Edgar Filing: TRUSTCO BANK CORP N Y

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

Commission File Number 0-10592

TRUSTCO BANK CORP NY

(Exact name of registrant as specified in its charter)

NEW YORK		14‑1630287
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5 SARNOWSKI DRIVE, GLENVILLE, NEW YORK		12302
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code:

(518) 377‑3311

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

☒Yes ☐ No

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

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

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

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

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

Common Stock		Number of Shares Outstanding as of July 31, 2017
$1 Par Value		96,101,978

TrustCo Bank Corp NY

INDEX

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

		Consolidated Statements of Income for the three month and six month periods ended June 30, 2017 and 2016	3

		Consolidated Statements of Comprehensive Income for the three month and six month periods ended June 30, 2017 and 2016	4

		Consolidated Statements of Financial Condition as of June 30, 2017 and December 31, 2016	5

		Consolidated Statements of Changes in Shareholders’ Equity for the six month periods ended June 30, 2017 and 2016	6

		Consolidated Statements of Cash Flows for the six month periods ended June 30, 2017 and 2016	7

		Notes to Consolidated Interim Financial Statements	8 – 37

		Report of Independent Registered Public Accounting Firm	38

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39-60

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

	Item 4.	Controls and Procedures	61

	Part II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	62

	Item 1A.	Risk Factors	62

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62

	Item 3.	Defaults Upon Senior Securities	62

	Item 4.	Mine Safety	62

	Item 5.	Other Information	62

	Item 6.	Exhibits	62

Index

TRUSTCO BANK CORP NY

Consolidated Statements of Income (Unaudited)

(dollars in thousands, except per share data)

	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017		2016

Interest and dividend income:
Interest and fees on loans	$	36,662			35,652		72,706		71,257
Interest and dividends on securities available for sale:
U. S. government sponsored enterprises		607			404		1,202		659
State and political subdivisions		11			13		23		27
Mortgage-backed securities and collateralized mortgage obligations-residential		1,944			2,169		3,902		4,285
Corporate bonds		154			-		305		-
Small Business Administration-guaranteed participation securities		394			450		809		926
Mortgage-backed securities and collateralized mortgage obligations-commercial		21			38		44		74
Other securities		4			4		8		8
Total interest and dividends on securities available for sale		3,135			3,078		6,293		5,979

Interest on held to maturity securities:
Mortgage-backed securities and collateralized mortgage obligations-residential		296			374		612		775
Corporate bonds		154			154		308		308
Total interest on held to maturity securities		450			528		920		1,083

Federal Reserve Bank and Federal Home Loan Bank stock		134			118		268		238
Interest on federal funds sold and other short-term investments		1,727			832		2,973		1,677
Total interest income		42,108			40,208		83,160		80,234

Interest expense:
Interest on deposits:
Interest-bearing checking		134			116		258		230
Savings		435			604		865		1,208
Money market deposit accounts		468			467		934		962
Time deposits		2,181			2,460		4,464		4,833
Interest on short-term borrowings		349			262		698		519
Total interest expense		3,567			3,909		7,219		7,752

Net interest income		38,541			36,299		75,941		72,482
Provision for loan losses		550			800		1,150		1,600
Net interest income after provision for loan losses		37,991			35,499		74,791		70,882

Noninterest income:
Trustco financial services income		1,425			1,512		3,283		3,117
Fees for services to customers		2,797			2,737		5,434		5,398
Net gain on securities transactions		-			668		-		668
Other		282			282		514		588
Total noninterest income		4,504			5,199		9,231		9,771

Noninterest expenses:
Salaries and employee benefits		9,559			8,934		19,769		17,937
Net occupancy expense		4,267			3,918		8,376		8,006
Equipment expense		1,428			1,840		2,984		3,354
Professional services		1,963			2,098		3,891		4,244
Outsourced services		1,500			1,425		3,000		2,976
Advertising expense		607			570		1,320		1,299
FDIC and other insurance		1,012			1,949		2,059		3,939
Other real estate (income) expense, net		(4	)		423		495		942
Other		2,581			2,817		5,038		4,715
Total noninterest expenses		22,913			23,974		46,932		47,412

Income before taxes		19,582			16,724		37,090		33,241
Income taxes		7,342			6,260		13,903		12,366

Net income	$	12,240			10,464		23,187		20,875

Net income per share:
- Basic	$	0.127			0.110		0.242		0.219

- Diluted	$	0.127			0.109		0.241		0.219

See accompanying notes to unaudited consolidated interim financial statements.

Index

TRUSTCO BANK CORP NY

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in thousands)

	Three Months Ended June 30						Six Months Ended June 30
	2017			2016			2017			2016

Net income	$	12,240			10,464			23,187			20,875

Net unrealized holding gain on securities available for sale		3,343			4,565			4,522			12,600
Reclassification adjustments for net gain recognized in income		-			(668	)		-			(668	)
Tax effect		(1,337	)		(1,559	)		(1,809	)		(4,773	)

Net unrealized gain on securities available for sale, net of tax		2,006			2,338			2,713			7,159


Amortization of net actuarial gain		(73	)		(50	)		(136	)		(17	)
Amortization of prior service cost		22			22			45			45
Tax effect		20			12			36			(11	)
Amortization of net actuarial gain and prior service cost on pension and postretirement plans, net of tax		(31	)		(16	)		(55	)		17

Other comprehensive income, net of tax		1,975			2,322			2,658			7,176
Comprehensive income	$	14,215			12,786			25,845			28,051

See accompanying notes to unaudited consolidated interim financial statements.

Index

TRUSTCO BANK CORP NY

Consolidated Statements of Financial Condition

(dollars in thousands, except per share data)

	June, 2017			December 31, 2016
ASSETS:	(Unaudited)			(Audited)

Cash and due from banks	$	43,783			48,719

Federal funds sold and other short term investments		663,360			658,555
Total cash and cash equivalents		707,143			707,274

Securities available for sale		605,457			620,360

Held to maturity securities (fair value 2017 $42,803; 2016 $47,526)		41,208			45,490

Federal Reserve Bank and Federal Home Loan Bank stock		9,723			9,579

Loans, net of deferred net costs		3,507,473			3,430,586
Less:
Allowance for loan losses		44,162			43,890
Net loans		3,463,311			3,386,696

Bank premises and equipment, net		35,174			35,466
Other assets		58,466			63,941

Total assets	$	4,920,482			4,868,806

LIABILITIES:
Deposits:
Demand	$	390,120			377,755
Interest-bearing checking		871,004			815,534
Savings accounts		1,285,886			1,271,449
Money market deposit accounts		572,580			571,962
Time deposits		1,088,824			1,159,463
Total deposits		4,208,414			4,196,163

Short-term borrowings		233,621			209,406
Accrued expenses and other liabilities		31,081			30,551

Total liabilities	$	4,473,116			4,436,120

SHAREHOLDERS' EQUITY:
Capital stock par value $1; 150,000,000 shares authorized; 99,510,682 and 99,214,382 shares issued at June 30, 2017 and December 31, 2016, respectively		99,511			99,214
Surplus		172,603			171,425
Undivided profits		212,112			201,517
Accumulated other comprehensive loss, net of tax		(3,593	)		(6,251	)
Treasury stock at cost - 3,495,799 and 3,434,205 shares at
June 30, 2017 and December 31, 2016, respectively		(33,267	)		(33,219	)

Total shareholders' equity		447,366			432,686

Total liabilities and shareholders' equity	$	4,920,482			4,868,806

See accompanying notes to unaudited consolidated interim financial statements.

Index

TRUSTCO BANK CORP NY

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

(dollars in thousands, except per share data)

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


Beginning balance, January 1, 2016	$	98,973		171,443			184,009			(4,781	)		(36,334	)		413,310
Net income		-		-			20,875			-			-			20,875
Other comprehensive income, net of tax		-		-			-			7,176			-			7,176
Cash dividend declared, $.1312 per share		-		-			(12,528	)		-			-			(12,528	)
Stock options exercised (97,600 shares)		98		404			-			-			-			502
Purchase of treasury stock (80,769 shares)		-		-			-			-			(489	)		(489	)
Sale of treasury stock (213,748 shares)		-		(785	)		-			-			2,092			1,307
Stock based compensation expense		-		112			-			-			-			112

Ending balance,June 30, 2016	$	99,071		171,174			192,356			2,395			(34,731	)		430,265

Beginning balance, January 1, 2017	$	99,214		171,425			201,517			(6,251	)		(33,219	)		432,686
Net income		-		-			23,187			-			-			23,187
Other comprehensive income, net of tax		-		-			-			2,658			-			2,658
Cash dividend declared, $.1312 per share		-		-			(12,592	)		-			-			(12,592	)
Stock options exercised (296,300 shares)		297		1,298			-			-			-			1,595
Purchase of treasury stock (213,356 shares)		-		-			-			-			(1,503	)		(1,503	)
Sale of treasury stock (151,762 shares)		-		(199	)		-			-			1,455			1,256
Stock based compensation expense		-		79			-			-			-			79

Ending balance, June 30, 2017	$	99,511		172,603			212,112			(3,593	)		(33,267	)		447,366

See accompanying notes to unaudited consolidated interim financial statements.

Index

TRUSTCO BANK CORP NY

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

	Six months ended June 30,
	2017			2016

Cash flows from operating activities:
Net income	$	23,187			20,875

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,898			2,071
Net gain on sale of other real estate owned		(507	)		(363	)
Writedown of other real estate owned		362			606
Provision for loan losses		1,150			1,600
Deferred tax expense		693			1,211
Net amortization of securities		2,244			2,453
Stock based compensation expense		79			112
Net loss on sale of bank premises and equipment		-			(62	)
Net gain on sales of securities		-			(668	)
Decrease in taxes receivable		4,087			1,996
Decrease in interest receivable		(213	)		(442	)
(Decrease) increase in interest payable		(64	)		17
Increase in other assets		(1,639	)		(1,530	)
Increase (decrease) in accrued expenses and other liabilities		910			(599	)
Total adjustments		9,000			6,402
Net cash provided by operating activities		32,187			27,277

Cash flows from investing activities:

Proceeds from sales and calls of securities available for sale		73,569			134,550
Proceeds from calls and maturities of held to maturity securities		4,282			5,781
Purchases of securities available for sale		(56,388	)		(144,422	)
Proceeds from maturities of securities available for sale		-			550
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock		(144	)		(99	)
Net increase in loans		(80,030	)		(54,636	)
Proceeds from dispositions of other real estate owned		3,093			4,058
Proceeds from dispositions of bank premises and equipment		-			58
Purchases of bank premises and equipment		(1,606	)		(1,217	)
Net cash (used in) provided by investing activities		(57,224	)		(55,377	)


Cash flows from financing activities:

Net increase in deposits		12,251			80,249
Net increase (decrease) in short-term borrowings		24,215			(684	)
Proceeds from exercise of stock options		1,595			502
Stock based award tax withholding payments		(333	)		(32	)
Proceeds from sale of treasury stock		1,256			1,307
Purchases of treasury stock		(1,503	)		(489	)
Dividends paid		(12,575	)		(12,513	)
Net cash provided by financing activities		24,906			68,340
Net (decrease) increase in cash and cash equivalents		(131	)		40,240
Cash and cash equivalents at beginning of period		707,274			718,156
Cash and cash equivalents at end of period	$	707,143			758,396

Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest paid	$	7,283			7,735
Income taxes paid		9,808			10,485
Other non cash items:
Transfer of loans to other real estate owned		2,265			2,448
Increase in dividends payable		17			15
Change in unrealized gain on securities available for sale-gross of deferred taxes		4,522			11,932
Change in deferred tax effect on unrealized gain on securities available for sale		(1,809	)		(4,773	)
Amortization of net actuarial (gain) loss and prior service cost on pension and postretirement plans		(91	)		28
Change in deferred tax effect of amortization of net actuarial (gain) loss and prior service cost on pension and postretirement plans		36			(11	)

See accompanying notes to unaudited consolidated interim financial statements.

