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
March 31, 2016
 
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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒Yes    ☐ No

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

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

Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐

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 April 30, 2016
$1 Par Value
 
95,495,515
 


TrustCo Bank Corp NY

INDEX
 
Part I.
FINANCIAL INFORMATION
PAGE NO.
Item 1.
Consolidated Interim Financial Statements (Unaudited):
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7-8
     
 
9 – 34
     
 
35
     
Item 2.
36-54
     
Item 3.
55
     
Item 4.
55
     
Part II.
OTHER INFORMATION
 
     
Item 1.
56
     
Item 1A.
56
     
Item 2.
56
     
Item 3.
56
     
Item 4.
56
     
Item 5.
56
     
Item 6.
56

2

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

      
Three Months Ended
March 31,
 
     
2016
   
2015
 
               
Interest and dividend income:
             
Interest and fees on loans
 
 
$
35,605
     
34,983
 
Interest and dividends on securities available for sale:
                 
U. S. government sponsored enterprises
     
255
     
212
 
State and political subdivisions
     
14
     
25
 
Mortgage-backed securities and collateralized mortgage obligations-residential
     
2,116
     
2,393
 
Corporate bonds
     
-
     
1
 
Small Business Administration-guaranteed participation securities
     
476
     
522
 
Mortgage-backed securities and collateralized mortgage obligations-commercial
     
36
     
37
 
Other securities
     
4
     
4
 
Total interest and dividends on securities available for sale
     
2,901
     
3,194
 
                   
Interest on held to maturity securities:
                 
Mortgage-backed securities and collateralized mortgage obligations-residential
     
402
     
478
 
Corporate bonds
     
154
     
154
 
Total interest on held to maturity securities
     
556
     
632
 
                   
Federal Reserve Bank and Federal Home Loan Bank stock
     
120
     
116
 
Interest on federal funds sold and other short-term investments
     
844
     
400
 
Total interest income
     
40,026
     
39,325
 
                   
Interest expense:
                 
Interest on deposits:
                 
Interest-bearing checking
     
114
     
105
 
Savings
     
604
     
658
 
Money market deposit accounts
     
496
     
617
 
Time deposits
     
2,373
     
2,434
 
Interest on short-term borrowings
     
257
     
346
 
Total interest expense
     
3,844
     
4,160
 
                 
Net interest income
     
36,182
     
35,165
 
Provision for loan losses
     
800
     
800
 
Net interest income after provision for loan losses
     
35,382
     
34,365
 
                 
Noninterest income:
               
Trustco financial services income
     
1,605
     
1,653
 
Fees for services to customers
     
2,661
     
2,524
 
Net gain on securities transactions
     
-
     
249
 
Other
     
306
     
197
 
Total noninterest income
     
4,572
     
4,623
 
                 
Noninterest expenses:
               
Salaries and employee benefits
     
9,003
     
8,481
 
Net occupancy expense
     
4,088
     
4,108
 
Equipment expense
     
1,514
     
1,942
 
Professional services
     
2,146
     
1,507
 
Outsourced services
     
1,551
     
1,425
 
Advertising expense
     
729
     
600
 
FDIC and other insurance
     
1,990
     
1,065
 
Other real estate expense, net
     
519
     
424
 
Other
     
1,899
     
2,305
 
Total noninterest expenses
     
23,439
     
21,857
 
                 
Income before taxes
     
16,515
     
17,131
 
Income taxes
     
6,106
     
6,416
 
                 
Net income
 
 
$
10,409
     
10,715
 
                 
Net income per share:
               
- Basic
 
 
$
0.109
     
0.113
 
                 
- Diluted
 
 
$
0.109
     
0.113
 
 
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
March 31,
 
   
2016
   
2015
 
             
Net income
 
$
10,409
     
10,715
 
                 
Net unrealized holding gain on securities available for sale
   
8,035
     
3,309
 
Reclassification adjustments for net gain recognized in income
   
-
     
(249
)
Tax effect
   
(3,214
)
   
(1,222
)
                 
Net unrealized gain on securities available for sale, net of tax
   
4,821
     
1,838
 
                 
                 
Amortization of net actuarial loss (gain)
   
33
     
(5
)
Amortization of prior service cost (credit)
   
23
     
(22
)
Tax effect
   
(23
)
   
11
 
Amortization of net actuarial loss (gain) and prior service cost (credit) on pension and postretirement plans, net of tax
   
33
     
(16
)
                 
Other comprehensive income, net of tax
   
4,854
     
1,822
 
Comprehensive income
 
$
15,263
     
12,537
 

See accompanying notes to unaudited consolidated interim financial statements.
 
4

TRUSTCO BANK CORP NY
Consolidated Statements of Financial Condition
(dollars in thousands)

   
March 31, 2016
   
December 31, 2015
 
ASSETS:
 
(Unaudited)
   
(Audited)
 
             
Cash and due from banks
 
$
37,373
     
41,698
 
                 
Federal funds sold and other short term investments
   
722,805
     
676,458
 
Total cash and cash equivalents
   
760,178
     
718,156
 
                 
Securities available for sale
   
590,128
     
601,037
 
                 
Held to maturity securities (fair value 2016 $56,708; 2015 $59,439)
   
53,574
     
56,465
 
                 
Federal Reserve Bank and Federal Home Loan Bank stock
   
9,480
     
9,480
 
                 
Loans, net of deferred fees and costs
   
3,301,379
     
3,293,304
 
Less:
               
Allowance for loan losses
   
44,398
     
44,762
 
Net loans
   
3,256,981
     
3,248,542
 
                 
Bank premises and equipment, net
   
37,360
     
37,643
 
Other assets
   
55,561
     
63,669
 
                 
Total assets
 
$
4,763,262
     
4,734,992
 
                 
LIABILITIES:
               
Deposits:
               
Demand
 
$
359,060
     
365,081
 
Interest-bearing checking
   
746,562
     
754,347
 
Savings accounts
   
1,272,394
     
1,262,194
 
Money market deposit accounts
   
595,585
     
610,826
 
Time deposits
   
1,168,887
     
1,107,930
 
Total deposits
   
4,142,488
     
4,100,378
 
                 
Short-term borrowings
   
169,528
     
191,226
 
Accrued expenses and other liabilities
   
28,221
     
30,078
 
                 
Total liabilities
   
4,340,237
     
4,321,682
 
                 
SHAREHOLDERS' EQUITY:
               
Capital stock par value $1; 150,000,000 shares authorized; 98,973,452 shares issued at March 31, 2016 and December 31, 2015
   
98,973
     
98,973
 
Surplus
   
171,113
     
171,443
 
Undivided profits
   
188,159
     
184,009
 
Accumulated other comprehensive income (loss), net of tax
   
73
     
(4,781
)
Treasury stock at cost - 3,604,877 and  3,711,228 shares at March 31, 2016 and December 31, 2015, respectively
   
(35,293
)
   
(36,334
)
                 
Total shareholders' equity
   
423,025
     
413,310
 
                 
Total liabilities and shareholders' equity
 
$
4,763,262
     
4,734,992
 

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, 2015
 
$
98,945
     
172,353
     
166,745
     
(4,509
)
   
(40,090
)
   
393,444
 
Net income
   
-
     
-
     
10,715
     
-
     
-
     
10,715
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
1,822
     
-
     
1,822
 
Cash dividend declared, $.065625 per share
   
-
     
-
     
(6,228
)
   
-
     
-
     
(6,228
)
Stock options exerised and related tax benefits (19,429 shares)
   
19
     
80
     
-
     
-
     
-
     
99
 
Purchase of treasury stock (14,881 shares)
   
-
     
-
     
-
     
-
     
(99
)
   
(99
)
Sale of treasury stock (93,718 shares)
   
-
     
(244
)
   
-
     
-
     
919
     
675
 
Stock based compensation expense
   
-
     
48
     
-
     
-
     
-
     
48
 
                                                 
Ending balance, March 31, 2015
 
$
98,964
     
172,237
     
171,232
     
(2,687
)
   
(39,270
)
   
400,476
 
                                                 
Beginning balance, January 1, 2016
 
$
98,973
     
171,443
     
184,009
     
(4,781
)
   
(36,334
)
   
413,310
 
Net income
   
-
     
-
     
10,409
     
-
     
-
     
10,409
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
4,854
     
-
     
4,854
 
Cash dividend declared, $.065625 per share
   
-
     
-
     
(6,259
)
   
-
     
-
     
(6,259
)
Sale of treasury stock (106,351 shares)
   
-
     
(386
)
   
-
     
-
     
1,041
     
655
 
Stock based compensation expense
   
-
     
56
     
-
     
-
     
-
     
56
 
                                                 
Ending balance, March 31, 2016
 
$
98,973
     
171,113
     
188,159
     
73
     
(35,293
)
   
423,025
 

See accompanying notes to unaudited consolidated interim financial statements.
 
6

TRUSTCO BANK CORP NY
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
 
   
Three months ended March 31,
 
   
2016
   
2015
 
             
Cash flows from operating activities:
           
Net income
 
$
10,409
     
10,715
 
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
1,061
     
1,173
 
Net (gain) loss on sale of other real estate owned
   
-
     
(134
)
Writedown of other real estate owned
   
346
     
259
 
Provision for loan losses
   
800
     
800
 
Deferred tax (benefit) expense
   
(179
)
   
891
 
Net amortization of securities
   
1,152
     
1,520
 
Stock based compensation expense
   
56
     
48
 
Net loss (gain) on sale of bank premises and equipment
   
3
     
(1
)
Net gain on sales and calls of securities
   
-
     
(249
)
Decrease in taxes receivable
   
4,703
     
4,379
 
Decrease in interest receivable
   
264
     
424
 
Increase in interest payable
   
48
     
22
 
Increase in other assets
   
(632
)
   
(1,625
)
Decrease in accrued expenses and other liabilities
   
(1,912
)
   
(1,390
)
Total adjustments
   
5,710
     
6,117
 
Net cash provided by operating activities
   
16,119
     
16,832
 
                 
Cash flows from investing activities:
               
                 
Proceeds from sales and calls of securities available for sale
   
48,913
     
52,625
 
Proceeds from calls and maturities of held to maturity securities
   
2,891
     
3,686
 
Purchases of securities available for sale
   
(31,121
)
   
(40,928
)
Net increase in loans
   
(10,275
)
   
(38,670
)
Proceeds from dispositions of other real estate owned
   
1,461
     
1,552
 
Proceeds from dispositions of bank premises and equipment
   
18
     
51
 
Purchases of bank premises and equipment
   
(799
)
   
(1,470
)
Net cash used in investing activities
   
11,088
     
(23,154
)
                 
                 
Cash flows from financing activities:
               
                 
Net increase in deposits
   
42,110
     
84,927
 
Net (decrease) increase in short-term borrowings
   
(21,698
)
   
5,622
 
Proceeds from exercise of stock options
               
and related tax benefits
   
-
     
99
 
Proceeds from sale of treasury stock
   
655
     
675
 
Purchases of treasury stock
   
-
     
(99
)
Dividends paid
   
(6,252
)
   
(6,224
)
Net cash provided by financing activities
   
14,815
     
85,000
 
Net increase in cash and cash equivalents
   
42,022
     
78,678
 
Cash and cash equivalents at beginning of period
   
718,156
     
671,448
 
Cash and cash equivalents at end of period
 
$
760,178
     
750,126
 
 
7

Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the year for:
               
Interest paid
 
$
3,796
     
4,138
 
Income taxes paid
   
1,360
     
2,037
 
Other non cash items:
               
Transfer of loans to other real estate owned
   
1,036
     
2,194
 
Increase in dividends payable
   
7
     
4
 
Change in unrealized gain on securities available for sale-gross of deferred taxes
   
8,035
     
3,060
 
Change in deferred tax effect on unrealized gain on securities available for sale
   
(3,214
)
   
(1,222
)
Amortization of net actuarial loss and prior service credit on pension and postretirement plans
   
56
     
(27
)
Change in deferred tax effect of amortization of net actuarial loss and prior service credit
   
(23
)
   
11
 

See accompanying notes to unaudited consolidated interim financial statements.
 
