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

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20162017
Commission File Number 0-10592
 
TRUSTCO BANK CORP NY
(Exact name of registrant as specified in its charter)

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

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

Registrant's telephone number, including area code:
(518) 377‑3311

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Common Stock
 
Number of Shares Outstanding
as of OctoberJuly 31, 20162017
$1 Par Value 95,705,17696,101,978
 
TrustCo Bank Corp NY

INDEX

Part I.FINANCIAL INFORMATIONPAGE NO.
 Item 1.Consolidated Interim Financial Statements (Unaudited):
    
  
Consolidated Statements of Income for the three month and ninesix month periods ended SeptemberJune 30, 20162017 and 20152016
3
    
  
Consolidated Statements of Comprehensive Income for the three month and ninesix month periods ended SeptemberJune 30, 20162017 and 20152016
4
    
  
Consolidated Statements of Financial Condition as of SeptemberJune 30, 20162017 and December 31, 20152016
5
    
  
Consolidated Statements of Changes in Shareholders’ Equity for the ninesix month periods ended SeptemberJune 30, 20162017 and 20152016
6
    
  
Consolidated Statements of Cash Flows for the ninesix month periods ended SeptemberJune 30, 20162017 and 20152016
7
    
  
Notes to Consolidated Interim Financial Statements
8-358 – 37
    
  
Report of Independent Registered Public Accounting Firm
3638
    
 Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
37-5839-60
    
 Item 3.
Quantitative and Qualitative Disclosures About Market Risk
5961
    
 Item 4.
Controls and Procedures
5961
    
Part II.OTHER INFORMATION 
    
 Item 1.
Legal Proceedings
60
62
    
 Item 1A.
Risk Factors
6062
    
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
6062
    
 Item 3.
Defaults Upon Senior Securities
6062
    
 Item 4.
Mine Safety
60
62
    
 Item 5.
Other Information
6062
    
 Item 6.
Exhibits
6062
 
2
Index
TRUSTCO BANK CORP NY
Consolidated Statements of Income (Unaudited)
(dollars in thousands, except per share data)

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2016 2015  2016  2015  2017  2016  2017  2016 
                       
Interest and dividend income:                       
Interest and fees on loans $36,171  35,631   107,428   105,957  $36,662   35,652   72,706   71,257 
Interest and dividends on securities available for sale:                               
U. S. government sponsored enterprises  408  584   1,067   1,162   607   404   1,202   659 
State and political subdivisions  13  23   40   71   11   13   23   27 
Mortgage-backed securities and collateralized mortgage obligations-residential  1,829  2,230   6,114   6,899   1,944   2,169   3,902   4,285 
Corporate bonds  97  -   97   1   154   -   305   - 
Small Business Administration-guaranteed participation securities  445  497   1,371   1,522   394   450   809   926 
Mortgage-backed securities and collateralized mortgage obligations-commercial  36  37   110   112   21   38   44   74 
Other securities  4  4   12   12   4   4   8   8 
Total interest and dividends on securities available for sale  2,832  3,375   8,811   9,779   3,135   3,078   6,293   5,979 
                               
Interest on held to maturity securities:                               
Mortgage-backed securities and collateralized mortgage obligations-residential  347  461   1,123   1,419   296   374   612   775 
Corporate bonds  156  153   464   461   154   154   308   308 
Total interest on held to maturity securities  503  614   1,587   1,880   450   528   920   1,083 
                               
Federal Reserve Bank and Federal Home Loan Bank stock  131  113   369   347   134   118   268   238 
Interest on federal funds sold and other short-term investments  866  408   2,542   1,231   1,727   832   2,973   1,677 
Total interest income  40,503  40,141   120,737   119,194   42,108   40,208   83,160   80,234 
                               
Interest expense:                               
Interest on deposits:                               
Interest-bearing checking  120  117   350   333   134   116   258   230 
Savings  504  603   1,712   1,860   435   604   865   1,208 
Money market deposit accounts  463  537   1,426   1,701   468   467   934   962 
Time deposits  2,468  2,544   7,301   7,478   2,181   2,460   4,464   4,833 
Interest on short-term borrowings  281  290   800   936   349   262   698   519 
Total interest expense  3,836  4,091   11,589   12,308   3,567   3,909   7,219   7,752 
                               
Net interest income  36,667  36,050   109,148   106,886   38,541   36,299   75,941   72,482 
Provision for loan losses  750  800   2,350   2,400   550   800   1,150   1,600 
Net interest income after provision for loan losses  35,917  35,250   106,798   104,486   37,991   35,499   74,791   70,882 
                               
Noninterest income:                               
Trustco financial services income  1,347  1,351   4,464   4,482   1,425   1,512   3,283   3,117 
Fees for services to customers  2,664  2,770   8,062   7,985   2,797   2,737   5,434   5,398 
Net gain on securities transactions  -  -   668   249   -   668   -   668 
Other  718  244   1,306   726   282   282   514   588 
Total noninterest income  4,729  4,365   14,500   13,442   4,504   5,199   9,231   9,771 
                               
Noninterest expenses:                               
Salaries and employee benefits  8,995  7,834   26,932   24,479   9,559   8,934   19,769   17,937 
Net occupancy expense  3,887  3,929   11,893   11,915   4,267   3,918   8,376   8,006 
Equipment expense  1,596  1,596   4,950   5,341   1,428   1,840   2,984   3,354 
Professional services  1,959  2,238   6,203   5,811   1,963   2,098   3,891   4,244 
Outsourced services  1,465  1,425   4,441   4,275   1,500   1,425   3,000   2,976 
Advertising expense  489  668   1,788   2,001   607   570   1,320   1,299 
FDIC and other insurance  1,127  2,202   5,066   4,284   1,012   1,949   2,059   3,939 
Other real estate expense, net  895  806   1,837   1,431 
Other real estate (income) expense, net  (4)  423   495   942 
Other  2,636  2,766   7,352   7,915   2,581   2,817   5,038   4,715 
Total noninterest expenses  23,049  23,464   70,462   67,452   22,913   23,974   46,932   47,412 
                               
Income before taxes  17,597  16,151   50,836   50,476   19,582   16,724   37,090   33,241 
Income taxes  6,667  5,535   19,033   18,418   7,342   6,260   13,903   12,366 
                               
Net income $10,930  10,616   31,803   32,058  $12,240   10,464   23,187   20,875 
                               
Net income per share:                               
- Basic $0.114  0.112   0.333   0.337  $0.127   0.110   0.242   0.219 
                               
- Diluted $0.114  0.111   0.333   0.337  $0.127   0.109   0.241   0.219 

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

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
 2016  2015  2016  2015  2017  2016  2017  2016 
                        
Net income $10,930   10,616   31,803   32,058  $12,240   10,464   23,187   20,875 
                                
Net unrealized holding (loss) gain on securities available for sale  (125)  7,855   12,475   5,682 
Net unrealized holding gain on securities available for sale  3,343   4,565   4,522   12,600 
Reclassification adjustments for net gain recognized in income  -   -   (668)  (249)  -   (668)  -   (668)
Tax effect  50   (3,142)  (4,723)  (2,171)  (1,337)  (1,559)  (1,809)  (4,773)
                                
Net unrealized (loss) gain on securities available for sale, net of tax  (75)  4,713   7,084   3,262 
Net unrealized gain on securities available for sale, net of tax  2,006   2,338   2,713   7,159 
                                
                                
Amortization of net actuarial (gain) loss  (8)  43   (25)  53 
Amortization of net actuarial gain  (73)  (50)  (136)  (17)
Amortization of prior service cost  22   23   67   68   22   22   45   45 
Tax effect  (6)  (26)  (17)  (48)  20   12   36   (11)
Amortization of net actuarial (gain) loss and prior service cost on pension and postretirement plans, net of tax  8   40   25   73 
Amortization of net actuarial gain and prior service cost on pension and postretirement plans, net of tax  (31)  (16)  (55)  17 
                                
Other comprehensive (loss) income, net of tax  (67)  4,753   7,109   3,335 
Other comprehensive income, net of tax  1,975   2,322   2,658   7,176 
Comprehensive income $10,863   15,369   38,912   35,393  $14,215   12,786   25,845   28,051 

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

 September 30, 2016 December 31, 2015  June, 2017  December 31, 2016 
ASSETS: (Unaudited) (Audited)  (Unaudited)  (Audited) 
           
Cash and due from banks $42,296  41,698  $43,783   48,719 
               
Federal funds sold and other short term investments  622,132  676,458   663,360   658,555 
Total cash and cash equivalents  664,428  718,156   707,143   707,274 
               
Securities available for sale  654,502  601,037   605,457   620,360 
               
Held to maturity securities (fair value 2016 $50,991; 2015 $59,439)  48,030  56,465 
Held to maturity securities (fair value 2017 $42,803; 2016 $47,526)  41,208   45,490 
               
Federal Reserve Bank and Federal Home Loan Bank stock  9,579  9,480   9,723   9,579 
               
Loans, net of deferred net costs  3,387,631  3,293,304   3,507,473   3,430,586 
Less:               
Allowance for loan losses  43,950  44,762   44,162   43,890 
Net loans  3,343,681  3,248,542   3,463,311   3,386,696 
               
Bank premises and equipment, net  36,110  37,643   35,174   35,466 
Other assets  56,519  63,669   58,466   63,941 
               
Total assets $4,812,849  4,734,992  $4,920,482   4,868,806 
               
LIABILITIES:               
Deposits:               
Demand $380,090  365,081  $390,120   377,755 
Interest-bearing checking  785,118  754,347   871,004   815,534 
Savings accounts  1,277,734  1,262,194   1,285,886   1,271,449 
Money market deposit accounts  566,097  610,826   572,580   571,962 
Time deposits  1,159,199  1,107,930   1,088,824   1,159,463 
Total deposits  4,168,238  4,100,378   4,208,414   4,196,163 
               
Short-term borrowings  179,204  191,226   233,621   209,406 
Accrued expenses and other liabilities  29,799  30,078   31,081   30,551 
               
Total liabilities $4,377,241  4,321,682  $4,473,116   4,436,120 
               
SHAREHOLDERS' EQUITY:               
Capital stock par value $1; 150,000,000 shares authorized; 99,121,082 and 98,973,452 shares issued at September 30, 2016 and December 31, 2015, respectively  99,121  98,973 
Capital stock par value $1; 150,000,000 shares authorized; 99,510,682 and 99,214,382 shares issued at June 30, 2017 and December 31, 2016, respectively  99,511   99,214 
Surplus  171,093  171,443   172,603   171,425 
Undivided profits  197,013  184,009   212,112   201,517 
Accumulated other comprehensive income (loss), net of tax  2,328  (4,781)
Treasury stock at cost - 3,506,797 and 3,711,228 shares at September 30, 2016 and December 31, 2015, respectively  (33,947) (36,334)
Accumulated other comprehensive loss, net of tax  (3,593)  (6,251)
Treasury stock at cost - 3,495,799 and 3,434,205 shares at        
June 30, 2017 and December 31, 2016, respectively  (33,267)  (33,219)
               
Total shareholders' equity  435,608  413,310   447,366   432,686 
               
Total liabilities and shareholders' equity $4,812,849  4,734,992  $4,920,482   4,868,806 

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

  
Capital
Stock
  Surplus  
Undivided
Profits
  
Accumulated
Other
Comprehensive
(Loss) Income
  
Treasury
Stock
  Total 
                   
                   
Beginning balance, January 1, 2015 $98,945   172,353   166,745   (4,509)  (40,090)  393,444 
Net income  -   -   32,058   -   -   32,058 
Other comprehensive income, net of tax  -   -   -   3,335   -   3,335 
Cash dividend declared, $.1969 per share  -   -   (18,710)  -   -   (18,710)
Stock options exercised and related tax benefits (19,429 shares)  19   80   -   -   -   99 
Purchase of treasury stock (14,881 shares)  -   -   -   -   (99)  (99)
Sale of treasury stock (286,844 shares)  -   (789)  -   -   2,810   2,021 
Stock based compensation expense  -   144   -   -   -   144 
                         
Ending balance, September 30, 2015 $98,964   171,788   180,093   (1,174)  (37,379)  412,292 
                         
Beginning balance, January 1, 2016 $98,973   171,443   184,009   (4,781)  (36,334)  413,310 
Net income  -   -   31,803   -   -   31,803 
Other comprehensive income, net of tax  -   -   -   7,109   -   7,109 
Cash dividend declared, $.1969 per share  -   -   (18,799)  -   -   (18,799)
Stock options exercised and related tax benefits (147,630 shares)  148   612   -   -   -   760 
Purchase of treasury stock (111,906 shares)  -   -   -   -   (701)  (701)
Sale of treasury stock (316,337 shares)  -   (1,130)  -   -   3,088   1,958 
Stock based compensation expense  -   168   -   -   -   168 
                         
Ending balance, September 30, 2016 $99,121   171,093   197,013   2,328   (33,947)  435,608 
  
Capital
Stock
  Surplus  
Undivided
Profits
  
Accumulated
Other
Comprehensive
(Loss) Income
  
Treasury
Stock
  Total 
                   
                   
Beginning balance, January 1, 2016 $98,973   171,443   184,009   (4,781)  (36,334)  413,310 
Net income  -   -   20,875   -   -   20,875 
Other comprehensive income, net of tax  -   -   -   7,176   -   7,176 
Cash dividend declared, $.1312 per share  -   -   (12,528)  -   -   (12,528)
Stock options exercised (97,600 shares)  98   404   -   -   -   502 
Purchase of treasury stock (80,769 shares)  -   -   -   -   (489)  (489)
Sale of treasury stock (213,748 shares)  -   (785)  -   -   2,092   1,307 
Stock based compensation expense  -   112   -   -   -   112 
                         
Ending balance,June 30, 2016 $99,071   171,174   192,356   2,395   (34,731)  430,265 
                         
Beginning balance, January 1, 2017 $99,214   171,425   201,517   (6,251)  (33,219)  432,686 
Net income  -   -   23,187   -   -   23,187 
Other comprehensive income, net of tax  -   -   -   2,658   -   2,658 
Cash dividend declared, $.1312 per share  -   -   (12,592)  -   -   (12,592)
Stock options exercised (296,300 shares)  297   1,298   -   -   -   1,595 
Purchase of treasury stock (213,356 shares)  -   -   -   -   (1,503)  (1,503)
Sale of treasury stock (151,762 shares)  -   (199)  -   -   1,455   1,256 
Stock based compensation expense  -   79   -   -   -   79 
                         
Ending balance, June 30, 2017 $99,511   172,603   212,112   (3,593)  (33,267)  447,366 

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

  Six months ended June 30, 
  2017  2016 
       
Cash flows from operating activities:      
Net income $23,187   20,875 
         
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  1,898   2,071 
Net gain on sale of other real estate owned  (507)  (363)
Writedown of other real estate owned  362   606 
Provision for loan losses  1,150   1,600 
Deferred tax expense  693   1,211 
Net amortization of securities  2,244   2,453 
Stock based compensation expense  79   112 
Net loss on sale of bank premises and equipment  -   (62)
Net gain on sales of securities  -   (668)
Decrease in taxes receivable  4,087   1,996 
Decrease in interest receivable  (213)  (442)
(Decrease) increase in interest payable  (64)  17 
Increase in other assets  (1,639)  (1,530)
Increase (decrease) in accrued expenses and other liabilities  910   (599)
Total adjustments  9,000   6,402 
Net cash provided by operating activities  32,187   27,277 
         
Cash flows from investing activities:        
         
Proceeds from sales and calls of securities available for sale  73,569   134,550 
Proceeds from calls and maturities of held to maturity securities  4,282   5,781 
Purchases of securities available for sale  (56,388)  (144,422)
Proceeds from maturities of securities available for sale  -   550 
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock  (144)  (99)
Net increase in loans  (80,030)  (54,636)
Proceeds from dispositions of other real estate owned  3,093   4,058 
Proceeds from dispositions of bank premises and equipment  -   58 
Purchases of bank premises and equipment  (1,606)  (1,217)
Net cash (used in) provided by investing activities  (57,224)  (55,377)
         
         
Cash flows from financing activities:        
         
Net increase in deposits  12,251   80,249 
Net increase (decrease) in short-term borrowings  24,215   (684)
Proceeds from exercise of stock options  1,595   502 
Stock based award tax withholding payments  (333)  (32)
Proceeds from sale of treasury stock  1,256   1,307 
Purchases of treasury stock  (1,503)  (489)
Dividends paid  (12,575)  (12,513)
Net cash provided by financing activities  24,906   68,340 
Net (decrease) increase in cash and cash equivalents  (131)  40,240 
Cash and cash equivalents at beginning of period  707,274   718,156 
Cash and cash equivalents at end of period $707,143   758,396 
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid during the year for:        
Interest paid $7,283   7,735 
Income taxes paid  9,808   10,485 
Other non cash items:        
Transfer of loans to other real estate owned  2,265   2,448 
Increase in dividends payable  17   15 
Change in unrealized gain on securities available for sale-gross of deferred taxes  4,522   11,932 
Change in deferred tax effect on unrealized gain on securities available for sale  (1,809)  (4,773)
Amortization of net actuarial (gain) loss and prior service cost on pension and postretirement plans  (91)  28 
Change in deferred tax effect of amortization of net actuarial (gain) loss and prior service cost on pension and postretirement plans  36   (11)

  Nine months ended September 30, 
  2016  2015 
Cash flows from operating activities:      
Net income $31,803   32,058 
         
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  3,071   3,469 
Net gain on sale of other real estate owned  (281)  (354)
Writedown of other real estate owned  911   781 
Provision for loan losses  2,350   2,400 
Deferred tax expense  3,899   2,832 
Net amortization of securities  3,702   4,134 
Stock based compensation expense  168   144 
Net gain on sale of bank premises and equipment  (480)  - 
Net gain on sales of securities  (668)  (249)
Decrease in taxes receivable  2,320   3,599 
(Increase) decrease in interest receivable  (610)  453 
Decrease in interest payable  (5)  (40)
Increase in other assets  (4,844)  (3,400)
(Decrease) increase in accrued expenses and other liabilities  (297)  2,713 
Total adjustments  9,236   16,482 
Net cash provided by operating activities  41,039   48,540 
         
Cash flows from investing activities:        
         
Proceeds from sales and calls of securities available for sale  205,312   185,159 
Proceeds from calls and maturities of held to maturity securities  8,435   10,948 
Purchases of securities available for sale  (250,554)  (132,898)
Proceeds from maturities of securities available for sale  550   1,499 
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock  (99)  (252)
Net increase in loans  (101,292)  (132,594)
Proceeds from dispositions of other real estate owned  4,860   5,464 
Proceeds from dispositions of bank premises and equipment  674   107 
Purchases of bank premises and equipment  (1,732)  (2,517)
Net cash used in investing activities  (133,846)  (65,084)
         
Cash flows from financing activities:        
         
Net increase in deposits  67,860   64,552 
Net decrease in short-term borrowings  (12,022)  (4,711)
Proceeds from exercise of stock options and related tax benefits  760   99 
Proceeds from sale of treasury stock  1,958   2,021 
Purchases of treasury stock  (701)  (99)
Dividends paid  (18,776)  (18,694)
Net cash provided by financing activities  39,079   43,168 
Net increase in cash and cash equivalents  (53,728)  26,624 
Cash and cash equivalents at beginning of period  718,156   671,448 
Cash and cash equivalents at end of period $664,428   698,072 
         
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid during the year for:        
Interest paid $11,594   12,348 
Income taxes paid  16,944   14,859 
Other non cash items:        
Transfer of loans to other real estate owned  3,803   5,343 
Increase in dividends payable  23   16 
Change in unrealized gain on securities available for sale-gross of deferred taxes  11,807   5,433 
Change in deferred tax effect on unrealized gain on securities available for sale  (4,723)  (2,171)
Amortization of net actuarial loss and prior service credit on pension and postretirement plans  42   121 
Change in deferred tax effect of amortization of net actuarial loss and prior service credit  (17)  (48)
See accompanying notes to unaudited consolidated interim financial statements.
 
