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

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR

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

Commission File Number 0-10592

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

New York
 
14-1630287
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

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

Registrant’s telephone number, including area code:
(518) 377-3311

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol (s)
Name of each exchange on which registered
Common Stock, $1.00 par value
TRST
Nasdaq Global Select Market

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

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

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

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

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

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

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

Common Stock
Number of Shares Outstanding
as of April 30, 2020
$1 Par Value
96,432,657



TrustCo Bank Corp NY

INDEX

Part I.
FINANCIAL INFORMATION
PAGE NO.
 
 
 
Item 1.
Consolidated Interim Financial Statements (Unaudited):
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8 – 36
 
 
 
 
37
 
 
 
Item 2.
38-58
 
 
 
Item 3.
59
 
 
 
Item 4.
59
 
 
 
Part II.
OTHER INFORMATION
 
 
 
 
Item 1.
60
 
 
 
Item 1A.
60
 
 
 
Item 2.
62
 
 
 
Item 3.
63
 
 
 
Item 4.
63
 
 
 
Item 5.
63
 
 
 
Item 6.
64



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

 
Three months ended
March 31,
 
   
2020
   
2019
 
             
Interest and dividend income:
           
Interest and fees on loans
 
$
42,063
     
41,253
 
Interest and dividends on securities available for sale:
               
U. S. government sponsored enterprises
   
421
     
783
 
State and political subdivisions
   
1
     
1
 
Mortgage-backed securities and collateralized mortgage obligations-residential
   
2,113
     
1,555
 
Corporate bonds
   
238
     
208
 
Small Business Administration-guaranteed participation securities
   
245
     
297
 
Other securities
   
6
     
5
 
Total interest and dividends on securities available for sale
   
3,024
     
2,849
 
                 
Interest on held to maturity securities:
               
Mortgage-backed securities and collateralized mortgage obligations-residential
   
175
     
217
 
Total interest on held to maturity securities
   
175
     
217
 
                 
Federal Reserve Bank and Federal Home Loan Bank stock
   
82
     
85
 
Interest on federal funds sold and other short-term investments
   
1,267
     
3,009
 
Total interest income
   
46,611
     
47,413
 
                 
Interest expense:
               
Interest on deposits:
               
Interest-bearing checking
   
16
     
121
 
Savings accounts
   
233
     
377
 
Money market deposit accounts
   
1,096
     
826
 
Time deposits
   
6,391
     
5,976
 
Interest on short-term borrowings
   
322
     
381
 
Total interest expense
   
8,058
     
7,681
 
                 
Net interest income
   
38,553
     
39,732
 
Provision for loan losses
   
2,000
     
300
 
Net interest income after provision for loan losses
   
36,553
     
39,432
 
                 
Noninterest income:
               
Trustco financial services income
   
1,600
     
1,733
 
Fees for services to customers
   
2,315
     
2,520
 
Net gain on securities transactions
   
1,155
     
-
 
Other
   
264
     
384
 
Total noninterest income
   
5,334
     
4,637
 
                 
Noninterest expenses:
               
Salaries and employee benefits
   
11,373
     
11,451
 
Net occupancy expense
   
4,306
     
4,167
 
Equipment expense
   
1,802
     
1,902
 
Professional services
   
1,481
     
1,650
 
Outsourced services
   
2,075
     
1,925
 
Advertising expense
   
488
     
785
 
FDIC and other insurance
   
294
     
648
 
Other real estate expense (income), net
   
194
     
(24
)
Other
   
2,255
     
2,363
 
Total noninterest expenses
   
24,268
     
24,867
 
                 
Income before taxes
   
17,619
     
19,202
 
Income taxes
   
4,306
     
4,644
 
                 
Net income
 
$
13,313
     
14,558
 
                 
Net income per share:
               
- Basic
 
$
0.138
     
0.150
 
                 
- Diluted
 
$
0.138
     
0.150
 

See accompanying notes to unaudited consolidated interim financial statements.
3

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

 
Three months ended
March 31,
 
   
2020
   
2019
 
             
Net income
 
$
13,313
     
14,558
 
                 
Net unrealized holding gain on securities available for sale
   
10,732
     
4,588
 
Reclassification adjustments for net gain recognized in income
   
(1,155
)
   
-
 
Tax effect
   
(2,487
)
   
(1,192
)
                 
Net unrealized gain on securities available for sale, net of tax
   
7,090
     
3,396
 
                 
                 
Amortization of net actuarial gain
   
(166
)
   
(48
)
Amortization of prior service credit
   
(49
)
   
(85
)
Tax effect
   
56
     
35
 
Amortization of net actuarial gain and prior service credit on pension and postretirement plans, net of tax
   
(159
)
   
(98
)
                 
Other comprehensive income, net of tax
   
6,931
     
3,298
 
Comprehensive income
 
$
20,244
     
17,856
 

See accompanying notes to unaudited consolidated interim financial statements.
4
TRUSTCO BANK CORP NY
Consolidated Statements of Financial Condition (Unaudited)
(dollars in thousands, except per share data)

 
March 31, 2020
   
December 31, 2019
 
ASSETS:
           
             
Cash and due from banks
 
$
43,362
     
48,198
 
                 
Federal funds sold and other short term investments
   
492,691
     
408,648
 
Total cash and cash equivalents
   
536,053
     
456,846
 
                 
Securities available for sale
   
503,166
     
573,823
 
                 
Held to maturity securities (fair value 2020 $19,035; 2019 $19,680)
   
17,720
     
18,618
 
                 
Federal Reserve Bank and Federal Home Loan Bank stock
   
9,183
     
9,183
 
                 
Loans, net of deferred net costs
   
4,099,392
     
4,062,196
 
Less:
               
Allowance for loan losses
   
46,155
     
44,317
 
Net loans
   
4,053,237
     
4,017,879
 
                 
Bank premises and equipment, net
   
34,428
     
34,622
 
Operating lease right-of-use assets
   
49,955
     
51,475
 
Other assets
   
52,905
     
58,876
 
                 
Total assets
 
$
5,256,647
     
5,221,322
 
                 
LIABILITIES:
               
Deposits:
               
Demand
 
$
480,255
     
463,858
 
Interest-bearing checking
   
895,254
     
875,672
 
Savings accounts
   
1,122,116
     
1,113,146
 
Money market deposit accounts
   
617,198
     
599,163
 
Time deposits
   
1,367,005
     
1,398,177
 
Total deposits
   
4,481,828
     
4,450,016
 
                 
Short-term borrowings
   
148,090
     
148,666
 
Operating lease liabilities
   
54,998
     
56,553
 
Accrued expenses and other liabilities
   
23,546
     
27,830
 
                 
Total liabilities
   
4,708,462
     
4,683,065
 
                 
SHAREHOLDERS’ EQUITY:
               
Capital stock par value $1; 150,000,000 shares authorized;  100,204,832 and 100,204,832 shares issued at March 31, 2020 and December 31, 2019, respectively
   
100,205
     
100,205
 
Surplus
   
176,431
     
176,427
 
Undivided profits
   
294,553
     
288,067
 
Accumulated other comprehensive income, net of tax
   
11,392
     
4,461
 
Treasury stock at cost - 3,772,175 and 3,283,175 shares at March 31, 2020 and December 31, 2019, respectively
   
(34,396
)
   
(30,903
)
                 
Total shareholders’ equity
   
548,185
     
538,257
 
                 
Total liabilities and shareholders’ equity
 
$
5,256,647
   
$
5,221,322
 

See accompanying notes to unaudited consolidated interim financial statements.
5

TRUSTCO BANK CORP NY
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(dollars in thousands, except per share data)

 
Capital
Stock
   
Surplus
   
Undivided
Profits
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Treasury
Stock
   
Total
 
                                     
Beginning balance, January 1, 2019
 
$
100,175
     
176,710
     
256,397
     
(10,309
)
   
(33,102
)
   
489,871
 
Net income
   
-
     
-
     
14,558
     
-
     
-
     
14,558
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
3,298
     
-
     
3,298
 
Stock options exercised (5,100 shares)
   
5
     
30
     
-
     
-
     
-
     
35
 
Cash dividend declared, $0.068125 per share
   
-
     
-
     
(6,591
)
   
-
     
-
     
(6,591
)
Purchase of treasury stock (4,131 shares)
   
-
     
-
     
-
     
-
     
(35
)
   
(35
)
Sale of treasury stock (86,297 shares)
   
-
     
(218
)
   
-
     
-
     
812
     
594
 
Stock based compensation expense
   
-
     
(12
)
   
-
     
-
     
-
     
(12
)
                                                 
Ending balance, March 31, 2019
 
$
100,180
     
176,510
     
264,364
     
(7,011
)
   
(32,325
)
   
501,718
 
                                                 
Beginning balance, January 1, 2020
 
$
100,205
     
176,427
     
288,067
     
4,461
     
(30,903
)
   
538,257
 
Net income
   
-
     
-
     
13,313
     
-
     
-
     
13,313
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
6,931
     
-
     
6,931
 
Cash dividend declared, $0.068125 per share
   
-
     
-
     
(6,827
)
   
-
     
-
     
(6,827
)
Purchase of treasury stock (489,000 shares)
   
-
     
-
     
-
     
-
     
(3,493
)
   
(3,493
)
Stock based compensation expense
   
-
     
4
     
-
     
-
     
-
     
4
 
                                                 
Ending balance, March 31, 2020
 
$
100,205
     
176,431
     
294,553
     
11,392
     
(34,396
)
   
548,185
 

See accompanying notes to unaudited consolidated interim financial statements.
6


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

 
Three months ended March 31,
 
   
2020
   
2019
 
             
Cash flows from operating activities:
           
Net income
 
$
13,313
     
14,558
 
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
999
     
1,010
 
Amortization of right-of-use asset
   
1,520
     
1,470
 
Net gain on sale of other real estate owned
   
(82
)
   
(306
)
Writedown of other real estate owned
   
80
     
140
 
Provision for loan losses
   
2,000
     
300
 
Deferred tax expense
   
846
     
498
 
Net amortization of securities
   
858
     
688
 
Stock based compensation expense
   
4
     
(12
)
Net gain on sales of securities
   
(1,155
)
   
-
 
Decrease (increase) in taxes receivable
   
3,682
     
(18
)
Decrease  (increase) in interest receivable
   
673
     
(13
)
(Decrease) increase in interest payable
   
(200
)
   
448
 
Increase in other assets
   
(2,171
)
   
(1,545
)
Decrease in operating lease liabilities
   
(1,555
)
   
(1,488
)
Decrease in accrued expenses and other liabilities
   
(4,307
)
   
(3,141
)
Total adjustments
   
1,192
     
(1,969
)
Net cash provided by operating activities
   
14,505
     
12,589
 
                 
Cash flows from investing activities:
               
Proceeds from sales and calls of securities available for sale
   
98,363
     
16,041
 
Proceeds from calls and maturities of held to maturity securities
   
859
     
851
 
Proceeds from maturities of securities available for sale
   
5,000
     
10,000
 
Purchases of securities available for sale
   
(22,793
)
   
(67,103
)
Net decrease (increase) in loans
   
(37,792
)
   
11,863
 
Proceeds from dispositions of other real estate owned
   
731
     
1,265
 
Purchases of bank premises and equipment
   
(805
)
   
(744
)
Net cash provided by (used in) investing activities
   
43,563
     
(27,827
)
                 
Cash flows from financing activities:
               
Net increase in deposits
   
31,812
     
138,822
 
Net decrease in short-term borrowings
   
(576
)
   
(2,115
)
Proceeds from exercise of stock options
   
-
     
35
 
Proceeds from sale of treasury stock
   
-
     
594
 
Purchases of treasury stock
   
(3,493
)
   
(35
)
Dividends paid
   
(6,604
)
   
(6,585
)
Net cash provided by financing activities
   
21,139
     
130,716
 
Net increase in cash and cash equivalents
   
79,207
     
115,478
 
Cash and cash equivalents at beginning of period
   
456,846
     
503,709
 
Cash and cash equivalents at end of period
 
$
536,053
     
619,187
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the year for:
               
Interest paid
 
$
8,258
     
7,233
 
Income taxes paid
   
626
     
4,662
 
Other non cash items:
               
Transfer of loans to other real estate owned
   
434
     
685
 
Increase in dividends payable
   
223
     
6
 
Change in unrealized gain on securities available for sale-gross of deferred taxes
   
9,577
     
4,588
 
Change in deferred tax effect on unrealized gain on securities available for sale
   
(2,487
)
   
(1,192
)
Amortization of net actuarial gain and prior service credit on pension and postretirement plans
   
(215
)
   
(133
)
Change in deferred tax effect of amortization of net actuarial gain and prior service credit on pension and postretirement benefit plans
   
56
     
35
 

See accompanying notes to unaudited consolidated interim financial statements.
7

(1) Financial Statement Presentation

The unaudited Consolidated Interim Financial Statements of TrustCo Bank Corp NY (the “Company” or “TrustCo”) include the accounts of the Company’s subsidiary, Trustco Bank (also referred to as the “Bank”) and other subsidiaries after elimination of all significant intercompany accounts and transactions.  Prior period amounts are reclassified when necessary to conform to the current period presentation.  The net income reported for the three months ended March 31, 2020 is not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or any interim periods.  These financial statements consider events that occurred through the date of filing.