Index

(1) Financial Statement Presentation

The unaudited Consolidated Interim Financial Statements of TrustCo Bank Corp NY (the “Company” or “TrustCo”) include the accounts of the subsidiaries after elimination of all significant intercompany accounts and transactions. Prior period amounts are reclassified when necessary to conform to the current period presentation. The net income reported for the three and six months ended June 30, 2017 is not necessarily indicative of the results that may be expected for the year ending December 31, 2017, 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 for fair presentation. The accompanying Consolidated Interim Financial Statements should be read in conjunction with the Company’s year-end Consolidated Financial Statements, including notes thereto, which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. 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.

Effective January 1, 2017, the Company adopted FASB issued ASU No. 2016-09, “Improvement to Employee Share-Based Payment Accounting” which 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 adoption of these amendments did not have a material impact on the Consolidated Interim Financial Statements.

(2) Earnings Per Share

The Company computes earnings per share in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share (“ASC 260”). A reconciliation of the component parts of earnings per share for the three and six months ended June 30, 2017 and 2016 is as follows:

(in thousands, except per share data)	For the three months ended June 30:				For the six months ended June 30:
(in thousands, except per share data)	For the three months ended June 30:				For the six months ended June 30:
	2017		2016		2017		2016
Net income	$	12,240		10,464	$	23,187		20,875
Weighted average common shares		96,003		95,487		95,944		95,426
Stock Options		70		93		90		70
Weighted average common shares including potential dilutive shares		96,073		95,580		96,034		95,496

Basic EPS	$	0.127		0.110	$	0.242		0.219

Diluted EPS	$	0.127		0.109	$	0.241		0.219

Index

For the three and six months ended June 30, 2017, the weighted average number of antidilutive stock options excluded from diluted earnings per share was approximately 412 thousand. For the three and six months ended June 30, 2016 the weighted average number of antidilutive stock options excluded from diluted earnings per share was approximately 1.6 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.

(3) Benefit Plans

The table below outlines the components of the Company's net periodic benefit recognized during the three and six months ended June 30, 2017 and 2016 for its pension and other postretirement benefit plans:

	For the three months ended June 30,
	Pension Benefits						Other Postretirement Benefits
(dollars in thousands)	2017			2016			2017			2016

Service cost	$	11			16			23			32
Interest cost		322			349			54			61
Expected return on plan assets		(686	)		(681	)		(190	)		(180	)
Amortization of net loss (gain)		10			5			(83	)		(55	)
Amortization of prior service cost		-			-			22			22
Net periodic benefit	$	(343	)		(311	)		(174	)		(120	)

	For the six months ended June 30,
	Pension Benefits					Other Postretirement Benefits
(dollars in thousands)		2017		2016			2017		2016

Service cost	$	22		31			51		64
Interest cost		651		686			110		123
Expected return on plan assets		(1,372	)	(1,325	)		(381	)	(360	)
Amortization of net loss (gain)		33		92			(169	)	(109	)
Amortization of prior service cost		-		-			45		45
Net periodic benefit	$	(666	)	(516	)		(344	)	(237	)

The Company does not expect to make contributions to its pension and postretirement benefit plans in 2017. As of June 30, 2017, no contributions have been made, however, this decision is reviewed each quarter and is subject to change based upon market conditions.

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

Index

(4) Investment Securities

(a) Securities available for sale

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

(dollars in thousands)	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

U.S. government sponsored enterprises	$	129,939		71		1,624		128,386
State and political subdivisions		523		13		-		536
Corporate bonds		40,613		-		115		40,498
Mortgage backed securities and collateralized mortgage obligations - residential		355,966		177		3,552		352,591
Small Business Administration- guaranteed participation securities		74,514		-		1,656		72,858
Mortgage backed securities and collateralized mortgage obligations - commercial		9,960		-		57		9,903
Other		650		-		-		650
Total debt securities		612,165		261		7,004		605,422
Equity securities		35		-		-		35
Total securities available for sale	$	612,200		261		7,004		605,457

(dollars in thousands)	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

U.S. government sponsored enterprises	$	119,887		-		2,621		117,266
State and political subdivisions		873		13		-		886
Mortgage backed securities and collateralized mortgage obligations - residential		378,068		123		5,883		372,308
Corporate bonds		40,956		-		251		40,705
Small Business Administration- guaranteed participation securities		81,026		-		2,527		78,499
Mortgage backed securities and collateralized mortgage obligations - commercial		10,130		-		119		10,011
Other		650		-		-		650
Total debt securities		631,590		136		11,401		620,325
Equity securities		35		-		-		35
Total securities available for sale	$	631,625		136		11,401		620,360

Index

The following table distributes the debt securities included in the available for sale portfolio as of June 30, 2017, 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	$	50,482		50,397
Due in one year through five years		111,183		109,607
Due after five years through ten years		10,060		10,066
Due after ten years		-		-
Mortgage backed securities and collateralized mortgage obligations - residential		355,966		352,591
Small Business Administration- guaranteed participation securities		74,514		72,858
Mortgage backed securities and collateralized mortgage obligations - commercial		9,960		9,903
	$	612,165		605,422

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)	June 30, 2017
	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	$	88,286		1,602		14,978		22		103,264		1,624
Mortgage backed securities and collateralized mortgage obligations - residential		320,377		3,361		11,024		191		331,401		3,552
Corporate bonds		40,498		115		-		-		40,498		115
Small Business Administration- guaranteed participation securities		60,095		1,200		12,763		456		72,858		1,656
Mortgage backed securities and collateralized mortgage obligations - commercial		9,903		57		-		-		9,903		57

Total	$	519,159		6,335		38,765		669		557,924		7,004

Index

(dollars in thousands)	December 31, 2016
	Less than 12 months				12 months or more				Total
	Fair Value		Gross Unreal. Loss		Fair Value		Gross Unreal. Loss		Fair Value		Gross Unreal. Loss
U.S. government sponsored enterprises	$	102,266		2,621		-		-		102,266		2,621
Mortgage backed securities and collateralized mortgage obligations - residential		359,622		5,766		4,713		117		364,335		5,883
Corporate bonds		40,705		251		-		-		40,705		251
Small Business Administration- guaranteed participation securities		64,560		1,960		13,940		567		78,500		2,527
Mortgage backed securities and collateralized mortgage obligations - commercial		10,011		119		-		-		10,011		119

Total	$	577,164		10,717		18,653		684		595,817		11,401

The proceeds from sales and calls of securities available for sale, gross realized gains and gross realized losses from sales and calls during the three and six months ended June 30, 2017 and 2016 are as follows:

(dollars in thousands)	Three months ended June 30,
	2017		2016

Proceeds from sales	$	-		44,829
Proceeds from calls		52,799		40,808
Gross realized gains		-		668
Gross realized losses		-		-

(dollars in thousands)	Six months ended June 30,
	2017		2016

Proceeds from sales	$	-		44,829
Proceeds from calls		73,569		89,721
Gross realized gains		-		668
Gross realized losses		-		-

There were no sales of securities available for sale during the three and six months ended June 30, 2017. For the three and six months ended June 30, 2016, income tax expense recognized on net gains on sales of securities available for sale was approximately $267 thousand.

Index

(b) Held to maturity securities

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

(dollars in thousands)	June 30, 2017
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value

Mortgage backed securities and collateralized mortgage obligations - residential	$	31,211		1,520		-		32,731
Corporate bonds		9,997		75		-		10,072
Total held to maturity	$	41,208		1,595		-		42,803

(dollars in thousands)	December 31, 2016
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value

Mortgage backed securities and collateralized mortgage obligations - residential	$	35,500		1,736		-		37,236
Corporate bonds		9,990		300		-		10,290
Total held to maturity	$	45,490		2,036		-		47,526

The following table distributes the debt securities included in the held to maturity portfolio as of June 30, 2017, 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	$	9,997		10,072
Mortgage backed securities and collateralized mortgage obligations - residential		31,211		32,731
	$	41,208		42,803

There were no held to maturity securities in an unrecognized loss position as of June 30, 2017 or December 31, 2016.

There were no sales or transfers of held to maturity securities during the three and six months ended June 30, 2017 and 2016.

Index

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 FASB ASC Topic 320, Investments – Debt and Equity Securities (“ASC 320”).

In determining OTTI under the 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 June 30, 2017, the Company’s security portfolios 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 June 30, 2017.

Index

(5) Loans and Allowance for Loan Losses

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

	June 30, 2017
(dollars in thousands)	New York and other states*		Florida		Total
Commercial:
Commercial real estate	$	149,245		11,099		160,344
Other		22,342		349		22,691
Real estate mortgage - 1 to 4 family:
First mortgages		2,208,078		714,360		2,922,438
Home equity loans		64,387		12,481		76,868
Home equity lines of credit		271,480		45,194		316,674
Installment		7,061		1,397		8,458
Total loans, net	$	2,722,593		784,880		3,507,473
Less: Allowance for loan losses						44,162
Net loans					$	3,463,311

	December 31, 2016
(dollars in thousands)	New York and other states*		Florida		Total
Commercial:
Commercial real estate	$	151,366		12,243		163,609
Other		27,539		46		27,585
Real estate mortgage - 1 to 4 family:
First mortgages		2,158,904		665,183		2,824,087
Home equity loans		60,892		10,754		71,646
Home equity lines of credit		286,586		48,255		334,841
Installment		7,048		1,770		8,818
Total loans, net	$	2,692,335		738,251		3,430,586
Less: Allowance for loan losses						43,890
Net loans					$	3,386,696

*Includes New York, New Jersey, Vermont and Massachusetts

At June 30, 2017 and December 31, 2016, the Company had approximately $23.8 million and $24.8 million of real estate construction loans, respectively. Of the $23.8 million in real estate construction loans at June 30, 2017, approximately $14.6 million are secured by first mortgages to residential borrowers while approximately $9.2 million were to commercial borrowers for residential construction projects. Of the $24.8 million in real estate construction loans at December 31, 2016, approximately $16.3 million are secured by first mortgages to residential borrowers while approximately $8.5 million were to commercial borrowers for residential construction projects. The vast majority of construction loans are in the Company’s New York market.

