TRST 10-Q Quarterly Report Sept. 30, 2020 | Alphaminr
TRUSTCO BANK CORP N Y
ALPHAMINR

TRST 10-Q Quarter ended Sept. 30, 2020

Balance Sheet
Cash Flow
Income Statement
TRUSTCO BANK CORP N Y
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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 September 30, 2020
OR

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

Commission File Number 0-10592

TRUSTCO BANK CORP NY
(Exact name of registrant as specified in its charter)

New York
14-1630287
(State or other jurisdiction 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
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 every Interactive Data File required to be submitted 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 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 October 31, 2020
$1 Par Value
96,432,657





TrustCo Bank Corp NY
INDEX

Part I.
FINANCIAL INFORMATION
PAGE NO.
Item 1.
Consolidated Interim Financial Statements (Unaudited):
3
4
5
6
7
8–39
40
Item 2.
41–65
Item 3.
66
Item 4.
66
Part II.
OTHER INFORMATION
Item 1.
67
Item 1A.
67
Item 2.
67
Item 3.
67
Item 4.
67
Item 5.
67
Item 6.
68



2
TRUSTCO BANK CORP NY
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)

Three months ended
September 30,
Nine months ended
September 30,
2020
2019
2020
2019
Interest and dividend income:
Interest and fees on loans
$
41,330
41,923
125,058
124,608
Interest and dividends on securities available for sale:
U. S. government sponsored enterprises
14
996
541
2,600
State and political subdivisions
1
2
4
6
Mortgage-backed securities and collateralized mortgage obligations - residential
1,319
2,178
4,959
5,885
Corporate bonds
646
321
1,372
801
Small Business Administration-guaranteed participation securities
216
282
690
868
Other securities
5
6
16
16
Total interest and dividends on securities available for sale
2,201
3,785
7,582
10,176
Interest on held to maturity securities:
Mortgage-backed securities and collateralized mortgage obligations-residential
138
187
475
613
Total interest on held to maturity securities
138
187
475
613
Federal Reserve Bank and Federal Home Loan Bank stock
77
81
351
365
Interest on federal funds sold and other short-term investments
242
2,552
1,702
8,843
Total interest income
43,988
48,528
135,168
144,605
Interest expense:
Interest on deposits:
Interest-bearing checking
55
52
97
267
Savings accounts
161
323
560
1,067
Money market deposit accounts
637
1,177
2,595
3,122
Time deposits
4,749
7,974
16,739
21,462
Interest on short-term borrowings
221
359
778
1,121
Total interest expense
5,823
9,885
20,769
27,039
Net interest income
38,165
38,643
114,399
117,566
Provision (Credit) for loan losses
1,000
-
5,000
( 41
)
Net interest income after provision for loan losses
37,165
38,643
109,399
117,607
Noninterest income:
Trustco financial services income
1,784
1,517
4,752
4,933
Fees for services to customers
2,292
2,602
6,414
7,733
Net gain on securities transactions
-
-
1,155
-
Other
265
806
780
1,810
Total noninterest income
4,341
4,925
13,101
14,476
Noninterest expenses:
Salaries and employee benefits
10,899
11,725
33,920
34,887
Net occupancy expense
4,277
4,094
12,968
12,267
Equipment expense
1,607
1,689
5,015
5,300
Professional services
1,311
1,507
3,974
4,725
Outsourced services
1,875
1,875
5,825
5,675
Advertising expense
305
494
1,394
2,057
FDIC and other insurance
660
282
1,563
1,528
Other real estate (income) expense, net
( 115
)
33
47
219
Other
1,855
2,371
6,168
7,181
Total noninterest expenses
22,674
24,070
70,874
73,839
Income before taxes
18,832
19,498
51,626
58,244
Income taxes
4,761
4,790
12,988
14,311
Net income
$
14,071
14,708
$
38,638
43,933
Net income per share:
- Basic
$
0.146
0.152
$
0.400
0.454
- Diluted
$
0.146
0.152
$
0.400
0.453

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
September 30,
Nine months ended
September 30,
2020
2019
2020
2019
Net income
$
14,071
14,708
38,638
43,933
Net unrealized holding (loss) gain on securities available for sale
( 267
)
2,418
11,392
14,185
Reclassification adjustments for net gain recognized in income
-
-
( 1,155
)
-
Tax effect
69
( 628
)
( 2,660
)
( 3,686
)
Net unrealized (loss) gain on securities available for sale, net of tax
( 198
)
1,790
7,577
10,499
Amortization of net actuarial gain
( 222
)
( 35
)
( 531
)
( 103
)
Amortization of prior service credit
( 49
)
( 83
)
( 147
)
( 250
)
Tax effect
70
31
177
92
Amortization of net actuarial gain and prior service credit
on pension and postretirement plans, net of tax
( 201
)
( 87
)
( 501
)
( 261
)
Other comprehensive (loss) income, net of tax
( 399
)
1,703
7,076
10,238
Comprehensive income
$
13,672
16,411
45,714
54,171

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)

September 30, 2020
December 31, 2019
ASSETS:
Cash and due from banks
$
47,703
48,198
Federal funds sold and other short term investments
908,616
408,648
Total cash and cash equivalents
956,319
456,846
Securities available for sale
454,743
573,823
Held to maturity securities (fair value 2020 $ 16,343 ; 2019 $ 19,680 )
15,094
18,618
Federal Reserve Bank and Federal Home Loan Bank stock
5,506
9,183
Loans, net of deferred net costs
4,214,555
4,062,196
Less:
Allowance for loan losses
49,123
44,317
Net loans
4,165,432
4,017,879
Bank premises and equipment, net
34,417
34,622
Operating lease right-of-use assets
47,174
51,475
Other assets
57,244
58,876
Total assets
$
5,735,929
5,221,322
LIABILITIES:
Deposits:
Demand
$
635,345
463,858
Interest-bearing checking
1,024,290
875,672
Savings accounts
1,235,259
1,113,146
Money market deposit accounts
699,132
599,163
Time deposits
1,305,024
1,398,177
Total deposits
4,899,050
4,450,016
Short-term borrowings
193,455
148,666
Operating lease liabilities
52,125
56,553
Accrued expenses and other liabilities
30,771
27,830
Total liabilities
5,175,401
4,683,065
SHAREHOLDERS' EQUITY:
Capital stock par value $ 1 ; 150,000,000 shares authorized; 100,204,832 and 100,204,832 shares issued at September 30, 2020 and December 31, 2019, respectively
100,205
100,205
Surplus
176,441
176,427
Undivided profits
306,741
288,067
Accumulated other comprehensive income, net of tax
11,537
4,461
Treasury stock at cost - 3,772,175 and 3,283,175 shares at September 30, 2020 and December 31, 2019, respectively
( 34,396
)
( 30,903
)
Total shareholders' equity
560,528
538,257
Total liabilities and shareholders' equity
$
5,735,929
5,221,322

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, 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
Net income
-
-
14,708
-
-
14,708
Other comprehensive income, net of tax
-
-
-
1,703
-
1,703
Cash dividend declared, $ 0.068125 per share
-
-
( 6,599
)
-
-
( 6,599
)
Stock options exercised ( 19,850 shares)
20
98
-
-
-
118
Sale of treasury stock ( 74,656 shares)
-
( 105
)
-
-
702
597
Stock based compensation expense
-
6
-
-
-
6
Ending balance, September 30 , 2019
$
100,200
176,395
280,542
( 71
)
( 30,903
)
526,163
Beginning balance, January 1, 2020
$
100,205
176,427
288,067
4,461
( 30,903
)
538,257
Net income
-
-
13,313
-
-
13,313
Other comprehensive income, net of tax
-
-
-
6,931
-
6,931
Cash dividend declared, $ 0.068125 per share
-
-
( 6,827
)
-
-
( 6,827
)
Purchase of treasury stock ( 489,000 shares)
-
-
-
-
( 3,493
)
( 3,493
)
Stock based compensation expense
-
4
-
-
-
4
Ending balance, March 31, 2020
$
100,205
176,431
294,553
11,392
( 34,396
)
548,185
Net income
-
-
11,254
-
-
11,254
Other comprehensive income, net of  tax
-
-
-
544
-
544
Cash dividend declared, $ 0.068125 per share
-
-
( 6,568
)
-
-
( 6,568
)
Stock based compensation expense
-
6
-
-
-
6
Ending balance, June 30, 2020
$
100,205
176,437
299,239
11,936
( 34,396
)
553,421
Net income
-
-
14,071
-
-
14,071
Other comprehensive income, net of tax
-
-
-
( 399
)
-
( 399
)
Cash dividend declared, $ 0.068125 per share
-
-
( 6,569
)
-
-
( 6,569
)
Stock based compensation expense
-
4
-
-
-
4
Ending balance, September 30, 2020
$
100,205
176,441
306,741
11,537
( 34,396
)
560,528

See accompanying notes to unaudited consolidated interim financial statements.

6

TRUSTCO BANK CORP NY
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)

Nine months ended September 30,
2020
2019
Cash flows from operating activities:
Net income
$
38,638
43,933
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
3,003
2,958
Amortization of right-of-use asset
4,588
4,420
Net gain on sale of other real estate owned
( 332
)
( 686
)
Writedown of other real estate owned
120
294
Provision (credit) for loan losses
5,000
( 41
)
Deferred tax (benefit) expense
( 1,199
)
844
Net amortization of securities
2,703
2,128
Stock based compensation expense
14
-
Net gain on sale of bank premises and equipment
-
( 3
)
Net gain on sales of securities
( 1,155
)
-
Decrease in taxes receivable
570
1,903
Increase in interest receivable
( 180
)
( 397
)
(Decrease) increase in interest payable
( 682
)
510
Increase in other assets
( 1,201
)
( 2,669
)
Decrease in operating lease liabilities
( 4,715
)
( 4,489
)
Increase in accrued expenses and other liabilities
2,734
1,066
Total adjustments
9,268
5,838
Net cash provided by operating activities
47,906
49,771
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale
226,886
101,306
Proceeds from calls and maturities of held to maturity securities
3,398
2,665
Purchases of securities available for sale
( 103,991
)
( 260,466
)
Proceeds from maturities of securities available for sale
5,000
10,052
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock
( 380
)
( 230
)
Proceeds from redemption of Federal Reserve Bank stock
4,057
-
Net increase in loans
( 152,987
)
( 115,120
)
Proceeds from dispositions of other real estate owned
1,802
3,159
Proceeds from dispositions of bank premises and equipment
-
3
Purchases of bank premises and equipment
( 2,798
)
( 2,432
)
Net cash used in investing activities
( 19,013
)
( 261,063
)
Cash flows from financing activities:
Net increase in deposits
449,034
186,920
Net increase (decrease) in short-term borrowings
44,789
( 10,798
)
Proceeds from exercise of stock options
-
153
Proceeds from sale of treasury stock
-
1,791
Purchases of treasury stock
( 3,493
)
( 35
)
Dividends paid
( 19,750
)
( 19,771
)
Net cash provided by financing activities
470,580
158,260
Net increase (decrease) in cash and cash equivalents
499,473
( 53,032
)
Cash and cash equivalents at beginning of period
456,846
503,709
Cash and cash equivalents at end of period
$
956,319
450,677
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest paid
$
21,451
26,529
Income taxes paid
12,274
12,263
Other non cash items:
Transfer of loans to other real estate owned
434
3,501
Increase in dividends payable
214
17
Change in unrealized gain on securities available for sale-gross of deferred taxes
10,237
14,185
Change in deferred tax effect on unrealized gain on securities available for sale
( 2,660
)
( 3,686
)
Amortization of net actuarial gain and prior service credit on pension and postretirement plans
( 678
)
( 353
)
Change in deferred tax effect of amortization of net actuarial gain postretirement benefit plans
177
92

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 Company’s principal subsidiary, Trustco Bank (also referred to as the “Bank”) and other 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 nine months ended September 30, 2020 is not necessarily indicative of the results that may be expected for the year ending December 31, 2020, 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 September 30, 2020 , the results of operations for the three and nine months ended September 30, 2020 and 2019 , and the cash flows for the nine months ended September 30, 2020 and 2019 . 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, 2019 . 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 nine months ended September 30, 2020 and 2019 is as follows:

(in thousands, except per share data)
For the three months ended
September 30,
For the nine months ended
September 30,
2020
2019
2020
2019
Net income
$
14,071
14,708
$
38,638
43,933
Weighted average common shares
96,433
96,907
96,531
96,825
Stock Options
4
70
14
72
Weighted average common shares including potential dilutive shares
96,437
96,977
96,545
96,897
Basic EPS
$
0.146
0.152
$
0.400
0.454
Diluted EPS
$
0.146
0.152
$
0.400
0.453

For the three and nine months ended September 30, 2020 and 2019 the weighted average antidilutive stock options excluded from dilutive earnings were approximately 452 thousand and - 0 -, respectively. The stock options are antidilutive because the strike price is greater than the average fair value of the Company’s common stock for the periods presented.

