TRUSTCO BANK CORP N Y - Quarter Report: 2019 June (Form 10-Q)

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 quarterly period ended June 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _________

Commission File Number 000-10592

TRUSTCO BANK CORP N Y

(Exact name of registrant as specified in its charter)

New York		14-1630287
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol (s)	Name of each exchange on which registered
Common Stock, $1.00 par value	TRST	The Nasdaq Global Select Market

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 ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ☒	Accelerated filer ☐	Non-accelerated filer ☐
Smaller reporting company ☐	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock	Number of Shares Outstanding as of July 31, 2019
$1 Par Value	96,910,157

Index

TrustCo Bank Corp NY

INDEX

Part I.	FINANCIAL INFORMATION	PAGE NO.
Item 1.	Consolidated Interim Financial Statements (Unaudited):

	Consolidated Statements of Income for the three-month and six-month periods ended June 30, 2019 and 2018	3

	Consolidated Statements of Comprehensive Income for the three-month and six-month periods ended June 30, 2019 and 2018	4

	Consolidated Statements of Financial Condition as of June 30, 2019 and December 31, 2018	5

	Consolidated Statements of Changes in Shareholders’ Equity for the six-month periods ended June 30, 2019 and 2018	6

	Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2019 and 2018	7

	Notes to Consolidated Interim Financial Statements	8-40

	Report of Independent Registered Public Accounting Firm	41

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42-61

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62

Item 4.	Controls and Procedures	62

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3.	Defaults Upon Senior Securities	63

Item 4.	Mine Safety	63

Item 5.	Other Information	63

Item 6.	Exhibits	63

Index

TRUSTCO BANK CORP NY

Consolidated Statements of Income (Unaudited)

(dollars in thousands, except per share data)

	Three months ended June 30,					Six months ended June 30,
	2019			2018		2019			2018

Interest and dividend income:
Interest and fees on loans	$	41,432			38,956		82,685			77,047
Interest and dividends on securities available for sale:
U. S. government sponsored enterprises		821			787		1,604			1,537
State and political subdivisions		3			6		4			13
Mortgage-backed securities and collateralized mortgage obligations		2,152			1,670		3,707			3,475
Corporate bonds		272			150		480			283
Small Business Administration-guaranteed participation securities		289			333		586			685
Other securities		5			4		10			9
Total interest and dividends on securities available for sale		3,542			2,950		6,391			6,002

Interest on held to maturity securities:
Mortgage-backed securities and collateralized mortgage obligations-residential		209			244		426			504
Total interest on held to maturity securities		209			244		426			504

Federal Reserve Bank and Federal Home Loan Bank stock		199			198		284			275
Interest on federal funds sold and other short-term investments		3,282			2,467		6,291			4,484
Total interest income		48,664			44,815		96,077			88,312

Interest expense:
Interest on deposits:
Interest-bearing checking		94			112		215			218
Savings accounts		367			420		744			839
Money market deposit accounts		1,119			452		1,945			891
Time deposits		7,512			3,439		13,488			6,299
Interest on short-term borrowings		381			283		762			641
Total interest expense		9,473			4,706		17,154			8,888

Net interest income		39,191			40,109		78,923			79,424
(Credit) Provision for loan losses		(341	)		300		(41	)		600
Net interest income after provision for loan losses		39,532			39,809		78,964			78,824

Noninterest income:
Trustco financial services income		1,683			1,596		3,416			3,411
Fees for services to customers		2,611			2,677		5,131			5,322
Other		620			222		1,004			441
Total noninterest income		4,914			4,495		9,551			9,174

Noninterest expenses:
Salaries and employee benefits		11,711			10,741		23,162			21,163
Net occupancy expense		4,006			4,101		8,173			8,416
Equipment expense		1,709			1,793		3,611			3,544
Professional services		1,568			1,814		3,218			3,244
Outsourced services		1,875			1,825		3,800			3,750
Advertising expense		778			670		1,563			1,300
FDIC and other insurance		598			514		1,246			1,537
Other real estate expense, net		210			294		186			666
Other		2,447			2,343		4,810			4,630
Total noninterest expenses		24,902			24,095		49,769			48,250

Income before taxes		19,544			20,209		38,746			39,748
Income taxes		4,877			4,804		9,521			9,535

Net income	$	14,667			15,405	$	29,225			30,213

Net income per share:
- Basic	$	0.152			0.160	$	0.302			0.313

- Diluted	$	0.151			0.160	$	0.302			0.313

See accompanying notes to unaudited consolidated interim financial statements.

Index

TRUSTCO BANK CORP NY

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in thousands)

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018

Net income	$	14,667			15,405			29,225			30,213

Net unrealized holding gain (loss) on securities available for sale		7,177			(1,669	)		11,767			(8,830	)
Tax effect		(1,864	)		425			(3,058	)		2,284

Net unrealized gain (loss) on securities available for sale, net of tax		5,313			(1,244	)		8,709			(6,546	)

Amortization of net actuarial gain		(20	)		(106	)		(68	)		(178	)
Amortization of prior service (credit) cost		(82	)		22			(167	)		45
Tax effect		26			22			61			35
Amortization of net actuarial gain and prior service credit on pension and postretirement plans, net of tax		(76	)		(62	)		(174	)		(98	)

Other comprehensive income (loss), net of tax		5,237			(1,306	)		8,535			(6,644	)
Comprehensive income	$	19,904			14,099			37,760			23,569

See accompanying notes to unaudited consolidated interim financial statements.

Index

TRUSTCO BANK CORP NY

Consolidated Statements of Financial Condition (Unaudited)

(dollars in thousands, except per share data)

	June 30, 2019			December 31, 2018
ASSETS:

Cash and due from banks	$	42,471			49,260

Federal funds sold and other short term investments		517,684			454,449
Total cash and cash equivalents		560,155			503,709

Securities available for sale		633,540			501,463

Held to maturity securities (fair value 2019 $21,623; 2018 $22,924)		20,667			22,501

Federal Reserve Bank and Federal Home Loan Bank stock		9,183			8,953

Loans, net of deferred net costs		3,906,409			3,874,096
Less:
Allowance for loan losses		44,365			44,766
Net loans		3,862,044			3,829,330

Bank premises and equipment, net		34,058			34,694
Operating lease right-of-use assets		51,097			-
Other assets		56,926			58,263

Total assets	$	5,227,670			4,958,913

LIABILITIES:
Deposits:
Demand	$	432,780			405,069
Interest-bearing checking		888,433			904,678
Savings accounts		1,132,308			1,182,683
Money market deposit accounts		562,318			507,311
Time deposits		1,446,428			1,274,506
Total deposits		4,462,267			4,274,247

Short-term borrowings		166,746			161,893
Operating lease liabilities		56,237			-
Accrued expenses and other liabilities		26,790			32,902

Total liabilities		4,712,040			4,469,042

SHAREHOLDERS’ EQUITY:
Capital stock par value $1; 150,000,000 shares authorized; 100,180,132 and 100,175,032 shares issued at June 30, 2019 and December 31, 2018, respectively		100,180			100,175
Surplus		176,396			176,710
Undivided profits		272,433			256,397
Accumulated other comprehensive loss, net of tax		(1,774	)		(10,309	)
Treasury stock at cost - 3,357,831 and 3,516,440 shares at June 30, 2019 and December 31, 2018, respectively		(31,605	)		(33,102	)

Total shareholders’ equity		515,630			489,871

Total liabilities and shareholders’ equity	$	5,227,670			4,958,913

See accompanying notes to unaudited consolidated interim financial statements.

Index

TRUSTCO BANK CORP NY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars in thousands, except per share data)

	Capital Stock		Surplus			Undivided Profits			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total

Beginning balance, January 1, 2018	$	99,998		175,651			219,436			(1,806	)		(34,971	)		458,308
Net income		-		-			14,808			-			-			14,808
Tax Cuts and Jobs Act of 2017, Reclassification from AOCI to Retained Earnings, Tax Effect		-		-			1,346			(1,346	)		-			-
Other comprehensive loss, net of tax		-		-			-			(5,338	)		-			(5,338	)
Cash dividend declared, $0.0656 per share		-		-			(6,323	)		-			-			(6,323	)
Stock options exercised (4,000 shares)		4		16			-			-			-			20
Sale of treasury stock (65,289 shares)		-		(21	)		-			-			615			594
Stock based compensation expense		-		28			-			-			-			28

Ending balance, March 31, 2018	$	100,002		175,674			229,267			(8,490	)		(34,356	)		462,097
Net income		-		-			15,405			-			-			15,405
Tax Cuts and Jobs Act of 2017, Reclassification from AOCI to Retained Earnings, Tax Effect		-		-			-			-			-			-
Other comprehensive loss, net of tax		-		-			-			(1,306	)		-			(1,306	)
Cash dividend declared, $0.0656 per share		-		-			(6,330	)		-			-			(6,330	)
Stock options exercised (91,200 shares)		91		592			-			-			-			683
Purchase of treasury stock (45,509 shares)		-		-			-			-			(379	)		(379	)
Sale of treasury stock (70,792 shares)		-		(72	)		-			-			668			596
Stock based compensation expense		-		49			-			-			-			49

Ending balance, June 30, 2018	$	100,093		176,243			238,342			(9,796	)		(34,067	)		470,815

Beginning balance, January 1, 2019	$	100,175		176,710			256,397			(10,309	)		(33,102	)		489,871
Net income		-		-			14,558			-			-			14,558
Other comprehensive income, net of tax		-		-			-			3,298			-			3,298
Stock options exercised (5,100 shares)		5		30			-			-			-			35
Cash dividend declared, $0.068125 per share		-		-			(6,591	)		-			-			(6,591	)
Purchase of treasury stock (4,131 shares)		-		-			-			-			(35	)		(35	)
Sale of treasury stock (86,297 shares)		-		(218	)		-			-			812			594
Stock based compensation expense		-		(12	)		-			-			-			(12	)

Ending balance, March 31, 2019	$	100,180		176,510			264,364			(7,011	)		(32,325	)		501,718
Net income		-		-			14,667			-			-			14,667
Other comprehensive income, net of tax		-		-			-			5,237			-			5,237
Cash dividend declared, $0.068125 per share		-		-			(6,598	)		-			-			(6,598	)
Sale of treasury stock (76,443 shares)		-		(120	)		-			-			720			600
Stock based compensation expense		-		6			-			-			-			6

Ending balance, June 30, 2019	$	100,180		176,396			272,433			(1,774	)		(31,605	)		515,630

See accompanying notes to unaudited consolidated interim financial statements.

Index

TRUSTCO BANK CORP NY

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

	Six months ended June 30,
	2019			2018

Cash flows from operating activities:
Net income	$	29,225			30,213

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,982			1,946
Amortization of right-of-use asset		2,941			-
Net gain on sale of other real estate owned		(465	)		(220	)
Writedown of other real estate owned		276			230
(Credit) provision for loan losses		(41	)		600
Deferred tax expense		660			70
Net amortization of securities		1,313			1,725
Stock based compensation expense		(6	)		77
Net gain on sale of bank premises and equipment		(2	)		-
Decrease in taxes receivable		1,038			1,311
(Increase) Decrease in interest receivable		(996	)		112
Increase in interest payable		528			158
Increase in other assets		(1,647	)		(1,439	)
Decrease in operating lease liabilities		(2,983	)		-
Decrease in accrued expenses and other liabilities		(1,469	)		(1,784	)
Total adjustments		1,129			2,786
Net cash provided by operating activities		30,354			32,999

Cash flows from investing activities:
Proceeds from calls of securities available for sale		44,450			49,481
Proceeds from calls and maturities of held to maturity securities		1,754			2,821
Purchases of securities available for sale		(176,045	)		(60,088	)
Proceeds from maturities of securities available for sale		10,052			45,000
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock		(230	)		(174	)
Net increase in loans		(35,385	)		(106,869	)
Proceeds from dispositions of other real estate owned		1,951			2,521
Proceeds from dispositions of bank premises and equipment		2			-
Purchases of bank premises and equipment		(1,346	)		(2,310	)
Net cash used in investing activities		(154,797	)		(69,618	)

Cash flows from financing activities:
Net increase in deposits		188,020			81,944
Net increase (decrease) in short-term borrowings		4,853			(60,286	)
Proceeds from exercise of stock options		35			703
Stock based award tax withholding payments		-			(37	)
Proceeds from sale of treasury stock		1,194			1,190
Purchases of treasury stock		(35	)		(379	)
Dividends paid		(13,178	)		(12,640	)
Net cash provided by financing activities		180,889			10,495
Net increase in cash and cash equivalents		56,446			(26,124	)
Cash and cash equivalents at beginning of period		503,709			612,740
Cash and cash equivalents at end of period	$	560,155			586,616

Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest paid	$	16,626			4,549
Income taxes paid		8,332			6,524
Other non cash items:
Transfer of loans to other real estate owned		2,712			1,854
Increase in dividends payable		11			13
Change in unrealized gain (loss) on securities available for sale-gross of deferred taxes		11,767			(8,830	)
Change in deferred tax effect on unrealized (gain) loss on securities available for sale		(3,058	)		2,284
Amortization of net actuarial gain and prior service cost on pension and postretirement plans		(235	)		(133	)
Change in deferred tax effect of amortization of net actuarial gain postretirement benefit plans		61			35

See accompanying notes to unaudited consolidated interim financial statements.

Index

(1) Financial Statement Presentation

The unaudited Consolidated Interim Financial Statements of TrustCo Bank Corp NY (the “Company” or “TrustCo”) include the accounts of the subsidiaries after elimination of all significant intercompany accounts and transactions. Prior period amounts are reclassified when necessary to conform to the current period presentation. The net income reported for the three and six months ended June 30, 2019 is not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any interim periods. These financial statements consider events that occurred through the date of filing.

In the opinion of the management of the Company, the accompanying unaudited Consolidated Interim Financial Statements contain all recurring adjustments necessary to present fairly the financial position as of June 30, 2019, the results of operations and cash flows for the three and six months ended June 30, 2019 and 2018. The accompanying Consolidated Interim Financial Statements should be read in conjunction with the Company’s year-end Consolidated Financial Statements, including notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States.

