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, 2021
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, 2021
$1 Par Value
96,439,602







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.
60
 
 
 
Item 3.
60
 
 
 
Item 4.
60
 
 
 
Item 5.
61
 
 
 
Item 6.
61


2

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

 
Three months ended
March 31,
 
   
2021
   
2020
 
             
Interest and dividend income:
           
Interest and fees on loans
 
$
40,217
     
42,063
 
Interest and dividends on securities available for sale:
               
U. S. government sponsored enterprises
   
50
     
421
 
State and political subdivisions
   
1
     
1
 
Mortgage-backed securities and collateralized mortgage obligations-residential
   
1,237
     
2,113
 
Corporate bonds
   
316
     
238
 
Small Business Administration-guaranteed participation securities
   
206
     
245
 
Other securities
   
6
     
6
 
Total interest and dividends on securities available for sale
   
1,816
     
3,024
 
                 
Interest on held to maturity securities:
               
Mortgage-backed securities and collateralized mortgage obligations-residential
   
123
     
175
 
Total interest on held to maturity securities
   
123
     
175
 
                 
Federal Reserve Bank and Federal Home Loan Bank stock
   
69
     
82
 
Interest on federal funds sold and other short-term investments
   
270
     
1,267
 
Total interest income
   
42,495
     
46,611
 
                 
Interest expense:
               
Interest on deposits:
               
Interest-bearing checking
   
52
     
16
 
Savings accounts
   
159
     
233
 
Money market deposit accounts
   
283
     
1,096
 
Time deposits
   
1,666
     
6,391
 
Interest on short-term borrowings
   
228
     
322
 
Total interest expense
   
2,388
     
8,058
 
                 
Net interest income
   
40,107
     
38,553
 
Provision for loan losses
   
350
     
2,000
 
Net interest income after provision for loan losses
   
39,757
     
36,553
 
                 
Noninterest income:
               
Trustco financial services income
   
2,035
     
1,600
 
Fees for services to customers
   
2,204
     
2,315
 
Net gain on securities transactions
   
-
     
1,155
 
Other
   
189
     
264
 
Total noninterest income
   
4,428
     
5,334
 
                 
Noninterest expenses:
               
Salaries and employee benefits
   
12,425
     
11,373
 
Net occupancy expense
   
4,586
     
4,306
 
Equipment expense
   
1,631
     
1,802
 
Professional services
   
1,432
     
1,481
 
Outsourced services
   
2,250
     
2,075
 
Advertising expense
   
354
     
488
 
FDIC and other insurance
   
707
     
294
 
Other real estate expense, net
   
239
     
194
 
Other
   
1,711
     
2,255
 
Total noninterest expenses
   
25,335
     
24,268
 
                 
Income before taxes
   
18,850
     
17,619
 
Income taxes
   
4,767
     
4,306
 
                 
Net income
 
$
14,083
     
13,313
 
                 
Net income per share:
               
- Basic
 
$
0.146
     
0.138
 
                 
- Diluted
 
$
0.146
     
0.138
 

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,
 
   
2021
   
2020
 
             
Net income
 
$
14,083
     
13,313
 
                 
Net unrealized holding (loss) gain on securities available for sale
   
(6,018
)
   
10,732
 
Reclassification adjustments for net gain recognized in income
   
-
     
(1,155
)
Tax effect
   
1,557
     
(2,487
)
                 
Net unrealized (loss) gain on securities available for sale, net of tax
   
(4,461
)
   
7,090
 
                 
Amortization of net actuarial gain
   
(228
)
   
(166
)
Amortization of prior service credit
   
(52
)
   
(49
)
Tax effect
   
73
     
56
 
Amortization of net actuarial gain and prior service credit on pension and postretirement plans, net of tax
   
(207
)
   
(159
)
                 
Other comprehensive (loss) income, net of tax
   
(4,668
)
   
6,931
 
Comprehensive income
 
$
9,415
     
20,244
 

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, 2021
   
December 31, 2020
 
ASSETS:
           
             
Cash and due from banks
 
$
45,493
     
47,196
 
Federal funds sold and other short term investments
   
1,094,880
     
1,059,903
 
Total cash and cash equivalents
   
1,140,373
     
1,107,099
 
                 
Securities available for sale
   
527,587
     
439,071
 
                 
Held to maturity securities ($13,891 and $14,988 fair value at March 31, 2021 and Decmber 31, 2020, respectively)
   
12,729
     
13,824
 
                 
Federal Reserve Bank and Federal Home Loan Bank stock
   
5,506
     
5,506
 
                 
Loans, net of deferred net costs
   
4,269,172
     
4,244,470
 
Less:
               
Allowance for loan losses
   
49,991
     
49,595
 
Net loans
   
4,219,181
     
4,194,875
 
                 
Bank premises and equipment, net
   
34,012
     
34,412
 
Operating lease right-of-use assets
   
46,614
     
47,885
 
Other assets
   
60,455
     
59,124
 
                 
Total assets
 
$
6,046,457
     
5,901,796
 
                 
LIABILITIES:
               
Deposits:
               
Demand
 
$
718,343
     
652,756
 
Interest-bearing checking
   
1,141,595
     
1,086,558
 
Savings accounts
   
1,362,141
     
1,285,501
 
Money market deposit accounts
   
719,580
     
716,005
 
Time deposits
   
1,231,263
     
1,296,373
 
Total deposits
   
5,172,922
     
5,037,193
 
                 
Short-term borrowings
   
229,950
     
214,755
 
Operating lease liabilities
   
51,449
     
52,784
 
Accrued expenses and other liabilities
   
21,105
     
28,903
 
                 
Total liabilities
   
5,475,426
     
5,333,635
 
                 
SHAREHOLDERS' EQUITY:
               
Capital stock par value $1; 150,000,000 shares authorized;  100,218,082 and 100,204,832 shares issued at March 31, 2021 and December 31, 2020, respectively
   
100,218
     
100,205
 
Surplus
   
176,500
     
176,442
 
Undivided profits
   
321,486
     
313,974
 
Accumulated other comprehensive income, net of tax
   
7,268
     
11,936
 
Treasury stock at cost - 3,778,480 and 3,772,175 shares at March 31, 2021 and December 31, 2020, respectively
   
(34,441
)
   
(34,396
)
                 
Total shareholders' equity
   
571,031
     
568,161
 
                 
Total liabilities and shareholders' equity
 
$
6,046,457
     
5,901,796
 

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
   
Treasury
Stock
   
Total
 
                                     
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
 
                                                 
Beginning balance, January 1, 2021
 
$
100,205
     
176,442
     
313,974
     
11,936
     
(34,396
)
   
568,161
 
Net income
   
-
     
-
     
14,083
     
-
     
-
     
14,083
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
(4,668
)
   
-
     
(4,668
)
Stock options exercised (13,250 shares)
   
13
     
58
     
-
     
-
     
-
     
71
 
Cash dividend declared, $0.068125 per share
   
-
     
-
     
(6,571
)
   
-
     
-
     
(6,571
)
Purchase of treasury stock (6,305 Shares)
   
-
     
-
     
-
     
-
     
(45
)
   
(45
)
                                                 
Ending balance, March 31, 2021
 
$
100,218
     
176,500
     
321,486
     
7,268
     
(34,441
)
   
571,031
 

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,
 
   
2021
   
2020
 
             
Cash flows from operating activities:
           
Net income
 
$
14,083
     
13,313
 
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
1,063
     
999
 
Amortization of right-of-use asset
   
1,573
     
1,520
 
Net gain on sale of other real estate owned
   
-
     
(82
)
Writedown of other real estate owned
   
121
     
80
 
Provision for loan losses
   
350
     
2,000
 
Deferred tax expense
   
1,152
     
846
 
Net amortization of securities
   
1,081
     
858
 
Stock based compensation expense
   
-
     
4
 
Net gain on sale of bank premises and equipment
   
(4
)
   
-
 
Net gain on sales of securities
   
-
     
(1,155
)
Decrease in taxes receivable
   
101
     
3,682
 
Decrease in interest receivable
   
392
     
673
 
Decrease in interest payable
   
(164
)
   
(200
)
Increase in other assets
   
(3,160
)
   
(2,171
)
Decrease in operating lease liabilities
   
(1,637
)
   
(1,555
)
Decrease in accrued expenses and other liabilities
   
(6,221
)
   
(4,307
)
Total adjustments
   
(5,353
)
   
1,192
 
Net cash provided by operating activities
   
8,730
     
14,505
 
                 
Cash flows from investing activities:
               
Proceeds from sales and calls of securities available for sale
   
36,820
     
98,363
 
Proceeds from calls and maturities of held to maturity securities
   
1,061
     
859
 
Purchases of securities available for sale
   
(132,456
)
   
(22,793
)
Proceeds from maturities of securities available for sale
   
55
     
5,000
 
Net increase in loans
   
(24,656
)
   
(37,792
)
Proceeds from dispositions of other real estate owned
   
-
     
731
 
Proceeds from dispositions of bank premises and equipment
   
4
     
-
 
Purchases of bank premises and equipment
   
(663
)
   
(805
)
Net cash (used in) provided by investing activities
   
(119,835
)
   
43,563
 
                 
Cash flows from financing activities:
               
Net increase in deposits
   
135,729
     
31,812
 
Net increase (decrease) in short-term borrowings
   
15,195
     
(576
)
Proceeds from exercise of stock options
   
71
     
-
 
Purchases of treasury stock
   
(45
)
   
(3,493
)
Dividends paid
   
(6,571
)
   
(6,604
)
Net cash provided by financing activities
   
144,379
     
21,139
 
Net increase in cash and cash equivalents
   
33,274
     
79,207
 
Cash and cash equivalents at beginning of period
   
1,107,099
     
456,846
 
Cash and cash equivalents at end of period
 
$
1,140,373
     
536,053
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the year for:
               
Interest paid
 
$
2,552
     
8,258
 
Income taxes paid
   
4,661
     
626
 
Other non cash items:
               
Transfer of loans to other real estate owned
   
-
     
434
 
Increase in dividends payable
   
-
     
223
 
Change in unrealized (loss) gain on securities available for sale-gross of deferred taxes
   
(6,018
)
   
9,577
 
Change in deferred tax effect on unrealized loss (gain) on securities available for sale
   
1,557
     
(2,487
)
Amortization of net actuarial gain and prior service credit on pension and postretirement plans
   
(280
)
   