8
(3) Benefit Plans

The table below outlines the components of the Company's net periodic benefit recognized during the three and nine months ended September 30, 2020 and 2019 for its pension and other postretirement benefit plans:

Three months ended September 30,
Pension Benefits
Other Postretirement Benefits
(dollars in thousands)
2020
2019
2020
2019
Service cost
$
9
10
15
17
Interest cost
269
311
40
60
Expected return on plan assets
( 755
)
( 702
)
( 296
)
( 248
)
Amortization of net loss (gain)
( 5
)
14
( 217
)
( 49
)
Amortization of prior service credit
-
-
( 49
)
( 83
)
Net periodic benefit
$
( 482
)
( 367
)
( 507
)
( 303
)

Nine months ended September 30,
Pension Benefits
Other Postretirement Benefits
(dollars in thousands)
2020
2019
2020
2019
Service cost
$
28
31
55
49
Interest cost
807
933
152
180
Expected return on plan assets
( 2,265
)
( 2,108
)
( 887
)
( 743
)
Amortization of net loss (gain)
-
44
( 531
)
( 147
)
Amortization of prior service credit
-
-
( 147
)
( 250
)
Net periodic benefit
$
( 1,430
)
( 1,100
)
( 1,358
)
( 911
)

The Company does not expect to make contributions to its pension and postretirement benefit plans in 2020.  As of September 30, 2020, 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:

September 30, 2020
(dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. government sponsored enterprises
$
30,000
3
7
29,996
State and political subdivisions
110
1
-
111
Mortgage backed securities and collateralized mortgage obligations - residential
301,490
8,369
91
309,768
Corporate bonds
69,231
1,048
166
70,113
Small Business Administration - guaranteed participation securities
42,599
1,471
-
44,070
Other
685
-
-
685
Total Securities Available for Sale
$
444,115
10,892
264
454,743

December 31, 2019
(dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. government sponsored enterprises
$
104,895
36
419
104,512
State and political subdivisions
160
2
-
162
Mortgage backed securities and collateralized mortgage obligations - residential
388,537
2,406
1,426
389,517
Corporate bonds
30,164
367
95
30,436
Small Business Administration - guaranteed participation securities
48,991
-
480
48,511
Other
685
-
-
685
Total securities available for sale
$
573,432
2,811
2,420
573,823

The following table distributes the debt securities included in the available for sale portfolio as of September 30, 2020 , 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
Due in one year or less
$
18,563
18,747
Due in one year through five years
81,445
82,140
Due after five years through ten years
18
18
Mortgage backed securities and collateralized mortgage obligations - residential
301,490
309,768
Small Business Administration - guaranteed participation securities
42,599
44,070
$
444,115
454,743

10
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:

September 30, 2020
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
$
9,993
7
-
-
9,993
7
Mortgage backed securities and collateralized mortgage obligations - residential
20,096
91
-
-
20,096
91
Corporate bonds
15,723
103
4,937
63
20,660
166
Total
$
45,812
201
4,937
63
50,749
264

December 31, 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
$
19,820
180
74,656
239
94,476
419
Mortgage backed securities and collateralized mortgage obligations - residential
67,322
446
169,169
980
236,491
1,426
Corporate bonds
4,905
95
-
-
4,905
95
Small Business Administration - guaranteed participation securities
48,510
480
-
-
48,510
480
Total
$
140,557
1,201
243,825
1,219
384,382
2,420

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 nine months ended September 30, 2020 and 2019 are as follows:

Three months ended September 30,
(dollars in thousands)
2020
2019
Proceeds from sales
$
-
$
-
Proceeds from calls/paydowns
43,052
56,856
Proceeds from maturities
-
-
Gross realized losses
-
-

Nine months ended September 30,
(dollars in thousands)
2020
2019
Proceeds from sales
$
29,219
$
-
Proceeds from calls/paydowns
197,667
101,306
Proceeds from maturities
5,000
10,052
Gross realized gains
1,155
-

The current interest rate environment has significantly contributed to more bonds being called. There were no transfers of securities available for sale during the three and nine months ended September 30, 2020 and 2019.

11
(b) Held to maturity securities

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

September 30, 2020
(dollars in thousands)
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage backed securities and collateralized mortgage obligations - residential
$
15,094
1,249
-
16,343
Total held to maturity
$
15,094
1,249
-
16,343

December 31, 2019
(dollars in thousands)
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage backed securities and collateralized mortgage obligations - residential
$
18,618
1,062
-
19,680
Total held to maturity
$
18,618
1,062
-
19,680

The following table distributes the debt securities included in the held to maturity portfolio as of  September 30, 2020, 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
$
15,094
16,343
$
15,094
16,343

All held to maturity securities are held at cost on the financial statements.  There were no gross unrecognized losses on held to maturity securities as of September 30, 2020 and December 31, 2019 .

There were no sales or transfers of held to maturity securities during the three and nine months ended September 30, 2020 and 2019.

(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.

12
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.

As of September 30, 2020, 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 September 30, 2020.

Mortgage backed securities and collateralized mortgage obligations – residential: At September 30, 2020, 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 September 30, 2020.

Corporate Bonds: At September 30, 2020, 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 September 30, 2020.

13
(5) Loans and Allowance for Loan Losses

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

September 30, 2020
(dollars in thousands)
New York and
other states*
Florida
Total
Commercial:
Commercial real estate
$
152,994
18,579
171,573
Other
59,886
204
60,090
Real estate mortgage - 1 to 4 family:
First mortgages
2,580,577
1,065,903
3,646,480
Home equity loans
62,595
15,671
78,266
Home equity lines of credit
200,605
47,715
248,320
Installment
7,997
1,829
9,826
Total loans, net
$
3,064,654
$
1,149,901
4,214,555
Less: Allowance for loan losses
49,123
Net loans
$
4,165,432

December 31, 2019
(dollars in thousands)
New York and
other states*
Florida
Total
Commercial:
Commercial real estate
$
162,186
17,752
179,938
Other
19,326
235
19,561
Real estate mortgage - 1 to 4 family:
First mortgages
2,541,440
953,995
3,495,435
Home equity loans
69,791
18,548
88,339
Home equity lines of credit
221,487
46,435
267,922
Installment
8,706
2,295
11,001
Total loans, net
$
3,022,936
1,039,260
4,062,196
Less: Allowance for loan losses
44,317
Net loans
$
4,017,879

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

At September 30, 2020 and December 31, 2019, the Company had approximately $ 26.8 million and $ 28.5 million of real estate construction loans, respectively.  Of the $ 26.8 million in real estate construction loans at September 30, 2020, approximately $ 11.0 million are secured by first mortgages to residential borrowers while approximately $ 15.8 million were to commercial borrowers for residential construction projects.  Of the $ 28.5 million in real estate construction loans at December 31, 2019, approximately $ 10.7 million are secured by first mortgages to residential borrowers while approximately $ 17.8 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.

14
The following tables present the recorded investment in non-accrual loans by loan class:

September 30, 2020
(dollars in thousands)
New York and
other states*
Florida
Total
Loans in non-accrual status:
Commercial:
Commercial real estate
$
378
-
378
Other
113
-
113
Real estate mortgage - 1 to 4 family:
First mortgages
17,193
1,075
18,268
Home equity loans
90
47
137
Home equity lines of credit
2,694
132
2,826
Installment
49
-
49
Total non-accrual loans
20,517
1,254
21,771
Restructured real estate mortgages - 1 to 4 family
25
-
25
Total nonperforming loans
$
20,542
1,254
21,796

December 31, 2019
(dollars in thousands)
New York and
other states*
Florida
Total
Loans in non-accrual status:
Commercial:
Commercial real estate
$
733
-
733
Other
83
-
83
Real estate mortgage - 1 to 4 family:
First mortgages
15,385
1,468
16,853
Home equity loans
218
48
266
Home equity lines of credit
2,804
98
2,902
Installment
3
-
3
Total non-accrual loans
19,226
1,614
20,840
Restructured real estate mortgages - 1 to 4 family
29
-
29
Total nonperforming loans
$
19,255
1,614
20,869

* 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 September 30, 2020 and December 31, 2019, other real estate owned included $ 423 thousand and $ 1.6 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 $ 11.5 million and $ 8.7 million as of September 30, 2020 and December 31, 2019 respectively.

15
The following tables present the aging of the recorded investment in past due loans by loan class and by region as of September 30, 2020 and December 31, 2019:

September 30, 2020
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
$
-
-
279
279
152,715
152,994
Other
-
-
113
113
59,773
59,886
Real estate mortgage - 1 to 4 family:
First mortgages
3,842
738
12,183
16,763
2,563,814
2,580,577
Home equity loans
147
4
49
200
62,395
62,595
Home equity lines of credit
722
33
1,236
1,991
198,614
200,605
Installment
46
15
49
110
7,887
7,997
Total
$
4,757
790
13,909
19,456
3,045,198
3,064,654

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
$
-
-
-
-
18,579
18,579
Other
-
-
-
-
204
204
Real estate mortgage - 1 to 4 family:
First mortgages
636
-
718
1,354
1,064,549
1,065,903
Home equity loans
-
47
-
47
15,624
15,671
Home equity lines of credit
-
-
-
-
47,715
47,715
Installment
16
8
-
24
1,805
1,829
Total
$
652
55
718
1,425
1,148,476
1,149,901

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
$
-
-
279
279
171,294
171,573
Other
-
-
113
113
59,977
60,090
Real estate mortgage - 1 to 4 family:
First mortgages
4,478
738
12,901
18,117
3,628,363
3,646,480
Home equity loans
147
51
49
247
78,019
78,266
Home equity lines of credit
722
33
1,236
1,991
246,329
248,320
Installment
62
23
49
134
9,692
9,826
Total
$
5,409
845
14,627
20,881
4,193,674
4,214,555

* Includes New York, New Jersey, Vermont and Massachusetts.
16
December 31, 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
$
141
-
617
758
161,428
162,186
Other
80
-
33
113
19,213
19,326
Real estate mortgage - 1 to 4 family:
First mortgages
3,444
292
11,328
15,064
2,526,376
2,541,440
Home equity loans
183
7
133
323
69,468
69,791
Home equity lines of credit
232
149
1,141
1,522
219,965
221,487
Installment
37
8
3
48
8,658
8,706
Total
$
4,117
456
13,255
17,828
3,005,108
3,022,936

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
$
-
-
-
-
17,752
17,752
Other
-
-
-
-
235
235
Real estate mortgage - 1 to 4 family:
First mortgages
542
-
617
1,159
952,836
953,995
Home equity loans
63
-
-
63
18,485
18,548
Home equity lines of credit
80
-
50
130
46,305
46,435
Installment
-
-
-
-
2,295
2,295
Total
$
685
-
667
1,352
1,037,908
1,039,260

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
$
141
-
617
758
179,180
179,938
Other
80
-
33
113
19,448
19,561
Real estate mortgage - 1 to 4 family:
First mortgages
3,986
292
11,945
16,223
3,479,212
3,495,435
Home equity loans
246
7
133
386
87,953
88,339
Home equity lines of credit
312
149
1,191
1,652
266,270
267,922
Installment
37
8
3
48
10,953
11,001
Total
$
4,802
456
13,922
19,180
4,043,016
4,062,196

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

At September 30, 2020 and December 31, 2019, 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.

