UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended Commission File Number 0-10592 June 30, 2004 TRUSTCO BANK CORP NY (Exact name of registrant as specified in its charter) NEW YORK 14-1630287 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 SARNOWSKI DRIVE, GLENVILLE, NEW YORK 12302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 377-3311 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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes (x) No.( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of Shares Outstanding Class of Common Stock as of July 30,2004 --------------------------- ---------------------- $1 Par Value 74,309,810
TrustCo Bank Corp NY INDEX Part I. FINANCIAL INFORMATION PAGE NO. Item 1. Interim Financial Statements (Unaudited): 2 Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2004 and 2003 Consolidated Statements of Condition as of June 30, 3 2004 and December 31, 2003 Consolidated Statements of Cash Flows for the Six 4 - 5 Months Ended June 30, 2004 and 2003 Notes to Consolidated Interim Financial Statements 6 - 11 Report of Independent Registered Public 12 Accounting Firm Item 2. Management's Discussion and Analysis 13 - 28 Item 3. Quantitative and Qualitative Disclosures About 29 Market Risk Item 4. Controls and Procedures 29 Part II. OTHER INFORMATION Item 1. Legal Proceedings 30 Item 2. Changes in Securities, Use of Proceeds and 30 Issuer Purchases of Equity Securities Item 3. Defaults Upon Senior Securities 30 Item 4. Submissions of Matters to Vote of Security Holders 31 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 32 1
<TABLE> <CAPTION> TRUSTCO BANK CORP NY Consolidated Statements of Income (Unaudited) (dollars in thousands, except per share data) 3 Months Ended 6 Months Ended June 30 June 30 2004 2003 2004 2003 ---- ---- ---- ---- Interest income: <S> <C> <C> <C> <C> Interest and fees on loans $ 18,429 22,722 37,210 47,308 Interest on U. S. Treasuries and agencies 9,892 5,707 20,727 9,094 Interest on states and political subdivisions 2,180 2,950 4,511 5,918 Interest on mortgage-backed securities 657 1,014 1,537 2,005 Interest and dividends on other securities 1,741 870 2,129 2,684 Interest on federal funds sold and other short-term 1,206 1,482 2,400 3,137 investments ------------------------------------------------- Total interest income 34,105 34,745 68,514 70,146 ------------------------------------------------- Interest expense: Interest on deposits: Interest-bearing checking 395 379 785 890 Savings 1,982 2,373 3,905 4,943 Money market deposit accounts 379 508 828 1,061 Time deposits 6,480 6,822 12,883 14,541 Interest on short-term borrowings 201 259 379 606 Interest on long-term debt 2 5 5 11 ------------------------------------------------- Total interest expense 9,439 10,346 18,785 22,052 ------------------------------------------------- Net interest income 24,666 24,399 49,729 48,094 Provision for loan losses 150 300 300 600 ------------------------------------------------- Net interest income after provision for loan losses 24,516 24,099 49,429 47,494 ------------------------------------------------- Noninterest income: Trust department income 1,532 1,573 2,999 2,972 Fees for other services to customers 2,814 2,936 5,295 5,556 Net gain on securities transactions 3,588 2,234 7,774 5,330 Other 441 765 1,028 1,500 ------------------------------------------------- Total noninterest income 8,375 7,508 17,096 15,358 ------------------------------------------------- Noninterest expenses: Salaries and employee benefits 5,185 5,066 10,462 10,314 Net occupancy expense 1,580 1,482 3,504 3,184 Equipment expense 487 688 940 1,914 Professional services 953 777 1,757 1,397 Outsourced services 1,054 1,850 2,177 3,100 Other real estate expenses / (income) (76) (163) (221) (197) Other 2,516 2,879 5,588 5,536 ------------------------------------------------- Total noninterest expenses 11,699 12,579 24,207 25,248 ------------------------------------------------- Income before taxes 21,192 19,028 42,318 37,604 Income taxes 6,821 5,617 13,814 11,001 ------------------------------------------------- Net income $ 14,371 13,411 28,504 26,603 ================================================ Net income per Common Share: - Basic $ 0.193 0.180 0.384 0.358 =============================================== - Diluted $ 0.191 0.178 0.380 0.354 ============================================== See accompanying notes to consolidated interim financial statements. </TABLE> 2
<TABLE> <CAPTION> TRUSTCO BANK CORP NY Consolidated Statements of Condition (Unaudited) (dollars in thousands, except per share data) 6/30/04 12/31/03 ------- -------- ASSETS: <S> <C> <C> Cash and due from banks $ 46,575 56,425 Federal funds sold and other short-term investments 484,433 355,257 ---------------- ---------------- Total cash and cash equivalents 531,008 411,682 ---------------- ---------------- Securities available for sale: U. S. Treasuries and agencies 744,749 863,658 States and political subdivisions 165,203 191,727 Mortgage-backed securities 179,079 66,322 Other 33,235 55,219 ---------------- ---------------- Total securities available for sale 1,122,266 1,176,926 ---------------- ---------------- Loans: Commercial 193,669 193,613 Residential mortgage loans 778,550 783,591 Home equity line of credit 181,302 171,078 Installment loans 13,271 14,365 ---------------- ---------------- Total loans 1,166,792 1,162,647 Less: Allowance for loan losses 48,347 48,739 Unearned income 382 381 ---------------- ---------------- Net loans 1,118,063 1,113,527 ---------------- ---------------- Bank premises and equipment 20,091 20,168 Other assets 57,799 55,816 ---------------- ---------------- Total assets $ 2,849,227 2,778,119 ================ ================ LIABILITIES: Deposits: Demand $ 209,271 197,116 Interest-bearing checking 332,269 334,038 Savings 827,145 780,862 Money market deposit accounts 160,944 159,645 Certificates of deposit (in denominations of $100,000 or more) 174,882 170,423 Other time deposits 789,485 777,726 ---------------- ---------------- Total deposits 2,493,996 2,419,810 Short-term borrowings 106,656 90,608 Long-term debt 141 239 Accrued expenses and other liabilities 33,815 40,700 ---------------- ---------------- Total liabilities 2,634,608 2,551,357 ---------------- ---------------- SHAREHOLDERS' EQUITY: Capital stock par value $1; 100,000,000 shares authorized, and 81,447,650 and 80,711,016 shares issued at June 30, 2004 and December 31, 2003, respectively 81,448 80,711 Surplus 108,144 103,611 Undivided profits 84,297 78,051 Accumulated other comprehensive income: Net unrealized gain on securities available for sale 3,924 21,042 Treasury stock at cost - 7,256,734 and 6,765,119 shares at June 30, 2004 and December 31, 2003, respectively (63,194) (56,653) ---------------- ---------------- Total shareholders' equity 214,619 226,762 ---------------- ---------------- Total liabilities and shareholders' equity $ 2,849,227 2,778,119 ================ ================ See accompanying notes to consolidated interim financial statements. </TABLE> 3
<TABLE> <CAPTION> TRUSTCO BANK CORP NY Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS SIX MONTHS ENDED June 30, 2004 2003 ---------------- ---------------- Cash flows from operating activities: <S> <C> <C> Net income $ 28,504 26,603 ---------------- ---------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 943 1,362 Net loss on sales of bank premises and equipment 55 --- Provision for loan losses 300 600 Net gain on securities transactions (7,774) (5,330) Deferred tax expense (benefit) 1,264 (835) (Increase)/decrease in taxes receivable (8,969) 9,496 Decrease/(increase) in interest receivable 481 (1,448) Decrease in interest payable (191) (530) Decrease in other assets 16,573 1,124 Decrease in accrued expenses and other liabilities (6,725) (2,796) ---------------- ---------------- Total adjustments (4,043) 1,643 ---------------- ---------------- Net cash provided by operating activities 24,461 28,246 ---------------- ---------------- Cash flows from investing activities: Proceeds from sales and calls of securities available for sale 836,549 398,039 Purchase of securities available for sale (803,126) (704,548) Proceeds from maturities of securities available for sale 561 2,366 Net (increase)/decrease in loans (4,836) 142,338 Proceeds from sales of bank premises and equipment 23 --- Proceeds from sales of real estate owned --- 86 Capital expenditures (944) (1,066) ---------------- ---------------- Net cash provided by (used in) investing activities 28,227 (162,785) ---------------- ---------------- Cash flows from financing activities: Net increase in deposits 74,186 61,314 Net increase/(decrease) in short-term borrowings 16,048 (69,948) Repayment of long-term debt (98) (93) Proceeds from exercise of stock options 5,270 4,417 Proceeds from sale of treasury stock 3,893 3,786 Purchase of treasury stock (10,434) (14,230) Dividends paid (22,227) (22,687) ---------------- ---------------- Net cash provided by (used in) financing activities 66,638 (37,441) ---------------- ---------------- Net increase/(decrease) in cash and cash equivalents 119,326 (171,980) Cash and cash equivalents at beginning of period 411,682 606,082 ---------------- ---------------- Cash and cash equivalents at end of period $ 531,008 434,102 ================ ================ See accompanying notes to consolidated interim financial statements. (Continued) </TABLE> 4
<TABLE> <CAPTION> TRUSTCO BANK CORP NY Consolidated Statements of Cash Flows Continued (Unaudited) (dollars in thousands) SUPPLEMENTAL INFORMATION: SIX MONTHS ENDED June 30, 2004 2003 ---------------- ---------------- <S> <C> <C> Interest paid $ 18,976 22,582 Income taxes paid 3,384 2,385 Increase/(decrease) in dividends payable 31 (454) Increase/(decrease) in net unrealized gain on securities available for sale (pre-tax) (28,450) 1,524 Change in deferred tax effect on net unrealized gain on securities available for sale 11,332 (283) See accompanying notes to consolidated interim financial statements. </TABLE> 5
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (Unaudited) 1. Financial Statement Presentation In the opinion of the management of TrustCo Bank Corp NY (the Company), the accompanying unaudited Consolidated Interim Financial Statements contain all adjustments necessary to present fairly the financial position as of June 30, 2004, the results of operations for the three months and six months ended June 30, 2004 and 2003, and cash flows for the six months ended June 30, 2004 and 2003. The accompanying Consolidated Interim Financial Statements should be read in conjunction with the TrustCo Bank Corp NY year-end Consolidated Financial Statements, including notes thereto, which are included in TrustCo Bank Corp NY's 2003 Annual Report to Shareholders on Form 10-K. 2. Earnings Per Share A reconciliation of the component parts of earnings per share for the three month and six month periods ended June 30, 2004 and 2003 follows: <TABLE> <CAPTION> Weighted Average Shares (In thousands, Net Outstanding Per Share except per share data) Income Amounts ----------------- -------------------------- ------------------- For the quarter ended June 30, 2004: Basic EPS: Net income available to <S> <C> <C> <C> common shareholders.............. $14,371 74,354 $0.193 Effect of Dilutive Securities: Stock options............................. ------ 741 (0.002) ----------------- -------------------------- ------------------- Diluted EPS $14,371 75,095 $0.191 ================= ========================== =================== For six months ended June 30, 2004: Basic EPS: Net income available to common shareholders.............. $28,504 74,241 $0.384 Effect of Dilutive Securities: Stock options............................. ------- 844 (0.004) ----------------- -------------------------- ------------------- Diluted EPS $28,504 75,085 $0.380 ================= ========================== =================== There were no antidilutive stock options as of June 30, 2004. </TABLE> 6
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (unaudited) continued 2. Earnings Per Share (continued) <TABLE> <CAPTION> Weighted Average Shares (In thousands, Net Outstanding Per Share except per share data) Income Amounts ----------------- -------------------------- ------------------- For the quarter ended June 30, 2003: Basic EPS: Net income available to <S> <C> <C> <C> common shareholders.............. $13,411 74,369 $0.180 Effect of Dilutive Securities: Stock options............................. ------ 868 (0.002) ----------------- -------------------------- ------------------- Diluted EPS $13,411 75,237 $0.178 ================= ========================== =================== For six months ended June 30, 2003: Basic EPS: Net income available to common shareholders.............. $26,603 74,309 $0.358 Effect of Dilutive Securities: Stock options............................. ------- 901 (0.004) ----------------- -------------------------- ------------------- Diluted EPS $26,603 75,210 $0.354 ================= ========================== =================== There were 793,250 stock options which were antidilutive as of June 30, 2003 and were therefore excluded from the June 30, 2003 calculations. </TABLE> 7
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (unaudited) continued 3. Stock Option Plans The Company has stock option plans for officers and directors and has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123), as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure". The Company's stock option plans are accounted for in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and as such, no compensation expense has been recorded for these plans. Had compensation expense for the Company's stock option plans been determined consistent with Statement 123, the Company's net income and earnings per share for the periods ended June 30, 2004 and 2003 would have been as follows: (dollars in thousands except per share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 -------------------- ---------------------- Net income: <S> <C> <C> <C> <C> As reported $14,371 13,411 28,504 26,603 Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (165) (231) (331) (463) ------------------------- -------------------------- Pro forma net income $14,206 13,180 28,173 26,140 -------------------------- --------------------------- Earnings per share: Basic - as reported $ .193 .180 .384 .358 Basic - pro forma .191 .177 .379 .352 Diluted - as reported .191 .178 .380 .354 Diluted - pro forma .189 .175 .375 .348 The weighted average fair value of each option as of the grant date was estimated using the Black-Scholes pricing model, and calculated in accordance with Statement 123. No options were granted in the first six months of 2004. </TABLE> 8
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (unaudited) continued 4. Comprehensive Income (Loss) Comprehensive income (loss) for the three month periods ended June 30, 2004 and 2003 was $(6,720,000) and $18,057,000, respectively, and $11,386,000 and $27,844,000 for the six month periods ended June 30, 2004 and 2003, respectively. The following summarizes the components of other comprehensive income (loss): <TABLE> <CAPTION> (dollars in thousands) Three months ended June 30 2004 2003 ---------------------------------------- Unrealized holding gains (losses) arising during period, net of tax (pre-tax loss of $31,471 for 2004 and pre-tax gain of $9,917 for 2003) <S> <C> <C> <C> $(18,933) 5,997 Reclassification adjustment for net gain realized in net income during the period, net of tax (pre-tax gains of $3,588 for 2004 and $2,234 for 2003) (2,158) (1,351) -------------------------------------- Other comprehensive income (loss) $(21,091) 4,646 ======================================= (dollars in thousands) Six months ended June 30 2004 2003 Unrealized holding gains (losses) arising during period, net of tax (pre-tax loss of $20,676 for 2004 and pre-tax gain of $6,854 for 2003) $(12,442) 4,436 Reclassification adjustment for net gain realized in net income during the period, net of tax (pre-tax gains of $7,774 for 2004 and $5,330 for 2003) (4,676) (3,195) --------------------------------------- Other comprehensive income (loss) $(17,118) 1,241 ======================================= </TABLE> 9
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (unaudited) continued 5. Benefit Plans The table below outlines the component's of the Company's net periodic expense (benefit) recognized during the periods ended June 30, 2004 and 2003 for its pension and other postretirement benefit plans: <TABLE> <CAPTION> Components of Net Periodic Expense/(Benefit) for the three months ended June 30, Pension Benefits Other Postretirement Benefits 2004 2003 2004 2003 ---------------------------- ----------------------------- <S> <C> <C> <C> <C> Service cost $ 216 174 1 1 Interest cost 410 352 8 12 Expected return on plan assets (348) (416) (58) (94) Amortization of prior service cost (credit) 38 6 (114) (101) Amortization of net actuarial gain - - - (11) ---------------------------- ----------------------------- Net periodic expense/(benefit) $ 316 116 (163) (193) ============================ ============================== Components of Net Periodic Expense/(Benefit) for the six months ended June 30, Pension Benefits Other Postretirement Benefits 2004 2003 2004 2003 ----------------------- ------------------------------ Service cost $ 432 348 2 2 Interest cost 820 704 16 24 Expected return on plan assets (859) (832) (247) (188) Amortization of prior service cost (credit) 76 12 (228) (202) Amortization of net actuarial gain - - - (22) ------------------------ ------------------------------- Net periodic expense/(benefit) $ 469 232 (457) (386) ========================= =============================== </TABLE> 10
TrustCo Bank Corp NY Notes to Consolidated Interim Financial Statements (unaudited) continued 5. Benefit Plans (Continued) Contributions The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2003 , that it did not expect to make any contributions to its pension and other postretirement benefit plans in 2004. As of June 30, 2004, no contributions have been made. The Company presently anticipates that, in accordance with IRS limitations and accounting standards, it will not make any contributions in 2004. 6. Guarantees The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Company to 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 $ 4.2 million at June 30, 2004 and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of twelve 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 June 30, 2004 was insignificant. 11
Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders TrustCo Bank Corp NY: We have reviewed the consolidated statement of condition of TrustCo Bank Corp NY and subsidiaries (the Company) as of June 30, 2004, the related consolidated statements of income for the three month and six month periods ended June 30, 2004 and 2003, and the related consolidated statements of cash flows for the six month periods ended June 30, 2004 and 2003. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with standards established by the Public Company Accounting Oversight Board (United States), the consolidated statement of condition of TrustCo Bank Corp NY and subsidiaries as of December 31, 2003, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 20, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of condition as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived. /s/KPMG LLP - ------------------------------ KPMG LLP Albany, New York July 12, 2004 12
TrustCo Bank Corp NY Management's Discussion and Analysis June 30, 2004 The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo Bank Corp NY ("TrustCo" or "Company") during the three month and six month periods ended June 30, 2004, with comparisons to 2003 as applicable. Interest income, net interest income and net interest margin are presented on a fully taxable equivalent basis in this discussion. The consolidated interim financial statements and related notes, as well as the 2003 Annual Report to Shareholders should be read in conjunction with this review. Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation. Forward-looking Statements Statements included in this review and in future filings by TrustCo with the Securities and Exchange Commission, in TrustCo's press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect TrustCo's actual results, and could cause TrustCo's actual financial performance to differ materially from that expressed in any forward-looking statement: (1) credit risk, (2) interest rate risk, (3) competition, (4) changes in the regulatory environment, and (5) changes in general business and economic trends. The 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. Following this discussion is the table "Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential" which gives a detailed breakdown of TrustCo's average interest earning assets and interest bearing liabilities for the three months and six months ended June 30, 2004 and 2003. Overview TrustCo recorded net income of $14.4 million, or $0.191 of diluted earnings per share for the three months ended June 30, 2004, as compared to net income of $13.4 million or $0.178 of diluted earnings per share in the same period in 2003. For the six month period ended June 30, 2004, TrustCo recorded net income of $28.5 million, or $0.380 of diluted earnings per share, as compared to $26.6 million, or $0.354 of diluted earnings per share for the comparable period in 2003. 13
TrustCo Bank Corp NY Management's Discussion and Analysis - continued June 30, 2004 The primary factors accounting for the year to date increases are: ` A $112.7 million increase in the average balance of interest earning assets from $2.60 billion for the six-month period ended June 30, 2003 to $2.71 billion for the six-month period ended June 30, 2004, ` A reduction in the provision for loan losses from $600 thousand in 2003 to $300 thousand in 2004, ` An increase in total noninterest income from $15.4 million in 2003 to $17.1 million in 2004. Within this category, securities transactions resulted in $5.3 million of net gains in 2003 compared to $7.8 million in 2004, and ` A reduction in total noninterest expense from $25.2 million for the six months ended June 30, 2003 to $24.2 million for the comparable period in 2004. Partially offsetting these year to date positive factors was a decrease in net interest margin from 3.98% in 2003 to 3.87% in 2004. Asset/Liability Management The Company strives to generate superior earnings capabilities through a mix of core deposits, funding a prudent mix of earning assets. This is, in its most fundamental form, the essence of asset/liability management. Additionally, TrustCo attempts to maintain adequate liquidity and reduce the sensitivity of net interest income to changes in interest rates to an acceptable level while enhancing profitability both on a short-term and long-term basis. The following Management's Discussion and Analysis for the second quarter and first six months of 2004 compared to the comparable periods in 2003 is greatly affected by the change in interest rates in the marketplace in which TrustCo competes. Included in the 2003 Annual Report to Shareholders is a description of the effect interest rates had on the results for the year 2003 compared to 2002. Most of the same market factors discussed in the 2003 Annual Report also had a significant impact on 2004 results. Interest rates have remained at low levels during the second quarter of 2004 and for the six months ended June 30,2004. The federal funds rate was 1.00% for most of the first half of 2004 and was increased to 1.25% on June 30, 2004. The federal funds rate has a significant effect on the general marketplace and impacts the rates earned on loans and investments along with rates paid on deposits. As described in this management's discussion and analysis, the effect of this prolonged period of low interest rates has caused the average yield on the interest earning assets to decrease from 5.70% for the first half of 2003 to 5.27% for the comparable period in 2004, a reduction of 43 basis points. Along with this reduction in the yields on assets, there has been a corresponding decrease in the rates paid on interest bearing liabilities from 1.97% in 2003 to 1.60% for the first half of 2004. The net effect of these changes has resulted in a net interest margin of 3.87% on a year to date basis for 2004 compared to 3.98% for 2003. 14
During the second quarter of 2004 market interest rates on securities and loans have increased in anticipation of increases in the federal funds rate. As an example, the 10 year treasury bond yielded 3.84% at the end of the first quarter of 2004 and has increased 74 basis points to 4.58% as of June 30, 2004. These changes have had a significant impact on the market value of the securities available for sale portfolio. At March 31, 2004 the net unrealized gain in the securities available for sale portfolio was $41.6 million as compared to $ 6.5 million at June 30, 2004. This increase in market interest rates has significant implications on the fair value of assets and liabilities on the balance sheet along with net interest income implications as the Company reinvests excess liquidity at these higher interest rates. Through early August there has not yet been a noticeable corresponding increase in rates on interest bearing liabilities. Earning Assets Total average balance of interest earning assets increased from $2.62 billion for the second quarter of 2003 to $2.75 billion for the second quarter of 2004 with an average yield of 5.58% in 2003 and 5.16% in 2004. Income on earning assets decreased during this same time-period from $36.5 million in 2003 to $35.5 million in 2004. For the six month period ended June 30, 2004, the average balance of interest earning assets was $2.71 billion, an increase of $112.7 million from the comparable period in 2003 of $2.60 billion. The average yield on interest earning assets was 5.70% for 2003, compared to 5.27% in 2004. The increase in the average balance of earning assets did not offset the decrease in the yield earned on these assets, thereby resulting in a reduction in interest income of $2.6 million to $71.2 million for the six months of 2004, compared to $73.8 million for the six months of 2003. Loans The average balance of loans for the second quarter was $1.16 billion in 2004 and $1.31 billion in 2003. The yield on loans decreased from 6.96% in 2003 to 6.35% in 2004. The combination of the lower average balances and the lower rates resulted in a decrease in the interest income on loans by $4.3 million. For the six-month period ended June 30, 2004, the average balance in the loan portfolio was $1.16 billion compared to $1.35 billion for the comparable period in 2003. The average yield decreased from 7.04% in 2003 to 6.41% in 2004. The decrease in the average balance of loans outstanding and the impact of the decrease in the yield resulted in total interest income of $37.2 million in 2004 compared to $47.3 million in 2003. 15
During the second quarter and first half of 2004, the balance of the loan portfolio decreased primarily as a result of residential mortgages, though changes were also noted in other loan areas. The average balance of residential mortgage loans for the first half of 2004 was $779.8 million compared to $982.7 million in 2003, a decrease of 20.6%. The average yield on residential mortgage loans decreased by 51 basis points compared to 2003. The average balance of residential mortgage loans for the second quarter of 2004 was $777.4 million compared to $939.5 million for the comparable period in 2003. The average yield decreased to 6.72% for the second quarter of 2004 compared to 7.26% for 2003. TrustCo actively markets the residential mortgage loan products within its market territory. Mortgage loan rates are affected by a number of factors including the prime rate, the federal funds rate, rates set by competitors and secondary market participants. As noted previously, market interest rates have dropped significantly as a result of national economic policy in the United States. During this period of low interest rates, TrustCo aggressively marketed the unique aspects of its loan products thereby attempting to create a differentiation from other lenders. These unique aspects include extremely low closing costs, fast turnaround time on loan approvals, no escrow or mortgage insurance requirements and the fact that the Company holds these loans in portfolio and does not sell them into the secondary markets. However, the decrease in the residential mortgage loan portfolio reflects the results of historical low interest rates in the residential loan area and the desire by loan customers to obtain these historic low rates. In light of TrustCo's decision to hold loans in portfolio, management made the decision to offer loans at slightly higher interest rates compared to the local competition. The end result was the decline in balances in this portfolio from a combination of lower originations and higher prepayments from refinancings with other lenders. TrustCo was somewhat successful in its marketing efforts with respect to the unique aspects of its loan products, however, these successes were not enough to offset the amount of refinancings as a result of customers looking for absolutely the lowest interest rates being offered in the marketplace. Though there is debate among nationally recognized economists, the general tenor of the national economy is for improvement and increases in long-term interest rates. Consequently the significant amount of refinancing that has occurred may be substantially completed with only residual effects into the second half of 2004. Assuming a rise in long-term interest rates, the Company would anticipate that the unique features of its loan product will once again attract customers in the residential mortgage loan area. 16
TrustCo Bank Corp NY Management's Discussion and Analysis - continued June 30, 2004 The impact of the prolonged period of decreases in the benchmark interest rate indexes (prime rate, federal funds rate, etc.) is apparent in the decrease in the yield earned in the commercial loan, home equity loan and consumer loan portfolios. The average yields earned on these loan types in 2004 were 55 bp, 28 bp andr 162 bp respectively, less than the average yields earned in the first six months of 2003. The average balance of home equity lines of credit increased to $179.3 million in the second quarter of 2004 compared to $150.9 million in the comparable period in 2003. The average yield during this time period was 3.88% in 2004 and 4.10% in 2003. The six month results reflected these same trends with an average balance of $146.6 million in 2003 and $176.8 million in 2004. The average yield for the six months of 2004 was 3.88% and 4.16% for 2003. The increase in the average balance of home equity lines of credit reflects consumers' desire to obtain the lowest cost financing vehicles available. Trustco's home equity line of credit is at the prime rate during an introductory period and then floats with prime over the life of the line. Closing costs are waived for consumers so long as the line remains active and utilized for a set period of time. Securities Available for Sale During the second quarter of 2004, the average balance of securities available for sale was $1.09 billion with a yield of 5.80%, compared to $832.5 million for the second quarter of 2003 with a yield of 5.89%. The combination of the increase in average balance partially offset by the decrease in the average yield caused an increase in interest income on securities available for sale of approximately $3.6 million between the second quarter of 2004 and 2003. The six-month results reflect similar trends. The total average balance of securities available for sale during the six months of 2004 was $1.06 billion with an average yield of 5.97% compared to an average balance for 2003 of $741.3 million with a yield of 6.30%. Within the portfolio of securities available for sale, there was a $246.2 million increase in the average balance of US Treasury and agency obligations from $479.2 million in the second quarter of 2003 to $725.4 million for the comparable period in 2004. The yield on this category of securities increased from 4.76% in 2003 to 5.45% in 2004. The increased balances of securities available for sale was in response to the historically low yield available in the federal funds marketplace, increased cash flow as a result of loan refinancing and deposit inflows. Though the investment yields on 2004 purchases are overall lower than the yield earned on the existing securities portfolio, the new investments provide additional interest income and help to offset the loss of interest income from other areas. Virtually all of the new purchases of US Treasury and agency obligations were callable agency bonds issued by Freddie Mac, FNMA and the FHLB. 17