(215
)
Change in deferred tax effect of amortization of net actuarial gain postretirement benefit plans
   
73
     
56
 

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, 2021 is not necessarily indicative of the results that may be expected for the year ending December 31, 2021, 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, 2021, the results of operations and cash flows for the three months ended March 31, 2021 and 2020.  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, 2020.  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, 2021 and 2020 is as follows:

(in thousands, except per share data)
 
For the three months ended
March 31,
 
   
2021
   
2020
 
Net income
 
$
14,083
   
$
13,313
 
Weighted average common shares
   
96,435
     
96,727
 
Stock Options
   
31
     
22
 
Weighted average common shares including potential dilutive shares
   
96,466
     
96,749
 
                 
Basic EPS
 
$
0.146
   
$
0.138
 
                 
Diluted EPS
 
$
0.146
   
$
0.138
 

For the three months, ended March 31, 2021 and 2020 the weighted average anti-dilutive stock options excluded from diluted earnings per share were approximately 302 thousand and 452 thousand, 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, 2021 and 2020 for its pension and other postretirement benefit plans:

 
Three months ended March 31,
 
 
Pension Benefits
   
Other Postretirement Benefits
 
(dollars in thousands)
 
2021
   
2020
   
2021
   
2020
 
                         
Service cost
 
$
11
     
12
     
22
     
19
 
Interest cost
   
216
     
266
     
44
     
54
 
Expected return on plan assets
   
(761
)
   
(819
)
   
(327
)
   
(296
)
Amortization of net gain
   
-
     
-
     
(228
)
   
(166
)
Amortization of prior service credit
   
-
     
-
     
(52
)
   
(49
)
Net periodic benefit
 
$
(534
)
   
(541
)
   
(541
)
   
(438
)

The Company does not expect to contribute to its pension and postretirement benefit plans in 2021.  As of March 31, 2021, 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, 2021
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
U.S. government sponsored enterprises
 
$
74,970
     
-
     
505
     
74,465
 
State and political subdivisions
   
48
     
-
     
-
     
48
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
344,892
     
5,953
     
2,528
     
348,317
 
Corporate bonds
   
64,562
     
661
     
384
     
64,839
 
Small Business Administration - guaranteed participation securities
   
38,737
     
495
     
-
     
39,232
 
Other
   
685
     
1
     
-
     
686
 
Total Securities Available for Sale
 
$
523,894
     
7,110
     
3,417
     
527,587
 

 
December 31, 2020
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
U.S. government sponsored enterprises
 
$
20,000
     
-
     
32
     
19,968
 
State and political subdivisions
   
103
     
-
     
-
     
103
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
308,432
     
7,749
     
23
     
316,158
 
Corporate bonds
   
59,185
     
916
     
162
     
59,939
 
Small Business Administration - guaranteed participation securities
   
40,955
     
1,262
     
-
     
42,217
 
Other
   
685
     
1
     
-
     
686
 
                                 
Total securities available for sale
 
$
429,360
     
9,928
     
217
     
439,071
 

The following table distributes the debt securities included in the available for sale portfolio as of March 31, 2021, based on the securities’ final maturity. Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty.  Securities not due at a single maturity date are presented separately.

(dollars in thousands)
 
Amortized
Cost
   
Fair
Value
 
             
Due in one year or less
 
$
14,219
     
14,390
 
Due in one year through five years
   
121,037
     
120,669
 
Due after five years through ten years
   
5,009
     
4,979
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
344,892
     
348,317
 
Small Business Administration - guaranteed participation securities
   
38,737
     
39,232
 
   
$
523,894
     
527,587
 

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, 2021
 
   
Less than
12 months
   
12 months
or more
   
Total
 
(dollars in thousands)
 
Fair
Value
   
Gross
Unrealized
Loss
   
Fair
Value
   
Gross
Unrealized
Loss
   
Fair
Value
   
Gross
Unrealized
Loss
 
                                     
U.S. government sponsored enterprises
 
$
74,465
     
505
     
-
     
-
     
74,465
     
505
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
125,788
     
2,528
     
-
     
-
     
125,788
     
2,528
 
Corporate bonds
   
20,112
     
321
     
4,937
     
63
     
25,049
     
384
 
                                                 
Total
 
$
220,365
     
3,354
     
4,937
     
63
     
225,302
     
3,417
 

 
December 31, 2020
 
   
Less than
12 months
   
12 months
or more
   
Total
 
(dollars in thousands)
 
Fair
Value
   
Gross
Unrealized
Loss
   
Fair
Value
   
Gross
Unrealized
Loss
   
Fair
Value
   
Gross
Unrealized
Loss
 
                                     
U.S. government sponsored enterprises
 
$
19,968
     
32
     
-
     
-
     
19,968
     
32
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
19,471
     
23
     
-
     
-
     
19,471
     
23
 
Corporate bonds
   
14,901
     
99
     
4,937
     
63
     
19,838
     
162
 
                                                 
Total
 
$
54,340
     
154
     
4,937
     
63
     
59,277
     
217
 

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, 2021 and 2020 are as follows:

 
Three months ended March 31,
 
(dollars in thousands)
 
2021
   
2020
 
             
Proceeds from sales
 
$
-
   
$
29,219
 
Proceeds from calls/paydowns
   
36,820
     
69,144
 
Proceeds from maturities
   
55
     
5,000
 
Gross realized gains
   
-
     
1,155
 
Gross realized losses
   
-
     
-
 

11

(b) Held to maturity securities

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

 
March 31, 2021
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrecognized
Gains
   
Gross
Unrecognized
Losses
   
Fair
Value
 
                         
Mortgage backed securities and collateralized mortgage obligations - residential
 
$
12,729
     
1,162
     
-
     
13,891
 
Total held to maturity
 
$
12,729
     
1,162
     
-
     
13,891
 

 
December 31, 2020
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrecognized
Gains
   
Gross
Unrecognized
Losses
   
Fair
Value
 
                         
Mortgage backed securities and collateralized mortgage obligations - residential
 
$
13,824
     
1,164
     
-
     
14,988
 
Total held to maturity
 
$
13,824
     
1,164
     
-
     
14,988
 

The following table distributes the debt securities included in the held to maturity portfolio as of March 31, 2021, 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.

(dollars in thousands)
 
Amortized
Cost
   
Fair
Value
 
Mortgage backed securities and collateralized mortgage obligations - residential
 
$
12,729
     
13,891
 
   
$
12,729
     
13,891
 

 
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, 2021 and December 31, 2020.

There were no sales or transfers of held to maturity securities during the three months ended March 31, 2021 and 2020.

(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, 2021, the Company’s securities portfolio included certain securities, which were in an unrealized loss position, and are discussed below.

U.S. government sponsored enterprises:  In the case of unrealized losses on U.S. government sponsored enterprises, because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2021.

Mortgage backed securities and collateralized mortgage obligations – residential:  At March 31, 2021, 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, 2021.

Corporate Bonds:  At March 31, 2021, 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, 2021.

13


(5) Loans and Allowance for Loan Losses

 
 
March 31, 2021
 
(dollars in thousands)
 
New York and
other states*
   
Florida
   
Total
 
Commercial:
                 
Commercial real estate
 
$
146,994
     
17,989
     
164,983
 
Other
   
51,673
     
365
     
52,038
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
2,615,578
     
1,122,469
     
3,738,047
 
Home equity loans
   
55,469
     
14,321
     
69,790
 
Home equity lines of credit
   
185,237
     
50,407
     
235,644
 
Installment
   
7,072
     
1,598
     
8,670
 
Total loans, net
 
$
3,062,023
     
1,207,149
     
4,269,172
 
Less: Allowance for loan losses
                   
49,991
 
Net loans
                 
$
4,219,181
 

 
 
December 31, 2020
 
(dollars in thousands)
 
New York and
other states*
   
Florida
   
Total
 
Commercial:
                 
Commercial real estate
 
$
148,775
     
18,666
     
167,441
 
Other
   
44,932
     
119
     
45,051
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
2,606,781
     
1,098,915
     
3,705,696
 
Home equity loans
   
59,400
     
15,071
     
74,471
 
Home equity lines of credit
   
193,654
     
48,540
     
242,194
 
Installment
   
7,810
     
1,807
     
9,617
 
Total loans, net
 
$
3,061,352
     
1,183,118
     
4,244,470
 
Less: Allowance for loan losses
                   
49,595
 
Net loans
                 
$
4,194,875
 

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

Included in commercial loans above are Paycheck Protection Program (“PPP”) loans totaling $36.6 million and $28.9 million as of March 31, 2021 and December 31, 2020, respectively.

At March 31, 2021 and December 31, 2020, the Company had approximately $28.5 million and $24.7 million of real estate construction loans, respectively.  Of the $28.5 million in real estate construction loans at March 31, 2021, approximately $14.4 million are secured by first mortgages to residential borrowers while approximately $14.1 million were to commercial borrowers for residential construction projects.  Of the $24.7 million in real estate construction loans at December 31, 2020, approximately $10.5 million were secured by first mortgages to residential borrowers while approximately $14.2 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 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).  Other real estate owned is included in Other assets on the Balance Sheet.  As of March 31, 2021 and December 31, 2020, other real estate owned included $420 thousand and $541 thousand of residential foreclosed properties, respectively.  In addition, non-accrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $12.3 million and $11.6 million, respectively, as of March 31, 2021 and December 31, 2020.

