's fiscal year, and that changes in funded status be measured as of the end of the employer's fiscal year, and that changes in funded status be recognized in comprehensive income in the year the changes occur. Statement 36 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) No. 158 does not change the amount of net periodic benefit cost included in net income or address measurement issues related to defined benefit or post-retirement plans. The requirement to recognize funded status is effective for fiscal years ending after December 15, 2006. The requirement to measure assets and obligations as of the employer's fiscal year is effective for fiscal years ending after December 15, 2008. The unrecognized overfunded pre-tax components of the defined benefit pension plan and the retiree medical plan of $12.1 million were recorded on the balance sheet at December 31, 2006. Balances previously recognized in the financial statements were adjusted to reflect those overfunded positions with the offset as an adjustment to the deferred income tax accounts and to accumulated other comprehensive income, as an element of shareholder's equity. (b) Prior Year Immaterial Uncorrected Misstatements In September 2006, the Staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 108 "Considering the Effects of Prior Year Misstatements in Current Year Financial Statements." SAB No 108 requires quantification of prior year immaterial uncorrected misstatements under both the "rollover approach" and the "iron curtain approach." The "rollover approach" quantifies a misstatement based on the amount of the error originating in the current year income statement, but ignores the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. The "iron curtain approach" quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement's year(s) of origination. Prior to SAB No. 108, the Company utilized the rollover approach when quantifying misstatements. The provisions of SAB No. 108 must be applied to financial statements for fiscal years ending after November 15, 2006. As a result of the adoption of SAB No. 108, TrustCo recognized a reduction in other liabilities and a decrease in the allowance for loan losses, as described below. These entries were recorded as adjustments of the beginning of the year 2006 opening balances for these accounts and the impact, net of tax, was reflected in shareholders' equity as a cumulative effect adjustment to undivided profits, a component of shareholders' equity. The entries to reduce other liabilities were in connection with the following items: Approximately $3.0 million of unused accrued interest for potential tax settlements related to certain tax positions, including the timing of loan charge offs for tax return purposes, in connection with mergers in 1985 and 1991. Approximately $1.9 million of unused accrued expenses related to credit risk on long term letters of credit acquired in a 1991 acquisition. These letters of credit generally expired through the mid 1990s. Approximately $1.4 million in unused accrued expenses related to the anticipated termination of a computer services contract in the early 1990s. Negotiations subsequently resolved the matter with out requiring full payment. Approximately $2.0 million in unused accrued expenses related to credit risk associated with unadvanced amounts on credit cards, not reversed as this portfolio was paid down. These misstatements were not material to the consolidated financial statements in each of the respective years affected. The reduction of the allowance for loan losses was the result of excess provisions for loan losses recorded primarily in the 1990s. This misstatement primarily occurred as a result of the Company's extrapolation of historical loan loss experience over the future expected lives of the respective loan portfolios (also known as "life of the loan" approach), and the Company did not consider qualitative factors which impact credit quality. The misstatement of the provision for loan losses was not considered material to the Company's consolidated financial statements in any of the respective years impacted by these misstatements. Under the rollover approach described above, management did not consider these items to be material to the consolidated financial statements. However, under the dual approach required by SAB No. 108, these items are being adjusted effective as of January 1, 2006. In accordance with the transition provisions of SAB No. 108, the Company recorded the cumulative effect of these items as an adjustment to its opening undivided profits for fiscal 2006, net of their respective tax effects. (3) 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 $21.6 million and $20.5 million at December 31, 2006 and 2005, respectively. (4) Securities Available for Sale The amortized