Exhibit 13

 

TrustCo Bank Corp NY (the “Company,” or “TrustCo”) is a savings and loan holding company headquartered in Glenville, New York.  The Company is the largest financial services company headquartered in the Capital Region of New York State, and its principal subsidiary, Trustco Bank (the “Bank” or “Trustco”), operates 148 community banking offices and 161 Automatic Teller Machines throughout the Bank’s market areas.  The Company serves 5 states and 32 counties with a broad range of community banking services.

Financial Highlights

(dollars in thousands, except per share data)	Years ended December 31,
	2018			2017			Percent Change
Income:
Net interest income	$	160,686		$	154,368			4.09	%
Net Income		61,445			43,145			42.42
Per Share:
Basic earnings		0.637			0.449			41.87
Diluted earnings		0.636			0.448			41.96
Book value at period end		5.07			4.76			6.51
Average Balances:
Assets		4,900,450			4,875,668			0.51
Loans, net		3,746,082			3,514,900			6.58
Deposits		4,206,577			4,171,396			0.84
Shareholders’ equity		470,814			447,680			5.17
Financial Ratios:
Return on average assets		1.25	%		0.88	%		42.05
Return on average equity		13.05			9.64			35.38
Consolidated tier 1 capital to:
Total assets (leverage)		10.13			9.45			7.20
Risk-adjusted assets		18.79			18.02			4.27
Common equity tier 1 capital ratio		18.79			18.02			4.27
Total capital to risk-adjusted assets		20.05			19.28			3.97
Net loans charged off to average loans		0.0002			0.04893			(99.56	)
Allowance for loan losses to nonperforming loans		1.79	x		1.81	x		(1.12	)
Efficiency ratio*		53.97	%		53.75	%		0.41
Dividend Payout ratio		42.02			58.44			(28.10	)

Per Share information of common stock

	Basic Earnings		Diluted Earnings		Cash Dividend		Book Value		Range of Stock Price
									High		Low
2018
First quarter	$	0.154	$	0.153	$	0.0656	$	4.80	$	9.33	$	8.25
Second quarter		0.160		0.160		0.0656		4.87		9.35		8.35
Third quarter		0.157		0.157		0.0681		4.93		9.45		8.35
Fourth quarter		0.166		0.166		0.0681		5.07		8.53		6.51
2017
First quarter	$	0.114	$	0.114	$	0.0656	$	4.57	$	8.00	$	7.80
Second quarter		0.127		0.127		0.0656		4.66		7.75		7.58
Third quarter		0.131		0.131		0.0656		4.73		9.10		8.85
Fourth quarter		0.077		0.076		0.0656		4.76		9.30		9.15

*Certain of the financial measures used in this report, such as Tax-Equivalent Net Interest Income and Tax-Equivalent Net Interest Margin, Tangible Book Value Per Share and the Efficiency Ratio, are determined by methods other than in accordance with generally accepted accounting principles (“GAAP”).  A reconciliation of these measures to the closest comparable GAAP financial measures is presented herein.

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Financial Highlights	1
President’s Message	3
Management’s Discussion and Analysis of Financial Condition and Results of Operations	4-30
Glossary of Terms	31-33
Management’s Report on Internal Control Over Financial Reporting	34
Report of Independent Registered Public Accounting Firm	35-36
Consolidated Financial Statements and Notes	37-83
Branch Locations	84-89
Officers and Board of Directors	90-91
General Information	92-93
Share Price Information	94

TrustCo Bank Corp NY Mission

The Mission of TrustCo Bank Corp NY is to provide an above-average return to our owners in a manner consistent with our commitment to all stakeholders of the Company and its primary subsidiary, Trustco Bank, including customers, employees, community, regulators and shareholders.

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President’s Message

Dear fellow shareholders,

Writing this letter, I reflect on the year past and look forward to the future.  I am pleased to report that the view of our company in both directions is extremely positive.  Thank you for being part of our continued success.

In 2018, our company saw $61.4 million in earnings up from $43.1 million in 2017.  This performance was the result of intense focus on TrustCo’s core purpose – delivering quality banking products and services at a fair price with a particular emphasis on residential mortgage lending.  This is what we do well and every person on the TrustCo team knows it.  Our purpose drives everything we do and, when we truly fulfill our purpose, we improve our community one dream at a time and our business thrives.  Thriving business permitted 2018’s increase in our company’s dividend.   The company paid dividends of $25.8 million in 2018 and did so while maintaining strong capital ratios.

Looking forward, I see genuine promise of even greater success.  Our clear and positive mission is attractive to the up-and-coming generation of millennials who increasingly make up not only our customer base, but our most valuable asset - our workforce.  Today’s financial performance fuels tomorrow’s success.  We continue to invest in our company at all levels and our investments in systems and technology have not only improved our customer experience, but position us to sustain our corporate purpose with efficiency and technological ease in an ever‑evolving banking market.

Another source of insight and direction comes from our ongoing engagement with our shareholders.  We share information about what we are doing and how we are doing it and we listen to what is important to you and the advice that you offer – particularly on matters of governance.  We continuously assess the state of our corporate affairs and never hesitate to embrace improvements in areas such as diversity, transparency, accountability, and responsibility.

In 2018 we enhanced the ranks of our senior executive management team with the promotion of Michael Ozimek, our Chief Financial Officer, and Kevin Curley, our head of Branch Administration and Operations, to Executive Vice President.  These promotions, and the mutual commitments that they represent, greatly enhance long‑term shareholder value by ensuring the availability of top-tier talent well into the future.  Also in 2018, our ranks were diminished by the untimely passing of our Vice President of Investor Relations, Kevin Timmons.  His wisdom, insight, and warm personality are sorely missed.

The bar of achievement has been set high, but our team is more than ready and able to do whatever needs to be done in 2019 and beyond.  We are aware that the road ahead is not without challenges, but we face that road with eagerness and enthusiasm.  We will strive for the ever-more efficient accomplishment of our corporate purpose and the rewards that accompany such success.

Yours sincerely,

 

Robert J. McCormick

Chairman, President, and Chief Executive Officer

TrustCo Bank Corp NY

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The financial review which follows will focus on the factors affecting the financial condition and results of operations of TrustCo during 2018 and, in summary form, the two preceding years.  Unless otherwise indicated, net interest income and net interest margin are presented in this discussion on a taxable equivalent basis.  Balances discussed are daily averages unless otherwise described.  The consolidated financial statements and related notes and the quarterly reports to shareholders for 2018 should be read in conjunction with this review.  Reclassifications of prior year data are made where necessary to conform to the current year’s presentation.

TrustCo made significant progress in 2018 despite a challenging operating environment and mixed economic conditions.  Among the key results for 2018, in management’s view:

· Net income after taxes increased 42.4% in 2018 versus 2017;

· Period-end loans were up $238 million for 2018 compared to the prior year;

· Period-end core deposits were up $101 million for 2018 compared to the prior year;

· Nonperforming assets declined $960 thousand or 3.5% to $26.7 million from year-end 2017 to year-end 2018;

· Net interest margin improved 11 basis points to 3.33% in 2018 versus 2017;

· At 53.97%, the efficiency ratio remained substantially better than peer-group  levels (see Non-GAAP Financial Measures Reconciliation), and;

· The regulatory capital levels of both the Company and the Bank improved at December 31, 2018 relative to the prior year, and the Bank continues to meet the definition of “well capitalized” for regulatory purposes.

Management believes that the Company was able to achieve these accomplishments, despite a continued mixed economy and increased regulatory expectations, by executing its long term plan focused on traditional lending criteria and balance sheet management.  Achievement of specific business goals such as the continued expansion of loans and deposits, along with tight control of operating expenses and manageable levels of nonperforming assets, is fundamental to the long term success of the Company as a whole.

Return on average equity was 13.05% in 2018 compared to 9.64% in 2017, while return on average assets was 1.25% in 2018 as compared to 0.88% in 2017.

The economic and business environment generally improved during 2018 but remains mixed with various regions of the nation experiencing uneven growth or change during the year.  Real gross domestic product (“GDP”) increased at an annual rate of 3.4% during the third quarter of 2018, the latest available information, compared to 2017 and 2016 when GDP increased by 2.2% and 1.5% respectively.  The annual growth rate for GDP remains below the range exhibited during the robust growth periods experienced during the 1980’s and 1990’s.  Equity markets did not fare well during 2018 due to a number of factors including ongoing trade discussions, rising interest rates and concern relative to the length of the economic recovery and the potential for an upcoming recession.  The Dow Jones Industrial Average was down 3.5% during 2018 and the S&P 500 was also down 4.4% for 2018.  United States Treasuries saw significant flattening of the yield curve during 2018 with the shorter term maturities increasing in yield more significantly than the yield increases on the longer term maturities.  Beginning 2018 the yield on the 2 year Treasury bond was 1.92% and increased 56 basis points during the year to close 2018 at 2.48% whereas the 10 year Treasury bond began 2018 at 2.46% and closed the year up 23 basis points to 2.69% at year-end.  These rate changes have a significant implication to the broader economic cycle and reflect the Federal Reserve Board’s desire to increase shorter term rates to help offset some of the above target growth that has occurred in the last several quarters.

The outlook for the United States economy is complicated by political uncertainties domestically and internationally which has led to trade disruptions and anticipation of economic slowdowns.  Corporate profits for 2018 have generally been enhanced as a result of the 2017 Tax Act which reduced the overall corporate federal tax rates on business operating in the United States.  These reduced tax rates will continue into 2019 but will not, on their own, contribute to an increase in net profits for 2019 over 2018.  Growth in business operations and expansion of corporate activities will be necessary for broad range increases in revenues and profits.

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Employment increased and unemployment decreased during 2018 as workers reentered the workforce and companies expanded operations to accommodate economic growth and demand for their products and services.  The unemployment rate has reached historical lows which is generally interpreted to mean that the economy has reached full employment which in turn historically has been an indicator of increased wage pressure and increased inflation.  The Federal Reserve Board action to increase short term rates is to help offset the impact of these inflationary factors in the economy.

Generally a steady increase in economic activities is viewed as a positive for the banking and finance industries as economic growth creates additional demand for company goods and services which in turn result in increased revenues and profits.  TrustCo like most other banking organizations prices many of their liabilities (deposits and short term debt) off of the shorter end of the Treasury maturity curve which in 2018 has been increasing faster than the longer end of the Treasury maturity curve.  Continuation of this trend could lead to pressure on net margins which in turn may cause management to take action with respect to excess liquidity.

Management believes that TrustCo’s long term focus on traditional banking services has enabled the Company to avoid significant impact from asset quality problems, and the Company’s strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with past practices.  While we continue to adhere to prudent underwriting standards, as a lender, we may be adversely impacted by general economic weaknesses and by a downturn in the housing markets in the areas we serve.

Regulatory Agreement

Trustco Bank entered into an agreement with its primary regulator, the Office of the Comptroller of the Currency (OCC), on July 21, 2015.  The agreement calls for the Bank to take various actions in areas such as compliance, corporate governance, audit, capital planning including dividends, and strategic planning, among others.  The agreement followed the completion of the OCC’s regularly scheduled exam of the Bank.  Since the completion of the examination, the Bank has been working to address the issues raised.  The Bank’s Board of Directors and management remain committed to fully addressing all provisions of the agreement.On February 14, 2018, the Office of the Comptroller of the Currency (OCC) notified Trustco Bank that it had terminated the July 21, 2015 agreement between the OCC and the Bank effective February 7, 2018.  The agreement had required the Bank to take various actions in areas such as compliance, corporate governance, audit, capital planning including dividends, and strategic planning, among others.

Tax Cuts and Jobs Act

On December 22, 2017 the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law.  The Tax Act makes broad and complex changes to the U.S. tax code that affected our 2017 results and that will affect future periods.  Among the Tax Act’s changes is a reduction of the statutory corporate tax rate from 35% to 21%.  The lower tax rate will have a significant beneficial impact on the Company’s results going forward, but also resulted in the revaluation of net deferred tax assets on our balance sheet as of December 31, 2017, based on the lower tax rate.  Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements.  Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled.  Deferred tax assets and liabilities are adjusted through income tax expense as changes in tax laws are enacted.  The rate reduction was effective January 1, 2018.  Included in results for the fourth quarter and full year 2017 is a reduction in the value of net deferred tax assets of $5.1 million, which was recorded as additional income tax expense for the quarter ended December 31, 2017.  This charge had a negative impact on reported net income, earnings per share, return on average equity and return on average assets for the quarter and year ended December 31, 2017.

Overview

2018 results were marked by continued growth in the Company’s loan portfolio.  The loan portfolio grew to a total of $3.87 billion, an increase of $238 million or 6.5% over the 2017 year-end balance.  Deposits ended 2018 at $4.27 billion, up from $4.17 billion the prior year-end.  The year-over-year increases in loans reflect the success the Company has had in attracting customers to the Bank.  Management believes that TrustCo’s success is predicated on providing core banking services to a wider number of customers and continuing to provide added services to existing customers where possible.  Growing the customer base should contribute to continued growth of loans and deposits, as well as net interest income and non-interest income.

TrustCo recorded net income of $61.4 million or $0.636 of diluted earnings per share for the year ended December 31, 2018, compared to $43.1 million or $0.448 of diluted earnings per share for the year ended December 31, 2017.  Net income before taxes was $79.7 million in 2018 compared to $76.7 million in 2017.

During 2018, the following had a significant effect on net income:

· an increase of $6.3 million in net interest income from 2017 to 2018 as a result of a combination of 0.67% growth in average interest earning assets and an 11 basis point increase in the net interest margin to 3.33%;

· a decrease of $600 thousand in the provision for loan losses to $1.4 million in 2018;

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· an increase of $3.7 million in total non-interest expense, as compared to 2017, and;

· an decrease of $15.4 million in income tax expense from $33.6 million in 2017 to $18.2 million in 2018.

TrustCo performed well in comparison to its peers with respect to a number of key performance ratios during 2018 and 2017, including:

· return on average equity of 13.05% for 2018 and 9.64% for 2017, compared to medians of 10.43% in 2018 and 8.37% in 2017 for a peer group comprised of all publicly traded banks and thrifts tracked by S&P Global Market Intelligence Financial with assets of $2 billion to $10 billion, and

· an efficiency ratio, as calculated by S&P Global Market Intelligence, of 53.97% for 2018 and 53.72% for 2017, compared to the peer group medians of 58.49% in 2018 and 58.62% in 2017.  Note that the S&P calculation differs slightly from our calculation.

During 2018, TrustCo’s results were positively affected by the growth of deposits, strong loan growth and a shift in asset mix.  Despite the changes in the interest rate environment during 2018, the Company was able to continue to attract deposits at relatively low yields.  On average for 2018, non-maturity deposits were 73.7% of total deposits, consistent with 2017.  Overall, the cost of interest bearing liabilities increased 15 basis points to 0.51% in 2018 as compared to 2017.  Average loan balances increased 6.6% from 2017 to 2018, while the total of short-term investments, available for sale securities and held to maturity securities decreased 11.3%, resulting in average net loans growing to 77.7% of average earning assets in 2018 from 73.4% in 2017.  Given that loan yields were approximately 135 basis points above the yield on the total of short-term investments and securities, this shift, combined with the growth of average earning assets, the increase in the Federal funds target rate and the decline in funding cost, contributed to the $6.3 million increase in net interest income from 2017 to 2018.  The Company has traditionally maintained a high liquidity position, and taken a conservative stance in its investment portfolio through the use of relatively short-term securities.  The changing rate environment in 2018 resulted in maturing and called securities being reinvested, as noted, in loans as well as into a combination of Federal funds and bonds.  The Federal Reserve Board’s (“FRB”) continued accommodative monetary policy, despite the increases in the target Federal funds range, along with modest economic growth domestically and low rates in other nations, were key drivers of the rate environment during 2018.  The 2007-2008 easing of monetary policy by the FRB included a particularly sharp reduction in the Federal Funds rate in 2008, from the 4.25% rate at the beginning of the year to a target range of 0.00% to 0.25% by year‑end.  That target range was in place throughout most of 2016. The FRB increased the target range several times beginning in December of 2016, with the target range now at 2.25% to 2.55%.  The FRB Federal Open Market Committee (“FOMC” or “Committee”) affirmed in its December 19, 2018 press release that “Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate.  Job gains have been strong, on average, in recent months, and the unemployment rate has remained low.  Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year.  On a 12‑month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent.  Indicators of longer-term inflation expectations are little changed, on balance.  Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.  The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.” Based on the above the committee raised the target range from 2.25% to 2.50% in December.

As discussed previously, some market interest rates moved significantly during the course of 2018, with shorter term rates rising sharply but longer term rates remaining roughly flat versus year‑end 2017.  Overall, trends in market rates caused a flattening of the yield curve, on average, during the year.  The average daily spread between the ten year Treasury and the two year Treasury was 38 basis points in 2018, down from an average of 93 basis points in 2017 and 102 basis points in 2016.  The spread narrowed more significantly later in the year, ending 2018 at 21 basis points.  A more positive slope in the yield curve is generally beneficial for the Company’s earnings derived from its core mix of loans and deposits.

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The tables below illustrate the range of key Treasury bond interest rates during 2017 and 2018.

	3 Month T Bill (BEY) Yield(%)		2 Year T Note Yield(%)		5 Year T Note Yield(%)		10 Year T Note Yield(%)		10 Year - 2 Year Spread(%)
2018
Beginning of Year		1.44		1.92		2.25		2.46	0.51
Peak		2.45		2.98		3.09		3.24	0.78
Trough		1.39		1.94		2.25		2.44	0.11
End of Year		2.45		2.48		2.51		2.69	0.21
Average		1.97		2.53		2.75		2.91	0.38
Median		1.95		2.56		2.76		2.90	0.33
2017
Beginning of Year		0.51		1.20		1.93		2.45		1.25
Peak		1.47		1.92		2.26		2.62		1.30
Trough		0.50		1.12		1.63		2.05		0.51
End of Year		1.39		1.89		2.20		2.40		0.51
Average		0.95		1.40		1.91		2.33		0.93
Median		1.01		1.34		1.90		2.34		0.91

Source: S&P Global Market Intelligence

In addition to changes in interest rates, economic conditions have a significant impact on the allowance for loan losses.  The decrease in the provision for loan losses from $2.0 million in 2017 to $1.4 million in 2018 positively affected net income.  Net charge‑offs decreased from $1.7 million in 2017 to $804 thousand in 2018.  Total nonperforming loans increased $609 thousand from 2017.  Details on nonperforming loans and net charge-offs are included in the notes to the financial statements.  The decline in the provision for loan losses is primarily a reflection of the improvement in the performance of the loan portfolio and economic conditions.

TrustCo focuses on providing high quality service to the communities served by its branch‑banking network.  The financial results for the Company are influenced by economic events that affect those communities, as well as national economic trends, primarily interest rates, affecting the entire banking industry.

The Company remains focused on building its customer relationships, deposits and loans throughout its branch network, with a particular emphasis on the branches added recently added to our “network.”

The Company continually looks for opportunities to open new offices each year by filling in or extending existing markets.  The Bank has continued to expand the franchise to areas experiencing economic growth, specifically in central Florida and the downstate New York region.  The Company has experienced significant growth in both markets as measured by deposit balances, and to a lesser extent, by loan balances.  All new branches have the same products and features found at other Trustco Bank locations.  With a combination of competitive rates, excellent service and convenient locations, management believes that the new branches will continue to attract deposit and loan customers and be a welcome addition to these communities.  The branches opened since the expansion program began have continued to add to the Company’s customer base.  As expected, some branches have grown more rapidly than others.  Generally, new bank branches continue to grow for years after being opened, although there is no specific time frame that could be characterized as typical.  The expansion program has contributed significantly to the growth of both deposits and loans, as well as to non‑interest income and non‑interest expense.  The higher costs are offset by net interest income earned on core loans and deposits generated by these branches, as well as associated non‑interest income.  Revenue growth is expected to continue, as these branches typically continue to add new customers and increase penetration with existing customers over time.

Asset/Liability Management

In managing its balance sheet, TrustCo utilizes funding and capital sources within sound credit, investment, interest rate, and liquidity risk guidelines established by management and approved by the Board of Directors.  Loans and securities (including Federal Funds sold and other short-term investments) are the Company’s primary earning assets.  Average interest earning assets were 98.4% and 98.3% of average total assets for 2018 and for 2017 respectively.

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TrustCo, through its management of liabilities, attempts to provide stable and flexible sources of funding within established liquidity and interest rate risk guidelines.  This is accomplished through core deposit banking products offered within the markets served by the Company.  TrustCo does not actively seek to attract out‑of‑area deposits or so‑called “hot money,” but rather focuses on core relationships with both depositors and borrowers.

TrustCo’s objectives in managing its balance sheet are to limit the sensitivity of net interest income to actual or potential changes in interest rates and to enhance profitability through strategies that should provide sufficient reward for predicted and controlled risk.  The Company is deliberate in its efforts to maintain adequate liquidity under prevailing and projected economic conditions and to maintain an efficient and appropriate mix of core deposit relationships.  The Company relies on traditional banking investment instruments and its large base of core deposits to help in asset/liability management.  Predicting the impact of changing rates on the Company’s net interest income and net fair value of its balance sheet is complex and subject to uncertainty for a number of reasons.  For example, in making a general assumption that rates will rise, a myriad of other assumptions regarding whether the slope of the yield curve remains the same or changes, whether the spreads of various loans, deposits and investments remain unchanged, widen or narrow and what changes occur in customer behavior all need to be made.  The Company routinely models various rate changes and monitors basis changes that may be incorporated into that modeling.

Interest Rates

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.  The absolute level of interest rates, changes in 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 year.

Interest rates have a significant impact on the operations and financial results of all financial services companies.  One of the most important interest rates used to control national economic policy is the “Federal Funds” rate.  This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating.  As noted previously, during 2007‑2008 the FRB aggressively reduced the Federal Funds rate, including a decrease from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008.  The target range remained at that level until December 2016 when the range was increased to 0.25% to 0.50%.  Subsequent increases have resulted in the current range of 2.25% to 2.50%.

The yield on the ten-year Treasury bond increased by 23 basis points from 2.46% at the beginning of 2018 to the year‑end level of 2.69%, despite the increases in short term rates.  The rate on the ten year Treasury bond and other long-term interest rates have a significant influence on the rates offered for new residential real estate loans.  These changes in interest rates have an effect on the Company relative to the interest income on loans, securities, and Federal Funds sold and on other short-term instruments as well as the interest expense on deposits and borrowings.  Residential real estate loans and longer‑term investments are most affected by the changes in longer term market interest rates such as the ten‑year Treasury.  The Federal Funds sold portfolio and other short‑term investments are affected primarily by changes in the Federal Funds target rate.  Deposit interest rates are most affected by short term market interest rates.  Also, changes in interest rates have an effect on the recorded balance of the securities available for sale portfolio, which are recorded at fair value.  Generally, as market interest rates increase, the fair value of the securities will decrease and the reverse is also generally applicable.  Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae.  Because TrustCo is a portfolio lender and does not sell loans into the secondary market, the Company establishes rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates.  Higher market interest rates also generally increase the value of retail deposits.

While the increase in the Federal Funds target range had a beneficial impact on earnings on the Company’s cash position, the net effect of market changes in interest rates during 2018 was that yields earned on both the investment portfolios and loans remained quite low in 2018 relative to historic levels, while deposit costs were roughly stable.

Earning Assets

Average earning assets during 2018 were $4.82 billion, which was an increase of $31.7 million from 2017.  This increase was the result of growth in the average balance of net loans of $231.2 million, offset by decreases of $116.5 million in Federal Funds sold and other short‑term investments, $13.1 million in held-to-maturity securities and $69.5 million in securities available for sale between 2017 and 2018.  The increase in the loan portfolio is the result of a significant increase in residential mortgage loans, which more than offset decreases in each of the other loan categories.  The increase in real estate loans is a result of a strategic focus on growth of this product throughout the Trustco Bank branch network through an effective marketing campaign and competitive rates and closing costs.

Total average assets were $4.90 billion for 2018 and $4.88 billion for 2017.

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The table “Mix of Average Earning Assets” shows how the mix of the earning assets has changed over the last three years.  While the growth in earning assets is critical to improved profitability, changes in the mix also have a significant impact on income levels, as discussed below.

MIX OF AVERAGE EARNING ASSETS

(dollars in thousands)							2018 vs.			2017 vs.			Components of Total Earning Assets
	2018		2017		2016		2017			2016			2018			2017		2016
Loans, net	$	3,746,082		3,514,900		3,348,324		231,182			166,576			77.7	%		73.4		71.3
Securities available for sale (1):
U.S. government sponsored enterprises		155,381		139,652		101,242		15,729			38,410			3.2			2.9		2.2
State and political subdivisions		414		682		991		(268	)		(309	)		-			-		-
Mortgage-backed securities and collateralized mortgage obligations residential		294,732		350,256		410,646		(55,524	)		(60,390	)		6.1			7.3		8.7
Corporate bonds		30,310		41,946		17,088		(11,636	)		24,858			0.6			0.9		0.4
Small Business Administration-guaranteed participation securities		63,430		73,996		86,407		(10,566	)		(12,411	)		1.3			1.5		1.8
Mortgage-backed securities and collateralized mortgage obligations-commercial		2,769		9,963		10,284		(7,194	)		(321	)		0.1			0.2		0.2
Other		685		685		683		-			2			-			-		-
Total securities available for sale		547,721		617,180		627,341		(69,459	)		(10,161	)		11.3			12.9		13.4
Held-to-maturity securities:
Mortgage-backed securities and collateralized mortgage obligations		24,801		31,266		40,830		(6,465	)		(9,564	)		0.5			0.7		0.9
Corporate bonds		-		6,663		10,145		(6,663	)		(3,482	)		-			0.1		0.2
Total held-to-maturity securities		24,801		37,929		50,975		(13,128	)		(13,046	)		0.5			0.8		1.1
Federal Reserve Bank and Federal Home Loan Bank stock		8,907		9,295		9,554		(388	)		(259	)		0.2			0.2		0.2
Federal funds sold and other short-term investments		495,066		611,586		662,436		(116,520	)		(50,850	)		10.3			12.8		14.1
Total earning assets	$	4,822,577		4,790,890		4,698,630		31,687			92,260			100.0	%		100.0		100.0

(1) The average balances of securities available for sale are presented using amortized cost for these securities.

Page 9 of 94

Loans

In 2018, the Company experienced another year of significant loan growth.  The $237.7 million increase in the Company’s gross loan portfolio from December 31, 2017 to December 31, 2018 was due to higher residential mortgage balances, which offset lower balances in other loan categories.  Average loans increased $231.2 million during 2018 to $3.75 billion.  Interest income on the loan portfolio increased to $158.3 million in 2018 from $148.2 million in 2017.  The average yield increased 1 basis point to 4.23% in 2018 compared to 2017.