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

 
March 31, 2021
 
(dollars in thousands)
 
New York and
other states*
   
Florida
   
Total
 
Loans in non-accrual status:
                 
Commercial:
                 
Commercial real estate
 
$
45
     
-
     
45
 
Other
   
80
     
-
     
80
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
16,645
     
1,451
     
18,096
 
Home equity loans
   
78
     
46
     
124
 
Home equity lines of credit
   
3,103
     
129
     
3,232
 
Installment
   
32
     
-
     
32
 
Total non-accrual loans
   
19,983
     
1,626
     
21,609
 
Restructured real estate mortgages - 1 to 4 family
   
22
     
-
     
22
 
Total nonperforming loans
 
$
20,005
     
1,626
     
21,631
 

 
December 31, 2020
 
(dollars in thousands)
 
New York and
other states*
   
Florida
   
Total
 
Loans in non-accrual status:
                 
Commercial:
                 
Commercial real estate
 
$
372
     
-
     
372
 
Other
   
80
     
-
     
80
 
Real estate mortgage - 1 to 4 family:
                       
First mortgages
   
16,637
     
1,010
     
17,647
 
Home equity loans
   
80
     
47
     
127
 
Home equity lines of credit
   
2,662
     
130
     
2,792
 
Installment
   
43
     
-
     
43
 
Total non-accrual loans
   
19,874
     
1,187
     
21,061
 
Restructured real estate mortgages - 1 to 4 family
   
23
     
-
     
23
 
Total nonperforming loans
 
$
19,897
     
1,187
     
21,084
 

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

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, 2021 and December 31, 2020:

 
March 31, 2021
 
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
 
$
324
     
-
     
-
     
324
     
146,670
     
146,994
 
Other
   
-
     
-
     
80
     
80
     
51,593
     
51,673
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
1,439
     
281
     
11,133
     
12,853
     
2,602,725
     
2,615,578
 
Home equity loans
   
147
     
-
     
50
     
197
     
55,272
     
55,469
 
Home equity lines of credit
   
413
     
140
     
1,484
     
2,037
     
183,200
     
185,237
 
Installment
   
6
     
-
     
-
     
6
     
7,066
     
7,072
 
                                                 
Total
 
$
2,329
     
421
     
12,747
     
15,497
     
3,046,526
     
3,062,023
 

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
 
$
-
     
-
     
-
     
-
     
17,989
     
17,989
 
Other
   
-
     
-
     
-
     
-
     
365
     
365
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
1,052
     
163
     
914
     
2,129
     
1,120,340
     
1,122,469
 
Home equity loans
   
-
     
1
     
46
     
47
     
14,274
     
14,321
 
Home equity lines of credit
   
-
     
221
     
-
     
221
     
50,186
     
50,407
 
Installment
   
19
     
-
     
-
     
19
     
1,579
     
1,598
 
                                                 
Total
 
$
1,071
     
385
     
960
     
2,416
     
1,204,733
     
1,207,149
 

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
 
$
324
     
-
     
-
     
324
     
164,659
     
164,983
 
Other
   
-
     
-
     
80
     
80
     
51,958
     
52,038
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
2,491
     
444
     
12,047
     
14,982
     
3,723,065
     
3,738,047
 
Home equity loans
   
147
     
1
     
96
     
244
     
69,546
     
69,790
 
Home equity lines of credit
   
413
     
361
     
1,484
     
2,258
     
233,386
     
235,644
 
Installment
   
25
     
-
     
-
     
25
     
8,645
     
8,670
 
                                                 
Total
 
$
3,400
     
806
     
13,707
     
17,913
     
4,251,259
     
4,269,172
 

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

16


 
December 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
 
$
125
     
77
     
279
     
481
     
148,294
     
148,775
 
Other
   
-
     
-
     
80
     
80
     
44,852
     
44,932
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
1,220
     
982
     
10,927
     
13,129
     
2,593,652
     
2,606,781
 
Home equity loans
   
120
     
1
     
48
     
169
     
59,231
     
59,400
 
Home equity lines of credit
   
401
     
344
     
1,273
     
2,018
     
191,636
     
193,654
 
Installment
   
3
     
-
     
43
     
46
     
7,764
     
7,810
 
                                                 
Total
 
$
1,869
     
1,404
     
12,650
     
15,923
     
3,045,429
     
3,061,352
 

Florida:
                                   
(dollars in thousands)
 
30-59
Days
Past Due
   
60-89
Days
Past Due
   
90 +
Days
Past Due
   
Total
30+ days
Past Due
   
Current
   
Total
Loans
 
                                     
Commercial:
                                   
Commercial real estate
 
$
-
     
-
     
-
     
-
     
18,666
     
18,666
 
Other
   
-
     
-
     
-
     
-
     
119
     
119
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
365
     
517
     
655
     
1,537
     
1,097,378
     
1,098,915
 
Home equity loans
   
-
     
-
     
47
     
47
     
15,024
     
15,071
 
Home equity lines of credit
   
-
     
-
     
-
     
-
     
48,540
     
48,540
 
Installment
   
7
     
10
     
-
     
17
     
1,790
     
1,807
 
                                                 
Total
 
$
372
     
527
     
702
     
1,601
     
1,181,517
     
1,183,118
 

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
 
$
125
     
77
     
279
     
481
     
166,960
     
167,441
 
Other
   
-
     
-
     
80
     
80
     
44,971
     
45,051
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
1,585
     
1,499
     
11,582
     
14,666
     
3,691,030
     
3,705,696
 
Home equity loans
   
120
     
1
     
95
     
216
     
74,255
     
74,471
 
Home equity lines of credit
   
401
     
344
     
1,273
     
2,018
     
240,176
     
242,194
 
Installment
   
10
     
10
     
43
     
63
     
9,554
     
9,617
 
                                                 
Total
 
$
2,241
     
1,931
     
13,352
     
17,524
     
4,226,946
     
4,244,470
 

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

At March 31, 2021 and December 31, 2020, there were no loans that were 90 days past due and still accruing interest.  As a result, non-accrual loans include all loans 90 days or more past due as well as certain loans less than 90 days past due that were placed on non-accrual status for reasons other than delinquent status.  There are no commitments to extend further credit on non-accrual or restructured loans.

17

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

 
For the three months ended March 31, 2021
 
(dollars in thousands)
 
Commercial
   
Real Estate
Mortgage-
1 to 4 Family
   
Installment
   
Total
 
Balance at beginning of period
 
$
4,140
     
44,950
     
505
     
49,595
 
Loans charged off:
                               
New York and other states*
   
-
     
86
     
7
     
93
 
Florida
   
-
     
-
     
2
     
2
 
Total loan chargeoffs
   
-
     
86
     
9
     
95
 
                                 
Recoveries of loans previously charged off:
                               
New York and other states*
   
32
     
88
     
21
     
141
 
Florida
   
-
     
-
     
-
     
-
 
Total recoveries
   
32
     
88
     
21
     
141
 
Net loans (recoveries) charged off
   
(32
)
   
(2
)
   
(12
)
   
(46
)
(Credit) provision for loan losses
   
(120
)
   
555
     
(85
)
   
350
 
Balance at end of period
 
$
4,052
     
45,507
     
432
     
49,991
 

 
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 (recoveries) charged off
   
1
     
138
     
23
     
162
 
(Credit) provision for loan losses
   
(38
)
   
2,033
     
5
     
2,000
 
Balance at end of period
 
$
3,960
     
41,643
     
552
     
46,155
 

* 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, 2021 and December 31, 2020:

 
March 31, 2021
 
(dollars in thousands)
 
Commercial
Loans
   
1-to-4 Family
Residential
Real Estate
   
Installment
Loans
   
Total
 
Allowance for loan losses:
                       
Ending allowance balance attributable to loans:
                       
Individually evaluated for impairment
 
$
-
     
-
     
-
     
-
 
Collectively evaluated for impairment
   
4,052
     
45,507
     
432
     
49,991
 
                                 
Total ending allowance balance
 
$
4,052
     
45,507
     
432
     
49,991
 
                                 
Loans:
                               
Individually evaluated for impairment
 
$
699
     
19,646
     
-
     
20,345
 
Collectively evaluated for impairment
   
216,322
     
4,023,835
     
8,670
     
4,248,827
 
                                 
Total ending loans balance
 
$
217,021
     
4,043,481
     
8,670
     
4,269,172
 

 
December 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
   
4,140
     
44,950
     
505
     
49,595
 
                                 
Total ending allowance balance
 
$
4,140
     
44,950
     
505
     
49,595
 
                                 
Loans:
                               
Individually evaluated for impairment
 
$
1,028
     
20,553
     
-
     
21,581
 
Collectively evaluated for impairment
   
211,464
     
4,001,808
     
9,617
     
4,222,889
 
                                 
Total ending loans balance
 
$
212,492
     
4,022,361
     
9,617
     
4,244,470
 

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, 2021 and December 31, 2020 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, 2021 and December 31, 2020:

 
March 31, 2021
 
New York and other states*:
                       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
523
     
616
     
-
     
1,152
 
Other
   
80
     
80
     
-
     
106
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
14,425
     
14,812
     
-
     
14,059
 
Home equity loans
   
214
     
214
     
-
     
235
 
Home equity lines of credit
   
2,005
     
2,145
     
-
     
2,260
 
                                 
Total
 
$
17,247
     
17,867
     
-
     
17,812
 

Florida:
                       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
96
     
96
     
-
     
106
 
Other
   
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
2,758
     
2,758
     
-
     
2,547
 
Home equity loans
   
-
     
-
     
-
     
17
 
Home equity lines of credit
   
244
     
244
     
-
     
246
 
                                 
Total
 
$
3,098
     
3,098
     
-
     
2,916
 

Total:
                       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
619
     
712
     
-
     
1,258
 
Other
   
80
     
80
     
-
     
106
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
17,183
     
17,570
     
-
     
16,606
 
Home equity loans
   
214
     
214
     
-
     
252
 
Home equity lines of credit
   
2,249
     
2,389
     
-
     
2,506
 
                                 
Total
 
$
20,345
     
20,965
     
-
     
20,728
 

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

20


 
December 31, 2020
 
New York and other states*:
                       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
819
     
943
     
-
     
1,186
 
Other
   
111
     
111
     
-
     
103
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
15,024
     
15,411
     
-
     
14,110
 
Home equity loans
   
219
     
240
     
-
     
235
 
Home equity lines of credit
   
2,158
     
2,298
     
-
     
2,258
 
                                 
Total
 
$
18,331
     
19,003
     
-
     
17,892
 

Florida:
                       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
98
     
98
     
-
     
105
 
Other
   
-
     
-
     
-
     
-
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
2,908
     
2,908
     
-
     
2,555
 
Home equity loans
   
-
     
-
     
-
     
16
 
Home equity lines of credit
   
244
     
244
     
-
     
246
 
                                 
Total
 
$
3,250
     
3,250
     
-
     
2,922
 

Total:
                       
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
 
                         
Commercial:
                       
Commercial real estate
 
$
917
     
1,041
     
-
     
1,291
 
Other
   
111
     
111
     
-
     
103
 
Real estate mortgage - 1 to 4 family:
                               
First mortgages
   
17,932
     
18,319
     
-
     
16,665
 
Home equity loans
   
219
     
240
     
-
     
251
 
Home equity lines of credit
   
2,402
     
2,542
     
-
     
2,504
 
                                 
Total
 
$
21,581
     
22,253
     
-
     
20,814
 

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

The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as impaired.  Interest income recognized on impaired loans was not material during the three months ended March 31, 2021 and 2020.

