UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 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
 
(I.R.S. Employer Identification No.)
or organization)
   

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 October 31, 2016
$1 Par Value
 
95,705,176
 

 

TrustCo Bank Corp NY

INDEX

Part I.
FINANCIAL INFORMATION
PAGE NO.
 
Item 1.
Consolidated Interim Financial Statements (Unaudited):
 
       
   
3
       
   
4
       
   
5
       
   
6
       
   
7
       
   
8-35
       
   
36
       
 
Item 2.
37-58
       
 
Item 3.
59
       
 
Item 4.
59
       
Part II.
OTHER INFORMATION
 
       
 
Item 1.
60
       
 
Item 1A.
60
       
 
Item 2.
60
       
 
Item 3.
60
       
 
Item 4.
60
       
 
Item 5.
60
       
 
Item 6.
60
 
2

TRUSTCO BANK CORP NY
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
 
2015
   
2016
   
2015
 
                       
Interest and dividend income:
                     
Interest and fees on loans
 
$
36,171
   
35,631
     
107,428
     
105,957
 
Interest and dividends on securities available for sale:
                             
U. S. government sponsored enterprises
   
408
   
584
     
1,067
     
1,162
 
State and political subdivisions
   
13
   
23
     
40
     
71
 
Mortgage-backed securities and collateralized mortgage obligations-residential
   
1,829
   
2,230
     
6,114
     
6,899
 
Corporate bonds
   
97
   
-
     
97
     
1
 
Small Business Administration-guaranteed participation securities
   
445
   
497
     
1,371
     
1,522
 
Mortgage-backed securities and collateralized mortgage obligations-commercial
   
36
   
37
     
110
     
112
 
Other securities
   
4
   
4
     
12
     
12
 
Total interest and dividends on securities available for sale
   
2,832
   
3,375
     
8,811
     
9,779
 
                               
Interest on held to maturity securities:
                             
Mortgage-backed securities and collateralized mortgage obligations-residential
   
347
   
461
     
1,123
     
1,419
 
Corporate bonds
   
156
   
153
     
464
     
461
 
Total interest on held to maturity securities
   
503
   
614
     
1,587
     
1,880
 
                               
Federal Reserve Bank and Federal Home Loan Bank stock
   
131
   
113
     
369
     
347
 
Interest on federal funds sold and other short-term investments
   
866
   
408
     
2,542
     
1,231
 
Total interest income
   
40,503
   
40,141
     
120,737
     
119,194
 
                               
Interest expense:
                             
Interest on deposits:
                             
Interest-bearing checking
   
120
   
117
     
350
     
333
 
Savings
   
504
   
603
     
1,712
     
1,860
 
Money market deposit accounts
   
463
   
537
     
1,426
     
1,701
 
Time deposits
   
2,468
   
2,544
     
7,301
     
7,478
 
Interest on short-term borrowings
   
281
   
290
     
800
     
936
 
Total interest expense
   
3,836
   
4,091
     
11,589
     
12,308
 
                               
Net interest income
   
36,667
   
36,050
     
109,148
     
106,886
 
Provision for loan losses
   
750
   
800
     
2,350
     
2,400
 
Net interest income after provision for loan losses
   
35,917
   
35,250
     
106,798
     
104,486
 
                               
Noninterest income:
                             
Trustco financial services income
   
1,347
   
1,351
     
4,464
     
4,482
 
Fees for services to customers
   
2,664
   
2,770
     
8,062
     
7,985
 
Net gain on securities transactions
   
-
   
-
     
668
     
249
 
Other
   
718
   
244
     
1,306
     
726
 
Total noninterest income
   
4,729
   
4,365
     
14,500
     
13,442
 
                               
Noninterest expenses:
                             
Salaries and employee benefits
   
8,995
   
7,834
     
26,932
     
24,479
 
Net occupancy expense
   
3,887
   
3,929
     
11,893
     
11,915
 
Equipment expense
   
1,596
   
1,596
     
4,950
     
5,341
 
Professional services
   
1,959
   
2,238
     
6,203
     
5,811
 
Outsourced services
   
1,465
   
1,425
     
4,441
     
4,275
 
Advertising expense
   
489
   
668
     
1,788
     
2,001
 
FDIC and other insurance
   
1,127
   
2,202
     
5,066
     
4,284
 
Other real estate expense, net
   
895
   
806
     
1,837
     
1,431
 
Other
   
2,636
   
2,766
     
7,352
     
7,915
 
Total noninterest expenses
   
23,049
   
23,464
     
70,462
     
67,452
 
                               
Income before taxes
   
17,597
   
16,151
     
50,836
     
50,476
 
Income taxes
   
6,667
   
5,535
     
19,033
     
18,418
 
                               
Net income
 
$
10,930
   
10,616
     
31,803
     
32,058
 
                               
Net income per share:
                             
- Basic
 
$
0.114
   
0.112
     
0.333
     
0.337
 
                               
- Diluted
 
$
0.114
   
0.111
     
0.333
     
0.337
 

See accompanying notes to unaudited consolidated interim financial statements.
 
3

TRUSTCO BANK CORP NY
Consolidated Statements of Comprehensive Income (Unaudited)
(dollars in thousands)

 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Net income
 
$
10,930
     
10,616
     
31,803
     
32,058
 
                                 
Net unrealized holding (loss) gain on securities available for sale
   
(125
)
   
7,855
     
12,475
     
5,682
 
Reclassification adjustments for net gain recognized in income
   
-
     
-
     
(668
)
   
(249
)
Tax effect
   
50
     
(3,142
)
   
(4,723
)
   
(2,171
)
                                 
Net unrealized (loss) gain on securities available for sale, net of tax
   
(75
)
   
4,713
     
7,084
     
3,262
 
                                 
                                 
Amortization of net actuarial (gain) loss
   
(8
)
   
43
     
(25
)
   
53
 
Amortization of prior service cost
   
22
     
23
     
67
     
68
 
Tax effect
   
(6
)
   
(26
)
   
(17
)
   
(48
)
Amortization of net actuarial (gain) loss and prior service cost on pension and postretirement plans, net of tax
   
8
     
40
     
25
     
73
 
                                 
Other comprehensive (loss) income, net of tax
   
(67
)
   
4,753
     
7,109
     
3,335
 
Comprehensive income
 
$
10,863
     
15,369
     
38,912
     
35,393
 

See accompanying notes to unaudited consolidated interim financial statements.
 
4

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

   
September 30, 2016
 
December 31, 2015
 
ASSETS:
 
(Unaudited)
 
(Audited)
 
           
Cash and due from banks
 
$
42,296
   
41,698
 
               
Federal funds sold and other short term investments
   
622,132
   
676,458
 
Total cash and cash equivalents
   
664,428
   
718,156
 
               
Securities available for sale
   
654,502
   
601,037
 
               
Held to maturity securities (fair value 2016 $50,991; 2015 $59,439)
   
48,030
   
56,465
 
               
Federal Reserve Bank and Federal Home Loan Bank stock
   
9,579
   
9,480
 
               
Loans, net of deferred net costs
   
3,387,631
   
3,293,304
 
Less:
             
Allowance for loan losses
   
43,950
   
44,762
 
Net loans
   
3,343,681
   
3,248,542
 
               
Bank premises and equipment, net
   
36,110
   
37,643
 
Other assets
   
56,519
   
63,669
 
               
Total assets
 
$
4,812,849
   
4,734,992
 
               
LIABILITIES:
             
Deposits:
             
Demand
 
$
380,090
   
365,081
 
Interest-bearing checking
   
785,118
   
754,347
 
Savings accounts
   
1,277,734
   
1,262,194
 
Money market deposit accounts
   
566,097
   
610,826
 
Time deposits
   
1,159,199
   
1,107,930
 
Total deposits
   
4,168,238
   
4,100,378
 
               
Short-term borrowings
   
179,204
   
191,226
 
Accrued expenses and other liabilities
   
29,799
   
30,078
 
               
Total liabilities
 
$
4,377,241
   
4,321,682
 
               
SHAREHOLDERS' EQUITY:
             
Capital stock par value $1; 150,000,000 shares authorized; 99,121,082 and 98,973,452 shares issued at September 30, 2016 and December 31, 2015, respectively
   
99,121
   
98,973
 
Surplus
   
171,093
   
171,443
 
Undivided profits
   
197,013
   
184,009
 
Accumulated other comprehensive income (loss), net of tax
   
2,328
   
(4,781
)
Treasury stock at cost - 3,506,797 and  3,711,228 shares at September 30, 2016 and December 31, 2015, respectively
   
(33,947
)  
(36,334
)
               
Total shareholders' equity
   
435,608
   
413,310
 
               
Total liabilities and shareholders' equity
 
$
4,812,849
   
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
   
-
     
-
     
32,058
     
-
     
-
     
32,058
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
3,335
     
-
     
3,335
 
Cash dividend declared, $.1969 per share
   
-
     
-
     
(18,710
)
   
-
     
-
     
(18,710
)
Stock options exercised and related tax benefits (19,429 shares)
   
19
     
80
     
-
     
-
     
-
     
99
 
Purchase of treasury stock (14,881 shares)
   
-
     
-
     
-
     
-
     
(99
)
   
(99
)
Sale of treasury stock (286,844 shares)
   
-
     
(789
)
   
-
     
-
     
2,810
     
2,021
 
Stock based compensation expense
   
-
     
144
     
-
     
-
     
-
     
144
 
                                                 
Ending balance, September 30, 2015
 
$
98,964
     
171,788
     
180,093
     
(1,174
)
   
(37,379
)
   
412,292
 
                                                 
Beginning balance, January 1, 2016
 
$
98,973
     
171,443
     
184,009
     
(4,781
)
   
(36,334
)
   
413,310
 
Net income
   
-
     
-
     
31,803
     
-
     
-
     
31,803
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
7,109
     
-
     
7,109
 
Cash dividend declared, $.1969 per share
   
-
     
-
     
(18,799
)
   
-
     
-
     
(18,799
)
Stock options exercised and related tax benefits (147,630 shares)
   
148
     
612
     
-
     
-
     
-
     
760
 
Purchase of treasury stock (111,906 shares)
   
-
     
-
     
-
     
-
     
(701
)
   
(701
)
Sale of treasury stock (316,337 shares)
   
-
     
(1,130
)
   
-
     
-
     
3,088
     
1,958
 
Stock based compensation expense
   
-
     
168
     
-
     
-
     
-
     
168
 
                                                 
Ending balance, September 30, 2016
 
$
99,121
     
171,093
     
197,013
     
2,328
     
(33,947
)
   
435,608
 
 
See accompanying notes to unaudited consolidated interim financial statements.
 
