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
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________

Commission File Number 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):
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8-40
     
 
41
     
Item 2.
42-61
     
Item 3.
62
     
Item 4.
62
     
Part II.
OTHER INFORMATION
 
     
Item 1.
63
     
Item 1A.
63
     
Item 2.
63
     
Item 3.
63
     
Item 4.
63
     
Item 5.
63
     
Item 6.
63
2

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.

3

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.



4

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.

5


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.

6


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.
7


(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.


8

(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.


9

(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.
10


(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
 


11

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
 


12

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.

(c) Other-Than-Temporary Impairment

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.
13

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.

14

(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.
15

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.


16

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.

17



 
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.
18

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.
19



 
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.
20


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.
21

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.

22



 
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.
23


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)
                                     
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.
24



 
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)
                                     
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.
25

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)
                         
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.
26

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.
27



 
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.


28

(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.
29

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.
30

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.
31

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
 


32

(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
)


33

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.
34

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.
35

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
%

36

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.
37

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
 
 
                       
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


38

(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.
39

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.


40



GRAPHIC
 
 
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
41

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;

42

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.
43

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.
44


 
 
 
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.

45

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.

46

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%.
47

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.
48

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.
49

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.
50

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.
51

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.
52

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.
53

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.
54

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.
55

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
 


56

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.
57

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.
58

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.
59

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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

60


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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

61

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.
62

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
63


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

64

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
65

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.
 
 
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
 
 
Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer.
 
 
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

66

Exhibit 3.1
 
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
 
TRUSTCO BANK CORP NY
 
UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW
 
We, Robert J. McCormick and Michael Hall, being respectively, the President and Chief Executive Officer and Secretary of TrustCo Bank Corp NY, certify:
 
FIRST.  The name of the Corporation is TRUSTCO BANK CORP NY.
 
SECOND.  The Certificate of Incorporation was filed by the Department of State on the twenty-eighth day of October, 1981.  An Amended and Restated Certificate of Incorporation was filed by the Department of Sate on the fifteenth day of July 1988, and an Amendment to the Amended and Restated Certificate of Incorporation was filed by the Department of State on the twenty-ninth day of August 1991.  A further Amended and Restated Certificate of Incorporation was filed by the department of state on the sixth day of August 1993, and Amendments to the Amended and Restated Certificate were filed by the Department of State on the fifth day of June 1996, and the fifth day of June 1997. A further Amended and Restated Certificate of Incorporation was filed the second day of October 1997, and amendments to the Amended and Restated Certificate of Incorporation were filed by the New York Department of State on the twentieth day of May 1999, the twenty-fifth day of June 2004, the sixth day of June 2006, and the twenty-third day of May 2019.
 
THIRD.  The Certificate of Incorporation of the Corporation is restated as set forth in its entirety below.  The Restated Certificate of Incorporation restates the text of the Certificate of Incorporation as amended on May 20, 1999, June 25, 2004, June 6, 2006 and May 23, 2019, which amendments (i) increased the number of authorized shares of common stock set forth in Section 4.1 of Article IV from 50,000,000 shares to 100,000,000 shares, (ii) changed the number of directors set forth in Article VI, (iii) further increased the number of authorized shares of common stock set forth in Section 4.1 of Article IV from 100,000,000 shares to 150,000,000 shares, (iv) eliminated the classified board set forth in Article VI  to provide instead for the annual election of directors beginning at the 2020 annual meeting of the Corporation’s shareholders and (v) changed the voting requirements set forth in Article VIII. No additional changes or amendments are being made pursuant to this restatement. This Restated Certificate of Incorporation also changes the description in Article III of the location of the Corporation’s office and changes the address in Article V to which the Secretary of State shall mail a copy of any process against the Corporation served upon the Secretary of State. No additional changes or amendments are being made pursuant to this restatement.
 
FOURTH.  The Certificate of Incorporation, as restated, is set forth below:
 

Article I
Name
 
1.           The name of the corporation is:
 
TrustCo Bank Corp N Y
 
(hereinafter called the “Corporation”).
 
Article II
Purposes
 
2.            Subject to any limitation provided in the Business Corporation Law or any other statute of the State of New York, and except as otherwise specifically provided in this Certificate, the purposes for which the Corporation is formed are:
 
2.1          To the extent that a corporation formed under the Business Corporation Law of the State of New York may lawfully do so, to acquire, own, control, hold with power to vote, deal in and with, and dispose of, in any manner, interests in financial institutions, including, without limitation, banks, trust companies, savings banks, national banking associations, savings and loan associations, industrial banks, investment banks, service banks, safe deposit companies, credit unions, and mutual trust investment companies, located within or without the State of New York, and to acquire, own, control, hold with power to vote, deal in and with, and dispose of, in any manner, interests in any other companies, corporations, partnerships, trusts, unincorporated associations, joint stock associations, and other entities, which are engaged in activities related to the business of banking.
 
2.2          To the extent that a corporation formed under the Business Corporation law of the State of New York may lawfully do so, to engage in, carry on, conduct, and participate in activities, enterprises and businesses permitted to be engaged in, carried on, conducted and participated in by bank holding companies under applicable provisions of law and also research, experimenting, manufacturing, assembling, building, erecting, trading, buying, selling, collecting, distributing, wholesaling, retailing, importing, exporting, processing, compounding, producing, refining, synthesizing, mining, extracting, growing, liquidating, dismantling, demolishing, servicing, promoting, exhibiting and publishing activities, enterprises and businesses; and also any activities, enterprises, ventures and businesses similar or incidental to any of the foregoing.
 
2.3          To create, acquire, hold, deal in and with, and dispose of, in any manner, any legal or equitable interest in real property and chattels real, and, without limiting the generality of the foregoing, to purchase, receive, take (by grant, gift, devise, bequest or otherwise), own, hold, improve, employ, use, operate, manage, repair, control, maintain, sell, assign, transfer, convey, exchange, lease, alter, construct, mortgage or encumber real property, whether improved or unimproved, and structures and improvements on real property, or leaseholds, or any other legal or equitable interests or rights therein.
 
2.4          To create, acquire, hold, deal in and with, and dispose of, in any manner, any legal or equitable interest in tangible or intangible personal property, and, without limiting the generality of the foregoing, to make, purchase, receive, take (by grant, gift, bequest, lease, exchange or otherwise), own, hold, improve, employ, use, operate, manage, repair, control, maintain, process, import, export, sell, assign, transfer, convey, exchange, lease or otherwise dispose of, mortgage, pledge or otherwise encumber or in any manner to exploit, turn to account, trade or deal in or with, personal property, whether tangible or intangible, or any other legal or equitable interests or rights therein.


