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,September 30, 2017Commission 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'sRegistrant’s telephone number, including area code: 
(518) 377‑3311

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

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

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

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

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

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

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

Common Stock 
Number of Shares Outstanding
as of April 30,October 31, 2017
$1 Par Value 95,997,08296,107,596
 
TrustCo Bank Corp NY

INDEX

Part I.FINANCIAL INFORMATIONPAGE NO.
 Item 1.Consolidated Interim Financial Statements (Unaudited):
    
  
Consolidated Statements of Income for the three month and nine month periods ended March 31,September 30, 2017 and 2016
3
    
  
Consolidated Statements of Comprehensive Income for the three month and nine month periods ended March 31,September 30, 2017 and 2016
4
    
  
Consolidated Statements of Financial Condition as of March 31,September 30, 2017 and December 31, 2016
5
    
  
Consolidated Statements of Changes in Shareholders’ Equity for the threenine month periods ended March 31,September 30, 2017 and 2016
6
    
  
Consolidated Statements of Cash Flows for the threenine month periods ended March 31,September 30, 2017 and 2016
7
    
  
Notes to Consolidated Interim Financial Statements
8 – 348–37
    
  
Report of Independent Registered Public Accounting Firm
3538
    
 Item 2.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
36-5539-60
    
 Item 3.
Quantitative and Qualitative Disclosures About Market Risk
5661
   
 Item 4.
Controls and Procedures
5661
    
 Part II.OTHER INFORMATION 
    
 Item 1.
Legal Proceedings
5762
    
 Item 1A.
Risk Factors
5762
    
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
5762
    
 Item 3.
Defaults Upon Senior Securities
5762
    
 Item 4.
Mine Safety
5762
    
 Item 5.
Other Information
5762
    
 Item 6.
Exhibits
5762
 
2
Index
TRUSTCO BANK CORP NY
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)

 
Three Months Ended
March 31,
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2017  2016  2017  2016  2017  2016 
                  
Interest and dividend income:                  
Interest and fees on loans $36,044   35,605  $37,513   36,171   110,219   107,428 
Interest and dividends on securities available for sale:                        
U. S. government sponsored enterprises  595   255   465   408   1,667   1,067 
State and political subdivisions  12   14   6   13   29   40 
Mortgage-backed securities and collateralized mortgage obligations-residential  1,958   2,116   1,815   1,829   5,717   6,114 
Corporate bonds  151   -   153   97   458   97 
Small Business Administration-guaranteed participation securities  415   476   380   445   1,189   1,371 
Mortgage-backed securities and collateralized mortgage obligations-commercial  23   36   22   36   66   110 
Other securities  4   4   4   4   12   12 
Total interest and dividends on securities available for sale  3,158   2,901   2,845   2,832   9,138   8,811 
                        
Interest on held to maturity securities:                        
Mortgage-backed securities and collateralized mortgage obligations-residential  316   402   276   347   888   1,123 
Corporate bonds  154   154   102   156   410   464 
Total interest on held to maturity securities  470   556   378   503   1,298   1,587 
                        
Federal Reserve Bank and Federal Home Loan Bank stock  134   120   125   131   393   369 
Interest on federal funds sold and other short-term investments  1,246   844   1,927   866   4,900   2,542 
Total interest income  41,052   40,026   42,788   40,503   125,948   120,737 
                        
Interest expense:                        
Interest on deposits:                        
Interest-bearing checking  124   114   113   120   371   350 
Savings  430   604   435   504   1,300   1,712 
Money market deposit accounts  466   496   469   463   1,403   1,426 
Time deposits  2,283   2,373   2,247   2,468   6,711   7,301 
Interest on short-term borrowings  349   257   345   281   1,043   800 
Total interest expense  3,652   3,844   3,609   3,836   10,828   11,589 
                       
Net interest income  37,400   36,182   39,179   36,667   115,120   109,148 
Provision for loan losses  600   800   550   750   1,700   2,350 
Net interest income after provision for loan losses  36,800   35,382   38,629   35,917   113,420   106,798 
                       
Noninterest income:                       
Trustco financial services income  1,858   1,605   1,844   1,347   5,127   4,464 
Fees for services to customers  2,637   2,661   2,767   2,664   8,201   8,062 
Net gain on securities transactions  -   -   -   668 
Other  232   306   243   718   757   1,306 
Total noninterest income  4,727   4,572   4,854   4,729   14,085   14,500 
                       
Noninterest expenses:                       
Salaries and employee benefits  10,210   9,003   10,360   8,995   30,129   26,932 
Net occupancy expense  4,109   4,088   4,027   3,887   12,403   11,893 
Equipment expense  1,556   1,514   1,669   1,596   4,653   4,950 
Professional services  1,928   2,146   1,679   1,959   5,570   6,203 
Outsourced services  1,500   1,551   1,650   1,465   4,650   4,441 
Advertising expense  713   729   699   489   2,019   1,788 
FDIC and other insurance  1,047   1,990   1,018   1,127   3,077   5,066 
Other real estate expense, net  499   519 
Other real estate expense (income), net  275   895   770   1,837 
Other  2,457   1,899   2,149   2,636   7,187   7,352 
Total noninterest expenses  24,019   23,439   23,526   23,049   70,458   70,462 
                       
Income before taxes  17,508   16,515   19,957   17,597   57,047   50,836 
Income taxes  6,561   6,106   7,361   6,667   21,264   19,033 
                       
Net income $10,947   10,409  $12,596   10,930   35,783   31,803 
                       
Net income per share:                       
- Basic $0.114   0.109  $0.131   0.114   0.373   0.333 
                       
- Diluted $0.114   0.109  $0.131   0.114   0.372   0.333 

See accompanying notes to unaudited consolidated interim financial statements.
 
3
Index
TRUSTCO BANK CORP NY
Consolidated Statements of Comprehensive Income (Unaudited)
(dollars in thousands)

 
Three Months Ended
March 31
  
Three Months Ended
September 30
  
Nine Months Ended
September 30
 
 2017  2016  2017  2016  2017  2016 
                  
Net income $10,947   10,409  $12,596   10,930   35,783   31,803 
                        
Net unrealized holding gain on securities available for sale  1,179   8,035   938   (125)  5,460   12,475 
Reclassification adjustments for net gain recognized in income  -   -   -   (668)
Tax effect  (472)  (3,214)  (376)  50   (2,185)  (4,723)
                        
Net unrealized gain on securities available for sale, net of tax  707   4,821   562   (75)  3,275   7,084 
                        
Amortization of net actuarial (gain) loss  (63)  33 
Amortization of net actuarial gain  (72)  (8)  (208)  (25)
Amortization of prior service cost  23   23   23   22   68   67 
Tax effect  16   (23)  20   (6)  56   (17)
Amortization of net actuarial (gain) loss and prior service cost on pension and postretirement plans, net of tax  (24)  33 
Amortization of net actuarial gain and prior service cost on pension and postretirement plans, net of tax  (29)  8   (84)  25 
                        
Other comprehensive income, net of tax  683   4,854   533   (67)  3,191   7,109 
Comprehensive income $11,630   15,263  $13,129   10,863   38,974   38,912 

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

 March 31, 2017  December 31, 2016  September 30, 2017  December 31, 2016 
ASSETS: (Unaudited)  (Audited)  (Unaudited)  (Audited) 
            
Cash and due from banks $41,352   48,719  $41,598   48,719 
               
Federal funds sold and other short term investments  641,839   658,555   582,599   658,555 
Total cash and cash equivalents  683,191   707,274   624,197   707,274 
              
Securities available for sale  647,560   620,360   580,430   620,360 
                
Held to maturity securities (fair value 2017 $45,015; 2016 $47,526)  43,270   45,490 
Held to maturity securities (fair value 2017 $30,731; 2016 $47,526)  29,268   45,490 
                
Federal Reserve Bank and Federal Home Loan Bank stock  9,579   9,579   8,779   9,579 
              
Loans, net of deferred net costs  3,448,936   3,430,586   3,578,282   3,430,586 
Less:              
Allowance for loan losses  44,048   43,890   44,082   43,890 
Net loans  3,404,888   3,386,696   3,534,200   3,386,696 
                
Bank premises and equipment, net  35,175   35,466   35,028   35,466 
Other assets  63,080   63,941   58,373   63,941 
              
Total assets $4,886,743   4,868,806  $4,870,275   4,868,806 
              
LIABILITIES:              
Deposits:              
Demand $373,930   377,755  $397,623   377,755 
Interest-bearing checking  838,936   815,534   862,067   815,534 
Savings accounts  1,287,802   1,271,449   1,265,229   1,271,449 
Money market deposit accounts  583,909   571,962   564,557   571,962 
Time deposits  1,113,892   1,159,463   1,075,886   1,159,463 
Total deposits  4,198,469   4,196,163   4,165,362   4,196,163 
              
Short-term borrowings  220,946   209,406   216,508   209,406 
Accrued expenses and other liabilities  28,628   30,551   33,477   30,551 
              
Total liabilities $4,448,043   4,436,120  $4,415,347   4,436,120 
              
SHAREHOLDERS' EQUITY:       
Capital stock par value $1; 150,000,000 shares authorized; 99,492,882 and 99,214,382 shares issued at March 31, 2017 and December 31, 2016, respectively  99,493   99,214 
SHAREHOLDERS’ EQUITY:       
Capital stock par value $1; 150,000,000 shares authorized; 99,561,882 and 99,214,382 shares issued at September 30, 2017 and December 31, 2016, respectively  99,562   99,214 
Surplus  172,628   171,425   172,712   171,425 
Undivided profits  206,173   201,517   218,401   201,517 
Accumulated other comprehensive loss, net of tax  (5,568)  (6,251)  (3,060)  (6,251)
Treasury stock at cost - 3,575,636 and 3,434,205 shares at March 31, 2017 and December 31, 2016, respectively  (34,026)  (33,219)
Treasury stock at cost - 3,454,286 and 3,434,205 shares at        
September 30, 2017 and December 31, 2016, respectively  (32,687)  (33,219)
              
Total shareholders' equity  438,700   432,686 
Total shareholders’ equity  454,928   432,686 
                
Total liabilities and shareholders' equity $4,886,743   4,868,806 
Total liabilities and shareholders’ equity $4,870,275   4,868,806 

See accompanying notes to unaudited consolidated interim financial statements.
 
5
Index
TRUSTCO BANK CORP NY
Consolidated Statements of Changes in Shareholders'Shareholders’ Equity (Unaudited)
(dollars in thousands, except per share data)

 
Capital
Stock
  Surplus  
Undivided
Profits
  
Accumulated
Other
Comprehensive
(Loss) Income
  
Treasury
Stock
  Total 
 
Capital
Stock
  Surplus  
Undivided
Profits
  
Accumulated
Other
Comprehensive
(Loss) Income
  
Treasury
Stock
  Total                   
Beginning balance, January 1, 2016 $98,973   171,443   184,009   (4,781)  (36,334)  413,310  $98,973   171,443   184,009   (4,781)  (36,334)  413,310 
Net income  -   -   10,409   -   -   10,409   -   -   31,803   -   -   31,803 
Other comprehensive income, net of tax  -   -   -   4,854   -   4,854   -   -   -   7,109   -   7,109 
Cash dividend declared, $.0656 per share  -   -   (6,259)  -   -   (6,259)
Sale of treasury stock (106,351 shares)  -   (386)  -   -   1,041   655 
Cash dividend declared, $.1969 per share  -   -   (18,799)  -   -   (18,799)
Stock options exercised (147,630 shares)  148   612   -   -   -   760 
Purchase of treasury stock (111,906 shares)  -   -   -   -   (701)  (701)
Sale of treasury stock (316,337 shares)  -   (1,130)  -   -   3,088   1,958 
Stock based compensation expense  -   56   -   -   -   56   -   168   -   -   -   168 
                                                
Ending balance, March 31, 2016 $98,973   171,113   188,159   73   (35,293)  423,025 
Ending balance, September 30, 2016 $99,121   171,093   197,013   2,328   (33,947)  435,608 
                                                
Beginning balance, January 1, 2017 $99,214   171,425   201,517   (6,251)  (33,219)  432,686  $99,214   171,425   201,517   (6,251)  (33,219)  432,686 
Net income  -   -   10,947   -   -   10,947   -   -   35,783   -   -   35,783 
Other comprehensive income, net of tax  -   -   -   683   -   683   -   -   -   3,191   -   3,191 
Cash dividend declared, $.0656 per share  -   -   (6,291)  -   -   (6,291)
Stock options exercised (278,500 shares)  279   1,224   -   -   -   1,503 
Purchase of treasury stock (213,356 shares)  -   -   -   -   (1,503)  (1,503)
Sale of treasury stock (71,925 shares)  -   (63)  -   -   696   633 
Cash dividend declared, $.1969 per share  -   -   (18,899)  -   -   (18,899)
Stock options exercised (347,500 shares)  348   1,510   -   -   -   1,858 
Purchase of treasury stock (251,646 shares)  -   -   -   -   (1,683)  (1,683)
Sale of treasury stock (231,750 shares)  -   (337)  -   -   2,215   1,878 
Stock based compensation expense  -   42   -   -   -   42   -   114   -   -   -   114 
                                                
Ending balance, March 31, 2017 $99,493   172,628   206,173   (5,568)  (34,026)  438,700 
Ending balance, September 30, 2017 $99,562   172,712   218,401   (3,060)  (32,687)  454,928 

See accompanying notes to unaudited consolidated interim financial statements.
 
6
Index
TRUSTCO BANK CORP NY
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)

 Three months ended March 31,  Nine months ended September 30, 
 2017  2016  2017  2016 
            
Cash flows from operating activities:            
Net income $10,947   10,409  $35,783   31,803 
                
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization  946   1,061   2,857   3,071 
Net gain on sale of other real estate owned  (191)  -   (897)  (281)
Writedown of other real estate owned  188   346   823   911 
Provision for loan losses  600   800   1,700   2,350 
Deferred tax expense (benefit)  368   (179)
Deferred tax expense  1,122   3,899 
Net amortization of securities  1,114   1,152   2,244   3,702 
Stock based compensation expense  42   56   114   168 
Net loss on sale of bank premises and equipment  -   3 
(Increase) decrease in taxes receivable  (411)  4,703 
Net loss on sale/retirement of bank premises and equipment  43   (480)
Net gain on sales of securities  -   (668)
Decrease in taxes receivable  2,748   2,320 
Decrease in interest receivable  328   264   257   (610)
(Decrease) increase in interest payable  (16)  48 
Decrease in interest payable  (56)  (5)
Increase in other assets  (997)  (632)  (2,214)  (4,844)
Decrease in accrued expenses and other liabilities  (1,602)  (1,912)
Increase (decrease) in accrued expenses and other liabilities  2,957   (297)
Total adjustments  369   5,710   11,698   9,236 
Net cash provided by operating activities  11,316   16,119   47,481   41,039 
                
Cash flows from investing activities:                
                
Proceeds from sales and calls of securities available for sale  20,770   48,913   109,123   205,312 
Proceeds from calls and maturities of held to maturity securities  2,220   2,891   16,222   8,435 
Purchases of securities available for sale  (47,905)  (31,121)  (65,977)  (250,554)
Proceeds from maturities of securities available for sale  -   550 
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock  (144)  (99)
Proceeds from redemption of Federal Reserve Bank and Federal Home Loan Bank stock  944   - 
Net increase in loans  (19,579)  (10,275)  (152,334)  (101,292)
Proceeds from dispositions of other real estate owned  1,867   1,461   4,593   4,860 
Proceeds from dispositions of bank premises and equipment  -   18   -   674 
Purchases of bank premises and equipment  (655)  (799)  (2,462)  (1,732)
Net cash (used in) provided by investing activities  (43,282)  11,088   (90,035)  (133,846)
                
Cash flows from financing activities:                
                
Net increase in deposits  2,306   42,110 
Net increase (decrease) in short-term borrowings  11,540   (21,698)
Net change in deposits  (30,801)  67,860 
Net change in short-term borrowings  7,102   (12,022)
Proceeds from exercise of stock options  1,503   -   1,858   760 
Stock based award tax withholding payments  (312)  - 
Proceeds from sale of treasury stock  633   655   1,878   1,958 
Purchases of treasury stock  (1,503)  -   (1,683)  (701)
Dividends paid  (6,284)  (6,252)  (18,877)  (18,776)
Net cash provided by financing activities  7,883   14,815   (40,523)  39,079 
Net (decrease) increase in cash and cash equivalents  (24,083)  42,022 
Net decrease in cash and cash equivalents  (83,077)  (53,728)
Cash and cash equivalents at beginning of period  707,274   718,156   707,274   718,156 
Cash and cash equivalents at end of period $683,191   760,178  $624,197   664,428 
                
Supplemental Disclosure of Cash Flow Information:                
Cash paid during the year for:                
Interest paid $3,668   3,796  $10,884   11,594 
Income taxes paid  6,150   1,360   18,508   16,944 
Other non cash items:                
Transfer of loans to other real estate owned  787   1,036   3,130   3,803 
Increase in dividends payable  7   7   22   23 
Change in unrealized gain on securities available for sale-gross of deferred taxes  1,179   8,035   5,460   11,807 
Change in deferred tax effect on unrealized gain on securities available for sale  (472)  (3,214)  (2,185)  (4,723)
Amortization of net actuarial (gain) loss and prior service cost on pension and postretirement plans  (40)  56   (140)  42 
Change in deferred tax effect of amortization of net actuarial (gain) loss and prior service cost on pension and postretirement plans  16   (23)  56   (17)

See accompanying notes to unaudited consolidated interim financial statements.
 