17
Activity in the allowance for loan losses by portfolio segment is summarized as follows:

For the three months ended September 30, 2020
( dollars in thousand s)
Commercial
Real Estate
Mortgage-
1 to 4 Family
Installment
Total
Balance at beginning of period
$
4,366
43,274
504
48,144
Loans charged off:
New York and other states*
-
64
21
85
Florida
-
-
-
-
Total loan chargeoffs
-
64
21
85
Recoveries of loans previously charged off:
New York and other states*
1
60
3
64
Florida
-
-
-
-
Total recoveries
1
60
3
64
Net loans (recoveries) charged off
( 1
)
4
18
21
(Credit) provision for loan losses
( 100
)
1,053
47
1,000
Balance at end of period
$
4,267
44,323
533
49,123

For the three months ended September 30, 2019
( dollars in thousand s)
Commercial
Real Estate
Mortgage-
1 to 4 Family
Installment
Total
Balance at beginning of period
$
3,913
39,963
489
44,365
Loans charged off:
New York and other states*
13
147
16
176
Florida
-
-
16
16
Total loan chargeoffs
13
147
32
192
Recoveries of loans previously charged off:
New York and other states*
41
108
7
156
Florida
-
-
-
-
Total recoveries
41
108
7
156
Net loans (recoveries) charged off
( 28
)
39
25
36
(Credit) provision for loan losses
( 70
)
( 18
)
88
-
Balance at end of period
$
3,871
39,906
552
44,329

* Includes New York, New Jersey, Vermont and Massachusetts.
18

Nine months ended September 30, 2020
Commercial
Real Estate
Mortgage-
1 to 4 Family
Installment
Total
Balance at beginning of period
$
3,999
39,748
570
44,317
Loans charged off:
New York and other states*
3
277
77
357
Florida
-
-
19
19
Total loan chargeoffs
3
277
96
376
Recoveries of loans previously charged off:
New York and other states*
9
160
11
180
Florida
-
2
-
2
Total recoveries
9
162
11
182
Net loans charged off (recoveries)
( 6
)
115
85
194
Provision for loan losses
262
4,690
48
5,000
Balance at end of period
$
4,267
44,323
533
49,123

Nine months ended September 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*
20
744
94
858
Florida
-
29
47
76
Total loan chargeoffs
20
773
141
934
Recoveries of loans previously charged off:
New York and other states*
45
441
17
503
Florida
-
35
-
35
Total recoveries
45
476
17
538
Net loans charged off
( 25
)
297
124
396
(Credit) provision for loan losses
( 202
)
431
( 270
)
( 41
)
Balance at end of period
$
3,871
$
39,906
552
44,329

* 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.

19
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 September 30, 2020 and December 31, 2019:

September 30, 2020
(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
4,267
44,323
533
49,123
Total ending allowance balance
$
4,267
44,323
533
49,123
Loans:
Individually evaluated for impairment
$
1,084
20,648
-
21,732
Collectively evaluated for impairment
230,579
3,952,418
9,826
4,192,823
Total ending loans balance
$
231,663
3,973,066
9,826
4,214,555

December 31, 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
3,999
39,748
570
44,317
Total ending allowance balance
$
3,999
39,748
570
44,317
Loans:
Individually evaluated for impairment
$
1,437
19,539
-
20,976
Collectively evaluated for impairment
198,062
3,832,157
11,001
4,041,220
Total ending loans balance
$
199,499
3,851,696
11,001
4,062,196

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 September 30, 2020 and December 31, 2019 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.

20
The following tables present impaired loans by loan class as of September 30, 2020 and December 31, 2019:

September 30, 2020
New York and other states*:
(dollars in thousands)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Commercial:
Commercial real estate
$
839
1,062
-
1,121
Other
145
145
-
112
Real estate mortgage - 1 to 4 family:
First mortgages
14,895
15,282
-
14,062
Home equity loans
223
243
-
235
Home equity lines of credit
2,268
2,408
-
2,249
Total
$
18,370
19,140
-
17,779

Florida:
(dollars in thousands)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Commercial:
Commercial real estate
$
100
-
105
Other
-
-
-
Real estate mortgage - 1 to 4 family:
First mortgages
3,018
3,018
-
2,567
Home equity loans
-
-
-
13
Home equity lines of credit
244
244
-
245
Total
$
3,362
3,262
-
2,930

Total:
(dollars in thousands)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Commercial:
Commercial real estate
$
939
1,062
-
1,226
Other
145
145
-
112
Real estate mortgage - 1 to 4 family:
First mortgages
17,913
18,300
-
16,629
Home equity loans
223
243
-
248
Home equity lines of credit
2,512
2,652
-
2,494
Total
$
21,732
22,402
-
20,709

* Includes New York, New Jersey, Vermont and Massachusetts.
21

December 31, 2019
New York and other states*:
(dollars in thousands)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Commercial:
Commercial real estate
$
1,217
1,359
-
1,385
Other
115
115
-
38
Real estate mortgage - 1 to 4 family:
First mortgages
14,414
14,714
-
14,358
Home equity loans
235
255
-
241
Home equity lines of credit
2,160
2,300
-
2,274
Total
$
18,141
18,743
-
18,296

Florida:
(dollars in thousands)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Commercial:
Commercial real estate
$
105
105
-
82
Other
-
-
-
26
Real estate mortgage - 1 to 4 family:
First mortgages
2,486
2,486
-
2,259
Home equity loans
-
-
-
51
Home equity lines of credit
244
244
-
249
Total
$
2,835
2,835
-
2,667

Total:
(dollars in thousands)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Commercial:
Commercial real estate
$
1,322
1,464
-
1,467
Other
115
115
-
64
Real estate mortgage - 1 to 4 family:
First mortgages
16,900
17,200
-
16,617
Home equity loans
235
255
-
292
Home equity lines of credit
2,404
2,544
-
2,523
Total
$
20,976
21,578
-
20,963

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

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 nine months ended September 30, 2020 and 2019.

22
As of September 30, 2020 and December 31, 2019 impaired loans included approximately $ 11.8 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 chargeoff is taken at that time.  As a result, as of September 30, 2020 and December 31, 2019, 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 tables present, by class, loans that were modified as TDR’s:

Three months ended 9/30/2020
Three months ended 9/30/2019
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
$
126
126
-
$
-
-
Real estate mortgage - 1 to 4 family:
First mortgages
6
1,533
1,533
4
537
537
Home equity loans
-
-
-
-
-
-
Home equity lines of credit
1
50
50
-
-
-
Total
8
$
1,709
1,709
4
$
537
537

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
-
-
-
5
509
509
Home equity loans
-
-
-
-
-
-
Home equity lines of credit
-
-
-
-
-
-
Total
-
$
-
-
5
$
509
509

* Includes New York, New Jersey, Vermont and Massachusetts.
23

Nine months ended 9/30/2020
Nine months ended 9/30/2019
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
$
126
126
1
$
127
127
Real estate mortgage - 1 to 4 family:
First mortgages
9
1,982
1,982
12
1,768
1,768
Home equity loans
-
-
-
-
-
-
Home equity lines of credit
3
169
169
2
235
235
Total
13
$
2,277
2,277
15
$
2,130
2,130

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
4
589
589
5
509
509
Home equity loans
-
-
-
-
-
-
Home equity lines of credit
-
-
-
-
-
-
Total
4
$
589
589
5
$
509
509

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

24
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.

The following tables present, by class, TDR’s that defaulted during the three and nine months ended September 30, 2020 and 2019 which had been modified within the last twelve months:

Three months ended 9/30/2020
Three months ended 9/30/2019
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
3
264
-
-
Home equity lines of credit
1
19
-
-
Total
4
$
283
-
$
-

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
-
-
-
-
Home equity loans
-
-
-
-
Home equity lines of credit
-
-
-
-
Total
-
$
-
-
$
-

* Includes New York, New Jersey, Vermont and Massachusetts.
25

Nine months ended 9/30/2020
Nine months ended 9/30/2019
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
4
459
-
-
Home equity loans
-
-
-
-
Home equity lines of credit
1
19
-
-
Total
5
$
478
-
$
-

(dollars in thousands)
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Commercial:
Commercial real estate
-
$
-
-
$
-
Real estate mortgage - 1 to 4 family:
First mortgages
-
-
-
-
Home equity lines of credit
-
-
-
-
Total
-
$
-
-
$
-

* 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.

Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of TDR classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period. Loans not meeting the CARES ACT or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures. Loan modifications and payment deferrals made pursuant to COVID 19 as of September 30, 2020 totaled approximately $ 7 million, which included $ 2 million of commercial loans and $ 5 million of residential loans. As of June 30, 2020 these amounts totaled approximately $ 190 million, which included $ 45 million of commercial loans and $ 145 million of residential loans. The reduction in loan deferrals represents loans that are now paying in accordance with their terms.  As of September 30, 2020, there was no material impact to delinquencies and non-accruals regarding the loans that came out of deferment.

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.

26
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.

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 September 30, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

September 30, 2020
New York and other states*:
(dollars in thousands)
Pass
Classified
Total
Commercial:
Commercial real estate
$
149,866
3,128
152,994
Other
59,404
482
59,886
$
209,270
3,610
212,880

Florida:
(dollars in thousands)
Pass
Classified
Total
Commercial:
Commercial real estate
$
18,005
574
18,579
Other
204
-
204
$
18,209
574
18,783

Total:
(dollars in thousands)
Pass
Classified
Total
Commercial:
Commercial real estate
$
167,871
3,702
171,573
Other
59,608
482
60,090
$
227,479
4,184
231,663

* Includes New York, New Jersey and Massachusetts.
27

December 31, 2019
New York and other states:
(dollars in thousands)
Pass
Classified
Total
Commercial:
Commercial real estate
$
157,280
4,906
162,186
Other
18,384
942
19,326
$
175,664
5,848
181,512

Florida:
(dollars in thousands)
Pass
Classified
Total
Commercial:
Commercial real estate
$
17,752
-
17,752
Other
235
-
235
$
17,987
-
17,987

Total:
(dollars in thousands)
Pass
Classified
Total
Commercial:
Commercial real estate
$
175,032
4,906
179,938
Other
18,619
942
19,561
$
193,651
5,848
199,499

* Includes New York, New Jersey and Massachusetts.