(2) Earnings Per Share

The Company computes earnings per share in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share (“ASC 260”). A reconciliation of the component parts of earnings per share for the three and six months ended June 30, 2019 and 2018 is as follows:

(in thousands, except per share data)	For the three months ended June 30,				For the six months ended June 30,
	2019		2018		2019		2018
Net income	$	14,667		15,405	$	29,225		30,213
Weighted average common shares		96,822		96,449		96,784		96,401
Stock Options		69		131		73		134
Weighted average common shares including potential dilutive shares		96,891		96,580		96,857		96,535

Basic EPS	$	0.152		0.160	$	0.302		0.313

Diluted EPS	$	0.151		0.160	$	0.302		0.313

For the three and six months ended June 30, 2019 and 2018, there were no antidilutive stock options excluded from diluted earnings per share.

Index

(3) Benefit Plans

The table below outlines the components of the Company’s net periodic benefit recognized during the three and six months ended June 30, 2019 and 2018 for its pension and other postretirement benefit plans:

	Three months ended June 30,
	Pension Benefits						Other Postretirement Benefits
(dollars in thousands)	2019			2018			2019			2018

Service cost	$	13			6			14			26
Interest cost		307			273			60			55
Expected return on plan assets		(654	)		(819	)		(247	)		(191	)
Amortization of net (gain) loss		30			(17	)		(50	)		(89	)
Amortization of prior service cost		-			-			(82	)		22
Net periodic benefit	$	(304	)		(557	)		(305	)		(177	)

	Six months ended June 30,
	Pension Benefits						Other Postretirement Benefits
(dollars in thousands)	2019			2018			2019			2018

Service cost	$	21			17			32			52
Interest cost		622			599			120			109
Expected return on plan assets		(1,406	)		(1,506	)		(495	)		(381	)
Amortization of net loss (gain)		30			-			(98	)		(178	)
Amortization of prior service cost		-			-			(167	)		45
Net periodic benefit	$	(733	)		(890	)		(608	)		(353	)

The Company does not expect to make contributions to its pension and postretirement benefit plans in 2019. As of June 30, 2019, no contributions have been made, however, this decision is reviewed each quarter and is subject to change based upon market conditions.

Since 2003, the Company has not subsidized retiree medical insurance premiums. However, it continues to provide postretirement medical benefits to a limited number of current and retired executives in accordance with the terms of their employment contracts.

Index

(4) Investment Securities

(a) Securities available for sale

The amortized cost and fair value of the securities available for sale are as follows:

	June 30, 2019
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

U.S. government sponsored enterprises	$	184,866		76		494		184,448
State and political subdivisions		166		4		-		170
Mortgage backed securities and collateralized mortgage obligations - residential		356,376		1,631		3,328		354,679
Corporate bonds		40,254		321		108		40,467
Small Business Administration - guaranteed participation securities		53,494		-		403		53,091
Other		685		-		-		685

Total Securities Available for Sale	$	635,841		2,032		4,333		633,540

	December 31, 2018
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

U.S. government sponsored enterprises	$	154,868		-		2,708		152,160
State and political subdivisions		168		5		-		173
Mortgage backed securities and collateralized mortgage obligations - residential		271,386		53		9,407		262,032
Corporate bonds		30,048		-		110		29,938
Small Business Administration - guaranteed participation securities		58,376		-		1,901		56,475
Other		685		-		-		685

Total securities available for sale	$	515,531		58		14,126		501,463

The schedule of maturities of debt securities available for sale is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.

Index

(dollars in thousands)	Amortized Cost		Fair Value

Due in one year or less	$	5,080		5,093
Due in one year through five years		170,836		170,638
Due after five years through ten years		50,055		50,039
Mortgage backed securities and collateralized mortgage obligations		356,376		354,679
Small Business Administration - guaranteed participation securities		53,494		53,091
	$	635,841		633,540

Gross unrealized losses on securities available for sale and the related fair values aggregated by the length of time that individual securities have been in an unrealized loss position, were as follows:

	June 30, 2019
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Gross Unreal. Loss		Fair Value		Gross Unreal. Loss		Fair Value		Gross Unreal. Loss

U.S. government sponsored enterprises	$	19,939		61		94,461		433		114,400		494
Mortgage backed securities and collateralized mortgage obligations - residential		4,025		24		243,286		3,304		247,311		3,328
Corporate bonds		14,892		108		-		-		14,892		108
Small Business Administration - guaranteed participation securities		-		-		53,091		403		53,091		403

Total	$	38,856		193		390,838		4,140	$	429,694		4,333

	December 31, 2018
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Gross Unreal. Loss		Fair Value		Gross Unreal. Loss		Fair Value		Gross Unreal. Loss

U.S. government sponsored enterprises	$	29,870		106		112,291		2,602		142,161		2,708
Mortgage backed securities and collateralized mortgage obligations - residential		1,102		11		259,729		9,396		260,831		9,407
Corporate bonds		14,943		98		9,995		12		24,938		110
Small Business Administration - guaranteed participation securities		-		-		56,475		1,901		56,475		1,901

Total	$	45,915		215		438,490		13,911		484,405		14,126

Index

The proceeds from sales and calls of securities available for sale, gross realized gains and gross realized losses from sales and calls during the three and six months ended June 30, 2019 and 2018 are as follows:

	Three months ended June 30,
(dollars in thousands)	2019		2018

Proceeds from sales	$	-		-
Proceeds from calls/paydowns		28,409		24,453
Proceeds from maturities		52		20,000

	Six months ended June 30,
(dollars in thousands)	2019		2018

Proceeds from sales	$	-		-
Proceeds from calls/paydowns		44,450		49,481
Proceeds from maturities		10,052		45,000

There were no gross realized gains or losses from calls of available for sale securities during the three and six months ended June 30, 2019 and 2018.

There were no sales or transfers of securities available for sale during the three and six months ended June 30, 2019 and 2018.

(b) Held to maturity securities

The amortized cost and fair value of the held to maturity securities are as follows:

	June 30, 2019
(dollars in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value

Mortgage backed securities and collateralized mortgage obligations - residential	$	20,667		961		5		21,623

Total held to maturity	$	20,667		961		5		21,623

	December 31, 2018
(dollars in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value

Mortgage backed securities and collateralized mortgage obligations - residential	$	22,501		577		154		22,924

Total held to maturity	$	22,501		577		154		22,924

Index

The following table distributes the debt securities included in the held to maturity portfolio as of June 30, 2019, based on the securities’ final maturity. Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty. Securities not due at a single maturity date are presented separately:

(dollars in thousands)	Amortized Cost		Fair Value
Mortgage backed securities and collateralized mortgage obligations - residential	$	20,667		21,623
	$	20,667		21,623

Gross unrecognized losses on securities held to maturity and the related fair values aggregated by the length of time that individual securities have been in an unrecognized loss position, were as follows:

	June 30, 2019
(dollars in thousands)	Less than 12 months				12 months or more				Total
	Fair Value		Gross Unrec. Loss		Fair Value		Gross Unrec. Loss		Fair Value		Gross Unrec. Loss
Mortgage backed securities and collateralized mortgage obligations - residential	$	-		-		2,421		5		2,421		5

Total	$	-		-		2,421		5		2,421		5

	December 31, 2018
(dollars in thousands)	Less than 12 months				12 months or more				Total
	Fair Value		Gross Unrec. Loss		Fair Value		Gross Unrec. Loss		Fair Value		Gross Unrec. Loss
Mortgage backed securities and collateralized mortgage obligations - residential	$	10,958		154		-		-		10,958		154

Total	$	10,958		154		-		-		10,958		154

There were no sales or transfers of held to maturity securities during the three and six months ended June 30, 2019 and 2018.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio by type and applying the appropriate OTTI model.

In determining OTTI for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether any other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether management intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If management intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If management does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, the OTTI on debt securities shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

Index

As of June 30, 2019, the Company’s security portfolio included certain securities which were in an unrealized loss position, and are discussed below.

U.S. government sponsored enterprises: In the case of unrealized losses on U.S. government sponsored enterprises, because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2019.

Mortgage backed securities and collateralized mortgage obligations – residential: At June 30, 2019, all mortgage backed securities and collateralized mortgage obligations held by the Company were issued by U.S. government sponsored entities and agencies, primarily Ginnie Mae, Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2019.

Corporate Bonds: At June 30, 2019, corporate bonds held by the Company are investment grade quality. Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2019.

Small Business Administration (SBA) - guaranteed participation securities: At June 30, 2019, all of the SBA securities held by the Company were issued and guaranteed by U.S. Small Business Administration. Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2019.

Index

(5) Loans and Allowance for Loan Losses

The following table presents the recorded investment in loans by loan class:

	June 30, 2019
(dollars in thousands)	New York and other states*		Florida		Total
Commercial:
Commercial real estate	$	153,550		14,404		167,954
Other		22,280		273		22,553
Real estate mortgage - 1 to 4 family:
First mortgages		2,461,857		876,259		3,338,116
Home equity loans		71,758		18,955		90,713
Home equity lines of credit		233,360		44,199		277,559
Installment		7,588		1,926		9,514
Total loans, net	$	2,950,393	$	956,016		3,906,409
Less: Allowance for loan losses						44,365
Net loans					$	3,862,044

	December 31, 2018
(dollars in thousands)	New York and other states*		Florida		Total
Commercial:
Commercial real estate	$	156,278		15,275		171,553
Other		24,330		263		24,593
Real estate mortgage - 1 to 4 family:
First mortgages		2,442,711		845,166		3,287,877
Home equity loans		71,523		17,308		88,831
Home equity lines of credit		243,765		45,775		289,540
Installment		9,462		2,240		11,702
Total loans, net	$	2,948,069		926,027		3,874,096
Less: Allowance for loan losses						44,766
Net loans					$	3,829,330

* Includes New York, New Jersey, Vermont and Massachusetts.

At June 30, 2019 and December 31, 2018, the Company had approximately $27.7 million and $26.7 million of real estate construction loans, respectively. Of the $27.7 million in real estate construction loans at June 30, 2019, approximately $13.3 million are secured by second mortgages to residential borrowers while approximately $14.4 million were to commercial borrowers for residential construction projects. Of the $26.7 million in real estate construction loans at December 31, 2018, approximately $14.2 million are secured by second mortgages to residential borrowers while approximately $12.5 million were to commercial borrowers for residential construction projects. The vast majority of construction loans are in the Company’s New York market.

TrustCo lends in the geographic territory of its branch locations in New York, Florida, Massachusetts, New Jersey and Vermont. Although the loan portfolio is diversified, a portion of its debtors’ ability to repay depends significantly on the economic conditions prevailing in the respective geographic territory.

Index

The following tables present the recorded investment in non-accrual loans by loan class:

	June 30, 2019
(dollars in thousands)	New York and other states*		Florida		Total
Loans in non-accrual status:
Commercial:
Commercial real estate	$	902		-		902
Other		3		-		3
Real estate mortgage - 1 to 4 family:
First mortgages		15,818		1,433		17,251
Home equity loans		342		-		342
Home equity lines of credit		3,473		131		3,604
Installment		1		-		1
Total non-accrual loans		20,539		1,564		22,103
Restructured real estate mortgages - 1 to 4 family		31		-		31
Total nonperforming loans	$	20,570		1,564		22,134

	December 31, 2018
(dollars in thousands)	New York and other states*		Florida		Total
Loans in non-accrual status:
Commercial:
Commercial real estate	$	639		-		639
Other		6		-		6
Real estate mortgage - 1 to 4 family:
First mortgages		18,202		1,812		20,014
Home equity loans		247		-		247
Home equity lines of credit		3,924		103		4,027
Installment		4		15		19
Total non-accrual loans		23,022		1,930		24,952
Restructured real estate mortgages - 1 to 4 family		34		-		34
Total nonperforming loans	$	23,056		1,930		24,986

* Includes New York, New Jersey, Vermont and Massachusetts.

The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu). As of June 30, 2019 and December 31, 2018, other estate owned included $2.1 million and $1.1 million of residential foreclosed properties, respectively. In addition, non-accrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $9.6 million and $12.4 million as of June 30, 2019 and December 31, 2018, respectively.

Index

The following tables present the aging of the recorded investment in past due loans by loan class and by region as of June 30, 2019 and December 31, 2018:

	June 30, 2019
New York and other states*:
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 + Days Past Due		Total 30+ days Past Due		Current		Total Loans

Commercial:
Commercial real estate	$	478		-		-		478		153,072		153,550
Other		-		-		-		-		22,280		22,280
Real estate mortgage - 1 to 4 family:
First mortgages		2,746		932		11,363		15,041		2,446,816		2,461,857
Home equity loans		59		-		289		348		71,410		71,758
Home equity lines of credit		464		28		1,700		2,192		231,168		233,360
Installment		57		9		1		67		7,521		7,588

Total	$	3,804		969		13,353		18,126		2,932,267		2,950,393

Florida:
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 + Days Past Due		Total 30+ days Past Due		Current		Total Loans

Commercial:
Commercial real estate	$	-		-		-		-		14,404		14,404
Other		-		-		-		-		273		273
Real estate mortgage - 1 to 4 family:
First mortgages		555		822		623		2,000		874,259		876,259
Home equity loans		-		50		-		50		18,905		18,955
Home equity lines of credit		141		-		80		221		43,978		44,199
Installment		-		16		-		16		1,910		1,926

Total	$	696		888		703		2,287		953,729		956,016

Total:
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 + Days Past Due		Total 30+ days Past Due		Current		Total Loans

Commercial:
Commercial real estate	$	478		-		-		478		167,476		167,954
Other		-		-		-		-		22,553		22,553
Real estate mortgage - 1 to 4 family:
First mortgages		3,301		1,754		11,986		17,041		3,321,075		3,338,116
Home equity loans		59		50		289		398		90,315		90,713
Home equity lines of credit		605		28		1,780		2,413		275,146		277,559
Installment		57		25		1		83		9,431		9,514

Total	$	4,500		1,857		14,056		20,413		3,885,996		3,906,409

* Includes New York, New Jersey, Vermont and Massachusetts.