These bonds have call features that allow the issuer to redeem the bonds at predetermined times. The six month balance for US Treasury and agency obligations increased from $365.0 million in 2003 to $735.5 million in 2004. The yield was 5.64% in 2004 as compared to 4.99% in 2003. The other securities category also increased during the second quarter of 2004 to an average balance of $146.2 million as compared to $63.7 million for the comparable period in 2003. This increase was due to the purchase of approximately $128.2 million of collateralized mortgage obligations during 2004. All of the collateralized mortgage obligations are government agency issued bonds with relatively short anticipated cash flow lives. As previously noted, during the second half of 2003 and into 2004 management decided to invest some of the additional cash flows coming from the loan portfolio refinancings into the securities available for sale portfolio so as to provide interest income and as a means of utilizing these funds other than in overnight investments. The securities purchased during this time period have been primarily federal agency bonds consistent with the Company's past practices. While this strategy provides the Company with additional interest income over the federal funds rate, it does subject these assets to a greater degree of interest rate risk. General market interest rate increases impact the market value of the securities available for sale portfolio thereby creating a reduction in the overall portfolio's unrealized gain position and lowering the Company's accumulated other comprehensive income (a component of shareholders' equity). Federal Funds Sold and Other Short-Term Investments During the second quarter of 2004, the average balance of federal funds sold and other short-term investments was $496.2 million with a yield of 0.98%, compared to the average balance for the three month period ended June 30, 2003 of $475.5 million with an average yield of 1.25%. The $20.8 million increase in the average balance, combined with the 27 basis points decrease in the average yield, resulted in total interest income on federal funds sold and other short-term investments of $1.2 million for 2004 compared to $1.5 million for 2003. During the six-month period ended June 30, 2004, the average balance of federal funds sold and other short-term investments was $486.1 million with a yield of 0.99% compared to an average balance of $507.8 million in 2003 with an average yield of 1.25%. Changes in the yield on the federal funds and other short-term investment portfolios resulted primarily from changes in the target rate set of the Federal Reserve Board for federal funds sold. That rate was increased at the end of June 2004 from 1.00% to 1.25%. 18
Funding Opportunities TrustCo utilizes various funding sources to support its earning asset portfolio. The vast majority of the Company's funding comes from traditional deposit vehicles such as savings, interest bearing checking and time deposit accounts. During the quarter, total average interest bearing liabilities were $2.38 billion for 2004 and $2.26 billion for 2003. The rate paid on total interest bearing liabilities was 1.59% for the second quarter of 2004 and 1.84% for 2003. Total interest expense for the second quarter decreased approximately $906 thousand to $9.4 million for 2004 compared to $10.3 million for 2003. Similar changes in interest bearing liabilities were noted for the six-month period. Total interest bearing liabilities were $2.35 billion for the six-month periods ended June 30, 2004 and $2.25 billion for 2003. The rate paid on total interest bearing liabilities was 1.60% for 2004 and 1.97% for 2003 and total interest expense was $18.8 million in 2004 and $22.1 million in 2003. Demand deposit average balances increased $20.6 million for the second quarter of 2004 compared to the second quarter of 2003. Demand deposits averaged $208.6 million in 2004 and $188.0 million in 2003. On a year to date basis, average demand deposits were $201.8 million in 2004 compared to $180.7 million in 2003. Interest bearing deposit balances have increased from an average of $2.12 billion for the first six months of 2003 to $2.25 billion for 2004. Each of the deposit categories has also increased with the most notable being the increase in the average balance of savings accounts which averaged $743.2 million in 2003 and $798.2 million in 2004. TrustCo has experienced a deposit inflow primarily as a result of customers moving funds back into the banking system from the stock and bond market and from TrustCo's new branch openings. The average balance of certificates of deposit and other time deposits increased from $911.5 million for the six-month period ended June 30, 2003 to $956.9 million for the comparable period in 2004. The average yield on these deposits decreased from 3.22% in 2003 to 2.71% in 2004. The second quarter results reflect similar trends as noted for the six-month results. Interest bearing deposits increased from an average of $2.14 billion for the second quarter of 2003 to $2.27 billion in 2004. The average yield paid on these deposits was 1.89% in 2003 and 1.64% in 2004. Savings account balances increased from an average of $761.0 million for the second quarter of 2003 to $811.8 million for the comparable period in 2004. Certificates of deposit and other time deposits also increased during the quarter from an average of $911.6 million in 2003 to $961.6 million in 2004. 19
In addition to customers moving funds back into the banking market, TrustCo has also attracted customers as a result of the branch expansion program. New branches opened since 2003 are continuing to attract customers which has added to the deposit increases. Short-term borrowings for the quarter averaged $112.1 million in 2004 compared to $124.4 million in 2003. The average yield decreased during this time period from 0.83% to 0.72% for the second quarter of 2004. On a year to date basis, short term borrowings averaged $105.9 million for the six months ended June 30, 2004 compared to $136.3 million for the comparable period in 2003. The average yield was 0.72% for the six months of 2004 and 0.90% for 2003. Net Interest Income Taxable equivalent net interest income decreased by $114 thousand to $26.0 million for the second quarter of 2004. The net interest spread decreased 17 basis points between 2003 and 2004 and the net interest margin decreased by 22 basis points. Taxable equivalent net interest income for the first six months of 2004 was $52.5 million, an increase of approximately $690 thousand over the $51.8 million for the first six months of 2003. Net interest spread decreased 6 basis points to 3.67% and net interest margin decreased 11 basis points to 3.87% for the six-month period ended June 30, 2004, compared to the six-month period ended June 30, 2003. Nonperforming Assets Nonperforming assets include nonperforming loans, which are those loans in a nonaccrual status, loans that have been restructured, and loans past due three payments or more, and still accruing interest. Also included in the total of nonperforming assets are foreclosed real estate properties, which are categorized as real estate owned. Impaired loans are considered to be those commercial and commercial real estate loans in a nonaccrual status and loans restructured since January 1, 1995, when the accounting standards required the identification, measurement and reporting of impaired loans. The following will describe the nonperforming assets of TrustCo as of June 30, 2004. 20
TrustCo Bank Corp NY Management's Discussion and Analysis - continued June 30, 2004 Nonperforming loans: Total nonperforming loans were $2.9 million at June 30, 2004, a decrease from the $3.9 million of nonperforming loans at June 30, 2003. There were no nonaccrual loans at June 30, 2004 and 2003. Restructured loans were $2.9 million at June 30, 2004 compared to $3.9 million at June 30, 2003. There were no loans past due three payments or more and still accruing interest at June 30, 2004 and 2003. All of the $2.9 million of nonperforming loans as of June 30, 2004 are restructured residential real estate or retail consumer loans. The vast majority of nonperforming loans in the past were concentrated in the commercial and commercial real estate portfolios. Since 2000, there has been a continued shifting in the components of Trustco's problem loans and chargeoffs from commercial and commercial real estate to the residential real estate and retail consumer loan portfolios. Contributing factors to this shift include: ` The overall emphasis within TrustCo for residential real estate originations, ` The relatively weak economic environment in the upstate New York territory, and ` The reduction in real estate values in selected sections of TrustCo's market area that has occurred since the middle of the 1990's, thereby causing a reduction in the collateral that supports the real estate loans. Consumer defaults and bankruptcies have increased over the last several years and this has lead to an increase in defaults on loans. TrustCo strives to identify borrowers that are experiencing financial difficulties and to work aggressively with them to minimize losses or exposures. Total impaired loans at June 30, 2004 of $2.7 million, consisted of restructured residential loans. During the first six months of 2004, there have been $61 thousand of commercial loan charge offs, $192 thousand of consumer loan charge offs and $3.3 million of mortgage loan charge offs as compared with $134 thousand of commercial loan charge offs, $290 thousand of consumer loan charge offs and $5.3 million of mortgage loan charge offs in the first six months of 2003. Recoveries during the first six-month periods have been $2.8 million in 2004 and $2.0 million in 2003. Real estate owned: There was no real estate owned as of June 30, 2004 and 2003. Allowance for loan losses: The balance of the allowance for loan losses is maintained at a level that is, in management's judgment, representative of the amount of the risk inherent in the loan portfolio. 21
At June 30, 2004, the allowance for loan losses was $48.3 million, which represents a decrease from the $48.7 million in the allowance at December 31, 2003. The allowance represents 4.14% of the loan portfolio as of June 30, 2004 compared to 3.88% at June 30, 2003. The provision charged to expense was $150 thousand for the second quarter of 2004 and $300 thousand for the second quarter of 2003. For the six-month periods, the provision charged to expense was $300 thousand for 2004 and $600 thousand for 2003. In deciding on the adequacy of the allowance for loan losses, management reviews the current nonperforming loan portfolio as well as loans that are past due and not yet categorized as nonperforming for reporting purposes. Also, there are a number of other factors that are taken into consideration, including: ` The magnitude and nature of the recent loan charge offs and the movement of charge offs to the residential real estate loan portfolio, ` The change in the loan portfolio and the implication that has in relation to the economic climate in the bank's business territory, ` Changes in underwriting standards in the competitive environment in which TrustCo operates, ` Significant growth in the level of losses associated with bankruptcies and the time period needed to foreclose, secure and dispose of collateral, and ` The relatively weak economic environment in the upstate New York territory combined with declining real estate prices. In the Company's primary market area, consumer bankruptcies and defaults in general have risen significantly since the 1990's. This trend appears to be continuing as a result of economic strife and the relative ease of access by consumers to additional credit. Job growth in the upstate New York area has been modest to declining and there continues to be a shifting of higher paying jobs in manufacturing and government to lower paying service jobs. Management continues to monitor these and other asset quality trends in the review of allowance adequacy. Liquidity and Interest Rate Sensitivity TrustCo seeks to obtain favorable sources of funding and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. TrustCo's earnings performance and strong capital position enable the Company to raise funds easily in the marketplace and to secure new sources of funding. The Company actively manages its liquidity through target ratios established under its liquidity policies. Continual monitoring of both historical and prospective ratios allows TrustCo to employ strategies necessary to maintain adequate liquidity. Management has also defined various degrees of adverse liquidity situations, which could potentially occur, and has prepared appropriate contingency plans should such a situation arise. 22
Noninterest Income Total noninterest income for the three months ended June 30, 2004 was $8.4 million, an increase of $867 thousand from the comparable period in 2003. During the 2004 period, the Company recorded net securities gains of $3.6 million compared to $2.2 million for the comparable period in 2003. Excluding these securities transactions, noninterest income decreased from $5.3 million in the second quarter of 2003 to $4.8 million for the comparable period in 2004. Total noninterest income was $17.1 million for the six months of 2004 compared to $15.4 million for 2003. Excluding net securities gains of $7.8 million and $5.3 million, in the six month period ended June 30, 2004 and 2003, respectively, the balances for 2004 and 2003 would have been $9.3 million and $10.0 million, respectively. Net securities transactions have been significant for both the six-month and quarterly results in 2004 and 2003. The level of these transactions reflects management's decision to liquidate certain investments as interest rates were at historically low levels and therefore the gains on security sales were high. These sales provide the Company with additional liquidity for potential reinvestment at higher interest rates later in 2004. Management also has begun liquidating certain of the equity investments that had accumulated over the last several years as part of the expansion program to acquire other companies. Trust department income decreased by $41 thousand to $1.5 million for the second quarter of 2004. The reduction in trust fee income is the result of a decrease in assets under management from $961 million as of March 31, 2004 to $945 million as of June 30, 2004. Service fees and other income are down between 2004 and 2003 due primarily to loan volume and refinancing activities. Noninterest Expenses Total noninterest expense for the second quarter of 2004 and 2003 was $11.7 million and $12.6 million, respectively. For the six months ended June 30, 2004 and 2003, total noninterest expense was $24.2 million and $25.2 million, respectively. Salaries and employee benefits cost increased from $5.1 million for the second quarter of 2003 to $5.2 million for the comparable period in 2004. The increase in salaries and employee benefits is the result of additional personnel due to the branch expansion program and normal employee turnover. 23
Similar increases in salaries and benefits were also noted for the six month period ended June 30, 2004 compared to 2003. Total salaries and employee benefits were $10.5 million for 2004 and $10.3 million for 2003. Net occupancy expense increased $98 thousand for the second quarter of 2004 compared to 2003 due primarily to the new branch operations and the cost of utilities. The TrustCo branch expansion program added two new offices during the first six months of 2003 and five additional sites in the second half of 2003. No new locations were opened during the first half of 2004, however approximately seven locations are under development in the Capital District, downstate New York and the Orlando, Florida regions and are expected to open prior to year-end 2004. Equipment expense decreased approximately $201 thousand during the second quarter of 2004 compared to 2003 as a result of reduced computer expense due to contracts not being renewed in 2004 as a result of the 2002 computer software conversion. On a year to date basis, equipment expense decreased by $974 thousand to $940 thousand due to this non-renewal and the write-off in 2003 of equipment and software no longer utilized. Professional service expenses for the second quarter of 2004 were $953 thousand, an increase of $176 thousand from the comparable period in 2003. On a year to date basis, professional service expenses were $1.8 million in 2004 compared to $1.4 million in 2003. Included in the 2004 expense accounts were additional fees paid for consultants to assist in the upcoming 2004 computer software conversion. Those expenses were not incurred in 2003. Outsourced services decreased from $1.9 million in the second quarter of 2003 to $1.1 million for the second quarter of 2004. On a year to date basis, outsourced services were $2.2 million in 2004 compared to $3.1 million in 2003. These costs are for data processing, item processing and certain back room operations that were transferred to a third party vendor in the fourth quarter of 2003. The decrease in outsourced services expense between 2003 and 2004 was the elimination of one item of outsourced service in the latter part of 2003 that was brought back in-house. There was a reduction in the fees paid to the third party services as a result of this change, however the additional work was absorbed by the existing TrustCo employees. 24
Income Taxes In the second quarter of 2004 and 2003, TrustCo recognized income tax expense of $6.8 million and $5.6 million, respectively. This resulted in an effective tax rate of 32.2% for 2004 and 29.5% for 2003. For the six months of 2004, total income tax expense was $13.8 million compared to $11.0 million for 2003. This resulted in an effective tax rate of 32.6% for 2004 and 29.3% for 2003. The increase in effective tax rates during 2004 is primarily due to a reduction in the proportion of tax exempt income to total pre-tax income as compared to 2003. Capital Resources Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios. New issues of equity securities have not been required since traditionally, most of its capital requirements are met through the capital retention. Total shareholders' equity at June 30, 2004 was $214.6 million, a decrease of $12.1 million from the year-end 2003 balance of $226.8 million. The change in shareholders' equity between year-end 2003 and June 30, 2004 primarily reflects net income retained by TrustCo ($ 6.2 million), the proceeds from shares issued upon the exercise of stock options ($5.3 million), a $17.1 million decrease in accumulated other comprehensive income and a $6.5 million increase in treasury stock. The change in the accumulated other comprehensive income is a result of the reduction in the unrealized appreciation in value of the securities available for sale portfolio. As noted previously, since the end of the first quarter of 2004 there has been a significant increase in the general market interest rates, which have therefore caused a reduction in the market value of these securities. TrustCo declared dividends of $0.300 per share during the first six months of 2004 and 2003. These resulted in a dividend payout ratio of 78.1% in 2004 and 83.6% in 2003. The Company achieved the following capital ratios as of June 30, 2004 and 2003. June 30, Minimum Regulatory 2004 2003 Guidelines -------------------------------------------- Tier 1 risk adjusted capital 16.61% 16.33 4.00 Total risk adjusted capital 17.89 17.62 8.00 25
TrustCo Bank Corp NY Management's Discussion and Analysis - continued June 30, 2004 In addition, at June 30, 2004 and 2003, the consolidated equity to total assets ratio (excluding the mark to market effect of securities available for sale) was 7.41% and 7.76%, respectively, compared to a minimum regulatory guideline of 4.00%. Critical Accounting Policies Pursuant to SEC guidance, management of the Company is encouraged to evaluate and disclose those accounting policies that are judged to be critical policies - those most important to the portrayal of the Company's financial condition and results, and that require management's most difficult subjective or complex judgments. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in the Company's 2003 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. 26
<TABLE> <CAPTION> TrustCo Bank Corp NY Management's Discussion and Analysis STATISTICAL DISCLOSURE I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following table summarizes the component distribution of average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale are calculated using amortized costs for these securities. Included in the balance of shareholders' equity is unrealized appreciation, net of tax, in the available for sale portfolio of $8.4 million in 2004 and $26.8 million in 2003. The subtotals contained In the following table are the arithmetic totals of the items contained in that category. Three 2004 Three 2003 Months Months --------- --- ------- --------- --- -------- --- ------- ------- ---------- -------- ---------- Average Interest Average Average Interest Average Change in Variance Variance Balance Rate Balance Rate Interest Balance Rate (dollars in thousands) Income/ Change Change Expense Assets <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial loans $ 193,113 $ 3,302 6.84% $ 202,690 $ 3,693 7.29% $(391) $(134) $(257) Residential mortgage loans 777,383 13,050 6.72% 939,518 17,041 7.26% (3,991) (3,131) (860) Home equity lines of credit 179,303 1,732 3.88% 150,925 1,540 4.10% 192 857 (665) Installment loans 12,408 354 11.47% 14,220 461 13.04% (107) (57) (50) ----------- ----------- ------ -------- ------- -------- -------- ------- ------ Loans, net of unearned income 1,162,207 18,438 6.35% 1,307,353 22,735 6.96% (4,297) (2,465) (1,832) Securities available for sale: U.S. Treasuries and agencies 725,402 9,892 5.45% 479,208 5,707 4.76% 4,186 4,047 139 Mortgage-backed securities 49,930 657 5.26% 67,223 1,014 6.03% (357) 546 (903) States and political subdivisions 169,126 3,326 7.87% 222,340 4,440 7.99% (1,114) (965) (149) Other 146,219 1,945 5.32% 63,745 1,107 6.95% 838 653 185 ----------- ---------- ------ -------- -------- ------ --------- ------- ------- Total securities available 1,090,677 15,820 5.80% 832,516 12,268 5.89% 3,553 4,281 (728) for sale Federal funds sold and other short-term investments 496,233 1,206 0.98% 475,475 1,482 1.25% (276) (114) (162) ----------- ----------- ------ -------- ------- ------- ------- -------- -------- Total Interest earning 2,749,117 35,464 5.16% 2,615,344 36,485 5.58% (1,020) 1,702 (2,722) assets ------------------- ------------------------------------------------ Allowance for loan losses (49,020) (52,336) Cash and non-interest earning 140,655 153,158 assets ----------- -------- Total assets $ 2,840,752 $ 2,716,166 =========== =========== Liabilities and shareholders' equity Deposits: Interest bearing checking $ 331,312 395 0.48% $ 313,820 379 0.48% 16 141 (125) Money market accounts 166,482 379 0.92% 148,607 508 1.37% (129) 368 (497) Savings 811,822 1,982 0.98% 761,004 2,373 1.25% (391) 1,369 (1,760) Time deposits 961,644 6,480 2.71% 911,604 6,822 3.00% (342) 2,580 (2,922) ----------- -------------------------------- ------------------------------------------------- Total interest bearing deposits 2,271,260 9,236 1.64% 2,135,035 10,082 1.89% (846) 4,458 (5,304) Short-term borrowings 112,124 201 0.72% 124,418 259 0.83% (58) (33) (25) Long-term debt 158 2 5.45% 350 5 5.84% (2) (2) --- ----------- --------------------------------- ------------------------------------------------ Total interest bearing liabilities 2,383,542 9,439 1.59% 2,259,803 10,346 1.84% (906) 4,423 (5,329) ------ ------ ------------------------- Demand deposits 208,612 187,977 Other liabilities 35,065 36,616 Shareholders' equity 213,533 231,770 ----------- -------- Total liab. & shareholders' equity $ 2,840,752 $ 2,716,166 =========== ========== Net interest income 26,025 26,139 (114) (2,721) 2,607 -------- ------- -------------------------- Net interest spread 3.57% 3.74% Net interest margin (net interest Income to total interest earning assets) 3.78% 4.00% Tax equivalent adjustment (1,359) 1,740 ------- -------- Net interest income per book $ 24,666 $ 24,399 ====== ====== </TABLE> 27
<TABLE> <CAPTION> TrustCo Bank Corp NY Management's Discussion and Analysis STATISTICAL DISCLOSURE I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following table summarizes the component distribution of average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale are calculated using amortized costs for these securities. Included in the balance of shareholders' equity is unrealized appreciation, net of tax, in the available for sale portfolio of $15.3 million in 2004 and $27.2 million in 2003. The subtotals contained In the following table are the arithmetic totals of the items contained in that category. Six 2004 Six 2003 Months Months ----------- --- --------- -------- --- ------- ---- -------- ------- ---------- -------- -------- Average Interest Average Average Interest Average Change in Variance Variance Balance Rate Balance Rate Interest Balance Rate (dollars in thousands) Income/ Change Change Expense Assets <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial loans $ 192,755 $ 6,607 6.86% $ 202,121 $ 7,479 7.41% $(872) $(299) $(573) Residential mortgage loans 779,822 26,481 6.79% 982,656 35,889 7.30% (9,408) (7,381) (2,027) Home equity lines of credit 176,841 3,413 3.88% 146,618 3,019 4.16% 394 958 (564) Installment loans 12,571 728 11.65% 14,523 953 13.27% (225) (120) (105) --------- ---------- ------ ---------- ------------------------------------------------- Loans, net of unearned income 1,161,989 37,229 6.41% 1,345,918 47,340 7.04% (10,111) (6,842) 3,269) Securities available for sale: U.S. Treasuries and agencies 735,454 20,727 5.64% 364,981 9,098 4.99% 11,629 11,243 386 Mortgage-backed securities 59,206 1,537 5.19% 63,465 2,005 6.32% (468) 490 (958) States and political subdivisions 174,812 6,884 7.87% 222,643 8,907 8.00% (2,025) (1,754) (271) Other 90,125 2,468 5.48% 90,186 3,335 7.40% (867) (676) (191) ----------- ------------------- -------- ------------------------------------------------ Total securities available for sale 1,059,597 31,616 5.97% 741,275 23,345 6.30% 8,269 9,303 (1,034) Federal funds sold and other short-term investments 486,135 2,400 0.99% 507,836 3,137 1.25% (735) (304) (431) ----------- -------------------- -------- ------------------------------------------------ Total Interest earning assets 2,707,721 71,245 5.27% 2,595,029 73,822 5.70% (2,577) 2,157 (4,734) -------------------- ------------------------------------------------ Allowance for loan losses (49,259) (52,508) Cash and non-interest earning assets 152,798 160,954 ----------- ---------- Total assets $ 2,811,260 $ 2,703,475 =========== =========== Liabilities and shareholders' equity Deposits: Interest bearing checking $ 328,577 785 0.48% $ 316,454 890 0.57% (105) 80 (185) Money market accounts 164,943 828 1.01% 146,388 1,061 1.46% (233) 316 (549) Savings 798,231 3,905 0.98% 743,206 4,943 1.34% (1,038) 1,045 (2,083) Time deposits 956,891 12,883 2.71% 911,526 14,541 3.22% (1,658) 1,922 (3,580) ----------- ---------------------------------- ------------------------------------------------ Total interest bearing deposits 2,248,642 18,401 1.65% 2,117,574 21,435 2.04% (3,034) 3,363 (6,397) Short-term borrowings 105,885 379 0.72% 136,296 606 0.90% (227) (129) (98) Long-term debt 182 5 5.55% 373 11 5.89% (6) (6) --- ----------- --------------------------------- ------------------------------------------------ Total interest bearing liabilities 2,354,709 18,785 1.60% 2,254,243 22,052 1.97% (3,267) 3,228 (6,495) ------ ------ ---------------------------- Demand deposits 201,832 180,728 Other liabilities 32,751 36,163 Shareholders' equity 221,968 232,341 ----------- -------- Total liab. & shareholders' equity $ 2,811,260 $ 2,703,475 =========== ========== Net interest income 52,460 51,770 690 (1,071) 1,761 --------- ---------- ---------------------------- Net interest spread 3.67% 3.73% Net interest margin (net interest Income to total interest earning assets) 3.87% 3.98% Tax equivalent adjustment (2,731) 3,676 ------ ------ Net interest income per book $ 49,729 $ 48,094 ====== ====== </TABLE> 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk As detailed in the Annual Report to Shareholders as of December 31, 2003, the Company is subject to interest rate risk as its principal market risk. As noted in Item 2 (Management's Discussion and Analysis for the six months ended June 30, 2004), the Company continues to respond to changes in interest rates in a fashion to position the Company to meet both short term earning goals but to also allow the Company to respond to changes in interest rates in the future. The average balance of federal funds sold and other short-term investments has decreased from $540.6 million in 2003 to $486.1 million in 2004. As investment opportunities presented themselves, management began investing funds from the federal funds sold and other short-term investment portfolio into the securities available for sale and loan portfolios. This trend is expected to continue into the third quarter. The Company believes there was no significant change to its interest rate risk during the second quarter of 2004. Item 4. Controls and Procedures The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 ("Exchange Act") designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon this evaluation of those disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer of the Company concluded, as of the end of the period covered by this report, that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected. There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting. 29
PART II OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities, Use of Proceeds and Issuer 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 2004 Shares Paid per Plans or Plans or Period Purchased Share Programs Programs ------------------------------------------------------------------------ ------------------------------------------------------------------------ April 1 - April 30 33,800 $ 12.98 0 N/A ------------------------------------------------------------------------ ------------------------------------------------------------------------ May 1 - May 31 153,700 $ 12.52 0 N/A ------------------------------------------------------------------------- ------------------------------------------------------------------------- June 1 - June 30 112,500 $ 12.90 0 N/A --------------------------------------------------------------------------- --------------------------------------------------------------------------- Total 300,000 $ 12.72 0 N/A --------------------------------------------------------------------------- --------------------------------------------------------------------------- All 300,000 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 3. Defaults Upon Senior Securities None. 30
Item 4. Submissions of Matters to Vote of Security Holders At the annual meeting held May 17, 2004, shareholders of the Company were asked to consider the Company's nominees for directors and to elect three (3) directors. The Company's nominees for director were Joseph A. Lucarelli (three-year term), Robert A. McCormick (three-year term), Anthony J. Marinello, MD, PhD (one-year term). The results of shareholder voting are as follows: 1. Election of Directors: Director For Withheld -------- --- -------- Joseph A. Lucarelli 62,221,792 4,119,922 Robert A. McCormick 58,694,677 7,647,038 Anthony J. Marinello, MD, PhD 61,941,026 4,400,698 Directors continuing in office are Barton A. Andreoli, William D. Powers, and William J. Purdy. 2. Proposal to adopt the 2004 TrustCo Directors Stock Option Plan. For Withheld Abstain --- -------- ------- 39,503,591 10,299,500 1,713,767 3. Proposal to adopt the 2004 TrustCo Stock Option Plan. For Withheld Abstain --- -------- ------- 42,498,898 7,366,391 1,651,566 4. Proposal to adopt amendment to the Amended and Restated Certificate of Incorporation of TrustCo to change the minimum and maximum numbers of directors. For Withheld Abstain --- -------- ------- 60,288,855 4,771,636 1,281,214 5. Proposal to ratify the appointment of KPMG LLP as the independent certified public accountants of TrustCo for the fiscal year ending December 31, 2004. For Withheld Abstain --- ---------- -------- 61,267,732 4,567,809 505,173 31
Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Reg S-K (Item 601) Exhibit No. Description 3(i)(a) Amended and Restated Certificate of Incorporation of TrustCo Bank Corp NY, dated May 20, 2004. 10(a) 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(b) 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(c) 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). 31(a) Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer. 31(b) Rule 13a-15(e)/15d-15(e) 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. 32
(b) Reports on Form 8-K During the quarter ended June 30, 2004, TrustCo filed the following reports on Form 8-K: April 20, 2004, regarding two press releases dated April 20, 2004, detailing first quarter financial results. April 28, 2004, regarding a press release dated April 28, 2004, providing additional information to Institutional Shareholder Services about tax fees that TrustCo reported in its proxy statement for its 2004 Annual Meeting of Shareholders. May 3, 2004, regarding a press release dated May 3, 2004, announcing the retirement of Nancy A. McNamara, Senior Vice President, effective April 30, 2004. May 17, 2004, regarding a press release dated May 17, 2004, announcing the results of its 2004 Annual Meeting of Shareholders. May 18, 2004, regarding a press release dated May 18, 2004, declaring a cash dividend of $0.15 per share payable on July 1, 2004, to shareholders of record at the close of business on June 4, 2004. 33
SIGNATURES Pursuant to the requirements 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 J. McCormick ----------------------------- Robert J. McCormick President and Chief Executive Officer By: /s/ Robert T. Cushing -------------------------- Robert T. Cushing Executive Vice President and Chief Financial Officer Date: August 9, 2004 34
Exhibits Exhibits Index Reg S-K Exhibit No. Description 3(i)(a) Amended and Restated Certificate of Incorporation of TrustCo Bank Corp NY, dated May 20, 2004. 10(a) 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(b) 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(b) 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). 31(a) Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer. 31(b) Rule 13a-15(e)/15d-15(e) 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. 35
Exhibits Exhibit 3(i)(a) Article VI - CERTIFICATE OF INCORPORATION Directors; Election and Classification The following is the text of Article VI of TrustCo's Amended and Restated Certificate of Incorporation, as approved for amendment: 6. The entire Board of Directors, consisting of not less than five (5) members and not more than fifteen (15) members, shall be divided into three (3) classes of not less than two (2) members each, which classes are hereby designated as Class A, Class B and Class C. The number of directors of Class A shall equal one-third (1/3) of the total number of directors as determined in the manner provided in the Bylaws (with any fractional remainder to count as one); the number of directors of Class B shall equal one-third (1/3) of said total number of directors (or the nearest whole number thereto); and the number of Directors in Class C shall equal said total number of directors minus the aggregate number of Directors in Classes A and B. At the election of the first Board of Directors, the class of each of the members then elected shall be designated. The term of office of each member then designated as a Class A director shall expire at the annual meeting of shareholders next ensuing, that of each member then designated as a Class B director at the annual meeting of shareholders one year thereafter, and that of each member then designated as a Class C director at the annual meeting of shareholders two years thereafter. At each annual meeting of shareholders held after the election and classification of the first Board of Directors, directors to succeed those whose terms expire at such annual meeting shall be elected to hold office for a term expiring at the third succeeding annual meeting of shareholders and until their respective successors are elected and have qualified or until their respective earlier displacement from office by resignation, removal or otherwise. The Board of Directors of the Corporation shall have the authority to establish from time to time the exact number of directors, as shall be set forth in resolutions that may be adopted by the Board of Directors. 36
Exhibit 10(a) MASTER SERVICES AGREEMENT between SunGard Wealth Management Services, LLC and TRUSTCO BANK Dated as of April 1, 2004 MATERIAL INDICATED BY AN ASTERISK ("*") HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SEC. 37
<TABLE> <CAPTION> TABLE OF CONTENTS <S> <C> MASTER SERVICES AGREEMENT........................................................................................23 1. Definitions.............................................................................................28 1.1. "Additional Service Levels"....................................................................28 1.2. "Additional Services"..........................................................................28 1.3. "Additional Services Task Order"...............................................................28 1.4. "Affiliate"....................................................................................28 1.5. "Aggregated Data"..............................................................................28 1.6. "Agreement"....................................................................................28 1.7. "Bank Regulatory Requirements".................................................................28 1.8. "Base Services"................................................................................28 1.9. "Base Service Levels"..........................................................................29 1.10. "Changes"......................................................................................29 1.11. "Confidential Information".....................................................................29 1.12. "Conversion Date"..............................................................................29 1.13. "Critical Problem".............................................................................29 1.14. "Customer".....................................................................................29 1.15. "Developed Software"...........................................................................29 1.16. "Dispute"......................................................................................30 1.17. "Effective Date"...............................................................................30 1.18. "Equipment"....................................................................................30 1.19. "Executive"....................................................................................30 1.20. "Force Majeure Event"..........................................................................30 1.21. "Indemnified Claim"............................................................................30 1.22. "Industry Change"..............................................................................30 1.23. "Other Intellectual Property"..................................................................30 1.24. "Professional".................................................................................31 1.25. "Relationship Manager".........................................................................31 1.26. "Services".....................................................................................31 1.27. "Service Levels"...............................................................................31 1.28. "Software".....................................................................................31 1.29. "SunGard"......................................................................................31 1.30. "SWMS Personnel"...............................................................................31 1.31. "SWMS Third Party Providers"...................................................................31 1.32. "SWMS Third Party Software"....................................................................31 1.33. "System"...................................................................................... 31 1.34. "Term"...................................................................................... 31 1.35. Termination Assistance Period".................................................................31 1.36. "Termination Assistance Services"..............................................................32 1.37. "Terms of Service".............................................................................32 1.38. "Third Party Claim"............................................................................32 1.39. "Third Party Contracts"........................................................................32 1.40. "Third Party Provider..........................................................................32 1.41. "Transitioned Out Services"....................................................................32 1.42. "TRUSTCO Data".................................................................................32 38
1.43. "TRUSTCO Proprietary Software".................................................................32 1.44. "TRUSTCO Software".............................................................................32 1.45. "TRUSTCO Third Party Providers"................................................................32 1.46. "TRUSTCO Third Party Software".................................................................33 1.47. "Nominee Partnership"..........................................................................33 1.48. "Unaffiliated Third Party Provider"............................................................33 1.49. "User Documentation"...........................................................................33 2. Term....................................................................................................33 2.1. Initial Term...................................................................................33 2.2. Renewal Term(s)................................................................................33 3. Services................................................................................................34 3.1. Transition-In Services/Workplan................................................................34 3.2. Base Services..................................................................................34 3.3. Terms of Service...............................................................................34 3.4. Scope of Use...................................................................................35 3.5. Additional Services............................................................................35 3.6. Changes........................................................................................35 3.7. Additional Services Task Order Procedures......................................................36 4. SWMS Personnel..........................................................................................36 4.1. Assignment of SWMS Personnel...................................................................36 4.2. Subcontractors and Affiliates..................................................................36 5. Equipment, Facilities, and Third Party Contracts........................................................37 5.1. SWMS Facilities................................................................................37 5.2. Third Party Contracts..........................................................................37 6. Proprietary Rights and Intellectual Property............................................................38 6.1. SWMS Third Party Software......................................................................38 6.2. Third Party Providers..........................................................................39 6.3. Rights in Developed Software and Other Intellectual Property...................................40 6.4. TRUSTCO Software...............................................................................41 6.5. TRUSTCO Wealth Management Intellectual Property andDocumentation...............................42 6.6. License Rights and Trademarks..................................................................42 6.7. Export.........................................................................................43 7. Service Levels..........................................................................................43 7.1. Service Levels.................................................................................43 7.2. Additional Service Levels......................................................................46 7.3. Responsibility for Achieving Service Levels....................................................46 8. Contract Management and Procedures......................................................................47 8.1. Relationship Managers..........................................................................47 8.2. Reliance on Instructions.......................................................................47 8.3. Information, Approvals and Cooperation.........................................................48 9. Regulatory Access.......................................................................................48 10. Charges.................................................................................................48 10.1. Charges for Base Services......................................................................48 10.2. Charges for Additional Services................................................................49 10.3. Expenses...................................................................................... 49 10.4. Taxes...................................................................................... 49 39
11. Invoicing and Payment...................................................................................49 11.1. Invoicing......................................................................................49 11.2. Payment Due....................................................................................50 11.3. Audit of Charges...............................................................................50 12. Safeguarding Of Data and Confidentiality................................................................50 12.1. TRUSTCO Data...................................................................................50 12.2. Records Retention..............................................................................51 12.3. Privacy Laws and Regulations...................................................................51 12.4. Confidentiality................................................................................51 13. Representations and Warranties..........................................................................53 13.1. Authorization..................................................................................53 13.2. Bank Regulatory Requirements...................................................................53 13.3. Covenant of Cooperation and Good Faith.........................................................53 13.4. Noninfringement................................................................................53 13.5. DISCLAIMER OF WARRANTIES.......................................................................54 14. Insurance...............................................................................................54 14.1. Worker's Compensation Insurance................................................................55 14.2. Commercial General Liability Insurance.........................................................55 14.3. Errors and Omissions coverage..................................................................55 14.4. Employee Dishonesty Insurance (Crime Policy)...................................................55 15. Indemnification.........................................................................................55 15.1. Personal Injury and Property Damage............................................................55 15.2. Intellectual Property Indemnity................................................................56 15.3. Indemnification Procedures.....................................................................57 16. Liability...............................................................................................57 16.1. LIMITATION AS TO TYPES OF DAMAGES..............................................................57 16.2. DOLLAR LIMITATION..............................................................................58 16.3. Statute of Limitations.........................................................................58 16.4. Force Majeure..................................................................................58 16.5 SunGard Business Systems Guarantee.............................................................59 17. Dispute Resolution......................................................................................59 17.1. Review of Performance..........................................................................59 17.2. Dispute Escalation.............................................................................60 17.3. Contract Enforcement...........................................................................60 17.4. Continued Performance..........................................................................60 18. Termination.............................................................................................60 18.1. Termination for Cause..........................................................................60 18.2. Termination for Non-Payment....................................................................61 18.3. Termination for Insolvency.....................................................................61 18.4. Termination for Convenience....................................................................62 18.5 Termination Assistance and Rights upon Termination or Expiration...................................62 19. Miscellaneous...........................................................................................65 19.1. Notices...................................................................................... 65 19.2. Binding Nature and Assignment..................................................................66 40
19.3. Severability...................................................................................66 19.4. Counterparts...................................................................................67 19.5. Relationship of Parties........................................................................67 19.6. Further Assurances.............................................................................67 19.7. Non-competition................................................................................67 19.8. Third Party Beneficiaries......................................................................68 19.9. Media Releases.................................................................................68 19.10. Modification and Waiver........................................................................68 19.11. Entire Agreement...............................................................................68 19.12. Governing Law..................................................................................69 19.13. Attorney's Fees................................................................................69 SCHEDULES TO MASTER SERVICES AGREEMENT..................................................................70 104 41
</TABLE> MASTER SERVICES AGREEMENT THIS MASTER SERVICES AGREEMENT, dated as of March , 2004, is between Trustco Bank. ("TRUSTCO or BANK"), and SunGard Wealth Management Services, LLC, a Delaware limited liability corporation ("SWMS"). TRUSTCO and SWMS are collectively hereinafter referred to as the "Parties," and individually, a "Party". 1. Definitions The following defined terms used in this Agreement shall have the meanings set forth below. Other terms are defined as indicated in the context of specific provisions. "Additional Service Levels" Additional Service Levels has the meaning given in Section 7.3 hereof. "Additional Services" Additional Services means any services, functions or responsibilities other than the Base Services that SWMS will provide to TRUSTCO pursuant to Additional Services Task Orders in accordance with the Additional Services Task Order procedures provided for herein. "Additional Services Task Order" Additional Services Task Order(s) has the meaning given in Section 3.7 hereof. "Affiliate" Affiliate means a company or other business organization or other entity related through common ownership, common control of management or owners, or through some other control mechanism to another business organization and that is providing or receiving services pursuant to this Agreement. "Aggregated Data" Aggregated Data has the meaning given in Section 12.1 hereof. "Agreement" Agreement means this Master Services Agreement, the Schedules to this Master Services Agreement referenced herein and any Additional Services Task Order agreed to by the Parties that references this Master Services Agreement. "Bank Regulatory Requirements" Bank Regulatory Requirements mean the rules and regulations promulgated by the regulatory authority that is authorized by law to regulate TRUSTCO including but not limited to the Securities Exchange Commission and the Office of Thrift Supervision. "Base Services" Base Services means all of the wealth management operations outsourcing services, functions, activities, tasks and responsibilities, other than the Additional Services pursuant to the Additional Services Task Orders in accordance with the Additional Services Task Order procedures provided for herein, that SWMS will perform and provide, as such services, functions, activities, tasks, and responsibilities may evolve and be supplemented during the Term of the Agreement to TRUSTCO pursuant to the Agreement as described on the attached Schedule A. 42
"Base Service Levels" Base Service Levels has the meaning given in Section 7. 1(A). "Changes" Changes has the meaning given in Section 3.6 hereof. "Confidential Information" Confidential Information means all non-public written, electronic, and oral proprietary information communicated from one Party (the "Disclosing Party") to the other Party (the "Receiving Party") during the Term and the Termination Assistance Period in connection with this Agreement or any Additional Services Task Order, including without limitation (a) with respect to TRUSTCO, all non-public information of or relating to TRUSTCO or its Customers, (b) with respect to SWMS, the SWMS Third Party Software, the Other Intellectual Property, all costing, pricing, technology, techniques, processes, methodologies, and other proprietary information of SWMS, and (c) with respect to each Party, the terms of this Agreement and all Additional Services Task Orders. Confidential Information will not include information that (i) was known by the Receiving Party without an obligation of confidentiality before its receipt from the Disclosing Party, (ii) is independently developed by the Receiving Party without reliance on Confidential Information of the Disclosing Party, (iii) is or becomes publicly available without a breach by the Receiving Party of this Agreement, or (iv) is disclosed to the Receiving Party by a third person who is not required to maintain its confidentiality. "Conversion Date" Conversion Date has the meaning given in Section 3.3 hereof. "Critical Problem" Critical Problem has the meaning given in Section 7.1 (C) hereof. "Customer" Customer means TRUSTCO's Customers who are authorized by TRUSTCO to use and access the Services pursuant to the terms, conditions and restrictions of this Agreement. "Developed Software" Developed Software means all programming, applets, scripts, code, applications and other software made, developed, or actually or constructively reduced to practice by SWMS (whether solely by SWMS or jointly with others, including, but not limited to SWMS's affiliates and TRUSTCO) pursuant to this Agreement or any Additional Services Task Order, contained in, comprising, or otherwise necessary to use, display and/or maintain the Services; provided, however, that Software developed solely by TRUSTCO for its own use and purposes during the Term of this Agreement and which does not utilize any information obtained by TRUSTCO concerning any SWMS Third Party Software shall not be considered to be Developed Software for the purposes of this Agreement 43
"Dispute" Dispute has the meaning given in Section 17.2 hereof. "Effective Date" Effective Date means the date on which the last party to this Agreement signs this Agreement. "Equipment" Equipment includes all computer and communications equipment, including personal computers, network servers, modems, printers, mainframes, routers, cabling and related equipment that SWMS uses or needs to provide the Services. "Executive" Executive means an officer or senior employee of SWMS with at least ten (10) years experience in the wealth management or trust industry. "Force Majeure Event" Force Majeure Event has the meaning given in Section 16.4 hereof. "Indemnified Claim" Indemnified Claim has the meaning given in Section 15.3 hereof. "Industry Change" Industry Change means a regulatory change or an industry wide or technological change materially affecting the delivery of the applicable products or services. "Other Intellectual Property" Other Intellectual Property means all inventions (whether or not protectable under patent laws), works of authorship, information fixed in any tangible medium of expression (whether or not protectable under copyright laws), moral rights, mask works, trademarks, trade names, trade dress, service marks, trade secrets, publicity rights, know-how, ideas (whether or not protectable under trade secret laws), and all other subject matter protectable under patent, copyright, moral right, mask work, trademark, trade secret, or other laws, including without limitation all documentation, new or useful art, combinations, discoveries, formulae, procedures, processes, manufacturing techniques, technical developments, specifications, manuals, artwork, software, programming, applets, scripts, designs, logos, tags lines, corporate branding/identity, or other tangible or intangible embodiments of information made, conceived, developed, or actually or constructively reduced to practice by SWMS (whether solely by SWMS or jointly with others, including, but not limited to SWMS's affiliates or TRUSTCO) pursuant to this Agreement, an Additional Services Task Order or for any other SWMS customer, contained in, comprising, or otherwise necessary to use, display and/or maintain the Services or services for other SWMS's customers; provided, however, that Software developed solely by TRUSTCO for its own use and purposes during the Term of this Agreement and which does not utilize any information obtained by TRUSTCO concerning any SWMS Third Party Software shall not be considered to be Other Intellectual Property for the purposes of this Agreement. 44
"Professional" Professional means an employee of SWMS having more than five (5) years but less than ten (10) years experience in the wealth management or trust industry. "Relationship Manager" Relationship Manager has the meaning given in Section 8.1 hereof. "Services" Services means the Base Services, the Termination Assistance Services and any Additional Services. "Service Levels" Service Levels means the Base Service Levels and any Additional Service Levels. "Software" Software means the SWMS Third Party Software, TRUSTCO Software and the Developed Software. "SunGard" SunGard means SunGard Business Systems Inc., a Delaware corporation. "SWMS Personnel" SWMS Personnel means the SWMS employees, together with any subcontractors and independent contractors of SWMS, who are assigned by SWMS to perform the Services. "SWMS Third Party Providers" SWMS Third Party Providers means any company, entity, person or other third party that is owned or affiliated with SWMS and is providing services or products to SWMS for delivery of wealth management operations outsourcing services to TRUSTCO. SWMS Third Party Providers specifically excludes TRUSTCO Third Party Providers defined in Section 1.45 below and Unaffiliated Third Party Providers defined in Section 1.48 below. "SWMS Third Party Software" SWMS Third Party Software means any software, or part of any software, that is licensed or leased by SWMS from a third party and is used by SWMS to provide the Services. The SWMS Third Party Software as of the Effective Date is identified in Schedule F. Schedule F may be amended from time to time pursuant to the terms of the Agreement. "System" System means the Software and Equipment covered under this Agreement including the SunGard AddVantage system. "Term" Term has the meaning given in Section 2 hereof. "Termination Assistance Period" Termination Assistance Period has the meaning given in Section 18.5 hereof. 45
"Termination Assistance Services" Termination Assistance Services has the meaning given in Section 18.5 hereof. "Terms of Service" Terms of Service has the meaning given in Section 3.3 hereof. "Third Party Claim" Any claim asserted by any person or entity that is not (a) a party to this Agreement or (b) an Affiliate of a party to this Agreement. "Third Party Contracts" Third Party Contracts means the agreements between TRUSTCO and third parties listed in Schedule G under which the third parties are, as of the Effective Date, furnishing or providing services or products to TRUSTCO, and with respect to which SWMS will be required to act for or on behalf of TRUSTCO in order to provide the Services. "Third Party Provider" Third Party Provider means any company, entity, person or other third party providing services or products to or for SWMS with respect to SWMS providing the Services to TRUSTCO, excluding any entity majority owned or directly controlled by SunGard Data Systems Inc. or any of its subsidiaries. "Transitioned Out Services" Transitioned Out Services has the meaning given in Section 18.5 hereof. "TRUSTCO Data" TRUSTCO Data means all data and information that TRUSTCO submits, provides or transmits to SWMS in connection with the Services, including information submitted to SWMS before the Effective Date; data and information of TRUSTCO's Customers; and all information derived from that information, including as stored in or processed through the Equipment or the Software; excluding however, all SWMS Confidential Information, Developed Software and Other Intellectual Property. "TRUSTCO Proprietary Software" TRUSTCO Proprietary Software means any software, or part of any software, owned by TRUSTCO which SWMS uses or needs to use to provide the Services. The TRUSTCO Proprietary Software as of the Effective Date is listed in Schedule D. The Parties may amend Schedule D from time to time pursuant to mutual agreement. "TRUSTCO Software" TRUSTCO Software means the TRUSTCO Proprietary Software and the TRUSTCO Third Party Software. "TRUSTCO Third Party Providers" TRUSTCO Third Party Provider(s) means any company, entity, person or other third party that was providing services or products to TRUSTCO for delivery of wealth management operations services by TRUSTCO on or before the Effective Date and any comparable replacement. TRUSTCO Third Party Provider specifically excludes SWMS Third Party Providers defined in Section 1.31 and Unaffiliated Third Party Providers defined in Section 1.48 below. 46