Included in classified loans in the above tables are impaired loans of $ 849 thousand and $ 816 thousand at September 30, 2020 and December 31, 2019, 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 department 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 September 30, 2020 and December 31, 2019 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 September 30, 2020 and December 31, 2019 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 chargeoff 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
September 30, 2020 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)
U.S. government sponsored enterprises
$
29,996
$
-
$
29,996
$
-
State and political subdivisions
111
-
111
-
Mortgage backed securities and collateralized mortgage obligations - residential
309,768
-
309,768
-
Corporate bonds
70,113
-
70,113
-
Small Business Administration- guaranteed participation securities
44,070
-
44,070
-
Other securities
685
-
685
-
Total securities available for sale
$
454,743
$
-
$
454,743
$
-

Fair Value Measurements at
December 31, 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
$
104,512
$
-
$
104,512
$
-
State and political subdivisions
162
-
162
-
Mortgage backed securities and collateralized mortgage obligations - residential
389,517
-
389,517
-
Corporate bonds
30,436
-
30,436
-
Small Business Administration- guaranteed participation securities
48,511
-
48,511
-
Other securities
685
-
685
-
Total securities available for sale
$
573,823
$
-
$
573,823
$
-

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2020 and 2019.

30
Assets measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurements at
September 30, 2020 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
$
423
$
-
$
-
$
423
Sales comparison approach
Adjustments for differences between comparable sales
1 % - 9 % ( 3
%)
Impaired loans:
Real estate mortgage -1 to 4     family
509
-
-
509
Sales comparison approach
Adjustments for differences between comparable sales
1 % - 11 % ( 11
%)

Fair Value Measurements at
December 31, 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
$
1,579
$
-
$
-
$
1,579
Sales comparison approach
Adjustments for differences between comparable sales
1 % - 21 % ( 2
%)
Impaired loans:
Real estate mortgage -1 to 4 family
120
-
-
120
Sales comparison approach
Adjustments for differences between comparable sales
1 % - 17 % ( 9
%)

Other real estate owned, that is carried at fair value less costs to sell, was approximately $ 423 thousand at September 30, 2020 and consisted of only residential real estate properties.  Valuation charges of $ 62 thousand and $ 120 thousand are included in earnings for the three months and nine months ended September 30, 2020, respectively .

Of the total impaired loans of $ 21.7 million at September 30, 2020, none are collateral dependent and carried at fair value measured on a non‑recurring basis .

Other real estate owned, that is carried at fair value less costs to sell, was approximately $ 1.6 million at December 31, 2019 and consisted of $ 358 thousand of commercial real estate and $ 1.2 million of residential real estate properties.  A valuation charge of $ 366 thousand is included in earnings for the year ended December 31, 2019.

Of the total impaired loans of $ 21.0 million at December 31, 2019, $ 120 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, 2019.  Gross charge offs related to residential impaired loans included in the table above amounted to $ 22 thousand.

31
In accordance with FASB Topic 825, Financial Instruments (“ASC 825”), t he carrying amounts and estimated fair values (represents exit price) of financial instruments, at September 30, 2020 and December 31, 2019 are as follows :

(dollars in thousands)
Fair Value Measurements at
Carrying
September 30, 2020 Using:
Value
Level 1
Level 2
Level 3
Total
Financial assets:
Cash and cash equivalents
$
956,319
956,319
-
-
956,319
Securities available for sale
454,743
-
454,743
-
454,743
Held to maturity securities
15,094
-
16,343
-
16,343
Federal Home Loan Bank stock
5,506
N/A
N/A
N/A
N/A
Net loans
4,165,432
-
-
4,258,258
4,258,258
Accrued interest receivable
11,095
16
1,471
9,608
11,095
Financial liabilities:
Demand deposits
635,345
635,345
-
-
635,345
Interest bearing deposits
4,263,705
2,958,681
1,308,158
-
4,266,839
Short-term borrowings
193,455
-
193,455
-
193,455
Accrued interest payable
777
85
692
-
777

(dollars in thousands)
Fair Value Measurements at
Carrying
December 31, 2019 Using:
Value
Level 1
Level 2
Level 3
Total
Financial assets:
Cash and cash equivalents
$
456,846
456,846
-
-
456,846
Securities available for sale
573,823
-
573,823
-
573,823
Held to maturity securities
18,618
-
19,680
-
19,680
Federal Reserve Bank and Federal
Home Loan Bank stock
9,183
N/A
N/A
N/A
N/A
Net loans
4,017,879
-
-
4,078,210
4,078,210
Accrued interest receivable
10,915
216
2,221
8,478
10,915
Financial liabilities:
Demand deposits
463,858
463,858
-
-
463,858
Interest bearing deposits
3,986,158
2,587,981
1,397,271
-
3,985,252
Short-term borrowings
148,666
-
148,666
-
148,666
Accrued interest payable
1,459
174
1,285
-
1,459


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 9/30/2020
(dollars in thousands)
Balance at
7/1/2020
Other
Comprehensive
Income (loss)-
Before
Reclassifications
Amount
reclassified
from Accumulated
Other Comprehensive
Income
Other
Comprehensive
Income (loss)-
Three months ended
9/30/2020
Balance at
9/30/2020
Net unrealized holding loss on securities available for sale, net of tax
$
8,061
( 198
)
-
( 198
)
7,863
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax
4,840
-
-
-
4,840
Net change in net actuarial gain and prior service credit on pension and postretirement benefit plans, net of tax
( 965
)
-
( 201
)
( 201
)
( 1,166
)
Accumulated other comprehensive loss, net of tax
$
11,936
( 198
)
( 201
)
( 399
)
11,537

Three months ended 9/30/2019
(dollars in thousands)
Balance at
7/1/2019
Other
Comprehensive
Income (loss)-
Before
Reclassifications
Amount
reclassified
from Accumulated
Other Comprehensive
Income
Other
Comprehensive
Income (loss)-
Three months ended
9/30/2019
Balance at
9/30/2019
Net unrealized holding gain on securities available for sale, net of tax
$
( 1,707
)
1,790
-
1,790
83
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax
423
-
-
-
423
Net change in net actuarial gain and prior service credit on pension and postretirement benefit plans, net of tax
( 490
)
-
( 87
)
( 87
)
( 577
)
Accumulated other comprehensive income (loss), net of tax
$
( 1,774
)
1,790
( 87
)
1,703
( 71
)

Nine months ended 9/30/2020
(dollars in thousands)
Balance at
1/1/2020
Other
Comprehensive
Income (loss)-
Before
Reclassifications
Amount
reclassified
from Accumulated
Other Comprehensive
Income
Other
Comprehensive
Income (loss)-
Three months ended
9/30/2020
Balance at
9/30/2020
Net unrealized holding gain on securities available for sale, net of tax
$
286
8,432
( 855
)
7,577
7,863
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax
4,840
-
-
-
4,840
Net change in net actuarial gain and prior service credit on pension and postretirement benefit plans, net of tax
( 665
)
-
( 501
)
( 501
)
( 1,166
)
Accumulated other comprehensive loss, net of tax
$
4,461
8,432
( 1,356
)
7,076
11,537

Nine months ended 9/30/2019
(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
9/30/2019
Balance at
9/30/2019
Net unrealized holding gain on securities available for sale, net of tax
$
( 10,416
)
10,499
-
10,499
83
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax
423
-
-
-
423
Net change in net actuarial gain and prior service credit on pension and postretirement benefit plans, net of tax
( 316
)
-
( 261
)
( 261
)
( 577
)
Accumulated other comprehensive income (loss), net of tax
$
( 10,309
)
10,499
( 261
)
10,238
( 71
)

33
The following represents the reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019:

(dollars in thousands)
Three months ended
Nine months ended
September 30,
September 30,
2020
2019
2020
2019
Affected Line Item in Financial Statements
Net unrealized holding gain on securities available for sale
Realized gain on securities transactions
$
-
-
$
1,155
-
Net gain on securities transactions
Income tax effect
-
-
( 300
)
-
Income taxes
Net of tax
-
-
855
-
Amortization of pension and postretirement benefit items:
Amortization of net actuarial gain (loss)
$
222
35
$
531
103
Salaries and employee benefits
Amortization of prior service credit (cost)
49
83
147
250
Salaries and employee benefits
Income tax benefit
( 70
)
( 31
)
( 177
)
( 92
)
Income taxes
Net of tax
201
87
501
261
Total reclassifications, net of tax
$
201
87
$
1,356
261


(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 nine months ended September 30, 2020 and 2019. Items outside the scope of ASC 606 are noted as such.

(dollars in thousands)
Three months ended
Nine months ended
September 30,
September 30,
2020
2019
2020
2019
Non-interest income
Service Charges on Deposits
Overdraft fees
$
595
$
931
$
1,920
$
2,630
Other
348
124
1,159
343
Interchange Income
1,195
970
3,072
3,785
Net gain on securities transactions (a)
-
-
1,155
-
Wealth management fees
1,784
1,517
4,752
4,933
Other (a)
419
1,383
1,043
2,785
Total non-interest income
$
4,341
$
4,925
$
13,101
$
14,476

(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.

34
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.

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 fees are 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 September 30, 2020 the Company did not have any leases with terms of twelve months or less.

35
As of September 30, 2020 the Company does not have leases that have not yet commenced.   At September 30, 2020 lease expiration dates ranged from three months to 24.0 years and have a weighted average remaining lease term of 8.9 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.

Other information related to leases was as follows:

(dollars in thousands)
Three months ended
September 30,
2020
2019
Operating lease cost
$
1,966
$
2,007
Variable lease cost
369
497
Total Lease costs
$
2,335
$
2,504

(dollars in thousands)
Nine months ended
September 30,
2020
2019
Operating lease cost
$
5,893
$
5,828
Variable lease cost
1,524
1,472
Total Lease costs
$
7,417
$
7,300

(dollars in thousands)
Nine months ended
September 30,
2020
2019
Supplemental cash flows information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
6,022
$
5,824
Right-of-use assets obtained in exchange for lease obligations:
$
287
$
54,038
Weighted average remaining lease term
8.9 years
9.4 years
Weighted average discount rate
3.25
%
3.30
%

36
Future minimum lease payments under non-cancellable leases as of September 30, 2020 were as follows:

(dollars in thousands)
Year ending
December 31,
2020 (a)
$
2,020
2021
8,062
2022
7,561
2023
7,256
2024
7,128
Thereafter
28,551
Total lease payments
$
60,578
Less: Interest
8,453
Present value of lease liabilities
$
52,125

(a) Excluding the nine months ended September 30, 2020.

During the quarter ended September 30, 2020, the Board of Directors elected a new director that owns six commercial properties in which the Company leases branches from.  Total lease payments, which is included in the table above, owed at September 30, 2020 was $ 4.7 million, which includes $ 699 thousand of interest.

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

(dollars in thousands)
Year ending
December 31,
2019 (a)
$
1,967
2020
7,820
2021
7,818
2022
7,300
2023
6,978
Thereafter
32,600
Total lease payments
$
64,483
Less: Interest
9,752
Present value of lease liabilities
$
54,731

(a) Excluding the nine months ended September 30, 2019.

(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, 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. As of September 30, 2020, 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.  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 September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019 :

(Bank Only)
Minimum for
Capital Adequacy plus
Capital Conservation
As of September 30, 2020
Well
(dollars in thousands)
Amount
Ratio
Capitalized (1)
Buffer (1)(2)
Tier 1 leverage ratio
$
533,874
9.329
%
5.000
%
4.000
%
Common equity tier 1 capital
533,874
18.491
6.500
7.000
Tier 1 risk-based capital
533,874
18.491
8.000
8.500
Total risk-based capital
570,127
19.747
10.000
10.500

As of December 31, 2019
Well
Minimum for
Capital Adequacy plus
Capital Conservation
(dollars in thousands)
Amount
Ratio
Capitalized (1)
Buffer (1)(2)
Tier 1 leverage ratio
$
516,775
9.940
%
5.000
%
4.000
%
Common equity tier 1 capital
516,775
18.412
6.500
7.000
Tier 1 risk-based capital
516,775
18.412
8.000
8.500
Total risk-based capital
551,975
19.666
10.000
10.500

(Consolidated)
As of September 30, 2020
Minimum for
Capital Adequacy plus
Capital Conservation
(dollars in thousands)
Amount
Ratio
Buffer (1)(2)
Tier 1 leverage ratio
$
548,437
9.582
%
4.000
%
Common equity tier 1 capital
548,437
18.994
7.000
Tier 1 risk-based capital
548,437
18.994
8.500
Total risk-based capital
584,692
20.250
10.500

As of December 31, 2019
Minimum for
Capital Adequacy plus
Capital Conservation
(dollars in thousands)
Amount
Ratio
Buffer (1)(2)
Tier 1 leverage ratio
$
533,243
10.254
%
4.000
%
Common equity Tier 1 capital
533,243
18.988
7.000
Tier 1 risk-based capital
533,243
18.988
8.500
Total risk-based capital
568,463
20.242
10.500

(1)
Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized
(2)
The September 30, 2020 and December 31, 2019 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a capital conservation buffer of 2.50 percent

38
(11) New Accounting Pronouncements

In September 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.