In the opinion of the management of the Company, the accompanying unaudited Consolidated Interim Financial Statements contain all recurring adjustments necessary to present fairly the financial position as of March 31, 2020, the results of operations and cash flows for the three months ended March 31, 2020 and 2019.  The accompanying unaudited Consolidated Interim Financial Statements should be read in conjunction with the Company’s year-end Consolidated Financial Statements, including notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.  The accompanying unaudited Consolidated Interim Financial Statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States.

(2) Earnings Per Share

The Company computes earnings per share in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share (“ASC 260”).   A reconciliation of the component parts of earnings per share for the three months ended March 31, 2020 and 2019 is as follows:

(in thousands,
except per share data)
 
For the three months ended
March 31,
 
   
2020
   
2019
 
Net income
 
$
13,313
     
14,558
 
Weighted average common shares
   
96,727
     
96,744
 
Stock Options
   
22
     
78
 
Weighted average common shares including potential dilutive shares
   
96,749
     
96,822
 
                 
Basic EPS
 
$
0.138
     
0.150
 
                 
Diluted EPS
 
$
0.138
     
0.150
 

 
For the three months ended March 31, 2020 and 2019 the weighted average antidilutive stock options excluded from diluted earnings per share were approximately 452 thousand and -0-, respectively.  The stock options are antidilutive because the strike price is greater than the average fair value of the Company’s common stock for the periods presented.
 
8


(3) Benefit Plans

The table below outlines the components of the Company’s net periodic benefit recognized during the three months ended March 31, 2020 and 2019 for its pension and other postretirement benefit plans:

 
For the three months ended March 31,
 
 
Pension Benefits
   
Other Postretirement Benefits
 
(dollars in thousands)
 
2020
   
2019
   
2020
   
2019
 
                         
Service cost
 
$
12
     
8
     
19
     
18
 
Interest cost
   
266
     
315
     
54
     
60
 
Expected return on plan assets
   
(819
)
   
(752
)
   
(296
)
   
(248
)
Amortization of net gain
   
-
     
-
     
(166
)
   
(48
)
Amortization of prior service credit
   
-
     
-
     
(49
)
   
(85
)
Net periodic benefit
 
$
(541
)
   
(429
)
   
(438
)
   
(303
)

The Company does not expect to make contributions to its pension and postretirement benefit plans in 2020.  As of March 31, 2020, no contributions have been made, however, this decision is reviewed each quarter and is subject to change based upon market conditions.

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

9

(4) Investment Securities

(a) Securities available for sale

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

 
March 31, 2020
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
U.S. government sponsored enterprises
 
$
54,900
     
70
     
-
     
54,970
 
State and political subdivisions
   
110
     
2
     
-
     
112
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
343,168
     
8,906
     
7
     
352,067
 
Corporate bonds
   
47,943
     
779
     
158
     
48,564
 
Small Business Administration - guaranteed participation securities
   
46,392
     
376
     
-
     
46,768
 
Other
   
685
     
-
     
-
     
685
 
                                 
Total securities available for sale
 
$
493,198
     
10,133
     
165
     
503,166
 

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

The schedule of maturities of debt securities available for sale is presented below.  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
 
$
10,062
     
10,104
 
Due in one year through five years
   
83,558
     
84,189
 
Due after five years through ten years
   
10,018
     
10,038
 
Mortgage backed securities and collateralized mortgage obligations
   
343,168
     
352,067
 
Small Business Administration - guaranteed participation securities
   
46,392
     
46,768
 
   
$
493,198
     
503,166
 
10


Gross unrealized losses on securities available for sale and the related fair values aggregated by the length of time that individual securities have been in an unrealized loss position, were as follows:

 
March 31, 2020
 
   
Less than
12 months
   
12 months
or more
   
Total
 
(dollars in thousands)
 
Fair
Value
   
Gross
Unreal.
Loss
   
Fair
Value
   
Gross
Unreal.
Loss
   
Fair
Value
   
Gross
Unreal.
Loss
 
                                     
Mortgage backed securities and collateralized mortgage obligations - residential
 
$
-
     
-
     
4,390
     
7
     
4,390
     
7
 
Corporate bonds
   
-
     
-
     
4,843
     
158
     
4,843
     
158
 
                                                 
Total
 
$
-
     
-
     
9,233
     
165
     
9,233
     
165
 

 
December 31, 2019
 
   
Less than
12 months
   
12 months
or more
   
Total
 
(dollars in thousands)
 
Fair
Value
   
Gross
Unreal.
Loss
   
Fair
Value
   
Gross
Unreal.
Loss
   
Fair
Value
   
Gross
Unreal.
Loss
 
                                     
U.S. government sponsored enterprises
 
$
19,820
     
180
     
74,656
     
239
     
94,476
     
419
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
67,322
     
446
     
169,169
     
980
     
236,491
     
1,426
 
Corporate bonds
   
4,905
     
95
     
-
     
-
     
4,905
     
95
 
Small Business Administration - guaranteed participation securities
   
48,510
     
480
     
-
     
-
     
48,510
     
480
 
                                                 
Total
 
$
140,557
     
1,201
     
243,825
     
1,219
     
384,382
     
2,420
 

The proceeds from sales and calls and maturities of securities available for sale, gross realized gains and gross realized losses from sales and calls during the three months ended March 31, 2020 and 2019 are as follows:

(dollars in thousands)
 
Three months ended March 31,
 
   
2020
   
2019
 
             
Proceeds from sales
 
$
29,219
     
-
 
Proceeds from calls/paydowns
   
69,144
     
16,041
 
Proceeds from maturities
   
5,000
     
10,000
 
Gross realized gains
   
1,155
     
-
 
Gross realized losses
   
-
     
-
 

There were no transfers of securities available for sale during the three months ended March 31, 2020 and 2019.
11

(b) Held to maturity securities

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

 
March 31, 2020
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrecognized
Gains
   
Gross
Unrecognized
Losses
   
Fair
Value
 
                         
Mortgage backed securities and collateralized mortgage obligations - residential
 
$
17,720
     
1,315
     
-
     
19,035
 
Total held to maturity
 
$
17,720
     
1,315
     
-
     
19,035
 

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

The following table distributes the held to maturity portfolio as of March 31, 2020, based on the securities’ final maturity.  Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty.  Securities not due at a single maturity date are presented separately:

(dollars in thousands)
 
Amortized
Cost
   
Fair
Value
 
Mortgage backed securities and collateralized mortgage obligations - residential
 
$
17,720
     
19,035
 
   
$
17,720
     
19,035
 

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

There were no sales or transfers of held to maturity securities during the three months ended March 31, 2020 and 2019.

(c) Other-Than-Temporary Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  The investment securities portfolio is evaluated for OTTI by segregating the portfolio by type and applying the appropriate OTTI model.

In determining OTTI for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.  The assessment of whether any other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
12

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

As of March 31, 2020, the Company’s security portfolio included certain securities which were in an unrealized loss position, and are discussed below.

Mortgage backed securities and collateralized mortgage obligations – residential:  At March 31, 2020, all mortgage backed securities and collateralized mortgage obligations held by the Company were issued by U.S. government sponsored entities and agencies, primarily Ginnie Mae, Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support.  Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2020.

Corporate Bonds:  At March 31, 2020, corporate bonds held by the Company are investment grade quality.  Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2020.

13

(5) Loans and Allowance for Loan Losses


 
 
March 31, 2020
 
(dollars in thousands)
 
New York and
other states*
   
Florida
   
Total
 
Commercial:
                 
Commercial real estate
 
$
158,630
     
17,579
     
176,209
 
Other
   
19,221
     
375
     
19,596
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
2,558,048
     
982,078
     
3,540,126
 
Home equity loans
   
68,628
     
18,367
     
86,995
 
Home equity lines of credit
   
217,101
     
48,652
     
265,753
 
Installment
   
8,386
     
2,327
     
10,713
 
Total loans, net
 
$
3,030,014
     
1,069,378
     
4,099,392
 
Less: Allowance for loan losses
                   
46,155
 
Net loans
                 
$
4,053,237
 

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

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

At March 31, 2020 and December 31, 2019, the Company had approximately $27.6 million and $28.5 million of real estate construction loans, respectively.  Of the $27.6 million in real estate construction loans at March 31, 2020, approximately $9.5 million are secured by first mortgages to residential borrowers while approximately $18.1 million were to commercial borrowers for residential construction projects.  Of the $28.5 million in real estate construction loans at December 31, 2019, approximately $10.7 million are secured by first mortgages to residential borrowers while approximately $17.8 million were to commercial borrowers for residential construction projects.  The vast majority of construction loans are in the Company’s New York market.

The Company lends in the geographic territory of its branch locations in New York, Florida, Massachusetts, New Jersey and Vermont. Although the loan portfolio is diversified, a portion of its debtors’ ability to repay depends significantly on the economic conditions prevailing in the respective geographic territory.
14

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

 
March 31, 2020
 
(dollars in thousands)
 
New York and
other states*
   
Florida
   
Total
 
Loans in non-accrual status:
                 
Commercial:
                 
Commercial real estate
 
$
517
     
-
     
517
 
Other
   
113
     
-
     
113
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
15,741
     
1,258
     
16,999
 
Home equity loans
   
139
     
48
     
187
 
Home equity lines of credit
   
2,690
     
186
     
2,876
 
Installment
   
24
     
-
     
24
 
Total non-accrual loans
   
19,224
     
1,492
     
20,716
 
Restructured real estate mortgages - 1 to 4 family
   
27
     
-
     
27
 
Total nonperforming loans
 
$
19,251
     
1,492
     
20,743
 

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

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

The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu).  As of March 31, 2020 and December 31, 2019, other real estate owned included $877  thousand and $1.2 million of residential foreclosed properties, respectively.  In addition, non-accrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $9.2 million and $8.7 million, respectively, as of March 31, 2020 and December 31, 2019.
15

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

 
March 31, 2020
 
New York and other states*:
                                   
(dollars in thousands)
 
30-59
Days
Past Due
   
60-89
Days
Past Due
   
90 +
Days
Past Due
   
Total
30+ days
Past Due
   
Current
   
Total
Loans
 
                                     
Commercial:
                                   
Commercial real estate
 
$
211
     
-
     
332
     
543
     
158,087
     
158,630
 
Other
   
-
     
-
     
113
     
113
     
19,108
     
19,221
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
3,410
     
2,129
     
11,114
     
16,653
     
2,541,395
     
2,558,048
 
Home equity loans
   
205
     
122
     
80
     
407
     
68,221
     
68,628
 
Home equity lines of credit
   
729
     
85
     
871
     
1,685
     
215,416
     
217,101
 
Installment
   
17
     
9
     
24
     
50
     
8,336
     
8,386
 
                                                 
Total
 
$
4,572
     
2,345
     
12,534
     
19,451
     
3,010,563
     
3,030,014
 

Florida:
                                   
(dollars in thousands)
 
30-59
Days
Past Due
   
60-89
Days
Past Due
   
90 +
Days
Past Due
   
Total
30+ days
Past Due
   
Current
   
Total
Loans
 
                                     
Commercial:
                                   
Commercial real estate
 
$
-
     
-
     
-
     
-
     
17,579
     
17,579
 
Other
   
-
     
-
     
-
     
-
     
375
     
375
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
629
     
385
     
500
     
1,514
     
980,564
     
982,078
 
Home equity loans
   
62
     
-
     
-
     
62
     
18,305
     
18,367
 
Home equity lines of credit
   
99
     
-
     
140
     
239
     
48,413
     
48,652
 
Installment
   
16
     
-
     
-
     
16
     
2,311
     
2,327
 
                                                 
Total
 
$
806
     
385
     
640
     
1,831
     
1,067,547
     
1,069,378
 

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
 
$
211
     
-
     
332
     
543
     
175,666
     
176,209
 
Other
   
-
     
-
     
113
     
113
     
19,483
     
19,596
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
4,039
     
2,514
     
11,614
     
18,167
     
3,521,959
     
3,540,126
 
Home equity loans
   
267
     
122
     
80
     
469
     
86,526
     
86,995
 
Home equity lines of credit
   
828
     
85
     
1,011
     
1,924
     
263,829
     
265,753
 
Installment
   
33
     
9
     
24
     
66
     
10,647
     
10,713
 
                                                 
Total
 
$
5,378
     
2,730
     
13,174
     
21,282
     
4,078,110
     
4,099,392
 

* Includes New York, New Jersey, Vermont and Massachusetts.
16


 
December 31, 2019
 
New York and other states*:
                                   
(dollars in thousands)
 
30-59
Days
Past Due
   
60-89
Days
Past Due
   
90 +
Days
Past Due
   
Total
30+ days
Past Due
   
Current
   
Total
Loans
 
                                     
Commercial:
                                   
Commercial real estate
 
$
141
     
-
     
617
     
758
     
161,428
     
162,186
 
Other
   
80
     
-
     
33
     
113
     
19,213
     
19,326
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
3,444
     
292
     
11,328
     
15,064
     
2,526,376
     
2,541,440
 
Home equity loans
   
183
     
7
     
133
     
323
     
69,468
     
69,791
 
Home equity lines of credit
   
232
     
149
     
1,141
     
1,522
     
219,965
     
221,487
 
Installment
   
37
     
8
     
3
     
48
     
8,658
     
8,706
 
                                                 
Total
 
$
4,117
     
456
     
13,255
     
17,828
     
3,005,108
     
3,022,936
 

Florida:
                                   
(dollars in thousands)
 
30-59
Days
Past Due
   
60-89
Days
Past Due
   
90 +
Days
Past Due
   
Total
30+ days
Past Due
   
Current
   
Total
Loans
 
                                     
Commercial:
                                   
Commercial real estate
 
$
-
     
-
     
-
     
-
     
17,752
     
17,752
 
Other
   
-
     
-
     
-
     
-
     
235
     
235
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
542
     
-
     
617
     
1,159
     
952,836
     
953,995
 
Home equity loans
   
63
     
-
     
-
     
63
     
18,485
     
18,548
 
Home equity lines of credit
   
80
     
-
     
50
     
130
     
46,305
     
46,435
 
Installment
   
-
     
-
     
-
     
-
     
2,295
     
2,295
 
                                                 
Total
 
$
685
     
-
     
667
     
1,352
     
1,037,908
     
1,039,260
 

Total:
                                   
(dollars in thousands)
 
30-59
Days
Past Due
   
60-89
Days
Past Due
   
90 +
Days
Past Due
   
Total
30+ days
Past Due
   
Current
   
Total
Loans
 
                                     
Commercial:
                                   
Commercial real estate
 
$
141
     
-
     
617
     
758
     
179,180
     
179,938
 
Other
   
80
     
-
     
33
     
113
     
19,448
     
19,561
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
3,986
     
292
     
11,945
     
16,223
     
3,479,212
     
3,495,435
 
Home equity loans
   
246
     
7
     
133
     
386
     
87,953
     
88,339
 
Home equity lines of credit
   
312
     
149
     
1,191
     
1,652
     
266,270
     
267,922
 
Installment
   
37
     
8
     
3
     
48
     
10,953
     
11,001
 
                                                 
Total
 
$
4,802
     
456
     
13,922
     
19,180
     
4,043,016
     
4,062,196
 

* Includes New York, New Jersey, Vermont and Massachusetts.
17

At March 31, 2020 and December 31, 2019, there were no loans that were 90 days past due and still accruing interest.  As a result, non-accrual loans include all loans 90 days or more past due as well as certain loans less than 90 days past due that were placed on non-accrual status for reasons other than delinquent status.  There are no commitments to extend further credit on non-accrual or restructured loans.