Index

	December 31, 2018
New York and other states*:
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 + Days Past Due		Total 30+ days Past Due		Current		Total Loans

Commercial:
Commercial real estate	$	198		-		370		568		155,710		156,278
Other		-		-		-		-		24,330		24,330
Real estate mortgage - 1 to 4 family:
First mortgages		3,276		898		13,267		17,441		2,425,270		2,442,711
Home equity loans		158		94		212		464		71,059		71,523
Home equity lines of credit		963		348		1,691		3,002		240,763		243,765
Installment		44		29		2		75		9,387		9,462

Total	$	4,639		1,369		15,542		21,550		2,926,519		2,948,069

Florida:
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 + Days Past Due		Total 30+ days Past Due		Current		Total Loans

Commercial:
Commercial real estate	$	-		-		-		-		15,275		15,275
Other		-		-		-		-		263		263
Real estate mortgage - 1 to 4 family:
First mortgages		417		407		721		1,545		843,621		845,166
Home equity loans		50		-		-		50		17,258		17,308
Home equity lines of credit		40		-		50		90		45,685		45,775
Installment		12		7		15		34		2,206		2,240

Total	$	519		414		786		1,719		924,308		926,027

Total:
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 + Days Past Due		Total 30+ days Past Due		Current		Total Loans

Commercial:
Commercial real estate	$	198		-		370		568		170,985		171,553
Other		-		-		-		-		24,593		24,593
Real estate mortgage - 1 to 4 family:
First mortgages		3,693		1,305		13,988		18,986		3,268,891		3,287,877
Home equity loans		208		94		212		514		88,317		88,831
Home equity lines of credit		1,003		348		1,741		3,092		286,448		289,540
Installment		56		36		17		109		11,593		11,702

Total	$	5,158		1,783		16,328		23,269		3,850,827		3,874,096

* Includes New York, New Jersey, Vermont and Massachusetts.

At June 30, 2019 and December 31, 2018, there were no loans that were 90 days past due and still accruing interest. As a result, non-accrual loans include all loans 90 days or more past due as well as certain loans less than 90 days past due that were placed on non-accrual status for reasons other than delinquent status. There are no commitments to extend further credit on non-accrual or restructured loans.

Index

Activity in the allowance for loan losses by portfolio segment is summarized as follows:

	For the three months ended June 30, 2019
(dollars in thousands)	Commercial			Real Estate Mortgage- 1 to 4 Family			Installment			Total
Balance at beginning of period	$	3,734			39,985			952			44,671
Loans charged off:
New York and other states*		-			205			49			254
Florida		-			-			-			-
Total loan chargeoffs		-			205			49			254

Recoveries of loans previously charged off:
New York and other states*		1			259			4			264
Florida		-			25			-			25
Total recoveries		1			284			4			289
Net loans (recoveries) charged off		(1	)		(79	)		45			(35	)
(Credit) provision for loan losses		178			(101	)		(418	)		(341	)
Balance at end of period	$	3,913			39,963			489			44,365

	For the three months ended June 30, 2018
(dollars in thousands)	Commercial			Real Estate Mortgage- 1 to 4 Family		Installment		Total
Balance at beginning of period	$	4,255			39,359		765		44,379
Loans charged off:
New York and other states*		-			239		41		280
Florida		-			-		3		3
Total loan chargeoffs		-			239		44		283

Recoveries of loans previously charged off:
New York and other states*		1			89		14		104
Florida		-			-		3		3
Total recoveries		1			89		17		107
Net loans (recoveries) charged off		(1	)		150		27		176
Provision for loan losses		(61	)		262		99		300
Balance at end of period	$	4,195			39,471		837		44,503

* Includes New York, New Jersey, Vermont and Massachusetts.

Index

	Six months ended June 30, 2019
	Commercial			Real Estate Mortgage- 1 to 4 Family		Installment			Total
Balance at beginning of period	$	4,048			39,772		946			44,766
Loans charged off:
New York and other states*		7			597		78			682
Florida		-			29		31			60
Total loan chargeoffs		7			626		109			742

Recoveries of loans previously charged off:
New York and other states*		4			333		10			347
Florida		-			35		-			35
Total recoveries		4			368		10			382
Net loans charged off		3			258		99			360
(Credit) provision for loan losses		(132	)		449		(358	)		(41	)
Balance at end of period	$	3,913			39,963		489			44,365

	Six months ended June 30, 2018
	Commercial			Real Estate Mortgage- 1 to 4 Family		Installment		Total
Balance at beginning of period	$	4,324			39,077		769		44,170
Loans charged off:
New York and other states*		-			370		112		482
Florida		-			-		6		6
Total loan chargeoffs		-			370		118		488

Recoveries of loans previously charged off:
New York and other states*		7			192		19		218
Florida		-			-		3		3
Total recoveries		7			192		22		221
Net loans (recoveries) charged off		(7	)		178		96		267
Provision (recoveries) for loan losses		(136	)		572		164		600
Balance at end of period	$	4,195			39,471		837		44,503

* Includes New York, New Jersey, Vermont and Massachusetts.

The Company has identified non-accrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring (“TDR”), as impaired loans. A loan is considered impaired when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured as a TDR.

Index

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2019 and December 31, 2018:

	June 30, 2019
(dollars in thousands)	Commercial Loans		1-to-4 Family Residential Real Estate		Installment Loans		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-		-		-		-
Collectively evaluated for impairment		3,913		39,963		489		44,365

Total ending allowance balance	$	3,913		39,963		489		44,365

Loans:
Individually evaluated for impairment	$	1,696		19,084		-		20,780
Collectively evaluated for impairment		188,811		3,687,304		9,514		3,885,629

Total ending loans balance	$	190,507		3,706,388		9,514		3,906,409

	December 31, 2018
(dollars in thousands)	Commercial Loans		1-to-4 Family Residential Real Estate		Installment Loans		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-		-		-		-
Collectively evaluated for impairment		4,048		39,772		946		44,766

Total ending allowance balance	$	4,048		39,772		946		44,766

Loans:
Individually evaluated for impairment	$	1,424		20,864		-		22,288
Collectively evaluated for impairment		194,722		3,645,384		11,702		3,851,808

Total ending loans balance	$	196,146		3,666,248		11,702		3,874,096

A loan for which the terms have been modified, and for which the borrower is experiencing financial difficulties, is considered a TDR and is classified as impaired. TDR’s at June 30, 2019 and December 31, 2018 are measured at the present value of estimated future cash flows using the loan’s effective rate at inception or the fair value of the underlying collateral if the loan is considered collateral dependent.

Index

The following tables present impaired loans by loan class as of June 30, 2019 and December 31, 2018:

	June 30, 2019
New York and other states*:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Commercial:
Commercial real estate	$	1,552		1,722		-		1,419
Other		35		35		-		106
Real estate mortgage - 1 to 4 family:
First mortgages		14,100		14,393		-		14,784
Home equity loans		243		263		-		250
Home equity lines of credit		2,395		2,535		-		2,507

Total	$	18,325		18,948		-		19,066

Florida:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Commercial:
Commercial real estate	$	109		109		-		112
Other		-		-		-		-
Real estate mortgage - 1 to 4 family:
First mortgages		2,014		2,014		-		2,178
Home equity loans		81		81		-		83
Home equity lines of credit		251		251		-		253

Total	$	2,455		2,455		-		2,626

Total:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Commercial:
Commercial real estate	$	1,661		1,831		-		1,531
Other		35		35		-		106
Real estate mortgage - 1 to 4 family:
First mortgages		16,114		16,407		-		16,962
Home equity loans		324		344		-		333
Home equity lines of credit		2,646		2,786		-		2,760

Total	$	20,780		21,403		-		21,692

* Includes New York, New Jersey, Vermont and Massachusetts.

Index

	December 31, 2018
New York and other states*:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Commercial:
Commercial real estate	$	1,274		1,444		-		1,503
Other		38		88		-		123
Real estate mortgage - 1 to 4 family:
First mortgages		15,210		15,661		-		15,577
Home equity loans		252		272		-		262
Home equity lines of credit		2,772		2,996		-		2,772

Total	$	19,546		20,461		-		20,237

Florida:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Commercial:
Commercial real estate	$	112		112		-		57
Other		-		-		-		-
Real estate mortgage - 1 to 4 family:
First mortgages		2,293		2,399		-		2,455
Home equity loans		84		84		-		86
Home equity lines of credit		253		253		-		326

Total	$	2,742		2,848		-		2,924

Total:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Commercial:
Commercial real estate	$	1,386		1,556		-		1,560
Other		38		88		-		123
Real estate mortgage - 1 to 4 family:
First mortgages		17,503		18,060		-		18,032
Home equity loans		336		356		-		348
Home equity lines of credit		3,025		3,249		-		3,098

Total	$	22,288		23,309		-		23,161

* Includes New York, New Jersey, Vermont and Massachusetts.

Index

The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as impaired. Interest income recognized on impaired loans was not material during the three and six months ended June 30, 2019 and 2018.

As of June 30, 2019 and December 31, 2018 impaired loans included approximately $11.2 million and $11.1 million of loans in accruing status that were identified as TDR’s in accordance with regulatory guidance related to Chapter 7 bankruptcy loans, respectively.

Management evaluates impairment on impaired loans on a quarterly basis. If, during this evaluation, impairment of the loan is identified, a charge off is taken at that time. As a result, as of June 30, 2019 and December 31, 2018, based upon management’s evaluation and due to the sufficiency of chargeoffs taken, none of the allowance for loan losses has been allocated to a specific impaired loan(s).

The following table presents, by class, loans that were modified as TDR’s:

	Three months ended 6/30/2019						Three months ended 6/30/2018

New York and other states*:	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
(dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial:
Commercial real estate		1	$	128		128		-	$	-		-
Real estate mortgage - 1 to 4 family:
First mortgages		5		718		718		2		125		125
Home equity loans		-		-		-		-		-		-
Home equity lines of credit		3		278		278		-		-		-

Total		9	$	1,124		1,124		2	$	125		125

Florida:

(dollars in thousands)

Number of

Contracts

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

Number of

Contracts

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

Commercial:

Commercial real estate

Real estate mortgage - 1 to 4 family:

First mortgages

Home equity loans

Home equity lines of credit

Total

* Includes New York, New Jersey, Vermont and Massachusetts.

Index

	Six months ended 6/30/2019						Six months ended 6/30/2018

New York and other states*:	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
(dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial:
Commercial real estate		1	$	128		128		-	$	-		-
Real estate mortgage - 1 to 4 family:
First mortgages		9		1,368		1,368		4		598		598
Home equity loans		-		-		-		-		-		-
Home equity lines of credit		3		278		278		2		208		208

Total		13	$	1,774		1,774		6	$	806		806

Florida:

(dollars in thousands)

Number of

Contracts

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

Number of

Contracts

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

Commercial:

Commercial real estate

Real estate mortgage - 1 to 4 family:

First mortgages

Home equity loans

Home equity lines of credit

Total

* Includes New York, New Jersey, Vermont and Massachusetts.

The addition of these TDR’s did not have a significant impact on the allowance for loan losses.

In situations where the Company considers a loan modification, management determines whether the borrower is experiencing financial difficulty by performing an evaluation of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s underwriting policy.

Generally, the modification of the terms of loans was the result of the borrower filing for bankruptcy protection. Chapter 13 bankruptcies generally include the deferral of all past due amounts for a period of generally 60 months in accordance with the bankruptcy court order. In the case of Chapter 7 bankruptcies, as previously noted, even though there is no modification of terms, the borrowers’ debt to the Company was discharged and they did not reaffirm the debt.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In situations involving a borrower filing for Chapter 13 bankruptcy protection, however, a loan is considered to be in payment default once it is 30 days contractually past due, consistent with the treatment by the bankruptcy court.

Index

During the three months ended June 30, 2019 and 2018 there were no TDR’s that defaulted which had been modified during the last twelve months. The following table presents, by class, TDR’s that defaulted during the six months ended June 30, 2019 and 2018 which had been modified within the last twelve months:

	Six months ended 6/30/2019				Six months ended 6/30/2018
New York and other states*:	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
(dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment

Commercial:
Commercial real estate		-	$	-		-	$	-
Real estate mortgage - 1 to 4 family:
First mortgages		-		-		-		-
Home equity loans		-		-		-		-
Home equity lines of credit		-		-		1		3

Total		-	$	-		1	$	3

Florida: (dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment

Commercial:
Commercial real estate		-	$	-		-	$	-
Real estate mortgage - 1 to 4 family:
First mortgages		-		-		1		72
Home equity lines of credit		-		-		-		-

Total		-	$	-		1	$	72

* Includes New York, New Jersey, Vermont and Massachusetts.

The TDR’s that subsequently defaulted described above did not have a material impact on the allowance for loan losses.

The Company categorizes non-homogenous loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. On at least an annual basis, the Company’s loan grading process analyzes non-homogeneous loans, such as commercial and commercial real estate loans, individually by grading the loans based on credit risk. The loan grades assigned to all loan types are tested by the Company’s internal loan review department in accordance with the Company’s internal loan review policy.

The Company uses the following definitions for classified loans:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as such have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those loans classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. All doubtful loans are considered impaired.

Index

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “pass” rated loans.

As of June 30, 2019 and December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	June 30, 2019

New York and other states*:
(dollars in thousands)	Pass		Classified		Total

Commercial:
Commercial real estate	$	148,331		5,219		153,550
Other		21,258		1,022		22,280

	$	169,589		6,241		175,830

Florida:
(dollars in thousands)	Pass		Classified		Total

Commercial:
Commercial real estate	$	14,404		-		14,404
Other		273		-		273

	$	14,677		-		14,677

Total:
(dollars in thousands)	Pass		Classified		Total

Commercial:
Commercial real estate	$	162,735		5,219		167,954
Other		21,531		1,022		22,553

	$	184,266		6,241		190,507

* Includes New York, New Jersey and Massachusetts.

Index

	December 31, 2018

New York and other states:
(dollars in thousands)	Pass		Classified		Total

Commercial:
Commercial real estate	$	152,045		4,233		156,278
Other		23,331		999		24,330

	$	175,376		5,232		180,608

Florida:
(dollars in thousands)	Pass		Classified		Total

Commercial:
Commercial real estate	$	15,163		112		15,275
Other		263		-		263

	$	15,426		112		15,538

Total:
(dollars in thousands)	Pass		Classified		Total

Commercial:
Commercial real estate	$	167,208		4,345		171,553
Other		23,594		999		24,593

	$	190,802		5,344		196,146

* Includes New York, New Jersey and Massachusetts.

Included in classified loans in the above tables are impaired loans of $1.3 million and 1.4 million at June 30, 2019 and December 31, 2018, respectively.

For homogeneous loan pools, such as residential mortgages, home equity lines of credit, and installment loans, the Company uses payment status to identify the credit risk in these loan portfolios. Payment status is reviewed on a daily basis by the Company’s collection area and on a monthly basis with respect to determining the adequacy of the allowance for loan losses. The payment status of these homogeneous pools as of June 30, 2019 and December 31, 2018 is included in the aging of the recorded investment of the past due loans table. In addition, the total nonperforming portion of these homogeneous loan pools as of June 30, 2019 and December 31, 2018 is presented in the non-accrual loans table.