As previously disclosed, the Company formed a cross-functional team to work through its implementation of the plan. The Company has selected the Discounted Cash Flow modeling method and is running parallel processes and is working to finalize assessment and documentation of processes, data and model validation testing, qualitative factors and forecast periods. The company has selected a third party software solution to assist in the application of the new standard. The Company has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act) until the date on which the National Emergency concerning COVID-19 is terminated or December 31, 2020, whichever occurs first. Upon adoption of ASU 2016-13, the Company will recognize a one-time cumulative effect adjustment through retained earnings to increase its allowance for credit loss and to increase its unfunded loan commitment liability as of January 1, 2020.

(12) Risks and Uncertainties

Beginning in March 2020, the Company experienced negative impacts to its business in the form of requests for loan deferrals of principal and interest due to the business disruption caused by COVID-19. In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.  At this time, it is difficult to quantify the impact COVID-19 will have on future periods. The Company has evaluated the impact of the effects of COVID-19 and determined that there were no material or systematic adverse impacts on the Company’s September 30, 2020 balance sheet and results of operations except for an increase in provision for loan losses and related allowance for loan losses.

On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company’s financial condition and results of operations. As a result of the spread of COVID-19, economic uncertainties have arisen which are likely to continue to negatively impact net interest income, provision for loan losses, and noninterest income. Other financial impact could occur though such potential impact is unknown at this time.

As of September 30, 2020, the Company and Bank capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios, as well as the ability of the Company and the Bank to pay dividends or make other distributions, could be adversely impacted by further credit losses.

Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of TDR classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period. Loans not meeting the CARES ACT or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures.  Loan Modifications and payment deferrals made pursuant to COVID 19 as of September 30, 2020 totaled approximately $ 7 million, which included $ 2 million of commercial loans and $ 5 million of residential loans.  As of June 30, 2020 these amounts totaled approximately $ 190 million, which included $ 45 million of commercial loans and $ 145 million of residential loans. The reduction in loan deferrals represents loans that are now paying in accordance with their terms. As of September 30, 2020, there was no material impact to delinquencies and non-accruals regarding the loans that came out of deferment.

At this time, we do not believe there exists any impairment to our goodwill, long-lived assets, right of use assets, held to maturity investment securities, or available-for-sale investment securities due to the COVID-19 pandemic. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets.

39

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 September 30, 2020, and the related consolidated statements of income and comprehensive income for the three and nine-month periods ended September 30, 2020 and September 30, 2019 and the related changes in shareholders’ equity and cash flows for the nine-month periods ended September 30, 2020 and September 30, 2019, 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, 2019, 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 February 28, 2020, 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, 2019, 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
New York, New York
November 6, 2020

40

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, including statements regarding the effect of the novel coronavirus disease (“COVID-19”)  pandemic on our business, financial condition and results of operations and our continuing response to the COVID-19 pandemic, 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.  Forward-looking statements can be identified by the use of such words as may, will, should, could, would, estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions.  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, 2019, the factors listed below, 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.  Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic.  Such factors include:

•
The current pandemic related to COVID-19, causing TrustCo a decline in the demand for products and services; an increase in loan delinquencies; problem assets and foreclosures; a decline in collateral value; a work stoppage, forced quarantine, or other interruption or the unavailability of key employees; an increase in the allowance for loan losses; a reduction in wealth management revenues; an increase in Federal Deposit Insurance Corporation premiums; a reduction in the value of the securities portfolio; or a decline in the net worth and liquidity of loan guarantors;
•
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, 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;

41
•
the future earnings and capital levels of TrustCo and Trustco Bank and the continued non objection 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;
•
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, 2019 and in our Form 10-Q for the quarter ended March 31, 2020.

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.

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 nine‑month periods ended September 30, 2020 and 2019.

42
Introduction
The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three‑month and nine‑month periods ended September 30, 2020, with comparisons to the corresponding period in 2019, 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 2019 Annual Report to Shareholders on Form 10‑K, which was filed with the SEC on February 28, 2020, 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.

COVID-19 Impact
Beginning in March 2020, we experienced negative impacts to our business in the form of requests for loan deferrals of principal and interest due to the business disruption caused by COVID-19.  In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.  At this time, it is difficult to quantify the impact COVID-19 will have on future periods.  The Company has evaluated the impact of the effects of COVID-19 and determined that there were no material or systematic adverse impacts on the Company’s balance sheets and results of operations as of and for the first nine month of 2020, except for an increase in the provision for loan losses as a result of the increased risk inherent in the loan portfolio resulting from the pandemic.

The following is a description of the impact the COVID-19 global pandemic is having our business:

Loan modifications

We began receiving requests from our borrowers for loan deferrals in March 2020 and agreed with many borrowers to modify their loans. Modifications included the deferral of principal and/or interest payments for terms generally up to 90 days. Requests are evaluated individually and approved modifications are based on the unique circumstances of each borrower. We are committed to working with our clients to allow time to work through the challenges of this pandemic. At this time, it is uncertain what future impact loan modifications related to COVID-19 difficulties will have on our financial condition, results of operations and provision for loan losses. Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of troubled debt restructuring (“TDR”) classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period. Loans not meeting the CARES Act or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures.

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The following table shows the number of loans and the outstanding loan balances at the time the principal and interest deferrals were approved as of September 30, 2020 and June 30, 2020:

September 30, 2020
June 30, 2020
(Dollars In Thousands)
New York and Other states*:
Number
of loans
Outstanding
loan balance
Number
of loans
Outstanding
loan balance
Commercial
5
$
1,351
79
$
39,630
Residential mortgage loans
13
2,780
441
94,028
Home equity line of credit
-
-
13
641
Installment loans
1
88
5
150
Total
19
$
4,219
538
$
134,449
Florida:
Number
of loans
Outstanding
loan balance
Number
of loans
Outstanding
loan balance
Commercial
1
$
574
5
$
5,392
Residential mortgage loans
10
2,387
205
49,745
Home equity line of credit
-
-
1
9
Installment loans
-
-
3
86
Total
11
$
2,961
214
$
55,232
Total:
Number
of loans
Outstanding
loan balance
Number
of loans
Outstanding
loan balance
Commercial
6
$
1,925
84
$
45,022
Residential mortgage loans
23
5,167
646
143,773
Home equity line of credit
-
-
14
650
Installment loans
1
88
8
236
Total
30
$
7,180
752
$
189,681

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

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The commercial loans that were deferred included various types of businesses.  The following table shows the remaining commercial loans and the outstanding loan balances, by industry, at the time the principal and interest deferrals were approved as of September 30, 2020 and June 30, 2020:

September 30, 2020
June 30, 2020
(Dollars In Thousands)
New York and Other states*
Number
of loans
Outstanding
loan balance
Number
of loans
Outstanding
loan balance
Fitness and Recreational Sports Centers
-
$
-
7
$
11,534
Lessors and Property Managers of Nonresidential Buildings
-
-
7
6,551
Lessors and Property Managers of Residential Buildings
-
-
31
9,818
Other various businesses
-
-
14
2,558
Lessors of Nonresidential Buildings - Self Storage Units
-
-
2
2,238
New Single-Family Housing Construction
-
-
3
1,921
Food Service
5
1,351
5
1,351
Retail
-
-
4
1,349
New Single-Family Housing Construction - Land Development
-
-
3
1,260
Commercial Construction
-
-
3
1,050
5
$
1,351
79
$
39,630
Florida:
Number
of loans
Outstanding
loan balance
Number
of loans
Outstanding
loan balance
Fitness and Recreational Sports Centers
-
$
-
-
$
-
Lessors and Property Managers of Nonresidential Buildings
-
-
2
4,533
Lessors and Property Managers of Residential Buildings
-
-
1
46
Other various businesses
-
-
1
319
Lessors of Nonresidential Buildings - Self Storage Units
-
-
1
494
New Single-Family Housing Construction
-
-
-
-
Food Service
1
574
-
-
Retail
-
-
-
-
New Single-Family Housing Construction - Land Development
-
-
-
-
Commercial Construction
-
-
-
-
1
$
574
5
$
5,392
Total:
Number
of loans
Outstanding
loan balance
Number
of loans
Outstanding
loan balance
Fitness and Recreational Sports Centers
-
$
-
7
$
11,534
Lessors and Property Managers of Nonresidential Buildings
-
-
9
11,084
Lessors and Property Managers of Residential Buildings
-
-
32
9,864
Other various businesses
-
-
15
2,877
Lessors of Nonresidential Buildings - Self Storage Units
-
-
3
2,732
New Single-Family Housing Construction
-
-
3
1,921
Food Service
6
1,925
5
1,351
Retail
-
-
4
1,349
New Single-Family Housing Construction - Land Development
-
-
3
1,260
Commercial Construction
-
-
3
1,050
6
$
1,925
84
$
45,022

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

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Paycheck Protection Program (PPP) and Liquidity

As part of the CARES Act, approved by the President on March 27, 2020, the Small Business Administration (SBA) was authorized to guarantee loans under the PPP through August 8, 2020 for small businesses that met the necessary eligibility requirements in order to keep their workers on the payroll. The Company began accepting applications on April 3, 2020.  As of September 30, 2020, 663 PPP loans totaling $45.7 million have been processed.  The Company received loan origination fees which are being recognized over the life of the loan using the effective yield method.

On April 9, 2020, the FDIC, Federal Reserve and OCC created the Paycheck Protection Program Liquidity Facility (PPPLF) to bolster the effectiveness of the PPP by providing liquidity to and neutralizing the regulatory capital effects on participating financial institutions. We do not intend to utilize the liquidity relief offered by the PPPLF as we do not expect our participation in the PPP to have a negative impact on our liquidity position, capital resources, financial condition or results of operations.

Asset impairment

At this time, we do not believe there exists any impairment to our goodwill, long-lived assets, right of use assets, held to maturity investment securities or available-for-sale investment securities due to the COVID-19 pandemic. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets.

Provision for loan losses

See “Allowance for Loan Losses” for more information.

Preventative measures

The Company has instituted preventative measures at branch and back office locations to protect the health of both the customers and our employees, including regular deep cleaning of facilities, adhering to CDC guidelines, and practicing “social distancing.”  These additional expenses did not have a material impact on the Company for the nine months ended September 30, 2020.

Federal Reserve Actions

The Federal Reserve Board has taken several actions to support the flow of credit to households and businesses.  Some of these pertinent actions include:
•
The establishment of the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, and the Primary Dealer Credit Facility;
•
The expansion of central bank liquidity swap lines;

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•
Steps to enhance the availability and ease terms for borrowing at the discount window;
•
The elimination of reserve requirements;
•
Guidance encouraging banks to be flexible with customers experiencing financial challenges related to the COVID-19 and to utilize their liquidity and capital buffers in doing so;
•
expanding access to its Paycheck Protection Program Liquidity Facility (PPPLF) for additional SBA-qualified lenders;
•
Statements encouraging the use of daylight credit at the Federal Reserve.