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

Index

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

	June 30, 2017
(dollars in thousands)	New York and other states		Florida		Total
Loans in non-accrual status:
Commercial:
Commercial real estate	$	1,611		-		1,611
Other		100		-		100
Real estate mortgage - 1 to 4 family:
First mortgages		17,178		1,870		19,048
Home equity loans		48		-		48
Home equity lines of credit		3,413		242		3,655
Installment		25		-		25
Total non-accrual loans		22,375		2,112		24,487
Restructured real estate mortgages - 1 to 4 family		41		-		41
Total nonperforming loans	$	22,416		2,112		24,528

	December 31, 2016
(dollars in thousands)	New York and other states		Florida		Total
Loans in non-accrual status:
Commercial:
Commercial real estate	$	1,843		-		1,843
Other		-		-		-
Real estate mortgage - 1 to 4 family:
First mortgages		17,727		1,659		19,386
Home equity loans		95		-		95
Home equity lines of credit		3,376		270		3,646
Installment		48		-		48
Total non-accrual loans		23,089		1,929		25,018
Restructured real estate mortgages - 1 to 4 family		42		-		42
Total nonperforming loans	$	23,131		1,929		25,060

The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu). As of June 30, 2017 and December 31, 2016, other estate owned included $2.9 million and $3.5 million of residential foreclosed properties, respectively. In addition, non-accrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $11.1 million and $12.5 million as of June 30, 2017 and December 31, 2016, respectively.

Index

The following tables present the aging of the recorded investment in past due loans by loan class and by region as of June 30, 2017 and December 31, 2016:

New York and other states:

	June 30, 2017
(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	$	133		-		1,523		1,656		147,589		149,245
Other		-		-		100		100		22,242		22,342
Real estate mortgage - 1 to 4 family:
First mortgages		3,997		2,101		9,106		15,204		2,192,874		2,208,078
Home equity loans		107		40		18		165		64,222		64,387
Home equity lines of credit		554		600		2,076		3,230		268,250		271,480
Installment		45		13		22		80		6,981		7,061

Total	$	4,836		2,754		12,845		20,435		2,702,158		2,722,593

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	$	-		-		-		-		11,099		11,099
Other		-		-		-		-		349		349
Real estate mortgage - 1 to 4 family:
First mortgages		793		72		928		1,793		712,567		714,360
Home equity loans		-		53		-		53		12,428		12,481
Home equity lines of credit		50		-		-		50		45,144		45,194
Installment		7		5		-		12		1,385		1,397

Total	$	850		130		928		1,908		782,972		784,880

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	$	133		-		1,523		1,656		158,688		160,344
Other		-		-		100		100		22,591		22,691
Real estate mortgage - 1 to 4 family:
First mortgages		4,790		2,173		10,034		16,997		2,905,441		2,922,438
Home equity loans		107		93		18		218		76,650		76,868
Home equity lines of credit		604		600		2,076		3,280		313,394		316,674
Installment		52		18		22		92		8,366		8,458

Total	$	5,686		2,884		13,773		22,343		3,485,130		3,507,473

Index

New York and other states:

	December 31, 2016
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 + Days Past Due		Total 30+ days Past Due		Current		Total Loans

Commercial:
Commercial real estate	$	50		43		1,706		1,799		149,567		151,366
Other		-		-		-		-		27,539		27,539
Real estate mortgage - 1 to 4 family:
First mortgages		6,379		2,924		9,643		18,946		2,139,958		2,158,904
Home equity loans		50		3		74		127		60,765		60,892
Home equity lines of credit		685		111		1,839		2,635		283,951		286,586
Installment		34		32		15		81		6,967		7,048

Total	$	7,198		3,113		13,277		23,588		2,668,747		2,692,335

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	$	-		-		-		-		12,243		12,243
Other		-		-		-		-		46		46
Real estate mortgage - 1 to 4 family:
First mortgages		1,942		69		1,255		3,266		661,917		665,183
Home equity loans		19		-		-		19		10,735		10,754
Home equity lines of credit		-		-		156		156		48,099		48,255
Installment		30		6		-		36		1,734		1,770

Total	$	1,991		75		1,411		3,477		734,774		738,251

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	$	50		43		1,706		1,799		161,810		163,609
Other		-		-		-		-		27,585		27,585
Real estate mortgage - 1 to 4 family:
First mortgages		8,321		2,993		10,898		22,212		2,801,875		2,824,087
Home equity loans		69		3		74		146		71,500		71,646
Home equity lines of credit		685		111		1,995		2,791		332,050		334,841
Installment		64		38		15		117		8,701		8,818

Total	$	9,189		3,188		14,688		27,065		3,403,521		3,430,586

Index

At June 30, 2017 and December 31, 2016, 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.

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

(dollars in thousands)	For the three months ended June 30, 2017
	Commercial			Real Estate Mortgage- 1 to 4 Family		Installment		Total
Balance at beginning of period	$	4,810			38,581		657		44,048
Loans charged off:
New York and other states*		-			522		40		562
Florida		-			52		13		65
Total loan chargeoffs		-			574		53		627

Recoveries of loans previously charged off:
New York and other states*		-			188		3		191
Florida		-			-		-		-
Total recoveries		-			188		3		191
Net loans charged off		-			386		50		436
Provision for loan losses		(214	)		676		88		550
Balance at end of period	$	4,596			38,871		695		44,162

(dollars in thousands)	For the three months ended June 30, 2016
	Commercial		Real Estate Mortgage- 1 to 4 Family		Installment		Total
Balance at beginning of period	$	4,919		39,017		462		44,398
Loans charged off:
New York and other states*		68		1,090		92		1,250
Florida		-		17		1		18
Total loan chargeoffs		68		1,107		93		1,268

Recoveries of loans previously charged off:
New York and other states*		1		117		15		133
Florida		-		1		-		1
Total recoveries		1		118		15		134
Net loans charged off		67		989		78		1,134
Provision (credit) for loan losses		194		561		45		800
Balance at end of period	$	5,046		38,589		429		44,064

Index

(dollars in thousands)	For the six months ended June 30, 2017
	Commercial			Real Estate Mortgage- 1 to 4 Family		Installment		Total
Balance at beginning of period	$	4,929			38,231		730		43,890
Loans charged off:
New York and other states*		72			952		81		1,105
Florida		-			136		15		151
Total loan chargeoffs		72			1,088		96		1,256

Recoveries of loans previously charged off:
New York and other states*		8			357		13		378
Florida		-			-		-		-
Total recoveries		8			357		13		378
Net loans charged off		64			731		83		878
Provision for loan losses		(269	)		1,371		48		1,150
Balance at end of period	$	4,596			38,871		695		44,162

(dollars in thousands)	For the six months ended June 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*		332		1,979		173		2,484
Florida		-		101		17		118
Total loan chargeoffs		332		2,080		190		2,602

Recoveries of loans previously charged off:
New York and other states*		41		235		26		302
Florida		-		2		-		2
Total recoveries		41		237		26		304
Net loans charged off		291		1,843		164		2,298
Provision for loan losses		846		679		75		1,600
Balance at end of period	$	5,046		38,589		429		44,064

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.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2017 and December 31, 2016:

	June 30, 2017
(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		4,596		38,871		695		44,162

Total ending allowance balance	$	4,596		38,871		695		44,162

Loans:
Individually evaluated for impairment	$	4,008		21,782		-		25,790
Collectively evaluated for impairment		179,027		3,294,198		8,458		3,481,683

Total ending loans balance	$	183,035		3,315,980		8,458		3,507,473

Index

	December 31, 2016
(dollars in thousands)	Commercial Loans		1-to-4 Family Residential Real Estate		Installment Loans		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-		-		-		-
Collectively evaluated for impairment		4,929		38,231		730		43,890

Total ending allowance balance	$	4,929		38,231		730		43,890

Loans:
Individually evaluated for impairment	$	2,418		21,607		-		24,025
Collectively evaluated for impairment		188,776		3,208,967		8,818		3,406,561

Total ending loans balance	$	191,194		3,230,574		8,818		3,430,586

A loan for which the terms have been modified, and for which the borrower is experiencing financial difficulties, is considered a TDR and is classified as impaired. TDR’s at June 30, 2017 and December 31, 2016 are measured at the present value of estimated future cash flows using the loan’s effective rate at inception or the fair value of the underlying collateral if the loan is considered collateral dependent.

Index

The following tables present impaired loans by loan class as of June 30, 2017 and December 31, 2016:

New York and other states:

	June 30, 2017
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Commercial:
Commercial real estate	$	3,908		4,955		-		2,883
Other		100		100		-		100
Real estate mortgage - 1 to 4 family:
First mortgages		16,350		17,019		-		16,939
Home equity loans		265		301		-		270
Home equity lines of credit		2,042		2,226		-		2,060

Total	$	22,665		24,601		-		22,251

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		2,446		2,538		-		2,177
Home equity loans		92		92		-		93
Home equity lines of credit		587		659		-		579

Total	$	3,125		3,289		-		2,849

Total:

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

Commercial:
Commercial real estate	$	3,908		4,955		-		2,883
Other		100		100		-		100
Real estate mortgage - 1 to 4 family:
First mortgages		18,796		19,557		-		19,116
Home equity loans		357		393		-		363
Home equity lines of credit		2,629		2,885		-		2,639

Total	$	25,790		27,890		-		25,100

Index

New York and other states:

	December 31, 2016
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

Commercial:
Commercial real estate	$	2,418		3,470		-		2,214
Other		-		-		-		-
Real estate mortgage - 1 to 4 family:
First mortgages		16,675		17,439		-		15,665
Home equity loans		269		305		-		251
Home equity lines of credit		1,999		2,160		-		1,806

Total	$	21,361		23,374		-		19,936

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		2,009		2,100		-		1,800
Home equity loans		94		94		-		81
Home equity lines of credit		561		633		-		591

Total	$	2,664		2,827		-		2,472

Total:

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

Commercial:
Commercial real estate	$	2,418		3,470		-		2,214
Other		-		-		-		-
Real estate mortgage - 1 to 4 family:
First mortgages		18,684		19,539		-		17,465
Home equity loans		363		399		-		332
Home equity lines of credit		2,560		2,793		-		2,397

Total	$	24,025		26,201		-		22,408

Index

The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as impaired. Interest income recognized on impaired loans was not material during the three and six months ended June 30, 2017 and 2016.

As of June 30, 2017 and December 31, 2016 impaired loans included approximately $14.0 million and $11.5 million of loans in accruing status that were identified as TDR’s in accordance with regulatory guidance related to Chapter 7 bankruptcy loans, respectively.