8

(1) Financial Statement Presentation

The unaudited Consolidated Interim Financial Statements of TrustCo Bank Corp NY (the “Company” or “TrustCo”) include the accounts of the subsidiaries after elimination of all significant intercompany accounts and transactions.  Prior period amounts are reclassified when necessary to conform to the current period presentation.  The net income reported for the three months ended March 31, 2016 is not necessarily indicative of the results that may be expected for the year ending December 31, 2016, 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 March 31, 2016, the results of operations and cash flows for the three months ended March 31, 2016 and 2015.  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 Company's 2015 Annual Report on Form 10-K for the year ended December 31, 2015.  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 months ended March 31, 2016 and 2015 is as follows:

(dollars in thousands, except per share data)
           
   
2016
   
2015
 
For the three months ended
           
March 31:
           
Net income
 
$
10,409
     
10,715
 
Weighted average common shares
   
95,365
     
94,947
 
Stock Options
   
47
     
127
 
Weighted average common shares including potential dilutive shares
   
95,412
     
95,074
 
                 
Basic EPS
 
$
0.109
     
0.113
 
                 
Diluted EPS
 
$
0.109
     
0.113
 
 
For the three months ended March 31, 2016, the weighted average number of antidilutive stock options excluded from diluted earnings per share was approximately 1.6 million.  For the three months ended March 31, 2015 the weighted average number of antidilutive stock options excluded from diluted earnings per share was approximately 1.4 million.  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.
 
9

(3) Benefit Plans

The table below outlines the components of the Company's net periodic benefit recognized during the three months ended March 31, 2016 and 2015 for its pension and other postretirement benefit plans:

   
For the three months ended March 31,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
(dollars in thousands)
 
2016
   
2015
   
2016
   
2015
 
                         
Service cost
 
$
15
     
15
     
32
     
39
 
Interest cost
   
337
     
330
     
61
     
65
 
Expected return on plan assets
   
(644
)
   
(684
)
   
(181
)
   
(181
)
Amortization of net (gain) loss
   
87
     
(40
)
   
(54
)
   
35
 
Amortization of prior service cost (credit)
   
-
     
-
     
23
     
(22
)
Net periodic benefit
 
$
(205
)
   
(379
)
   
(119
)
   
(64
)

The Company does not expect to make contributions to its pension and postretirement benefit plans in 2016.  As of March 31, 2016, 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.

10

(4) Investment Securities

(a) Securities available for sale

The amortized cost and fair value of the securities available for sale are as follows:
                        
(dollars in thousands)
 
March 31, 2016
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
U.S. government sponsored enterprises
 
$
66,899
     
44
     
23
     
66,920
 
State and political subdivisions
   
955
     
19
     
-
     
974
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
421,323
     
1,821
     
955
     
422,189
 
Small Business Administration- guaranteed participation securities
   
89,362
     
96
     
405
     
89,053
 
Mortgage backed securities and collateralized mortgage obligations - commercial
   
10,353
     
-
     
46
     
10,307
 
Other
   
650
     
-
     
-
     
650
 
Total debt securities
   
589,542
     
1,980
     
1,429
     
590,093
 
Equity securities
   
35
     
-
     
-
     
35
 
Total securities available for sale
 
$
589,577
     
1,980
     
1,429
     
590,128
 
                                  
(dollars in thousands)
 
December 31, 2015
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
U.S. government sponsored enterprises
 
$
86,899
     
19
     
181
     
86,737
 
State and political subdivisions
   
1,270
     
20
     
-
     
1,290
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
416,625
     
430
     
5,326
     
411,729
 
Small Business Administration-guaranteed participation securities
   
92,620
     
-
     
2,204
     
90,416
 
Mortgage backed securities and collateralized mortgage obligations - commercial
   
10,422
     
-
     
242
     
10,180
 
Other
   
650
     
-
     
-
     
650
 
Total debt securities
   
608,486
     
469
     
7,953
     
601,002
 
Equity securities
   
35
     
-
     
-
     
35
 
Total securities available for sale
 
$
608,521
     
469
     
7,953
     
601,037
 
 
11

The following table distributes the debt securities included in the available for sale portfolio as of March 31, 2016, based on the securities’ contractual maturity.  Actual maturities may differ as a result of the right of certain issuers to call or prepay their obligations without penalty.  Securities not due at a single maturity date are shown separately.
                                    
(dollars in thousands)
 
Amortized
Cost
   
Fair
Value
 
Due in one year or less
 
$
1,956
     
1,958
 
Due in one year through five years
   
66,087
     
66,122
 
Due after five years through ten years
   
452
     
455
 
Due after ten years
   
9
     
9
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
421,323
     
422,189
 
Small Business Administration- guaranteed participation securities
   
89,362
     
89,053
 
Mortgage backed securities and collateralized mortgage obligations - commercial
   
10,353
     
10,307
 
   
$
589,542
     
590,093
 
 
12

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:
                                   
(dollars in thousands)
 
March 31, 2016
 
   
Less than
12 months
   
12 months
or more
   
Total
 
   
Fair
Value
   
Gross
Unreal
Loss
   
Fair
Value
   
Gross
Unreal
Loss
   
Fair
Value
   
Gross
Unreal
Loss
 
U.S. government sponsored enterprises
 
$
10,492
     
8
     
9,985
     
15
     
20,477
     
23
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
39,789
     
70
     
177,396
     
885
     
217,185
     
955
 
Small Business Administration- guaranteed participation securities
   
7,688
     
19
     
31,703
     
386
     
39,391
     
405
 
Mortgage backed securities and collateralized mortgage obligations - commercial
   
5,623
     
23
     
4,685
     
23
     
10,308
     
46
 
                                                 
Total
 
$
63,592
     
120
     
223,769
     
1,309
     
287,361
     
1,429
 
                                  
(dollars in thousands)
December 31, 2015
 
 
Less than
12 months
 
12 months
or more
 
Total
 
   
Fair
Value
 
Gross
Unreal.
Loss
 
Fair
Value
 
Gross
Unreal.
Loss
 
Fair
Value
 
Gross
Unreal.
Loss
 
U.S. government sponsored enterprises
 
$
41,786
     
113
     
9,932
     
68
     
51,718
     
181
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
187,605
     
2,147
     
167,549
     
3,179
     
355,153
     
5,326
 
Small Business Administration-guaranteed participation securities
   
7,529
     
111
     
82,888
     
2,093
     
90,417
     
2,204
 
Mortgage backed securities and collateralized mortgage obligations - commercial
   
5,553
     
130
     
4,627
     
112
     
10,180
     
242
 
                                                 
Total
 
$
242,473
     
2,501
     
264,996
     
5,452
     
507,468
     
7,953
 

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 months ended March 31, 2016 and 2015 are as follows:

(dollars in thousands)
 
Three months ended March 31,
 
   
2016
   
2015
 
             
Proceeds from sales
 
$
-
     
22,945
 
Proceeds from calls
   
48,913
     
29,680
 
Gross realized gains
   
-
     
249
 
Gross realized losses
   
-
     
-
 
 
13

For the three months ended March 31, 2015, income tax expense recognized on net gains on sales of securities available for sale were approximately $100 thousand.

 (b) Held to maturity securities

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

(dollars in thousands)
 
March 31, 2016
 
   
Amortized
Cost
   
Gross
Unrecognized
Gains
   
Gross
Unrecognized
Losses
   
Fair
Value
 
                         
Mortgage backed securities and collateralized mortgage obligations - residential
 
$
43,595
     
2,542
     
-
     
46,137
 
Corporate bonds
   
9,979
     
592
     
-
     
10,571
 
Total held to maturity
 
$
53,574
     
3,134
     
-
     
56,708
 
 
(dollars in thousands)
 
December 31, 2015
 
   
Amortized
Cost
   
Gross
Unrecognized
Gains
   
Gross
Unrecognized
Losses
   
Fair
Value
 
                         
Mortgage backed securities and collateralized mortgage obligations - residential
 
$
46,490
     
2,308
     
-
     
48,798
 
Corporate bonds
   
9,975
     
666
     
-
     
10,641
 
Total held to maturity
 
$
56,465
     
2,974
     
-
     
59,439
 

The following table distributes the debt securities included in the held to maturity portfolio as of March 31, 2016, based on the securities’ contractual maturity.  Actual maturities may differ as a result of the right of certain issuers to call or prepay their obligations without penalty.  Securities not due at a single maturity date are shown separately.

(dollars in thousands)
 
Amortized
Cost
   
Fair
Value
 
Due in one year through five years
 
$
9,979
     
10,571
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
43,595
     
46,137
 
   
$
53,574
     
56,708
 

There were no held to maturity securities in an unrecognized loss position as of March 31, 2016 or December 31, 2015.

There were no sales or transfers of held to maturity securities during the three months ended March 31, 2016 and 2015.
 
14

(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. Investment securities classified as available for sale or held to maturity are generally evaluated for OTTI under ASC 320 “Investments – Debt and Equity Securities.”

In determining OTTI under the FASB ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether any other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

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

As of March 31, 2016, the Company’s security portfolio included certain securities which were in an unrealized loss position.  These securities are U.S. Government Agencies or issuances from U.S. Government sponsored entities.  The declines in fair value are 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 March 31, 2016.
 
15

(5) Loans and Allowance for Loan Losses

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

   
March 31, 2016
 
(dollars in thousands)
 
New York and
other states*
   
Florida
   
Total
 
Commercial:
                 
Commercial real estate
 
$
159,786
     
14,372
     
174,158
 
Other
   
24,521
     
86
     
24,607
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
2,094,665
     
581,220
     
2,675,885
 
Home equity loans
   
52,299
     
9,600
     
61,899
 
Home equity lines of credit
   
305,407
     
50,756
     
356,163
 
Installment
   
7,565
     
1,102
     
8,667
 
Total loans, net
 
$
2,644,243
     
657,136
     
3,301,379
 
Less: Allowance for loan losses
                   
44,398
 
Net loans
                 
$
3,256,981
 
 
   
December 31, 2015
 
(dollars in thousands)
 
New York and
other states*
   
Florida
   
Total
 
Commercial:
                 
Commercial real estate
 
$
160,965
     
14,908
     
175,873
 
Other
   
27,449
     
93
     
27,542
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
2,093,957
     
566,715
     
2,660,672
 
Home equity loans
   
52,251
     
8,250
     
60,501
 
Home equity lines of credit
   
308,165
     
51,160
     
359,325
 
Installment
   
8,000
     
1,391
     
9,391
 
Total loans, net
 
$
2,650,787
     
642,517
     
3,293,304
 
Less: Allowance for loan losses
                   
44,762
 
Net loans
                 
$
3,248,542
 

*Includes
New York, New Jersey, Vermont and Massachusetts

At March 31, 2016 and December 31, 2015, the Company had approximately $23.4 million and $26.6 million of real estate construction loans, respectively.  Of the $23.4 million in real estate construction loans at March 31, 2016, approximately $13.6 million are secured by first mortgages to residential borrowers while approximately $9.8 million were to commercial borrowers for residential construction projects. Of the $26.6 million in real estate construction loans at December 31, 2015, approximately $16.0 million are secured by first mortgages to residential borrowers while approximately $10.6 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.
 
16

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

   
March 31, 2016
 
(dollars in thousands)
 
New York and
other states
   
Florida
   
Total
 
Loans in non-accrual status:
                 
Commercial:
                 
Commercial real estate
 
$
2,762
     
-
     
2,762
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
21,781
     
1,503
     
23,284
 
Home equity loans
   
139
     
-
     
139
 
Home equity lines of credit
   
3,749
     
299
     
4,048
 
Installment
   
74
     
-
     
74
 
Total non-accrual loans
   
28,505
     
1,802
     
30,307
 
Restructured real estate mortgages - 1 to 4 family
   
47
     
-
     
47
 
Total nonperforming loans
 
$
28,552
     
1,802
     
30,354
 
 
   
December 31, 2015
 
(dollars in thousands)
 
New York and
other states
   
Florida
   
Total
 
Loans in non-accrual status:
                 
Commercial:
                 
Commercial real estate
 
$
3,024
     
-
     
3,024
 
Other
   
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
19,488
     
1,488
     
20,976
 
Home equity loans
   
212
     
-
     
212
 
Home equity lines of credit
   
3,573
     
329
     
3,902
 
Installment
   
90
     
8
     
98
 
Total non-accrual loans
   
26,387
     
1,825
     
28,212
 
Restructured real estate mortgages - 1 to 4 family
   
48
     
-
     
48
 
Total nonperforming loans
 
$
26,435
     
1,825
     
28,260
 

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 March 31, 2016 and December 31, 2015, other real estate owned included $4.9 million and $5.4 million, respectively, of residential foreclosed properties. In addition, non-accrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $14.9 million and $13.2 million as of March 31, 2016 and December 31, 2015, respectively.
 