Economic Overview
During the third quarter of 2020 financial markets continued to be influenced by the economic conditions that resulted from the COVID-19 pandemic. After a rebound in the second quarter, stocks continued to show strong gains in the third quarter, pushing the S&P 500 index and the Nasdaq Composite index to record highs in late August.  Credit markets continue to be driven by worldwide economic news, effects of COVID-19, and demand shifts.  The shape of the yield curve remained consistent during the quarter as compared to prior quarters. The 10-year Treasury bond averaged .65% during the third quarter compared to .69% in the second quarter of 2020, a decrease of 4 basis points, and the 2-year Treasury bond average rate decreased 5 basis points to .14%.  The spread between the 10-year and the 2-year Treasury bonds expanded slightly from 0.49% on average in the second quarter to 0.51% in the third quarter of 2020.  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 0.00% to 0.25% 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.  Changes in rates and spreads during the current quarter continue to be from the effects of the COVID-19 pandemic.

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3 Month
2 Year
5 Year
10 Year
10 - 2 Year
Yield (%)
Yield (%)
Yield (%)
Yield (%)
Spread (%)
Q3/19
Beg of Q3
2.12
1.75
1.76
2.00
0.25
Peak
2.26
1.92
1.88
2.13
0.28
Trough
1.80
1.43
1.32
1.47
-0.04
End of Q3
1.88
1.63
1.55
1.68
0.05
Average in Q3
2.03
1.69
1.63
1.80
0.11
Q4/19
Beg of Q4
1.88
1.63
1.55
1.68
0.05
Peak
1.82
1.68
1.75
1.94
0.34
Trough
1.52
1.39
1.34
1.52
0.09
End of Q4
1.55
1.58
1.69
1.92
0.34
Average in Q4
1.61
1.59
1.61
1.79
0.20
Q1/20
Beg of Q1
1.55
1.58
1.69
1.92
0.34
Peak
1.59
1.58
1.67
1.88
0.68
Trough
0.00
0.23
0.37
0.54
0.12
End of Q1
0.11
0.23
0.37
0.70
0.47
Average in Q1
1.10
1.08
1.14
1.37
0.28
Q2/20
Beg of Q2
0.11
0.23
0.37
0.70
0.47
Peak
0.26
0.28
0.48
0.91
0.69
Trough
0.09
0.13
0.28
0.58
0.38
End of Q2
0.16
0.16
0.29
0.66
0.50
Average in Q2
0.14
0.19
0.36
0.69
0.49
Q3/20
Beg of Q3
0.16
0.16
0.29
0.66
0.50
Peak
0.16
0.17
0.32
0.74
0.60
Trough
0.09
0.11
0.19
0.52
0.41
End of Q3
0.10
0.13
0.28
0.69
0.56
Average in Q3
0.14
0.14
0.27
0.65
0.51

The United States economy showed some modest improvements in various areas heading into 2020 until the COVID-19 uncertainty began to gain momentum throughout the year.  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.

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 well capitalized 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, particularly those arising during the 2008-2010 financial crisis.  Nevertheless, the Company may experience increases in nonperforming loans (“NPLs”) relative to historical levels from time to time.  Should general housing prices and other economic measures, such as unemployment in the Company’s market areas, deteriorate as a result of the COVID-19 pandemic, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans.

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In a direct response to the COVID-19 pandemic, on March 27, 2020 Congress passed the CARES Act. Included in the CARES Act is support for small businesses, direct payments to lower and middle income families, expanded unemployment insurance, additional funding for health care providers, as well as support for other industries.  The Federal Reserve Board, in an attempt to increase liquidity and promote the normal functioning of financial markets, also provided support by increasing purchases of Treasury securities and agency mortgage-backed securities.

Financial Overview
TrustCo recorded net income of $14.1 million, or $0.146 of diluted earnings per share, for the three‑months ended September 30, 2020, compared to net income of $14.7 million, or $0.152 of diluted earnings per share, in the same period in 2019.  Return on average assets was .98% and 1.12%, respectively, for the three‑months ended September 30, 2020 and 2019.  Return on average equity was 10.04% and 11.19%, respectively, for the three‑months ended September 30, 2020 and 2019.

The primary factors accounting for the slight change in net income for the three‑months ended September 30, 2020 compared to the same period of the prior year were:

•
An increase in the average balance of interest earning assets of $501.2 million to $5.58 billion for the third quarter of 2020 compared to the same period in 2019 .
•
A decrease in taxable equivalent net interest margin for the third quarter of 2020 to 2.73% from 3.04% in the prior year period.
•
An overall decrease in noninterest expense of $1.4 million for the third quarter of 2020 compared to the third quarter of 2019.
•
A provision for loan losses of $1 million for the third quarter of 2020 as compared with no provision for loan losses in the third quarter of 2019.
•
A decrease of $584 thousand in noninterest income for the third quarter of 2020 compared to the third quarter of 2019.
•
A decrease of $478 thousand in net interest income for the third quarter of 2020 compared to the third quarter of 2019.

TrustCo recorded net income of $38.6 million, or $0.400 of diluted earnings per share, for the nine-months ended September 30, 2020, compared to net income of $43.9 million, or $0.453 of diluted earnings per share, in the same period in 2019.  Return on average assets was .94% and 1.14%, respectively, for the nine‑months ended September 30, 2020 and 2019.  Return on average equity was 9.38% and 11.56%, respectively, for the nine‑months ended September 30, 2020 and 2019.

Asset/Liability Management
The Company strives to generate its earnings capabilities through a mix of core deposits funding a prudent mix of interest 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.

49
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, 2019 is a description of the effect interest rates had on the results for the year 2019 compared to 2018.  Many of the same market factors discussed in the 2019 Annual Report continued to have a significant impact on results through the third quarter of 2020, as well as the economic effect of COVID-19.

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.  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 2015 when the range was increased to 0.25% to 0.50%.  Subsequent increases resulted a range of 2.25% to 2.50% until the second half of 2019 when the rate was cut several times before the end of 2019.  During the first quarter of 2020 the rate was significantly decreased again as a result of the global pandemic related to COVID-19, and has returned the range of 0.00% to 0.25%.

The changes in interest rates have an effect on the Company relative to the interest income on loans, securities, and Federal Funds sold and other short-term instruments as well as 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 Federal Funds sold portfolio and other short‑term investments are affected primarily by changes in the Federal Funds target rate.  Deposit interest rates are most affected by short term market interest rates.  Also, changes in interest rates have an effect on the recorded balance of the securities available for sale portfolio, which are recorded at fair value.  Generally, as market interest rates increase, the fair value of the securities will decrease 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 also generally increase the value of retail deposits.

50
TrustCo’s principal loan products are residential real estate loans.  As noted above, 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 114 basis points, on average, during the third quarter of 2020 compared to the fourth quarter of 2019 and was down 115 basis points as compared to the third quarter of 2019.

While TrustCo has been affected by changes in financial markets over time, the impacts have been mitigated by the Company’s generally conservative approach to banking.  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 extensive branch network.  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 third quarter of 2020, the net interest margin was 2.73%, down 31 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 increased by $472.8 million while the average yield decreased 209 basis points in the third quarter of 2020 compared to the same period in 2019.
•
The average balance of securities available for sale decreased by $218.1 million and the average yield decreased 29 basis points to 2.05%.  The average balance of held to maturity securities decreased by $4.4 million and the average yield decreased 18 basis points to 3.52% for the third quarter of 2020 compared to the same period in 2019.
•
The average loan portfolio grew by $254.6 million to $4.20 billion while the average yield decreased 32 basis points to 3.94% in the third quarter of 2020 compared to the same period in 2019.
•
The average balance of interest bearing liabilities (primarily deposit accounts) increased $292.4 million while the average rate paid decreased 42 basis points to 0.52% in the third quarter of 2020 compared to the same period in 2019.

51
During the third quarter of 2020, 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.

The strategy on the funding side of the balance sheet was to offer competitive shorter term rates which allowed the Bank to gain market share as well as retain our existing time deposits.  This strategy drove growth at a relatively low cost that will sustain TrustCo’s strong liquidity position and continue to allow us to cross sell new and existing relationships and take advantage of opportunities as they arise.

Earning Assets
Total average interest earning assets increased from $5.08 billion in the third quarter of 2019 to $5.58 billion in the same period of 2020 with an average yield of 3.15% in the third quarter of 2020 and 3.82% in the third quarter of 2019.  There was a shift in the mix of assets towards a higher proportion of federal funds sold and other short-term investments from securities available for sale.  The sharp decrease in the federal funds rate during March of 2020 significantly decreased the average yield on the federal funds sold and other short-term investments from 2.19% in the third quarter of 2019 to 0.10% in the third quarter of 2020, which drove down the overall yield on interest earning assets.    Interest income on average earning assets decreased from $48.5 million in the third quarter of 2019 to $44.0 million in the third quarter of 2020, on a tax equivalent basis, and was primarily driven by the mix of assets shift and the lower federal funds rate as mentioned above.

Loans
The average balance of loans was $4.20 billion in the third quarter of 2020 and $3.94 billion in the comparable period in 2019.  The yield on loans was down 32 basis points to 3.94%.  Interest income on loans was $41.3 million in the third quarter of 2020 down $593 thousand from the same period in 2019.  The higher average balances did not offset the decrease in yield.

Compared to the third quarter of 2019, the average balance of residential mortgage loans and commercial loans increased while home equity lines of credit and installment loans decreased.  The average balance of residential mortgage loans was $3.70 billion in 2020 compared to $3.47 billion in 2019, an increase of 6.9%.  The average yield on residential mortgage loan decreased by 24 basis points to 3.89% in the third quarter of 2020 compared to 2019.

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 an eventual rise in long-term interest rates, the Company would anticipate that the unique features of its loan products will continue to attract customers in the residential mortgage loan area.

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Commercial loans, which consist primarily of loans secured by commercial real estate, increased $41.0 million to an average balance of $231.5 million in the third quarter of 2020 compared to the same period in the prior year, primarily as a result of the issuance of the PPP loans.  The average yield on this portfolio was down 91 basis points to 4.54% compared to the prior year period, primarily as a result of the 1% interest rate on the PPP Loans.  The Company remained selective in underwriting non-PPP 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 decreased 97 basis points to 3.98% during the third quarter of 2020 compared to the same period in 2019.  The decrease in yield is the result of prime rate decreases which impacted some loans as well as a smaller percentage of lower yielding initial rate balances.  The average balances of home equity lines decreased 8.6% to $251.5 million in the third quarter of 2020 as compared to the prior year.  Consistent with prior periods, customers with home equity lines continue to refinance their balances into fixed rate mortgage loans and have been less likely to draw on home equity lines due to reduced tax benefits.

Securities Available for Sale
The average balance of the securities available for sale portfolio for the third quarter of 2020 was $429.3 million compared to $647.5 million for the comparable period in 2019.  The declining balance reflects routine sales, paydowns, calls and maturities, partially offset by new investment purchases.  The current interest rate environment has significantly contributed to more bonds being called. The average yield was 2.05% for the third quarter of 2020 compared to 2.34% for the third quarter of 2019.  This portfolio is primarily comprised of agency issued residential mortgage backed securities and collateralized mortgage obligations, 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 income, net of tax.

The net unrealized gain in the available for sale securities portfolio was $10.6 million as of September 30, 2020 compared to a net unrealized gain of $391 thousand as of December 31, 2019.  The unrealized gain 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 $15.8 million for the third quarter of 2020 compared to $20.2 million in the third quarter of 2019.  The decrease in balance reflects routine paydowns.  No new securities were added to this portfolio during the period.  The average yield was 3.52% for the third quarter of 2020 compared to 3.70% for the same period in 2019.  TrustCo expects to hold the securities in this portfolio until they mature or are called.