"TRUSTCO Third Party Software" TRUSTCO Third Party Software means any software, or part of any software, licensed or leased by TRUSTCO from a third party whose use by SWMS is reasonably necessary for SWMS to provide the Services. The TRUSTCO Third Party Software as of the Effective Date is listed in Schedule E. The Parties may amend Schedule E from time to time pursuant to mutual agreement. "Nominee Partnership" Nominee Partnership has the meaning given in Section 6.5 (B) hereof. "Unaffiliated Third Party Provider" Unaffiliated Third Party Provider means any Third Party Provider which is not a SWMS Third Party Provider or a TRUSTCO Third Party Provider. Notwithstanding anything in this Agreement to the contrary, Unaffiliated Third Party Providers shall also mean Third Party Providers such as Interactive Data Corporation and other Third Party Providers of services for the delivery of wealth management operation services from whom industry users cannot obtain contracts containing material warranties and indemnities with respect to the Third Party Provider's services, excluding any entity owned or affiliated with SWMS. "User Documentation" User Documentation means the descriptions of functionality of the SWMS Third Party Software as published from time to time by SWMS, or as otherwise agreed to in writing by the Parties, and the descriptions of functionality of the Developed Software as provided in an Additional Services Task Order, or as otherwise agreed to in writing by the Parties. 2. Term Initial Term The initial term of this Agreement will begin on the Effective Date and will continue in effect for a period of five (5) years ("Initial Term") unless earlier terminated in accordance with the provisions of this Agreement. Renewal Term(s) The Agreement can be renewed at the end of the Initial Term pursuant to a written agreement duly executed by both Parties for an additional five (5) year term upon essentially the same terms and conditions exclusive of any pricing terms and conditions. In order for TRUSTCO to exercise the right of renewal they must provide SWMS with written notice of TRUSTCO's intent to renew at least 180 days prior to the expiration of the Initial Term. Upon receipt of TRUSTCO's notice of intent to renew both Parties shall enter into good faith negotiations to negotiate the pricing terms and conditions of the renewal term. Should the Parties be unable to come to mutual agreement on the terms and conditions of a renewal contract, the contract shall terminate upon the expiration of the Initial Term and SWMS shall provide termination assistance to TRUSTCO in accordance with the Termination Assistance Services provisions of Section 18.5 of this Agreement. The Agreement can be renewed at the end of the Initial Term only. The Initial Term and the Renewal Terms are collectively referred to herein as the "Term." 47
3. Services Transition-In Services/Workplan A. Transition-In Services. SWMS shall provide to TRUSTCO the transition-in services described in the Workplan and in accordance with the transition schedule set forth in Schedule I, which describes, among other things, the transition of the performance of and responsibility for the functions, responsibilities and tasks currently performed by TRUSTCO to SWMS which comprise the Base Services. SWMS' performance of the transition-in services and its adherence to the transition schedule set forth in Schedule I is subject to TRUSTCO's prompt performance of its obligations hereunder, including all tasks set forth in the Workplan. SWMS shall not be responsible for delays or additional costs arising from TRUSTCO's or its agents' failure to perform as required hereunder. B. Training. SWMS will provide training to TRUSTCO as described in Schedule A (Base Services). Base Services During the Term, SWMS will provide to TRUSTCO the Services identified in Schedule A (the "Base Services") for the fees as identified in Section 10 and Schedule C. During the Term, SWMS shall be the exclusive provider of the Base Services and types of services identified in Schedule A (Base Services), together with any Additional Services and types of services provided pursuant to Additional Services Task Orders. Provided that SWMS is not in material default of any of its obligations under this Agreement, TRUSTCO agrees that during the Term the Services shall be provided exclusively by SWMS hereunder and not by any other third party or by TRUSTCO itself; provided, however, that TRUSTCO may provide such services for its own assets but not for wealth management assets of its customers or its Affiliates' customers. Terms of Service The use of the Services by TRUSTCO and its Customers shall conform to the terms, procedures, requirements, and limitations ("Terms of Services") contained in the documentation and other instructions provided to TRUSTCO on the first Business Day after the TRUSTCO assets are converted to the SunGard AddVantage system and TRUSTCO has accepted the commencement of the Base Services by SWMS, which acceptance shall not be unreasonably withheld ("Conversion Date") and from time to time amended. SWMS reserves the right to deny Services to any Customers who breach or fail to comply with the Terms of Service; providing that SWMS will provide notice to TRUSTCO within a reasonable period of time of the denial of service to the Customer. TRUSTCO agrees to cooperate with SWMS and assist SWMS with enforcing the Terms of Services, and notifying TRUSTCO's Customers of the Terms of Service. TRUSTCO shall notify its Customers of SWMS' rights and obligations under this Agreement, and provide such other instructions and documentation to its Customers, as is reasonably necessary for SWMS to provide the Services and otherwise perform under this Agreement. TRUSTCO shall, at its expense and pursuant to the procedures set forth in Section 15.3 (Indemnification Procedures), defend SWMS from any third-party claims brought against SWMS arising out of a TRUSTCO Customer's unauthorized or improper use or modification of the Services; provided, however, that TRUSTCO shall not be required to defend SWMS or pay any judgment against SWMS for such third-party claims if such claims are primarily caused by a failure of SWMS' system security or SWMS' negligence. TRUSTCO shall pay any judgments finally awarded by a court of competent jurisdiction to such third parties against SWMS based on such claims after TRUSTCO has presented its defenses (or after TRUSTCO elected not to defend such claims) and any settlements to which TRUSTCO agrees in writing (or to which SWMS agreed after TRUSTCO elected not to defend such claims). SWMS' ability to deliver the Services is dependent upon TRUSTCO handling certain responsibilities which are critical to the delivery of the Services including, but are not limited to, the responsibilities listed on Schedule K. As such, TRUSTCO agrees to perform the critical responsibilities listed on Schedule K in accordance with the Terms of Service. Scope of Use TRUSTCO may use the Services only in the ordinary course of its business operations and for its own internal business purposes, which shall include making the Services available to its Customers as provided herein. TRUSTCO shall use the Services only in accordance with the User Documentation and the other terms and conditions of this Agreement. TRUSTCO may copy the User Documentation to the extent reasonably necessary for use of the System under this Agreement. 48
Additional Services During the Term, SWMS will perform such Additional Services as the Parties from time to time agree in writing in accordance with the Additional Services Task Order procedures described in Section 3.7. Changes If, at any time, SWMS determines, reasonably and in good faith, that a material change or addition to any of the Base Services is required to efficiently continue provision of the Base Service or Additional Services, SWMS shall give written notice to TRUSTCO of the proposed change or addition and an estimate of the additional project time required to complete the proposed change or addition ("Changes"). Changes which are required in order to comply with regulatory changes will be effective upon provision of notice by SWMS to TRUSTCO. For all other changes, within ten (10) business days after receipt of such notice, TRUSTCO shall give written notice to SWMS that TRUSTCO elects to (a) disagree with SWMS's Changes or (b) accept SWMS's Changes. TRUSTCO shall be deemed to have elected to implement SWMS's Changes if no such notice is received by SWMS within ten (10) business days of TRUSTCO's receipt of such notice. If TRUSTCO timely notifies SWMS that it disagrees with SWMS's determination that the change or addition is necessary, SWMS will reevaluate the determination, and, if necessary, the parties shall institute informal dispute resolution pursuant to 17.2 (Dispute Escalation). 49
Additional Services Task Order Procedures A. Additional Services shall be provided by SWMS only pursuant to a task order ("Additional Services Task Order") describing, at a minimum, the scope of such Additional Services; the charges, fees, expenses or other amounts to be paid to SWMS for such Additional Services ("Additional Services Charges"); and the impact, if any, that performance of the Additional Services will have on the Base Service Levels, and any other pending delivery or performance schedules or obligations of either Party hereunder. Upon execution of an Additional Services Task Order by a duly authorized representative of each Party, it shall be subject to and part of this Agreement and shall be binding on SWMS and TRUSTCO. To the extent there is any inconsistency or conflict between the terms of any Additional Services Task Order and the terms of this Agreement, the terms of the Additional Services Task Order shall control but only with respect to such Additional Services Task Order. B. Additional Services which require special programming to the AddVantage system will be considered only pursuant to an Additional Services Task Order describing at a minimum, the scope of such Additional Services. SWMS will forward the request for programming on to AddVantage and will respond back to TRUSTCO within a reasonable period of time with an estimate of the cost of such programming and an estimate of the time frame for completion of the programming. The special programming will only be placed in line for development upon TRUSTCO's direction to proceed with the programming and agreement to pay for the programming costs and such fees will be subject to payment in accordance with the agreed upon Additional Services Task Order. 4. SWMS Personnel Assignment of SWMS Personnel Without limiting any other provisions of this Agreement or any Additional Services Task Order relating to Service Levels, SWMS will assign the number of SWMS Personnel reasonably necessary to perform the Services. Subcontractors and Affiliates A. The Services will be performed by SWMS, itself and through its direct and indirect wholly-owned subsidiaries or Affiliates. SWMS may subcontract any portion of the Services to third parties, including to SWMS Affiliates and non-Affiliates. SWMS will not disclose any confidential information of TRUSTCO to any unaffiliated subcontractor unless and until such subcontractor has agreed in writing to protect the confidentiality of such confidential information in the manner required by Section 12 and then only to the extent necessary for such subcontractor to perform those Services subcontracted to it. SWMS will remain responsible for the obligations it performs and those performed by any SWMS Third Party Provider to the same extent as if such obligations were performed by SWMS. 50
B. With respect to TRUSTCO Third Party Providers and Unaffiliated Third Party Providers, SWMS will not be responsible or liable to TRUSTCO to the extent SWMS's ability to deliver the Services, meet the Service Levels or other default is adversely affected by any failure, default or delay by such Third Party Provider, provided however that SWMS shall: 1) Use commercially reasonable efforts to require the TRUSTCO Third Party Provider and/or Unaffiliated Third Party Provider, in its contract with SWMS, to provide the applicable services or products in manner consistent with the Service Levels, 2) Use commercially reasonable efforts to require or compel the TRUSTCO and/or Unaffiliated Third Party Provider to comply with all contractual and other obligations owed to SWMS, 3) pass through to TRUSTCO all amounts recovered or received from the TRUSTCO and/or Unaffiliated Third Party Provider with respect to damages sustained by TRUSTCO or TRUSTCO'S Customers as a result of the TRUSTCO and/or Unaffiliated Third Party Provider's failure, default or delay, 4) take corrective action pursuant to Section 7.1 (E) for all Critical Problems (as defined in Section 7) caused by a TRUSTCO and/or Unaffiliated Third Party Provider, and 5) Promptly advise TRUSTCO of all material failures, defaults or delays by a TRUSTCO and/or Unaffiliated Third Party Provider. 5. Equipment, Facilities, and Third Party Contracts SWMS Facilities SWMS may perform the Services in such facilities maintained by SWMS (collectively, "SWMS Facilities"), including without limitation SunGard's data center operations in Birmingham, Alabama (the "Data Center") as SWMS deems appropriate, following consultation with TRUSTCO, so long as appropriate security procedures have been implemented and are being observed at the SWMS Facilities. Third Party Contracts On or within ten (10) days after the Effective Date, TRUSTCO shall notify the third party suppliers and vendors under the Third Party Contracts described in Schedule G in writing of its appointment of SWMS as its agent under the Third Party Contracts for administrative, ministerial and managerial purposes. Unless agreed to otherwise pursuant to a written assignment, TRUSTCO will retain financial responsibility for the Third Party Contracts at all times during the Term and the Termination Assistance Period. If the actions or failures to act of the vendors under the Third Party Contracts cause a failure to meet Service Levels, SWMS shall be excused from liability for such failures in accordance with Section 7. 51
Proprietary Rights and Intellectual Property SWMS Third Party Software Except as provided in this Section 6 or as otherwise provided in this Agreement, neither TRUSTCO nor its Affiliates nor its Customers will have any rights or interests in the SWMS Third Party Software and SWMS shall remain the contracting party of record for the SWMS Third Party Software. SWMS hereby grants to TRUSTCO and its Customers a non-exclusive, non-transferable (except as permitted by herein) right during the Term to access and employ the SWMS Third Party Software for the purpose of receiving the Services or will otherwise make arrangements to confirm or acquire TRUSTCO and its Customers the right to access and employ the SWMS Third Party Software for the purpose of receiving the Services, to the extent reasonably necessary for TRUSTCO and its Customers to access and employ the Services, subject to all terms, conditions and restrictions as may be imposed by the licensor of the applicable SWMS Third Party Software. Unless otherwise agreed to in writing by the Parties, (i) no SWMS Third Party Software shall be delivered to TRUSTCO (physically, electronically or otherwise), (ii) all SWMS Third Party Software shall remain in the possession and control of SWMS or the applicable third party, and (iii) TRUSTCO's rights hereunder to the SWMS Third Party Software is limited to the right to access and employ the SWMS Third Party Software and related services via the Internet or other network for the purposes of using the Services and obtaining information and data in connection with the Services, and permitting the Customers to do the foregoing subject to SWMS right to limit Customer access as provided elsewhere in this Agreement. Except as expressly provided in this Agreement, TRUSTCO shall not be required to pay any additional fees to access and employ the SunGard AddVantage Software. SWMS Third Party Software Required Consents Prior to giving TRUSTCO access to the SWMS Third Party Software, SWMS will obtain those consents as may be required for the grant to TRUSTCO of the rights to SWMS Third Party Software specified in herein (the "SWMS Third Party Software Required Consents"). SWMS will pay any fees (including transfer or upgrade fees) that may be required to obtain the SWMS Third Party Software Required Consents, provided however that the Parties shall negotiate and agree upon payment of the fees for SWMS Third Party Software for Additional Services. 52
Software Access and Employment Restrictions Except as provided herein, TRUSTCO shall not permit others to use, copy, decompile or otherwise reverse engineer the SWMS Third Party Software, and TRUSTCO, its Affiliates and their Customers shall comply with all terms, conditions and restrictions as may be imposed by the owner of the applicable SWMS Third Party Software. Except as specifically provided in Section 6.1 (A) above, TRUSTCO may not allow any other third parties to use or access the SWMS Third Party Software or the Services without the written consent of SWMS. TRUSTCO shall be responsible for all damages, losses, expenses and other costs to SWMS or TRUSTCO. Expiration of Access Rights Unless otherwise expressly provided this Agreement, (i) the rights of access granted herein shall immediately and automatically expire contemporaneously with the expiration or termination of this Agreement and any applicable Termination Assistance Period, and (ii) upon expiration or termination of this Agreement and any applicable Termination Assistance Period , TRUSTCO's and its Affiliates and their Customers' access to the SWMS Third Party Software and the Services shall be discontinued and TRUSTCO shall either return to SWMS, or at SWMS' election destroy, all SWMS Third Party Software and related user documentation in its possession and certify to SWMS that TRUSTCO has divested itself of all ability to access and employ the SWMS Third Party Software. Third Party Providers TRUSTCO hereby acknowledges and agrees that the Services provided under this Agreement contain information obtained, selected and consolidated by the certain Third Party Providers. TRUSTCO's use of the market data and/or other data and services provided by the Third Party Providers described herein is authorized and regulated by the Third Party Providers and further that the Third Party Providers may require SWMS to provide such information and data about TRUSTCO and the Third Party Users in connection with their provision of the Services. TRUSTCO also acknowledges that the Third Party Providers may modify the Services, discontinue availability of the Services or modify the rules concerning availability and applicable royalty fees of any of the Services or require changes to the Services, in which case neither SWMS nor the Third Party Providers may be held responsible for such modification and discontinuance; provided, however, that if a material service is discontinued by a Third Party Provider, SWMS will use commercially reasonable efforts to find an alternative provider for such discontinued service. If an alternative provider can not be found to provide substantially similar services for substantially similar costs for the material discontinued services, the parties agree to negotiate in good faith an adjustment to the Base Charges for the material discontinued service. Any changes required by the Third Party Providers shall be made a part of this Agreement by SWMS's written notice of any such changes to TRUSTCO. For a thirty (30) day period after receiving such notice from SWMS, TRUSTCO may reject such changes and terminate the affected Third Party Data or Service by written notice to SWMS. If such notice is not received by SWMS within such thirty (30) day period, this Agreement shall be modified by such changes, and shall remain in full force and effect. 53
TRUSTCO acknowledges that SWMS is required to display certain notices and agreements and to report certain data related to TRUSTCO's use of the Services to the Third Party Providers from whom the information is selected and consolidated by SWMS. To enable SWMS to meet its obligation in this regard, TRUSTCO agrees to inform SWMS, in writing, whenever its display of notices or utilization of any information derived from the Services changes. TRUSTCO shall display all such notices and agreements in the exact manner specified by SWMS or a Third Party Provider in writing or as set forth herein. TRUSTCO acknowledges and agrees that the number and content of such notices, as well as other terms and conditions, may be changed from time to time by the Third Party Providers. TRUSTCO shall comply with all applicable laws and obtain all reasonable and necessary consents from any person, including its employees and the TRUSTCO Customers and their respective employees, if any, regarding the collection, use and distribution to SWMS of any information or data regarding any TRUSTCO Customer and to the use by TRUSTCO and TRUSTCO Customers of the Services for the purposes set forth herein. The information and data may include personal and other information about TRUSTCO, its employees, the TRUSTCO Customers and TRUSTCO's employees, including their use of the market data. SWMS may use this information and data to carry out its obligations under this Agreement, including the provision of such information to the Third Party Providers; provided, however, that any such disclosure must be made in compliance with Section 12 of this Agreement. Rights in Developed Software and Other Intellectual Property SWMS will retain all right, title and interest in and to all the Developed Software and all Other Intellectual Property, and TRUSTCO and its Affiliates will have no rights or interests in such Developed Software or Other Intellectual Property except as otherwise provided in this Agreement or an Additional Services Task Order. SWMS hereby grants to TRUSTCO a non-exclusive, non-transferable (except as permitted herein) right during the Term to access and employ the Developed Software and the Other Intellectual Property reasonably necessary for itself and its Customers to access and employ the Services. TRUSTCO's rights to Developed Software and Other Intellectual Property after the expiration or termination of this Agreement are set forth in Section 18.5 (Termination Assistance and Rights Upon Termination or Expiration). In the event, by operation of law or otherwise, TRUSTCO is deemed to be the owner of all or any portion of the intellectual property rights in the Developed Software and/or Other Intellectual Property, TRUSTCO hereby assigns all such rights to SWMS and agrees to cooperate with SWMS in confirming SWMS' sole and exclusive ownership of the Developed Software and Other Intellectual Property; provided, however, that Software developed solely by TRUSTCO for its own use and purposes during the Term of this Agreement and which does not utilize any information obtained by TRUSTCO concerning any SWMS Third Party Software shall not be considered to be Developed Software or Other Intellectual Property for the purposes of this provision. 54
TRUSTCO Software A. Rights to TRUSTCO Proprietary Software As between SWMS and TRUSTCO, TRUSTCO shall retain all right, title and interest in and to the TRUSTCO Proprietary Software, and SWMS will have no rights or interests in TRUSTCO Proprietary Software except as set forth in this Section or as otherwise described in this Agreement. To the extent reasonably necessary for SWMS to provide the Services, TRUSTCO hereby grants to SWMS and its Affiliates a non-exclusive, non-transferable (except as provided herein), fully paid up, right during the Term to access and employ the TRUSTCO Proprietary Software. B. Rights to TRUSTCO Third Party Software TRUSTCO agrees, at TRUSTCO's expense, to assign to SWMS and to cause vendors or owners of the TRUSTCO Third Party Software to consent to and accept the assignment of all licenses and rights and to grant to SWMS the rights access and employ the TRUSTCO Third Party Software as is necessary for SWMS to provide the Services and services to other customers of SWMS, including the right, if necessary to grant access to and employment of the Third Party Software to provide the Services and services to other customers of SWMS. At SWMS' discretion, in lieu of such assignment, TRUSTCO shall grant to SWMS and its Affiliates a non-exclusive, non-transferable (except as provided herein), fully paid up, right during the Term to access and employ the TRUSTCO Proprietary software as is necessary for SWMS to provide the Services and services to other customers of SWMS. C. TRUSTCO Third Party Software Required Consents Prior to giving SWMS access to the TRUSTCO Third Party Software, TRUSTCO will obtain those consents as may be required for the grant to SWMS of the rights to TRUSTCO Third Party Software specified in herein (the "TRUSTCO Third Party Software Required Consents"). TRUSTCO will pay any fees (including transfer or upgrade fees) that may be required to obtain the TRUSTCO Third Party Software Required Consents. D. License and Sublicense Restrictions SWMS shall not sublicense, copy, decompile or otherwise reverse engineer the TRUSTCO Software. 55
TRUSTCO Wealth Management Intellectual Property and Documentation A. TRUSTCO agrees to provide to SWMS a reasonable number of copies of and access to all wealth management operations policies and procedures and other information that is reasonably necessary, to enable SWMS to provide the Services to TRUSTCO. TRUSTCO further agrees to promptly provide SWMS with written notice of any changes in TRUSTCO's policies or procedures which affect the delivery of the Services. B. TRUSTCO further agrees to provide to SWMS all reasonable assistance and cooperation, and grant such rights to SWMS as are reasonably necessary, to enable SWMS to use TRUSTCO's nominee partnership WESCO (the "Nominee Partnership") to provide the Services. Only assets of TRUSTCO or its subsidiaries shall be transferred to the Nominee Partnership or accounts of the Nominee Partnership. C. During the Term of this Agreement TRUSTCO agrees to select a financial institution to serve as custodian for TRUSTCO's wealth management assets covered by this Agreement and selects Union Planters Bank ("UPC") to serve as custodian under this Agreement. TRUSTCO further agrees and authorizes all assets, which are held by custodian on behalf of TRUSTCO pursuant to this Agreement, to be held in the nominee partnership name ("Nominee Partnership") of the custodian. D. TRUSTCO represents and warrants that as of the Execution Date to the best of its knowledge that the policies and procedures encompassed or included in the TRUSTCO Wealth Management Intellectual Property comply with all applicable laws and regulations in effect on the Effective Date. TRUSTCO shall indemnify and hold SWMS harmless pursuant to the procedures of Section 15.3 (Indemnification Procedure) from and against any liability, loss, damage, cost, or expense (including, without limitation, reasonable attorneys' fees as provided herein) resulting from (a) TRUSTCO's breach of the warranty set forth in this paragraph or (b) a third party claim asserting that the Wealth Management Intellectual Property infringes a third person's copyright, trade secret or United States patent enforceable in the United States. License Rights and Trademarks Except for the access and employment rights contained in this Agreement or any Additional Services Task Order, this Agreement, the Additional Services Task Order, and any disclosures made hereunder or thereunder do not grant any right to either Party under any patents, trademarks or copyrights of the other Party. Neither party shall use the trademarks, service marks or logos or designs of the other Party without the advance written consent of such Party. 56
Export The Parties acknowledge that certain Software and technical data to be provided under this Agreement and any Additional Services Task Order may be subject to export controls under the laws and regulations of the United States or other countries. Neither Party will export or re-export any of those items or any direct product of them nor undertake any transaction in violation of any of those laws or regulations. To the extent within a Party's control, that Party will be responsible for, and will coordinate and oversee, compliance with those export laws concerning any items it exports or imports under this Agreement. Service Levels Service Levels Commencing on the Conversion Date, SWMS shall provide the Base Services at a level of service at least equal to the levels of service set forth in Schedule C (Schedule C is entitled "Base Services); such levels of services are referred to herein as the "Base Service Levels"), and as set forth in more detail therein. SWMS is relieved from any obligation to achieve any Service Levels pursuant to this Agreement if the failure to achieve any Service Level is caused by the action or inaction of TRUSTCO, its Affiliates, employees, their Customers, the TRUSTCO Third Party Providers, or the Unaffiliated Third Party Providers. In the event SWMS fails to perform the Services as agreed, or fails to achieve a Service Level with respect to Services, that (a) results, or could immediately or imminently result, in financial loss or financial harm to an TRUSTCO Customer or (b) constitutes a serious violation of Bank Regulatory Requirements resulting in the applicable agency or regulator requiring the violation to be addressed by the full Board of Directors of TRUSTCO (a "Critical Problem"), TRUSTCO shall promptly notify SWMS in writing, electronically or telephonically of the occurrence of the Critical Problem, describing the circumstances in reasonable detail. Issues which do no rise to the level of a Critical Problem will be handled through the normal Relationship Manager process. E. With respect to Critical Problems, SWMS shall: Acknowledge receipt and provide a preliminary response to TRUSTCO's notice of such Critical Problem within one hour. Assign qualified, dedicated staff to analyze, identify and implement potential solutions to remedy the Critical Problem, working sixteen (16) hours per day, six (6) days per week. Commence corrective action to remedy the Critical Problem within one hour of notice of the Critical Problem from TRUSTCO. Provide status updates with respect to remedying the Critical Problem to TRUSTCO at least three times a day. F. In the event SWMS fails to take the corrective action required above with respect to a Critical Problem, and the Relationship Managers are unable to agree on an appropriate course of action to remedy the Critical Problem, the Relationship Mangers shall escalate the dispute to the executive level of each Party, or higher if warranted under the circumstances. If the appropriate executives are unable to resolve the dispute, and the issue has not been satisfactorily resolved by SWMS five business days after TRUSTCO has declared the Critical Problem and which if necessary pursuant to Section 7.1 (D) has been determined to be a Critical Problem, the following remedial actions shall apply: 57
(i) For Critical Problems which are not related to the AddVantage System, TRUSTCO shall have the right take all reasonable and necessary steps and actions to remedy the Critical Problem using its own employees and Third Party Providers to assist SWMS or assume full responsibility for performance of that aspect of the Services to which the Critical Problem relates until such time as the Critical Problem is resolved and the service is capable of being performed in accordance with the Service Level Standard; provided, however, that Third Party Providers shall not be granted access to the AddVantage System or its proprietary information; and (ii) For Critical Problems which are related to the AddVantage System, TRUSTCO shall have the right to procure such service from an alternate source for performance of that aspect of the service to which the Critical Problem relates until such time as the Critical Problem is resolved and the service is capable of being performed in accordance with the Service Level Standard. G.. In the event TRUSTCO designates a failure to achieve a Service Level as a Critical Problem and SWMS disagrees with such designation, SWMS shall provisionally treat the problem as a Critical Problem for the purposes of responding to and correcting the problem while the parties work to settle the disagreement. The Parties' Relationship Managers shall promptly meet in person or telephonically to attempt to resolve the dispute with respect to such designation. In the event the Relationship Managers cannot promptly resolve the dispute, the Parties will resolve the dispute in accordance with the procedures of Section 17. In the event, it is determined that TRUSTCO improperly or erroneously designated the failure as a Critical Problem, then TRUSTCO shall pay to SWMS, as damages, the reasonable additional costs and expenses incurred by SWMS as a direct result of such accelerated and heightened response and remedial activities, all reasonable and documented costs and expenses incurred by SWMS in connection with such determination, together with liquidated damages in the amount of $10,000.00 per occurrence, the Parties acknowledging that the additional costs and expenses would not adequately and fully compensate SWMS for the impacts, delays, disruptions and inefficiencies caused by an improper or erroneous Critical Problem designation by TRUSTCO; provided however, that TRUSTCO shall be entitled to one erroneous Critical Problem designation each year of the Term with no liability for damages. 58