6

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


   
Nine months ended September 30,
 
   
2016
   
2015
 
Cash flows from operating activities:
           
Net income
 
$
31,803
     
32,058
 
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
3,071
     
3,469
 
Net gain on sale of other real estate owned
   
(281
)
   
(354
)
Writedown of other real estate owned
   
911
     
781
 
Provision for loan losses
   
2,350
     
2,400
 
Deferred tax expense
   
3,899
     
2,832
 
Net amortization of securities
   
3,702
     
4,134
 
Stock based compensation expense
   
168
     
144
 
Net gain on sale of bank premises and equipment
   
(480
)
   
-
 
Net gain on sales of securities
   
(668
)
   
(249
)
Decrease in taxes receivable
   
2,320
     
3,599
 
(Increase) decrease in interest receivable
   
(610
)
   
453
 
Decrease in interest payable
   
(5
)
   
(40
)
Increase in other assets
   
(4,844
)
   
(3,400
)
(Decrease) increase in accrued expenses and other liabilities
   
(297
)
   
2,713
 
Total adjustments
   
9,236
     
16,482
 
Net cash provided by operating activities
   
41,039
     
48,540
 
                 
Cash flows from investing activities:
               
                 
Proceeds from sales and calls of securities available for sale
   
205,312
     
185,159
 
Proceeds from calls and maturities of held to maturity securities
   
8,435
     
10,948
 
Purchases of securities available for sale
   
(250,554
)
   
(132,898
)
Proceeds from maturities of securities available for sale
   
550
     
1,499
 
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock
   
(99
)
   
(252
)
Net increase in loans
   
(101,292
)
   
(132,594
)
Proceeds from dispositions of other real estate owned
   
4,860
     
5,464
 
Proceeds from dispositions of bank premises and equipment
   
674
     
107
 
Purchases of bank premises and equipment
   
(1,732
)
   
(2,517
)
Net cash used in investing activities
   
(133,846
)
   
(65,084
)
                 
Cash flows from financing activities:
               
                 
Net increase in deposits
   
67,860
     
64,552
 
Net decrease in short-term borrowings
   
(12,022
)
   
(4,711
)
Proceeds from exercise of stock options and related tax benefits
   
760
     
99
 
Proceeds from sale of treasury stock
   
1,958
     
2,021
 
Purchases of treasury stock
   
(701
)
   
(99
)
Dividends paid
   
(18,776
)
   
(18,694
)
Net cash provided by financing activities
   
39,079
     
43,168
 
Net increase in cash and cash equivalents
   
(53,728
)
   
26,624
 
Cash and cash equivalents at beginning of period
   
718,156
     
671,448
 
Cash and cash equivalents at end of period
 
$
664,428
     
698,072
 
                 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the year for:
               
Interest paid
 
$
11,594
     
12,348
 
Income taxes paid
   
16,944
     
14,859
 
Other non cash items:
               
Transfer of loans to other real estate owned
   
3,803
     
5,343
 
Increase in dividends payable
   
23
     
16
 
Change in unrealized gain on securities available for sale-gross of deferred taxes
   
11,807
     
5,433
 
Change in deferred tax effect on unrealized gain on securities available for sale
   
(4,723
)
   
(2,171
)
Amortization of net actuarial loss and prior service credit on pension and postretirement plans
   
42
     
121
 
Change in deferred tax effect of amortization of net actuarial loss and prior service credit
   
(17
)
   
(48
)
 
See accompanying notes to unaudited consolidated interim financial statements.
 
7

(1) Financial Statement Presentation

The unaudited Consolidated Interim Financial Statements of TrustCo Bank Corp NY (the “Company” or “TrustCo”) include the accounts of the subsidiaries after elimination of all significant intercompany accounts and transactions.  Prior period amounts are reclassified when necessary to conform to the current period presentation.  The net income reported for the three months and nine months ended September 30, 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 September 30, 2016, the results of operations and cash flows for the three months and nine months ended September 30, 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 the 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 and nine months ended September 30, 2016 and 2015 is as follows:

(in thousands, except per share data)
 
For the three months ended
September 30:
   
For the nine months ended
September 30:
 
   
2016
   
2015
   
2016
   
2015
 
Net income
 
$
10,930
     
10,616
   
$
31,803
     
32,058
 
Weighted average common shares
   
95,603
     
95,149
     
95,486
     
95,051
 
Stock Options
   
119
     
85
     
86
     
116
 
Weighted average common shares including potential dilutive shares
   
95,722
     
95,234
     
95,572
     
95,167
 
                                 
Basic EPS
 
$
0.114
     
0.112
   
$
0.333
     
0.337
 
                                 
Diluted EPS
 
$
0.114
     
0.111
   
$
0.333
     
0.337
 
 
For the three months and nine months ended September 30, 2016, the weighted average number of antidilutive stock options excluded from diluted earnings per share was approximately 1.6 million.  For the three and nine months ended September 30, 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.
 
8

(3) Benefit Plans

The table below outlines the components of the Company's net periodic benefit recognized during the three months and nine months ended September 30, 2016 and 2015 for its pension and other postretirement benefit plans:

   
For the three months ended September 30,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
(dollars in thousands)
 
2016
   
2015
   
2016
   
2015
 
                         
Service cost
 
$
15
     
15
     
32
     
47
 
Interest cost
   
343
     
337
     
61
     
72
 
Expected return on plan assets
   
(669
)
   
(684
)
   
(180
)
   
(182
)
Amortization of net loss (gain)
   
46
     
77
     
(54
)
   
(34
)
Amortization of prior service cost
   
-
     
-
     
22
     
23
 
Net periodic benefit
 
$
(265
)
   
(255
)
   
(119
)
   
(74
)
 
   
For the nine months ended September 30,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
(dollars in thousands)
 
2016
   
2015
   
2016
   
2015
 
                         
Service cost
 
$
46
     
45
     
96
     
125
 
Interest cost
   
1,029
     
997
     
184
     
201
 
Expected return on plan assets
   
(1,994
)
   
(2,052
)
   
(540
)
   
(543
)
Amortization of net loss (gain)
   
138
     
158
     
(163
)
   
(105
)
Amortization of prior service cost
   
-
     
-
     
67
     
68
 
Net periodic benefit
 
$
(781
)
   
(852
)
   
(356
)
   
(254
)

The Company does not expect to make contributions to its pension and postretirement benefit plans in 2016.  As of September 30, 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.
 
9

(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)
 
September 30, 2016
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
U.S. government sponsored enterprises
 
$
116,285
     
46
     
4
     
116,327
 
State and political subdivisions
   
953
     
17
     
-
     
970
 
Corporate bonds
   
41,127
     
-
     
102
     
41,025
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
396,647
     
4,072
     
144
     
400,575
 
Small Business Administration-guaranteed participation securities
   
84,268
     
531
     
112
     
84,687
 
Mortgage backed securities and collateralized mortgage obligations - commercial
   
10,214
     
19
     
-
     
10,233
 
Other
   
650
     
-
     
-
     
650
 
Total debt securities
   
650,144
     
4,685
     
362
     
654,467
 
Equity securities
   
35
     
-
     
-
     
35
 
Total securities available for sale
 
$
650,179
     
4,685
     
362
     
654,502
 

(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
 
 
10

The following table distributes the debt securities included in the available for sale portfolio as of September 30, 2016, based on the securities’ final maturity.   Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty.  Securities not due at a single maturity date are presented separately:

(dollars in thousands)
 
Amortized
Cost
   
Fair
Value
 
Due in one year or less
 
$
1,406
     
1,408
 
Due in one year through five years
   
142,461
     
142,415
 
Due after five years through ten years
   
15,139
     
15,140
 
Due after ten years
   
9
     
9
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
396,647
     
400,575
 
Small Business Administration-guaranteed participation securities
   
84,268
     
84,687
 
Mortgage backed securities and collateralized mortgage obligations - commercial
   
10,214
     
10,233
 
   
$
650,144
     
654,467
 
 
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)
 
September 30, 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
 
$
14,996
     
4
     
-
     
-
     
14,996
     
4
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
29,252
     
116
     
5,138
     
28
     
34,390
     
144
 
Corporate bonds
   
41,025
     
102
     
-
     
-
     
41,025
     
102
 
Small Business Administration -guaranteed participation securities
   
-
     
-
     
15,332
     
112
     
15,332
     
112
 
Total
 
$
85,273
     
222
     
20,470
     
140
     
105,743
     
362
 
 
11

(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 and nine months ended September 30, 2016 and 2015 are as follows:

(dollars in thousands)
 
Three months ended September 30,
 
   
2016
   
2015
 
             
Proceeds from sales
 
$
-
     
-
 
Proceeds from calls
   
70,762
     
106,555
 
Gross realized gains
   
-
     
-
 
Gross realized losses
   
-
     
-
 

(dollars in thousands)
 
Nine months ended September 30,
 
   
2016
   
2015
 
             
Proceeds from sales
 
$
44,829
     
22,945
 
Proceeds from calls
   
160,483
     
162,214
 
Gross realized gains
   
668
     
249
 
Gross realized losses
   
-
     
-
 

For the nine months ended September 30, 2016, income tax expense recognized on net gains on sales of securities available for sale was approximately $267 thousand.  For the nine months ended September 30, 2015, income tax expense recognized on net gains on sales of securities available for sale was approximately $100 thousand.  There were no sales of securities available for sale during the three months ended September 30, 2016 and 2015.
 