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

 
For the three months ended March 31, 2020
 
(dollars in thousands)
 
Commercial
   
Real Estate
Mortgage-
1 to 4 Family
   
Installment
   
Total
 
Balance at beginning of period
 
$
3,999
     
39,748
     
570
     
44,317
 
Loans charged off:
                               
New York and other states*
   
3
     
191
     
7
     
201
 
Florida
   
-
     
-
     
19
     
19
 
Total loan chargeoffs
   
3
     
191
     
26
     
220
 
                                 
Recoveries of loans previously charged off:
                               
New York and other states*
   
2
     
51
     
3
     
56
 
Florida
   
-
     
2
     
-
     
2
 
Total recoveries
   
2
     
53
     
3
     
58
 
Net loans charged off
   
1
     
138
     
23
     
162
 
Provision (credit) for loan losses
   
(38
)
   
2,033
     
5
     
2,000
 
Balance at end of period
 
$
3,960
     
41,643
     
552
     
46,155
 

 
For the three months ended March 31, 2019
 
(dollars in thousands)
 
Commercial
   
Real Estate
Mortgage-
1 to 4 Family
   
Installment
   
Total
 
Balance at beginning of period
 
$
4,048
     
39,772
     
946
     
44,766
 
Loans charged off:
                               
New York and other states*
   
7
     
392
     
29
     
428
 
Florida
   
-
     
29
     
31
     
60
 
Total loan chargeoffs
   
7
     
421
     
60
     
488
 
                                 
Recoveries of loans previously charged off:
                               
New York and other states*
   
3
     
74
     
6
     
83
 
Florida
   
-
     
10
     
-
     
10
 
Total recoveries
   
3
     
84
     
6
     
93
 
Net loans charged off
   
4
     
337
     
54
     
395
 
Provision (credit) for loan losses
   
(310
)
   
550
     
60
     
300
 
Balance at end of period
 
$
3,734
     
39,985
     
952
     
44,671
 

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


The Company has identified non-accrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring (“TDR”), as impaired loans.  A loan is considered impaired when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured as a TDR.
18

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2020 and December 31, 2019:

 
March 31, 2020
 
(dollars in thousands)
 
Commercial
Loans
   
1-to-4 Family
Residential
Real Estate
   
Installment
Loans
   
Total
 
Allowance for loan losses:
                       
Ending allowance balance attributable to loans:
                       
Individually evaluated for impairment
 
$
-
     
-
     
-
     
-
 
Collectively evaluated for impairment
   
3,960
     
41,643
     
552
     
46,155
 
                                 
Total ending allowance balance
 
$
3,960
     
41,643
     
552
     
46,155
 
                                 
Loans:
                               
Individually evaluated for impairment
 
$
1,115
     
19,172
     
-
     
20,287
 
Collectively evaluated for impairment
   
194,690
     
3,873,702
     
10,713
     
4,079,105
 
                                 
Total ending loans balance
 
$
195,805
     
3,892,874
     
10,713
     
4,099,392
 

 
December 31, 2019
 
(dollars in thousands)
 
Commercial
Loans
   
1-to-4 Family
Residential
Real Estate
   
Installment
Loans
   
Total
 
Allowance for loan losses:
                       
Ending allowance balance attributable to loans:
                       
Individually evaluated for impairment
 
$
-
     
-
     
-
     
-
 
Collectively evaluated for impairment
   
3,999
     
39,748
     
570
     
44,317
 
                                 
Total ending allowance balance
 
$
3,999
     
39,748
     
570
     
44,317
 
                                 
Loans:
                               
Individually evaluated for impairment
 
$
1,437
     
19,539
     
-
     
20,976
 
Collectively evaluated for impairment
   
198,062
     
3,832,157
     
11,001
     
4,041,220
 
                                 
Total ending loans balance
 
$
199,499
     
3,851,696
     
11,001
     
4,062,196
 

A loan for which the terms have been modified, and for which the borrower is experiencing financial difficulties, is considered a TDR and is classified as impaired.  TDR’s at March 31, 2020 and December 31, 2019 are measured at the present value of estimated future cash flows using the loan’s effective rate at inception or the fair value of the underlying collateral if the loan is considered collateral dependent.
19

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

 
March 31, 2020
 
New York and other states*:
                       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
866
   
$
1,006
     
-
     
1,245
 
Other
   
145
     
145
     
-
     
91
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
13,872
     
14,249
     
-
     
14,095
 
Home equity loans
   
232
     
252
     
-
     
237
 
Home equity lines of credit
   
2,209
     
2,349
     
-
     
2,286
 
                                 
Total
 
$
17,324
     
18,001
     
-
     
17,954
 

Florida:
                       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
104
     
104
     
-
     
106
 
Other
   
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
2,615
     
2,615
     
-
     
2,405
 
Home equity loans
   
-
     
-
     
-
     
30
 
Home equity lines of credit
   
244
     
244
     
-
     
247
 
                                 
Total
 
$
2,963
     
2,963
     
-
     
2,788
 

Total:
                       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
970
     
1,110
     
-
     
1,352
 
Other
   
145
     
145
     
-
     
91
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
16,487
     
16,864
     
-
     
16,500
 
Home equity loans
   
232
     
252
     
-
     
267
 
Home equity lines of credit
   
2,453
     
2,593
     
-
     
2,533
 
                                 
Total
 
$
20,287
     
20,964
     
-
     
20,743
 

* Includes New York, New Jersey, Vermont and Massachusetts.
20


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

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

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

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

21

The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as impaired.  Interest income recognized on impaired loans was not material during the three months ended March 31, 2020 and 2019.

As of March 31, 2020 and December 31, 2019 impaired loans included approximately $10.7 million and $10.9 million of loans in accruing status that were identified as TDR’s in accordance with regulatory guidance related to Chapter 7 bankruptcy loans.

Management evaluates impairment on impaired loans on a quarterly basis. If, during this evaluation, impairment of the loan is identified, a chargeoff is taken at that time.  As a result, as of  March 31, 2020 and December 31, 2019, based upon management’s evaluation and due to the sufficiency of chargeoffs taken, none of the allowance for loan losses has been allocated to a specific impaired loan(s).

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

 
Three months ended 3/31/2020
   
Three months ended 3/31/2019
 
                                     
New York and other states*:
 
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
   
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
 
(dollars in thousands)
                                     
Commercial:
                                   
Commercial real estate
   
-
   
$
-
     
-
     
-
   
$
-
     
-
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
1
   
$
167
     
167
     
4
   
$
656
     
656
 
Home equity loans
   
-
     
-
     
-
     
-
     
-
     
-
 
Home equity lines of credit
   
1
     
70
     
70
     
-
     
-
     
-
 
                                                 
Total
   
2
   
$
237
   
$
237
     
4
   
$
656
   
$
656
 

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
   
1
   
$
147
     
147
     
-
   
$
-
     
-
 
Home equity loans
   
-
     
-
     
-
     
-
     
-
     
-
 
Home equity lines of credit
   
-
     
-
     
-
     
-
     
-
     
-
 
                                                 
Total
   
1
   
$
147
     
147
     
-
   
$
-
     
-
 

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


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

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

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.
22

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.

There were no TDR’s that defaulted during the three months ended March 31, 2020 and 2019 which had been modified within the last twelve months:

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

The Company uses the following definitions for classified loans:

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “pass” rated loans.
23

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

 
March 31, 2020
 
                   
New York and other states*:
                 
(dollars in thousands)
 
Pass
   
Classified
   
Total
 
                   
Commercial:
                 
Commercial real estate
 
$
153,910
     
4,720
     
158,630
 
Other
   
18,721
     
500
     
19,221
 
                         
   
$
172,631
     
5,220
     
177,851
 

Florida:
                 
(dollars in thousands)
 
Pass
   
Classified
   
Total
 
                   
Commercial:
                 
Commercial real estate
 
$
17,579
     
-
     
17,579
 
Other
   
375
     
-
     
375
 
                         
   
$
17,954
     
-
     
17,954
 

Total:
                 
(dollars in thousands)
 
Pass
   
Classified
   
Total
 
                   
Commercial:
                 
Commercial real estate
 
$
171,489
     
4,720
     
176,209
 
Other
   
19,096
     
500
     
19,596
 
                         
   
$
190,585
     
5,220
     
195,805
 

* Includes New York, New Jersey and Massachusetts.
24


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

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

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

* Includes New York, New Jersey and Massachusetts.

Included in classified loans in the above tables are impaired loans of $874 thousand and $816  thousand at March 31, 2020 and December 31, 2019, respectively.

For homogeneous loan pools, such as residential mortgages, home equity lines of credit, and installment loans, the Company uses payment status to identify the credit risk in these loan portfolios. Payment status is reviewed on a daily basis by the Bank’s collection area and on a monthly basis with respect to determining the adequacy of the allowance for loan losses. The payment status of these homogeneous pools as of  March 31, 2020 and December 31, 2019 is included in the aging of the recorded investment of the past due loans table. In addition, the total nonperforming portion of these homogeneous loan pools as of March 31, 2020 and December 31, 2019 is presented in the non-accrual loans table.

As more fully discussed in Note 12 – Risks and Uncertainties, the Company experienced requests for loan deferrals of principal and interest due to the business disruption caused by Coronavirus Disease 2019 (“COVID-19”), which are excluded from evaluation of TDR classification and will continue to be reported as current during the payment deferral period.


25

(6) Fair Value of Financial Instruments

Fair value measurements (ASC 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the value that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of assets and liabilities:

Securities Available for Sale: The fair value of securities available for sale is determined utilizing an independent pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. This results in a Level 2 classification of the inputs for determining fair value. Interest and dividend income is recorded on the accrual method and is included in the Consolidated Statements of Income in the respective investment class under total interest and dividend income. 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.
26

Indications of value for both collateral-dependent impaired loans and other real estate owned are obtained from third party providers or the Company’s internal Appraisal Department. All indications of value are reviewed for reasonableness by a member of the Appraisal Department for the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value via comparison with independent data sources such as recent market data or industry-wide statistics.