cost and market value of the securities available for sale are as follows: (dollars in thousands) December 31, 2006 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasuries and agencies $ 999 -- -- 999 Government sponsored enterprises 751,539 -- 17,990 733,549 States and political subdivisions 129,633 3,524 277 132,880 Mortgage-backed securities and collateralized mortgage obligations 170,450 336 2,890 167,896 Other 680 -- 8 672 Total debt securities 1,053,301 3,860 21,165 1,035,996 Equity securities 11,933 341 -- 12,274 Total securities available for sale $1,065,234 4,201 21,165 1,048,270 37 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (dollars in thousands) December 31, 2005 Gross Gross Amortized Unrealized Unrealized Fair 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 Federal Home Loan Bank stock and Federal Reserve Bank stock included in equity securities at December 31, 2006 and 2005, was $5.1 million and $4.7 million, respectively. The following table distributes the debt securities included in the available for sale portfolio as of December 31, 2006, based on the securities' final maturity (mortgage-backed securities and collateralized mortgage obligations are stated using an estimated average life): (dollars in thousands) Amortized Fair Cost Value Due in one year or less $66,648 66,450 Due after one year through five years 350,083 345,905 Due after five years through ten years 70,748 69,753 Due after ten years 565,822 553,888 $ 1,053,301 1,035,996 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, 2006 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 $50,878 121 668,675 17,869 719,553 7,990 States and political subdivisions 12,444 65 19,379 212 31,823 277 Mortgage-backed securities and collateralized mortgage obligations 16,930 132 126,956 2,758 143,886 2,890 Other -- -- 592 8 592 8 Total $80,252 318 815,602 20,847 895,854 21,165
(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
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 and intent 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. 38 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) 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 and intent 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 2006, 2005 and 2004 are as follows: (dollars in thousands) December 31, 2006 2005 2004 Proceeds $97,842 275,855 1,155,807 Gross realized gains 55 6,297 25,006 Gross realized losses 651 298 11,294 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 $138.5 million and $104.7 million at December 31, 2006 and 2005, respectively. The Company has the following balances of securities available for sale as of December 31, 2006 that represent greater than 10% of shareholders equity: Amortized Fair Cost Value Federal Home Loan Bank $176,160 172,700 Federal National Mortgage Association 137,038 134,166 Federal Home Loan Mortgage Corporation 235,781 228,836 (5) Loans and Allowance for Loan Losses A summary of loans by category is as follows: (dollars in thousands) December 31, 2006 2005 Commercial $ 247,622 202,570 Real estate - construction 25,534 22,123 Real estate mortgage 1,240,312 1,047,994 Home equity lines of credit 242,555 192,291 Installment loans 6,491 5,741 Total loans, net 1,762,514 1,470,719 Less: Allowance for loan losses 35,616 45,377 Net loans $1,726,898 1,425,342 At December 31, 2006 and 2005, loans to executive officers, directors, and to associates of such persons aggregated $2.4 million and $3.0 million, respectively. During 2006, approximately $115 thousand of new loans were made and repayments of loans totalled approximately $740 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. The following table sets forth information with regard to nonperforming loans: (dollars in thousands) December 31, 2006 2005 2004 Loans in nonaccrual status $5,713 1,662 557 Loans contractually past due 3 payments or more and still accruing interest 211 35 -- Restructured loans 1,189 1,518 2,610 Total nonperforming loans $7,113 3,215 3,167 Interest on nonaccrual and restructured loans of $380 thousand in 2006, $250 thousand in 2005, and $377 thousand in 2004 would have been earned in accordance with the original contractual terms of the loans. Approximately $149 thousand, $201 thousand, and $329 thousand of interest on nonaccrual and restructured loans was collected and recognized as income in 2006, 2005, and 2004, 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, 2006 2005 2004 Balance at beginning of year $45,377 49,384 48,739 Adjustment upon adoption of Staff Accounting Bulletin No. 108 (7,600) -- -- Adjusted balance at beginning of year 37,777 49,384 48,739 Provision (credit) for loan losses (3,575) (6,260) 450 Loans charged off (2,117) (2,464) (5,797) Recoveries on loans previously charged off 3,531 4,717 5,992 Balance at year end $35,616 45,377 