12

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

(dollars in thousands)
 
September 30, 2016
 
   
Amortized
Cost
   
Gross
Unrecognized
Gains
   
Gross
Unrecognized
Losses
   
Fair
Value
 
Mortgage backed securities and collateralized mortgage obligations - residential
 
$
38,044
     
2,547
     
-
     
40,591
 
Corporate bonds
   
9,986
     
414
     
-
     
10,400
 
Total held to maturity
 
$
48,030
     
2,961
     
-
     
50,991
 

(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 September 30, 2016, based on the securities’ final maturity.   Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty.  Securities not due at a single maturity date are presented separately:

(dollars in thousands)
 
Amortized
Cost
   
Fair
Value
 
Due in one year through five years
 
$
9,986
     
10,400
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
38,044
     
40,591
 
   
$
48,030
     
50,991
 

There were no held to maturity securities in an unrecognized loss position as of September 30, 2016 or December 31, 2015.

There were no sales or transfers of held to maturity securities during the three months and nine months ended September 30, 2016 and 2015.

(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 evaluated for OTTI under ASC 320 “Investments – Debt and Equity Securities.”
 
13

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 September 30, 2016, the Company’s security portfolio included certain securities which were in an unrealized loss position.  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 September 30, 2016.
 
14

(5) Loans and Allowance for Loan Losses

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

   
September 30, 2016
 
(dollars in thousands)
 
New York and
other states*
   
Florida
   
Total
 
Commercial:
                 
Commercial real estate
 
$
154,747
     
12,505
     
167,252
 
Other
   
22,543
     
-
     
22,543
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
2,138,783
     
636,753
     
2,775,536
 
Home equity loans
   
59,512
     
10,828
     
70,340
 
Home equity lines of credit
   
293,459
     
49,986
     
343,445
 
Installment
   
6,849
     
1,666
     
8,515
 
Total loans, net
 
$
2,675,893
     
711,738
     
3,387,631
 
Less: Allowance for loan losses
                   
43,950
 
Net loans
                 
$
3,343,681
 
 
   
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 September 30, 2016 and December 31, 2015, the Company had approximately $23.5 million and $26.6 million of real estate construction loans, respectively.  Of the $23.5 million in real estate construction loans at September 30, 2016, approximately $14.0 million are secured by second mortgages to residential borrowers while approximately $9.5 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 second 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.
 
15

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

   
September 30, 2016
 
(dollars in thousands)
 
New York and
other states
   
Florida
   
Total
 
Loans in non-accrual status:
                 
Commercial:
                 
Commercial real estate
 
$
2,366
     
-
     
2,366
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
18,361
     
1,503
     
19,864
 
Home equity loans
   
94
     
45
     
139
 
Home equity lines of credit
   
3,223
     
296
     
3,519
 
Installment
   
70
     
-
     
70
 
Total non-accrual loans
   
24,114
     
1,844
     
25,958
 
Restructured real estate mortgages - 1 to 4 family
   
44
     
-
     
44
 
Total nonperforming loans
 
$
24,158
     
1,844
     
26,002
 

   
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 September 30, 2016 and December 31, 2015, other estate owned included $4.1 million and $5.4 million of residential foreclosed properties, respectively. In addition, non-accrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $12.8 million and $13.2 million as of September 30, 2016 and December 31, 2015, respectively.
 
16

The following tables present the aging of the recorded investment in past due loans by loan class and by region as of September 30, 2016 and December 31, 2015:
 
New York and other states:
   
September 30, 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
 
$
301
     
-
     
2,323
     
2,624
     
152,123
     
154,747
 
Other
   
-
     
-
     
-
     
-
     
22,543
     
22,543
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
3,415
     
2,243
     
10,629
     
16,287
     
2,122,496
     
2,138,783
 
Home equity loans
   
71
     
30
     
42
     
143
     
59,369
     
59,512
 
Home equity lines of credit
   
672
     
182
     
1,476
     
2,330
     
291,129
     
293,459
 
Installment
   
18
     
10
     
48
     
76
     
6,773
     
6,849
 
Total
 
$
4,477
     
2,465
     
14,518
     
21,460
     
2,654,433
     
2,675,893
 

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
 
$
-
     
-
     
-
     
-
     
12,505
     
12,505
 
Other
   
-
     
-
     
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
608
     
-
     
1,085
     
1,693
     
635,060
     
636,753
 
Home equity loans
   
-
     
-
     
-
     
-
     
10,828
     
10,828
 
Home equity lines of credit
   
50
     
-
     
180
     
230
     
49,756
     
49,986
 
Installment
   
25
     
1
     
-
     
26
     
1,640
     
1,666
 
Total
 
$
683
     
1
     
1,265
     
1,949
     
709,789
     
711,738
 
 
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
 
$
301
     
-
     
2,323
     
2,624
     
164,628
     
167,252
 
Other
   
-
     
-
     
-
     
-
     
22,543
     
22,543
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
4,023
     
2,243
     
11,714
     
17,980
     
2,757,556
     
2,775,536
 
Home equity loans
   
71
     
30
     
42
     
143
     
70,197
     
70,340
 
Home equity lines of credit
   
722
     
182
     
1,656
     
2,560
     
340,885
     
343,445
 
Installment
   
43
     
11
     
48
     
102
     
8,413
     
8,515
 
Total
 
$
5,160
     
2,466
     
15,783
     
23,409
     
3,364,222
     
3,387,631
 
 
17

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 September 30, 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.
 
18

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

(dollars in thousands)
 
For the three months ended September 30, 2016
 
   
Commercial
   
Real Estate
Mortgage-
1 to 4 Family
   
Installment
   
Total
 
Balance at beginning of period
 
$
5,046
     
38,589
     
429
     
44,064
 
Loans charged off:
                               
New York and other states*
   
356
     
549
     
57
     
962
 
Florida
   
-
     
2
     
3
     
5
 
Total loan chargeoffs
   
356
     
551
     
60
     
967
 
                                 
Recoveries of loans previously charged off:
                               
New York and other states*
   
3
     
78
     
20
     
101
 
Florida
   
-
     
2
     
-
     
2
 
Total recoveries
   
3
     
80
     
20
     
103
 
Net loans charged off
   
353
     
471
     
40
     
864
 
Provision for loan losses
   
505
     
(51
)
   
296
     
750
 
Balance at end of period
 
$
5,198
     
38,067
     
685
     
43,950
 

(dollars in thousands)
 
For the three months ended September 30, 2015
 
   
Commercial
   
Real Estate
Mortgage-
1 to 4 Family
   
Installment
   
Total
 
Balance at beginning of period
 
$
4,022
     
41,087
     
462
     
45,571
 
Loans charged off:
                               
New York and other states*
   
3
     
1,300
     
50
     
1,353
 
Florida
   
-
     
35
     
4
     
39
 
Total loan chargeoffs
   
3
     
1,335
     
54
     
1,392
 
                                 
Recoveries of loans previously charged off:
                               
New York and other states*
   
-
     
141
     
24
     
165
 
Florida
   
3
     
2
     
-
     
5
 
Total recoveries
   
3
     
143
     
24
     
170
 
Net loans charged off
   
-
     
1,192
     
30
     
1,222
 
Provision (credit) for loan losses
   
34
     
752
     
14
     
800
 
Balance at end of period
 
$
4,056
     
40,647
     
446
     
45,149
 
 
19

(dollars in thousands)
 
For the nine months ended September 30, 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*
   
688
     
2,528
     
230
     
3,446
 
Florida
   
-
     
103
     
20
     
123
 
Total loan chargeoffs
   
688
     
2,631
     
250
     
3,569
 
                                 
Recoveries of loans previously charged off:
                               
New York and other states*
   
44
     
313
     
46
     
403
 
Florida
   
-
     
4
     
-
     
4
 
Total recoveries
   
44
     
317
     
46
     
407
 
Net loans charged off
   
644
     
2,314
     
204
     
3,162
 
Provision for loan losses
   
1,351
     
628
     
371
     
2,350
 
Balance at end of period
 
$
5,198
     
38,067
     
685
     
43,950
 

(dollars in thousands)
 
For the nine months ended September 30, 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*
   
103
     
3,480
     
126
     
3,709
 
Florida
   
-
     
313
     
4
     
317
 
Total loan chargeoffs
   
103
     
3,793
     
130
     
4,026
 
                                 
Recoveries of loans previously charged off:
                               
New York and other states*
   
16
     
384
     
39
     
439
 
Florida
   
5
     
4
     
-
     
9
 
Total recoveries
   
21
     
388
     
39
     
448
 
Net loans charged off
   
82
     
3,405
     
91
     
3,578
 
Provision for loan losses
   
67
     
1,964
     
369
     
2,400
 
Balance at end of period
 
$
4,056
     
40,647
     
446
     
45,149
 
 
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 September 30, 2016 and December 31, 2015:
 
   
September 30, 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
   
5,198
     
38,067
     
685
     
43,950
 
                                 
Total ending allowance balance
 
$
5,198
     
38,067
     
685
     
43,950
 
                                 
                                 
Loans:
                               
Individually evaluated for impairment
 
$
2,638
     
22,190
     
-
     
24,828
 
Collectively evaluated for impairment
   
187,157
     
3,167,131
     
8,515
     
3,362,803
 
                                 
Total ending loans balance
 
$
189,795
     
3,189,321
     
8,515
     
3,387,631
 

   
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 September 30, 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 September 30, 2016 and December 31, 2015:

New York and other states:
    
September 30, 2016
 
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
2,638
     
4,016
     
-
     
2,764
 
Other
   
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
17,391
     
18,135
     
-
     
16,641
 
Home equity loans
   
276
     
312
     
-
     
248
 
Home equity lines of credit
   
1,945
     
2,108
     
-
     
1,800
 
                                 
Total
 
$
22,250
     
24,571
     
-
     
21,453
 
 
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
   
1,913
     
2,004
     
-
     
1,742
 
Home equity loans
   
96
     
96
     
-
     
76
 
Home equity lines of credit
   
569
     
641
     
-
     
600
 
                                 
Total
 
$
2,578
     
2,741
     
-
     
2,418
 
 
Total:
 
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
2,638
     
4,016
     
-
     
2,764
 
Other
   
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
19,304
     
20,139
     
-
     
18,383
 
Home equity loans
   
372
     
408
     
-
     
324
 
Home equity lines of credit
   
2,514
     
2,749
     
-
     
2,400
 
                                 
Total
 
$
24,828
     
27,312
     
-
     
23,871
 
 
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 and nine months ended September 30, 2016 and 2015.
 