LOAN PORTFOLIO

(dollars in thousands)	As of December 31,
	2018					2017					2016
	Amount		Percent			Amount		Percent			Amount		Percent
Commercial	$	183,598		4.7	%	$	176,385		4.9	%	$	182,653		5.3	%
Real estate - construction		26,717		0.7			30,946		0.9			24,826		0.7
Real estate - mortgage		3,362,539		86.8			3,111,397		85.6			2,879,448		83.9
Home equity lines of credit		289,540		7.5			308,916		8.5			334,841		9.8
Installment loans		11,702		0.3			8,763		0.2			8,818		0.3
Total loans		3,874,096		100.0	%		3,636,407		100.0	%		3,430,586		100.0	%
Less: Allowance for loan losses		44,766					44,170					43,890
Net loans (1)	$	3,829,330				$	3,592,237				$	3,386,696

	Average Balances
	2018					2017					2016					2015					2014
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Commercial	$	175,814		4.7	%	$	175,596		5.0	%	$	186,800		5.6	%	$	195,265		6.0	%	$	201,317		6.7	%
Real estate - construction		26,717		0.7			26,616		0.8			23,645		0.7			29,101		0.9			35,109		1.2
Real estate - mortgage		3,236,631		86.5			2,985,870		84.9			2,779,451		83.0			2,647,265		81.8			2,428,383		80.6
Home equity lines of credit		297,678		7.9			318,660		9.1			350,004		10.5			354,718		11.0			343,264		11.4
Installment loans		9,242		0.2			8,158		0.2			8,424		0.3			8,457		0.3			6,083		0.2
Total loans		3,746,082		100.0	%		3,514,900		100.0	%		3,348,324		100.0	%		3,234,806		100.0	%		3,014,156		100.0	%
Less: Allowance for loan losses		44,651					44,319					44,718					46,023					47,409
Net loans (1)	$	3,701,431				$	3,470,581				$	3,303,606				$	3,188,783				$	2,966,747

(1) Presented net of deferred direct loan origination fees and costs.

Through marketing, pricing and a customer-friendly service delivery network, TrustCo has attempted to distinguish itself from other mortgage lenders by highlighting the uniqueness of its loan products.  Specifically, low closing costs, no escrow or private mortgage insurance, quick loan decisions and fast closings were identified and marketed.  The fact that the Company holds mortgages in its loan portfolio rather than selling them into secondary markets was also highlighted.  The average balance of residential real estate mortgage loans was approximately $3.28 billion in 2018 and approximately $3.00 billion in 2017.  Income on real estate loans increased to $133.9 million in 2018 from $125.0 million in 2017.  The yield on the portfolio decreased from 4.16% in 2017 to 4.12% in 2018 due to changes in retail rates in the marketplace.  The vast majority of TrustCo’s real estate loans are secured by properties within the Bank’s market area.

TrustCo does not make subprime loans or purchase investments collateralized by subprime loans.  A loan may be considered subprime for a number of reasons, but effectively subprime loans are loans where the certainty of repayment of principal and interest is lower than for a traditional prime loan due to the structure of the loan itself, the credit worthiness of the borrower, the underwriting standards of the lender or some combination of these.  For instance, adjustable loans underwritten at initial low “teaser” rates instead of the fully indexed rate and loans to borrowers with poor payment history would generally be classified as subprime.  Other than for its small credit card portfolio, TrustCo underwrites its loan originations in a traditional manner, focusing on key factors that have proven to result in good credit decisions, rather than relying on automated systems or basing decisions primarily on one factor, such as a borrower’s credit score.

Average commercial loans of $188.4 million in 2018 increased by $3.0 million from $185.4 million in 2017.  Average commercial loans included $12.5 million and $9.8 million of commercial real estate construction loans in 2018 and 2017, respectively.  The average yield on the commercial loan portfolio increased to 5.26% for 2018 from 5.25% in 2017, which, coupled with the higher average balance resulted in interest income on commercial loans of $9.9 million in 2018 and $9.7 million in 2017.

TrustCo’s commercial lending activities are focused on balancing the Company’s commitment to meeting the credit needs of businesses in its market areas with the necessity of managing its credit risk.  In accordance with these goals, the Company has consistently emphasized the origination of loans within its market area. TrustCo’s commercial loan portfolio contains no foreign loans, nor does it contain any significant concentrations of credit to any single borrower or industry.  The Capital Region commercial loan portfolio reflects the diversity of businesses found in the market area, including light manufacturing, retail, service, and real estate-related businesses.  Commercial loans made in the downstate New York market area and in the central Florida market area also reflect the businesses in those areas, with a focus on real estate.

Page 10 of 94

TrustCo strives to maintain strong asset quality in all segments of its loan portfolio, especially commercial loans.  There is significant competition for commercial loans continues to be intense in the Bank’s market regions.

TrustCo has a strong position in the home equity credit line product in its market area.  During 2018, the average balance of home equity credit lines was $297.7 million, a decrease from $318.7 million in 2017.  Trustco Bank competes with both regional and national concerns for these lines of credit and faces stiff competition with respect to interest rates, closing costs, and customer service for these loans.  TrustCo continuously reviews changes made by competitors with respect to the home equity credit line product and adjusts its offerings to remain competitive while meeting evolving needs.  Changes in consumer behavior have resulted in this product being somewhat less popular in recent years.  TrustCo’s average yield on this portfolio was 4.56% for 2018 and 3.98% in 2017.  This resulted in interest income on home equity credit lines of $13.6 million in 2018, compared to $12.7 million in 2017.

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGE IN INTEREST RATES

(dollars in thousands)	December 31, 2018
	In 1 Year or Less		After 1 Year But Within 5 Years		After 5 Years		Total
Commercial	$	42,045		51,732		89,821		183,598
Real estate construction		26,717		-		-		26,717
Total		68,762		51,732		89,821		210,315
Predetermined rates		28,728		51,732		89,821		170,281
Floating rates		40,034		-		-		40,034
Total	$	68,762		51,732		89,821		210,315

At December 31, 2018 and 2017, the Company had approximately $26.7 million and $30.9 million of real estate construction loans, respectively.  Of the $26.7 million in real estate construction loans at December 31, 2018, approximately $14.2 million were secured by first mortgages to residential borrowers with the remaining $12.5 million were loans to commercial borrowers for residential construction projects.  Of the $30.9 million in real estate construction loans at December 31, 2017, approximately $24.8 million were secured by first mortgages to residential borrowers while approximately $16.3 million were to commercial borrowers for residential construction projects.  The vast majority of the Company’s construction loans are in the Company’s New York market.

INVESTMENT SECURITIES

(dollars in thousands)	As of December 31,
	2018				2017				2016
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available for sale:
U. S. government sponsored enterprises	$	154,868		152,160		139,890		137,851		119,887		117,266
State and political subdivisions		168		173		515		525		873		886
Mortgage backed securities and collateralized mortgage obligations-residential		271,386		262,032		320,614		315,983		378,068		372,308
Corporate bonds		30,048		29,938		40,270		40,162		40,956		40,705
Small Business Adminstration-guaranteed participation securities		58,376		56,475		68,921		67,059		81,026		78,499
Mortgage backed securities and collateralized mortgage obligations-commercial		-		-		9,810		9,700		10,130		10,011
Other		685		685		685		685		685		685
Total securities available for sale		515,531		501,463		580,705		571,965		631,625		620,360
Held to maturity securities:
Mortgage backed securities and collateralized mortgage obligations-residential		22,501		22,924		27,551		28,701		35,500		37,236
Corporate bonds		-		-		-		-		9,990		10,290
Total held to maturity securities		22,501		22,924		27,551		28,701		45,490		47,526
Total investment securities	$	538,032		524,387		608,256		600,666		677,115		667,886

Page 11 of 94

Securities available for sale: The portfolio of securities available for sale is designed to provide a stable source of interest income and liquidity.  The portfolio is also managed by the Company to take advantage of changes in interest rates and is particularly important in providing greater flexibility in the current low interest rate environment.  The securities available for sale portfolio is managed under a policy detailing the types and characteristics acceptable in the portfolio.  Mortgage backed securities and collateralized mortgage obligations held in the portfolio include only pass‑throughs issued by United States government agencies or sponsored enterprises.

Holdings of various types of securities may vary from year‑to‑year depending on management’s assessment of relative risk and reward, and also due to timing issues of call, maturities, prepayments and purchases.  Holdings of both municipal and corporate securities are subject to additional monitoring requirements under current regulations, adding to the costs of owning those securities.

Proceeds from sales, calls and maturities of securities available for sale have been invested in higher yielding assets, such as loans, or temporarily held in Federal Funds sold and other short term investments until deployed to fund future loan growth or future investment opportunities.

The designation of securities as “available for sale” is made at the time of purchase, based upon management’s intent and ability to hold the securities for an indefinite period of time.  These securities are available for sale in response to changes in market interest rates, related changes in prepayment risk, needs for liquidity, or changes in the availability of and yield on alternative investments.  At December 31, 2018 some securities in this portfolio had fair values that were less than the amortized cost due to changes in interest rates and market conditions and not related to the credit condition of the issuers.  At December 31, 2018, the Company did not intend to sell, and it is not likely that the Company will be required to sell these securities before market recovery.  Accordingly, at December 31, 2018 the Company did not consider any of the unrealized losses to be other than temporary.

At December 31, 2018, the carrying value of securities available for sale amounted to $501.5 million, compared to $572.0 million at year end 2017.  For 2018, the average balance of securities available for sale was $547.7 million with an average yield of 2.16%, compared to an average balance in 2017 of $617.2 million with an average yield of 1.95%.  The taxable equivalent income earned on the securities available for sale portfolio in 2017 was $12.1 million, compared to $11.8 million earned in 2018.

Securities available for sale are recorded at their fair value, with any unrealized gains or losses, net of taxes, recognized as a component of shareholders’ equity.  Average balances of securities available for sale are stated at amortized cost.  At December 31, 2018, the fair value of TrustCo’s portfolio of securities available for sale carried gross unrealized gains of approximately $58 thousand and gross unrealized losses of approximately $14.1 million.  At December 31, 2017, the fair value of the company’s portfolio of securities available for sale carried gross unrealized gains of approximately $121 thousand and gross unrealized losses of approximately $8.9 million.  As previously noted, in both periods, unrealized losses were related to market interest rate levels and were not credit related.

Held to Maturity Securities: At December 31, 2018 the Company held $22.5 million of held to maturity securities, compared to $27.6 million at December 31, 2017.  For 2018, the average balance of held to maturity securities was $24.8 million, compared to $37.9 million in 2017.  Similar to securities available for sale, cash flow from these securities has been reinvested in higher yielding assets, such as loans, or temporarily held in Federal Funds sold and other short term investments to fund future loan growth or future investment opportunities.  The average yield on held to maturity securities decreased from 4.11% in 2017 to 3.88% in 2018 as the mix within the portfolio changed due primarily to paydowns and prepayments on the mortgage-backed securities held in the portfolio.  The maturity of a corporate bond with a relatively high yield also impacted the overall yield on this portfolio in 2018.  Interest income on held to maturity securities declined from $1.6 million in 2017 to $962 thousand in 2018, reflecting the decline in average balances.  Held to maturity securities are recorded at amortized cost.  The fair value of these securities as of December 31, 2018 was $22.9 million.

The designation of securities as “held to maturity” is made at the time of purchase, based upon management’s intent and ability to hold the securities until final maturity.  At December 31, 2018 there were $154 thousand in unrecognized losses on securities in this portfolio.

Securities Gains: During 2018 and 2017, TrustCo did not recognize any net gains from securities transactions, compared to net gains of $668 thousand in 2016.  There were no sales or transfers of held to maturity securities in 2018, 2017 and 2016.

TrustCo has not invested in any exotic investment products such as interest rate swaps, forward placement contracts, or other instruments commonly referred to as derivatives.  In addition, the Company has not invested in securities backed by subprime mortgages or in collateralized debt obligations (CDOs).  By actively managing a portfolio of high quality securities, TrustCo believes it can meet the objectives of asset/liability management and liquidity, while at the same time producing a reasonably predictable earnings stream.

Page 12 of 94

SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD

(dollars in thousands)	As of December 31, 2018
	Maturing:
Debt securities available for sale:	Within 1 Year			After 1 But Within 5 Years		After 5 But Within 10 Years		After 10 Years		Total
U. S. government sponsored enterprises
Amortized cost	$	-			154,868		-		-		154,868
Fair Value		-			152,160		-		-		152,160
Weighted average yield		-	%		2.03		-		-		2.03
State and political subdivisions
Amortized cost	$	8			126		34		-		168
Fair Value		8			131		34		-		173
Weighted average yield		5.44	%		5.05		5.26		-		5.11
Mortgage backed securities and collateralized mortgage obligations-residential
Amortized cost	$	1,148			72,739		191,576		5,923		271,386
Fair Value		1,139			70,166		184,979		5,748		262,032
Weighted average yield		1.99	%		2.25		2.44		3.12		2.41
Corporate bonds
Amortized cost	$	10,007			20,041		-		-		30,048
Fair Value		9,995			19,943		-		-		29,938
Weighted average yield		1.45	%		3.30		-		-		2.68
Small Business Administration-guaranteed participation securities
Amortized cost	$	-			58,376		-		-		58,376
Fair Value		-			56,475		-		-		56,475
Weighted average yield		-	%		2.05		-		-		2.05
Mortgage backed securities and collateralized mortgage obligations-commercial
Amortized cost	$	-			-		-		-		-
Fair Value		-			-		-		-		-
Weighted average yield		-	%		-		-		-		-
Other
Amortized cost	$	50			600		35		-		685
Fair Value		50			600		35		-		685
Weighted average yield		1.91	%		3.44		0.20		-		3.15
Total securities available for sale
Amortized cost	$	11,213			306,750		191,645		5,923		515,531
Fair Value		11,192			299,475		185,048		5,748		501,463
Weighted average yield		1.51	%		2.17		2.44		3		2.27

Held to maturity securities:
U. S. government sponsored enterprises
Amortized cost	$	-		-	-	-	-
Fair Value		-		-	-	-	-
Weighted average yield		-	%	-	-	-	-
Mortgage backed securities and collateralized mortgage obligations-residential
Amortized cost	$	-		16,713	5,788	-	22,501
Fair Value		-		16,906	6,018	-	22,924
Weighted average yield		-	%	3.68	5.06	-	4.03
Corporate bonds
Amortized cost	$	-		-	-	-	-
Fair Value		-		-	-	-	-
Weighted average yield		-	%	-	-	-	-
Total held to maturity securities
Amortized cost	$	-		16,713	5,788	-	22,501
Fair Value		-		16,906	6,018	-	22,924
Weighted average yield		-	%	3.68	5.06	-	4.03

Weighted average yields have not been adjusted for any tax-equivalent factor.

Maturity and call dates of securities: Many of the securities in the Company’s portfolios have a call date in addition to the stated maturity date.  Call dates allow the issuer to redeem the bonds prior to maturity at specified dates and at predetermined prices.  Normally, securities are redeemed at the call date when the issuer can reissue the security at a lower interest rate.  Therefore, for cash flow, liquidity and interest rate management purposes, it is important to monitor both maturity dates and call dates.  The level of calls in 2018 was lower than the 2017 level, as rising interest rates reduce the probability of calls.  The probability of future calls will change depending on market interest rate levels.  The tables labeled “Securities Portfolio Maturity and Call Date Distribution,” show the distribution, based on both final maturity and call date of each security, broken out by the available for sale and held to maturity portfolios as of December 31, 2018.  Mortgage backed securities, collateralized mortgage obligations and Small Business Administration securities are reported using an estimate of average life.  Actual maturities may differ from contractual maturities because of securities’ prepayments and the right of certain issuers to call or prepay their obligations without penalty.  The table, “Securities Portfolio Maturity Distribution and Yield,” shows the distribution of maturities for each of the securities portfolios, based on final maturity, as well as the average yields at December 31, 2018 on each type/maturity grouping.

Page 13 of 94

SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION

Debt securities available for sale:

(dollars in thousands)	As of December 31, 2018
	Based on Final Maturity				Based on Call Date
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within 1 year	$	10,078		10,067		166,081		163,352
1 to 5 years		175,727		172,933		126,977		123,319
5 to 10 years		8,108		7,780		216,515		209,009
After 10 years		321,618		310,683		5,958		5,783
Total debt securities available for sale	$	515,531		501,463		515,531		501,463

Held to maturity securities:

(dollars in thousands)	As of December 31, 2018
	Based on Final Maturity				Based on Call Date
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
1 to 5 years	$	-		-		16,713		16,906
5 to 10 years		1,288		1,293		5,788		6,018
After 10 years		21,213		21,631		-		-
Total held to maturity securities	$	22,501		22,924		22,501		22,924

Federal Funds Sold and Other Short-term Investments

During 2018, the average balance of Federal Funds sold and other short-term investments was $495.1 million, a decrease from $611.6 million in 2017.  The average rate earned on these assets was 1.09% in 2017 and 1.87% in 2018.  The increase in the average rate in 2018 was due to the increases in the Federal Funds target range that were implemented.  TrustCo utilizes this category of earning assets as a means of maintaining strong liquidity.  The Federal Funds sold and other short-term investments portfolio is significantly affected by changes in the target Federal Funds rate, as are virtually all short term interest-sensitive instruments.

The year-end balance of Federal Funds sold and other short term investments was $454.5million for 2018, compared to $568.6 million at year end 2017.  While yields on investment securities with acceptable risk characteristics were insufficient to justify shifting overnight liquidity into other investment types during 2018, some funds were shifted into higher yielding loans.  Management will continue to evaluate the overall level of the Federal Funds sold and other short-term investments in 2018 and will make appropriate adjustments based upon market opportunities and interest rates.

Funding Sources

TrustCo utilizes various traditional sources of funds to support its earning asset portfolio.  The table, “Mix of Average Sources of Funding,” presents the various categories of funds used and the corresponding average balances for each of the last three years.

Deposits: Average total deposits were approximately $4.21 billion in 2018, compared to approximately $4.17 billion in 2017, an increase of $35.2 million.  Changes in deposit categories (average balances 2018 versus 2017) included: demand deposits up $13.7 million, interest-bearing checking deposits up $53.4 million, savings down $33.6 million, money market down $51.0 million and time deposits up $52.7 million.  While many customers remain in one product type for many years, others may move funds between product types to maximize the yield earned or as a result of increased or decreased liquidity needs.  The increase in core deposits reflects the focus on growing these lower costing funding sources by providing core banking services better, faster and cheaper than competitors.  The increase in time deposits over $250 thousand is not the result of any incentive pricing as TrustCo does not offer premium rates on large certificates of deposit.

Page 14 of 94

MIX OF AVERAGE SOURCES OF FUNDING

(dollars in thousands)			2018 vs.				2018 vs.			2017 vs.			Components of Total Funding
	2018		2017		2016		2017			2016			2018			2017		2016
Retail deposits
Demand deposits	$	396,367		382,658		369,820		13,709			12,838			9.0	%		8.7		8.5
Savings		1,241,619		1,275,268		1,272,015		(33,649	)		3,253			28.2			29.0		29.3
Time deposits under $250 thousand		967,765		960,408		1,018,571		7,357			(58,163	)		22.0			21.8		23.5
Interest bearing checking accounts		897,378		844,010		764,399		53,368			79,611			20.4			19.2		17.6
Money market deposits		521,233		572,270		580,125		(51,037	)		(7,855	)		11.8			13.0		13.4
Total retail deposits		4,024,362		4,034,614		4,004,930		(10,252	)		29,684			91.4			91.7		92.4
Time deposits over $250 thousand		182,215		136,782		144,271		45,433			(7,489	)		4.1			3.1		3.3
Short-term borrowings		194,810		228,086		185,672		(33,276	)		42,414			4.4			5.2		4.3
Total purchased liabilities		377,025		364,868		329,943		12,157			34,925			8.6			8.3		7.6
Total sources of funding	$	4,401,387		4,399,482		4,334,873		1,905			64,609			100.0	%		100.0		100.0

AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS

(dollars in thousands)	2018									2017									2016
	Average Balance			Interest Income/ Expense			Average Rate			Average Balance			Interest Income/ Expense			Average Rate			Average Balance			Interest Income/ Expense			Average Rate
Assets
Loans, net	$	3,746,082			158,304			4.23	%	$	3,514,900			148,162			4.22	%	$	3,348,324			143,705			4.29	%
Securities available for sale:
U.S. government sponsored enterprises		155,381			3,112			2.00			139,652			2,281			1.63			101,242			1,489			1.47
State and political subdivisions		414			34			8.21			682			55			8.06			991			80			8.07
Mortgage backed securities and collateralized mortgage obligations-residential		294,732			6,593			2.24			350,256			7,447			2.13			410,646			7,963			1.94
Corporate bonds		30,310			687			2.27			41,946			606			1.44			17,088			246			1.44
Small Business Administration-guaranteed participation securities		63,430			1,339			2.11			73,996			1,547			2.09			86,407			1,801			2.08
Mortgage backed securities and collateralized mortgage obligations-commercial		2,769			37			1.33			9,963			109			1.09			10,284			133			1.29
Other		685			18			2.63			685			16			2.34			683			16			2.34
Total securities available for sale		547,721			11,820			2.16			617,180			12,061			1.95			627,341			11,728			1.87
Held to maturity securities:
Mortgage backed securities and collateralized mortgage obligations-residential		24,801			962			3.88			31,266			1,149			3.67			40,830			1,454			3.56
Corporate bonds		-			-			-			6,663			410			6.15			10,145			617			6.08
Total held to maturity securities		24,801			962			3.88			37,929			1,559			4.11			50,975			2,071			4.06
Federal Reserve Bank and Federal Home
Loan Bank stock		8,907			564			6.33			9,295			544			5.85			9,554			502			5.25
Federal funds sold and other short-term investments		495,066			9,276			1.87			611,586			6,679			1.09			662,436			3,407			0.50
Total interest earning assets		4,822,577			180,926			3.75	%		4,790,890			169,005			3.53	%		4,698,630			161,413			3.44	%
Allowance for loan losses		(44,651	)								(44,319	)								(44,718	)
Cash and noninterest earning assets		122,524									129,097									136,789
Total assets	$	4,900,450								$	4,875,668								$	4,790,701
Liabilities and shareholders’ equity
Interest bearing deposits:
Interest bearing checking accounts	$	897,378			442			0.05	%	$	844,010			478			0.06	%	$	764,399			473			0.06	%
Savings		1,241,619			1,657			0.13			1,275,268			1,729			0.14			1,272,015			2,148			0.17
Time deposits and money markets		1,671,213			16,859			1.01			1,669,460			10,983			0.66			1,742,967			11,592			0.67
Total interest bearing deposits		3,810,210			18,958			0.50			3,788,738			13,190			0.35			3,779,381			14,213			0.38
Short-term borrowings		194,810			1,270			0.65			228,086			1,402			0.61			185,672			1,091			0.59
Total interest bearing liabilities		4,005,020			20,228			0.51	%		4,016,824			14,592			0.36	%		3,965,053			15,304			0.39	%
Demand deposits		396,367									382,658									369,820
Other liabilities		28,249									28,506									27,439
Shareholders’ equity		470,814									447,680									428,389
Total liabilities and shareholders’ equity	$	4,900,450								$	4,875,668								$	4,790,701
Net interest income					160,698									154,413									146,109
Taxable equivalent adjustment					(12	)								(45	)								(54	)
Net interest income					160,686									154,368									146,055
Net interest spread								3.25	%								3.16	%								3.05	%
Net interest margin (net interest income to total interest earnings assets)								3.33									3.22									3.11

Portions of income earned on certain commercial loans, obligations of states and political subdivisions, and equity securities are exempt from federal and/or state taxation.  Appropriate adjustments have been made to reflect the equivalent amount of taxable income that would have been necessary to generate an equal amount of after tax income.  Federal and state tax rates used to calculate income on a tax equivalent basis were 21.0% and 6.0%, respectively, for 2018, and 35.0% and 7.5%, respectively, for 2017 and 2016.  [The average balances of securities available for sale and held to maturity were calculated using amortized costs.  Included in the average balance of shareholders’ equity is $849 thousand, $3.1 million, and $5.0 million in 2018, 2017, and 2016, respectively, of net unrealized loss, net of tax, in the available for sale securities portfolio.]  The gross amounts of the net unrealized loss has been included in cash and noninterest earning assets.  Nonaccrual loans are included in average loans.

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While the overall cost of interest bearing deposits increased 0.50% in 2018, the overall growth in interest bearing assets and yields increased, which resulted in improvement to the margin by 11 basis points.

The Company strives to maintain competitive rates on deposit accounts and to attract customers through a combination of competitive interest rates, quality customer service, and convenient banking locations.  In this fashion, management believes, TrustCo is able to attract deposit customers looking for a long-term banking relationship and to cross-sell banking services utilizing the deposit account relationship as the starting point.

Other funding sources: The Company had $194.8 million of average short‑term borrowings outstanding during 2018, compared to $228.1 million in 2017.  These borrowings represent customer repurchase accounts, which behave more like deposit accounts than traditional borrowings.  The average cost of short-term borrowings was 0.65% in 2018 and 0.61% in 2017.  This resulted in interest expense of approximately $1.3 million in 2018, compared to $1.4 million in 2017.

AVERAGE DEPOSITS BY TYPE OF DEPOSITOR

(dollars in thousands)	Years ended December 31,
	2018		2017		2016		2015		2014
Individuals, partnerships and corporations	$	4,184,850		4,149,832		4,127,587		4,085,491		3,965,716
U.S. Government		-		-		-		-		2
States and political subdivisions		3,007		2,765		3,085		2,654		2,141
Other (certified and official checks, etc.)		18,720		18,799		18,529		15,360		11,109
Total average deposits by type of depositor	$	4,206,577		4,171,396		4,149,201		4,103,505		3,978,968

MATURITY OF TIME DEPOSITS OVER $250 THOUSAND

(dollars in thousands)
	As of December 31, 2018
Under 3 months	$	62,888
3 to 6 months		41,392
6 to 12 months		27,414
Over 12 months		50,521
Total	$	182,215

VOLUME AND YIELD ANALYSIS

(dollars in thousands)	2018 vs. 2017									2017 vs. 2016
	Increase (Decrease)			Due to Volume			Due to Rate			Increase (Decrease)			Due to Volume			Due to Rate
Interest income (TE):
Federal funds sold and other short-term investments	$	2,597			(942	)		3,539		$	3,272			(231	)	$	3,503
Securities available for sale:
Taxable		(220	)		(1,465	)		1,245			358			(751	)		1,109
Tax-exempt		(21	)		(21	)		-			(25	)		(25	)		-
Total securities available for sale		(241	)		(1,486	)		1,245			333			(776	)		1,109
Held to maturity securities (taxable)		(597	)		(453	)		(144	)		(512	)		(564	)		52
Federal Reserve Bank and Federal Home Loan Bank stock		20			(21	)		41			42			(13	)		55
Loans, net		10,142			9,623			519			4,457			6,985			(2,528	)
Total interest income		11,921			6,721			5,200			7,592			5,401			2,191
Interest expense:
Interest bearing checking accounts		(36	)		34			(70	)		5			27			(22	)
Savings		(72	)		(44	)		(28	)		(419	)		5			(424	)
Time deposits and money markets		5,876			318			5,558			(609	)		(571	)		(38	)
Short-term borrowings		(132	)		(226	)		94			311			259			52
Total interest expense		5,636			82			5,554			(712	)		(280	)		(432	)
Net interest income (TE)	$	6,285			6,639			(354	)	$	8,304			5,681			2,623

Page 16 of 94

Capital Resources

Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios and to qualify Trustco Bank as a well-capitalized institution in accordance with federal regulatory requirements. Historically, most of the Company’s capital requirements have been provided through retained earnings generated.

Both TrustCo and Trustco Bank are subject to regulatory capital requirements.  On January 1, 2016, 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 2018 was the third year of implementation of the new capital rules.

As of December 31, 2018, the capital levels of both TrustCo and the Bank exceeded the minimum standards, including with the current and also fully phased-in capital conservation buffer is taken into account.

Under the OCC’s “prompt corrective action” regulations, a bank is deemed to be “well-capitalized” when it’s 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 December 31, 2018 and 2017, Trustco Bank met the definition of “well-capitalized.”