21

As of March 31, 2021 and December 31, 2020 impaired loans included approximately $11.1 million and $11.7 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, 2021 and December 31, 2020, 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 March 31, 2021
   
Three months ended March 31, 2020
 
 New York and other states*:
                                   
 
(dollars in thousands)
 
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
   
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
 
                                     
Commercial:
                                   
Commercial real estate
   
-
   
$
-
     
-
     
-
   
$
-
     
-
 
Real estate mortgage - 1 to 4 family:
                                               
First mortgages
   
-
     
-
     
-
     
1
     
167
     
167
 
Home equity loans
   
-
     
-
     
-
     
-
     
-
     
-
 
Home equity lines of credit
   
-
     
-
     
-
     
1
     
70
     
70
 
                                                 
Total
   
-
   
$
-
     
-
     
2
   
$
237
     
237
 

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

* 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.

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.

22

There were no TDR’s that defaulted during the three months ended March 31, 2021 and 2020 which had been modified within the last twelve months.

Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of 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 made pursuant to the CARES ACT that were in payment deferral at March 31, 2021 were not material.

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, 2021 and December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 
March 31, 2021
 
                   
New York and other states*:
                 
(dollars in thousands)
 
Pass
   
Classified
   
Total
 
                   
Commercial:
                 
Commercial real estate
 
$
144,433
     
2,561
     
146,994
 
Other
   
51,444
     
229
     
51,673
 
   
$
195,877
     
2,790
     
198,667
 

Florida:
                 
(dollars in thousands)
 
Pass
   
Classified
   
Total
 
                   
Commercial:
                 
Commercial real estate
 
$
17,419
     
570
     
17,989
 
Other
   
365
     
-
     
365
 
   
$
17,784
     
570
     
18,354
 

Total:
                 
(dollars in thousands)
 
Pass
   
Classified
   
Total
 
                   
Commercial:
                 
Commercial real estate
 
$
161,852
     
3,131
     
164,983
 
Other
   
51,809
     
229
     
52,038
 
   
$
213,661
     
3,360
     
217,021
 

* Includes New York, New Jersey and Massachusetts.

24


 
 
December 31, 2020
 
                   
New York and other states:
                 
(dollars in thousands)
 
Pass
   
Classified
   
Total
 
                   
Commercial:
                 
Commercial real estate
 
$
145,741
     
3,034
     
148,775
 
Other
   
44,522
     
410
     
44,932
 
   
$
190,263
     
3,444
     
193,707
 

Florida:
                 
(dollars in thousands)
 
Pass
   
Classified
   
Total
 
                   
Commercial:
                 
Commercial real estate
 
$
18,092
     
574
     
18,666
 
Other
   
119
     
-
     
119
 
   
$
18,211
     
574
     
18,785
 

Total:
                 
(dollars in thousands)
 
Pass
   
Classified
   
Total
 
                   
Commercial:
                 
Commercial real estate
 
$
163,833
     
3,608
     
167,441
 
Other
   
44,641
     
410
     
45,051
 
   
$
208,474
     
4,018
     
212,492
 

* Includes New York, New Jersey and Massachusetts.

Included in classified loans in the above tables are impaired loans of $471 thousand and $796 thousand at March 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020 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, 2021 and December 31, 2020 is presented in the non-accrual loans table.

(6) Fair Value of Financial Instruments

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

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

25

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.

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.

26

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

 
Fair Value Measurements at
 
   
March 31, 2021 Using:
 
(dollars in thousands)
 
Carrying
Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
                         
U.S. government sponsored enterprises
 
$
74,465
   
$
-
   
$
74,465
   
$
-
 
State and political subdivisions
   
48
     
-
     
48
     
-
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
348,317
     
-
     
348,317
     
-
 
Corporate bonds
   
64,839
     
-
     
64,839
     
-
 
Small Business Administration- guaranteed participation securities
   
39,232
     
-
     
39,232
     
-
 
Other securities
   
686
     
-
     
686
     
-
 
                                 
Total securities available for sale
 
$
527,587
   
$
-
   
$
527,587
   
$
-
 

 
Fair Value Measurements at
 
   
December 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
 
$
19,968
   
$
-
   
$
19,968
   
$
-
 
State and political subdivisions
   
103
     
-
     
103
     
-
 
Mortgage backed securities and collateralized mortgage obligations - residential
   
316,158
     
-
     
316,158
     
-
 
Corporate bonds
   
59,939
     
-
     
59,939
     
-
 
Small Business Administration- guaranteed participation securities
   
42,217
     
-
     
42,217
     
-
 
Other securities
   
686
     
-
     
686
     
-
 
                                 
Total securities available for sale
 
$
439,071
   
$
-
   
$
439,071
   
$
-
 

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2021 and 2020.

27

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

 
 
Fair Value Measurements at
 
 
 
     
 
 
March 31, 2021 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
 
$
420
   
$
-
   
$
-
   
$
420
 
Sales comparison approach
Adjustments for differences between comparable sales
   
1% - 7% (2
%)
                                             
Impaired loans:
                                           
Real estate mortgage -1 to 4 family
   
-
     
-
     
-
     
-
 
Sales comparison
Adjustments for differences between comparable sales
   
N/A
 

 
 
Fair Value Measurements at
 
 
 
     
 
 
December 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
 
$
541
   
$
-
   
$
-
   
$
541
 
Sales comparison approach
Adjustments for differences between comparable sales
   
1% - 7% (2
%)
                                             
Impaired loans:
                                           
Real estate mortgage -1 to 4 family
   
211
     
-
     
-
     
211
 
Sales comparison
Adjustments for differences between comparable sales
   
11% - 12% (12
%)

Other real estate owned, that is carried at fair value less costs to sell was approximately $420 thousand at March 31, 2021 and consisted of only residential real estate properties.  Valuation charges of $121 thousand are included in earnings for the three months ended March 31, 2021.

Of the total impaired loans of $20.3 million at March 31, 2021, none are collateral dependent and carried at fair value measured on a non-recurring basis.

Other real estate owned, that is carried at fair value less costs to sell, was approximately $541 thousand at December 31, 2020 and consisted of only residential real estate properties.  A valuation charge of $120 thousand is included in earnings for the year ended December 31, 2020.

Of the total impaired loans of $21.6 million at December 31, 2020, $211 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, 2020.  Gross chargeoffs related to residential impaired loans included in the table above amounted to $10 thousand at December 31, 2020.

28

The carrying amounts and estimated fair values (represents exit price) of financial instruments, at March 31, 2021 and December 31, 2020 are as follows:

(dollars in thousands)
       
Fair Value Measurements at
 
   
Carrying
   
March 31, 2021 Using:
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                             
Cash and cash equivalents
 
$
1,140,373
     
1,140,373
     
-
     
-
     
1,140,373
 
Securities available for sale
   
527,587
     
-
     
527,587
     
-
     
527,587
 
Held to maturity securities
   
12,729
     
-
     
13,891
     
-
     
13,891
 
Federal Home Loan Bank stock
   
5,506
     
N/A
     
N/A
     
N/A
     
N/A
 
Net loans
   
4,219,181
     
-
     
-
     
4,301,999
     
4,301,999
 
Accrued interest receivable
   
9,639
     
21
     
1,368
     
8,250
     
9,639
 
Financial liabilities:
                                       
Demand deposits
   
718,343
     
718,343
     
-
     
-
     
718,343
 
Interest bearing deposits
   
4,454,579
     
3,223,316
     
1,232,604
     
-
     
4,455,920
 
Short-term borrowings
   
229,950
     
-
     
229,950
     
-
     
229,950
 
Accrued interest payable
   
310
     
45
     
265
     
-
     
310
 

(dollars in thousands)
       
Fair Value Measurements at
 
   
Carrying
   
December 31, 2020 Using:
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                             
Cash and cash equivalents
 
$
1,107,099
     
1,107,099
     
-
     
-
     
1,107,099
 
Securities available for sale
   
439,071
     
-
     
439,071
     
-
     
439,071
 
Held to maturity securities
   
13,824
     
-
     
14,988
     
-
     
14,988
 
Federal Reserve Bank and Federal
                                       
Home Loan Bank stock
   
5,506
     
N/A
     
N/A
     
N/A
     
N/A
 
Net loans
   
4,194,875
     
-
     
-
     
4,287,585
     
4,287,585
 
Accrued interest receivable
   
10,031
     
39
     
1,458
     
8,534
     
10,031
 
Financial liabilities:
                                       
Demand deposits
   
652,756
     
652,756
     
-
     
-
     
652,756
 
Interest bearing deposits
   
4,384,437
     
3,088,064
     
1,298,375
     
-
     
4,386,439
 
Short-term borrowings
   
214,755
     
-
     
214,755
     
-
     
214,755
 
Accrued interest payable
   
474
     
68
     
406
     
-
     
474
 

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 3/31/2021
 
(dollars in thousands)
 
Balance at
12/31/2020
   
Other
Comprehensive
Income (loss)-
Before
Reclassifications
   
Amount
reclassified
from Accumulated
Other Comprehensive
Income
   
Other
Comprehensive
Income (loss)-
Three months ended
3/31/2021
   
Balance at
3/31/2021
 
 
                             
Net unrealized holding loss on securities available for sale, net of tax
 
$
7,186
     
(4,461
)
   
-
     
(4,461
)
   
2,725
 
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax
   
6,084
     
-
     
-
     
-
     
6,084
 
Net change in net actuarial gain and prior service credit on pension and postretirement benefit plans, net of tax
   
(1,334
)
   
-
     
(207
)
   
(207
)
   
(1,541
)
 
                                       
Accumulated other comprehensive loss, net of tax
 
$
11,936
     
(4,461
)
   
(207
)
   
(4,668
)
   
7,268
 

 
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
   
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 income (loss), net of tax
 
$
4,461
     
7,945
     
(1,014
)
   
6,931
     
11,392
 

The following represents the reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2021 and 2020:

 
Three months ended
March 31,
   
   
2021
   
2020
 
Affected Line Item in Financial Statements
                  
Net unrealized holding gain on securities available for sale
               
Realized gain on securities transactions
 
$
-
     
1,155
 
Net gain on securities transactions
Income tax effect
   
-
     
(300
)
Income taxes
Net of tax
   
-
     
855
   
                      
Amortization of pension and postretirement benefit items:
                   
Amortization of net actuarial gain
 
$
228
     
166
 
Salaries and employee benefits
Amortization of prior service credit
   
52
     
49
 
Salaries and employee benefits
Income tax benefit
   
(73
)
   
(56
)
Income taxes
Net of tax
   
207
     
159
   
                      
Total reclassifications, net of tax
 
$
207
     
159
   

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, 2021 and 2020. Items outside the scope of ASC 606 are noted as such.