17

The following tables present the aging of the recorded investment in past due loans by loan class and by region as of March 31, 2016 and December 31, 2015:
 
New York and other states:
   
March 31, 2016
 
(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
 
$
-
     
-
     
2,080
     
2,080
     
157,706
     
159,786
 
Other
   
-
     
-
     
-
     
-
     
24,521
     
24,521
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
2,454
     
1,441
     
13,882
     
17,777
     
2,076,888
     
2,094,665
 
Home equity loans
   
4
     
43
     
77
     
124
     
52,175
     
52,299
 
Home equity lines of credit
   
469
     
455
     
1,410
     
2,334
     
303,073
     
305,407
 
Installment
   
75
     
11
     
66
     
152
     
7,413
     
7,565
 
                                                 
Total
 
$
3,002
     
1,950
     
17,515
     
22,467
     
2,621,776
     
2,644,243
 
 
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
 
$
-
     
8
     
-
     
8
     
14,364
     
14,372
 
Other
   
-
     
-
     
-
     
-
     
86
     
86
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
209
     
432
     
791
     
1,432
     
579,788
     
581,220
 
Home equity loans
   
-
     
-
     
-
     
-
     
9,600
     
9,600
 
Home equity lines of credit
   
113
     
-
     
180
     
293
     
50,463
     
50,756
 
Installment
   
2
     
1
     
-
     
3
     
1,099
     
1,102
 
                                                 
Total
 
$
324
     
441
     
971
     
1,736
     
655,400
     
657,136
 
 
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
 
$
-
     
8
     
2,080
     
2,088
     
172,070
     
174,158
 
Other
   
-
     
-
     
-
     
-
     
24,607
     
24,607
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
2,663
     
1,873
     
14,673
     
19,209
     
2,656,676
     
2,675,885
 
Home equity loans
   
4
     
43
     
77
     
124
     
61,775
     
61,899
 
Home equity lines of credit
   
582
     
455
     
1,590
     
2,627
     
353,536
     
356,163
 
Installment
   
77
     
12
     
66
     
155
     
8,512
     
8,667
 
                                                 
Total
 
$
3,326
     
2,391
     
18,486
     
24,203
     
3,277,176
     
3,301,379
 
 
18

New York and other states:
   
December 31, 2015
 
(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
 
$
-
     
-
     
2,340
     
2,340
     
158,625
     
160,965
 
Other
   
-
     
-
     
-
     
-
     
27,449
     
27,449
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
4,321
     
2,037
     
12,529
     
18,887
     
2,075,070
     
2,093,957
 
Home equity loans
   
43
     
-
     
149
     
192
     
52,059
     
52,251
 
Home equity lines of credit
   
572
     
204
     
1,418
     
2,194
     
305,971
     
308,165
 
Installment
   
34
     
19
     
88
     
141
     
7,859
     
8,000
 
                                                 
Total
 
$
4,970
     
2,260
     
16,524
     
23,754
     
2,627,033
     
2,650,787
 
 
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
 
$
10
     
-
     
-
     
10
     
14,898
     
14,908
 
Other
   
-
     
-
     
-
     
-
     
93
     
93
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
665
     
271
     
851
     
1,787
     
564,928
     
566,715
 
Home equity loans
   
-
     
-
     
-
     
-
     
8,250
     
8,250
 
Home equity lines of credit
   
159
     
-
     
240
     
399
     
50,761
     
51,160
 
Installment
   
1
     
21
     
-
     
22
     
1,369
     
1,391
 
                                                 
Total
 
$
835
     
292
     
1,091
     
2,218
     
640,299
     
642,517
 
 
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
 
$
10
     
-
     
2,340
     
2,350
     
173,523
     
175,873
 
Other
   
-
     
-
     
-
     
-
     
27,542
     
27,542
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
4,986
     
2,308
     
13,380
     
20,674
     
2,639,998
     
2,660,672
 
Home equity loans
   
43
     
-
     
149
     
192
     
60,309
     
60,501
 
   Home equity lines of credit
   
731
     
204
     
1,658
     
2,593
     
356,732
     
359,325
 
Installment
   
35
     
40
     
88
     
163
     
9,228
     
9,391
 
                                                 
Total
 
$
5,805
     
2,552
     
17,615
     
25,972
     
3,267,332
     
3,293,304
 

At March 31, 2016 and December 31, 2015, 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.
 
19

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

(dollars in thousands)
 
For the three months ended March 31, 2016
 
   
Commercial
   
Real Estate
Mortgage-
1 to 4 Family
   
Installment
   
Total
 
Balance at beginning of period
 
$
4,491
     
39,753
     
518
     
44,762
 
Loans charged off:
                               
New York and other states*
   
264
     
889
     
81
     
1,234
 
Florida
   
-
     
84
     
16
     
100
 
Total loan chargeoffs
   
264
     
973
     
97
     
1,334
 
                                 
Recoveries of loans previously charged off:
                               
New York and other states*
   
40
     
118
     
11
     
169
 
Florida
   
-
     
1
     
-
     
1
 
Total recoveries
   
40
     
119
     
11
     
170
 
Net loans charged off
   
224
     
854
     
86
     
1,164
 
Provision for loan losses
   
652
     
118
     
30
     
800
 
Balance at end of period
 
$
4,919
     
39,017
     
462
     
44,398
 

(dollars in thousands)
 
For the three months ended March 31, 2015
 
   
Commercial
   
Real Estate
Mortgage-
1 to 4 Family
   
Installment
   
Total
 
Balance at beginning of period
 
$
4,071
     
42,088
     
168
     
46,327
 
Loans charged off:
                               
New York and other states*
   
50
     
1,114
     
43
     
1,207
 
Florida
   
-
     
109
     
-
     
109
 
Total loan chargeoffs
   
50
     
1,223
     
43
     
1,316
 
                                 
Recoveries of loans previously charged off:
                               
New York and other states*
   
16
     
110
     
6
     
132
 
Florida
   
1
     
-
     
-
     
1
 
Total recoveries
   
17
     
110
     
6
     
133
 
Net loans charged off
   
33
     
1,113
     
37
     
1,183
 
Provision (credit) for loan losses
   
(14
)
   
554
     
260
     
800
 
Balance at end of period
 
$
4,024
     
41,529
     
391
     
45,944
 

The Company has identified non-accrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring (“TDR”), as impaired loans. A loan is considered impaired when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured as a TDR.
 
20

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2016 and December 31, 2015:

   
March 31, 2016
 
(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
   
4,919
     
39,017
     
462
     
44,398
 
                                 
Total ending allowance balance
 
$
4,919
     
39,017
     
462
     
44,398
 
                                 
                                 
Loans:
                               
Individually evaluated for impairment
 
$
3,040
     
22,647
     
-
     
25,687
 
Collectively evaluated for impairment
   
195,725
     
3,071,300
     
8,667
     
3,275,692
 
                                 
Total ending loans balance
 
$
198,765
     
3,093,947
     
8,667
     
3,301,379
 

   
December 31, 2015
 
(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
   
4,491
     
39,753
     
518
     
44,762
 
                                 
Total ending allowance balance
 
$
4,491
     
39,753
     
518
     
44,762
 
                                 
Loans:
                               
Individually evaluated for impairment
 
$
3,306
     
22,575
     
-
     
25,881
 
Collectively evaluated for impairment
   
200,109
     
3,057,923
     
9,391
     
3,267,423
 
                                 
Total ending loans balance
 
$
203,415
     
3,080,498
     
9,391
     
3,293,304
 

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 March 31, 2016 and December 31, 2015 are measured at the present value of estimated future cash flows using the loan’s effective rate at inception or the fair value of the underlying collateral if the loan is considered collateral dependent.
 
21

The following tables present impaired loans by loan class as of March 31, 2016 and December 31, 2015:

New York and other states:
     
   
March 31, 2016
 
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
3,040
     
3,993
     
-
     
4,828
 
Other
   
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
17,529
     
18,573
     
-
     
17,553
 
Home equity loans
   
299
     
358
     
-
     
320
 
Home equity lines of credit
   
2,165
     
2,370
     
-
     
2,436
 
                                 
Total
 
$
23,033
     
25,294
     
-
     
25,137
 

Florida:
                       
                         
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
-
     
-
     
-
     
-
 
Other
   
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
1,993
     
2,105
     
-
     
1,872
 
Home equity loans
   
52
     
52
     
-
     
52
 
Home equity lines of credit
   
609
     
693
     
-
     
618
 
                                 
Total
 
$
2,654
     
2,850
     
-
     
2,542
 

Total:
     
       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
3,040
     
3,993
     
-
     
4,828
 
Other
   
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
19,522
     
20,678
     
-
     
19,425
 
Home equity loans
   
351
     
410
     
-
     
372
 
Home equity lines of credit
   
2,774
     
3,063
     
-
     
3,054
 
                                 
Total
 
$
25,687
     
28,144
     
-
     
27,679
 
 
22

New York and other states:
     
   
December 31, 2015
 
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
3,306
     
3,996
     
-
     
3,608
 
Other
   
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
17,460
     
18,602
     
-
     
18,127
 
Home equity loans
   
359
     
417
     
-
     
382
 
Home equity lines of credit
   
2,306
     
2,569
     
-
     
2,238
 
                                 
Total
 
$
23,431
     
25,584
     
-
     
24,355
 

Florida:
     
       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
-
     
-
     
-
     
-
 
Other
   
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
1,760
     
1,852
     
-
     
1,489
 
Home equity loans
   
53
     
53
     
-
     
54
 
Home equity lines of credit
   
637
     
720
     
-
     
654
 
                                 
Total
 
$
2,450
     
2,625
     
-
     
2,197
 

Total:
     
       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
3,306
     
3,996
     
-
     
3,608
 
Other
   
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
19,220
     
20,454
     
-
     
19,616
 
Home equity loans
   
412
     
470
     
-
     
436
 
Home equity lines of credit
   
2,943
     
3,289
     
-
     
2,892
 
                                 
Total
 
$
25,881
     
28,209
     
-
     
26,552
 

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 months ended March 31, 2016 and 2015.
 
23

As of March 31, 2016 and December 31, 2015 impaired loans included approximately $10.0 million and $10.6 million of 1 to 4 family residential real estate loans in accruing status that were identified as TDR’s in accordance with regulatory guidance related to Chapter 7 bankruptcy loans.

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 March 31, 2016 and December 31, 2015, based upon management’s evaluation and due to the sufficiency of chargeoffs taken, none of the allowance for loan losses has been allocated to a specific impaired loan(s).

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

   
Three months ended 3/31/2016
   
Three months ended 3/31/2015
 
New York and other states*:
       
Pre-Modification
   
Post-Modification
         
Pre-Modification
   
Post-Modification
 
(dollars in thousands)
 
Number of
Contracts
   
Outstanding
Recorded
Investment
   
Outstanding
Recorded
Investment
   
Number of
Contracts
   
Outstanding
Recorded
Investment
   
Outstanding
Recorded
Investment
 
                                     
Real estate mortgage - 1 to 4 family:
                                   
First mortgages
   
12
   
$
1,270
   
$
1,270
     
11
   
$
2,240
   
$
2,240
 
Home equity loans
   
-
     
-
     
-
     
1
     
10
     
10
 
Home equity lines of credit
   
4
     
103
     
103
     
1
     
50
     
50
 
                                                 
Total
   
16
   
$
1,373
   
$
1,373
     
13
   
$
2,300
   
$
2,300
 

Florida:
       
Pre-Modification
   
Post-Modification
         
Pre-Modification
   
Post-Modification
 
(dollars in thousands)
 
Number of
Contracts
   
Outstanding
Recorded
Investment
   
Outstanding
Recorded
Investment
   
Number of
Contracts
   
Outstanding
Recorded
Investment
   
Outstanding
Recorded
Investment
 
                                     
Real estate mortgage - 1 to 4 family:
                                   
First mortgages
   
2
   
$
245
   
$
245
     
1
   
$
157
   
$
157
 
Home equity lines of credit
   
-
     
-
     
-
     
2
     
50
     
50
 
                                                 
Total
   
2
   
$
245
   
$
245
     
3
   
$
207
   
$
207
 

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.
 