The Company’s dividend payout ratio was 42.0% of net income in 2018 and 58.4% of net income in 2017.  The per-share dividend paid was $0.2625 in 2017 and $0.2674 in 2018.  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, during 2018 and 2017, the Bank’s compliance with the capital plan required under the terms of the Bank’s July 21, 2016 formal agreement with the OCC.  Under the OCC agreement, the Bank could declare or pay a dividend or make a capital distribution only (a) if the Bank was in compliance with its approved written capital plan, and would remain in compliance with such Capital Plan immediately following the declaration or payment of any dividend or capital distribution, and (b) following OCC approval under OCC capital distribution rules.  The OCC could 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 2016, the payment of dividends by the Bank are subject to prior approval.  As noted above, the OCC has terminated the formal agreement with the Bank effective February 7, 2018.  As a result of the termination of the agreement, the Bank will not be required to obtain prior OCC approval of proposed dividend payments to the Company, although the Bank will be required to provide prior notice of intended dividends to the Federal Reserve Board and the OCC.

TrustCo’s consolidated Tier 1 risk-based capital was 18.79% of risk-adjusted assets at December 31, 2018, and 18.02% of risk‑adjusted assets at December 31, 2017.  Consolidated Tier 1 capital to assets (leverage ratio) at December 31, 2018 was 10.13%, as compared to 9.45% at year-end 2017.  Note 14 to the financial statements includes information on all regulatory capital ratios.

TrustCo maintains a dividend reinvestment plan (DRP) with approximately 11,900 participants.  During 2018, $2.4 million of dividends paid on the shares held in this plan were reinvested 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.

Risk Management

The responsibility for balance sheet risk management oversight is the function of the Company’s Asset Allocation Committee.  The Committee meets monthly and includes the executive officers of the Company as well as other department managers as appropriate.  The meetings include a review of balance sheet structure, formulation of strategy in light of anticipated economic conditions, and comparison to Board-established guidelines to control exposures to various types of risk.

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Credit Risk

Credit risk is managed through a network of loan officer authorities, review committees, loan policies, and oversight from the senior executives of the Company.  In addition, the Company utilizes an independent loan review function to evaluate management’s loan grading of non-homogeneous loans.  Management follows a policy of continually identifying, analyzing, and evaluating the credit risk inherent in the loan portfolio.  As a result of management’s ongoing reviews of the loan portfolio, loans are placed in nonaccrual status, either due to the delinquent status of the principal and/or interest payments, or based on a judgment by management that, although payment of principal and/or interest is current, such action is prudent.  Thereafter, no interest is taken into income unless received in cash or until such time as the borrower demonstrates a sustained ability to make scheduled payments of interest and principal.

Management has also developed policies and procedures to monitor the credit risk in relation to the Federal Funds sold portfolio.  TrustCo maintains an approved list of third party banks to which Trustco can sell Federal Funds and monitors the credit rating and capital levels of those institutions.  At December 31, 2018 virtually all of the Federal Funds sold and other short term investments were funds on deposit at the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York.  The Company also monitors the credit ratings on its investment securities and performs initial and periodic reviews of financial information for corporate and municipal bonds.

Nonperforming Assets

Nonperforming assets include loans in nonaccrual status, restructured loans, loans past due by three payments or more and still accruing interest, and foreclosed real estate properties.

Nonperforming assets at year-end 2018 and 2017 totaled $26.7 million and $27.6 million, respectively.  Nonperforming loans as a percentage of the total loan portfolio were 0.64% in 2018 and 0.67% in 2017.  As of December 31, 2018 and 2017, there were $8.6 million of loans in non-accruing status that were less than 90 days past due.  During 2018, a sale of approximately $4.4 million of nonperforming assets was completed at a gain of $925 thousand.

NONPERFORMING ASSETS

(dollars in thousands)	As of December 31,
	2018			2017		2016		2015		2014
Loans in nonaccrual status	$	24,952			24,339		25,018		28,212		33,886
Loans contractually past due 3 payments or more and still accruing interest		-			-		-		-		-
Restructured retail loans		34			38		42		48		125
Total nonperforming loans (1)		24,986			24,377		25,060		28,260		34,011
Foreclosed real estate		1,676			3,246		4,268		6,455		6,441
Total nonperforming assets	$	26,662			27,623		29,328		34,715		40,452
Allowance for loan losses	$	44,766			44,170		43,890		44,762		46,327
Allowance coverage of nonperforming loans		1.79	x		1.81		1.75		1.58		1.36
Nonperforming loans as a % of total loans		0.64	%		0.67		0.73		0.86		1.08
Nonperforming assets as a % of total assets		0.54	%		0.56		0.60		0.73		0.87

(1)  As of December 31, 2018, 2017 and 2016, the Company also had $11.1 million, $11.8 million and $11.5 million, respectively, of performing retail loans for which the borrower has filed for chapter 7 bankruptcy protection and not reaffirmed their debt to Trustco Bank.  Under guidance issued by the OCC in the third quarter of 2016, these loans are deemed to be troubled debt restructurings (“TDRs”), and as such have been included in the impaired loan disclosures.  For the periods prior to the OCC guidance, these loans were not considered to be TDRs.

At December 31, 2018, nonperforming loans include a mix of commercial and residential loans.  Of the total nonaccrual loans of $25.0 million, $24.3 million were residential real estate loans and $645 thousand were commercial loans.  It is the Company’s policy to classify loans as nonperforming if three monthly payments have been missed.  Economic conditions improved over the last year, but remain challenging in some respects.  The majority of the Company’s loan portfolio continues to come from its historical market area in Upstate New York.  As of December 31, 2018, 76.1% of loans are in New York, including both the Upstate and Downstate areas, as well as nominal loan balances in adjoining states.  The Upstate New York region has been affected by the economic downturn to a much lesser degree than markets that previously enjoyed more robust growth and more rapid escalation in housing prices.  The remaining 23.9% of the loan portfolio are Florida loans.  The Company’s Downstate New York and Florida market areas experienced more of an impact from the economic downturn, but conditions have improved significantly over the recent years.  At December 31, 2018, 7.7% of nonperforming loans were in Florida and 92.3% were in the Company’s New York area markets.  At December 31, 2018 nonperforming Florida loans amounted to $1.9 million compared to $2.4 million at December 31, 2017.

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TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured under a TDR, as impaired loans.

There were $1.4 million and $2.2 million of commercial loans classified as impaired as of December 31, 2018 and 2017, respectively.  In addition, there were $20.9 million and $22.0 million of residential TDRs classified as impaired at December 31, 2018 and 2017, respectively.  Generally, residential TDRs involve the borrower filing for bankruptcy protection.  The average balances of all impaired loans were $23.1 million during 2018, $24.8 million in 2017 and $22.4 million in 2016.

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.

There are inherent risks associated with lending, however based on its review of the loan portfolio, including loans classified as nonperforming loans, TDRs and impaired loans, management is aware of no other loans in the portfolio that pose significant risk of the eventual non-collection of principal and interest.  As of December 31, 2018, 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 no advances to borrowers or projects located outside the United States.  The Bank makes loans to executive officers, directors and to associates of such persons.  These loans are made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions.  These loans do not involve more than normal risk of collectability or present other unfavorable features.

At year-end 2018 and 2017 there were $1.7 million and $3.2 million of foreclosed real estate, respectively.  Although the length of time to complete a foreclosure has remained elevated in recent years, TrustCo, as a portfolio lender, has not encountered issues such as lost notes and other documents, which have been a problem in the foreclosure process for many other mortgagees.

Allowance for Loan Losses

The Company maintains an allowance for loan losses that is available to absorb losses on loans that management determines are uncollectible.  The balance of the allowance is maintained at a level that is, in management’s judgment, representative of probable incurred losses related to the loan portfolio at the end of the reporting period.

The allowance for loan losses represents management’s estimate of probable and reasonably estimable credit losses inherent in the held for investment loan portfolio.  In determining the allowance, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably estimated.  On a quarterly basis, we assess the risk inherent in our loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature of the portfolio, industry concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional and national economic factors on the quality of the loan portfolio.  Based on this analysis, we record a provision for loan losses in order to maintain the allowance at appropriate levels.

Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including management’s assessment of overall portfolio quality.  The allowance is maintained at an amount we believe is sufficient to provide for estimated losses inherent in our loan portfolio at each balance sheet date, and fluctuations in the provision for loan losses may result from management’s assessment of the adequacy of the allowance.  Changes in these estimates and assumptions are possible and may have a material impact on our allowance, and therefore our financial position, liquidity or results of operations.

 The table, “Summary of Loan Loss Experience”, includes an analysis of the changes to the allowance for the past five years.  Net loans charged off in 2018 and 2017 were $804 thousand and $1.7 million, respectively.  The decrease in net charge-offs was primarily the result of lower gross charge-offs in both the New York and Florida residential segments of the portfolio and lower commercial gross charge-offs in the New York segment.  New York commercial gross charge-offs were up $28 thousand from 2017 to 2018, while residential gross charge-offs were down $1.2 million in 2018 relative to 2017.  There were no Florida commercial charge-offs in either 2017 or 2018, while residential gross charge-offs were down $167 thousand from 2017 to 2018.  Total gross installment charge‑offs increased $38 from 2017 to 2018.  The changes in gross and net charge-offs in these categories reflected economic and market changes.  During 2018, 61.5% of net charge-offs were on residential real estate loans, 27.2% were on installment loans and commercial loans of 11.2%, compared to an average loan mix of 5.0% commercial, 94.8% real estate (including home equity products) and 0.2% installment.  Included in the net numbers cited above were recoveries of $399 thousand in 2018 and $791 thousand in 2017.  The Company recorded a $1.4 million provision for loan losses in 2018 compared to $2.0 million in 2017.  The decrease in the provision for loan losses in 2018 was primarily related to positive asset quality trends and improving economic conditions.

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The allowance for loan losses increased from $44.2 million at December 31, 2017, or 1.21% of total loans at that date, to $44.8 million at December 31, 2018, or 1.16% of total loans at that date.

While conditions in most of the Bank’s market areas are stable or improving, should general economic conditions weaken and/or real estate values begin to decline again, the level of problem loans may increase, as would the level of the provision for loan losses.

SUMMARY OF LOAN LOSS EXPERIENCE

(dollars in thousands)
	2018			2017		2016		2015		2014
Amount of loans outstanding at end of year (less unearned income)	$	3,874,096			3,636,407		3,430,586		3,293,304		3,158,332
Average loans outstanding during year (less average unearned income)		3,746,082			3,514,900		3,348,324		3,234,806		3,014,156
Balance of allowance at beginning of year		44,170			43,890		44,762		46,327		47,714
Loans charged off:
Commercial and commercial real estate		100			72		795		779		1,010
Real estate mortgage - 1 to 4 family		846			2,220		3,573		4,951		6,320
Installment		257			219		342		185		214
Total		1,203			2,511		4,710		5,915		7,544
Recoveries of loans previously charged off:
Commercial and commercial real estate		10			96		207		27		514
Real estate mortgage - 1 to 4 family		351			669		617		577		511
Installment		38			26		64		46		32
Total		399			791		888		650		1,057
Net loans charged off		804			1,720		3,822		5,265		6,487
Provision for loan losses		1,400			2,000		2,950		3,700		5,100
Balance of allowance at end of year	$	44,766			44,170		43,890		44,762		46,327
Net charge offs as a percent of average loans outstanding during year (less average unearned income)		0.02	%		0.05		0.11		0.16		0.22
Allowance as a percent of loans outstanding at end of year		1.16			1.21		1.28		1.36		1.47

Allocation of the Allowance for Loan Losses

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

(dollars in thousands)	As of December 31, 2018					As of December 31, 2017
	Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans
Commercial	$	3,903		4.74	%	$	4,205		4.85	%
Real estate - construction		310		0.69	%		379		0.85	%
Real estate mortgage - 1 to 4 family		34,918		86.80	%		33,622		85.56	%
Home equity lines of credit		4,689		7.47	%		5,195		8.50	%
Installment Loans		946		0.30	%		769		0.24	%
	$	44,766		100.00	%	$	44,170		100.00	%

Market Risk

The Company’s principal exposure to market risk is with respect to interest rate risk.  Interest rate risk is the potential for economic loss due to future interest rate changes.  These economic losses can be reflected as a loss of future net interest income and/or a loss of current market value.

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Quantitative and Qualitative Disclosure about Market Risk

TrustCo realizes income principally from the difference or spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings.  Loan volume and yield, as well as the volume of and rates on investments, deposits and borrowings are affected by market interest rates.  Additionally, because of the terms and conditions of many of the loan documents and deposit accounts, a change in interest rates could also affect the projected maturities of the loan portfolio and/or the deposit base.

In monitoring interest rate risk, management focuses on evaluating the levels of net interest income and the fair value of capital in varying interest rate cycles within Board-approved policy limits.  Interest rate risk management also must take into consideration, among other factors, the Company’s overall credit, operating income, operating cost, and capital profile.  The Asset Allocation Committee, which includes all members of executive management and reports quarterly to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of potential change in the fair value of capital as a result of changes in market interest rates.

The Company uses an industry standard simulation model as the primary tool to identify, quantify and project changes in interest rates and the impact on the balance sheet and forecasted net interest income.  The model utilizes assumptions with respect to cash flows 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 a fair value amount with respect to non-time deposit categories, since these deposits are part of the core deposit products of the Company.  The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the fair value of capital or precisely predict the impact of fluctuations in interest rates on the fair value of capital.

Using this model, the fair values of capital projections as of December 31, 2018 are referenced below.  The base case 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 December 31, 2018.  The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100, 200, 300 and 400 basis points (BP) or to decrease by 100 basis points.

As of December 31, 2018	Estimated Percentage of Fair value of Capital to Fair value of Assets
+400 BP		19.27	%
+300 BP		20.91
+200 BP		22.44
+100 BP		22.51
Current rates		23.29
-100 BP		22.71
-200 BP		20.33

At December 31, 2018, the Company’s consolidated Tier 1 capital to assets ratio (leverage capital ratio) was 10.13%.

The fair value of capital is calculated as the fair value of assets less the fair value of liabilities in the interest rate scenario presented.  The fair value of capital in the current rate environment is 23.29% of the fair value of assets, whereas the current Tier 1 capital to assets ratio was 10.13% at December 31, 2018, as noted.  The significant difference between these two capital ratios reflects the impact that a fair value calculation can have on the capital ratios of a company.  The fair value of capital calculations take into consideration the fair value of deposits, including those deposits considered core deposits, along with the fair value of assets such as the loan portfolio.

A secondary method to identify and manage the interest rate risk profile is the static gap analysis.  Interest sensitivity gap analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods.  An asset‑sensitive position indicates that there are more rate-sensitive assets than rate‑sensitive liabilities repricing or maturing within specific time periods, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling rates.  A liability‑sensitive position would generally imply a negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates.

Static gap analysis has limitations because it cannot measure precisely the effect of interest rate movements and competitive pressures on the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities.  In addition, a significant portion of the interest sensitive assets are fixed rate securities with relatively long lives whereas the interest-bearing liabilities are not subject to these same limitations.  As a result, certain assets and liabilities may in fact reprice at different times and at different volumes than the static gap analysis would indicate.  The Company deemphasized the use of gap analysis in favor of the more advanced methods provided by the previously noted model, including the sensitivity of the economic value of equity and net interest income.

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The Company recognizes the relatively long-term nature of the fixed rate residential loan portfolio.  To fund those long‑term assets, the Company cultivates long-term deposit relationships (often called core deposits).  These core deposit relationships tend to be longer-term in nature and not as susceptible to changes in interest rates.  Core deposit balances, along with substantial levels of short‑term liquid assets allows the Company to take on certain interest rate risk with respect to the fixed rate loans on its balance sheet.

The table, “Interest Rate Sensitivity,” presents an analysis of the interest-sensitivity gap position at December 31, 2018.  All interest-earning assets and interest-bearing liabilities are shown based upon their contractual maturity or repricing date adjusted for forecasted prepayment rates.  Asset prepayment and liability repricing periods are selected after considering the current rate environment, industry prepayment and data specific to the Company.  The interest rate sensitivity table indicates that TrustCo is nominally liability sensitive on a cumulative basis when measured in the less than 1 year and 1-5 years buckets.  The effect of being liability sensitive is that rising interest rates should result in liabilities repricing to higher levels faster than assets repricing to higher levels, thus decreasing net interest income.  TrustCo is nominally asset sensitive on the Over 5 years bucket.  The effect of being that rising interest rates should result in assets repricing to higher levels faster than liabilities repricing to higher levels, thus increasing net interest income.  Conversely, should interest rates decline, the Company’s interest bearing assets would reprice down faster than liabilities, resulting in lower net interest income.

INTEREST RATE SENSITIVITY

(dollars in thousands)	At December 31, 2018
	Repricing in:
	Less than 1 year			1-5 years			Over 5 years			Rate Insensitive		Total
Total assets	$	1,149,031			1,353,709			2,356,562			99,611		4,958,913
Cumulative total assets	$	1,149,031			2,502,740			4,859,302			4,958,913
Total liabilities and shareholders’ equity	$	1,392,308			1,420,754			1,630,934			514,917		4,958,913
Cumulative total liabilities and shareholders’ equity	$	1,392,308			2,813,062			4,443,996			4,958,913
Cumulative interest sensitivity gap	$	(243,277	)		(310,322	)		415,306
Cumulative gap as a % of interest earning assets for the period		(21.2	%)		(12.4	%)		8.5	%
Cumulative interest sensitive assets to liabilities		82.5	%		89.0	%		109.3	%

In practice, the optionality imbedded in many of the Company’s assets and liabilities, along with other limitations such as differing timing between changes in rates on varying assets and liabilities limits the effectiveness of gap analysis.  Thus, the table should be viewed as a rough framework in the evaluation of interest rate risk.  Management takes these factors, and others, into consideration when reviewing the Bank’s gap position and establishing its asset/liability strategy.  As noted, the simulation model is better able to consider these aspects of the Bank’s exposure to potential rate changes and thus is viewed as the more important of the two methodologies.

Liquidity Risk

TrustCo seeks to obtain favorable funding sources and to maintain prudent levels of liquid assets in order to satisfy various liquidity demands.  In addition to serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer-initiated needs.  Many factors affect the ability to meet liquidity needs, including changes in the markets served by the Bank’s network of branches, the mix of assets and liabilities, and general economic conditions.

The Company actively manages its liquidity position through target ratios established under its asset/liability management policies.  Continual monitoring of these ratios, both historically and through forecasts under multiple interest rate scenarios, allows TrustCo to employ strategies necessary to maintain adequate liquidity levelsas provided in its asset/liability management policies.  Management has also developed various liquidity alternatives, such as borrowings from the Federal Home Loan Bank of New York (“FHLBNY”) and the Federal Reserve Bank of New York (“FRBNY”), and through the utilization of brokered CDs, should the need develop.

The Company achieves its liability-based liquidity objectives in a variety of ways.  Liabilities can be classified into three categories for the purposes of managing liability-based liquidity: retail deposits, purchased money, and capital market funds.  TrustCo seeks deposits that are dependable and predictable and that are based as much on the level and quality of service as they are on interest rate.  Average retail deposits (total deposits less time deposits greater than $250 thousand) amounted to $4.02 billion in 2018 and $4.03 billion in 2017.  Average balances of core deposits are detailed in the table “Mix of Average Sources of Funding.”

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In addition to core deposits, another source of liability-based funding available to TrustCo is purchased money, which consists of long-term and short-term borrowings, Federal Funds purchased, securities sold under repurchase agreements, and time deposits greater than $250 thousand.  The average balances of these purchased liabilities are detailed in the table “Mix of Average Sources of Funding.”  During 2018, the average balance of purchased liabilities was $377.0 million, compared with $364.9 million in 2017.  Although classified as purchased liabilities for the purposes of this analysis the Company does not offer premium rates on large time deposits and thus views its time deposits as relatively stable funds.  The increase in borrowed funds is wholly the result of customer’s behavioral preferences in regard to managing their funds and does not reflect any decision by management to increase this category of funding.  The classification of time deposits over $250 thousand as purchased liabilities is typical industry practice, partly reflecting that some banks pay premium rates for larger balance time deposits.

The Bank also has a line of credit available with the FHLBNY.  The amount of that line is determined by the Bank’s total assets and the amount and types of collateral pledged.  Assets that are eligible for pledging include most loans and securities.  The Bank can borrow up to 30% of its total assets from the FHLBNY without special approval and may apply to borrow up to 50% of its total assets.  Securities and loans pledged as collateral against any borrowings must cover certain margin requirements.  Eligible securities have a maximum lendable value of 67% to 97%, depending on the security type, with the securities in the Bank’s investment portfolio generally having maximum lendable values of 80% to 95%.  The maximum lendable value against loans is 90% for 1-4 family residential mortgages, 80% for multifamily mortgages and 75% for commercial mortgages.  For both securities and loans, the maximum lendable limits are applied to the market value of the asset pledged.  At December 31, 2018 there were no outstanding balances associated with this line of credit.  In addition, the Bank has access to borrowings from the FRBNY.  Borrowings from the FRBNY are subject to collateralization by securities or loans acceptable to the FRBNY and at collateral margins set by the FRBNY.

The Company’s overall liquidity position is favorable compared to its peers.  A simple liquidity proxy often used in the industry is the ratio of loans to deposits, with a lower number representing a more liquid institution.  At December 31, 2018, TrustCo’s loan to deposit ratio was 90.64% compared to 87.1% at December 31, 2017, while the median peer group of all publically traded banks and thrifts tracked by S&P Global Market Intelligence financial with assets between $2 billion and $10 billion had ratios of 94.8% and 92.0%, respectively.  In addition, at December 31, 2018 and 2017, the Company had cash and cash equivalents totaling $503.7 million and $612.7 million, respectively, as well as unpledged securities available for sale with a fair value of $298.4 million and $220.2 million, respectively.

Off-Balance Sheet Risk

Commitments to extend credit: The Bank makes contractual commitments to extend credit, and extends lines of credit which are subject to the Bank’s credit approval and monitoring procedures.  At December 31, 2018 and 2017, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $432.6 million and $414.3 million, respectively.  In management’s opinion, there are no material commitments to extend credit that represent unusual risk.

The Company has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party.  Standby letters of credit generally arise in connection with lending relationships.  The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers.  Contingent obligations under standby letters of credit totaled approximately $6.6 million and $3.8 million at December 31, 2018 and 2017, respectively, and represent the maximum potential future payments the Company could be required to make.  Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements.  Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments.  Company policies governing loan collateral apply to standby letters of credit at the time of credit extension.  Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral.  The fair value of the Company’s standby letters of credit at December 31, 2018 and 2017 was insignificant.

Other off-balance sheet risk: TrustCo does not engage in activities involving interest rate swaps, forward placement contracts, or any other instruments commonly referred to as “derivatives.”  Management believes these instruments pose a high degree of risk, and that investing in them is unnecessary.  TrustCo has no off-balance sheet partnerships, joint ventures, or other risk sharing entities.

Noninterest Income and Expense

Noninterest income: Noninterest income is an important source of revenue for the Company and a factor in overall results.  Total noninterest income was $18.1 million in 2018, $18.4 million in 2017 and $19.0 million in 2016.  There were no net securities gains recorded in 2018 while 2016 results included $668 thousand of net gains.  Excluding securities gains and losses, noninterest income was $18.1 million in 2018, $18.4 million in 2017 and $18.3 million in 2016.

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Trustco Financial Services contributes a large recurring portion of noninterest income through fees generated by providing fiduciary and investment management services.  Income from these fiduciary activities totaled $6.3 million in 2018, $6.6 million in 2017 and $5.9 million in 2016.  Trust fees are generally calculated as a percentage of the assets under management by Trustco Financial Services.  In addition, trust fees include fees for estate settlements, tax preparation, and other services.  Assets under management by Trustco Financial Services are not included on the Company’s Consolidated Financial Statements because Trustco Financial Services holds these assets in a fiduciary capacity.  At December 31, 2018, 2017 and 2016, fair value of assets under management by the Trustco Financial Services were approximately $802.6 million, $890.2 million and $845.7 million, respectively.  The changes in levels of assets under management reflects a combination of changing market valuations and the net impact of new customer asset additions, losses of accounts and the settlement of estates.

The Company routinely reviews its service charge policies and levels relative to its competitors.  Reflecting those reviews, the Company makes changes in fees for services to customers in terms of both the levels of fees as well as types of fees where appropriate.  The changes in reported noninterest income also reflect the volume of services customers utilized and regulatory changes governing overdrafts.  There were no sales of nonperforming loans in 2018.  During 2018, 2017 and 2016 sales of nonperforming loans resulted in gains of $85 thousand and $24 thousand, respectively, and are included in other noninterest income.  Also included in other noninterest income in 2016 is a gain of $469 thousand on the sale of a building.

NONINTEREST INCOME

(dollars in thousands)	For the year ended December 31,						2018 vs. 2017
	2018		2017		2016		Amount			Percent
Trustco Financial Services income	$	6,283		6,584		5,886	$	(301	)		(4.6	)%
Fees for services to customers		10,912		10,798		10,857		114			1.1
Net gain on securities transactions		-		-		668		-			-
Other		886		991		1,601		(105	)		(10.6	)
Total noninterest income	$	18,081		18,373		19,012	$	(292	)		(1.6	)%

Noninterest expense: Noninterest expense was $97.7 million in 2018, compared with $94.0 million in 2017 and $93.8 million in 2016.  TrustCo’s operating philosophy stresses the importance of monitoring and controlling the level of noninterest expense.  The efficiency ratio is a strong indicator of how well controlled and monitored these expenses are for a banking enterprise.  A low ratio indicates highly efficient performance.  The median efficiency ratio for a peer group composed of banking institutions with assets of $2 to $10 billion was 56.0% for 2018.  TrustCo’s efficiency ratio was 53.9% in 2018, 53.7% in 2017 and 55.7% in 2016.  Excluded from the efficiency ratio calculation were $668 thousand of securities gains in 2016.  In addition in 2016 the ratio excludes the gain on the sale of a branch building, and for 2017 and 2016 gains on the sale of NPL’s previously mentioned were also excluded.  Other real estate owned expense or income is also excluded from this calculation for all periods presented.

NONINTEREST EXPENSE

(dollars in thousands)	For the year ended December 31,						2018 vs. 2017
	2018		2017		2016		Amount			Percent
Salaries and employee benefits	$	42,107		40,665		36,508	$	1,442			3.5	%
Net occupancy expense		17,213		16,543		16,078		670			4.1
Equipment expense		7,068		6,118		6,320		950			15.5
Professional services		6,555		6,895		8,200		(340	)		(4.9	)
Outsourced services		7,500		6,410		6,216		1,090			17.0
Advertising expense		3,020		2,578		2,515		442			17.1
FDIC and other insurance		2,741		4,179		5,967		(1,438	)		(34.4	)
Other real estate expense, net		1,231		1,171		2,558		60			5.1
Other		10,278		9,435		9,465		843			8.9
Total noninterest expense	$	97,713		93,994		93,827	$	3,719			4.0	%

Salaries and employee benefits are the most significant component of noninterest expense.  For 2018, these expenses amounted to $42.1 million, compared with $40.7 million in 2017 and $36.5 million in 2016.  The change in salaries and benefits in 2018 was primarily due to increases in employees related to fulfilling the agreement with the OCC.  Full time equivalent headcount increased from 846 as of December 31, 2017 to 854 as of December 31, 2018.

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Professional services expense was $6.6 million in 2018, compared to $6.9 million in 2017 and $8.2 million in 2016.  The decrease in these costs in 2017 compared to 2016 was driven by the reduced use of various consultants and experts utilized to assist with meeting the requirements of the agreement with the OCC.