7
Index
(1)
(1) Financial Statement Presentation

The unaudited Consolidated Interim Financial Statements of TrustCo Bank Corp NY (the “Company” or “TrustCo”) include the accounts of the subsidiaries after elimination of all significant intercompany accounts and transactions.  Prior period amounts are reclassified when necessary to conform to the current period presentation.  The net income reported for the three and nine months ended March 31,September 30, 2017 is not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or any interim periods.  These financial statements consider events that occurred through the date of filing.

In the opinion of the management of the Company, the accompanying unaudited Consolidated Interim Financial Statements contain all recurring adjustments necessary to present fairly the financial position as of March 31, 2017, the results of operations and cash flows for the three months ended March 31, 2017 and 2016.fair presentation.  The accompanying Consolidated Interim Financial Statements should be read in conjunction with the Company’s year-end Consolidated Financial Statements, including notes thereto, which are included in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2016.  The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States.

Effective January 1, 2017, the Company adopted FASB issued ASU No. 2016-09, “Improvement to Employee Share-Based Payment Accounting” which amended existing guidance to simplify aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2016. The adoption of these amendments did not have a material impact on the Consolidated Interim Financial Statements.

(2)(2) Earnings Per Share

The Company computes earnings per share in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share (“ASC 260”).   A reconciliation of the component parts of earnings per share for the three and nine months ended March 31,September 30, 2017 and 2016 is as follows:

(in thousands,except per share data) 
For the three months ended
March 31:
 
(in thousands, except per share data) 
For the three months ended
September 30:
  
For the nine months ended
September 30:
 
 2017  2016  2017  2016  2017  2016 
Net income $10,947   10,409  $12,596   10,930  $35,783   31,803 
Weighted average common shares  95,879   95,365   96,102   95,603   95,997   95,486 
Stock Options  108   47   103   119   94   86 
Weighted average common shares including potential dilutive shares  95,987   95,412   96,205   95,722   96,091   95,572 
                        
Basic EPS $0.114   0.109  $0.131   0.114  $0.373   0.333 
                        
Diluted EPS $0.114   0.109  $0.131   0.114  $0.372   0.333 
 
8
Index
For the three and nine months ended March 31,September 30, 2017, the weighted average number of antidilutive stock options excluded from diluted earnings per share was approximately 553 thousand.995 thousand and 1.4 million.  For the three and nine months ended March 31,September 30, 2016 the weighted average number of antidilutive stock options excluded from diluted earnings per share was approximately 1.6 million.  The stock options are antidilutive because the strike price is greater than the average fair value of the Company’s common stock for the periods presented.

(3)(3) Benefit Plans

The table below outlines the components of the Company'sCompany’s net periodic benefit recognized during the three and nine months ended March 31,September 30, 2017 and 2016 for its pension and other postretirement benefit plans:

 For the three months ended March 31,  For the three months ended September 30, 
 Pension Benefits  Other Postretirement Benefits  Pension Benefits  Other Postretirement Benefits 
(dollars in thousands) 2017  2016  2017  2016  2017  2016  2017  2016 
                        
Service cost $11   15   28   32  $11   15   26   32 
Interest cost  329   337   56   61   326   343   54   61 
Expected return on plan assets  (686)  (644)  (191)  (181)  (686)  (669)  (190)  (180)
Amortization of net loss (gain)  23   87   (86)  (54)  17   46   (89)  (54)
Amortization of prior service cost  -   -   23   23   -   -   23   22 
Net periodic benefit $(323)  (205)  (170)  (119) $(332)  (265)  (176)  (119)
  For the nine months ended September 30, 
  Pension Benefits  Other Postretirement Benefits 
(dollars in thousands)  2017   2016   2017   2016 
                 
Service cost $33   46   77   96 
Interest cost  977   1,029   164   184 
Expected return on plan assets  (2,058)  (1,994)  (571)  (540)
Amortization of net loss (gain)  50   138   (258)  (163)
Amortization of prior service cost  -   -   68   67 
Net periodic benefit $(998)  (781)  (520)  (356)
The Company does not expect to make contributions to its pension and postretirement benefit plans in 2017.  As of March 31,September 30, 2017, no contributions have been made, however, this decision is reviewed each quarter and is subject to change based upon market conditions.

Since 2003, the Company has not subsidized retiree medical insurance premiums.  However, it continues to provide postretirement medical benefits to a limited number of current and retired executives in accordance with the terms of their employment contracts.
 
9
Index
(4)(4) Investment Securities

(a) Securities available for sale

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

(dollars in thousands) March 31, 2017  September 30, 2017 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
                        
U.S. government sponsored enterprises $165,026   4   2,689   162,341  $125,024   93   1,459   123,658 
State and political subdivisions  873   14   -   887   521   12   -   533 
Corporate bonds  40,785   -   173   40,612   40,442   -   61   40,381 
Mortgage backed securities and collateralized mortgage obligations - residential  362,665   132   5,114   357,683   338,519   164   3,152   335,531 
Small Business Administration-guaranteed participation securities  77,567   -   2,138   75,429 
Small Business Administration- guaranteed participation securities  71,169   -   1,351   69,818 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,045   -   122   9,923   9,875   -   51   9,824 
Other  650   -   -   650   650   -   -   650 
Total debt securities  657,611   150   10,236   647,525   586,200   269   6,074   580,395 
Equity securities  35   -   -   35   35   -   -   35 
Total securities available for sale $657,646   150   10,236   647,560  $586,235   269   6,074   580,430 

(dollars in thousands) December 31, 2016 December 31, 2016 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
                        
U.S. government sponsored enterprises $119,887   -   2,621   117,266  $119,887   -   2,621   117,266 
State and political subdivisions  873   13   -   886   873   13   -   886 
Mortgage backed securities and collateralized mortgage obligations - residential  378,068   123   5,883   372,308   378,068   123   5,883   372,308 
Corporate bonds  40,956   -   251   40,705   40,956   -   251   40,705 
Small Business Administration-guaranteed participation securities  81,026   -   2,527   78,499 
Small Business Administration- guaranteed participation securities  81,026   -   2,527   78,499 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,130   -   119   10,011   10,130   -   119   10,011 
Other  650   -   -   650   650   -   -   650 
Total debt securities  631,590   136   11,401   620,325   631,590   136   11,401   620,325 
Equity securities  35   -   -   35   35   -   -   35 
Total securities available for sale $631,625   136   11,401   620,360  $631,625   136   11,401   620,360 
 
10
Index
The following table distributes the debt securities included in the available for sale portfolio as of March 31,September 30, 2017, based on the securities’ final maturity.   Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty.  Securities not due at a single maturity date are presented separately:
(dollars in thousands) 
Amortized
Cost
  
Fair
Value
 
Due in one year or less $50,331   50,283 
Due in one year through five years  106,105   104,749 
Due after five years through ten years  10,201   10,190 
Due after ten years  -   - 
Mortgage backed securities and collateralized mortgage obligations - residential  338,519   335,531 
Small Business Administration- guaranteed participation securities  71,169   69,818 
Mortgage backed securities and collateralized mortgage obligations - commercial  9,875   9,824 
  $586,200   580,395 

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

(dollars in thousands) September 30, 2017 
  
Less than
12 months
  
12 months
or more
  
Total
 
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
 
U.S. government sponsored enterprises $24,887   113   88,544   1,346   113,431   1,459 
Corporate bonds  -   -   40,381   61   40,381   61 
Mortgage backed securities and collateralized mortgage obligations - residential  228,925   1,972   82,423   1,180   311,348   3,152 
Small Business Administration- guaranteed participation securities  20,070   270   49,748   1,081   69,818   1,351 
Mortgage backed securities and collateralized mortgage obligations - commercial  -   -   9,824   51   9,824   51 
                         
Total $273,882   2,355   270,920   3,719   544,802   6,074 
11
Index
(dollars in thousands) December 31, 2016 
  
Less than
12 months
  
12 months
or more
  
Total
 
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
 
                  
U.S. government sponsored enterprises $102,266   2,621   -   -   102,266   2,621 
Corporate bonds  40,705   251   -   -   40,705   251 
Mortgage backed securities and collateralized mortgage obligations - residential  359,622   5,766   4,713   117   364,335   5,883 
Small Business Administration- guaranteed participation securities  64,560   1,960   13,940   567   78,500   2,527 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,011   119   -   -   10,011   119 
                         
Total $577,164   10,717   18,653   684   595,817   11,401 

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

(dollars in thousands) Three months ended September 30, 
  2017  2016 
       
Proceeds from sales $-   - 
Proceeds from calls  35,554   70,762 
Gross realized gains  -   - 
Gross realized losses  -   - 

(dollars in thousands) Nine months ended September 30, 
  2017  2016 
       
Proceeds from sales $-   44,829 
Proceeds from calls  109,123   160,483 
Gross realized gains  -   668 
Gross realized losses  -   - 

There were no sales of securities available for sale during the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, income tax expense recognized on net gains on sales of securities available for sale was approximately $267 thousand.
12
Index
(b) Held to maturity securities

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

(dollars in thousands) September 30, 2017 
  
Amortized
Cost
  
Gross
Unrecognized
Gains
  
Gross
Unrecognized
Losses
  
Fair
Value
 
             
Mortgage backed securities and collateralized mortgage obligations - residential $29,268   1,463   -   30,731 
Total held to maturity $29,268   1,463   -   30,731 
(dollars in thousands) December 31, 2016 
  
Amortized
Cost
  
Gross
Unrecognized
Gains
  
Gross
Unrecognized
Losses
  
Fair
Value
 
                 
Mortgage backed securities and collateralized mortgage obligations - residential $35,500   1,736   -   37,236 
Corporate bonds  9,990   300   -   10,290 
Total held to maturity $45,490   2,036   -   47,526 

The following table distributes the debt securities included in the held to maturity portfolio as of September 30, 2017, based on the securities’ final maturity.   Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty.  Securities not due at a single maturity date are presented separately:

(dollars in thousands) 
Amortized
Cost
  
Fair
Value
 
Due in one year or less $30,044   29,980 
Due in one year through five years  142,230   140,094 
Due after five years through ten years  35,060   34,416 
Due after ten years  -   - 
Mortgage backed securities and collateralized mortgage obligations - residential  362,665   357,683 
Small Business Administration-guaranteed participation securities  77,567   75,429 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,045   9,923 
  $657,611   647,525 

(dollars in thousands) 
Amortized
Cost
  
Fair
Value
 
Mortgage backed securities and collateralized mortgage obligations - residential  29,268   30,731 
  $29,268   30,731 
Gross unrealized losses on securities available for sale and the related fair values aggregated by the length of time that individual securities have been in an unrealized loss position, were as follows:

(dollars in thousands) March 31, 2017 
  
Less than
12 months
  
12 months
or more
  Total 
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
 
U.S. government sponsored enterprises $142,187   2,689   -   -   142,187   2,689 
Mortgage backed securities and collateralized mortgage obligations - residential  345,977   5,004   4,466   110   350,443   5,114 
Corporate bonds  40,612   173   -   -   40,612   173 
Small Business Administration-guaranteed participation securities  61,474   1,590   13,955   548   75,429   2,138 
Mortgage backed securities and collateralized mortgage obligations - commercial  9,923   122   -   -   9,923   122 
Total $600,173   9,578   18,421   658   618,594   10,236 
11
Index
(dollars in thousands) December 31, 2016 
  
Less than
12 months
  
12 months
or more
  Total 
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
 
U.S. government sponsored enterprises $102,266   2,621   -   -   102,266   2,621 
Mortgage backed securities and collateralized mortgage obligations - residential  359,622   5,766   4,713   117   364,335   5,883 
Corporate bonds  40,705   251   -   -   40,705   251 
Small Business Administration-guaranteed participation securities  64,560   1,960   13,940   567   78,500   2,527 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,011   119   -   -   10,011   119 
Total $577,164   10,717   18,653   684   595,817   11,401 

The proceeds from sales and calls of securities available for sale, gross realized gains and gross realized losses from sales and calls during the three months ended March 31, 2017 and 2016 are as follows:

(dollars in thousands) Three months ended March 31, 
  2017  2016 
Proceeds from sales $-   - 
Proceeds from calls  20,770   48,913 
Gross realized gains  -   - 
Gross realized losses  -   - 

There were no sales of securities available for sale during the three months ended March 31, 2017 and 2016.
12
Index
(b) Held to maturity securities

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

(dollars in thousands) March 31, 2017 
  
Amortized
Cost
  
Gross
Unrecognized
Gains
  
Gross
Unrecognized
Losses
  
Fair
Value
 
             
Mortgage backed securities and collateralized mortgage obligations - residential $33,276   1,557   -   34,833 
Corporate bonds  9,994   188   -   10,182 
Total held to maturity $43,270   1,745   -   45,015 

(dollars in thousands) December 31, 2016 
  
Amortized
Cost
  
Gross
Unrecognized
Gains
  
Gross
Unrecognized
Losses
  
Fair
Value
 
             
Mortgage backed securities and collateralized mortgage obligations - residential $35,500   1,736   -   37,236 
Corporate bonds  9,990   300   -   10,290 
Total held to maturity $45,490   2,036   -   47,526 

The following table distributes the debt securities included in the held to maturity portfolio as of March 31, 2017, based on the securities’ final maturity.   Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty.  Securities not due at a single maturity date are presented separately:

(dollars in thousands) 
Amortized
Cost
  
Fair
Value
 
Due in one year or less $9,994   10,182 
Mortgage backed securities and collateralized mortgage obligations - residential  33,276   34,833 
  $43,270   45,015 

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

There were no sales or transfers of held to maturity securities during the three and nine months ended March 31,September 30, 2017 and 2016.
13
Index

(c) Other-Than-Temporary Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio by type and applying the appropriate OTTI model. Investment securities classified as available for sale or held to maturity are evaluated for OTTI under FASB ASC Topic 320, Investments – Debt and Equity Securities (“ASC 320”).

13
Index
In determining OTTI under the ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether any other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

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

As of March 31,September 30, 2017, the Company’s security portfolioportfolios included certain securities which were in an unrealized loss position.  The declines in fair value are attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31,September 30, 2017.
 
14
Index
(5)(5) Loans and Allowance for Loan Losses

The following table presents the recorded investment in loans by loan class:
 March 31, 2017  September 30, 2017 
(dollars in thousands) 
New York and
other states*
  Florida  Total  
New York and
other states*
  Florida  Total 
Commercial:                  
Commercial real estate $150,683   11,375   162,058  $152,228   12,980   165,208 
Other  22,048   345   22,393   21,754   319   22,073 
Real estate mortgage - 1 to 4 family:                        
First mortgages  2,167,971   688,426   2,856,397   2,251,152   742,697   2,993,849 
Home equity loans  61,913   11,618   73,531   64,556   12,565   77,121 
Home equity lines of credit  279,986   46,294   326,280   267,143   44,610   311,753 
Installment  6,447   1,830   8,277   6,796   1,482   8,278 
Total loans, net $2,689,048   759,888   3,448,936  $2,763,629   814,653   3,578,282 
Less: Allowance for loan losses          44,048           44,082 
Net loans         $3,404,888          $3,534,200 
            
  December 31, 2016 
(dollars in thousands)
 
 
New York and
other states*
  Florida  
Total
 
Commercial:       
 
Commercial real estate $151,366   
12,243
   
163,609
 
Other  27,539   46   27,585 
Real estate mortgage - 1 to 4 family:            
First mortgages  2,158,904   665,183   2,824,087 
Home equity loans  60,892   10,754   71,646 
Home equity lines of credit  286,586   48,255   334,841 
Installment  7,048   1,770   8,818 
Total loans, net $2,692,335   738,251   3,430,586 
Less: Allowance for loan losses          43,890 
Net loans         $3,386,696 

*Includes New York, New Jersey, Vermont and Massachusetts

At March 31,September 30, 2017 and December 31, 2016, the Company had approximately $23.9$27.6 million and $24.8$24.8 million of real estate construction loans, respectively.  Of the $23.9$27.6 million in real estate construction loans at March 31,September 30, 2017, approximately $14.3$17.2 million are secured by secondfirst mortgages to residential borrowers while approximately $9.6$10.4 million were to commercial borrowers for residential construction projects. Of the $24.8$24.8 million in real estate construction loans at December 31, 2016, approximately $16.3 million are secured by secondfirst mortgages to residential borrowers while approximately $8.5$8.5 million were to commercial borrowers for residential construction projects. The vast majority of construction loans are in the Company’s New York market.