2.5          To make, create, apply for, renew, take (by grant, gift, bequest or otherwise), purchase, lease or otherwise acquire, to hold, own, register, use, operate, to sell, assign, license, lease, transfer, exchange or otherwise dispose of, to mortgage, pledge or otherwise encumber, to acquire or grant licenses with respect to, or in any manner to exploit, turn to account, trade or deal in or with, copyrights, trademarks, service marks, designs, inventions, discoveries, improvements, developments, processes, formulas, patents, trade names, labels, prints, or any interest or right, whether legal or equitable, therein.
 
2.6          To purchase, take (by grant, gift, bequest or otherwise), receive, subscribe for, invest in or otherwise acquire, own, hold, employ, sell, lend, lease, exchange, transfer, assign, or otherwise dispose of, mortgage, pledge, use, and otherwise deal in and with, or in respect of shares, stock, bonds, debentures, warrants, rights, scrip, notes, evidences of indebtedness, certificates of interest or participation in profit-sharing agreements, collateral trust certificates, preorganization certificates and subscriptions, investment contracts, voting trust certificates, certificates of deposit or other securities or obligations of any kind by whomsoever issued (whether or not engaged in similar or different businesses, governmental or other activities); to exercise in respect thereof all powers and privileges of individual or corporate ownership or interest therein, including the right to vote thereon (by proxy or otherwise) for any and all purposes; to consent or otherwise act with respect thereto, without limitation and to issue in exchange therefor the Corporation’s shares, stock, bonds, debentures, warrants, rights, scrip, notes, evidences of indebtedness, or other securities or obligations of any kind.
 
2.7          To make contracts, incur debts and other liabilities, and borrow money on such terms and at such rate of interest as the Corporation may determine; and to mortgage, pledge, convey, assign, in trust or otherwise encumber or dispose of, the property, good will, franchises or other assets of the Corporation, including contract rights and including after-acquired property.
 
2.8          To lend money, with or without security; provided that the Corporation shall not have the power to engage in the business of banking.
 
2.9         To issue, reissue, sell, assign, exchange, pledge, negotiate or otherwise dispose of, to purchase, receive, take, own, hold or otherwise acquire, to deal in or with, or to cancel, shares, stock, bonds, debentures, warrants, rights, scrip, notes, evidences of indebtedness or other securities or obligations of the corporation of any kind, whether secured or unsecured, and whether or not convertible into or subordinated to any other class of securities.
 
2.10        In furtherance of its corporate business, to guarantee or assume liability for the payment of the principal of, or dividends or interest on, or sinking fund payments in respect of, shares, stock, bonds, debentures, warrants, rights, scrip, notes, evidences of indebtedness, certificates of interest or participation in profit-sharing agreements, collateral trust certificates, preorganization certificates and subscriptions, investment contracts, voting trust certificates, certificates of deposit, or other securities or obligations of any kind by whomsoever issued; and to guarantee or assume liability for the performance of any other contract or obligation, made or issued by any domestic or foreign corporation, partnership, association, trustee, group, individual or entity; and, when authorized in any manner provided by law, to give any guaranty although not in furtherance of the Corporation’s purposes.
 
2.11        In furtherance of its corporate business, to be a promoter, partner, co-venturer, member, associate or manager of other business enterprises or ventures, or to be an agent thereof, or to the extent permitted in any jurisdiction to be an incorporator of other corporations of any kind or type.


2.12        To cause to be formed under the laws of any state or country, to control or in any manner participate in the management of, to reorganize, merge, consolidate, and to liquidate or dissolve any corporation, association or organization of any kind.

2.13        To engage in, carry on, conduct and/or participate in any activity, enterprise or business which is similar or related to any activity, enterprise or business herein set forth, or which is capable of being conveniently carried on incidental to any such activity, enterprise or business or which may directly or indirectly protect or enhance the value of any of the rights or property of the Corporation.
 
2.14        To engage in, carry on, conduct and/or participate in any general or specific branch or phase of the activities, enterprises or businesses authorized in the Certificate in the State of New York or in any other state of the United States and in all foreign countries, and in all territories, possessions and other places, and in connection with the same, or any thereof, to be and acts either as principal, agents, contractors or otherwise.
 
2.15        To do everything necessary, suitable, convenient or proper for the accomplishment, attainment or furtherance of, to do every other act or thing incidental to, appurtenant to, growing out of or connected with, the purposes set forth in this Certificate, whether alone or in association with others; to possess all the rights, powers and privileges now or hereafter conferred by the laws of the State of New York upon a corporation organized under the Business Corporation Law of the State of New York (as the same may be amended from time to time) or any statute which may be enacted to supplement or replace it, and, in general, to carry on any of the activities and to do any of the things herein set forth to the same extent and as fully as a natural person or a partnership, association, corporation, or other entity, or any of them, might or could do; provided that nothing herein set forth shall be construed as authorizing the Corporation to possess any purpose, object or power, or to do any act or thing forbidden by law to a corporation organized under the Business Corporation Law of the State of New York.
 
The foregoing provisions of this Article shall be construed as purposes, objects and powers, and each as an independent purpose, object and power, in furtherance, and not in limitation, of the purposes, objects and powers granted to the Corporation by the laws of the State of New York; and except as otherwise specifically provided in any such provision, no purpose, object or power herein set forth shall be in any way limited or restricted by reference to, or inference from, any other provision of this Certificate.
 
Article III
Office
 
The office of the corporation is to be located in the County of Schenectady and State of New York.
 
Article IV
Number of Shares, Preemptive Rights Denied
 
4.1          The total number of shares of Common Stock which the Corporation shall have authority to issue is 150,000,000 shares of the par value of $1 per share.
 
The total number of shares of Preferred Stock which the Corporation shall have authority to issue is 500,000 shares of the par value of $10 per share.
 

The Board of Directors of the Corporation shall have the authority to provide for the issuance of the Preferred Stock in one or more series, with such voting powers, full or limited, but not to exceed one vote per share, or without voting powers, and with such designations, conversion rights, redemption prices, dividend rates and similar matters, including preferences over shares of Common Stock or other series of Preferred Stock as to dividends or distributions of assets and relative participation, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be set forth in resolutions providing for the issuance thereof that may be adopted by the Board of Directors.
 
4.2          No holder of shares of the Corporation shall be entitled as of right to subscribe for, purchase or receive any new or additional shares of any class, whether now or hereafter authorized, or any notes, bonds, debentures or other securities convertible into, or carrying options or warrants to purchase, shares of any class; but all such new or additional shares of any class, or notes, bonds, debentures or other securities convertible into, or carry options or warrants to purchase, shares of any class may be issued or disposed of by the Board of Directors to such persons and on such terms as it, in its absolute discretion, may deem advisable.
 