(dollars in thousands)
 
Three months ended
 
   
March 31,
 
   
2021
   
2020
 
             
Non-interest income
           
Service Charges on Deposits
           
Overdraft fees
 
$
617
   
$
873
 
Other
   
469
     
429
 
Interchange Income
   
1,153
     
946
 
Net gain on securities transactions (a)
   
-
     
1,155
 
Wealth management fees
   
2,035
     
1,600
 
Other (a)
   
154
     
331
 
                 
Total non-interest income
 
$
4,428
   
$
5,334
 

(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, 2021,  the Company did not have any leases with terms of twelve months or less.

As of March 31, 2021, the Company has one lease that the construction has not started yet. At March 31, 2021, lease expiration dates ranged from six months to 23.5 years and have a weighted average remaining lease term of 8.9 years.  Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements. As mentioned above the leases generally also include variable lease components which include real estate taxes, insurance, and common area maintenance (“CAM”) charges in the annual rental payments.

32

Other information related to leases was as follows:

(dollars in thousands)
 
Three months ended
March 31,
 
   
2021
   
2020
 
Operating lease cost
 
$
2,016
   
$
1,995
 
Variable lease cost
   
502
     
480
 
                 
Total Lease costs
 
$
2,518
   
$
2,475
 

(dollars in thousands)
 
Three months ended
March 31,
 
   
2021
   
2020
 
Supplemental cash flows information:
           
Cash paid for amounts included in the measurement of lease liabilities:
           
Operating cash flows from operating leases
 
$
2,038
   
$
1,995
 
                 
Right-of-use assets obtained in exchange for lease obligations:
   
302
     
-
 
                 
Weighted average remaining lease term
 
8.9 years
   
9.2 years
 
Weighted average discount rate
   
3.16
%
   
3.25
%

Future minimum lease payments under non-cancellable leases as of March 31, 2021 were as follows:

(dollars in thousands)
     
       
Year ending December 31,
     
2021(a)
 
$
6,155
 
2022
   
7,780
 
2023
   
7,475
 
2024
   
7,350
 
2025
   
6,976
 
Thereafter
   
23,660
 
Total lease payments
 
$
59,396
 
Less: Interest
   
7,947
 
         
Present value of lease liabilities
 
$
51,449
 

(a) Excluding three months ended March 31, 2021.

A member of the Board of Directors has an ownership interest in six entities that own commercial real estate leased by the Company for use as branch locations.  Total lease payments from the Company to those entities, which are included in the table above, owed at March 31, 2021, were $4.4 million, which includes interest in the amount of $620 thousand.

33


(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. As of March 31,2021, 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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020:

(Bank Only)
                       
 
             
Minimum for
Capital Adequacy plus
Capital Conservation
 
 
 
As of March 31, 2021
   
Well
 
 
(dollars in thousands)
 
Amount
   
Ratio
   
Capitalized(1)
   
Buffer (1)(2)
 
 
                       
Tier 1 leverage ratio
 
$
546,391
     
9.235
%
   
5.000
%
   
4.000
%
Common equity tier 1 capital
   
546,391
     
18.654
     
6.500
     
7.000
 
Tier 1 risk-based capital
   
546,391
     
18.654
     
8.000
     
8.500
 
Total risk-based capital
   
283,171
     
19.910
     
10.000
     
10.500
 

 
 
As of December 31, 2020
   
Well
   
Minimum for
Capital Adequacy plus
Capital Conservation
 
(dollars in thousands)
 
Amount
   
Ratio
   
Capitalized(1)
   
Buffer (1)(2)
 
 
                       
Tier 1 leverage ratio
 
$
539,897
     
9.378
%
   
5.000
%
   
4.000
%
Common equity tier 1 capital
   
539,897
     
18.646
     
6.500
     
7.000
 
Tier 1 risk-based capital
   
539,897
     
18.646
     
8.000
     
8.500
 
Total risk-based capital
   
576,257
     
19.902
     
10.000
     
10.500
 

(Consolidated)
           
   
As of March 31, 2021
   
Minimum for
Capital Adequacy plus
Capital Conservation
 
(dollars in thousands)
 
Amount
   
Ratio
   
Buffer (1)(2)
 
 
                 
Tier 1 leverage ratio
 
$
563,210
     
9.515
%
   
4.000
%
Common equity tier 1 capital
   
563,210
     
19.223
     
7.000
 
Tier 1 risk-based capital
   
563,210
     
19.223
     
8.500
 
Total risk-based capital
   
599,999
     
20.479
     
10.500
 

 
 
As of December 31, 2020
   
Minimum for
Capital Adequacy plus
Capital Conservation
 
(dollars in thousands)
 
Amount
   
Ratio
   
Buffer (1)(2)
 
 
                 
Tier 1 leverage ratio
 
$
555,672
     
9.650
%
   
4.000
%
Common equity Tier 1 capital
   
555,672
     
19.187
     
7.000
 
Tier 1 risk-based capital
   
555,672
     
19.187
     
8.500
 
Total risk-based capital
   
592,040
     
20.443
     
10.500
 

(1)
Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized
(2)
The March 31, 2021 and December 31, 2020 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a capital conservation buffer of 2.50 percent

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(11) New Accounting Pronouncements

In September 2016, the FASB released ASU 2016-13, "Financial Instruments - Credit Losses" (referred to as “CECL”) 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 CECL. 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 had previously elected to delay its adoption of CECL, as provided by the CARES Act until the date on which the National Emergency concerning COVID-19 was terminated or December 31, 2020, whichever occurred first.  The December 31, 2020 adoption date under the CARES Act was extended to January 1, 2022 as a part of the COVID-19 Relief Bill, which became law in December 2020, and therefore the Company intends to adopt CECL on January 1, 2022.

(12) Risks and Uncertainties

Beginning in March 2020, the Company experienced negative impacts to its business in the form of requests for loan deferrals of principal and interest due to the business disruption caused by COVID-19.  In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.  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. The Company has evaluated the impact of the effects of COVID-19 and determined that there have been no lasting material or systematic adverse impacts on the Company’s March 31, 2021 financial statements, except for the increase in the allowance for loan losses as a result of the potential for future credit losses due to the uncertainty of borrowers ability to repay during the pandemic.  As of March 31, 2021, 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 unanticipated credit losses. 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 and continue to negatively impact net interest income, provision for loan losses, and noninterest income.

Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of TDR classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period. Loans not meeting the CARES ACT or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures.  As of March 31, 2021, loans in deferral were not material.

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, 2021, and the related consolidated statements of income and comprehensive income, the related changes in shareholders’ equity and cash flows for the three month periods ended March 31, 2021 and March 31, 2020, 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, 2020, 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 26, 2021, 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, 2020, 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 7, 2021
 

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

Forward-looking Statements
Statements included in this report and in future filings by TrustCo 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, 2020, 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.

The current COVID-19 pandemic, the effects of which could, and in some instances has, caused us to 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 unavailability of key employees; an increase in the allowance for loan losses; a reduction in wealth management revenues; an increase in Federal Deposit Insurance Corporation premiums; a reduction in the value of the securities portfolio; or a decline in the net worth and liquidity of loan guarantors;

TrustCo’s ability to continue to originate a significant volume of one- to- four family mortgage loans in its market areas and to otherwise maintain or increase its market share in the areas in which it operates;
 
TrustCo’s ability to continue to maintain noninterest expense and other overhead costs at reasonable levels relative to income;
 
TrustCo’s ability to make accurate assumptions and judgments regarding the credit risks associated with its lending and investing activities, including changes in the level and direction of loan delinquencies and charge-offs, changes in property values, and changes in estimates of the adequacy of the allowance for loan and lease losses;
 
the effects of and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations;
 
restrictions or conditions imposed by TrustCo’s and Trustco Bank’s regulators on their operations that may make it more difficult to achieve TrustCo’s and Trustco Bank’s goals;

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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 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, 2020.

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

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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, 2021 and 2020.

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, 2021, with comparisons to the corresponding period in 2020, 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 2020 Annual Report on Form 10-K, which was filed with the SEC on February 26, 2021, should also be read in conjunction with this review.  Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation.

COVID-19 Impact
Beginning in March 2020, we experienced negative impacts to our business in the form of requests for loan deferrals of principal and interest due to the business disruption caused by COVID-19.  In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.  The Company has evaluated the impact of the effects of COVID-19 and determined that there were no material or systematic adverse impacts on the Company’s balance sheets and results of operations as of and for the quarter ended March 31, 2021.  At this time, it is difficult to quantify the impact COVID-19 will have on future periods.

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

Loan modifications

We began receiving requests from our borrowers for loan deferrals in March 2020 and agreed with many borrowers to modify their loans. Modifications included the deferral of principal and/or interest payments for terms generally up to 90 days. Requests were evaluated individually and approved modifications were 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. The Company has evaluated the impact of the effects of COVID-19 and determined that there have been no lasting material or systematic adverse impacts on the Company’s March 31, 2021 financial statements, except for the increase in the allowance for loan losses as a result of the potential for future credit losses due to the uncertainty of borrowers ability to repay during the pandemic.  Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of troubled debt restructuring (“TDR”) classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period.  Loans not meeting the CARES Act or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures.  As of March 31, 2021, loans in deferral were not material.

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Paycheck Protection Program (PPP) and Liquidity

As part of the CARES Act, approved by the President on March 27, 2020, the Small Business Administration (SBA) has been authorized to guarantee loans under the PPP 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.  The Bank had originally funded 663 Paycheck Protection Program (“PPP”) loans totaling $46 million in 2020, and an additional $17 million in the first quarter of 2021.  As of March 31, 2021, 531 PPP loans totaling $37 million remain outstanding.  The Company receives loan origination fees which are 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 “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 our customers and employees, including regular deep cleaning of facilities, adhering to CDC guidelines, and practicing “social distancing.”  These additional expenses did not have a material impact on the Company for the quarter ended March 31, 2021.

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;

41

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.
 