49,384 39 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) The Company identifies impaired loans and measures the impairment in accordance with Statement of Financial Accounting Standards No. 114, "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, 2006 and 2005. Retail loans totaling $1.2 million as of December 31, 2006, and $1.5 million as of December 31, 2005, 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 2006, 2005, and 2004, the average balance of impaired loans was $1.3 million, $1.9 million, and $2.9 million, respectively, and there was approximately $149 thousand, $201 thousand, and $314 thousand of interest income recorded on these loans in the accompanying Consolidated Statements of Income. (6) Bank Premises and Equipment A summary of premises and equipment at December 31, 2006 and 2005 follows: (dollars in thousands) 2006 2005 Land $ 2,413 2,413 Buildings 24,372 23,208 Furniture, fixtures and equipment 27,395 25,231 Leasehold improvements 7,663 6,467 61,843 57,319 Accumulated depreciation and amortization (37,793) (35,585) Total $ 24,050 21,734 Depreciation and amortization expense approximated $2.7 million, $2.7 million, and $1.9 million for the years 2006, 2005, and 2004, respectively. Occupancy expense of the Bank's premises included rental expense of $3.1 million in 2006, $2.4 million in 2005, and $2.1 million in 2004. (7) Deposits Interest expense on deposits was as follows: (dollars in thousands) For the years ended December 31, 2006 2005 2004 Interest bearing checking accounts $ 1,303 1,376 1,586 Savings accounts 10,800 6,769 7,968 Time deposits and money market accounts 55,125 35,481 28,223 Total $67,228 43,626 37,777 At December 31, 2006, the maturity of total time deposits is as follows: (dollars in thousands) Under 1 year $ 794,084 1 to 2 years 276,012 2 to 3 years 110,511 3 to 4 years 81,444 4 to 5 years 11,805 Over 5 years 2,313 $1,276,169 (8) Short-Term Borrowings Short-term borrowings of the Company were cash management accounts as follows: (dollars in thousands) 2006 2005 Amount outstanding at December 31 $95,507 87,935 Maximum amount outstanding at any month end 95,538 87,935 Average amount outstanding 95,239 83,381 Weighted average interest rate: For the year 3.89 2.43 As of year end 4.15 3.32 Cash management accounts represent 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. (9) Long-Term Debt Long-term debt at December 31, 2006 and 2005, of $59 thousand and $87 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. (10) 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) 2006 2005 2004 Current tax expense: Federal $20,607 26,161 23,337 State 602 1,810 396 Total current tax expense 21,209 27,971 23,733 Deferred tax expense 1,105 2,874 3,106 Total income tax expense $22,314 30,845 26,839 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005, are as follows: 40 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) December 31, (dollars in thousands) 2006 2005 Deductible Deductible temporary temporary differences differences Benefits and deferred remuneration $ (69) 460 Deferred loan fees, net 18 15 Difference in reporting the allowance for loan losses, net 17,400 21,676 Other income or expense not yet reported for tax purposes 2,523 5,254 Depreciable assets 2,083 2,253 Other items 849 555 Net deferred tax asset at end of year 22,804 30,213 Net deferred tax asset at beginning of year 30,213 33,087 Implementation of new accounting standard (Staff Accounting Bulletin No. 108) 6,304 -- Adjusted net deferred tax asset at beginning of year 23,909 33,087 Deferred tax expense $ 1,105 2,874 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 $22.8 million and $30.2 million at December 31, 2006 and 2005, respectively, will be realized. In addition to the deferred tax items described in the preceding table, the Company has a deferred tax asset of $6.8 million and $4.0 million at December 31, 2006 and 2005, respectively, relating to the net unrealized losses on securities available for sale and a deferred tax liability at December 31, 2006 of $4.8 million as a result of the previously unrecognized overfunded position in the Company's pension and post retirement benefit plans. This deferred tax liability resulted from the adoption of SFAS No. 158 in 2006, there was no such deferred tax liability as of December 31, 2005. 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, 2006 2005 2004 Statutory federal income tax rate 35.0% 35.0 35.0 Increase/(decrease) in taxes resulting from: Tax exempt income (2.7) (2.3) (3.5) State income tax, net of federal tax benefit 0.8 1.7 0.8 Other items (0.1) (0.1) (0.1) Effective income tax rate 33.0% 34.3 32.2 (11) 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 (c) 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 for benefits attributed to service to date. During 2006, the Company determined that the pension plan would be frozen as of December 31, 2006 and that no additional benefit to employees would be accrued. As a result of this action the Company recognized a net curtailment gain of $372 thousand during 2006. 