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

 
Fair Value Measurements at
 
   
March 31, 2020 Using:
 
(dollars in thousands)
 
Carrying
Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
                         
Securities available for sale:
                       
U.S. government sponsored enterprises
 
$
54,970
   
$
-
   
$
54,970
   
$
-
 
State and political subdivisions
   
112
     
-
     
112
     
-
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
352,067
     
-
     
352,067
     
-
 
Corporate bonds
   
48,564
     
-
     
48,564
     
-
 
Small Business Administration- guaranteed participation securities
   
46,768
     
-
     
46,768
     
-
 
Other securities
   
685
     
-
     
685
     
-
 
                                 
Total securities available for sale
 
$
503,166
   
$
-
   
$
503,166
   
$
-
 

 
Fair Value Measurements at
 
   
December 31, 2019 Using:
 
(dollars in thousands)
 
Carrying
Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
                         
Securities available for sale:
                       
U.S. government sponsored enterprises
 
$
104,512
   
$
-
   
$
104,512
   
$
-
 
State and political subdivisions
   
162
     
-
     
162
     
-
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
389,517
     
-
     
389,517
     
-
 
Corporate bonds
   
30,436
     
-
     
30,436
     
-
 
Small Business Administration- guaranteed participation securities
   
48,511
     
-
     
48,511
     
-
 
Other securities
   
685
     
-
     
685
     
-
 
                                 
Total securities available for sale
 
$
573,823
   
$
-
   
$
573,823
   
$
-
 

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2020 and 2019.
27

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

 
 
Fair Value Measurements at
 
 
 
     
 
 
March 31, 2020 Using:
 
 
 
     
(dollars in thousands)
 
Carrying
Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Valuation
 technique
Unobservable
 inputs
 
Range (Weighted Average)
 
 
                       
 
 
     
Other real estate owned
 
$
1,284
   
$
-
   
$
-
   
$
1,284
 
Sales comparison approach
Adjustments for differences between comparable sales
   
1% - 5% (3
%)
                                             
Impaired loans:
                                           
Real estate mortgage -1 to 4     family
   
417
     
-
     
-
     
417
 
Sales comparison approach
Adjustments for differences between comparable sales
   
11% - 13% (12
%)

 
 
Fair Value Measurements at
 
 
 
     
 
 
December 31, 2019 Using:
 
 
 
     
(dollars in thousands)
 
Carrying
Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Valuation
 technique
Unobservable
 inputs
 
Range (Weighted Average)
 
 
                       
 
 
     
Other real estate owned
 
$
1,579
   
$
-
   
$
-
   
$
1,579
 
Sales comparison approach
Adjustments for differences between comparable sales
   
1% - 21% (7
%)
                                             
Impaired loans:
                                           
Real estate mortgage -1 to 4 family
   
120
     
-
     
-
     
120
 
Sales comparison approach
Adjustments for differences between comparable sales
   
1% - 17% (9
%)
Home equity lines of credit
                                           

Other real estate owned, that is carried at fair value less costs to sell was approximately $1.3 million at March 31, 2020 and consisted of $407 thousand of commercial real estate and $877 thousand of residential real estate properties.  Valuation charges of $80 thousand are included in earnings for the three months ended March 31, 2020.

Of the total impaired loans of $20.3 million at March 31, 2020, $417 thousand of residential mortgages are collateral dependent and are carried at fair value measured on a non-recurring basis.  Due to the sufficiency of chargeoffs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at March 31, 2020.  Gross chargeoffs related to residential impaired loans included in the table above were $77 thousand for the three months ended March 31, 2020. 

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

Of the total impaired loans of $21.0 million at December 31, 2019, $120 thousand are collateral dependent and are carried at fair value measured on a non-recurring basis.  Due to the sufficiency of chargeoffs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at December 31, 2019.  Gross chargeoffs related to residential impaired loans included in the table above amounted to $22 thousand at December 31, 2019.
28

The carrying amounts and estimated fair values (represents exit price) of financial instruments, at March 31, 2020 and December 31, 2019 are as follows:

(dollars in thousands)
       
Fair Value Measurements at
 
   
Carrying
   
March 31, 2020 Using:
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                             
Cash and cash equivalents
 
$
536,053
     
536,053
     
-
     
-
     
536,053
 
Securities available for sale
   
503,166
     
-
     
503,166
     
-
     
503,166
 
Held to maturity securities
   
17,720
     
-
     
19,035
     
-
     
19,035
 
Federal Reserve Bank and Federal
                                       
Home Loan Bank stock
   
9,183
     
N/A
     
N/A
     
N/A
     
N/A
 
Net loans
   
4,099,392
     
-
     
-
     
4,131,365
     
4,131,365
 
Accrued interest receivable
   
10,242
     
8
     
1,841
     
8,393
     
10,242
 
Financial liabilities:
                                       
Demand deposits
   
480,255
     
480,255
     
-
     
-
     
480,255
 
Interest bearing deposits
   
4,001,573
     
2,634,568
     
1,375,391
     
-
     
4,009,959
 
Short-term borrowings
   
148,090
     
-
     
148,090
     
-
     
148,090
 
Accrued interest payable
   
1,259
     
145
     
1,114
     
-
     
1,259
 

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

29

(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 3/31/2020
 
(dollars in thousands)
 
Balance at
12/31/2019
   
Other
Comprehensive
Income (loss)-
Before
Reclassifications
   
Amount
reclassified
from Accumulated
Other Comprehensive
Income
   
Other
Comprehensive
Income (loss)-
Three months ended
3/31/2020
   
Balance at
3/31/2020
 
 
                             
Net unrealized holding gain on securities available for sale, net of tax
 
$
286
     
7,945
     
(855
)
   
7,090
     
7,376
 
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax (a)
   
4,840
     
-
     
-
     
-
     
4,840
 
Net change in net actuarial gain and prior service credit on pension and postretirement benefit plans, net of tax
   
(665
)
   
-
     
(159
)
   
(159
)
   
(824
)
 
                                       
Accumulated other comprehensive loss, net of tax
 
$
4,461
     
7,945
     
(1,014
)
   
6,931
     
11,392
 

 
Three months ended 3/31/2019
 
(dollars in thousands)
 
Balance at
12/31/2018
   
Other
Comprehensive
Income (loss)-
Before
Reclassifications
   
Amount
reclassified
from Accumulated
Other Comprehensive
Income
   
Other
Comprehensive
Income (loss)-
Three months ended
3/31/2019
   
Balance at
3/31/2019
 
                               
Net unrealized holding loss on securities available for sale, net of tax
 
$
(10,416
)
   
3,396
     
-
     
3,396
     
(7,020
)
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax (a)
   
423
     
-
     
-
     
-
     
423
 
Net change in net actuarial gain and prior service credit on pension and postretirement benefit plans, net of tax
   
(316
)
   
-
     
(98
)
   
(98
)
   
(414
)
                                         
Accumulated other comprehensive income (loss), net of tax
 
$
(10,309
)
   
3,396
     
(98
)
   
3,298
     
(7,011
)

(a) Measured annually. 

The following represents the reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2020 and 2019:

 
Three months ended
March 31,
   
(dollars in thousands)
 
2020
   
2019
 
Affected Line Item in Financial Statements
                  
Unrealized gains on securities available for sale
               
Realized gain on securities transactions
 
$
1,155
     
-
 
Net gain on securities transactions
Income tax expense
   
(300
)
   
-
 
Income taxes
Net of tax
   
855
     
-
   
                      
Amortization of pension and postretirement benefit items:
                   
Amortization of net actuarial gain
 
$
166
     
48
 
Salaries and employee benefits
Amortization of prior service credit
   
49
     
85
 
Salaries and employee benefits
Income tax benefit
   
(56
)
   
(35
)
Income taxes
Net of tax
   
159
     
98
   
                      
Total reclassifications, net of tax
 
$
159
     
98
   

30

(8) Revenue from Contracts with Customers

All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income.  The following table presents the Company’s sources of Non-Interest Income for the three months ended March 31, 2020 and 2019. Items outside the scope of ASC 606 are noted as such.

 
Three months ended
 
   
March 31,
 
(dollars in thousands)
 
2020
   
2019
 
             
Non-interest income
           
Service Charges on Deposits
           
Overdraft fees
 
$
873
   
$
850
 
Other
   
108
     
110
 
Interchange Income
   
277
     
1,531
 
Wealth management fees
   
1,600
     
1,733
 
Net gain on securities transactions (a)
   
1,155
     
-
 
Other (a)
   
1,321
     
413
 
                 
Total non-interest income
 
$
5,334
   
$
4,637
 

(a) Not within the scope of ASC 606.

A description of the Company’s revenue streams accounted for ASC 606 follows:

Service charges on Deposit Accounts:    The Company earns fees from its deposit customers for transaction-based, account maintenance and overdraft services.  Transaction-based fees, which include services such as stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request.  Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation.  Overdraft fees are recognized at the point in time that the overdraft occurs.  Service charges on deposits are withdrawn from the customer’s account balance.

Interchange Income:     Interchange revenue primarily consists of interchange fees, volume-related incentives and ATM charges. As the card-issuing bank, interchange fees represent our portion of discount fees paid by merchants for credit / debit card transactions processed through the interchange network.  The levels and structure of interchange rates are set by the card processing companies and are based on cardholder purchase volumes.  The Company earns interchange income as cardholder transactions occur and interchange fees are settled on a daily basis concurrent with the transaction processing services provided to the cardholder.

Wealth Management fees:     TrustCo Financial Services provides a comprehensive suite of trust and wealth management products and services, including financial and estate planning, trustee and custodial services, investment management, corporate retirement plan recordkeeping and administration of which a fee is charged to manage assets for investment or transact on accounts.  These fees are earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed over the period in which services are performed based on a percentage of the fair value of assets under management or administration.  Other services are based on a fixed fee for certain account types, or based on transaction activity and are recognized when services are rendered.  Fees are withdrawn from the customer’s account balance.

31

(9) Operating Leases

The Company adopted Topic 842 “Leases” effective January 1, 2019 and has applied the guidance to all operating leases within the scope of Topic 842 at that date.  The company elected to adopt practical expedients, which among other things, does not require reassessment of lease classification.

The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception.  Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the Company’s balance sheets.

Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.  Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.  The Company’s leases do not provide an implicit rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine present value of operating lease liabilities.  Additionally, the Company does allocate the consideration between lease and non-lease components.  The Company’s lease terms may include options to extend when it is reasonably certain that the Company will exercise that option.  Lease expense for lease payments is recognized on a straight-line basis over the lease term.  Variable lease components, such as fair market value adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.  Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. As of March 31, 2020  the Company did not have any leases with terms of twelve months or less.

As of March 31, 2020 the Company does not have leases that have not yet commenced. At March 31, 2020 lease expiration dates ranged from eight months to 24.5 years and have a weighted average remaining lease term of 9.2 years.  Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements. As mentioned above the leases generally also include variable lease components which include real estate taxes, insurance, and common area maintenance (“CAM”) charges in the annual rental payments.
32

Other information related to leases was as follows:

(dollars in thousands)
 
Three months ended
March 31,
 
   
2020
   
2019
 
Operating lease cost
 
$
1,995
   
$
1,891
 
Variable lease cost
   
480
     
466
 
                 
Total Lease costs
 
$
2,475
   
$
2,357
 

(dollars in thousands)
 
Three months ended
March 31,
 
   
2020
   
2019
 
Supplemental cash flows information:
           
Cash paid for amounts included in the measurement of lease liabilities:
           
Operating cash flows from operating leases
 
$
1,995
     
1,949
 
                 
Right-of-use assets obtained in exchange for lease obligations:
   
-
     
53,029
 
                 
Weighted average remaining lease term
 
9.2 years
   
9.8 years
 
Weighted average discount rate
   
3.25
%
   
3.30
%

Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows:

(dollars in thousands)
 
       
Year ending
December 31,
     
2020(a)
 
$
6,039
 
2021
   
8,033
 
2022
   
7,533
 
2023
   
7,227
 
2024
   
7,100
 
Thereafter
   
28,361
 
Total lease payments
 
$
64,293
 
Less: Interest
   
9,295
 
         
Present value of lease liabilities
 
$
54,998
 

(a) Excluding three months ended March 31, 2020.

The company has not recognized any options to extend as part of its ROU assets or lease liabilities.
33

The following table presents the minimum annual lease payments under the terms of these leases, exclusive of renewal provisions at December 31, 2019:

(dollars in thousands)
     
       
Year ending
December 31,
     
2020
 
$
8,039
 
2021
   
8,033
 
2022
   
7,533
 
2023
   
7,227
 
2024
   
7,100
 
Thereafter
   
28,361
 
Total lease payments
 
$
66,293
 
Less: Interest
   
9,740
 
         
Present value of lease liabilities
 
$
56,553
 

At March 31, 2020 and December 31, 2019 the operating lease right-of-use asset was $50.0 million and $51.5 million, respectively.

(10) Regulatory Capital Requirements

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy regulations and, additionally for banks, the prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can result in regulatory action.  The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and became fully phased in on January 1, 2019.  The capital rules include a capital conservation buffer that is designed to absorb losses during periods of economic stress and to require increased capital levels before capital distributions and certain other payments can be made.  Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.  The buffer was fully implemented at 2.5% as of January 1, 2019. As of March 31, 2020, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If a bank is not classified as well capitalized, regulatory approval is required to accept brokered deposits.  If a bank is undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.  The federal banking agencies are required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution or its holding company.  Such actions could have a direct material effect on an institution’s or its holding company’s financial statements.  As of March 31, 2020 and December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  There are no conditions or events since that notification that management believes have changed the Bank’s category.
34

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

(Bank Only)
                       
 
                   
Minimum
for
Capital
Adequacy
plus
Capital
Conservation
 
 
 
As of March 31, 2020
   
Well
 
 
(dollars in thousands)
 
Amount
   
Ratio
   
Capitalized(1)
   
Buffer (1)(2)
 
 
                       
Tier 1 leverage ratio
 
$
522,527
     
10.058
%
   
5.000
%
   
4.000
%
Common equity tier 1 capital
   
522,527
     
18.470
     
6.500
     
7.000
 
Tier 1 risk-based capital
   
522,527
     
18.470
     
8.000
     
8.500
 
Total risk-based capital
   
558,027
     
19.724
     
10.000
     
10.500
 

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

(Consolidated)
           
 
       
Minimum for
Capital Adequacy plus
Capital Conservation
Buffer (1)(2)
 
 
           
 
 
As of March 31, 2020
 
(dollars in thousands)
 
Amount
   
Ratio
 
 
                 
Tier 1 leverage ratio
 
$
536,239
     
10.316
%
   
4.000
%
Common equity tier 1 capital
   
536,239
     
18.943
     
7.000
 
Tier 1 risk-based capital
   
536,239
     
18.943
     
8.500
 
Total risk-based capital
   
571,760
     
20.198
     
10.500
 

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

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

35

(11) New Accounting Pronouncements

In September 2016, the FASB released ASU 2016-13, “Financial Instruments - Credit Losses” which amended existing guidance to replace current generally accepted accounting principles used to measure a reporting entity’s credit losses.  The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.  To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

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


(12) Risks and Uncertainties

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

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

As of March 31, 2020, the Company and Bank capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios, as well as the ability of the Company and the Bank to pay dividends or make other distributions, could be adversely impacted by further credit losses.

Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of troubled debt restructurings (“TDR”) classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period. Loans not meeting the CARES ACT or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures.  Loan Modifications and payment deferrals made pursuant to COVID 19 through March 31, 2020 totaled approximately $4.9 million, which included $4.1 million of commercial loans and $808 thousand of residential loans.

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


36


GRAPHIC

 
Crowe LLP
 
Independent Member Crowe Global


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Results of Review of Interim Financial Information

We have reviewed the consolidated statement of financial condition of TrustCo Bank Corp NY (the “Company”) as of March 31, 2020, and the related consolidated statements of income and comprehensive income for the three-month periods ended March 31, 2020 and March 31, 2019 and the related changes in shareholders’ equity and cash flows for the three month periods ended March 31, 2020 and March 31, 2019, and the related notes (collectively referred to as the “interim financial information or statements”). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statement of financial condition of the Company as of December 31, 2019, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of financial condition as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company’s management.  We conducted our review in accordance with the standards of the PCAOB. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.



 
/s/ Crowe LLP

New York, New York
May 8, 2020
37

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements
Statements included in this report and in future filings by TrustCo with the Securities and Exchange Commission, in TrustCo’s press releases, and in oral statements made with the approval of an authorized executive officer, including statements regarding the effect of the novel coronavirus disease (“COVID-19”)  pandemic on our business and our continuing response to the COVID-19 pandemic, that are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.  Forward-looking statements can be identified by the use of such words as may, will, should, could, would, estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions.  TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

In addition to factors described under Part II, Item 1A, Risk Factors, and under the Risk Factor discussion in TrustCo’s Annual Report on Form 10-K for the year ended December 31, 2019, the factors listed below, among others, in some cases have affected and in the future could affect TrustCo’s actual results and could cause TrustCo’s actual financial performance to differ materially from that expressed in any forward-looking statement.  Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic.

●
As a result of the current pandemic related to COVID-19, TrustCo may experience a decline in the demand for products and services; an increase in loan delinquencies; problem assets and foreclosures; a decline in collateral value; a work stoppage, forced quarantine, or other interruption or the unavailablilty of key employees; an increase in the allowance for loan losses; a reduction in wealth management revenues; an increase in Federal Deposit Insurance Corporation premiums; a reduction in the value of the securities portfolio; and a decline in the net worth and liquidity of loan guarantors;
●
TrustCo’s ability to continue to originate a significant volume of one- to- four family mortgage loans in its market areas and to otherwise maintain or increase its market share in the areas in which it operates;
●
TrustCo’s ability to continue to maintain noninterest expense and other overhead costs at reasonable levels relative to income;
●
TrustCo’s ability to make accurate assumptions and judgments regarding the credit risks associated with its lending and investing activities, including changes in the level and direction of loan delinquencies and charge-offs, changes in property values, and changes in estimates of the adequacy of the allowance for loan and lease losses;
●
the effects of and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations;
●
restrictions or conditions imposed by TrustCo’s and Trustco Bank’s regulators on their operations that may make it more difficult to achieve TrustCo’s and Trustco Bank’s goals;
38
●
the future earnings and capital levels of TrustCo and Trustco Bank and the continued non objection from TrustCo’s and Trustco Bank’s primary federal banking regulators under regulatory rules to distribute capital from Trustco Bank to TrustCo, which could affect the ability of TrustCo to pay dividends;
●
the results of supervisory monitoring or examinations of Trustco Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our loss allowances or to take other actions that reduce capital or income;
●
adverse conditions in the securities markets that lead to impairment in the value of securities in TrustCo’s investment portfolio;
●
the perceived overall value of TrustCo’s products and services by users, including the features, pricing and quality compared to competitors’ products and services and the willingness of current and prospective customers to substitute competitors’ products and services for TrustCo’s products and services;
●
changes in consumer spending, borrowing and savings habits;
●
the effect of changes in financial services laws and regulations (including laws concerning taxation, banking and securities) and the impact of other governmental initiatives affecting the financial services industry, including regulatory capital requirements;
●
changes in management personnel;
●
real estate and collateral values;
●
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, Financial Accounting Standards Board (“FASB”) or the Public Company Accounting Oversight Board;
●
disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;
●
technological changes and electronic, cyber and physical security breaches;
●
changes in local market areas and general business and economic trends;
●
TrustCo’s success at managing the risks involved in the foregoing and managing its business; and
●
other risks and uncertainties included under “Risk Factors” in our Form 10-K for the year ended December 31, 2019.

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

Following this discussion are the tables “Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential” which gives a detailed breakdown of TrustCo’s average interest earning assets and interest bearing liabilities for the three month periods ended March 31, 2020 and 2019.
39
Introduction
The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three month period ended March 31, 2020, with comparisons to the corresponding period in 2019, as applicable.  Net interest margin is presented on a fully taxable equivalent basis in this discussion.  The consolidated interim financial statements and related notes, as well as the 2019 Annual Report on Form 10-K, which was filed with the SEC on February 28, 2020, should also be read in conjunction with this review.  Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period’s presentation.

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

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

Loan modifications

We began receiving requests from our borrowers for loan deferrals in March 2020. Modifications include the deferral of principal and interest payments for terms generally up to 90 days. Requests are evaluated individually and approved modifications are based on the unique circumstances of each borrower. We are committed to working with our clients to allow time to work through the challenges of this pandemic. At this time, it is uncertain what future impact loan modifications related to COVID-19 difficulties will have on our financial condition, results of operations and provision for loan losses. Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of troubled debt restructurings (“TDR”) classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period. Loans not meeting the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures.
40
The following table shows the number of loans and the outstanding loan balances at the time the principal and interest deferrals were approved as of April 28, 2020:

New York and Other states*:
 
Number of loans
   
Outstanding loan
balance (in thousands)
 
Commercial
   
67
   
$
35,910
 
Residential mortgage loans
   
344
     
74,534
 
Home equity line of credit
   
28
     
2,050
 
Installment loans
   
3
     
113
 
Total
   
442
   
$
112,607
 

Florida:
 
Number of loans
   
Outstanding loan
balance (in thousands)
 
Commercial
   
3
   
$
4,579
 
Residential mortgage loans
   
150
     
35,896
 
Home equity line of credit
   
6
     
383
 
Installment loans
   
2
     
84
 
Total
   
161
   
$
40,942
 

Total:
 
Number of loans
   
Outstanding loan
balance (in thousands)
 
Commercial
   
70
   
$
40,489
 
Residential mortgage loans
   
494
     
110,430
 
Home equity line of credit
   
34
     
2,433
 
Installment loans
   
5
     
197
 
Total
   
603
   
$
153,549
 

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

The commercial loans that are deferred include loans from various types of businesses.  These loans include borrowers from fitness and recreational sports centers, lessors and property managers of non-residential and residential buildings, general automotive repair, new single family construction, commercial construction, retail, and food service.
41

Paycheck Protection Program (PPP) and Liquidity

As part of the CARES Act, approved by the President on March 27, 2020, the Small Business Administration (SBA) has been authorized to guarantee loans under the PPP through June 30, 2020 for small businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll. The Company began accepting applications on April 3, 2020.  As of April 28, 2020, 405 PPP loans totaling $33.8 million have been processed.  The Company will receive loan origination fees which will be recognized over the life of the loan and apply the effective yield method. 

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

Asset impairment

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

Provision for loan losses

See Part I Financial Information, Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Allowance for Loan Losses” for more information.

Preventative measures

The Company has instituted preventative measures at branch and back office locations to protect the health of both the customers and our employees, including regular deep cleaning of facilities, adhering to CDC guidelines, and practicing “social distancing.”

Federal Reserve Actions

The Federal Reserve Board has taken several actions to support the flow of credit to households and businesses.  Some of these pertinent actions include:
 
●
The establishment of the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, and the Primary Dealer Credit Facility;
●
The expansion of central bank liquidity swap lines;
●
Steps to enhance the availability and ease terms for borrowing at the discount window;
●
The elimination of reserve requirements;
●
Guidance encouraging banks to be flexible with customers experiencing financial challenges related to the coronavirus and to utilize their liquidity and capital buffers in doing so;
●
expand access to its Paycheck Protection Program Liquidity Facility (PPPLF) for additional SBA-qualified lenders;
●
Statements encouraging the use of daylight credit at the Federal Reserve.

42

Economic Overview
During the first quarter of 2020 financial markets were drastically influenced by the economic conditions that resulted from the COVID-19 pandemic.  Stocks suffered their worst quarterly declines since the financial crisis in late 2008 as the pandemic led to shutdowns of significant portions of the global economy.  For the full first quarter, the S&P 500 Index was down 19.6% and the Dow Jones Industrial Average was down 11.15%.  Credit markets continue to be driven by worldwide economic news, effects of COVID-19, and demand shifts.  The shape of the yield curve remained consistent during the quarter as compared to prior quarters.  The 10-year Treasury bond averaged 1.37% during Q1 2020 compared to 1.79% in Q4 2019, a decrease of 42 basis points.  The 2-year Treasury bond average rate decreased 51 basis points to 1.08%, resulting in flattening of the yield curve.  The spread between the 10-year and the 2-year Treasury bonds expanded slightly from 0.20% on average in Q4 to 0.28% in Q1.  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 ended the fourth quarter 2019 at a range of 1.50% to 1.75%, and in response to the current economic downturn, decreased drastically in the first quarter to a range of 0.00% to 0.25%.  Spreads of most asset classes to the comparative treasury yield, 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.  Changes in rates and spreads during the current quarter were primarily due to the effects of the COVID-19 pandemic.

   
3 Month
Yield (%)
2 Year
Yield (%)
5 Year
Yield (%)
10 Year
Yield (%)
10 - 2 Year
Spread (%)
               
Q1/19
 
Beg of Q1
2.45
2.48
2.51
2.69
0.21
 
Peak
2.49
2.62
2.62
2.79
0.21
 
Trough
2.37
2.22
2.18
2.39
0.13
 
End of Q1
2.40
2.27
2.23
2.41
0.14
 
Average in Q1
2.44
2.49
2.46
2.65
0.17
               
Q2/19
 
Beg of Q2
2.40
2.27
2.23
2.41
0.14
 
Peak
2.47
2.41
2.41
2.60
0.30
 
Trough
2.11
1.71
1.73
2.00
0.14
 
End of Q2
2.12
1.75
1.76
2.00
0.25
 
Average in Q2
2.35
2.13
2.12
2.34
0.21
               
Q3/19
 
Beg of Q3
2.12
1.75
1.76
2.00
0.25
 
Peak
2.26
1.92
1.88
2.13
0.28
 
Trough
1.80
1.43
1.32
1.47
-0.04
 
End of Q3
1.88
1.63
1.55
1.68
0.05
 
Average in Q3
2.03
1.69
1.63
1.80
0.11
               
Q4/19
 
Beg of Q4
1.88
1.63
1.55
1.68
0.05
 
Peak
1.82
1.68
1.75
1.94
0.34
 
Trough
1.52
1.39
1.34
1.52
0.09
 
End of Q4
1.55
1.58
1.69
1.92
0.34
 
Average in Q4
1.61
1.59
1.61
1.79
0.20
               
Q1/20
 
Beg of Q1
1.55
1.58
1.69
1.92
0.34
 
Peak
1.59
1.58
1.67
1.88
0.68
 
Trough
0.00
0.23
0.37
0.54
0.12
 
End of Q1
0.11
0.23
0.37
0.70
0.47
 
Average in Q1
1.10
1.08
1.14
1.37
0.28

The United States economy continued to show some modest improvements in various areas heading into 2020 until the COVID-19 uncertainty began to gain momentum.  Economic conditions vary significantly over geographic areas, with strength concentrated in and around major population centers on the coasts and in certain areas where economic activity has been driven by specific regional factors.

TrustCo believes that its long-term focus on traditional banking services and practices historically 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, particularly those arising during the 2008-2010 financial crisis.  Nevertheless, the Company may experience increases in nonperforming loans (“NPLs”) relative to historical levels from time to time.  Should general housing prices and other economic measures, such as unemployment in the Company’s market areas, deteriorate as a result of the COVID-19 pandemic, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans.
43
In a direct response to the COVID-19 pandemic, on March 27, 2020 Congress passed the CARES Act. Included in the CARES Act is support for small businesses, direct payments to lower and middle income families, expanded unemployment insurance, additional funding for health care providers, as well as support for other industries.  The Federal Reserve Board, in an attempt to increase liquidity and promote the normal functioning of financial markets, also provided support by increasing purchases of Treasury securities and agency mortgage-backed securities.

Financial Overview
TrustCo recorded net income of $13.3 million, or $0.138 of diluted earnings per share, for the three months ended March 31, 2020, compared to net income of $14.6 million, or $0.150 of diluted earnings per share, in the same period in 2019.  Return on average assets was 1.03% and 1.17%, respectively, for the three months ended March 31, 2020 and 2019.  Return on average equity was 9.87% and 11.93%, respectively, for the three months ended March 31, 2020 and 2019.