7
Index
(1) Financial Statement Presentation

The unaudited Consolidated Interim Financial Statements of TrustCo Bank Corp NY (the “Company” or “TrustCo”) include the accounts of the subsidiaries after elimination of all significant intercompany accounts and transactions.  Prior period amounts are reclassified when necessary to conform to the current period presentation.  The net income reported for the three months and ninesix months ended SeptemberJune 30, 20162017 is not necessarily indicative of the results that may be expected for the year ending December 31, 2016,2017, or any interim periods.  These financial statements consider events that occurred through the date of filing.

In the opinion of the management of the Company, the accompanying unaudited Consolidated Interim Financial Statements contain all recurring adjustments necessary to present fairly the financial position as of September 30, 2016, the results of operations and cash flows for the three months and nine months ended September 30, 2016 and 2015.fair presentation.  The accompanying Consolidated Interim Financial Statements should be read in conjunction with the Company’s year-end Consolidated Financial Statements, including notes thereto, which are included in the Company's 2015 Annual Report on Form 10-K for the year ended December 31, 2015.2016.  The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States.

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

(2) Earnings Per Share

The Company computes earnings per share in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share (“ASC 260”).   A reconciliation of the component parts of earnings per share for the three months and ninesix months ended SeptemberJune 30, 20162017 and 20152016 is as follows:

(in thousands, except per share data)  
For the three months ended
June 30:
    
For the six months ended
June 30:
 
 
For the three months ended
September 30:
  
For the nine months ended
September 30:
 
 2016  2015  2016  2015  2017  2016  2017  2016 
Net income $10,930   10,616  $31,803   32,058  $12,240   10,464  $23,187   20,875 
Weighted average common shares  95,603   95,149   95,486   95,051   96,003   95,487   95,944   95,426 
Stock Options  119   85   86   116   70   93   90   70 
Weighted average common shares including potential dilutive shares  95,722   95,234   95,572   95,167   96,073   95,580   96,034   95,496 
                                
Basic EPS $0.114   0.112  $0.333   0.337  $0.127   0.110  $0.242   0.219 
                                
Diluted EPS $0.114   0.111  $0.333   0.337  $0.127   0.109  $0.241   0.219 
 
8
Index
For the three months and ninesix months ended SeptemberJune 30, 2017, the weighted average number of antidilutive stock options excluded from diluted earnings per share was approximately 412 thousand.  For the three and six months ended June 30, 2016 the weighted average number of antidilutive stock options excluded from diluted earnings per share was approximately 1.6 million.  For the three and nine months ended September 30, 2015 the weighted average number of antidilutive stock options excluded from diluted earnings per share was approximately 1.4 million.  The stock options are antidilutive because the strike price is greater than the average fair value of the Company’s common stock for the periods presented.
8
Index

(3) Benefit Plans

The table below outlines the components of the Company's net periodic benefit recognized during the three months and ninesix months ended SeptemberJune 30, 20162017 and 20152016 for its pension and other postretirement benefit plans:

 For the three months ended September 30,  For the three months ended June 30, 
 Pension Benefits  Other Postretirement Benefits  Pension Benefits  Other Postretirement Benefits 
(dollars in thousands) 2016  2015  2016  2015  2017  2016  2017  2016 
                        
Service cost $15   15   32   47  $11   16   23   32 
Interest cost  343   337   61   72   322   349   54   61 
Expected return on plan assets  (669)  (684)  (180)  (182)  (686)  (681)  (190)  (180)
Amortization of net loss (gain)  46   77   (54)  (34)  10   5   (83)  (55)
Amortization of prior service cost  -   -   22   23   -   -   22   22 
Net periodic benefit $(265)  (255)  (119)  (74) $(343)  (311)  (174)  (120)
 
 For the nine months ended September 30,  For the six months ended June 30, 
 Pension Benefits  Other Postretirement Benefits  Pension Benefits  Other Postretirement Benefits 
(dollars in thousands) 2016  2015  2016  2015   2017   2016   2017   2016 
                            
Service cost $46   45   96   125  $22   31   51   64 
Interest cost  1,029   997   184   201   651   686   110   123 
Expected return on plan assets  (1,994)  (2,052)  (540)  (543)  (1,372)  (1,325)  (381)  (360)
Amortization of net loss (gain)  138   158   (163)  (105)  33   92   (169)  (109)
Amortization of prior service cost  -   -   67   68   -   -   45   45 
Net periodic benefit $(781)  (852)  (356)  (254) $(666)  (516)  (344)  (237)

The Company does not expect to make contributions to its pension and postretirement benefit plans in 2016.2017.  As of SeptemberJune 30, 2016,2017, no contributions have been made, however, this decision is reviewed each quarter and is subject to change based upon market conditions.

Since 2003, the Company has not subsidized retiree medical insurance premiums.  However, it continues to provide postretirement medical benefits to a limited number of current and retired executives in accordance with the terms of their employment contracts.
 
9
Index
(4) 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) September 30, 2016 
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
             
U.S. government sponsored enterprises $116,285   46   4   116,327 
State and political subdivisions  953   17   -   970 
Corporate bonds  41,127   -   102   41,025 
Mortgage backed securities and collateralized mortgage obligations - residential  396,647   4,072   144   400,575 
Small Business Administration-guaranteed participation securities  84,268   531   112   84,687 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,214   19   -   10,233 
Other  650   -   -   650 
Total debt securities  650,144   4,685   362   654,467 
Equity securities  35   -   -   35 
Total securities available for sale $650,179   4,685   362   654,502 

(dollars in thousands) December 31, 2015  June 30, 2017 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
                        
U.S. government sponsored enterprises $86,899   19   181   86,737  $129,939   71   1,624   128,386 
State and political subdivisions  1,270   20   -   1,290   523   13   -   536 
Corporate bonds  40,613   -   115   40,498 
Mortgage backed securities and collateralized mortgage obligations - residential  416,625   430   5,326   411,729   355,966   177   3,552   352,591 
Small Business Administration-guaranteed participation securities  92,620   -   2,204   90,416 
Small Business Administration- guaranteed participation securities  74,514   -   1,656   72,858 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,422   -   242   10,180   9,960   -   57   9,903 
Other  650   -   -   650   650   -   -   650 
Total debt securities  608,486   469   7,953   601,002   612,165   261   7,004   605,422 
Equity securities  35   -   -   35   35   -   -   35 
Total securities available for sale $608,521   469   7,953   601,037  $612,200   261   7,004   605,457 

(dollars in thousands) December 31, 2016 
    
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
             
U.S. government sponsored enterprises $119,887   -   2,621   117,266 
State and political subdivisions  873   13   -   886 
Mortgage backed securities and collateralized mortgage obligations - residential  378,068   123   5,883   372,308 
Corporate bonds  40,956   -   251   40,705 
Small Business Administration- guaranteed participation securities  81,026   -   2,527   78,499 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,130   -   119   10,011 
Other  650   -   -   650 
Total debt securities  631,590   136   11,401   620,325 
Equity securities  35   -   -   35 
Total securities available for sale $631,625   136   11,401   620,360 
 
10
Index
The following table distributes the debt securities included in the available for sale portfolio as of SeptemberJune 30, 2016,2017, based on the securities’ final maturity.   Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty.  Securities not due at a single maturity date are presented separately:

(dollars in thousands) 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Due in one year or less $1,406   1,408  $50,482   50,397 
Due in one year through five years  142,461   142,415   111,183   109,607 
Due after five years through ten years  15,139   15,140   10,060   10,066 
Due after ten years  9   9   -   - 
Mortgage backed securities and collateralized mortgage obligations - residential  396,647   400,575   355,966   352,591 
Small Business Administration-guaranteed participation securities  84,268   84,687 
Small Business Administration- guaranteed participation securities  74,514   72,858 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,214   10,233   9,960   9,903 
 $650,144   654,467  $612,165   605,422 

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

(dollars in thousands) September 30, 2016   June 30, 2017 
 
Less than
12 months
 
12 months
or more
 Total  
Less than
12 months
  
12 months
or more
  Total 
 
Fair
Value
 
Gross
Unreal.
Loss
 
Fair
Value
 
Gross
Unreal.
Loss
 
Fair
Value
 
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
 
U.S. government sponsored enterprises $14,996   4   -   -   14,996   4  $88,286   1,602   14,978   22   103,264   1,624 
Mortgage backed securities and collateralized mortgage obligations - residential  29,252   116   5,138   28   34,390   144   320,377   3,361   11,024   191   331,401   3,552 
Corporate bonds  41,025   102   -   -   41,025   102   40,498   115   -   -   40,498   115 
Small Business Administration -guaranteed participation securities  -   -   15,332   112   15,332   112 
Small Business Administration- guaranteed participation securities  60,095   1,200   12,763   456   72,858   1,656 
Mortgage backed securities and collateralized mortgage obligations - commercial  9,903   57   -   -   9,903   57 
                        
Total $85,273   222   20,470   140   105,743   362  $519,159   6,335   38,765   669   557,924   7,004 
 
11
Index
(dollars in thousands) December 31, 2015  December 31, 2016 
 
Less than
12 months
 
12 months
or more
 Total  
Less than
12 months
  
12 months
or more
  Total 
 
Fair
Value
 
Gross
Unreal.
Loss
 
Fair
Value
 
Gross
Unreal.
Loss
 
Fair
Value
 
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
  
Fair
Value
  
Gross
Unreal.
Loss
 
U.S. government sponsored enterprises $41,786   113   9,932   68   51,718   181  $102,266   2,621   -   -   102,266   2,621 
Mortgage backed securities and collateralized mortgage obligations - residential  187,605   2,147   167,549   3,179   355,153   5,326   359,622   5,766   4,713   117   364,335   5,883 
Small Business Administration-guaranteed participation securities  7,529   111   82,888   2,093   90,417   2,204 
Corporate bonds  40,705   251   -   -   40,705   251 
Small Business Administration- guaranteed participation securities  64,560   1,960   13,940   567   78,500   2,527 
Mortgage backed securities and collateralized mortgage obligations - commercial  5,553   130   4,627   112   10,180   242   10,011   119   -   -   10,011   119 
                        
Total $242,473   2,501   264,996   5,452   507,468   7,953  $577,164   10,717   18,653   684   595,817   11,401 

The proceeds from sales and calls of securities available for sale, gross realized gains and gross realized losses from sales and calls during the three months and ninesix months ended SeptemberJune 30, 20162017 and 20152016 are as follows:

(dollars in thousands) Three months ended September 30,  Three months ended June 30, 
 2016  2015  2017  2016 
            
Proceeds from sales $-   -  $-   44,829 
Proceeds from calls  70,762   106,555   52,799   40,808 
Gross realized gains  -   -   -   668 
Gross realized losses  -   -   -   - 

(dollars in thousands) Nine months ended September 30,  Six months ended June 30, 
 2016  2015  2017  2016 
            
Proceeds from sales $44,829   22,945  $-   44,829 
Proceeds from calls  160,483   162,214   73,569   89,721 
Gross realized gains  668   249   -   668 
Gross realized losses  -   -   -   - 

There were no sales of securities available for sale during the three and six months ended June 30, 2017. For the ninethree and six months ended SeptemberJune 30, 2016, income tax expense recognized on net gains on sales of securities available for sale was approximately $267 thousand.  For the nine months ended September 30, 2015, income tax expense recognized on net gains on sales of securities available for sale was approximately $100 thousand.  There were no sales of securities available for sale during the three months ended September 30, 2016 and 2015.
 
12
Index
(b) Held to maturity securities

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

(dollars in thousands) September 30, 2016  June 30, 2017 
 
Amortized
Cost
  
Gross
Unrecognized
Gains
  
Gross
Unrecognized
Losses
  
Fair
Value
 
 
Amortized
Cost
  
Gross
Unrecognized
Gains
  
Gross
Unrecognized
Losses
  
Fair
Value
             
Mortgage backed securities and collateralized mortgage obligations - residential $38,044   2,547   -   40,591  $31,211   1,520   -   32,731 
Corporate bonds  9,986   414   -   10,400   9,997   75   -   10,072 
Total held to maturity $48,030   2,961   -   50,991  $41,208   1,595   -   42,803 
(dollars in thousands) December 31, 2016 
  
Amortized
Cost
  
Gross
Unrecognized
Gains
  
Gross
Unrecognized
Losses
  
Fair
Value
 
                 
Mortgage backed securities and collateralized mortgage obligations - residential $35,500   1,736   -   37,236 
Corporate bonds  9,990   300   -   10,290 
Total held to maturity $45,490   2,036   -   47,526 

(dollars in thousands) December 31, 2015 
  
Amortized
Cost
  
Gross
Unrecognized
Gains
  
Gross
Unrecognized
Losses
  
Fair
Value
 
Mortgage backed securities and collateralized mortgage obligations - residential $46,490   2,308   -   48,798 
Corporate bonds  9,975   666   -   10,641 
Total held to maturity $56,465   2,974   -   59,439 
The following table distributes the debt securities included in the held to maturity portfolio as of SeptemberJune 30, 2016,2017, based on the securities’ final maturity.   Actual maturities may differ because of securities prepayments and the right of certain issuers to call or prepay their obligations without penalty.  Securities not due at a single maturity date are presented separately:

(dollars in thousands) 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Due in one year through five years $9,986   10,400 
Due in one year or less $9,997   10,072 
Mortgage backed securities and collateralized mortgage obligations - residential  38,044   40,591   31,211   32,731 
 $48,030   50,991  $41,208   42,803 

There were no held to maturity securities in an unrecognized loss position as of SeptemberJune 30, 20162017 or December 31, 2015.2016.

There were no sales or transfers of held to maturity securities during the three months and ninesix months ended SeptemberJune 30, 20162017 and 20152016.

13
Index
(c) Other-Than-Temporary Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio by type and applying the appropriate OTTI model. Investment securities classified as available for sale or held to maturity are evaluated for OTTI under FASB ASC Topic 320 “Investments,Investments – Debt and Equity Securities.”
Securities (“ASC 320”)13.
Index

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

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

As of SeptemberJune 30, 2016,2017, the Company’s security portfolioportfolios included certain securities which were in an unrealized loss position.  The declines in fair value are attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at SeptemberJune 30, 20162017.
 
14
Index
(5) Loans and Allowance for Loan Losses

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

 September 30, 2016  June 30, 2017 
(dollars in thousands) 
New York and
other states*
  Florida  Total  
New York and
other states*
  Florida  Total 
Commercial:                  
Commercial real estate $154,747   12,505   167,252  $149,245   11,099   160,344 
Other  22,543   -   22,543   22,342   349   22,691 
Real estate mortgage - 1 to 4 family:                        
First mortgages  2,138,783   636,753   2,775,536   2,208,078   714,360   2,922,438 
Home equity loans  59,512   10,828   70,340   64,387   12,481   76,868 
Home equity lines of credit  293,459   49,986   343,445   271,480   45,194   316,674 
Installment  6,849   1,666   8,515   7,061   1,397   8,458 
Total loans, net $2,675,893   711,738   3,387,631  $2,722,593   784,880   3,507,473 
Less: Allowance for loan losses          43,950           44,162 
Net loans         $3,343,681          $3,463,311 
 
 December 31, 2015  December 31, 2016 
(dollars in thousands) 
New York and
other states*
  Florida  Total  
New York and
other states*
  Florida  Total 
Commercial:                  
Commercial real estate $160,965   14,908   175,873  $151,366   12,243   163,609 
Other  27,449   93   27,542   27,539   46   27,585 
Real estate mortgage - 1 to 4 family:                        
First mortgages  2,093,957   566,715   2,660,672   2,158,904   665,183   2,824,087 
Home equity loans  52,251   8,250   60,501   60,892   10,754   71,646 
Home equity lines of credit  308,165   51,160   359,325   286,586   48,255   334,841 
Installment  8,000   1,391   9,391   7,048   1,770   8,818 
Total loans, net $2,650,787   642,517   3,293,304  $2,692,335   738,251   3,430,586 
Less: Allowance for loan losses          44,762           43,890 
Net loans         $3,248,542          $3,386,696 

*Includes New York, New Jersey, Vermont and Massachusetts

At SeptemberJune 30, 20162017 and December 31, 2015,2016, the Company had approximately $23.5$23.8 million and $26.6$24.8 million of real estate construction loans, respectively.  Of the $23.5$23.8 million in real estate construction loans at SeptemberJune 30, 2016,2017, approximately $14.0$14.6 million are secured by secondfirst mortgages to residential borrowers while approximately $9.5$9.2 million were to commercial borrowers for residential construction projects. Of the $26.6$24.8 million in real estate construction loans at December 31, 2015,2016, approximately $16.0$16.3 million are secured by secondfirst mortgages to residential borrowers while approximately $10.6$8.5 million were to commercial borrowers for residential construction projects. The vast majority of construction loans are in the Company’s New York market.

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

 September 30, 2016  June 30, 2017 
(dollars in thousands) 
New York and
other states
  Florida  Total  
New York and
other states
  Florida  Total 
Loans in non-accrual status:                  
Commercial:                  
Commercial real estate $2,366   -   2,366  $1,611   -   1,611 
Other  100   -   100 
Real estate mortgage - 1 to 4 family:                        
First mortgages  18,361   1,503   19,864   17,178   1,870   19,048 
Home equity loans  94   45   139   48   -   48 
Home equity lines of credit  3,223   296   3,519   3,413   242   3,655 
Installment  70   -   70   25   -   25 
Total non-accrual loans  24,114   1,844   25,958   22,375   2,112   24,487 
Restructured real estate mortgages - 1 to 4 family  44   -   44   41   -   41 
Total nonperforming loans $24,158   1,844   26,002  $22,416   2,112   24,528 

 December 31, 2015  December 31, 2016 
(dollars in thousands) 
New York and
other states
  Florida  Total  
New York and
other states
  Florida  Total 
Loans in non-accrual status:                     
Commercial:                     
Commercial real estate $3,024   -   3,024  $1,843   -   1,843 
Other  -   -   -   -   -   - 
Real estate mortgage - 1 to 4 family:                        
First mortgages  19,488   1,488   20,976   17,727   1,659   19,386 
Home equity loans  212   -   212   95   -   95 
Home equity lines of credit  3,573   329   3,902   3,376   270   3,646 
Installment  90   8   98   48   -   48 
Total non-accrual loans  26,387   1,825   28,212   23,089   1,929   25,018 
Restructured real estate mortgages - 1 to 4 family  48   -   48   42   -   42 
Total nonperforming loans $26,435   1,825   28,260  $23,131   1,929   25,060 

The Company transfers loans to other real estate owned, at fair value less cost to sell, in the period the Company obtains physical possession of the property (through legal title or through a deed in lieu). As of SeptemberJune 30, 20162017 and December 31, 2015,2016, other estate owned included $4$2.19 million and $5.4$3.5 million of residential foreclosed properties, respectively. In addition, non-accrual residential mortgage loans that are in the process of foreclosure had a recorded investment of $11.1 million and $12.8 million and $13.25 million as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.
 