As of September 30, 2020, this portfolio consisted solely of agency issued residential mortgage-backed securities.  The balances for these securities are recorded at amortized cost.

53
Federal Funds Sold and Other Short‑term Investments
The 2020 third quarter average balance of Federal Funds sold and other short‑term investments were $938.1 million, a $472.8 million increase from the $465.3 million average for the same period in 2019.  The yield was 0.10% for the third quarter of 2020 and 2.19% for the comparable period in 2019.  Interest income from this portfolio decreased $2.3 million from $2.6 million in 2019 to $242 thousand in 2020.  The higher average balances did not offset several target rate decreases.

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.

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 $258.8 million to $4.28 billion for the third quarter of 2020 versus the third quarter in the prior year, and the average rate paid decreased from 0.95% for 2019 to 0.52% for 2020.  Total interest expense on these deposits decreased $3.9 million to $5.6 million in the third quarter of 2020 compared to the same period in 2019.  From the third quarter of 2019 to the third quarter of 2020, interest bearing demand account average balances were up 17.2%, certificates of deposit average balances were down 7.0%, non‑interest demand average balances were up 41.8%, average savings balances increased 8.5% and money market balances were up 20.2%.  Our growth in deposits came at relatively low cost and continues to be offset by higher earnings on loan yields and returns in the investment portfolio.  Because we offered competitive shorter term CD rates in the past, we expect cost of interest bearing liabilities to continue to decrease as these reprice at lower rates.

At September 30, 2020, the maturity of total time deposits is as follows:

(dollars in thousands)
Under 1 year
$
1,184,740
1 to 2 years
106,072
2 to 3 years
9,774
3 to 4 years
3,015
4 to 5 years
1,223
Over 5 years
200
$
1,305,024

Average short‑term borrowings for the quarter were $193.8 million in 2020 compared to $160.2 million in 2019.  The average rate decreased during this time period from 0.90% in 2019 to 0.45% in 2020.  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.

54
Net Interest Income
Taxable equivalent net interest income decreased by $478 thousand to $38.2 million in the third quarter of 2020 compared to the same period in 2019.  The net interest spread was down 25 basis points to 2.63% in the third quarter of 2020 compared to the same period in 2019.  As previously noted, the net interest margin was down 31 basis points to 2.73% for the third quarter of 2020 compared to the same period in 2019.

Taxable equivalent net interest income decreased by $3.2 million to $114.4 million in the first nine‑months of 2020 compared to the same period in 2019.  The net interest spread was down 24 basis points to 2.74% in the first nine‑months of 2020 compared to the same period in 2019. The net interest margin was down 27 basis points to 2.86% for the first nine‑months of 2020 compared to the same period in 2019.

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.  As of September 30, 2020, there were no pandemic related deferrals that have been recorded as NPLs or TDRs.

The following describes the nonperforming assets of TrustCo as of September 30, 2020:

Nonperforming loans and foreclosed real estate :  Total NPLs were $21.8 million at September 30, 2020, compared to $20.9 million at December 31, 2019 and $21.0 million at September 30, 2019.  There were $21.8 million of non‑accrual loans at September 30, 2020 compared to $20.8 million at December 31, 2019 and $21.0 million at September 30, 2019.  There were no loans at September 30, 2020 and 2019 and December 31, 2019 that were past due 90 days or more and still accruing interest.

At September 30, 2020, nonperforming loans primarily include a mix of commercial and residential loans.  Of total nonperforming loans of $21.8 million at September 30, 2020, $21.2 million were residential real estate loans, $491 thousand were commercial loans and mortgages and $49 thousand were installment loans, compared to $20.0 million, $816 thousand and $3 thousand, respectively, at December 31, 2019.

A significant percentage of nonperforming loans are residential real estate loans, which are historically lower‑risk than most other types of loans.  Net chargeoffs were $4 thousand on residential real estate loans (including home equity lines of credit) for the third quarter of 2020 compared to net chargeoffs of $39 thousand for the third quarter of 2019.  Management believes that these loans have been appropriately written down where required.

55
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.  Due to the recent COVID-19 pandemic, the Bank is monitoring recent state regulatory mandates in regards to a moratorium on foreclosures.  The collateral on nonaccrual loans is evaluated periodically, and the loan value is written down if the collateral value is insufficient.

The Company originates loans throughout its deposit franchise area.  At September 30, 2020, 72.7% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 27.3% were in Florida.  Those figures compare to 74.4% and 25.6%, respectively at December 31, 2019.

Economic conditions vary widely by geographic location.  As a percentage of the total nonperforming loans as of September 30, 2020, 5.8% were to Florida borrowers, compared to 94.2% to borrowers in New York and surrounding areas.  For the three‑months ended September 30, 2020, New York and surrounding areas experienced net chargeoffs of approximately $21 thousand, compared to none in Florida.

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 September 30, 2020, 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 $1.1 million of commercial mortgages and commercial loans classified as impaired as of September 30, 2020 compared to $1.4 million at December 31, 2019.  There were $20.6 million of impaired residential loans at September 30, 2020 and $19.5 million at December 31, 2019 .  The average balances of all impaired loans were $20.7 million for the nine months of 2020 and $21.0 million for the full year 2019.

As of September 30, 2020 and December 31, 2019, the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.

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 deed in lieu).  As of September 30, 2020 other real estate owned included $423 thousand of foreclosed real estate compared to $1.6 million at December 31, 2019.

56
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.

The allocation of the allowance for loans losses is as follows:

(dollars in thousands)
As of
September 30, 2020
As of
December 31, 2019
Percent of
Percent of
Loans to
Loans to
Amount
Total Loans
Amount
Total Loans
Commercial
$
4,083
5.12
%
$
3,805
4.47
%
Real estate - construction
315
0.64
%
311
0.70
%
Real estate mortgage - 1 to 4 family
40,458
88.12
%
35,632
87.96
%
Home equity lines of credit
3,734
5.89
%
3,999
6.60
%
Installment Loans
533
0.23
%
570
0.27
%
$
49,123
100.00
%
$
44,317
100.00
%

At September 30, 2020, the allowance for loan losses was $49.1 million, compared to $44.3 million at September 30, 2019 and at December 31, 2019.  The allowance represents 1.17% of the loan portfolio as of September 30, 2020 compared to 1.11% at September 30, 2019 and 1.09% at December 31, 2019.

The provision for loan losses was $1 million for the quarter ended September 30, 2020 compared to no provision for loan losses for the quarter ended September 30, 2019.  The increase is primarily driven by the uncertainty in the current economic environment resulting from COVID-19.  Net chargeoffs for the three‑month period ended September 30, 2020 were $21 thousand and were $36 thousand for the prior year period.  Net chargeoffs for the nine‑month period ended September 30, 2020 were $194 thousand and were $396 thousand for the prior year period.

During the third quarter of 2020, there were commercial loan net recoveries of $1 thousand and $22 thousand of residential mortgage and consumer loan net chargeoffs compared with commercial loan net recoveries of $28 thousand and $64 thousand of net residential mortgage and consumer loan chargeoffs in the third quarter of 2019.

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;
•
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; and

57

•
The economic environment as a result of the global pandemic.
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.

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.  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 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 deposits 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 September 30, 2020 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 September 30, 2020.  The following 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.

58

As of September 30, 2020
Estimated Percentage of
Fair value of Capital to
Fair value of Assets
+400 BP
18.50
%
+300 BP
18.60
+200 BP
18.60
+100 BP
18.70
Current rates
17.90
-100 BP
13.80

Noninterest Income
Total noninterest income for the third quarter of 2020 was $4.3 million versus $4.9 million for the previous year.  Financial services income was $1.8 million in the third quarter of 2020 as compared to $1.5 million in the prior year period primarily as a result of fluctuations in asset market values under management and fees associated with estate settlements.  Other income was $265 thousand, down $541 thousand in the third quarter of 2020 as compared to the year ago period. Fees for services to customers were down $310 thousand over the same period in the prior year.  The fair value of assets under management was $899 million at September 30, 2020 and $928 million as of December 31, 2019 and $896 million at September 30, 2019.

For the nine months through September 30, 2020 total noninterest income was $13.1 million, down $1.4 million compared to the prior year period.  The decrease is the result of less financial services income as a result of lower asset market values under management throughout 2020, less fees for services to customers which is driven by lower overdraft fees due to higher deposit balances, and a decrease in other income which also included a gain on the sale of the credit card portfolio in 2019, partially offset by a net gain on securities transactions.

Noninterest Expenses
Total noninterest expenses were $22.7 million for the three‑months ended September 30, 2020, compared to $24.1 million for the three‑months ended September 30, 2019.  Significant changes included a decrease of $826 thousand in salaries and employee benefits which is primarily a result of lower stock-based compensation expense due to a decrease in the Company’s stock price, a $196 thousand decrease in professional services, a $189 decrease in advertising expense, a $148 decrease in other real estate expense, a $516 thousand decrease in other expense, partially offset by an increase of $183 thousand in occupancy expense and a $378 thousand increase in FDIC and other insurance.  Full time equivalent headcount decreased from 823 as of September 30, 2019 to 771 as of September 30, 2020.  The decrease in FTE’s in the period presented was not due to the effects of the pandemic.  The Company constantly hires qualified candidates and from time-to-time experiences fluctuations in head count.

Total noninterest expenses were $70.9 million for the nine‑months ended September 30, 2020, compared to $73.8 million for the nine‑months ended September 30, 2019 .  Significant changes included a decrease of $967 thousand in salaries and employee benefits, a $285 thousand decrease in equipment expense, a $751 thousand decrease in professional services, a $663 decrease in advertising expense, a $172 decrease in other real estate expense, a $1.0 million decrease in other expense, partially offset by an increase of $701 thousand in occupancy expense and a $150 thousand increase in outsourced services.  The overall decrease in expenses for the three and nine months ended September 30, 2020 is primarily a result of the Company’s continued efforts to control costs.

59
Income Taxes
In the third quarter of 2020, TrustCo recognized income tax expense of $4.8 million compared to the same for the third quarter of 2019.  The effective tax rates were 25.3% and 24.6% for the third quarters of 2020 and 2019, respectively.  For the first nine‑months, income taxes were $13.0 million in 2020, as compared to $14.3 million in 2019.  The effective tax rates were 25.2% and 24.6% for 2020 and 2019, 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.

Total shareholders’ equity at September 30, 2020 was $560.5 million compared to $526.2 million at September 30, 2019.  TrustCo declared a dividend of $0.068125 per share in the third quarter of 2020.  This results in a dividend payout ratio of 46.68% based on third quarter 2020 earnings of $14.1 million.