H. Subject to the limitations set forth in Sections 16, SWMS agrees to defend, indemnify, and hold harmless TRUSTCO, its directors, officers and employees, from and against any liability, loss, damage, cost, or expense (including, without limitation, reasonable attorneys' fees as provided herein) resulting from a claim by a TRUSTCO Customer arising out of or based on a Critical Problem caused solely by SWMS's failure to perform the Services as agreed, or failure to achieve a Service Level with respect to Services. In the event TRUSTCO is entitled to indemnification under this Section 7, the indemnification procedures outlined in Section 15.3 (Indemnification Procedures) shall apply. I. Within 120 days after the Effective Date, the Parties shall mutually develop a list of criteria for monitoring and evaluating both Parties' performance under this Agreement (the "Report Card"). The Report Card is intended to provide an overall assessment of the Parties' performance based on major categories of Services ("Service Categories"), and shall not necessarily grade each service on a line by line basis. The Parties shall meet monthly for the first six months after the Effective Date, with at least the Relationship Managers in attendance, to discuss and complete the Report Card, cooperating in good faith in an effort to reach consensus, and noting points of disagreement, where applicable. Thereafter, the Parties shall meet quarterly to discuss and complete the Report Card for the prior quarter. The Report Card will be completed for the calendar quarters ending in March, June, September and December. J. In the event a Party receives a failing grade in a Service Category, the Parties will mutually discuss, including at a minimum the Relationship Managers, the steps to be taken to respond to and remedy the problem ("Equitable Response"). The Equitable Response may include modification to the Services (without materially reducing the Services or the Service Level), Additional Services, or a credit or other monetary payment to fairly compensate the non-failing party for the losses or damages resulting from the deficient Service Category. In the event the Relationship Managers are unable to agree on a grade or an Equitable Response, the Relationship Managers will escalate the dispute to the executive level of each Party, or higher if warranted under the circumstances. K. In the event the Parties' executives are unable to resolve the dispute and a Party has a failing grade (or the other Party asserts a Party has a failing grade) with respect to a Service Category for at least three (3) consecutive months, the deficiency shall be treated as a Critical Problem with respect to corrective action to be taken as set forth in Section 7.1 (C). 59
L. Adjustment of Service Levels The Parties will meet to review the Base Service Levels annually. As a result of those meetings and as necessary from time to time during the Term, the Parties may by mutual agreement add to, delete or adjust the Base Service Levels. The reasons for those additions, deletions or adjustments may include new products, services or functionality; improved performance capabilities associated with advances in the technology and methods used to perform the Base Services; or changes in TRUSTCO's business or technology environment, such as the implementation of a major initiative that changes the nature of the Base Services. Where the Parties agree to make such an addition, deletion or adjustment, the Parties shall also agree on any adjustment in SWMS' charges appropriate and equitable to reflect changes in the costs to provide the Base Services in accordance with the new or adjusted Base Service Levels. Additional Service Levels With respect to each Additional Services project, the Parties may agree on any services levels applicable to any such project ("Additional Service Levels") on a case by case basis and document such Additional Services Levels in the applicable Additional Services Task Order. With respect to any such Additional Service Levels, beginning on the date specified in the applicable Additional Services Task Order, SWMS will perform the Additional Services described in the applicable Additional Services Task Order in conformance with the Additional Service Levels set forth in such Additional Services Task Order. The impact, if any, of the Additional Services on the Base Service Levels shall, if reasonably feasible to identify in advance, be set forth in the Additional Service Task Order as described in Section 3.7, and the Services Levels shall be adjusted accordingly. Responsibility for Achieving Service Levels SWMS will not be responsible for the Service Levels to the extent SWMS's and/or its Affiliates abilities to deliver the Services are adversely affected by (i) TRUSTCO's failure to materially perform its obligations under this Agreement or any applicable Additional Services Task Order; (ii) the negligence, wrongful acts or omissions of TRUSTCO or its third party vendors(including those third party vendors under the Third Party Contracts that are managed by SWMS); (iii) the failure of any of TRUSTCO's employees to adequately perform their tasks related to the Services; (iv) unreasonable, untimely, incomplete or inaccurate information from TRUSTCO to the extent such materially and adversely affects SWMS ability to deliver the Services; (v) TRUSTCO's material failure to make information, materials, software, facilities, hardware, Equipment or qualified personnel available to SWMS in the manner required by this Agreement; (vi) the material failure of any Equipment owned or leased by TRUSTCO to the extent such failure is not caused by SWMS; (vii) the failure, default or delay by any third party not affiliated with SMWS; (viii) Industry Change, or (ix) the occurrence of a Force Majeure Event as defined in Section 16.4. In the event of an Industry Change, SWMS shall not be responsible for the Service Levels directly affected by such change for a reasonable period of time to allow SWMS to adjust to the new industry demands. 60
Contract Management and Procedures Relationship Managers Each Party (an "Appointing Party") will appoint an individual (a "Relationship Manager") who, from the Effective Date until replaced by the Appointing Party, will serve as that Appointing Party's representative under this Agreement. Each Relationship Manager will (i) have overall responsibility for managing and coordinating the performance of the Appointing Party's obligations under this Agreement, and (ii) be authorized to act for and on behalf of the Appointing Party concerning all matters relating to this Agreement. The Relationship Managers shall meet and confer in good faith to agree upon mutually acceptable procedures for meetings and reports with respect to the Parties' respective obligations hereunder. Neither Party will reassign its Relationship Manager, unless it provides at least 10 days prior written notice to the other Party. If a Party terminates the employment of or reassigns its Relationship Manager, it will appoint a new Relationship Manager with prior written notice to, the other Party. Reliance on Instructions A. In performing its obligations under this Agreement, SWMS will be entitled to rely upon any routine instructions, authorizations, approvals or other information provided to SWMS by (a) TRUSTCO's Relationship Manager, (b) any other TRUSTCO personnel identified by TRUSTCO's Relationship Manager or (c) except with respect to additional financial obligations on the part of TRUSTCO, any other TRUSTCO management personnel reasonably appearing to SWMS as having authority to provide the same on behalf of TRUSTCO. TRUSTCO shall provide a list of management personnel ("Management List") as of the Conversion Date and agrees to update the Management List from time to time as necessary and SWMS may rely on the Management List for the purposes of this Section 8.2. Unless SWMS knew of any lack of actual authority, error, incorrectness or inaccuracy in such instructions, authorizations, approvals or other information, SWMS will incur no liability or responsibility of any kind in relying on or complying with any such instructions or information. With respect to actions concerning or affecting cash, investment or other financial interests of TRUSTCO's Customers, SWMS shall rely exclusively upon TRUSTCO's instructions with respect to such matters, and SWMS shall not exercise discretion with respect to such matters. 61
B. In performing its obligations under this Agreement, TRUSTCO will be entitled to rely upon any routine instructions, authorizations, approvals or other information provided to TRUSTCO by (a) SWMS's Relationship Manager, (b) any other SWMS personnel identified by SWMS's Relationship Manager or (c) except with respect to Additional Services or additional financial obligations on the part of SWMS, any other SWMS personnel reasonably appearing to TRUSTCO as having authority to provide the same on behalf of SWMS. Unless TRUSTCO knew of any lack of actual authority, error, incorrectness or inaccuracy in such instructions, authorizations, approvals or other information, TRUSTCO will incur no liability or responsibility of any kind in relying on or complying with any such instructions or information. Information, Approvals and Cooperation The Parties shall cooperate with each other by, among other things, making its management decisions, information, approvals and acceptances related to the Services, and the provision thereof, available to each other on a timely basis upon reasonable request, so that the Parties may accomplish their obligations and responsibilities under this Agreement and each Additional Services Task Order. Each Party's Relationship Manager, or his or her designee, will be the Party's principal point of contact for obtaining those decisions, information, approvals and acceptances. Regulatory Access The records regarding TRUSTCO that are maintained and/or produced by SWMS under this Agreement will during normal business hours, upon reasonable notice to SWMS, or as otherwise required by law be available for examination and audit by any governmental agency or regulator that has jurisdiction over TRUSTCO's business. Each Party will notify the other promptly of any formal request by an authorized governmental agency or regulator to examine records regarding TRUSTCO that are maintained by SWMS. Upon TRUSTCO's written request, SWMS will provide any relevant information to those agencies and/or regulators and will subject itself to any required examination or regulation. The costs of ordinary and routine regulatory examinations and audits are included in the Base Services Charges. TRUSTCO will reimburse SWMS for the reasonable costs SWMS' incurs in connection with any extraordinary or non-routine regulatory examinations or audits by such regulators to the extent such extraordinary or non-routine regulatory examinations or audits are caused by TRUSTCO, its employees or Customers. SWMS will be excused from its obligation to meet the Service Levels during any such examination or audit to the extent such examination or audit precludes, interferes with or delays SWMS ability to perform the Services in accordance with such Service Levels. Charges Charges for Base Services TRUSTCO will pay to SWMS the conversion charges in accordance with the provisions of Schedule C and will pay the charges for the Base Services and expenses on a monthly basis, beginning with the month during which the Conversion Date occurs in the amounts set forth in Schedule C (the "Base Services Charges") for the Base Services. The Base Service Charges as subject to change in accordance with the provisions of Schedule C for any changes in the Base Services made pursuant to Section 3.6. 62
Charges for Additional Services For each month during the Term that SWMS provides Additional Services to TRUSTCO, TRUSTCO will pay SWMS all Additional Services Charges for such Additional Services at such rates set forth in the applicable Additional Services Task Order. To the extent Charges are based on an hourly rate, TRUSTCO shall pay the amount of $250 per hour for executives and $175 per hour for professionals during the first year of the Term. The hourly rates will adjust annually at each anniversary date of the Effective Date to an amount equal to the rate during the preceding year plus (a) the most recent Consumer Price Index (Employment Cost Index Compensation White Collar-ECICWIT) percentage adjustment, provided however, any one annual adjustment shall not exceed six (6) percent. Expenses TRUSTCO will pay, or reimburse SWMS for (a) reasonable and documented expenses described or otherwise provided for in the Schedules, and (b) any extraordinary expenses with respect to providing the Services and/or which are the result of regulatory changes or Industry Changes; provided that any expenses which exceed five thousand dollars ($5,000) must have the prior written approval of TRUSTCO, which will not be unreasonably withheld. TRUSTCO will continue to be responsible for all postage (including overnight delivery service and courier charges) utilized by SWMS for TRUSTCO's wealth management customers. Taxes The Parties' respective responsibilities for taxes arising under or in connection with this Agreement and each Additional Services Task Order are as follows: A. Property Taxes Each Party is responsible for any personal property taxes on property it owns or leases, for franchise and privilege taxes on its business, and for taxes based on its net income. B. Taxes on Services TRUSTCO shall be responsible for all federal, state or local taxes, however designated or levied, based on those charges, on this Agreement, on an Additional Services Task Order, or on the Services. Invoicing and Payment Invoicing Except as otherwise expressly provided in this Agreement or an Additional Services Task Order, SWMS will invoice TRUSTCO monthly in arrears for all amounts due under this Agreement. SWMS will invoice TRUSTCO for Base Services in accordance with the provisions of Schedule C (Base Services Charges). On or about the beginning of each month, SWMS will deliver to TRUSTCO an invoice for any Additional Services Charges for any Additional Services provided during the previous month calculated in accordance with the rates for Additional Services specified in the applicable Additional Services Task Orders. SWMS will compute periodic charges under this Agreement and each Additional Services Task Order on a calendar month basis and prorate those charges for any partial month. 63
Payment Due Subject to the other provisions of this Section 11 and unless otherwise agreed, TRUSTCO will pay invoices that SWMS submits under this Agreement and each Additional Services Task Order within thirty (30) days after receipt. Any amount not paid when due will thereafter bear interest paid at a rate equal to the lesser of (i) one percent (1%) per month or twelve percent (12%) per annum, pro-rated on the basis of a 365 day year, or (ii) the highest rate allowed by applicable law. Audit of Charges On a least thirty (30) days advance written notice by TRUSTCO, SWMS will permit TRUSTCO or its independent auditors (who will not be competitors SWMS, other than TRUSTCO's reporting external auditors), at no additional expense to SWMS, to access SWMS' books and records at a mutually agreeable time and place to perform an annual audit to the extent necessary to verify SWMS' charges to TRUSTCO under this Agreement and any Additional Services Task Order. TRUSTCO will provide SWMS with a copy of the audit report resulting from each audit. As promptly as practicable after providing the audit report, the Parties will review it and work in good faith to agree on any adjustment of charges and any appropriate future adjustments to SWMS' charges or practices under, and necessary for compliance with, this Agreement and any Additional Services Task Order. If SWMS desires to limit the scope of TRUSTCO's audit in order to protect confidential or proprietary information of SWMS or any customer of SWMS, the audit will be conducted by an independent third party auditor mutually acceptable to SWMS and TRUSTCO, who will verify SWMS' charges to TRUSTCO for the relevant period without disclosing any confidential information to TRUSTCO. Any third party auditors shall execute a non-disclosure/confidentiality agreement provided by SWMS before being granted access to SWMS' facilities and records. Safeguarding Of Data and Confidentiality TRUSTCO Data As between TRUSTCO and SWMS, TRUSTCO owns and will continue to own all right, title and interest in and to all TRUSTCO Data. Upon the termination of the Termination Assistance Period or on any earlier date as TRUSTCO and SWMS mutually determine that SWMS will no longer need the TRUSTCO Data to render the Services, SWMS will either return TRUSTCO Data in its possession to TRUSTCO, or at TRUSTCO's election erase TRUSTCO Data from the data files maintained by SWMS. Except as provided herein, SWMS may not use TRUSTCO Data for any purpose except to provide the Services, nor may SWMS sell, assign, lease or otherwise dispose of or commercially exploit TRUSTCO Data or any part of thereof. Notwithstanding the foregoing, SWMS shall have the right to use aggregated non-customer identifiable TRUSTCO Data relating to TRUSTCO and its Customers ("Aggregated Data") for purposes of improving the Services or marketing SWMS' services to other customers or potential customers of SWMS. When used by SWMS for these purposes and not for purposes of providing the Services, Aggregated Data will not include information that discloses the name or physical street address of a TRUSTCO Customer, and will not link information regarding the TRUSTCO Customer to the identity of the Customer. 64
Records Retention SWMS shall retain TRUSTCO Data in accordance with the records retention provisions of the Record Retention Policy attached hereto as Schedule J; provided, however, that the Parties are in agreement that SWMS shall have the right to place reasonable limitations on the amount of historical data maintained on the system at any one time (currently two (2) years history), and that the delivery of electronic data in a standard format to TRUSTCO for cold storage purposes and the subsequent purging of history shall be deemed by the Parties to be in accordance with any Record Retention Policy adopted by the Parties. SWMS sole responsibility for data being purged from the system is to deliver the data to TRUSTCO in a standard format for TRUSTCO's use with its archival system. The parties recognize that additional history storage on the AddVantage system may be available for additional fees. Privacy Laws and Regulations TRUSTCO shall be responsible for developing, preparing and providing all notices required by an act, law, rule or regulation, including without limitation the Gramm-Leach Bliley Act and its implementing regulations, pertaining to the collection, protection and sharing of information relating to TRUSTCO's Customers ("Privacy Policy"). TRUSTCO shall provide a copy of its current Privacy Policy to SWMS, and SWMS shall comply with TRUSTCO's reasonable Privacy Policy with respect to all TRUSTCO Data that comes into the possession or control of SWMS, or is otherwise handled or transmitted by SWMS. TRUSTCO shall promptly reimburse SWMS for all material expenses incurred in complying with the Privacy Policy. TRUSTCO shall provide SWMS with a minimum of thirty (30) days prior written notice of any material changes to the Privacy Policy. Confidentiality C. The Receiving Party agrees that all Confidential Information provided under this Agreement or an Additional Services Task Order by the Disclosing Party will be treated as confidential, regardless of whether marked or described as Confidential Information, and all confidentiality notices on that Confidential Information will be retained. 65
D. In avoiding unauthorized disclosure or use of the Disclosing Party's Confidential Information, the Receiving Party will use at least the same degree of care, but no less than a reasonable degree of care, as it employs concerning its own Confidential Information of similar importance. E. The Receiving Party may disclose Confidential Information only to its own officers, directors, and employees and to its consultants, subcontractors and advisors who reasonably need to know it. The Receiving Party will be responsible to the Disclosing Party for any violation of the provisions of this Section 12, by its officers, directors, employees, consultants, subcontractors or advisors. SWMS shall be permitted to provide access to Confidential Information to its Affiliates, and to any regulatory agency or other third party in connection with providing or as required to provide the Services, or as required by law or applicable regulation. F. The Receiving Party may not use the Disclosing Party's Confidential Information for any purpose not in furtherance of this Agreement, unless it obtains the Disclosing Party's prior written authorization. G. If the Receiving Party is requested to disclose any of the Disclosing Party's Confidential Information as part of an administrative or judicial proceeding, the Receiving Party will, to the extent permitted by applicable law, promptly notify the Disclosing Party of that request and cooperate with the Disclosing Party, at the Disclosing Party's expense, in seeking a protective order or similar confidential treatment for the Confidential Information. If no protective order or other confidential treatment is obtained, the Receiving Party will (i) disclose only that portion of the Confidential Information that is legally required to be disclosed based on the opinion of its counsel and (ii) use reasonable efforts to obtain reliable assurance that confidential treatment will be accorded the Confidential Information so disclosed. H. The Receiving Party agrees that in the event of a breach or threatened breach by the Disclosing Party, or any officer, director, consultant, subcontractor, advisor or employee of the Disclosing Party, of the provisions of this Section 12, the Disclosing Party will have no adequate remedy in money damages. Accordingly, each Party agrees that the other may seek, from any court of competent jurisdiction, injunctive and preliminary relief to remedy any actual or threatened unauthorized use or disclosure of the other party's Confidential Information. 66
Representations and Warranties Authorization Each Party represents and warrants to the other that (i) it has the requisite corporate power and authority to enter into this Agreement and each Additional Services Task Order and to carry out the transactions contemplated by this Agreement and each Additional Services Task Order, including the giving or withholding of any approval, acceptance, consent, notice or other action required or permitted by this Agreement or that Additional Services Task Order, and (ii) the execution, delivery and performance of this Agreement and each Additional Services Task Order and the consummation of the transactions contemplated by this Agreement and each Additional Services Task Order have been and will be duly authorized by the requisite corporate action on the part of that Party. Bank Regulatory Requirements During the Term, the Services provided under this Agreement by SWMS shall comply in all material respects with Bank Regulatory Requirements which apply to TRUSTCO including compliance with all reasonable policies adopted by TRUSTCO in order to meet the objectives of the Interagency Guidelines Establishing Standards for Safeguarding Customer Information (12 CFR 570, Appendix B) SWMS will provide TRUSTCO with its current Security and Privacy overview which will be updated and supplemented from time to time and reports generated by SWMS pursuant to compliance with the service levels.. Covenant of Cooperation and Good Faith The Parties covenant to timely and diligently cooperate to effect the goals, objectives and purposes of this Agreement and to facilitate the performance of their respective duties and obligations under the Agreement in a commercially reasonably manner. Further, the Parties agree to deal and negotiate with each other in good faith in the execution and implementation of their duties and obligations under the Agreement. However, nothing in this Agreement shall be construed as creating a relationship in which SWMS is the fiduciary of TRUSTCO. Noninfringement A. SWMS covenants, represents and warrants that SWMS and the SWMS Third Party Providers will perform their respective responsibilities under the Agreement in a manner that does not infringe, or constitute an infringement or misappropriation of, any patent, trade secret, copyright or other proprietary right of any third party. Notwithstanding this provision or any other provision in the Agreement, SWMS makes no warranty or representation with respect to any claims for such infringement or misappropriation by virtue of its compliance with such obligations herein to provide TRUSTCO access to, use of or benefits of any Third Party Contracts prior to receiving the necessary Required Consents. However, SWMS agrees to pay through to TRUSTCO the amounts recovered or received by SWMS from the TRUSTCO Third Party Providers with respect to damages sustained by TRUSTCO as a result of the Third Party's infringement. 67
B. TRUSTCO covenants, represents and warrants that TRUSTCO and its Affiliates will perform their respective responsibilities under the Agreement in a manner that does not infringe, or constitute an infringement or misappropriation of, any patent, trade secret, copyright or other proprietary right of any third party. Notwithstanding this provision or any other provision in the Agreement, TRUSTCO makes no warranty or representation with respect to any claims for such infringement or misappropriation by virtue of its compliance with such obligations herein to provide SWMS access to, use of or benefits of any Third Party Contracts prior to receiving the necessary Required Consents. However, TRUSTCO agrees to pay through to SWMS the amounts recovered or received by TRUSTCO from the TRUSTCO Third Party Providers and/or Unaffiliated Third Party Providers with respect to damages sustained by SWMS as a result of the Third Party's infringement. DISCLAIMER OF WARRANTIES THE SERVICES AND THE SWMS THIRD PARTY SOFTWARE ARE PROVIDED "AS-IS" AND "AS AVAILABLE," WITHOUT REPRESENTATIONS OR WARRANTIES OF ANY KIND, ORAL OR WRITTEN. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES AND EACH PARTY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, ARISING FROM COURSE OF DEALING, COURSE OF PERFORMANCE, USAGE OF TRADE, QUALITY OF INFORMATION, QUIET ENJOYMENT OR OTHERWISE, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, QUALITY OF INFORMATION, QUIET ENJOYMENT, AND TITLE/NON-INFRINGEMENT, OR THAT THE SERVICES OR DATA PROCESSED OR PROVIDED BY SWMS WILL BE ERROR-FREE INTERRUPTION-FREE. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, SWMS SHALL HAVE NO LIABILITY WITH RESPECT TO ANY THIRD PARTY DATA AND SERVICES OR THIRD PARTY PRODUCTS. EXCEPT TO THE EXTENT THAT SWMS' IS ENTITLED TO ASSERT DEFENSES UNDER ANY PROVISIONS OF THE AGREEMENT OTHER THAN THIS SECTION 13.5, THIS DISCLAIMER AS SET FORTH ABOVE CANNOT BE INTERPOSED AS A DEFENSE TO SWMS' OBLIGATION TO PROVIDE THE SERVICES IN ACCORDANCE WITH THE BASE SERVICE LEVELS AS PROVIDED IN SCHEDULE B TO THIS AGREEMENT. Insurance During the Term, SWMS will be covered by the following insurance: 68
Worker's Compensation Insurance, including occupational illness or disease coverage, or other similar social insurance in accordance with the laws of the country, state, or territory exercising jurisdiction over the employee and Employer's Liability Insurance with coverage limits of $1,000,000 per accident and a policy limit of $1,000,000. Commercial General Liability Insurance, including Products, Completed Operations, and Personal Injury Liability, Contractual Liability and Broad Form Property Damage Liability covering bodily injury and property damage with coverage limits of $1,000,000 per occurrence and $2,000,000 general aggregate. Errors and Omissions coverage with coverage limits of $10,000,000 per wrongful act and an aggregate of $10,000,000. Employee Dishonesty Insurance (Crime Policy) for loss arising out of or in connection with fraudulent or dishonest acts committed by SWMS' employees, acting alone or in collusion with others, including loss of money, securities and other property of others in SWMS' care, custody or control with coverage limits of $15,000,000 per loss with an aggregate of $15,000,000.. Indemnification Personal Injury and Property Damage I. By SWMS SWMS shall, subject to the provisions of Section 16, at its expense, defend TRUSTCO from and against any third-party claims brought against TRUSTCO relating to personal injury (including death) or loss or damage to tangible property (other than data or information) to the extent such personal injury or damage to tangible property is the result of the negligence or wrongful misconduct of SWMS, its employees, Affiliates, agents, representatives and SWMS Third Party Providers. In addition, SWMS shall pay any judgments finally awarded by a court of competent jurisdiction to such third parties against TRUSTCO based on such claims after SWMS has presented its defenses (or after SWMS elected not to defend such claims), and any settlements to which SWMS agrees in writing (or to which TRUSTCO agreed after SWMS elected not to defend such claims). By TRUSTCO TRUSTCO shall, at its expense, defend SWMS from and against any third-party claims brought against SWMS relating to personal injury (including death) or loss or damage to tangible property (other than data or information) to the extent such personal injury or damage to tangible property is the result of the negligence or wrongful misconduct of TRUSTCO, its employees, Affiliates, agents, representatives, TRUSTCO Third Party Providers, and Unaffiliated Third Party Providers. In addition, TRUSTCO shall pay any judgments finally awarded by a court of competent jurisdiction to such third parties against SWMS based on such claims after TRUSTCO has presented its defenses (or after TRUSTCO elected not to defend such claims) and any settlements to which TRUSTCO agrees in writing (or to which SWMS agreed after TRUSTCO elected not to defend such claims). 69
Intellectual Property Indemnity J. By SWMS SWMS shall, at its expense, and pursuant to the other terms, conditions and procedures of this Section 15, indemnify and defend TRUSTCO from and against any third-party claims brought against TRUSTCO alleging that TRUSTCO's use, in accordance with the terms of this Agreement, of the SWMS Third Party Software (but only to the extent such software is licensed to SWMS by an entity majority owned or directly controlled by SunGard Data Systems Inc. or any of its subsidiaries) the SWMS Intellectual Property infringes a third person's copyright, trade secret or United States patent enforceable in the United States. In addition, in the event a third party asserts a claim against TRUSTCO relating to any other SWMS Third Party Software, SWMS will reasonably cooperate with TRUSTCO with respect to assigning or otherwise passing through to TRUSTCO any infringement warranties or indemnification rights available to SWMS from vendors of SWMS Third Party Software. SWMS shall pay any judgments finally awarded by a court of competent jurisdiction to such third parties against TRUSTCO based on such claims after SWMS has presented its defenses (or after SWMS elected not to defend such claims) and any settlements to which SWMS agrees in writing (or to which TRUSTCO agreed after SWMS elected not to defend such claims). Mitigation Upon receiving notice of an infringement claim, the indemnifying party may, in its sole discretion, (i) modify the allegedly infringing item to be non-infringing without materially impairing its functionality, (ii) replace the allegedly infringing item with a non-infringing item of substantially equivalent functionality, or (iii) obtain for the indemnified party the right to continue to use the item in accordance with the terms of this Agreement. Exclusions Notwithstanding the other provisions of this Section 15.2 and except as expressly provided otherwise, the indemnifying party shall have no liability to the indemnified party for any claim of infringement to the extent that such claim is based on modifications or enhancements to the applicable software or equipment created by the indemnified party, or the misuse or use of the applicable software or equipment by the indemnified party in a manner not intended by the indemnifying party. 70