Economic Overview
During the first quarter of 2021, financial markets kept the momentum gained during the fourth quarter of 2020 pushing indexes further into record territory.  New stimulus funds along with accelerated COVID-19 vaccinations contributed to the increased confidence in the economy.  For the first quarter of 2021, the S&P 500 Index was up 5.8% and the Dow Jones Industrial Average was up 7.8%.  Credit markets continue to be driven by worldwide economic news, effects of COVID-19, and demand shifts.  The shape of the yield curve steepened during the quarter as compared to prior quarters.  The 10‑year Treasury bond averaged 1.34% during Q1 2021 compared to 0.86% in Q4 2020, an increase of 48 basis points.  The 2‑year Treasury bond average rate decreased 2 basis points to 0.13%, resulting in a steepening of the yield curve.  The spread between the 10‑year and the 2-year Treasury bonds expanded from 0.71% on average in Q4 to 1.20% 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 Federal Funds rate remained flat at 0.00% to 0.25% for the quarter.  Spreads of most asset classes to the comparative treasury yield, including agency securities, corporates, municipals and mortgage-backed securities, continue to be down as compared to the levels seen before the pandemic.  Accordingly, changes in rates and spreads continue to be effected by the pandemic.

42


   
3 Month
2 Year
5 Year
10 Year
 10 - 2 Year
     
Yield (%)
Yield (%)
Yield (%)
Yield (%)
 Spread (%)
               
Q1/20
 
Beg of Q1
1.55
1.58
1.69
1.92
0.34
 
Peak
1.59
1.58
1.67
1.88
0.68
 
Trough
0.00
0.23
0.37
0.54
0.12
 
End of Q1
0.11
0.23
0.37
0.70
0.47
 
Average in Q1
1.10
1.08
1.14
1.37
0.28
               
Q2/20
 
Beg of Q2
0.11
0.23
0.37
0.70
0.47
 
Peak
0.26
0.28
0.48
0.91
0.69
 
Trough
0.09
0.13
0.28
0.58
0.38
 
End of Q2
0.16
0.16
0.29
0.66
0.50
 
Average in Q2
0.14
0.19
0.36
0.69
0.49
               
Q3/20
 
Beg of Q3
0.16
0.16
0.29
0.66
0.50
 
Peak
0.16
0.17
0.32
0.74
0.60
 
Trough
0.09
0.11
0.19
0.52
0.41
 
End of Q3
0.10
0.13
0.28
0.69
0.56
 
Average in Q3
0.14
0.14
0.27
0.65
0.51
               
Q4/20
 
Beg of Q4
0.10
0.13
0.28
0.69
0.56
 
Peak
0.12
0.19
0.46
0.98
0.83
 
Trough
0.07
0.11
0.27
0.68
0.54
 
End of Q4
0.09
0.13
0.36
0.93
0.80
 
Average in Q4
0.09
0.15
0.37
0.86
0.71
               
Q1/21
 
Beg of Q1
0.09
0.13
0.36
0.93
0.80
 
Peak
0.09
0.17
0.92
1.74
1.59
 
Trough
0.01
0.09
0.36
0.93
0.82
 
End of Q1
0.03
0.16
0.92
1.74
1.58
 
Average in Q1
0.05
0.13
0.62
1.34
1.20

The United States economy continued to show improvements heading into 2021 as mentioned above.  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 or other reasons, 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. As previously noted, included in the CARES Act is support for small businesses, direct payments to lower and middle income families, expanded unemployment insurance, additional funding for health care providers, as well as support for other industries.  The Federal Reserve Board, in an attempt to increase liquidity and promote the normal functioning of financial markets, also provided support by increasing purchases of Treasury securities and agency mortgage-backed securities.

Financial Overview
TrustCo recorded net income of $14.1 million, or $0.146 of diluted earnings per share, for the three months ended March 31, 2021, compared to net income of $13.3 million, or $0.138 of diluted earnings per share, in the same period in 2020.  Return on average assets was 0.96% and 1.03%, respectively, for the three months ended March 31, 2021 and 2020.  Return on average equity was 10.01% and 9.87%, respectively, for the three months ended March 31, 2021 and 2020.

The primary factors accounting for the change in net income for the three months ended March 31, 2021 compared to the same period of the prior year were:

A decrease in the cost of interest bearing liabilities of $5.7 million, partially offset by a decrease in income from interest earning assets of $4.1 million, resulted in an increase in taxable equivalent net interest income in the first quarter of 2021 compared to the first quarter of 2020 of $1.6 million.

A decrease of $1.7 million in provision for loan losses for the first quarter of 2021 compared to the first quarter 2020.

A decrease of $906 thousand in noninterest income for the first quarter of 2021 compared to the first quarter of 2020, primarily driven by a $1.2 million gain on securities transactions in the prior period.

An increase of $1.1 million in noninterest expense for the first quarter 2021 compared to the first quarter 2020.

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, 2020 is a description of the effect interest rates had on the results for the year 2020 compared to 2019.  Many of the same market factors discussed in the 2020 Annual Report continued to have a significant impact on results through the first quarter of 2021, as well as the economic effect of COVID-19.

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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.  From December 2015 through December 2018, the U.S. Federal Reserve Board increased its federal funds target rate from a range of 0.00% - 0.25% to a range of 2.25% - 2.50%. Beginning in the second half of 2019, the Federal Reserve Board began lowering the rate in response to a slowing economy.  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 58 basis points lower in the first quarter of 2021 relative to the prior year period.  Rates were lower on all interest bearing deposit accounts as a result of repricing over the last year due to the pandemic.  Please refer to the statistical disclosures in the table below entitled “Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential.”

The interest rate on the 10-year Treasury bond and other long-term interest rates have significant influence on the rates for new residential real estate loans.  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.

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 up 48 basis points, on average, during the first quarter of 2021 compared to the fourth quarter of 2020 and was down 3 basis points as compared to the first quarter of 2020.

45

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 2021, the net interest margin was 2.78%, down 27 basis points versus the prior year’s quarter.  The quarterly results reflect the following significant factors:

The average balance of Federal Funds sold and other short-term investments increased by $617.5 million while the average yield decreased 113 basis points in the first quarter of 2021 compared to the same period in 2020.

The average balance of securities available for sale decreased by $57.8 million while the average yield decreased 76 basis points to 1.50%.  The average balance of held to maturity securities decreased by $4.9 million and the average yield decreased 16 basis points to 3.70% for the first quarter of 2021 compared to the same period in 2020.

The average loan portfolio grew by $173.3 million to $4.25 billion and the average yield decreased 33 basis points to 3.80% in the first quarter of 2021 compared to the same period in 2020.

The average balance of interest bearing liabilities (primarily deposit accounts) increased $485.5 million and the average rate paid decreased 58 basis points to 0.21% in the first quarter of 2021 compared to the same period in 2020.

During the first quarter of 2021, 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.

46

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 $5.06 billion in the first quarter of 2020 to $5.78 billion in the same period of 2021 with an average yield of 2.95% in the first quarter of 2021 and 3.69% in the first quarter of 2020.  There was a shift in the mix of assets towards a higher proportion of federal funds sold and other short-term investments from securities available for sale, as well as from increases in deposits.  The sharp decrease in the federal funds rate during March of 2020 significantly decreased the average yield on the federal funds sold and other short-term investments from 1.24% in the first quarter of 2020 to 0.11% in the first quarter of 2021, which drove down the overall yield on interest earning assets.     Interest income on average earning assets decreased $4.1 million in the first quarter of 2021 from the prior year period, on a tax equivalent basis, and was primarily driven by the lower market rates as mentioned above.

Loans
The average balance of loans was $4.25 billion in the first quarter of 2021 and $4.08 billion in the comparable period in 2020.  The yield on loans decreased 33 basis points to 3.80%.  The higher average balances did not offset the decrease in yield.

Compared to the first quarter of 2020, 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 $3.79 billion in 2021 compared to $3.60 billion in 2020, an increase of 5.2%.  The average yield on residential mortgage loans decreased by 36 basis points to 3.69% in the first quarter of 2021 compared to 2020.

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.

Commercial loans, which consist primarily of loans secured by commercial real estate, increased $14.7 million to an average balance of $212.8 million in the first quarter of 2021 compared to the same period in the prior year, primarily as a result of the remaining PPP loans.  The average yield on this portfolio was up 41 basis points to 5.54% compared to the prior year period, primarily as a result of the origination fees recognized on forgiven PPP loans.  The Company remains selective in underwriting commercial loans in recent periods as the apparent risk/reward balance has been less favorable in many cases.

47

The average yield on home equity credit lines decreased 51 basis points to 3.84% during the first quarter of 2021 compared to the prior year 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 10.2% to $238.4 million in the first quarter of 2021 as compared to the prior year.  Customers with home equity lines continue to refinance their balances into fixed rate mortgage loans given the current rate environment and have been less likely to draw on home equity lines due to reduced tax benefits.

Securities Available for Sale
The average balance of the securities available for sale portfolio for the first quarter of 2021 was $482.9 million compared to $540.7 million for the comparable period in 2020.  The decrease in the balance reflects routine paydowns, calls and maturities, offset by new investment purchases.  The average yield was 1.50% for the first quarter of 2021 compared to 2.26% for the first quarter of 2020.  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 $3.7 million as of March 31, 2021 compared to a net unrealized gain of $9.7million as of December 31, 2020.  The decrease in the net unrealized gains 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 $13.3 million for the first quarter of 2021 compared to $18.1 million in the first quarter of 2020.  The decrease in balances reflects routine paydowns and calls.  No new securities were added to this portfolio during the period.  The average yield was 3.70% for the first quarter of 2021 compared to 3.86% for the year earlier period.  TrustCo expects to hold the securities in this portfolio until they mature or are called.

As of March 31, 2021, this portfolio consisted solely of residential mortgage-backed securities.  The balances for these securities are recorded at amortized cost.

Federal Funds Sold and Other Short-term Investments
The 2021 first quarter average balance of Federal Funds sold and other short-term investments was $1.03 billion, a $617.5 million increase from the $412.1 million average for the same period in 2020.  The yield was 0.11% for the first quarter of 2021 and 1.24% for the comparable period in 2020.  Interest income from this portfolio decreased $1.0 million from $1.3 million in 2020 to approximately $300 thousand in 2021.  The higher average balances did not offset the target rate decreases from early 2020.

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.