The primary factors accounting for the change in net income for the three months ended March 31, 2020 compared to the same period of the prior year were:

●
An increase in the average balance of interest earning assets of $143.2 million to $5.1 billion for the first quarter of 2020 compared to the same period in 2019.

●
A decrease in taxable equivalent net interest margin for the first quarter of 2020 to 3.05% from 3.24% in the prior year period.  The decrease in the margin, coupled with the increase in average earning assets, resulted in a decrease of $1.2 million in taxable equivalent net interest income in the first quarter of 2020 compared to the first quarter of 2019.

●
An increase of $1.7 million in provision for loan losses for the first quarter of 2020 compared to the first quarter 2019.

●
An increase of $697 thousand in noninterest income for the first quarter of 2020 compared to the first quarter of 2019, primarily driven by a $1.2 million gain on securities transactions.

●
A decrease of $599 thousand in noninterest expense for the first quarter 2020 compared to the first quarter 2019.
44
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 on Form 10-K for the year ended December 31, 2019 is a description of the effect interest rates had on the results for the year 2019 compared to 2018.  Many of the same market factors discussed in the 2019 Annual Report continued to have a significant impact on results through the first quarter of 2020, as well as the impacts form COVID-19.

TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations and rates paid on deposits and charged on loans.  In the experience of management, the absolute level of interest rates, changes in interest rates and customers’ expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period.

Interest rates have a significant impact on the operations and financial results of all financial services companies.  One of the most important interest rates used to control national economic policy is the “Federal Funds” rate.  This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating.  During 2007‑2008 the FRB aggressively reduced the Federal Funds rate, including a decrease from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008.  The target range remained at that level until December 2015 when the range was increased to 0.25% to 0.50%.  Subsequent increases resulted in the range of 2.25% to 2.50% until the second half of 2019 when the rate was cut several times before the end of 2019.  During the first quarter of 2020 the rate was significantly decreased again as a result of the global pandemic related to COVID-19, and has returned the range of 0.00% to 0.25%.

Traditionally, interest rates on bank deposit accounts are heavily influenced by the Federal Funds rate.  The average rate on interest bearing deposits was 2 basis points higher in the first quarter of 2020 relative to the prior year period.  Rates were slightly lower on interest bearing checking accounts and savings accounts but higher on money market accounts and time deposits.  Please refer to the statistical disclosures in the table below entitled “Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential.”

The interest rate on the ten-year Treasury bond and other long-term interest rates have significant influence on the rates for new residential real estate loans.  These changes in interest rates have an effect on the Company relative to the interest income on loans, securities, and Federal Funds sold and other short-term instruments as well as the interest expense on deposits and borrowings.  Residential real estate loans and longer‑term investments are most affected by the changes in longer term market interest rates such as the 10‑year Treasury.  The Federal Funds sold portfolio and other short‑term investments are affected primarily by changes in the Federal Funds target rate.  Deposit interest rates are most affected by short term market interest rates.  Also, changes in interest rates have an effect on the recorded balance of the securities available for sale portfolio, which are recorded at fair value.  Generally, as market interest rates increase, the fair value of the securities will decrease and the reverse is also generally applicable.  Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae.  Because TrustCo is a portfolio lender and does not sell loans into the secondary market, the Company establishes rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates.  Higher market interest rates also generally increase the value of retail deposits.
45
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 ten-year Treasury.  The 10-year Treasury yield was down 42 basis points, on average, during the first quarter of 2020 compared to the fourth quarter of 2019 and was down 128 basis points as compared to the first quarter of 2019.

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

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

For the first quarter of 2020, the net interest margin was 3.05%, down 19 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 $90.9 million while the average yield decreased 119 basis points in the first quarter of 2020 compared to the same period in 2019.  The decrease in the average balance helped to fund the $209.1 million increase in loans.

●
The average balance of securities available for sale increased by $28.7 million while the average yield increased 3 basis points to 2.26%.  The average balance of held to maturity securities decreased by $3.9 million and the average yield decreased 8 basis points to 3.86% for the first quarter of 2020 compared to the same period in 2019.

●
The average loan portfolio grew by $209.1 million to $4.08 billion and the average yield decreased 15 basis points to 4.13% in the first quarter of 2020 compared to the same period in 2019.

●
The average balance of interest bearing liabilities (primarily deposit accounts) increased $54.6 million and the average rate paid increased 2 basis points to 0.79% in the first quarter of 2020 compared to the same period in 2019.
46

During the first quarter of 2020, the Company continued to focus on its strategy to expand the loan portfolio by offering competitive interest rates.  Management believes the TrustCo residential real estate loan product is very competitive compared to local and national competitors.  Competition remains strong in the Company’s market areas.

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

Earning Assets
Total average interest earning assets increased from $4.91 billion in the first quarter of 2019 to $5.06 billion in the same period of 2020 with an average yield of 3.69% in the first quarter of 2020 and 3.87% in the first quarter of 2019.  There was a slight shift in the mix of assets towards higher proportions of loans and securities available for sale from federal funds sold and other short-term investments. However, the sharp decrease in the federal funds rate during the last month of the quarter significantly decreased the average yield on the federal funds sold and other short-term investments from 2.43% in the first quarter of 2019 to 1.24% in the first quarter of 2020, which drove down the overall yield on interest earning assets.  Interest income on average earning assets decreased $802 thousand in the first quarter of 2020 from the prior year period, on a tax equivalent basis, and was primarily driven by the lower federal funds rate as mentioned above.

Loans
The average balance of loans was $4.08 billion in the first quarter of 2020 and $3.87 billion in the comparable period in 2019.  The yield on loans decreased 15 basis points to 4.13%.  The higher average balances led to an increase in interest income on loans from $41.3 million in the first quarter of 2019 to $42.1 million in the first quarter of 2020.

Compared to the first quarter of 2019, the average balance of residential mortgage loans and commercial loans increased while home equity lines of credit and installment loans decreased.  The average balance of residential mortgage loans was $3.60 billion in 2020 compared to $3.37 billion in 2019, an increase of 6.7%.  The average yield on residential mortgage loans decreased by 9 basis points to 4.05% in the first quarter of 2020 compared to 2019.

TrustCo actively markets the residential loan products within its market territories.  Mortgage loan rates are affected by a number of factors including rates on Treasury securities, the Federal Funds rate and rates set by competitors and secondary market participants.  TrustCo aggressively markets the unique aspects of its loan products thereby attempting to create a differentiation from other lenders.  These unique aspects include low closing costs, fast turn-around time on loan approvals, no escrow or mortgage insurance requirements for qualified borrowers and the fact that the Company typically holds these loans in portfolio and does not sell them into the secondary markets.  Assuming an eventual 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.
47
Commercial loans, which consist primarily of loans secured by commercial real estate, increased $4.3 million to an average balance of $198.0 million in the first quarter of 2020 compared to the same period in the prior year.  The average yield on this portfolio was down 20 basis points to 5.13% compared to the prior year period, primarily reflecting the decrease in the prime rate.  The Company remains 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 decreased 66 basis points to 4.35% during the first quarter of 2020 compared to the year earlier period.  The decrease in yield is the result of prime rate decreases which impacted some loans as well as a smaller percentage of lower yielding initial rate balances.  The average balances of home equity lines decreased 7.2% to $265.5 million in the first quarter of 2020 as compared to the prior year.  Customers with home equity lines continue to refinance their balances into fixed rate mortgage loans.

Securities Available for Sale
The average balance of the securities available for sale portfolio for the first quarter of 2020 was $540.7 million compared to $512.0 million for the comparable period in 2019.  The increase in the balance reflects new investment purchases partially offset by routine paydowns, sales, calls and maturities.  The average yield was 2.26% for the first quarter of 2020 compared to 2.23% for the first quarter of 2019.  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), Small Business Administration participation certificates, corporate bonds and municipal bonds.  These securities are recorded at fair value with any adjustment in fair value included in other comprehensive income (loss), net of tax.

The net unrealized gain in the available for sale securities portfolio was $10.0 million as of March 31, 2020 compared to a net unrealized gain of $391 thousand as of December 31, 2019.  The unrealized loss in the portfolio is the result of changes in market interest rate levels.

Held to Maturity Securities
The average balance of held to maturity securities was $18.1 million for the first quarter of 2020 compared to $22.0 million in the first quarter of 2019.  The decrease in balances reflects routine paydowns and calls.  No new securities were added to this portfolio during the period.  The average yield was 3.86% for the first quarter of 2020 compared to 3.94% for the year earlier period.  TrustCo expects to hold the securities in this portfolio until they mature or are called.

As of March 31, 2020, this portfolio consisted solely of residential mortgage-backed securities.  The balances for these securities are recorded at amortized cost.
48
Federal Funds Sold and Other Short-term Investments
The 2020 first quarter average balance of Federal Funds sold and other short-term investments was $412.1 million, a $90.9 million decrease from the $503.0 million average for the same period in 2019.  The yield was 1.24% for the first quarter of 2020 and 2.43% for the comparable period in 2019.  Interest income from this portfolio decreased $1.7 million from $3.0 million in 2019 to $1.3 million in 2020, reflecting several target rate decreases as previously mentioned, as well as the decrease 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 time deposits) increased $60.1 million to $4.0 billion for the first quarter of 2020 versus the first quarter in the prior year, and the average rate paid increased from 0.76% for 2019 to 0.78% for 2020.  Total interest expense on these deposits increased $436 thousand to $7.7 million in the first quarter of 2020 compared to the year earlier period.  From the first quarter of 2019 to the first quarter of 2020, interest bearing checking account average balances were down 1.1%, certificates of deposit average balances were up 1.2%, non-interest demand average balances were up 15.3%, average savings balances decreased 3.8% and money market balances were up 18.6%.  Our growth in deposits came at relatively the same cost and continues to be offset by higher earnings on loan yields and returns in the investment portfolio.  Because we offered competitive shorter term rates in the past, we expect cost of interest bearing liabilities to continue to decrease as these reprice at lower rates.

At March 31, 2020, the maturity of total time deposits is as follows:

(dollars in thousands)
     
       
Under 1 year
 
$
1,274,928
 
1 to 2 years
   
75,461
 
2 to 3 years
   
10,461
 
3 to 4 years
   
3,161
 
4 to 5 years
   
2,798
 
Over 5 years
   
196
 
   
$
1,367,005
 

Average short-term borrowings for the first quarter of 2020 were $153.7 million compared to $159.1  million in the same period in 2019.  The average rate decreased during this time period from 0.97% in 2019 to 0.84% in 2020.  The short-term borrowings of the Company are cash management accounts, which represent retail accounts with customers for which the Bank has pledged certain assets as collateral.
49
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 Management Policy.  Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.

Net Interest Income
Taxable equivalent net interest income decreased by $1.2 million to $38.6 million in the first quarter of 2020 compared to the same period in 2019.  The net interest spread was down 20 basis points to 2.91% in the first quarter of 2020 compared to the same period in 2019.  As previously noted, the net interest margin was down 19 basis points to 3.05 for the first quarter of 2020 compared to the same period in 2019.

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

The following describes the nonperforming assets of TrustCo as of March 31, 2020:

Nonperforming loans and foreclosed real estate: Total NPLs were $20.7 million at March 31, 2020, compared to $20.9 million at December 31, 2019 and $24.7 million at March 31, 2019.  There were $20.7 million of non-accrual loans at March 31, 2020 compared to $20.8 million at December 31, 2019 and $24.7 million at March 31, 2019.  There were no loans at March 31, 2020 and 2019 and December 31, 2019 that were past due 90 days or more and still accruing interest.

At March 31, 2020, nonperforming loans primarily include a mix of commercial and residential loans.  Of total nonperforming loans of $20.7 million at March 31, 2020, $20.1 million were residential real estate loans, $630 thousand were commercial loans and mortgages and $24 thousand were installment loans, compared to $20.0 million, $816 thousand and $3 thousand, respectively at December 31, 2019.

A significant percentage of nonperforming loans are residential real estate loans, which are historically lower-risk than most other types of loans.  Net chargeoffs were $138 thousand on residential real estate loans (including home equity lines of credit) for the first quarter of 2020 compared to $337 thousand for the first quarter of 2019.  Management believes that these loans have been appropriately written down where required.
50
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.  Additionally, due to the recent COVID-19 pandemic, the Bank is monitoring recent regulatory mandates by state in regards to a moratorium on foreclosures.

The Company originates loans throughout its deposit franchise area.  At March 31, 2020, 73.9% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 26.1% were in Florida.  Those figures compare to 74.4% and 25.6%, respectively at December 31, 2019.

Economic conditions vary widely by geographic location.   As a percentage of the total nonperforming loans as of March 31, 2020, 7.2% were to Florida borrowers, compared to 92.8% to borrowers in New York and surrounding areas.  For the three months ended March 31, 2020, New York and surrounding areas experienced net chargeoffs of approximately $145 thousand, compared to net chargeoffs of $17 thousand in Florida.

Other than loans currently identified as nonperforming and loan deferrals as a result of COVID-19, management is aware of no other loans in the Bank’s portfolio that pose material risk of the eventual non-collection of principal and interest.  Also as of March 31, 2020, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources.

TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring (TDR), as impaired loans.  There were $1.1 million of commercial mortgages and commercial loans classified as impaired as of March 31, 2020 compared to $1.4 million at December 31, 2019.  There were $19.2 million of impaired residential loans at March 31, 2020 and $19.5 million at December 31, 2019.  The average balances of all impaired loans were $20.7 million for the three months of 2020 and $21.0 million for the full year 2019.