FDIC and other insurance expense was $2.7 million in 2018, $4.2 million in 2017 and $6.0 million in 2016.  The decline in 2018 reflects the full year impact of changes in the FDIC premium structure that occurred during 2017.

Other real estate expense remained $1.2 million in 2018, as compared to $1.2 million in 2017 and $2.6 million in 2016.  Included in ORE expense during 2018, 2017 and 2016 were write downs of properties included in ORE totaling $769 thousand, $1.1 million and $1.2 million, respectively.

Changes in other noninterest expense are the results of normal banking activities.  The decrease in 2017 versus 2016 was partly the result of the one-time costs in 2016 to roll out chip card technology for TrustCo’s debit cards.

Income Tax

As discussed, the Act had a significant impact on the Company’s recognized tax expense in 2018.  In 2018, TrustCo recognized income tax expense of $18.2 million, as compared to $33.6 million in 2017 (which included the $5.1 million associated with the Tax Act), and $25.7 million in 2016.  The effective tax rates were 22.9%, 43.8% and 37.6% in 2018, 2017, and 2016, respectively.  The lower effective tax rate in 2018 is due to the federal tax reform.

Contractual Obligations

The Company is contractually obligated to make the following payments on leases as of December 31, 2018:

(dollars in thousands)	Payments Due by Period:
	Less Than 1 Year		1-3 Years	3-5 Years	More than 5 Years		Total
Operating leases	$	7,799	15,177	13,721		32,722		69,419

In addition, the Company is contractually obligated to pay data processing vendors approximately $6 million to $7 million per year through 2021.

Also, the Company is obligated under its various employee benefit plans to make certain payments of approximately $1.8 to $1.9 million per year through 2025.  Additionally, the Company is obligated to pay the accumulated benefits under the Company’s supplementary pension plan which amounted to $5.4 million and $5.6 million, respectively, as of December 31, 2018 and 2017. Actual payments under the plan are made in accordance with the plan provisions.

Impact of Inflation and Changing Prices

The Consolidated Financial Statements for the years ended 2018, 2017 and 2016 have been prepared in accordance with U.S. generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation.  The impact of inflation is reflected in the increasing cost of operations.

Unlike most industrial companies, nearly all assets and liabilities of the Company are monetary.  As a result, changes in interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation, because interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s consolidated financial statements contains a summary of the Company’s significant accounting policies.

Management believes that the Company’s policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.

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The provision for loan losses is based upon Management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated fair value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although Management uses current and relevant information available in relation to their loan portfolio, the adequacy of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in primarily New York, and Florida. Accordingly, the collectability of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in local market conditions and may experience adverse economic conditions. Future adjustments to the provision for loan losses and allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

Pursuant to recent Securities and Exchange Commission (“SEC”) guidance, management of the Company is encouraged to evaluate and disclose those accounting policies that are 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 credit losses in the 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 2018 Annual Report on Form 10‑K is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.

Recent Accounting Pronouncements

Please refer to Note 17 to the consolidated financial statements for a detailed discussion of new accounting pronouncements and their impact on the Company.

Forward‑Looking Statements

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

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 make accurate assumptions and judgments regarding the credit risks associated with its lending and investing activities, including changes in the level and direction of loan delinquencies and charge-offs, changes in property values, and changes in estimates of the adequacy of the allowance for loan and lease losses;

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

· Restrictions or conditions imposed by TrustCo’s and Trustco Bank’s regulators on their operations that may make it more difficult to achieve TrustCo’s and Trustco Bank’s goals;

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· the future earnings and capital levels of TrustCo and Trustco Bank and the continued receipt of approvals from TrustCo’s and Trustco Bank’s primary federal banking regulators under regulatory rules to distribute capital from Trustco Bank to TrustCo, which could affect the ability of TrustCo to pay dividends;

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

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

· Unanticipated effects from the Tax Act that may limit its benefits or adversely impact our business[, which could include decreased demand for borrowing by our customers or increased price competition that offsets the benefits of decreased federal income tax expense;

· the perceived overall value of TrustCo’s products and services by users, including the features, pricing and quality compared to competitors’ products and services and the willingness of current and prospective customers to substitute competitors’ products and services for TrustCo’s products and services;

· changes in consumer spending, borrowing and savings habits;

· the effect of changes in financial services laws and regulations (including laws concerning taxation, banking and securities) and the impact of other governmental initiatives affecting the financial services industry, including regulatory capital requirements;

· changes in management personnel;

· real estate and collateral values;

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

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

· technological changes and electronic, cyber and physical security breaches;

· changes in local market areas and general business and economic trends, 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, 2018.

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

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SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION

(dollars in thousands, except per share data)

	2018							2017
		Q1	Q2	Q3	Q4	Year			Q1	Q2	Q3	Q4	Year
Income statement:
Interest and dividend income	$	43,497	44,815	45,738	46,864		180,914	$	41,052	42,108	42,788	43,012		168,960
Interest expense		4,182	4,706	5,215	6,125		20,228		3,652	3,567	3,609	3,764		14,592
Net interest income		39,315	40,109	40,523	40,739		160,686		37,400	38,541	39,179	39,248		154,368
Provision for loan losses		300	300	300	500		1,400		600	550	550	300		2,000
Net interest income after provison for loan losses		39,015	39,809	40,223	40,239		159,286		36,800	37,991	38,629	38,948		152,368
Noninterest income		4,679	4,495	4,455	4,452		18,081		4,727	4,504	4,854	4,288		18,373
Noninterest expense		24,155	24,095	24,544	24,919		97,713		24,019	22,913	23,526	23,536		93,994
Income before income taxes		19,539	20,209	20,134	19,772		79,654		17,508	19,582	19,957	19,700		76,747
Income tax expense		4,731	4,804	4,935	3,739		18,209		6,561	7,342	7,361	12,338		33,602
Net income	$	14,808	15,405	15,199	16,033		61,445	$	10,947	12,240	12,596	7,362		43,145
Per share data:
Basic earnings	$	0.154	0.160	0.157	0.166		0.637	$	0.114	0.127	0.131	0.077		0.449
Diluted earnings		0.153	0.160	0.157	0.166		0.636		0.114	0.127	0.131	0.076		0.448
Cash dividends declared		0.0656	0.0656	0.0681	0.0681		0.2674		0.0656	0.0656	0.0656	0.0656		0.2625

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FIVE YEAR SUMMARY OF FINANCIAL DATA

(dollars in thousands, except per share data)	Years ended December 31,
	2018			2017			2016			2015			2014
Statement of income data:
Interest and dividend income	$	180,914			168,960			161,359			159,345			156,941
Interest expense		20,228			14,592			15,304			16,197			15,488
Net interest income		160,686			154,368			146,055			143,148			141,453
Provision for loan losses		1,400			2,000			2,950			3,700			5,100
Net interest income after provision for loan losses		159,286			152,368			143,105			139,448			136,353
Noninterest income		18,081			18,373			18,344			17,621			19,189
Net gain on securities transactions		-			-			668			251			717
Noninterest expense		97,713			93,994			93,827			90,560			84,670
Income before income taxes		79,654			76,747			68,290			66,760			71,589
Income taxes		18,209			33,602			25,689			24,522			27,396
Net income	$	61,445			43,145			42,601			42,238			44,193
Share data:
Average equivalent diluted shares (in thousands)		96,646			96,222			95,648			95,213			94,753
Book value	$	5.07			4.75			4.52			4.34			4.15
Cash dividends		0.267			0.263			0.263			0.263			0.263
Basic earnings		0.637			0.449			0.446			0.444			0.467
Diluted earnings		0.636			0.448			0.445			0.444			0.466
Financial:
Return on average assets		1.25	%		0.88			0.89			0.89			0.97
Return on average shareholders’ equity		13.05			9.64			9.94			10.41			11.54
Cash dividend payout ratio		42.02			58.44			58.88			59.13			56.30
Tier 1 capital to assets (leverage ratio)		10.13			9.45			9.11			8.85			8.55
Tier 1 capital as a % of total risk adjusted assets		18.79			18.02			17.78			17.71			17.04
Common equity tier 1 capital ratio		18.79			18.02			17.78			17.71			N/A
Total capital as a % of total risk adjusted assets		20.05			19.28			19.04			18.97			18.30
Efficiency ratio*		53.97			53.75			55.67			55.08			52.60
Net interest margin		3.33			3.22			3.11			3.09			3.16
Average balances:
Total assets	$	4,900,450			4,875,668			4,790,701			4,721,146			4,574,941
Earning assets		4,822,577			4,790,890			4,698,630			4,630,417			4,487,133
Loans, net		3,746,082			3,514,900			3,348,324			3,234,806			3,014,156
Allowance for loan losses		(44,651	)		(44,319	)		(44,718	)		(46,023	)		(47,409	)
Securities available for sale		547,721			617,180			627,341			657,951			794,613
Held to maturity securities		24,801			37,929			50,975			63,730			78,356
Federal Reserve Bank and Federal Home Loan Bank stock		8,907			9,295			9,554			9,414			10,135
Deposits		4,206,577			4,171,396			4,149,201			4,103,505			3,978,968
Short-term borrowings		194,810			228,086			185,672			184,725			189,430
Shareholders’ equity		470,814			447,680			428,389			405,761			382,810

*  Non-GAAP figure; refer to Non-gaap financial measures reconciliation section for definition

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Non-GAAP Financial Measures Reconciliation

Certain of the financial measures used in this report, such as taxable equivalent net interest income and net interest margin, and efficiency ratio, are determined by methods other than in accordance with generally accepted accounting principles (“GAAP”).

Taxable Equivalent Net Interest Income and Taxable Equivalent Net Interest Margin: Net interest income is commonly presented on a taxable equivalent basis.  That is, to the extent that some component of the institution’s net interest income will be exempt from taxation (e.g., was received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added back to the net interest income total.  Management considers this adjustment helpful to investors in comparing one financial institution’s net interest income (pre-tax) to that of another institution, as each will have a different proportion of tax-exempt items in their portfolios.  Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets.  For purposes of this measure as well, taxable equivalent net interest income is generally used by financial institutions, again to provide investors with a better basis of comparison from institution to institution.  We calculate the taxable equivalent net interest margin by dividing GAAP net interest income, adjusted to include the benefit of non-taxable interest income, by average interest earnings assets.

The Efficiency Ratio: Financial institutions often use an “efficiency ratio” as a measure of expense control.  The efficiency ratio typically is defined as noninterest expense divided by the sum of taxable equivalent net interest income and noninterest income.  As in the case of net interest income, generally, net interest income as utilized in calculating the efficiency ratio is typically expressed on a taxable equivalent basis.  Moreover, many financial institutions, in calculating the efficiency ratio, also adjust both noninterest expense and noninterest income to exclude from these items (as calculated under GAAP) certain component elements, such as other real estate expense (deducted from noninterest expense) and securities transactions (excluded from noninterest income).  We calculate the efficiency ratio by dividing total noninterest expenses as determined under GAAP, as adjusted, by net interest income (fully taxable equivalent) and total noninterest income as determined under GAAP, as adjusted, as stated in the table below.

We believe that these non-GAAP financial measures provide information that is important to investors and that is useful in understanding the Company’s financial position, results and ratios.  Management internally assesses our performance based, in part, on these measures.  However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures.  As other companies may use different calculations for these measures, this presentation may not be comparable to other similarly titled measures reported by other companies.  A reconciliation of the non-GAAP measures of tangible book value per share, efficiency ratio, and taxable equivalent net interest income and net interest margin to the underlying GAAP financial measures is set forth below.

(dollars in thousands, except per share amounts)

(Unaudited)

	Years ended
Taxable Equivalent Net Interest Margin	12/31/18			12/31/17			12/31/16			12/31/15			12/31/14
Net interest income		160,686			154,368			146,055			143,148			141,453
Taxable Equivalent Adjustment		12			45			54			74			130
Net interest income (Taxable Equivalent)		160,698			154,413			146,109			143,222			141,583
Total Interest Earning Assets		4,822,577			4,790,890			4,698,630			4,630,417			4,487,133
Net Interest Margin		3.33	%		3.22	%		3.11	%		3.09	%		3.15	%
Taxable Equivalent Net Interest Margin		3.33	%		3.22	%		3.11	%		3.09	%		3.16	%

	Years ended
Efficiency Ratio	12/31/18			12/31/17			12/31/16			12/31/15			12/31/14
Net interest income (fully taxable equivalent)		160,698			154,413			146,109			143,222			141,583
Non-interest income		18,081			18,373			19,012			17,872			19,906
Less:  Net gain on securities		-			-			668			251			717
Less:  Net gain on sale of building and net gain on sale of nonperforming loans		-			84			493			60			1,719
Revenue used for efficiency ratio		178,779			172,702			163,960			160,783			159,053
Total Noninterest expense		97,713			93,994			93,827			90,560			84,670
Less:  Other real estate expense, net		1,231			1,171			2,558			2,001			1,009
Expenses used for efficiency ratio		96,482			92,823			91,269			88,559			83,661
Efficiency Ratio		53.97	%		53.75	%		55.67	%		55.08	%		52.60	%

Page 30 of 94

Glossary of Terms

Allowance for Loan Losses:

A balance sheet account which represents management’s estimate of probable credit losses in the loan portfolio. The provision for loan losses is added to the allowance account, charge offs of loans decrease the allowance balance and recoveries on previously charged off loans serve to increase the balance.

Basic Earnings Per Share:

Net income divided by the weighted average number of common shares outstanding (including participating securities) during the period.

Cash Dividends Per Share:

Total cash dividends for each share outstanding on the record dates.

Common equity tier 1 capital ratio

Common equity Tier 1 capital to risk weighted assets

Comprehensive Income:

Net income plus the change in selected items recorded directly to capital such as the net change in unrealized market gains and losses on securities available for sale and the overfunded/underfunded positions in the retirement plans.

Core Deposits:

Deposits that are traditionally stable, including all deposits other than time deposits of $250,000 or more.

Derivative Investments:

Investments in futures contracts, forwards, swaps, or other investments with similar characteristics.

Diluted Earnings Per Share:

Net income divided by the weighted average number of common shares outstanding during the period, taking into consideration the effect of any dilutive stock options.

Earning Assets:

The sum of interest-bearing deposits with banks, securities available for sale, securities held to maturity, trading securities, loans, net of unearned income, and Federal Funds sold and other short-term investments.

Efficiency Ratio:

Noninterest expense (excluding other real estate expense) divided by taxable equivalent net interest income plus noninterest income (excluding securities transactions and other component income items).  This is an indicator of the total cost of operating the Company in relation to the total income generated.

Federal Funds Sold:

A short-term (generally one business day) investment of excess cash reserves from one bank to another.

Government Sponsored Enterprises (“GSE”):

Corporations sponsored by the United States government and include the Federal Home Loan Bank (FHLB), the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), the Federal National Mortgage Association (FNMA or Fannie Mae) and the Small Business Administration (SBA).

Impaired Loans:

Loans, principally commercial, where it is probable that the borrower will be unable to make the principal and interest payments according to the contractual terms of the loan, and all loans considered TDRs.

Page 31 of 94

Glossary of Terms (continued)

Interest Bearing Liabilities:

The sum of interest bearing deposits, Federal Funds purchased, securities sold under agreements to repurchase, short-term borrowings, and long-term debt.

Interest Rate Spread:

The difference between the taxable equivalent yield on earning assets and the rate paid on interest bearing liabilities.

Liquidity:

The ability to meet loan commitments, deposit withdrawals, and maturing borrowings as they come due.

Net Interest Income:

The difference between income on earning assets and interest expense on interest bearing liabilities.

Net Interest Margin:

Fully taxable equivalent net interest income as a percentage of average earning assets.

Net Loans Charged Off:

Reductions to the allowance for loan losses written off as losses, net of the recovery of loans previously charged off.

Nonaccrual Loans:

Loans for which no periodic accrual of interest income is recognized.

Nonperforming Assets:

The sum of nonperforming loans plus foreclosed real estate properties.

Nonperforming Loans:

The sum of loans in a nonaccrual status (for purposes of interest recognition), plus accruing loans three payments or more past due as to principal or interest payments.

Parent Company:

A company that owns or controls a subsidiary through the ownership of voting stock.

Real Estate Owned:

Real estate acquired through foreclosure proceedings.

Return on Average Assets:

Net income as a percentage of average total assets.

Return on Average Equity:

Net income as a percentage of average equity.

Risk-Adjusted Assets:

A regulatory calculation that assigns risk factors to various assets on the balance sheet.

Risk-Based Capital:

The amount of capital required by federal regulatory standards, based on a risk-weighting of assets.

Page 32 of 94

Glossary of Terms (continued)

Subprime Loans:

Loans, including mortgages, that are underwritten based on non-traditional guidelines or structured in non-traditional ways, typically with the goal of facilitating the approval of loans that more conservative lenders would likely decline.

Tangible Book Value Per Share:

Total shareholders’ equity (less goodwill) divided by shares outstanding on the same date.  This provides an indication of the tangible book value of a share of stock.

Taxable Equivalent (“TE”):

Tax exempt income that has been adjusted to an amount that would yield the same after tax income had the income been subject to taxation at the statutory federal and/or state income tax rates.

Tier 1 Capital:

Total shareholders’ equity excluding accumulated other comprehensive income.

Troubled Debt Restructurings (TDRs):

A refinanced loan in which the bank allows the borrower certain concessions that would normally not be considered.  The concessions are made in light of the borrower’s financial difficulties and the bank’s objective to maximize recovery on the loan.  TDRs are considered impaired loans.

Page 33 of 94

Management’s Report on Internal Control over Financial Reporting

The management of TrustCo Bank Corp NY is responsible for establishing and maintaining adequate internal control over financial reporting.  TrustCo’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has completed an assessment of TrustCo Bank Corp NY’s internal control over financial reporting as of December 31, 2018.  In making this assessment, we used the criteria set forth by the 2013 Internal Control - Integrated Framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria.  Based on our assessment, we believe that, as of December 31, 2018, the Company maintained effective internal control over financial reporting.

The Company’s internal control over financial reporting as of December 31, 2018 has been audited by Crowe LLP, the Company’s independent registered public accounting firm, as stated in their report which is included herein.

 

Robert J. McCormick

Chairman, President, and Chief Executive Officer

 

Michael M. Ozimek

Executive Vice President, and Chief Financial Officer

March 1, 2019

Page 34 of 94

Crowe LLP Independent Member Crowe Global

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of Trustco Bank Corp NY

Glenville, New York

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of condition of Trustco Bank Corp NY (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”).  We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

Page 35 of 94

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Crowe LLP

We have served as the Company’s auditor since 2009.

New York, New York

March 1, 2019

Page 36 of 94

TRUSTCO BANK CORP NY

Consolidated Statements of Income

(dollars in thousands, except per share data)

	Years ended December 31,
	2018		2017		2016
Interest and dividend income:
Interest and fees on loans	$	158,304		148,133		143,679
Interest and dividends on securities available for sale:
U. S. government sponsored enterprises		3,112		2,281		1,489
State and political subdivisions		22		39		52
Mortgage-backed securities and collateralized mortgage obligations-residential		6,593		7,447		7,963
Corporate bonds		687		606		246
Small Business Administration-guaranteed participation securities		1,339		1,547		1,801
Mortgage-backed securities and collateralized mortgage obligations-commercial		37		109		133
Other		18		16		16
Total interest and dividends on securities available for sale		11,808		12,045		11,700
Interest on held to maturity securities:
Mortgage-backed securities and collateralized mortgage obligations-residential		962		1,149		1,454
Corporate bonds		-		410		617
Total interest on held to maturity securities		962		1,559		2,071
Federal Reserve Bank and Federal Home Loan Bank stock		564		544		502
Interest on federal funds sold and other short-term investments		9,276		6,679		3,407
Total interest and dividend income		180,914		168,960		161,359
Interest expense:
Interest on deposits		18,958		13,190		14,213
Interest on short-term borrowings		1,270		1,402		1,091
Total interest expense		20,228		14,592		15,304
Net interest income		160,686		154,368		146,055
Provision for loan losses		1,400		2,000		2,950
Net interest income after provision for loan losses		159,286		152,368		143,105
Noninterest income:
Trustco Financial Services income		6,283		6,584		5,886
Fees for services to customers		10,912		10,798		10,857
Net gain on securities transactions		-		-		668
Other		886		991		1,601
Total noninterest income		18,081		18,373		19,012
Noninterest expense:
Salaries and employee benefits		42,107		40,665		36,508
Net occupancy expense		17,213		16,543		16,078
Equipment expense		7,068		6,118		6,320
Professional services		6,555		6,895		8,200
Outsourced services		7,500		6,410		6,216
Advertising expense		3,020		2,578		2,515
FDIC and other insurance expense		2,741		4,179		5,967
Other real estate expense, net		1,231		1,171		2,558
Other		10,278		9,435		9,465
Total noninterest expense		97,713		93,994		93,827
Income before income taxes		79,654		76,747		68,290
Income taxes		18,209		33,602		25,689
Net income	$	61,445		43,145		42,601
Earnings per share:
Basic	$	0.637		0.449		0.446
Diluted		0.636		0.448		0.445

See accompanying notes to consolidated financial statements.

Page 37 of 94

Consolidated Statements of Comprehensive Income

(dollars in thousands, except per share data)

	Years ended December 31,
	2018			2017			2016
Net income	$	61,445			43,145			42,601
Net unrealized holding (loss) gain on securities available for sale		(5,328	)		2,524			(3,096	)
Reclassification adjustments for net gain recognized in income		-			-			(688	)
Tax effect		1,384			(792	)		1,514
Net unrealized (loss) gain on securities available for sale, net of tax		(3,944	)		1,732			(2,270	)
Change in overfunded position in pension and postretirement plans arising during the year		(3,684	)		3,824			1,333
Tax effect		957			(812	)		(533	)
Change in overfunded position in pension and postretirement plans arising during the year, net of tax		(2,727	)		3,012			800
Amortization of net actuarial gain		(556	)		(289	)		(90	)
Amortization of prior service (benefit) cost		(100	)		90			90
Tax effect		170			(100	)		-
Amortization of net actuarial gain and prior service credit on pension and postretirement plans, net of tax		(486	)		(299	)		-
Other comprehensive (loss) income, net of tax		(7,157	)		4,445			(1,470	)
Comprehensive income	$	54,288			47,590			41,131

See accompanying notes to consolidated financial statements.

Page 38 of 94

TRUSTCO BANK CORP NY

Consolidated Statements of Condition

(dollars in thousands, except per share data)

	As of December 31,
	2018			2017
ASSETS
Cash and due from banks	$	49,260			44,125
Federal funds sold and other short term investments		454,449			568,615
Total cash and cash equivalents		503,709			612,740
Securities available for sale		501,463			571,965
Held to maturity securities ($22,924 and $28,701 fair value at December 31, 2018 and 2017, respectively)		22,501			27,551
Federal Reserve Bank and Federal Home Loan Bank stock		8,953			8,779
Loans, net of deferred net costs		3,874,096			3,636,407
Less: Allowance for loan losses		44,766			44,170
Net loans		3,829,330			3,592,237
Bank premises and equipment, net		34,694			35,157
Other assets		58,263			59,579
Total assets	$	4,958,913			4,908,008
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	405,069			398,399
Savings accounts		1,182,683			1,260,447
Interest-bearing checking		904,678			891,052
Money market deposit accounts		507,311			556,462
Time accounts		1,274,506			1,066,966
Total deposits		4,274,247			4,173,326
Short-term borrowings		161,893			242,991
Accrued expenses and other liabilities		32,902			33,383
Total liabilities		4,469,042			4,449,700
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY:
Capital stock: $1 par value; 150,000,000 shares authorized, 100,175,032 and 99,998,482 shares issued at December 31, 2018 and 2017, respectively		100,175			99,998
Surplus		176,710			175,651
Undivided profits		256,397			219,436
Accumulated other comprehensive loss, net of tax		(10,309	)		(1,806	)
Treasury stock: 3,516,440 and 3,709,171 shares, at cost, at December 31, 2018 and 2017, respectively		(33,102	)		(34,971	)
Total shareholders’ equity		489,871			458,308
Total liabilities and shareholders’ equity	$	4,958,913			4,908,008

See accompanying notes to consolidated financial statements.

Page 39 of 94

Consolidated Statements of Changes in Shareholders’ Equity

(dollars in thousands, except per share data)

	Capital Stock		Surplus			Undivided Profits			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Beginning balance, January 1, 2016		98,973		171,443			184,009			(4,781	)		(36,334	)		413,310
Net Income		-		-			42,601			-			-			42,601
Change in other comprehensive loss, net of tax		-		-			-			(1,470	)		-			(1,470	)
Stock option exercises		241		1,127			-			-			-			1,368
Cash dividend declared, $.2625 per share		-		-			(25,093	)		-			-			(25,093	)
Purchase of treasury stock (22,364 shares)		-		-			-			-			(701	)		(701	)
Sale of treasury stock (398,431 shares)		-		(1,369	)		-			-			3,816			2,447
Stock based compensation expense		-		224			-			-			-			224
Ending balance, December 31, 2016	$	99,214		171,425			201,517			(6,251	)		(33,219	)		432,686
Net Income		-		-			43,145			-			-			43,145
Change in other comprehensive income (loss), net of tax		-		-			-			4,445			-			4,445
Stock option exercises		784		4,452			-			-			-			5,236
Cash dividend declared, $.2625 per share		-		-			(25,226	)		-			-			(25,226	)
Purchase of treasury stock (574,256 shares)		-		-			-			-			(4,608	)		(4,608	)
Sale of treasury stock (299,290 shares)		-		(376	)		-			-			2,856			2,480
Stock based compensation expense		-		150			-			-			-			150
Ending balance, December 31, 2017	$	99,998		175,651			219,436			(1,806	)		(34,971	)		458,308
Net income		-		-			61,445			-			-			61,445
Tax Cuts and Jobs Act of 2017, Reclassification from AOCI to Retained Earnings, Tax Effect		-		-			1,346			(1,346	)		-			-
Other comprehensive loss, net of tax		-		-			-			(7,157	)		-			(7,157	)
Stock options exercises		177		1,082			-			-			-			1,259
Cash dividend declared, $0.2675 per share		-		-			(25,830	)		-			-			(25,830	)
Purchase of treasury stock (81,940 shares)		-		-			-			-			(718	)		(718	)
Sale of treasury stock (274,671 shares)		-		(196	)		-			-			2,587			2,391
Stock based compensation expense		-		173			-			-			-			173
Ending balance, December 31, 2018	$	100,175		176,710			256,397			(10,309	)		(33,102	)		489,871

Page 40 of 94

TRUSTCO BANK CORP NY

Consolidated Statements of Cash Flows

(dollars in thousands, except per share data)

	Years ended December 31,
	2018			2017			2016
Cash flows from operating activities:
Net income	$	61,445			43,145			42,601
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,109			3,816			4,038
Net gain on sale of other real estate owned		(613	)		(924	)		(298	)
Writedown of other real estate owned		769			1,071			1,242
Provision for loan losses		1,400			2,000			2,950
Deferred tax (benefit) expense		2,556			(183	)		3,261
Net amortization of securities		3,147			4,326			4,986
Stock based compensation expense		173			150			224
Net (gain) loss on sale of bank premises and equipment		(1	)		43			(480	)
Net gain on securities transactions		-			-			(668	)
Decrease (increase) in taxes receivable		1,683			6,124			(921	)
Decrease (increase) in interest receivable		100			(371	)		(808	)
Increase in interest payable		487			11			25
Increase in other assets		(6,386	)		(310	)		(1,677	)
Decrease (increase) in accrued expenses and other liabilities		(1,229	)		2,792			419
Total adjustments		6,195			18,545			12,293
Net cash provided by operating activities		67,640			61,690			54,894
Cash flows from investing activities:
Proceeds from sales, paydowns and calls of securities available for sale		78,230			124,624			245,929
Purchases of securities available for sale		(61,807	)		(83,031	)		(275,303	)
Proceeds from maturities of securities available for sale		45,604			5,000			1,949
Proceeds from calls and maturities of held to maturity securities		5,050			17,939			10,975
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock		(174	)		(143	)		(99	)
Proceeds from redemptions of Federal Reserve Bank and Federal Home Loan Bank stock		-			943			-
Net increase in loans		(241,149	)		(212,028	)		(146,629	)
Proceeds from dispositions of other real estate owned		4,071			5,362			6,768
Proceeds from dispositions of bank premises and equipment		1			63			674
Purchases of bank premises and equipment		(3,646	)		(3,613	)		(2,055	)
Net cash used in investing activities		(173,820	)		(144,884	)		(157,791	)
Cash flows from financing activities:
Net increase in deposits		100,921			(22,837	)		95,785
Net change in short-term borrowings		(81,098	)		33,585			18,180
Proceeds from exercise of stock options		1,259			5,237			1,368
Stock based award tax withholding payments		(37	)		-			-
Proceeds from sales of treasury stock		2,391			2,480			2,447
Purchases of treasury stock		(718	)		(4,608	)		(701	)
Dividends paid		(25,569	)		(25,197	)		(25,064	)
Net cash (used in) provided by financing activities		(2,851	)		(11,340	)		92,015
Net (decrease) increase in cash and cash equivalents		(109,031	)		(94,534	)		(10,882	)
Cash and cash equivalents at beginning of period		612,740			707,274			718,156
Cash and cash equivalents at end of period	$	503,709			612,740			707,274

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Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest paid	$	19,741		14,581		15,279
Income taxes paid		16,359		26,127		23,494
Non cash investing and financing activites:
Transfer of loans to real estate owned		2,656		4,487		5,525
Increase in dividends payable		261		29		29
Change in unrealized (loss) gain on securities available for sale - gross of deferred taxes		(5,328	)	2,524		(3,784	)
Change in deferred tax effect on unrealized gain (loss) on securities available for sale, net of reclassification adjustment		1,384		(792	)	1,514
Amortization of net actuarial loss and prior service credit on pension and post retirement plans, gross of deferred taxes		(656	)	(199	)	-
Change in deferred tax effect of amortization of net actuarial loss and prior service credit on pension and post retirement plans		170		(100	)	-
Change in overfunded portion of pension and post retirement benefit plans (ASC 715) - gross of deferred taxes		(3,684	)	3,824		1,333
Deferred tax effect of change in overfunded portion of pension and post retirement benefit plans (ASC 715)		957		(812	)	(533	)

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The accounting and financial reporting policies of TrustCo Bank Corp NY (the Company or TrustCo), ORE Subsidiary Corp., Trustco Bank (referred to as Trustco Bank or the Bank), and its wholly owned subsidiaries, Trustco Realty Corporation, Trustco Insurance Agency, Inc., ORE Property, Inc. and its subsidiaries ORE Property One, Inc. and ORE Property Two, Inc. conform to general practices within the banking industry and are in conformity with U.S. generally accepted accounting principles.  A description of the more significant policies follows.