23

As of September 30, 2016 and December 31, 2015 impaired loans included approximately $11.4 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, respectively.

Management evaluates impairment on impaired loans on a quarterly basis. If, during this evaluation, impairment of the loan is identified, a charge off is taken at that time. As a result, as of September 30, 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 9/30/2016
   
Three months ended 9/30/2015
 
New York and other states*:
 
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
   
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
 
(dollars in thousands)
                                     
Real estate mortgage - 1 to 4 family:
                                   
First mortgages
   
7
   
$
655
   
$
655
     
8
   
$
1,055
   
$
1,055
 
Home equity loans
   
1
     
44
     
44
     
-
     
-
     
-
 
Home equity lines of credit
   
2
     
183
     
183
     
3
     
115
     
115
 
                                                 
Total
   
10
   
$
882
   
$
882
     
11
   
$
1,170
   
$
1,170
 

Florida:
                       
 
(dollars in thousands)
 
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
   
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
 
                                     
Real estate mortgage - 1 to 4 family:
                                   
First mortgages
   
-
   
$
-
   
$
-
     
4
   
$
524
   
$
524
 
Home equity lines of credit
   
-
     
-
     
-
     
2
     
57
     
57
 
                                                 
Total
   
-
   
$
-
   
$
-
     
6
   
$
581
   
$
581
 
 
   
Nine months ended 9/30/2016
   
Nine months ended 9/30/2015
 
New York and other states*:
 
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
   
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
 
(dollars in thousands)
                                     
Real estate mortgage - 1 to 4 family:
                                   
First mortgages
   
27
   
$
2,383
     
2,383
     
28
   
$
4,042
     
4,042
 
Home equity loans
   
1
     
44
     
44
     
1
     
139
     
139
 
Home equity lines of credit
   
10
     
316
     
316
     
5
     
159
     
159
 
                                                 
Total
   
38
   
$
2,743
   
$
2,743
     
34
   
$
4,340
   
$
4,340
 

Florida:
                               
(dollars in thousands)
 
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
   
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
 
                                     
Real estate mortgage - 1 to 4 family:
                                   
First mortgages
   
2
   
$
408
   
$
408
     
5
   
$
681
   
$
681
 
Home equity loans
   
1
     
45
     
45
     
-
     
-
     
-
 
Home equity lines of credit
   
1
     
6
     
6
     
4
     
107
     
107
 
                                                 
Total
   
4
   
$
459
   
$
459
     
9
   
$
788
   
$
788
 

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

In situations where the Bank 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.
 
24

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

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

The following table presents, by class, TDR’s that defaulted during the three months and nine months ended September 30, 2016 and 2015 which had been modified within the last twelve months:
 
   
Three months ended 9/30/2016
   
Three months ended 9/30/2015
 
New York and other states*:
(dollars in thousands)
 
Number of
Contracts
   
Recorded
Investment
   
Number of
Contracts
   
Recorded
Investment
 
                         
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
-
   
$
-
     
1
   
$
121
 
                                 
Total
   
-
   
$
-
     
1
   
$
121
 

Florida:
(dollars in thousands)
 
Number of
Contracts
   
Recorded
Investment
   
Number of
Contracts
   
Recorded
Investment
 
                         
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
-
   
$
-
     
-
   
$
-
 
                                 
Total
   
-
   
$
-
     
-
   
$
-
 

   
Nine months ended 9/30/2016
   
Nine months ended 9/30/2015
 
New York and other states*:
(dollars in thousands)
 
Number of
Contracts
   
Recorded
Investment
   
Number of
Contracts
   
Recorded
Investment
 
                         
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
1
   
$
107
     
1
   
$
121
 
                                 
Total
   
1
   
$
107
     
1
   
$
121
 

Florida:
(dollars in thousands)
 
Number of
Contracts
   
Recorded
Investment
   
Number of
Contracts
   
Recorded
Investment
 
                         
Real estate mortgage - 1 to 4 family:
                       
Home equity lines of credit
   
1
   
$
46
     
1
   
$
50
 
                                 
Total
   
1
   
$
46
     
1
   
$
50
 
 
The TDR’s that subsequently defaulted described above did not have a material impact on the allowance for loan losses.
 
25

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

The Company uses the following definitions for classified loans:

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “pass” rated loans.
 
26

As of September 30, 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:
 
   
September 30, 2016
 
New York and other states:
                 
                   
(dollars in thousands)
                 
   
Pass
   
Classified
   
Total
 
Commercial:
                 
Commercial real estate
 
$
143,529
     
11,218
     
154,747
 
Other
   
21,372
     
1,171
     
22,543
 
                         
   
$
164,901
     
12,389
     
177,290
 
 
Florida:
 
(dollars in thousands)
                 
   
Pass
   
Classified
   
Total
 
Commercial:
                 
Commercial real estate
 
$
12,505
     
-
     
12,505
 
Other
   
-
     
-
     
-
 
                         
   
$
12,505
     
-
     
12,505
 
 
Total:
 
(dollars in thousands)
                 
   
Pass
   
Classified
   
Total
 
Commercial:
                 
Commercial real estate
 
$
156,034
     
11,218
     
167,252
 
Other
   
21,372
     
1,171
     
22,543
 
                         
   
$
177,406
     
12,389
     
189,795
 
 
27

   
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
 
 
Included in classified loans in the above tables are impaired loans of $2.4 million and $3.0 million at September 30, 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 Bank’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 September 30, 2016 and December 31, 2015 is included in the aging of the recorded investment of the past due loans table. In addition, the total nonperforming portion of these homogeneous loan pools as of September 30, 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:
 
28

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.

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.
 
29

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

   
Fair Value Measurements at
September 30, 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
 
$
116,327
   
$
-
   
$
116,327
   
$
-
 
State and political subdivisions
   
970
     
-
     
970
     
-
 
Corporate bonds
   
41,025
     
-
     
41,025
     
-
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
400,575
     
-
     
400,575
     
-
 
Small Business Administration- guaranteed participation securities
   
84,687
     
-
     
84,687
     
-
 
Mortgage backed securities and collateralized mortgage obligations - commercial
   
10,233
     
-
     
10,233
     
-
 
Other securities
   
685
     
35
     
650
     
-
 
Total securities available for sale
 
$
654,502
   
$
35
   
$
654,467
   
$
-
 
 
 
   
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
   
$
-
 
 
30

There were no transfers between Level 1 and Level 2 during the three months and nine months ended September 30, 2016 and 2015.

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

 
   
Fair Value Measurements at
September 30, 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)
   
Valuation technique
   
Unobservable inputs
 
Range (Weighted Average)
 
(dollars in thousands)
                                   
                                     
Other real estate owned
 
$
4,768
   
$
-
   
$
-
   
$
4,768
 
Sales comparison approach
 
Adjustments for differences between comparable sales
   
1% - 12% (7%)
Impaired loans:
                                             
Commercial real estate
   
1,290
     
-
     
-
     
1,290
 
Sales comparison approach
 
Adjustments for differences between comparable sales
   
0% - 35% (26%)
 
                                               
Real estate mortgage - 1 to 4 family
   
107
     
-
     
-
     
107
 
Sales comparison approach
 
Adjustments for differences between comparable sales
   
1% - 8% (5%)
 
 
   
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)
   
Valuation technique
   
Unobservable inputs
 
Range (Weighted Average)
 
(dollars in thousands)
                                   
                                     
Other real estate owned
 
$
6,455
   
$
-
   
$
-
   
$
6,455
 
Sales comparison approach
 
Adjustments for differences between comparable sales
   
1% - 10% (4%)
Impaired loans:
                                             
Commercial real estate
   
878
     
-
     
-
     
878
 
Sales comparison approach
 
Adjustments for differences between comparable sales
   
3% - 22% (11%)
 
                                               
Real estate mortgage - 1 to 4 family
   
3,109
     
-
     
-
     
3,109
 
Sales comparison approach
 
Adjustments for differences between comparable sales
   
0% - 9% (4%)
 
 
Other real estate owned, that is carried at fair value less costs to sell was approximately $4.8 million at September 30, 2016 and consisted of approximately $700 thousand of commercial real estate and $4.1 million of residential real estate properties. Valuation charges of $305 thousand and $911 thousand are included in earnings for the three months and nine months ended September 30, 2016, respectively.

Of the total impaired loans of $24.8 million at September 30, 2016, $1.4 million are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at September 30, 2016.  Gross charge offs related to commercial impaired loans included in the table above were $406 thousand for the three months and nine months ended September 30, 2016 while gross charge offs related to residential impaired loans included in the table above amounted to $0 and $4 thousand for the three months and nine months ended September 30, 2016, respectively.

Other real estate owned, that 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.

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 charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at December 31, 2015. Gross charge offs related to commercial impaired loans included in the table above were $641 thousand for the year ended December 31, 2015, while gross charge offs related to residential impaired loans included in the table above amounted to $648 thousand.
 
31

In accordance with ASC 825, the carrying amounts and estimated fair values of financial instruments, at September 30, 2016 and December 31, 2015 are as follows:
 
(dollars in thousands)
 
Carrying
   
Fair Value Measurements at
September 30, 2016 Using:
 
 
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                             
Cash and cash equivalents
 
$
664,428
     
664,428
     
-
     
-
     
664,428
 
Securities available for sale
   
654,502
     
35
     
654,467
     
-
     
654,502
 
Held to maturity securities
   
48,030
     
-
     
50,991
     
-
     
50,991
 
Federal Reserve Bank and Federal
                                       
Home Loan Bank stock
   
9,579
     
N/A
     
N/A
     
N/A
     
N/A
 
Net loans
   
3,343,681
     
-
     
-
     
3,414,401
     
3,414,401
 
Accrued interest receivable
   
10,872
     
25
     
2,695
     
8,152
     
10,872
 
Financial liabilities:
                                       
Demand deposits
   
380,090
     
380,090
     
-
     
-
     
380,090
 
Interest bearing deposits
   
3,788,148
     
2,628,949
     
1,160,918
     
-
     
3,789,867
 
Short-term borrowings
   
179,204
     
-
     
179,204
     
-
     
179,204
 
Accrued interest payable
   
496
     
72
     
424
     
-
     
496
 

(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.