24

The following table presents, by class, TDR’s that defaulted during the three months ended March 31, 2016 and 2015 which had been modified within the last twelve months:

   
Three months ended 3/31/2016
   
Three months ended 3/31/2015
 
New York and other states*:
(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
   
2
   
$
101
     
-
   
$
-
 
Home equity lines of credit
   
1
     
48
     
-
     
-
 
                                 
Total
   
3
   
$
149
     
-
   
$
-
 

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 lines of credit
   
-
   
$
-
     
1
   
$
50
 
                                 
Total
   
-
   
$
-
     
1
   
$
50
 

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

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

The Company uses the following definitions for classified loans:

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “pass” rated loans.
 
25

As of March 31, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

   
March 31, 2016
 
New York and other states:
                 
                   
(dollars in thousands)
                 
   
Pass
   
Classified
   
Total
 
Commercial:
                 
Commercial real estate
 
$
145,254
     
14,532
     
159,786
 
Other
   
23,791
     
730
     
24,521
 
                         
   
$
169,045
     
15,262
     
184,307
 

Florida:
                 
                   
(dollars in thousands)
                 
   
Pass
   
Classified
   
Total
 
Commercial:
                 
Commercial real estate
 
$
14,372
     
-
     
14,372
 
Other
   
86
     
-
     
86
 
                         
   
$
14,458
     
-
     
14,458
 
 
Total:
                       
                         
(dollars in thousands)
                       
   
Pass
   
Classified
   
Total
 
Commercial:
                       
Commercial real estate
 
$
159,626
     
14,532
     
174,158
 
Other
   
23,877
     
730
     
24,607
 
                         
   
$
183,503
     
15,262
     
198,765
 

   
December 31, 2015
 
New York and other states:
                 
                   
(dollars in thousands)
                 
   
Pass
   
Classified
   
Total
 
Commercial:
                 
Commercial real estate
 
$
145,335
     
15,630
     
160,965
 
Other
   
26,715
     
734
     
27,449
 
                         
   
$
172,050
     
16,364
     
188,414
 

Florida:
                 
                   
(dollars in thousands)
                 
   
Pass
   
Classified
   
Total
 
Commercial:
                 
Commercial real estate
 
$
14,908
     
-
     
14,908
 
Other
   
93
     
-
     
93
 
                         
   
$
15,001
     
-
     
15,001
 

Total:
                 
                   
(dollars in thousands)
                 
   
Pass
   
Classified
   
Total
 
Commercial:
                 
Commercial real estate
 
$
160,243
     
15,630
     
175,873
 
Other
   
26,808
     
734
     
27,542
 
                         
   
$
187,051
     
16,364
     
203,415
 
 
26

Included in classified loans in the above tables are impaired loans of $2.8 million and $3.0 million at March 31, 2016 and December 31, 2015, respectively.

For homogeneous loan pools, such as residential mortgages, home equity lines of credit, and installment loans, the Company uses payment status to identify the credit risk in these loan portfolios. Payment status is reviewed on a daily basis by the Company’s collection area and on a monthly basis with respect to determining the adequacy of the allowance for loan losses. The payment status of these homogeneous pools as of March 31, 2016 and December 31, 2015 is included in the aging of the recorded investment of past due loans table. In addition, the total nonperforming portion of these homogeneous loan pools as of March 31, 2016 and December 31, 2015 is presented in the non-accrual loans table.

(6) Fair Value of Financial Instruments

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 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. Also classified as available for sale securities, the fair value of equity securities is determined by quoted market prices and these are designated as Level 1. 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.
 
27

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.

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
March 31, 2016 Using:
 
                         
   
Carrying
Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
(dollars in thousands)
                       
Securities available for sale:
                       
U.S. government sponsored enterprises
 
$
66,920
   
$
-
   
$
66,920
   
$
-
 
State and political subdivisions
   
974
     
-
     
974
     
-
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
422,189
     
-
     
422,189
     
-
 
Small Business Administration-guaranteed participation securities
   
89,053
     
-
     
89,053
     
-
 
Mortgage backed securities and collateralized mortgage obligations - commercial
   
10,307
     
-
     
10,307
     
-
 
Other securities
   
685
     
35
     
650
     
-
 
Total securities available for sale
 
$
590,128
   
$
35
   
$
590,093
   
$
-
 
 
28

   
Fair Value Measurements at
December 31, 2015 Using:
 
                         
   
Carrying
Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
(dollars in thousands)
                       
Securities available for sale:
                       
U.S. government sponsored enterprises
 
$
86,737
   
$
-
   
$
86,737
   
$
-
 
State and political subdivisions
   
1,290
     
-
     
1,290
     
-
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
411,729
     
-
     
411,729
     
-
 
Small Business Administration-guaranteed participation securities
   
90,416
     
-
     
90,416
     
-
 
Mortgage backed securities and collateralized mortgage obligations - commercial
   
10,180
     
-
     
10,180
     
-
 
Other securities
   
685
     
35
     
650
     
-
 
Total securities available for sale
 
$
601,037
   
$
35
   
$
601,002
   
$
-
 

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2016 and 2015.
 
29

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

   
Fair Value Measurements at
March 31, 2016 Using:
 
                         
   
Carrying
Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
(dollars in thousands)
                       
                         
Other real estate owned
 
$
5,684
   
$
-
   
$
-
   
$
5,684
 
Impaired loans:                                
Commercial real estate
   
921
     
-
     
-
     
921
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
2,029
     
-
     
-
     
2,029
 
Home Equity Loans
   
53
     
-
     
-
     
53
 
Home equity lines of credit
   
401
     
-
     
-
     
401
 

   
Fair Value Measurements at
December 31, 2015 Using:
 
                         
   
Carrying
Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
(dollars in thousands)
                       
                         
Other real estate owned  $ 6,455    
$
-    
$
-      $ 6,455  
Impaired loans:
                               
Commercial real estate
   
878
     
-
     
-
     
878
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
2,601
     
-
     
-
     
2,601
 
Home Equity Loans
   
53
     
-
     
-
     
53
 
Home equity lines of credit
   
455
     
-
     
-
     
455
 

Other real estate owned, which is carried at fair value less costs to sell, approximated $5.7 million at March 31, 2016 and consisted of $775 thousand of commercial real estate and $4.9 million of residential real estate properties. Valuation charges of $346 thousand are included in earnings for the three months ended March 31, 2016.

Of the total impaired loans of $25.7 million at March 31, 2016, $3.0 million are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of chargeoffs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at March 31, 2016.  Gross chargeoffs related to commercial impaired loans included in the table above were $264 thousand for the three months ended March 31, 2016, while gross chargeoffs related to residential impaired loans included in the table above amounted to $666 thousand for the three months ended March 31, 2016.

Other real estate owned, which is carried at fair value less costs to sell, approximates $6.4 million at December 31, 2015 and consisted of $1.0 million of commercial real estate and $5.4 million of residential real estate properties. A valuation charge of $1.1 million is included in earnings for the year ended December 31, 2015.
 
30

Of the total impaired loans of $25.9 million at December 31, 2015, $4.0 million are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of chargeoffs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at December 31, 2015. Gross chargeoffs related to commercial impaired loans included in the table above were $641 thousand for the year ended December 31, 2015, while gross chargeoffs related to residential impaired loans included in the table above amounted to $648 thousand.

In accordance with ASC 825, the carrying amounts and estimated fair values of financial instruments, at March 31, 2016 and December 31, 2015 are as follows:

(dollars in thousands)  
Carrying
   
Fair Value Measurements at
March 31, 2016 Using:
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                             
Cash and cash equivalents
 
$
760,178
     
760,178
     
-
     
-
     
760,178
 
Securities available for sale
   
590,128
     
35
     
590,093
     
-
     
590,128
 
Held to maturity securities
   
53,574
     
-
     
56,708
     
-
     
56,708
 
Federal Reserve Bank and Federal Home Loan Bank stock
   
9,480
     
N/A
 
   
N/A
 
   
N/A
 
   
N/A
 
Net loans
   
3,256,981
     
-
     
-
     
3,318,262
     
3,318,262
 
Accrued interest receivable
   
9,925
     
19
     
2,135
     
7,771
     
9,925
 
Financial liabilities:
                                       
Demand deposits
   
359,060
     
359,060
     
-
     
-
     
359,060
 
Interest bearing deposits
   
3,783,428
     
2,614,541
     
1,170,835
     
-
     
3,785,376
 
Short-term borrowings
   
169,528
     
-
     
169,528
     
-
     
169,528
 
Accrued interest payable
   
549
     
86
     
463
     
-
     
549
 

(dollars in thousands)  
Carrying
   
Fair Value Measurements at
December 31, 2015 Using:
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                             
Cash and cash equivalents
 
$
718,156
     
718,156
     
-
     
-
     
718,156
 
Securities available for sale
   
601,037
     
35
     
601,002
     
-
     
601,037
 
Held to maturity securities
   
56,465
     
-
     
59,439
     
-
     
59,439
 
Federal Reserve Bank and Federal Home Loan Bank stock
   
9,480
     
N/A
 
   
N/A
 
   
N/A
 
   
N/A
 
Net loans
   
3,248,542
     
-
     
-
     
3,279,167
     
3,279,167
 
Accrued interest receivable
   
10,262
     
80
     
2,370
     
7,812
     
10,262
 
Financial liabilities:
                                       
Demand deposits
   
365,081
     
365,081
     
-
     
-
     
365,081
 
Interest bearing deposits
   
3,735,297
     
2,627,367
     
1,111,240
     
-
     
3,738,607
 
Short-term borrowings
   
191,226
     
-
     
191,226
     
-
     
191,226
 
Accrued interest payable
   
501
     
74
     
427
     
-
     
501
 

The specific estimation methods and assumptions used can have a substantial impact on the resulting fair values of financial instruments. The following is a brief summary of the significant methods and assumptions used in estimating fair values:

Cash and Cash Equivalents

The carrying values of these financial instruments approximate fair values and are classified as Level 1.
 
31

Federal Reserve Bank and Federal Home Loan Bank stock

It is not practical to determine the fair value of Federal Reserve Bank and Federal Home Loan Bank stock due to their restrictive nature.

Securities Held to Maturity

Similar to securities available for sale described previously, the fair value of securities held to maturity are 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 2 classification of the inputs for determining fair value. Interest and dividend income is recorded on the accrual method and 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.

Loans

The fair values of all loans are estimated using discounted cash flow analyses with discount rates equal to the interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposit Liabilities

The fair values disclosed for noninterest bearing demand deposits, interest bearing checking accounts, savings accounts, and money market accounts are, by definition, equal to the amount payable on demand at the balance sheet date resulting in a Level 1 classification. The carrying value of all variable rate certificates of deposit approximates fair value resulting in a Level 2 classification. The fair value of fixed rate certificates of deposit is estimated using discounted cash flow analyses with discount rates equal to the interest rates currently being offered on certificates of similar size and remaining maturity resulting in a Level 2 classification.

Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification consistent with the asset or liability that they are associated with.

Short-Term Borrowings and Other Financial Instruments

The fair value of all short-term borrowings, and other financial instruments approximates the carrying value resulting in a Level 2 classification.

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk. Such financial instruments consist of commitments to extend financing and standby letters of credit. If the commitments are exercised by the prospective borrowers, these financial instruments will become interest earning assets of the Company. If the commitments expire, the Company retains any fees paid by the prospective borrower. The fair value of commitments is estimated based upon fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the present creditworthiness of the borrower. For fixed rate commitments, the fair value estimation takes into consideration an interest rate risk factor. The fair value of these off-balance sheet items approximates the recorded amounts of the related fees, which are considered to be immaterial.
 
32

The Company does not engage in activities involving interest rate swaps, forward placement contracts, or any other instruments commonly referred to as derivatives.