60
The Bank and the Company reported the following capital ratios as of September 30, 2020 and December 31, 2019:

(Bank Only)
As of September 30, 2020
Well
Minimum for
Capital Adequacy plus
Capital Conservation
(dollars in thousands)
Amount
Ratio
Capitalized (1)
Buffer (1)(2)
Tier 1 leverage ratio
533,874
9.329
%
5.000
%
4.000
%
Common equity tier 1 capital
533,874
18.491
6.500
7.000
Tier 1 risk-based capital
533,874
18.491
8.000
8.500
Total risk-based capital
570,127
19.747
10.000
10.500

As of December 31, 2019
Well
Minimum for
Capital Adequacy plus
Capital Conservation
(dollars in thousands)
Amount
Ratio
Capitalized (1)
Buffer (1)(2)
Tier 1 leverage ratio
$
516,775
9.940
%
5.000
%
4.000
%
Common equity tier 1 capital
516,775
18.412
6.500
7.000
Tier 1 risk-based capital
516,775
18.412
8.000
8.500
Total risk-based capital
551,975
19.666
10.000
10.500

(Consolidated)
As of September 30, 2020
Minimum for
Capital Adequacy plus
Capital Conservation
(dollars in thousands)
Amount
Ratio
Buffer (1)(2)
Tier 1 leverage ratio
$
548,437
9.582
%
4.000
%
Common equity tier 1 capital
548,437
18.994
7.000
Tier 1 risk-based capital
548,437
18.994
8.500
Total risk-based capital
584,692
20.250
10.500

As of December 31, 2019
Minimum for
Capital Adequacy plus
Capital Conservation
(dollars in thousands)
Amount
Ratio
Buffer (1)(2)
Tier 1 leverage ratio
$
533,243
10.254
%
4.000
%
Common equity Tier 1 capital
533,243
18.988
7.000
Tier 1 risk-based capital
533,243
18.988
8.500
Total risk-based capital
568,463
20.242
10.500

(1)
Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized
(2)
The September 30, 2020 and December 31, 2019 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a capital conservation buffer of 2.50 percent

In addition, at September 30, 2020, the consolidated equity to total assets ratio was 9.77%, compared to 10.31% at December 31, 2019 and 10.07% at September 30, 2019.

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 2020.

61
As of September 30, 2020, 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 Office of the Comptroller of the Currency’s (“OCC”) “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 September 30, 2020 and 2019, Trustco Bank met the definition of “well‑capitalized.”

As noted, the Company’s dividend payout ratio was 46.68% of net income for the third quarter of 2020 and 44.85% of net income for the third quarter of 2019.  The per‑share dividend paid in the third quarters of 2020 and 2019 was $0.068125.  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 11,077 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.

Share Repurchase Program
The Company did not repurchase any of its shares of common stock during the three months ended September 30, 2020.

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.

62
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, 2019 is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.

Recent Accounting Pronouncements
Please refer to Note 11 to the consolidated financial statements for a detailed discussion of new accounting pronouncements and their impact on the Company.  As indicated in Note 11, as allowed by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) the Bank elected to delay the adoption of ASU 2016-13, “Financial Instruments – Credit Losses,” until the earlier of the termination of the national emergency concerning COVID-19 or December 31, 2020.

63
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 $8.3 million in 2020 and ($0.4) million in 2019.  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
September 30, 2020
Three months ended
September 30, 2019
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
$
12,391
14
0.45
%
$
183,580
$
996
2.17
%
$
(982
)
(530
)
(452
)
Mortgage backed securities and collateralized mortgage obligations-residential
313,296
1,319
1.68
%
370,808
2,178
2.35
%
(859
)
(304
)
(555
)
State and political subdivisions
110
2
7.90
%
166
3
7.23
%
(1
)
(1
)
-
Corporate bonds
59,555
646
4.33
%
40,231
321
3.19
%
325
186
139
Small Business Administration-guaranteed participation securities
43,282
216
1.99
%
51,988
282
2.17
%
(66
)
(44
)
(22
)
Other
685
5
2.92
%
685
6
3.50
%
(1
)
-
(1
)
Total securities available for sale
429,319
2,202
2.05
%
647,458
3,786
2.34
%
(1,584
)
(693
)
(891
)
Federal funds sold and other short-term Investments
938,087
242
0.10
%
465,251
2,552
2.19
%
(2,310
)
8,831
(11,141
)
Held to maturity securities:
Mortgage backed securities and collateralized mortgage obligations-residential
15,759
138
3.52
%
20,197
187
3.70
%
(49
)
(40
)
(9
)
Total held to maturity securities
15,759
138
3.52
%
20,197
187
3.70
%
(49
)
(40
)
(9
)
Federal Reserve Bank and Federal Home Loan Bank stock
5,506
77
5.59
%
9,183
81
3.53
%
(4
)
(156
)
152
Commercial loans
231,517
2,625
4.54
%
190,538
2,596
5.45
%
29
1,972
(1,943
)
Residential mortgage loans
3,702,680
36,020
3.89
%
3,465,102
35,743
4.13
%
277
9,129
(8,852
)
Home equity lines of credit
251,459
2,515
3.98
%
275,047
3,401
4.95
%
(886
)
(269
)
(617
)
Installment loans
9,632
170
7.02
%
9,967
183
7.34
%
(13
)
(6
)
(7
)
Loans, net of unearned income
4,195,288
41,330
3.94
%
3,940,654
41,923
4.26
%
(593
)
10,826
(11,419
)
Total interest earning assets
5,583,959
43,989
3.15
%
5,082,743
48,529
3.82
%
(4,540
)
18,768
(23,308
)
Allowance for loan losses
(48,483
)
(44,448
)
Cash & non-interest earning assets
201,018
188,528
Total assets
$
5,736,494
5,226,823
Liabilities and shareholders' equity
Deposits:
Interest bearing checking accounts
$
1,024,455
55
0.02
%
$
874,179
$
52
0.02
%
3
3
-
Money market accounts
682,319
637
0.37
%
567,554
1,177
0.83
%
(540
)
1,250
(1,790
)
Savings
1,222,956
161
0.05
%
1,126,935
323
0.11
%
(162
)
159
(321
)
Time deposits
1,355,244
4,749
1.39
%
1,457,510
7,974
2.19
%
(3,225
)
(522
)
(2,703
)
Total interest bearing deposits
4,284,974
5,602
0.52
%
4,026,178
9,526
0.95
%
(3,924
)
890
(4,814
)
Short-term borrowings
193,765
221
0.45
%
160,162
359
0.90
%
(138
)
384
(522
)
Total interest bearing liabilities
4,478,739
5,823
0.52
%
4,186,340
9,885
0.94
%
(4,062
)
1,274
(5,336
)
Demand deposits
622,313
438,789
Other liabilities
78,093
80,188
Shareholders' equity
557,349
521,506
Total liabilities and shareholders' equity
$
5,736,494
$
5,226,823
Net interest income , tax equivalent
38,166
38,644
$
(478
)
17,494
(17,972
)
Net interest spread
2.63
%
2.88
%
Net interest margin (net interest income to total interest earning assets)
2.73
%
3.04
%
Tax equivalent adjustment
(1
)
(1
)
Net interest income
38,165
38,643

64
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 $7.2 million in 2020 and ($4.9) million in 2019.  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)
Nine months ended
September 30, 2020
Nine months ended
September 30, 2019
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
$
42,573
541
1.69
%
$
166,119
2,600
2.09
%
$
(2,059
)
(1,641
)
(418
)
Mortgage backed securities and collateralized mortgage obligations-residential
339,300
4,959
1.95
%
329,188
5,885
2.38
%
(926
)
277
(1,203
)
State and political subdivisions
111
6
7.79
%
167
9
7.19
%
(3
)
(4
)
1
Corporate bonds
46,508
1,372
3.93
%
33,678
801
3.17
%
571
350
221
Small Business Administration-guaranteed participation securities
45,313
690
2.03
%
54,414
868
2.13
%
(178
)
(139
)
(39
)
Other
685
16
3.11
%
685
16
3.11
%
-
-
-
Total securities available for sale
474,490
7,584
2.13
%
584,251
10,179
2.32
%
(2,595
)
(1,157
)
(1,438
)
Federal funds sold and other short-term Investments
693,286
1,702
0.33
%
504,512
8,843
2.34
%
(7,141
)
3,991
(11,132
)
Held to maturity securities:
Mortgage backed securities and collateralized mortgage obligations-residential
17,029
475
3.72
%
21,123
613
3.87
%
(138
)
(115
)
(23
)
Total held to maturity securities
17,029
475
3.72
%
21,123
613
3.87
%
(138
)
(115
)
(23
)
Federal Reserve Bank and Federal Home Loan Bank stock
7,998
351
5.85
%
9,104
365
5.35
%
(14
)
(59
)
45
Commercial loans
217,573
7,778
4.77
%
191,370
7,725
5.38
%
53
1,310
(1,257
)
Residential mortgage loans
3,652,766
108,845
3.97
%
3,412,411
105,786
4.13
%
3,059
8,916
(5,857
)
Home equity lines of credit
258,956
7,898
4.07
%
280,248
10,441
4.97
%
(2,543
)
(754
)
(1,789
)
Installment loans
10,129
537
7.08
%
10,718
656
8.16
%
(119
)
(35
)
(84
)
Loans, net of unearned income
4,139,424
125,058
4.03
%
3,894,747
124,608
4.27
%
450
9,437
(8,987
)
Total interest earning assets
5,332,227
135,170
3.38
%
5,013,737
144,608
3.85
%
(9,438
)
12,097
(21,535
)
Allowance for loan losses
(46,618
)
(44,744
)
Cash & non-interest earning assets
196,835
180,568
Total assets
$
5,482,444
$
5,149,561
Liabilities and shareholders' equity
Deposits:
Interest bearing checking accounts
$
949,909
97
0.01
%
$
878,106
267
0.04
%
(170
)
32
(202
)
Money market accounts
646,170
2,595
0.54
%
546,601
3,122
0.76
%
(527
)
733
(1,260
)
Savings
1,169,316
560
0.06
%
1,141,607
1,067
0.12
%
(507
)
28
(535
)
Time deposits
1,372,369
16,739
1.63
%
1,416,306
21,462
2.02
%
(4,723
)
(653
)
(4,070
)
Total interest bearing deposits
4,137,764
19,991
0.65
%
3,982,620
25,918
0.87
%
(5,927
)
140
(6,067
)
Short-term borrowings
173,497
778
0.60
%
160,647
1,121
0.93
%
(343
)
132
(475
)
Total interest bearing liabilities
4,311,261
20,769
0.64
%
4,143,267
27,039
0.87
%
(6,270
)
272
(6,542
)
Demand deposits
543,279
418,327
Other liabilities
77,568
79,937
Shareholders' equity
550,336
508,030
Total liabilities and shareholders' equity
$
5,482,444
$
5,149,561
Net interest income , tax equivalent
114,401
117,569
$
(3,168
)
11,825
(14,993
)
Net interest spread
2.74
%
2.98
%
Net interest margin (net interest income to total interest earning assets)
2.86
%
3.13
%
Tax equivalent adjustment
(2
)
(3
)
Net interest income
114,399
117,566

65
Item 3.
Quantitative and Qualitative Disclosures about Market Risk

As detailed in the Annual Report to Shareholders as of December 31, 2019, 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 nine‑month periods ended September 30, 2020 and 2019, 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 third quarter of 2020, the Company had an average balance of Federal Funds sold and other short‑term investments of $938.1 million compared to $465.3 million in the third quarter of 2019.  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.

Market disruptions brought about by the COVID-19 pandemic may adversely affect our sensitivity to market interest rates.  We could experience an increase in the cost of funding on our balance sheet.  We could also experience increased pricing competition for our existing loans or future borrower prospects, which could decrease rates earned on our earning assets.

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.

66
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.

PART II
OTHER INFORMATION
Item 1.
Legal Proceedings

None.

Item 1A.
Risk Factors

There were no material changes to the risk factors as previously disclosed in response to Item 1A to Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, or in response to Item 1A to Part II of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020.

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

Share Repurchase Program

On June 7, 2019, the Company announced that its board of directors approved a stock repurchase program under which the Company was authorized to repurchase over the following twelve months up to 1,000,000 shares of Company common stock, or approximately 1% of its outstanding shares.  The Company commenced repurchases under the program during the quarter ended March 31, 2020.  On April 16, 2020, the Company announced that it had chosen to suspend the repurchase program and on June 6, 2020 the program expired.


Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety

None.

Item 5.
Other Information

None.

67
Item 6.
Exhibits

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

68
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:  November 6, 2020


69
TABLE OF CONTENTS