Consolidation

The consolidated financial statements of the Company include the accounts of the subsidiaries after elimination of all significant intercompany accounts and transactions.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Securities Available for Sale and Held to Maturity

Securities available for sale are carried at fair value with any unrealized appreciation or depreciation of value, net of tax, included as an element of accumulated other comprehensive income or loss in shareholders’ equity.  Management maintains an available for sale portfolio in order to provide maximum flexibility in balance sheet management.  The designation of available for sale is made at the time of purchase based upon management’s intent to hold the securities for an indefinite period of time.  These securities, however, are available for sale in response to changes in market interest rates, related changes in liquidity needs, or changes in the availability of and yield on alternative investments.  Unrealized losses on securities that reflect a decline in value which is other‑than‑temporary, if any, are charged to earnings and/or accumulated other comprehensive income (loss).

Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts.

The cost of debt securities is adjusted for amortization of premium and accretion of discount using the interest method.  Premiums and discounts on securities are amortized on the interest method over the estimated remaining term of the underlying security without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated.

Gains and losses on the sale of securities available for sale are recorded at trade date and determined using the specific identification method.

Other-Than-Temporary-Impairment (“OTTI”)

A decline in the fair value of any available for sale or held to maturity security below cost that is deemed to be other than temporary is charged to earnings and/or accumulated other comprehensive income (loss), resulting in the establishment of a new cost basis of the security.  Management evaluates these types of securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  Additional discussion of OTTI is included in Note 3 of the consolidated financial statements.

Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) stock

The Bank is a member of the FHLB system.  Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.  FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.  Dividends are reported as income.  The Bank is also a member of its regional Federal Reserve Bank.  FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.  Any dividends received are reported as income.

Loans

Loans are carried at the principal amount outstanding net of unearned income and unamortized loan fees and costs, which are recognized as adjustments to interest income over the applicable loan term.  Interest income on loans is accrued based on the principal amount outstanding.

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Nonperforming loans include non‑accrual loans and loans which are three payments or more past due and still accruing interest.  Generally, loans are placed in non‑accrual status either due to the delinquent status of principal and/or interest payments, or a judgment by management that, although payments of principal and/or interest are current, such action is prudent based upon specific facts and circumstances surrounding the borrower.  Typically, a loan is moved to non-accrual status after 90 days of non‑payment in accordance with the Company’s policy.  Past due status is based on the contractual terms of the loan.  All interest accrued but not received for loans placed on non-accrual status is reversed against interest income.  Future payments received on nonperforming loans are recorded as interest income or principal reductions based upon management’s ultimate expectation for collection.  Loans may be removed from non‑accrual status when they become current as to principal and interest and have demonstrated a sustained ability to make loan payments in accordance with the contractual terms of the loan.  Loans may also be removed from non‑accrual status when, in the opinion of management, the loan is expected to be fully collectable as to principal and interest.  When, in the opinion of management, the collection of principal appears unlikely, the loan balance is evaluated in light of its sources of repayment, and a charge-off is recorded when appropriate.

Loan origination fees, net of certain direct origination costs, are deferred and recognized using the level yield method without anticipating prepayments.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level considered adequate by management to provide for probable incurred loan losses.  The allowance is increased by provisions charged against income, while loan losses are charged against the allowance when management deems a loan balance to be uncollectible.  Subsequent recoveries, if any, are credited to the allowance.

The Company performs an analysis of the adequacy of the allowance on at least a quarterly basis.  Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, current economic conditions, past due and charge‑off trends and other factors.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  Such agencies may require the Company to change the allowance based on their judgments of information available to them at the time of their examination.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.  The allowance methodology consists of specific and general components.  The specific component relates to loans that are individually classified as impaired.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Additionally, loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDR’s) and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case‑by‑case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

TDR’s are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.  If a TDR is considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral with any charge‑off recognized at that time.  For TDR’s that subsequently default, the Company determines the amount of additional charge‑off, if any, in accordance with the accounting policy for the allowance for loan losses with respect to impaired loans described previously.

Commercial and commercial real estate loans in non‑accrual status are defined as impaired loans and are individually evaluated for impairment.  In addition, any restructured loans that meet the definition of a TDR are defined as impaired.  If a loan is impaired, a charge‑off is taken so that the loan is reported at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral, if repayment is expected solely from the collateral.  Residential real estate loans and consumer loans are collectively evaluated for impairment.

The general component of the allowance covers non‑impaired loans and is based on historical loss experience adjusted for current factors.  The historical loss experience is determined by geography for each portfolio segment and is based on the actual net loss history experienced by the Company over the most recent four years.  This actual loss experience is supplemented with other qualitative factors based on the risks present in each geography and portfolio segment.  These factors include consideration of the following: changes in national, regional and local economic trends and conditions; effects of any changes in interest rates; changes in the volume and severity of net charge‑offs, delinquencies, and nonperforming loans; changes in the experience, ability, and depth of lending management and other relevant staff; changes in the quality of the Company’s loan review system; effects of any changes in credit concentrations; effects of any changes in underwriting standards, lending policies, procedures, and practices; and changes in the nature, volume and terms of loans.  Changes in the volume and severity of net charge‑offs, delinquencies, and nonperforming loans includes consideration of levels and trends of loan delinquencies and net charge‑offs by portfolio segment.  The determination of qualitative factors involves significant judgement, and the use of subjective measurement.

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The Company’s allowance methodology also includes additional allocation percentages for residential and installment loans in non‑accrual status and residential and installment loans three payments past due and still accruing interest, and residential loans with loan‑to‑value ratios in excess of 90% at the time of origination.  Additional allocation percentages are applied to commercial loans classified as special mention and substandard by the Company’s loan review grading process that are not considered as impaired to recognize the added risk associated with these loans.  The reserve percentages are determined based upon a review of recent charge‑offs and take into consideration the type of loan, the fixed or variable nature of the loan, and the type and geography of the underlying collateral, if any, specifically for loans that are in these categories.

The following portfolio segments have been identified: commercial loans, residential real estate loans, and installment loans:

Commercial:  Commercial real estate loans and other commercial loans are made based primarily on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.  Commercial real estate collateral is generally located within the Bank’s geographic territories; while collateral for non‑real estate secured commercial loans is typically accounts receivable, inventory, and/or equipment.  Repayment is primarily dependent upon the borrower’s ability to service the debt based upon cash flows generated from the underlying business.  Additional support involves liquidation of the pledged collateral and enforcement of a personal guarantee, if a guarantee is obtained.

Residential real estate:  Residential real estate loans, including first mortgages, home equity loans and home equity lines of credit, are collateralized by first or second liens on one‑to‑four family residences generally located within the Bank’s market areas.  Proof of ownership title, clear mortgage title, and hazard insurance coverage are normally required.

Installment:  The Company’s installment loans are primarily made up of installment loans, personal lines of credit, as well as secured and unsecured credit cards.  The installment loans represent a relatively small portion of the loan portfolio and are primarily used for personal expenses and are secured by automobiles, equipment and other forms of collateral, while personal lines of credit are unsecured as are most credit card loans.

Bank Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation.  Depreciation is computed on either the straight‑line or accelerated methods over the remaining useful lives of the assets; generally 20 to 40 years for buildings, 3 to 7 years for furniture and equipment, and the shorter of the estimated life of the asset or the lease term for leasehold improvements.

Other Real Estate Owned

Assets that are acquired through or instead of foreclosure are initially recorded at fair value less costs to sell.  These assets are subsequently accounted for at the lower of cost or fair value less costs to sell.  Subsequent write downs and gains and losses on sale are included in noninterest expense.  Operating costs after acquisition are also included in noninterest expense.  At December 31, 2018 and 2017, there were $1.7 million and $3.2 million, respectively, of other real estate owned included in the category of Other Assets in the accompanying Consolidated Statements of Condition.

Income Taxes

Deferred taxes are recorded for the future tax consequences of events that have been recognized in the financial statements or tax returns based upon enacted tax laws and rates.  Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not.  The amount recognized is the largest amount of tax benefit that has a greater than 50% likelihood of being realized on examination.  For tax positions not meeting the “more likely than not” test, no benefit is recorded.

Dividend Restrictions

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 filing of notices or applications with the Bank’s and the Company’s regulators.  The Bank’s primary regulator 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 between the Bank and a regulator or a condition imposed in a previously approved application or notice. Currently the Bank meets the regulatory definition of a well-capitalized institution.  During 2019, the Bank could declare dividends of approximately $85.8 million plus any 2019 net profits retained to the date of the dividend declaration.

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Benefit Plans

The Company has a defined benefit pension plan covering substantially all of its employees.  The benefits are based on years of service and the employee’s compensation.  This plan was frozen as of December 31, 2006.

The Company has a postretirement benefit plan that permits retirees under age 65 to participate in the Company’s medical plan by which retirees pay all of their premiums.

Under certain employment contracts with selected executive officers, the Company is obligated to provide postretirement benefits to these individuals once they attain certain vesting requirements.

The Company recognized in the Consolidated Statement of Condition the funded status of the pension plan and postretirement benefit plan with an offset, net of tax, recorded in accumulated other comprehensive loss.

Stock-Based Compensation Plans

The Company has stock-based compensation plans for employees and directors.  Compensation cost is recognized for stock options and restricted stock awards issued to employees and directors based on the fair value of these awards at the date of grant.  A Black-Scholes model is utilized to estimate the fair value of stock options while, for restricted stock awards, the fair value of the Company’s common stock at the date of grant is used.

Compensation cost for stock options and restricted stock awards to be settled in stock are recognized over the required service period generally defined as the vesting period.  The expense is recognized over the shorter of each award’s vesting period or the retirement date for any awards that vest immediately upon eligible retirement.

Awards to be settled in cash based on the fair value of the Company’s stock at vesting are treated as liability based awards.

Compensation costs for liability based awards are re‑measured at each reporting date and recognized over the vesting period.  For awards with performance based conditions, compensation cost is recognized over the performance period based on the Company’s expectation of the likelihood of meeting the specific performance criteria.

Earnings Per Share

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period.  All outstanding unvested share‑based payment awards that contain rights to non‑forfeitable dividends are considered participating securities for this calculation.  Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options.  At December 31, 2018, 2017, and 2016, the Company did not have any unvested awards that would be considered participating securities.

Segment Reporting

The Company’s operations are exclusively in the financial services industry and include the provision of traditional banking services.  Management evaluates the performance of the Company based on only one business segment, that of community banking.  The Company operates primarily in the geographical region of Upstate New York with branches also in Florida and the mid‑Hudson valley region of New York.  In the opinion of management, the Company does not have any other reportable segments as defined by “Accounting Standards Codification” (ASC) Topic 280, “Disclosure about Segments of an Enterprise and Related Information.”

Cash and Cash Equivalents

The Company classifies cash on hand, cash due from banks, Federal Funds sold, and other short-term investments as cash and cash equivalents for disclosure purposes.

Trust Assets

Assets under management with the Trustco Financial Services Department are not included in the Company’s consolidated financial statements because Trustco Financial Services holds these assets in a fiduciary capacity.

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Comprehensive Income (Loss)

Comprehensive income (loss) represents the sum of net income and items of other comprehensive income or loss, which are reported directly in shareholders’ equity, net of tax, such as the change in net unrealized gain or loss on securities available for sale and changes in the funded position of the pension and postretirement benefit plans.  Accumulated other comprehensive income or loss, which is a component of shareholders’ equity, represents the net unrealized gain or loss on securities available for sale, net of tax and the funded position in the Company’s pension plan and postretirement benefit plans, net of tax.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 13.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect these estimates.

(2) Balances at Other Banks

The Company is required to maintain certain reserves of vault cash and/or deposits with the Federal Reserve Bank.  The amount of this reserve requirement, included in cash and due from banks and federal funds sold and other short‑term investments, was approximately $ 35.8 million and $34.5 million at December 31, 2018 and 2017, respectively.

(3) 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)	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government sponsored enterprises	$	154,868		-		2,708		152,160
State and political subdivisions		168		5		-		173
Mortgage backed securities and collateralized mortgage obligations - residential		271,386		53		9,407		262,032
Corporate bonds		30,048		-		110		29,938
Small Business Administration - guaranteed participation securities		58,376		-		1,901		56,475
Other		685		-		-		685
Total securities available for sale	$	515,531		58		14,126		501,463

(dollars in thousands)	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government sponsored enterprises	$	139,890		27		2,066		137,851
State and political subdivisions		515		10		-		525
Mortgage backed securities and collateralized mortgage obligations - residential		320,614		84		4,715		315,983
Corporate bonds		40,270		-		108		40,162
Small Business Administration - guaranteed participation securities		68,921		-		1,862		67,059
Mortgage backed securities and collateralized mortgage obligations - commercial		9,810		-		110		9,700
Other		685		-		-		685
Total securities available for sale	$	580,705		121		8,861		571,965

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The following table distributes the amortized cost and fair value of debt securities included in the available for sale portfolio as of December 31, 2018, 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 are shown separately:

(dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	10,065		10,053
Due in one year through five years		175,635		172,834
Due after five years through ten years		69		69
Mortgage backed securities and collateralized mortgage obligations - residential		271,386		262,032
Small Business Administration - guaranteed participation securities		58,376		56,475
	$	515,531		501,463

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)	December 31, 2018
	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	$	29,870		106		112,291		2,602		142,161		2,708
Mortgage backed securities and collateralized mortgage obligations - residential		1,102		11		259,729		9,396		260,831		9,407
Corporate bonds		14,943		98		9,995		12		24,938		110
Small Business Administration - guaranteed participation securities		-		-		56,475		1,901		56,475		1,901
Total	$	45,915		215		438,490		13,911		484,405		14,126

(dollars in thousands)	December 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	$	29,734		266		98,090		1,800		127,824		2,066
Mortgage backed securities and collateralized mortgage obligations - residential		48,080		371		266,394		4,344		314,474		4,715
Corporate bonds		-		-		40,162		108		40,162		108
Small Business Administration - guaranteed participation securities		-		-		67,059		1,862		67,059		1,862
Mortgage backed securities and collateralized mortgage obligations - commercial		-		-		9,700		110		9,700		110
Total	$	77,814		637		481,405		8,224		559,219		8,861

The proceeds from sales and calls/paydowns of securities available for sale, gross realized gains and gross realized losses from sales and calls during 2018, 2017 and 2016 are as follows:

(dollars in thousands)	Years ended December 31,
	2018		2017		2016
Proceeds from sales	$	-		-		44,829
Proceeds from calls/paydowns		78,230		124,624		201,100
Gross realized gains		-		-		668
Gross realized losses		-		-		-

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There were no sales of securities in 2018 and 2017.  Tax expense on gain on sale of securities for the year ended December 31, 2016 totaled $267 thousand.

The amount of securities that have been pledged to secure short-term borrowings and for other purposes amounted to $205.5 million and $326.5 million at December 31, 2018 and 2017, respectively.

(b) Held to maturity securities

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

	December 31, 2018
(dollars in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Mortgage backed securities and collateralized mortgage obligations - residential	$	22,501		577		154		22,924
Total held to maturity	$	22,501		577		154		22,924

	December 31, 2017
(dollars in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Mortgage backed securities and collateralized mortgage obligations - residential	$	27,551		1,150		-		28,701
Total held to maturity	$	27,551		1,150		-		28,701

The following table distributes the debt securities included in the held to maturity portfolio as of December 31, 2018, 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 shown separately.

(dollars in thousands)	Amortized Cost		Fair Value
Mortgage backed securities and collateralized mortgage obligations - residential	$	22,501		22,924
	$	22,501		22,924

Held to maturity securities in unrecognized losses as of December 31, 2018 had a fair value of $11.0 million and a loss of $154 thousand, all of which was in a loss position under 12 months as of December 31, 2018.  There were no sales or transfers of held to maturity securities during 2018 and 2017.

(c) Concentrations

The Company has the following balances of securities held in the available for sale and held to maturity portfolios as of December 31, 2018 that represent greater than 10% of shareholders’ equity:

(dollars in thousands)	Amortized Cost		Fair Value
Federal Home Loan Mortgage Corporation	$	96,320		93,630
Federal National Mortgage Association		200,717		193,767
Federal Home Loan Bank NY		69,976		68,969
Small Business Administration		58,376		56,475
Federal Farm Credit Bureau		49,992		49,066

(d) 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.

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

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 December 31, 2018, the Company’s security portfolio included certain securities which were in an unrealized loss position, and are discussed below.

U.S. government sponsored enterprises

In the case of unrealized losses on U.S. government sponsored enterprises, because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2018.

Mortgage backed securities and collateralized mortgage obligations – residential

At December 31, 2018, all mortgage backed securities and collateralized mortgage obligations held by the Company were issued by U.S. government sponsored entities and agencies, primarily Ginnie Mae, Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support.  Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other‑than‑temporarily impaired at December 31, 2018.

Corporate Bonds

At December 31, 2018, corporate bonds held by the Company are investment grade quality.  Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2018.

Small Business Administration (SBA) - guaranteed participation securities

At December 31, 2018, all of the SBA securities held by the Company were issued and guaranteed by U.S. Small Business Administration.  Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2018.

Mortgage backed securities and collateralized mortgage obligations – commercial

As of December 31, 2018, all of the mortgage backed securities and collateralized mortgage obligations held by the Company were issued by U.S. government sponsored entities and agencies, are current as to the payment of interest and principal and the Company expects to collect the full amount of the principal and interest payments.  Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other‑than‑temporarily impaired at December 31, 2018.

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As a result of the above analysis, for the year ended December 31, 2018, the Company did not recognize any other‑than‑temporary impairment losses for credit or any other reason.

(4) Loans and Allowance for Loan Losses

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

	December 31, 2018
(dollars in thousands)	New York and other states*		Florida		Total
Commercial:
Commercial real estate	$	156,278		15,275		171,553
Other		24,330		263		24,593
Real estate mortgage - 1 to 4 family:
First mortgages		2,442,711		845,166		3,287,877
Home equity loans		71,523		17,308		88,831
Home equity lines of credit		243,765		45,775		289,540
Installment		9,462		2,240		11,702
Total loans, net	$	2,948,069		926,027		3,874,096
Less: Allowance for loan losses						44,766
Net loans					$	3,829,330

	December 31, 2017
(dollars in thousands)	New York and other states*		Florida		Total
Commercial:
Commercial real estate	$	149,368		12,524		161,892
Other		23,606		709		24,315
Real estate mortgage - 1 to 4 family:
First mortgages		2,286,148		765,929		3,052,077
Home equity loans		66,455		13,989		80,444
Home equity lines of credit		263,275		45,641		308,916
Installment		7,141		1,622		8,763
Total loans, net	$	2,795,993		840,414		3,636,407
Less: Allowance for loan losses						44,170
Net loans					$	3,592,237
* Includes New York, New Jersey, Vermont and Massachusetts.

At December 31, 2018 and 2017, the Company had approximately $26.7 million and $30.9 million of real estate construction loans, respectively.  Of the $26.7 million in real estate construction loans at December 31, 2018, approximately $14.2 million were secured by first mortgages to residential borrowers with the remaining $12.5 million were to commercial borrowers for residential construction projects.  Of the $30.9 million in real estate construction loans at December 31, 2017, approximately $21.1 million were secured by first mortgages to residential borrowers with the remaining $9.8 million were to commercial borrowers for residential construction projects.  The vast majority of construction loans are in the Company’s New York market.

At December 31, 2018 and 2017, loans to executive officers, directors, and to associates of such persons aggregated $5.5 million and $6.9 million, respectively.  During 2018, approximately $1.0 million of new loans were made and repayments of loans totaled approximately $2.4 million.  The composition of related parties did not change at December 31, 2018.  The composition of related parties did change during the year ended December 31, 2017 resulting in a reduction of approximately $100 thousand to outstanding loans to related parties.  All loans are current according to their terms.

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.

Page 51 of 94

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

	December 31, 2018
(dollars in thousands)	New York and other states*		Florida		Total
Loans in non-accrual status:
Commercial:
Commercial real estate	$	639		-		639
Other		6		-		6
Real estate mortgage - 1 to 4 family:
First mortgages		18,202		1,812		20,014
Home equity loans		247		-		247
Home equity lines of credit		3,924		103		4,027
Installment		4		15		19
Total non-accrual loans		23,022		1,930		24,952
Restructured real estate mortgages - 1 to 4 family		34		-		34
Total nonperforming loans	$	23,056		1,930		24,986

	December 31, 2017
(dollars in thousands)	New York and other states*		Florida		Total
Loans in non-accrual status:
Commercial:
Commercial real estate	$	1,443		-		1,443
Other		100		-		100
Real estate mortgage - 1 to 4 family:
First mortgages		16,654		2,259		18,913
Home equity loans		93		-		93
Home equity lines of credit		3,603		130		3,733
Installment		57		-		57
Total non-accrual loans		21,950		2,389		24,339
Restructured real estate mortgages - 1 to 4 family		38		-		38
Total nonperforming loans	$	21,988		2,389		24,377
* Includes New York, New Jersey, Vermont and Massachusetts.

The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu).  As of December 31, 2018 and December 31, 2017, other real estate owned included $1.1 million and $2.7 million, respectively, of residential foreclosed properties.  In addition, non‑accrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $12.4 million and $12.6 million as of December 31, 2018 and December 31, 2017, respectively.

Page 52 of 94

The following tables present the aging of the recorded investment in past due loans by loan class and by region as of December 31, 2018 and 2017:

	December 31, 2018
New York and other states*:	30-59 Days		60-89 Days		90 + Days		Total 30+ days				Total
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Loans
Commercial:
Commercial real estate	$	198		-		370		568		155,710		156,278
Other		-		-		-		-		24,330		24,330
Real estate mortgage - 1 to 4 family:
First mortgages		3,276		898		13,267		17,441		2,425,270		2,442,711
Home equity loans		158		94		212		464		71,059		71,523
Home equity lines of credit		963		348		1,691		3,002		240,763		243,765
Installment		44		29		2		75		9,387		9,462
Total	$	4,639		1,369		15,542		21,550		2,926,519		2,948,069

Florida:	30-59 Days		60-89 Days		90 + Days		Total 30+ days				Total
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Loans
Commercial:
Commercial real estate	$	-		-		-		-		15,275		15,275
Other		-		-		-		-		263		263
Real estate mortgage - 1 to 4 family:
First mortgages		417		407		721		1,545		843,621		845,166
Home equity loans		50		-		-		50		17,258		17,308
Home equity lines of credit		40		-		50		90		45,685		45,775
Installment		12		7		15		34		2,206		2,240
Total	$	519		414		786		1,719		924,308		926,027

Total:	30-59 Days		60-89 Days		90 + Days		Total 30+ days				Total
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Loans
Commercial:
Commercial real estate	$	198		-		370		568		170,985		171,553
Other		-		-		-		-		24,593		24,593
Real estate mortgage - 1 to 4 family:
First mortgages		3,693		1,305		13,988		18,986		3,268,891		3,287,877
Home equity loans		208		94		212		514		88,317		88,831
Home equity lines of credit		1,003		348		1,741		3,092		286,448		289,540
Installment		56		36		17		109		11,593		11,702
Total	$	5,158		1,783		16,328		23,269		3,850,827		3,874,096
* Includes New York, New Jersey, Vermont and Massachusetts.

Page 53 of 94

	December 31, 2017
New York and other states*:	30-59 Days		60-89 Days		90 + Days		Total 30+ days				Total
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Loans
Commercial:
Commercial real estate	$	183		174		1,332		1,689		147,679		149,368
Other		-		-		100		100		23,506		23,606
Real estate mortgage - 1 to 4 family:
First mortgages		5,669		1,300		9,014		15,983		2,270,165		2,286,148
Home equity loans		6		-		45		51		66,404		66,455
Home equity lines of credit		489		18		2,139		2,646		260,629		263,275
Installment		46		17		25		88		7,053		7,141
Total	$	6,393		1,509		12,655		20,557		2,775,436		2,795,993

Florida:	30-59 Days		60-89 Days		90 + Days		Total 30+ days				Total
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Loans
Commercial:
Commercial real estate	$	-		-		-		-		12,524		12,524
Other		-		-		-		-		709		709
Real estate mortgage - 1 to 4 family:
First mortgages		277		-		1,404		1,681		764,248		765,929
Home equity loans		-		-		-		-		13,989		13,989
Home equity lines of credit		-		-		-		-		45,641		45,641
Installment		3		5		26		34		1,588		1,622
Total	$	280		5		1,430		1,715		838,699		840,414

Total:	30-59 Days		60-89 Days		90 + Days		Total 30+ days				Total
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Loans
Commercial:
Commercial real estate	$	183		174		1,332		1,689		160,203		161,892
Other		-		-		100		100		24,215		24,315
Real estate mortgage - 1 to 4 family:
First mortgages		5,946		1,300		10,418		17,664		3,034,413		3,052,077
Home equity loans		6		-		45		51		80,393		80,444
Home equity lines of credit		489		18		2,139		2,646		306,270		308,916
Installment		49		22		51		122		8,641		8,763
Total	$	6,673		1,514		14,085		22,272		3,614,135		3,636,407
* Includes New York, New Jersey, Vermont and Massachusetts.