TrustCo lends in the geographic territory of its branch locations in New York, Florida, Massachusetts, New Jersey and Vermont. Although the loan portfolio is diversified, a portion of its debtors’ ability to repay depends significantly on the economic conditions prevailing in the respective geographic territory.
 
15
Index
The following tables present the recorded investment in non-accrual loans by loan class:

 March 31, 2017  September 30, 2017 
(dollars in thousands) 
New York and
other states
  Florida  Total  
New York and
other states
  Florida  Total 
Loans in non-accrual status:                  
Commercial:                  
Commercial real estate $1,758   -   1,758  $1,596   -   1,596 
Other  100   -   100   100   -   100 
Real estate mortgage - 1 to 4 family:                        
First mortgages  19,445   1,440   20,885   17,048   1,764   18,812 
Home equity loans  46   -   46   35   -   35 
Home equity lines of credit  3,281   272   3,553   3,843   131   3,974 
Installment  41   -   41   30   -   30 
Total non-accrual loans  24,671   1,712   26,383   22,652   1,895   24,547 
Restructured real estate mortgages - 1 to 4 family  41   -   41   40   -   40 
Total nonperforming loans $24,712   1,712   26,424  $22,692   1,895   24,587 
  December 31, 2016 
 (dollars in thousands) 
New York and
other states
  Florida  Total 
Loans in non-accrual status:            
Commercial:            
Commercial real estate $1,843   -   1,843 
Other  -   -   - 
Real estate mortgage - 1 to 4 family:            
First mortgages  17,727   1,659   19,386 
Home equity loans  95   -   95 
Home equity lines of credit  3,376   270   3,646 
Installment  48   -   48 
Total non-accrual loans  23,089   1,929   25,018 
Restructured real estate mortgages - 1 to 4 family  42   -   42 
Total nonperforming loans $23,131   1,929   25,060 

The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu). As of March 31,September 30, 2017 and December 31, 2016, other estate owned included $2.5$2.5 million and $3.5$3.5 million of residential foreclosed properties, respectively. In addition, non-accrualNon-accrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $12.6$13.3 million and $12.5$12.5 million as of March 31,September 30, 2017 and December 31, 2016, respectively.
 
16
Index
The following tables present the aging of the recorded investment in past due loans by loan class and by region as of March 31,September 30, 2017 and December 31, 2016 :2016:

New York and other states:
New York and other states:                  
 September 30, 2017 
(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90+
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                      
Commercial:                     
Commercial real estate $-   -   1,481   1,481   150,747   152,228 
Other  -   -   100   100   21,654   21,754 
Real estate mortgage - 1 to 4 family:                        
First mortgages  4,972   1,973   9,560   16,505   2,234,647   2,251,152 
Home equity loans  70   -   3   73   64,483   64,556 
Home equity lines of credit  337   167   2,235   2,739   264,404   267,143 
Installment  39   29   10   78   6,718   6,796 
                         
Total $5,418   2,169   13,389   20,976   2,742,653   2,763,629 

  March 31, 2017 
(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                   
Commercial:                  
Commercial real estate $270   -   1,626   1,896   148,787   150,683 
Other  -   -   100   100   21,948   22,048 
Real estate mortgage - 1 to 4 family:                        
First mortgages  2,614   1,185   10,573   14,372   2,153,599   2,167,971 
Home equity loans  5   3   22   30   61,883   61,913 
Home equity lines of credit  402   179   1,684   2,265   277,721   279,986 
Installment  20   8   22   50   6,397   6,447 
Total $3,311   1,375   14,027   18,713   2,670,335   2,689,048 

Florida:
Florida:                       
                        
(dollars in thousands)  
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90+
Days
Past Due
  
Total
30+ days
Past Due
  Current  
 
Total
Loans
 
                         
Commercial:                        
Commercial real estate $-   -   -   -   12,980   12,980 
Other  -   -   -   -   319   319 
Real estate mortgage - 1 to 4 family:                        
First mortgages  845   291   1,323   2,459   740,238   742,697 
Home equity loans  -   -   -   -   12,565   12,565 
Home equity lines of credit  -   -   -   -   44,610   44,610 
Installment  -   -   -   -   1,482   1,482 
                         
Total $845   291   1,323   2,459   812,194   814,653 

(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                   
Commercial:                  
Commercial real estate $-   -   -   -   11,375   11,375 
Other  -   -   -   -   345   345 
Real estate mortgage - 1 to 4 family:                        
First mortgages  1,656   393   571   2,620   685,806   688,426 
Home equity loans  -   10   -   10   11,608   11,618 
Home equity lines of credit  50   20   90   160   46,134   46,294 
Installment  12   7   -   19   1,811   1,830 
Total $1,718   430   661   2,809   757,079   759,888 

Total:
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 $-   -   1,481   1,481   163,727   165,208 
Other  -   -   100   100   21,973   22,073 
Real estate mortgage - 1 to 4 family:                        
First mortgages  5,817   2,264   10,883   18,964   2,974,885   2,993,849 
Home equity loans  70   -   3   73   77,048   77,121 
Home equity lines of credit  337   167   2,235   2,739   309,014   311,753 
Installment  39   29   10   78   8,200   8,278 
                         
Total $6,263   2,460   14,712   23,435   3,554,847   3,578,282 

(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 $270   -   1,626   1,896   160,162   162,058 
Other  -   -   100   100   22,293   22,393 
Real estate mortgage - 1 to 4 family:                        
First mortgages  4,270   1,578   11,144   16,992   2,839,405   2,856,397 
Home equity loans  5   13   22   40   73,491   73,531 
Home equity lines of credit  452   199   1,774   2,425   323,855   326,280 
Installment  32   15   22   69   8,208   8,277 
Total $5,029   1,805   14,688   21,522   3,427,414   3,448,936 
 
17
Index
New York and other states:
New York and other states:                  
  December 31, 2016 
(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90+
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                      
Commercial:                     
Commercial real estate $50   43   1,706   1,799   149,567   151,366 
Other  -   -   -   -   27,539   27,539 
Real estate mortgage - 1 to 4 family:                        
First mortgages  6,379   2,924   9,643   18,946   2,139,958   2,158,904 
Home equity loans  50   3   74   127   60,765   60,892 
Home equity lines of credit  685   111   1,839   2,635   283,951   286,586 
Installment  34   32   15   81   6,967   7,048 
                         
Total $7,198   3,113   13,277   23,588   2,668,747   2,692,335 

  December 31, 2016 
(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                   
Commercial:                  
Commercial real estate $50   43   1,706   1,799   149,567   151,366 
Other  -   -   -   -   27,539   27,539 
Real estate mortgage - 1 to 4 family:                        
First mortgages  6,379   2,924   9,643   18,946   2,139,958   2,158,904 
Home equity loans  50   3   74   127   60,765   60,892 
Home equity lines of credit  685   111   1,839   2,635   283,951   286,586 
Installment  34   32   15   81   6,967   7,048 
Total $7,198   3,113   13,277   23,588   2,668,747   2,692,335 

Florida:
Florida:                        
                         
                   
(dollars in thousands)  
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90+
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                         
Commercial:                        
Commercial real estate $-   -   -   -   12,243   12,243 
Other  -   -   -   -   46   46 
Real estate mortgage - 1 to 4 family:                        
First mortgages  1,942   69   1,255   3,266   661,917   665,183 
Home equity loans  19   -   -   19   10,735   10,754 
Home equity lines of credit  -   -   156   156   48,099   48,255 
Installment  30   6   -   36   1,734   1,770 
                         
Total $1,991   75   1,411   3,477   734,774   738,251 

(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                   
Commercial:                  
Commercial real estate $-   -   -   -   12,243   12,243 
Other  -   -   -   -   46   46 
Real estate mortgage - 1 to 4 family:                        
First mortgages  1,942   69   1,255   3,266   661,917   665,183 
Home equity loans  19   -   -   19   10,735   10,754 
Home equity lines of credit  -   -   156   156   48,099   48,255 
Installment  30   6   -   36   1,734   1,770 
Total $1,991   75   1,411   3,477   734,774   738,251 

Total:
Total:                        
    
                   
(dollars in thousands)  
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90+
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                         
Commercial:                        
Commercial real estate $50   43   1,706   1,799   161,810   163,609 
Other  -   -   -   -   27,585   27,585 
Real estate mortgage - 1 to 4 family:                        
First mortgages  8,321   2,993   10,898   22,212   2,801,875   2,824,087 
Home equity loans  69   3   74   146   71,500   71,646 
Home equity lines of credit  685   111   1,995   2,791   332,050   334,841 
Installment  64   38   15   117   8,701   8,818 
                         
Total $9,189   3,188   14,688   27,065   3,403,521   3,430,586 

(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                   
Commercial:                  
Commercial real estate $50   43   1,706   1,799   161,810   163,609 
Other  -   -   -   -   27,585   27,585 
Real estate mortgage - 1 to 4 family:                        
First mortgages  8,321   2,993   10,898   22,212   2,801,875   2,824,087 
Home equity loans  69   3   74   146   71,500   71,646 
Home equity lines of credit  685   111   1,995   2,791   332,050   334,841 
Installment  64   38   15   117   8,701   8,818 
Total $9,189   3,188   14,688   27,065   3,403,521   3,430,586 
 
18
Index
At March 31,September 30, 2017 and December 31, 2016, there were no loans that were 90 days past due and still accruing interest. As a result, non-accrual loans include all loans 90 days or more past due as well as certain loans less than 90 days past due that were placed on non-accrual status for reasons other than delinquent status. There are no commitments to extend further credit on non-accrual or restructured loans.

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

(dollars in thousands) For the three months ended March 31, 2017  For the three months ended September 30, 2017 
 Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total  Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total 
Balance at beginning of period $4,929   38,231   730   43,890  $4,596   38,871   695   44,162 
Loans charged off:                                
New York and other states*  72   430   41   543   -   747   65   812 
Florida  -   84   2   86   -   31   4   35 
Total loan chargeoffs  72   514   43   629   -   778   69   847 
                                
Recoveries of loans previously charged off:                                
New York and other states*  8   169   10   187   -   137   8   145 
Florida  -   -   -   -   -   72   -   72 
Total recoveries  8   169   10   187   -   209   8   217 
Net loans charged off  64   345   33   442   -   569   61   630 
Provision for loan losses  (55)  695   (40)  600   24   434   92   550 
Balance at end of period $4,810   38,581   657   44,048  $4,620   38,736   726   44,082 

(dollars in thousands) For the three months ended March 31, 2016  For the three months ended September 30, 2016 
 Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total  Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total 
Balance at beginning of period $4,491   39,753   518   44,762  $5,046   38,589   429   44,064 
Loans charged off:                                
New York and other states*  264   889   81   1,234   356   549   57   962 
Florida  -   84   16   100   -   2   3   5 
Total loan chargeoffs  264   973   97   1,334   356   551   60   967 
                                
Recoveries of loans previously charged off:                                
New York and other states*  40   118   11   169   3   78   20   101 
Florida  -   1   -   1   -   2   -   2 
Total recoveries  40   119   11   170   3   80   20   103 
Net loans charged off  224   854   86   1,164   353   471   40   864 
Provision for loan losses  652   118   30   800 
Provision (credit) for loan losses  505   (51)  296   750 
Balance at end of period $4,919   39,017   462   44,398  $5,198   38,067   685   43,950 
19
(dollars in thousands) For the nine months ended September 30, 2017 
  Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total 
Balance at beginning of period $4,929   38,231   730   43,890 
Loans charged off:                
New York and other states*  72   1,699   146   1,917 
Florida  -   167   19   186 
Total loan chargeoffs  72   1,866   165   2,103 
                 
Recoveries of loans previously charged off:                
New York and other states*  8   494   21   523 
Florida  -   72   -   72 
Total recoveries  8   566   21   595 
Net loans charged off  64   1,300   144   1,508 
Provision for loan losses  (245)  1,805   140   1,700 
Balance at end of period $4,620   38,736   726   44,082 

(dollars in thousands) For the nine months ended September 30, 2016 
  Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total 
Balance at beginning of period $4,491   39,753   518   44,762 
Loans charged off:                
New York and other states*  688   2,528   230   3,446 
Florida  -   103   20   123 
Total loan chargeoffs  688   2,631   250   3,569 
                 
Recoveries of loans previously charged off:                
New York and other states*  44   313   46   403 
Florida  -   4   -   4 
Total recoveries  44   317   46   407 
Net loans charged off  644   2,314   204   3,162 
Provision for loan losses  1,351   628   371   2,350 
Balance at end of period $5,198   38,067   685   43,950 
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.
19

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,September 30, 2017 and December 31, 2016:

 March 31, 2017  September 30, 2017 
(dollars in thousands) Commercial Loans  
1-to-4 Family
Residential Real Estate
  Installment Loans  Total  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  4,810   38,581   657   44,048   4,620   38,736   726   44,082 
                                
Total ending allowance balance $4,810   38,581   657   44,048  $4,620   38,736   726   44,082 
                                
Loans:                                
Individually evaluated for impairment $2,422   22,964   -   25,386  $2,969   21,585   -   24,554 
Collectively evaluated for impairment  182,029   3,233,244   8,277   3,423,550   184,312   3,361,138   8,278   3,553,728 
                                
Total ending loans balance $184,451   3,256,208   8,277   3,448,936  $187,281   3,382,723   8,278   3,578,282 

20
 December 31, 2016 
(dollars in thousands) Commercial Loans  
1-to-4 Family
Residential Real Estate
  Installment Loans  Total 
Allowance for loan losses:            
Ending allowance balance attributable to loans:            
Individually evaluated for impairment $-   -   -   - 
Collectively evaluated for impairment  4,929   38,231   730   43,890 
                 
Total ending allowance balance $4,929   38,231   730   43,890 
                 
Loans:                
Individually evaluated for impairment $2,418   21,607   -   24,025 
Collectively evaluated for impairment  188,776   3,208,967   8,818   3,406,561 
                 
Total ending loans balance $191,194   3,230,574   8,818   3,430,586 

A loan for which the terms have been modified, and for which the borrower is experiencing financial difficulties, is considered a TDR and is classified as impaired. TDR’s at March 31,September 30, 2017 and December 31, 2016 are measured at the present value of estimated future cash flows using the loan’s effective rate at inception or the fair value of the underlying collateral if the loan is considered collateral dependent.
 
2021
The following tables present impaired loans by loan class as of March 31,September 30, 2017 and December 31, 2016:
The following table presents impaired loans by loan class:

New York and other states:

 March 31, 2017  September 30, 2017 
(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Recorded
 Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
 Recorded
 Investment
 
                        
Commercial:                        
Commercial real estate $2,322   3,514   -   2,282  $2,869   3,916   -   2,879 
Other  100   100   -   100   100   100   -   100 
Real estate mortgage - 1 to 4 family:Real estate mortgage - 1 to 4 family:                             
First mortgages  17,791   18,526   -   16,154   16,043   16,351   -   16,715 
Home equity loans  275   311   -   269   252   272   -   265 
Home equity lines of credit  2,139   2,301   -   2,039   2,330   2,524   -   2,128 
                                
Total $22,627   24,752   -   20,844  $21,594   23,163   -   22,087 

Florida:

(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Recorded
 Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
 Recorded
Investment
 
                        
Commercial:                        
Commercial real estate $-   -   -   -  $-   -   -   - 
Other  -   -   -   -   -   -   -   - 
Real estate mortgage - 1 to 4 family:Real estate mortgage - 1 to 4 family:                             
First mortgages  2,077   2,168   -   2,714   2,335   2,441   -   2,217 
Home equity loans  93   93   -   94   90   90   -   92 
Home equity lines of credit  589   661   -   579   535   535   -   568 
                                
Total $2,759   2,922   -   3,387  $2,960   3,066   -   2,877 

Total:

(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
 
                        
Commercial:                        
Commercial real estate $2,322   3,514   -   2,282  $2,869   3,916   -   2,879 
Other  100   100   -   100   100   100   -   100 
Real estate mortgage - 1 to 4 family:Real estate mortgage - 1 to 4 family:                             
First mortgages  19,868   20,694   -   18,868   18,378   18,792   -   18,932 
Home equity loans  368   404   -   363   342   362   -   358 
Home equity lines of credit  2,728   2,962   -   2,618   2,865   3,059   -   2,696 
                                
Total $25,386   27,674   -   24,231  $24,554   26,229   -   24,964 
 
2122
New York and other states:

  December 31, 2016 
(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
 
             
Commercial:            
Commercial real estate $2,418   3,470   -   2,214 
Other  -   -   -   - 
Real estate mortgage - 1 to 4 family:                
First mortgages  16,675   17,439   -   15,665 
Home equity loans  269   305   -   251 
Home equity lines of credit  1,999   2,160   -   1,806 
                 
Total $21,361   23,374   -   19,936 

Florida:

(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
 
             
Commercial:            
Commercial real estate $-   -   -   - 
Other  -   -   -   - 
Real estate mortgage - 1 to 4 family:                
First mortgages  2,009   2,100   -   1,800 
Home equity loans  94   94   -   81 
Home equity lines of credit  561   633   -   591 
                 
Total $2,664   2,827   -   2,472 

Total:

(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
 
             
Commercial:            
Commercial real estate $2,418   3,470   -   2,214 
Other  -   -   -   - 
Real estate mortgage - 1 to 4 family:                
First mortgages  18,684   19,539   -   17,465 
Home equity loans  363   399   -   332 
Home equity lines of credit  2,560   2,793   -   2,397 
                 
Total $24,025   26,201   -   22,408 
 
2223
The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as impaired. Interest income recognized on impaired loans was not material during the three and nine months ended March 31,September 30, 2017 and 2016.