(7) Accumulated Other Comprehensive (Loss) Income

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

   
Three months ended 3/31/16
 
(dollars in thousands)
 
Balance at
12/31/2015
   
Other
Comprehensive
Income (loss)-
Before
Reclassifications
   
Amount
reclassified
from Accumulated
Other Comprehensive
Income
   
Other
Comprehensive
Income (loss)-
Three months
ended 3/31/16
   
Balance at
3/31/2016
 
                               
                               
Net unrealized holding gain (loss) on securities available for sale, net of tax
 
$
(4,492
)
   
4,821
     
-
     
4,821
     
329
 
Net change in net actuarial loss and prior service credit on pension and postretirement benefit plans, net of tax
   
(289
)
   
-
     
33
     
33
     
(256
)
                                         
Accumulated other comprehensive income (loss), net of tax
   
(4,781
)
   
4,821
     
33
     
4,854
     
73
 

   
Three months ended 3/31/15
 
(dollars in thousands)
 
Balance at
12/31/2014
   
Other
Comprehensive
Income (loss)-
Before
Reclassifications
   
Amount
reclassified
from Accumulated
Other Comprehensive
Income
   
Other
Comprehensive
Income (loss)-
Three months
ended 3/31/15
   
Balance at
3/31/2015
 
                               
                               
Net unrealized holding gain (loss) on securities available for sale, net of tax
 
$
(3,693
)
   
1,987
     
(149
)
   
1,838
     
(1,855
)
Net change in net actuarial loss and prior service credit on pension and postretirement benefit plans, net of tax
   
(816
)
   
-
     
(16
)
   
(16
)
   
(832
)
                                         
Accumulated other comprehensive income (loss), net of tax
   
(4,509
)
   
1,987
     
(165
)
   
1,822
     
(2,687
)

The following represents the reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2016 and 2015:

   
Three months ended
   
(dollars in thousands)
 
March 31,
   
   
2016
   
2015
 
Affected Line Item in Statements
Unrealized gains (losses) on securities available for sale
               
                  
Realized gain on securities transactions
 
$
-
     
249
 
Net gain on securities transactions
Income tax expense
   
-
     
(100
)
Income taxes
Net of tax
   
-
     
149
   
                      
Amortization of pension and postretirement benefit items
                   
                      
Amortization of net actuarial loss
   
33
     
5
 
Salaries and employee benefits
Amortization of prior service credit
   
23
     
22
 
Salaries and employee benefits
Income tax benefit
   
(23
)
   
(11
)
Income taxes
Net of tax
   
33
     
16
   
                      
Total reclassifications, net of tax
 
$
33
     
165
   
 
33

(8) Agreement with the Office of the Comptroller of the Currency

On July 21, 2015 Trustco Bank (the “Bank”), the Company’s wholly owned subsidiary, entered into a formal agreement (the “Formal Agreement”) with the Comptroller of the Currency of the United States (the “OCC”).

The Formal Agreement relates to the findings of the OCC following an examination of the Bank. Since the completion of the examination, the Bank believes it has been working diligently to address the findings of the examination and to develop and implement appropriate formal action plans.

The Formal Agreement requires the Bank to take various actions, within prescribed time frames, with respect to certain areas of the Bank. These include, among others, (i) establishment of a committee of at least three Directors to monitor and coordinate the Bank’s response to the Formal Agreement; (ii) adoption of compliance plans to respond to the Formal Agreement with the assistance of an independent qualified consultant; (iii) evaluation and implementation of improvements in corporate governance with the assistance of an independent qualified consultant; (iv) evaluation and implementation of improvements in internal audit; (v) development of a strategic plan; (vi) development of a revised capital plan consistent with the strategic plan; (vii) development and implementation of improvements to the Bank’s loan review system; and (viii) such other necessary steps to address the issues and questions noted by the OCC in the Formal Agreement.

 (9) New Accounting Pronouncements

Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In July 2015, FASB deferred the effective date of the ASU by one year which means ASU 2014-09 will be effective for the Company on January 1, 2018.  In March 2016, FASB issued ASU 2016-08 which amended illustrative examples to clarify how to apply the implementation guidance on principal versus agent considerations. The Company is currently evaluating the potential impact of ASU 2014-09, and subsequent amendments, on its consolidated financial statements.

In January 2016, the FASB amended existing guidance to improve accounting standards for financial instruments including clarification and simplification of accounting and disclosure requirements and the requirement for public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company is evaluating the impact of these amendments on its consolidated financial statements.

In February 2016, the FASB amended existing guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company is evaluating the impact of these amendments on its consolidated financial statements.

In March 2016, the FASB amended existing guidance to simplify aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company is evaluating the impact of these amendments on its consolidated financial statements.
 
34

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
TrustCo Bank Corp NY
Glenville, New York

We have reviewed the accompanying consolidated statements of financial condition of TrustCo Bank Corp NY as of March 31, 2016, the related consolidated statements of income, comprehensive income, and the related changes in shareholders’ equity and cash flows for the three-month period ended March 31, 2016 and 2015. These interim financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

Crowe Horwath LLP

New York, New York
May 6, 2016
 
35

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 Bank Corp NY (“TrustCo” or the “Company”) with the Securities and Exchange Commission, in TrustCo’s press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. 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.  Examples of forward-looking statements include, among others, statements TrustCo makes regarding its expectations for complying with the new regulatory capital rules, costs associated with the Formal Agreement that the Company’s subsidiary, Trustco Bank (or the “Bank”) has entered into with the Office of the Comptroller of the Currency (“OCC”), the Company’s ability to grow its balance sheet and the profitability of such growth, the ability of its loan products to continue to attract customers if long-term rates rise and the ability to secure new sources of liquidity should the need arise.  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, 2015, the following important factors, among others, in some cases have affected and in the future could affect TrustCo’s actual results, and could cause TrustCo’s actual financial performance to differ materially from that expressed in any forward-looking statement:

· TrustCo’s ability to continue to originate a significant volume of one- to- four family mortgage loans in its market areas and to otherwise maintain or increase its market share in the areas in which it operates;
· TrustCo’s ability to continue to maintain noninterest expense and other overhead costs at reasonable levels relative to income;
· TrustCo’s ability to comply with the Formal Agreement entered into with Trustco Bank’s regulator, the OCC, and potential regulatory actions if TrustCo or Trustco Bank fails to comply;
· 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;
· the future earnings and capital levels of TrustCo and Trustco Bank and the continued receipt of approvals from TrustCo’s and Trustco Bank’s primary federal banking regulators under regulatory rules and the Formal Agreement to distribute capital from Trustco Bank to TrustCo, which could affect the ability of TrustCo to pay;
· 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 chargeoffs, changes in property values, and changes in estimates of the adequacy of the allowance for loan and lease losses;
 
36

· 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;
· 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 new regulatory capital requirements that took effect for 2015;
· the results of 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;
· 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;
· technological changes and electronic, cyber and physical security breaches;
· changes in local market areas and general business and economic trends, as well as changes in consumer spending and saving habits;
· 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, 2015.

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 periods ended March 31, 2016 and 2015.

Introduction
The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three month period ended March 31, 2016, with comparisons to the corresponding period in 2015, 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 2015 Annual Report to Shareholders on Form 10-K, which was filed with the SEC on March 4, 2016, 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.
 
37

Equity markets ended the first quarter up modestly, after suffering a meaningful correction earlier in the quarter.  Overall volatility was relatively high.  For the full first quarter, the S&P 500 Index was up 0.8% and the Dow Jones Industrial Average was up 1.5%.  Credit markets continue to be driven by worldwide economic news and decreasing liquidity in some segments of the bond market.  The shape of the curve continued to flatten during the quarter.  The 10 year Treasury bond averaged 1.92% during Q1 compared to 2.19% in Q4, a decrease of 27 basis points.  However, the 2 year Treasury bond average rate remained flat at 0.84%, resulting in the flattening of the curve.  The spread between the 10 year and the 2 year Treasury bonds decreased from 1.35% on average in Q4 to 1.08% in Q1.  This spread has declined in seven of the last eight quarters, and is less than half the 2.42% level averaged at its most recent peak in Q4 of 2013.  Steeper yield curves are 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 Fed Funds range remained unchanged at 0.25% to 0.50% during the first quarter of 2016, unchanged since the 25 basis point increase in the fourth quarter of 2015.  Spreads of most asset classes, including agency securities and mortgage-backed securities, declined slightly compared to recent quarters.  Changes in rates and spreads during the current quarter were due to a number of factors; however, uncertainty about the timing of any actions that the Federal Reserve Board (“FRB”) would take in regard to the extraordinary accommodations that have influenced markets in recent years and further uncertainty regarding the economy and related issues were key factors.  Low risk free rates in major nations have also caused investors to shift into alternative fixed income instruments, contributing to the compression of spreads over the risk free rate.
 
38

       
3 Month
Yield (%)
   
2 Year
Yield (%)
   
5 Year
Yield (%)
   
10 Year
Yield (%)
   
10-2 Year
Spread (%)
 
Q1/15      
Beg of Q1
   
0.02
     
0.66
     
1.61
     
2.12
     
1.46
 
Peak
   
0.05
     
0.73
     
1.70
     
2.24
     
1.51
 
Trough
   
0.01
     
0.44
     
1.18
     
1.68
     
1.19
 
End of Q1
   
0.03
     
0.56
     
1.37
     
1.94
     
1.38
 
Average in Q1
   
0.02
     
0.60
     
1.46
     
1.97
     
1.36
 
                                             
Q2/15      
Beg of Q2
   
0.03
     
0.55
     
1.32
     
1.87
     
1.32
 
Peak
   
0.03
     
0.75
     
1.80
     
2.50
     
1.77
 
Trough
   
0.01
     
0.49
     
1.26
     
1.85
     
1.32
 
End of Q2
   
0.01
     
0.64
     
1.63
     
2.35
     
1.71
 
Average in Q2
   
0.02
     
0.61
     
1.53
     
2.16
     
1.55
 
                                             
Q3/15      
Beg of Q3
   
0.01
     
0.69
     
1.70
     
2.43
     
1.74
 
Peak
   
0.12
     
0.82
     
1.72
     
2.44
     
1.77
 
Trough
   
0.00
     
0.55
     
1.37
     
2.01
     
1.40
 
End of Q3
   
0.00
     
0.64
     
1.37
     
2.06
     
1.42
 
Average in Q3
   
0.04
     
0.69
     
1.56
     
2.22
     
1.53
 
                                             
Q4/15      
Beg of Q4
   
0.00
     
0.64
     
1.37
     
2.05
     
1.41
 
Peak
   
0.29
     
1.09
     
1.81
     
2.36
     
1.47
 
Trough
   
0.00
     
0.57
     
1.29
     
1.99
     
1.19
 
End of Q4
   
0.16
     
1.06
     
1.76
     
2.27
     
1.21
 
Average in Q4
   
0.13
     
0.84
     
1.59
     
2.19
     
1.35
 
                                             
Q1/16      
Beg of Q1
   
0.16
     
1.06
     
1.76
     
2.27
     
1.21
 
Peak
   
0.36
     
1.06
     
1.76
     
2.27
     
1.23
 
Trough
   
0.16
     
0.64
     
1.11
     
1.63
     
0.95
 
End of Q1
   
0.21
     
0.73
     
1.21
     
1.78
     
1.05
 
Average in Q1
   
0.29
     
0.84
     
1.37
     
1.92
     
1.08
 
 
Despite some modest improvements in parts of the economy, the underlying economy of the United States continued to face significant challenges. Employment metrics were somewhat more positive than negative, but were not particularly robust. Economic conditions vary significantly over geographic areas, with strength concentrated in and around major population centers on the coasts and in certain areas where economic activity has been driven by specific regional factors.  The unprecedented intervention by governments in markets and attempts to stimulate the economy, including the sharp easing of monetary policy during 2007-2008 are now in the early stages of being stabilized, and will eventually be reversed. Economic activity in Europe, China and elsewhere has also been mixed at best, contributing to global economic issues and leading to additional government stimulation efforts in those areas.  Finally, regulatory changes that have been enacted are expected to continue to impact the banking industry going forward. These regulatory changes have added significant operating expense and operational burden and fundamentally changed the way banks conduct business.