16
Index
The following tables present the aging of the recorded investment in past due loans by loan class and by region as of SeptemberJune 30, 20162017 and December 31, 2015:2016:
 
New York and other states:
 September 30, 2016  June 30, 2017 
(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
  
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                                    
Commercial:                                    
Commercial real estate $301   -   2,323   2,624   152,123   154,747  $133   -   1,523   1,656   147,589   149,245 
Other  -   -   -   -   22,543   22,543   -   -   100   100   22,242   22,342 
Real estate mortgage - 1 to 4 family:                                                
First mortgages  3,415   2,243   10,629   16,287   2,122,496   2,138,783   3,997   2,101   9,106   15,204   2,192,874   2,208,078 
Home equity loans  71   30   42   143   59,369   59,512   107   40   18   165   64,222   64,387 
Home equity lines of credit  672   182   1,476   2,330   291,129   293,459   554   600   2,076   3,230   268,250   271,480 
Installment  18   10   48   76   6,773   6,849   45   13   22   80   6,981   7,061 
                        
Total $4,477   2,465   14,518   21,460   2,654,433   2,675,893  $4,836   2,754   12,845   20,435   2,702,158   2,722,593 
Florida:

(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                   
Commercial:                  
Commercial real estate $-   -   -   -   12,505   12,505 
Other  -   -   -   -   -   - 
Real estate mortgage - 1 to 4 family:                        
First mortgages  608   -   1,085   1,693   635,060   636,753 
Home equity loans  -   -   -   -   10,828   10,828 
Home equity lines of credit  50   -   180   230   49,756   49,986 
Installment  25   1   -   26   1,640   1,666 
Total $683   1   1,265   1,949   709,789   711,738 
(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                   
Commercial:                  
Commercial real estate $-   -   -   -   11,099   11,099 
Other  -   -   -   -   349   349 
Real estate mortgage - 1 to 4 family:                        
First mortgages  793   72   928   1,793   712,567   714,360 
Home equity loans  -   53   -   53   12,428   12,481 
Home equity lines of credit  50   -   -   50   45,144   45,194 
Installment  7   5   -   12   1,385   1,397 
                         
Total $850   130   928   1,908   782,972   784,880 
 
Total:

(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
  
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                                          
Commercial:                                          
Commercial real estate $301   -   2,323   2,624   164,628   167,252  $133   -   1,523   1,656   158,688   160,344 
Other  -   -   -   -   22,543   22,543   -   -   100   100   22,591   22,691 
Real estate mortgage - 1 to 4 family:                                                
First mortgages  4,023   2,243   11,714   17,980   2,757,556   2,775,536   4,790   2,173   10,034   16,997   2,905,441   2,922,438 
Home equity loans  71   30   42   143   70,197   70,340   107   93   18   218   76,650   76,868 
Home equity lines of credit  722   182   1,656   2,560   340,885   343,445   604   600   2,076   3,280   313,394   316,674 
Installment  43   11   48   102   8,413   8,515   52   18   22   92   8,366   8,458 
                        
Total $5,160   2,466   15,783   23,409   3,364,222   3,387,631  $5,686   2,884   13,773   22,343   3,485,130   3,507,473 
 
17
New York and other states:
  December 31, 2015 
(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                   
Commercial:                  
Commercial real estate $-   -   2,340   2,340   158,625   160,965 
Other  -   -   -   -   27,449   27,449 
Real estate mortgage - 1 to 4 family:                        
First mortgages  4,321   2,037   12,529   18,887   2,075,070   2,093,957 
Home equity loans  43   -   149   192   52,059   52,251 
Home equity lines of credit  572   204   1,418   2,194   305,971   308,165 
Installment  34   19   88   141   7,859   8,000 
Total $4,970   2,260   16,524   23,754   2,627,033   2,650,787 
  December 31, 2016 
(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                   
Commercial:                  
Commercial real estate $50   43   1,706   1,799   149,567   151,366 
Other  -   -   -   -   27,539   27,539 
Real estate mortgage - 1 to 4 family:                        
First mortgages  6,379   2,924   9,643   18,946   2,139,958   2,158,904 
Home equity loans  50   3   74   127   60,765   60,892 
Home equity lines of credit  685   111   1,839   2,635   283,951   286,586 
Installment  34   32   15   81   6,967   7,048 
                         
Total $7,198   3,113   13,277   23,588   2,668,747   2,692,335 
 
Florida:
 
(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
  
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                                    
Commercial:                                    
Commercial real estate $10   -   -   10   14,898   14,908  $-   -   -   -   12,243   12,243 
Other  -   -   -   -   93   93   -   -   -   -   46   46 
Real estate mortgage - 1 to 4 family:                                                
First mortgages  665   271   851   1,787   564,928   566,715   1,942   69   1,255   3,266   661,917   665,183 
Home equity loans  -   -   -   -   8,250   8,250   19   -   -   19   10,735   10,754 
Home equity lines of credit  159   -   240   399   50,761   51,160   -   -   156   156   48,099   48,255 
Installment  1   21   -   22   1,369   1,391   30   6   -   36   1,734   1,770 
                        
Total $835   292   1,091   2,218   640,299   642,517  $1,991   75   1,411   3,477   734,774   738,251 
Total:
(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                   
Commercial:                  
Commercial real estate $50   43   1,706   1,799   161,810   163,609 
Other  -   -   -   -   27,585   27,585 
Real estate mortgage - 1 to 4 family:                        
First mortgages  8,321   2,993   10,898   22,212   2,801,875   2,824,087 
Home equity loans  69   3   74   146   71,500   71,646 
Home equity lines of credit  685   111   1,995   2,791   332,050   334,841 
Installment  64   38   15   117   8,701   8,818 
                         
Total $9,189   3,188   14,688   27,065   3,403,521   3,430,586 
 
Total:18
(dollars in thousands) 
30-59
Days
Past Due
  
60-89
Days
Past Due
  
90 +
Days
Past Due
  
Total
30+ days
Past Due
  Current  
Total
Loans
 
                   
Commercial:                  
Commercial real estate $10   -   2,340   2,350   173,523   175,873 
Other  -   -   -   -   27,542   27,542 
Real estate mortgage - 1 to 4 family:                        
First mortgages  4,986   2,308   13,380   20,674   2,639,998   2,660,672 
Home equity loans  43   -   149   192   60,309   60,501 
Home equity lines of credit  731   204   1,658   2,593   356,732   359,325 
Installment  35   40   88   163   9,228   9,391 
Total $5,805   2,552   17,615   25,972   3,267,332   3,293,304 
At SeptemberJune 30, 20162017 and December 31, 2015,2016, there were no loans that were 90 days past due and still accruing interest. As a result, non-accrual loans include all loans 90 days or more past due as well as certain loans less than 90 days past due that were placed on non-accrual status for reasons other than delinquent status. There are no commitments to extend further credit on non-accrual or restructured loans.
Activity in the allowance for loan losses by portfolio segment is summarized as follows:

(dollars in thousands) For the three months ended September 30, 2016  For the three months ended June 30, 2017 
 Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total  Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total 
Balance at beginning of period $5,046   38,589   429   44,064  $4,810   38,581   657   44,048 
Loans charged off:                                
New York and other states*  356   549   57   962   -   522   40   562 
Florida  -   2   3   5   -   52   13   65 
Total loan chargeoffs  356   551   60   967   -   574   53   627 
                                
Recoveries of loans previously charged off:                                
New York and other states*  3   78   20   101   -   188   3   191 
Florida  -   2   -   2   -   -   -   - 
Total recoveries  3   80   20   103   -   188   3   191 
Net loans charged off  353   471   40   864   -   386   50   436 
Provision for loan losses  505   (51)  296   750   (214)  676   88   550 
Balance at end of period $5,198   38,067   685   43,950  $4,596   38,871   695   44,162 

(dollars in thousands) For the three months ended September 30, 2015  For the three months ended June 30, 2016 
 Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total  Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total 
Balance at beginning of period $4,022   41,087   462   45,571  $4,919   39,017   462   44,398 
Loans charged off:                                
New York and other states*  3   1,300   50   1,353   68   1,090   92   1,250 
Florida  -   35   4   39   -   17   1   18 
Total loan chargeoffs  3   1,335   54   1,392   68   1,107   93   1,268 
                                
Recoveries of loans previously charged off:                                
New York and other states*  -   141   24   165   1   117   15   133 
Florida  3   2   -   5   -   1   -   1 
Total recoveries  3   143   24   170   1   118   15   134 
Net loans charged off  -   1,192   30   1,222   67   989   78   1,134 
Provision (credit) for loan losses  34   752   14   800   194   561   45   800 
Balance at end of period $4,056   40,647   446   45,149  $5,046   38,589   429   44,064 
 
(dollars in thousands) For the nine months ended September 30, 2016  For the six months ended June 30, 2017 
 Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total  Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total 
Balance at beginning of period $4,491   39,753   518   44,762  $4,929   38,231   730   43,890 
Loans charged off:                                
New York and other states*  688   2,528   230   3,446   72   952   81   1,105 
Florida  -   103   20   123   -   136   15   151 
Total loan chargeoffs  688   2,631   250   3,569   72   1,088   96   1,256 
                                
Recoveries of loans previously charged off:                                
New York and other states*  44   313   46   403   8   357   13   378 
Florida  -   4   -   4   -   -   -   - 
Total recoveries  44   317   46   407   8   357   13   378 
Net loans charged off  644   2,314   204   3,162   64   731   83   878 
Provision for loan losses  1,351   628   371   2,350   (269)  1,371   48   1,150 
Balance at end of period $5,198   38,067   685   43,950  $4,596   38,871   695   44,162 
(dollars in thousands) For the six months ended June 30, 2016 
  Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total 
Balance at beginning of period $4,491   39,753   518   44,762 
Loans charged off:                
New York and other states*  332   1,979   173   2,484 
Florida  -   101   17   118 
Total loan chargeoffs  332   2,080   190   2,602 
                 
Recoveries of loans previously charged off:                
New York and other states*  41   235   26   302 
Florida  -   2   -   2 
Total recoveries  41   237   26   304 
Net loans charged off  291   1,843   164   2,298 
Provision for loan losses  846   679   75   1,600 
Balance at end of period $5,046   38,589   429   44,064 

(dollars in thousands) For the nine months ended September 30, 2015 
  Commercial  
Real Estate
Mortgage-
1 to 4 Family
  Installment  Total 
Balance at beginning of period $4,071   42,088   168   46,327 
Loans charged off:                
New York and other states*  103   3,480   126   3,709 
Florida  -   313   4   317 
Total loan chargeoffs  103   3,793   130   4,026 
                 
Recoveries of loans previously charged off:                
New York and other states*  16   384   39   439 
Florida  5   4   -   9 
Total recoveries  21   388   39   448 
Net loans charged off  82   3,405   91   3,578 
Provision for loan losses  67   1,964   369   2,400 
Balance at end of period $4,056   40,647   446   45,149 
The Company has identified non-accrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring (“TDR”), as impaired loans. A loan is considered impaired when it is probable that the borrower will be unable to repay the loan according to the original contractual terms of the loan agreement or the loan is restructured as a TDR.
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of SeptemberJune 30, 20162017 and December 31, 2015:2016:

  June 30, 2017 
(dollars in thousands) Commercial Loans  
1-to-4 Family
Residential Real Estate
  Installment Loans  Total 
Allowance for loan losses:            
Ending allowance balance attributable to loans:            
Individually evaluated for impairment $-   -   -   - 
Collectively evaluated for impairment  4,596   38,871   695   44,162 
                 
Total ending allowance balance $4,596   38,871   695   44,162 
                 
Loans:                
Individually evaluated for impairment $4,008   21,782   -   25,790 
Collectively evaluated for impairment  179,027   3,294,198   8,458   3,481,683 
                 
Total ending loans balance $183,035   3,315,980   8,458   3,507,473 
 
  September 30, 2016 
(dollars in thousands) Commercial Loans  
1-to-4 Family
Residential Real Estate
  Installment Loans  Total 
Allowance for loan losses:            
Ending allowance balance attributable to loans:            
Individually evaluated for impairment $-   -   -   - 
Collectively evaluated for impairment  5,198   38,067   685   43,950 
                 
Total ending allowance balance $5,198   38,067   685   43,950 
                 
                 
Loans:                
Individually evaluated for impairment $2,638   22,190   -   24,828 
Collectively evaluated for impairment  187,157   3,167,131   8,515   3,362,803 
                 
Total ending loans balance $189,795   3,189,321   8,515   3,387,631 
  December 31, 2016 
(dollars in thousands) Commercial Loans  
1-to-4 Family
Residential Real Estate
  Installment Loans  Total 
Allowance for loan losses:            
Ending allowance balance attributable to loans:            
Individually evaluated for impairment $-   -   -   - 
Collectively evaluated for impairment  4,929   38,231   730   43,890 
                 
Total ending allowance balance $4,929   38,231   730   43,890 
                 
Loans:                
Individually evaluated for impairment $2,418   21,607   -   24,025 
Collectively evaluated for impairment  188,776   3,208,967   8,818   3,406,561 
                 
Total ending loans balance $191,194   3,230,574   8,818   3,430,586 

  December 31, 2015 
(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  4,491   39,753   518   44,762 
                 
Total ending allowance balance $4,491   39,753   518   44,762 
                 
                 
Loans:                
Individually evaluated for impairment $3,306   22,575   -   25,881 
Collectively evaluated for impairment  200,109   3,057,923   9,391   3,267,423 
                 
Total ending loans balance $203,415   3,080,498   9,391   3,293,304 
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 SeptemberJune 30, 20162017 and December 31, 20152016 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.
 
The following tables present impaired loans by loan class as of SeptemberJune 30, 20162017 and December 31, 2015:2016:

New York and other states:
   September 30, 2016 
(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
 
             
Commercial:            
Commercial real estate $2,638   4,016   -   2,764 
Other  -   -   -   - 
Real estate mortgage - 1 to 4 family:                
First mortgages  17,391   18,135   -   16,641 
Home equity loans  276   312   -   248 
Home equity lines of credit  1,945   2,108   -   1,800 
                 
Total $22,250   24,571   -   21,453 
  June 30, 2017 
(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
 
             
Commercial:            
Commercial real estate $3,908   4,955   -   2,883 
Other  100   100   -   100 
Real estate mortgage - 1 to 4 family:                
First mortgages  16,350   17,019   -   16,939 
Home equity loans  265   301   -   270 
Home equity lines of credit  2,042   2,226   -   2,060 
                 
Total $22,665   24,601   -   22,251 
 
Florida:
 
(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
 
                        
Commercial:                        
Commercial real estate $-   -   -   -  $-   -   -   - 
Other  -   -   -   -   -   -   -   - 
Real estate mortgage - 1 to 4 family:                              
First mortgages  1,913   2,004   -   1,742   2,446   2,538   -   2,177 
Home equity loans  96   96   -   76   92   92   -   93 
Home equity lines of credit  569   641   -   600   587   659   -   579 
                                
Total $2,578   2,741   -   2,418  $3,125   3,289   -   2,849 
 
Total:
 
(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
 
                        
Commercial:                        
Commercial real estate $2,638   4,016   -   2,764  $3,908   4,955   -   2,883 
Other  -   -   -   -   100   100   -   100 
Real estate mortgage - 1 to 4 family:                              
First mortgages  19,304   20,139   -   18,383   18,796   19,557   -   19,116 
Home equity loans  372   408   -   324   357   393   -   363 
Home equity lines of credit  2,514   2,749   -   2,400   2,629   2,885   -   2,639 
                                
Total $24,828   27,312   -   23,871  $25,790   27,890   -   25,100 
 
New York and other states:
 December 31, 2015  December 31, 2016 
(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
    
Average
Recorded
Investment
    
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
 
                        
Commercial:                        
Commercial real estate $3,306   3,996   -   3,608  $2,418   3,470   -   2,214 
Other  -   -   -   -   -   -   -   - 
Real estate mortgage - 1 to 4 family:                              
First mortgages  17,460   18,602   -   18,127   16,675   17,439   -   15,665 
Home equity loans  359   417   -   382   269   305   -   251 
Home equity lines of credit  2,306   2,569   -   2,238   1,999   2,160   -   1,806 
                                
Total $23,431   25,584   -   24,355  $21,361   23,374   -   19,936 
Florida:

(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
 
                        
Commercial:                        
Commercial real estate $-   -   -   -  $-   -   -   - 
Other  -   -   -   -   -   -   -   - 
Real estate mortgage - 1 to 4 family:                              
First mortgages  1,760   1,852   -   1,489   2,009   2,100   -   1,800 
Home equity loans  53   53   -   54   94   94   -   81 
Home equity lines of credit  637   720   -   654   561   633   -   591 
                                
Total $2,450   2,625   -   2,197  $2,664   2,827   -   2,472 
 
Total:
 
(dollars in thousands) 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
 
                        
Commercial:                        
Commercial real estate $3,306   3,996   -   3,608  $2,418   3,470   -   2,214 
Other  -   -   -   -   -   -   -   - 
Real estate mortgage - 1 to 4 family:                              
First mortgages  19,220   20,454   -   19,616   18,684   19,539   -   17,465 
Home equity loans  412   470   -   436   363   399   -   332 
Home equity lines of credit  2,943   3,289   -   2,892   2,560   2,793   -   2,397 
                                
Total $25,881   28,209   -   26,552  $24,025   26,201   -   22,408 
 
The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as impaired. Interest income recognized on impaired loans was not material during the three months and ninesix months ended SeptemberJune 30, 20162017 and 20152016.
As of SeptemberJune 30, 20162017 and December 31, 20152016 impaired loans included approximately $14.0 million and $11.45 million and $10.6 million of 1 to 4 family residential real estate loans in accruing status that were identified as TDR’s in accordance with regulatory guidance related to Chapter 7 bankruptcy loans, respectively.

Management evaluates impairment on impaired loans on a quarterly basis. If, during this evaluation, impairment of the loan is identified, a charge off is taken at that time. As a result, as of SeptemberJune 30, 20162017 and December 31, 2015,2016, based upon management’s evaluation and due to the sufficiency of chargeoffs taken, none of the allowance for loan losses has been allocated to a specific impaired loan(s).