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.
 
32

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.

The Company does not engage in activities involving interest rate swaps, forward placement contracts, or any other instruments commonly referred to as derivatives.
 
33

(7) Accumulated Other Comprehensive Income (Loss)

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

   
Three months ended 9/30/16
 
(dollars in thousands)     
Balance at
7/1/2016
   
Other
Comprehensive
Income (loss)-
Before
Reclassifications
   
Amount
reclassified
from Accumulated
Other Comprehensive
Income
   
Other
Comprehensive
Income (loss)-
Three months
ended 9/30/16
   
Balance at
9/30/2016
 
                               
Net unrealized holding gain (loss) on securities available for sale, net of tax
 
$
2,667
     
(75
)
   
-
     
(75
)
   
2,592
 
Net change in net actuarial loss (gain) and prior service cost on pension and postretirement benefit plans, net of tax
   
(272
)
   
-
     
8
     
8
     
(264
)
                                         
Accumulated other comprehensive income (loss), net of tax
   
2,395
     
(75
)
   
8
     
(67
)
   
2,328
 

   
Three months ended 9/30/2015
 
(dollars in thousands)
 
Balance at
7/1/2015
   
Other
Comprehensive
Income (loss)-
Before
Reclassifications
   
Amount
reclassified
from Accumulated
Other Comprehensive
Income
   
Other
Comprehensive
Income (loss)-
Three months
ended 9/30/15
   
Balance at
9/30/2015
 
                               
Net unrealized holding gain (loss) on securities available for sale, net of tax
 
$
(5,144
)
   
4,713
     
-
     
4,713
     
(431
)
Net change in net actuarial loss (gain) and prior service cost on pension and postretirement benefit plans, net of tax
   
(783
)
   
-
     
40
     
40
     
(743
)
                                         
Accumulated other comprehensive income (loss), net of tax
   
(5,927
)
   
4,713
     
40
     
4,753
     
(1,174
)
 
   
Nine months ended 9/30/16
 
 (dollars in thousands)           
Balance at
1/1/2016
           
Other
Comprehensive
Loss-
Before
Reclassifications
           
Amount
reclassified
from Accumulated
Other Comprehensive
Loss
           
Other
Comprehensive
Income (loss)-
Six months
ended 9/30/16
               
Balance at
9/30/2016
     
                               
Net unrealized holding gain (loss) on securities available for sale, net of tax
 
$
(4,492
)
   
7,484
     
(401
)
   
7,084
     
2,592
 
Net change in net actuarial loss (gain) and prior service cost on pension and  postretirement benefit plans, net of tax
   
(289
)
   
-
     
25
     
25
     
(264
)
                                         
Accumulated other comprehensive income (loss), net of tax
   
(4,781
)
   
7,484
     
(376
)
   
7,109
     
2,328
 

   
Nine months ended 9/30/15
 
(dollars in thousands)
 
Balance at
1/1/2015
   
Other
Comprehensive
Income (loss)-
Before
Reclassifications
   
Amount
reclassified
from Accumulated
Other Comprehensive
Income
   
Other
Comprehensive
Income (loss)-
Six months
ended 9/30/15
   
Balance at
9/30/2015
 
                               
Net unrealized holding gain (loss) on securities available for sale, net of tax
 
$
(3,693
)
   
3,411
     
(149
)
   
3,262
     
(431
)
Net change in net actuarial loss (gain) and prior service cost on pension and postretirement benefit plans, net of tax
   
(816
)
   
-
     
73
     
73
     
(743
)
                                         
Accumulated other comprehensive income (loss), net of tax
   
(4,509
)
   
3,411
     
(76
)
   
3,335
     
(1,174
)
 
The following represents the reclassifications out of accumulated other comprehensive income (loss) for the three months and nine months ended September 30, 2016 and 2015:
 
 
(dollars in thousands)
 
Three months ended
September 30,
   
Nine months ended
September 30,
    
   
2016
   
2015
   
2016
   
2015
 
Affected Line Item in Statements
Net unrealized holding gains (losses) on securities available for sale
                             
                                
Realized gain on securities transactions
 
$
-
     
-
   
$
668
     
249
 
Net gain on securities transactions
Income tax expense
   
-
     
-
     
(267
)
   
(100
)
Income taxes
Net of tax
   
-
     
-
     
401
     
149
   
                                        
Amortization of pension and postretirement benefit items
                                     
                                        
Amortization of net actuarial loss
   
8
     
(43
)
   
25
     
(53
)
Salaries and employee benefits
Amortization of prior service credit
   
(22
)
   
(23
)
   
(67
)
   
(68
)
Salaries and employee benefits
Income tax benefit
   
6
     
26
     
17
     
48
 
Income taxes
Net of tax
   
(8
)
   
(40
)
   
(25
)
   
(73
)
 
                                        
Total reclassifications, net of tax
 
$
(8
)
   
(40
)
 
$
376
     
76
   
 
34

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

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

The 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 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 Agreement; (ii) adoption of compliance plans to respond to the 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 Agreement.

 (9) New Accounting Pronouncements

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.

In June 2016, the FASB released Accounting Standards Update 2016-13 Financial Instruments – Credit Losses which amended existing guidance to replace current generally accepted accounting principles used to measure a reporting entity’s credit losses.  The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2019. The Company is evaluating the impact of these amendments on its consolidated financial statements.
 
35

 
 
Crowe Horwath LLP
 
Independent Member Crowe Horwath International

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 September 30, 2016, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2016 and 2015, and the related changes in shareholders’ equity and cash flows for the nine-month period ended September 30, 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.

/s/ Crowe Horwath LLP
 
   
New York, New York
 
November 4, 2016
 
 
36

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;
 
37

·
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 and nine month periods ended September 30, 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 and nine month periods ended September 30, 2016, with comparisons to the corresponding periods 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.
 
38

Equity markets ended the third quarter up, with most of the gain coming early in the quarter.  Volatility was relatively subdued for most of the quarter but increased somewhat over the last month.  For the full third quarter, the S&P 500 Index was up 3.3% and the Dow Jones Industrial Average was up 2.1%.  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, with average yields declining for the third quarter as compared to the second quarter.  The 10 year Treasury bond averaged 1.56% during Q3 compared to 1.75% in Q2, a decrease of 19 basis points.  However, the 2 year Treasury bond average rate declined just 4 basis points to 0.77%, resulting in the flattening of the curve.  The spread between the 10 year and the 2 year Treasury bonds decreased from 0.98% on average in Q2 to 0.84% in Q3.  This spread has declined in nine of the last ten quarters, and is significantly 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 third 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, increased 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, although, as noted, spreads did increase marginally in the third quarter.
 
39

        
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
 
                                               
 
Q2/16
 
Beg of Q2
   
0.21
     
0.73
     
1.21
     
1.78
     
1.05
 
Peak
   
0.35
     
0.92
     
1.41
     
1.94
     
1.08
 
Trough
   
0.19
     
0.58
     
1.00
     
1.46
     
0.85
 
End of Q2
   
0.26
     
0.58
     
1.01
     
1.49
     
0.91
 
Average in Q2
   
0.26
     
0.77
     
1.24
     
1.75
     
0.98
 
                                               
 
Q3/16
 
Beg of Q3
   
0.26
     
0.58
     
1.01
     
1.49
     
0.91
 
Peak
   
0.37
     
0.84
     
1.26
     
1.73
     
0.89
 
Trough
   
0.18
     
0.56
     
0.94
     
1.37
     
0.81
 
End of Q3
   
0.29
     
0.77
     
1.14
     
1.60
     
0.83
 
Average in Q3
   
0.30
     
0.73
     
1.13
     
1.56
     
0.84
 
 
The United States economy continues to show some modest improvements in some areas, but continues to face challenges. Employment metrics have generally improved, but remain inconsistent and 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 will eventually be reversed. Economic activity in Europe, China and elsewhere has also been mixed, 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 have fundamentally changed the way banks conduct business.
 
40

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 September 30, 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.

Overview
TrustCo recorded net income of $10.9 million, or $0.114 of diluted earnings per share for the three months ended September 30, 2016, compared to net income of $10.6 million, or $0.111 of diluted earnings per share, in the same period in 2015.  Return on average assets was 0.90% and 0.88%, respectively, for the three months ended September 30, 2016 and 2015.  Return on average equity was 10.05% and 10.35%, respectively, for the three months ended September 30, 2016 and 2015.

For the nine months ended September 30, 2016, net income was $31.8 million or $0.333 of diluted earnings per share, compared to $32.1 million and $0.337 per share, respectively, in the same period in 2015.  Return on average assets was 0.89% and 0.91%, respectively, for the nine months ended September 30, 2016 and 2015.  Return on average equity was 9.97% and 10.64%, respectively, for the nine months ended September 30, 2016 and 2015.

The primary factors accounting for the change in net income for the three months ended September 30, 2016 compared to the same periods of the prior year were:

·
An increase in the average balance of interest earning assets of $70.5 million to $4.75 billion for the third quarter of 2016 compared to the same period in 2015.

·
An increase in taxable equivalent net interest margin for the third quarter of 2016 to 3.09% 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 $612 thousand in taxable equivalent net interest income in the third quarter of 2016 compared to the third quarter of 2015.

·
An increase of $474 thousand in other income for the third quarter of 2016 as compared to the prior year period, primarily attributable to the sale of a former branch site.

·
An increase of $1.2 million in salaries and benefits expense for the third quarter of 2016 compared to the third quarter of 2015.
 