TrustCo believes that its long-term focus on traditional banking services and practices has enabled the Company to avoid significant impact from asset quality problems and that the Company’s strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with its past practice.  TrustCo has not engaged in the types of high risk loans and investments that have led to the widely reported problems in the industry.  Nevertheless, the Company may experience increases in nonperforming loans (“NPLs”) relative to historical levels from time to time.   While the Company does not expect to see a significant change in the inherent risk of loss in its loan portfolio at March 31, 2016, should general housing prices and other economic measures, such as unemployment in the Company’s market areas, deteriorate, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans.
 
39

Overview
TrustCo recorded net income of $10.4 million, or $0.109 of diluted earnings per share for the three months ended March 31, 2016, compared to net income of $10.7 million or $0.113 of diluted earnings per share in the same period in 2015.  Return on average assets was 0.89% and 0.93%, respectively, for the three months ended March 31, 2016 and 2015.  Return on average equity was 9.98% and 10.91%, respectively, for the three months ended March 31, 2016 and 2015.

The primary factors accounting for the change in net income for three months ended March 31, 2016 compared to the same periods of the prior year were:

· An increase in the average balance of interest earning assets of $48.1 million to $4.63 billion for the first quarter of 2016 compared to the same period in 2015.

· A decrease in the average balance of interest bearing liabilities of $6.2 million to $3.91 billion for the first quarter of 2016 compared to the same period in 2015.

· An increase in taxable equivalent net interest margin for the first quarter of 2016 to 3.13% from 3.08% in the prior year period.  The increase in the margin coupled with the increase in average earning assets, resulted in an increase of $1.01 million in taxable equivalent net interest income in the first quarter of 2016 compared to the first quarter of 2015.

· An increase of $1.6 million in noninterest expense, including net other real estate (“ORE”) expense, for the first quarter of 2016 compared to the first quarter of 2015.

· A decrease of $310 thousand in income taxes, in the first quarter of 2016 compared to the prior year due to lower pre-tax earnings.

Regulatory Agreement
On July 21, 2015 Trustco Bank, the wholly owned subsidiary of the Company, entered into a formal agreement with the OCC.

The Formal Agreement relates to the findings of the OCC following its regularly scheduled examination of the Bank in January 2015.  Since the completion of the examination, the Bank believes it has been working diligently to address the findings of the examination and to develop and implement appropriate formal action plans.
 
40

The Formal Agreement requires the Bank to take various actions, within prescribed time frames, with respect to certain areas of the Bank.  These include, among others, (i) establishment of a committee of at least three Directors to monitor and coordinate the Bank’s response to the Formal Agreement; (ii) adoption of compliance plans to respond to the Formal Agreement with the assistance of an independent qualified consultant; (iii) evaluation and implementation of improvements in corporate governance with the assistance of an independent qualified consultant; (iv) evaluation and implementation of improvements in internal audit; (v) development of a strategic plan; (vi) development of a revised capital plan, including dividends, consistent with the strategic plan; (vii) development and implementation of improvements to the Bank’s loan review system; and (viii) such other necessary steps to address the issues and questions noted by the OCC in the Formal Agreement.  The Company expects the cost to comply with the agreement to be approximately $5.0 million annually.

Asset/Liability Management
The Company strives to generate its earnings capabilities through a mix of core deposits funding a prudent mix of earning assets.  Additionally, TrustCo attempts to maintain adequate liquidity and reduce the sensitivity of net interest income to changes in interest rates to an acceptable level while enhancing profitability both on a short-term and long-term basis.

TrustCo’s results are affected by a variety of factors including competitive and economic conditions in the specific markets in which the Company operates, and more generally in 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, 2015 is a description of the effect interest rates had on the results for the year 2015 compared to 2014.  Many of the same market factors discussed in the 2015 Annual Report continued to have a significant impact on results through the first quarter of 2016.

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 implement national economic policy is the Federal Funds rate. This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating. The Federal Funds target rate decreased from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008. In December 2015, the target range increased to 0.50%.  FRB officials have not been completely consistent or clear in regard to expectations for the future and have generally stressed the need to be accommodative given economic conditions, but have noted that conditions may be in place to raise the target rate later this year.

Traditionally, interest rates on bank deposit accounts are heavily influenced by the Federal Funds rate.  The average rate on interest bearing deposits was 3 basis points lower in the first quarter of 2016 relative to the prior year period.  Relative to the year ago period, lower rates on money market and savings deposits and flat rates on interest-bearing checking and time deposits accounted for the overall reduction in the cost of interest bearing deposits.  Please refer to the statistical disclosures in the table below entitled “Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential.”
 
41

The interest rate on the 10 year Treasury bond and other long-term interest rates have significant influence on the rates for new residential real estate loans. The FRB has attempted to influence rates on mortgage loans by means other than targeting a lower Federal Funds rate, including direct intervention in the mortgage-backed securities market through purchasing these securities in an attempt to raise prices and reduce yields.  In recent periods this includes the reinvestment of principal payments received on its holdings of agency securities, agency mortgage-backed securities and Treasury securities. While no longer increasing its holdings of these securities, the reinvestment of principal means that the existing holdings are not being unwound.  Eventually, management believes, the FRB will have to unwind these positions, which would likely put upward pressure on rates, although other factors may mitigate this pressure.  These changes in interest rates can have an effect on the Company relative to the interest income on loans, securities and Federal Funds sold and other short term instruments, as well as on interest expense on deposits and borrowings.

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. As noted previously, the 10 year Treasury yield was up somewhat, on average, during the first quarter of 2016 compared to the first quarter of 2015, but the yield remains at relatively lower levels compared to historical yields.

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.  As a portfolio lender, TrustCo does not sell loans into the secondary market in the normal course of business, and is able to establish rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates.  Financial market volatility and the problems faced by the financial services industry have lessened the influence of the secondary market; however, various programs initiated by arms of the federal government have had an impact on rate levels for certain products.  Most importantly, a government goal of keeping mortgage rates low has been supported by targeted buying of certain securities, thus supporting prices and constraining yields, as noted above.  The futures of Freddie Mac and Fannie Mae remain uncertain as Congress debates the structure of both entities.

The Federal Funds sold and other short term investments portfolios are affected primarily by changes in the Federal Funds target rate. Also, changes in interest rates have an effect on the recorded balance of the securities available for sale portfolio, which is recorded at fair value. Generally, as interest rates increase the fair value of these securities will decrease.

Interest rates generally remained below historic norms on both short term and longer term investments during the first quarter of 2016.
 
42

While TrustCo has been affected by aspects of the overall changes in financial markets, it was not affected to the degree the mortgage crisis affected some banks and financial institutions in the United States beginning in 2007.  Generally, the crisis revolved around actual and future levels of delinquencies and defaults on mortgage loans, in many cases arising, in management’s view, from lenders with overly liberal underwriting standards, changes in the types of mortgage loans offered, significant upward resets on adjustable rate loans and fraud, among other factors.  The Company utilizes a traditional underwriting process in evaluating loan applications, and since originated loans are retained in the portfolio, there is a strong incentive to be conservative in making credit decisions.  For additional information concerning TrustCo’s loan portfolio and nonperforming loans, please refer to the discussions under “Loans” and “Nonperforming Assets,” respectively.  Further, the Company does not rely on borrowed funds to support its assets and maintains a significant level of liquidity on the asset side of the balance sheet.  These characteristics provide the Company with increased flexibility and stability during periods of market disruption and interest rate volatility.

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

For the first quarter of 2016, the net interest margin was 3.13%, up 5 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 $22.3 million while the average yield was 50 basis points in the first quarter of 2016 compared to 25 basis points in the same period in 2015.  The increase in the average balance reflects the decision to temporarily limit purchases of additional investment securities to make funds available for lending given the relative attractiveness of yields on loans versus securities.

The average balance of securities available for sale decreased by $82.5 million while the average yield increased to 1.97% for the first quarter of 2016 compared to 1.91% for the same period in 2015.  The average balance of held to maturity securities decreased by $14.2 million and the average yield increased to 4.03% for the first quarter of 2016 compared to 3.65% for the same period in 2015.

The average loan portfolio grew by $122.3 million to $3.30 billion and the average yield decreased 9 basis points to 4.33% in the first quarter of 2016 compared to the same period in 2015.  The decline in the average yield primarily reflects the decline in market interest rates on new loan originations as older, higher rate loans pay down or are paid off.
 
The average balance of interest bearing liabilities (primarily deposit accounts) decreased $6.2 million and the average rate paid decreased 3 basis points to 0.40% in the first quarter of 2016 compared to the same period in 2015.
43

During the first quarter of 2016, 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 continues to be to attract and retain deposit customers to the Company based upon a combination of service, convenience and interest rate.

Earning Assets
Total average interest earning assets increased from $4.58 billion in the first quarter of 2015 to $4.63 billion in the same period of 2016 with an average yield of 3.45% in 2015 and 3.47% in 2016.  Interest income on average earning assets increased from $39.3 million in the first quarter of 2015 to $40.0 million in the first quarter of 2016, on a tax equivalent basis. The increase was the result of higher volume combining with a slightly higher yield.

Loans
The average balance of loans was $3.30 billion in the first quarter of 2016 and $3.17 billion in the comparable period in 2015.  The yield on loans decreased 9 basis points to 4.33%.  The higher average balances more than offset the lower yield, leading to an increase in the interest income on loans from $35.0 million in the first quarter of 2015 to $35.6 million in the first quarter of 2016.

Compared to the first quarter of 2015, the average balance of the loan portfolio during the first quarter of 2016 increased in all categories except commercial loans, with increases in residential mortgage, home equity and installment loan categories.  The average balance of residential mortgage loans was $2.73 billion in 2016 compared to $2.59 billion in 2015, an increase of 5.1%.  The average yield on residential mortgage loans decreased by 13 basis points to 4.35% in the first quarter of 2016 compared to 2015.

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

Commercial loans, which consist primarily of loans secured by commercial real estate, decreased $17.7 million to an average balance of $201.4 million in the first quarter of 2016 compared to the same period in the prior year.  The average yield on this portfolio increased 9 basis points to 5.20% over the same period.
 
44

The average yield on home equity credit lines increased 4 basis points to 3.56% during the first quarter of 2016 compared to 3.52% in the year earlier period.  The average balances of home equity lines increased 1.9% to $358.8 million in the first quarter of 2016 as compared to the prior year.

Securities Available for Sale
The average balance of the securities available for sale portfolio for the first quarter of 2016 was $590.3 million compared to $672.9 million for the comparable period in 2015.  The decreased balances reflect routine paydowns, calls and maturities, partly offset by new investment purchases.  During the quarter, continued low market yields on securities eligible to be added to the portfolio resulted in loans being a more attractive option for the deployment of cash.  The average yield was 1.97% for the first quarter of 2016 and 1.91% for the first quarter of 2015 for the available for sale portfolio.  This portfolio is primarily comprised of agency issued residential mortgage backed securities, bonds issued by government sponsored enterprises (such as Fannie Mae, the Federal Home Loan Bank, and Freddie Mac), agency-issued commercial mortgage backed securities, Small Business Administration participation certificates and municipal bonds.  These securities are recorded at fair value with any adjustment in fair value included in other comprehensive income (loss), net of tax.

The net unrealized gain in the available for sale securities portfolio was $551 thousand as of March 31, 2016 compared to a net unrealized loss of $7.5 million as of December 31, 2015.  The unrealized gain or loss in the portfolio is primarily the result of changes in market interest rate levels.

Held to Maturity Securities
The average balance of held to maturity securities was $55.1 million for the first quarter of 2016 compared to $69.3 million in the first quarter of 2015.  The decrease in balances reflects routine paydowns, calls and maturities and follows the overall decline in securities with a shift towards cash for more flexibility and loans for greater yield.  The average yield was 4.03% for the first quarter of 2016 compared to 3.65% for the year earlier period.  The higher yield reflects a modest change in mix and slower prepayments on MBS, which reduced premium amortization.  TrustCo expects to hold the securities in this portfolio until they mature or are called.

As of March 31, 2016, the securities in this portfolio include residential mortgage-backed securities and corporate bonds.  The balances for these securities are recorded at amortized cost.