48

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 $415.3 million to $4.4 billion for the first quarter of 2021 versus the first quarter in the prior year, and the average rate paid decreased from 0.78% for 2020 to 0.20% for 2021.  Total interest expense on these deposits decreased $5.6 million to $2.2 million in the first quarter of 2021 compared to the year earlier period.  From the first quarter of 2020 to the first quarter of 2021, interest bearing checking account average balances were up  24.5%, certificates of deposit average balances were down 7.9%, non‑interest demand average balances were up 46.9%, average savings balances increased 17.8% and money market balances were up 18.1%.  Our growth in deposits came at relatively low cost and continues to be offset by higher earnings on loan yields and returns in the investment portfolio.

At March 31, 2021, the maturity of total time deposits is as follows:

(dollars in thousands)
     
       
Under 1 year
 
$
1,060,965
 
1 to 2 years
   
156,531
 
2 to 3 years
   
9,873
 
3 to 4 years
   
2,852
 
4 to 5 years
   
842
 
Over 5 years
   
200
 
   
$
1,231,263
 

Average short-term borrowings for the first quarter of 2021 were $223.8 million compared to $153.7 million in the same period in 2020.  The average rate decreased during this period from 0.84% in 2020 to 0.41% in 2021.  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.

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.

49

Net Interest Income
Taxable equivalent net interest income increased by $1.6 million to $40.1 million in the first quarter of 2021 compared to the same period in 2020.  The net interest spread was down 17 basis points to 2.74% in the first quarter of 2021 compared to the same period in 2020.  As previously noted, the net interest margin was down 27 basis points to 2.78 for the first quarter of 2021 compared to the same period in 2020.

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, 2021:

Nonperforming loans and foreclosed real estate: Total NPLs and non-accrual loans were $21.6 million at March 31, 2021, compared to $21.1 million at December 31, 2020 and $20.7 million at March 31, 2020.  There were no loans at March 31, 2021 and 2020 and December 31, 2020 that were past due 90 days or more and still accruing interest.

At March 31, 2021, nonperforming loans primarily include a mix of commercial and residential loans.  Of total nonperforming loans of $21.6 million at March 31, 2021, $21.5 million were residential real estate loans, $125 thousand were commercial loans and mortgages and $32 thousand were installment loans, compared to $20.6 million, $452 thousand and $43 thousand, respectively at December 31, 2020.

A significant percentage of nonperforming loans are residential real estate loans, which are historically lower-risk than most other types of loans.  Net recoveries were $2 thousand on residential real estate loans (including home equity lines of credit) for the first quarter of 2021 compared to net chargeoffs of $138 thousand for the first quarter of 2020.  Management believes that these loans have been appropriately written down where required.

Ongoing portfolio management is intended to result in early identification and disengagement from deteriorating credits.  TrustCo has a diversified loan portfolio that includes a significant balance of residential mortgage loans to borrowers in the Capital Region of New York and avoids concentrations to any one borrower or any single industry.  TrustCo has no advances to borrowers or projects located outside the United States.  TrustCo continues to identify delinquent loans as quickly as possible and to move promptly to resolve problem loans.  Efforts to resolve delinquencies begin immediately after the payment grace period expires, with repeated, automatically generated notices, as well as personalized phone calls and letters.  Loans are placed in nonaccrual status once they are 90 days past due, or earlier if management has determined that such classification is appropriate.  Once in nonaccrual status, loans are either brought current and maintained current, at which point they may be returned to accrual status, or they proceed through the foreclosure process.  The collateral on nonaccrual loans is evaluated periodically, and the loan value is written down if the collateral value is insufficient.  Additionally, due to the recent COVID-19 pandemic, the Bank is monitoring recent regulatory mandates by state in regards to a moratorium on foreclosures.

50

The Company originates loans throughout its deposit franchise area.  At March 31, 2021, 71.7% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 28.3% were in Florida.  Those figures compare to 72.1% and 27.9%, respectively at December 31, 2020.

Economic conditions vary widely by geographic location.   As a percentage of the total nonperforming loans as of March 31, 2021, 7.5% were to Florida borrowers, compared to 92.5% to borrowers in New York and surrounding areas.  For the three months ended March 31, 2021, New York and surrounding areas experienced net recoveries of approximately $48 thousand, compared to net chargeoffs of $2 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, 2021, 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 $699 thousand of commercial mortgages and commercial loans classified as impaired as of March 31, 2021 compared to $1.0 million at December 31, 2020.  There were $19.6 million of impaired residential loans at March 31, 2021 and $20.6 million at December 31, 2020.  The average balances of all impaired loans were $20.7 million for the three months of 2021 and $20.8 million for the full year 2020.

As of March 31, 2021 and December 31, 2020, the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.

At March 31, 2021 there was $420 thousand of foreclosed real estate compared to $541 thousand at December 31, 2020.

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)
 
March 31, 2021
   
December 31, 2020
 
   
Amount
   
Percent of
Loans to
Total Loans
   
Amount
   
Percent of
Loans to
Total Loans
 
Commercial
 
$
3,886
     
4.75
%
 
$
3,975
     
4.67
%
Real estate - construction
   
338
     
0.67
%
   
290
     
0.58
%
Real estate mortgage - 1 to 4 family
   
41,892
     
88.86
%
   
41,228
     
88.81
%
Home equity lines of credit
   
3,443
     
5.52
%
   
3,597
     
5.71
%
Installment Loans
   
432
     
0.20
%
   
505
     
0.23
%
   
$
49,991
     
100.00
%
 
$
49,595
     
100.00
%

At March 31, 2021, the allowance for loan losses was $50.0 million, compared to $46.2 million at March 31, 2020 and $49.6 million at December 31, 2020.  The allowance represents 1.17% of the loan portfolio as of March 31, 2021 compared to 1.13% at March 31, 2020 and 1.17% at December 31, 2020.

The provision for loan losses was $350 thousand for the quarter ended March 31, 2021 and $2 million for the quarter ended March 31, 2020.  The decrease in the provision is primarily driven by the beginning of the uncertainty in the economic environment resulting from the COVID-19 pandemic in the same period in the prior year. Net recoveries for the three-month period ended March 31, 2021 were $46 thousand and net chargeoffs of $162 thousand for the prior year period.

During the first quarter of 2021, there were no commercial loan chargeoffs and $95 thousand of gross residential mortgage and consumer loan chargeoffs compared with $3 thousand of commercial loan chargeoffs and $217 thousand of gross residential mortgage and consumer loan chargeoffs in the first quarter of 2020.  Gross recoveries during the first quarter of 2021 were $32 thousand for commercial loans and $109 thousand for residential mortgage and consumer loans, compared to $2 thousand for commercial loans and $56 thousand for residential mortgage and consumer loans in the first quarter of 2020.

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 the global pandemic.

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

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, 2021 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, 2021.  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, 2021
 
Estimated Percentage of
Fair value of Capital to
Fair value of Assets
 
+400 BP
   
21.60
%
+300 BP
   
21.70
 
+200 BP
   
21.60
 
+100 BP
   
22.00
 
Current rates
   
21.40
 
-100 BP
   
18.40
 

53

Noninterest Income
Total noninterest income for the first quarter of 2021 and 2020 was $4.4 million and $5.3 million, respectively.  The decrease over the same period in the prior year was primarily related to net gains on securities transactions in the prior year period, partially offset by an increase in financial services income in the current year period.  The fair value of assets under management was $1.04 billion at March 31, 2021 and $997 million as of December 31, 2020 and $786 million at March 31, 2020.

Noninterest Expenses
Total noninterest expenses were $25.3 million for the three months ended March 31, 2021, compared to $24.3 million for the three months ended March 31, 2020.  Significant changes included an increase in salaries and employee benefits primarily as a result of the increase in the Company’s stock price which increased benefit liabilities.  FDIC and other insurance expense also increased primarily as a result of credits in the prior period due to the FDIC reaching the Deposit Reserve Fund reserve ratio.  These increases were partially offset by decreases in equipment expense, and other expense.  Full time equivalent headcount increased from 813 as of March 31, 2020 to 820 as of March 31, 2021.

Income Taxes
In the first quarter of 2021, TrustCo recognized income tax expense of $4.8 million compared to $4.3 million for the first quarter of 2020.  The effective tax rates were 25.3% and 24.4%, respectively, for the first quarters of 2021 and 2020.

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, 2021 was $571.0 million compared to $548.2 million at March 31, 2020.  TrustCo declared a dividend of $0.068125 per share in the first quarter of 2021.  This results in a dividend payout ratio of 46.65% based on first quarter 2021 earnings of $14.1 million.

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The Bank and the Company reported the following capital ratios as of March 31, 2021 and December 31, 2020:

(Bank Only)
             
Minimum for
Capital Adequacy plus
 
   
As of March 31, 2021
   
Well
   
Capital Conservation
 
(dollars in thousands)
 
Amount
   
Ratio
   
Capitalized(1)
   
Buffer (1)(2)
 
                         
Tier 1 leverage ratio
 
$
546,391
     
9.235
%
   
5.000
%
   
4.000
%
Common equity tier 1 capital
   
546,391
     
18.654
     
6.500
     
7.000
 
Tier 1 risk-based capital
   
546,391
     
18.654
     
8.000
     
8.500
 
Total risk-based capital
   
283,171
     
19.910
     
10.000
     
10.500
 

             
Minimum for
Capital Adequacy plus
 
   
As of December 31, 2020
   
Well
   
Capital Conservation
 
(dollars in thousands)
 
Amount
   
Ratio
   
Capitalized(1)
   
Buffer (1)(2)
 
                         
Tier 1 leverage ratio
 
$
539,897
     
9.378
%
   
5.000
%
   
4.000
%
Common equity tier 1 capital
   
539,897
     
18.646
     
6.500
     
7.000
 
Tier 1 risk-based capital
   
539,897
     
18.646
     
8.000
     
8.500
 
Total risk-based capital
   
576,257
     
19.902
     
10.000
     
10.500
 

(Consolidated)

       
Minimum for
Capital Adequacy plus
 
   
As of March 31, 2021
   
Capital Conservation
 
(dollars in thousands)
 
Amount
   
Ratio
   
Buffer (1)(2)
 
                   
Tier 1 leverage ratio
 
$
563,210
     
9.515
%
   
4.000
%
Common equity tier 1 capital
   
563,210
     
19.223
     
7.000
 
Tier 1 risk-based capital
   
563,210
     
19.223
     
8.500
 
Total risk-based capital
   
599,999
     
20.479
     
10.500
 

       
Minimum for
Capital Adequacy plus
 
   
As of December 31, 2020
   
Capital Conservation
 
(dollars in thousands)
 
Amount
   
Ratio
   
Buffer (1)(2)
 
                   
Tier 1 leverage ratio
 
$
555,672
     
9.650
%
   
4.000
%
Common equity Tier 1 capital
   
555,672
     
19.187
     
7.000
 
Tier 1 risk-based capital
   
555,672
     
19.187
     
8.500
 
Total risk-based capital
   
592,040
     
20.443
     
10.500
 

(1)
Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized
(2)
The March 31, 2021 and December 31, 2020 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, 2021, Trustco’s consolidated equity to total assets ratio was 9.44% compared to 9.63% at December 31, 2020 and 10.43% at March 31, 2020.