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, 2006 and 2005. Change in Projected Benefit Obligation: (dollars in thousands) 2006 2005 Projected benefit obligation at beginning of year $28,542 27,581 Service cost 732 804 Interest cost 1,478 1,519 Benefits paid (1,733) (1,567) Net actuarial (gain) loss (54) 205 Total effect from curtailment (2,794) -- Projected benefit obligation at end of year $26,171 28,542 Change in Plan Assets and Reconciliation of Funded Status: (dollars in thousands) 2006 2005 Fair value of plan assets at beginning of year $28,998 29,242 Actual gain on plan assets 3,509 1,323 Benefits paid (1,733) (1,567) Fair value of plan assets at end of year 30,774 28,998 Funded status 4,603 457 Unrecognized net actuarial (gain) loss (1,852) 746 Unrecognized prior service cost -- 1,595 Net amount 2,751 2,798 Adjustment to overfunded position of plan assets for adoption of SFAS No. 158 1,852 -- Overfunded position $ 4,603 2,798 41 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) The accumulated benefit obligation for the plan was $26.2 million and $25.8 million at December 31, 2006 and 2005, respectively. Components of Net Periodic Pension Expense: For the years ended December 31, (dollars in thousands) 2006 2005 2004 Service cost $ 732 804 784 Interest cost 1,478 1,519 1,499 Expected return on plan assets (1,856) (1,850) (1,669) Amortization of unrecognized prior service cost 65 106 90 Curtailment gain, net (372) -- -- Net periodic pension expense $ 47 579 704 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 2007 $1,538 2008 1,519 2009 1,496 2010 1,503 2011 1,519 2012 - 2016 8,027 The assumptions used to determine benefit obligations at December 31 are as follows: 2006 2005 Discount rate 5.50% 5.50 Rate of increase in future compensation N.A. 4.00 The assumptions used to determine net periodic pension expense for the years ended December 31 are as follows: 2006 2005 2004 Discount rate 5.50% 5.75 6.00 Rate of increase in future compensation 4.00 4.50 5.00 Expected long-term rate of return on assets 6.50 6.50 6.00 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 $427 thousand, $581 thousand, and $662 thousand, in 2006, 2005, and 2004, 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. The accumulated benefits under this supplementary pension plan was approximately $4.7 million as of December 31, 2006. 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, 2006 and 2005, the trusts had assets totaling $6.4 million and $5.7 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. 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, 2006 and 2005. Change in Accumulated Benefit Obligation: (dollars in thousands) 2006 2005 Accumulated benefit obligation at beginning of year $1,272 891 Service cost 30 35 Retiree contributions 28 176 Interest cost 53 65 Benefits paid (109) (221) Net actuarial (gain) loss (243) 326 Accumulated benefit obligation at end of year $1,031 1,272 Change in Plan Assets and Reconciliation of Funded Status: (dollars in thousands) 2006 2005 Fair value of plan assets at beginning of year $12,172 11,726 Actual gain on plan assets 1,435 491 Retiree contributions 28 176 Benefits paid (109) (221) Fair value of plan assets at end of year 13,526 12,172 Funded status 12,495 10,901 Unrecognized net actuarial gain (3,867) (2,680) Unrecognized prior service credit (6,376) (6,780) Net amount 2,252 1,441 Adjustment to overfunded position of plan assets for adoption of SFAS No. 158 10,244 -- Overfunded position $12,496 1,441 42 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) Components of Net Periodic Benefit: For the years ended December 31, (dollars in thousands) 2006 2005 2004 Service cost $ 30 35 12 Interest cost 53 65 31 Expected return on plan assets (402) (405) (428) Amortization of net actuarial gain (88) (75) (107) Amortization of prior service credit (403) (403) (403) Net periodic benefit $(810) (783) (895) Expected Future Benefit Payments The following benefit payments are expected to be paid: Year Postretirement Benefits 2007 $ 37 2008 38 2009 39 2010 40 2011 41 2012 - 2016 224 The discount rate assumption used to determine benefit obligations at December 31 is as follows: 2006 2005 Discount rate 5.50% 5.50 The assumptions used to determine net periodic pension benefit for the years ended December 31 are as follows: 2006 2005 2004 Discount rate 5.50% 5.75 6.00 Expected long-term rate of return on assets, net of tax 3.30 3.45 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, 2006, and the interest and service components of net periodic