Index

(6) Fair Value of Financial Instruments

FASB Topic 820, Fair Value Measurements (“ASC 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the value that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of assets and liabilities:

Securities Available for Sale: The fair value of securities available for sale is determined utilizing an independent pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. This results in a Level 1 or Level 2 classification of the inputs for determining fair value. Interest and dividend income is recorded on the accrual method and is included in the Consolidated Statements of Income in the respective investment class under total interest and dividend income. The Company does not have any securities that would be designated as Level 3.

Other Real Estate Owned: Assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. This results in a Level 3 classification of the inputs for determining fair value.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally have had a charge off through the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. When obtained, non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Index

Indications of value for both collateral-dependent impaired loans and other real estate owned are obtained from third party providers or the Company’s internal Appraisal Department. All indications of value are reviewed for reasonableness by a member of the Appraisal Department for the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value via comparison with independent data sources such as recent market data or industry-wide statistics.

Assets and liabilities measured at fair value under ASC 820 on a recurring basis are summarized below:

	Fair Value Measurements at
	June 30, 2019 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Securities available for sale:
U.S. government sponsored enterprises	$	184,448	$	-	$	184,448	$	-
State and political subdivisions		170		-		170		-
Mortgage backed securities and collateralized mortgage obligations - residential		354,679		-		354,679		-
Corporate bonds		40,467		-		40,467		-
Small Business Administration- guaranteed participation securities		53,091		-		53,091		-
Other securities		685		-		685		-

Total securities available for sale	$	633,540	$	-	$	633,540	$	-

	Fair Value Measurements at
	December 31, 2018 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Securities available for sale:
U.S. government sponsored enterprises	$	152,160	$	-	$	152,160	$	-
State and political subdivisions		173		-		173		-
Mortgage backed securities and collateralized mortgage obligations - residential		262,032		-		262,032		-
Corporate bonds		29,938		-		29,938		-
Small Business Administration- guaranteed participation securities		56,475		-		56,475		-
Other securities		685		-		685		-

Total securities available for sale	$	501,463	$	-	$	501,463	$	-

There were no transfers between Level 1 and Level 2 during the three and six months ended June 30, 2019 and 2018.

Index

Assets measured at fair value on a non-recurring basis are summarized below:

	Fair Value Measurements at
	June 30, 2019 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation technique	Unobservable inputs	Range (Weighted Average)

Other real estate owned	$	2,625	$	-	$	-	$	2,625	Sales comparison approach	Adjustments for differences between comparable sales		1% - 13% (4	%)

Impaired loans:
Real estate mortgage -1 to 4 family		216		-		-		216	Sales comparison approach	Adjustments for differences between comparable sales		7% - 17% (12	%)

	Fair Value Measurements at
	December 31, 2018 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation technique	Unobservable inputs	Range (Weighted Average)

Other real estate owned	$	1,675	$	-	$	-	$	1,675	Sales comparison approach	Adjustments for differences between comparable sales		1% - 14% (7	%)

Impaired loans:
Real estate mortgage -1 to 4 family		459		-		-		459	Sales comparison approach	Adjustments for differences between comparable sales		5% - 14% (10	%)

Other real estate owned, that is carried at fair value less costs to sell was approximately $2.6 million at June 30, 2019 and consisted of $560 thousand of commercial real estate and approximately $2.1 million of residential real estate properties. Valuation charges of $106 thousand and $276 thousand are included in earnings for the three and six months ended June 30, 2019, respectively.

Of the total impaired loans of $20.8 million at June 30, 2019, $216 thousand are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at June 30, 2019. There were no gross charge offs related to commercial impaired loans for the three and six months ended June 30, 2019. Gross charge offs related to residential impaired loans included in the table above were $5 thousand for the six months ended June 30, 2019, there were no gross charge offs related to residential impaired loans for the three months ended June 30, 2019.

Other real estate owned, that is carried at fair value less costs to sell, was approximately $1.7 million at December 31, 2018 and consisted of $560 thousand of commercial real estate and $1.1 million of residential real estate properties. A valuation charge of $769 thousand is included in earnings for the year ended December 31, 2018.

Index

Of the total impaired loans of $22.3 million at December 31, 2018, $459 thousand are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at December 31, 2018. Gross charge offs related to residential impaired loans included in the table above amounted to $67 thousand at December 31, 2018.

In accordance with FASB Topic 825, Financial Instruments (“ASC 825”), the carrying amounts and estimated fair values of financial instruments, at June 30, 2019 and December 31, 2018 are as follows:

(dollars in thousands)			Fair Value Measurements at
	Carrying		June 30, 2019 Using:
	Value		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	560,155		560,155		-		-		560,155
Securities available for sale		633,540		-		633,540		-		633,540
Held to maturity securities		20,667		-		21,623		-		21,623
Federal Reserve Bank and Federal
Home Loan Bank stock		9,183		N/A		N/A		N/A		N/A
Net loans		3,862,044		-		-		3,887,326		3,887,326
Accrued interest receivable		12,337		370		2,586		9,381		12,337
Financial liabilities:
Demand deposits		432,780		432,780		-		-		432,780
Interest bearing deposits		4,029,487		2,583,059		1,445,848		-		4,028,907
Short-term borrowings		166,746		-		166,746		-		166,746
Accrued interest payable		1,552		191		1,361		-		1,552

(dollars in thousands)			Fair Value Measurements at
	Carrying		December 31, 2018 Using:
	Value		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	503,709		503,709		-		-		503,709
Securities available for sale		501,463		-		501,463		-		501,463
Held to maturity securities		22,501		-		22,924		-		22,924
Federal Reserve Bank and Federal
Home Loan Bank stock		8,953		N/A		N/A		N/A		N/A
Net loans		3,829,330		-		-		3,753,966		3,753,966
Accrued interest receivable		11,341		353		2,371		8,617		11,341
Financial liabilities:
Demand deposits		405,069		405,069		-		-		405,069
Interest bearing deposits		3,869,178		2,594,672		1,264,772		-		3,859,444
Short-term borrowings		161,893		-		161,893		-		161,893
Accrued interest payable		1,024		104		920		-		1,024

Index

(7) Accumulated Other Comprehensive Income (Loss)

The following is a summary of the accumulated other comprehensive (loss) income balances, net of tax:

	Three months ended 6/30/2019
(dollars in thousands)	Balance at 4/1/2019			Other Comprehensive Income (loss)- Before Reclassifications			Amount reclassified from Accumulated Other Comprehensive Income		Other Comprehensive Income (loss)- Three months ended 6/30/2019			Balance at 6/30/2019

Net unrealized holding loss on securities available for sale, net of tax	$	(7,020	)		5,313			-		5,313			(1,707	)
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax		423			-			-		-			423
Net change in net actuarial loss and prior service credit on pension and postretirement benefit plans, net of tax		(414	)		(76	)		-		(76	)		(490	)

Accumulated other comprehensive loss, net of tax	$	(7,011	)		5,237			-		5,237			(1,774	)

	Three months ended 6/30/2018
(dollars in thousands)	Balance at 4/1/2018			Other Comprehensive Income (loss)- Before Reclassifications			Amount reclassified from Accumulated Other Comprehensive Income			Other Comprehensive Income (loss)- Three months ended 6/30/2018			Balance at 6/30/2018

Net unrealized holding (gain) loss on securities available for sale, net of tax	$	(10,332	)		(1,244	)		-			(1,244	)		(11,576	)
Net change in net actuarial (gain) loss and prior service cost on pension and postretirement benefit plans, net of tax		3,188			-			(62	)		(62	)		3,126
Tax Cuts and Jobs Act of 2017, Reclassification from AOCI to Retained Earnings, Tax Effect		(1,346	)		-			-			-			(1,346	)

Accumulated other comprehensive income (loss), net of tax	$	(8,490	)		(1,244	)		(62	)		(1,306	)		(9,796	)

	Six months ended 6/30/2019
(dollars in thousands)	Balance at 1/1/2019			Other Comprehensive Income (loss)- Before Reclassifications			Amount reclassified from Accumulated Other Comprehensive Income		Other Comprehensive Income (loss)- Three months ended 6/30/2019			Balance at 6/30/2019

Net unrealized holding loss on securities available for sale, net of tax	$	(10,416	)		8,709			-		8,709			(1,707	)
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax		423			-			-		-			423
Net change in net actuarial loss and prior service credit on pension and postretirement benefit plans, net of tax		316			(174	)		-		(174	)		(490	)

Accumulated other comprehensive loss, net of tax	$	(10,309	)		8,535			-		8,535			(1,774	)

	Six months ended 6/30/2018
(dollars in thousands)	Balance at 1/1/2018			Other Comprehensive Income (loss)- Before Reclassifications			Amount reclassified from Accumulated Other Comprehensive Income			Other Comprehensive Income (loss)- Three months ended 6/30/2018			Balance at 6/30/2018

Net unrealized holding (gain) loss on securities available for sale, net of tax	$	(5,030	)		(6,546	)		-			(6,546	)		(11,576	)
Net change in net actuarial (gain) loss and prior service cost on pension and postretirement benefit plans, net of tax		3,224			-			(98	)		(98	)		3,126
Tax Cuts and Jobs Act of 2017, Reclassification from AOCI to Retained Earnings, Tax Effect		-			-			(1,346	)		-			(1,346	)

Accumulated other comprehensive income (loss), net of tax	$	(1,806	)		(6,546	)		(1,444	)		(6,644	)		(9,796	)

Index

The following represents the reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2019 and 2018:

(dollars in thousands)	Three months ended						Six months ended
	June 30,						June 30,
	2019			2018			2019			2018			Affected Line Item in Financial Statements
Amortization of pension and postretirement benefit items:
Amortization of net actuarial gain (loss)	$	20			106		$	68			178		Salaries and employee benefits
Amortization of prior service cost		82			(22	)		167			(45	)	Salaries and employee benefits
Income tax benefit		(26	)		(22	)		(61	)		(35	)	Income taxes
Net of tax		76			62			174			98

Total reclassifications, net of tax	$	76			62		$	174			98

(8) Revenue from Contracts with Customers

All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income. The following table presents the Company’s sources of Non-Interest Income for the three months and six months ended June 30, 2019 and 2018. Items outside the scope of ASC 606 are noted as such.

(dollars in thousands)	Three months ended				Six months ended
	June 30,				June 30,
	2019		2018		2019		2018
Non-interest income
Service Charges on Deposits
Overdraft fees	$	849	$	823	$	1,699	$	1,650
Other		109		96		219		210
Interchange Income		1,284		1,170		2,815		2,476
Wealth management fees		1,683		1,596		3,416		3,411
Other (a)		989		810		1,402		1,427

Total non-interest income	$	4,914	$	4,495	$	9,551	$	9,174

(a) Not within the scope of ASC 606.

A description of the Company’s revenue streams accounted in accordance with ASC 606 as follows:

Service charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Interchange Income: Interchange revenue primarily consists of interchange fees, volume-related incentives and ATM charges. As the card-issuing bank, interchange fees represent our portion of discount fees paid by merchants for credit/debit card transactions processed through the interchange network. The levels and structure of interchange rates are set by the card processing companies and are based on cardholder purchase volumes. The Company earns interchange income as cardholder transactions occur and interchange fees are settled on a daily basis concurrent with the transaction processing services provided to the cardholder.

Index

Wealth Management fees: Trustco Financial Services provides a comprehensive suite of trust and wealth management products and services, including financial and estate planning, trustee and custodial services, investment management, corporate retirement plan recordkeeping and administration of which a fee is charged to manage assets for investment or transact on accounts. These fees are earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed over the period in which services are performed based on a percentage of the fair value of assets under management or administration. Other services are based on a fixed fee for certain account types, or based on transaction activity and are recognized when services are rendered. Fees are withdrawn from the customer’s account balance.

Gains/Losses on Sales of Other real Estate Owned “OREO”: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain/ (loss) on sale if a significant financing component is present.

(9) Operating Leases

The Company adopted Topic 842 “Leases” effective January 1, 2019 and has applied the guidance to all operating leases within the scope of Topic 842 at that date. The company elected to adopt practical expedients, which among other things, does not require reassessment of lease classification.

The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the Company’s balance sheets.

Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company’s leases do not provide an implicit rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine present value of operating lease liabilities. Additionally, the Company does allocate the consideration between lease and non-lease components. The Company’s lease terms may include options to extend when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease components, such as fair market value adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. As of January 1, 2019 the Company did not have any leases with terms of twelve months or less.

As of June 30, 2019 the Company does not have leases that have not yet commenced. At June 30, 2019 lease expiration dates ranged from five months to 25.3 years and have a weighted average remaining lease term of 9.6 years. Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements. As mentioned above the leases generally also include variable lease components which include real estate taxes, insurance, and common area maintenance (“CAM”) charges in the annual rental payments.

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Other information related to leases was as follows:

(dollars in thousands)	Three months ended June 30,
	2019		2018
Operating lease cost	$	1,930	$	1,928
Variable lease cost		509		468

Total Lease costs	$	2,439	$	2,396

(dollars in thousands)	Six months ended June 30,
	2019		2018
Operating lease cost	$	3,821	$	3,840
Variable lease cost		975		1,054

Total Lease costs	$	4,796	$	4,894

(dollars in thousands)	Six months ended June 30,
	2019
Supplemental cash flows information:

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	3,906

Right-of-use assets obtained in exchange for lease obligations:		54,038

Weighted average remaining lease term	9.6 years
Weighted average discount rate		3.30	%

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Future minimum lease payments under non-cancellable leases as of June 30, 2019 were as follows:

(dollars in thousands)

Year ending December 31,
2019^(a)	$	3,933
2020		7,820
2021		7,818
2022		7,300
2023		6,978
Thereafter		32,600
Total lease payments	$	66,449
Less: Interest		10,212

Present value of lease liabilities	$	56,237

^(a)Excluding the six months ended June 30, 2019.

Future minimum lease payments under non-cancellable leases as of June 30, 2018 were as follows:

(dollars in thousands)

Year ending December 31,
2018^(b)	$	3,881
2019		7,799
2020		7,622
2021		7,555
2022		7,048
Thereafter		39,395

Total lease payments	$	73,300

^(b)Excluding six months ended June 30, 2018.

(10) Regulatory Capital Requirements

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy regulations and, additionally for banks, the prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and became fully phased in on January 1, 2019. The capital rules include a capital conservation buffer that is designed to absorb losses during periods of economic stress and to require increased capital levels before capital distributions and certain other payments can be made. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers. The buffer was fully implemented at 2.5% as of January 1, 2019. Management believes, as of June 30, 2019, the Company and Bank meet all capital adequacy requirements to which they are subject.