41

·
A decrease of $1.1 million in Federal Deposit Insurance Corporation (FDIC) and other insurance expense for the third quarter of 2016 compared to the third quarter of 2015.

·
An increase of $1.1 million in income taxes in the third quarter of 2016 compared to the prior year due to higher pre-tax earnings and a slightly higher effective tax rate in the 2016 period (See section titled “Income Taxes”).

The primary factors accounting for the change in net income for the nine months ended September 30, 2016 compared to the same periods of the prior year were:

·
An increase in the average balance of interest earning assets of $57.8 million to $4.69 billion for the first nine months of 2016 compared to the same period in 2015.

·
An increase in taxable equivalent net interest margin for the first nine months of 2016 to 3.10% 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 $2.2 million in taxable equivalent net interest income in the first nine months of 2016 compared to the same period in 2015.

·
An increase of $419 thousand in securities gains for the first nine months of 2016 as compared to the prior year period.

·
An increase of $580 thousand in other income for the third quarter of 2016 as compared to the prior year period, primarily attributable to the sale of a former branch site.

·
An increase of $2.5 million in salaries and benefits for the first nine months of 2016 compared to the same period in 2015.

·
An increase of $782 thousand in FDIC and other insurance for the first nine months of 2016 compared to the same period in 2015.

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.
 
42

The Formal Agreement requires the Bank to take various actions, within prescribed time frames, with respect to certain activities 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 costs to implement the recommendations in the agreement are expected to remain elevated, reflecting the Company’s investment in additional personnel and systems within the retail loan, deposit and regulatory compliance areas.

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 third 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 increased to a range of 0.25% 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 in their September statement that the “Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
 
43

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 third quarter of 2016 relative to the prior year period.  Relative to the year ago period, lower rates on money market deposits, savings deposits and CDs 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.”

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.  The 10 year Treasury yield was down significantly, on average, during the third quarter of 2016 compared to the third quarter of 2015.

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.  Very low interest rates in many markets around the world have also increased demand for US fixed income assets, which has also contributed to the decline of rates on these assets.
 
44

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 third quarter of 2016.

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 third quarter of 2016, the net interest margin was 3.09%, up 1 basis point 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 $31.5 million while the average yield was 50 basis points in the third quarter of 2016 compared to 25 basis points in the same period in 2015.  The increase in the average balance reflects a decline in investments and growth of funding sources, partly offset by continued growth of the loan portfolio.

The average balance of securities available for sale decreased by $57.9 million while the average yield decreased to 1.79% for the third quarter of 2016 compared to 1.96% for the same period in 2015.  The average balance of held to maturity securities decreased by $11.9 million and the average yield increased to 4.03% for the third quarter of 2016 compared to 3.97% for the same period in 2015.
 
45

The average loan portfolio grew by $108.7 million to $3.37 billion and the average yield decreased 8 basis points to 4.29% in the third 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) increased $32.9 million and the average rate paid decreased 3 basis points to 0.38% in the third quarter of 2016 compared to the same period in 2015.

During the third 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 $4.68 billion in the third quarter of 2015 to $4.75 billion in the same period of 2016 with an average yield of 3.41% in the third quarter of 2016 and 3.43% in the third quarter of 2015.  The shift in the mix of assets towards a higher proportion of loans, along with the increase in yield on cash, partly offset the declining yields on securities available for sale and loans.  Interest income on average earning assets increased from $40.2 million in the third quarter of 2015 to $40.5 million in the third quarter of 2016, on a tax equivalent basis. The increase was the result of higher volume more than offsetting the decline in yield.

Loans
The average balance of loans was $3.37 billion in the third quarter of 2016 and $3.26 billion in the comparable period in 2015.  The yield on loans decreased 8 basis points to 4.29%.  The higher average balances more than offset the lower yield, leading to an increase in the interest income on loans from $35.6 million in the third quarter of 2015 to $36.2 million in the third quarter of 2016.

Compared to the third quarter of 2015, the average balance of residential mortgage loans increased, however other loan categories decreased.  The average balance of residential mortgage loans was $2.82 billion in 2016 compared to $2.69 billion in 2015, an increase of 4.8%.  The average yield on residential mortgage loans decreased by 13 basis points to 4.28% in the third quarter of 2016 compared to 2015.
 
46

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 $13.4 million to an average balance of $195.1 million in the third quarter of 2016 compared to the same period in the prior year.  The average yield on this portfolio was up 17 basis points to 5.32%, compared to 5.15% in the prior year period.  The Company has been selective in underwriting commercial loans in 2016 as the apparent risk/reward balance has been less favorable in many cases.

The average yield on home equity credit lines increased 17 basis points to 3.70% during the third quarter of 2016 compared to 3.53% in the year earlier period.  The average balances of home equity lines decreased 2.2% to $346.7 million in the third 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 third quarter of 2016 was $633.9 million compared to $691.8 million for the comparable period in 2015.  The decreased balances reflect routine paydowns, calls, maturities and sales, 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 1.79% for the third quarter of 2016 and 1.96% for the third 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, corporate bonds 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 $4.3 million as of September 30, 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.
 
47

Held to Maturity Securities
The average balance of held to maturity securities was $50.0 million for the third quarter of 2016 compared to $61.9 million in the third 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 third quarter of 2016 compared to 3.97% for the year earlier period.  The higher yield reflects a modest change in mix and slower prepayments on mortgage-backed securities (MBS), which reduced premium amortization.  TrustCo expects to hold the securities in this portfolio until they mature or are called.

As of September 30, 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 third quarter average balance of Federal Funds sold and other short-term investments was $683.8 million, a $31.5 million increase from the $652.3 million average for the same period in 2015.  The yield was 0.50% for the third quarter of 2016 and 0.25% for the comparable period in 2015.  Interest income from this portfolio increased $458 thousand from $408 thousand in 2015 to $866 thousand in 2016, reflecting the target rate increase that took effect in December of 2015 and the increased balances.

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

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 $20.2 million to $3.81 billion for the third quarter of 2016 versus the third quarter in the prior year, and the average rate paid decreased from 0.40% for 2015 to 0.37% for 2016.  Total interest expense on these deposits decreased $246 thousand to $3.6 million in the third quarter of 2016 compared to the year earlier period.  From the third quarter of 2015 to the third quarter of 2016, interest bearing demand account average balances were up 7.2%, certificates of deposit average balances were down 1.1%, non-interest demand average balances were up 4.8%, average savings balances increased 2.7% and money market balances were down 8.3%.

The Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet.  The Bank is a member of the Federal Home Loan Bank of New York (FHLBNY) and is an eligible borrower at the Federal Reserve Bank of New York (FRBNY) and has the ability to borrow utilizing securities and/or loans as collateral in regard to the FHLBNY and against securities in regard to the FRBNY.  The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a contingent funding source within its Asset/Liability Policy.  Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.
 
48

At September 30, 2016, the maturity of total time deposits is as follows:

(dollars in thousands)
     
       
Under 1 year
 
$
1,066,556
 
1 to 2 years
   
34,268
 
2 to 3 years
   
50,803
 
3 to 4 years
   
5,712
 
4 to 5 years
   
1,660
 
Over 5 years
   
200
 
   
$
1,159,199
 

Average short-term borrowings for the quarter were $189.9 million in 2016 compared to $177.2 million in 2015.  The average rate decreased during this time period from 0.65% 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 $612 thousand to $36.7 million in the third quarter of 2016 compared to the same period in 2015.  The net interest spread was up 1 basis point to 3.03% in the third quarter of 2016 compared to the same in 2015. As previously noted, the net interest margin was up 1 basis points to 3.09% for the third quarter of 2016 compared to the same period in 2015.

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 September 30, 2016:

Nonperforming loans and foreclosed real estate: Total NPLs were $26.0 million at September 30, 2016, compared to $28.3 million at December 31, 2015 and $31.9 million at September 30, 2015.  There were $26.0 million of non-accrual loans at September 30, 2016 compared to $28.2 million at December 31, 2015 and $31.9 million at September 30, 2015.  There were no loans at September 30, 2016 and 2015 and December 31, 2015 that were past due 90 days or more and still accruing interest.

At September 30, 2016, nonperforming loans primarily include a mix of commercial and residential loans.  Of total nonperforming loans of $26.0 million at September 30, 2016, $23.6 million were residential real estate loans, $2.4 million were commercial mortgages and $70 thousand were installment loans, compared to $25.1 million, $3.0 million and $98 thousand, respectively at December 31, 2015.
 
49

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 0.06% of average residential real estate loans (including home equity lines of credit) for the third quarter of 2016 compared to 0.16% for the third 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 September 30, 2016, 79.0% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 21.0% 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 6.6% and 1.8%, respectively, as of September 30, 2016.

Economic conditions vary widely by geographic location.  Florida experienced a more significant downturn than New York during the recession.  Consequently, nonperforming loans (NPLs as a percentage of the portfolio) had generally been more heavily weighted towards Florida in recent years.  However, as of September 30, 2016, NPLs were roughly in line with regional outstandings, as 7.1% of nonperforming loans were to Florida borrowers, compared to 92.9% 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 September 30, 2016, New York and surrounding areas experienced net charge-offs of approximately $861 thousand, compared to $3 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 September 30, 2016, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources.
 
50

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 $2.6 million of commercial mortgages and commercial loans classified as impaired as of September 30, 2016 compared to $3.3 million at December 31, 2015.  There were $22.2 million of impaired residential loans at September 30, 2016 and $22.6 million at December 31, 2015.  The average balances of all impaired loans were $23.9 million for the nine months of 2016 and $26.6 million for the full year 2015.

As of September 30, 2016 and December 31, 2015, the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.