At December 31, 2018 and 2017, there were no loans that are 90 days past due and still accruing interest.  As a result, non‑accrual loans includes all loans 90 days past due and greater as well as certain loans less than 90 days past due that were placed in non‑accruing status for reasons other than delinquent status.  There are no commitments to extend further credit on nonaccrual or restructured loans.

Page 54 of 94

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

	For the year ended December 31, 2018
(dollars in thousands)	Commercial			Real Estate Mortgage- 1 to 4 Family		Installment		Total
Balance at beginning of period	$	4,324			39,077		769		44,170
Loans charged off:
New York and other states*		100			846		224		1,170
Florida		-			-		33		33
Total loan chargeoffs		100			846		257		1,203
Recoveries of loans previously charged off:
New York and other states*		10			348		32		390
Florida		-			3		6		9
Total recoveries		10			351		38		399
Net loans charged off (recoveries)		90			495		219		804
Provision (recoveries) for loan losses		(186	)		1,190		396		1,400
Balance at end of period	$	4,048			39,772		946		44,766

	For the year ended December 31, 2017
(dollars in thousands)	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			2,053		200		2,325
Florida		-			167		19		186
Total loan chargeoffs		72			2,220		219		2,511
Recoveries of loans previously charged off:
New York and other states*		96			596		26		718
Florida		-			73		-		73
Total recoveries		96			669		26		791
Net loans charged off (recoveries)		(24	)		1,551		193		1,720
Provision (recoveries) for loan losses		(629	)		2,397		232		2,000
Balance at end of period	$	4,324			39,077		769		44,170

	For the year ended December 31, 2016
(dollars in thousands)	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*		795		3,447		303		4,545
Florida		-		126		39		165
Total loan chargeoffs		795		3,573		342		4,710
Recoveries of loans previously charged off:
New York and other states*		207		613		64		884
Florida		-		4		-		4
Total recoveries		207		617		64		888
Net loans charged off (recoveries)		588		2,956		278		3,822
Provision (recoveries) for loan losses		1,026		1,434		490		2,950
Balance at end of period	$	4,929		38,231		730		43,890
* Includes New York, New Jersey, Vermont and Massachusetts.

Page 55 of 94

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 December 31, 2018 and 2017:

	December 31, 2018
(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		4,048		39,772		946		44,766
Total ending allowance balance	$	4,048		39,772		946		44,766
Loans:
Individually evaluated for impairment	$	1,424		20,864		-		22,288
Collectively evaluated for impairment		194,722		3,645,384		11,702		3,851,808
Total ending loans balance	$	196,146		3,666,248		11,702		3,874,096

	December 31, 2017
(dollars in thousands)	Commercial Loans		1-to-4 Family Residential Real Estate		Installment Loans		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-		-		-		-
Collectively evaluated for impairment		4,324		39,077		769		44,170
Total ending allowance balance	$	4,324		39,077		769		44,170
Loans:
Individually evaluated for impairment	$	2,248		22,032		-		24,280
Collectively evaluated for impairment		183,959		3,419,405		8,763		3,612,127
Total ending loans balance	$	186,207		3,441,437		8,763		3,636,407

The Company has identified nonaccrual 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 in a TDR.

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 December 31, 2018 and 2017 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.

Page 56 of 94

The following tables present impaired loans by loan class as of December 31, 2018 and 2017:

	December 31, 2018
New York and other states*:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Avg Recorded Investment
Commercial:
Commercial real estate	$	1,274		1,444		-		1,503
Other		38		88		-		123
Real estate mortgage - 1 to 4 family:
First mortgages		15,210		15,661		-		15,577
Home equity loans		252		272		-		262
Home equity lines of credit		2,772		2,996		-		2,772
Total	$	19,546		20,461		-		20,237

Florida:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Avg Recorded Investment
Commercial:
Commercial real estate	$	112		112		-		57
Real estate mortgage - 1 to 4 family:
First mortgages		2,293		2,399		-		2,455
Home equity loans		84		84		-		86
Home equity lines of credit		253		253		-		326
Total	$	2,742		2,848		-		2,924

Total:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Avg Recorded Investment
Commercial:
Commercial real estate	$	1,386		1,556		-		1,560
Other		38		88		-		123
Real estate mortgage - 1 to 4 family:
First mortgages		17,503		18,060		-		18,032
Home equity loans		336		356		-		348
Home equity lines of credit		3,025		3,249		-		3,098
Total	$	22,288		23,309		-		23,161
* Includes New York, New Jersey, Vermont and Massachusetts.

Page 57 of 94

	December 31, 2017
New York and other states*:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Avg Recorded Investment
Commercial:
Commercial real estate	$	2,148		3,120		-		2,711
Other		100		100		-		87
Real estate mortgage - 1 to 4 family:
First mortgages		15,850		16,540		-		16,508
Home equity loans		270		291		-		263
Home equity lines of credit		2,606		2,847		-		2,193
Total	$	20,974		22,898		-		21,762

Florida:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Avg Recorded Investment
Commercial:
Commercial real estate	$	-		-		-		-
Other		-		-		-		-
Real estate mortgage - 1 to 4 family:
First mortgages		2,707		2,813		-		2,335
Home equity loans		89		89		-		92
Home equity lines of credit		510		510		-		561
Total	$	3,306		3,412		-		2,988

Total:
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Avg Recorded Investment
Commercial:
Commercial real estate	$	2,148		3,120		-		2,711
Other		100		100		-		87
Real estate mortgage - 1 to 4 family:
First mortgages		18,557		19,353		-		18,843
Home equity loans		359		380		-		355
Home equity lines of credit		3,116		3,357		-		2,754
Total	$	24,280		26,310		-		24,750
* Includes New York, New Jersey, Vermont and Massachusetts.

The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as impaired.  Interest income recognized on impaired loans was not material in 2018, 2017, and 2016.

Included in impaired loans as of December 31, 2018 and 2017 are approximately $11.1 million and $11.8 million, respectively, of loans in accruing status that were identified as TDR’s.

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 if necessary.  As a result, as of December 31, 2018 and 2017, based upon management’s evaluation and due to the sufficiency of charge‑offs taken, none of the allowance for loan losses has been allocated to a specific impaired loan(s).

Page 58 of 94

The following table presents modified loans by class that were determined to be TDR’s that occurred during the years ended December 31, 2018, 2017 and 2016:

	Year ended 12/31/2018						Year ended 12/31/2017						Year ended 12/31/2016
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		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial:
Commercial real estate		6	$	747		747		4	$	426		426		2	$	401		401
Real estate mortgage - 1 to 4 family:
First mortgages		18		2,349		2,349		44		5,653		5,653		30		2,871		2,871
Home equity loans		1		6		6		3		56		56		1		44		44
Home equity lines of credit		5		325		325		18		868		868		10		402		402
Total		30	$	3,427		3,427		69	$	7,003		7,003		43	$	3,718		3,718

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
Real estate mortgage - 1 to 4 family:
First mortgages		1	$	35		35		10	$	1,076		1,076		4	$	504		504
Home equity loans		-		-		-		-		-		-		1		45		45
Home equity lines of credit		-		-		-		2		95		95		1		6		6
Total		1	$	35		35		12	$	1,171		1,171		6	$	555		555

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

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

The following table presents loans by class modified as TDR’s that occurred during the years ended December 31, 2018, 2017 and 2016 for which there was a payment default within 12 months of modification:

	Year ended 12/31/2018				Year ended 12/31/2017				Year ended 12/31/2016
New York and other states*: (dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Real estate mortgage - 1 to 4 family:
First mortgages		1	$	101		1	$	72		3	$	291
Home equity lines of credit		-		-		1		3		1		141
Total		1	$	101		2	$	75		4	$	432

Florida: (dollars in thousands)

Number of Contracts

Recorded Investment

Number of Contracts

Recorded Investment

Number of Contracts

Recorded Investment

Real estate mortgage - 1 to 4 family:

First mortgages

-

$

-

-

$

-

-

$

-

Home equity lines of credit

-

-

-

-

-

-

Total

-

$

-

-

$

-

-

$

-

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

In situations where the Bank considers a loan modification, management determines whether the borrower is experiencing financial difficulty by performing an evaluation of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.  This evaluation is performed under the Company’s underwriting policy.  Generally, the modification of the terms of loans was the result of the borrower filing for bankruptcy protection.  Chapter 13 bankruptcies generally include the deferral of all past due amounts for a period of generally 60 months in accordance with the bankruptcy court order.  In the case of Chapter 7 bankruptcies, even though there is no modification of terms, the borrowers’ debt to the Company was discharged and they may 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.

Page 59 of 94

The TDR’s that subsequently defaulted described above did not have a material impact on the allowance for loan losses as the underlying collateral was evaluated at the time these loans were identified as TDR’s, and a charge‑off was taken at that time, if necessary.  Collateral values on these loans are reviewed for collateral sufficiency on a quarterly basis.

The Company categorizes non-homogenous loans such as commercial and commercial real estate 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, in accordance with the Company’s Loan Policy, the Company analyzes non-homogeneous loans, individually by grading the loans based on credit risk.  The loan grades assigned to all loan types are also tested by the Company’s external loan review firm in accordance with the Company’s 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 so classified 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 December 31, 2018 and 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	December 31, 2018
New York and other states*: (dollars in thousands)	Pass		Classified		Total
Commercial:
Commercial real estate	$	152,045		4,233		156,278
Other		23,331		999		24,330
	$	175,376		5,232		180,608

Florida: (dollars in thousands)	Pass		Classified		Total
Commercial:
Commercial real estate	$	15,163		112		15,275
Other		263		-		263
	$	15,426		112		15,538

Total: (dollars in thousands)	Pass		Classified		Total
Commercial:
Commercial real estate	$	167,208		4,345		171,553
Other		23,594		999		24,593
	$	190,802		5,344		196,146
* Includes New York, New Jersey and Massachusetts.

Page 60 of 94

	December 31, 2017
New York and other states*: (dollars in thousands)	Pass		Classified		Total
Commercial:
Commercial real estate	$	140,806		8,562		149,368
Other		21,936		1,670		23,606
	$	162,742		10,232		172,974

Florida: (dollars in thousands)	Pass		Classified		Total
Commercial:
Commercial real estate	$	12,406		118		12,524
Other		709		-		709
	$	13,115		118		13,233

Total: (dollars in thousands)	Pass		Classified		Total
Commercial:
Commercial real estate	$	153,212		8,680		161,892
Other		22,645		1,670		24,315
	$	175,857		10,350		186,207
* Includes New York, New Jersey and Massachusetts.

Included in classified loans in the above tables are impaired loans of $1.4 million and $1.5 million at December 31, 2018 and 2017, respectively.

For homogeneous loan pools, such as residential mortgages, home equity lines of credit, and installment loans, the Company uses payment status to identify the credit risk in these loan portfolios.  Payment status is reviewed on a daily basis by the Bank’s collection area and on a monthly basis with respect to determining the adequacy of the allowance for loan losses.  The payment status of these homogeneous pools at December 31, 2018 and 2017 is included in the aging of the recorded investment of past due loans table.  In addition, the total nonperforming portion of these homogeneous loan pools at December 31, 2018 and 2017 is presented in the recorded investment in non-accrual loans table.

(5) Bank Premises and Equipment

A summary of premises and equipment at December 31, 2018 and 2017 follows:

(dollars in thousands)	2018			2017
Land	$	2,308		$	2,308
Buildings		34,969			34,599
Furniture, fixtures and equipment		52,153			50,832
Leasehold improvements		31,906			30,275
Total bank premises and equipment		121,336			118,014
Accumulated depreciation and amortization		(86,642	)		(82,857	)
Total	$	34,694		$	35,157

Depreciation and amortization expense was approximately $4.1 million, $3.8 million, and $4.0 million for the years 2018, 2017, and 2016, respectively.  Occupancy expense of the Bank’s premises included rental expense of $8.0 million in 2018, $7.8 million in 2017, and $7.6 million in 2016.

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(6) Deposits

Interest expense on deposits was as follows:

(dollars in thousands)	For the year ended December 31,
	2018		2017		2016
Interest bearing checking accounts	$	442		478		473
Savings accounts		1,657		1,729		2,148
Time deposits and money market accounts		16,859		10,983		11,592
Total	$	18,958		13,190		14,213

At December 31, 2018, the maturity of total time deposits is as follows:

(dollars in thousands)
Under 1 year	$	941,376
1 to 2 years		276,224
2 to 3 years		48,048
3 to 4 years		4,815
4 to 5 years		3,747
Over 5 years		296
	$	1,274,506

Included in total time deposits as of December 31, 2018 and 2017 is $ 182.2 million and $136.8 million in time deposits with balances in excess of $250,000.

(7) Short-Term Borrowings

Short-term borrowings of the Company were cash management accounts as follows:

(dollars in thousands)	2018			2017		2016
Amount outstanding at December 31,	$	161,893			242,991		209,406
Maximum amount outstanding at any month end		233,522			252,996		209,406
Average amount outstanding		194,810			228,086		185,672
Weighted average interest rate:
For the year		0.65	%		0.61		0.59
As of year end		0.95			0.62		0.59

Cash management accounts represent retail accounts with customers for which the Bank has pledged certain assets as collateral.

Trustco Bank also has an available line of credit with the Federal Home Loan Bank of New York which approximates the balance of securities and/or loans pledged against such borrowings.  The line of credit requires securities and/or loans to be pledged as collateral for the amount borrowed.  As of December 31, 2018 and 2017, the Company had no outstanding borrowings with the Federal Home Loan Bank of New York.

Trustco Bank is approved to borrow on a short-term basis from the Federal Reserve Bank of New York.  The Bank can pledge certain securities to the Federal Reserve Bank to support this arrangement.  As of December 31, 2018 and 2017, the Bank had no outstanding borrowings and loans with the Federal Reserve Bank of New York.

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(8) Income Taxes

A summary of income tax expense included in the Consolidated Statements of Income follows:

(dollars in thousands)	For the year ended December 31,
	2018		2017			2016
Current tax expense:
Federal	$	13,897	$	26,510			20,904
State		1,756		2,221			1,524
Total current tax expense		15,653		28,731			22,428
Enactment of Federal Tax Reform		-		5,054			-
Deferred tax  (benefit) expense		2,556		(183	)		3,261
Total income tax expense	$	18,209	$	33,602			25,689

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017, are as follows:

	December 31,
(dollars in thousands)	2018			2017
	Deductible temporary differences			Deductible temporary differences
Benefits and deferred remuneration	$	(5,204	)	$	(4,087	)
Difference in reporting the allowance for loan losses, net		12,082			12,002
Other income or expense not yet reported for tax purposes		(210	)		(327	)
Depreciable assets		(1,961	)		(325	)
Net deferred tax asset at end of year		4,707			7,263
Net deferred tax asset at beginning of year		7,263			12,134
Enactment of Federal Tax Reform		-			5,054
Deferred tax expense	$	2,556		$	(183	)

Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not.  Based primarily on the sufficiency of expected future taxable income, management believes it is more likely than not that the remaining deferred tax asset of $4.7 million and $7.3 million at December 31, 2018 and 2017, respectively, will be realized.

In addition to the deferred tax items described in the preceding table, the Company has deferred tax assets of $3.7 million and $2.3 million at December 31, 2018 and 2017, respectively, relating to the net unrealized losses on securities available for sale and deferred tax (liabilities) assets of approximately ($200) thousand and ($1.2) million at December 31, 2018 and 2017, respectively, as a result of changes in the unrecognized overfunded position in the Company’s pension and postretirement benefit plans recorded, net of tax, as an adjustment to accumulated other comprehensive loss.

The effective tax rates differ from the statutory federal income tax rate.  The reasons for these differences are as follows:

	For the years ended December 31,
	2018			2017			2016
Statutory federal income tax rate		21.0	%		35.0			35.0
Increase/(decrease) in taxes resulting from:
Tax exempt income		(0.1	)		(0.1	)		(0.1	)
State income tax, net of federal tax benefit		2.4			1.6			1.8
Enactment of Federal Tax Reform		-			6.6			-
Other items		(0.4	)		0.7			0.9
Effective income tax rate		22.9	%		43.8			37.6

On a periodic basis, the Company evaluates its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate.  This evaluation takes into consideration the status of taxing authorities’ current examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment in relation to uncertain tax positions.

The Company does not anticipate a material charge to the amount of unrecognized tax benefits in the next twelve months.

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The Company recognizes interest and/or penalties related to income tax matters in noninterest expense.  For the years 2018, 2017, and 2016, these amounts were not material.  The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction as well as in various states.  In the normal course of business, the Company is subject to U.S. federal, state, and local income tax examinations by tax authorities.  The Company’s federal and state income tax returns for the years 2015 through 2018 remain open to examination.  The Company’s 2014, 2015 and 2016 New York State income tax returns are currently under examination.

On December 22, 2017 H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”), was signed into law.  The Act included many provisions that affect our income tax expense, including reducing our federal tax rate from 35% to 21%, effective January 1, 2018.  As a result of this rate reduction, we were required to re-measure, through income tax expense in the period of enactment, our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled.  The re‑measurement of our net deferred tax asset resulted in additional 2017 income tax expense of $5.1 million.

Also on December 22, 2017, the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 118 (“SAB 118”) to address any uncertainty or diversity of views in practice in accounting for the income tax effect of the Act in situations where a registrant did not have the necessary information available, prepared, or analyzed in reasonable detail to complete this accounting in the reporting period that included the enactment date.  SAB 118 allowed for a measurement period, not to extend beyond one year of the Act’s enactment date, to complete the necessary accounting.

As of December 31, 2018, the Company’s deferred tax liability for temporary differences between the tax and financial reporting bases of fixed assets and the implementation of software updates to process the calculations associated with the Act’s provisions has been completed.  This Act’s provision allows for 100% bonus depreciation on fixed assets placed in service after September 27, 2017.  The adjustment to the temporary difference between the tax and financial reporting bases of fixed assets resulted in a one-time benefit of $880 thousand.

The Company made no adjustments to deferred tax assets representing future deductions for accrued compensation that may be subject to new limitations under Internal Revenue Code Section 162(m) which, generally, limits, the annual deduction for certain compensation paid to certain employees to $1 million.  As of December 31, 2017, there was uncertainty regarding how the newly-enacted rules in this area apply to existing contracts.  These matters were finalized in 2018 with no material impact to Income tax expense.

(9) Benefit Plans

(a) Retirement Plan

The Company maintains a trusteed non-contributory pension plan covering employees that have completed one year of employment and 1,000 hours of service.  The benefits are based on the sum of (a) a benefit equal to a prior service benefit plus the average of the employees’ highest five consecutive years’ compensation in the ten years preceding retirement multiplied by a percentage of service after a specified date plus (b) a benefit based upon career average compensation.  The amounts contributed to the plan are determined annually on the basis of (a) the maximum amount that can be deducted for federal income tax purposes or (b) the amount certified by a consulting actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974.  Contributions are intended to provide for benefits attributed to service to date.  Assets of the plan are administered by Trustco Bank’s Financial Services Department.  This plan was frozen as of December 31, 2006.

The following tables set forth the plan’s funded status and amounts recognized in the Company’s consolidated statements of condition at December 31, 2018 and 2017:

Change in Projected Benefit Obligation:

	December 31,
(dollars in thousands)	2018			2017
Projected benefit obligation at beginning of year	$	31,219			30,730
Service cost		34			42
Interest cost		1,197			1,303
Benefit payments and expected expenses		(1,937	)		(2,050	)
Net actuarial (gain) loss		(1,995	)		1,194
Projected benefit obligation at end of year	$	28,518			31,219

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Change in Plan Assets and Reconciliation of Funded Status:

	December 31,
(dollars in thousands)	2018			2017
Fair Value of plan assets at beginning of year	$	47,227			43,100
Actual (loss) gain on plan assets		(1,126	)		6,169
Benefit payments and actual expenses		(1,944	)		(2,042	)
Fair value of plan assets at end of year		44,157			47,227
Funded status at end of year	$	15,639			16,008

Amounts recognized in accumulated other comprehensive loss consist of the following as of:

	December 31,
	2018		2017
Net actuarial loss	$	5,122		2,972

The accumulated benefit obligation was $28.5 million and $31.2 million at December 31, 2018 and 2017, respectively.

Components of Net Periodic Pension Income and Other Amounts Recognized in Other Comprehensive (Loss) Income:

	For the years ended December 31,
(dollars in thousands)	2018			2017			2016
Service cost	$	34			42			61
Interest cost		1,197			1,303			1,371
Expected return on plan assets		(3,012	)		(2,742	)		(2,648	)
Amortization of net loss		-			67			184
Net periodic pension credit		(1,781	)		(1,330	)		(1,032	)
Amortization of net loss		-			(67	)		(184	)
Net actuarial loss (gain) included in other comprehensive income (loss)		2,149			(2,240	)		(367	)
Total recognized in other comprehensive income (loss)		2,149			(2,307	)		(551	)
Total recognized in net periodic benefit cost (credit) and other comprehensive income (loss)	$	368			(3,637	)		(1,583	)

The estimated net loss for the plan that will be amortized from accumulated other comprehensive loss into net periodic benefit income over the next fiscal year is $74 thousand.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

(dollars in thousands)
Year	Pension Benefits
2019	$	1,743
2020		1,782
2021		1,857
2022		1,842
2023		1,832
2024 - 2028		9,255

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The assumptions used to determine benefit obligations at December 31 are as follows:

	2018			2017		2016
Discount rate		4.53	%		3.93		4.41

The assumptions used to determine net periodic pension expense (benefit) for the years ended December 31 are as follows:

	2018			2017		2016
Discount rate		3.93	%		4.41		4.55
Expected long-term rate of return on assets		6.50			6.50		6.50

The annual rate assumption used for purposes of computing the service and interest costs components is determined based upon factors including the yields on high quality corporate bonds and other appropriate yield curves along with analysis prepared by the Company’s actuaries.

(b) Supplemental Retirement Plan

The Company also has a supplementary pension plan under which additional retirement benefits are accrued for eligible executive officers.  This plan supplements the defined benefit retirement plan for eligible employees that exceed the Internal Revenue Service limit on the amount of pension payments that are allowed from a retirement plan.  The supplemental plan provides eligible employees with total benefit payments as calculated by the retirement plan without regard to this limitation.  Benefits under this plan are calculated using the same actuarial assumptions and interest rates as used for the retirement plan calculations.  The accumulated benefits under this supplementary pension plan was approximately $2.3 million and $5.6 million as of December 31, 2018 and 2017, respectively.  In 2018 retirement benefits of $3.2 million was paid out to a former executive officer.  Effective as of December 31, 2008, this plan has been frozen and no additional benefits will accrue.  Instead, the amount of the Company’s annual contribution to the plan plus interest is paid directly to each eligible employee.  The expense recorded for this plan was $1.4 million, $1.1 million, and $1.0 million, in 2018, 2017, and 2016, respectively.

Rabbi trusts have been established for this plan.  These trust accounts are administered by the Trustco Financial Services Department and invest primarily in bonds issued by government-sponsored enterprises and money market instruments.  These assets are recorded at their fair value and are included in short-term investments in the Consolidated Statements of Condition.  As of December 31, 2018 and 2017, the trusts had assets totaling $2.5 million and $5.6 million, respectively.

(c) Postretirement Benefits

The Company permits retirees under age 65 to participate in the Company’s medical plan by making certain payments.  In addition, the plan provides a death benefit to certain eligible employees and retirees.

In 2003, the Company amended the medical plan to reflect changes to the retiree medical insurance coverage portion.  The Company’s subsidy of the retiree medical insurance premiums was eliminated at that time.  The Company continues to provide postretirement medical benefits for a limited number of executives in accordance with their employment contracts.

The following tables show the plan’s funded status and amounts recognized in the Company’s Consolidated Statements of Condition at December 31, 2018 and 2017:

Change in Accumulated Benefit Obligation:

(dollars in thousands)
	December 31,
	2018			2017
Accumulated benefit obligation at beginning of year	$	5,613			5,120
Service cost		53			103
Interest cost		202			218
Benefits paid		(178	)		(93	)
Net actuarial (gain) loss		(290	)		265
Accumulated benefit obligation at end of year	$	5,400			5,613

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Change in Plan Assets and Reconciliation of Funded Status:

(dollars in thousands)
	December 31,
	2018			2017
Fair value of plan assets at beginning of year	$	22,922			20,338
Actual (loss) gain on plan assets		(798	)		2,611
Company contributions		145			66
Benefits paid		(178	)		(93	)
Fair value of plan assets at end of year		22,091			22,922
Funded status at end of year	$	16,691			17,309

The accumulated benefit obligation was $5.4 million and $5.6 million at December 31, 2018 and 2017, respectively.

Components of Net Periodic Benefit Income and Other Amounts Recognized in Other Comprehensive Income (Loss):

(dollars in thousands)	For the years ended December 31,
	2018			2017			2016
Service cost	$	53			103			116
Interest cost		202			218			221
Expected return on plan assets		(1,028	)		(761	)		(720	)
Amortization of net actuarial gain		(556	)		(356	)		(274	)
Amortization of prior service (credit) cost		(100	)		90			90
Net periodic benefit credit		(1,429	)		(706	)		(567	)
Net loss (gain)		830			(1,584	)		(966	)
Amortization of prior service credit (cost)		100			(90	)		(90	)
Prior service cost		705			-			-
Amortization of net gain		556			356			274
Total amount recognized in other comprehensive (loss) income		2,191			(1,318	)		(782	)
Total amount recognized in net periodic benefit cost and other comprehensive income (loss)	$	762			(2,024	)		(1,349	)

The estimated amount of net gain that will be amortized from accumulated other comprehensive loss into net periodic benefit income over the next fiscal year is approximately $556 thousand while the estimated amount of prior service cost that will be amortized from accumulated other comprehensive loss into net periodic benefit loss over the next fiscal year is approximately $100 thousand.

Expected Future Benefit Payments

The following benefit payments are expected to be paid:

(dollars in thousands)
Year	Postretirement Benefits
2019	$	177
2020		163
2021		137
2022		155
2023		172
2024 - 2028		1,225

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The discount rate assumption used to determine benefit obligations at December 31 is as follows:

	2018			2017		2016
Discount rate		4.53	%		3.93		4.41

The assumptions used to determine net periodic pension expense (benefit) for the years ended December 31 are as follows:

	2018			2017		2016
Discount rate		3.93	%		4.41		4.55
Expected long-term rate of return on assets, net of tax		4.50			3.75		3.75

The annual rate assumption used for purposes of computing the service and interest costs components is determined based upon factors including the yields on high quality corporate bonds and other appropriate yield curves along with analysis prepared by the Company’s actuaries.