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Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is not classified as well capitalized, regulatory approval is required to accept brokered deposits. If a bank is undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. The federal banking agencies are required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution or its holding company. Such actions could have a direct material effect on an institution’s or its holding company’s financial statements. As of June 30, 2019 and December 31, 2018, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank and the Company reported the following capital ratios as of June 30, 2019 and December 31, 2018:

(Bank Only)

	As of June 30, 2019					Well Capitalized⁽¹⁾			Adequately Capitalized⁽¹⁾⁽²⁾
(dollars in thousands)	Amount		Ratio			Well Capitalized⁽¹⁾			Adequately Capitalized⁽¹⁾⁽²⁾

Tier 1 leverage capital	$	501,685		9.685	%		5.000	%		4.000	%
Common equity tier 1 capital		501,685		18.236			6.500			7.000
Tier 1 risk-based capital		501,685		18.236			8.000			8.500
Total risk-based capital		536,199		19.491			10.000			10.500

	As of December 31, 2018					Well			Adequately
(dollars in thousands)	Amount		Ratio			Capitalized⁽¹⁾			Capitalized⁽¹⁾⁽³⁾

Tier 1 (core) capital	$	484,581		9.767	%		5.000	%		4.000	%
Common equity tier 1 capital		484,581		18.233			6.500			6.380
Tier 1 risk-based capital		484,581		18.233			8.000			7.880
Total risk-based capital		517,948		19.489			10.000			9.880

(Consolidated)
						Minimum for Capital Adequacy plus Capital Conservation Buffer⁽¹⁾⁽²⁾

	As of June 30, 2019
(dollars in thousands)	Amount		Ratio

Tier 1 leverage capital	$	516,850		9.974	%		4.000	%
Common equity tier 1 capital		516,850		18.777			7.000
Tier 1 risk-based capital		516,850		18.777			8.500
Total risk-based capital		551,383		20.031			10.500

	As of December 31, 2018					Minimum for Capital Adequacy plus Capital Conservation
(dollars in thousands)	Amount		Ratio			Buffer⁽¹⁾⁽²⁾

Tier 1 leverage ratio	$	499,626		10.129	%		4.000	%
Common equity Tier 1 capital		499,626		18.790			6.380
Tier 1 risk-based capital		499,626		18.790			7.880
Total risk-based capital		533,009		20.046			9.880

(1)	Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized

(2)	The June 30, 2019 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a capital conservation buffer of 2.50 percent

(3)	The December 31, 2018 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 1.88 percent

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(11) New Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016 02, Leases (Topic 842) (“ASU 2016 02”). ASU 2016 02 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases that extend more than twelve months on the balance sheet. This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016 02 is effective for financial statements issued for annual and interim periods beginning after December 15, 2018 for public business entities. Early adoption is permitted. The Company elected to adopt ASU 2016 02 as of January 1, 2019. The Company has elected the package of practical expedients permitted in ASC Topic 842. Accordingly, the Company accounted for its existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC Topic 842, (b) whether classification of the operating leases would be different in accordance with ASC Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2018) would have met the definition of initial direct costs in ASC Topic 842 at lease commencement. The company has also elected the practical expedient to use hindsight in determining the lease term. As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2019 (a) a lease liability of approximately $58.2 million, which represents the present value of the remaining lease payments of approximately $69.4 million, discounted using the Company’s incremental borrowing rate, and (b) a ROU asset of approximately $53.0 million which represents the lease liability of $58.2 million adjusted for accrued rent of approximately $5.2 million. This standard did not have a material impact on the Company’s key performance metrics and had no impact on the Company’s operating results. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.

In June 2016, the FASB released ASU 2016-13, “Financial Instruments – Credit Losses” which amended existing guidance to replace current generally accepted accounting principles used to measure a reporting entity’s credit losses. The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2019. The ASU represents a significant departure from current GAAP and the Company is evaluating the impact of the ASU on its consolidated financial statements, which includes developing a roadmap for implementation of the new standard. The Company’s committee meets regularly to evaluate the provisions of the ASU, to address the additional data requirements necessary, to determine the approach for implementation and to identify new internal controls over enhanced processes that will be put into place for estimating the allowance under ASU 2016-13. To date, the Company has completed a detailed implementation plan with a software solution to serve as its CECL platform. The Company is developing models for default and loss estimates, documenting processes, controls and accounting policy elections for the execution of “trial” or “parallel” runs of its ASU 2016-13 compliant methodology throughout 2019.

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In February 2018, the FASB issued ASU 2018-02, “Income statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” which will allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. These amendments are effective for all entities for fiscal years beginning after December 15, 2018. For Interim periods within those fiscal years, early adoption of the amendment is permitted including public business entities for reporting periods for which financial statements have not yet been issued. The Company did adopt the ASU in the first quarter of 2018 and reclassified the stranded tax effect in accumulated other comprehensive income to retained earnings in the period ended March 31, 2018.

In April 2019, Accounting Standards Update No. 2019-04 “Codification improvements to topic 326 Financial Instruments-Credit Losses, Topic 815 Derivatives and Hedging, and Topic 825, “Financial Instruments” (“ASU 2019-04”) was issued to provide additional clarification on the scope and disclosure requirements of Topic 326, ASU 2019-04 includes provisions related to accounting policy elections that can be made by the entity related to accrued interest receivable and expected prepayments on financial assets, the inclusion of recoveries in estimating the allowance for credit losses and consideration of contract extension and renewals when determining the contractual term. This ASU also provides clarification on the tabular vintage disclosures related to line-of-credit arrangements that convert term loans. The Company currently writes off the uncollectible accrued interest receivable balance upon nonaccrual status by reversing interest income. The company currently includes recoveries in estimating the allowance for credit losses and is evaluating all other components of the update and their impacts to the Company effective December 15, 2019.

In May 2019, Accounting Standards update No. 2019-05, “Financial Instruments – Credit Losses ( Topic 326);Targeted transition relief” (“ASU 2019-05”) was issued to allow an entity to make an irrevocable fair value option election on instruments within the scope of Topic 326 that are measured at amortized cost, except for Held-to-maturity debt securities. This election can be applied on all instrument-by instrument basis upon adoption of Topic 326. The Company is currently reviewing the impacts of the update to the Company effective December 15, 2019.

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	Crowe LLP Independent Member Crowe Global

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of TrustCo Bank Corp NY

Glenville, New York

Results of Review of Interim Financial Information

We have reviewed the consolidated statement of financial condition of TrustCo Bank Corp NY (the "Company") as of June 30, 2019, and the related consolidated statements of income and comprehensive income for the three-month and six- month periods ended June 30, 2019 and June 30, 2018 and the related changes in shareholders’ equity and cash flows for the six- month periods ended June 30, 2019 and June 30, 2018, and the related notes (collectively referred to as the "interim financial information or statements"). Based on our reviews, 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 accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated statement of financial condition of the Company as of December 31, 2018, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of financial condition as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the PCAOB. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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 PCAOB, 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.

/s/ Crowe LLP

Livingston, New Jersey

August 8, 2019

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Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

Statements included in this report 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, that 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. All statements in this news release that are not historical are forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended. Forward-looking statements can be identified by words such as "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding our expectations for our performance during 2019, the impact of Federal Reserve actions regarding interest rates and the growth of loans and deposits throughout our branch network, our ability to capitalize on economic changes in the areas in which we operate and the extent to which higher expenses to fulfill operating and regulatory requirements recur or diminish over time. Such forward-looking statements are subject to factors that could cause actual results to differ materially for TrustCo from those discussed. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

In addition to factors described under Part II, Item 1A, Risk Factors, if any, and under the Risk Factor discussion in TrustCo’s Annual Report on Form 10-K for the year ended December 31, 2018, 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:

•

TrustCo’s ability to continue to originate a significant volume of one- to- four family mortgage loans in its market areas and to otherwise maintain or increase its market share in the areas in which it operates;

•

TrustCo’s ability to continue to maintain noninterest expense and other overhead costs at reasonable levels relative to income;

•

TrustCo’s ability to make accurate assumptions and judgments regarding the credit risks associated with its lending and investing activities, including changes in the level and direction of loan delinquencies and charge-offs, changes in property values, and changes in estimates of the adequacy of the allowance for loan and lease losses;

•

the effects of and changes in, trade, tariffs, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations;

•

restrictions or conditions imposed by TrustCo’s and Trustco Bank’s regulators on their operations that may make it more difficult to achieve TrustCo’s and Trustco Bank’s goals;

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•

the future earnings and capital levels of TrustCo and Trustco Bank and the continued receipt of approvals from TrustCo’s and Trustco Bank’s primary federal banking regulators under regulatory rules to distribute capital from Trustco Bank to TrustCo, which could affect the ability of TrustCo to pay dividends;

•

the results of supervisory monitoring or examinations of Trustco Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our loss allowances or to take other actions that reduce capital or income;

•

adverse conditions in the securities markets that lead to impairment in the value of securities in TrustCo’s investment portfolio;

•

unanticipated effects from the Tax Cuts & Jobs Act of 2017 that may limit its benefits or adversely impact our business, which could include decreased demand for borrowing by our customers or increased price competition that offsets the benefits of decreased federal income tax expense;

•

the perceived overall value of TrustCo’s products and services by users, including the features, pricing and quality compared to competitors’ products and services and the willingness of current and prospective customers to substitute competitors’ products and services for TrustCo’s products and services;

•

changes in consumer spending, borrowing and savings habits;

•

the effect of changes in financial services laws and regulations (including laws concerning taxation, banking and securities) and the impact of other governmental initiatives affecting the financial services industry, including regulatory capital requirements;

•

changes in management personnel;

•

real estate and collateral values;

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, Financial Accounting Standards Board (“FASB”) or the Public Company Accounting Oversight Board;

•

disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;

•

technological changes and electronic, cyber and physical security breaches;

•

changes in local market areas and general business and economic trends;

•

TrustCo’s success at managing the risks involved in the foregoing and managing its business; and

•

other risks and uncertainties included under “Risk Factors” in our Form 10-K for the year ended December 31, 2018.

You should not rely upon forward-looking statements as predictions of future events. Although TrustCo believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. 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.

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Following this discussion are the tables "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-month and six-month periods ended June 30, 2019 and 2018.

Introduction

The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three-month and six-month month periods ended June 30, 2019, with comparisons to the corresponding period in 2018, as applicable. Net interest margin is presented on a fully taxable equivalent basis in this discussion. The consolidated interim financial statements and related notes, as well as the 2018 Annual Report to Shareholders on Form 10-K, which was filed with the SEC on March 1, 2019, should also 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.

During the second quarter of 2019 broad financial markets were influenced by both underling economic conditions and by political developments. Ongoing trade negotiations among many of the leading nations signaled a desire to resolve trade issues and to remove the uncertainty that the current tariffs have created. US equity markets were favorable and showed continued volatility during the quarter. For the second quarter, the S&P 500 index was up 4.3% and the Dow Jones industrial average was up 3.2% indicating strength across most equity market participants, which generally signals investor confidence in economic activity. Credit markets continue to be driven by worldwide economic and political news and demand shifts between segments of the bond market as investors seek to capture yield and prepare for a potential rate change by the Federal Reserve Board. Some indicators have developed that would signal the Fed is considering a rate cut in the near future and as such that has helped to compress rates on various maturities of bonds even further. The shape of the yield curve remained flat during the quarter. The 10-year Treasury bond averaged 2.34% during the second quarter compared to 2.65% in the first quarter of 2019 a decrease of 31 basis points. The 2-year Treasury bond average rate decreased 36 basis points to 2.13% resulting in continued flattening of the cure. The spread between the 10-year and the 2-year Treasury bonds expanded slightly from 0.16% on average in the first quarter to 0.21% in the second quarter of 2019. This spread had been depressed in recent years and compares to 2.42% during its most recent peak in the fourth quarter of 2013. Steeper yield curves are generally favorable for portfolio mortgage lenders like TrustCo. The table below illustrates the range of rate movements for both short term and longer term rates. The target Federal Funds rate remained flat at 2.25% to 2.50% for the quarter. Spreads for most asset classes, including agency securities, corporates, municipals and mortgage-backed securities, were down by the end of the quarter as compared to the levels of a year earlier. Rate changes and spreads during the current quarter were due to a number of factors; however, uncertainty about the timing of additional actions that the Federal Reserve Board would take in regard to the uncertainty regarding the economy and related issues are key factors. Low risk free rates in major nations have caused investors to shift into alternative fixed income instruments, contributing to the compression of spreads over the risk free rates. The Federal Reserve’s decision as to the direction and timing of a rate change is widely anticipated by the markets and has been considered in establishing longer term market rates.

Index

		3 Month Yield (%)	2 Year Yield (%)	5 Year Yield (%)	10 Year Yield (%)	10 - 2 Year Spread (%)

Q1/18	Beg of Q1	1.39	1.89	2.20	2.40	0.51
	Peak	1.81	2.34	2.69	2.94	0.78
	Trough	1.39	1.89	2.20	2.40	0.47
	End of Q1	1.73	2.27	2.56	2.74	0.47
	Average in Q1	1.58	2.15	2.53	2.75	0.60

Q2/18	Beg of Q2	1.73	2.27	2.56	2.74	0.47
	Peak	1.95	2.59	2.94	3.11	0.54
	Trough	1.71	2.25	2.55	2.73	0.31
	End of Q2	1.93	2.52	2.73	2.85	0.33
	Average in Q2	1.87	2.47	2.76	2.92	0.44

Q3/18	Beg of Q3	1.93	2.52	2.73	2.85	0.33
	Peak	2.22	2.83	2.99	3.10	0.27
	Trough	1.96	2.53	2.70	2.82	0.29
	End of Q3	2.19	2.81	2.94	3.05	0.24
	Average in Q3	2.07	2.67	2.81	2.92	0.25

Q4/18	Beg of Q4	2.19	2.81	2.94	3.05	0.24
	Peak	2.45	2.98	3.09	3.24	0.26
	Trough	2.19	2.48	2.51	2.69	0.21
	End of Q4	2.45	2.48	2.51	2.69	0.21
	Average in Q4	2.35	2.80	2.88	3.04	0.24

Q1/19	Beg of Q1	2.45	2.48	2.51	2.69	0.21
	Peak	2.49	2.62	2.62	2.79	0.17
	Trough	2.37	2.22	2.18	2.39	0.17
	End of Q1	2.40	2.27	2.23	2.41	0.14
	Average in Q1	2.44	2.49	2.46	2.65	0.16

Q2/19	Beg of Q2	2.43	2.33	2.31	2.49	0.16
	Peak	2.47	2.41	2.41	2.60	0.19
	Trough	2.11	1.71	1.73	2.00	0.29
	End of Q2	2.12	1.75	1.76	2.00	0.25
	Average in Q2	2.35	2.13	2.12	2.34	0.21

The United States economy continues to show improvements in selected geographic areas. Economic conditions vary significantly over geographic areas with strength concentrated in and around major population centers on the coasts and in certain areas where economic activity has been driven by specific regional factors. The unprecedented intervention by governments in markets and attempts to stimulate the economy including the significant easing of monetary policy in the recent past is gradually being unwound based on the guidance released by the Federal Reserve. Economic activity in Europe, China and elsewhere remains mixed. This has added to the uncertainty of global growth and the general direction of interest rates. Political changes in Europe, the United Kingdom and in South America has also added to this situation and this has in turn increased demand for risk free assets. Current tensions regarding trade and tariffs have significantly heightened uncertainty. Finally regulatory changes that have been enacted are expected to continue to impact the banking industry going forward. These regulatory changes have added significant operating expense and operational burdens and have fundamentally changed the way banks conduct business. The current administration has set policy initiatives that include attempts to reduce the regulatory burden. The timing, extent and impact of these new actions are not yet finalized and the actual impact on day to day banking operations is uncertain.