Article V
Designation of Secretary of State; Mailing Address
 
5.            The Secretary of State is designated as the agent of the Corporation upon whom process in any action or proceeding against the Corporation may be served, and the address to which the Secretary of State shall mail a copy of process in any action or proceeding against the Corporation which may be served upon him is:
 
 
5 Sarnowski Drive
 
Glenville, New York 12302
 
Attn:  Corporate Secretary

Article VI
Directors; Election and Classification
 
6.            The entire Board of Directors shall consist of not less than five (5) members and not more than fifteen (15) members. Commencing with the 2020 annual meeting of shareholders, directors to succeed those whose terms expire at each annual meeting shall be elected to hold office for a term expiring at the next succeeding annual meeting of shareholders and until their respective successors are elected and have qualified or until their respective earlier displacement from office by resignation, removal or otherwise. Any director elected prior to the annual meeting of shareholders in 2020 for a term that expires at the annual meeting of shareholders in 2021 or the annual meeting of shareholders in 2022 shall continue to hold office until the end of the term for which such director was elected. The division of directors into classes shall terminate at the annual meeting of shareholders in 2022, from and after which all directors will stand for election annually.
 
The Board of Directors of the Corporation shall have the authority to establish from time to time the exact number of directors, as shall be set forth in resolutions that may be adopted by the Board of Directors.

Article VII
Duration
 
7.            The duration of the Corporation is to be perpetual.
 

Article VIII
Shareholders – Quorum, Voting and Special Meeting
 
8.            The holders of at least a majority of the outstanding Voting Stock of the Corporation shall be present in person or by proxy at any meeting of shareholders in order to constitute a quorum for the transaction of any business. Whenever any corporate action, other than the election of directors, is to be taken by vote of the shareholders, it shall, except as otherwise required by this Certificate of Incorporation or by law, be authorized by a majority of the votes cast in favor of or against such action at a meeting of shareholders by the holders of shares entitled to vote thereon. Except as otherwise provided in this Certificate of Incorporation or by law, an abstention shall not constitute a vote cast.
 
Article IX
Quorum and Voting Requirements at Directors’ Meeting
 
9.            A majority of the Board of Directors shall be present at any meeting of Directors in order to constitute a quorum for the transaction of any business.  The affirmative vote of a majority of the entire Board of Directors shall be necessary for the transaction of any business or specified items of business, except as otherwise provided in this Certificate, and except that, the affirmative vote of two-thirds of the entire Board of Directors shall be necessary to change, amend or repeal any provision of the Certificate of Incorporation or By-Laws.
 
Article X
Business Combination
 
10.1       Shareholder Approval of Business Combination -- Maximum Vote.
 
(A)         Except as otherwise expressly provided in Section 10.2 of this Article X, the approval of any Business Combination (as hereinafter defined) shall, in addition to any affirmative vote required by law or any other provision of this Certificate of Incorporation or any preferred stock designation of the Corporation, require the affirmative vote of the holders of not less than two-thirds of the shares of the Corporation then entitled to vote generally in the election of directors of the Corporation (hereinafter in this Article X referred to as “Voting Stock”), voting together as a single class, with each share of Voting Stock to have one (1) vote.
 
(B)         The term “Business Combination” as used in this Article X shall mean:
 
(i)           any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Substantial Shareholder (as hereinafter defined) or (b) any other corporation which, after such merger or consolidation, would be a Substantial Shareholder, regardless of which entity survives;
 
(ii)          any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Substantial Shareholder of all or any significant part of the assets of the Corporation or any Subsidiary, or both, with a “significant part of the assets” to be defined as more than ten percent (10%) of the total assets of such entity as shown on its audited statement of condition as of the end of the most recent fiscal year ending prior to the time the particular transaction is announced;
 
(iii)         the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Substantial Shareholder; or
 

(iv)         any transaction involving the Corporation or any Subsidiary, including any issuance, transfer or reclassification of any securities of, or any recapitalization of, the Corporation or any Subsidiary, or any merger or consolidation of the Corporation with any Subsidiary (whether or not involving a Substantial Shareholder), if the transaction would have the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is owned directly or indirectly by a Substantial Shareholder.

10.2       Exception to Maximum Vote Requirement.
 
The provision of Section 10.1 of this Article X shall not be applicable to any Business Combination, and such Business Combination shall require only such affirmative shareholder vote as is required by law or otherwise, if, in the case of a Business Combination which does not involve any cash or other consideration being received by shareholders of the Corporation (in their capacities as shareholders) the condition specified in the following paragraph (i) is met, or, in the case of any Business Combination, either the condition specified in the following paragraph (i) is met or the condition specified in the following paragraph (ii) is met:
 
(i)           the Business Combination shall have been approved by two-thirds of the Disinterested Directors (as hereinafter defined), it being understood that this condition shall not be capable of satisfaction unless there is at least one Disinterested Director.
 
(ii)          the consideration to be received per share by holders of Common Stock of the Corporation and by holders of each other class of Voting Stock outstanding, if any, shall be Fair Consideration (as hereinafter defined).
 
10.3  Definitions.
 
(A)         “Fair Consideration” shall mean,
 
(i)           in the case of shares of Common Stock, an amount in cash or readily available funds at least equal to the highest of the following (whether or not the Substantial Shareholder has previously acquired such shares):
 
(a)          the highest per share price paid by the Substantial Shareholder for any such shares acquired by it within the three-year period immediately preceding the first public announcement of the proposal of the Business Combination (hereinafter referred to as the “Announcement Date”), plus an “Interest Adjustment” of such price, as defined hereafter in this Section 10.3(A);
 
(b)          the highest reported per share price at which such shares were publicly traded during the three-year period immediately preceding the Announcement Date, plus an “Interest Adjustment” of such price, as defined hereafter in this Section 10.3(A);
 
(c)          the per share fair market value of such shares on the Announcement Date, plus an “Interest Adjustment” of such value, as defined hereafter in this Section 10.3(A); or
 
(d)          the book value per share of Common Stock as of the end of the latest fiscal quarter preceding the Announcement Date, plus an “Interest Adjustment” of such value, as defined hereafter in this Section 10.3(A).
 
(ii)          and in the case of shares of any class of Voting Stock of the Corporation outstanding, an amount in cash or readily available funds at least equal to the highest of the following (whether or not the Substantial Shareholder has previously acquired any such shares);
 
(a)          the highest per share price paid by the Substantial Shareholder for any such shares acquired by it within the three-year period immediately preceding the Announcement Date, plus an “interest Adjustment” of such price, as defined hereafter in this Section 10.3(A);
 

(b)          the highest reported per share price at which such shares were publicly traded during the three-year period immediately preceding the Announcement Date, plus an “Interest Adjustment” of such price, as defined hereafter in this Section 10.3(A);
 
(c)          the per share fair market value of such shares on the Announcement Date, plus an “Interest Adjustment” of such value, as defined hereafter in this Section 10.3(AA); or
 
(d)          the highest preferential amount per share to which the holders of such shares are entitled in the event of voluntary or involuntary liquidation or dissolution of the Corporation.
 