Federal Funds Sold and Other Short-term Investments
The 2016 first quarter average balance of Federal Funds sold and other short-term investments was $675.6 million, a $22.3 million increase from the $653.3 million average for the same period in 2015.  The yield was 0.50% for the first quarter of 2016 and 0.25% for the comparable period in 2015.  Interest income from this portfolio increased $444 thousand from $400 thousand in 2015 to $844 thousand in 2016, reflecting the average balance increase and target rate increase that took effect in December.
 
45

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 deposits (which includes interest bearing checking, money market accounts, savings and certificates of deposit) increased $10.0 million to $3.74 billion for the first quarter of 2016 versus the first quarter in the prior year, and the average rate paid decreased from 0.42% for 2015 to 0.39% for 2016.  Total interest expense on these deposits decreased $227 thousand to $3.6 million in the first quarter of 2016 compared to the year earlier period.  From the first quarter of 2015 to the first quarter of 2016, interest bearing demand account average balances were up 8.4%, certificates of deposit average balances were down 3.9%, non-interest demand average balances were up 9.1% and average savings balances increased 2.7%.  Money market balances were down 5.3%.   The Company has not utilized brokered deposits as a funding source, but does incorporate them as a contingent funding source within its Asset/Liability Policy.  Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.

At March 31, 2016, the maturity of total time deposits is as follows:

(dollars in thousands)
     
       
Under 1 year
 
$
856,904
 
1 to 2 years
   
265,553
 
2 to 3 years
   
27,899
 
3 to 4 years
   
15,588
 
4 to 5 years
   
2,733
 
Over 5 years
   
210
 
   
$
1,168,887
 

Average short-term borrowings for the quarter were $176.1 million in 2016 compared to $192.3 million in 2015.  The average rate decreased during this time period from 0.73% in 2015 to 0.59% in 2016.  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.

Net Interest Income
Taxable equivalent net interest income increased by $1.01 million to $36.2 million in the first quarter of 2016 compared to the same period in 2015.  The net interest spread was up 5 basis points to 3.07% in the first quarter of 2016 compared to the year ago period. As previously noted, the net interest margin was up 5 basis points to 3.13% for the first quarter of 2016 compared to the same period in 2015.
 
46

Nonperforming Assets
Nonperforming assets include nonperforming loans (“NPLs”), which are those loans in a non-accrual status and loans past due three payments or more and still accruing interest.  Also included in the total of nonperforming assets are foreclosed real estate properties, which are included in other assets and categorized as other real estate owned.

The following describes the nonperforming assets of TrustCo as of March 31, 2016:

Nonperforming loans and foreclosed real estate: Total NPLs were $30.4 million at March 31, 2016, compared to $28.3 million at December 31, 2015 and $33.5 million at March 31, 2015.  There were $30.3 million of non-accrual loans at March 31, 2016 compared to $28.2 million at December 31, 2015 and $33.4 million at March 31, 2015.  There were no loans at March 31, 2016 and 2015 and December 31, 2015 that were past due 90 days or more and still accruing interest.

At March 31, 2016, nonperforming loans primarily include a mix of commercial and residential loans.  Of total nonperforming loans of $30.4 million at March 31, 2016, $27.5 million were residential real estate loans, $2.8 million were commercial mortgages and $74 thousand were installment loans, compared to $25.1 million, $3.0 million and $98 thousand, respectively at December 31, 2015.

A significant percentage of nonperforming loans are residential real estate loans, which are historically lower-risk than most other types of loans.  Annualized net chargeoffs were 0.11% of average residential real estate loans (including home equity lines of credit) for the first quarter of 2016 compared to 0.15% for the first quarter of 2015.  Management believes that these loans have been appropriately written down where required.

Ongoing portfolio management is intended to result in early identification and disengagement from deteriorating credits. TrustCo has a diversified loan portfolio that includes a significant balance of residential mortgage loans to borrowers in the Capital Region of New York and avoids concentrations to any one borrower or any single industry.  TrustCo has no advances to borrowers or projects located outside the United States.  TrustCo continues to identify delinquent loans as quickly as possible and to move promptly to resolve problem loans.  Efforts to resolve delinquencies begin immediately after the payment grace period expires, with repeated, automatically generated notices, as well as personalized phone calls and letters.  Loans are placed in nonaccrual status once they are 90 days past due, or earlier if management has determined that such classification is appropriate.  Once in nonaccrual status, loans are either brought current and maintained current, at which point they may be returned to accrual status, or they proceed through the foreclosure process.  The collateral on nonaccrual loans is evaluated periodically, and the loan value is written down if the collateral value is insufficient.
 
The Company originates loans throughout its deposit franchise area.  At March 31, 2016, 80.1% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 19.9% were in Florida.  Those figures compare to 80.5% and 19.5%, respectively at December 31, 2015.  Within these two geographic regions, commercial loans constitute a larger component of the local outstandings in New York than in Florida, at 7.0% and 2.2%, respectively, as of March 31, 2016.
 
47

Economic conditions vary widely by geographic location.  Florida experienced a more significant downturn than New York during the recession.  Reflecting that, nonperforming loans (NPLs as a percentage of the portfolio) had generally been more heavily weighted towards Florida in recent years.  However, as of March 31, 2016, NPLs were roughly in line with regional outstandings, as 5.9% of nonperforming loans were to Florida borrowers, compared to 94.1% in New York and surrounding areas.  The level of Florida based NPLs was 6.5% of total NPLs as of December 31, 2015.  For the three months ended March 31, 2016, New York and surrounding areas experienced net charge-offs of approximately $1.1 million, compared to $99 thousand 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 March 31, 2016, 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 $3.0 million of commercial mortgages and commercial loans classified as impaired as of March 31, 2016, compared to $3.3 million at December 31, 2015.  There were $22.6 million of impaired residential loans at both March 31, 2016 and December 31, 2015.  The average balances of all impaired loans were $27.7 million during the first three months of 2016 and $26.6 million for the full year 2015.

As of March 31, 2016 and December 31, 2015, the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.

At March 31, 2016 there was $5.7 million of foreclosed real estate compared to $6.5 million at December 31, 2015.

Allowance for loan losses: The balance of the allowance for loan losses is maintained at a level that is, in management’s judgment, representative of the amount of probable incurred losses in the loan portfolio.

(dollars in thousands)
 
As of
March 31, 2016
   
As of
December 31, 2015
 
   
Amount
   
Percent of
Loans to
Total Loans
   
Amount
   
Percent of
Loans to
Total Loans
 
Commercial
 
$
4,787
     
5.72
%
 
$
4,347
     
5.85
%
Real estate - construction
   
319
     
0.71
%
   
365
     
0.81
%
Real estate mortgage - 1 to 4 family
   
32,608
     
82.52
%
   
33,167
     
82.14
%
Home equity lines of credit
   
6,222
     
10.79
%
   
6,365
     
10.91
%
Installment Loans
   
462
     
0.26
%
   
518
     
0.29
%
   
$
44,398
     
100.00
%
 
$
44,762
     
100.00
%

At March 31, 2016, the allowance for loan losses was $44.4 million, compared to $45.9 million at March 31, 2015 and $44.8 million at December 31, 2015.  The allowance represents 1.34% of the loan portfolio as of March 31, 2016 compared to 1.44% at March 31, 2015 and 1.36% at December 31, 2015.
 
48

The provision for loan losses was $800 thousand for the quarter ended March 31, 2016 and 2015.  Net chargeoffs for the three-month period ended March 31, 2016 and 2015 were $1.2 million.

During the first quarter of 2016, there were $264 thousand of gross commercial loan chargeoffs and $1.1 million of gross residential mortgage and consumer loan chargeoffs as compared with $50 thousand of gross commercial loan charge-offs and $1.3 million of residential mortgage and consumer loan chargeoffs in the first quarter of 2015.  Gross recoveries during the first quarter of 2016 were $40 thousand for commercial loans and $130 thousand for residential mortgage and consumer loans, compared to $17 thousand for commercial loans and $116 thousand for residential and consumer in the first quarter of 2015.

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

· The magnitude and nature of recent loan chargeoffs and recoveries,
· The growth in the loan portfolio and the implication that it has in relation to the economic climate in the Bank’s market territories, and
· The economic environment in the Upstate New York territory primarily (the Company’s largest geographical market) over the last several years, as well as in the Company’s other market areas.

Management continues to monitor these factors in determining future loan loss provisions or recaptures in relation to the economic environment, loan chargeoffs, recoveries and the level and trends of nonperforming loans.

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.  While TrustCo has not used brokered deposits as a funding source, the Company does have a program in place to do so as a source of contingent liquidity.
 
49

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 March 31, 2016 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 March 31, 2016. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp.

As of March 31, 2016
 
Estimated Percentage of
Fair value of Capital to
Fair value of Assets
 
+400 BP
   
19.90
%
+300 BP
   
21.08
 
+200 BP
   
22.22
 
+100 BP
   
23.11
 
Current rates
   
21.72
 
-100 BP
   
21.47
 

Noninterest Income
Total noninterest income for both the first quarter of 2016 and 2015 was $4.6 million.

Trustco Financial Services income decreased $48 thousand to $1.6 million for the first quarter of 2016 compared to the first quarter of 2015.  The fair value of assets under management were $844 million at March 31, 2016 compared to $842 million at December 31, 2015 and $922 million at March 31, 2015.  The fluctuation in assets was due to market value changes and net account acquisitions/closures.

The total of fees for other services to customers plus other income was $3.0 million in the first quarter of 2016, up $246 thousand.

Noninterest Expenses
Total noninterest expenses were $23.4 million for the three months ended March 31, 2016, compared to $21.9 million for the three months ended March 31, 2015.  The largest cause of the increase in expenses was a $925 thousand increase in FDIC and other insurance expenses.  Other significant increases included higher professional services expenses and salaries and employee benefits.  Professional services expenses were up $639 thousand for the period, due in large part to legal and consulting fees related to the Formal Agreement with the OCC.  Salaries and benefits were up $522 thousand due to increases in full time equivalent headcount from 747 as of March 31, 2015, to 784 as of March 31, 2016.  Decreases of $20 thousand in net occupancy expense and $428 thousand in equipment expense offset a portion of the increases.   ORE expenses were up slightly for the first quarter of 2016 compared to 2015.  Other noninterest expense was down $406 thousand due primarily to declines in property taxes paid on problem loans and the decline in the liability for off-balance sheet exposures.
 
50

Income Taxes
In the first quarter of 2016, TrustCo recognized income tax expense of $6.1 million, compared to $6.4 million for the first quarter of 2015.  The effective tax rates were 37.0% and 37.5% for the first quarters of 2016 and 2015, 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.

Trustco Bank’s Formal Agreement with the OCC requires the Bank to develop and comply with a capital plan, and the Bank may declare or pay a dividend or make a capital distribution only (a) when the Bank is in compliance with its approved written capital plan, and would remain in compliance with such Capital Plan immediately following the declaration or payment of any dividend or capital distribution and (b) following OCC approval under OCC capital distribution rules.

Total shareholders’ equity at March 31, 2016 was $423.0 million, compared to $400.5 million at March 31, 2015. TrustCo declared a dividend of $0.065625 per share in the first quarter of 2016.  This results in a dividend payout ratio of 60.13% based on first quarter 2016 earnings per share of $0.109.
 