Indemnification Procedures With respect to any third party claims for which either Party is entitled to indemnification under this Section 15 (an "Indemnified Claim"), the following procedures will apply: K. Notice After any entity entitled to indemnification under this Section receives notice of the commencement or threatened commencement of any civil, criminal, administrative, or investigative action or proceeding involving an Indemnified Claim for which the indemnified party will seek indemnification under this Section, the indemnified party will promptly notify the indemnifying party of that claim in writing. Such notice shall describe any matters with respect to the Indemnified Claim of which the indemnified party has knowledge. However, failing to notify an indemnifying party of an Indemnified Claim will not relieve the indemnifying party of its obligations under this Agreement except to the extent the indemnifying party is prejudiced thereby. The indemnified party will give the indemnifying party full opportunity to control the response to the Indemnified Claim and the defense thereof, including, without limitation, any agreement relating to the settlement thereof; provided, however, the indemnified party may participate, at its own expense, in any defense and any settlement directly or through counsel of its choice. As soon as reasonably practicable after receiving written notice of the claim, the indemnifying party will notify the indemnified party in writing as to whether the indemnifying party elects to assume control of the defense and settlement of that claim. If the indemnifying party elects not to defend, the indemnified party will have the right to defend or settle the claim as it may deem appropriate, at the cost and expense of the indemnifying party, which will promptly reimburse the indemnified party for such costs, expenses and settlement amounts. L. Subrogation If an indemnifying party is obligated to indemnify an indemnified party under this Section, then, upon paying that indemnity in full, the indemnifying party will be subrogated to all rights of the indemnified party concerning the claims to which the indemnification relates. 71
Liability LIMITATION AS TO TYPES OF DAMAGES NOTHWITHSTANDING ANY OTHER PROVISION IN THIS AGREEMENT, WITH RESPECT TO ALL CLAIMS ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT (INCLUDING WITHOUT LIMITATION CLAIMS FOR BREACH OF AN OBLIGATION TO PROVIDE INDEMNIFICATION), THE MEASURE OF DAMAGES PAYABLE BY EITHER PARTY WILL NOT INCLUDE, AND NEITHER PARTY'S LIABILITY WILL INCLUDE, ANY AMOUNTS FOR INDIRECT, INCIDENTAL, RELIANCE, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES (INCLUDING LOST REVENUE, LOST PROFIT, LOSS OF DATA, OR BUSINESS INTERRUPTION LOSSES) OF ANY PARTY, INCLUDING THIRD PARTIES, WHETHER IN TORT OR CONTRACT, AND WHETHER OR NOT SUCH DAMAGES ARE FORESEEN OR UNFORESEEN. THE LIMITATIONS IN THIS SECTION SHALL NOT APPLY TO DAMAGES ARISING OUT OF (A) A PARTY'S BREACH OF A CONFIDENTIALITY OBLIGATION UNDER THIS AGREEMENT, (B) TRUSTCO'S BREACH OF THE LIMITATIONS ON USE OF THE SWMS INTELLECTUAL PROPERTY OR THE SERVICES, OR (C) A CLAIM UNDER SECTION 15.2 (Intellectual Property Indemnity). DOLLAR LIMITATION NOTHWITHSTANDING ANY OTHER PROVISION IN THIS AGREEMENT, SWMS's LIABILITY TO TRUSTCO FOR ANY CLAIM UNDER OR RELATING TO THIS AGREEMENT, OR RELATING IN ANY WAY TO THE SERVICES, WHETHER BREACH OF CONTRACT OR TORT, WILL NOT EXCEED, IN THE AGGREGATE, AN AMOUNT EQUAL TO THE AMOUNT PAID BY THE CUSTOMER TO SWMS UNDER THIS AGREEMENT FOR THE TWO (2) YEAR PERIOD PRIOR TO THE MOST RECENT CAUSE OF ACTION. Statute of Limitations A Party may not assert against the other any cause of action arising under this Agreement or any Additional Services Task Order that accrued more than three (3) years before that Party filed a suit alleging that cause of action. Force Majeure M. Force Majeure Event Neither Party is or will be liable for any default or delay in the performance of its obligations under this Agreement or any Additional Services Task Order (excluding payment obligations hereunder or thereunder) if and to the extent a Force Majeure Event occurs. For purposes of this Agreement, a "Force Majeure Event" occurs if and to the extent: (i) the default or delay is caused, directly or indirectly, by fire, flood, earthquake, natural disasters, elements of nature or acts of God; riots, civil disorders, terrorist acts, rebellions or revolutions in any country; delay or failure in communications or electronic data transmission as a result of excessive or extraordinary traffic caused by extraordinary market occurrences or circumstances; acts or omissions of third parties not subcontractors of the defaulting party or suppliers; or any other cause beyond the reasonable control of that Party; (ii) the non-performing Party is without fault in causing that default or delay; and (iii) the non-performing Party cannot reasonably circumvent the default or delay through the use of alternate sources, workaround plans or other means (including, with respect to SWMS, by SWMS meeting any express obligations it may have for performing disaster recovery services as part of the Services; provided however, SWMS shall be relieved from performing disaster recovery services to the extent SWMS is prevented or hindered by performing such services as a result of or during the occurrence a Force Majeure Event). 72
N. Excused from Performance If and for so long as a Force Majeure Event occurs, the non-performing Party is excused from further performing or observing the obligation(s) affected, provided the Party continues to use commercially reasonable efforts to recommence performance. Any Party delayed in its performance under those circumstances will promptly notify the Party to whom performance is due and describe at a reasonable level of detail the circumstances causing the delay. 16.5 ....SunGard Business Systems Guarantee SunGard guarantees, subject to the provisions of Section 16, (i) the timely payment of all liabilities, damages, indemnities and other amounts owed by SWMS to TRUSTCO under this Agreement and shall assume full responsibility for payment of such amounts in the event that SWMS is unable or refuses to pay such amounts after SWMS liability therefore has clearly been established and is not in dispute and (ii) performance of all of SWMS obligations under this Agreement if SWMS fails to fulfill any such obligations. With respect to all claims asserted by TRUSTCO against SunGard, SunGard shall be entitled to raise and assert all defenses and contract limitations under this Agreement that would otherwise be available to SWMS and SunGard's liabilities shall not extend beyond the limits of this Agreement. Dispute Resolution Review of Performance The Relationship Managers will meet as often as mutually agreed to review performance under this Agreement and each Additional Services Task Order. If any dispute between the Parties arises out of or in connection with this Agreement or any Additional Services Task Order the procedures in this Section 17 shall be implemented. 73
Dispute Escalation In the event of any dispute, controversy or claim of any kind or nature arising under or in connection with this Agreement or any Additional Services Task Order (including disputes as to the creation, validity, interpretation, breach or termination of this Agreement or any Additional Services Task Order) which cannot be resolved by the Relationship Managers (a "Dispute"), then upon the written request of either Party, each of the Parties will appoint a designated senior business executive (other than the Parties' designated Relationship Managers) whose task it will be to meet for the purpose of endeavoring to resolve the Dispute. The designated executives will meet as often as the Parties reasonably deem necessary in order to gather and furnish to the other all information with respect to the matter in issue which the Parties believe to be appropriate and germane in connection with its resolution. Such executives will discuss the Dispute and will negotiate in good faith in an effort to resolve the Dispute without the necessity of any formal proceeding relating thereto. The specific format for such discussions will be left to the discretion of the designated executives but may include the preparation of agreed upon statements of fact or written statements of position furnished to the other Party. No formal proceedings for the resolution of the Dispute may be commenced until the earlier to occur of (a) a mutual good faith conclusion by the designated executives that amicable resolution through continued negotiation of the matter in issue does not appear likely or (b) the 30th day after the initial request to negotiate the Dispute. Contract Enforcement The Parties agree that any dispute, controversy, claim or disagreement between or among either of the Parties to this Agreement that the Parties are unable to resolve through the informal discussions or negotiations pursuant to Section 17.2 may be submitted in order to settle such unresolved dispute upon the completion of the dispute resolution process to a court of competent jurisdiction in either Pennsylvania or New York. The Parties stipulate that the submission of disputes to the dispute resolution process as provided in Section 17.2 shall be a condition precedent to any suit, action or proceeding instituted in any court or before any administrative tribunal with respect to such dispute. Continued Performance Unless this Agreement or the applicable Additional Services Task Order has been terminated in accordance with the provisions of Section 18, SWMS will continue to provide the Services during any dispute resolution proceedings, provided TRUSTCO continues to make payment for those Services as provided in this Agreement. Termination Termination for Cause If either party materially defaults in performing any of its duties or obligations (except for payment obligations) under this Agreement or under an Additional Services Task Order, and fails to substantially cure that default within 60 days after receiving written notice specifying the default (or, concerning any default that cannot reasonably be cured within that 60 day period but is curable, if the defaulting party fails to proceed within that 60 day period to commence curing the default and thereafter to proceed with all due diligence to substantially cure it, and to substantially cure it within 120 days after the giving of that written notice), then the non-defaulting party may, by giving written notice of the default to the defaulting party, terminate the Additional Services Task Order that was breached and, where applicable due to material breach with respect to Base Services, this Agreement, as of a date specified in the notice of termination, which date will be no later than one year after the date on which the terminating Party's right to terminate arose. If the default is incapable of being cured, then the 60 day cure period shall not apply, and notice of termination may be given directly by the party not in default. A Party's right to give a termination notice under this Section 18 will expire once the default is substantially cured. 74
Termination for Non-Payment If TRUSTCO defaults in the payment when due of any material amount under this Agreement or an Additional Services Task Order, other than amounts in dispute pursuant to Section 17 so long as any disputed amount for which payment is not made is attributable to specific Services that TRUSTCO reasonably contends have not been performed in accordance with this Agreement, and does not cure the default within 15 days after receiving written notice of the default, then SWMS may, by giving written notice of the default to TRUSTCO, terminate this Agreement as of a date specified in the notice of termination, which date will be no later than one year after the date on which SWMS' right to terminate arose. SWMS right to give a termination notice under this Section will expire once TRUSTCO is current in its payment obligations hereunder, including any applicable interest payments. Termination for Insolvency If a Party (the "Insolvent Party") becomes or is declared insolvent or bankrupt; is the subject of any proceedings relating to its liquidation, insolvency or for the appointment of a receiver or similar officer for it (which, in the case of involuntary proceedings, remains pending without dismissal for at least 60 days); makes an assignment for the benefit of substantially all of its creditors; or enters into an agreement for the composition, extension, or readjustment of substantially all of its obligations, then the other Party may, by giving written notice to the Insolvent Party, terminate this Agreement and each Additional Services Task Order as of a date specified in the notice of termination. However, neither this Agreement nor any Additional Services Task Order may be terminated under this Section 18 once the Insolvent Party ceases to be insolvent or be the subject of a proceeding relating to its liquidation, insolvency or the appointment of a receiver. ANY RIGHT OF ACCESS TO AND EMPLOYMENT OF THE SYSTEMS CONTEMPLATED BY THIS AGREEMENT, SHALL BE DEEMED AN EXECUTORY CONTRACT UNDER SECTION 365(n) OF TITLE 11 TO THE U.S. BANKRUPTCY CODE AND SHALL REMAIN IN FULL AND FORCE AND EFFECT UPON THE TRUSTCO'S ELECTION AND TRUSTCO'S SUBSTANTIAL PERFORMANCE HEREUNDER, NOTWITHSTANDING ANY BANKRUPTCY OR INSOLVENCY OF THE OWNER. 75
Termination for Convenience TRUSTCO may terminate this Agreement without cause at any time after the second anniversary the Conversion Date upon written notice to SWMS, and such termination shall be effective as of the date specified in such termination notice but in no event less than ninety (90) days after the date of such termination notice. In the event of any termination by TRUSTCO in accordance herewith prior to the Conversion Date, the Conversion Charge provided for in Section 2 of Schedule C shall be considered by the Parties to represent liquidated damages which shall be retained by SWMS to partially compensate it for early termination of the Agreement and such liquidated damages shall be in addition to TRUSTCO's obligation to pay any other fees and expenses that are owed by TRUSTCO for Services provided up to the effective date of termination. In the event of any termination by TRUSTCO in accordance herewith on or after the Conversion Date, TRUSTCO shall pay a termination fee equal to the following (based on the prevailing rates for Treasury securities with a maturity comparable to the unexpired term of the contract, as of the first business day of the month in which termination is effective and as published in The Wall Street Journal) on the effective date of termination of the minimum monthly payments that would be due during the unexpired portion of the Term in accordance with Section 3(d) of Schedule C: During the Initial Term of the Agreement-100% of the net present value of the monthly payments due during the remaining unexpired term of the Agreement; and During any renewal term an amount to be determined by the parties at the time the renewal fees are negotiated. 18.5 Termination Assistance and Rights upon Termination or Expiration Upon receiving any notice of termination by TRUSTCO, or upon expiration of the Term, SWMS will, for a period of up to 12 (twelve) months (plus an additional 30 days if the 12 month period ends on or between December 15 and December 31) after the termination or expiration of the Term ("Termination Assistance Period"), provide to TRUSTCO the termination assistance reasonably requested to allow the Services provided under this Agreement to continue, and to facilitate the orderly transfer of responsibility for performance of the Services to TRUSTCO or to a third party designated by TRUSTCO ("Termination Assistance Services"); provided that TRUSTCO pays SWMS for the resources used by SWMS to provide such Termination Assistance Services on a time and materials basis at rates equal to SWMS' then-current reasonable commercial rates for those resources charged to similarly situated customers. Additionally, TRUSTCO shall continue to pay all Charges as provided by this Agreement during the Termination Assistance Period. SWMS shall be relieved from complying with Service Levels for Services that TRUSTCO discontinues obtaining from SWMS (the "Transitioned Out Services") and to the extent the Service Levels for the remaining Services are adversely impacted by the Transitioned Out Services or third parties providing the Transitioned Out Services. If termination of this Agreement is a result of a breach of any part of this Agreement or any Additional Services Task Order by TRUSTCO, then (i) TRUSTCO will pay SWMS in advance for such Termination Assistance Services, and (ii) SWMS will invoice TRUSTCO each month in advance in an amount equal to SWMS' reasonable estimate of the total amount payable to SWMS for such Termination Assistance Services for that month, adjusted as necessary, to reconcile the estimated and actual charges for Termination Assistance Services provided during the prior month. All such advance payments will be payable on the first day of each month during the Termination Assistance Period, provided the first month's payment will be paid on the first day of the Termination Assistance Period if that day does not fall the first day of the month. For any termination or expiration of this Agreement other than as a result of a breach of any part of this Agreement or any Additional Services Task Order by TRUSTCO, SWMS will invoice TRUSTCO at the beginning of each month in arrears in an amount equal to the total charges payable to SWMS for any Termination Assistance Services provided during the previous month. The Termination Assistance Services to be provided will include without limitation the following: 76
A. Transition Out Plan Developing, together with TRUSTCO, a plan for the orderly transition of the performance of the Services from SWMS to TRUSTCO or to a third party designated by TRUSTCO. B. Training Providing reasonable formal training for personnel of TRUSTCO in the performance of the Services then being transitioned to TRUSTCO; provided SWMS shall not be obligated to provide training or disclose information concerning the workings or methodology of any proprietary software or systems. C. Equipment Providing TRUSTCO the right to (i) assume any leases for Equipment leased by SWMS that is then dedicated to providing Services for TRUSTCO under this Agreement, if and to the extent SWMS has the necessary rights to allow the assumption of the leases, and (ii) purchase from SWMS any Equipment owned by SWMS that is then dedicated to providing Services for TRUSTCO under this Agreement. If TRUSTCO exercises its right under item (ii), it will pay to SWMS an amount equal to the fair market value of the applicable Equipment. SWMS will also provide all users manuals and other documentation in its possession that relates to that Equipment. TRUSTCO will assume responsibility under any third party software license fees or maintenance agreements for that Equipment to the extent those responsibilities relate to periods after the date of termination or expiration of this Agreement. D. Third Party Services Assigning, at TRUSTCO's request and expense, to TRUSTCO or its designee, any third party services then being used by SWMS solely in performing the Services pursuant to this Agreement; and, assisting TRUSTCO in obtaining, at TRUSTCO's expense, any necessary rights to any third party services then being utilized by SWMS in performing the Services and in the performance of services for any other SWMS Customer. SWMS will be entitled to retain the right to use any of those third party services in connection with the performance of services for any other SWMS customer. E. SWMS Third Party Software Assisting TRUSTCO in obtaining, at TRUSTCO's expense, any necessary licenses to any SWMS Third Party Software then being utilized by SWMS in performing the Services. SWMS will be entitled to retain the right to continue to license and use any of the SWMS Third Party Software in connection with the performance of services for any other SWMS customer. 77
F. Developed Software Provided that TRUSTCO is not in breach of this Agreement, granting to TRUSTCO during the Termination Assistance Period a non-transferable, non-exclusive, fully paid up, royalty free right to access and employ any Developed Software (including all related documentation) and Other Intellectual Property that SWMS used as of the termination of the Agreement for providing the Services to TRUSTCO. The Developed Software that are the subject of the rights granted under this subsection are collectively referred to as the "Transition SWMS Materials". The licenses to access and use the Transition SWMS Materials will be subject to the following: 1. Except with the prior written consent of SWMS, the Transition SWMS Materials will not be accessed, operated, directly or indirectly, (i) by persons other than employees of TRUSTCO, or (ii) on equipment that is not under the control of TRUSTCO. 78
2. The Transition SWMS Materials may only be accessed or used for continued use of the Services (or replacement or transitioned services) during the transition. TRUSTCO (i) will keep the Transition SWMS Materials confidential, (ii) will not at any time allow the Transition SWMS Materials, or any of the various components of them or any modifications to them, to be disclosed to or accessed by third parties, sold, assigned, leased or commercially exploited or marketed in any way, with or without charge, by TRUSTCO or its employees or agents and, (iii) except to the extent necessary for normal operation of the Transition SWMS Materials as permitted in this Agreement, will not permit the Licensed SWMS Materials to be accessed, copied or reproduced, in whole or in part, by any person at any time. 3. TRUSTCO acknowledges and agrees that the Transition SWMS Materials are SWMS' and its licensors' valuable property, that violation in any material respect of any provision of this Section would cause SWMS irreparable injury for which it would have no adequate remedy at law, and, in addition to any and all other remedies or rights SWMS may have at law or in equity, SWMS will be entitled to preliminary and other injunctive relief against a violation of that nature. Miscellaneous Notices All notices, requests, demands and other communications to be given or delivered under or by reason of the provisions of this Agreement or any Additional Services Task Order for the enforcement of the Agreement provisions will be in writing and will be deemed given (i) on the date sent, when sent by facsimile or delivered personally, (ii) on the next business day when sent by overnight Federal Express, Express Mail or similar service and (iii) on the third business day after being mailed when mailed by certified first class mail, return receipt requested, to each Party at the following address (or to such other address as that Party may have specified by notice given to the other pursuant to this provision): If to SWMS: SunGard Wealth Management Services, LLC 8300 East Thorn Drive, Suite 100 Wichita, Kansas 67226 Attention: President With a copy to: 79
SunGard Data Systems Inc. 1285 Drummers Lane Wayne, Pennsylvania 19087 Attention: General Counsel Trustco Bank 3 Sarnowski Drive Glenville, N.Y. 12302 Attention: Kevin Curley With a copy to: Trustco Bank 5 Sarnowski Drive Glenville, N.Y. 12305 Attention: President & CEO Notwithstanding the notice provisions above, the directions and instructions delivered by the Parties in the context of facilitating the day to day operations outsourcing functions by SWMS for TRUSTCO pursuant to this Agreement or any Additional Services Task Order may be delivered in writing, through e-mail or through Quickflow forms or other AddVantage methodologies without having to adhere to the formal notice provisions above. Binding Nature and Assignment This Agreement and each Additional Services Task Order is binding on the Parties and their respective successors and assigns. Either party may assign its right to receive payments under this Agreement and each Additional Services Task Order by providing written notice of that assignment to the other Party, and SWMS shall be permitted to assign this Agreement in the event of a restructuring that does not material impact its (or the assignee's) ability to provide the Services. In addition, either Party may assign all of its rights and obligations under this Agreement and all Additional Services Task Orders to any acquirer of all, or substantially all, of that Party's assets, provided that such transfer may not (a) increase the scope of the Services, (b) decrease the Charges, fees or other compensation paid or to be paid to SWMS, or (c) increase the scope of any other obligations of the non-assigning Party. Except as otherwise provided in this Section, neither Party will, nor has the power to, assign this Agreement nor any Additional Services Task Order without the other Party's prior written consent, which consent shall not be unreasonably withheld. Severability Whenever possible, each provision, or any portion of each provision, of this Agreement and each Additional Services Task Order will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision, or any portion of any provision, of this Agreement or an Additional Services Task Order is held to be prohibited by or invalid under applicable law, that provision, or portion of that provision, will be deemed restated to reflect the original intentions of the Parties as nearly as possible in accordance with applicable law, and, if capable of substantial performance, the remaining provisions of this Agreement will be enforced as if this Agreement and that Additional Services Task Order was entered into without the invalid provision. 80
Counterparts This Agreement and each Additional Services Task Order may be executed in one or more counterparts, all of which taken together will constitute one and the same instrument. Relationship of Parties A. SWMS SHALL NOT OWE A FIDUCIARY OBLIGATION TO, AND SHALL NOT BE DEEMED A FIDUCIARY OF, TRUSTCO OR TRUSTCO'S CUSTOMERS, SWMS SHALL NOT PROVIDE, AND SHALL NOT BE REQUIRED OR OBLIGATED TO PROVIDE LEGAL, TAX OR INVESTMENT ADVICE (EXCEPT WITH RESPECT TO MAINTAINING THE INVESTMENT NETWORK) TO TRUSTCO OR ITS CUSTOMERS. B. Except as expressly provided, SWMS does not undertake by this Agreement or any Additional Services Task Order or otherwise to perform any of TRUSTCO's obligations, whether regulatory or contractual, or to assume any responsibility for any of TRUSTCO's business or operations. SWMS shall not owe a fiduciary obligation to, and shall not be deemed a fiduciary of, TRUSTCO or TRUSTCO's customers. SWMS has the sole right and obligation to supervise, manage, contract, direct, procure, perform or cause to be performed, all work to be performed by SWMS under this Agreement and each Additional Services Task Order. TRUSTCO acknowledges and agrees that, except as otherwise provided by Section (Non-competition), or this Agreement or any Additional Services Task Order, SWMS may perform information technology services, including services similar to those performed for TRUSTCO under this Agreement and any Additional Services Task Order, for any third party and at any SWMS Facility that SWMS may use to provide the Services. Further Assurances The Parties agree to execute and deliver such other letters, instruments and documents as either Party reasonably requests to in order to permit SWMS to provide the Services, and for TRUSTCO to access and use the Services. Neither Party's execution, delivery, or performance of this Agreement or any Additional Services Task Order will constitute a violation of any judgment, order, or decree; a material default under any material contract by which it or any of its material assets are bound; or an event that would, with notice or lapse of time, or both, constitute such a default. Non-competition Except as expressly provided herein, during the Term and continuing until and for so long as TRUSTCO is receiving Base Services from SWMS, and for a period of two (2) years thereafter, TRUSTCO shall not, directly or indirectly, offer or become a shareholder, member, partner or otherwise have an ownership in any entity offering wealth management operation services in competition with SWMS; provided, however, that this provision shall not apply if TRUSTCO acquires or is acquired by an organization that in the aggregate (and without regard to the revenues of any individual business unit) received less than thirty-five percent (35%) of its revenues from wealth management operations outsourcing services at the time of the acquisition. Notwithstanding the foregoing, nothing contained in this Agreement or any Additional Services Task Order, or any other document shall prohibit TRUSTCO, its parent, subsidiaries or affiliates, from providing trust services to TRUSTCO, its parent, subsidiaries or affiliates. 81
Third Party Beneficiaries This Agreement does not, and neither Party intends that this Agreement will, confer any legal rights on any third party, including TRUSTCO Customers, or to be enforceable in any part by a third party. Media Releases other than references by SWMS to TRUSTCO in its promotional, marketing and related materials, all media releases, public announcements and public disclosures by either Party relating to this Agreement or its subject matter shall be subject to the other Party's review and approval prior to release. This restriction does not apply (i) to any announcement intended solely for internal distribution or (ii) any disclosure required by law. This Agreement does not confer and neither Party will have any right to use the other Party's trademarks, service marks or logos without the other Party's prior written consent. Modification and Waiver Only a written instrument duly executed by or on behalf of each Party may modify this Agreement or any Additional Services Task Order. No delay or omission by either Party to exercise any right or power under this Agreement or any Additional Services Task Order will impair that modification right or power, nor be construed to be a waiver of it. If either Party waives any of the other Party's obligations under this Agreement or any Additional Services Task Order, or waives any breach of this Agreement or any Additional Services Task Order, that waiver will not be construed to be a waiver of any succeeding breach nor of any other obligation under this Agreement or any Additional Services Task Order. Entire Agreement This Agreement and each Additional Services Task Order, including the Schedules referred to in this Agreement and that Additional Services Task Order and attached to it, each of which is incorporated in this Agreement for all purposes, constitutes the entire agreement between the Parties concerning the subject matter of this Agreement and that Additional Services Task Order, and supercedes all prior agreements or understanding with respect to the subject matter of this Agreement (except of obligations expressly provided for surviving termination of the Letter of Intent signed by the Parties in contemplation of this Agreement). There are no (and neither party has relied on in executing this Agreement any) representations, understandings or agreements, written or oral, relative to this Agreement that are not fully expressed in this Agreement or an Additional Services Task Order. 82
Governing Law The laws of the State of New York (other than the choice of law rules) will govern all questions concerning the construction, validity, enforceability and interpretation of this Agreement and each Additional Services Task Order and the performance of the obligations imposed by this Agreement and each Additional Services Task Order. Attorney's Fees Should either party to this Agreement institute any action or proceeding (excluding mediation proceedings) to enforce this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement, otherwise arising under this Agreement, or for a declaration of rights hereunder, the prevailing party in any such action or proceeding shall be entitled to receive from the other party all costs and expenses, including, without limitation, reasonable attorney's fees, incurred by the prevailing party in such action or proceeding, including appellate proceedings. IN WITNESS WHEREOF, SWMS and TRUSTCO have each caused this Agreement to be signed and delivered by its duly authorized representative, all as of the Effective Date. SunGard Wealth Management Services, LLC Trustco Bank By: ______________________________ By:________________________ Title: ______________________________ Title:_____________________ 83