Management evaluates impairment on impaired loans on a quarterly basis. If, during this evaluation, impairment of the loan is identified, a charge off is taken at that time. As a result, as of June 30, 2017 and December 31, 2016, based upon management’s evaluation and due to the sufficiency of chargeoffs taken, none of the allowance for loan losses has been allocated to a specific impaired loan(s).

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

	Three months ended 6/30/2017						Three months ended 6/30/2016
New York and other states*: (dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial:
Commercial real estate		3	$	747		747		-	$	-		-
Real estate mortgage - 1 to 4 family:
First mortgages		7	$	1,098	$	1,098		10	$	753	$	753
Home equity loans		-		-		-		-		-		-
Home equity lines of credit		1		3		3		5		66		66

Total		11	$	1,848	$	1,848		15	$	819	$	819

Florida: (dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial:
Commercial real estate		-	$	-		-		-	$	-		-
Real estate mortgage - 1 to 4 family:
First mortgages		4	$	387	$	387		1	$	298	$	298
Home equity loans		-		-		-		1		46		46
Home equity lines of credit		-		-		-		1		6		6

Total		4	$	387	$	387		3	$	350	$	350

Index

	Six months ended 6/30/2017						Six months ended 6/30/2016
New York and other states*: (dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial:
Commercial real estate		3	$	747	$	747		-	$	-	$	-
Real estate mortgage - 1 to 4 family:
First mortgages		18	$	3,045		3,045		22	$	1,807		1,807
Home equity loans		1		13		13		-		-		-
Home equity lines of credit		5		161		161		9		157		157

Total		27	$	3,966	$	3,966		31	$	1,964	$	1,964

Florida: (dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial:
Commercial real estate		-	$	-		-		-	$	-		-
Real estate mortgage - 1 to 4 family:
First mortgages		5	$	467	$	467		3	$	525	$	525
Home equity loans		-		-		-		1		46		46
Home equity lines of credit		1		70		70		1		6		6

Total		6	$	537	$	537		5	$	577	$	577

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

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

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

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

Index

The following table presents, by class, TDR’s that defaulted during the three and six months ended June 30, 2017 and 2016 which had been modified within the last twelve months:

	Three months ended 6/30/2017				Three months ended 6/30/2016
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
Home equity lines of credit		1		3		-		-

Total		1	$	3		1	$	107

Florida:

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

Real estate mortgage - 1 to 4 family:
First mortgages		-	$	-		1	$	46

Total		-	$	-		1	$	46

	Six months ended 6/30/2017				Six months ended 6/30/2016
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		-	$	-		3	$	268
Home equity loans		-		-		1		48
Home equity lines of credit		1		3		-		-

Total		1	$	3		4	$	316

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

Real estate mortgage - 1 to 4 family:
First mortgages		1	$	77		-	$	-
Home equity lines of credit		1	$	70		1	$	46

Total		2	$	147		1	$	46

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

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

Index

The Company uses the following definitions for classified loans:

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

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

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

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

As of June 30, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	June 30, 2017
New York and other states:

(dollars in thousands)
	Pass		Classified		Total
Commercial:
Commercial real estate	$	139,103		10,142		149,245
Other		20,623		1,719		22,342

	$	159,726		11,861		171,587

Florida:

(dollars in thousands)
	Pass		Classified		Total
Commercial:
Commercial real estate	$	11,099		-		11,099
Other		349		-		349

	$	11,448		-		11,448

Total:

(dollars in thousands)
	Pass		Classified		Total
Commercial:
Commercial real estate	$	150,202		10,142		160,344
Other		20,972		1,719		22,691

	$	171,174		11,861		183,035

Index

	December 31, 2016
New York and other states:

(dollars in thousands)
	Pass		Classified		Total
Commercial:
Commercial real estate	$	136,676		14,690		151,366
Other		25,442		2,097		27,539

	$	162,118		16,787		178,905

Florida:

(dollars in thousands)
	Pass		Classified		Total
Commercial:
Commercial real estate	$	12,243		-		12,243
Other		46		-		46

	$	12,289		-		12,289

Total:

(dollars in thousands)
	Pass		Classified		Total
Commercial:
Commercial real estate	$	148,919		14,690		163,609
Other		25,488		2,097		27,585

	$	174,407		16,787		191,194

Included in classified loans in the above tables are non-accrual loans of $1.7 million and $1.8 million at June 30, 2017 and December 31, 2016, respectively.

For homogeneous loan pools, such as residential mortgages, home equity lines of credit, and installment loans, the Company uses payment status to identify the credit risk in these loan portfolios. Payment status is reviewed on a daily basis by the Company’s collection area and on a monthly basis with respect to determining the adequacy of the allowance for loan losses. The payment status of these homogeneous pools as of June 30, 2017 and December 31, 2016 is included in the aging of the recorded investment of the past due loans table. In addition, the total nonperforming portion of these homogeneous loan pools as of June 30, 2017 and December 31, 2016 is presented in the non-accrual loans table.

(6) Fair Value of Financial Instruments

FASB Topic 820, Fair Value Measurement (“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:

Index

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.

Index

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

	Fair Value Measurements at June 30, 2017 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	$	128,386	$	-	$	128,386	$	-
State and political subdivisions		536		-		536		-
Corporate bonds		40,498		-		40,498		-
Mortgage backed securities and collateralized mortgage obligations - residential		352,591		-		352,591		-
Small Business Administration- guaranteed participation securities		72,858		-		72,858		-
Mortgage backed securities and collateralized mortgage obligations - commercial		9,903		-		9,903		-
Other securities		685		35		650		-
Total securities available for sale	$	605,457	$	35	$	605,422	$	-

	Fair Value Measurements at December 31, 2016 Using:

	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(dollars in thousands)
Securities available for sale:
U.S. government sponsored enterprises	$	117,266	$	-	$	117,266	$	-
State and political subdivisions		886		-		886		-
Mortgage backed securities and collateralized mortgage obligations - residential		372,308		-		372,308		-
Corporate bonds		40,705		-		40,705		-
Small Business Administration- guaranteed participation securities		78,499		-		78,499		-
Mortgage backed securities and collateralized mortgage obligations - commercial		10,011		-		10,011		-
Other securities		685		35		650		-
Total securities available for sale	$	620,360	$	35	$	620,325	$	-

Index

There were no transfers between Level 1 and Level 2 during the three and six months ended June 30, 2017 and 2016.

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

	Fair Value Measurements at June 30, 2017 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	$	3,585	$	-	$	-	$	3,585	Sales comparison approach	Adjustments for differences between comparable sales		2% - 10% (4%)
Impaired loans:

Real estate mortgage - 1 to 4 family		466		-		-		466	Sales comparison approach	Adjustments for differences between comparable sales		2% - 5% (4%)

	Fair Value Measurements at December 31, 2016 Using:

	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation technique	Unobservable inputs	Range (Weighted Average)
(dollars in thousands)

Other real estate owned	$	4,268	$	-	$	-	$	4,268	Sales comparison approach	Adjustments for differences between comparable sales		1% - 14% (7%)
Impaired loans:
Commercial real estate		1,250		-		-		1,250	Sales comparison approach	Adjustments for differences between comparable sales		7% - 35% (23%)

Real estate mortgage - 1 to 4 family		458		-		-		458	Sales comparison approach	Adjustments for differences between comparable sales		5% - 14% (10%)

Other real estate owned, that is carried at fair value less costs to sell was approximately $3.6 million at June 30, 2017 and consisted of $707 thousand of commercial real estate and $2.9 million of residential real estate properties. Valuation charges of $174 thousand and $362 thousand are included in earnings for the three and six months ended June 30, 2017, respectively.

Of the total impaired loans of $25.8 million at June 30, 2017, $466 thousand are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at June 30, 2017. Gross charge offs related to residential impaired loans included in the table above were $10 thousand and $26 thousand for the three and six months ended June 30, 2017, respectively.

Other real estate owned, that is carried at fair value less costs to sell, was approximately $4.3 million at December 31, 2016 and consisted of $756 thousand of commercial real estate and $3.5 million of residential real estate properties. A valuation charge of $1.2 million is included in earnings for the year ended December 31, 2016.

Of the total impaired loans of $25.8 million at December 31, 2016, $1.7 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, 2016. Gross charge offs related to commercial impaired loans included in the table above were $482 thousand for the year ended December 31, 2016, while gross charge offs related to residential impaired loans included in the table above amounted to $226 thousand.

Index

In accordance with FASB Topic 825, Financial Instruments (“ASC 825”), the carrying amounts and estimated fair values of financial instruments, at June 30, 2017 and December 31, 2016 are as follows:

(dollars in thousands)			Fair Value Measurements at
	Carrying		June 30, 2017 Using:
	Value		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	707,143		707,143		-		-		707,143
Securities available for sale		605,457		35		605,422		-		605,457
Held to maturity securities		41,208		-		42,803		-		42,803
Federal Reserve Bank and Federal
Home Loan Bank stock		9,723		N/A		N/A		N/A		N/A
Net loans		3,463,311		-		-		3,471,697		3,471,697
Accrued interest receivable		11,283		238		2,811		8,234		11,283
Financial liabilities:
Demand deposits		390,120		390,120		-		-		390,120
Interest bearing deposits		3,818,294		2,729,470		1,082,006		-		3,811,476
Short-term borrowings		233,621		-		233,621		-		233,621
Accrued interest payable		462		76		385		-		462

(dollars in thousands)			Fair Value Measurements at
	Carrying		December 31, 2016 Using:
	Value		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	707,274		707,274		-		-		707,274
Securities available for sale		620,360		35		620,325		-		620,360
Held to maturity securities		45,490		-		47,526		-		47,526
Federal Reserve Bank and Federal
Home Loan Bank stock		9,579		N/A		N/A		N/A		N/A
Net loans		3,386,696		-		-		3,370,976		3,370,976
Accrued interest receivable		11,070		145		2,654		8,271		11,070
Financial liabilities:
Demand deposits		377,755		377,755		-		-		377,755
Interest bearing deposits		3,818,408		2,658,945		1,156,025		-		3,814,970
Short-term borrowings		209,406		-		209,406		-		209,406
Accrued interest payable		526		82		444		-		526

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.

Index

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.