For measurement purposes, a graded annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 2018 and thereafter.  A one percentage point increase in the assumed health care cost in each year would have an approximate $1.0 million impact on the accumulated postretirement benefit obligation as of December 31, 2018, while a 1% decrease would have an approximate ($821) thousand impact.  The impact on the interest and service components of net periodic postretirement benefit credit for the year ended December 31, 2018 would be $51 thousand for a one percentage point increase and ($40) thousand for a one percentage point decrease.

(d) Components of Accumulated Other Comprehensive Loss Related to Retirement and Postretirement Benefit Plans

The following table details the change in the components of other comprehensive (loss) income related to the retirement plan and the postretirement benefit plan, at December 31, 2018 and 2017, respectively:

(dollars in thousands)	December 31, 2018
	Retirement Plan		Post- Retirement Benefit Plan		Total
Change in overfunded position of pension and postretirement benefits	$	2,149		830		2,979
Prior service cost		-		705		705
Amortization of net actuarial gain		-		556		556
Amortization of prior service credit		-		100		100
Total	$	2,149		2,191		4,340

	December 31, 2017
	Retirement Plan			Post- Retirement Benefit Plan			Total
Change in overfunded position of pension and postretirement benefits	$	(2,240	)		(1,584	)		(3,824	)
Amortization of net actuarial gain (loss)		(67	)		356			289
Amortization of prior service cost		-			(90	)		(90	)
Total	$	(2,307	)		(1,318	)		(3,625	)

(e)  Major Categories of Pension and Postretirement Benefit Plan Assets:

The asset allocations of the Company’s pension and postretirement benefit plans at December 31, were as follows:

	Pension Benefit Plan Assets					Postretirement Benefit Plan Assets
	2018			2017		2018		2017
Debt Securities		31	%		29		29		34
Equity Securities		62			69		62		64
Other		7			2		9		2
Total		100	%		100		100		100

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The expected long-term rate-of-return on plan assets, noted in sections (a) and (b) above, reflects long-term earnings expectations on existing plan assets.  In estimating that rate, appropriate consideration was given to historical returns earned by plan assets and the rates of return expected to be available for reinvestment.  Rates of return were adjusted to reflect current capital market assumptions and changes in investment allocations.

The Company’s investment policies and strategies for the pension benefit and postretirement benefit plans prescribe a target allocation of 50% to 70% equity securities, 25% to 40% debt securities, and 0% to 10% for other securities for the asset categories.  The Company’s investment goals are to maximize returns subject to specific risk management policies.  Its risk management policies permit direct investments in equity and debt securities and mutual funds while prohibiting direct investment in derivative financial instruments.  The Company addresses diversification by the use of mutual fund investments whose underlying investments are in domestic and international debt and equity securities.  These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable.

Fair Value of Plan Assets:

Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Equity mutual funds, Fixed Income mutual funds and Debt Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1).  For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

The fair value of the plan assets at December 31, 2018 and 2017, by asset category, is as follows:

			Fair Value Measurements at December 31, 2018 Using:
Retirement Plan (dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Plan Assets
Cash and cash equivalents	$	3,147		3,147		-		-
Equity mutual funds		27,420		27,420		-		-
U.S. government sponsored enterprises		9,376		-		9,376		-
Corporate bonds		3,638		-		3,638		-
Fixed income mutual funds		576		576		-		-
Total Plan Assets	$	44,157		31,143		13,014		-

			Fair Value Measurements at December 31, 2018 Using:
Postretirement Benefits (dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Plan Assets
Cash and cash equivalents	$	2,046		2,046		-		-
Equity mutual funds		13,590		13,590		-		-
U.S. government sponsored enterprises		3,111		-		3,111		-
Corporate bonds		3,118		-		3,118		-
State and political subdivisions		226		-		226		-
Total Plan Assets	$	22,091		15,636		6,455		-

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			Fair Value Measurements at December 31, 2017 Using:
Retirement Plan (dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Plan Assets
Cash and cash equivalents	$	1,034		1,034		-		-
Equity mutual funds		32,509		32,509		-		-
U.S. government sponsored enterprises		6,920		-		6,920		-
Corporate bonds		6,163		-		6,163		-
Fixed income mutual funds		601		601		-		-
Total Plan Assets	$	47,227		34,144		13,083		-

			Fair Value Measurements at December 31, 2017 Using:
Postretirement Benefits (dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Plan Assets
Cash and cash equivalents	$	406		406		-		-
Equity mutual funds		14,703		14,703		-		-
U.S. government sponsored enterprises		3,512		-		3,512		-
Corporate bonds		3,610		-		3,610		-
State and political subdivisions		688		-		688		-
Total Plan Assets	$	22,919		15,109		7,810		-

At December 31, 2018 and 2017, the majority of the equity mutual funds included in the plan assets of the retirement plan and postretirement benefit plan consist of large-cap index funds, while the remainder of the equity mutual funds consists of mid‑cap, small‑cap and international funds.

There were no transfers between Level 1 and Level 2 in 2018 and 2017.

The Company made no contributions to its pension and postretirement benefit plans in 2018 or 2017.  The Company does not expect to make any contributions to its pension and postretirement benefit plans in 2019.

(f) Incentive and Bonus Plans

During 2006, the Company amended its profit sharing plan to include a 401(k) feature.  Under the 401(k) feature, the Company matches 100% of the aggregate salary contribution up to the first 3% of compensation and 50% of the aggregate contribution of the next 3%.  No profit sharing contributions were made in 2018, 2017 or 2016 but were replaced with Company contributions to the 401(k) feature of the plan.  Expenses related to the plan aggregated $1.1 million for 2018, $1.0 million in 2017 and $986 thousand in 2016.

The Company also has an officers and executive incentive plan.  The expense of these plans generally are based on the Company’s performance and estimated distributions to participants are accrued during the year and generally paid in the following year.  The expense recorded for this plan was $2.7 million, $1.9 million and $1.7 million in 2018, 2017 and 2016, respectively.

The Company has also awarded 1.5 million performance bonus units to the executive officers and directors.  These units become vested and exercisable only under a change of control as defined in the plan.  The units were awarded based upon the stock price at the time of grant and, if exercised under a change of control, allow the holder to receive the increase in value offered in the exchange over the stock price at the date of grant for each unit, if any.  As of December 31, 2018, the weighted average strike price of each unit was $8.81.

(g) Stock-Based Compensation Plans-Equity Awards

Equity awards are types of stock-based compensation that are to be settled in shares.  As such, the amount of compensation expense to be paid at the time of settlement is included in surplus in the Consolidated Statement of Condition.

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Under the Amended and Restated TrustCo Bank Corp NY 2010 Equity Incentive Plan (Equity Incentive Plan), the Company may grant stock options and restricted stock to its eligible employees for up to approximately 2.3 million shares of common stock, and may make certain other equity based, cash-settled awards (description in section (h) below) for up to the equivalent of approximately 1.4 million shares of common stock.

Under the Amended and Restated TrustCo Bank Corp NY 2010 Directors Equity Incentive Plan (Directors Plan), the Company may grant stock options and restricted stock to its directors for up to approximately 250 thousand shares of common stock, and may make certain other equity based, cash-settled awards (description in section (h) below) for up to the equivalent of approximately 250 thousand shares of common stock.

Under each of these plans, the exercise price of each option equals the fair value of the Company’s stock on the date of grant, and an option’s maximum term is ten years.  Options vest over five years from the date the options are granted for the employees plans and they are immediately vested under the directors’ plans.  A summary of the status of TrustCo’s stock option awards as of December 31, 2018 and changes during the year then ended, are as follows:

	Outstanding Options
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
Balance, January 1, 2018		742,941		$	6.78
New options awarded - 2018		-			-
Expired options - 2018		-			-
Options forfeited - 2018		(11,750	)		-
Exercised options - 2018		(176,550	)		7.13
Balance, December 31, 2018		554,641		$	6.65	5.5  years

	Exercisable Options
Balance, December 31, 2018		458,891	$	6.64	5.3 years

At December 31, 2018, the intrinsic value of outstanding stock options and vested stock options was approximately $144 thousand and $140 thousand, respectively.  The Company expects all unvested options to vest according to plan provisions.

During 2018, 2017 and 2016, options for 177 thousand, 784 thousand and 241 thousand shares of stock were exercised, respectively.  The intrinsic value and related tax benefits of stock options exercised in these years was not material.  It is the Company’s policy to generally issue stock for stock option exercises from previously unissued shares of common stock or treasury shares.

Unrecognized stock-based compensation expense related to non-vested stock options totaled $38 thousand at December 31, 2018.  At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 1.59 years.  Income tax benefits recognized in the accompanying Consolidated Statements of Income related to stock-based compensation were not material.

Valuation of Stock-Based Compensation: The fair value of the Company’s employee and director stock options granted is estimated on the measurement date, which, for the Company, is the date of grant.  The Company did not grant new stock option awards in 2018.

During 2018, 2017 and 2016, the Company recognized $173 thousand, $150 thousand and $224 thousand in stock-based compensation expense related to the equity awards, respectively.

(h) Stock-Based Compensation Plans-Liability Awards

Liability awards are types of stock-based compensation that can be settled in cash (not shares).  As such, the amount of compensation expense to be paid at the time of settlement is included in accrued expenses and other liabilities in the Consolidated Statement of Condition.  The Company granted both service-based and performance based liability awards in 2018, 2017 and 2016.

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The activity for service-based awards during 2018 was as follows:

Restricted share units

	Outstanding Units
Balance, December 31, 2017		213,100
New awards granted		104,424
Forfeited awards		(13,350	)
Awards settled		(85,747	)
Balance, December 31, 2018		218,427

Service-Based Awards: During 2018 and 2017, the Company issued restricted share units to certain eligible officers, executives and its board of directors.  The restricted share units do not hold voting powers, and are not eligible for common stock dividends.  Depending on the year of the grant the awards either become 100% vested after three years based upon a cliff-vesting schedule, or vest in whole units in equal installments from the first through the third year following the award date.  Upon issuance, the fair value of these awards is the fair value of the Company’s common stock on the grant date.  Thereafter, the amount of compensation expense recognized is based on the fair value of the Company’s stock.

During 2018, 2017 and 2016, the Company recognized $458 thousand, $633 thousand and $610 thousand, respectively, in stock‑based compensation expense related to these awards.  Unrecognized stock-based compensation expense related to the outstanding restricted share units totaled approximately $1 million at December 31, 2018.  During 2018, awards granted in 2015 became fully vested and settled.  The weighted average period over which the unrecognized expense is expected to be recognized was approximately 29 months as of December 31, 2018.

The liability related to service-based liability awards was approximately $526 thousand and $749 thousand at December 31, 2018 and 2017, respectively.

The activity for performance-based awards during 2018 was as follows:

Performance share units

	Outstanding Units
Balance, December 31, 2017		370,100
New awards granted		138,643
Awards settled		(82,076	)
Forfeited awards		(17,774	)
Balance, December 31, 2018		408,893

Performance Based Awards: During 2018, 2017 and 2016, the Company issued performance share units to certain eligible officers and executives.  These units do not hold voting powers, are not eligible for common stock dividends, and become 100% vested after three years based upon a cliff-vesting schedule.  Upon issuance, fair value of these units was the fair value of the Company’s common stock on the grant date.  Thereafter, the amount of compensation expense recognized is based upon the Company’s achievement of certain performance criteria in accordance with Plan provisions as well as the fair value of the Company’s stock.

For units granted in 2015, those have been fully vested and unpaid.  For units granted subsequent to 2015, all of the units are unvested as of December 31, 2018 and the company expects to meet the required performance criteria of the awards.

During 2018, 2017 and 2016, the Company recognized approximately $644 thousand, $1.2 million and $23 thousand, respectively, in stock based compensation expense (benefit) related to these units.  Unrecognized stock-based compensation expense related to the outstanding performance share units totaled $1.6 million at December 31, 2018.  The weighted average period over which the unrecognized expense is expected to be recognized was approximately 27 months as of December 31, 2018.

The liability related to performance based liability awards totaled $1.7 million and $1.5 million at December 31, 2018 and 2017, respectively.

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(10)  Commitments and Contingent Liabilities

(a) Leases

The Bank leases certain banking premises.  These leases are accounted for as operating leases with minimum rental commitments in the amounts presented below.  The majority of these leases contain options to renew.

2019	$	7,799
2020		7,622
2021		7,555
2022		7,048
2023		6,673
2024 and after		32,722
	$	69,419

(b) Litigation

Existing litigation arising in the normal course of business is not expected to result in any material loss to the Company.

(c) Outsourced Services

The Company contracted with third-party service providers to perform certain banking functions.  The outsourced services include data and item processing for the Bank and trust operations.  The service expense can vary based upon the volume and nature of transactions processed.  Outsourced service expense was $7.5 million for 2018, $6.4 million for 2017 and $6.2 million in 2016.  The Company is contractually obligated to pay these third-party service providers approximately $7 to $8 million per year through 2025.

(11) 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”).  TrustCo adopted FASB Staff Position on Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, as codified in FASB ASC 260-10 (“ASC 260-10”), which clarified that unvested share-based payment awards that contain nonforfeitable rights to receive dividends or divided equivalents (whether paid or unpaid) are participating securities, and thus, should be included in the two-class method of computing earnings per share (“EPS”).  Participating securities under this statement include the unvested employees’ and directors’ restricted stock awards with time-based vesting, which receive nonforfeitable dividend payments.  At December 31, 2018, 2017 and 2016, the Company no longer has unvested awards that would be considered participating securities.

A reconciliation of the component parts of earnings per share for 2018, 2017 and 2016 follows:

(dollars in thousands, except per share data)
	2018		2017		2016
For the years ended December 31:
Net income	$	61,445		43,145		42,601
Weighted average common shares		96,505		96,111		95,548
Effect of dilutive common stock options		141		111		100
Weighted average common shares including potential dilutive shares		96,646		96,222		95,648
Basic EPS	$	0.637		0.449		0.446
Diluted EPS	$	0.636		0.448		0.445

For the year ended December 31, 2018, there were 319 thousand antidilutive stock options excluded from diluted earnings per share.  For the year ended December 31, 2017, there were no antidilutive stock options excluded from diluted earnings per share.  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.

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(12) Off-Balance Sheet Financial Instruments

Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require a fee.  Commitments sometimes expire without being drawn upon.  Therefore, the total commitment amounts do not necessarily represent future cash requirements.  These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Bank’s normal credit policies, including obtaining collateral.  The Bank’s maximum exposure to credit loss for loan commitments, including unused lines of credit, at December 31, 2018 and 2017, was $432.6 million and $414.3 million, respectively.  Approximately 80% of these commitments were for variable rate products at the end of 2018 and 2017.

The Company does not issue any guarantees that require liability-recognition or disclosure, other than its standby letters of credit.  The Company has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party.  Standby letters of credit generally arise in connection with lending relationships.  The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers.  Contingent obligations under standby letters of credit totaled approximately $6.6 million and $3.8 million at December 31, 2018 and 2017, respectively, and represent the maximum potential future payments the Company could be required to make.  Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements.  Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments.  Company policies governing loan collateral apply to standby letters of credit at the time of credit extension.  Loan‑to‑value ratios are generally consistent with loan‑to‑value requirements for other commercial loans secured by similar types of collateral.  The fair value of the Company’s standby letters of credit at December 31, 2018 and 2017 was insignificant.

No losses are anticipated as a result of loan commitments or standby letters of credit.

(13) Fair Value

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

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

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices or 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 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 income statement in the respective investment class under total interest income.  The Company does not have any securities that would be designated as level 3.

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

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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 charge-off 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.

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

	Fair Value Measurements at December 31, 2018 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Securities available for sale:
U.S. government sponsored enterprises	$	152,160	$	-	$	152,160	$	-
State and political subdivisions		173		-		173		-
Mortgage backed securities and collateralized mortgage obligations - residential		262,032		-		262,032		-
Corporate bonds		29,938		-		29,938		-
Small Business Administration - guaranteed participation securities		56,475		-		56,475		-
Other		685		-		685		-
Total securities available for sale	$	501,463	$	-	$	501,463	$	-

	Fair Value Measurements at December 31, 2017 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Securities available for sale:
U.S. government sponsored enterprises	$	137,851	$	-	$	137,851	$	-
State and political subdivisions		525		-		525		-
Mortgage backed securities and collateralized mortgage obligations - residential		315,983		-		315,983		-
Corporate bonds		40,162		-		40,162		-
Small Business Administration - guaranteed participation securities		67,059		-		67,059		-
Mortgage backed securities and collateralized mortgage obligations - commercial		9,700		-		9,700		-
Other		685		35		650		-
Total securities available for sale	$	571,965	$	35	$	571,930	$	-

There were no transfers between Level 1 and Level 2 in 2018 and 2017.

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

	Fair Value Measurements at December 31, 2018 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation technique	Unobservable inputs	Range (Weighted Average)
Other real estate owned	$	1,675	$	-	$	-	$	1,675	Sales comparison approach	Adjustments for differences between comparable sales		1% - 14% (7	%)
Impaired loans:
Real estate mortgage - 1 to 4 family		459		-		-		459	Sales comparison approach	Adjustments for differences between comparable sales		5% - 14% (10	%)

	Fair Value Measurements at December 31, 2017 Using:
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation technique	Unobservable inputs	Range (Weighted Average)
Other real estate owned	$	3,246	$	-	$	-	$	3,246	Sales comparison approach	Adjustments for differences between comparable sales		1% - 14% (7	%)
Impaired loans:
Real estate mortgage - 1 to 4 family		844		-		-		844	Sales comparison approach	Adjustments for differences between comparable sales		5% - 14% (10	%)

Other real estate owned, which is carried at fair value less costs to sell, was approximately $1.7 million at December 31, 2018, and consisted of $560 thousand of commercial real estate and $1.1 million of residential real estate properties.  A valuation charge of $769 thousand is included in earnings for the year ended December 31, 2018.

Of the total impaired loans of $22.3 million at December 31, 2018, $459 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 December 31, 2018.  Gross charge-offs related to residential impaired loans included in the table above amounted to $67 thousand.

Other real estate owned, which is carried at fair value less costs to sell, was approximately $3.2 million at December 31, 2017, and consisted of $541 thousand of commercial real estate and $2.7 million of residential real estate properties.  A valuation charge of $1.1 million is included in earnings for the year ended December 31, 2017.

Of the total impaired loans of $24.1 million at December 31, 2017, $844 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 December 31, 2017.  Gross charge-offs related to residential impaired loans included in the table above amounted to $151 thousand.

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In accordance with ASC 825, the carrying amounts and estimated fair values (exit price) of financial instruments at December 31, 2018 and 2017 are as follows:

(dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2018 Using:
	Value		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	503,709		503,709		-		-		503,709
Securities available for sale		501,463		-		501,463		-		501,463
Held to maturity securities		22,501		-		22,924		-		22,924
Federal Reserve Bank and Federal Home Loan Bank stock		8,953		N/A		N/A		N/A		N/A
Net loans		3,829,330		-		-		3,753,966		3,753,966
Accrued interest receivable		11,341		353		2,371		8,617		11,341
Financial liabilities:
Demand deposits		405,069		405,069		-		-		405,069
Interest bearing deposits		3,869,178		2,594,672		1,264,772		-		3,859,444
Short-term borrowings		161,893		-		161,893		-		161,893
Accrued interest payable		1,024		104		920		-		1,024

(dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2017 Using:
	Value		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	612,740		612,740		-		-		612,740
Securities available for sale		571,965		35		571,930		-		571,965
Held to maturity securities		27,551		-		28,701		-		28,701
Federal Reserve Bank and Federal Home Loan Bank stock		8,779		N/A		N/A		N/A		N/A
Net loans		3,592,237		-		-		3,598,213		3,598,213
Accrued interest receivable		11,441		243		2,440		8,758		11,441
Financial liabilities:
Demand deposits		398,399		398,399		-		-		398,399
Interest bearing deposits		3,774,927		2,707,961		1,076,213		-		3,784,174
Short-term borrowings		242,991		-		242,991		-		242,991
Accrued interest payable		537		77		460		-		537

(14) Regulatory Capital Requirements

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy regulations and, additionally for banks, the prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can result in regulatory action.  The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.  The capital rules include a capital conservation buffer that is designed to absorb losses during periods of economic stress and to require increased capital levels before capital distributions and certain other payments can be made.  Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.  Implementation of the buffer began in January 2016 at the 0.625% level, and the buffer increases 0.625% each year thereafter until it reaches 2.5% on January 1, 2019.  Management believes, as of December 31, 2018, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If a bank is adequately capitalized, regulatory approval is required to accept brokered deposits.  If a bank is undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.  The federal banking agencies are required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution or its holding company.  Such actions could have a direct material effect on an institution’s or its holding company’s financial statements.  As of December 31, 2018 and December 31, 2017, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

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The following is a summary of actual capital amounts and ratios as of December 31, 2018 and 2017, for Trustco Bank:

	As of December 31, 2018					Well			Adequately
(dollars in thousands)	Amount		Ratio			Capitalized(1)			Capitalized(1)(2)
Tier 1 leverage ratio	$	484,581		9.767	%		5.000	%		4.000	%
Common equity Tier 1 capital		484,581		18.233			6.500			6.380
Tier 1 risk-based capital		484,581		18.233			8.000			7.880
Total risk-based capital		517,948		19.489			10.000			9.880

	As of December 31, 2017					Well			Adequately
(dollars in thousands)	Amount		Ratio			Capitalized(1)			Capitalized(1)
Tier 1 leverage ratio	$	444,931		9.152	%		5.000	%		4.000	%
Common equity Tier 1 capital		444,931		17.460			6.500			5.750
Tier 1 risk-based capital		444,931		17.460			8.000			7.250
Total risk-based capital		476,942		18.720			10.000			9.250

The following is a summary of actual capital amounts and ratios as of December 31, 2018 and 2017 for TrustCo on a consolidated basis.

	As of December 31, 2018					Minimum for Capital Adequacy plus Capital Conservation
(dollars in thousands)	Amount		Ratio			Buffer(1)(2)
Tier 1 leverage ratio	$	499,626		10.129	%		4.000	%
Common equity Tier 1 capital		499,626		18.790			6.380
Tier 1 risk-based capital		499,626		18.790			7.880
Total risk-based capital		533,009		20.046			9.880

	As of December 31, 2017					Minimum for Capital Adequacy plus Capital Conservation
(dollars in thousands)	Amount		Ratio			Buffer (1)(2)
Tier 1 leverage ratio	$	459,561		9.449	%		4.000	%
Common equity Tier 1 capital		459,561		18.020			5.750
Tier 1 risk-based capital		459,561		18.020			7.250
Total risk-based capital		491,590		19.280			9.250

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

(2) The December 31, 2018 and 2017 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 1.88 percent, and 1.25 percent repectively.

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(15) Accumulated Other Comprehensive Loss

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

	Year ended 12/31/2018
(dollars in thousands)	Balance at 12/31/2017			Other Comprehensive Income (loss)- Before Reclassifications			Amount reclassified from Accumulated Other Comprehensive Income			Other Comprehensive Income (loss)- year ended 12/31/2018			Balance at 12/31/2018
Net unrealized holding loss on securities available for sale, net of tax	$	(5,030	)		(3,944	)		-			(3,944	)		(8,974	)
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax		3,054			(2,727	)		-			(2,727	)		327
Net change in net actuarial loss and prior service cost on pension and pension and postretirement benefit plans, net of tax		170			-			(486	)		(486	)		(316	)
Tax Cuts and Jobs Act of 2017, Reclassification from AOCI to Retained Earnings, Tax Effect		-			-			(1,346	)		-			(1,346	)
Accumulated other comprehensive loss, net of tax	$	(1,806	)		(6,671	)		(1,832	)		(7,157	)		(10,309	)

	Year ended 12/31/2017
(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)- year ended 12/31/2017			Balance at 12/31/2017
Net unrealized holding loss on securities available for sale, net of tax	$	(6,762	)		1,732					1,732			(5,030	)
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax		42			3,012		-			3,012			3,054
Net change in net actuarial loss and prior service cost on pension and pension and postretirement benefit plans, net of tax		469			-		(299	)		(299	)		170
Accumulated other comprehensive loss, net of tax	$	(6,251	)		4,744		(299	)		4,445			(1,806	)

	Year ended 12/31/2016
(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)- year ended 12/31/2016			Balance at 12/31/2016
Net unrealized holding loss on securities available for sale, net of tax	$	(4,492	)		(1,869	)		(401	)		(2,270	)		(6,762	)
Net change in overfunded position in pension and postretirement plans arising during the year, net of tax		(758	)		800			-			800			42
Net change in net actuarial loss and prior service cost on pension and pension and postretirement benefit plans, net of tax		469			-			-			-			469
Accumulated other comprehensive loss, net of tax	$	(4,781	)		(1,069	)		(401	)		(1,470	)		(6,251	)

 The following represents the reclassifications out of accumulated other comprehensive loss for the years ended December 31, 2018, 2017 and 2016:

(dollars in thousands)	December 31,
	2018			2017			2016			Affected Line Item in Financial Statements
Unrealized gains on securities available for sale:
Realized gain on securities transactions	$	-			-			668		Net gain on securities transactions
Income tax expense		-			-			(267	)	Income taxes
Net of tax		-			-			401
Amortization of pension and postretirement benefit items:
Amortization of net actuarial gain (loss)		556			289			90		Salaries and employee benefits
Amortization of prior service cost		100			(90	)		(90	)	Salaries and employee benefits
Income tax benefit		(170	)		100			-		Income taxes
Net of tax		486			299			-
Total reclassifications, net of tax	$	486			299			401

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(16) Revenue from Contracts with Customers

All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income.   The following table presents the Company’s sources of Non-Interest Income for the years ended December 31, 2018 and 2017.  Items outside the scope of ASC 606 are noted as such.

(dollars in thousands)	For the years ended December 31,
	2018		2017
Non-interest income
Service Charges on Deposits
Overdraft fees	$	3,543		3,492
Other		455		477
Interchange Income		4,822		4,743
Wealth management fees		6,283		6,584
Other (a)		2,978		3,077
Total non-interest income	$	18,081		18,373
(a) Not within the scope of ASC 606.

A description of the Company’s revenue streams accounted in accordance with ASC 606 as follows:

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

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

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

Gains/Losses on Sales of Other real Estate Owned “OREO”:  The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.  When the company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable.  Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.  In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain/(loss) on sale if a significant financing component is present.

(17) Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 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.

Page 80 of 94

The Company has adopted this ASU on January 1, 2018.  Upon adoption the Company determined that there were no accumulated adjustments needed and no changes to the patterns on how the company recognized revenue.  The Company did add disclosures for the items in-scope as described in Note 16.

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.  The ASU was adopted on January 1, 2018, and does not significantly impact the Company’s consolidated financial statements.  The Company has amended disclosures to comply with the exit price notion as required under the ASU for the period ended September 30, 2018.

In February 2018, the FASB issued ASU 2018-02, “Income statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” which will allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.  These amendments are effective for all entities for fiscal years beginning after December 15, 2018.  For Interim periods within those fiscal years, early adoption of the amendment is permitted including public business entities for reporting periods for which financial statements have not yet been issued.  The Company did adopt the ASU in the first quarter of 2018 and reclassified the stranded tax effect in accumulated other comprehensive income to retained earnings in the period ended March 31, 2018.

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.  The Company will adopt the ASU in the first quarter of 2019 and expects an increase in the lease assets and lease liabilities of approximately $50 million to $60 million, with no material effect on the Company’s key financial ratios.

In September 2016, the FASB released ASU 2016-13, “Financial Instruments – Credit Losses” which amended existing guidance to replace current generally accepted accounting principles used to measure a reporting entity’s credit losses.  The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.  To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  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 developing a roadmap for implementation of the new standard.  The Company has formed a committee which is performing implementation planning and evaluating the impact of the ASU on its consolidated financial statements.  In addition, the Company has selected a software vendor for the CECL model and are working with outside consultants to assist with implementation.