An “Interest Adjustment” of any price or value per share for a class of shares under this Section 10.3(A) shall equal an amount of interest on such price or value compounded annually from the Announcement Date until the Consummation Date of the Business Combination (The “Consummation Date”), or, in the case of subdivisions (a) and (b) in each of the subsections (A)(i) and (A)(ii) in this Section 10.3, from the date of the Substantial Shareholder first became a Substantial Shareholder (the “Determination Date”) until the Consummation Date, at a market prime rate of interest as may be determined from time to time by a majority of the Disinterested Directors, less the aggregate amount of any cash dividends per share paid on such class of shares during such period up to but not in excess of such amount of interest.
 
(B)          “Substantial Shareholder” shall mean and include any individual, corporation, partnership or other person or entity (other than the Corporation or any Subsidiary) which, together with its “Affiliates” and “Associates” (as such terms were defined as of December 11, 1984, in Rule 12b-2 under the Securities Exchange Act of 1934, is the “Beneficial Owner” (as determined in accordance with the criteria set forth as of December 11, 1984, under Rule 13d-3 under the Securities Exchange Act of 1934) in the aggregate of more than five percent (5%) of the voting power of the then-outstanding Voting Stock of the Corporation of any Affiliate or Associate of any such individual, corporation, partnership or other person or entity.
 
(C)         “Subsidiary” shall mean any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation.
 
(D)         “Disinterested Director” shall mean any member of the Board of Directors of the Corporation (the “Board”) who is unaffiliated with the Substantial Shareholder and who was a member of the Board prior to the Determination Date or became a member of the Board after the Determination Date and was recommended or elected by a majority of Disinterested Directors then on the Board.
 
10.4       Interpretative Power of Disinterested Directors.
 
A majority of the Disinterested Directors from time to time shall have the power and duty to determine, on the basis of facts known to them after reasonable inquiry,  all facts necessary to determine compliance with this Article X, including, without limitation, (1) whether a person or entity is a Substantial Shareholder, (2) whether the price in a proposed Business Combination is Fair Consideration, (3) the number of shares of Voting Stock beneficially owned by any person or entity at any given time, and (4) the fair market value as of any given date of the shares of any class of Voting Stock.
 
10.5       Alteration, Amendment and Repeal
 

Notwithstanding any other provision of this Certificate of Incorporation or any provision of law or any preferred stock designation of the Corporation which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law or this Certificate of Incorporation or any preferred stock designation of this Corporation, the affirmative vote of the holders of at least two-thirds of the voting power of the then-outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend or repeal, or to adopt any provision inconsistent with, this Article X or any provision of this Article X.

Article XI
Limitation of Personal Liability
 
11.          To the fullest extent that the Business Corporation Law of the State of New York, as the same exists or may hereafter be amended, permits elimination or a limitation of the liabilities of directors, no director of the corporation shall be liable to the corporation, or its shareholders for any breach of duty in such capacity.  Any repeal or modification of this Article by the shareholders of the corporation shall be prospective only and shall not adversely affect any elimination or limitation of the personal liability of a director of the corporation for acts or omissions occurring prior to the effective date of such repeal or modification.
 
FIFTH.  This restatement of the Certificate of Incorporation of the Corporation was authorized by a majority vote of the Board of Directors pursuant to Section 807 of the Business Corporation Law.
 

IN WITNESS WHEREOF, THE UNDERSIGNED HAVE SIGNED THIS CERTIFICATE THIS 23rd DAY OF MAY, 2019, AND DO HEREBY AFFIRM THE CONTENTS TO BE TRUE UNDER THE PENALTIES OF PERJURY.

 
/s/ Robert J. McCormick
 
ROBERT J. McCORMICK
 
President and Chief Executive Officer

 
/s/ Michael Hall
 
MICHAEL HALL
 
Secretary


AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
TRUSTCO BANK CORP N Y
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
 
 
Filed by:
Lewis Rice LLC
   
600 Washington Avenue
   
Suite 2500
   
St. Louis, Missouri 63101




Exhibit 3.2

AMENDED AND RESTATED BYLAWS OF
TRUSTCO BANK CORP NY

(a New York State Corporation)

(May 23, 2019)



ARTICLE 1

DEFINITIONS

As used in these Bylaws, unless the context otherwise requires, the term:

1.1  “Board” means the Board of Directors of the Corporation.

1.2  “Business Corporation Law” means the Business Corporation Law of the State of New York, as amended from time to time.

1.3  “Bylaws” means the initial Bylaws of the Corporation, as amended from time to time.

1.4  “Certificate of Incorporation” means the initial certificate of incorporation of the Corporation, as amended, supplemented or restated from time to time.

1.5.  “Corporation” means TrustCo Bank Corp NY.

1.6  “Directors” means directors of the Corporation.

1.7  “Entire Board” means the total number of directors which the Corporation would have if there were no vacancies.

1.8  “Chief Executive Officer” means the Chief Executive Officer of the corporation.

1.9  “Chairman” means chairman of the Board of the Corporation.

1.10 “President” means the President of the Corporation.

1.11 “Secretary” means the Secretary of the Corporation.

1.12 “Vice President” means the Vice President of the Corporation.


ARTICLE 2

SHAREHOLDERS

2.1  PLACE OF MEETINGS.  Every meeting of shareholders shall be held at such place within or without the State of New York as shall be designated by the Board of Directors in the notice of such meeting or in the waiver of notice thereof.

2.2  ANNUAL MEETING.  A meeting of shareholders shall be held annually for the election of Directors and the transaction of other business at such hour and on such business day as may be determined by the Board.  Written notice of such meeting, stating the place, date and hour thereof, shall be given, personally or by mail, not less than ten nor more than sixty days before the date of such meeting, to each shareholder certified to vote at such meeting.

2.3  SPECIAL MEETINGS. A special meeting of shareholders, other than those regulated by statute, may be called at any time by the Board, the Chairman or by the Chief Executive Officer.  It shall also be the duty of the Chief Executive Officer to call such a meeting whenever requested in writing so to do by shareholders owning two thirds of the issued and outstanding share entitled to vote at such a meeting.  Written notice of such meeting, stating the place, date, hour and purpose thereof, and indicating that it is being given by the person or persons calling such meeting, shall be given, personally or by mail, not less than ten nor more than sixty days before the date of such meeting, to each shareholder certified to vote at such meeting.