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

At March 31, 2020 there was $1.3 million of foreclosed real estate compared to $1.6 million at December 31, 2019.

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.
51
The allocation of the allowance for loans losses is as follows:

(dollars in thousands)
 
As of
March 31, 2020
 
 
As of
December 31, 2019
 
 
 
Amount
 
 
Percent of
Loans to
Total Loans
 
 
Amount
 
 
Percent of
Loans to
Total Loans
 
Commercial
 
$
3,756
 
 
 
4.34
%
 
$
3,805
 
 
 
4.47
%
Real estate - construction
 
 
312
 
 
 
0.67
%
 
 
311
 
 
 
0.70
%
Real estate mortgage - 1 to 4 family
 
 
37,625
 
 
 
88.25
%
 
 
35,632
 
 
 
87.96
%
Home equity lines of credit
 
 
3,910
 
 
 
6.48
%
 
 
3,999
 
 
 
6.60
%
Installment Loans
 
 
552
 
 
 
0.26
%
 
 
570
 
 
 
0.27
%
 
 
$
46,155
 
 
 
100.00
%
 
$
44,317
 
 
 
100.00
%

At March 31, 2020, the allowance for loan losses was $46.2 million, compared to $44.7 million at March 31, 2019 and $44.3 million at December 31, 2019.  The allowance represents 1.13% of the loan portfolio as of March 31, 2020 compared to 1.16% at March 31, 2019 and 1.09% at December 31, 2019.

The provision for loan losses was $2 million for the quarter ended March 31, 2020 and $300 thousand for the quarter ended March 31, 2019.  The increase is primarily driven by the uncertainty in the current economic environment resulting from COVID-19.  Net chargeoffs for the three-month period ended March 31, 2020 were $162 thousand and were $395 thousand for the prior year period.

During the first quarter of 2020, there were $3 thousand commercial loan chargeoffs and $217 thousand of gross residential mortgage and consumer loan chargeoffs compared with $7 thousand gross commercial loan chargeoffs and $481 thousand of residential mortgage and consumer loan chargeoffs in the first quarter of 2019.  Gross recoveries during the first quarter of 2020 were $2 thousand for commercial loans and $56 thousand for residential mortgage and consumer loans, compared to $3 thousand for commercial loans and $90 thousand for residential and consumer in the first quarter of 2019.

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

●
The magnitude and nature of recent loan chargeoffs and recoveries;
●
The growth in the loan portfolio and the implication that it has in relation to the economic climate in the Bank’s market territories;
●
The economic environment in the Upstate New York and Florida territories over the last several years, as well as in the Company’s other market areas, and;
●
The economic environment as a result of COVID-19 and resultant business shutdowns and unemployment spikes.

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.
52
Liquidity and Interest Rate Sensitivity
TrustCo seeks to obtain favorable sources of funding and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands.  Management believes that TrustCo’s earnings performance and strong capital position enable the Company to easily secure new sources of liquidity.  The Company actively manages its liquidity through target ratios established under its liquidity policies.  Continual monitoring of both historical and prospective ratios allows TrustCo to employ strategies necessary to maintain adequate liquidity.  Management has also defined various degrees of adverse liquidity situations which could potentially occur and has prepared appropriate contingency plans should such a situation arise.  As noted, the Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet.  As previously stated, the Bank is a member of the FHLBNY and is an eligible borrower at the FRBNY and has the ability to borrow utilizing securities and/or loans as collateral at either institution.  The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a contingent funding source within its Asset/Liability Management Policy.  Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.

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

Using this model, the fair value of capital projections as of March 31, 2020 are referenced below.  The base case (current rates) scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of March 31, 2020.  The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp.

As of March 31, 2020
 
Estimated Percentage of
Fair value of Capital to
Fair value of Assets
+400 BP
 
  19.80%
+300 BP
 
20.20
+200 BP
 
20.50
+100 BP
 
20.60
Current rates
 
20.00
-100 BP
 
16.30
53
Noninterest Income
Total noninterest income for the first quarter of 2020 and 2019 was $5.3 million and $4.6 million, respectively.  The increase over the same period in the prior year was primarily related to net gains on securities transactions.  The fair value of assets under management was $786 million at March 31, 2020 and $928 million as of December 31, 2019 and $867 million at March 31, 2019.

Noninterest Expenses
Total noninterest expenses were $24.3 million for the three months ended March 31, 2020, compared to $24.9 million for the three months ended March 31, 2019.  Significant changes included declines in professional services, advertising expense, and FDIC and other Insurance, partially offset by increases in outsourced services and ORE expenses, net.    Full time equivalent headcount decreased from 899 as of March 31, 2019 to 813 as of March 31, 2020.

Income Taxes
In the first quarter of 2020, TrustCo recognized income tax expense of $4.3 million compared to $4.6 million for the first quarter of 2019.  The effective tax rates were 24.4% and 24.2%, respectively, for the first quarters of 2020 and 2019.

Capital Resources
Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios.

Banking regulators have moved towards higher required capital requirements due to the standards included in the Basel III reform measures and the Dodd-Frank Act, as well as a general trend towards reducing risk in the banking system by providing a greater capital margin.

Total shareholders’ equity at March 31, 2020 was $548.2 million compared to $501.7 million at March 31, 2019.  TrustCo declared a dividend of $0.068125 per share in the first quarter of 2020.  This results in a dividend payout ratio of 49.41% based on first quarter 2020 earnings of $13.3 million.
54
The Bank and the Company reported the following capital ratios as of March 31, 2020 and December 31, 2019:

(Bank Only)
 
 
 
 
 
 
 
 
 
 
Minimum for
 
 
 
 
 
 
 
 
 
 
 
 
Capital Adequacy plus
 
 
 
As of March 31, 2020
 
 
Well
 
 
Capital Conservation
 
(dollars in thousands)
 
Amount
 
 
Ratio
 
 
Capitalized(1)
 
 
Buffer (1)(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
 
$
522,527
 
 
 
10.058
%
 
 
5.000
%
 
 
4.000
%
Common equity tier 1 capital
 
 
522,527
 
 
 
18.470
 
 
 
6.500
 
 
 
7.000
 
Tier 1 risk-based capital
 
 
522,527
 
 
 
18.470
 
 
 
8.000
 
 
 
8.500
 
Total risk-based capital
 
 
558,027
 
 
 
19.724
 
 
 
10.000
 
 
 
10.500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2019
 
 
Well
 
 
Adequately
 
(dollars in thousands)
 
Amount
 
 
Ratio
 
 
Capitalized(1)
 
 
Capitalized(1)(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
 
$
516,775
 
 
 
9.940
%
 
 
5.000
%
 
 
4.000
%
Common equity tier 1 capital
 
 
516,775
 
 
 
18.412
 
 
 
6.500
 
 
 
7.000
 
Tier 1 risk-based capital
 
 
516,775
 
 
 
18.412
 
 
 
8.000
 
 
 
8.500
 
Total risk-based capital
 
 
551,975
 
 
 
19.666
 
 
 
10.000
 
 
 
10.500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Consolidated)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Minimum for
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Adequacy plus
 
 
 
 
 
 
 
As of March 31, 2020
 
 
Capital Conservation
 
 
 
 
 
(dollars in thousands)
 
Amount
 
 
Ratio
 
 
Buffer (1)(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
 
$
536,239
 
 
 
10.316
%
 
 
4.000
%
 
 
 
 
Common equity tier 1 capital
 
 
536,239
 
 
 
18.943
 
 
 
7.000
 
 
 
 
 
Tier 1 risk-based capital
 
 
536,239
 
 
 
18.943
 
 
 
8.500
 
 
 
 
 
Total risk-based capital
 
 
571,760
 
 
 
20.198
 
 
 
10.500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Minimum for
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Adequacy plus
 
 
 
 
 
 
 
As of December 31, 2019
 
 
Capital Conservation
 
 
 
 
 
(dollars in thousands)
 
Amount
 
 
Ratio
 
 
Buffer (1)(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
 
$
533,243
 
 
 
10.254
%
 
 
4.000
%
 
 
 
 
Common equity Tier 1 capital
 
 
533,243
 
 
 
18.988
 
 
 
7.000
 
 
 
 
 
Tier 1 risk-based capital
 
 
533,243
 
 
 
18.988
 
 
 
8.500
 
 
 
 
 
Total risk-based capital
 
 
568,463
 
 
 
20.242
 
 
 
10.500
 
 
 
 
 

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

(2)
The March 31, 2020 and December 31, 2019 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a capital conservation buffer of 2.50 percent

In addition, at March 31, 2020, Trustco’s consolidated equity to total assets ratio was 10.43% compared to 10.31% at December 31, 2019 and 9.73% at March 31, 2019.

Both TrustCo and Trustco Bank are subject to regulatory capital requirements contained in rules published by the Federal Reserve Board, FDIC and OCC. The rules establish a comprehensive capital framework for all U.S. banking organizations designed to implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The rules were effective for the Company and the Bank on January 1, 2015, with full compliance with all of the final rule’s requirements being phased in over a multi-year schedule. Calendar year 2018 was the final year of implementation of the capital rules and the capital rules were fully phased in effective January 1, 2019.
55
The capital rules require the Company’s and the Bank’s capital to exceed the regulatory standards plus a capital conservation buffer in order to avoid constraints on dividends, equity repurchases and certain compensation. To meet the requirement, a banking organization must maintain an amount of common equity Tier 1 (“CET1”) capital that exceeds the buffer level of 2.5% above each of the minimum risk-weighted asset ratios. To avoid capital conservation buffer constraints, the organization must maintain the following capital ratios: (1) CET1 to risk-weighted assets of more than 7.0%, (ii) Tier 1 capital to risk-weighted assets of more than 8.5%, and (iii) total capital (Tier 1 plus Tier 2) to risk-weighted assets of more than 10.5%.

As of March 31, 2020, the capital levels of both TrustCo and the Bank exceeded the minimum standards, including with the current, capital conservation buffer taken into account.

Under the Office of the Comptroller of the Currency’s (“OCC”) “prompt corrective action” regulations, a bank is deemed to be “well capitalized” when its CET1, Tier 1, total risk-based and leverage capital ratios are at least 6.5%, 8%, 10% and 5%, respectively.  A bank is deemed to be “adequately capitalized” or better if its capital ratios meet or exceed the minimum federal regulatory capital requirements, and “undercapitalized” if it fails to meet these minimal capital requirements.  A bank is “significantly undercapitalized” if its CET1, Tier 1, total risk-based and leverage capital ratios fall below 3%, 4%, 6% and 3%, respectively and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%.  At March 31, 2020 and 2019, Trustco Bank met the definition of “well capitalized.”

As noted, the Company’s dividend payout ratio was 49.41% of net income for the first quarter of 2020 and 45.23% of net income for the first quarter of 2019.  The per-share dividend paid in both the first quarter of 2020, the fourth quarter of 2019, and the first quarter of 2018 was $0.068125. The Company’s ability to pay dividends to its shareholders is dependent upon the ability of the Bank to pay dividends to the Company.  The payment of dividends by the Bank to the Company is subject to continued compliance with minimum regulatory capital requirements.  The OCC may disapprove a dividend if: the Bank would be undercapitalized following the distribution; the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statue, regulation or agreement.

TrustCo maintains a dividend reinvestment plan (DRP) with approximately 11,206 participants.  The DRP allows participants to reinvest dividends in shares of the Company.  The DRP also allows for additional purchases by participants and has a discount feature (up to a 5% for safe harbor provisions) that can be activated by management as a tool to raise capital.  To date, the discount feature has not been utilized.

Share Repurchase Program

On June 7, 2019 the Company’s Board of Directors authorized a share repurchase program of up to 1,000,000 shares.  During the three months ended March 31, 2020, the Company repurchased a total of 489 thousand shares at an average price per share of $7.11 for a total of $3.5 million under its Board authorized share repurchase program.  The shares purchased as of March 31, 2020 represent .51% of our common shares outstanding.  On April 16, 2020 the Company announced that it has suspended its share repurchase program.
56
Critical Accounting Policies and Estimates
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, 2019 is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.