As of March 31,September 30, 2017 and December 31, 2016 impaired loans included approximately $11.9$11.0 million and $11.5$11.5 million of loans in accruing status that were identified as TDR’s in accordance with regulatory guidance related to Chapter 7 bankruptcy loans, respectively.respectively.

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

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

 Three months ended 3/31/2017  Three months ended 3/31/2016  Three months ended 9/30/2017  Three months ended 9/30/2016 
New York and other states*:
(dollars in thousands)
 
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
New York and other states*:    Pre-Modification  Post-Modification     Pre-Modification  Post-Modification 
(dollars in thousands) 
Number of
Contracts
  
Outstanding
Recorded
Investment
  
Outstanding
Recorded
Investment
  
Number of
Contracts
  
Outstanding
Recorded
Investment
  
Outstanding
Recorded
Investment
 
                                    
Commercial:                  
Commercial real estate  -  $-   -   -  $-   - 
Real estate mortgage - 1 to 4 family:                                          
First mortgages  11  $1,947  $1,947   12  $1,270  $1,270   7  $941  $941   7  $655  $655 
Home equity loans  1   13   13   -   -   -   -   -   -   1   44   44 
Home equity lines of credit  4   158   158   4   103   103   3   296   296   2   183   183 
                                                
Total  16  $2,118  $2,118   16  $1,373  $1,373   10  $1,237  $1,237   10  $882  $882 

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
  
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  $80  $80   2  $245  $245   2  $251  $251   -  $-  $- 
Home equity loans  -   -   -   -   -   - 
Home equity lines of credit  1   70   70   -   -   -   -   -   -   -   -   - 
                                                
Total  2  $150  $150   2  $245  $245   2  $251  $251   -  $-  $- 

24
  Nine months ended 9/30/2017  Nine months ended 9/30/2016 
New York and other states*:    Pre-Modification  Post-Modification     Pre-Modification  Post-Modification 
  (dollars in thousands) 
Number of
Contracts
  
Outstanding
Recorded
Investment
  
Outstanding
Recorded
Investment
  
Number of
Contracts
  
Outstanding
Recorded
Investment
  
Outstanding
Recorded
Investment
 
                   
Commercial:                  
Commercial real estate  3  $747  $747   -  $-  $- 
Real estate mortgage - 1 to 4 family:                        
First mortgages  25  $3,986   3,986   27  $2,383   2,383 
Home equity loans  1   13   13   1   44   44 
Home equity lines of credit  8   457   457   10   316   316 
                         
Total  37  $5,203  $5,203   38  $2,743  $2,743 
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  7  $718  $718   2  $408  $408 
Home equity loans  -   -   -   1   45   45 
Home equity lines of credit  1   70   70   1   6   6 
                         
Total  8  $788  $788   4  $459  $459 
The addition of these TDR’s did not have a significant impact on the allowance for loan losses.

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

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

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In situations involving a borrower filing for Chapter 13 bankruptcy protection, however, a loan is considered to be in payment default once it is 30 days contractually past due, consistent with the treatment by the bankruptcy court.
 
2325
The following table presents, by class, TDR’s that defaulted during the three and nine months ended March 31,September 30, 2017 and 2016 which had been modified within the last twelve months:
 Three months ended 3/31/2017  Three months ended 3/31/2016  Three months ended 9/30/2017  Three months ended 9/30/2016 
New York and other states*:
(dollars in thousands)
 
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
 
                        
Real estate mortgage - 1 to 4 family:                        
First mortgages  -  $-   2  $101   2  $236   -  $- 
Home equity lines of credit  -   -   1   48   -   -   -   - 
                                
Total  -  $-   3  $149   2  $236   -  $- 
Florida:

(dollars in thousands) 
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
 
             
Real estate mortgage - 1 to 4 family:            
First mortgages  1  $80   -  $- 
Home equity lines of credit  1  $70   -  $- 
                 
Total  2  $150   -  $- 
(dollars in thousands)
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Real estate mortgage - 1 to 4 family:
First mortgages-$--$-
Total-$--$-

  Nine months ended 9/30/2017  Nine months ended 9/30/2016 
New York and other states*:
(dollars in thousands)
 
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
 
             
Real estate mortgage - 1 to 4 family:            
First mortgages  2  $236   1  $107 
Home equity loans  -   -   -   - 
Home equity lines of credit  1   3   -   - 
                 
Total  3  $239   1  $107 
Florida:
(dollars in thousands) 
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
 
             
Real estate mortgage - 1 to 4 family:            
First mortgages  1  $77   -  $- 
Home equity lines of credit  1  $70   1  $46 
                 
Total  2  $147   1  $46 
The TDR’s that subsequently defaulted described above did not have a material impact on the allowance for loan losses.

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

The Company uses the following definitions for classified loans:

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

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

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those loans classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. All doubtful loans are considered impaired.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “pass” rated loans.

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

 March 31, 2017  September 30, 2017 
New York and other states:                  
                  
(dollars in thousands)                  
 Pass  Classified  Total  Pass  Classified  Total 
Commercial:                  
Commercial real estate $137,482   13,201   150,683  $142,390   9,838   152,228 
Other  19,915   2,133   22,048   20,154   1,600   21,754 
                        
 $157,397   15,334   172,731  $162,544   11,438   173,982 

Florida:

(dollars in thousands)         
 Pass  Classified  Total 
Commercial:         
Commercial real estate $11,375   -   11,375 
Other  345   -   345 
             
  $11,720   -   11,720 
(dollars in thousands)         
  Pass  Classified  Total 
Commercial:         
Commercial real estate $12,980   -   12,980 
Other  319   -   319 
             
  $13,299   -   13,299 

Total:

(dollars in thousands)                  
 Pass  Classified  Total  Pass  Classified  Total 
Commercial:                  
Commercial real estate $148,857   13,201   162,058  $155,370   9,838   165,208 
Other  20,260   2,133   22,393   20,473   1,600   22,073 
                        
 $169,117   15,334   184,451  $175,843   11,438   187,281 
 
2527
  December 31, 2016 
New York and other states:         
          
(dollars in thousands)         
  Pass  Classified  Total 
Commercial:         
Commercial real estate $136,676   14,690   151,366 
Other  25,442   2,097   27,539 
             
  $162,118   16,787   178,905 

Florida:         
          
(dollars in thousands)         
  Pass  Classified  Total 
Commercial:         
Commercial real estate $12,243   -   12,243 
Other  46   -   46 
             
  $12,289   -   12,289 
Florida:

(dollars in thousands)         
 Pass  Classified  Total 
Commercial:         
Commercial real estate $12,243   -   12,243 
Other  46   -   46 
             
  $12,289   -   12,289 

Total:

(dollars in thousands)         
  Pass  Classified  Total 
Commercial:         
Commercial real estate $148,919   14,690   163,609 
Other  25,488   2,097   27,585 
             
  $174,407   16,787   191,194 

Included in classified loans in the above tables are impairednon-accrual loans of $1.8$1.2 million and $1.8 million at March 31,September 30, 2017 and December 31, 2016,. respectively.

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

(6)Fair Value of Financial Instruments

FASB Topic 820, Fair Value MeasurementsMeasurement (“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:
 
2628
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.

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

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

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

Securities Available for Sale: The fair value of securities available for sale is determined utilizing an independent pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. This results in a Level 2 classification of the inputs for determining fair value. Interest and dividend income is recorded on the accrual method and is included in the Consolidated Statements of Income in the respective investment class under total interest and dividend income. Also classified as available for sale securities, the fair value of equity securities is determined by quoted market prices and these are designated as Level 1. The Company does not have any securities that would be designated as Level 3.

Other Real Estate Owned: Assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. This results in a Level 3 classification of the inputs for determining fair value.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally have had a chargeoff through the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. When obtained, non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Indications of value for both collateral-dependent impaired loans and other real estate owned are obtained from third party providers or the Company’s internal Appraisal Department. All indications of value are reviewed for reasonableness by a member of the Appraisal Department for the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value via comparison with independent data sources such as recent market data or industry-wide statistics.
 
2729
Assets and liabilities measured at fair value under ASC 820 on a recurring basis are summarized below:

 
Fair Value Measurements at
March 31, 2017 Using:
  
Fair Value Measurements at
September 30, 2017 Using:
 
                        
 
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
(dollars in thousands)                        
Securities available for sale:                        
U.S. government sponsored enterprises $162,341  $-  $162,341  $-  $123,658  $-  $123,658  $- 
State and political subdivisions  887   -   887   -   533   -   533   - 
Corporate bonds  40,612   -   40,612   -   40,381   -   40,381   - 
Mortgage backed securities and collateralized mortgage obligations - residential  357,683   -   357,683   -   335,531   -   335,531   - 
Small Business Administration-guaranteed participation securities  75,429   -   75,429   - 
Small Business Administration- guaranteed participation securities  69,818   -   69,818   - 
Mortgage backed securities and collateralized mortgage obligations - commercial  9,923   -   9,923   -   9,824   -   9,824   - 
Other securities  685   35   650   -   685   35   650   - 
Total securities available for sale $647,560  $35  $647,525  $-  $580,430  $35  $580,395  $- 

 Fair Value Measurements at    
 December 31, 2016 Using:  
Fair Value Measurements at
December 31, 2016 Using:
 
                        
 
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
(dollars in thousands)                        
Securities available for sale:                        
U.S. government sponsored enterprises $117,266  $-  $117,266  $-  $117,266  $-  $117,266  $- 
State and political subdivisions  886   -   886   -   886   -   886   - 
Mortgage backed securities and collateralized mortgage obligations - residential  372,308   -   372,308   -   372,308   -   372,308   - 
Corporate bonds  40,705   -   40,705   -   40,705   -   40,705   - 
Small Business Administration-guaranteed participation securities  78,499   -   78,499   - 
Small Business Administration- guaranteed participation securities  78,499   -   78,499   - 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,011   -   10,011   -   10,011   -   10,011   - 
Other securities  685   35   650   -   685   35   650   - 
Total securities available for sale $620,360  $35  $620,325  $-  $620,360  $35  $620,325  $- 
 
2830
There were no transfers between Level 1 and Level 2 during the three and nine months ended March 31,September 30, 2017 and 2016.

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

 
Fair Value Measurements at
March 31, 2017 Using:
       
                   
Fair Value Measurements at
September 30, 2017 Using:
       
 
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 Valuation technique Unobservable inputs Range (Weighted Average)  
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 Valuation technique Unobservable inputs Range (Weighted Average) 
(dollars in thousands)                                    
                                    
Other real estate owned $3,191  $-  $-  $3,191 
Sales comparison
approach
 Adjustments for differences between comparable sales  2% - 13% (4%) $2,879  $-  $-  $2,879 Sales comparison approach Adjustments for differences between comparable sales  2% - 10% (4%) 
Impaired loans:                                              
Commercial real estate  542   -   -   542 
Sales comparison
approach
 Adjustments for differences between comparable sales  11% - 22% (20%)
                                              
Real estate mortgage - 1 to 4 family  920   -   -   920 
Sales comparison
approach
 Adjustments for differences between comparable sales  5% - 17% (10%)  651   -   -   651 Sales comparison approach Adjustments for differences between comparable sales  2% - 5% (4%) 

 
Fair Value Measurements at
December 31, 2016 Using:
                
                   
Fair Value Measurements at
December 31, 2016 Using:
       
 
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 Valuation technique Unobservable inputs Range (Weighted Average)  
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 Valuation technique Unobservable inputs Range (Weighted Average) 
(dollars in thousands)                                    
                                    
Other real estate owned $4,268  $-  $-  $4,268 Sales comparison approach 
Adjustments for
differences between
comparable sales
  1% - 14% (7%) $4,268  $-  $-  $4,268 Sales comparison approach Adjustments for differences between comparable sales  1% - 14% (7%) 
Impaired loans:                                              
Commercial real estate  1,250   -   -   1,250 Sales comparison approach Adjustments for differences between comparable sales  7% - 35% (23%)  1,250   -   -   1,250 Sales comparison approach Adjustments for differences between comparable sales  7% - 35% (23%) 
                                              
Real estate mortgage - 1 to 4 family  458   -   -   458 Sales comparison approach Adjustments for differences between comparable sales  5% - 14% (10%)  458   -   -   458 Sales comparison approach Adjustments for differences between comparable sales  5% - 14% (10%) 

Other real estate owned, that is carried at fair value less costs to sell was approximately $3.2$2.9 million at March 31,September 30, 2017 and consisted of $729$358 thousand of commercial real estate and $2.5$2.5 million of residential real estate properties. Valuation charges of $188$461 thousand and $823 thousand are included in earnings for the three and nine months ended March 31, 2017.September 30, 2017, respectively.

Of the total impaired loans of $25.4$24.6 million at March 31,September 30, 2017, $1.5 million$651 thousand are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at March 31,September 30, 2017.  Gross charge offs related to commercial impaired loans included in the table above were $72 thousand for the three months ended March 31, 2017 while gross charge offs related to residential impaired loans included in the table above were $59$15 thousand and $41 thousand for the three and nine months ended March 31,September 30, 2017,. respectively.

Other real estate owned, that is carried at fair value less costs to sell, was approximately $4.3 million at December 31, 2016 and consisted of $756 thousand of commercial real estate and $3.5$3.5 million of residential real estate properties. A valuation charge of $1.2 million is included in earnings for the year ended December 31, 2016.2016.

Of the total impaired loans of $24.0$24.0 million at December 31, 2016, $1.7$1.7 million are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at December 31, 2016. Gross charge offs related to commercial impaired loans included in the table above were $482 thousand for the year ended December 31, 2016, while gross charge offs related to residential impaired loans included in the table above amounted to $226 thousand.
 
2931
In accordance with FASB Topic 825, Financial Instruments (“ASC 825”), the carrying amounts and estimated fair values of financial instruments, at March 31,September 30, 2017 and December 31, 2016 are as follows:

(dollars in thousands) Carrying  
Fair Value Measurements at
March 31, 2017 Using:
  Carrying  
Fair Value Measurements at
September 30, 2017 Using:
 
 Value  Level 1  Level 2  Level 3  Total  Value  Level 1  Level 2  Level 3  Total 
Financial assets:                              
Cash and cash equivalents $683,191   683,191   -   -   683,191  $624,197   624,197   -   -   624,197 
Securities available for sale  647,560   35   647,525   -   647,560   580,430   35   580,395   -   580,430 
Held to maturity securities  43,270   -   45,015   -   45,015   29,268   -   30,731   -   30,731 
Federal Reserve Bank and Federal Home Loan Bank stock  9,579   N/A   N/A   N/A   N/A 
Federal Reserve Bank and Federal                    
Home Loan Bank stock  8,779   N/A   N/A   N/A   N/A 
Net loans  3,404,888   -   -   3,399,832   3,399,832   3,534,200   -   -   3,541,135   3,541,135 
Accrued interest receivable  10,742   34   2,855   7,853   10,742   10,813   56   2,473   8,284   10,813 
Financial liabilities:                                        
Demand deposits  373,930   373,930   -   -   373,930   397,623   397,623   -   -   397,623 
Interest bearing deposits  3,824,539   2,710,647   1,108,640   -   3,819,287   3,767,739   2,691,853   1,069,906   -   3,761,759 
Short-term borrowings  220,946   -   220,946   -   220,946   216,508   -   216,508   -   216,508 
Accrued interest payable  510   91   419   -   510   470   67   402   -   470 

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

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

Cash and Cash Equivalents

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

Federal Reserve Bank and Federal Home Loan Bank stock

It is not practical to determine the fair value of Federal Reserve Bank and Federal Home Loan Bank stock due to their restrictive nature.
 
3032
Securities Held to Maturity

Similar to securities available for sale described previously, the fair value of securities held to maturity are determined utilizing an independent pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. This results in a Level 2 classification of the inputs for determining fair value. Interest and dividend income is recorded on the accrual method and included in the Consolidated Statements of Income in the respective investment class under total interest and dividend income. The Company does not have any securities that would be designated as Level 3.

Loans

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

Deposit Liabilities

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

Accrued Interest Receivable/Payable

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

Short-Term Borrowings and Other Financial Instruments

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

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk. Such financial instruments consist of commitments to extend financing and standby letters of credit. If the commitments are exercised by the prospective borrowers, these financial instruments will become interest earning assets of the Company. If the commitments expire, the Company retains any fees paid by the prospective borrower. The fair value of commitments is estimated based upon fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the present creditworthiness of the borrower. For fixed rate commitments, the fair value estimation takes into consideration an interest rate risk factor. The fair value of these off-balance sheet items approximates the recorded amounts of the related fees, which are considered to be immaterial.
The Company does not engage in activities involving interest rate swaps, forward placement contracts, or any other instruments commonly referred to as derivatives.