2.4  QUORUM AND VOTING REQUIREMENTS; ADJOURNMENT.  Except with respect to a special meeting for the election of Directors as required by law, or as otherwise provided in these Bylaws or the Certificate of Incorporation , (a) the holders of at least a majority of the outstanding shares of the Corporation shall be present in person or by proxy at any meeting of the shareholders in order to constitute a quorum for the transaction of any business, and (b) whenever any corporate action, other than the election of directors, is to be taken by vote of the shareholders, it shall, except as otherwise required by the Certificate of Incorporation or by law, be authorized by a majority of the votes cast in favor of or against such action at a meeting of shareholders by the holders of shares entitled to vote thereon; provided, however, that when a specified item of business is required to be voted on by a class or series (if the Corporation shall then have outstanding shares or more than one class or series), voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum (as to such class or series) for the transaction of such item of business. The holders of a majority of shares present in person or represented by proxy at any meeting of shareholders, including an adjourned meeting, whether or not a quorum is present, may adjourn such meeting to another time and place. Except as otherwise provided in Certificate of Incorporation or by law, an abstention shall not constitute a vote cast.

2.5  INSPECTORS AT MEETINGS. Two or more inspectors shall be appointed by the Board prior to each Annual Meeting of Shareholders, to serve at the meeting or any adjournment thereof.  In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the person presiding thereat.


2.6  ORGANIZATION. The Board shall designate either the Chairman of the Board of Directors or the Chief Executive Officer to act as chairman of every meeting of shareholders. Notwithstanding such designation, in the absence of the Chairman from the meeting, the Chief Executive Officer shall act as chairman of the meeting, and in the absence of the Chief Executive Officer, the Chairman shall act as chairman of the meeting. In the absence of both the Chairman and the Chief Executive Officer, the chairman of the meeting shall be an officer of the Corporation designated by the Board. The Secretary, or in his absence, one of the Vice Presidents not acting as chairman of the meeting, shall act as secretary of the meeting. In case none of the officers above designated to act as chairman or secretary of the meeting, respectively, shall be present, a chairman or a secretary of the meeting, as the case may be, shall be chosen by a majority of the votes cast at such meeting by the holders of shares present in person, or represented by proxy and entitled to vote at the meeting.

2.7  ORDER OF BUSINESS.  The order of business at all meetings of shareholders shall be as determined by the Chairman of the meeting, but the order of business to be followed at any meeting at which a quorum is present may be changed by a majority of the votes cast at such meeting by the holders of shares present in person or represented by proxy and entitled to vote at the meeting.

ARTICLE 3

DIRECTORS

3.1  BOARD OF DIRECTORS.  Except as otherwise provided in the Certificate of Incorporation, the affairs of the Corporation shall be managed and its corporate powers exercised by its Board.  In addition to the powers expressly conferred by the Bylaws, the Board may exercise all powers and perform all acts which are not required, by the Bylaws or the Certificate of Incorporation or by law, to be exercised and performed by the shareholders.

3.2  NUMBER; QUALIFICATION; TERM OF OFFICE.  Subject to Section 702(b) of the Business Corporation Law, the number of Directors constituting the Entire Board may be changed from time to time by action of the shareholders or the Board, provided that such number shall not be less than five or more than fifteen.  The Directors shall be elected each year for a term as provided in the Certificate of Incorporation.

3.3  ELECTION.  Except as otherwise provided by the Certificate of Incorporation, these bylaws or by law, a nominee for director shall be elected to the Board if a majority of the votes cast are in favor of such nominee’s election; provided, however, that if the number of nominees for election to the Board exceeds the number of Directors to be elected, Directors shall be elected by a plurality of the votes of the shares represented in person or by proxy at any meeting of stockholders held to elect Directors and entitled to vote on such election of Directors.  For purposes of this Section 3.3, a majority of votes cast shall mean the number of votes cast “for” a Director’s election exceeds the number of votes cast “against” that Director’s election (with “abstentions” and “broker nonvotes” not counted as a vote cast either “for” or “against” that Director’s election). In the event that a nominee fails to receive an affirmative majority of the votes cast in any election where the number of nominees is less than or equal to the number of Directors to be elected, the Board, within its powers, may take any appropriate action, including decreasing the number of directors, filling a vacancy or, if such nominee is an existing Director, accepting such Director’s resignation as a Director in accordance with any applicable Corporation policy.


3.4  CHAIRMAN OF THE BOARD OF DIRECTORS. The Board shall designate one of their number as the Chairman.  The Chairman shall, if present, preside at all meetings of the Board and may perform such other duties as from time to time may be assigned him by the Board.  The Chairman shall be a member of such committees as the Board may from time to time determine.

3.5  NEWLY CREATED DIRECTORSHIP AND VACANCIES.  Newly created directorships resulting from an increase in the number of Directors and vacancies occurring in the Board for any reason, may be filled by vote of a majority of the Directors then in office, although less than a quorum, at any meeting.  Directors elected by the Board shall hold office until the next meeting of shareholders at which the election of directors is in the regular order of business, and until their successors have been elected and qualified.

3.6  RULES AND REGULATIONS.  The Board of Directors may adopt such Rules and Regulations for the conduct of its meetings and the management of the affairs of the Company as it may deem proper, not inconsistent with the laws of the State of New York, or these Bylaws.

3.7  REGULAR MEETINGS.  Regular meetings of the Board shall be held on the third Tuesday of February, May, August and November, unless otherwise specified by the Board, and may be held at such times and places as may be fixed from time to time by the Board, and may be held without notice.

3.8  SPECIAL MEETINGS.  Special meetings of the Board shall be held whenever called by the Chairman, and a special meeting shall be called by the Chief Executive Officer or the Secretary at the written request of any seven Directors.  Notice of the time and place of each special meeting of the Board shall, if mailed, be addressed to each Director at the address designated by him for that purpose or, if none is designated, at his last known address at least three days before the date on which the meeting is to be held; or such notice shall be sent to each Director at such address by telegraph, or similar means of communication, or be delivered to him personally, not later than the day before the date on which such meeting is to be held.

3.9  WAIVERS OF NOTICE.  Anything in these Bylaws or in any resolution adopted by the Board to the contrary notwithstanding, notice of any meeting of the Board need not be given to any Director who submits a signed waiver of such notice, whether before or after such meeting, or who attends such meeting without protesting, prior thereto or at its commencement, the lack of notice to him.


3.10 ORGANIZATION.  At each meeting of the Board, the Chairman of the Board or in the absence of the Chairman of the Board, a Chairman chosen by the majority of the Directors present, shall preside.  The Secretary, or in the absence of the Secretary, a Vice President, shall act as Secretary at each meeting of the Board.

3.11  QUORUM AND VOTING.  A majority of the Entire Board shall constitute a quorum for the transaction of business or of any specified item of business at any meeting of the Board.  The affirmative vote of a majority of the Entire Board shall be necessary for the transaction of any business or specified item of business at any meeting of the Board, except that the affirmative vote of two-thirds of the Entire Board shall be necessary to change, amend or repeal any provision of the Certificate of Incorporation or Bylaws.