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

  Three months ended 9/30/2016  Three months ended 9/30/2015 
New York and other states*: 
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
(dollars in thousands)
                   
Real estate mortgage - 1 to 4 family:                  
First mortgages  7  $655  $655   8  $1,055  $1,055 
Home equity loans  1   44   44   -   -   - 
Home equity lines of credit  2   183   183   3   115   115 
                         
Total  10  $882  $882   11  $1,170  $1,170 

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
 
                   Three months ended 6/30/2017  Three months ended 6/30/2016 
New York and other states*:
(dollars in thousands)
 
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
                  
Commercial:                  
Commercial real estate  3  $747   747   -  $-   - 
Real estate mortgage - 1 to 4 family:
                                          
First mortgages  
-
  
$
-
  
$
-
   
4
  
$
524
  
$
524
   7  $1,098  $1,098   10  $753  $753 
Home equity loans  -   -   -   -   -   - 
Home equity lines of credit  
-
   
-
   
-
   
2
   
57
   
57
   1   3   3   5   66   66 
                                                
Total  
-
  
$
-
  
$
-
   
6
  
$
581
  
$
581
   11  $1,848  $1,848   15  $819  $819 
 
Florida:
(dollars in thousands)
 
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
 Nine months ended 9/30/2016  Nine months ended 9/30/2015                   
New York and other states*: 
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
(dollars in thousands)
                  
Commercial:                  
Commercial real estate  -  $-   -   -  $-   - 
Real estate mortgage - 1 to 4 family:                                          
First mortgages  27  $2,383   2,383   28  $4,042   4,042   4  $387  $387   1  $298  $298 
Home equity loans  1   44   44   1   139   139   -   -   -   1   46   46 
Home equity lines of credit  10   316   316   5   159   159   -   -   -   1   6   6 
                                                
Total  38  $2,743  $2,743   34  $4,340  $4,340   4  $387  $387   3  $350  $350 

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
 
                   
Real estate mortgage - 1 to 4 family:                  
First mortgages  2  $408  $408   5  $681  $681 
Home equity loans  1   45   45   -   -   - 
Home equity lines of credit  1   6   6   4   107   107 
                         
Total  4  $459  $459   9  $788  $788 
  Six months ended 6/30/2017  Six months ended 6/30/2016 
New York and other states*:
 
 
(dollars in thousands)
 
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
                   
Commercial:                  
Commercial real estate  3  $747  $747   -  $-  $- 
Real estate mortgage - 1 to 4 family:                        
First mortgages  18  $3,045   3,045   22  $1,807   1,807 
Home equity loans  1   13   13   -   -   - 
Home equity lines of credit  5   161   161   9   157   157 
                         
Total  27  $3,966  $3,966   31  $1,964  $1,964 
Florida:
 
 
(dollars in thousands)
 
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Contracts
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
                   
Commercial:                  
Commercial real estate  -  $-   -   -  $-   - 
Real estate mortgage - 1 to 4 family:                        
First mortgages  5  $467  $467   3  $525  $525 
Home equity loans  -   -   -   1   46   46 
Home equity lines of credit  1   70   70   1   6   6 
                         
Total  6  $537  $537   5  $577  $577 

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

In situations where the BankCompany considers a loan modification, management determines whether the borrower is experiencing financial difficulty by performing an evaluation of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s underwriting policy.
Generally, the modification of the terms of loans was the result of the borrower filing for bankruptcy protection. Chapter 13 bankruptcies generally include the deferral of all past due amounts for a period of generally 60 months in accordance with the bankruptcy court order. In the case of Chapter 7 bankruptcies, as previously noted, even though there is no modification of terms, the borrowers’ debt to the Company was discharged and they did not reaffirm the debt.

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

The following table presents, by class, TDR’s that defaulted during the three months and ninesix months ended SeptemberJune 30, 20162017 and 20152016 which had been modified within the last twelve months:

 Three months ended 9/30/2016  Three months ended 9/30/2015  Three months ended 6/30/2017  Three months ended 6/30/2016 
New York and other states*:
(dollars in thousands)
 
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
 
                        
Real estate mortgage - 1 to 4 family:                        
First mortgages  -  $-   1  $121   -  $-   1  $107 
Home equity lines of credit  1   3   -   - 
                                
Total  -  $-   1  $121   1  $3   1  $107 

Florida:
(dollars in thousands)
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Real estate mortgage - 1 to 4 family:
First mortgages-$--$-
Total-$--$-
(dollars in thousands) 
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
 
             
Real estate mortgage - 1 to 4 family:            
First mortgages  -  $-   1  $46 
 
                
Total  -  $-   1  $46 

 Nine months ended 9/30/2016  Nine months ended 9/30/2015  Six months ended 6/30/2017  Six months ended 6/30/2016 
New York and other states*:
(dollars in thousands)
 
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
 
                        
Real estate mortgage - 1 to 4 family:                        
First mortgages  1  $107   1  $121   -  $-   3  $268 
Home equity loans  -   -   1   48 
Home equity lines of credit  1   3   -   - 
                                
Total  1  $107   1  $121   1  $3   4  $316 

Florida:
Florida:            
(dollars in thousands) 
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
  
Number of
Contracts
  
Recorded
Investment
 
                        
Real estate mortgage - 1 to 4 family:                        
First mortgages  1  $77   -  $- 
Home equity lines of credit  1  $46   1  $50   1  $70   1  $46 
                                
Total  1  $46   1  $50   2  $147   1  $46 
 
The TDR’s that subsequently defaulted described above did not have a material impact on the allowance for loan losses.
The Company categorizes non-homogenous loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. On at least an annual basis, the Company’s loan grading process analyzes non-homogeneous loans, such as commercial and commercial real estate loans, individually by grading the loans based on credit risk.  The loan grades assigned to all loan types are tested by the Company’s internal loan review department in accordance with the Company’s internal loan review policy.

The Company uses the following definitions for classified loans:

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “pass” rated loans.
As of SeptemberJune 30, 20162017 and December 31, 2015,2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 September 30, 2016  June 30, 2017 
New York and other states:                  
                  
(dollars in thousands)                  
 Pass  Classified  Total   Pass   Classified  Total
Commercial:                  
Commercial real estate $143,529   11,218   154,747  $139,103   10,142   149,245 
Other  21,372   1,171   22,543   20,623   1,719   22,342 
                        
 $164,901   12,389   177,290  $159,726   11,861   171,587 
 
Florida:
Florida:         
          
(dollars in thousands)         
  Pass  Classified  Total 
Commercial:         
Commercial real estate $11,099   -   11,099 
Other  349   -   349 
             
  $11,448   -   11,448 
 
(dollars in thousands)         
  Pass  Classified  Total 
Commercial:         
Commercial real estate $12,505   -   12,505 
Other  -   -   - 
             
  $12,505   -   12,505 
Total:
Total:         
         
(dollars in thousands)                  
 Pass  Classified  Total  Pass  Classified  Total 
Commercial:                  
Commercial real estate $156,034   11,218   167,252  $150,202   10,142   160,344 
Other  21,372   1,171   22,543   20,972   1,719   22,691 
                        
 $177,406   12,389   189,795  $171,174   11,861   183,035 
 
 December 31, 2015  December 31, 2016 
New York and other states:                  
                  
(dollars in thousands)                  
 Pass  Classified  Total  Pass  Classified  Total 
Commercial:                  
Commercial real estate $145,335   15,630   160,965  $136,676   14,690   151,366 
Other  26,715   734   27,449   25,442   2,097   27,539 
                        
 $172,050   16,364   188,414  $162,118   16,787   178,905 
            
Florida:            
            
(dollars in thousands)            
 Pass  Classified  Total 
Commercial:            
Commercial real estate $12,243   -   12,243 
Other  46   -   46 
            
 $12,289   -   12,289 
            
Total:            
            
(dollars in thousands)            
 Pass  Classified  Total 
Commercial:            
Commercial real estate $148,919   14,690   163,609 
Other  25,488   2,097   27,585 
            
 $174,407   16,787   191,194 
Florida:
(dollars in thousands)         
  Pass  Classified  Total 
Commercial:         
Commercial real estate $14,908   -   14,908 
Other  93   -   93 
             
  $15,001   -   15,001 
Total:
(dollars in thousands)         
  Pass  Classified  Total 
Commercial:         
Commercial real estate $160,243   15,630   175,873 
Other  26,808   734   27,542 
             
  $187,051   16,364   203,415 

Included in classified loans in the above tables are impairednon-accrual loans of $2.4$1.7 million and $3.0$1.8 million at SeptemberJune 30, 20162017 and December 31, 2015, respectively.2016, respectively.

For homogeneous loan pools, such as residential mortgages, home equity lines of credit, and installment loans, the Company uses payment status to identify the credit risk in these loan portfolios. Payment status is reviewed on a daily basis by the Bank’sCompany’s collection area and on a monthly basis with respect to determining the adequacy of the allowance for loan losses. The payment status of these homogeneous pools as of SeptemberJune 30, 20162017 and December 31, 20152016 is included in the aging of the recorded investment of the past due loans table. In addition, the total nonperforming portion of these homogeneous loan pools as of SeptemberJune 30, 20162017 and December 31, 20152016 is presented in the non-accrual loans table.

(6) Fair Value of Financial Instruments

FASB Topic 820, Fair value measurements (ASC 820)Value Measurement (“ASC 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:
 
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.

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

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

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

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

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

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

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

 
Fair Value Measurements at
September 30, 2016 Using:
  
Fair Value Measurements at
June 30, 2017 Using:
 
               
 
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
(dollars in thousands)                        
Securities available for sale:                        
U.S. government sponsored enterprises $116,327  $-  $116,327  $-  $128,386  $-  $128,386  $- 
State and political subdivisions  970   -   970   -   536   -   536   - 
Corporate bonds  41,025   -   41,025   -   40,498   -   40,498   - 
Mortgage backed securities and collateralized mortgage obligations - residential  400,575   -   400,575   -   352,591   -   352,591   - 
Small Business Administration- guaranteed participation securities  84,687   -   84,687   -   72,858   -   72,858   - 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,233   -   10,233   -   9,903   -   9,903   - 
Other securities  685   35   650   -   685   35   650   - 
Total securities available for sale $654,502  $35  $654,467  $-  $605,457  $35  $605,422  $- 
 
 
Fair Value Measurements at
December 31, 2015 Using:
  
Fair Value Measurements at
December 31, 2016 Using:
 
                   
 
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
(dollars in thousands)                            
Securities available for sale:                            
U.S. government sponsored enterprises $86,737  $-  $86,737  $-  $117,266  $-  $117,266  $- 
State and political subdivisions  1,290   -   1,290   -   886   -   886   - 
Mortgage backed securities and collateralized mortgage obligations - residential  411,729   -   411,729   -   372,308   -   372,308   - 
Corporate bonds  40,705   -   40,705   - 
Small Business Administration- guaranteed participation securities  90,416   -   90,416   -   78,499   -   78,499   - 
Mortgage backed securities and collateralized mortgage obligations - commercial  10,180   -   10,180   -   10,011   -   10,011   - 
Other securities  685   35   650   -   685   35   650   - 
Total securities available for sale $601,037  $35  $601,002  $-  $620,360  $35  $620,325  $- 
 
There were no transfers between Level 1 and Level 2 during the three months and ninesix months ended SeptemberJune 30, 20162017 and 20152016.

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

  
Fair Value Measurements at
June 30, 2017 Using:
       
                   
  
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 Valuation technique Unobservable inputs Range (Weighted Average) 
(dollars in thousands)                  
                   
Other real estate owned $3,585  $-  $-  $3,585 Sales comparison approach Adjustments for differences between comparable sales  2% - 10% (4%)
Impaired loans:                       
                        
Real estate mortgage - 1 to 4 family  466   -   -   466 Sales comparison approach Adjustments for differences between comparable sales  2% - 5% (4%)
 
 
Fair Value Measurements at
September 30, 2016 Using:
        
Fair Value Measurements at
December 31, 2016 Using:
       
                           
 
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Valuation technique  Unobservable inputs Range (Weighted Average)  
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 Valuation technique Unobservable inputs Range (Weighted Average) 
(dollars in thousands)                                    
                                    
Other real estate owned $4,768  $-  $-  $4,768 Sales comparison approach Adjustments for differences between comparable sales  1% - 12% (7%) $4,268  $-  $-  $4,268 Sales comparison approach Adjustments for differences between comparable sales  1% - 14% (7%) 
Impaired loans:                                              
Commercial real estate  1,290   -   -   1,290 Sales comparison approach Adjustments for differences between comparable sales  0% - 35% (26%)   1,250   -   -   1,250 Sales comparison approach Adjustments for differences between comparable sales  7% - 35% (23%) 
                                              
Real estate mortgage - 1 to 4 family  107   -   -   107 Sales comparison approach Adjustments for differences between comparable sales  1% - 8% (5%)   458   -   -   458 Sales comparison approach Adjustments for differences between comparable sales  5% - 14% (10%) 
  
Fair Value Measurements at
December 31, 2015 Using:
       
          
   
Carrying
Value
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Valuation technique  Unobservable inputs Range (Weighted Average) 
(dollars in thousands)                  
                   
Other real estate owned $6,455  $-  $-  $6,455 Sales comparison approach Adjustments for differences between comparable sales  1% - 10% (4%)
Impaired loans:                       
Commercial real estate  878   -   -   878 Sales comparison approach Adjustments for differences between comparable sales  3% - 22% (11%) 
                        
Real estate mortgage - 1 to 4 family  3,109   -   -   3,109 Sales comparison approach Adjustments for differences between comparable sales  0% - 9% (4%) 

Other real estate owned, that is carried at fair value less costs to sell was approximately $4$3.86 million at SeptemberJune 30, 20162017 and consisted of approximately $700$707 thousand of commercial real estate and $4.1$2.9 million of residential real estate properties. Valuation charges of $305$174 thousand and $911$362 thousand are included in earnings for the three months and ninesix months ended SeptemberJune 30, 2016,2017, respectively.

Of the total impaired loans of $24.8$25.8 million at SeptemberJune 30, 2016, $1.4 million2017, $466 thousand are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at SeptemberJune 30, 2016.2017.  Gross charge offs related to commercial impaired loans included in the table above were $406 thousand for the three months and nine months ended September 30, 2016 while gross charge offs related to residential impaired loans included in the table above amounted to $0were $10 thousand and $4$26 thousand for the three months and ninesix months ended SeptemberJune 30, 2016, respectively.2017, respectively.

Other real estate owned, that is carried at fair value less costs to sell, approximates $6.4was approximately $4.3 million at December 31, 20152016 and consisted of $1.0 million$756 thousand of commercial real estate and $5.4$3.5 million of residential real estate properties. A valuation charge of $1.1$1.2 million is included in earnings for the year ended December 31, 2015.2016.

Of the total impaired loans of $25.9$25.8 million at December 31, 2015, $4.02016, $1.7 million are collateral dependent and are carried at fair value measured on a non-recurring basis. Due to the sufficiency of charge offs taken on these loans and the adequacy of the underlying collateral, there were no specific valuation allowances for these loans at December 31, 2015.2016. Gross charge offs related to commercial impaired loans included in the table above were $641$482 thousand for the year ended December 31, 2015,2016, while gross charge offs related to residential impaired loans included in the table above amounted to $648$226 thousand.
 
In accordance with FASB Topic 825, Financial Instruments (“ASC 825,825”), the carrying amounts and estimated fair values of financial instruments, at SeptemberJune 30, 20162017 and December 31, 20152016 are as follows:
(dollars in thousands) Carrying  
Fair Value Measurements at
September 30, 2016 Using:
 
 Value  Level 1  Level 2  Level 3  Total 
Financial assets:               
Cash and cash equivalents $664,428   664,428   -   -   664,428 
Securities available for sale  654,502   35   654,467   -   654,502 
Held to maturity securities  48,030   -   50,991   -   50,991 
Federal Reserve Bank and Federal                    
Home Loan Bank stock  9,579   N/A   N/A   N/A   N/A 
Net loans  3,343,681   -   -   3,414,401   3,414,401 
Accrued interest receivable  10,872   25   2,695   8,152   10,872 
Financial liabilities:                    
Demand deposits  380,090   380,090   -   -   380,090 
Interest bearing deposits  3,788,148   2,628,949   1,160,918   -   3,789,867 
Short-term borrowings  179,204   -   179,204   -   179,204 
Accrued interest payable  496   72   424   -   496 

(dollars in thousands) Carrying  
Fair Value Measurements at
December 31, 2015 Using:
    Fair Value Measurements at 
 Carrying  June 30, 2017 Using: 
 Value  Level 1  Level 2  Level 3  Total  Value  Level 1  Level 2  Level 3  Total 
Financial assets:                              
Cash and cash equivalents $718,156   718,156   -   -   718,156  $707,143   707,143   -   -   707,143 
Securities available for sale  601,037   35   601,002   -   601,037   605,457   35   605,422   -   605,457 
Held to maturity securities  56,465   -   59,439   -   59,439   41,208   -   42,803   -   42,803 
Federal Reserve Bank and Federal                                        
Home Loan Bank stock  9,480   N/A   N/A   N/A   N/A   9,723   N/A   N/A   N/A   N/A 
Net loans  3,248,542   -   -   3,279,167   3,279,167   3,463,311   -   -   3,471,697   3,471,697 
Accrued interest receivable  10,262   80   2,370   7,812   10,262   11,283   238   2,811   8,234   11,283 
Financial liabilities:                                        
Demand deposits  365,081   365,081   -   -   365,081   390,120   390,120   -   -   390,120 
Interest bearing deposits  3,735,297   2,627,367   1,111,240   -   3,738,607   3,818,294   2,729,470   1,082,006   -   3,811,476 
Short-term borrowings  191,226   -   191,226   -   191,226   233,621   -   233,621   -   233,621 
Accrued interest payable  501   74   427   -   501   462   76   385   -   462 
(dollars in thousands)   Fair Value Measurements at 
  Carrying  December 31, 2016 Using: 
 Value  Level 1  Level 2  Level 3  Total 
Financial assets:               
Cash and cash equivalents $707,274   707,274   -   -   707,274 
Securities available for sale  620,360   35   620,325   -   620,360 
Held to maturity securities  45,490   -   47,526   -   47,526 
Federal Reserve Bank and Federal                    
Home Loan Bank stock  9,579   N/A   N/A   N/A   N/A 
Net loans  3,386,696   -   -   3,370,976   3,370,976 
Accrued interest receivable  11,070   145   2,654   8,271   11,070 
Financial liabilities:                    
Demand deposits  377,755   377,755   -   -   377,755 
Interest bearing deposits  3,818,408   2,658,945   1,156,025   -   3,814,970 
Short-term borrowings  209,406   -   209,406   -   209,406 
Accrued interest payable  526   82   444   -   526 

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

Cash and Cash Equivalents

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

Federal Reserve Bank and Federal Home Loan Bank stock

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

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

Loans

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

Deposit Liabilities

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

Accrued Interest Receivable/Payable

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

Short-Term Borrowings and Other Financial Instruments

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

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk. Such financial instruments consist of commitments to extend financing and standby letters of credit. If the commitments are exercised by the prospective borrowers, these financial instruments will become interest earning assets of the Company. If the commitments expire, the Company retains any fees paid by the prospective borrower. The fair value of commitments is estimated based upon fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the present creditworthiness of the borrower. For fixed rate commitments, the fair value estimation takes into consideration an interest rate risk factor. The fair value of these off-balance sheet items approximates the recorded amounts of the related fees, which are considered to be immaterial.