51

The Bank reported the following capital ratios as of March 31, 2016 and December 31, 2015:

(dollars in thousands)
 
As of March 31, 2016
   
Well
   
Adequately
 
   
Amount
   
Ratio
   
Capitalized*
   
Capitalized*
 
                         
Tier 1 leverage capital
 
$
410,033
     
8.69
%
   
5.00
%
   
4.00
%
Common equity tier 1 capital
   
410,033
     
17.37
     
6.50
     
4.50
 
Tier 1 risk-based capital
   
410,033
     
17.37
     
8.00
     
6.00
 
Total risk-based capital
   
439,733
     
18.62
     
10.00
     
8.00
 

(dollars in thousands)
 
As of December 31, 2015
   
Well
   
Adequately
 
   
Amount
   
Ratio
   
Capitalized*
   
Capitalized*
 
                         
Tier 1 (core) capital
 
$
405,506
     
8.60
%
   
5.00
%
   
4.00
%
Common equity tier 1 capital
   
405,506
     
17.21
     
6.50
     
4.50
 
Tier 1 risk-based capital
   
405,506
     
17.21
     
8.00
     
6.00
 
Total risk-based capital
   
435,149
     
18.47
     
10.00
     
8.00
 

*Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized

The following is a summary of actual capital amounts and ratios as of March 31, 2016 and December 31, 2015 for TrustCo on a consolidated basis:

(dollars in thousands)
 
As of March 31, 2016
 
   
Amount
   
Ratio
 
             
Tier 1 leverage capital
 
$
422,399
     
8.95
%
Common equity tier 1 capital
   
422,399
     
17.88
 
Tier 1 risk-based capital
   
422,399
     
17.88
 
Total risk-based capital
   
452,114
     
19.14
 

(dollars in thousands)
 
As of December 31, 2015
 
   
Amount
   
Ratio
 
             
Leverage capital
 
$
417,538
     
8.85
%
Common equity tier 1 capital
   
417,538
     
17.71
 
Tier 1 risk-based capital
   
417,538
     
17.71
 
Total risk-based capital
   
447,193
     
18.97
 

In addition, at March 31, 2016, the consolidated equity to total assets ratio was 8.88%, compared to 8.73% at December 31, 2015 and 8.45% at March 31, 2015.

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines 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 minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements and results of operations.  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 fully phased in by January 1, 2019.  The Basel III capital rules will require the Company and the Bank to meet a capital conservation buffer requirement in order to avoid constraints on dividends, equity repurchases and certain compensation. To meet the requirement when it is fully phased in, the organization must maintain an amount of CET1 capital that exceeds the buffer level of 2.5% above each of the minimum risk-weighted asset ratios. The requirement will be phased in over a four year period, starting January 1, 2016, when the amount of such capital must exceed the buffer level of 0.625%. The buffer level will increase by 0.625% each year until it reaches 2.5% on January 1, 2019. When the capital conservation buffer requirement is fully phased in, to avoid constraints, a banking organization must maintain the following capital ratios: (1) CET1 to risk-weighted assets more than 7.0%, (ii) Tier 1 capital to risk-weighted assets more than 8.5%, and (iii) total capital (Tier 1 plus Tier 2) to risk-weighted assets more than 10.5%.  Prior to January 1, 2015, the Company had not been subject to express regulatory capital requirements.  The Company has chosen to exclude net unrealized gain or loss on available for sale securities in computing regulatory capital.  Management believes as of March 31, 2016, the Company and Bank meet all capital adequacy requirements to which they are subject.
 
52

Prompt corrective action regulations provide five classifications:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  Adequately capitalized institutions must obtain prior regulatory approval to accept brokered deposits.  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.  If an institution is classified as undercapitalized, it is required to submit a capital restoration plan to its federal banking regulators and is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the acceptance by the federal banking regulators of a capital restoration plan for the institution.  Furthermore, if an institution is classified as undercapitalized, the federal banking regulators may take certain actions to correct the capital position of the institution; if it is classified as significantly undercapitalized or critically undercapitalized, the federal banking regulators would be required to take one or more prompt corrective actions.  These actions would include, among other things, requiring sales of new securities to bolster capital, improvements in management, limits on interest rates paid, prohibitions on transactions with affiliates, termination of certain risky activities and restrictions on compensation paid to executive officers.  If a bank is classified as critically undercapitalized, the bank must be placed into conservatorship or receivership within 90 days, unless the federal banking regulators determines that other action would better achieve the purposes of the prompt corrective action regime.  Any of the foregoing regulatory actions could have a direct material effect on an institution’s or its holding company’s financial statements.  The Bank’s capital ratios exceed the levels necessary to meet the definition of “well capitalized” for regulatory purposes as of March 31, 2016.

Critical Accounting Policies:
Pursuant to SEC guidance, management of the Company is encouraged to evaluate and disclose those accounting policies judged to be critical policies - those most important to the portrayal of the Company’s financial condition and results, and that require management’s most difficult subjective or complex judgments.
 
Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover the inherent risk of losses in the loan portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.
 
53

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 loss, net of tax, in the available for sale portfolio of ($2.2) million in 2016 and ($2.6) million in 2015.  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.

   
Three months ended
March 31, 2016
   
Three months ended
March 31, 2015
   
 
 
                                                       
(dollars in thousands)
 
Average
Balance
   
Interest
   
Average
Rate
   
Average
Balance
   
Interest
   
Average
Rate
   
Change in
Interest
Income/
Expense
   
Variance
Balance
Change
   
Variance
Rate
Change
 
                                                       
Assets
                                                   
                                                       
Securities available for sale:
                                                     
U. S. government sponsored enterprises
 
$
75,031
     
255
     
1.36
%
 
$
77,865
     
212
     
1.09
%
 
$
43
     
(48
)
   
91
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
412,499
     
2,116
     
2.05
%
   
478,410
     
2,393
     
2.00
%
   
(277
)
   
(639
)
   
362
 
State and political subdivisions
   
1,114
     
22
     
7.90
%
   
2,092
     
38
     
7.26
%
   
(16
)
   
(36
)
   
20
 
Corporate bonds
   
-
     
-
     
0.00
%
   
1,499
     
1
     
0.13
%
   
(1
)
   
(1
)
   
(1
)
Small Business Administration-guaranteed participation securities
   
90,611
     
476
     
2.10
%
   
101,662
     
522
     
2.06
%
   
(46
)
   
(108
)
   
62
 
Mortgage backed securities and collateralized mortgage obligations-commercial
   
10,394
     
36
     
1.40
     
10,669
     
37
     
1.40
     
(1
)
   
(1
)
   
-
 
Other
   
685
     
4
     
2.34
%
   
685
     
4
     
2.34
%
   
-
     
-
     
-
 
                                                                         
Total securities available for sale
   
590,334
     
2,909
     
1.97
%
   
672,882
     
3,207
     
1.91
%
   
(298
)
   
(833
)
   
535
 
                                                                         
Federal funds sold and other short-term Investments
   
675,586
     
844
     
0.50
%
   
653,263
     
400
     
0.25
%
   
444
     
15
     
429
 
                                                                         
Held to maturity securities:
                                                                       
Corporate bonds
   
9,977
     
154
     
6.17
%
   
9,962
     
154
     
6.17
%
   
-
     
-
     
-
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
45,112
     
402
     
3.56
%
   
59,351
     
478
     
3.22
%
   
(76
)
   
(333
)
   
257
 
                                                                         
Total held to maturity securities
   
55,089
     
556
     
4.03
%
   
69,313
     
632
     
3.65
%
   
(76
)
   
(333
)
   
257
 
                                                                         
Federal Reserve Bank and Federal Home Loan Bank stock
   
9,480
     
120
     
5.06
%
   
9,228
     
116
     
5.03
%
   
4
     
3
     
1
 
                                                                         
Commercial loans
   
201,367
     
2,617
     
5.20
%
   
219,050
     
2,796
     
5.11
%
   
(179
)
   
(471
)
   
292
 
Residential mortgage loans
   
2,726,811
     
29,622
     
4.35
%
   
2,594,216
     
28,958
     
4.48
%
   
664
     
4,726
     
(4,062
)
Home equity lines of credit
   
358,817
     
3,179
     
3.56
%
   
352,258
     
3,061
     
3.52
%
   
118
     
73
     
45
 
Installment loans
   
8,659
     
193
     
8.94
%
   
7,794
     
175
     
9.11
%
   
18
     
38
     
(20
)
                                                                         
Loans, net of unearned income
   
3,295,654
     
35,611
     
4.33
%
   
3,173,318
     
34,990
     
4.42
%
   
621
     
4,366
     
(3,745
)
                                                                         
Total interest earning assets
   
4,626,143
     
40,040
     
3.47
%
   
4,578,004
     
39,345
     
3.45
%
   
695
     
3,218
     
(2,523
)
                                                                         
Allowance for loan losses
   
(45,271
)
                   
(46,597
)
                                       
Cash & non-interest earning assets
   
135,532
                     
138,560
                                         
                                                                         
Total assets
 
$
4,716,404
                   
$
4,669,967
                                         
                                                                         
Liabilities and shareholders' equity
                                                                       
                                                                         
Deposits:
                                                                       
Interest bearing checking accounts
 
$
735,098
     
114
     
0.06
%
 
$
677,963
     
105
     
0.06
%
   
9
     
9
     
-
 
Money market accounts
   
603,774
     
496
     
0.33
%
   
637,858
     
617
     
0.39
%
   
(121
)
   
(31
)
   
(90
)
Savings
   
1,262,467
     
604
     
0.19
%
   
1,229,498
     
658
     
0.22
%
   
(54
)
   
112
     
(166
)
Time deposits
   
1,134,459
     
2,373
     
0.84
%
   
1,180,436
     
2,434
     
0.84
%
   
(61
)
   
(61
)
   
-
 
                                                                         
Total interest bearing deposits
   
3,735,798
     
3,587
     
0.39
%
   
3,725,755
     
3,814
     
0.42
%
   
(227
)
   
29
     
(256
)
Short-term borrowings
   
176,119
     
257
     
0.59
%
   
192,344
     
346
     
0.73
%
   
(89
)
   
(27
)
   
(62
)
                                                                         
Total interest bearing liabilities
   
3,911,917
     
3,844
     
0.40
%
   
3,918,099
     
4,160
     
0.43
%
   
(316
)
   
2
     
(318
)
                                                                         
Demand deposits
   
358,224
                     
328,407
                                         
Other liabilities
   
26,917
                     
25,289
                                         
Shareholders' equity
   
419,346
                     
398,172
                                         
                                                                         
Total liabilities and shareholders' equity
 
$
4,716,404
                   
$
4,669,967
                                         
                                                                         
Net interest income , tax equivalent
           
36,196
                     
35,185
           
$
1,011
     
3,216
     
(2,205
)
                                                                         
Net interest spread
                   
3.07
%
                   
3.02
%
                       
                                                                         
Net interest margin (net interest income to total interest earning assets)
                   
3.13
%
                   
3.08
%
                       
                                                                         
Tax equivalent adjustment
           
(14
)
                   
(20
)
                               
                                                                         
Net interest income
           
36,182
                     
35,165
                                 
 
54

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As detailed in the Annual Report to Shareholders as of December 31, 2015, 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 periods ended March 31, 2016 and 2015, the Company continues to respond to changes in interest rates in a fashion to position the Company to meet short term earning goals and to also allow the Company to respond to changes in interest rates in the future.  Consequently, for the first quarter of 2016, the Company had an average balance of Federal Funds sold and other short-term investments of $675.6 million compared to $653.3 million in the first quarter of 2015.  As investment opportunities present themselves, management plans to invest funds from the Federal Funds sold and other short-term investment portfolio into the securities available for sale, securities held to maturity and loan portfolios.  Additional disclosure of interest rate risk can be found under “Liquidity and Interest Rate Sensitivity” and “Asset/Liability Management” in the Management’s Discussion and Analysis section of this document.

Item 4. Controls and Procedures

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

The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)) designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based upon this evaluation of those disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer of the Company concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Further, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.

There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.
 
55

PART II OTHER INFORMATION
Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety

None.

Item 5. Other Information

None.

Item 6. Exhibits

Reg S-K (Item 601)
Exhibit No.
Description
 
10(a)
Trustco Bank Executive Officer Incentive Plan (Amended and Restated as of February 16, 2016), incorporated by reference to exhibit 10(a) to the Form 8-K filed February 17, 2016
   
15
Crowe Horwath LLP Letter Regarding Unaudited Interim Financial Information
   
31(a)
Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer.
   
31(b)
Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer.
 
32
Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer.
 
56

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
TrustCo Bank Corp NY
   
 
By: /s/ Robert J. McCormick
 
 
Robert J. McCormick
 
President and Chief Executive Officer
   
 
By: /s/ Michael M. Ozimek
 
 
Michael M. Ozimek
 
Senior Vice President
and Chief Financial Officer
   
Date:  May 6, 2016
 
 
57

Exhibits Index

Reg S-K
Exhibit No.
Description
   
10(a)
Trustco Bank Executive Officer Incentive Plan (Amended and Restated as of February 16, 2016), incorporated by reference to exhibit 10(a) to the Form 8-K filed February 17, 2016
   
Crowe Horwath 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
 
 
58