Recent Accounting Pronouncements
Please refer to Note 11 to the consolidated financial statements for a detailed discussion of new accounting pronouncements and their impact on the Company.  As indicated in Note 11, as allowed by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) the Bank elected to delay the adoption of ASU 2016-13, “Financial Instruments – Credit Losses,” until the earlier of the termination of the national emergency concerning COVID-19 or December 31, 2020.
57
TrustCo Bank Corp NY
Management’s Discussion and Analysis
STATISTICAL DISCLOSURE

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

The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities.  Included in the average balance of shareholders’ equity is the unrealized gain (loss), net of tax, in the available for sale portfolio of $4.9 million in 2020 and ($9.2) million in 2019.  The subtotals contained in the following table are the arithmetic totals of the items contained in that category.  Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Three months ended
March 31, 2020
 
 
Three months ended
March 31, 2019
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
Interest
 
 
Average
 
 
Average
 
 
Interest
 
 
Average
 
 
Change in
 
 
Variance
 
 
Variance
 
 
 
Balance
 
 
 
 
 
Rate
 
 
Balance
 
 
 
 
 
Rate
 
 
Interest
 
 
Balance
 
 
Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income/
 
 
Change
 
 
Change
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. government sponsored enterprises
 
$
92,369
 
 
 
421
 
 
 
1.82
%
 
$
154,258
 
 
 
783
 
 
 
2.03
%
 
$
(362
)
 
 
(289
)
 
 
(73
)
Mortgage backed securities and collateralized mortgage obligations-residential
 
 
371,768
 
 
 
2,113
 
 
 
2.27
%
 
 
273,004
 
 
 
1,555
 
 
 
2.28
%
 
 
558
 
 
 
590
 
 
 
(32
)
State and political subdivisions
 
 
114
 
 
 
2
 
 
 
7.59
%
 
 
168
 
 
 
2
 
 
 
7.85
%
 
 
-
 
 
 
-
 
 
 
-
 
Corporate bonds
 
 
28,332
 
 
 
238
 
 
 
3.36
%
 
 
26,862
 
 
 
208
 
 
 
3.09
%
 
 
30
 
 
 
12
 
 
 
18
 
Small Business Administration-guaranteed participation securities
 
 
47,418
 
 
 
245
 
 
 
2.06
%
 
 
57,057
 
 
 
297
 
 
 
2.08
%
 
 
(52
)
 
 
(50
)
 
 
(2
)
Other
 
 
685
 
 
 
6
 
 
 
3.50
%
 
 
685
 
 
 
5
 
 
 
2.92
%
 
 
1
 
 
 
-
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total securities available for sale
 
 
540,686
 
 
 
3,025
 
 
 
2.26
%
 
 
512,034
 
 
 
2,850
 
 
 
2.23
%
 
 
175
 
 
 
263
 
 
 
(88
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and other short-term Investments
 
 
412,076
 
 
 
1,267
 
 
 
1.24
%
 
 
502,976
 
 
 
3,009
 
 
 
2.43
%
 
 
(1,742
)
 
 
(469
)
 
 
(1,273
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held to maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage backed securities and collateralized mortgage obligations-residential
 
 
18,144
 
 
 
175
 
 
 
3.86
%
 
 
22,037
 
 
 
217
 
 
 
3.94
%
 
 
(42
)
 
 
(9
)
 
 
(33
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total held to maturity securities
 
 
18,144
 
 
 
175
 
 
 
3.86
%
 
 
22,037
 
 
 
217
 
 
 
3.94
%
 
 
(42
)
 
 
(9
)
 
 
(33
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Reserve Bank and Federal Home Loan Bank stock
 
 
9,183
 
 
 
82
 
 
 
3.57
%
 
 
8,953
 
 
 
85
 
 
 
3.80
%
 
 
(3
)
 
 
2
 
 
 
(5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial loans
 
 
198,047
 
 
 
2,542
 
 
 
5.13
%
 
 
193,738
 
 
 
2,583
 
 
 
5.33
%
 
 
(41
)
 
 
62
 
 
 
(103
)
Residential mortgage loans
 
 
3,601,728
 
 
 
36,461
 
 
 
4.05
%
 
 
3,374,990
 
 
 
34,864
 
 
 
4.14
%
 
 
1,597
 
 
 
2,326
 
 
 
(729
)
Home equity lines of credit
 
 
265,461
 
 
 
2,868
 
 
 
4.35
%
 
 
286,199
 
 
 
3,537
 
 
 
5.01
%
 
 
(669
)
 
 
(236
)
 
 
(433
)
Installment loans
 
 
10,717
 
 
 
192
 
 
 
7.20
%
 
 
11,897
 
 
 
269
 
 
 
9.17
%
 
 
(77
)
 
 
(24
)
 
 
(53
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned income
 
 
4,075,953
 
 
 
42,063
 
 
 
4.13
%
 
 
3,866,824
 
 
 
41,253
 
 
 
4.28
%
 
 
810
 
 
 
2,128
 
 
 
(1,318
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest earning assets
 
 
5,056,042
 
 
 
46,612
 
 
 
3.69
%
 
 
4,912,824
 
 
 
47,414
 
 
 
3.87
%
 
 
(802
)
 
 
1,915
 
 
 
(2,717
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
(44,520
)
 
 
 
 
 
 
 
 
 
 
(44,947
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash & non-interest earning assets
 
 
193,619
 
 
 
 
 
 
 
 
 
 
 
176,009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
5,205,141
 
 
 
 
 
 
 
 
 
 
$
5,043,886
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing checking accounts
 
$
871,153
 
 
 
16
 
 
 
0.01
%
 
$
880,474
 
 
 
121
 
 
 
0.06
%
 
 
(105
)
 
 
(1
)
 
 
(104
)
Money market accounts
 
 
614,201
 
 
 
1,096
 
 
 
0.72
%
 
 
517,995
 
 
 
826
 
 
 
0.65
%
 
 
270
 
 
 
173
 
 
 
97
 
Savings
 
 
1,116,558
 
 
 
233
 
 
 
0.08
%
 
 
1,160,142
 
 
 
377
 
 
 
0.13
%
 
 
(144
)
 
 
(14
)
 
 
(130
)
Time deposits
 
 
1,369,914
 
 
 
6,391
 
 
 
1.88
%
 
 
1,353,160
 
 
 
5,976
 
 
 
1.79
%
 
 
415
 
 
 
85
 
 
 
330
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest bearing deposits
 
 
3,971,826
 
 
 
7,736
 
 
 
0.78
%
 
 
3,911,771
 
 
 
7,300
 
 
 
0.76
%
 
 
436
 
 
 
243
 
 
 
193
 
Short-term borrowings
 
 
153,668
 
 
 
322
 
 
 
0.84
%
 
 
159,076
 
 
 
381
 
 
 
0.97
%
 
 
(59
)
 
 
(12
)
 
 
(47
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest bearing liabilities
 
 
4,125,494
 
 
 
8,058
 
 
 
0.79
%
 
 
4,070,847
 
 
 
7,681
 
 
 
0.77
%
 
 
377
 
 
 
231
 
 
 
146
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
 
 
458,476
 
 
 
 
 
 
 
 
 
 
 
397,522
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
 
79,003
 
 
 
 
 
 
 
 
 
 
 
80,579
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 
542,168
 
 
 
 
 
 
 
 
 
 
 
494,938
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’ equity
 
$
5,205,141
 
 
 
 
 
 
 
 
 
 
$
5,043,886
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income , tax equivalent
 
 
 
 
 
 
38,554
 
 
 
 
 
 
 
 
 
 
 
39,733
 
 
 
 
 
 
$
(1,179
)
 
 
1,684
 
 
 
(2,863
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest spread
 
 
 
 
 
 
 
 
 
 
2.91
%
 
 
 
 
 
 
 
 
 
 
3.11
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin (net interest income to total interest earning assets)
 
 
 
 
 
 
 
 
 
 
3.05
%
 
 
 
 
 
 
 
 
 
 
3.24
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax equivalent adjustment
 
 
 
 
 
 
(1
)
 
 
 
 
 
 
 
 
 
 
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
 
 
 
 
38,553
 
 
 
 
 
 
 
 
 
 
 
39,732
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

58
Item 3.
Quantitative and Qualitative Disclosures about Market Risk

As detailed in the Annual Report on Form 10-K as of December 31, 2019, the Company is subject to interest rate risk as its principal market risk.  As noted in the Management’s Discussion and Analysis for the three month periods ended March 31, 2020 and 2019, the Company continues to respond to changes in interest rates in such a way that positions the Company to meet short term earning goals and also allows the Company to respond to changes in interest rates in the future.  Consequently, for the first quarter of 2020, the Company had an average balance of Federal Funds sold and other short-term investments of $412.1 million compared to $503.0 million in the first quarter of 2019.  As investment opportunities present themselves, management plans to invest funds from the Federal Funds sold and other short-term investment portfolio into the securities available for sale, securities held to maturity and loan portfolios.  Additional disclosure of interest rate risk can be found under “Liquidity and Interest Rate Sensitivity” and “Asset/Liability Management” in the Management’s Discussion and Analysis section of this document.

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

Item 4.
Controls and Procedures

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

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

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

There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.
59
PART II
OTHER INFORMATION

Item 1.
Legal Proceedings

None.

Item 1A.
Risk Factors

In light of the rapidly evolving COVID-19 pandemic, TrustCo (and collectively with the Bank, “we,” “us,” and “our”) have updated a number of the risk factors affecting our business since those presented in our Annual Report on Form 10-K, Part I, Item 1A, for the fiscal year ended December 31, 2019 (the “Annual Report”) filed with the Securities and Exchange Commission on February 28, 2020. The following risk factors should be read in conjunction with the risk factors set forth in the Annual Report.

The COVID-19 outbreak could adversely affect our business activities, financial condition and results of operations.

Our banking business, and the business of our industry generally, is dependent upon the willingness and ability of customers to conduct banking and other financial transactions. The spread of COVID-19 has caused, and we expect it to continue to cause, severe disruptions in the U.S. economy, including in the geographic areas in which we operate. Such economic disruptions could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans, negatively impact national and regional economic conditions, result in declines in loan demand and originations, the value of loan collateral (particularly in our home mortgage loan portfolio), and deposit availability, and negatively impact the implementation of our growth strategy. The spread of COVID-19 may result in a significant decrease in business and/or cause customers to be unable to meet existing payment or other obligations. The effects of the economic disruptions created by the COVID-19 pandemic, depending on their extent, could heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019 and could materially and adversely affect our liquidity and financial condition, and the results of our operations could be materially and adversely affected.

While the spread of COVID-19 has minimally affected our operations as of March 31, 2020, we may experience temporary closures of offices and/or suspension of certain services. Although we maintain contingency plans for a pandemic, the spread of COVID-19 could negatively affect key employees, including operational management personnel and those charged with preparing, monitoring, and evaluating our financial reporting and internal controls.  Such a spread or outbreak could also negatively impact the business and operations of third-party service providers who perform critical services for us. If COVID-19, or another highly infectious or contagious disease, spreads or the response to contain COVID-19 is unsuccessful, we could experience a material adverse effect to our business, financial condition, and results of operations.
60
Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of Federal Reserve actions. Market interest rates have declined significantly. Yields on the 30-year Treasury notes and 10-year Treasury notes, which significantly influence home mortgage interest rates, are at historic lows. On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%, and on March 15, 2020, it further reduced the target federal funds rate by 100 basis points to 0.00% to 0.25% and announced a quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. The Federal Reserve reduced the interest that it pays on excess reserves from 1.60% to 1.10% on March 3, 2020, and then to 0.10% on March 15, 2020. We expect that these reductions in interest rates, especially if prolonged, could adversely affect net interest income and margins and profitability.

The extent to which the COVID-19 pandemic affects our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

As a participating lender in the SBA’s Paycheck Protection Program, the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the Payment Protection Program and risks that the SBA may not fund some or all Payment Protection Program loan guaranties.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which included a $349 billion loan program administered through the SBA referred to as the Payment Protection Program (“PPP”), and Congress has recently approved additional funding for the program.  Under the program, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria.

We have experienced increased volume of loan originations, particularly SBA loans pursuant to the PPP. Certain of these SBA loans have mandated interest rates that are lower than our usual rates and may not be purchased by the SBA or other third parties within expected timeframes.  In addition, borrowers may draw on existing lines of credit or seek additional loans to finance their businesses. These factors may result in reduced levels of capital and liquidity being available to originate more profitable loans, which will negatively impact our ability to serve our existing customers and our ability to attract new customers.

Since the opening of the PPP on April 3, 2020, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications. We may be exposed to the risk of similar litigation, from both customers and non-customers that approached us regarding PPP loans, regarding our process and procedures used in processing applications. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by related litigation could have a material adverse impact on our business, financial condition and results of operations.
61
We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules, and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

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

Share Repurchase Program

The following table provides certain information with respect to the Company’s purchases of its common shares during the three months ended March 31, 2020:

Period
 
Total
numbers of
shares
purchased
 
 
Average
price paid
per share
 
 
Total number
of shares
purchased as
part of publicly
announced
plans or
programs
 
 
Maximum number of
shares that may yet
be purchased under
the plans or
programs (1)
 
January 1, 2020 through January 31, 2020
 
 
75,000
 
 
$
8.04
 
 
 
75,000
 
 
 
925,000
 
February 1, 2020 through February 29, 2020
 
 
225,000
 
 
$
7.50
 
 
 
225,000
 
 
 
700,000
 
March 1, 2020 through March 31, 2020
 
 
189,000
 
 
$
6.28
 
 
 
189,000
 
 
 
511,000
 
Total
 
 
489,000
 
 
$
7.11
 
 
 
489,000
 
 
 
511,000
 

(1)
On June 7, 2019, the Company announced that its board of directors approved a stock repurchase program under which the Company may repurchase over the following twelve months up to 1,000,000 shares of Company common stock, or approximately 1% of its current outstanding shares. Repurchases would be made in open market or private transactions, through block trades, or pursuant to any trading plan that may be adopted in accordance with Securities and Exchange Commission rules and at prices management considered to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program was subject to suspension, termination or modification at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The Company commenced repurchases under the program during the quarter ended March 31, 2020.  On April 16, 2020, the Company announced that it had chosen to suspend the repurchase program.
62
Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety

None.

Item 5.
Other Information

None.
63
Item 6.
Exhibits

Reg S-K (Item 601)
Exhibit No.
Description
 
 
15
Crowe LLP Letter Regarding Unaudited Interim Financial Information
 
 
Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer.
 
 
Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer.
 
 
32
Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer.
 
 
101.INS
Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRLTaxonomy Extension Presentation Linkbase Document
64
SIGNATURES

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

 
TrustCo Bank Corp NY
 
 
 
     
 
By: /s/ Robert J. McCormick
 
 
Robert J. McCormick
 
 
Chairman, President and Chief Executive Officer


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

Date:  May 8, 2020



65
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