(7)Accumulated Other Comprehensive Income (Loss) Income

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

 Three months ended 3/31/17  Three months ended 9/30/17 
(dollars in thousands) 
Balance at
12/31/2016
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Income
  
Other
Comprehensive
Income (loss)-
Three months
ended 3/31/2017
  
Balance at
3/31/2017
  
Balance at
7/1/2017
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Income
  
Other
Comprehensive
Income (loss)-
Three months
ended 9/30/2017
  
Balance at
9/30/2017
 
                              
               
Net unrealized holding gain (loss) on securities available for sale, net of tax $(6,762)  707   -   707   (6,055) $(4,049)  562   -   562   (3,487)
Net change in net actuarial (gain) loss and prior service cost on pension and postretirement benefit plans, net of tax  511   -   (24)  (24)  487 
Accumulated other comprehensive (loss) income, net of tax  (6,251)  707   (24)  683   (5,568)
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax  456   -   (29)  (29)  427 
                    
Accumulated other comprehensive income (loss), net of tax  (3,593)  562   (29)  533   (3,060)

 Three months ended 3/31/2016  Three months ended 9/30/2016 
(dollars in thousands) 
Balance at
12/31/2015
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Income
  
Other
Comprehensive
Income (loss)-
Three months
ended 3/31/2016
  
Balance at
3/31/2016
  
Balance at
7/1/2016
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Income
  
Other
Comprehensive
Income (loss)-
Three months
ended 9/30/2016
  
Balance at
9/30/2016
 
                              
                              
Net unrealized holding gain (loss) on securities available for sale, net of tax $(4,492)  4,821   -   4,821   329  $2,667   (75)  -   (75)  2,592 
Net change in net actuarial (gain) loss and prior service cost on pension and postretirement benefit plans, net of tax  (289)  -   33   33   (256)
Accumulated other comprehensive (loss) income, net of tax  (4,781)  4,821   33   4,854   73 
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax  (272)  -   8   8   (264)
                    
Accumulated other comprehensive income (loss), net of tax  2,395   (75)  8   (67)  2,328 

  Nine months ended 9/30/17 
(dollars in thousands) 
Balance at
1/1/2017
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Loss
  
Other
Comprehensive
Income (loss)-
Six months
ended 9/30/2017
  
Balance at
9/30/2017
 
                
                
Net unrealized holding gain (loss) on securities available for sale, net of tax $(6,762)  3,275   -   3,275   (3,487)
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax  511   -   (84)  (84)  427 
                     
Accumulated other comprehensive income (loss), net of tax  (6,251)  3,275   (84)  3,191   (3,060)
  Nine months ended 9/30/16 
(dollars in thousands) 
Balance at
1/1/2016
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Income
  
Other
Comprehensive
Income (loss)-
Six months
ended 9/30/2016
  
Balance at
9/30/2016
 
                
                
Net unrealized holding gain (loss) on securities available for sale, net of tax $(4,492)  7,483   (401)  7,084   2,592 
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax  (289)  -   25   25   (264)
                     
Accumulated other comprehensive income (loss), net of tax  (4,781)  7,483   (376)  7,109   2,328 
The following represents the reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended March 31,September 30, 2017 and 2016:

(dollars in thousands) 
Three months ended
March 31,
   
Three months ended
September 30,
  
Nine months ended
September 30,
  
 2017  2016 Affected Line Item in Statements 2017  2016  2017  2016 Affected Line Item in Statements
Net unrealized holding gain on securities available for sale                 
                  
Realized gain on securities transactions $-   -  $-   668 Net gain on securities transactions
Income tax effect  -   -   -   (267)Income taxes
Net of tax  -   -   -   401  
                                 
Amortization of pension and postretirement benefit items                              
                                 
Amortization of net actuarial (gain) loss  (63)  33 Salaries and employee benefits
Amortization of net actuarial gain  72   8   208   25 Salaries and employee benefits
Amortization of prior service cost  23   23 Salaries and employee benefits  (23)  (22)  (68)  (67)Salaries and employee benefits
Income tax expense (benefit)  16   (23)Income taxes
Income tax effect  (20)  6   (56)  17 Income taxes
Net of tax  (24)  33    29   (8)  84   (25) 
                                   
Total reclassifications, net of tax $(24)  33   $29   (8) $84   376  

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

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

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

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

(9)New Accounting Pronouncements

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

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” which amended existing guidance to improve accounting standards for financial instruments including clarification and simplification of accounting and disclosure requirements and the requirement for public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2017. The ASU is not expected to significantly impact the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases” which amended existing guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2018. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date which will impact the financial position and capital ratios of the Company.  As of December 31, 2016, the Company has approximately $69.7 million in minimum lease payments for existing operating leases of branch locations with varying expiration dates from 2017 and after. The Company is evaluatingdoes not expect the ASU to have a material impact on the Company’s results of ASU No. 2016-02 on its consolidated financial statements.operations.

In June 2016, the FASB released ASU No. 2016-13, “Financial Instruments – Credit Losses” which amended existing guidance to replace current generally accepted accounting principles used to measure a reporting entity’s credit losses.  The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2019. The ASU represents a significant departure from current GAAP and the Company is evaluating the impact of the ASU on its consolidated financial statements, which includes developingstatements.  The Company has established a roadmap for implementation of the new standard.and is currently evaluating vendor solutions that will assist in implementing required changes to loan loss estimation model.
In January 2017, the FASB issued ASU No.2017-04,No. 2017-04, “Intangibles-Goodwill and Other (Topic 350)” which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.  An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.  A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this ASU for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  The ASU is not expected to significantly impact the Company’s consolidated financial statements.

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

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

In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation – Scope of Modification Accounting (Topic 718)”.  The amendments in this ASU clarifies the application of the guidance in Topic 718, Compensation – Stock Compensation, by providing guidance about which changes in terms or conditions of a share-based payment award require and entity to apply modification accounting.  An entity should account for the effects of a modification unless all the following are met: 1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; 2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; 3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU.  The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The ASU is not expected to significantly impact the Company’s consolidated financial statements.
 
3437
Crowe Horwath LLP
Independent Member Crowe Horwath International
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying consolidated statements of financial condition of TrustCo Bank Corp NY as of March 31,September 30, 2017, and the related consolidated statements of income and comprehensive income, for the three-month and nine-month periods ended September 30, 2017 and 2016 and the related changes in shareholders’ equity and cash flows for the three-monthnine-month periods ended March 31,September 30, 2017 and 2016. These interim financial statements are the responsibility of the Company'sCompany’s management.

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

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

/s/ Crowe Horwath LLP

New York, New York
May 5,November 7, 2017
 
3538
Item 2.Management's
Management’s Discussion and Analysis of Financial Condition and Results of  Operations

Forward-looking Statements
Statements included in this report and in future filings by TrustCo Bank Corp NY (“TrustCo” or the “Company”) with the Securities and Exchange Commission, in TrustCo’s press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Forward-looking statements can be identified by the use of such words as may, will, should, could, would, estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions.  Examples of forward-looking statements include, among others, statements TrustCo makes regarding its expectations for complying with the new regulatory capital rules, costs associated with the Formal Agreement that the Company’s subsidiary, Trustco Bank (or the “Bank”) has entered into with the Office of the Comptroller of the Currency (“OCC”), the Company’s ability to grow its balance sheet and the profitability of such growth, the ability of its loan products to continue to attract customers if long-term rates rise and the ability to secure new sources of liquidity should the need arise.  TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

In addition to factors described under Part II, Item 1A, Risk Factors, if any, and under the Risk Factor discussion in TrustCo’s Annual Report on Form 10-K for the year ended December 31, 2016, the following important factors, among others, in some cases have affected and in the future could affect TrustCo’s actual results and could cause TrustCo’s actual financial performance to differ materially from that expressed in any forward-looking statement:

·TrustCo’s ability to continue to originate a significant volume of one- to- four family mortgage loans in its market areas and to otherwise maintain or increase its market share in the areas in which it operates;
·TrustCo’s ability to continue to maintain noninterest expense and other overhead costs at reasonable levels relative to income;
·TrustCo’s ability to comply with the Formal Agreement entered into with Trustco Bank’s regulator, the OCC, and potential regulatory actions if TrustCo or Trustco Bank fails to comply;
·restrictions or conditions imposed by TrustCo’s and Trustco Bank’s regulators on their operations that may make it more difficult to achieve TrustCo’s and Trustco Bank’s goals;
·the future earnings and capital levels of TrustCo and Trustco Bank and the continued receipt of approvals from TrustCo’s and Trustco Bank’s primary federal banking regulators under regulatory rules and the Formal Agreement to distribute capital from Trustco Bank to TrustCo, which could affect the ability of TrustCo to pay;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 allowancesallowance or to take other actions that reduce capital or income;
 
3639
·TrustCo’s ability to make accurate assumptions and judgments regarding the credit risks associated with its lending and investing activities, including changes in the level and direction of loan delinquencies and chargeoffs, changes in property values, and changes in estimates of the adequacy of the allowance for loan and lease losses;
·the effects of and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations;
·adverse conditions in the securities markets that lead to impairment in the value of securities in TrustCo’s investment portfolio;
·changes in law and policy accompanying the new presidential administration and uncertainty or speculation pending the enactment of such changes;
·the perceived overall value of TrustCo’s products and services by users, including the features, pricing and quality compared to competitors’ products and services and the willingness of current and prospective customers to substitute competitors’ products and services for TrustCo’s products and services;
·changes in consumer spending, borrowing and savings habits;
·the effect of changes in financial services laws and regulations (including laws concerning taxation, banking and securities) and the impact of other governmental initiatives affecting the financial services industry, including new regulatory capital requirements that took effect forbeginning in 2016;
·changes in management personnel;
·real estate and collateral values;
·changes in accounting policies and practices, as may be adopted by the bank regulatory agencies Financial Accounting Standards Board (“FASB”) or the Public Company Accounting Oversight Board;
·disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;
·technological changes and electronic, cyber and physical security breaches;
·changes in local market areas and general business and economic trends, as well as changes in consumer spending and saving habits;
·TrustCo’s success at managing the risks involved in the foregoing and managing its business; and
·other risks and uncertainties included under “Risk Factors” in our Form 10-K for the year ended December 31, 2016.

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

Following this discussion are the tables "Distribution“Distribution of Assets, Liabilities and Shareholders'Shareholders’ Equity: Interest Rates and Interest Differential"Differential” which gives a detailed breakdown of TrustCo'sTrustCo’s average interest earning assets and interest bearing liabilities for the three and nine month periods ended March 31,September 30, 2017 and 2016.
 
3740
Introduction
The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three and nine month periodperiods ended March 31,September 30, 2017, with comparisons to the corresponding period in 2016, as applicable.  Net interest margin is presented on a fully taxable equivalent basis in this discussion.  The consolidated interim financial statements and related notes, as well as the 2016 Annual Report to Shareholders on Form 10-K, which was filed with the SEC on March 3, 2017, should also be read in conjunction with this review.  Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period'speriod’s presentation.

During the firstthird quarter of 2017 financial markets were influenced by both underlying economic conditions and by political developments, in particular expectations arising from initiatives expected to be pursued by the Trump administration.developments.  Equity markets ended the firstthird quarter up, with most of the gain coming early ingaining gradually over the quarter.  For the full firstthird quarter, the S&P 500 Index was up 5.5%4.0% and the Dow Jones Industrial Average was up 4.6%4.9%.  Credit markets continue to be driven by worldwide economic news and decreasing liquidity in somedemand shifts between segments of the bond market.market as investors seek to capture yield in a continued low rate environment.  The shape of the yield curve continued to flatten during the quarter, with average yields decliningflat or down for longer maturities and up for shorter maturities in the firstthird quarter as compared to the second quarter.  The 10-year Treasury bond averaged 2.45%2.24% during Q1Q3 compared to 2.14%2.26% in Q4, an increaseQ2, a decrease of 312 basis points.  The 2-year Treasury bond average rate increased 236 basis points to 1.24%1.36%, resulting in a modest steepeningflattening of the curve.  The spread between the 10-year and the 2-year Treasury bonds increasedcontracted from 1.13%0.96% on average in Q4Q2 to 1.20%0.88% in Q1.Q3.  This spread had been declining over most of the last three years.  Even with the modest improvementdepressed in Q1, the spread remains at only half of therecent years, and compares to 2.42% level averaged during its most recent peak in Q4 of 2013.  Steeper yield curves are favorable for portfolio mortgage lenders like TrustCo.  The table below illustrates the range of rate movements for both short term and longer term rates.  The target Fed Funds range was increased by 25 basis points on March 15,June 14, 2017 to a range of 0.75%1.00% to 1.00%1.25%.  This increase follows a similar 25 basis point increaseincreases announced onin December 14, 2016.of 2016 and March of 2017.  Spreads of most asset classes, including agency securities, corporates, municipals and mortgage-backed securities, were flat to down by the end of the quarter as compared to the levels seen a year earlier, but generally roughly flat with levels seen at the end of 2016.the second quarter of 2017.  Changes in rates and spreads during the current quarter were due to a number of factors; however, uncertainty about the timing of anyadditional actions that the Federal Reserve Board (“FRB”) would take in regard to the extraordinary accommodations that have influenced markets in recent years and further uncertainty regarding the economy and related issues were key factors.  Low risk free rates in major nations have also caused investors to shift into alternative fixed income instruments, contributing to the compression of spreads over the risk free rate.  On September 20, 2017 the Federal Open Market Committee announced that it would initiate the balance sheet normalization program discussed in June of 2017.  Information regarding this program provided some additional direction to the market.
 
3841
     
3 Month
Yield (%)
  
2 Year
Yield (%)
  
5 Year
Yield (%)
  
10 Year
Yield (%)
  
10 - 2 Year
Spread (%)
 
                  
Q1/16 Beg of Q1  0.16   1.06   1.76   2.27   1.21 
Peak  0.36   1.06   1.76   2.27   1.23 
Trough  0.16   0.64   1.11   1.63   0.95 
End of Q1  0.21   0.73   1.21   1.78   1.05 
Average in Q1  0.29   0.84   1.37   1.92   1.08 
                       
Q2/16 Beg of Q2  0.23   0.76   1.24   1.78   1.03 
Peak  0.35   0.92   1.41   1.94   1.08 
Trough  0.19   0.58   1.00   1.46   0.85 
End of Q2  0.26   0.58   1.01   1.49   0.91 
Average in Q2  0.26   0.77   1.24   1.75   0.98 
                       
Q3/16 Beg of Q3  0.28   0.59   1.00   1.46   0.87 
Peak  0.37   0.84   1.26   1.73   0.97 
Trough  0.18   0.56   0.94   1.37   0.76 
End of Q3  0.29   0.77   1.14   1.60   0.83 
Average in Q3  0.30   0.73   1.13   1.56   0.84 
                       
Q4/16 Beg of Q4  0.32   0.80   0.91   1.63   0.83 
Peak  0.55   1.29   1.61   2.60   1.34 
Trough  0.30   0.80   0.91   1.63   0.83 
End of Q4  0.51   1.20   1.47   2.45   1.25 
Average in Q4  0.43   1.01   1.24   2.14   1.13 
                       
Q1/17 Beg of Q1  0.16   1.06   1.76   2.27   1.21 
Peak  0.79   1.40   2.14   2.62   1.30 
Trough  0.50   1.12   1.80   2.31   1.11 
End of Q1  0.76   1.27   1.93   2.40   1.13 
Average in Q1  0.60   1.24   1.95   2.45   1.20 
     
3 Month
Yield (%)
  
2 Year
Yield (%)
  
5 Year
Yield (%)
  
10 Year
Yield (%)
  
10 - 2 Year
Spread (%)
 
                  
Q3/16 Beg of Q3  0.28   0.59   1.00   1.46   0.87 
Peak  0.37   0.84   1.26   1.73   0.97 
Trough  0.18   0.56   0.94   1.37   0.76 
End of Q3  0.29   0.77   1.14   1.60   0.83 
Average in Q3  0.30   0.73   1.13   1.56   0.84 
                       
Q4/16 Beg of Q4  0.32   0.80   0.91   1.63   0.83 
Peak  0.55   1.29   1.61   2.60   1.34 
Trough  0.30   0.80   0.91   1.63   0.83 
End of Q4  0.51   1.20   1.47   2.45   1.25 
Average in Q4  0.43   1.01   1.24   2.14   1.13 
                       
Q1/17 Beg of Q1  0.16   1.06   1.76   2.27   1.21 
Peak  0.79   1.40   2.14   2.62   1.30 
Trough  0.50   1.12   1.80   2.31   1.11 
End of Q1  0.76   1.27   1.93   2.40   1.13 
Average in Q1  0.60   1.24   1.95   2.45   1.20 
                       
Q2/17 Beg of Q2  0.76   1.27   1.93   2.40   1.13 
Peak  1.04   1.38   1.94   2.42   1.11 
Trough  0.79   1.18   1.71   2.14   0.78 
End of Q2  1.03   1.38   1.89   2.31   0.93 
Average in Q2  0.91   1.30   1.81   2.26   0.96 
                       
Q3/17 Beg of Q3  1.03   1.38   1.89   2.31   0.93 
Peak  1.18   1.47   1.95   2.39   1.00 
Trough  0.98   1.27   1.63   2.05   0.77 
End of Q3  1.06   1.47   1.92   2.33   0.86 
Average in Q3  1.05   1.36   1.81   2.24   0.88 

The United States economy continues to show some modest improvements in some areas, but continues to face challenges. Employment metrics have generally improved, but remain inconsistent and not particularly robust. Economic conditions vary significantly over geographic areas, with strength concentrated in and around major population centers on the coasts and in certain areas where economic activity has been driven by specific regional factors.  The unprecedented intervention by governments in markets and attempts to stimulate the economy, including the sharp easing of monetary policy during 2007-2008, will eventually be reversed. How and when the Federal Reserve resolves its own balance sheet expansion has becomebeen an increasingarea of significant focus of economists and market participants.  As noted, guidance on this issue was provided in late September.  Economic activity in Europe, China and elsewhere has also improved in some aspects, but remains mixed.  Finally, regulatory changes that have been enacted are expected to continue to impact the banking industry going forward. These regulatory changes have added significant operating expense and operational burden and have fundamentally changed the way banks conduct business.  The newcurrent presidential administration has set policy initiatives that include attempts to reduce the regulatory burden; the timing and extent of any success on that front is yet to be determined.  Fiscal policy initiatives, particularly a plan to significantly reduce corporate tax rates could have a major impact on the economy and on TrustCo, but there is no certainty that those initiatives will take effect at all or will result in any timely and/or significant change.
 