The Company does not engage in activities involving interest rate swaps, forward placement contracts, or any other instruments commonly referred to as derivatives.
 
(7) Accumulated Other Comprehensive Income (Loss)

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

 
Three months ended 9/30/16
  Three months ended 6/30/17  
(dollars in thousands)  
Balance at
7/1/2016
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Income
  
Other
Comprehensive
Income (loss)-
Three months
ended 9/30/16
  
Balance at
9/30/2016
  
Balance at
4/1/2017
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Income
  
Other
Comprehensive
Income (loss)-
Three months
ended 6/30/2017
  
Balance at
6/30/2017
 
                              
Net unrealized holding gain (loss) on securities available for sale, net of tax $2,667   (75)  -   (75)  2,592  $(6,055)  2,006   -   2,006   (4,049)
Net change in net actuarial loss (gain) and prior service cost on pension and postretirement benefit plans, net of tax  (272)  -   8   8   (264)
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax  487   -   (31)  (31)  456 
                                        
Accumulated other comprehensive income (loss), net of tax  2,395   (75)  8   (67)  2,328   (5,568)  2,006   (31)  1,975   (3,593)
  Three months ended 6/30/2016  
(dollars in thousands) 
Balance at
4/1/2016
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Income
  
Other
Comprehensive
Income (loss)-
Three months
ended 6/30/2016
  
Balance at
6/30/2016
 
                
Net unrealized holding gain (loss) on securities available for sale, net of tax $329   2,739   (401)  2,338   2,667 
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax  (256)  -   (16)  (16)  (272)
                     
Accumulated other comprehensive income (loss), net of tax  73   2,739   (417)  2,322   2,395 

 
Three months ended 9/30/2015
  Six months ended 6/30/17  
(dollars in thousands) 
Balance at
7/1/2015
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Income
  
Other
Comprehensive
Income (loss)-
Three months
ended 9/30/15
  
Balance at
9/30/2015
  
Balance at
1/1/2017
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Loss
  
Other
Comprehensive
Income (loss)-
Six months
ended 6/30/2017
  
Balance at
6/30/2017
 
                              
               
Net unrealized holding gain (loss) on securities available for sale, net of tax $(5,144)  4,713   -   4,713   (431) $(6,762)  2,713   -   2,713   (4,049)
Net change in net actuarial loss (gain) and prior service cost on pension and postretirement benefit plans, net of tax  (783)  -   40   40   (743)
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax  511   -   (55)  (55)  456 
                                        
Accumulated other comprehensive income (loss), net of tax  (5,927)  4,713   40   4,753   (1,174)  (6,251)  2,713   (55)  2,658   (3,593)
 
 
Nine months ended 9/30/16
  Six months ended 6/30/16 
(dollars in thousands)         
Balance at
1/1/2016
          
Other
Comprehensive
Loss-
Before
Reclassifications
          
Amount
reclassified
from Accumulated
Other Comprehensive
Loss
          
Other
Comprehensive
Income (loss)-
Six months
ended 9/30/16
             
Balance at
9/30/2016
      
Balance at
1/1/2016
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Income
  
Other
Comprehensive
Income (loss)-
Six months
ended 6/30/2016
  
Balance at
6/30/2016
 
                              
               
Net unrealized holding gain (loss) on securities available for sale, net of tax $(4,492)  7,484   (401)  7,084   2,592  $(4,492)  7,560   (401)  7,159   2,667 
Net change in net actuarial loss (gain) and prior service cost on pension and postretirement benefit plans, net of tax  (289)  -   25   25   (264)
Net change in net actuarial gain and prior service cost on pension and postretirement benefit plans, net of tax  (289)  -   17   17   (272)
                                        
Accumulated other comprehensive income (loss), net of tax  (4,781)  7,484   (376)  7,109   2,328   (4,781)  7,560   (384)  7,176   2,395 

  
Nine months ended 9/30/15
 
(dollars in thousands) 
Balance at
1/1/2015
  
Other
Comprehensive
Income (loss)-
Before
Reclassifications
  
Amount
reclassified
from Accumulated
Other Comprehensive
Income
  
Other
Comprehensive
Income (loss)-
Six months
ended 9/30/15
  
Balance at
9/30/2015
 
                
Net unrealized holding gain (loss) on securities available for sale, net of tax $(3,693)  3,411   (149)  3,262   (431)
Net change in net actuarial loss (gain) and prior service cost on pension and postretirement benefit plans, net of tax  (816)  -   73   73   (743)
                     
Accumulated other comprehensive income (loss), net of tax  (4,509)  3,411   (76)  3,335   (1,174)
The following represents the reclassifications out of accumulated other comprehensive income (loss) for the three months and ninesix months ended SeptemberJune 30, 20162017 and 2015:2016:

(dollars in thousands) 
Three months ended
September 30,
  
Nine months ended
September 30,
    
Three months ended
June 30,
  
Six months ended
June 30,
  
 2016  2015  2016  2015 Affected Line Item in Statements 2017  2016  2017  2016 Affected Line Item in Statements
Net unrealized holding gains (losses) on securities available for sale                 
Net unrealized holding gain on securities available for sale                 
                                    
Realized gain on securities transactions $-   -  $668   249 Net gain on securities transactions $-   668  $-   668 Net gain on securities transactions
Income tax expense  -   -   (267)  (100)Income taxes
Income tax effect  -   (267)  -   (267)Income taxes
Net of tax  -   -   401   149    -   401   -   401  
                                            
Amortization of pension and postretirement benefit items                                          
                                            
Amortization of net actuarial loss  8   (43)  25   (53)Salaries and employee benefits
Amortization of prior service credit  (22)  (23)  (67)  (68)Salaries and employee benefits
Income tax benefit  6   26   17   48 Income taxes
Amortization of net actuarial gain  73   50   136   17 Salaries and employee benefits
Amortization of prior service cost  (22)  (22)  (45)  (45)Salaries and employee benefits
Income tax effect  (20)  (12)  (36)  11 Income taxes
Net of tax  (8)  (40)  (25)  (73)   31   16   55   (17) 
                                            
Total reclassifications, net of tax $(8)  (40) $376   76   $31   417  $55   384  
 
(8) Agreement with the Office of the Comptroller of the Currency

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

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

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

(9) New Accounting Pronouncements

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

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” which amended existing guidance to improve accounting standards for financial instruments including clarification and simplification of accounting and disclosure requirements and the requirement for public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2017. The CompanyASU is evaluatingnot expected to significantly impact the impact of these amendments on itsCompany’s consolidated financial statements.

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

In March 2016, the FASB amended existing guidanceASU to simplify aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classificationhave a material impact on the statementCompany’s results of cash flows. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company is evaluating the impact of these amendments on its consolidated financial statements.operations.

In June 2016, the FASB released Accounting Standards UpdateASU No. 2016-13, Financial“Financial Instruments – Credit LossesLosses” 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 thesethe ASU on its consolidated financial statements.  The Company has established a roadmap for implementation and is currently evaluating vendor solutions that will assist in implementing required changes to loan loss estimation model.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350)” which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.  An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.  A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this ASU for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  The ASU is not expected to significantly impact the Company’s consolidated financial statements.
 
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In March 2017, the FASB issued ASU No. 2017-07, “Compensation-Retirement Benefits (Topic 715)”.  The amendments in this ASU require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.  The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  The ASU is not expected to significantly impact the Company’s consolidated financial statements.

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

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying consolidated statements of financial condition of TrustCo Bank Corp NY as of SeptemberJune 30, 2016,2017, and the related consolidated statements of income and comprehensive income for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20162017 and 2015,2016 and the related changes in shareholders’ equity and cash flows for the nine-month periodsix-month periods ended SeptemberJune 30, 20162017 and 2015.2016. These interim financial statements are the responsibility of the Company's management.

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

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

/s/ Crowe Horwath LLP
New York, New York
November 4, 2016
/s/ Crowe Horwath LLP

New York, New York
August 4, 2017
 
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Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

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

In addition to factors described under Part II, Item 1A, Risk Factors, if any, and under the Risk Factor discussion in TrustCo’s Annual Report on Form 10-K for the year ended December 31, 2015,2016, the following important factors, among others, in some cases have affected and in the future could affect TrustCo’s actual results and could cause TrustCo’s actual financial performance to differ materially from that expressed in any forward-looking statement:

·TrustCo’s ability to continue to originate a significant volume of one- to- four family mortgage loans in its market areas and to otherwise maintain or increase its market share in the areas in which it operates;
·TrustCo’s ability to continue to maintain noninterest expense and other overhead costs at reasonable levels relative to income;
·TrustCo’s ability to comply with the Formal Agreement entered into with Trustco Bank’s regulator, the OCC, and potential regulatory actions if TrustCo or Trustco Bank fails to comply;
·restrictions or conditions imposed by TrustCo’s and Trustco Bank’s regulators on their operations that may make it more difficult to achieve TrustCo’s and Trustco Bank’s goals;
·the future earnings and capital levels of TrustCo and Trustco Bank and the continued receipt of approvals from TrustCo’s and Trustco Bank’s primary federal banking regulators under regulatory rules and the Formal Agreement to distribute capital from Trustco Bank to TrustCo, which could affect the ability of TrustCo to pay;pay dividends;
·the results of supervisory monitoring or examinations of Trustco Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our loss allowance or to take other actions that reduce capital or 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 chargeoffs, changes in property values, and changes in estimates of the adequacy of the allowance for loan and lease losses;
·the effects of and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations;
·adverse conditions in the securities markets that lead to impairment in the value of securities in TrustCo’s investment portfolio;
·changes in law and policy accompanying the new presidential administration and uncertainty or speculation pending the enactment of such changes;
·the perceived overall value of TrustCo’s products and services by users, including the features, pricing and quality compared to competitors’ products and services and the willingness of current and prospective customers to substitute competitors’ products and services for TrustCo’s products and services;
·changes in consumer spending, borrowing and savings habits;
·the effect of changes in financial services laws and regulations (including laws concerning taxation, banking and securities) and the impact of other governmental initiatives affecting the financial services industry, including new regulatory capital requirements that took effect for 2015;
·the results of 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;beginning in 2016;
·changes in management personnel;
·real estate and collateral values;
·changes in accounting policies and practices, as may be adopted by the bank regulatory agencies Financial Accounting Standards Board (“FASB”) or the Public Company Accounting Oversight Board;
·disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;
·technological changes and electronic, cyber and physical security breaches;
·changes in local market areas and general business and economic trends, as well as changes in consumer spending and saving habits;
·TrustCo’s success at managing the risks involved in the foregoing and managing its business; and
·other risks and uncertainties included under “Risk Factors” in our Form 10-K for the year ended December 31, 2015.2016.

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

Following this discussion are the tables "Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential" which gives a detailed breakdown of TrustCo's average interest earning assets and interest bearing liabilities for the three and ninesix month periods ended SeptemberJune 30, 20162017 and 2015.2016.

Introduction
The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three and ninesix month periods ended SeptemberJune 30, 2016,2017, with comparisons to the corresponding periodsperiod in 2015,2016, as applicable.  Net interest margin is presented on a fully taxable equivalent basis in this discussion.  The consolidated interim financial statements and related notes, as well as the 20152016 Annual Report to Shareholders on Form 10-K, which was filed with the SEC on March 4, 2016,3, 2017, should also be read in conjunction with this review.  Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation.

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During the second quarter of 2017 financial markets were influenced by both underlying economic conditions and by political developments, in particular expectations arising from initiatives expected to be pursued by the Trump administration.  Equity markets ended the thirdsecond quarter up, with most of the gain coming early in the quarter.  Volatility was relatively subdued for most of the quarter but increased somewhat over the last month.  For the full thirdsecond quarter, the S&P 500 Index was up 3.3%2.6% and the Dow Jones Industrial Average was up 2.1%3.3%.  Credit markets continue to be driven by worldwide economic news and decreasing liquidity in some segments of the bond market.  The shape of the yield curve continued to flatten during the quarter, with average yields declining for the thirdsecond quarter as compared to the secondfirst quarter.  The 10 year10-year Treasury bond averaged 1.56%2.26% during Q3Q2 compared to 1.75%2.45% in Q2,Q1, a decrease of 19 basis points.  However, the 2 yearThe 2-year Treasury bond average rate declined just 4increased 6 basis points to 0.77%1.30%, resulting in the flattening of the curve.  The spread between the 10 year10-year and the 2 year2-year Treasury bonds decreasedcontracted from 0.98%1.20% on average in Q2Q1 to 0.84%0.96% in Q3.Q2.  This spread has declinedhad been depressed in nine of the last ten quarters,recent years, and is significantly less than half thecompares to 2.42% level averaged atduring its most recent peak in Q4 of 2013.  Steeper yield curves are favorable for portfolio mortgage lenders like TrustCo.  The table below illustrates the range of rate movements for both short term and longer term rates.  The target Fed Funds range remained unchanged at 0.25%was increased by 25 basis points on June 14, 2017 to 0.50% during the third quartera range of 2016, unchanged since the1.00% to 1.25%.  This increase follows a similar 25 basis point increaseincreases announced in the fourth quarterDecember of 2015.2016 and March of 2017.  Spreads of most asset classes, including agency securities, corporates, municipals and mortgage-backed securities, increased slightlywere down by the end of the quarter as compared to recent quarters.the levels seen a year earlier, but generally roughly flat with levels seen at the end of the first quarter of 2017.  Changes in rates and spreads during the current quarter were due to a number of factors; however, uncertainty about the timing of any actions that the Federal Reserve Board (“FRB”) would take in regard to the extraordinary accommodations that have influenced markets in recent years and further uncertainty regarding the economy and related issues were key factors.  Low risk free rates in major nations have also caused investors to shift into alternative fixed income instruments, contributing to the compression of spreads over the risk free rate, although, as noted, spreads did increase marginally in the third quarter.rate.
 
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3 Month
Yield (%)
  
2 Year
Yield (%)
  
5 Year
Yield (%)
  
10 Year
Yield (%)
  
10 - 2 Year
Spread (%)
     
3 Month
Yield (%)
  
2 Year
Yield (%)
  
5 Year
Yield (%)
  
10 Year
Yield (%)
  
10 - 2 Year
Spread (%)
 
                                  
Q2/16 Beg of Q2  0.23   0.76   1.24   1.78   1.03 
Peak  0.35   0.92   1.41   1.94   1.08 
Trough  0.19   0.58   1.00   1.46   0.85 
End of Q2  0.26   0.58   1.01   1.49   0.91 
Average in Q2  0.26   0.77   1.24   1.75   0.98 
Q1/15 Beg of Q1  0.02   0.66   1.61   2.12   1.46                       
 Beg of Q3  0.28   0.59   1.00   1.46   0.87 
Peak  0.37   0.84   1.26   1.73   0.97 
Trough  0.18   0.56   0.94   1.37   0.76 
End of Q3  0.29   0.77   1.14   1.60   0.83 
Q3/16Average in Q3  0.30   0.73   1.13   1.56   0.84 
Q1/15 Peak  0.05   0.73   1.70   2.24   1.51                       
 Beg of Q4  0.32   0.80   0.91   1.63   0.83 
Peak  0.55   1.29   1.61   2.60   1.34 
Trough  0.30   0.80   0.91   1.63   0.83 
Q4/16End of Q4  0.51   1.20   1.47   2.45   1.25 
Average in Q4  0.43   1.01   1.24   2.14   1.13 
Q1/15 Trough  0.01   0.44   1.18   1.68   1.19                       
 Beg of Q1  0.16   1.06   1.76   2.27   1.21 
Peak  0.79   1.40   2.14   2.62   1.30 
Q1/17Trough  0.50   1.12   1.80   2.31   1.11 
End of Q1  0.76   1.27   1.93   2.40   1.13 
Average in Q1  0.60   1.24   1.95   2.45   1.20 
Q1/15 End of Q1  0.03   0.56   1.37   1.94   1.38                       
Average in Q1  0.02   0.60   1.46   1.97   1.36 
                     
Beg of Q2  0.03   0.55   1.32   1.87   1.32 
Peak  0.03   0.75   1.80   2.50   1.77 
Q2/15 Trough  0.01   0.49   1.26   1.85   1.32 
End of Q2  0.01   0.64   1.63   2.35   1.71 
Average in Q2  0.02   0.61   1.53   2.16   1.55 
                     
Beg of Q3  0.01   0.69   1.70   2.43   1.74 
Q3/15 Peak  0.12   0.82   1.72   2.44   1.77 
Trough  0.00   0.55   1.37   2.01   1.40 
End of Q3  0.00   0.64   1.37   2.06   1.42 
Average in Q3  0.04   0.69   1.56   2.22   1.53 
                     
Q4/15 Beg of Q4  0.00   0.64   1.37   2.05   1.41 
Peak  0.29   1.09   1.81   2.36   1.47 
Trough  0.00   0.57   1.29   1.99   1.19 
End of Q4  0.16   1.06   1.76   2.27   1.21 
Average in Q4  0.13   0.84   1.59   2.19   1.35 
                       
Q1/16 Beg of Q1  0.16   1.06   1.76   2.27   1.21 
Peak  0.36   1.06   1.76   2.27   1.23 
Trough  0.16   0.64   1.11   1.63   0.95 
End of Q1  0.21   0.73   1.21   1.78   1.05 
Average in Q1  0.29   0.84   1.37   1.92   1.08 
                       
Q2/16 Beg of Q2  0.21   0.73   1.21   1.78   1.05 
Peak  0.35   0.92   1.41   1.94   1.08 
Trough  0.19   0.58   1.00   1.46   0.85 
End of Q2  0.26   0.58   1.01   1.49   0.91 
Average in Q2  0.26   0.77   1.24   1.75   0.98 
                       
Q3/16 Beg of Q3  0.26   0.58   1.01   1.49   0.91 
Peak  0.37   0.84   1.26   1.73   0.89 
Trough  0.18   0.56   0.94   1.37   0.81 
End of Q3  0.29   0.77   1.14   1.60   0.83 
Average in Q3  0.30   0.73   1.13   1.56   0.84 
Q2/17 Beg of Q2  0.76   1.27   1.93   2.40   1.13 
Peak  1.04   1.38   1.94   2.42   1.11 
Trough  0.79   1.18   1.71   2.14   0.78 
End of Q2  1.03   1.38   1.89   2.31   0.93 
Average in Q2  0.91   1.30   1.81   2.26   0.96 
 
The United States economy continues to show some modest improvements in some areas, but continues to face challenges. Employment metrics have generally improved, but remain inconsistent and not particularly robust. Economic conditions vary significantly over geographic areas, with strength concentrated in and around major population centers on the coasts and in certain areas where economic activity has been driven by specific regional factors.  The unprecedented intervention by governments in markets and attempts to stimulate the economy, including the sharp easing of monetary policy during 2007-2008, will eventually be reversed. How and when the Federal Reserve resolves its own balance sheet expansion has been an area of significant focus of economists and market participants.  During the second quarter, the FRB provided some insight on plans for shrinking its balance sheet but the start of that program remains uncertain.  Economic activity in Europe, China and elsewhere has also been mixed, contributing to global economic issues and leading to additional government stimulation effortsimproved in those areas.some aspects, but remains mixed.  Finally, regulatory changes that have been enacted are expected to continue to impact the banking industry going forward. These regulatory changes have added significant operating expense and operational burden and have fundamentally changed the way banks conduct business.  The new presidential administration has set policy initiatives that include attempts to reduce the regulatory burden; the timing and extent of any success on that front is yet to be determined.  Fiscal policy initiatives, particularly a plan to significantly reduce corporate tax rates could have a major impact on the economy and on TrustCo, but there is no certainty that those initiatives will take effect at all or will result in any timely and/or significant change.
 