3.12 WRITTEN CONSENT OF DIRECTORS WITHOUT A MEETING.  Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board consent in writing to the adoption of a resolution authorizing the action.  The resolution and the written consents thereto by the members of the Board shall be filed with the minutes of the proceedings of the Board.

3.13 PARTICIPATION IN MEETING OF BOARD BY MEANS OF CONFERENCE TELEPHONE OR SIMILAR COMMUNICATIONS EQUIPMENT.  Any one or more members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time.  Participation by such means shall constitute presence in person at a meeting.

3.14 NOMINATIONS.  Nominations for Directors, other than those made by or on behalf of the existing management of the Corporation, shall be made in writing and shall be delivered or mailed to the Board not less than (14) days nor more than fifty (50) days prior to any meeting of shareholders called for the election of Directors, provided, however, that if less than twenty-one (21) days notice of the meeting is given to shareholders, such nominations shall be mailed or delivered to the Board not later than the close of business on the seventh (7th) day following the day on which the notice of meeting was mailed.

ARTICLE 4

COMMITTEES

4.1  [Reserved]

4.2  OTHER COMMITTEES.  The Board, by resolution adopted by a majority of the Entire Board, may designate from among its members such other standing or special committees as may seem necessary or desirable from time to time.


ARTICLE 5

OFFICERS

5.1  OFFICERS.  The Board shall elect or appoint a Chairman and shall elect or appoint a President, either of which it shall designate the Chief Executive Officer.  If so elected or appointed by the Board, the Chairman may be the Chief Executive Officer or President of the Corporation; in the absence of such an election or appointment, however, the Chairman shall not be authorized to act in the capacity of an officer of the Corporation except as expressly authorized by the Board. The Board shall also elect or appoint one or more Vice Presidents and a Secretary, and such other officers as it may from time to time determine.  All officers shall hold their offices, respectively, at the pleasure of the Board.  The Board may require any and all officers, clerks and employees to give a bond or other security for the faithful performance of their duties, in such amount and with such sureties as the Board may determine.

5.2  CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Corporation shall have general supervision over the business of the Corporation, subject, however, to the control of the Board and of any duly authorized committee of Directors.  The Chief Executive Officer shall preside, in the absence of the Chairman, at meetings of the Board.  The Chief Executive Officer shall supervise the carrying out of policies adopted or approved by the Board.  He may, with the Secretary or any other officer of the Corporation, sign certificates for shares of the Corporation.  He may sign and execute, in the name of the Corporation, deeds, mortgages, bonds, contracts and other instruments, subject to any restrictions imposed by the Bylaws, Board or applicable laws, and, in general, he shall perform all duties incident to the office of the Chief Executive Officer and such other duties as from time to time may be assigned to him by the Board.

5.3  CHAIRMAN AND PRESIDENT.  Either the Chairman or the President shall be designated the Chief Executive Officer of the Corporation.  The President, if not so designated, shall perform such duties as from time to time may be assigned to him by the Board or by the Chief Executive Officer.  The Chairman, if not designated the Chief Executive Officer, shall perform such duties as from time to time may be assigned to him by the Board, but not by the Chief Executive Officer.

5.4  OTHER OFFICERS.  All the other officers of the Corporation shall perform all duties incident to their respective offices, subject to the supervision and direction of the Board and the Chief Executive Officer, and shall perform such other duties as may from time to time be assigned them by the Board or by the Chief Executive Officer.  The President and any Vice President may also, with the Secretary, sign and execute, in the name of the Corporation, deeds, mortgages, bonds, contracts and other instruments, subject to any restrictions imposed by the Bylaws, Board or applicable laws.

ARTICLE 6

CONTRACTS, LOANS, ETC

6.1  EXECUTION OF CONTRACTS.  The Board may authorize any officer, employee or agent, in the name and on behalf of the Corporation, to enter into any contract or execute and satisfy any instrument, and any such authority may be general or confined to specific instances, or otherwise limited.


6.2  LOANS.  The Chief Executive Officer or any other officer, employee or agent authorized by the Board may effect loans and advances at any time for the Corporation from any bank, trust company or other institution or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, and when authorized so to do may pledge and hypothecate or transfer any securities or other property of the Corporation as security for any such loans or advances.

6.3  SIGNATURE AUTHORITY.  The Chief Executive Officer shall from time to time authorize the appropriate officers and employees of the Corporation who are to sign, execute, acknowledge, verify and deliver or accept all agreements, conveyances, transfers, obligations, authentications, certificates and other documents and instruments and to affix the seal of the Corporation to any such document or instrument and to cause the same to be attested by the Secretary or Assistant Secretary.

ARTICLE 7

SHARES

7.1  STOCK CERTIFICATES.  Certificates representing shares of the Corporation, in such form as shall be determined from time to time by the Board, shall be signed by the Chief Executive Officer, the President, or any Vice President and the Secretary, and may be sealed with the seal of the Corporation or a facsimile thereof.

7.2  TRANSFER OF SHARES.  Transfers of shares shall be made only on the book of the Corporation by the holder thereof or by his duly authorized attorney or a transfer agent of the Corporation, and on surrender of the certificate or certificates representing such shares properly endorsed for transfer and upon payment of all necessary transfer taxes.  Every certificate exchanged, returned or surrendered to the Corporation shall be marked “Canceled”, with  the date of cancellation, by the Secretary or the transfer agent of the Corporation.  A person in whose name shares shall stand on the books of the Corporation shall be deemed the owner thereof to receive dividends, to vote as such owner and for all other purposes as respects the Corporation.  No transfer of shares shall be valid as against the Corporation, its shareholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until such transfer shall have been entered on the books of the Corporation by an entry showing from and to whom transferred.

7.3  CLOSING OF TRANSFER BOOKS.  The Board may prescribe a period prior to any shareholders’ meeting or prior to the payment of any dividend, not exceeding sixty days, during which no transfer of stock on the books of the Corporation may be made and may fix a day as provided by the Business Corporation Law as of which shareholders entitled to notice and to vote at such meeting shall be determined.

7.4  TRANSFER AND REGISTRY AGENTS.  The Corporation may from time to time maintain one or more transfer offices or agents and registry officer or agents at such place or places as may be determined from time to time by the Board.

7.5  LOST, DESTROYED, STOLEN AND MUTILATED CERTIFICATES.  If the holder of any shares shall notify the Corporation of any loss, destruction, theft or mutilation of the certificate or certificates representing such shares, the Corporation may issue a new certificate or certificates to replace the old, upon such conditions as may be specified by the Board consistent with applicable laws.


ARTICLE 8

EMERGENCIES

8.1  OPERATION DURING EMERGENCY.  In the event of a state of emergency declared by the President of the United States or the person performing his functions or by the Governor of the State of New York or by the person performing his functions, the officers and employees of the Corporation shall continue to conduct the affairs of the Corporation under such guidance from the Directors as may be available except as to matters which by statute require specific approval of the Board of Directors and subject to conformance with any governmental directives during the emergency.