postretirement benefit cost for the year ended December 31, 2006. (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: Postretirement Pension Benefit Benefit Plan Assets Plan Assets 2006 2005 2006 2005 Debt Securities 28.05% 33.00 28.74 30.72 Equity Securities 69.80 64.37 67.37 64.01 Other 2.15 2.63 3.89 5.27 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% to 70% equity securities and 30% to 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 2007. (d) Incentive and Bonus Plans During 2006 the Company amended its profit sharing plan to include a 401(k) feature. Under the 401(k) feature the Company matches 100% of the aggregate salary contribution up to the first 3% of compensation and 50% of the aggregate contribution of the next 3%. No profit sharing contribution was made in 2006 but was replaced with Company contributions to the 401k feature of the plan. Expenses related to the plan aggregated $234.8 thousand for 2006 and $1.3 million in 2005 and 2004. 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 $1.5 million, $2.0 million and $2.1 million in 2006, 2005 and 2004, respectively. The Company has awarded 2.7 million performance bonus units to the executive officers and directors. These units become vested and exercisable only under a change of control as defined in the plan. The units were awarded 43 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) 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 could have granted 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 could have granted 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. The Company has approximately 1.2 million options available to be granted as of December 31, 2006. 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 four 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, 2006, 2005 and 2004, 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, 2004 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 New options awarded - 2006 -- -- -- -- Cancelled options - 2006 (26,250) 12.86 (26,250) 12.86 Exercised options - 2006 (95,133) 6.14 (95,133) 6.14 Options became exercisable -- -- -- -- Balance, December 31, 2006 4,056,666 10.95 4,056,666 10.95 The following table summarizes information about total stock options outstanding and exercisable at December 31, 2006: Weighted Average Weighted Range of Options Remaining Average Exercise Outstanding Contractual Exercise Price and Exercisable Life Price Less than $7.50 13,076 1.0 years 5.97 Between $7.51 and $10.00 2,125,340 3.7 years 9.58 Greater than $10.00 1,918,250 7.5 years 12.50 Total 4,056,666 5.5 years 10.95 As described in Note 1, the Company accelerated all unvested options in 2005, accordingly there are no unvested options as of December 31, 2006 and 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 periods subsequent to the adoption of SFAS 123R. (12) 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) 2007 $ 3,385 2008 3,320 2009 3,254 2010 3,225 2011 3,148 2012 and after 30,117 $46,449 (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 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 $4.2 million in 2006, $4.1 million in 2005 and $4.3 million in 2004. The Company is contractually obligated to pay these third-party service providers approximately $4 million to $5 million per year through 2013. 44 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (13) Earnings Per Share A reconciliation of the component parts of earnings per share for 2006, 2005 and 2004 follows: (dollars in thousands, Weighted except per share data) Average Shares Per share Income Outstanding Amounts For the year ended December 31, 2006: Basic EPS: Income available to common shareholders $45,325 74,904 $.605 Effect of Dilutive Securities: Stock Options -- 245 (.002) Diluted EPS $45,325 75,149 $.603 For the year ended December 31, 2005: Basic EPS: Income available to common shareholders $58,989 74,278 $.761 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 As of December 31, 2006 and 2005, the number of antidulitive stock options excluded from diluted earnings per share was approximately 1.9 million and 665 thousand, respectively. (14) 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, 2006 and 2005, was $297.6 million and $306.7 million, respectively. Approximately 80% and 75% of these commitments were for variable rate products at the end of 2006 and 2005, respectively. 