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TrustCo believes that its long-term focus on traditional banking services and practices has enabled the Company to avoid significant impact from asset quality problems and that the Company’s strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with its past practice.  TrustCo has not engaged in the types of high risk loans and investments that have led to the widely reported problems in the industry.  Nevertheless, the Company may experience increases in nonperforming loans (“NPLs”) relative to historical levels from time to time.   While the Company does not expect to see a significant change in the inherent risk of loss in its loan portfolio at SeptemberJune 30, 2016,2017, should general housing prices and other economic measures, such as unemployment in the Company’s market areas, deteriorate, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans.

Overview
TrustCo recorded net income of $10.9$12.2 million, or $0.114$0.127 of diluted earnings per share, for the three months ended SeptemberJune 30, 2016,2017, compared to net income of $10.6$10.5 million, or $0.111$0.109 of diluted earnings per share, in the same period in 2015.2016.  Return on average assets was 0.90%1.00% and 0.88%, respectively, for the three months ended SeptemberJune 30, 20162017 and 2015.2016.  Return on average equity was 10.05%11.05% and 10.35%9.88%, respectively, for the three months ended SeptemberJune 30, 20162017 and 2015.2016.

For the ninesix months ended SeptemberJune 30, 2016,2017, net income was $31.8$23.2 million or $0.333$0.241 of diluted earnings per share, compared to $32.1$20.9 million and $0.337$0.219 per share, respectively, in the same period in 2015.2016.  Return on average assets was 0.89%0.96% and 0.91%0.88%, respectively, for the ninesix months ended SeptemberJune 30, 20162017 and 2015.2016.  Return on average equity was 9.97%10.62% and 10.64%9.93%, respectively, for the ninesix months ended SeptemberJune 30, 20162017 and 2015.2016.

The primary factors accounting for the change in net income for the three months ended SeptemberJune 30, 20162017 compared to the same periodsperiod of the prior year were:

·
An increase in the average balance of interest earning assets of $70.5$105.7 million to $4.75$4.81 billion for the thirdsecond quarter of 20162017 compared to the same period in 20152016.

·An increase in taxable equivalent net interest margin for the thirdsecond quarter of 20162017 to 3.09%3.21% from 3.08% in the prior year period.  The increase in the margin, coupled with the increase in average earning assets, resulted in an increase of $612 thousand in taxable equivalent net interest income in the third quarter of 2016 compared to the third quarter of 2015.

·An increase of $474 thousand in other income for the third quarter of 2016 as compared to the prior year period, primarily attributable to the sale of a former branch site.

·An increase of $1.2 million in salaries and benefits expense for the third quarter of 2016 compared to the third quarter of 2015.
41
·A decrease of $1.1 million in Federal Deposit Insurance Corporation (FDIC) and other insurance expense for the third quarter of 2016 compared to the third quarter of 2015.

·An increase of $1.1 million in income taxes in the third quarter of 2016 compared to the prior year due to higher pre-tax earnings and a slightly higher effective tax rate in the 2016 period (See section titled “Income Taxes”).

The primary factors accounting for the change in net income for the nine months ended September 30, 2016 compared to the same periods of the prior year were:

·
An increase in the average balance of interest earning assets of $57.8 million to $4.69 billion for the first nine months of 2016 compared to the same period in 2015.

·An increase in taxable equivalent net interest margin for the first nine months of 2016 to 3.10% from 3.08%3.09% in the prior year period.  The increase in the margin, coupled with the increase in average earning assets, resulted in an increase of $2.2 million in taxable equivalent net interest income in the first nine monthssecond quarter of 20162017 compared to the same periodsecond quarter of 2016.

·A decrease of $668 thousand in 2015.securities gains for the second quarter of 2017 as compared to the prior year period.
43
·An increase of $625 thousand in salaries and benefits expense for the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher staffing levels.

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

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

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

·An increase of $419$1.1 million in income taxes in the second quarter of 2017 compared to the prior year due primarily to higher pre-tax earnings.
The primary factors accounting for the change in net income for the six months ended June 30, 2017 compared to the same periods of the prior year were:

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

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

·A decrease of $668 thousand in securities gains for the first ninesix months of 20162017 as compared to the prior year period.

·
An increase of $580 thousand$1.8 million in other income salaries and benefits for the third quarterfirst six months of 20162017 as compared to the prior year period, primarily attributableperiod.

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

·An increase of $2.5$1.5 million in salaries and benefits forincome taxes, in the first ninesix months of 20162017 compared to the same period in 2015.2016.

·An increase of $782 thousand in FDIC and other insurance for the first nine months of 2016 compared to the same period in 2015.
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Regulatory Agreement
On July 21, 2015 Trustco Bank, the wholly owned subsidiary of the Company, entered into a formal agreement with the OCC.OCC (the “Agreement”).

The Formal Agreement relates to the findings of the OCC following its regularly scheduled examination of the Bank in January 2015.  Since the completion of the examination and entry into the Agreement, the Bank believes it has been working diligently to address the findings of the examination and to develop and implement appropriate formal action plans.
42

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

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

TrustCo’s results are affected by a variety of factors including competitive and economic conditions in the specific markets in which the Company operates and, more generally, in the national economy, financial market conditions and the regulatory environment.  Each of these factors is dynamic, and changes in any area can have an impact on TrustCo’s results.  Included in the Annual Report to Shareholders on Form 10-K for the year ended December 31, 20152016 is a description of the effect interest rates had on the results for the year 20152016 compared to 2014.2015.  Many of the same market factors discussed in the 20152016 Annual Report continued to have a significant impact on results through the thirdsecond quarter of 2016.2017.

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

45
Interest rates have a significant impact on the operations and financial results of all financial services companies. One of the most important interest rates used to implement national economic policy is the Federal Funds rate. This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating. The Federal Funds target rate decreased from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008. In December 2015, the target increased to a range of 0.25% to 0.50%, and  25 basis point increases in the target range were also announced in December of 2016 and March and June of 2017, producing the current range of 1.00% to 1.25%.  FRB officials have not been completely consistent or clearAdditional increases in regard2017 and beyond will largely be dependent on the strength of economic conditions.  In the July statement from the Federal Open Market Committee, it was noted that, “In determining the timing and size of future adjustments to expectationsthe target range for the future and have generally stressedfederal funds rate, the need to be accommodative given economic conditions, but have noted in their September statement that the “CommitteeCommittee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, theThe Committee will carefully monitor actual and expected progress towardinflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
43

Traditionally, interest rates on bank deposit accounts are heavily influenced by the Federal Funds rate.  The average rate on interest bearing deposits was 34 basis points lower in the thirdsecond quarter of 20162017 relative to the prior year period.  RelativeRates were flat or lower on all deposit categories as compared to the year agosame period lower rates on money market deposits, savings deposits and CDs accounted for the overall reduction in the cost of interest bearing deposits.2016.  Please refer to the statistical disclosures in the table below entitled “Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential.”

The interest rate on the 10 year10-year Treasury bond and other long-term interest rates have significant influence on the rates for new residential real estate loans. The FRB has attempted to influence rates on mortgage loans by means other than targeting a lower Federal Funds rate, including direct intervention in the mortgage-backed securities market through purchasing these securities in an attempt to raise prices and reduce yields.  In recent periods this includes the reinvestment of principal payments received on its holdings of agency securities, agency mortgage-backed securities and Treasury securities. While no longer increasing its holdings of these securities, the reinvestment of principal means that the existing holdings are not being unwound.  Eventually, management believes, theThe FRB will havehas stated its intent to unwind these positions, which would likely put upward pressure on rates, although other factors may mitigate this pressure.  These changes in interest rates can have an effect on the Company relative to the interest income on loans, securities and Federal Funds sold and other short term instruments, as well as on interest expense on deposits and borrowings. The timing of the FRB plan to reduce its holdings has not been set, but is generally expected to begin in the fall of 2017.

TrustCo’s principal loan products are residential real estate loans.  As noted above, residential real estate loans and longer-term investments are most affected by the changes in longer term market interest rates such as the 10 year10-year Treasury.  The 10 year10-year Treasury yield was down significantly,19 basis points, on average, during the thirdsecond quarter of 20162017 compared to the thirdfirst quarter of 2015.2017 but was up 51 basis points as compared to the second quarter of 2016.

46
Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae.  As a portfolio lender, TrustCo does not sell loans into the secondary market in the normal course of business and is able to establish rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates.  Financial market volatility and the problems faced by the financial services industry have lessened the influence of the secondary market; however, various programs initiated by arms of the federal government have had an impact on rate levels for certain products.  Most importantly, a government goal of keeping mortgage rates low has been supported by targeted buying of certain securities, thus supporting prices and constraining yields, as noted above.  Very low interest rates in many markets around the world have also increased demand for US fixed income assets, which has also contributed to the decline of ratesyields on these assets.
44

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

Interest rates generally remained below historic norms on both short term and longer term investments during the thirdsecond quarter of 2016.2017 despite the increases seen during the quarter.

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

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

47
For the thirdsecond quarter of 2016,2017, the net interest margin was 3.09%3.21%, up 112 basis pointpoints versus the prior year’s quarter.  The quarterly results reflect the following significant factors:

The average balance of Federal Funds sold and other short-term investments increaseddecreased by $31.5$24.8 million while the average yield was 50increased 57 basis points in the thirdsecond quarter of 20162017 compared to 25 basis points in the same period in 2015.2016.  The increasedecrease in the average balance reflects a declinehelped to fund increases in investments and growth of funding sources, partly offset by continued growth of the loan portfolio.loans.

The average balance of securities available for sale decreased by $57.9$9.7 million while the average yield decreasedincreased 7 basis points to 1.79% for the third quarter of 2016 compared to 1.96% for the same period in 2015..  The average balance of held to maturity securities decreased by $11.9$10.0 million and the average yield increased 22 basis points to 4.03%4.27% for the thirdsecond quarter of 20162017 compared to 3.97% for the same period in 2015.2016, with the increase due to a combination of slower prepayment speeds on mortgage-backed securities and the fact that corporate securities, which have higher yields, comprised a larger component of the portfolio in the 2017 period than in the 2016 period.
45

The average loan portfolio grew by $108.7$150.1 million to $3.37$3.47 billion and the average yield decreased 86 basis points to 4.29%4.23% in the thirdsecond quarter of 20162017 compared to the same period in 2015.2016.  The decline in the average yield primarily reflects the decline in market interest rates on new loan originations as older, higher rate loans pay down or are paid off.off, as well as declines in higher yielding commercial and installment loans.

The average balance of interest bearing liabilities (primarily deposit accounts) increased $32.9$71.4 million and the average rate paid decreased 34 basis points to 0.38%0.35% in the thirdsecond quarter of 20162017 compared to the same period in 2015.2016.

During the thirdsecond quarter of 2016,2017, the Company continued to focus on its strategy to expand the loan portfolio by offering competitive interest rates.  Management believes the TrustCo residential real estate loan product is very competitive compared to local and national competitors.  Competition remains strong in the Company’s market areas.

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

Earning Assets
Total average interest earning assets increased from $4.68$4.70 billion in the thirdsecond quarter of 20152016 to $4.75$4.81 billion in the same period of 20162017 with an average yield of 3.41%3.50% in the thirdsecond quarter of 20162017 and 3.43%3.42% in the thirdsecond quarter of 2015.2016.  The shift in the mix of assets towards a higher proportion of loans, along with the increase in yield on cash, partly offset the declining yields on securities available for sale and loans.  Interest income on average earning assets increased from $40.2 million in the thirdsecond quarter of 20152016 to $40.5$42.1 million in the thirdsecond quarter of 2016,2017, on a tax equivalent basis. The increase was the result of higher volume more than offsetting the decline inand yield.

Loans
The average balance of loans was $3.37$3.47 billion in the thirdsecond quarter of 20162017 and $3.26$3.32 billion in the comparable period in 2015.2016.  The yield on loans decreased 86 basis points to 4.29%4.23%.  The higher average balances more than offset the lower yield, leading to an increase in the interest income on loans from $35.6$35.7 million in the thirdsecond quarter of 20152016 to $36.2$36.7 million in the thirdsecond quarter of 2016.2017.

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Compared to the thirdsecond quarter of 2015,2016, the average balance of residential mortgage loans increased, however other loan categories decreased.  The average balance of residential mortgage loans was $2.82$2.96 billion in 2017 compared to $2.76 billion in 2016, compared to $2.69 billion in 2015, an increase of 4.8%7.2%.  The average yield on residential mortgage loans decreased by 13 basis points to 4.28%4.18% in the thirdsecond quarter of 20162017 compared to 2015.2016.
46

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

Commercial loans, which consist primarily of loans secured by commercial real estate, decreased $13.4$15.6 million to an average balance of $195.1$183.4 million in the thirdsecond quarter of 20162017 compared to the same period in the prior year.  The average yield on this portfolio was up 179 basis points to 5.32%,5.24% compared to 5.15% in the prior year period.period, primarily reflecting the increase in the prime rate.  The Company has been selective in underwriting commercial loans in 2016recent periods as the apparent risk/reward balance has been less favorable in many cases.

The average yield on home equity credit lines increased 1732 basis points to 3.70%3.90% during the thirdsecond quarter of 20162017 compared to 3.53% in the year earlier period.  The increase in yield is the result of prime rate increases which impacted some loans and a smaller proportion of lower yielding initial rate balances.  The average balances of home equity lines decreased 2.2%9.6% to $346.7$320.9 million in the thirdsecond quarter of 20162017 as compared to the prior year.  Some customers with home equity lines have refinanced their balances into fixed rate mortgage loans.

Securities Available for Sale
The average balance of the securities available for sale portfolio for the thirdsecond quarter of 20162017 was $633.9$642.4 million compared to $691.8$652.1 million for the comparable period in 2015.2016.  The decreased balances reflectbalance reflects routine paydowns, calls maturities and sales, partlymaturities, offset by new investment purchases.  During the quarter, continued low market yields on securities eligible to be added to the portfolio resulted in loans being a more attractive option for the deployment of cash.  The average yield was 1.79% for the third quarter of 2016 and 1.96% for the thirdsecond quarter of 20152017 compared to 1.89% for the available for sale portfolio.second quarter of 2016.  This portfolio is primarily comprised of agency issued residential mortgage backed securities, bonds issued by government sponsored enterprises (such as Fannie Mae, the Federal Home Loan Bank, and Freddie Mac), agency-issued commercial mortgage backed securities, Small Business Administration participation certificates, corporate bonds and municipal bonds.  These securities are recorded at fair value with any adjustment in fair value included in other comprehensive income (loss), net of tax.

The net unrealized gainloss in the available for sale securities portfolio was $4.3$6.7 million as of SeptemberJune 30, 20162017 compared to a net unrealized loss of $7.5$11.3 million as of December 31, 2015.2016.  The unrealized gain or loss in the portfolio is primarily the result of changes in market interest rate levels.
 
4749
Held to Maturity Securities
The average balance of held to maturity securities was $50.0$42.2 million for the thirdsecond quarter of 20162017 compared to $61.9$52.2 million in the thirdsecond quarter of 2015.2016.  The decrease in balances reflects routine paydowns calls and maturities and followscalls.  No new securities were added to this portfolio during the overall decline in securities with a shift towards cash for more flexibility and loans for greater yield.period.  The average yield was 4.03%4.27% for the thirdsecond quarter of 20162017 compared to 3.97%4.05% for the year earlier period.  The higher yield reflects a modest change in mix and slower prepayments on mortgage-backed securities (MBS), which reduced premium amortization.  TrustCo expects to hold the securities in this portfolio until they mature or are called.

As of SeptemberJune 30, 2016,2017, the securities in this portfolio include residential mortgage-backed securities and corporate bonds.  The balances for these securities are recorded at amortized cost.

Federal Funds Sold and Other Short-term Investments
The 2016 third2017 second quarter average balance of Federal Funds sold and other short-term investments was $683.8$643.6 million, a $31.5$24.8 million increasedecrease from the $652.3$668.4 million average for the same period in 2015.2016.  The yield was 0.50%1.07% for the thirdsecond quarter of 20162017 and 0.25%0.50% for the comparable period in 2015.2016.  Interest income from this portfolio increased $458$895 thousand from $408$832 thousand in 20152016 to $866 thousand$1.7 million in 2016,2017, reflecting the target rate increaseincreases that took effect in December of 20152016 and March of 2017, as well as the increasedpartial impact of the June 2017 target rate increase, partly offset by the decreased in balances.

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

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

Total average interest bearing deposits (which includes interest bearing checking, money market accounts, savings and certificates of deposit) increased $20.2$26.2 million to $3.81$3.82 billion for the thirdsecond quarter of 20162017 versus the thirdsecond quarter in the prior year, and the average rate paid decreased from 0.40%0.38% for 20152016 to 0.37%0.34% for 2016.2017.  Total interest expense on these deposits decreased $246$429 thousand to $3.6$3.2 million in the thirdsecond quarter of 20162017 compared to the year earlier period.  From the thirdsecond quarter of 20152016 to the thirdsecond quarter of 2016,2017, interest bearing demand account average balances were up 7.2%11.9%, certificates of deposit average balances were down 1.1%6.3%, non-interest demand average balances were up 4.8%2.7%, average savings balances increased 2.7%1.0% and money market balances were down 8.3%0.5%.

The Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet.  The Bank is a member of the Federal Home Loan Bank of New York (FHLBNY) and is an eligible borrower at the Federal Reserve Bank of New York (FRBNY) and has the ability to borrow utilizing securities and/or loans as collateral in regard to the FHLBNY and against securities in regard to the FRBNY.at either.  The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a contingent funding source within its Asset/Liability Policy.  Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.
 