Index

(7) Accumulated Other Comprehensive Income (Loss)

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

	Three months ended 6/30/17
(dollars in thousands)	Balance at 4/1/2017			Other Comprehensive Income (loss)- Before Reclassifications		Amount reclassified from Accumulated Other Comprehensive Income			Other Comprehensive Income (loss)- Three months ended 6/30/2017			Balance at 6/30/2017

Net unrealized holding gain (loss) on securities available for sale, net of tax	$	(6,055	)		2,006		-			2,006			(4,049	)
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax		487			-		(31	)		(31	)		456

Accumulated other comprehensive income (loss), net of tax		(5,568	)		2,006		(31	)		1,975			(3,593	)

	Three months ended 6/30/2016
(dollars in thousands)	Balance at 4/1/2016			Other Comprehensive Income (loss)- Before Reclassifications		Amount reclassified from Accumulated Other Comprehensive Income			Other Comprehensive Income (loss)- Three months ended 6/30/2016			Balance at 6/30/2016

Net unrealized holding gain (loss) on securities available for sale, net of tax	$	329			2,739		(401	)		2,338			2,667
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax		(256	)		-		(16	)		(16	)		(272	)

Accumulated other comprehensive income (loss), net of tax		73			2,739		(417	)		2,322			2,395

	Six months ended 6/30/17
(dollars in thousands)	Balance at 1/1/2017			Other Comprehensive Income (loss)- Before Reclassifications		Amount reclassified from Accumulated Other Comprehensive Loss			Other Comprehensive Income (loss)- Six months ended 6/30/2017			Balance at 6/30/2017


Net unrealized holding gain (loss) on securities available for sale, net of tax	$	(6,762	)		2,713		-			2,713			(4,049	)
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax		511			-		(55	)		(55	)		456

Accumulated other comprehensive income (loss), net of tax		(6,251	)		2,713		(55	)		2,658			(3,593	)

	Six months ended 6/30/16
(dollars in thousands)	Balance at 1/1/2016			Other Comprehensive Income (loss)- Before Reclassifications		Amount reclassified from Accumulated Other Comprehensive Income			Other Comprehensive Income (loss)- Six months ended 6/30/2016		Balance at 6/30/2016


Net unrealized holding gain (loss) on securities available for sale, net of tax	$	(4,492	)		7,560		(401	)		7,159		2,667
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax		(289	)		-		17			17		(272	)

Accumulated other comprehensive income (loss), net of tax		(4,781	)		7,560		(384	)		7,176		2,395

The following represents the reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2017 and 2016:

(dollars in thousands)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			Affected Line Item in Statements
Net unrealized holding gain on securities available for sale

Realized gain on securities transactions	$	-			668		$	-			668		Net gain on securities transactions
Income tax effect		-			(267	)		-			(267	)	Income taxes
Net of tax		-			401			-			401

Amortization of pension and postretirement benefit items

Amortization of net actuarial gain		73			50			136			17		Salaries and employee benefits
Amortization of prior service cost		(22	)		(22	)		(45	)		(45	)	Salaries and employee benefits
Income tax effect		(20	)		(12	)		(36	)		11		Income taxes
Net of tax		31			16			55			(17	)

Total reclassifications, net of tax	$	31			417		$	55			384

Index

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

On July 21, 2015 Trustco Bank (the “Bank”), the wholly owned subsidiary of the Company, 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 and entry into the Agreement, 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 May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” which implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In July 2015, FASB deferred the effective date of the ASU by one year which means ASU 2014-09 will be effective for the Company on January 1, 2018. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08 - Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10 - Identifying Performance Obligations and Licensing and ASU No. 2016-12 - Narrow-Scope Improvements and Practical Expedients. The ASU is not expected to significantly impact the Company’s financial position or the results of operations.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” which 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 ASU is not expected to significantly impact the Company’s consolidated financial statements.

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In February 2016, the FASB issued ASU No. 2016-02, “Leases” which 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. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date which will impact the financial position and capital ratios of the Company. As of December 31, 2016, the Company has approximately $69.7 million in minimum lease payments for existing operating leases of branch locations with varying expiration dates from 2017 and after. The Company does not expect the ASU to have a material impact on the Company’s results of operations.

In June 2016, the FASB released ASU No. 2016-13, “Financial Instruments – Credit Losses” which amended existing guidance to replace current generally accepted accounting principles used to measure a reporting entity’s credit losses. The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2019. The ASU represents a significant departure from current GAAP and the Company is evaluating the impact of the ASU on its consolidated financial statements. The Company has established a roadmap for implementation and is currently evaluating vendor solutions that will assist in implementing required changes to loan loss estimation model.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350)” which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this ASU for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The ASU is not expected to significantly impact the Company’s consolidated financial statements.

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In March 2017, the FASB issued ASU No. 2017-07, “Compensation-Retirement Benefits (Topic 715)”. The amendments in this ASU require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The ASU is not expected to significantly impact the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20)”. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is evaluating the impact of ASU No. 2017-08 on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation – Scope of Modification Accounting (Topic 718)”. The amendments in this ASU clarifies the application of the guidance in Topic 718, Compensation – Stock Compensation, by providing guidance about which changes in terms or conditions of a share-based payment award require and entity to apply modification accounting. An entity should account for the effects of a modification unless all the following are met: 1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; 2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; 3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The ASU is not expected to significantly impact the Company’s consolidated financial statements.

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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 June 30, 2017, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2017 and 2016 and the related changes in shareholders’ equity and cash flows for the six-month periods ended June 30, 2017 and 2016. 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

August 4, 2017

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Item 2.

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

Forward-looking Statements

Statements included in this report and in future filings by TrustCo 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, 2016, 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 dividends;

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

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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 losses;

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

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

changes in law and policy accompanying the new presidential administration and uncertainty or speculation pending the enactment of such changes;

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 beginning in 2016;

changes in management personnel;

real estate and collateral values;

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

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

technological changes and electronic, cyber and physical security breaches;

changes in local market areas and general business and economic trends, 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, 2016.

You should not rely upon forward-looking statements as predictions of future events. Although TrustCo believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Following this discussion are the tables "Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential" which gives a detailed breakdown of TrustCo's average interest earning assets and interest bearing liabilities for the three and six month periods ended June 30, 2017 and 2016.

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Introduction

The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three and six month periods ended June 30, 2017, with comparisons to the corresponding period in 2016, 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 2016 Annual Report to Shareholders on Form 10-K, which was filed with the SEC on March 3, 2017, should also be read in conjunction with this review. Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation.

During the second quarter of 2017 financial markets were influenced by both underlying economic conditions and by political developments, in particular expectations arising from initiatives expected to be pursued by the Trump administration. Equity markets ended the second quarter up, with most of the gain coming early in the quarter. For the full second quarter, the S&P 500 Index was up 2.6% and the Dow Jones Industrial Average was up 3.3%. Credit markets continue to be driven by worldwide economic news and decreasing liquidity in some segments of the bond market. The shape of the yield curve continued to flatten during the quarter, with average yields declining for the second quarter as compared to the first quarter. The 10-year Treasury bond averaged 2.26% during Q2 compared to 2.45% in Q1, a decrease of 19 basis points. The 2-year Treasury bond average rate increased 6 basis points to 1.30%, resulting in flattening of the curve. The spread between the 10-year and the 2-year Treasury bonds contracted from 1.20% on average in Q1 to 0.96% in Q2. This spread had been depressed in recent years, and compares to 2.42% during 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 was increased by 25 basis points on June 14, 2017 to a range of 1.00% to 1.25%. This increase follows a similar 25 basis point increases announced in December of 2016 and March of 2017. Spreads of most asset classes, including agency securities, corporates, municipals and mortgage-backed securities, were down by the end of the quarter as compared to the levels seen a year earlier, but generally roughly flat with levels seen at the end of the first quarter of 2017. 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.

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

Q2/16	Beg of Q2		0.23		0.76		1.24		1.78		1.03
	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		0.28		0.59		1.00		1.46		0.87
	Peak		0.37		0.84		1.26		1.73		0.97
	Trough		0.18		0.56		0.94		1.37		0.76
	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

Q4/16	Beg of Q4		0.32		0.80		0.91		1.63		0.83
	Peak		0.55		1.29		1.61		2.60		1.34
	Trough		0.30		0.80		0.91		1.63		0.83
	End of Q4		0.51		1.20		1.47		2.45		1.25
	Average in Q4		0.43		1.01		1.24		2.14		1.13

Q1/17	Beg of Q1		0.16		1.06		1.76		2.27		1.21
	Peak		0.79		1.40		2.14		2.62		1.30
	Trough		0.50		1.12		1.80		2.31		1.11
	End of Q1		0.76		1.27		1.93		2.40		1.13
	Average in Q1		0.60		1.24		1.95		2.45		1.20

Q2/17	Beg of Q2		0.76		1.27		1.93		2.40		1.13
	Peak		1.04		1.38		1.94		2.42		1.11
	Trough		0.79		1.18		1.71		2.14		0.78
	End of Q2		1.03		1.38		1.89		2.31		0.93
	Average in Q2		0.91		1.30		1.81		2.26		0.96

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. How and when the Federal Reserve resolves its own balance sheet expansion has been an area of significant focus of economists and market participants. During the second quarter, the FRB provided some insight on plans for shrinking its balance sheet but the start of that program remains uncertain. Economic activity in Europe, China and elsewhere has also improved in some aspects, but remains mixed. 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. The new presidential administration has set policy initiatives that include attempts to reduce the regulatory burden; the timing and extent of any success on that front is yet to be determined. Fiscal policy initiatives, particularly a plan to significantly reduce corporate tax rates could have a major impact on the economy and on TrustCo, but there is no certainty that those initiatives will take effect at all or will result in any timely and/or significant change.

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TrustCo believes that its long-term focus on traditional banking services and practices has enabled the Company to avoid significant impact from asset quality problems and that the Company’s strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with its past practice. TrustCo has not engaged in the types of high risk loans and investments that have led to the widely reported problems in the industry. Nevertheless, the Company may experience increases in nonperforming loans (“NPLs”) relative to historical levels from time to time. While the Company does not expect to see a significant change in the inherent risk of loss in its loan portfolio at June 30, 2017, 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 $12.2 million, or $0.127 of diluted earnings per share, for the three months ended June 30, 2017, compared to net income of $10.5 million, or $0.109 of diluted earnings per share, in the same period in 2016. Return on average assets was 1.00% and 0.88%, respectively, for the three months ended June 30, 2017 and 2016. Return on average equity was 11.05% and 9.88%, respectively, for the three months ended June 30, 2017 and 2016.

For the six months ended June 30, 2017, net income was $23.2 million or $0.241 of diluted earnings per share, compared to $20.9 million and $0.219 per share, respectively, in the same period in 2016. Return on average assets was 0.96% and 0.88%, respectively, for the six months ended June 30, 2017 and 2016. Return on average equity was 10.62% and 9.93%, respectively, for the six months ended June 30, 2017 and 2016.

The primary factors accounting for the change in net income for the three months ended June 30, 2017 compared to the same period of the prior year were:

An increase in the average balance of interest earning assets of $105.7 million to $4.81 billion for the second quarter of 2017 compared to the same period in 2016.

An increase in taxable equivalent net interest margin for the second quarter of 2017 to 3.21% from 3.09% 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 second quarter of 2017 compared to the second quarter of 2016.

A decrease of $668 thousand in securities gains for the second quarter of 2017 as compared to the prior year period.