Page 81 of 94

(18) Parent Company Only

The following statements pertain to TrustCo Bank Corp NY (Parent Company):

 Statements of Comprehensive Income

(dollars in thousands)	Years ended December 31,
	2018			2017			2016
Income:
Dividends and interest from subsidiaries	$	24,920			24,510			24,498
Net gain on securities transactions		-			-			-
Miscellaneous income		-			-			-
Total income		24,920			24,510			24,498
Expense:
Operating supplies		122			26			21
Professional services		438			122			461
Miscellaneous expense		1,755			2,573			1,258
Total expense		2,315			2,721			1,740
Income before income taxes and subsidiaries’ undistributed earnings		22,605			21,789			22,758
Income tax benefit		(523	)		(1,171	)		(578	)
Income before subsidiaries’ undistributed earnings		23,128			22,960			23,336
Equity in undistributed earnings of subsidiaries		38,317			20,185			19,265
Net income	$	61,445			43,145			42,601
Change in other comprehensive (loss) income		(7,157	)		4,445			(1,470	)
Comprehensive income	$	54,288			47,590			41,131

Statements of Condition

(dollars in thousands)	December 31,
	2018		2017
Assets:
Cash in subsidiary bank	$	22,665		21,773
Investments in subsidiaries		474,838		443,692
Securities available for sale		35		35
Other assets		683		771
Total assets		498,221		466,271
Liabilities and shareholders’ equity:
Accrued expenses and other liabilities		8,350		7,964
Total liabilities		8,350		7,964
Shareholders’ equity		489,871		458,307
Total liabilities and shareholders’ equity	$	498,221		466,271

Page 82 of 94

Statements of Cash Flows

(dollars in thousands)	Years ended December 31,
	2018			2017			2016
Increase/(decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income	$	61,445			43,145			42,601
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(38,317	)		(20,185	)		(19,265	)
Stock based compensation expense		173			150			224
Net change in other assets and accrued expenses		214			853			(196	)
Total adjustments		(37,930	)		(19,182	)		(19,237	)
Net cash provided by operating activities		23,515			23,963			23,364
Cash flows from financing activities:
Proceeds from exercise of stock options		1,259			5,236			1,368
Dividends paid		(25,555	)		(25,184	)		(25,055	)
Payments to acquire treasury stock		(718	)		(4,608	)		(701	)
Proceeds from sales of treasury stock		2,391			2,480			2,447
Net cash used in financing activities		(22,623	)		(22,076	)		(21,941	)
Net increase in cash and cash equivalents		892			1,887			1,423
Cash and cash equivalents at beginning of year		21,773			19,886			18,463
Cash and cash equivalents at end of year	$	22,665			21,773			19,886

Page 83 of 94

Branch Locations

New York
Airmont Office	Brunswick Office	East Greenbush Office
327 Route 59 East	740 Hoosick Rd.	501 Columbia Tpk.
Airmont, NY	Troy, NY	Rensselaer, NY
Telephone: (845) 357-2435	Telephone: (518) 272-0213	Telephone: (518) 479-7233
Altamont Ave. Office	Campbell West Plaza Office	Elmsford Office
1400 Altamont Ave.	141 West Campbell Rd.	100 Clearbrook Rd.
Schenectady, NY	Rotterdam, NY	Elmsford, NY
Telephone: (518) 356-1317	Telephone: (518) 377-2393	Telephone: (914) 345-1808
Altamont Ave. West Office	Central Ave. Office	Exit 8/Crescent Rd. Office
1900 Altamont Ave.	40 Central Ave.	1541 Crescent Rd.
Rotterdam, NY	Albany, NY	Clifton Park, NY
Telephone: (518) 355-1900	Telephone: (518) 426-7291	Telephone: (518) 383-0039
Amsterdam Office	Chatham Office	Exit 11 Office
4931 Route 30	193 Hudson Ave.	43 Round Lake Rd.
Amsterdam, NY	Chatham, NY	Ballston Lake, NY
Telephone: (518) 842-5459	Telephone: (518) 392-0031	Telephone: (518) 899-1558
Ardsley Office	Clifton Country Road Office	Fishkill Office
33-35 Center St.	7 Clifton Country Rd.	1545 Route 52
Ardsley, NY	Clifton Park, NY	Fishkill, NY
Telephone: (914) 693-3254	Telephone: (518) 371-5002	Telephone: (845) 896-8260
Ballston Spa Office	Clifton Park Office	Freemans Bridge Rd. Office
235 Church Ave.	1026 Route 146	1 Sarnowski Dr.
Ballston Spa, NY	Clifton Park, NY	Glenville, NY
Telephone: (518) 885-1561	Telephone: (518) 371-8451	Telephone: (518) 344-7510
Balltown Road Office	Cobleskill Office	Glenmont Office
1475 Balltown Rd.	104 Merchant Pl.	380 Route 9W
Niskayuna, NY	Cobleskill, NY	Glenmont, NY
Telephone: (518) 377-2460	Telephone: (518) 254-0290	Telephone: (518) 449-2128
Brandywine Office	Colonie Office	Glens Falls Office
1048 State St.	1818 Central Ave.	100 Glen St.
Schenectady, NY	Albany, NY	Glens Falls, NY
Telephone: (518) 346-4295	Telephone: (518) 456-0041	Telephone: (518) 798-8131
Briarcliff Manor Office	Crestwood Plaza Office	Greenwich Office
75 North State Rd.	415 Whitehall Rd.	131 Main St.
Briarcliff Manor, NY	Albany, NY	Greenwich, NY
Telephone: (914) 762-7133	Telephone: (518) 482-0693	Telephone: (518) 692-2233
Bronxville Office	Delmar Office	Guilderland Office
5-7 Park Place	167 Delaware Ave.	3900 Carman Rd.
Bronxville, NY	Delmar, NY	Schenectady, NY
Telephone: (914) 771-4180	Telephone: (518) 439-9941	Telephone: (518) 355-4890

Page 84 of 94

Branch Locations (continued)

Halfmoon Office
215 Guideboard Rd.	Loudon Plaza Office	Mt. Kisco Office
Country Dollar Plaza	372 Northern Blvd.	222 East Main St.
Halfmoon, NY	Albany, NY	Mt. Kisco, NY
Telephone: (518) 371-0593	Telephone: (518) 462-6668	Telephone: (914) 666-2362
Hartsdale Office	Madison Ave. Office	New City Office
220 East Hartsdale Ave.	1084 Madison Ave.	20 Squadron Blvd.
Hartsdale, NY	Albany, NY	New City, NY
Telephone: (914) 722-2640	Telephone: (518) 489-4711	Telephone: (845) 634-4571
Highland Office	Mahopac Office	New Scotland Office
3580 Route 9W	945 South Lake Blvd	301 New Scotland Ave.
Highland, NY	Mahopac, NY	Albany, NY
Telephone: (845) 691-7023	Telephone: (845) 803-8756	Telephone: (518) 438-7838
Hoosick Falls Office	Malta 4 Corners Office	Newton Plaza Office
47 Main St.	2471 Route 9	602 New Loudon Rd.
Hoosick Falls, NY	Malta, NY	Latham, NY
Telephone: (518) 686-5352	Telephone: (518) 899-1056	Telephone: (518) 786-3687
Hudson Office	Mamaroneck Office	Niskayuna-Woodlawn Office
507 Warren St.	180-190 East Boston Post Rd.	3461 State St.
Hudson, NY	Mamaroneck, NY	Schenectady, NY
Telephone: (518) 828-9434	Telephone: (914) 777-3023	Telephone: (518) 377-2264
Hudson Falls Office	Mayfair Office	Northern Pines Road Office
3750 Burgoyne Ave.	286 Saratoga Rd.	649 Maple Ave.
Hudson Falls, NY	Glenville, NY	Saratoga Springs, NY
Telephone: (518) 747-0886	Telephone: (518) 399-9121	Telephone: (518) 583-2634
Katonah Office	Mechanicville Office	Nyack Office
18 Woods Bridge Road	9 Price Chopper Plaza	388 Route 59
Katonah, NY	Mechanicville, NY	Nyack, NY
Telephone: (914) 666-6230	Telephone: (518) 664-1059	Telephone: (845) 535-3728
Kingston Office	Milton Office	Peekskill Office
1220 Ulster Ave.	2 Trieble Ave.	20 Welcher Ave.
Kingston, NY	Ballston Spa, NY	Peekskill, NY
Telephone: (845) 336-5372	Telephone: (518) 885-0498	Telephone: (914) 739-1839
Lake George Office	Monroe Office	Pelham Office
4066 Route 9L	791 Route 17M	132 Fifth Ave.
Lake George, NY	Monroe, NY	Pelham, NY
Telephone: (518) 668-2352	Telephone: (845) 782-1100	Telephone: (914) 632-1983
Latham Office	Mont Pleasant Office	Pomona Office
1 Johnson Rd.	959 Crane St.	1581 Route 202
Latham, NY	Schenectady, NY	Pomona, NY
Telephone: (518) 785-0761	Telephone: (518) 346-1267	Telephone: (845) 354-0176

Page 85 of 94

Branch Locations (continued)

Poughkeepsie Office	Sheridan Plaza Office	Troy Office
2656 South Rd.	1350 Gerling St.	5th Ave. and State St.
Poughkeepsie, NY	Schenectady, NY	Troy, NY
Telephone: (845) 485-6419	Telephone: (518) 377-8517	Telephone: (518) 274-5420
Queensbury Office	Slingerlands Office	Upper Union Street Office
118 Quaker Rd.	1569 New Scotland Rd.	1620 Union St.
Suite 1	Slingerlands, NY	Schenectady, NY
Queensbury, NY	Telephone: (518) 439-9352	Telephone: (518) 374-4056
Telephone: (518) 798-7226
	South Glens Falls Office	Ushers Road Office
Red Hook Office	133 Saratoga Rd.	308 Ushers Rd.
4 Morgans Way	Suite 1	Ballston Lake, NY
Red Hook, NY	South Glens Falls, NY	Telephone: (518) 877-8069
Telephone: (845) 752-2224	Telephone: (518) 793-7668
		Valatie Office
Rotterdam Office	State Farm Road Office	2929 Route 9
1416 Curry Rd.	2050 Western Ave.	Valatie, NY
Schenectady, NY	Guilderland, NY	Telephone: (518) 758-2265
Telephone: (518) 355-8330	Telephone: (518) 452-6913
		Wappingers Falls Office
Route 2 Office	State St. Albany Office	1490 Route 9
201 Troy-Schenectady Rd.	112 State St.	Wappingers Falls, NY
Latham, NY	Albany, NY	Telephone: (845) 298-9315
Telephone: (518) 785-7155	Telephone: (518) 436-9043
		Warrensburg Office
Route 7 Office	State St. Schenectady - Main Office	9 Lake George Plaza Rd.
1156 Troy-Schenectady Rd.	320 State St.	Lake George, NY
Latham, NY	Schenectady, NY	Telephone: (518) 623-3707
Telephone: (518) 785-4744	Telephone: (518) 381-3831
		West Sand Lake Office
Saratoga Springs Office	Stuyvesant Plaza Office	3690 NY Route 43
34 Congress St.	Western Ave. at Fuller Rd.	West Sand Lake, NY
Saratoga Springs, NY	Albany, NY	Telephone: (518) 674-3327
Telephone: (518) 587-3520	Telephone: (518) 489-2616
		Wilton Mall Office
Schaghticoke Office	Tanners Main Office	Route 50
2 Main St.	345 Main St.	Saratoga Springs, NY
Schaghticoke, NY	Catskill, NY	Telephone: (518) 583-1716
Telephone: (518) 753-6509	Telephone: (518) 943-2500
		Wolf Road Office
Scotia Office	Tanners West Office	34 Wolf Rd.
123 Mohawk Ave.	238 West Bridge St.	Albany, NY
Scotia, NY	Catskill, NY	Telephone: (518) 458-7761
Telephone: (518) 372-9416	Telephone: (518) 943-5090
		Wynantskill Office
		134-136 Main St.
		Wynantskill, NY
		Telephone: (518) 286-2674

Page 86 of 94

Branch Locations (continued)

Florida
Alafaya Woods Office	Curry Ford Road Office	Lady Lake Office
1500 Alafaya Trl.	3020 Lamberton Blvd., Suite 116	873 North US Highway 27/441
Oviedo, FL	Orlando, FL	Lady Lake, FL
Telephone: (407) 359-5991	Telephone: (407) 277-9663	Telephone: (352) 205-8893
Aloma Office	Curry Ford West Office	Lake Brantley Office
4070 Aloma Ave.	2838 Curry Ford Rd.	909 North SR 434
Winter Park, FL	Orlando, FL	Altamonte Springs, FL
Telephone: (407) 677-1969	Telephone: (407) 893-9878	Telephone: (407) 339-3396
Apollo Beach Office	Davenport Office	Lake Mary Office
205 Apollo Beach Blvd.	2300 Deer Creek Commons Ln.	350 West Lake Mary Blvd.
Apollo Beach, FL	Suite 600	Sanford, FL
Telephone: (813) 649-0460	Davenport, FL	Telephone: (407) 330-7106
	Telephone: (863) 424-9493
Apopka Office		Lake Nona Office
1134 North Rock Springs Rd.	Dean Road Office	9360 Narcoossee Rd.
Apopka, FL	3920 Dean Rd.	Orlando, FL
Telephone: (407) 464-7373	Orlando, FL	(407) 801-7330
	Telephone: (407) 657-8001
Avalon Park Office		Lake Square Office
3662 Avalon Park East Blvd.	Downtown Orlando Office	10105 Route 441
Orlando, FL	415 East Pine St.	Leesburg, FL
Telephone: (407) 380-2264	Orlando, FL	Telephone: (352) 323-8147
	Telephone: (407) 422-7129
Bay Hill Office		Lee Road Office
6084 Apopka Vineland Road	East Colonial Office	1084 Lee Rd., Suite 11
Orlando, FL	12901 East Colonial Dr.	Orlando, FL
Telephone: (321) 251-1859	Orlando, FL	Telephone: (407) 532-5211
	Telephone: (407) 275-3075
BeeLine Center Office		Lee Vista Office
10249 South John Young Pkwy.	Englewood Office	8288 Lee Vista Blvd., Suite E
Suite 101	2930 South McCall Rd.	Orlando, FL
Orlando, FL	Englewood, FL	Telephone: (321) 235-5583
Telephone: (407) 240-0945	Telephone: (941) 460-0601
		Leesburg Office
Beneva Village Office	Gateway Commons Office	1330 Citizens Blvd., Suite 101
5950 South Beneva Road	1525 East Osceola Pkwy., Suite 120	Leesburg, FL
Sarasota, FL	Kissimmee, FL	Telephone: (352) 365-1305
Telephone: (941) 923-8269	Telephone: (407) 932-0398
		Maitland Office
Bradenton Office	Goldenrod Office	9400 US Route 17/92, Suite 101
5858 Cortez Rd. West	7803 East Colonial Rd., Suite 107	Maitland, FL
Bradenton, FL	Orlando, FL	Telephone: (407) 332-6071
Telephone: (941) 792-2604	Telephone: (407) 207-3773
		Melbourne Office
Colonial Drive Office	Juno Beach Office	2481 Croton Rd.
4301 East Colonial Dr.	14051 US Highway 1	Melbourne, FL
Orlando, FL	Juno Beach, FL	Telephone: (321) 752 0446
Telephone: (407) 895-6393	Telephone: (561) 630-4521

Page 87 of 94

Branch Locations (continued)

Metro West Office	Rinehart Road Office	Vero Beach Office
2619 S. Hiawassee Rd.	1185 Rinehart Rd.	4125 20th Street
Orlando, FL	Sanford, FL	Vero Beach, FL
Telephone: (407) 293-1580	Telephone: (407) 268-3720	Telephone: (772) 492-9295
North Clermont Office	Sarasota Office	Westwood Plaza Office
12302 Roper Blvd.	2704 Bee Ridge Rd.	4942 West State Route 46
Clermont, FL	Sarasota, FL	Suite 1050
Telephone: (352) 243-2563	Telephone: (941) 929-9451	Sanford, FL
		Telephone: (407) 321-4925
Orange City Office	South Clermont Office
902 Saxon Blvd., Suite 101	16908 High Grove Blvd.	Windermere Office
Orange City, FL	Clermont, FL	2899 Maguire Rd.
Telephone: (386) 775-1392	Telephone: (352) 243-9511	Windermere, FL
		Telephone: (407) 654-0498
Ormond Beach Office	Stuart Office
115 North Nova Rd.	951 SE Federal Highway	Winter Garden Office
Ormond Beach, FL	Stuart, FL	16118 Marsh Rd.
Telephone: (386) 256-3813	Telephone: (772) 286-4757	Winter Garden, FL
		Telephone: (407) 654-4609
Osprey Office	Sun City Center
1300 South Tamiami Trl.	4441 Sun City Center	Winter Haven Office
Osprey, FL	Sun City Center, FL	7476 Cypress Gardens Blvd. Southeast
Telephone: (941) 918-9380	Telephone: (813) 633-1468	Winter Haven, FL
		Telephone: (863) 326-1918
Oviedo Office	Sweetwater Office
1875 West County Rd. 419	671 North Hunt Club Rd.	Winter Park Office
Suite 600	Longwood, FL	1211 N. Orange Ave.
Oviedo, FL	Telephone: (407) 774-1347	Winter Park, FL
Telephone: (407) 365-1145		Telephone: (407) 755-6707
	Tuskawilla Road Office
Pleasant Hill Commons Office	1295 Tuskawilla Rd., Suite 10	Winter Springs Office
3307 South Orange Blossom Trl.	Winter Springs, FL	851 East State Route 434
Kissimmee, FL	Telephone: (407) 695-5558	Winter Springs, FL
Telephone: (407) 846-8866		Telephone: (407) 327-6064
	Venice Office
Port Orange Office	2057 South Tamiami Trl.
3751 Clyde Morris Blvd.	Venice, FL
Port Orange, FL	Telephone: (941) 496-9100
Telephone: (386) 322-3730

Page 88 of 94

Branch Locations (continued)

Massachusetts	New Jersey	Vermont
Allendale Office	Northvale Office	Bennington Office
5 Cheshire Rd.	220 Livingston St.	215 North St.
Suite 18	Northvale, NJ	Bennington, VT
Pittsfield, MA	Telephone: (201) 750-1501	Telephone: (802) 447-4952
Telephone: (413) 236-8400
	Ramsey Office
Great Barrington Office	385 North Franklin Tpk.
326 Stockbridge Rd.	Ramsey, NJ
Great Barrington, MA	Telephone: (201) 934-1429
Telephone: (413) 644-0054
Lee Office
43 Park St.
Lee, MA
Telephone: (413) 243-4300
Pittsfield Office
1 Dan Fox Dr.
Pittsfield, MA
Telephone: (413) 442-1330

Page 89 of 94

EXECUTIVE OFFICERS	BOARD OF DIRECTORS
CHAIRMAN, PRESIDENT AND CHIEF	Dennis A. De Gennaro, President
EXECUTIVE OFFICER	Camelot Associates Corporation
Robert J. McCormick	Commercial and Residential Construction
EXECUTIVE VICE PRESIDENT AND CHIEF OPERATIONS OFFICER	Brian C. Flynn, CPA
Kevin M. Curley	KPMG LLP
	Retired Partner
EXECUTIVE VICE PRESIDENT
AND CHIEF RISK OFFICER	Lisa M. Lucarelli, Owner
Robert M. Leonard	LMKD Properties, LLC
	Property Management
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER	Thomas O. Maggs, President
Michael M. Ozimek	Maggs & Associates
	Insurance Agency
EXECUTIVE VICE PRESIDENT
AND CHIEF LENDING OFFICER	Anthony J. Marinello, M.D., Ph.D.
Scot R. Salvador	Physician
SENIOR VICE PRESIDENT AND	Robert J. McCormick,
TREASURER	Chairman, President and Chief Executive Officer
Eric W. Schreck	TrustCo Bank Corp NY
	Chairman, TrustCo Bank Corp NY
GENERAL COUNSEL AND CORPORATE
SECRETARY	William D. Powers,
Michael J. Hall	Powers & Co., LLC
	Retired Partner
Directors of TrustCo Bank Corp NY
are also Directors of Trustco Bank

HONORARY DIRECTORS
Lionel O. Barthold	John S. Morris, Ph.D	William F. Terry
Robert A. McCormick	James H. Murphy, D.D.S.
Nancy A. McNamara	Richard J. Murray, Jr.

Page 90 of 94

Trustco Bank Officers

CHAIRMAN, PRESIDENT

AND CHIEF EXECUTIVE OFFICER

Robert J. McCormick

EXECUTIVE VICE PRESIDENT AND CHIEF

OPERATIONS OFFICER

Kevin M. Curley

EXECUTIVE VICE PRESIDENT

AND CHIEF RISK OFFICER

Robert M. Leonard

EXECUTIVE VICE PRESIDENT

AND CHIEF FINANCIAL OFFICER

Michael M. Ozimek

EXECUTIVE VICE PRESIDENT

AND CHIEF LENDING OFFICER

Scot R. Salvador

GENERAL COUNSEL AND CORPORATE

SECRETARY

Michael J. Hall, Esq.

ACCOUNTING/FINANCE

Vice Presidents

Andrea A. McGuire

Michael Rydberg

Officer

Lynn M. Hallenbeck

AUDIT

Director of Internal Audit

Daniel R. Saullo

Officers

Kenneth E. Hughes Jr.

Jeff P. Klingbeil

Allison R. Pillans

BRANCH ADMINISTRATION

Senior Vice President and

Florida Regional President

Eric W. Schreck

Administrative Vice President

Carly K. Batista

Assistant Vice Presidents

Mark J. Cooper

Gloryvel Morales

Jocelyn E. Vizcara

Officers

Victor J. Berger

BRANCH ADMINISTRATION

(continued)

William B. Jansz

Lesly Jean-Louis

Kevin R. Mason

Nicolette C. Messina

Carmen Ramjeet

Pratik A. Shah

Berkley K. Young

COLLECTIONS/ OPERATIONS/

CREDIT

Vice Presidents

Stacy L. Marble

Michael V. Pitnell

Officers

Aislinn E. Melia

June M. Ryder

COMPLIANCE/ RISK/ BSA/

CREDIT ADMINISTRATION

Administrative Vice President and Chief

Compliance Officer and Information

Security Officer

Michael J. Ewell

Administrative Vice President

Michael J. Lofrumento

Vice President

Lara Ann Gough

Assistant Vice President

Jennifer L. Meadows

Officers

Amanda L. Biance

James A.P. McCarthy, Esq.

FINANCIAL SERVICES

Administrative Vice President and

Chief Trust Officer

Patrick J. LaPorta, Esq.

Vice President

Thomas M. Poitras

Officers

Michael D. Bates

John W. Bresonis

William J. Heslin

Clint M. Mallard

Lauren A. Maxwell

GENERAL SERVICES

Officer

Joseph N. Marley

INFORMATION TECHNOLOGY/ PLANNING AND SYSTEMS

Administrative Vice President

John R. George

Vice President and

Chief Technology Officer

Volney R. LaRowe

Officers

Jonathan R. Goodell

Michael F. McMahon

LENDING

Administrative Vice President

Michelle L. Simmonds

Vice President

Patrick M. Canavan

Assistant Vice Presidents

Amy E. Anderson

Suzanne E. Breen

Officers

Kevin P. Bailey

Rebecca L. O’Hare

Joseph M. Rice

MARKETING

Vice President

Adam E. Roselan

PERSONNEL/

QUALITY CONTROL/

TRAINING

Vice President and

Director of Human Resources

Mary-Jean Riley

Assistant Vice President

Jessica M. Marshall

Officers

Takla A. Awad

Jason T. Goodell

Page 91 of 94

General Information

ANNUAL MEETING

Thursday, May 23, 2019

10:00 AM

Trustco Bank’s Loan Center

6 Metro Park Road

Albany, NY 12205

CORPORATE HEADQUARTERS

5 Sarnowski Drive

Glenville, NY 12302

(518) 377-3311

DIVIDEND REINVESTMENT PLAN

A Dividend Reinvestment Plan is available to shareholders of TrustCo Bank Corp NY. It provides for the reinvestment of cash dividends and optional cash payments to purchase additional shares of TrustCo stock. The Dividend Reinvestment Plan has certain administrative charges and provides a convenient method of acquiring additional shares. Computershare acts as administrator for this service and is the agent for shareholders in these transactions. Shareholders who want additional information may contact Computershare at 1-800-368-5948.

DIRECT DEPOSIT OF DIVIDENDS

Electronic deposit of dividends, which offers safety and convenience, is available to TrustCo shareholders who wish to have dividends deposited directly to personal checking, savings or other accounts. If you would like to arrange direct deposit, please write to Computershare listed as transfer agent at the bottom of this page.

FORM 10-K

TrustCo Bank Corp NY will provide, without charge, a copy of its Form 10-K for the year ended December 31, 2018 upon written request. Requests and related inquiries should be directed to Robert M. Leonard, Executive Vice President and Chief Risk Officer, TrustCo Bank Corp NY, P.O. Box 380, Schenectady, New York 12301-0380.

CODE OF CONDUCT

TrustCo Bank Corp NY will provide, without charge, a copy of its Code of Conduct upon written request. Requests and related inquiries should be directed to Robert M. Leonard, Executive Vice President and Chief Risk Officer, TrustCo Bank Corp NY, P.O. Box 1082, Schenectady, New York 12301-1082.

NASDAQ SYMBOL: TRST

The Corporation’s common stock trades on The Nasdaq Stock Market under the symbol TRST. There were approximately 11,575 shareholders of record of TrustCo common stock as of January 19, 2019.

SUBSIDIARIES:

Trustco Bank

Glenville, New York

Member FDIC

(and its wholly owned subsidiaries)

Trustco Realty Corp

Glenville, New York

Trustco Insurance Agency, Inc.

Glenville, New York

ORE Property, Inc.

Glenville, New York

(and its wholly owned subsidiaries)

ORE Property One, Inc.

Orlando, Florida

ORE Property Two, Inc.

Orlando, Florida

ORE Subsidiary Corporation

Glenville, New York

Page 92 of 94

TRANSFER AGENT

Computershare

Regular Mail

PO BOX 505000

Louisville, KY 40233-5000

UNITED STATES

Overnight Delivery

462 South 4th Street

Suite 1600 Louisville, KY 40202

UNITED STATES

Toll Free: 1-800-368-5948 or 1-781-575-4223

Trustco Bank^® is a registered service mark with the U.S. Patent & Trademark Office.

Page 93 of 94

 

Share Price Information

The following graph shows changes over a five-year period in the value of $100 invested in: (1) TrustCo’s common stock; (2) Russell 2000 and (3) the SNL Bank and Thrift Index, an industry group compiled by S&P Global Market Intelligence, that includes all major exchange (NYSE, NYSE MKT, NASDAQ) banks and thrifts in S&P’s coverage universe. The index included 398 companies as of February 15, 2019. A list of the component companies can be obtained by contacting TrustCo.

		Period Ending
Index	12/31/13	12/31/14	12/31/15	12/31/16	12/31/17	12/31/18
TrustCo Bank Corp NY	100.00	105.10	92.60	137.12	148.84	114.58
Russell 2000 Index	100.00	104.89	100.26	121.63	139.44	124.09
SNL Bank and Thrift Index	100.00	111.63	113.89	143.78	169.07	140.45

Page 94 of 94