8.2  OFFICERS PRO TEMPORE DURING EMERGENCY.  The Board of Directors shall have power, in the absence or disability of any officer, or upon the refusal of any officer to act, to delegate and prescribe such officer’s powers and duties to any other officer for the time being.

8.3  DISASTER.  In the event of a state of emergency resulting from disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Corporation by the Directors and officers as contemplated by these Bylaws, any three or more available members of the Board of Directors shall be responsible for the full conduct and management of the affairs and business of the Corporation, notwithstanding any other provision of these Bylaws, and such directors shall further be empowered to exercise all powers reserved to any and all committees of the Board established pursuant to Article 4 of these Bylaws, until such time as the incumbent Board or a reconstituted Board is capable of assuming full conduct and management of such affairs and business.

ARTICLE 9

SEAL

9.1  SEAL.  The Board may adopt a corporate seal which shall be in the form of a circle and shall bear the full name of the Corporation and the year and State of its incorporation.

ARTICLE 10

FISCAL YEAR

10.1  FISCAL YEAR.  The fiscal year of the Corporation shall be determined, and may be changed, by resolution of the Board.


ARTICLE 11

VOTING OF SHARES HELD

11.1  VOTING OF SHARES HELD BY THE CORPORATION.   Unless otherwise provided by resolution of the Board and excepting the shares of any subsidiary company of the Corporation which are to be voted in accordance with the resolution of the Board, the Chief Executive Officer may from time to time appoint one or more attorneys or agents of the Corporation, in the name and on behalf of the Corporation, to cast the votes which the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation, any of whose shares or securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation and to consent in writing to any action by any such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such  consent, and may execute or  cause to be executed on behalf of the Corporation and under its corporate seal, or otherwise, such written proxies, consents, waivers or other instruments as he may deem necessary or proper in the premises; or the Chief Executive Officer may himself attend any meeting of the holders of the shares or other securities of any such other corporation and thereat vote or exercise any or all other powers of the Corporation as the holder of such shares or other securities of such other corporation.

ARTICLE 12

AMENDMENTS TO BYLAWS

12.1  AMENDMENTS.  The Bylaws or any of them may be altered, amended, supplemented or repealed, or new Bylaws may be adopted by a vote of the holders of at least two-thirds of the shares entitled to vote at any regular or special meeting of shareholders, or by a vote of at least two- thirds of the Entire Board of Directors at any regular or special meeting thereof, provided notice of such proposed changes has been set forth in the notice of meeting of shareholders or Directors.

ARTICLE 13

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 13.1. Indemnification  (a)  The Corporation shall indemnify to the fullest extent now or hereafter provided for or permitted by law each person involved in, or made or threatened to be made a party to, any action, suit, claim or proceeding, arbitration, alternative dispute resolution mechanism, investigation, administrative or legislative hearing or any other actual, threatened, pending or completed proceeding, whether civil, at law, in equity, criminal, administrative investigative or otherwise, or whether formal or informal, and including an action by or in the right of the Corporation or any other corporation, or any partnership, joint venture, trust, employee benefit plan or other enterprise, whether profit or non-profit (any such entity, other than the Corporation, being hereinafter referred to as an “Enterprise”) and including appeals therein (any such process being referred to as a “Proceeding”), by reason of the fact that such person (i) is or was a director or officer of the Corporation, or (ii) while serving as a director or officer of the Corporation, is or was serving, at the request of the Corporation, as director, officer or in any other capacity, any other Enterprise, including attorney’s fees, actually and reasonably incurred as a result of or in connection with any Proceeding, or any appeal therein, except as provided in Section 13.1(b) and Section 13.4 herein.


(b)  No indemnification shall be made to or on behalf of any such person if a judgment or other final adjudication adverse to such person establishes that (i) such person’s acts were committed in bad faith; (ii) were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated; (iii) that such person gained in fact in a financial profit or other advantage to which such person was not legally entitled; or (iv) in the event of criminal charges, that the person had reason to believe that such conduct was unlawful.  In addition, no indemnification shall be made with respect to any Proceeding initiated by any such person against the Corporation, or a director or officer of the Corporation, other than to enforce the terms of this Article 13, unless such Proceeding was authorized by the board of directors.  Further, no indemnification shall be made with respect to any settlement or compromise of any Proceeding unless and until the Corporation has consented to such settlement or compromise, which consent shall not be unreasonably withheld.

(c)  A person who has been successful, on the merits or otherwise, in the defense of a Proceeding shall be entitled to indemnification as authorized in this Article.  Except as provided in the preceding sentence and unless ordered by a court, indemnification under this bylaw shall be made by the Corporation if, and only if, authorized in the specific case:

(1)  By the board of directors acting by a quorum consisting of directors who are not parties to such Proceeding upon a finding that the conduct of the director or officer was not such that indemnification would be prohibited pursuant to Section 13.1(b), or

(2)  If such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs

(A) By the board upon the opinion in writing of independent legal counsel that indemnification is proper in the circumstances because the conduct of the director or officer was not such that indemnification would be prohibited pursuant to Section 13.1(b), or

(B)  By the shareholders upon a finding that the conduct of the director or officer was not such that indemnification would be prohibited pursuant to Section 13.1(b).

(d)  Persons covered under Section 13.1(a) shall be entitled to indemnification for any part of any Proceeding for which it is found that the conduct of the director or officer was not such that indemnification would be prohibited pursuant to Section 13.1(b). In making any determination regarding any person’s entitlement to indemnification, each charge, claim, or issue shall be reviewed individually under Section 13.1(c) herein.


(e)  Written notice of any Proceeding for which indemnification may be sought by any person shall be given to the Corporation as soon as practicable.  The Corporation shall then be permitted to participate in the defense of any such proceeding or, unless conflicts of interest or position exist between such person and the Corporation in the conduct of such defense, to assume such defense.  In the even that the Corporation assumes the defense of any such Proceeding, legal counsel selected by the Corporation shall be acceptable to such person.  After such an assumption, the Corporation shall be liable to such person for any legal or other expenses subsequently incurred only to the extent that independent counsel is retained on behalf of such person to provide advice regarding conflicts of interest and to monitor such Proceeding to the extent necessary to allow such independent counsel to assume such person’s defense in the Proceeding in the event that a subsequent conflict of interest makes further conduct of the defense by the Corporation impracticable.  The Corporation shall not be liable for any additional legal or other expenses incurred subsequent to the Corporation’s assumption of a defense, other than those specifically excepted in the previous sentence, unless expressly authorized by the Corporation.  In the event that the Corporation participates in the defense of any such Proceeding and such person selects counsel to represent such person in regard to such a Proceeding; such person shall cooperate in good faith with any request that common counsel be utilized by the parties to any Proceeding who are similarly situated, unless to do so would be inappropriate due to actual or potential differing interests between or among such parties.