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An increase of $625 thousand in salaries and benefits expense for the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher staffing levels.

A decrease of $937 thousand in Federal Deposit Insurance Corporation (FDIC) and other insurance expense for the second quarter of 2017 compared to the second quarter of 2016 due to a change in premiums charged by the FDIC.

A decrease of $412 thousand in Equipment expense for the second quarter of 2017 compared to the second quarter of 2016 due to decreased equipment maintenance and depreciation expense.

A decrease of $427 thousand in Other Real Estate expense for the second quarter of 2017 compared to the second quarter of 2016.

An increase of $1.1 million in income taxes in the second quarter of 2017 compared to the prior year due primarily to higher pre-tax earnings.

The primary factors accounting for the change in net income for the six months ended June 30, 2017 compared to the same periods of the prior year were:

An increase in the average balance of interest earning assets of $127.6 million to $4.79 billion for the first six months of 2017 compared to the same period in 2016.

An increase in taxable equivalent net interest margin for the first six months of 2017 to 3.17% from 3.11% in the prior year period. The increase in the margin coupled with the increase in average earning assets, resulted in an increase of $3.5 million in taxable equivalent net interest income in the first six months of 2017 compared to the same period in 2016.

A decrease of $668 thousand in securities gains for the first six months of 2017 as compared to the prior year period.

An increase of $1.8 million in salaries and benefits for the first six months of 2017 as compared to the prior year period.

A decrease of $1.9 million in FDIC and other insurance expense and a decrease of $447 thousand in net other real estate (“ORE”) expense, for the first six months of 2017 compared to the same period in 2016.

An increase of $1.5 million in income taxes, in the first six months of 2017 compared to the same period in 2016.

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Regulatory Agreement

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

The 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 and entry into the Agreement, 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 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 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, 2016 is a description of the effect interest rates had on the results for the year 2016 compared to 2015. Many of the same market factors discussed in the 2016 Annual Report continued to have a significant impact on results through the second quarter of 2017.

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.

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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%, and 25 basis point increases in the target range were also announced in December of 2016 and March and June of 2017, producing the current range of 1.00% to 1.25%. Additional increases in 2017 and beyond will largely be dependent on the strength of economic conditions. In the July statement from the Federal Open Market Committee, it was noted that, “In determining the timing and size of future adjustments to the target range for the federal funds rate, 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. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant 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.”

Traditionally, interest rates on bank deposit accounts are heavily influenced by the Federal Funds rate. The average rate on interest bearing deposits was 4 basis points lower in the second quarter of 2017 relative to the prior year period. Rates were flat or lower on all deposit categories as compared to the same period in 2016. 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. The FRB has stated its intent 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. The timing of the FRB plan to reduce its holdings has not been set, but is generally expected to begin in the fall of 2017.

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 19 basis points, on average, during the second quarter of 2017 compared to the first quarter of 2017 but was up 51 basis points as compared to the second quarter of 2016.

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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 yields on these assets.

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 second quarter of 2017 despite the increases seen during the quarter.

While TrustCo has been affected by changes in financial markets over time, the impact of the financial crisis that began in 2007 was mitigated by the Company’s generally conservative approach to banking. The Company utilizes a traditional underwriting process in evaluating loan applications, and since originated loans are retained in the portfolio, there is a strong incentive to be conservative in making credit decisions. For additional information concerning TrustCo’s loan portfolio and nonperforming loans, please refer to the discussions under “Loans” and “Nonperforming Assets,” respectively. Further, the Company does not rely on borrowed funds to support its assets and maintains a significant level of liquidity on the asset side of the balance sheet. These characteristics provide the Company with increased flexibility and stability during periods of market disruption and interest rate volatility.

A fundamental component of TrustCo’s strategy has been to grow customer relationships and the deposits and loans that are part of those relationships. The Company has significant capacity to grow its balance sheet given its 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.

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For the second quarter of 2017, the net interest margin was 3.21%, up 12 basis points versus the prior year’s quarter. The quarterly results reflect the following significant factors:

•

The average balance of Federal Funds sold and other short-term investments decreased by $24.8 million while the average yield increased 57 basis points in the second quarter of 2017 compared to the same period in 2016. The decrease in the average balance helped to fund increases in loans.

•

The average balance of securities available for sale decreased by $9.7 million while the average yield increased 7 basis points to 1.96%. The average balance of held to maturity securities decreased by $10.0 million and the average yield increased 22 basis points to 4.27% for the second quarter of 2017 compared to the same period in 2016, with the increase due to a combination of slower prepayment speeds on mortgage-backed securities and the fact that corporate securities, which have higher yields, comprised a larger component of the portfolio in the 2017 period than in the 2016 period.

•

The average loan portfolio grew by $150.1 million to $3.47 billion and the average yield decreased 6 basis points to 4.23% in the second quarter of 2017 compared to the same period in 2016. 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, as well as declines in higher yielding commercial and installment loans.

•

The average balance of interest bearing liabilities (primarily deposit accounts) increased $71.4 million and the average rate paid decreased 4 basis points to 0.35% in the second quarter of 2017 compared to the same period in 2016.

During the second quarter of 2017, 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 $4.70 billion in the second quarter of 2016 to $4.81 billion in the same period of 2017 with an average yield of 3.50% in the second quarter of 2017 and 3.42% in the second quarter of 2016. 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 loans. Interest income on average earning assets increased from $40.2 million in the second quarter of 2016 to $42.1 million in the second quarter of 2017, on a tax equivalent basis. The increase was the result of higher volume and yield.

Loans

The average balance of loans was $3.47 billion in the second quarter of 2017 and $3.32 billion in the comparable period in 2016. The yield on loans decreased 6 basis points to 4.23%. The higher average balances more than offset the lower yield, leading to an increase in interest income on loans from $35.7 million in the second quarter of 2016 to $36.7 million in the second quarter of 2017.

Index

Compared to the second quarter of 2016, the average balance of residential mortgage loans increased, however other loan categories decreased. The average balance of residential mortgage loans was $2.96 billion in 2017 compared to $2.76 billion in 2016, an increase of 7.2%. The average yield on residential mortgage loans decreased by 13 basis points to 4.18% in the second quarter of 2017 compared to 2016.

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 $15.6 million to an average balance of $183.4 million in the second quarter of 2017 compared to the same period in the prior year. The average yield on this portfolio was up 9 basis points to 5.24% compared to the prior year period, primarily reflecting the increase in the prime rate. The Company has been selective in underwriting commercial loans in recent periods as the apparent risk/reward balance has been less favorable in many cases.

The average yield on home equity credit lines increased 32 basis points to 3.90% during the second quarter of 2017 compared to the year earlier period. The increase in yield is the result of prime rate increases which impacted some loans and a smaller proportion of lower yielding initial rate balances. The average balances of home equity lines decreased 9.6% to $320.9 million in the second quarter of 2017 as compared to the prior year. Some customers with home equity lines have refinanced their balances into fixed rate mortgage loans.

Securities Available for Sale

The average balance of the securities available for sale portfolio for the second quarter of 2017 was $642.4 million compared to $652.1 million for the comparable period in 2016. The balance reflects routine paydowns, calls and maturities, offset by new investment purchases. The average yield was 1.96% for the second quarter of 2017 compared to 1.89% for the second quarter of 2016. 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 loss in the available for sale securities portfolio was $6.7 million as of June 30, 2017 compared to a net unrealized loss of $11.3 million as of December 31, 2016. The unrealized loss in the portfolio is primarily the result of changes in market interest rate levels.

Index

Held to Maturity Securities

The average balance of held to maturity securities was $42.2 million for the second quarter of 2017 compared to $52.2 million in the second quarter of 2016. The decrease in balances reflects routine paydowns and calls. No new securities were added to this portfolio during the period. The average yield was 4.27% for the second quarter of 2017 compared to 4.05% for the year earlier period. The higher yield reflects a 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 June 30, 2017, 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 2017 second quarter average balance of Federal Funds sold and other short-term investments was $643.6 million, a $24.8 million decrease from the $668.4 million average for the same period in 2016. The yield was 1.07% for the second quarter of 2017 and 0.50% for the comparable period in 2016. Interest income from this portfolio increased $895 thousand from $832 thousand in 2016 to $1.7 million in 2017, reflecting the target rate increases that took effect in December of 2016 and March of 2017, as well as the partial impact of the June 2017 target rate increase, partly offset by the decreased in 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 $26.2 million to $3.82 billion for the second quarter of 2017 versus the second quarter in the prior year, and the average rate paid decreased from 0.38% for 2016 to 0.34% for 2017. Total interest expense on these deposits decreased $429 thousand to $3.2 million in the second quarter of 2017 compared to the year earlier period. From the second quarter of 2016 to the second quarter of 2017, interest bearing demand account average balances were up 11.9%, certificates of deposit average balances were down 6.3%, non-interest demand average balances were up 2.7%, average savings balances increased 1.0% and money market balances were down 0.5%.

The Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet. The Bank is a member of the Federal Home Loan Bank of New York (FHLBNY) and is an eligible borrower at the Federal Reserve Bank of New York (FRBNY) and has the ability to borrow utilizing securities and/or loans as collateral at either. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a 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.

Index

At June 30, 2017, the maturity of total time deposits is as follows:

(dollars in thousands)

Under 1 year	$	801,777
1 to 2 years		241,916
2 to 3 years		40,857
3 to 4 years		2,508
4 to 5 years		1,547
Over 5 years		219
	$	1,088,824

Average short-term borrowings for the quarter were $226.5 million in 2017 compared to $181.2 million in 2016. The average rate increased during this time period from 0.58% in 2016 to 0.62% in 2017. 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 $2.2 million to $38.6 million in the second quarter of 2017 compared to the same period in 2016. The net interest spread was up 12 basis points to 3.15% in the second quarter of 2017 compared to the same in 2016. As previously noted, the net interest margin was up 12 basis points to 3.21 for the second quarter of 2017 compared to the same period in 2016.

Nonperforming Assets

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

The following describes the nonperforming assets of TrustCo as of June 30, 2017:

Nonperforming loans and foreclosed real estate: Total NPLs were $24.5 million at June 30, 2017, compared to $25.1 million at December 31, 2016 and $28.2 million at June 30, 2016. There were $24.5 million of non-accrual loans at June 30, 2017 compared to $25.0 million at December 31, 2016 and $28.2 million at June 30, 2016. There were no loans at June 30, 2017 and 2016 and December 31, 2016 that were past due 90 days or more and still accruing interest.

Index

At June 30, 2017, nonperforming loans primarily include a mix of commercial and residential loans. Of total nonperforming loans of $24.5 million at June 30, 2017, $22.8 million were residential real estate loans, $1.7 million were commercial mortgages and $25 thousand were installment loans, compared to $23.1 million, $1.8 million and $48 thousand, respectively at December 31, 2016.