SCHEDULES TO MASTER SERVICES AGREEMENT BETWEEN SUNGARD WEALTH MANAGEMENT SERVICES AND TRUSTCO CORPORATION LIST OF SCHEDULES A. Base Services B. Base Service Levels C. Base Services Charges D. TRUSTCO Proprietary Software E. TRUSTCO Third Party Software F. SWMS Third Party Software G. Third Party Contracts H. Disaster Recovery Plan I. Workplan J. Records Retention K. TRUSTCO Specified Responsibilities L. SWMS Third Party Providers M. Unaffiliated Third Party Providers [See separate document for Schedules] 84
SCHEDULE A BASE SERVICES The Base Services shall include the following summarized services which are more completely described in the Base Service Level Standards Schedule (B): I. Conversion Services. Upon execution of this Agreement and subject to the terms and conditions of this Agreement, SWMS and TRUSTCO will jointly work without delay to convert TRUSTCO's Wealth management Assets to the SunGard AddVantage system and SWMS outsourcing solution by the targeted date noted below or such later date as mutually agreed by the parties. The conversion services shall include the following: o Conversion Plan: Within a reasonable period of time after the Effective Date, SWMS and TRUSTCO will jointly formulate a conversion plan that identifies specific responsibilities of SWMS and TRUSTCO and a schedule for completion of such responsibilities (the "Conversion Plan"). o Data Conversion: Conversion of the current TRUSTCO wealth management accounts from the Series 7 system to the SunGard AddVantage System in accordance with the Conversion Plan which will include the following services: o SWMS shall provide the necessary Programming to convert the TRUSTCO assets from their current system. o TRUSTCO and/or its current Third Party Provider shall be responsible for extracting appropriate data from their current System in order to populate the AddVantage files as follows: o Account Master o Interested Party Master o Interested Party Sub-master o Master Account related Central accounts o Holdings/Tax/Cash Lots o Non-standard conversion programs that have been done by SWMS for clients when appropriate data files could be obtained: o Trade Date/Accrual Statement Accruals o Pricing Overlay o Upload of data for loading post conversion income o Implementation Support The SWMS Conversion will result in the conversion of all reasonably necessary data contained in the final Conversion Plan which will enable the TRUSTCO wealth management accounts that are to be converted to be processed on the SunGard AddVantage system. SWMS shall be responsible for using the developed Conversion Programming to convert the TRUSTCO data files extracted from their current system to the format required by the AddVantage System. Historical data will not be converted from TRUSTCO's previous system. SWMS will maintain historical data going forward from the date of conversion. As noted in the Agreement two years of history will be maintained on the system. Older data will be purged on a scheduled basis and delivered to TRUSTCO in a standard format for use by TRUSTCO on their archival system. TRUSTCO and SWMS will jointly be responsible for identifying any data conversion errors created in the data extracted from the Series 7 system and the conversion to the AddVantage System. TRUSTCO will be responsible for correcting all errors which are caused by the data extract and SWMS will be responsible for correcting all errors created by the conversion programming which do not result from the data extract provided by TRUSTCO. 85
o Data Conversion Schedule:The conversion of TRUSTCO data from their current system to the SunGard AddVantage System will be targeted for completion by SWMS by August 1, 2004 subject to: i) the determination of the feasibility of successfully completing the conversion on that date based on the results of due diligence completed on TRUSTCO's current wealth management system provider by SWMS; ii) that the necessary communication lines can be installed on a timely basis; and iii) SWMS receives reasonable cooperation and necessary and good data (including accounts and assets which are reconciled with all custodians) from both TRUSTCO and their current wealth management system provider on a timely basis and in accordance with the conversion plan jointly adopted by SWMS and TRUSTCO. o The conversion will be delayed if the test conversion and processing controls raise significant concerns which in SWMS or TRUSTCO's opinion would make a conversion by unwise. o Establish Network Connectivity: SWMS shall provide connectivity from TRUSTCO to the AddVantage system through the installation of necessary communication and back up lines. The connectivity provided will be the amount determined by SWMS and its Affiliates necessary to support the services, but TRUSTCO may request communication line enhancements at an additional charge to TRUSTCO. The ongoing monthly connectivity and line management charges for the communication lines will be TRUSTCO's responsibility. o TRUSTCO System Operations: During the period prior to the Conversion Date, TRUSTCO will be responsible for continuing to operate its current wealth management systems and for providing the appropriate and reasonable resources to assist SWMS with the orderly conversion of the TRUSTCO Data to the AddVantage system. o Training: SWMS shall provide initial training prior to the Conversion Date and as jointly deemed necessary for a period of up to 30 days after the Conversion Date to the TRUSTCO staff and trainers on the use of the AddVantage system in accordance with the Conversion Plan. (The training will be performed both on site at TRUSTCO and at SWMS training facilities.) The training will be reasonably sufficient to enable TRUSTCO to access and use the Base Services. o Post-Conversion On-Site Support: SWMS shall provide on site support for a period of two weeks after conversion or such longer period as may be necessary in SWMS's opinion to correct any conversion issues. o Workflow Consulting Services: SWMS shall provide sample work flow forms and procedures and TRUSTCO a minimum of 120 person days of consulting services for the purposes of: (a) recommending workflow procedures and Quickflow forms to be adopted by TRUSTCO for utilization in processing of the wealth management assets after the Conversion Date; (b) helping create workflow forms; and (c) assisting TRUSTCO with implementation of workflow procedures and Quickflow forms. o SQL Report Writing: SWMS will provide training to TRUSTCO on SQL to enable TRUSTCO to create reports which are not available as standard reports on AddVantage. In addition in the one year period after conversion, SWMS will, for the Base Charges, provide up to twenty (20) hours of SQL report writing support for TRUSTCO. II. Wealth Management Operations Services. o Wealth Management operations Services are provided on an outsourcing basis and all services are provided pursuant to the direction of TRUSTCO. 86
1 Securities Processing (Including) o Security registration and data maintenance - o Receipt and Delivery of Assets- o Security custody services (through a third party custodian)- o Security Trade Settlement- o Security Pricing (through a third party pricing service)- o Security Reconciliation- o Security Research (subject to availability of archival records)- o Income & Maturity Processing- o Capital Changes (through a third party provider)- o Special Securities Pricing (Securities which cannot be priced through an automated third party pricing system will be provided through Third Party Provider such as SparData and are subject to additional fees)- o Special Securities Research (Research for securities which cannot be priced through an automated third party pricing system will be provided through Third Party Provider such as SparData and are subject to additional fees)- o System Generated Report Data for Escheatment of idle funds- o Third Party Manager liaison (outside manager follow up)- o Special Asset Processing for loans, notes and liabilities- o Asset Pledge Processing- o Securities Set-Up and Maintenance TRUSTCO shall be responsible for directing trades for mutual funds and money market funds through QuickFlow and for placing trades on its marketable securities, either through QuickFlow forms to the network or with TRUSTCO's local brokerage firms. 2 Accounting- o Cash receipt and disbursement- o Cash Transfer- o Fee calculation and invoicing (system generated) o Cash reconcilement- o Manual balancing (transactions in and out) o Cash Management (Sweep)- o ACH Processing (in and out) o Pension payments- o System Generated Tax Reporting for 1099R and 5498 o System Generated Financial management reports- o Common Trust Fund Processing- o Wire Processing(through access to custodian's or TRUSTCO's wire system)- o Accrual calculations- o Amortization, accretion, original issue discount- o Account terminations (pursuant to TRUSTCO instructions)- o Master Trust rollup reporting - o Short Term Investment Fund accounting- 3 Customer Reporting o SWMS shall provide standard SWMS customer statement formats via the AddVantage system from which to select. 87
4. Technological Components Included in Base System o AddVantage Asset Management System (with the functionality offered through SWMS and all standard updates) o AddVantage Query o Accrual and Trade Date Reporting o ACH Interface o As of Date Reporting o Available Funds o DTC/Custody Interfaces o Funds and Equities Trade Uploads o Fee Receivables o Investment Scorecard Interface o Master Maintenance Change and Control o AddVantage Modeling- o Mortgage-Backed Securities and CMO Processing o Multi-Institutional and Branch Processing o On Demand Valuation o Pension Payment System o Security Movement and Control o Short Term Investment Fund o Statement Builder o Investment & Cash Modeling o Trade Order Entry III. Tax and Other Services o 1099R, 5498, 1099 Misc. Issuance utilizing the current AddVantage system capabilities- o A data extract will be provided via an interface to either Trust Tax Services of America or Fast Tax for preparation of all other 1099 and tax reporting. TRUSTCO will be responsible for entering into a contract with either Trust Tax Services of America or Fast Tax for preparation of 1099's and other tax services. o Estimated Tax payments file upload based on payments generated from TTSOA or FastTax. IV. Other Services o Automated Proxy Solicitation-(provided through a third party provider, currently ADP). Currently the third party provider does not charge for these services. Should that change in the future these third party proxy solicitation expenses would be the responsibility of TRUSTCO. o Schedule D Insurance Reporting (subject to additional fees)- o Toll free Help Desks for operations and system issues- o Securities Lending (subject to additional fees)- o SAS 70 for SWMS - 88
SCHEDULE B BASE SERVICE LEVEL STANDARDS In delivering its outsourcing services, SWMS will seek to deliver each Base Service Level Standard listed below in accordance with the Minimum Service Level. SWMS will attempt to handle transactions that occur after agreed upon cut off times on a best efforts basis, but will only be responsible for meeting the standards established by the Minimum Service Levels. <TABLE> <CAPTION> ---------------------------- ------------------------- ------------------------- ----------------------- Service Level Description Exceptions Minimum Service Level ---------------------------- ------------------------- ------------------------- ----------------------- ---------------------------- ------------------------- ------------------------- ----------------------- <S> <C> <C> B-1 SWMS shall safely Assets not eligible for 100% Compliance with Security Safekeeping maintain all eligible nominee registration the standard measured over assets in the nominee including all assets a calendar quarter name currently used by held in TRUSTCO's vault the custodian in order to efficiently effectuate the transfer of securities. Physical assets received for transfer on behalf of TRUSTCO will be safely maintained in a secure vault subject to dual control until such time as said assets can be delivered to third party custody providers. Physical asset transfer will be initiated within three (3) business days of receipt. ---------------------------- ------------------------- ------------------------- ----------------------- ---------------------------- ------------------------- ------------------------- ----------------------- B-2 Security receipts and If TRUSTCO exits a line 99% Compliance with Securities Movement deliveries will be of business or a the standard communicated to SWMS substantial measured over a via Quickflow forms and relationship is calendar quarter will be posted to an transitioning in or out account by the end of of TRUSTCO, the the business day, if relationship managers received by 4:00 PM will establish a Eastern Time if the mutually agreeable asset was received or service level and an delivered by the appropriate conversion depository. If plan. received after 4:00 PM Eastern Time they will be posted the next business day, if received by the depository. Securities which are not received or delivered on a timely basis create an out of balance occurrence if they are not resolved within forty-eight hours. In the event of an occurrence notice will be given of the resolution process. ---------------------------- ------------------------- ------------------------- ----------------------- 89
---------------------------- ------------------------- ------------------------- ----------------------- B-3 Equity and fixed income Trades for which 99% Compliance Security trade settlement trades which are TRUSTCO has not with the standard initiated by TRUSTCO provided SWMS with measured over a will be settled on the proper notification and calendar quarter contractual settlement direction. date unless the assets are subject to a specific standard in this Schedule B. Failed trade occurrences will be reported to the designated TRUSTCO personnel on the following business day by viewing a failed trade report via the system. ---------------------------- ------------------------- ------------------------- ----------------------- ---------------------------- ------------------------- ------------------------- ----------------------- B-4 A) Trades for If TRUSTCO decides to A) 100% by the 5th Common/Collective Fund Common/collective fund close or liquidate a business day of the Trades which are valued on a fund, a service level month. monthly, quarterly or agreement would need to B) 100% by the next annual basis will be be established by the business day posted by the 5th relationship managers. C) 100% by the 15th business day of the If TRUSTCO utilizes non calendar day month standard investment B) Trades for products (i.e. Hedge Common/collective fund Funds) or outside which are valued on a managers to manage all daily basis will be or part of the posted by the end of Common/collective the next business day funds, then the service C) Trades for Unitized level standard will be Pools which are valued subject to adjustment. on a monthly, quarterly or annual basis will be posted by the 15th calendar day of the month. ---------------------------- ------------------------- ------------------------- ----------------------- ---------------------------- ------------------------- ------------------------- ----------------------- B-5 Institutional mutual First time trades into 100% on settlement STN Mutual Fund Trades fund trades will be a new fund or a new date. posted on settlement dividend payment option. date. Trades must be received by SWMS via Quickflow forms by 2:30 PM Eastern Time. ---------------------------- ------------------------- ------------------------- ----------------------- 90
---------------------------- ------------------------- ------------------------- ----------------------- B-6 Trades for mutual First time trades into 100% on day of NON-STN Mutual Fund Trades funds, which cannot be a new fund or a new receipt of statement, traded through STN or dividend payment option wire or check. where the customer or funds which require requires a registration delivery of physical other than in nominee information by mail or form will be posted on overnight delivery receipt of funds or statement. ---------------------------- ------------------------- ------------------------- ----------------------- ---------------------------- ------------------------- ------------------------- ----------------------- B-7 Manual trade requests Requested trades in 100% within one day Manual Trades for Changing to shut off or change excess of 100 accounts of receipt Automatic Sweep Models sweep models will be per day require 72 executed within one day hours prior notice. of receipt. If SWMS receives trade request one hour prior to fund cut off, it will be processed on the same day; if not, then trade will be processed the next day. ---------------------------- ------------------------- ------------------------- ----------------------- ---------------------------- ------------------------- ------------------------- ----------------------- B-8 Automated sweep Sweep vehicles that are 100% compliance with Automatic Sweep investments of not approved by SWMS the standard un-invested cash and will be processed on a sales to raise cash 'best efforts' basis. will be executed by Accounts not properly SWMS on a daily basis, coded. based on established cutoff times, in temporary money market vehicles, as chosen by TRUSTCO. Trade settlement amounts must be received by SWMS one hour before published fund cut off times. ---------------------------- ------------------------- ------------------------- ----------------------- ---------------------------- ------------------------- ------------------------- ----------------------- B-9 Manual mutual fund Money market fund 100% compliance with Manual Money Market Fund trades will be made by vehicles that are not the standard Trades SWMS on a daily basis, approved by SWMS will based on established be processed on a 'best cutoffs, in temporary efforts' basis. money market vehicles, Accounts not properly as chosen by TRUSTCO coded. Trade settlement amounts must be received one hour before published fund cut off times. ---------------------------- ------------------------- ------------------------- ----------------------- ---------------------------- ------------------------- ------------------------- ----------------------- B-10 Maturities will be Securities that are 100% posted on Maturity Postings processed on maturity pledged for which maturity date date for all items that release of collateral are held at a has not been provided. depository. Securities for which the custodian does not pay the maturity on settlement date. ---------------------------- ------------------------- ------------------------- ----------------------- 91
---------------------------- ------------------------- ------------------------- ----------------------- B-11 Securities not held at 100% posted on Maturity Posting for Non a depository will be receipt of funds. Depository Assets posted upon receipt. ---------------------------- ------------------------- ------------------------- ----------------------- ---------------------------- ------------------------- ------------------------- ----------------------- B-12 A) Stock splits will be Out of balance A) 99% on ex-date Stock Splits/Stock posted on ex-date. conditions, shares held B) 99% on payable date Dividends B) Stock dividends in the name of TRUSTCO will be posted on or their customer. payable date. ---------------------------- ------------------------- ------------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-13 Within two business Any capital change 100% within 2 Capital Change days of receipt of announcement for business days Notifications capital change which notification announcements by was not received from electronic the third party notification or by service providers or mail or delivery agents or for which service, SWMS shall TRUSTCO does not notify TRUSTCO which provide direction or will include a criteria summary of the offer and the due date for written response to the offer. TRUSTCO will provide SWMS with directions and criteria for handling the capital change which will be handled in accordance with TRUSTCO's internal policies. TRUSTCO will notify SWMS of their decision by the deadline utilizing Quickflow form. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-14 Mandatory and Complex corporate 100% according to the Corporate Actions Posting voluntary corporate actions that require time of receipt actions will be allocation of cost posted on the day basis to multiple new funds are receive if issues. received by 1:00PM Eastern Time; if funds are received after 1:00 PM ET, then they will be posted on the next business day. ---------------------------- ----------------------- ----------------------- ----------------------- 92
---------------------------- ----------------------- ----------------------- ----------------------- B-15 A) Security movements A) 100% Compliance Security Movement will be reconciled by with the standard Reconciliation the end of the business day. Any out B) 100% Compliance of balance occurrence within 3 business days will be reported to the designated C) 100% Compliance TRUSTCO personnel on with the standard the following business day. An occurrence is defined as an out of balance condition, which cannot be resolved within 48 hours. B) In the event of such an occurrence, TRUSTCO will be notified as to the resolution of the exception or the steps being taken to resolve the occurrence. C) SWMS shall provide a semi-annual position reconciliation report for all assets held for TRUSTCO in the nominee name. Findings will be published 15 days after the end of the reporting period. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-16 Stock, bond, mutual If TRUSTCO exits a 100% within 1 Re-Registration fund, CD and physical line of business or a business day of item re-registrations substantial receipt. will be initiated relationship is upon receipt of the transitioning in or appropriate out of TRUSTCO, the documentation if relationship managers received by 1:00PM will establish a Eastern Time. mutually agreeable service level and appropriate conversion plan. ---------------------------- ----------------------- ----------------------- ----------------------- 93
---------------------------- ----------------------- -------------------------- ----------------------- B-17 Securities will be Special assets, which 100% Compliance with Securities Pricing priced on a daily cannot be priced by the standard basis utilizing a normal industry pricing third party service services, will be priced provider per the on a predetermined attached Exhibit A-1. frequency from TRUSTCO utilizing specialized pricing services. Common/Collective funds will be priced daily, monthly, quarterly, or annually in accordance with the fund provisions. Manually priced assets will be updated when valuations are provided in accordance with standard B-19. Assets which cannot be priced due to the data not being available or the failure of a Third Party Provider, other than a SunGard affiliate. SWMS will run a price variance report off the AddVantage system every business day based on the lowest reasonable tolerance level of any of our outsourcing customers (currently 10%). Prices for securities that show up on the variance report will be cross checked against the prices provided by Bloomberg. If any variance cannot be resolved through the cross check against Bloomberg and the pricing vendor, TRUSTCO will be notified on the same business day. ---------------------------- ----------------------- -------------------------- ----------------------- 94
---------------------------- ----------------------- ----------------------- ----------------------- B-18 Assets will be priced 99% Compliant with Special Asset Pricing in accordance with the standard the frequency code on measured over a the AddVantage calendar year system. For assets that cannot be priced utilizing the standard pricing services SWMS will notify TRUSTCO of the need for a non standard price. TRUSTCO is responsible for providing the non standard prices which can be provided by TRUSTCO or through utilization of outside pricing services as follows: Thinly traded securities, can be handled either by TRUSTCO or an approved outside provider and the pricing will be accomplished through a call in process or data feed. TRUSTCO will be responsible for the costs of any third party fee data provider other than the standard pricing service offered by SWMS. Real estate can be valued on an annual basis utilizing a specialized pricing service approved by TRUSTCO and the costs of such real estate pricing (currently $500.00 per asset) will be in addition to the base service fees. Prices will be entered within 1 business day of receipt of the special valuation from the specialized pricing service. TRUSTCO may request that an asset be valued utilizing a specialized pricing service at any time and the costs of such valuation will be in addition to the base service fee ---------------------------- ----------------------- ----------------------- ----------------------- 95
---------------------------- ----------------------- ----------------------- ----------------------- B-19 Manual pricing Requests that are 100% compliance with Manual Pricing Updates updates received from submitted without the the standard the appropriate proper documentations TRUSTCO personnel via or approvals Quickflow will be entered on the date received, if received by 4:00PM Eastern Time. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ------------------------- ------------------------- ----------------------- B-20 A) Common/collective If TRUSTCO decides to A) 98% within the Common/Collective Fund fund valuation and close or liquidate a first five business Valuations income calculation will fund, a service level day of the month be performed within the agreement would need to following a valuation first five business day be established by the period of the month following relationship managers B) 98% within the 15 a valuation period. and an appropriate calendar days. B) Valuations for conversion plan. Unitized Pools which If TRUSTCO utilizes non are valued on a standard investment monthly, quarterly or products (i.e. Hedge annual basis will be Funds) or outside available by the 15th managers to manage all calendar day of the or part of the month Common/collective funds, then the service level standard will be subject to adjustment. ---------------------------- ------------------------- ------------------------- ----------------------- ---------------------------- ------------------------- ------------------------- ----------------------- B-21 Research concerning Research will not be 98% Compliance with Asset Research asset history beginning provided for assets for the standard on the date of the periods prior to the measured over a . conversion of the date the assets were calendar quarter assets will be provided converted. Research is upon request from defined as retrieving current and archival information that is not records currently available SWMS will acknowledge a through the use of the request within one wealth management business day and accounting system provide a specific date provided by SunGard to provide TRUSTCO with Data Systems Inc. the research. A research request will be resolved within thirty business days unless otherwise mutually agreed upon by SWMS and TRUSTCO. ---------------------------- ------------------------- ------------------------- ----------------------- 96
---------------------------- ----------------------- -------------------------- ----------------------- B-22 Research concerning Research will not be SWMS will acknowledge Archived Asset Research archived asset provided for assets for a request within one history will be periods prior to the business day and will . provided upon request date of this Agreement provide to TRUSTCO an from current and and for assets for which estimated date for archival records no information exists. the completed research. Research is defined as retrieving information research by a Third that is not currently Party Provider is available through the needed, TRUSTCO will use of the wealth be notified that this management accounting request has been system provided by submitted to the SunGard Asset Management Third Party Provider Systems. TRUSTCO will and timing of the provide assistance on a reply is subject to mutually agreeable time the current terms and frame where the conditions of the information only resides Third Party Provider. on the TRUSTCO's optical retrieval system. ---------------------------- ----------------------- -------------------------- ----------------------- ---------------------------- ----------------------- -------------------------- ----------------------- B-23 SWMS shall receive Funds received after 100% compliance with Receipts & Disbursements and disburse funds on 4:00 PM Eastern Time the standard a daily basis at the will not be posted until direction of the next business day. appropriate TRUSTCO personnel via Funds will only be Quickflow forms, so distributed if TRUSTCO long as received by has provided directions 4:00 PM Eastern Time in an agreed upon format. otherwise will be posted the next Funds will only be business day. accepted if SWMS has been provided with information by TRUSTCO via Quickflow form(s) to post the funds being received to the appropriate wealth management account ---------------------------- ----------------------- -------------------------- ----------------------- 97
---------------------------- ----------------------- -------------------------- ----------------------- B-24 SWMS will utilize a If TRUSTCO does not 100% on the next Demand Deposit Account demand deposit provide their portion of business day Control account on behalf of the data within the TRUSTCO for required processing time processing TRUSTCO's frames to complete the wealth management reconciliation. transactions. The The reconcilement report account will be may contain outstanding TRUSTCO's, and will items to be cleared or be maintained with reconciled. the custodian, but SWMS will be provided with on-line direct access to the demand deposit account. SWMS will balance the demand deposit account and provide the previous business day's reconcilement to TRUSTCO on the following business day. ---------------------------- ----------------------- -------------------------- ----------------------- ---------------------------- ----------------------- -------------------------- ----------------------- B-25 Cash and processing None 99% cleared within 2 Cash & System Exceptions exceptions will be business days of cleared within 2 reconcilement business days of the reconcilement date. ---------------------------- ----------------------- -------------------------- ----------------------- ---------------------------- ----------------------- -------------------------- ----------------------- B-26 Stop payments More than 25 check 100% within 24 hours Stop Payments requests will be requests received for of receipt processed on the one wealth management business day the account. request is received if the request is received by 3:00PM Eastern Time; otherwise, the stop payment will be processed on the next business day. ---------------------------- ----------------------- -------------------------- ----------------------- ---------------------------- ----------------------- -------------------------- ----------------------- B-27 Check reconciliations Provided the bank 99% compliance with Check Reconciliation will be provided checking account has the standard within 3 business automated days provided SWMS reconciliations and SWMS has access to an has access. automated reconciliation system ---------------------------- ----------------------- -------------------------- ----------------------- ---------------------------- ----------------------- -------------------------- ----------------------- B-28 Income will be posted Income that is received 100% compliance with Income Collection on the date it is after the time that the standard measured received by the end wealth management books over a calendar of that business day, are closed for the day quarter if received by 3:00 and income that cannot PM Eastern Time, be readily tied to a except for income wealth management which is subject to a account. In the event separate service there is such an level pursuant to occurrence, that cannot this Schedule. be resolved within forty-eight hours, TRUSTCO will be notified as to the exception and a timeframe for resolution. ---------------------------- ----------------------- -------------------------- ----------------------- 98