3942
TrustCo believes that its long-term focus on traditional banking services and practices has enabled the Company to avoid significant impact from asset quality problems and that the Company’s strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with its past practice.  TrustCo has not engaged in the types of high risk loans and investments that have led to the widely reported problems in the industry.  Nevertheless, the Company may experience increases in nonperforming loans (“NPLs”) relative to historical levels from time to time.   While the Company does not expect to see a significant change in the inherent risk of loss in its loan portfolio at March 31,September 30, 2017, should general housing prices and other economic measures, such as unemployment in the Company’s market areas, deteriorate, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans.

Overview
TrustCo recorded net income of $10.9$12.6 million, or $0.114$0.131 of diluted earnings per share, for the three months ended March 31,September 30, 2017, compared to net income of $10.4$10.9 million, or $0.109$0.114 of diluted earnings per share, in the same period in 2016.  Return on average assets was 0.91%1.02% and 0.89%,0.90, respectively, for the three months ended March 31,September 30, 2017 and 2016.  Return on average equity was 10.17%11.06% and 9.98%10.05%, respectively, for the three months ended March 31,September 30, 2017 and 2016.

For the nine months ended September 30, 2017, net income was $35.8 million or $0.372 of diluted earnings per share, compared to $31.8 million and $0.333 per share, respectively, in the same period in 2016.  Return on average assets was 0.98% and 0.89%, respectively, for the nine months ended September 30, 2017 and 2016.  Return on average equity was 10.77% and 9.97%, respectively, for the nine months ended September 30, 2017 and 2016.

The primary factors accounting for the change in net income for the three months ended March 31,September 30, 2017 compared to the same period of the prior year were:

·
An increase in the average balance of interest earning assets of $149.3$55.8 million to $4.78$4.80 billion for the firstthird quarter of 2017 compared to the same period in 2016.

·An increase in taxable equivalent net interest margin for the firstthird quarter of 2017 to 3.14%3.26% from 3.13%3.09% in the prior year period.  The increase in the margin, coupled with the increase in average earning assets, resulted in an increase of $1.2$2.5 million in taxable equivalent net interest income in the firstthird quarter of 2017 compared to the firstthird quarter of 2016.

·An increase of $1.2$497 thousand in Financial Services income for the third quarter of 2017 as compared to the prior year period due to cash received from the settlement of several estates resulting in revenue greater that the estimated accrued amount.
·An increase of $1.4 million in salaries and benefits expense for the firstthird quarter of 2017 compared to the firstthird quarter of 2016, due to a combination of higher staffing levels, the impact of a higher stock price on liability-based stock compensation plans and other factors.

·A decrease of $280 thousand in Professional Services expense for the third quarter of 2017 compared to the third quarter of 2016.

·A increase of $210 thousand in Advertising expense for the third quarter of 2017 compared to the third quarter of 2016.

·A decrease of $943$620 thousand in Federal Deposit Insurance Corporation (FDIC) and other insuranceOther Real Estate expense for the firstthird quarter of 2017 compared to the firstthird quarter of 2016 due to increased gains recognized in the sale of properties.

·An increase of $694 thousand  in income taxes in the third quarter of 2017 compared to the prior year due primarily to higher pre-tax earnings.
The primary factors accounting for the change in net income for the nine months ended September 30, 2017 compared to the same periods of the prior year were:

·
An increase in the average balance of interest earning assets of $104.5 million to $4.90 billion for the first nine months of 2017 compared to the same period in 2016.

·An increase in taxable equivalent net interest margin for the first nine months of 2017 to 3.20% from 3.10% in the prior year period.  The increase in the margin coupled with the increase in average earning assets, resulted in an increase of $6.0 million in taxable equivalent net interest income in the first nine months of 2017 compared to the same period in 2016.

·A decrease of $218$668 thousand in Professionalsecurities gains for the first nine months of 2017 as compared to the prior year period.

·
An increase of $663 in Financial Services income for the first nine months of 2017 as compared to the prior year period, the majority of which was recognized in the third quarter as noted previously.

·
An increase of $3.2 million in salaries and benefits for the first nine months of 2017 as compared to the prior year period, for similar reasons as previously noted in regard to the third quarter of 2017.

·A decrease of $2.0 million in FDIC and other insurance expense and a decrease of $1.1 million in net other real estate (“ORE”) expense, for the first quarternine months of 2017 compared to the first quarter of 2016 due to increased staffing and benefits costs.same period in 2016.
 
4044
·An increase of $558 thousand in Other expense for the first quarter of 2017 compared to the first quarter of 2016.

·An increase of $455 thousand$2.2 million in income taxes, in the first quarternine months of 2017 compared to the prior yearsame period in 2016, due primarily to higher pre-taxan increase in pretax earnings.

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

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

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

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

TrustCo’s results are affected by a variety of factors including competitive and economic conditions in the specific markets in which the Company operates and, more generally, in the national economy, financial market conditions and the regulatory environment.  Each of these factors is dynamic, and changes in any area can have an impact on TrustCo’s results.  Included in the Annual Report to Shareholders on Form 10-K for the year ended December 31, 2016 is a description of the effect interest rates had on the results for the year 2016 compared to 2015.  Many of the same market factors discussed in the 2016 Annual Report continued to have a significant impact on results through the firstthird quarter of 2017.
TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations and rates paid on deposits and charged on loans.  In the experience of management, the absolute level of interest rates, changes in interest rates and customers’ expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period.

Interest rates have a significant impact on the operations and financial results of all financial services companies. One of the most important interest rates used to implement national economic policy is the Federal Funds rate. This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating. The Federal Funds target rate decreased from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008. In December 2015, the target increased to a range of 0.25% to 0.50%, and  25 basis point increases in the target range were also announced in December of 2016 and March and June of 2017, producing the current range of 0.75%1.00% to 1.00%1.25%.  While FRB officials have pointed repeatedly to additionalAdditional increases in 2017 and beyond will largely be dependent on the comments have not been completely consistent or clear in regard to expectations; any increases are likely to be supported only ifstrength of economic conditions continue to improve.conditions.  In the MarchNovember 1, 2017 statement from the Federal Open Market Committee, it was noted that, “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Traditionally, interest rates on bank deposit accounts are heavily influenced by the Federal Funds rate.  The average rate on interest bearing deposits was 43 basis points lower in the firstthird quarter of 2017 relative to the prior year period.  Rates were flat or lower on all deposit categories as compared to the same period in 2016.2016 except money market accounts.  Please refer to the statistical disclosures in the table below entitled “Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential.”

The interest rate on the 10-year Treasury bond and other long-term interest rates have significant influence on the rates for new residential real estate loans. The FRB has attempted to influence rates on mortgage loans by means other than targeting a lower Federal Funds rate, including direct intervention in the mortgage-backed securities market through purchasing these securities in an attempt to raise prices and reduce yields.  In recent periods this includes the reinvestment of principal payments received on its holdings of agency securities, agency mortgage-backed securities and Treasury securities. While no longer increasingThe FRB has stated its holdings of these securities, the reinvestment of principal means that the existing holdings are not being unwound.  Eventually, management believes, the FRB will haveintent to unwind these positions, which would likelycould put upward pressure on rates, although other factors may mitigate this pressure.  These changes in interest rates can have an effect on the Company relative to the interest income on loans, securities and Federal Funds sold and other short term instruments, as well as on interest expense on deposits and borrowings. The FRB plan to reduce its holdings began in October 2017 and will occur gradually.
 
4246
TrustCo’s principal loan products are residential real estate loans.  As noted above, residential real estate loans and longer-term investments are most affected by the changes in longer term market interest rates such as the 10-year Treasury.  As noted, theThe 10-year Treasury yield was up 31down 2 basis points, on average, during the firstthird quarter of 2017 compared to the fourthsecond quarter of 2016 and by 532017 but was up 68 basis points as compared to the firstthird quarter of 2016.

Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae.  As a portfolio lender, TrustCo does not sell loans into the secondary market in the normal course of business and is able to establish rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates.  Financial market volatility and the problems faced by the financial services industry have lessened the influence of the secondary market; however, various programs initiated by arms of the federal government have had an impact on rate levels for certain products.  Most importantly, a government goal of keeping mortgage rates low has been supported by targeted buying of certain securities, thus supporting prices and constraining yields, as noted above.  Very low interest rates in many markets around the world have also increased demand for US fixed income assets, which has also contributed to the decline of ratesyields on these assets.

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

Interest rates generally remained below historic norms on both short term and longer term investments during the firstthird quarter of 2017 despite the increases seen during the quarter.

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

A fundamental component of TrustCo’s strategy has been to grow customer relationships and the deposits and loans that are part of those relationships.  The Company has significant capacity to grow its balance sheet given its existing infrastructure.  The Company expects that growth to be profitable.  The current interest rate environment, however, has narrowed the margin on incremental balance sheet expansion.  While the Company has not changed its fundamental long term strategy in regard to utilizing its excess capacity, management continually evaluates changing conditions and may seek to limit growth or reduce the size of the balance sheet if its analysis indicates that doing so would be beneficial.
 
4347
For the firstthird quarter of 2017, the net interest margin was 3.14%3.26%, up 117 basis pointpoints versus the prior year’s quarter.  The quarterly results reflect the following significant factors:

The average balance of Federal Funds sold and other short-term investments decreased by $34.5$61.9 million while the average yield increased 2874 basis points in the firstthird quarter of 2017 compared to the same period in 2016.  The decrease in the average balance helped to fund increases in investments and loans.

The average balance of securities available for sale increaseddecreased by $51.9$39.8 million while the average yield remained flat at 1.97%increased 13 basis points to 1.92%.  The average balance of held to maturity securities decreased by $10.8$13.1 million and the average yield increased 7 basis points to 4.24%4.10% for the firstthird quarter of 2017 compared to 4.03% for the same period in 2016, with the increase in yield in both portfolios due to a combination of slower prepayment speeds on mortgage-backed securities and the fact that corporate securities, which have higher yields, comprised a larger component of the portfolio in the 2017 period than in the 2016 period.

The average loan portfolio grew by $142.5$171.0 million to $3.44$3.54 billion and the average yield decreased 145 basis points to 4.19%4.24% in the firstthird quarter of 2017 compared to the same period in 2016.  The decline in the average yield primarily reflects the decline in market interest rates on new loan originations as older, higher rate loans pay down or are paid off, as well as declines in higher yielding commercial and installment loans.

The average balance of interest bearing liabilities (primarily deposit accounts) increased $115.5$13.2 million and the average rate paid decreased 42 basis points to 0.36% in the firstthird quarter of 2017 compared to the same period in 2016.

During the firstthird quarter of 2017, the Company continued to focus on its strategy to expand the loan portfolio by offering competitive interest rates.  Management believes the TrustCo residential real estate loan product is very competitive compared to local and national competitors.  Competition remains strong in the Company’s market areas.

The strategy on the funding side of the balance sheet continues to be to attract and retain deposit customers to the Company based upon a combination of service, convenience and interest rate.

Earning Assets
Total average interest earning assets increased from $4.63$4.75 billion in the firstthird quarter of 2016 to $4.78$4.80 billion in the same period of 2017 with an average yield of 3.44%3.56% in the firstthird quarter of 2017 and 3.47%3.41% in the firstthird quarter of 2016.  The shift in the mix of assets towards a higher proportion of loans, along with the increase in yield on cash, partlymore than offset the declining yields on loans.  Interest income on average earning assets increased from $40.0$40.5 million in the firstthird quarter of 2016 to $41.1$42.8 million in the firstthird quarter of 2017, on a tax equivalent basis. The increase was the result of higher volume more than offsetting the decline inand yield.
 
4448
Loans
The average balance of loans was $3.44$3.54 billion in the firstthird quarter of 2017 and $3.30$3.37 billion in the comparable period in 2016.  The yield on loans decreased 145 basis points to 4.19%4.24%.  The higher average balances more than offset the lower yield, leading to an increase in the interest income on loans from $35.6$36.2 million in the firstthird quarter of 2016 to $36.1$37.5 million in the firstthird quarter of 2017.

Compared to the firstthird quarter of 2016, the average balance of residential mortgage loans increased, however other loan categories decreased.  The average balance of residential mortgage loans was $2.91$3.04 billion in 2017 compared to $2.73$2.82 billion in 2016, an increase of 6.8%7.7%.  The average yield on residential mortgage loans decreased by 1812 basis points to 4.17%4.16% in the firstthird quarter of 2017 compared to 2016.

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

Commercial loans, which consist primarily of loans secured by commercial real estate, decreased $13.8$11.2 million to an average balance of $187.6$183.9 million in the firstthird quarter of 2017 compared to the same period in the prior year.  The average yield on this portfolio was down 2up 8 basis points to 5.18%,5.40% compared to 5.20% in the prior year period.period, primarily reflecting the increase in the prime rate.  The Company has been selective in underwriting commercial loans in recent periods as the apparent risk/reward balance has been less favorable in many cases.

The average yield on home equity credit lines increased 1844 basis points to 3.74%4.14% during the firstthird quarter of 2017 compared to 3.56% in the year earlier period.  The increase in yield is the result of prime rate increases which impacted some loans and a smaller proportion of lower yielding initial rate balances.  The average balances of home equity lines decreased 7.9%9.8% to $330.3$312.8 million in the firstthird quarter of 2017 as compared to the prior year.  Some customers with home equity lines have refinanced their balances into fixed rate mortgage loans.

Securities Available for Sale
The average balance of the securities available for sale portfolio for the firstthird quarter of 2017 was $642.3$594.2 million compared to $590.3$633.9 million for the comparable period in 2016.  The increased balances reflectbalance reflects routine paydowns, calls maturities and sales,maturities, offset by new investment purchases.  The average yield was 1.97%1.92% for the firstthird quarter of 2017 and 2016compared to 1.79% for the available for sale portfolio.third quarter of 2016.  This portfolio is primarily comprised of agency issued residential mortgage backed securities, bonds issued by government sponsored enterprises (such as Fannie Mae, the Federal Home Loan Bank, and Freddie Mac), agency-issued commercial mortgage backed securities, Small Business Administration participation certificates, corporate bonds and municipal bonds.  These securities are recorded at fair value with any adjustment in fair value included in other comprehensive income (loss), net of tax.
 
4549
The net unrealized loss in the available for sale securities portfolio was $6.1$5.8 million as of March 31,September 30, 2017 compared to a net unrealized loss of $6.8$11.3 million as of December 31, 2016.  The unrealized loss in the portfolio is primarily the result of changes in market interest rate levels.

Held to Maturity Securities
The average balance of held to maturity securities was $44.3$36.9 million for the firstthird quarter of 2017 compared to $55.1$50.0 million in the firstthird quarter of 2016.  The decrease in balances reflects routine paydowns and calls.  No new securities were added to this portfolio during the period.  The average yield was 4.24%4.10% for the firstthird quarter of 2017 compared to 4.03% for the year earlier period.  The higher yield reflects a modest change in mix and slower prepayments on mortgage-backed securities (MBS), which reduced premium amortization.  TrustCo expects to hold the securities in this portfolio until they mature or are called.

As of March 31,September 30, 2017, the securities in this portfolio includeconsisted solely of residential mortgage-backed securities and corporate bonds.securities.  The balances for these securities are recorded at amortized cost.