4850
At SeptemberJune 30, 2016,2017, the maturity of total time deposits is as follows:

(dollars in thousands)      
      
Under 1 year $1,066,556  $801,777 
1 to 2 years  34,268   241,916 
2 to 3 years  50,803   40,857 
3 to 4 years  5,712   2,508 
4 to 5 years  1,660   1,547 
Over 5 years  200   219 
 $1,159,199  $1,088,824 

Average short-term borrowings for the quarter were $189.9$226.5 million in 20162017 compared to $177.2$181.2 million in 2015.2016.  The average rate decreasedincreased during this time period from 0.65%0.58% in 20152016 to 0.59%0.62% in 2016.2017.  The short-term borrowings of the Company are cash management accounts, which represent retail accounts with customers for which the Bank has pledged certain assets as collateral.

Net Interest Income
Taxable equivalent net interest income increased by $612 thousand$2.2 million to $36.7$38.6 million in the thirdsecond quarter of 20162017 compared to the same period in 2015.2016.  The net interest spread was up 112 basis pointpoints to 3.03%3.15% in the thirdsecond quarter of 20162017 compared to the same in 2015.2016. As previously noted, the net interest margin was up 112 basis points to 3.09%3.21 for the thirdsecond quarter of 20162017 compared to the same period in 2015.2016.

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

The following describes the nonperforming assets of TrustCo as of SeptemberJune 30, 2016:2017:

Nonperforming loans and foreclosed real estate: Total NPLs were $26.0$24.5 million at SeptemberJune 30, 2016,2017, compared to $28.3$25.1 million at December 31, 20152016 and $31.9$28.2 million at SeptemberJune 30, 2015.2016.  There were $26.0$24.5 million of non-accrual loans at SeptemberJune 30, 20162017 compared to $28.2$25.0 million at December 31, 20152016 and $31.9$28.2 million at SeptemberJune 30, 2015.2016.  There were no loans at SeptemberJune 30, 20162017 and 20152016 and December 31, 20152016 that were past due 90 days or more and still accruing interest.

51
Index
At SeptemberJune 30, 2016,2017, nonperforming loans primarily include a mix of commercial and residential loans.  Of total nonperforming loans of $26.0$24.5 million at SeptemberJune 30, 2016, $23.62017, $22.8 million were residential real estate loans, $2.4$1.7 million were commercial mortgages and $70$25 thousand were installment loans, compared to $25.1$23.1 million, $3.0$1.8 million and $98$48 thousand, respectively at December 31, 2015.2016.
49
Index

A significant percentage of nonperforming loans are residential real estate loans, which are historically lower-risk than most other types of loans.  Annualized net chargeoffs were 0.06%0.05% of average residential real estate loans (including home equity lines of credit) for the thirdsecond quarter of 20162017 compared to 0.16%0.13% for the thirdsecond quarter of 2015.2016.  Management believes that these loans have been appropriately written down where required.

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

The Company originates loans throughout its deposit franchise area.  At SeptemberJune 30, 2016, 79.0%2017, 77.6% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 21.0%22.4% were in Florida.  Those figures compare to 80.5%78.5% and 19.5%21.5%, respectively at December 31, 2015.2016.  Within these two geographic regions, commercial loans constitute a larger component of the local outstandings in New York than in Florida, at 6.6%6.3% and 1.8%1.5%, respectively, as of SeptemberJune 30, 2016.2017.

Economic conditions vary widely by geographic location.  Florida experienced a more significant downturn than New York during the recession.  Consequently, nonperforming loans (NPLs asrecession, however conditions in Florida have improved more than in New York in recent periods.  As a percentage of the portfolio) had generally been more heavily weighted towards Florida in recent years.  However,total nonperforming loans as of SeptemberJune 30, 2016, NPLs were roughly in line with regional outstandings, as 7.1% of nonperforming loans2017, 8.6% were to Florida borrowers, compared to 92.9%91.4% to borrowers in New York and surrounding areas.  The level of Florida based NPLs was 6.5% of total NPLs as of December 31, 2015.  For the three months ended SeptemberJune 30, 2016,2017, New York and surrounding areas experienced net charge-offschargeoffs of approximately $861$371 thousand, compared to $3$65 thousand in Florida.

Other than loans currently identified as nonperforming, management is aware of no other loans in the Bank’s portfolio that pose material risk of the eventual non-collection of principal and interest.  Also as of SeptemberJune 30, 2016,2017, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources.
 
5052
Index
TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring (TDR), as impaired loans.  There were $2.6$4.0 million of commercial mortgages and commercial loans classified as impaired as of SeptemberJune 30, 20162017 compared to $3.3$2.4 million at December 31, 2015.2016.  There were $22.2$21.8 million of impaired residential loans at SeptemberJune 30, 20162017 and $22.6$21.6 million at December 31, 20152016.  The average balances of all impaired loans were $23.9$25.1 million for the ninesix months of 20162017 and $26.6$22.4 million for the full year 2015.2016.

As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.

At SeptemberJune 30, 20162017 there was $4.8$3.6 million of foreclosed real estate compared to $6.5$4.3 million at December 31, 2015.2016.

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

(dollars in thousands) 
As of
September 30, 2016
  
As of
December 31, 2015
 
  Amount  
Percent of
Loans to
Total Loans
  Amount  
Percent of
Loans to
Total Loans
 
Commercial $5,074   5.32% $4,347   5.85%
Real estate - construction $307   0.69%  365   0.81%
Real estate mortgage - 1 to 4 family $31,990   83.60%  33,167   82.14%
Home equity lines of credit $5,894   10.14%  6,365   10.91%
Installment Loans $685   0.25%  518   0.29%
  $43,950   100.00% $44,762   100.00%
Management's Discussion and Analysis

Allocation of the Allowance for Loan Losses

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

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

At SeptemberJune 30, 2016,2017, the allowance for loan losses was $44.0$44.2 million, compared to $45.1$44.1 million at SeptemberJune 30, 20152016 and $44.8$43.9 million at December 31, 2015.2016.  The allowance represents 1.30%1.26% of the loan portfolio as of SeptemberJune 30, 2017 compared to 1.32% at June 30, 2016 compared to 1.38% at September 30, 2015 and 1.36%1.28% at December 31, 2015.2016.

The provision for loan losses was $750$550 thousand for the quarter ended SeptemberJune 30, 20162017 and $800 thousand for the quarter ended SeptemberJune 30, 2015.2016.  Net chargeoffs for the three-month period ended SeptemberJune 30, 20162017 were $864$436 thousand and were $1.2$1.1 million in the prior year period.

During the thirdsecond quarter of 2016,2017, there were $356 thousand of grossno commercial loan chargeoffs and $611$627 thousand of gross residential mortgage and consumer loan chargeoffs as compared with $3$68 thousand of gross commercial loan charge-offschargeoffs and $1.4$1.2 million of residential mortgage and consumer loan chargeoffs in the thirdsecond quarter of 2015.2016.  Gross recoveries during the thirdsecond quarter of 20162017 were $3 thousandzero for commercial loans and $100$191 thousand for residential mortgage and consumer loans, compared to $3$1 thousand for commercial loans and $167$133 thousand for residential and consumer in the thirdsecond quarter of 2015.2016.

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

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

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

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

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

54
Index
Using this model, the fair value of capital projections as of SeptemberJune 30, 20162017 are referenced below. The base case (current rates) scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of SeptemberJune 30, 2016.2017. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp.
52
Index

As of SeptemberJune 30, 20162017 
Estimated Percentage of
Fair value of Capital to
Fair value of Assets
 
+400 BP  19.4520.31%
+300 BP  20.8021.47 
+200 BP  22.1222.58 
+100 BP  23.2223.53 
Current rates  21.8823.66 
-100 BP  22.1022.09 

Noninterest Income
Total noninterest income for the thirdsecond quarter of 20162017 was $4.7$4.5 million, compared to $4.4$5.2 million in the prior year period.  The increasedecrease of $364$695 thousand was primarily due to a gaindecrease in gains on salenet gains on securities transactions.  There were no securities gains in the second quarter of a former branch site2017, compared to gains of $469$668 thousand in the third quarter of 2016.  For the nine months ended September 30, 2016 and 2015 total noninterest income was $14.5 million and $13.4 million, respectively.  The increase was primarily due to a $419 thousand increaseprior year period.  A nominal decrease in securities gains and the gain noted for the third quarter of 2016.

Trustco Financial Services income decreased $4 thousandwas approximately offset by an increase in fees for services to $1.3 million for the third quarter of 2016 compared to the third quarter of 2015.customers.  The fair value of assets under management was $863$845 million at SeptemberJune 30, 2017 and $846 million as of December 31, 2016 and $851 million at June 30, 2016.

For the six months through June 30, 2017 total noninterest income was $9.2 million, compared to $842$9.8 million at December 31, 2015 and $895 million at September 30, 2015.for the prior year period.  The fluctuation in assetsdecline was due to market value changes andthe same decrease in net account acquisitions/closures.  For both the nine months ended September 30, 2016 and 2015,gains on securities transactions noted above.  Excluding gains, noninterest income was up $128 thousand due to a $166 thousand in Financial Services income was $4.5 million.revenue increase.

The total of fees for other services to customers plus other income was $2.7 million in the third quarter of 2016, down $106 thousand versus the prior year quarter.

Noninterest Expenses
Total noninterest expenses were $23.0$22.9 million for the three months ended SeptemberJune 30, 2016,2017, compared to $23.5$24.0 million for the three months ended SeptemberJune 30, 20152016.  The largest cause of the decrease in expenses was a $1.1 million$937 thousand decrease in FDIC and other insurance expenses,expenses.  This change was due to a change in the premium charged by the FDIC.FDIC beginning in the third quarter of 2016.  Going forward we expect that the quarterly FDIC expense will approximate the level recorded in the thirdsecond quarter of 2016,2017, excluding the impact of balance sheet growth.  Other significant decreases were other real estate expense and equipment expense, down $427 thousand and $412 thousand, respectively. The only expense categorycategories to see a meaningful increase was theincreases were salaries and benefits, line, which was up $1.2 million.  This increase was primarily due$625 thousand in the second quarter of 2017 compared to the increase in fullyear-ago period and net occupancy expense, up $349 thousand over the same periods.  Full time equivalent headcount increased from 778801 as of SeptemberJune 30, 20152016 to 790813 as of SeptemberJune 30, 2016.  Other expense categories were mostly flat or down modestly.

Total noninterest expenses were $70.5 million for2017, which was the nine months ended September 30, 2016 compared to $67.5 million for the nine months ended September 30, 2015.  The largestprimary cause of the increase in expenses was a $2.5 million increase in salaries and benefits and a $782 thousand increase in FDIC and other insurance costs.  The increase in salaries and benefits was primarily due to the noted increase in full time equivalent headcount.  The only significant decreases were declines of $563 thousand in other expense and $391 thousand in equipment expense.increase.
 
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Index
For the six months through June 30, 2017 total noninterest expense was $46.9 million, compared to $47.4 million for the prior year period.  The largest cause of the decrease in expenses was a $1.9 million decrease in FDIC and other insurance expenses, as described above.  Decreases in other real estate expense, equipment expense and professional services expense also contributed.  These were mostly offset by an increase of $1.8 million in salaries and benefits, as well as smaller increases in net occupancy expense and other expense.

Income Taxes
In the thirdsecond quarter of 2016,2017, TrustCo recognized income tax expense of $6.7$7.3 million compared to $5.5$6.3 million for the thirdsecond quarter of 2015.2016.  The effective tax rates were 37.9%37.5% and 34.3%37.4% for the thirdsecond quarters of 20162017 and 2015,2016, respectively.  For the first nine months of 2016, thesix month periods through June 30, income taxes increased $1.5 million, with effective tax rate was 37.4% compared to 36.5% inrates of 37.5% and 37.2%, respectively, for the year earlier period.  The lower effective rates in the 2015 periods resulted from the final 2014 tax obligations, as reported on the 2014 income tax returns filed in the third quarter of 2015, being slightly lower than the amounts reflected in the 2014 financial statements.six months ended June 30, 2017 and 2016.

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

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

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

Total shareholders’ equity at SeptemberJune 30, 20162017 was $435.6$447.4 million compared to $412.3$430.3 million at SeptemberJune 30, 2015.2016. TrustCo declared a dividend of $0.065625 per share in the thirdsecond quarter of 2016.2017.  This results in a dividend payout ratio of 57.40%51.48% based on thirdsecond quarter 20162017 earnings of $10.9$12.2 million.

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Index
The Bank and the Company reported the following capital ratios as of SeptemberJune 30, 20162017 and December 31, 2015:2016:

(Bank Only)         
          
(dollars in thousands) As of June 30, 2017  Well  Adequately 
  Amount  Ratio  Capitalized(1)  Capitalized(1)(2) 
             
Tier 1 leverage capital $436,264   8.911%  5.000%  4.000%
Common equity tier 1 capital  436,264   17.363   6.500   5.750 
Tier 1 risk-based capital  436,264   17.363   8.000   7.250 
Total risk-based capital  467,832   18.620   10.000   9.250 
 
54
(dollars in thousands) As of December 31, 2016  Well  Adequately 
  Amount  Ratio  Capitalized(1)  Capitalized(1)(3) 
             
Tier 1 (core) capital $424,802   8.829%  5.000%  4.000%
Common equity tier 1 capital  424,802   17.238   6.500   5.125 
Tier 1 risk-based capital  424,802   17.238   8.000   6.625 
Total risk-based capital  455,772   18.492   10.000   8.625 
Index
(dollars in thousands) 
As of September 30, 2016
  Well  Adequately 
  Amount  Ratio  Capitalized(1)  Capitalized(1)(2) 
             
Tier 1 leverage capital $419,714   8.678%  5.000%  4.000%
Common equity tier 1 capital  419,714   17.110   6.500   5.125 
Tier 1 risk-based capital  419,714   17.110   8.000   6.625 
Total risk-based capital  450,546   18.367   10.000   8.625 
(1)Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized
(2)The June 30, 2017 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 1.25 percent
(3)The December 31, 2016 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 0.625 percent

(dollars in thousands) 
As of December 31, 2015
  Well  Adequately 
  Amount  Ratio  Capitalized(1)  Capitalized(1) 
             
Tier 1 (core) capital $405,506   8.600%  5.000%  4.000%
Common equity tier 1 capital  405,506   17.210   6.500   4.500 
Tier 1 risk-based capital  405,506   17.210   8.000   6.000 
Total risk-based capital  435,149   18.470   10.000   8.000 
(Consolidated)

(dollars in thousands) As of June 30, 2017 
  Amount  Ratio 
       
Tier 1 leverage capital $450,406   9.194%
Common equity tier 1 capital  450,406   17.921 
Tier 1 risk-based capital  450,406   17.921 
Total risk-based capital  481,984   19.178 
 
(1) Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized
(dollars in thousands) As of December 31, 2016 
  Amount  Ratio 
       
Leverage capital $438,426   9.110%
Common equity tier 1 capital  438,426   17.782 
Tier 1 risk-based capital  438,426   17.782 
Total risk-based capital  469,411   19.038 
(2) The September 30, 2016 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a transition capital conservation buffer of 0.625 percent

The following is a summary of actual capital amounts and ratios as of September 30, 2016 and December 31, 2015 for TrustCo on a consolidated basis:

(dollars in thousands) 
As of September 30, 2016
 
  
Amount
  
Ratio
 
       
Tier 1 leverage capital $432,726   8.946%
Common equity tier 1 capital  432,726   17.633 
Tier 1 risk-based capital  432,726   17.633 
Total risk-based capital  463,570   18.890 

(dollars in thousands) 
As of December 31, 2015
 
  Amount  Ratio 
       
Leverage capital $417,538   8.850%
Common equity tier 1 capital  417,538   17.710 
Tier 1 risk-based capital  417,538   17.710 
Total risk-based capital  447,193   18.970 

In addition, at SeptemberJune 30, 2016,2017, the consolidated equity to total assets ratio was 9.05%9.09%, compared to 8.73%8.89% at December 31, 20152016 and 8.72%8.91% at SeptemberJune 30, 2015.2016.

BanksBoth TrustCo and bank holding companiesTrustco Bank are subject to regulatory capital requirements. On January 1, 2015, a new capital rule took effect that revised the federal bank regulatory agencies’ risk-based capital requirements administered by federal banking agencies.  Capital adequacy guidelines and additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated undersubjected the Company to consolidated regulatory accounting practices.  Capital amounts and classifications arecapital requirements. Among other matters, the rule also subject to qualitative judgments by regulators.  Failure to meetestablished a new common equity Tier 1 minimum capital requirements can initiaterequirement 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 mandatory –assets, and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect onchanged what qualifies as capital for purposes of meeting the Company’s and the Bank’s financial statements and results of operations.  The final rules implementing Basel Committee on Banking Supervision’svarious capital guidelines for U.S. banks (Basel III rules) became effective forrequirements. In addition, the Company and the Bank on Januaryare required to maintain additional levels of Tier 1 2015, with full compliance with allcommon equity (the capital conservation buffer) over the minimum risk-based capital levels before they may pay dividends, repurchase shares, or pay discretionary bonuses. The new rule will be phased-in over several years and will be fully in effect in 2019.  Calendar year 2016 was the second year of implementation of the requirements being phased in over a multi-year schedule and fully phased in by January 1, 2019.  The Basel IIInew capital rules will require the Company and the Bank to meet a capital conservation buffer requirement in order to avoid constraints on dividends, equity repurchases and certain compensation. To meet the requirement when it is fully phased in, the organization must maintain an amount of CET1 capital that exceeds the buffer level of 2.5% above each of the minimum risk-weighted asset ratios. The requirement will be phased in over a four year period, starting January 1, 2016, when the amount of such capital must exceed the buffer level of 0.625%. Accordingly, the required minimum conservation buffer will increase to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019. When the capital conservation buffer requirement is fully phased in, to avoid constraints, a banking organization must maintain the following capital ratios: (1) CET1 to risk-weighted assets more than 7.0%, (ii) Tier 1 capital to risk-weighted assets more than 8.5%, and (iii) total capital (Tier 1 plus Tier 2) to risk-weighted assets more than 10.5%.  The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer is not met.rules. Prior to January 1, 2015, the Company had not been subject to expressconsolidated regulatory capital requirements.  The Company has chosen to exclude net unrealized gain or loss on available for sale securities in computing regulatory capital.  Management believes as

As of SeptemberJune 30, 2016,2017, the Companycapital levels of both TrustCo and the Bank meet all capital adequacy requirements to which they are subject,exceeded the minimum standards, including if the currently applicablecurrent (and also if the fully phased-in) capital conservation buffer of 0.625%.is taken into account.
 
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Index
PromptUnder the OCC’s “prompt corrective actionaction” 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.  Adequately capitalized institutions must obtain prior regulatory approval to accept brokered deposits.  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.  If an institution is classified as undercapitalized, it is required to submit a capital restoration plan to its federal banking regulators and is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the acceptance by the federal banking regulators of a capital restoration plan for the institution.  Furthermore, if an institution is classified as undercapitalized, the federal banking regulators may take certain actions to correct the capital position of the institution; if it is classified as significantly undercapitalized or critically undercapitalized, the federal banking regulators would be required to take one or more prompt corrective actions.  These actions would include, among other things, requiring sales of new securities to bolster capital, improvements in management, limits on interest rates paid, prohibitions on transactions with affiliates, termination of certain risky activities and restrictions on compensation paid to executive officers.  If a bank is classified as critically undercapitalized, the bank mustdeemed to be placed into conservatorship or receivership within 90 days, unless the federal banking regulators determines that other action would better achieve the purposes of the prompt corrective action regime.  Any of the foregoing regulatory actions could have a direct material effect on an institution’s or“well-capitalized” when its holding company’s financial statements.  The Bank’sCET1, 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 levels necessaryminimum federal regulatory capital requirements, and “undercapitalized” if it fails to meet these minimal capital requirements. A bank is “significantly undercapitalized” if its CET1, Tier 1, total risk-based and leverage capital ratios fall below 3%, 4%, 6%, and 3%, respectively and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. At June 30, 2017 and 2016, Trustco Bank met the definition of “well capitalized”“well-capitalized.”