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 0.05% of average residential real estate loans (including home equity lines of credit) for the second quarter of 2017 compared to 0.13% for the second quarter of 2016. 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 June 30, 2017, 77.6% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 22.4% were in Florida. Those figures compare to 78.5% and 21.5%, respectively at December 31, 2016. Within these two geographic regions, commercial loans constitute a larger component of the local outstandings in New York than in Florida, at 6.3% and 1.5%, respectively, as of June 30, 2017.

Economic conditions vary widely by geographic location. Florida experienced a more significant downturn than New York during the recession, however conditions in Florida have improved more than in New York in recent periods. As a percentage of the total nonperforming loans as of June 30, 2017, 8.6% were to Florida borrowers, compared to 91.4% to borrowers in New York and surrounding areas. For the three months ended June 30, 2017, New York and surrounding areas experienced net chargeoffs of approximately $371 thousand, compared to $65 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 June 30, 2017, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources.

Index

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 $4.0 million of commercial mortgages and commercial loans classified as impaired as of June 30, 2017 compared to $2.4 million at December 31, 2016. There were $21.8 million of impaired residential loans at June 30, 2017 and $21.6 million at December 31, 2016. The average balances of all impaired loans were $25.1 million for the six months of 2017 and $22.4 million for the full year 2016.

As of June 30, 2017 and December 31, 2016, the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.

At June 30, 2017 there was $3.6 million of foreclosed real estate compared to $4.3 million at December 31, 2016.

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.

Management's Discussion and Analysis

Allocation of the Allowance for Loan Losses

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

(dollars in thousands)	As of June 30, 2017					As of December 31, 2016
	Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans
Commercial	$	4,480		4.96	%	$	4,820		5.32	%
Real estate - construction	$	300		0.68	%		318		0.72	%
Real estate mortgage - 1 to 4 family	$	33,204		85.09	%		32,452		83.94	%
Home equity lines of credit	$	5,483		9.03	%		5,570		9.76	%
Installment Loans	$	695		0.24	%		730		0.26	%
	$	44,162		100.00	%	$	43,890		100.00	%

At June 30, 2017, the allowance for loan losses was $44.2 million, compared to $44.1 million at June 30, 2016 and $43.9 million at December 31, 2016. The allowance represents 1.26% of the loan portfolio as of June 30, 2017 compared to 1.32% at June 30, 2016 and 1.28% at December 31, 2016.

The provision for loan losses was $550 thousand for the quarter ended June 30, 2017 and $800 thousand for the quarter ended June 30, 2016. Net chargeoffs for the three-month period ended June 30, 2017 were $436 thousand and were $1.1 million in the prior year period.

During the second quarter of 2017, there were no commercial loan chargeoffs and $627 thousand of gross residential mortgage and consumer loan chargeoffs compared with $68 thousand of gross commercial loan chargeoffs and $1.2 million of residential mortgage and consumer loan chargeoffs in the second quarter of 2016. Gross recoveries during the second quarter of 2017 were zero for commercial loans and $191 thousand for residential mortgage and consumer loans, compared to $1 thousand for commercial loans and $133 thousand for residential and consumer in the second quarter of 2016.

Index

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

The magnitude and nature of recent loan chargeoffs and recoveries;

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

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

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

Liquidity and Interest Rate Sensitivity

TrustCo seeks to obtain favorable sources of funding and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Management believes that TrustCo’s earnings performance and strong capital position enable the Company to easily secure new sources of liquidity. The Company actively manages its liquidity through target ratios established under its liquidity policies. Continual monitoring of both historical and prospective ratios allows TrustCo to employ strategies necessary to maintain adequate liquidity. Management has also defined various degrees of adverse liquidity situations which could potentially occur and has prepared appropriate contingency plans should such a situation arise. As noted, the Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet. As previously stated, the Bank is a member of the FHLBNY and is an eligible borrower at the FRBNY and has the ability to borrow utilizing securities and/or loans as collateral at either institution. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a contingent funding source within its Asset/Liability 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.

Index

Using this model, the fair value of capital projections as of June 30, 2017 are referenced below. The base case (current rates) scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of June 30, 2017. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp.

As of June 30, 2017	Estimated Percentage of Fair value of Capital to Fair value of Assets
+400 BP		20.31	%
+300 BP		21.47
+200 BP		22.58
+100 BP		23.53
Current rates		23.66
-100 BP		22.09

Noninterest Income

Total noninterest income for the second quarter of 2017 was $4.5 million, compared to $5.2 million in the prior year period. The decrease of $695 thousand was due to a decrease in gains on net gains on securities transactions. There were no securities gains in the second quarter of 2017, compared to gains of $668 thousand in the prior year period. A nominal decrease in Trustco Financial Services income was approximately offset by an increase in fees for services to customers. The fair value of assets under management was $845 million at June 30, 2017 and $846 million as of December 31, 2016 and $851 million at June 30, 2016.

For the six months through June 30, 2017 total noninterest income was $9.2 million, compared to $9.8 million for the prior year period. The decline was due to the same decrease in net gains on securities transactions noted above. Excluding gains, noninterest income was up $128 thousand due to a $166 thousand in Financial Services revenue increase.

Noninterest Expenses

Total noninterest expenses were $22.9 million for the three months ended June 30, 2017, compared to $24.0 million for the three months ended June 30, 2016. The largest cause of the decrease in expenses was a $937 thousand decrease in FDIC and other insurance expenses. This change was due to a change in the premium charged by the FDIC beginning in the third quarter of 2016. Going forward we expect that the quarterly FDIC expense will approximate the level recorded in the second quarter of 2017, excluding the impact of balance sheet growth. Other significant decreases were other real estate expense and equipment expense, down $427 thousand and $412 thousand, respectively. The only expense categories to see meaningful increases were salaries and benefits, up $625 thousand in the second quarter of 2017 compared to the year-ago period and net occupancy expense, up $349 thousand over the same periods. Full time equivalent headcount increased from 801 as of June 30, 2016 to 813 as of June 30, 2017, which was the primary cause of the increase.

Index

For the six months through June 30, 2017 total noninterest expense was $46.9 million, compared to $47.4 million for the prior year period. The largest cause of the decrease in expenses was a $1.9 million decrease in FDIC and other insurance expenses, as described above. Decreases in other real estate expense, equipment expense and professional services expense also contributed. These were mostly offset by an increase of $1.8 million in salaries and benefits, as well as smaller increases in net occupancy expense and other expense.

Income Taxes

In the second quarter of 2017, TrustCo recognized income tax expense of $7.3 million compared to $6.3 million for the second quarter of 2016. The effective tax rates were 37.5% and 37.4% for the second quarters of 2017 and 2016, respectively. For the six month periods through June 30, income taxes increased $1.5 million, with effective tax rates of 37.5% and 37.2%, respectively, for the six months ended June 30, 2017 and 2016.

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 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 June 30, 2017 was $447.4 million compared to $430.3 million at June 30, 2016. TrustCo declared a dividend of $0.065625 per share in the second quarter of 2017. This results in a dividend payout ratio of 51.48% based on second quarter 2017 earnings of $12.2 million.

Index

The Bank and the Company reported the following capital ratios as of June 30, 2017 and December 31, 2016:

(Bank Only)

(dollars in thousands)	As of June 30, 2017					Well			Adequately
	Amount		Ratio			Capitalized(1)			Capitalized(1)(2)

Tier 1 leverage capital	$	436,264		8.911	%		5.000	%		4.000	%
Common equity tier 1 capital		436,264		17.363			6.500			5.750
Tier 1 risk-based capital		436,264		17.363			8.000			7.250
Total risk-based capital		467,832		18.620			10.000			9.250

(dollars in thousands)	As of December 31, 2016					Well			Adequately
	Amount		Ratio			Capitalized(1)			Capitalized(1)(3)

Tier 1 (core) capital	$	424,802		8.829	%		5.000	%		4.000	%
Common equity tier 1 capital		424,802		17.238			6.500			5.125
Tier 1 risk-based capital		424,802		17.238			8.000			6.625
Total risk-based capital		455,772		18.492			10.000			8.625

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

(2)	The June 30, 2017 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 1.25 percent

(3)	The December 31, 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

(Consolidated)

(dollars in thousands)	As of June 30, 2017
	Amount		Ratio

Tier 1 leverage capital	$	450,406		9.194	%
Common equity tier 1 capital		450,406		17.921
Tier 1 risk-based capital		450,406		17.921
Total risk-based capital		481,984		19.178

(dollars in thousands)	As of December 31, 2016
	Amount		Ratio

Leverage capital	$	438,426		9.110	%
Common equity tier 1 capital		438,426		17.782
Tier 1 risk-based capital		438,426		17.782
Total risk-based capital		469,411		19.038

In addition, at June 30, 2017, the consolidated equity to total assets ratio was 9.09%, compared to 8.89% at December 31, 2016 and 8.91% at June 30, 2016.

Both TrustCo and Trustco Bank are subject to regulatory capital requirements. On January 1, 2015, a new capital rule took effect that revised the federal bank regulatory agencies’ risk-based capital requirements and subjected the Company to consolidated regulatory capital requirements. Among other matters, the rule also established a new common equity Tier 1 minimum capital requirement of 4.5% of risk-weighted assets, increased the minimum Tier 1 capital to risk-based assets requirement from 4.0% to 6.0% of risk-weighted assets, changed the risk-weightings of certain assets, and changed what qualifies as capital for purposes of meeting the various capital requirements. In addition, the Company and the Bank are required to maintain additional levels of Tier 1 common equity (the capital conservation buffer) over the minimum risk-based capital levels before they may pay dividends, repurchase shares, or pay discretionary bonuses. The new rule will be phased-in over several years and will be fully in effect in 2019. Calendar year 2016 was the second year of implementation of the new capital rules. Prior to January 2015, the Company had not been subject to consolidated regulatory capital requirements.

As of June 30, 2017, the capital levels of both TrustCo and the Bank exceeded the minimum standards, including if the current (and also if the fully phased-in) capital conservation buffer is taken into account.

Index

Under the OCC’s “prompt corrective action” regulations, a bank is deemed to be “well-capitalized” when its CET1, Tier 1, total risk-based, and leverage capital ratios are at least 6.5%, 8%, 10%, and 5%, respectively. A bank is deemed to be “adequately capitalized” or better if its capital ratios meet or exceed the minimum federal regulatory capital requirements, and “undercapitalized” if it fails to meet these minimal capital requirements. A bank is “significantly undercapitalized” if its CET1, Tier 1, total risk-based and leverage capital ratios fall below 3%, 4%, 6%, and 3%, respectively and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. At June 30, 2017 and 2016, Trustco Bank met the definition of “well-capitalized.”