Federal Funds Sold and Other Short-term Investments
The 2017 firstthird quarter average balance of Federal Funds sold and other short-term investments was $641.1$621.9 million, a $34.5$61.9 million decrease from the $675.6$683.8 million average for the same period in 2016.  The yield was 0.78%1.24% for the firstthird quarter of 2017 and 0.50% for the comparable period in 2016.  Interest income from this portfolio increased $402 thousand$1.1 million from $844$866 thousand in 2016 to $1.2$1.9 million in 2017, reflecting the target rate increaseincreases that took effect in December of 2016 and the partial impactMarch and June of the March 2017, target rate increase, partly offset by the decreaseddecrease in balances.

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

Funding Opportunities
TrustCo utilizes various funding sources to support its earning asset portfolio.  The vast majority of the Company’s funding comes from traditional deposit vehicles such as savings, demand deposits, interest-bearing checking, money market and time deposit accounts.

Total average interest bearing deposits (which includes interest bearing checking, money market accounts, savings and certificates of deposit) increased $61.9decreased $20.1 million to $3.80$3.79 billion for the firstthird quarter of 2017 versus the firstthird quarter in the prior year, and the average rate paid decreased from 0.390.37% for 2016 to 0.35%0.34% for 2017.  Total interest expense on these deposits decreased $284$291 thousand to $3.3 million in the firstthird quarter of 2017 compared to the year earlier period.  From the firstthird quarter of 2016 to the firstthird quarter of 2017, interest bearing demand account average balances were up 10.1%10.4%, certificates of deposit average balances were flat,down 8.3%, non-interest demand average balances were up 3.4%3.1%, average savings balances increased 1.0%decreased 0.3% and money market balances were down 3.9%up 0.1%.
 
4650
The Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet.  The Bank is a member of the Federal Home Loan Bank of New York (FHLBNY) and is an eligible borrower at the Federal Reserve Bank of New York (FRBNY) and has the ability to borrow utilizing securities and/or loans as collateral in regard to the FHLBNY and against securities in regard to the FRBNY.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.

At March 31,September 30, 2017, the maturity of total time deposits is as follows:

(dollars in thousands)      
      
Under 1 year $933,108  $773,959 
1 to 2 years  126,530   274,233 
2 to 3 years  50,320   23,568 
3 to 4 years  2,768   1,912 
4 to 5 years  950   1,989 
Over 5 years  216   225 
 $1,113,892  $1,075,886 

Average short-term borrowings for the quarter were $229.7$223.2 million in 2017 compared to $176.1$189.9 million in 2016.  The average rate increased during this time period from 0.59% in 2016 to 0.61%0.62% in 2017.  The short-term borrowings of the Company are cash management accounts, which represent retail accounts with customers for which the Bank has pledged certain assets as collateral.

Net Interest Income
Taxable equivalent net interest income increased by $1.2$2.5 million to $37.4$39.2 million in the firstthird quarter of 2017 compared to the same period in 2016.  The net interest spread was up 118 basis pointpoints to 3.08%3.21% in the firstthird quarter of 2017 compared to the same in 2016. As previously noted, the net interest margin was up 117 basis points to 3.14%3.26% for the firstthird quarter of 2017 compared to the same period in 2016.

Nonperforming Assets
Nonperforming assets include nonperforming loans (“NPLs”), which are those loans in a non-accrual status and loans past due three payments or more and still accruing interest.  Also included in the total of nonperforming assets are foreclosed real estate properties, which are included in other assets and categorized as other real estate owned.
 
47
The following describes the nonperforming assets of TrustCo as of March 31,September 30, 2017:

Nonperforming loans and foreclosed real estate: Total NPLs were $26.4$24.6 million at March 31,September 30, 2017, compared to $25.1 million at December 31, 2016 and $30.4$26.0 million at March 31,September 30, 2016.  There were $26.4$24.5 million of non-accrual loans at March 31,September 30, 2017 compared to $25.0 million at December 31, 2016 and $30.3$26.0 million at March 31,September 30, 2016.  There were no loans at March 31,September 30, 2017 and 2016 and December 31, 2016 that were past due 90 days or more and still accruing interest.

51
At March 31,September 30, 2017, nonperforming loans primarily include a mix of commercial and residential loans.  Of total nonperforming loans of $26.4$24.5 million at March 31,September 30, 2017, $24.5$22.8 million were residential real estate loans, $1.9$1.7 million were commercial mortgages and $41$30 thousand were installment loans, compared to $23.1$23.2 million, $1.8 million and $48 thousand, respectively at December 31, 2016.

A significant percentage of nonperforming loans are residential real estate loans, which are historically lower-risk than most other types of loans.  Annualized net chargeoffs were 0.04%0.07% of average residential real estate loans (including home equity lines of credit) for the firstthird quarter of 2017 compared to 0.11%0.06% for the firstthird quarter of 2016.  Management believes that these loans have been appropriately written down where required.

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

The Company originates loans throughout its deposit franchise area.  At March 31,September 30, 2017, 78.0%77.2% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 22.0%22.8% were in Florida.  Those figures compare to 78.5% and 21.5%, respectively at December 31, 2016.  Within these two geographic regions, commercial loans constitute a larger component of the local outstandings in New York than in Florida, at 6.4%6.3% and 1.5%1.6%, respectively, as of March 31,September 30, 2017.

Economic conditions vary widely by geographic location.  Florida experienced a more significant downturn than New York during the recession.  Consequently, nonperforming loans (NPLs as a percentage of the portfolio) had generally been more heavily weighted towards Florida in recent years.  Howeverrecession, however conditions in Florida have improved more than in New York in recent periods andperiods.  As a percentage of the total nonperforming loans as of March 31,September 30, 2017, 6.5% of nonperforming loans7.7% were to Florida borrowers, compared to 93.5%92.3% to borrowers in New York and surrounding areas.  For the three months ended March 31,September 30, 2017, New York and surrounding areas experienced net chargeoffs of approximately $356$667 thousand, compared to $86net recoveries of $37 thousand in Florida.
 
4852
Other than loans currently identified as nonperforming, management is aware of no other loans in the Bank’s portfolio that pose material risk of the eventual non-collection of principal and interest.  Also as of March 31,September 30, 2017, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources.

TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring (TDR), as impaired loans.  There were $2.4$3.0 million of commercial mortgages and commercial loans classified as impaired as of March 31,September 30, 2017 compared to $2.4 million at December 31, 2016.  There were $23.0$21.6 million of impaired residential loans at March 31,September 30, 2017 and $21.6 million at December 31, 2016.  The average balances of all impaired loans were $24.2$25.0 million for the threenine months of 2017 and $22.4 million for the full year 2016.

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

At March 31,September 30, 2017 there was $3.2$2.9 million of foreclosed real estate compared to $4.3 million at December 31, 2016.

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

(dollars in thousands) 
As of
March 31, 2017
  
As of
December 31, 2016
 
  Amount  
Percent of
Loans to
Total Loans
  Amount  
Percent of
Loans to
Total Loans
 
Commercial $4,687   5.07% $4,820   5.32%
Real estate - construction $307   0.69%  318   0.72%
Real estate mortgage - 1 to 4 family $32,924   84.54%  32,452   83.94%
Home equity lines of credit $5,473   9.46%  5,570   9.76%
Installment Loans $657   0.24%  730   0.26%
  $44,048   100.00% $43,890   100.00%
Allocation of the Allowance for Loan Losses

The allocation of the allowance for loans losses is as follows:
(dollars in thousands) 
As of
September 30, 2017
  
As of
December 31, 2016
 
  Amount  
Percent of
Loans to
Total Loans
  Amount  
Percent of
Loans to
Total Loans
 
Commercial $4,490   4.94% $4,820   5.32%
Real estate - construction $343   0.78%  318   0.72%
Real estate mortgage - 1 to 4 family $33,083   85.34%  32,452   83.94%
Home equity lines of credit $5,440   8.71%  5,570   9.76%
Installment Loans $726   0.23%  730   0.26%
  $44,082   100.00% $43,890   100.00%
 
At March 31,September 30, 2017, the allowance for loan losses was $44.0$44.1 million, compared to $44.4$44.0 million at March 31,September 30, 2016 and $43.9 million at December 31, 2016.  The allowance represents 1.28%1.23% of the loan portfolio as of March 31,September 30, 2017 compared to 1.34%1.30% at March 31,September 30, 2016 and 1.28% at December 31, 2016.

53
The provision for loan losses was $600$550 thousand for the quarter ended March 31,September 30, 2017 and $800$750 thousand for the quarter ended March 31,September 30, 2016.  Net chargeoffs for the three-month period ended March 31,September 30, 2017 were $442$630 thousand and were $1.2 million in$864 thousand for the prior year period.
49

During the firstthird quarter of 2017, there were $72 thousand of grossno commercial loan chargeoffs and $557$847 thousand of gross residential mortgage and consumer loan chargeoffs as compared with $264$356 thousand of gross commercial loan chargeoffs and $1.1 million$611 thousand of gross residential mortgage and consumer loan chargeoffs in the firstthird quarter of 2016.  Gross recoveries during the firstthird quarter of 2017 were $8 thousandzero for commercial loans and $179$217 thousand for residential mortgage and consumer loans, compared to $40$3 thousand for commercial loans and $130$100 thousand for residential and consumer in the firstthird quarter of 2016.

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

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

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

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

54
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.
50

Using this model, the fair value of capital projections as of March 31,September 30, 2017 are referenced below. The base case (current rates) scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of March 31,September 30, 2017. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp.

As of March 31,September 30, 2017
 
Estimated Percentage of
Fair value of Capital to
Fair value of Assets
 
+400 BP  19.9019.81%
+300 BP  21.1121.10 
+200 BP  22.2722.37 
+100 BP  23.2823.41 
Current rates  23.5323.85 
-100 BP  22.0221.57 
 
Noninterest Income
Total noninterest income for the firstthird quarter of 2017 was $4.7$4.9 million, compared to $4.6$4.7 million in the prior year period.  The increase of $364$125 thousand was due to an increase in Trustco Financial Services income, offset by a decline in other income.  There were no net gains on securities gainstransactions in either quarter.period.  The increase in Trustco Financial Services income was primarily due to higher tax preparation fees.the settlement of several estates in the third quarter of 2017 that generated more revenue than previously accrued for.  Fees for services to customers were up $103 over the prior year period.  The fair value of assets under management was $876 million at September 30, 2017 and $846 million at both March 31, 2017 andas of December 31, 2016 and $844$863 million at March 31,September 30, 2016.  The

For the nine months through September 30, 2017 total of fees for other services to customers plus othernoninterest income was $2.9$14.1 million, in the first quarter of 2017, down $98 thousand versuscompared to $14.5 million for the prior year quarter.period.  The decline was due to a decrease of $668 thousand in net gains on securities transactions and a decrease of $549 in other income, offset by an increase of $663 thousand in Financial Services revenue, as noted previously.

Noninterest Expenses
Total noninterest expenses were $24.0$23.5 million for the three months ended March 31,September 30, 2017, compared to $23.4$23.0 million for the three months ended March 31,September 30, 2016.  The largest cause of the increase in expenses wasSignificant changes included a $1.2$1.4 million increase in salaries and benefits, which was mostly offset by a $943$620 thousand decrease in FDICother real estate costs and a $487 thousand decrease in other insurance expenses.  The latter change was due to a change in the premium charged by the FDIC.  Going forward we expect that the quarterly FDIC expense will approximate the level recorded in the first quarter of 2017, excluding the impact of balance sheet growth.  The only expense category to see a meaningful increase was the “other” line, which was up $558 thousand in the first quarter of 2017 as compared to the year-ago period.  Full time equivalent headcount increased from 784790 as of March 31,September 30, 2016 to 802815 as of March 31, 2017.September 30, 2017, which was a primary cause, along with the increase in the market price of TrustCo shares,  of the increase in salary and benefits expense.
 
5155
For the nine months through September 30, 2017 total noninterest expense was $70.5 million for both the third quarters of 2017 and 2016.  An increase of $3.2 million in salaries and benefits was offset by a decrease of $2.0 million decrease in FDIC and other insurance expenses and a decrease of $1.1 million in other real estate expense.  Changes in other categories were less significant.

Income Taxes
In the firstthird quarter of 2017, TrustCo recognized income tax expense of $6.6$7.4 million compared to $6.1$6.7 million for the firstthird quarter of 2016.  The effective tax rates were 37.5%36.9% and 37.0%37.9% for the firstthird quarters of 2017 and 2016, respectively.  For the nine month periods through September 30, income taxes increased $2.2 million, with effective tax rates of 37.3% and 37.4%, respectively, for the nine months ended September 30, 2017 and 2016.

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

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

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

Total shareholders’ equity at March 31,September 30, 2017 was $438.7$454.9 million compared to $423.0$435.6 million at March 31,September 30, 2016. TrustCo declared a dividend of $0.065625 per share in the firstthird quarter of 2016.2017.  This results in a dividend payout ratio of 57.47%50.07% based on firstthird quarter 2017 earnings of $10.9$12.6 million.
 
5256
The Bank and the Company reported the following capital ratios as of March 31,September 30, 2017 and December 31, 2016:
 
(Bank Only)
 
(dollars in thousands) As of March 31, 2017  Well  Adequately  As of September 30, 2017  
Well
Capitalized(1)
 
Adequately
Capitalized(1)(2)
 
 Amount  Ratio  Capitalized(1)  Capitalized(1)(2)  Amount Ratio   
                            
Tier 1 leverage capital $429,771   8.844%  5.000%  4.000  $443,310   9.071%  5.000%  4.000%
Common equity tier 1 capital  429,771   17.338   6.500   5.750   443,310   17.763   6.500   5.750 
Tier 1 risk-based capital  429,771   17.338   8.000   7.250   443,310   17.763   8.000   7.250 
Total risk-based capital  460,920   18.595   10.000   9.250   474,669   19.019   10.000   9.250 
 
(dollars in thousands) As of December 31, 2016 
Well
Capitalized(1)
 
Adequately
Capitalized(1)(3)
 
  Amount Ratio   
                 
Tier 1 (core) capital $424,802   8.829%  5.000%  4.000%
Common equity tier 1 capital  424,802   17.238   6.500   5.125 
Tier 1 risk-based capital  424,802   17.238   8.000   6.625 
Total risk-based capital  455,772   18.492   10.000   8.625 
(dollars in thousands) As of December 31, 2016  Well  Adequately 
  Amount  Ratio  Capitalized(1)  Capitalized(1)(3) 
             
Tier 1 (core) capital $424,802   8.829%  5.000%  4.000%
Common equity tier 1 capital  424,802   17.238   6.500   5.125 
Tier 1 risk-based capital  424,802   17.238   8.000   6.625 
Total risk-based capital  455,772   18.492   10.000   8.625 

(1)Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized
(2)The March 31,September 30, 2017 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 1.25 percent
(3)The December 31, 2016 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 0.625 percent

(Consolidated)
 
(dollars in thousands) As of March 31, 2017  
As of September 30, 2017
 
 Amount  Ratio  Amount  Ratio 
              
Tier 1 leverage capital $443,714   9.117% $457,434   9.359%
Common equity tier 1 capital  443,714   17.891   457,434   18.319 
Tier 1 risk-based capital  443,714   17.891   457,434   18.319 
Total risk-based capital  474,880   19.147   488,810   19.576 
 
(dollars in thousands) As of December 31, 2016 
  Amount Ratio 
         
Leverage capital $438,426   9.110%
Common equity tier 1 capital  438,426   17.782 
Tier 1 risk-based capital  438,426   17.782 
Total risk-based capital  469,411   19.038 
 
In addition, at March 31,September 30, 2017, the consolidated equity to total assets ratio was 8.98%9.34%, compared to 8.89% at December 31, 2016 and 8.88%9.05% at March 31,September 30, 2016.

Both TrustCo and Trustco Bank are subject to regulatory capital requirements. On January 1, 2015, a new capital rule took effect that revised the federal bank regulatory agencies’ risk-based capital requirements and 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 will be phased-in over several years and will be fully in effect in 2019.  Calendar year 2016 was the secondthird year of implementation of the new capital rules. Prior to January 2015, the Company had not been subject to consolidated regulatory capital requirements.

As of March 31,September 30, 2017, the capital levels of both TrustCo and the Bank exceeded the minimum standards, including if the current (and also if the fully phased-in) capital conservation buffer is taken into account.
 
5357
Index
Under the OCC’s “prompt corrective action” regulations, a bank is deemed to be “well-capitalized” when its CET1, Tier 1, total risk-based, and leverage capital ratios are at least 6.5%, 8%, 10%, and 5%, respectively. A bank is deemed to be “adequately capitalized” or better if its capital ratios meet or exceed the minimum federal regulatory capital requirements, and “undercapitalized” if it fails to meet these minimal capital requirements. A bank is “significantly undercapitalized” if its CET1, Tier 1, total risk-based and leverage capital ratios fall below 3%, 4%, 6%, and 3%, respectively and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. At March 31,September 30, 2017 and 2016, Trustco Bank met the definition of “well-capitalized.”