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TrustCo believes that its long-term focus on traditional banking services and practices has enabled the Company to avoid significant impact from asset quality problems and that the Company’s strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with its past practice. TrustCo has not engaged in the types of high risk loans and investments that have led to the widely reported problems in the industry. Nevertheless, the Company may experience increases in nonperforming loans (“NPLs”) relative to historical levels from time to time. While the Company does not expect to see a significant change in the inherent risk of loss in its loan portfolio at June 30, 2019, should general housing prices and other economic measures, such as unemployment in the Company’s market areas, deteriorate, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans.

Overview

TrustCo recorded net income of $14.7 million, or $0.151 of diluted earnings per share, for the three months ended June 30, 2019, compared to net income of $15.4 million, or $0.160 of diluted earnings per share, in the same period in 2018. Return on average assets was 1.14% and 1.26%, respectively, for the three-months ended June 30, 2019 and 2018. Return on average equity was 11.60% and 13.26%, respectively, for the three-months ended June 30, 2019 and 2018.

The primary factors accounting for the change in net income for the three months ended June 30, 2019 compared to the same period of the prior year were:

•

An increase in the average balance of interest earning assets of $210.0 million or 4.3% to $5.04 billion for the second quarter of 2019 compared to the same period in 2018.

•

A decrease in taxable equivalent net interest margin for the second quarter of 2019 to 3.11% from 3.32% in the prior year period. The decrease in the margin, offset with the increase in average earning assets, resulted in a decrease of $927 thousand in taxable equivalent net interest income in the second quarter of 2019 compared to the second quarter of 2018.

•

An increase of $970 thousand in salaries and employee benefits for the second quarter of 2019 compared to the second quarter of 2018. This increase was primarily driven by $542 thousand of additional expenses for our various benefit plans to true up our future estimated benefit liabilities primarily due to the increase in stock price at quarter end.

•

An increase of $158 thousand in outsourced services and advertising for the second quarter of 2019 compared to the second quarter of 2018.

Index

•

A decrease of $246 thousand in professional services expense for the second quarter of 2019 compared to the second quarter of 2018.

•

A decrease of $641 thousand in provision for loan losses for the second quarter of 2019 compared to the second quarter of 2018 driven by the sale of the credit card portfolio which resulted in a gain of $176 thousand and reduced the required loan loss reserve by $541 thousand.

TrustCo recorded net income of $29.2 million, or $0.302 of diluted earnings per share, for the six-months ended June 30, 2019, compared to net income of $30.2 million, or $0.313 of diluted earnings per share, in the same period in 2018. Return on average assets was 1.15% and 1.24%, respectively, for the six-months ended June 30, 2019 and 2018. Return on average equity was 11.76% and 13.17%, respectively, for the six-months ended June 30, 2019 and 2018.

Asset/Liability Management

The Company strives to generate its earnings capabilities through a mix of core deposits funding a prudent mix of earning assets. 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.

TrustCo’s results are affected by a variety of factors including competitive and economic conditions in the specific markets in which the Company operates and, more generally, by the national economy, financial market conditions and the regulatory environment. Each of these factors is dynamic, and changes in any area can have an impact on TrustCo’s results. Included in the Annual Report to Shareholders on Form 10-K for the year ended December 31, 2018 is a description of the effect interest rates had on the results for the year 2018 compared to 2017. Many of the same market factors discussed in the 2018 Annual Report continued to have a significant impact on results through the second quarter of 2019.

TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations and rates paid on deposits and charged on loans. In the experience of management, the absolute level of interest rates, changes in interest rates and customers’ expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period.

Interest rates have a significant impact on the operations and financial results of all financial services companies. One of the most important interest rates used to control national economic policy is the “Federal Funds” rate. This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating. As noted previously, during 2007-2008 the FRB aggressively reduced the Federal Funds rate, including a decrease from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008. The target range remained at that level until December 2016 when the range was increased from 0.25% to 0.50%. Subsequent increases have resulted in the current range of 2.25% to 2.50%.

Index

The yield on the 10-year Treasury bond increased by 64 basis points from 2.40% at the beginning of 2018 to the year-end level of 3.04%, despite the increases in short term rates. The rate on the ten year Treasury bond and other long-term interest rates have a significant influence on the rates offered for new residential real estate loans. These changes in interest rates have an effect on the Company relative to the interest income on loans, securities, and Federal Funds sold and on other short-term instruments as well as the interest expense on deposits and borrowings. Residential real estate loans and longer-term investments are most affected by the changes in longer term market interest rates such as the 10-year Treasury. The 10-year Treasury yield was down 31 basis points, on average, during the second quarter of 2019 compared to the first quarter of 2019 and was down 58 basis points as compared to the second quarter of 2018. The Federal Funds sold portfolio and other short-term investments are affected primarily by changes in the Federal Funds target rate. Deposit interest rates are most affected by short term market interest rates and rates offered by competitors. Also, changes in interest rates have an effect on the recorded balance of the securities available for sale portfolio, which are recorded at fair value. Generally, as market interest rates decrease, the fair value of the securities will increase and the reverse is also generally applicable. Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae. Because TrustCo is a portfolio lender and does not sell loans into the secondary market, the Company establishes rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates. Higher market interest rates generally increase the value of retail deposits.

While the increase in the Federal Funds target range had a beneficial impact on earnings on the Company’s cash position, the net effect of market changes in interest rates during 2019 was that yields earned on both the investment portfolios and loans remained quite low in 2019 relative to historic levels, while deposit costs began to increase driven by the competitiveness of the market to drive liquidity to fund lending.

As a portfolio lender, TrustCo does not sell loans into the secondary market in the normal course of business and is able to establish rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with secondary market rates. Financial market volatility and the problems faced by the financial services industry have lessened the influence of the secondary market; however, various programs initiated by arms of the federal government have had an impact on rate levels for certain products. Most importantly, a government goal of keeping mortgage rates low has been supported by targeted buying of certain securities, thus supporting prices and constraining yields, although that effort is now being gradually unwound. Very low interest rates in many markets around the world have also increased demand for US fixed income assets and contributed to the decline in yields on these assets. The Federal Reserve Board began to increase short term rates with the expectation that this would filter through to longer term asset yields. This has not been the case which heightens the demand for longer term assets and the expectations that the US economic activity will continue to expand at modest but manageable levels in the future.

Index

Interest rates generally remained below historic norms on both short term and longer term investments during the second quarter of 2019. The Company utilizes a traditional underwriting process in evaluating loan applications, and since originated loans are retained in the portfolio, there is a strong incentive to be conservative in making credit decisions. For additional information concerning TrustCo’s loan portfolio and nonperforming loans, please refer to the discussions under “Loans” and “Nonperforming Assets,” respectively. Further, the Company does not rely on borrowed funds to support its assets and maintains a significant level of liquidity on the asset side of the balance sheet. These characteristics provide the Company with increased flexibility and stability during periods of market disruption and interest rate volatility.

A fundamental component of TrustCo’s strategy has been to grow customer relationships and the deposits and loans that are part of those relationships. The Company has significant capacity to grow its balance sheet given its existing infrastructure. The Company expects that growth to be profitable. The current interest rate environment, however, has narrowed the margin on incremental balance sheet expansion. While the Company has not changed its fundamental long term strategy in regard to utilizing its excess capacity, management continually evaluates changing conditions and may seek to limit growth or reduce the size of the balance sheet if its analysis indicates that doing so would be beneficial.

For the second quarter of 2019, the net interest margin was 3.11%, down 21 basis points versus the prior year’s quarter. The quarterly results reflect the following significant factors:

•

The average balance of Federal Funds sold and other short-term investments decreased by $3.7 million while the average yield increased 59 basis points in the second quarter of 2019 compared to the same period in 2018.

•

The average balance of securities available for sale increased by $41.1 million while the average yield increased 24 basis points to 2.39%. The average balance of held to maturity securities decreased by $4.2 million and the average yield increased 10 basis points to 3.95% for the second quarter of 2019 compared to the same period in 2018 due to the maturity of corporate bond.

•

The average loan portfolio grew by $176.6 million to $3.88 billion and the average yield increased 6 basis points to 4.28% in the second quarter of 2019 compared to the same period in 2018.

•

The average balance of interest bearing liabilities (primarily time deposits) increased $149.4 million and the average rate paid increased 44 basis points to 0.91% in the second quarter of 2019 compared to the same period in 2018.

During the second quarter of 2019, the Company continued to focus on its strategy to expand the loan portfolio by offering competitive interest rates. Management believes the TrustCo residential real estate loan product is very competitive compared to local and national competitors. Competition remains strong in the Company’s market areas.

Index

The strategy on the funding side of the balance sheet continues to be to attract and retain deposit customers to the Company based upon a combination of service, convenience and interest rate.

Earning Assets

Total average interest earning assets increased from $4.83 billion in the second quarter of 2018 to $5.04 billion in the same period of 2019 with an average yield of 3.86% in the second quarter of 2019 and 3.72% in the second quarter of 2018. The shift in the mix of assets towards a higher proportion of loans and the increase in yield on cash drove the overall yield increase. Interest income on average earning assets increased from $44.8 million in the second quarter of 2018 to $48.7 million in the second quarter of 2019, on a tax equivalent basis. The increase was the result of higher volume and yield.

Loans

The average balance of loans was $3.88 billion in the second quarter of 2019 and $3.70 billion in the comparable period in 2018. The yield on loans was up 6 basis points to 4.28%. The higher average balances led to an increase in interest income on loans from $39.0 million in the second quarter of 2018 to $41.4 million in the second quarter of 2019.

Compared to the second quarter of 2018, the average balance of residential mortgage loans, commercial loans, and installment loans increased. The average balance of residential mortgage loans was $3.40 billion in the second quarter of 2019 compared to $3.21 billion in 2018, an increase of 6.0%. The average yield on residential mortgage loans increased by 3 basis points to 4.14% in the second quarter of 2019 compared to 2018.

TrustCo actively markets the residential loan products within its market territories. Mortgage loan rates are affected by a number of factors including rates on Treasury securities, the Federal Funds rate and rates set by competitors and secondary market participants. TrustCo aggressively markets the unique aspects of its loan products thereby attempting to create a differentiation from other lenders. These unique aspects include low closing costs, fast turn-around time on loan approvals, no escrow or mortgage insurance requirements for qualified borrowers and the fact that the Company typically holds these loans in portfolio and does not sell them into the secondary markets. Assuming a rise in long-term interest rates, the Company would anticipate that the unique features of its residential loan products will continue to attract customers in the residential mortgage loan area.

Commercial loans, which consist primarily of loans secured by commercial real estate, increased $2.7 million to an average balance of $189.9 million in the second quarter of 2019 compared to the same period in the prior year. The average yield on this portfolio was up 14 basis points to 5.36% compared to the prior year period. The Company has been selective in underwriting commercial loans in recent periods as the apparent risk/reward balance has been less favorable in many cases.

The average yield on home equity credit lines increased 40 basis points to 5.01% during the second quarter of 2019 compared to the year earlier period. The increase in yield is the result of prime rate increases which impacted some loans as well as a smaller percentage of lower yielding initial rate balances. The average balances of home equity lines decreased 6.3% to $279.6 million in the second quarter of 2019 as compared to the prior year. With the tax deductibility changes of home equity line interest, some customers have refinanced their balances into fixed rate mortgage loans.

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Securities Available for Sale

The average balance of the securities available for sale portfolio for the second quarter of 2019 was $591.8 million compared to $550.7 million for the comparable period in 2018. The balance reflects routine paydowns, calls and maturities, offset by new investment purchases. The average yield was 2.39% for the second quarter of 2019 compared to 2.15% for the second quarter of 2018. This portfolio is primarily comprised of bonds issued by government sponsored enterprises (such as Fannie Mae, the Federal Home Loan Bank, and Freddie Mac), Small Business Administration participation certificates, corporate bonds and municipal bonds. These securities are recorded at fair value with any adjustment in fair value included in accumulated other comprehensive loss, net of tax.

The net unrealized loss in the available for sale securities portfolio was $2.3 million as of June 30, 2019 compared to a net unrealized loss of $14.1 million as of December 31, 2018. The unrealized loss in the portfolio is primarily the result of changes in market interest rate levels.

Held to Maturity Securities

The average balance of held to maturity securities was $21.2 million for the second quarter of 2019 compared to $25.4 million in the second quarter of 2018. The decrease in balances reflects routine paydowns and calls. No new securities were added to this portfolio during the period. The average yield was 3.95% for the second quarter of 2019 compared to 3.85% for the year earlier period. Since the same period last year, the higher yield reflects the slowdown of prepayments of the underlying mortgage backed securities in this portfolio. TrustCo expects to hold the securities in this portfolio until they mature or are called.

As of June 30, 2019, this portfolio consisted solely of agency issued mortgage-backed securities. The balances for these securities are recorded at amortized cost.