As noted, the Company’s dividend payout ratio was 51.48% of net income for the second quarter of 2017 and 59.89% of net income for the second quarter of 2016. The per-share dividend paid in both the second quarters of 2016 and 2017 was $0.065625. The Company’s ability to pay dividends to its shareholders is dependent upon the ability of the Bank to pay dividends to the Company. The payment of dividends by the Bank to the Company is subject to continued compliance with minimum regulatory capital requirements and the Bank’s compliance with the capital plan required under the terms of the Agreement. Under the OCC agreement, 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. The OCC may disapprove a dividend if: the Bank would be undercapitalized following the distribution; the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statue, regulation or agreement. In addition, under the Agreement, the payment of dividends by the Bank are subject to prior approval.

TrustCo maintains a dividend reinvestment plan (DRP) with approximately 12,000 participants. The DRP allows participants to reinvest dividends in shares of the Company. The DRP also allows for additional purchases by participants and has a discount feature (up to a 5% for safe harbor provisions) that can be activated by management as a tool to raise capital. To date, the discount feature has not been utilized.

Critical Accounting Policies

Pursuant to Securities and Exchange Commission (SEC) guidance, management of the Company is encouraged to evaluate and disclose those accounting policies judged to be critical policies - those most important to the portrayal of the Company’s financial condition and results, and that require management’s most difficult subjective or complex judgments.

Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover the inherent risk of losses in the loan portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.

Index

TrustCo Bank Corp NY

Management's Discussion and Analysis

STATISTICAL DISCLOSURE

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

INTEREST RATES AND INTEREST DIFFERENTIAL

The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is the unrealized (loss) gain, net of tax, in the available for sale portfolio of ($3.6) million in 2017 and $0.7 million in 2016. 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 June 30, 2017									Three months ended June 30, 2016
(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	$	153,552			607			1.58	%	$	107,190			404			1.51	%	$	203			56			147
Mortgage backed securities and collateralized mortgage obligations-residential		359,085			1,944			2.17	%		445,162			2,169			1.95	%		(225	)		(1,364	)		1,139
State and political subdivisions		816			16			7.84	%		955			19			7.96	%		(3	)		(1	)		(2	)
Corporate bonds		42,699			154			1.44	%		-			-			-	%		154			-			-
Small Business Administration-guaranteed participation securities		75,561			394			2.09	%		87,801			450			2.05	%		(56	)		(106	)		50
Mortgage backed securities and collateralized mortgage obligations-commercial		10,003			21			0.84			10,321			38			1.47			(17	)		(9	)		(8	)
Other		685			4			2.34	%		677			4			2.36	%		-			-			-

Total securities available for sale		642,401			3,140			1.96	%		652,106			3,084			1.89	%		56			(1,423	)		1,325

Federal funds sold and other short-term Investments		643,557			1,727			1.07	%		668,395			832			0.50	%		895			(30	)		925

Held to maturity securities:
Corporate bonds		9,996			154			6.16	%		9,981			154			6.17	%		-			-			-
Mortgage backed securities and collateralized mortgage obligations-residential		32,188			296			3.68	%		42,188			374			3.55	%		(78	)		(162	)		84

Total held to maturity securities		42,184			450			4.27	%		52,169			528			4.05	%		(78	)		(162	)		84

Federal Reserve Bank and Federal Home Loan Bank stock		9,709			134			5.52	%		9,576			118			4.93	%		16			2			14

Commercial loans		183,382			2,401			5.24	%		198,938			2,563			5.15	%		(162	)		(418	)		256
Residential mortgage loans		2,958,994			30,943			4.18	%		2,759,024			29,725			4.31	%		1,218			5,850			(4,632	)
Home equity lines of credit		320,872			3,131			3.90	%		354,897			3,179			3.58	%		(48	)		(819	)		771
Installment loans		8,029			194			9.66	%		8,316			191			9.19	%		3			(30	)		33

Loans, net of unearned income		3,471,277			36,669			4.23	%		3,321,175			35,658			4.29	%		1,011			4,582			(3,571	)

Total interest earning assets		4,809,128			42,120			3.50	%		4,703,421			40,220			3.42	%		1,900			2,970			(1,224	)

Allowance for loan losses		(44,429	)								(44,754	)
Cash & non-interest earning assets		130,998									136,724

Total assets	$	4,895,697								$	4,795,391

Liabilities and shareholders' equity

Deposits:
Interest bearing checking accounts	$	849,965			134			0.06	%	$	759,546			116			0.06	%		18			13			5
Money market accounts		577,464			468			0.32	%		580,100			467			0.32	%		1			(1	)		2
Savings		1,286,282			435			0.14	%		1,273,575			604			0.19	%		(169	)		41			(210	)
Time deposits		1,102,777			2,181			0.79	%		1,177,084			2,460			0.84	%		(279	)		11,224			(11,503	)

Total interest bearing deposits		3,816,488			3,218			0.34	%		3,790,305			3,647			0.38	%		(429	)		11,277			(11,706	)
Short-term borrowings		226,455			349			0.62	%		181,247			262			0.58	%		87			69			18

Total interest bearing liabilities		4,042,943			3,567			0.35	%		3,971,552			3,909			0.39	%		(342	)		11,347			(11,689	)

Demand deposits		380,611									370,781
Other liabilities		28,026									27,121
Shareholders' equity		444,117									425,937

Total liabilities and shareholders' equity	$	4,895,697								$	4,795,391

Net interest income , tax equivalent					38,553									36,311					$	2,242			(8,377	)		10,465

Net interest spread								3.15	%								3.03	%

Net interest margin (net interest income to total interest earning assets)								3.21	%								3.09	%

Tax equivalent adjustment					(12	)								(12	)

Net interest income					38,541									36,299

Index

TrustCo Bank Corp NY

Management's Discussion and Analysis

STATISTICAL DISCLOSURE

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

INTEREST RATES AND INTEREST DIFFERENTIAL

The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is the unrealized loss, net of tax, in the available for sale portfolio of ($4.8) million in 2017 and ($0.5) million in 2016. 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.

	Six months ended June 30, 2017									Six months ended June 30, 2016
(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	$	148,054			1,202			1.62	%	$	91,111			659			1.45	%	$	543			280			263
Mortgage backed securities and collateralized mortgage obligations-residential		363,496			3,902			2.15	%		428,831			4,285			2.00	%		(383	)		(740	)		357
State and political subdivisions		844			35			8.29	%		1,034			41			7.93	%		(6	)		(11	)		5
Corporate bonds		42,143			305			1.45	%		-			-			-	%		305			-			-
Small Business Administration-guaranteed participation securities		77,068			809			2.10	%		89,206			926			2.08	%		(117	)		(142	)		25
Mortgage backed securities and collateralized mortgage obligations-commercial		10,046			44			0.88	%		10,357			74			1.43	%		(30	)		(7	)		(23	)
Other		685			8			2.34	%		682			8			2.35	%		-			-			-

Total securities available for sale		642,336			6,305			1.96	%		621,221			5,993			1.93	%		312			(619	)		626

Federal funds sold and other short-term Investments		642,348			2,973			0.93	%		671,990			1,677			0.50	%		1,296			(70	)		1,366

Held to maturity securities:
Corporate bonds		9,994			308			6.16	%		9,979			308			6.17	%		-			1			(1	)
Mortgage backed securities and collateralized mortgage obligations-residential		33,240			612			3.68	%		43,650			775			3.55	%		(163	)		(240	)		77

Total held to maturity securities		43,234			920			4.26	%		53,629			1,083			4.04	%		(163	)		(239	)		76

Federal Reserve Bank and Federal Home Loan Bank stock		9,645			268			5.56	%		9,527			238			5.00	%		30			3			27

Commercial loans		185,474			4,830			5.21	%		200,152			5,180			5.18	%		(350	)		(431	)		81
Residential mortgage loans		2,935,620			61,310			4.18	%		2,742,918			59,348			4.33	%		1,962			6,891			(4,929	)
Home equity lines of credit		325,579			6,216			3.82	%		356,857			6,358			3.56	%		(142	)		(1,087	)		945
Installment loans		8,128			363			8.93	%		8,488			383			9.02	%		(20	)		(7	)		(13	)

Loans, net of unearned income		3,454,801			72,719			4.21	%		3,308,415			71,269			4.31	%		1,450			5,366			(3,916	)

Total interest earning assets		4,792,364			83,185			3.47	%		4,664,782			80,260			3.44	%		2,925			4,441			(1,821	)

Allowance for loan losses		(44,333	)								(45,013	)
Cash & non-interest earning assets		130,575									136,138

Total assets	$	4,878,606								$	4,755,907

Liabilities and shareholders' equity

Deposits:
Interest bearing checking accounts	$	829,615			258			0.06	%	$	747,322			230			0.06	%		28			21			7
Money market accounts		578,728			934			0.32	%		591,937			962			0.33	%		(28	)		(14	)		(14	)
Savings		1,280,552			865			0.14	%		1,268,021			1,208			0.19	%		(343	)		35			(378	)
Time deposits		1,118,274			4,464			0.80	%		1,155,773			4,833			0.84	%		(369	)		(146	)		(223	)

Total interest bearing deposits		3,807,169			6,521			0.34	%		3,763,053			7,233			0.38	%		(712	)		(104	)		(608	)
Short-term borrowings		228,078			698			0.61	%		178,683			519			0.58	%		179			152			27

Total interest bearing liabilities		4,035,247			7,219			0.36	%		3,941,736			7,752			0.39	%		(533	)		47			(580	)

Demand deposits		375,610									364,503
Other liabilities		27,408									27,019
Shareholders' equity		440,341									422,649

Total liabilities and shareholders' equity	$	4,878,606								$	4,755,907

Net interest income , tax equivalent					75,966									72,508					$	3,458			4,394			(1,241	)

Net interest spread								3.11	%								3.05	%

Net interest margin (net interest income to total interest earning assets)								3.17	%								3.11	%

Tax equivalent adjustment					(25	)								(26	)

Net interest income					75,941									72,482

Index

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

As detailed in the Annual Report to Shareholders as of December 31, 2016, 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 and six month periods ended June 30, 2017 and 2016, the Company continues to respond to changes in interest rates in such a way that positions the Company to meet short term earning goals and also allows the Company to respond to changes in interest rates in the future. Consequently, for the second quarter of 2017, the Company had an average balance of Federal Funds sold and other short-term investments of $643.6 million compared to $668.4 million in the second quarter of 2016. As investment opportunities present themselves, management plans to invest funds from the Federal Funds sold and other short-term investment portfolio into the securities available for sale, securities held to maturity and loan portfolios. Additional disclosure of interest rate risk can be found under “Liquidity and Interest Rate Sensitivity” and “Asset/Liability Management” in the Management’s Discussion and Analysis section of this document.

Item 4.

Controls and Procedures

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

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

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

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

Index

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

There were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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 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

Index

SIGNATURES

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

	TrustCo Bank Corp NY

	By: /s/ Robert J. McCormick
	Robert J. McCormick
	President and Chief Executive Officer

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

Date: August 4, 2017

Index

Exhibits Index

Reg S-K

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	XBRL Taxonomy Extension Presentation Linkbase Document