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 $4.3 million and $2.8 million at December 31, 2006 and 2005, 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, 2006 and 2005 was insignificant. No losses are anticipated as a result of loan commitments or standby letters of credit. (15) 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, 2006 Carrying Fair Value Value Financial assets: Cash and cash equivalents $ 291,338 291,338 Securities available for sale 1,048,270 1,048,270 Loans 1,726,898 1,737,746 Accrued interest receivable 20,591 20,591 Assets invested in trust account 6,448 6,585 Financial liabilities: Demand deposits 259,401 259,401 Interest bearing deposits 2,539,982 2,539,982 Short-term borrowings 95,507 95,507 Long-term debt 59 59 Accrued interest payable 3,029 3,029 45 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) 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 Assets invested in trust account 5,679 5,721 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 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. 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. (16) 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, 2006 and 2005, 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, 2006 and 2005, 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, 2006 and 2005, for Trustco Bank: 46 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) (dollars in thousands) As of December 31, 2006 Amount Ratio Leverage capital: 228,114 7.25% Tier 1 risk-based capital: 228,114 14.16 Total risk-based capital: 248,446 15.42 (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 The following is a summary of actual capital amounts and ratios as of December 31, 2006 and 2005 for TrustCo on a consolidated basis: (dollars in thousands) As of December 31, 2006 Amount Ratio Leverage capital: 241,898 7.67% Tier 1 risk-based capital: 241,898 14.88 Total risk-based capital: 262,409 16.14 (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 (17) Pending Accounting Pronouncements In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, Fair Value Measurements ("SFAS 157"). This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, however, it is not expected to have a material effect on the Company's financial statements. In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments,' which eliminates the exemption from applying SFAS 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event. Adoption is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. This statement will be effective in 2007, however, it is not expected to have a material effect on the Company's financial statements. In July 2006, FASB issued Financial Accounting Standards Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes". FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises' financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently analyzing the effects of FIN 48. (18) 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: 2006 2005 2004 Dividends and interest from subsidiaries $49,144 37,733 19,403 Net gain on sales of securities 21 4,068 21,157 Income from other investments 219 131 424 Total income 49,384 41,932 40,984 Expense: Operating supplies 72 67 61 Professional services 66 276 203 Miscellaneous expense 163 277 85 Total expense 301 620 349 Income before income taxes and subsidiaries' undistributed earnings 49,083 41,312 40,635 Income tax (benefit) expense (14) 1,485 8,303 Income before subsidiaries' undistributed earnings 49,097 39,827 32,332 (Excess distributions by subsidiaries over earnings)/ equity in undistributed earnings of subsidiaries (3,772) 19,162 24,208 Net income $45,325 58,989 56,540 Statements of Condition (dollars in thousands) December 31, Assets: 2006 2005 Cash in subsidiary bank $ 14,133 12,603 Investments in subsidiaries 225,536 216,647 Securities available for sale 7,142 6,841 Other assets -- 3 Total assets $246,811 236,094 Liabilities and Shareholders' equity: Accrued expenses and other liabilities $ 7,288 7,433 Total liabilities 7,288 7,433 Shareholders' equity 239,523 228,661 Total liabilities and shareholders' equity $246,811 236,094 47 [LOGO] TRUSTCO Bank Corp NY Notes to Consolidated Financial Statements (continued) Statements of Cash Flows (dollars in thousands) Years Ended December 31, 2006 2005 2004 Increase/(decrease) in cash and cash equivalents: Cash flows from operating activities: Net income $ 45,325 58,989 56,540 Adjustments to reconcile net income to net cash provided by operating activities: Excess distributions by subsidiaries over earnings/ (equity in undistributed earnings of subsidiaries) 3,772 (19,162) (24,208) Net gain on sales of securities (21) (4,068) (21,157) Net change in other assets and accrued expenses (163) (943) 4,764 Total adjustments 3,588 (24,173) (40,601) Net cash provided by operating activities 48,913 34,816 15,939 Cash flows from investing activities: Proceeds from sales of securities available for sale 156 14,360 57,997 Purchases of securities available for sale (396) (12,166) (29,951) Net cash (used in)/provided by investing activities (240) 2,194 28,046 Cash flows from financing activities: Proceeds from exercise of stock options and related tax benefits 584 3,818 9,281 Dividends paid (47,890) (44,905) (44,504) Payments to acquire treasury stock (8,801) (14,846) (13,482) Proceeds from sales of treasury stock 8,964 10,996 7,887 Net cash used in financing activities (47,143) (44,937) (40,818) Net increase/(decrease) in cash and cash equivalents 1,530 (7,927) 3,167 Cash and cash equivalents at beginning of year 12,603 20,530 17,363 Cash and cash equivalents at end of year $ 14,133 12,603 20,530 Supplemental Information Increase in dividends payable $ 17 787 69 Change in unrealized (loss)/gain on securities available for sale -- gross . (40) 4,139 19,328 Change in deferred tax effect on unrealized loss/(gain) on securities available for sale 16 (1,651) (7,707) 48 [LOGO] TRUSTCO Bank Corp NY Branch Locations NEW YORK Airmont Office 327 Route 59 East Airmont, NY Telephone: (845) 357-2435 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 Chatham Office 193 Hudson Avenue Chatham, NY Telephone: (518) 392-0031 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 Mamaroneck Office 190 Boston Post Road Mamaroneck, NY Telephone: (914) 777-3023 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 Monroe Office 791 Rt. 17M Monroe, NY Telephone: (845) 782-1100 Mont Pleasant Office Crane St. at Main Ave. Schenectady, NY Telephone: (518) 346-1267 New City Office 20 Squadron Blvd. New City, NY Telephone: (845) 634-4571 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 649 Route 9 Gansevoort, 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 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 49 [LOGO] TRUSTCO Bank Corp NY Branch Locations 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 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 Apollo Beach Office 6434 Apollo Beach Blvd. Apollo Beach, FL Telephone: (813) 649-0460 Clermont Office 12305 US Route 27 Unit 108 Clermont, FL Telephone: (352) 243-2563 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 Curry Ford Road Office 3020 Lamberton Ave. 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 Leesburg Office 1330 Citizens Blvd., Suite 101 Leesburg, FL Telephone: (352) 365-1305 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 Orange City Office 902 Saxon Blvd. Orange City, FL Telephone: (386) 775-1392 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 MASSACHUSETTS Pittsfield Office 1 Dan Fox Drive Pittsfield, MA Telephone: (413) 442-1330 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 50 [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 Thomas M. Poitras ASSISTANT SECRETARIES Robert M. Leonard Sharon J. Parvis Directors of TrustCo Bank Corp NY are also Directors of Trustco Bank BOARD OF DIRECTORS Joseph Lucarelli President Traditional Builders Residential Construction Thomas O. Maggs President Maggs & Associates Insurance Agency 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 Corp NY William D. Powers Partner Powers & Co., LLC Consulting William J. Purdy President Welbourne & Purdy Realty, Inc. Real Estate FLORIDA ADVISORY BOARD MEMBERS Brian C. Dowdell, M.D., M.S. Jeffrey R. Jontz Cinda S. Mersel Charles R. Orden Sanford C. Shugart, Ph.D. Kathleen R. Walters 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 Presidents Deborah K. Appel Robert M. Leonard Eric W. Schreck Officers John R. George 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 FACILITIES Vice President George W. Wickswat MORTGAGE LOANS Vice President Michael J. Lofrumento OPERATIONS Administrative Vice President Kevin M. Curley Officer Colleen A. Meliski PERSONNEL/QUALITY CONTROL Vice President Sharon J. Parvis SALES/MARKETING Vice President Paul D. Matthews TRUST DEPARTMENT Vice President Patrick J. LaPorta, Esq. Officers Stephanie A. Duma Michael J. Ewell Jesse C. Koepp Richard W. Provost 51 [LOGO] TRUSTCO Bank Corp NY General Information ANNUAL MEETING Monday, May 14, 2007 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. 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 Thomas M. Poitras, 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 Sharon 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. There are approximately 15 thousand shareholders of record of TrustCo common stock. SUBSIDIARIES: Trustco Bank Glenville, New York Member FDIC (and its wholly owned subsidiary, Trustco Vermont Investment Company Bennington, Vermont) ORE Subsidiary Corp. 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. 