Federal Funds Sold and Other Short-term Investments

The 2019 second quarter average balance of Federal Funds sold and other short-term investments was $545.7 million, a $3.7 million decrease from the $549.4 million average for the same period in 2018. The yield was 2.41% for the second quarter of 2019 and 1.82% for the comparable period in 2018. Interest income from this portfolio increased $815 thousand from $2.5 million in 2018 to $3.3 million in 2019, reflecting the target rate increases, partly offset by the decrease in average balances.

The Federal Funds sold and other short-term investments portfolio is utilized to generate additional interest income and liquidity as funds are waiting to be deployed into the loan and securities portfolios.

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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, demand deposits, interest-bearing checking, money market and time deposit accounts.

Total average interest bearing accounts (which includes interest bearing checking, money market accounts, savings, and time deposits) increased $173.6 million to $4.01 billion for the second quarter of 2019 versus the second quarter in the prior year, and the average rate paid increased from 0.47% for 2018 to 0.91% for 2019. Total interest expense on these deposits increased from $4.4 million to $9.1 million in the second quarter of 2019 compared to the year earlier period. From the second quarter of 2018 to the second quarter of 2019, interest bearing demand account average balances were down 3.0%, certificates of deposit average balances were up 26.5%, non-interest demand average balances were up 5.4%, average savings balances decreased 9.7% and money market balances were up 4.6%. Because we offered competitive shorter term rates, we would expect margin to begin to stabilize in the later part of 2019 particularly in third and fourth quarter as our shorter term time deposits could reprice lower and provide opportunity for increased margin expansion.

The Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet. The Bank is a member of the Federal Home Loan Bank of New York (FHLBNY) and is an eligible borrower at the Federal Reserve Bank of New York (FRBNY) and has the ability to borrow utilizing securities and/or loans as collateral at either. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a potential contingent funding source within its Asset/Liability Management Policy. Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.

At June 30, 2019, the maturity of total time deposits is as follows:

(dollars in thousands)

Under 1 year	$	1,014,604
1 to 2 years		415,988
2 to 3 years		7,220
3 to 4 years		5,547
4 to 5 years		2,866
Over 5 years		203
	$	1,446,428

Average short-term borrowings for the second quarter were $162.7 million in 2019 compared to $189.6 million in 2018. The average rate increased during this time period from 0.61% in 2018 to 0.94% in 2019. The short-term borrowings of the Company are cash management accounts, which represent retail accounts with customers for which the Bank has pledged certain assets as collateral.

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Net Interest Income

Taxable equivalent net interest income decreased by $927 thousand to $39.2 million in the second quarter of 2019 compared to the same period in 2018. The net interest spread was down 29 basis points to 2.95% in the second quarter of 2019 compared to the same period in 2018. As previously noted, the net interest margin was down 21 basis points to 3.11% for the second quarter of 2019 compared to the same period in 2018.

Taxable equivalent net interest income decreased by $508 thousand to $78.9 million in the first six-months of 2019 compared to the same period in 2018. The net interest spread was down 20 basis points to 3.03% in the first six-months of 2019 compared to the same period in 2018. As previously noted, the net interest margin was down 13 basis points to 3.17% for the first six-months of 2019 compared to the same period in 2018.

Nonperforming Assets

Nonperforming assets include nonperforming loans (“NPLs”), which are those loans in a non-accrual status 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 included in other assets and categorized as other real estate owned.

The following describes the nonperforming assets of TrustCo as of June 30, 2019:

Nonperforming loans and foreclosed real estate: Total NPLs were $22.1 million at June 30, 2019, compared to $25.0 million at December 31, 2018 and $24.2 million at June 30, 2018. There were $22.1 million of non-accrual loans at June 30, 2019 compared to $25.0 million at December 31, 2018 and $24.1 million at June 30, 2018. There were no loans at June 30, 2019 and 2018 and December 31, 2018 that were past due 90 days or more and still accruing interest.

At June 30, 2019, nonperforming loans primarily include a mix of commercial and residential loans. Of total nonperforming loans of $22.1 million at June 30, 2019, $21.2 million were residential real estate loans, $905 thousand were commercial loans and mortgages and $1 thousand were installment loans, compared to $24.3 million, $645 million and $19 thousand, respectively, at December 31, 2018.

A significant percentage of nonperforming loans are residential real estate loans, which are historically lower-risk than most other types of loans. Net recoveries were $79 thousand on residential real estate loans (including home equity lines of credit) for the second quarter of 2019 compared to $150 thousand in chargeoffs for the second quarter of 2018. Management believes that these loans have been appropriately written down where required.

Ongoing portfolio management is intended to result in early identification and disengagement from deteriorating credits. TrustCo has a diversified loan portfolio that includes a significant balance of residential mortgage loans to borrowers in the Capital Region of New York and avoids concentrations to any one borrower or any single industry. TrustCo has no advances to borrowers or projects located outside the United States. TrustCo continues to identify delinquent loans as quickly as possible and to move promptly to resolve problem loans. Efforts to resolve delinquencies begin immediately after the payment grace period expires, with repeated, automatically generated notices, as well as personalized phone calls and letters. Loans are placed in nonaccrual status once they are 90 days past due, or earlier if management has determined that such classification is appropriate. Once in nonaccrual status, loans are either brought current and maintained current, at which point they may be returned to accrual status, or they proceed through the foreclosure process. The collateral on nonaccrual loans is evaluated periodically, and the loan value is written down if the collateral value is insufficient.

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The Company originates loans throughout its deposit franchise area. At June 30, 2019, 75.5% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 24.5% were in Florida. Those figures compare to 76.1% and 23.9%, respectively, at December 31, 2018.

Economic conditions vary widely by geographic location. Florida experienced a more significant downturn than New York during the recession, however conditions in Florida have improved more than in New York in recent periods. As a percentage of the total nonperforming loans as of June 30, 2019, 7.1% were to Florida borrowers, compared to 92.9% to borrowers in New York and surrounding areas. For the three months ended June 30, 2019, New York and surrounding areas experienced net recoveries of approximately $10 thousand, compared to net recoveries of $25 thousand in Florida for the entire portfolio.

Other than loans currently identified as nonperforming, management is aware of no other loans in the Bank’s portfolio that pose material risk of the eventual non-collection of principal and interest. Also as of June 30, 2019, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources.

TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring (TDR), as impaired loans. There were $1.3 million of commercial mortgages and commercial loans classified as impaired as of June 30, 2019 compared to $1.4 million at December 31, 2018. There were $19.1 million of impaired residential loans at June 30, 2019 and $20.9 million at December 31, 2018. The average balances of all impaired loans were $21.7 million for the six months of 2019 and $23.1 million for the full year 2018.

As of June 30, 2019 and December 31, 2018, the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.

At June 30, 2019 there was $2.6 million of foreclosed real estate compared to $1.7 million at December 31, 2018.

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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 probable incurred losses in the loan portfolio.

(dollars in thousands)	As of June 30, 2019					As of December 31, 2018
	Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans
Commercial	$	3,749		4.51	%	$	3,903		4.74	%
Real estate - construction		318		0.71	%		310		0.69	%
Real estate mortgage - 1 to 4 family		35,411		87.43	%		34,918		86.80	%
Home equity lines of credit		4,398		7.11	%		4,689		7.47	%
Installment Loans		489		0.24	%		946		0.30	%
	$	44,365		100.00	%	$	44,766		100.00	%

At June 30, 2019, the allowance for loan losses was $44.4 million, compared to $44.5 million at June 30, 2018 and $44.8 million at December 31, 2018. The allowance represents 1.14% of the loan portfolio as of June 30, 2019 compared to 1.19% at June 30, 2018 and 1.16% at December 31, 2018.

There was a negative provision for loan losses of $341 thousand recorded for the quarter ended June 30, 2019 and a provision of $300 thousand that was recorded for the quarter ended June 30, 2018. The negative second quarter provision for loan losses was driven by a $541 thousand reduction in the allocated reserve reflecting the sale of the Company’s remaining credit card portfolio and the quarterly provision of $200 thousand based on the Company’s allowance methodology. Net recoveries for the three-month period ended June 30, 2019 were $35 thousand compared to net chargeoffs of $176 thousand for the prior year period. Net chargeoffs for the six-month period ended June 30, 2019 were $360 thousand compared to $266 thousand for the prior year period.

During the second quarter of 2019, there were $1 thousand of commercial loan gross recoveries, $79 thousand of gross residential mortgage recoveries offset by $45 thousand of consumer loan chargeoffs, compared with $1 thousand of gross commercial loan recoveries, $150 thousand of residential mortgage chargeoffs, and $27 thousand of consumer loan chargeoffs for the same period prior year.

In determining the adequacy of the allowance for loan losses, management reviews the current nonperforming loan portfolio as well as loans that are past due and not yet categorized as nonperforming for reporting purposes. Also, there are a number of other factors that are taken into consideration, including:

•

The magnitude and nature of recent loan chargeoffs and recoveries;

•

The growth in the loan portfolio and the implication that it has in relation to the economic climate in the Bank’s market territories, and;

•

The economic environment in the Upstate New York and Florida territories over the last several years, as well as in the Company’s other market areas.

Management continues to monitor these factors in determining the provision for loan losses in relation to loan chargeoffs, recoveries, the level and trends of nonperforming loans and overall economic conditions in the Company’s market territories.

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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. Management believes that TrustCo’s earnings performance and strong capital position enable the Company to easily secure new sources of liquidity. 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. As noted, the Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet. As previously stated, the Bank is a member of the FHLBNY and is an eligible borrower at the FRBNY and has the ability to borrow utilizing securities and/or loans as collateral at either institution. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a contingent funding source within its Asset/Liability Management Policy. Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.

The Company uses an industry standard external model as the primary tool to identify, quantify and project changes in interest rates and prepayment speeds taken both from industry sources and internally generated data based upon historical trends in the Bank’s balance sheet. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in market interest rates are also incorporated into the model. This model calculates an economic or fair value amount with respect to non-time deposit categories since these deposits are part of the core deposit products of the Company. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the fair value of capital or precisely predict the impact of fluctuations in interest rates on the fair value of capital.

Using this model, the fair value of capital projections as of June 30, 2019 are referenced below. The base case (current rates) scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of June 30, 2019. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp and 200bp.

As of June 30, 2019	Estimated Percentage of Fair value of Capital to Fair value of Assets
+400 BP		17.21	%
+300 BP		18.19
+200 BP		19.10
+100 BP		19.90
Current rates		20.33
-100 BP		18.66
-200 BP		14.91

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Noninterest Income

Total noninterest income for the second quarter of 2019 was $4.9 million compared to $4.5 million for the same period in the prior year. Financial services income was up $87 thousand to $1.7 million in the second quarter of 2019 as compared to the year-ago period. Fees for services to customers were down $66 thousand over the same period in the prior year. The fair value of assets under management was $886 million at June 30, 2019, $803 million as of December 31, 2018, and $882 million at June 30, 2018.

For the six months ended June 30, 2019 total noninterest income was $9.6 million, up $377 thousand compared to the prior year period. A large perspective of the increase was due to the sale of the Company’s credit card portfolio which resulted in a gain of approximately $176 thousand.

Noninterest Expenses

Total noninterest expenses were $24.9 million for the three-months ended June 30, 2019, compared to $24.1 million for the three-months ended June 30, 2018. Significant changes included an increase of $970 thousand in salaries and employee benefits driven by benefit liability true ups of $542 thousand primarily related to increases in stock price and head count changes noted below, a $108 thousand increase in advertising expenses, partly offset by a $246 thousand decrease in professional fees. Full time equivalent headcount was 829 as of June 30, 2018, 854 as of December 31, 2018, 899 as of March 31, 2019 and 858 as of June 30, 2019. The change in headcount was driven by a restructuring of branches and hiring talent for redeployment to better serve the Company.

Total noninterest expenses were $49.8 million for the six-months ended June 30, 2019, compared to $48.3 million for the six-months ended June 30, 2018. Significant changes included an increase of $2.0 million in salaries and employee benefits, increases of $263 thousand and $180 thousand, respectively, in advertising costs and other expense, partly offset by decreases of $480 thousand in lower net other real estate expense, $291 thousand in FDIC and other insurance, and $243 thousand in net occupancy expense.

Income Taxes

In the second quarter of 2019, TrustCo recognized income tax expense of $4.9 million compared to $4.8 million for the second quarter of 2018. The effective tax rates were 25.0% and 23.8% for the second quarters of 2019 and 2018, respectively. For the first six-months, income taxes were $9.5 million in 2019 and 2018. The effective tax rates were 24.6% and 23.9% of 2019 and 2018, respectively.

Capital Resources

Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios.

Banking regulators have moved towards higher required capital requirements due to the standards included in the Basel III reform measures and the Dodd-Frank Act, as well as a general trend towards reducing risk in the banking system by providing a greater capital margin.

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Total shareholders’ equity at June 30, 2019 was $515.6 million compared to $470.8 million at June 30, 2018. TrustCo declared a dividend of $0.068125 per share in the second quarter of 2019. This results in a dividend payout ratio of 44.94% based on second quarter 2019 earnings of $14.7 million.

The Bank and the Company reported the following capital ratios as of June 30, 2019 and December 31, 2018:

(Bank Only)

	As of June 30, 2019					Well			Adequately
(dollars in thousands)	Amount		Ratio			Capitalized⁽¹⁾			Capitalized⁽¹⁾⁽²⁾

Tier 1 leverage capital		501,685		9.685	%		5.000	%		4.000	%
Common equity tier 1 capital		501,685		18.236			6.500			7.000
Tier 1 risk-based capital		501,685		18.236			8.000			8.500
Total risk-based capital		536,199		19.491			10.000			10.500

	As of December 31, 2018					Well			Adequately
(dollars in thousands)	Amount		Ratio			Capitalized⁽¹⁾			Capitalized⁽¹⁾⁽³⁾

Tier 1 (core) capital	$	484,581		9.767	%		5.000	%		4.000	%
Common equity tier 1 capital		484,581		18.233			6.500			6.380
Tier 1 risk-based capital		484,581		18.233			8.000			7.880
Total risk-based capital		517,948		19.489			10.000			9.880

(Consolidated)
						Minimum for
						Capital Adequacy plus
	As of June 30, 2019					Capital Conservation
(dollars in thousands)	Amount		Ratio			Buffer⁽¹⁾⁽²⁾

Tier 1 leverage capital	$	516,850		9.974	%		4.000	%
Common equity tier 1 capital		516,850		18.777			7.000
Tier 1 risk-based capital		516,850		18.777			8.500
Total risk-based capital		551,383		20.031			10.500

						Minimum for
						Capital Adequacy plus
	As of December 31, 2018					Capital Conservation
(dollars in thousands)	Amount		Ratio			Buffer⁽¹⁾⁽²⁾

Tier 1 leverage ratio	$	499,626		10.129	%		4.000	%
Common equity Tier 1 capital		499,626		18.790			6.380
Tier 1 risk-based capital		499,626		18.790			7.880
Total risk-based capital		533,009		20.046			9.880

(1)	Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized

(2)	The June 30, 2019 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a capital conservation buffer of 2.50 percent

(3)	The December 31, 2018 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 1.88 percent

In addition, at June 30, 2019, the consolidated equity to total assets ratio was 9.86%, compared to 9.88% at December 31, 2018 and 9.53% at June 30, 2018.