At September 30, 2016 there was $4.8 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
September 30, 2016
   
As of
December 31, 2015
 
   
Amount
   
Percent of
Loans to
Total Loans
   
Amount
   
Percent of
Loans to
Total Loans
 
Commercial
 
$
5,074
     
5.32
%
 
$
4,347
     
5.85
%
Real estate - construction
 
$
307
     
0.69
%
   
365
     
0.81
%
Real estate mortgage - 1 to 4 family
 
$
31,990
     
83.60
%
   
33,167
     
82.14
%
Home equity lines of credit
 
$
5,894
     
10.14
%
   
6,365
     
10.91
%
Installment Loans
 
$
685
     
0.25
%
   
518
     
0.29
%
   
$
43,950
     
100.00
%
 
$
44,762
     
100.00
%

At September 30, 2016, the allowance for loan losses was $44.0 million, compared to $45.1 million at September 30, 2015 and $44.8 million at December 31, 2015.  The allowance represents 1.30% of the loan portfolio as of September 30, 2016 compared to 1.38% at September 30, 2015 and 1.36% at December 31, 2015.

The provision for loan losses was $750 thousand for the quarter ended September 30, 2016 and $800 thousand for the quarter ended September 30, 2015.  Net chargeoffs for the three-month period ended September 30, 2016 were $864 thousand and were $1.2 million in the prior year period.

During the third quarter of 2016, there were $356 thousand of gross commercial loan chargeoffs and $611 thousand of gross residential mortgage and consumer loan chargeoffs as compared with $3 thousand of gross commercial loan charge-offs and $1.4 million of residential mortgage and consumer loan chargeoffs in the third quarter of 2015.  Gross recoveries during the third quarter of 2016 were $3 thousand for commercial loans and $100 thousand for residential mortgage and consumer loans, compared to $3 thousand for commercial loans and $167 thousand for residential and consumer in the third 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:
 
51

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

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

Using this model, the fair value of capital projections as of September 30, 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 September 30, 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.
 
52

As of September 30, 2016
 
Estimated Percentage of
Fair value of Capital to
Fair value of Assets
 
+400 BP
   
19.45
%
+300 BP
   
20.80
 
+200 BP
   
22.12
 
+100 BP
   
23.22
 
Current rates
   
21.88
 
-100 BP
   
22.10
 

Noninterest Income
Total noninterest income for the third quarter of 2016 was $4.7 million, compared to $4.4 million in the prior year period.  The increase of $364 thousand was primarily due to a gain on sale of a former branch site of $469 thousand in the third quarter of 2016.  For the nine months ended September 30, 2016 and 2015 total noninterest income was $14.5 million and $13.4 million, respectively.  The increase was primarily due to a $419 thousand increase in securities gains and the gain noted for the third quarter of 2016.

Trustco Financial Services income decreased $4 thousand to $1.3 million for the third quarter of 2016 compared to the third quarter of 2015.  The fair value of assets under management was $863 million at September 30, 2016 compared to $842 million at December 31, 2015 and $895 million at September 30, 2015.  The fluctuation in assets was due to market value changes and net account acquisitions/closures.  For both the nine months ended September 30, 2016 and 2015, Financial Services income was $4.5 million.

The total of fees for other services to customers plus other income was $2.7 million in the third quarter of 2016, down $106 thousand versus the prior year quarter.

Noninterest Expenses
Total noninterest expenses were $23.0 million for the three months ended September 30, 2016, compared to $23.5 million for the three months ended September 30, 2015.  The largest cause of the decrease in expenses was a $1.1 million decrease in FDIC and other insurance expenses, due to a change in the premium charged by the FDIC.  Going forward we expect that the quarterly FDIC expense will approximate the level recorded in the third quarter of 2016, excluding the impact of balance sheet growth.  The only expense category to see a meaningful increase was the salaries and benefits line, which was up $1.2 million.  This increase was primarily due to the increase in full time equivalent headcount from 778 as of September 30, 2015 to 790 as of September 30, 2016.  Other expense categories were mostly flat or down modestly.

Total noninterest expenses were $70.5 million for the nine months ended September 30, 2016 compared to $67.5 million for the nine months ended September 30, 2015.  The largest cause of the increase in expenses was a $2.5 million increase in salaries and benefits and a $782 thousand increase in FDIC and other insurance costs.  The increase in salaries and benefits was primarily due to the noted increase in full time equivalent headcount.  The only significant decreases were declines of $563 thousand in other expense and $391 thousand in equipment expense.
 
53

Income Taxes
In the third quarter of 2016, TrustCo recognized income tax expense of $6.7 million compared to $5.5 million for the third quarter of 2015.  The effective tax rates were 37.9% and 34.3% for the third quarters of 2016 and 2015, respectively.  For the first nine months of 2016, the effective tax rate was 37.4% compared to 36.5% in the year earlier period.  The lower effective rates in the 2015 periods resulted from the final 2014 tax obligations, as reported on the 2014 income tax returns filed in the third quarter of 2015, being slightly lower than the amounts reflected in the 2014 financial statements.

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 September 30, 2016 was $435.6 million compared to $412.3 million at September 30, 2015. TrustCo declared a dividend of $0.065625 per share in the third quarter of 2016.  This results in a dividend payout ratio of 57.40% based on third quarter 2016 earnings of $10.9 million.

The Bank reported the following capital ratios as of September 30, 2016 and December 31, 2015:
 
54

(dollars in thousands)
 
As of September 30, 2016
   
Well
   
Adequately
 
   
Amount
   
Ratio
   
Capitalized(1)
   
Capitalized(1)(2)
 
                         
Tier 1 leverage capital
 
$
419,714
     
8.678
%
   
5.000
%
   
4.000
%
Common equity tier 1 capital
   
419,714
     
17.110
     
6.500
     
5.125
 
Tier 1 risk-based capital
   
419,714
     
17.110
     
8.000
     
6.625
 
Total risk-based capital
   
450,546
     
18.367
     
10.000
     
8.625
 

(dollars in thousands)
 
As of December 31, 2015
   
Well
   
Adequately
 
   
Amount
   
Ratio
   
Capitalized(1)
   
Capitalized(1)
 
                         
Tier 1 (core) capital
 
$
405,506
     
8.600
%
   
5.000
%
   
4.000
%
Common equity tier 1 capital
   
405,506
     
17.210
     
6.500
     
4.500
 
Tier 1 risk-based capital
   
405,506
     
17.210
     
8.000
     
6.000
 
Total risk-based capital
   
435,149
     
18.470
     
10.000
     
8.000
 
 
(1) Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized
(2) The September 30, 2016 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 0.625 percent

The following is a summary of actual capital amounts and ratios as of September 30, 2016 and December 31, 2015 for TrustCo on a consolidated basis:

(dollars in thousands)
 
As of September 30, 2016
 
   
Amount
   
Ratio
 
             
Tier 1 leverage capital
 
$
432,726
     
8.946
%
Common equity tier 1 capital
   
432,726
     
17.633
 
Tier 1 risk-based capital
   
432,726
     
17.633
 
Total risk-based capital
   
463,570
     
18.890
 

(dollars in thousands)
 
As of December 31, 2015
 
   
Amount
   
Ratio
 
             
Leverage capital
 
$
417,538
     
8.850
%
Common equity tier 1 capital
   
417,538
     
17.710
 
Tier 1 risk-based capital
   
417,538
     
17.710
 
Total risk-based capital
   
447,193
     
18.970
 

In addition, at September 30, 2016, the consolidated equity to total assets ratio was 9.05%, compared to 8.73% at December 31, 2015 and 8.72% at September 30, 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 and the Bank 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%. Accordingly, the required minimum conservation buffer will increase to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 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%.  The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer is not met.  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 September 30, 2016, the Company and Bank meet all capital adequacy requirements to which they are subject, including the currently applicable capital conservation buffer of 0.625%.
 
55

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 September 30, 2016.

Critical Accounting Policies:
Pursuant to Securities and Exchange Commission (SEC) guidance, management of the Company is encouraged to evaluate and disclose those accounting policies judged to be critical policies - those most important to the portrayal of the Company’s financial condition and results, and that require management’s most difficult subjective or complex judgments.
 
Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover the inherent risk of losses in the loan portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.
 
56

TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE

I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIAL

The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities.  Included in the average balance of shareholders' equity is the unrealized gain (loss), net of tax, in the available for sale portfolio of $2.1 million in 2016 and ($3.5) 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
September 30, 2016
   
Three months ended
September 30, 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
 
 
$
109,488
     
408
     
1.49
%
 
$
157,454
     
584
     
1.48
%
 
$
(176
)
   
(205
)
   
29
 
Mortgage backed securities and collateralized mortgage obligations-residential
     
400,103
     
1,829
     
1.83
%
   
425,092
     
2,230
     
2.10
%
   
(401
)
   
(1,590
)
   
1,189
 
State and political subdivisions
     
953
     
20
     
8.39
%
   
1,937
     
34
     
7.02
%
   
(14
)
   
(49
)
   
35
 
Corporate bonds
     
27,161
     
97
     
1.43
%
   
-
     
-
     
-
%
   
97
     
97
     
-
 
Small Business Administration-guaranteed participation securities
     
85,305
     
445
     
2.09
%
   
96,109
     
497
     
2.07
%
   
(52
)
   
(78
)
   
26
 
Mortgage backed securities and collateralized mortgage obligations-commercial
     
10,247
     
36
     
1.41
     
10,532
     
37
     
1.41
     
(1
)
   
(0
)
   
(1
)
Other
     
685
     
4
     
2.34
%
   
685
     
4
     
2.34
%
   
-
     
-
     
-
 
                                                                           
Total securities available for sale
     
633,942
     
2,839
     
1.79
%
   
691,809
     
3,386
     
1.96
%
   
(547
)
   
(1,825
)
   
1,278
 
                                                                           
Federal funds sold and other short-term Investments
     
683,777
     
866
     
0.50
%
   
652,274
     
408
     
0.25
%
   
458
     
21
     
437
 
                                                                           
Held to maturity securities:
                                                                         
Corporate bonds
     
10,644
     
156
     
5.86
%
   
9,969
     
153
     
6.17
%
   
3
     
11
     
(8
)
Mortgage backed securities and collateralized mortgage obligations-residential
     
39,307
     
347
     
3.53
%
   
51,928
     
461
     
3.55
%
   
(114
)
   
(97
)
   
(17
)
                                                                           
Total held to maturity securities
     
49,951
     
503
     
4.03
%
   
61,897
     
614
     
3.97
%
   
(111
)
   