55

Both TrustCo and Trustco Bank are subject to regulatory capital requirements. 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.  On January 1, 2015, a new capital rule took effect that revised the federal bank regulatory agencies’ risk-based capital requirements and, for the first time, subjected the Company to consolidated regulatory capital requirements. Among other matters, the rule also established a new common equity Tier 1 minimum capital requirement of 4.5% of risk-weighted assets, increased the minimum Tier 1 capital to risk-based assets requirement from 4.0% to 6.0% of risk-weighted assets, changed the risk-weightings of certain assets, and changed what qualifies as capital for purposes of meeting the various capital requirements. In addition, the Company and the Bank are required to maintain additional levels of Tier 1 common equity (the capital conservation buffer) over the minimum risk-based capital levels before they may pay dividends, repurchase shares, or pay discretionary bonuses. The new rule was phased-in over several years and has been fully in effect since 2020.

As of March 31, 2021, 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 7%, 8.5%, 10.5% 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, 2021 and 2020, Trustco Bank met the definition of “well capitalized.”

As noted, the Company’s dividend payout ratio was 46.65% of net income for the first quarter of 2021 and 49.41% of net income for the first quarter of 2020.  The per-share dividend paid in both the first quarter of 2021, the fourth quarter of 2020, and the first quarter of 2020 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 8,936 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.

56

Reverse Stock Split Proposal

On February 16, 2021, the Company announced that the Board of Directors plans to seek approval at the Company’s annual shareholder meeting on May 20, 2021 for a reverse stock split of the Company’s common stock at a ratio of 1 for 5, and, effective at the same time of the reverse stock split, to reduce the number of authorized shares of the Company’s common stock from 150,000,000 to 30,000,000 shares.  The Board of Directors reserves its right to elect not to proceed with the reverse stock split if it determines that implementing a reverse split is no longer in the best interests of TrustCo and its shareholders.

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 0.51% of our common shares outstanding.  On April 16, 2020, the Company announced that it had suspended its share repurchase program. On February 18, 2021 the Company’s Board of Directors authorized another share repurchase program of up to 2,000,000 shares, or approximately 2% of its currently outstanding common stock. The Company did not make any repurchases under this authorization during the three months ended March 31, 2021.  If TrustCo’s reverse stock split is consummated, the shares subject to the repurchase program would be proportionately adjusted.

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, 2020 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.  The December 31, 2020 adoption date under the CARES Act was extended to January 1, 2022 as a part of the COVID-19 Relief Bill, which became law in December 2020, and therefore the Company intends to adopt CECL on January 1, 2022.

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, net of tax, in the available for sale portfolio of $4.6 million in 2021 and $4.9 million in 2020.  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, 2021
   
Three months ended
March 31, 2020
                   
                                                       
Assets
 
Average
Balance
   
Interest
   
Average
Rate
   
Average
Balance
   
Interest
   
Average
Rate
   
Change in
Interest
Income/
Expense
   
Variance
Balance
Change
   
Variance
Rate
Change
 
                                                       
Securities available for sale:
                                                     
U. S. government sponsored enterprises
 
$
51,649
   
$
50
     
0.38
%
 
$
92,369
   
$
421
     
1.82
%
 
$
(371
)
   
(133
)
   
(238
)
Mortgage backed securities and collateralized mortgage obligations-residential
   
327,614
     
1,237
     
1.51
%
   
371,768
     
2,113
     
2.27
%
   
(876
)
   
(229
)
   
(647
)
State and political subdivisions
   
50
     
1
     
6.47
%
   
114
     
2
     
7.59
%
   
(1
)
   
(1
)
   
-
 
Corporate bonds
   
63,334
     
316
     
1.99
%
   
28,332
     
238
     
3.36
%
   
78
     
641
     
(563
)
Small Business Administration-guaranteed participation securities
   
39,582
     
206
     
2.09
%
   
47,418
     
245
     
2.06
%
   
(39
)
   
(56
)
   
17
 
Other
   
686
     
6
     
3.50
%
   
685
     
6
     
3.50
%
   
-
     
-
     
-
 
                                                                         
    Total securities available for sale
   
482,915
     
1,816
     
1.50
%
   
540,686
     
3,025
     
2.26
%
   
(1,209
)
   
222
     
(1,431
)
                                                                         
Federal funds sold and other short-term Investments
   
1,029,570
     
270
     
0.11
%
   
412,076
     
1,267
     
1.24
%
   
(997
)
   
5,166
     
(6,163
)
                                                                         
Held to maturity securities:
                                                                       
Mortgage backed securities and collateralized mortgage obligations-residential
   
13,273
     
123
     
3.70
%
   
18,144
     
175
     
3.86
%
   
(52
)
   
(45
)
   
(7
)
                                                                         
     Total held to maturity securities
   
13,273
     
123
     
3.70
%
   
18,144
     
175
     
3.86
%
   
(52
)
   
(45
)
   
(7
)
                                                                         
Federal Reserve Bank and Federal Home Loan Bank stock
   
5,506
     
69
     
5.01
%
   
9,183
     
82
     
3.57
%
   
(13
)
   
(138
)
   
125
 
                                                                         
Commercial loans
   
212,781
     
2,945
     
5.54
%
   
198,047
     
2,542
     
5.13
%
   
403
     
196
     
207
 
Residential mortgage loans
   
3,789,256
     
34,852
     
3.69
%
   
3,601,728
     
36,461
     
4.05
%
   
(1,609
)
   
9,054
     
(10,663
)
Home equity lines of credit
   
238,379
     
2,259
     
3.84
%
   
265,461
     
2,868
     
4.35
%
   
(609
)
   
(285
)
   
(324
)
Installment loans
   
8,795
     
161
     
7.41
%
   
10,717
     
192
     
7.20
%
   
(31
)
   
(65
)
   
34
 
                                                                         
Loans, net of unearned income
   
4,249,211
     
40,217
     
3.80
%
   
4,075,953
     
42,063
     
4.13
%
   
(1,846
)
   
8,900
     
(10,746
)
                                                                         
Total interest earning assets
   
5,780,475
     
42,495
     
2.95
%
   
5,056,042
     
46,612
     
3.69
%
   
(4,117
)
   
14,105
     
(18,222
)
                                                                         
Allowance for loan losses
   
(49,945
)
                   
(44,520
)
                                       
Cash & non-interest earning assets
   
199,769
                     
193,619
                                         
                                                                         
Total assets
 
$
5,930,299
                     
5,205,141
                                         
                                                                         
                                                                         
Liabilities and shareholders' equity
                                                                       
                                                                         
Deposits:
                                                                       
Interest bearing checking accounts
 
$
1,084,572
     
52
     
0.02
%
 
$
871,153
   
$
16
     
0.01
%
   
36
     
6
     
30
 
Money market accounts
   
725,570
     
283
     
0.16
%
   
614,201
     
1,096
     
0.72
%
   
(813
)
   
1,144
     
(1,957
)
Savings
   
1,315,049
     
159
     
0.05
%
   
1,116,558
     
233
     
0.08
%
   
(74
)
   
212
     
(286
)
Time deposits
   
1,261,963
     
1,666
     
0.54
%
   
1,369,914
     
6,391
     
1.88
%
   
(4,725
)
   
(469
)
   
(4,256
)
                                                                         
Total interest bearing deposits
   
4,387,154
     
2,160
     
0.20
%
   
3,971,826
     
7,736
     
0.78
%
   
(5,576
)
   
893
     
(6,469
)
Short-term borrowings
   
223,807
     
228
     
0.41
%
   
153,668
     
322
     
0.84
%
   
(94
)
   
580
     
(674
)
                                                                         
Total interest bearing liabilities
   
4,610,961
     
2,388
     
0.21
%
   
4,125,494
     
8,058
     
0.79
%
   
(5,670
)
   
1,473
     
(7,143
)
                                                                         
Demand deposits
   
673,428
                     
458,476
                                         
Other liabilities
   
75,143
                     
79,003
                                         
Shareholders' equity
   
570,767
                     
542,168
                                         
 
                                                                       
Total liabilities and shareholders' equity
 
$
5,930,299
                   
$
5,205,141
                                         
                                                                         
Net interest income , tax equivalent
           
40,107
                     
38,554
           
$
1,553
     
12,632
     
(11,079
)
                                                                         
Net interest spread
                   
2.74
%
                   
2.91
%
                       
                                                                         
Net interest margin (net interest income to total interest earning assets)
                   
2.78
%
                   
3.05
%
                       
                                                                         
Tax equivalent adjustment
           
-
                     
(1
)
                               
                                                                         
Net interest income 
           
40,107
                     
38,553
                                 

58

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

As detailed in the Annual Report on Form 10-K as of December 31, 2020, 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, 2021 and 2020, 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 2021, the Company had an average balance of Federal Funds sold and other short-term investments of $1.0 billion compared to $412.1 million in the first quarter of 2020.  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.

59

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

PART II
OTHER INFORMATION

Item 1.
Legal Proceedings

None.

Item 1A.
Risk Factors

There were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2020.

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, 2021:

Issuer Purchases of Common Shares
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, 2021 through January 31, 2021
             -
 N/A
                              -
                              -
February 1, 2021 through February 28, 2021
             -
 N/A
                              -
                              -
March 1, 2021 through March 31, 2021
             -
 N/A
                              -
                              -
 
 
 
 
 
Total
             -
 N/A
                              -
                              -

(1)
On February 18, 2021 the Company’s Board of Directors authorized another share repurchase program of up to 2,000,000 shares, or approximately 2% of its currently outstanding common stock. If TrustCo’s previous announced reverse stock split is consummated, the then remaining number of shares subject to the repurchase program would be proportionately adjusted.  The Company did not make any repurchases under this authorization during the three months ended March 31, 2021.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety

None.

60

Item 5.
Other Information

None.

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

61

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 7, 2021
 


62
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