52 [LOGO] TRUSTCO Bank Corp NY Share Price Information The following graph shows changes over a five-year period in the value of $100 invested in: (1) TrustCo's common stock; (2) Russell 2000 and (3) an industry group of seventeen other regional bank holding companies compiled by SNL Financial LC, called the Superregional Bank Index. The fifteen-year period is presented in addition to the five-year period required by the S.E.C. because it provides additional perspective, and TrustCo management believes that longer-term performance is of greater interest to TrustCo shareholders. The fifteen-year graph uses the value of $100 invested in (1) TrustCo's common stock, (2) Russell 2000, and (3) an industry group of seventeen other regional bank holding companies compiled by SNL Financial LC, called the Superregional Bank Index. The source for this information is compiled by SNL Financial and they no longer report the S&P 500 Index which was presented in prior years. Therefore TrustCo has chosen to present the Russell 2000, and the SNL Superregional Bank Index and have eliminated the S&P 500. The banks comprising the Superregional Bank Index are: BB&T Corp., Comerica Inc., Fifth Third Bancorp, First Horizon National Corp., Huntington Bancshares Inc., KeyCorp, M&T Bank Corp., Marshall & Ilsley Corporation, National City Corp., PNC Financial Services Group, Inc., Popular Inc., Regions Financial Corp., SunTrust Banks, Inc., U.S. Bancorp, Wachovia Corp., Wells Fargo & Co., and Zions Bancorp. The S&P 500 index is not included in the 2006 graphs as the vendor, SNL Financial LC, no longer provides that information. If $100 was invested in the S&P 500 on December 31, 2001 that investment would be worth $135.03 as of December 31, 2006. The year-end pre-tax values of each investment are based on share price appreciation plus dividends paid, with cash dividends reinvested the date they were paid. TrustCo Bank Corp NY Total Return Performance
Period Ending Index 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 TrustCo Bank Corp NY 100.00 89.97 115.44 126.60 119.65 113.30 Russell 2000 100.00 79.52 117.09 138.55 144.86 171.47 SNL Superregional Banks 100.00 103.11 132.39 146.75 147.72 170.10
53 [LOGO] TRUSTCO Bank Corp NY TrustCo Bank Corp NY Total Return Performance
Period Ending Index 1991 1992 1993 1994 1995 1996 1997 1998 TrustCo Bank Corp NY 100.00 130.49 183.38 188.83 260.86 304.55 468.02 616.28 Russell 2000 100.00 118.41 140.76 138.20 177.52 206.80 253.06 246.61 SNL Superregional Bank Index 100.00 127.80 133.71 126.48 197.29 273.44 396.81 427.83
Total Return Performance (continued)
Period Ending Index 1999 2000 2001 2002 2003 2004 2005 2006 TrustCo Bank Corp NY 566.48 629.50 784.24 705.57 905.33 992.84 938.31 888.54 Russell 2000 299.04 290.00 297.21 236.34 348.00 411.78 430.53 509.61 SNL Superregional Bank Index 349.20 436.07 423.55 436.70 560.75 621.56 625.64 720.46
54 EX-21 5 ex21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF TRUSTCO BANK CORP NY Trustco Bank Federally chartered savings bank 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 6 ex23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 27, 2007, with respect to the consolidated statements of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 2006 and 2005, 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, 2006, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 and the effectiveness of internal control over financial reporting as of December 31, 2006 which reports appear in the December 31, 2006 Annual Report on Form 10-K of TrustCo Bank Corp NY. Our report, with respect to the consolidated statements of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 2006 and 2005, and the consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2006, refers to the Company's adoption of Statement of Financial Accounting Standards No. 158 "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)" as of December 31, 2006, and Staff Accounting Bulletin No. 108 "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" as of January 1, 2006. /s/ KPMG LLP Albany, New York February 28, 2007 EX-24 7 ex24.txt POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY The undersigned persons do hereby appoint Thomas Poitras or Robert T. Cushing as a true and lawful Attorney In Fact for the sole purpose of affixing their signatures to the 2006 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 20th day of February 2007. /s/ Joan Clark - ------------- Notary Public Joan Clark Notary Public, State of New York Qualified in Albany County No. 01CL4822282 Commission Expires November 30, 2010 EX-31 8 ex31ia.txt SECTION 302 CERTIFICATION 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: February 27, 2007 /s/ Robert J. McCormick - ----------------------- Robert J. McCormick President and Chief Executive Officer EX-31 9 ex31ib.txt SECTION 302 CERTIFICATION 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: February 27, 2007 /s/ Robert T. Cushing - --------------------- Robert T. Cushing Executive Vice President and Chief Financial Officer EX-32 10 ex32.txt SECTION 1350 AND 906 CERTIFICATIONS 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, 2006 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 February 27, 2007 -----END PRIVACY-ENHANCED MESSAGE-----