(86
)
   
(25
)
                                                                           
Federal Reserve Bank and Federal Home Loan Bank stock
     
9,579
     
131
     
5.47
%
   
9,480
     
113
     
4.77
%
   
18
     
1
     
17
 
                                                                           
Commercial loans
     
195,115
     
2,597
     
5.32
%
   
208,492
     
2,688
     
5.15
%
   
(91
)
   
(535
)
   
444
 
Residential mortgage loans
     
2,819,343
     
30,175
     
4.28
%
   
2,689,072
     
29,617
     
4.41
%
   
558
     
4,671
     
(4,113
)
Home equity lines of credit
     
346,744
     
3,211
     
3.70
%
   
354,552
     
3,151
     
3.53
%
   
60
     
(48
)
   
108
 
Installment loans
     
8,331
     
195
     
9.36
%
   
8,678
     
183
     
8.33
%
   
12
     
(41
)
   
53
 
                                                                           
Loans, net of unearned income
     
3,369,533
     
36,178
     
4.29
%
   
3,260,794
     
35,639
     
4.37
%
   
539
     
4,047
     
(3,508
)
                                                                           
Total interest earning assets
     
4,746,782
     
40,517
     
3.41
%
   
4,676,254
     
40,160
     
3.43
%
   
357
     
2,158
     
(1,801
)
                                                                           
Allowance for loan losses
     
(44,473
)
                   
(45,829
)
                                       
Cash & non-interest earning assets
     
137,462
                     
133,241
                                         
                                                                           
Total assets
 
 
$
4,839,771
                   
$
4,763,666
                                         
                                                                           
Liabilities and shareholders' equity
                                                                         
                                                                           
Deposits:
                                                                         
Interest bearing checking accounts
 
 
$
780,058
     
120
     
0.06
%
 
$
727,693
     
117
     
0.06
%
   
3
     
2
     
1
 
Money market accounts
     
571,333
     
463
     
0.32
%
   
623,381
     
537
     
0.34
%
   
(74
)
   
(47
)
   
(27
)
Savings
     
1,284,533
     
504
     
0.16
%
   
1,251,031
     
603
     
0.19
%
   
(99
)
   
97
     
(196
)
Time deposits
     
1,176,115
     
2,468
     
0.84
%
   
1,189,763
     
2,544
     
0.85
%
   
(76
)
   
(1,969
)
   
1,893
 
                                                                           
Total interest bearing deposits
     
3,812,039
     
3,555
     
0.37
%
   
3,791,868
     
3,801
     
0.40
%
   
(246
)
   
(1,917
)
   
1,671
 
Short-term borrowings
     
189,910
     
281
     
0.59
%
   
177,230
     
290
     
0.65
%
   
(9
)
   
36
     
(45
)
                                                                           
Total interest bearing liabilities
     
4,001,949
     
3,836
     
0.38
%
   
3,969,098
     
4,091
     
0.41
%
   
(255
)
   
(1,881
)
   
1,626
 
                                                                           
Demand deposits
     
377,455
                     
360,080
                                         
Other liabilities
     
27,496
                     
27,524
                                         
Shareholders' equity
     
432,871
                     
406,964
                                         
                                                                           
Total liabilities and shareholders' equity
 
 
$
4,839,771
                   
$
4,763,666
                                         
                                                                           
Net interest income , tax equivalent
             
36,681
                     
36,069
           
$
612
     
4,039
     
(3,427
)
                                                                           
Net interest spread
                     
3.03
%
                   
3.02
%
                       
                                                                           
Net interest margin (net interest income to total interest earning assets)
                     
3.09
%
                   
3.08
%
                       
                                                                           
Tax equivalent adjustment
             
(14
)
                   
(19
)
                               
                                                                           
Net interest income
             
36,667
                     
36,050 
                                 
 
57

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 $16 thousand in 2016 and  ($3.1) 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.

   
Nine months ended
September 30, 2016
   
Nine months ended
September 30, 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
 
$
97,281
     
1,067
     
1.46
%
 
$
116,824
     
1,162
     
1.33
%
 
$
(95
)
   
(254
)
   
159
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
419,185
     
6,114
     
1.94
%
   
448,223
     
6,899
     
2.05
%
   
(785
)
   
(438
)
   
(347
)
State and political subdivisions
   
1,007
     
60
     
7.94
%
   
1,989
     
108
     
7.32
%
   
(48
)
   
(62
)
   
14
 
Corporate bonds
   
9,120
     
97
     
1.42
%
   
813
     
1
     
0.16
%
   
96
     
54
     
42
 
Small Business Administration-guaranteed participation securities
   
87,896
     
1,371
     
2.08
%
   
98,868
     
1,522
     
2.05
%
   
(151
)
   
(186
)
   
35
 
Mortgage backed securities and collateralized mortgage obligations-commercial
   
10,320
     
110
     
1.42
%
   
10,600
     
112
     
1.41
%
   
(2
)
   
(3
)
   
1
 
Other
   
683
     
12
     
2.34
%
   
685
     
12
     
2.34
%
   
-
     
-
     
-
 
                                                                         
Total securities available for sale
   
625,492
     
8,831
     
1.88
%
   
678,002
     
9,816
     
1.93
%
   
(985
)
   
(888
)
   
(97
)
                                                                         
Federal funds sold and other short-term Investments
   
675,948
     
2,542
     
0.50
%
   
662,879
     
1,231
     
0.25
%
   
1,311
     
25
     
1,286
 
                                                                         
Held to maturity securities:
                                                                       
Corporate bonds
   
10,202
     
464
     
6.06
%
   
9,965
     
461
     
6.17
%
   
3
     
14
     
(11
)
Mortgage backed securities and collateralized mortgage obligations-residential
   
42,192
     
1,123
     
3.55
%
   
55,569
     
1,419
     
3.41
%
   
(296
)
   
(385
)
   
89
 
                                                                         
Total held to maturity securities
   
52,394
     
1,587
     
4.04
%
   
65,534
     
1,880
     
3.83
%
   
(293
)
   
(371
)
   
78
 
                                                                         
Federal Reserve Bank and Federal Home Loan Bank stock
   
9,545
     
369
     
5.15
%
   
9,392
     
347
     
4.93
%
   
22
     
6
     
16
 
                                                                         
Commercial loans
   
198,461
     
7,777
     
5.22
%
   
212,617
     
8,194
     
5.14
%
   
(417
)
   
(623
)
   
206
 
Residential mortgage loans
   
2,768,579
     
89,523
     
4.31
%
   
2,644,216
     
87,946
     
4.44
%
   
1,577
     
5,185
     
(3,608
)
Home equity lines of credit
   
353,461
     
9,569
     
3.61
%
   
353,630
     
9,304
     
3.52
%
   
265
     
(7
)
   
272
 
Installment loans
   
8,435
     
579
     
9.15
%
   
8,236
     
534
     
8.66
%
   
45
     
27
     
18
 
                                                                         
Loans, net of unearned income
   
3,328,936
     
107,448
     
4.30
%
   
3,218,699
     
105,978
     
4.39
%
   
1,470
     
4,582
     
(3,112
)
                                                                         
Total interest earning assets
   
4,692,315
     
120,777
     
3.43
%
   
4,634,506
     
119,252
     
3.43
%
   
1,525
     
3,353
     
(1,828
)
                                                                         
Allowance for loan losses
   
(44,832
)
                   
(46,203
)
                                       
Cash & non-interest earning assets
   
136,584
                     
136,906
                                         
                                                                         
Total assets
 
$
4,784,067
                   
$
4,725,209
                                         
                                                                         
Liabilities and shareholders' equity
                                                                       
                                                                         
Deposits:
                                                                       
Interest bearing checking accounts
 
$
758,314
     
350
     
0.06
%
 
$
704,323
     
333
     
0.06
%
   
17
     
13
     
4
 
Money market accounts
   
585,019
     
1,426
     
0.33
%
   
632,143
     
1,701
     
0.36
%
   
(275
)
   
(119
)
   
(156
)
Savings
   
1,273,565
     
1,712
     
0.18
%
   
1,243,544
     
1,860
     
0.20
%
   
(148
)
   
70
     
(218
)
Time deposits
   
1,162,603
     
7,301
     
0.84
%
   
1,186,846
     
7,478
     
0.84
%
   
(177
)
   
(153
)
   
(24
)
                                                                         
Total interest bearing deposits
   
3,779,501
     
10,789
     
0.38
%
   
3,766,856
     
11,372
     
0.40
%
   
(583
)
   
(190
)
   
(393
)
Short-term borrowings
   
182,453
     
800
     
0.58
%
   
184,079
     
936
     
0.68
%
   
(136
)
   
(8
)
   
(128
)
                                                                         
Total interest bearing liabilities
   
3,961,954
     
11,589
     
0.39
%
   
3,950,935
     
12,308
     
0.42
%
   
(719
)
   
(198
)
   
(521
)
                                                                         
Demand deposits
   
368,852
                     
344,606
                                         
Other liabilities
   
27,179
                     
26,689
                                         
Shareholders' equity
   
426,082
                     
402,979
                                         
                                                                         
Total liabilities and shareholders' equity
 
$
4,784,067
                   
$
4,725,209
                                         
                                                                         
Net interest income , tax equivalent
           
109,188
                     
106,944
           
$
2,244
     
3,552
     
(1,308
)
                                                                         
Net interest spread
                   
3.04
%
                   
3.01
%
                       
                                                                         
Net interest margin (net interest income to total interest earning assets)
                   
3.10
%
                   
3.08
%
                       
                                                                         
Tax equivalent adjustment
           
(40
)
                   
(58
)
                               
                                                                         
Net interest income
           
109,148
                     
106,886
                                 
 
58

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 September 30, 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 third quarter of 2016, the Company had an average balance of Federal Funds sold and other short-term investments of $683.8 million compared to $652.3 million in the third 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.
 
59

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
   
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.
   
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
 
60

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:  November 4, 2016
 
 
61

Exhibits Index
 
Reg S-K
Exhibit No.
Description
   
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
 
 
62