As noted, the Company’s dividend payout ratio was 57.47%50.07% of net income for the firstthird quarter of 2017 and 60.1%57.40% of net income for the firstthird quarter of 2016. The per-share dividend paid in both the firstthird quarters of 2016 and 2017 was $0.065625. The Company’s ability to pay dividends to its shareholders is dependent upon the ability of the Bank to pay dividends to the Company. The payment of dividends by the Bank to the Company is subject to continued compliance with minimum regulatory capital requirements and the Bank’s compliance with the capital plan required under the terms of the Bank’s July 21, 2015 Agreement with the OCC.Agreement. Under the OCC agreement, the Bank may declare or pay a dividend or make a capital distribution only (a) when the Bank is in compliance with its approved written capital plan, and would remain in compliance with such Capital Plancapital plan immediately following the declaration or payment of any dividend or capital distribution, and (b) following OCC approval under OCC capital distribution rules. The OCC may disapprove a dividend if: the Bank would be undercapitalized following the distribution; the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statue, regulation or agreement. In addition, under the Agreement, signed with the OCC in 2015, the payment of dividends by the Bank are subject to prior approval.

TrustCo maintains a dividend reinvestment plan (DRP) with approximately 12,000 participants. The DRP allows participants to reinvest dividends in shares of the Company. The DRP also allows for additional purchases by participants and has a discount feature (up to a 5% for safe harbor provisions) that can be activated by management as a tool to raise capital. To date, the discount feature has not been utilized.
 
Critical Accounting Policies:Policies
Pursuant to Securities and Exchange Commission (SEC) guidance, management of the Company is encouraged to evaluate and disclose those accounting policies judged to be critical policies - those most important to the portrayal of the Company’s financial condition and results, and that require management’s most difficult subjective or complex judgments.
 
Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover the inherent risk of losses in the loan portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.
 
5458
Index
TrustCo Bank Corp NY
Management'sManagement’s Discussion and Analysis
STATISTICAL DISCLOSURE

I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS'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'shareholders’ equity is the unrealized (loss) gain, (loss), net of tax, in the available for sale portfolio of ($5.8)3.0) million 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.
in interest income and expense  due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.
  
Three months ended
September 30, 2017
  
Three months ended
September 30, 2016
          
(dollars in thousands) 
Average
Balance
  Interest  
Average
Rate
  
Average
Balance
  Interest  
Average
Rate
  
Change in
Interest
Income/
Expense
  
Variance
Balance
Change
  
Variance
Rate
Change
 
Assets                           
                            
Securities available for sale:                           
U. S. government sponsored enterprises $123,055   465   1.51% $109,488   408   1.49% $57   51   6 
Mortgage backed securities and collateralized mortgage obligations-residential  345,248   1,815   2.10%  400,103   1,829   1.83%  (14)  (1,053)  1,039 
State and political subdivisions  522   11   8.43%  953   20   8.39%  (9)  (10)  1 
Corporate bonds  42,528   153   1.44%  27,161   97   1.43%  56   -   - 
Small Business Administration-guaranteed participation securities  72,204   380   2.11%  85,305   445   2.09%  (65)  (87)  22 
Mortgage backed securities and                                    
collateralized mortgage obligations-commercial  9,918   22   0.89   10,247   36   1.41   (14)  (1)  (13)
Other  685   4   2.34%  685   4   2.34%  -   -   - 
                                     
Total securities available for sale  594,160   2,850   1.92%  633,942   2,839   1.79%  11   (1,099)  1,054 
                                     
Federal funds sold and other short-term Investments  621,878   1,927   1.24%  683,777   866   0.50%  1,061   (522)  1,583 
                                     
Held to maturity securities:                                    
Corporate bonds  6,738   102   6.06%  10,644   156   5.86%  (54)  (88)  34 
Mortgage backed securities and collateralized mortgage obligations-residential  30,161   276   3.66%  39,307   347   3.53%  (71)  (150)  79 
                                     
Total held to maturity securities  36,899   378   4.10%  49,951   503   4.03%  (125)  (237)  112 
                                     
Federal Reserve Bank and Federal Home Loan Bank stock  9,117   125   5.48%  9,579   131   5.47%  (6)  (8)  2 
                                     
Commercial loans  183,867   2,482   5.40%  195,115   2,597   5.32%  (115)  (338)  223 
Residential mortgage loans  3,035,745   31,600   4.16%  2,819,343   30,175   4.28%  1,425   5,895   (4,470)
Home equity lines of credit  312,812   3,237   4.14%  346,744   3,211   3.70%  26   (1,365)  1,391 
Installment loans  8,096   200   9.88%  8,331   195   9.36%  5   (28)  33 
                                     
Loans, net of unearned income  3,540,520   37,519   4.24%  3,369,533   36,178   4.29%  1,341   4,165   (2,824)
                                     
Total interest earning assets  4,802,574   42,799   3.56%  4,746,782   40,517   3.41%  2,282   2,298   (72)
                                     
Allowance for loan losses  (44,284)          (44,473)                    
Cash & non-interest earning assets  127,004           137,462                     
                                     
Total assets $4,885,294          $4,839,771                     
                                     
Liabilities and shareholders’ equity                                    
                                     
Deposits:                                    
Interest bearing checking accounts $861,387   113   0.05% $780,058   120   0.06%  (7)  54   (61)
Money market accounts  572,168   469   0.33%  571,333   463   0.32%  6   0   6 
Savings  1,280,318   435   0.14%  1,284,533   504   0.16%  (69)  (1)  (68)
Time deposits  1,078,085   2,247   0.83%  1,176,115   2,468   0.84%  (221)  (80)  (141)
                                     
Total interest bearing deposits  3,791,958   3,264   0.34%  3,812,039   3,555   0.37%  (291)  (27)  (264)
Short-term borrowings  223,238   345   0.62%  189,910   281   0.59%  64   50   14 
                                     
Total interest bearing liabilities  4,015,196   3,609   0.36%  4,001,949   3,836   0.38%  (227)  23   (250)
                                     
Demand deposits  389,286           377,455                     
Other liabilities  28,809           27,496                     
Shareholders’ equity  452,003           432,871                     
                                     
Total liabilities and shareholders’ equity $4,885,294          $4,839,771                     
                                     
Net interest income , tax equivalent      39,190           36,681      $2,509   2,275   178 
                                     
Net interest spread          3.21%          3.03%            
                                     
Net interest margin (net interest income to total interest earning assets)          3.26%          3.09%            
                                     
Tax equivalent adjustment      (11)          (14)                
                                     
Net interest income      39,179           36,667                 
59
Index
TrustCo Bank Corp NY
Management’s Discussion and Analysis
STATISTICAL DISCLOSURE

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

The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities.  Included in the average balance of shareholders’ equity is the unrealized loss, net of tax, in the available for sale portfolio of ($4.2) million in 2017 and  ($2.2)0.5) million in 2016.  The subtotals contained in the following table are the arithmetic totals of the items contained in that category.  Increases and decreases in interest income and expense  due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.

 
Three months ended
March 31, 2017
  
Three months ended
March 31, 2016
           
Nine months ended
September 30, 2017
  
Nine months ended
September 30, 2016
          
(dollars in thousands) 
Average
Balance
  Interest  
Average
Rate
  
Average
Balance
  Interest  
Average
Rate
  
Change in
Interest
Income/
Expense
  
Variance
Balance
Change
  
Variance
Rate
Change
  
Average
Balance
  Interest  
Average
Rate
  
Average
Balance
  Interest  
Average
Rate
  
Change in
Interest
Income/
Expense
  
Variance
Balance
Change
  
Variance
Rate
Change
 
                           
Assets                                                      
                                                      
Securities available for sale:                                                      
U. S. government sponsored enterprises $142,495   595   1.67% $75,031   255   1.36% $340   (168)  508  $139,629   1,667   1.59% $97,281   1,067   1.46% $600   497   103 
Mortgage backed securities and collateralized mortgage obligations-residential  367,956   1,958   2.13%  412,499   2,116   2.05%  (158)  (247)  89   357,347   5,717   2.13%  419,185   6,114   1.94%  (397)  (1,204)  807 
State and political subdivisions  873   19   8.71%  1,114   22   7.90%  (3)  (14)  11   736   41   7.43%  1,007   60   7.94%  (19)  (11)  (8)
Corporate bonds  41,580   151   1.45%  -   -   0.00%  151   151   -   42,272   458   1.44%  9,120   97   1.42%  361   359   2 
Small Business Administration-guaranteed participation securities  78,591   415   2.11%  90,611   476   2.10%  (61)  (76)  15   75,429   1,189   2.10%  87,896   1,371   2.08%  (182)  (205)  23 
Mortgage backed securities and collateralized mortgage obligations-commercial  10,089   23   0.91%  10,394   36   1.40%  (13)  (8)  (5)  10,003   66   0.88%  10,320   110   1.42%  (44)  (3)  (41)
Other  685   4   2.34%  685   4   2.34%  -   -   -   685   12   2.34%  683   12   2.34%  -   -   - 
                                                                        
Total securities available for sale  642,269   3,165   1.97%  590,334   2,909   1.97%  256   (363)  619   626,101   9,150   1.95%  625,492   8,831   1.88%  319   (567)  886 
                                                                        
Federal funds sold and other short-term Investments  641,126   1,246   0.78%  675,586   844   0.50%  402   (40)  442   635,450   4,900   1.03%  675,948   2,542   0.50%  2,358   (256)  2,614 
                                                                        
Held to maturity securities:                                                                        
Corporate bonds  9,992   154   6.16%  9,977   154   6.17%  -   1   (1)  8,897   410   6.14%  10,202   464   6.06%  (54)  (64)  10 
Mortgage backed securities and collateralized mortgage obligations-residential  34,303   316   3.68%  45,112   402   3.56%  (86)  (170)  84   32,202   888   3.68%  42,192   1,123   3.55%  (235)  (297)  62 
                                                                        
Total held to maturity securities  44,295   470   4.24%  55,089   556   4.03%  (86)  (169)  83   41,099   1,298   4.21%  52,394   1,587   4.04%  (289)  (361)  72 
                                                                        
Federal Reserve Bank and Federal Home Loan Bank stock  9,579   134   5.60%  9,480   120   5.06%  14   1   13   9,467   393   5.54%  9,545   369   5.15%  24   (5)  29 
                                                                        
Commercial loans�� 187,590   2,429   5.18%  201,367   2,617   5.20%  (188)  (114)  (74)  184,932   7,313   5.27%  198,461   7,777   5.22%  (464)  (586)  122 
Residential mortgage loans  2,911,987   30,367   4.17%  2,726,811   29,622   4.35%  745   6,563   (5,818)  2,969,363   92,910   4.17%  2,768,579   89,523   4.31%  3,387   7,652   (4,265)
Home equity lines of credit  330,338   3,085   3.74%  358,817   3,179   3.56%  (94)  (846)  752   321,276   9,453   3.92%  353,461   9,569   3.61%  (116)  (1,193)  1,077 
Installment loans  8,228   169   8.22%  8,659   193   8.94%  (24)  (163)  139   8,117   563   9.25%  8,435   579   9.15%  (16)  (22)  6 
                                                                        
Loans, net of unearned income  3,438,143   36,050   4.19%  3,295,654   35,611   4.33%  439   5,439   (5,000)  3,483,688   110,239   4.22%  3,328,936   107,448   4.30%  2,791   5,850   (3,059)
                                                                        
Total interest earning assets  4,775,412   41,065   3.44%  4,626,143   40,040   3.47%  1,025   4,868   (3,843)  4,795,805   125,980   3.50%  4,692,315   120,777   3.43%  5,203   4,660   543 
                                                                        
Allowance for loan losses  (44,236)          (45,271)                      (44,317)          (44,832)                    
Cash & non-interest earning assets  130,186           135,532                       129,384           136,584                     
                                                                        
Total assets $4,861,362          $4,716,404                      $4,880,872          $4,784,067                     
                                                                        
Liabilities and shareholders' equity                                    
Liabilities and shareholders’ equity                                    
                                                                        
Deposits:                                                                        
Interest bearing checking accounts $809,039   124   0.06% $735,098   114   0.06%  10   10   -  $840,322   371   0.06% $758,314   350   0.06%  21   44   (23)
Money market accounts  580,006   466   0.32%  603,774   496   0.33%  (30)  (17)  (13)  576,518   1,403   0.32%  585,019   1,426   0.33%  (23)  (21)  (2)
Savings  1,274,757   430   0.13%  1,262,467   604   0.19%  (174)  40   (214)  1,280,473   1,300   0.14%  1,273,565   1,712   0.18%  (412)  16   (428)
Time deposits  1,133,942   2,283   0.81%  1,134,459   2,373   0.84%  (90)  (1)  (89)  1,104,731   6,711   0.81%  1,162,603   7,301   0.84%  (590)  (343)  (247)
                                                                        
Total interest bearing deposits  3,797,744   3,303   0.35%  3,735,798   3,587   0.39%  (284)  32   (316)  3,802,044   9,785   0.34%  3,779,501   10,789   0.38%  (1,004)  (304)  (700)
Short-term borrowings  229,719   349   0.61%  176,119   257   0.59%  92   83   9   226,447   1,043   0.61%  182,453   800   0.58%  243   196   47 
                                                                        
Total interest bearing liabilities  4,027,463   3,652   0.36%  3,911,917   3,844   0.40%  (192)  115   (307)  4,028,491   10,828   0.36%  3,961,954   11,589   0.39%  (761)  (108)  (653)
                                                                        
Demand deposits  370,552           358,224                       380,216           368,852                     
Other liabilities  26,781           26,917                       27,880           27,179                     
Shareholders' equity  436,566           419,346                     
Shareholders’ equity  444,285           426,082                     
                                                                        
Total liabilities and shareholders' equity $4,861,362          $4,716,404                     
Total liabilities and shareholders’ equity $4,880,872          $4,784,067                     
                                                                        
Net interest income , tax equivalent      37,413           36,196      $1,217   4,753   (3,536)      115,152           109,188      $5,964   4,768   1,196 
                                                                        
Net interest spread          3.08%          3.07%                      3.14%          3.04%            
                                                                        
Net interest margin (net interest income to total interest earning assets)          3.14%          3.13%                      3.20%          3.10%            
                                                                        
Tax equivalent adjustment      (13)          (14)                      (32)          (40)                
                                                                        
Net interest income      37,400           36,182                       115,120           109,148                 
 
5560
Index
Item 3.Quantitative and Qualitative Disclosures about Market Risk

As detailed in the Annual Report to Shareholders as of December 31, 2016, the Company is subject to interest rate risk as its principal market risk.  As noted in the Management’s Discussion and Analysis for the three and nine month periods ended March 31,September 30, 2017 and 2016, the Company continues to respond to changes in interest rates in such a fashion to positionway that positions the Company to meet short term earning goals and to also allowallows the Company to respond to changes in interest rates in the future.  Consequently, for the firstthird quarter of 2017, the Company had an average balance of Federal Funds sold and other short-term investments of $641.1$621.9 million compared to $675.6$683.8 million in the firstthird quarter of 2016.  As investment opportunities present themselves, management plans to invest funds from the Federal Funds sold and other short-term investment portfolio into the securities available for sale, securities held to maturity and loan portfolios.  Additional disclosure of interest rate risk can be found under “Liquidity and Interest Rate Sensitivity” and “Asset/Liability Management” in the Management’s Discussion and Analysis section of this document.

Item 4.Controls and Procedures

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

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

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

There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.
 
5661
Index
PART IIOTHER INFORMATION
Item 1.
Legal Proceedings

None.

Item 1A.
Risk Factors

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

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

None.


Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety

None.

Item 5.
Other Information

None.

Item 6.
Exhibits

Reg S-K (Item 601)
Exhibit No.
Description
  
15Crowe Horwath LLP Letter Regarding Unaudited Interim Financial Information
  
31(a)Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer.
  
31(b)Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer.
  
32Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer.
 
101.INSInstance Document
  
101.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
  
101.LABXBRL Taxonomy Extension Label Linkbase Document
  
101.PREXBRLTaxonomy Extension Presentation Linkbase Document
 
5762
Index
SIGNATURES

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

 TrustCo Bank Corp NY
  
 
By: /s/ Robert J. McCormick
 
 Robert J. McCormick
 President and Chief Executive Officer
 
By: /s//s/ Michael M. Ozimek
 
 Michael M. Ozimek
 Senior Vice President and Chief Financial Officer
Date:  May 5, 2017
 
Date:  November 7, 2017
5863
Index
Exhibits Index
 
Reg S-K
Exhibit No.
Description
  
15
Crowe Horwath LLP Letter Regarding Unaudited Interim Financial Information
  
31(a)
Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer.
  
31(b)
Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer.
  
32
Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek,  principal financial officer.
 
101.INSInstance Document
  
101.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
  
101.LABXBRL Taxonomy Extension Label Linkbase Document
  
101.PREXBRLTaxonomy Extension Presentation Linkbase Document
 
 
5964