(f)  In making any determination regarding any person’s entitlement to indemnification hereunder, it shall be presumed that such person is entitled to indemnification, and the Corporation shall have the burden of proving the contrary.

Section 13.2  Advancement of Expenses  Except in the case of a Proceeding against a director or officer specifically approved by the board of directors or as provided in Section 13.4, the Corporation shall, subject to Section 13.1 above, advance or promptly reimburse payment for expenses actually and reasonably incurred by or on behalf of a director or officer in defending any Proceeding in advance of the final disposition of such Proceeding.  Such payments shall be made promptly upon receipt by the Corporation, from time to time, of a written demand of such person for such advancement, together with an undertaking by or on behalf of such person to repay any expenses so advanced to the extent that the person receiving the advancement is ultimately found not to be entitled to indemnification for part or all of such expenses or, where indemnification is granted, to the extent such advances exceed the indemnification to which he is entitled.


Section 13.3  Rights Not Exclusive  The rights to indemnification and advancement of expenses granted by or pursuant to this Article 13: (i) shall not limit or exclude, but shall be in addition to, any other rights which may be granted by or pursuant to any statute, corporation charter, bylaw, resolution of shareholders or directors or agreement; (ii) shall be deemed to constitute contractual obligations of the Corporation to any director or officer who serves in a capacity referred to in Section 13.1 at any time during which this Article 13 is in effect; (iii) shall continue to exist after the repeal or modification of this Article 13 with respect to events occurring prior thereto; and (iv) shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the estate, spouse, heirs, executors, administrators or assigns of such person.  It is the intent of the Corporation through this Article 13 to require the Corporation to indemnify the persons referred to herein for the aforementioned judgments, fines, penalties, amounts paid in settlement, and expenses, including attorney’s fees, in each and every circumstance in which such indemnification could lawfully be permitted by express provisions of bylaws, and the indemnification required by the Article 13 shall not be limited by the absence of an express recital of such circumstances.  It is expressly recognized hereby that all directors or officers of the Corporation by serving as such after the adoption of this bylaw, are acting in reliance hereon and that the Corporation is estopped to contend otherwise.  This Article shall be binding on any successor to the Corporation, including any corporation or other entity which acquires all or substantially all of the Corporation’s assets in one or more transactions.

Section 13.4  Regulatory Enforcement Actions.  Except as otherwise permitted by 12 U.S.C. Section 1828(k) (or any successor provision thereto) and the regulations promulgated thereunder, the Corporation shall not indemnify directors, officers or employees against expenses, penalties or other payments incurred in an administrative proceeding or action instituted by an appropriate bank regulatory agency which proceeding or action results in a final order assessing civil money penalties or requiring affirmative action by an individual or individuals in the form of payments to the Corporation.  The Corporation shall not advance expenses pursuant to Section 13.2 in connection with any administrative proceeding by a federal bank regulatory agency that could result in an order assessing penalties or requiring payments to the Corporation, unless any and all conditions to such advancement in effect at the time of such advancement pursuant to applicable federal banking law and regulations, including the interpretations thereof by the appropriate federal bank regulatory agency, have been satisfied.  Except as otherwise permitted by 12 U.S.C. Section 1828(k) (or any successor provision thereto) and the regulations promulgated thereunder Any insurance provided pursuant to Section 13.6 herein shall not cover directors, officers or employees against expenses, penalties or other payments incurred in an administrative proceeding or action instituted by an appropriate bank regulatory agency which proceeding or action results in a final order assessing civil money penalties against any such director, officer or employee.

Section 13.5  Authorization of Contracts  The Corporation may, with the approval of the board of directors, enter into an agreement with any person who is, or is about to become, a director, officer, employee or agent of the Corporation, or who is serving, or is about to serve, at the request of the Corporation, as a director, officer or in any other capacity, any other Enterprise; which agreement may provide for indemnification of such person and advancement of expenses to such person upon terms, and the extent, not prohibited by law.  The failure to enter into any such agreement shall not affect or limit the rights of any such person under this Article 13.

Section 13.6  Insurance  The Corporation may, but is not required to, purchase and maintain insurance (i) to indemnify itself against any obligation it incurs as a result of indemnification of any person, as authorized herein, and (ii) to indemnify any person who is a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another Enterprise against any liability asserted against such person and incurred by such person in such capacity or arising out of such status, except as provided in Section 13.4 herein.

Section 13.7    Severability  If this Article XI or any part hereof shall be held unenforceable in any respect by a court of competent jurisdiction, it shall be deemed modified to the minimum extent necessary to make it enforceable, and the remainder of the Article 13 shall remain fully enforceable.


I, Michael Hall, Secretary of TrustCo Bank Corp NY, Glenville, New York, hereby certify that the foregoing is a complete, true and correct copy of the Amended and Restated Bylaws of TrustCo Bank Corp NY, and that the same are in full force and effect at this date.

 
/s/ Michael Hall
 
Secretary
 
Date: May 23, 2019




Exhibit 15


 
Crowe LLP
Independent Member Crowe Global

August 8, 2019

Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549

RE: FILING OF THE JUNE 30, 2019 FORM 10-Q FOR TRUSTCO BANK CORP NY

Commissioners:

We are aware that our report dated August 8, 2019, on our reviews of the interim financial information of TrustCo Bank Corp NY as of June 30, 2019 and for the three-month and six-month periods ended June 30, 2019 and 2018, included in the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2019, is incorporated by reference in its Registration Statements, Form S-8 (No. 333-175868), Form S-8 (No. 333-175867), Form S-8 (No. 333-206685), Form S-3 (No. 333-218227), and Form S-3 (No. 333-217712).

Yours very truly,

/s/ Crowe LLP




Exhibit 31(a)

Certification

I, Robert J. McCormick, certify that:


1.
I have reviewed this Form 10-Q of TrustCo Bank Corp NY;


2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and



5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 8, 2019
 
/s/ Robert J. McCormick  
Robert J. McCormick
Chairman, President and
Chief Executive Officer




Exhibit 31(b)

Certification

I, Michael M. Ozimek, certify that:

 
1.
I have reviewed this Form 10-Q of TrustCo Bank Corp NY;


2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and



5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 8, 2019
 
/s/ Michael M. Ozimek  
Michael M. Ozimek
Executive Vice President and
Chief Financial Officer




Exhibit 32

Certification
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 Of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of TrustCo Bank Corp NY (the “Company”) on Form 10-Q for the period ending June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


1.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


2.
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

  /s/ Robert J. McCormick
 
Robert J. McCormick
 
Chairman, President and
Chief Executive Officer

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

Date:  August 8, 2019