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

TrustCo maintains a dividend reinvestment plan (DRP) with approximately 12,000 participants. The DRP allows participants to reinvest dividends in shares of the Company. The DRP also allows for additional purchases by participants and has a discount feature (up to a 5% for safe harbor provisions) that can be activated by management as of September 30, 2016.a tool to raise capital. To date, the discount feature has not been utilized.

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

Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover the inherent risk of losses in the loan portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 20152016 is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.
 
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Index
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE

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

The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities.  Included in the average balance of shareholders' equity is the unrealized (loss) gain, (loss), net of tax, in the available for sale portfolio of ($2.13.6) millionin 20162017 and ($3.5)$0.7 million in 2015.2016.  The subtotals contained in the following table are the arithmetic totals of the items contained in that category.  Increases and decreases in interest income and expense  due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.

   
Three months ended
September 30, 2016
  
Three months ended
September 30, 2015
           
Three months ended
June 30, 2017
  
Three months ended
June 30, 2016
    
(dollars in thousands) 
Average
Balance
  Interest  
Average
Rate
  
Average
Balance
  Interest  
Average
Rate
  
Change in
Interest
Income/
Expense
  
Variance
Balance
Change
  
Variance
Rate
Change
  
Average
Balance
  Interest  
Average
Rate
  
Average
Balance
  Interest  
Average
Rate
  
Change in
Interest
Income/
Expense
  
Variance
Balance
Change
  
Variance
Rate
Change
 
                           
Assets                                                      
                                                      
Securities available for sale:                                                      
U. S. government sponsored enterprises  $109,488   408   1.49% $157,454   584   1.48% $(176)  (205)  29  $153,552   607   1.58% $107,190   404   1.51% $203   56   147 
Mortgage backed securities and collateralized mortgage obligations-residential  400,103   1,829   1.83%  425,092   2,230   2.10%  (401)  (1,590)  1,189   359,085   1,944   2.17%  445,162   2,169   1.95%  (225)  (1,364)  1,139 
State and political subdivisions  953   20   8.39%  1,937   34   7.02%  (14)  (49)  35   816   16   7.84%  955   19   7.96%  (3)  (1)  (2)
Corporate bonds  27,161   97   1.43%  -   -   -%  97   97   -   42,699   154   1.44%  -   -   -%  154   -   - 
Small Business Administration-guaranteed participation securities  85,305   445   2.09%  96,109   497   2.07%  (52)  (78)  26   75,561   394   2.09%  87,801   450   2.05%  (56)  (106)  50 
Mortgage backed securities and collateralized mortgage obligations-commercial  10,247   36   1.41   10,532   37   1.41   (1)  (0)  (1)  10,003   21   0.84   10,321   38   1.47   (17)  (9)  (8)
Other  685   4   2.34%  685   4   2.34%  -   -   -   685   4   2.34%  677   4   2.36%  -   -   - 
                                                                        
Total securities available for sale  633,942   2,839   1.79%  691,809   3,386   1.96%  (547)  (1,825)  1,278   642,401   3,140   1.96%  652,106   3,084   1.89%  56   (1,423)  1,325 
                                                                        
Federal funds sold and other short-term Investments  683,777   866   0.50%  652,274   408   0.25%  458   21   437   643,557   1,727   1.07%  668,395   832   0.50%  895   (30)  925 
                                                                        
Held to maturity securities:                                                                        
Corporate bonds  10,644   156   5.86%  9,969   153   6.17%  3   11   (8)  9,996   154   6.16%  9,981   154   6.17%  -   -   - 
Mortgage backed securities and collateralized mortgage obligations-residential  39,307   347   3.53%  51,928   461   3.55%  (114)  (97)  (17)  32,188   296   3.68%  42,188   374   3.55%  (78)  (162)  84 
                                                                        
Total held to maturity securities  49,951   503   4.03%  61,897   614   3.97%  (111)  (86)  (25)  42,184   450   4.27%  52,169   528   4.05%  (78)  (162)  84 
                                                                        
Federal Reserve Bank and Federal Home Loan Bank stock  9,579   131   5.47%  9,480   113   4.77%  18   1   17   9,709   134   5.52%  9,576   118   4.93%  16   2   14 
                                                                        
Commercial loans  195,115   2,597   5.32%  208,492   2,688   5.15%  (91)  (535)  444   183,382   2,401   5.24%  198,938   2,563   5.15%  (162)  (418)  256 
Residential mortgage loans  2,819,343   30,175   4.28%  2,689,072   29,617   4.41%  558   4,671   (4,113)  2,958,994   30,943   4.18%  2,759,024   29,725   4.31%  1,218   5,850   (4,632)
Home equity lines of credit  346,744   3,211   3.70%  354,552   3,151   3.53%  60   (48)  108   320,872   3,131   3.90%  354,897   3,179   3.58%  (48)  (819)  771 
Installment loans  8,331   195   9.36%  8,678   183   8.33%  12   (41)  53   8,029   194   9.66%  8,316   191   9.19%  3   (30)  33 
                                                                        
Loans, net of unearned income  3,369,533   36,178   4.29%  3,260,794   35,639   4.37%  539   4,047   (3,508)  3,471,277   36,669   4.23%  3,321,175   35,658   4.29%  1,011   4,582   (3,571)
                                                                        
Total interest earning assets  4,746,782   40,517   3.41%  4,676,254   40,160   3.43%  357   2,158   (1,801)  4,809,128   42,120   3.50%  4,703,421   40,220   3.42%  1,900   2,970   (1,224)
                                                                        
Allowance for loan losses  (44,473)          (45,829)                      (44,429)          (44,754)                    
Cash & non-interest earning assets  137,462           133,241                       130,998           136,724                     
                                                                        
Total assets  $4,839,771          $4,763,666                      $4,895,697          $4,795,391                     
                                                                        
Liabilities and shareholders' equity                                                                        
                                                                        
Deposits:                                                                 ��      
Interest bearing checking accounts  $780,058   120   0.06% $727,693   117   0.06%  3   2   1  $849,965   134   0.06% $759,546   116   0.06%  18   13   5 
Money market accounts  571,333   463   0.32%  623,381   537   0.34%  (74)  (47)  (27)  577,464   468   0.32%  580,100   467   0.32%  1   (1)  2 
Savings  1,284,533   504   0.16%  1,251,031   603   0.19%  (99)  97   (196)  1,286,282   435   0.14%  1,273,575   604   0.19%  (169)  41   (210)
Time deposits  1,176,115   2,468   0.84%  1,189,763   2,544   0.85%  (76)  (1,969)  1,893   1,102,777   2,181   0.79%  1,177,084   2,460   0.84%  (279)  11,224   (11,503)
                                                                        
Total interest bearing deposits  3,812,039   3,555   0.37%  3,791,868   3,801   0.40%  (246)  (1,917)  1,671   3,816,488   3,218   0.34%  3,790,305   3,647   0.38%  (429)  11,277   (11,706)
Short-term borrowings  189,910   281   0.59%  177,230   290   0.65%  (9)  36   (45)  226,455   349   0.62%  181,247   262   0.58%  87   69   18 
                                                                        
Total interest bearing liabilities  4,001,949   3,836   0.38%  3,969,098   4,091   0.41%  (255)  (1,881)  1,626   4,042,943   3,567   0.35%  3,971,552   3,909   0.39%  (342)  11,347   (11,689)
                                                                        
Demand deposits  377,455           360,080                       380,611           370,781                     
Other liabilities  27,496           27,524                       28,026           27,121                     
Shareholders' equity  432,871           406,964                       444,117           425,937                     
                                                                        
Total liabilities and shareholders' equity  $4,839,771          $4,763,666                      $4,895,697          $4,795,391                     
                                                                        
Net interest income , tax equivalent      36,681           36,069      $612   4,039   (3,427)      38,553           36,311      $2,242   (8,377)  10,465 
                                                                        
Net interest spread          3.03%          3.02%                      3.15%          3.03%            
                                                                        
Net interest margin (net interest income to total interest earning assets)          3.09%          3.08%                      3.21%          3.09%            
                                                                        
Tax equivalent adjustment      (14)          (19)                      (12)          (12)                
                                                                        
Net interest income      36,667           36,050                        38,541           36,299                 
 
5759
Index
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE

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

The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities.  Included in the average balance of shareholders' equity is the unrealized loss, net of tax, in the available for sale portfolio of ($16 thousand4.8) million in 20162017 and  ($3.1)0.5) million in 2015.2016.  The subtotals contained in the following table are the arithmetic totals of the items contained in that category.  Increases and decreases in interest income and expense  due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.

 
Nine months ended
September 30, 2016
  
Nine months ended
September 30, 2015
           
Six months ended
June 30, 2017
  
Six months ended
June 30, 2016
    
(dollars in thousands) 
Average
Balance
   Interest  
Average
Rate
  
Average
Balance
   Interest  
Average
Rate
  
Change in
Interest
Income/
Expense
  
Variance
Balance
Change
  
Variance
Rate
Change
  
Average
Balance
  Interest  
Average
Rate
  
Average
Balance
  Interest  
Average
Rate
  
Change in
Interest
Income/
Expense
  
Variance
Balance
Change
  
Variance
Rate
Change
 
                        
Assets                                                     
                                                      
Securities available for sale:                                                      
U. S. government sponsored enterprises $97,281   1,067   1.46% $116,824   1,162   1.33% $(95)  (254)  159  $148,054   1,202   1.62% $91,111   659   1.45% $543   280   263 
Mortgage backed securities and collateralized mortgage obligations-residential  419,185   6,114   1.94%  448,223   6,899   2.05%  (785)  (438)  (347)  363,496   3,902   2.15%  428,831   4,285   2.00%  (383)  (740)  357 
State and political subdivisions  1,007   60   7.94%  1,989   108   7.32%  (48)  (62)  14   844   35   8.29%  1,034   41   7.93%  (6)  (11)  5 
Corporate bonds  9,120   97   1.42%  813   1   0.16%  96   54   42   42,143   305   1.45%  -   -   -%  305   -   - 
Small Business Administration-guaranteed participation securities  87,896   1,371   2.08%  98,868   1,522   2.05%  (151)  (186)  35   77,068   809   2.10%  89,206   926   2.08%  (117)  (142)  25 
Mortgage backed securities and collateralized mortgage obligations-commercial  10,320   110   1.42%  10,600   112   1.41%  (2)  (3)  1   10,046   44   0.88%  10,357   74   1.43%  (30)  (7)  (23)
Other  683   12   2.34%  685   12   2.34%  -   -   -   685   8   2.34%  682   8   2.35%  -   -   - 
                                                                        
Total securities available for sale  625,492   8,831   1.88%  678,002   9,816   1.93%  (985)  (888)  (97)  642,336   6,305   1.96%  621,221   5,993   1.93%  312   (619)  626 
                                                                        
Federal funds sold and other short-term Investments  675,948   2,542   0.50%  662,879   1,231   0.25%  1,311   25   1,286   642,348   2,973   0.93%  671,990   1,677   0.50%  1,296   (70)  1,366 
                                                                        
Held to maturity securities:                                                                        
Corporate bonds  10,202   464   6.06%  9,965   461   6.17%  3   14   (11)  9,994   308   6.16%  9,979   308   6.17%  -   1   (1)
Mortgage backed securities and collateralized mortgage obligations-residential  42,192   1,123   3.55%  55,569   1,419   3.41%  (296)  (385)  89   33,240   612   3.68%  43,650   775   3.55%  (163)  (240)  77 
                                                                        
Total held to maturity securities  52,394   1,587   4.04%  65,534   1,880   3.83%  (293)  (371)  78   43,234   920   4.26%  53,629   1,083   4.04%  (163)  (239)  76 
                                                                        
Federal Reserve Bank and Federal Home Loan Bank stock  9,545   369   5.15%  9,392   347   4.93%  22   6   16   9,645   268   5.56%  9,527   238   5.00%  30   3   27 
                                                                        
Commercial loans  198,461   7,777   5.22%  212,617   8,194   5.14%  (417)  (623)  206   185,474   4,830   5.21%  200,152   5,180   5.18%  (350)  (431)  81 
Residential mortgage loans  2,768,579   89,523   4.31%  2,644,216   87,946   4.44%  1,577   5,185   (3,608)  2,935,620   61,310   4.18%  2,742,918   59,348   4.33%  1,962   6,891   (4,929)
Home equity lines of credit  353,461   9,569   3.61%  353,630   9,304   3.52%  265   (7)  272   325,579   6,216   3.82%  356,857   6,358   3.56%  (142)  (1,087)  945 
Installment loans  8,435   579   9.15%  8,236   534   8.66%  45   27   18   8,128   363   8.93%  8,488   383   9.02%  (20)  (7)  (13)
                                                                        
Loans, net of unearned income  3,328,936   107,448   4.30%  3,218,699   105,978   4.39%  1,470   4,582   (3,112)  3,454,801   72,719   4.21%  3,308,415   71,269   4.31%  1,450   5,366   (3,916)
                                                                        
Total interest earning assets  4,692,315   120,777   3.43%  4,634,506   119,252   3.43%  1,525   3,353   (1,828)  4,792,364   83,185   3.47%  4,664,782   80,260   3.44%  2,925   4,441   (1,821)
                                                                        
Allowance for loan losses  (44,832)          (46,203)                      (44,333)          (45,013)                    
Cash & non-interest earning assets  136,584           136,906                       130,575           136,138                     
                                                                        
Total assets $4,784,067          $4,725,209                      $4,878,606          $4,755,907                     
                                                                        
Liabilities and shareholders' equity                                                                        
                                                                        
Deposits:                                                                        
Interest bearing checking accounts $758,314   350   0.06% $704,323   333   0.06%  17   13   4  $829,615   258   0.06% $747,322   230   0.06%  28   21   7 
Money market accounts  585,019   1,426   0.33%  632,143   1,701   0.36%  (275)  (119)  (156)  578,728   934   0.32%  591,937   962   0.33%  (28)  (14)  (14)
Savings  1,273,565   1,712   0.18%  1,243,544   1,860   0.20%  (148)  70   (218)  1,280,552   865   0.14%  1,268,021   1,208   0.19%  (343)  35   (378)
Time deposits  1,162,603   7,301   0.84%  1,186,846   7,478   0.84%  (177)  (153)  (24)  1,118,274   4,464   0.80%  1,155,773   4,833   0.84%  (369)  (146)  (223)
                                                                        
Total interest bearing deposits  3,779,501   10,789   0.38%  3,766,856   11,372   0.40%  (583)  (190)  (393)  3,807,169   6,521   0.34%  3,763,053   7,233   0.38%  (712)  (104)  (608)
Short-term borrowings  182,453   800   0.58%  184,079   936   0.68%  (136)  (8)  (128)  228,078   698   0.61%  178,683   519   0.58%  179   152   27 
                                                                        
Total interest bearing liabilities  3,961,954   11,589   0.39%  3,950,935   12,308   0.42%  (719)  (198)  (521)  4,035,247   7,219   0.36%  3,941,736   7,752   0.39%  (533)  47   (580)
                                                                        
Demand deposits  368,852           344,606                       375,610           364,503                     
Other liabilities  27,179           26,689                       27,408           27,019                     
Shareholders' equity  426,082           402,979                       440,341           422,649                     
                                                                        
Total liabilities and shareholders' equity $4,784,067          $4,725,209                      $4,878,606          $4,755,907                     
                                                                        
Net interest income , tax equivalent      109,188           106,944      $2,244   3,552   (1,308)      75,966           72,508      $3,458   4,394   (1,241)
                                                                        
Net interest spread          3.04%          3.01%                      3.11%          3.05%            
                                                                        
Net interest margin (net interest income to total interest earning assets)          3.10%          3.08%                      3.17%          3.11%            
                                                                        
Tax equivalent adjustment      (40)          (58)                      (25)          (26)                
                                                                        
Net interest income      109,148           106,886                       75,941           72,482                 
 
5860
Item 3.
Quantitative and Qualitative Disclosures about Market Risk

As detailed in the Annual Report to Shareholders as of December 31, 2015,2016, the Company is subject to interest rate risk as its principal market risk.  As noted in the Management’s Discussion and Analysis for the three and six month periods ended SeptemberJune 30, 20162017 and 2015,2016, the Company continues to respond to changes in interest rates in such a fashion to positionway that positions the Company to meet short term earning goals and to also allowallows the Company to respond to changes in interest rates in the future.  Consequently, for the thirdsecond quarter of 2016,2017, the Company had an average balance of Federal Funds sold and other short-term investments of $683.8$643.6 million compared to $652.3$668.4 million in the thirdsecond quarter of 2015.2016.  As investment opportunities present themselves, management plans to invest funds from the Federal Funds sold and other short-term investment portfolio into the securities available for sale, securities held to maturity and loan portfolios.  Additional disclosure of interest rate risk can be found under “Liquidity and Interest Rate Sensitivity” and “Asset/Liability Management” in the Management’s Discussion and Analysis section of this document.

Item 4.
Controls and Procedures

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

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

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

There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.
 
5961
PART II          
PART IIOTHER INFORMATION
Item 1.
Legal Proceedings

None.

Item 1A.
Risk Factors

There were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.

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

None.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety

None.

Item 5.
Other Information

None.

Item 6.
Exhibits

Reg S-K (Item 601)
Exhibit No.
Description
  
15Crowe Horwath LLP Letter Regarding Unaudited Interim Financial Information
  
31(a)Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer.
  
31(b)Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer.
  
32Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer.
  
101.INSInstance Document
  
101.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
  
101.LABXBRL Taxonomy Extension Label Linkbase Document
  
101.PREXBRLTaxonomy Extension Presentation Linkbase Document
 
6062
SIGNATURES

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

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

 
By: /s/ Michael M. Ozimek
 
 Michael M. Ozimek
 Senior Vice President and Chief Financial Officer
Date:  November 4, 2016 

Date:  August 4, 2017
 
6163
Exhibits Index

Reg S-K
Exhibit No.Description
  
15
Crowe Horwath LLP Letter Regarding Unaudited Interim Financial Information
  
31(a)
Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer.
  
31(b)
Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer.
  
32
Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek,  principal financial officer.
  
101.INSInstance Document
  
101.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
  
101.LABXBRL Taxonomy Extension Label Linkbase Document
  
101.PREXBRLTaxonomyXBRL Taxonomy Extension Presentation Linkbase Document
 
 
6264