Both TrustCo and Trustco Bank are subject to regulatory capital requirements. On January 1, 2015, a new capital rule took effect that revised the federal bank regulatory agencies’ risk-based capital requirements and, for the first time, subjected the Company to consolidated regulatory capital requirements. Among other matters, the rule also established a new common equity Tier 1 minimum capital requirement of 4.5% of risk-weighted assets, increased the minimum Tier 1 capital to risk-based assets requirement from 4.0% to 6.0% of risk-weighted assets, changed the risk-weightings of certain assets, and changed what qualifies as capital for purposes of meeting the various capital requirements. In addition, the Company and the Bank are required to maintain additional levels of Tier 1 common equity (the capital conservation buffer) over the minimum risk-based capital levels before they may pay dividends, repurchase shares, or pay discretionary bonuses. The new rule was phased-in over several years and is fully in effect in 2019.

Index

As of June 30, 2019, the capital levels of both TrustCo and the Bank exceeded the minimum standards, including with the current and also fully phased-in capital conservation buffer is taken into account.

Under the OCC’s “prompt corrective action” regulations, a bank is deemed to be “well-capitalized” when its CET1, Tier 1, total risk-based, and leverage capital ratios are at least 6.5%, 8%, 10%, and 5%, respectively. A bank is deemed to be “adequately capitalized” or better if its capital ratios meet or exceed the minimum federal regulatory capital requirements, and “undercapitalized” if it fails to meet these minimal capital requirements. A bank is “significantly undercapitalized” if its CET1, Tier 1, total risk-based and leverage capital ratios fall below 3%, 4%, 6%, and 3%, respectively and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. At June 30, 2019 and 2018, Trustco Bank met the definition of “well-capitalized.”

As noted, the Company’s dividend payout ratio was 44.94% of net income for the second quarter of 2019 and 41.08% of net income for the second quarter of 2018. The per-share dividend paid in the second quarter of 2019 was $0.068125 compared to $0.065625 in the same period prior year. The Company’s ability to pay dividends to its shareholders is dependent upon the ability of the Bank to pay dividends to the Company. The payment of dividends by the Bank to the Company is subject to continued compliance with minimum regulatory capital requirements. The OCC may disapprove a dividend if: the Bank would be undercapitalized following the distribution; the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statue, regulation or agreement.

TrustCo maintains a dividend reinvestment plan (DRP) with approximately 11,500 participants. The DRP allows participants to reinvest dividends in shares of the Company. The DRP also allows for additional purchases by participants and has a discount feature (up to a 5% for safe harbor provisions) that can be activated by management as a tool to raise capital. To date, the discount feature has not been utilized.

Critical Accounting Policies

Pursuant to Securities and Exchange Commission (SEC) guidance, management of the Company is encouraged to evaluate and disclose those accounting policies 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 the inherent risk of losses in the loan 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 Annual Report on Form 10-K for the year ended December 31, 2018 is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.

Index

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 the 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 and held to maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is the unrealized gain (loss), net of tax, in the available for sale portfolio of ($5.0) million in 2019 and ($1.3) million in 2018. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.

(dollars in thousands)	Three months ended June 30, 2019									Three months ended June 30, 2018

Assets	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate			Change in Interest Income/ Expense			Variance Balance Change			Variance Rate Change

Securities available for sale:
U. S. government sponsored enterprises	$	160,197			821			2.05	%	$	154,862			787			2.03	%	$	34			26			8
Mortgage backed securities and collateralized mortgage obligations-residential		342,678			2,152			2.51	%		300,706			1,675			2.23	%		477			250			227
State and political subdivisions		168			4			9.52	%		515			10			7.81	%		(6	)		(18	)		12
Corporate bonds		33,793			272			3.22	%		27,780			150			2.16	%		122			37			85
Small Business Administration-guaranteed participation securities		54,254			289			2.13	%		64,886			333			2.05	%		(44	)		(120	)		76
Mortgage backed securities and collateralized mortgage obligations-commercial		-			-			-	%		1,285			(5	)		(1.51	)%		5			3			2
Other		686			5			2.92	%		685			4			2.34	%		1			-			1

Total securities available for sale		591,776			3,543			2.39	%		550,719			2,954			2.15	%		589			178			411

Federal funds sold and other short-term Investments		545,724			3,282			2.41	%		549,378			2,467			1.82	%		815			(114	)		929

Held to maturity securities:
Mortgage backed securities and collateralized mortgage obligations-residential		21,155			209			3.95	%		25,381			244			3.85	%		(35	)		(75	)		40

Total held to maturity securities		21,155			209			3.95	%		25,381			244			3.85	%		(35	)		(75	)		40

Federal Reserve Bank and Federal Home Loan Bank stock		9,173			199			8.68	%		8,943			198			8.86	%		1			19			(18	)

Commercial loans		189,870			2,546			5.36	%		187,157			2,444			5.22	%		102			35			67
Residential mortgage loans		3,396,149			35,179			4.14	%		3,205,035			32,914			4.11	%		2,265			1,993			272
Home equity lines of credit		279,622			3,503			5.01	%		298,489			3,391			4.61	%		112			(960	)		1,072
Installment loans		10,310			204			7.91	%		8,669			213			9.98	%		(9	)		167			(176	)

Loans, net of unearned income		3,875,951			41,432			4.28	%		3,699,350			38,962			4.22	%		2,470			1,235			1,235

Total interest earning assets		5,043,779			48,665			3.86	%		4,833,771			44,825			3.72	%		3,840			1,243			2,597

Allowance for loan losses		(44,841	)								(44,551	)
Cash & non-interest earning assets		177,019									124,099


Total assets	$	5,175,957								$	4,913,319


Liabilities and shareholders' equity

Deposits:
Interest bearing checking accounts	$	879,732			94			0.04	%	$	906,641			112			0.05	%		(18	)		(3	)		(15	)
Money market accounts		553,708			1,119			0.81	%		529,421			452			0.35	%		667			23			644
Savings		1,138,107			367			0.13	%		1,260,656			420			0.14	%		(53	)		(29	)		(24	)
Time deposits		1,437,097			7,512			2.09	%		1,135,630			3,439			1.23	%		4,073			1,120			2,953

Total interest bearing deposits		4,008,644			9,092			0.91	%		3,832,348			4,423			0.47	%		4,669			1,111			3,558
Short-term borrowings		162,690			381			0.94	%		189,611			283			0.61	%		98			(239	)		337

Total interest bearing liabilities		4,171,334			9,473			0.91	%		4,021,959			4,706			0.47	%		4,767			872			3,895

Demand deposits		418,215									396,783
Other liabilities		79,056									28,653
Shareholders' equity		507,352									465,924

Total liabilities and shareholders' equity	$	5,175,957								$	4,913,319

Net interest income , tax equivalent					39,192									40,119					$	(927	)		371			(1,298	)

Net interest spread								2.95	%								3.24	%

Net interest margin (net interest income to total interest earning assets)								3.11	%								3.32	%

Tax equivalent adjustment					(1	)								(10	)


Net interest income					39,191									40,109

Index

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 the 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 and held to maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is the unrealized gain (loss), net of tax, in the available for sale portfolio of ($7.1) million in 2019 and ($6.5) million in 2018. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.

(dollars in thousands)	Six months ended June 30, 2019									Six months ended June 30, 2018

Assets	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate			Change in Interest Income/ Expense			Variance Balance Change			Variance Rate Change

Securities available for sale:
U. S. government sponsored enterprises	$	157,244			1,604			2.04	%	$	155,723			1,537			1.97	%	$	67			14			53
Mortgage backed securities and collateralized mortgage obligations-residential		308,034			3,707			2.41	%		307,194			3,438			2.24	%		269			10			259
State and political subdivisions		168			6			7.14	%		515			20			9.37	%		(14	)		(10	)		(4	)
Corporate bonds		30,347			480			3.16	%		30,523			283			1.85	%		197			(5	)		202
Small Business Administration-guaranteed participation securities		55,648			586			2.11	%		65,990			685			2.08	%		(99	)		(124	)		25
Mortgage backed securities and collateralized mortgage obligations-commercial		-			-			-	%		5,507			37			1.34	%		(37	)		(19	)		(18	)
Other		685			10			2.92	%		685			9			2.27	%		1			-			1

Total securities available for sale		552,126			6,393			2.32	%		566,137			6,009			2.12	%		384			(134	)		518

Federal funds sold and other short-term Investments		524,468			6,291			2.40	%		539,219			4,484			1.68	%		1,807			(357	)		2,164

Held to maturity securities:
Mortgage backed securities and collateralized mortgage obligations-residential		21,594			426			3.95	%		26,086			504			3.86	%		(78	)		(109	)		31

Total held to maturity securities		21,594			426			3.95	%		26,086			504			3.86	%		(78	)		(109	)		31

Federal Reserve Bank and Federal Home Loan Bank stock		9,064			284			6.27	%		8,861			275			6.21	%		9			6			3

Commercial loans		191,793			5,129			5.35	%		186,405			4,858			6.25	%		271			606			(335	)
Residential mortgage loans		3,385,628			70,043			4.14	%		3,177,041			65,172			4.11	%		4,871			4,418			453
Home equity lines of credit		282,892			7,040			4.98	%		302,368			6,601			4.40	%		439			(1,005	)		1,444
Installment loans		11,099			473			8.52	%		8,518			418			9.88	%		55			197			(142	)

Loans, net of unearned income		3,871,412			82,685			4.27	%		3,674,332			77,049			4.20	%		5,636			4,216			1,420

Total interest earning assets		4,978,664			96,079			3.86	%		4,814,635			88,321			3.68	%		7,758			3,622			4,136

Allowance for loan losses		(44,894	)								(44,472	)
Cash & non-interest earning assets		176,518									124,483


Total assets	$	5,110,288								$	4,894,646


Liabilities and shareholders' equity

Deposits:
Interest bearing checking accounts	$	880,101			215			0.05	%	$	892,288			218			0.05	%		(3	)		(1	)		(2	)
Money market accounts		535,950			1,945			0.73	%		538,230			891			0.33	%		1,054			(11	)		1,065
Savings		1,149,064			744			0.13	%		1,260,509			839			0.13	%		(95	)		(91	)		(4	)
Time deposits		1,395,361			13,488			1.93	%		1,108,413			6,299			1.15	%		7,189			1,980			5,209

Total interest bearing deposits		3,960,476			16,392			0.83	%		3,799,440			8,247			0.44	%		8,145			1,877			6,268
Short-term borrowings		160,893			762			0.95	%		211,874			641			0.61	%		121			(397	)		518

Total interest bearing liabilities		4,121,369			17,154			0.83	%		4,011,314			8,888			0.45	%		8,266			1,480			6,786

Demand deposits		407,926									391,702
Other liabilities		79,814									28,891
Shareholders' equity		501,179									462,739

Total liabilities and shareholders' equity	$	5,110,288								$	4,894,646

Net interest income , tax equivalent					78,925									79,433					$	(508	)		2,142			(2,650	)

Net interest spread								3.03	%								3.23	%

Net interest margin (net interest income to total interest earning assets)								3.17	%								3.30	%

Tax equivalent adjustment					(2	)								(7	)


Net interest income					78,923									79,426

Index

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

As detailed in the Annual Report to Shareholders as of December 31, 2018, the Company is subject to interest rate risk as its principal market risk. As noted in the Management’s Discussion and Analysis for the three-month and six-month month periods ended June 30, 2019 and 2018, the Company continues to respond to changes in interest rates in such a way that positions the Company to meet short term earning goals and also allows the Company to respond to changes in interest rates in the future. Consequently, for the second quarter of 2019, the Company had an average balance of Federal Funds sold and other short-term investments of $545.7 million compared to $549.4 million in the second quarter of 2018. As investment opportunities present themselves, management plans to invest funds from the Federal Funds sold and other short-term investment portfolio into the securities available for sale, securities held to maturity and loan portfolios. Additional disclosure of interest rate risk can be found under “Liquidity and Interest Rate Sensitivity” and “Asset/Liability Management” in the Management’s Discussion and Analysis section of this document.

Item 4.

Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.

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.

Index

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

There were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

Index

Reg S-K (Item 601) Exhibit No.	Description

3.1	Amended and Restated Certificate of Incorporation of TrustCo Bank Corp NY dated May 23, 2019.

3.2	Amended and Restated Bylaws of TrustCo Bank Corp NY effective on May 23, 2019.

10.1	TrustCo Bank Corp NY 2019 Equity Incentive Plan (incorporated by reference in Appendix B to TrustCo Bank Corp NY’s Definitive Proxy Statement on Schedule 14A filed on April 1, 2019).

15	Crowe LLP Letter Regarding Unaudited Interim Financial Information

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 Michael M. Ozimek, principal financial officer.

32	Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer.

101.INS	Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRLTaxonomy Extension Presentation Linkbase Document

Index

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
	Chairman, President and Chief Executive Officer

	By:
	/s/ Michael M. Ozimek
	Michael M. Ozimek
	Executive Vice President and Chief Financial Officer

Date: August 8, 2019

Index

Exhibits Index

Reg S-K Exhibit No.	Description

3.1	Amended and Restated Certificate of Incorporation of TrustCo Bank Corp NY dated May 23, 2019.

3.2	Amended and Restated Bylaws of TrustCo Bank Corp NY effective on May 23, 2019.

10.1	TrustCo Bank Corp NY 2019 Equity Incentive Plan (incorporated by reference in Appendix B to TrustCo Bank Corp NY’s Definitive Proxy Statement on Schedule 14A filed on April 1, 2019).

15	Crowe LLP Letter Regarding Unaudited Interim Financial Information

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 Michael M. Ozimek, principal financial officer.

32	Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer.

101.INS	Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRLTaxonomy Extension Presentation Linkbase Document