---------------------------- ---------------------------- ------------------------ ----------------------- B-29 Cash dividends will be Dividends which can 99.5% on payable date Cash Dividend Collection posted on payable date for not be posted due to measured over a issues held at a actions or inactions calendar quarter depository. of third parties. ---------------------------- ---------------------------- ------------------------ ----------------------- ---------------------------- ---------------------------- ------------------------ ----------------------- B-30 CD interest on TRUSTCO Interest which can not 99.5% on the date CD Interest Collection certificates will be be posted due to that funds are posted on the date that actions or inactions received measured funds are received. of third parties. over a calendar quarter ---------------------------- ---------------------------- ------------------------ ----------------------- ---------------------------- ---------------------------- ------------------------ ----------------------- B-31 A) Income on If TRUSTCO decides to A) 98% by the 5th Common/Collective Fund collective/common funds close or liquidate a business day of the Income Posting will be posted by the 5th fund, a service level month after a business day of the month agreement would need valuation period after a valuation period to be established by B) 98% by the 15 B) Income for Unitized the relationship calendar day of the Pools which are valued on managers. month a monthly, quarterly or If TRUSTCO utilizes annual basis will be non standard posted by the 15th investment products calendar day of the month (i.e. Hedge Funds) or outside managers to manage all or part of the Common/collective funds, then the service level standard will be subject to adjustment. ---------------------------- ---------------------------- ------------------------ ----------------------- ---------------------------- ---------------------------- ------------------------ ----------------------- B-32 STN mutual fund dividends If announcements of 99.5% on payable date STN Mutual Funds Income will be posted no later dividends are not + 1 business day Collection than payable date +1 received. business day. ---------------------------- ---------------------------- ------------------------ ----------------------- ---------------------------- ---------------------------- ------------------------ ----------------------- B-33 Interest on money market Corrections to the 100% on first Money Market Funds Income instruments will be posted factors that are business day of the Posting by payable date on the received after the month measured over a first business day of the last business day of calendar quarter month, even if not the month. received. ---------------------------- ---------------------------- ------------------------ ----------------------- ---------------------------- ---------------------------- ------------------------ ----------------------- B-34 Interest or dividend Payments that are 100% on date of Interest/Dividend received payments received by check received for assets receipt +1 business by Check will be processed no later that are not day than 1 day after receipt. established in an account on the wealth management accounting system for which the proper documentation has not been provided to process the payment. ---------------------------- ---------------------------- ------------------------ ----------------------- ---------------------------- ---------------------------- ------------------------ ----------------------- B-35 Liability adjustments will Liability adjustments 100% on date of Liability Adjustments be processed no later than that are received for receipt + 1 business 1 business day after the first time without day receipt the proper documentation. ---------------------------- ---------------------------- ------------------------ ----------------------- ---------------------------- ---------------------------- ------------------------ ----------------------- B-36 Limited partnership None 99.5% on payable date Limited Partnership payments will be posted no + 1business day Payments later than payable date + 1 business day for issues held at a depository. ---------------------------- ---------------------------- ------------------------ ----------------------- 99
---------------------------- ---------------------------- ------------------------ ----------------------- B-37 Loan payments will be Payments that are 100% on date of Loan Payments processed within 1 received for assets receipt +1 business business day of receipt. that are not day established in an account on the wealth management accounting system for which the proper documentation has not been provided to process the payment. ---------------------------- ---------------------------- ------------------------ ----------------------- ---------------------------- ---------------------------- ------------------------ ----------------------- B-38 Promissory note payments, Payments that are 99% on date of Miscellaneous Receipts rent payments, other received for the first receipt +1 business assets, annuity payments, time that have been day Social Security payments, sent to the income royalty payments and other processing unit miscellaneous receipts without the proper will be processed no documentation. later than 1 business day after receipt. ---------------------------- ---------------------------- ------------------------ ----------------------- ---------------------------- ---------------------------- ------------------------ ----------------------- B-39 A) Non-STN eligible mutual A) None A) 99.5% on date of Non-STN Mutual Fund fund dividends will be B) Fund distributor receipt Receipts posted upon receipt of and/or TRUSTCO fails B) 99.5% on Payable statement/check/wire. to notify SWMS in date B) Providing that SWMS is writing prior to in receipt of funds, payable date Dividends on TRUSTCO Proprietary Mutual Funds will be posted on payable date ---------------------------- ---------------------------- ------------------------ ----------------------- ---------------------------- ---------------------------- ------------------------ ----------------------- B-40 Providing that SWMS is in Any securities that 99% on payable date US Government Income and receipt of funds, U S are not held at a Debt Payments Government, corporate, depository due to municipal debt income and client or TRUSTCO other debt payments will requirements. be posted on payable date. Any security for which a factor is not available on payable date. Payments will be posted upon receipt of the factors. ---------------------------- ---------------------------- ------------------------ ----------------------- ---------------------------- ---------------------------- ------------------------ ----------------------- B-41 Domestic outgoing wires Requests that are 99% compliance with Domestic Outgoing Wires received by the cutoff submitted without the the standard times established by SWMS proper forms or will be initiated and approvals. verified within 90 minutes of receipt if received by SWMS by 3:30 PM Eastern Time. Cutoff Times are preliminary and are subject to change based on the custodian and TRUSTCO utilized. ---------------------------- ---------------------------- ------------------------ ----------------------- 100
---------------------------- ----------------------- ----------------------- ----------------------- B-42 Incoming wires Requests that are 99% compliance with Incoming Wires received by the SWMS submitted without the the standard established cut off proper forms or times (currently 5 PM approvals. Eastern Time) will be Wires received after identified and the SWMS established credited to the cutoff times will be appropriate handled on a best account/unit on the efforts basis. same business day. Incoming wires received after the SWMS established cut off times will be credited on the following business day. Cutoff Times are preliminary and are subject to change based on the custodian and TRUSTCO utilized. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-43 SWMS will provide fee Fee calculations and 99% Compliance with Fee Calculation and computation data for invoices will not be the standard Invoicing TRUSTCO and will provided for accounts provide a monthly fee for which fee calculations and schedules have not invoices to TRUSTCO. been provided or for SWMS will also charge fee schedules that the customer account cannot be calculated monthly and remit the by SWMS's current fees to TRUSTCO. accounting system. SWMS will not collect fees via auto cash or by direct debit to TRUSTCO customers. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-44 Fee information sent Requests that are 100% completed for Fee Schedule Set Up prior to the 25th of submitted without the month end fee any month will be proper documentation processing. applied to new or approvals. accounts for that Additional time will month end. be required for mass changes of fee schedules in order to properly set up the schedules for testing and application to the accounts. SWMS and TRUSTCO will mutually agree to a schedule as required. SWMS should be notified 45 days in advance of a mass change of fee schedules. ---------------------------- ----------------------- ----------------------- ----------------------- 101
---------------------------- ----------------------- ----------------------- ----------------------- B-45 Final or special fee Requests that are 100% completed Special Fee Requests requests will be submitted without the within 5 days of receipt. days of receipt. completed within 5 proper documentation days of receipt. or approvals and the request for new fee schedules. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-46 Payments for Requests that are 100% completed within Repayment of Fees reimbursement of fees submitted without the 5 days of receipt will be processed proper documentation within 5 days of or approvals. receipt. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-47 Fees will be posted SWMS will not collect 100% compliance with Fee Postings on the fourth fees via auto cash or the standard business day of the by direct debit to month. TRUSTCO client bank accounts. ---------------------------- ----------------------- ----------------------- ----------------------- 102
---------------------------- ----------------------- ----------------------- ----------------------- B-48 In conjunction with Scheduled maintenance 99.0% of scheduled Wealth Management the Services, SWMS and processing time up-time measured Accounting System will provide access frame requirements quarterly to the SunGard (normally performed AddVantage Accounting on weekends); System. The tele-communication AddVantage accounting service provider system will be disruptions that are available during not affiliates of scheduled up-time, SWMS. Modifications currently defined as to scheduled up-time 7:00 AM - 9:00 PM must be requested Eastern Time, Monday seven days in advance. through Friday. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-49 System access will be Requests that are 100% completed within System Access for New provided for new submitted without the two business days Employees employees or changes proper documentation to current employee or approvals. access, within one (1) week of notification in writing; provided that these response times apply to normal business hours from Monday thru Friday. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-50 System access will be Requests that are 100% completed within Revocation of System Access revoked for submitted without the 2 hours during terminated TRUSTCO proper documentation normal business hours employees within two or approvals. Monday through Friday (2) hours of receipt of notification from an authorized TRUSTCO employee if received in writing or received orally and followed up in writing by 3:00 PM Eastern Time, provided that these response times apply to normal business hours from Monday thru Friday. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-51 SWMS will provide an Subject to the 99% file delivery Tax System Interface interface between the compatibility of within 2 business wealth management systems between SWMS days of availability accounting system and and TRUSTCO tax of the complete Trust Tax Services of providers. information for the America or FastTax, tax period for the delivery of data on a monthly basis on the 10th business day of each month. ---------------------------- ----------------------- ----------------------- ----------------------- 103
---------------------------- ----------------------- ----------------------- ----------------------- B-52 SWMS will provide the None 100% compliance with Tax Data data required for the standard pension tax reporting, Trust Tax Services of America or FastTax reporting, state tax reporting, estimated tax reporting and 5498 reporting. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- B-53 SWMS will provide TRUSTCO and SWMS shall System levels to be SQL Training initial training to a jointly coordinate the delivered shall be in limited number of running of the SQL accordance with the TRUSTCO users of to Database and SWMS shall usual standards as enable TRUSTCO to not unreasonably deny developed by SunGard utilize the SQL data access. Asset Management base for the AddVantage System. system for creating Scheduled maintenance, reports. standard downtime for backups, EOD and interface scheduling/processing requirements, software movement requirements, and any other scheduled outages shall be performed after normal business hours. Outages which are not within the control of SWMS, a SWMS Third Party Provider or an affiliate of SWMS. ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- B-54 SWMS will provide Subject to reasonable System levels to be Internet Access TRUSTCO Wealth downtime for maintenance delivered shall be in Management customers and upgrades. accordance with the with the ability to Customers of TRUSTCO that usual standards as view transactions and do not comply with SWMS developed by SunGard download their security policies. Asset Management account information System via the Internet ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- B-55 SWMS will provide a The help desk will not be 100% compliance with Help Desk help desk during the available on Saturday, the standard hours of 8:00 AM to Sunday or holidays. 8:00 PM Eastern Time that is accessible toll free and/or via e-mail. ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- B-56 The Help Desk will Requests that are 99% completed within Help Desk respond to written submitted without the 5 days Response to Written inquiries within five proper documentation or Inquiries calendar days of approvals. receipt, unless the requestor is informed prior to the expiration of five calendar days that it will take more time to complete the request/inquiry. ---------------------------- ----------------------- ---------------------------- ----------------------- 104
---------------------------- ----------------------- ---------------------------- ----------------------- B-57 Five business days None 100% within 5 Escheatment before the applicable business days of filing deadline, SWMS filing date will provide to TRUSTCO in a mutually-agreeable format the information required to complete the annual reports of unclaimed property for the appropriate state agencies. ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- B-58 SWMS will deliver SWMS shall not be 100% within 5 Performance Measurement asset performance responsible for the business days of measurement data failure to deliver the month end close extracts to TRUSTCO data that is due to by providing an Investment Scorecard's or interface of TRUSTCO other performance vendor data to an approved failures. SWMS vendor to help facilitate TRUSTCO's development of compliant performance reports. Files are to be delivered to a SWMS approved vendor, by electronic transmission by the 5th business day of the month for the previous month end. ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- B-59 SWMS will provide a Subject to the provision 100% Compliance Automated Proxy link to a Third Party of services with the standards. Solicitation Provider of proxy by an outside solicitation services third party provider and (currently ADP). SWMS the proper account coding will deliver a record by TRUSTCO. date position file TRUSTCO is required to daily for processing correct any errors in by the third party account coding reported on vendor of proxy a record date file by 3:00 mailing services. PM Eastern Time on the same day. The record date position files are based on the proxy information that is transmitted and received in AddVantage on a daily basis from ADP Any fees charged for utilization of the Third Party proxy solicitation service will be the TRUSTCO's responsibility. ---------------------------- ----------------------- ---------------------------- ----------------------- 105
---------------------------- ----------------------- ---------------------------- ----------------------- B-60 SWMS will provide 100% Compliance with Training Program initial training the standard sessions for TRUSTCO employees and trainers on operational functions and use of the AddVantage system. ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- ---------------------------- ----------------------- B-61 As part of the 100% Compliance with Workflow Analysis conversion program the standard and as agreed upon in the Workplan, SWMS will initially provide sample workflow procedures in accordance with Schedule A work with TRUSTCO to recommend workflow procedures, Quickflow forms to be adopted by TRUSTCO for utilization in the processing of wealth management assets after the Conversion Date, and assist TRUSTCO with implementation of workflow procedures and Quickflow forms. ---------------------------- ----------------------- ---------------------------- ----------------------- 106
---------------------------- ----------------------- ----------------------- ----------------------- B-62 For non institutional Out of balance 100% Compliance with Non Institutional statements, SWMS will statements and the standard Statement Production provide the data feed statements for which to a third party pricing information statement provider is not available. as follows: TRUSTCO will be a) For accounts where notified of an out of all assets are priced balance statement, by an automatic the cause of the out pricing services by of balance condition the 5th business day and the measures that of the month after need to be taken to the end of the re-balance the reporting period statement. b) For accounts that Statements will be have assets that must re-balanced within 5 be priced manually, business days. and so long as TRUSTCO provides directions to produce the statements without waiting on the manual prices, by the 5th business day of the month after the end of the reporting period; provided that SWMS has received the manual prices by the end of the month. Otherwise, statements will be provided ten (10) business days after SWMS receives the manual prices. ---------------------------- ----------------------- ----------------------- ----------------------- 107
---------------------------- ----------------------- ----------------------- ----------------------- B-63 For institutional Out of balance 100% Compliance with Institutional Customer statements, SWMS will statements and the standard Statement provide the data feed statements for which Production to a third party pricing information statement provider are not available. as follows: TRUSTCO will be a) For accounts where notified of an out of all assets are priced balance statement, by an automatic the cause of the out pricing services by of balance condition the 5th business day and the measures that of the month after need to be taken to the end of the re-balance the reporting period statement. b) For accounts that Statements will be have assets that must re-balanced within 7 be priced manually, business days. and so long as TRUSTCO provides directions to produce the statements without waiting on the manual prices, by the 5th business day of the month after the end of the reporting period; provided that SWMS has received the manual prices by the end of the month. Otherwise, statements will be provided ten (10) business days after SWMS receives the manual prices. ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-64 SWMS will provide an 100% Compliance with SAS 70 annual SAS 70 audit the service report for SWMS. standards ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-65 All mutual fund Subject to the 100% Compliance with SunGard Transaction Network trades for assets eligibility of the the service standard that are held on the mutual funds to be AddVantage system and traded through the that are eligible network. will be accomplished through utilization of the SunGard Transaction Network ("STN"). ---------------------------- ----------------------- ----------------------- ----------------------- ---------------------------- ----------------------- ----------------------- ----------------------- B-66 SWMS will provide 99.5% compliance with Required Reports access to TRUSTCO to the service standard, the reports which are measured monthly generally available from the AddVantage system. ---------------------------- ----------------------- ----------------------- ----------------------- </TABLE> 108
SCHEDULE C BASE SERVICES CHARGES Introduction This Schedule details (i) the Base Charges payable by TRUSTCO for the Base Services described in the Agreement and (ii) the pricing methodologies applicable to the Base Services. The Base Charges identified below, in the aggregate, compensate SunGard in full for the provision and performance of the Base Services as they currently exist. Except as set forth herein and in the Agreement, there are no additional charges or fees, however described, for the provision by SWMS of the Base Services. The Base Charges include charges for the SWMS Third Party Software and Equipment and the standard upgrades to and refreshes of the SWMS Third Party Software and Equipment sufficient to support the Base Services and satisfaction of the Service Levels set forth in Schedule B, during the Initial Term. Conversion Charge For conversion of the TRUSTCO Trust Assets to the SunGard AddVantage system TRUSTCO shall pay a one time conversion fee to SWMS of $* plus reasonable travel costs and per diem expenses. The conversion fee may be billed in increments or in a lump sum and these fees are payable within 30 days of receipt of the statement. In the event that the contract for the provision of SWMS' outsourcing services is terminated prior to the end of its initial term, the conversion charges provided for in this Agreement shall be considered by the parties to represent liquidated damages which shall be retained by SWMS to compensate it for the early termination of the agreement and such liquidated damages shall be in addition to any other fees and expenses which are owed by TRUSTCO to SWMS pursuant to the provisions of the contract. Monthly Base Charge 3.1 During the Initial Term , TRUSTCO shall pay a Monthly Base Services Charge to SWMS, which shall be calculated as follows: i) during the Initial Term of the Agreement, the monthly Base Charges will be calculated on a pro-rata basis on the market value of all TRUSTCO Trust Assets relating to the Base Services, including without limitation, private wealth (personal trust) assets, institutional wealth (employee benefits, endowment and foundations) assets, safekeeping and custodianship assets and investment advisory assets, (the "TRUSTCO Trust Assets") as follows: i) * basis points (* bps.) on the first $* market value of all the TRUSTCO Trust Assets under management; ii) For all TRUSTCO Trust Assets in excess of $* and less than $* there shall be no charge; MATERIAL INDICATED BY AN ASTERISK ("*") HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SEC. 109
iii) * basis points (* bps) on TRUSTCO Trust Assets in excess of $* and less than $*; and iv) * basis points (* bps) on all TRUSTCO Trust Assets in excess of $*. v) An example of the calculation of the basis point fees on the first $* of assets is as follows: . Each "basis point" (bps) is equal to one one-hundredth of one percent (0.01%); thus, for example, the Basis Point Fee of * basis points (* bps) of the wealth management assets is equal to * one-hundredths of one percent (*%) per annum of the total fair market value of the wealth management assets or $*. The monthly fee will be calculated on the basis of one twelfth (1 12th) of the annual basis point fee charge. and ii) during any Renewal Term, the monthly Base Charges will be calculated in accordance with the agreements reached by the Parties pursuant to Section 2.2 of the Agreement. Any TRUSTCO proprietary fund assets and TRUSTCO collective fund assets for which TRUSTCO provides custody services ("Other Assets") shall be included in the calculation of total TRUSTCO Trust Assets, provided that if such assets are recorded in more than one place in the system, such assets shall only be counted once. Assets of accounts for which TRUSTCO does have investment authority but no custody that are established for the purpose of shadow accounting shall be included in the calculation of total Trust Assets. The Parties recognize and are in agreement that the monthly Base Charges payable by TRUSTCO to SWMS are * percent (*%) attributable to the delivery of operational services by SWMS to TRUSTCO and * percent (*%) attributable to the provision by SWMS to TRUSTCO of access to systems and customized software. In addition to the monthly Base Charges TRUSTCO shall reimburse SWMS for all reasonable out of pocket expenses including postage, envelopes etc and pay a pro-rata portion of any mutually agreed upon fees for any Additional Services. Should TRUSTCO choose to utilize a statement type other than a standard SWMS statement format, TRUSTCO will be responsible for all costs in creating the statement type. Provided that SWMS is not in material default of any of its obligations under this Agreement, TRUSTCO agrees that during the Term the Base Services shall be provided exclusively by SWMS for the TRUSTCO Trust Assets on the Effective Date and any additional TRUSTCO assets for which Base Services are subsequently provided by SWMS and not by any other third party engaged by TRUSTCO or by TRUSTCO itself. The monthly Base Charges are subject to adjustment by SWMS upon 30 day notice in the event of a significant legal or regulatory change that results in an alteration in the way that trust account operations are required to be operated. MATERIAL INDICATED BY AN ASTERISK ("*") HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SEC. 110
The monthly Base Charges are also subject to adjustment by SWMS upon 30 day notice in the event of a significant change in the way that trust account operations are required to be operated that is not the result of a legal or regulatory change; provided, however, that if TRUSTCO should reasonably disagree with the proposed adjustment based on its belief that the change is not significant enough to warrant the proposed Base Charges adjustment, the Parties agree to handle the disagreement in accordance with the dispute resolution provisions of Section 17. The basis points factor for determining the monthly Base Charges (calculated on the entire market value of the TRUSTCO Trust Assets shall be subject to a minimum monthly charge. During the Initial Term TRUSTCO shall pay a minimum monthly Base Charge which is a prorated amount of an annual minimum fee of * dollars ($*) (the "Annual Minimum Fee"). In other words, if, at any time during the Initial Term, the monthly Base Charge as calculated pursuant to Section 2.1 above shall fall below the minimum Base Charge applicable to such year, TRUSTCO shall pay to SWMS the minimum Base Charge described above for such month. 4. Conversion Date Upon execution of this Agreement and subject to the terms and conditions of this Agreement, SWMS and TRUSTCO will jointly work without delay to convert TRUSTCO's Trust Assets to the SunGard AddVantage system and SWMS outsourcing solution. 5. Mutual Fund Trades, Equity Trades and Custody All eligible mutual funds will be traded through the SunGard Transaction Network and Union Planters Bank will serve as the custodian of TRUSTCO assets. SWMS shall be entitled to receive any revenue derived from such trades as part of its compensation. TRUSTCO will continue to be responsible for all trading charges for its Customers' assets. 6. Additional Storage on the AddVantage System For the Base Charges noted above SWMS provides two year's history plus the current year on the system. The history maintained on the system begins upon conversion and older history is purged on a systematic basis. TRUSTCO may retain a full five years history on the AddVantage system for an additional charge of * dollars ($*) per year for the fourth and fifth years of the Initial Term. Fees for maintaining additional history during any renewal term would be subject to agreement by the Parties on the fees to be paid. 7. Outside Tax Provider As noted in the Agreement, TRUSTCO is responsible for entering into a contract with an outside tax provider to prepare its 1099's and other tax reporting needs. TRUSTCO will be responsible for all fees in connection with the outside provider's services. 8. Investment Scorecard Performance Reporting If TRUSTCO decides to utilize Investment Scorecard through SWMS to provide its investment performance reporting the Investment Scorecard costs will be TRUSTCO's responsibility. The costs if contracted for through SWMS are estimated to be $* per account per month. MATERIAL INDICATED BY AN ASTERISK ("*") HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SEC. 111
SCHEDULE K TRUSTCO Specified responsibilities SWMS' ability to deliver the Services is dependent upon TRUSTCO handling certain responsibilities which are critical to the delivery of the Services including, but not limited to, the responsibilities listed on this Schedule K. As such, TRUSTCO agrees to perform the critical responsibilities listed on this Schedule K in accordance with the Terms of Service. o QuickFlow is the required means of communication between TRUSTCO and SWMS. As such TRUSTCO agrees to utilize Quickflow as its means of communicating all transactions, requests etc. to SWMS. o TRUSTCO will be responsible for all marketable security transaction trade entry either through Quickflow or the trades can be made directly to TRUSTCO's local brokers. o As part of the Workplan to be developed by the Parties there will be routine responsibilities that are necessary in order to deliver the Services, but which will be TRUSTCO's responsibility. Some of these routine responsibilities are for such things as: o Printing of on-site trust checks o Processing of cash transactions and daily blotter balancing o Transactional direction to SWMS through QuickFlow o Operations liaison for handling on site demands and work processes o Designated relationship manager to handle liaison between TRUSTCO and SWMS o Creating non standard reports o Approving all forms utilized In addition there will be other responsibilities which will be formalized in the Work Plan process. 112
Exhibit 31(a) Certification I, Robert J. McCormick, the principal executive officer of TrustCo Bank Corp NY ("registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 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 quarterly report is being prepared; and b) 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; c) 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; and 113
5. The registrant's other certifying officers 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 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: August 9, 2004 /s/ Robert J. McCormick ------------------ President and Chief Executive Officer 114
Exhibit 31(b) Certification I, Robert T. Cushing, the principal financial officer of TrustCo Bank Corp NY ("registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 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 quarterly report is being prepared; and b) 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; c) 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; and 115
5. The registrant's other certifying officers 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 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: August 9, 2004 /s/ Robert T. Cushing ------------------ Executive Vice President and Chief Financial Officer 116
Exhibit 32 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of TrustCo Bank Corp NY (the "Company") on Form 10-Q for the period ending June 30, 2004 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) or 15(d) 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 August 9, 2004 117