EX-13 2 ex13.htm EXHIBIT 13

Exhibit 13


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

Financial Highlights

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

Per Share information of common stock


 
Basic
Earnings
   
Diluted
Earnings
   
Cash
Dividend
   
Book
Value
   
Range of Stock
Price
 

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

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

Page 1 of 94

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

TrustCo Bank Corp NY Mission

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

Page 2 of 94


President’s Message

Dear fellow shareholders,

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

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

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

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

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

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

Yours sincerely,


Robert J. McCormick
Chairman, President, and Chief Executive Officer
TrustCo Bank Corp NY

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Page 4 of 94

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

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

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

Regulatory Agreement

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

Tax Cuts and Jobs Act

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

Overview

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

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

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

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

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

Page 5 of 94

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

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

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

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

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

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

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

Page 6 of 94

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

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

Source: S&P Global Market Intelligence

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

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

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

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

Asset/Liability Management

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

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

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

Interest Rates

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

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

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

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

Earning Assets

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

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

Page 8 of 94

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

MIX OF AVERAGE EARNING ASSETS

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

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

Page 9 of 94

Loans

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

LOAN PORTFOLIO

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

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

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

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

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

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

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

Page 10 of 94

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

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

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGE IN INTEREST RATES

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

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

INVESTMENT SECURITIES

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

Page 11 of 94

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

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

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

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

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

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

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

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

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

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

Page 12 of 94

SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD

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

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

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

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

Page 13 of 94

SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION

Debt securities available for sale:

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

Held to maturity securities:

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

Federal Funds Sold and Other Short-term Investments

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

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

Funding Sources

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

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

Page 14 of 94

MIX OF AVERAGE SOURCES OF FUNDING

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

AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS

(dollars in thousands)
 
2018
   
2017
   
2016
 
   
Average
Balance
   
Interest
Income/
Expense
   
Average
Rate
   
Average
Balance
   
Interest
Income/
Expense
   
Average
Rate
   
Average
Balance
   
Interest
Income/
Expense
   
Average
Rate
 
Assets
                                                     
Loans, net
 
$
3,746,082
     
158,304
     
4.23
%
 
$
3,514,900
     
148,162
     
4.22
%
 
$
3,348,324
     
143,705
     
4.29
%
                                                                         
Securities available for sale:
                                                                       
U.S. government sponsored enterprises
   
155,381
     
3,112
     
2.00
     
139,652
     
2,281
     
1.63
     
101,242
     
1,489
     
1.47
 
State and political subdivisions
   
414
     
34
     
8.21
     
682
     
55
     
8.06
     
991
     
80
     
8.07
 
Mortgage backed securities and collateralized mortgage obligations-residential
   
294,732
     
6,593
     
2.24
     
350,256
     
7,447
     
2.13
     
410,646
     
7,963
     
1.94
 
Corporate bonds
   
30,310
     
687
     
2.27
     
41,946
     
606
     
1.44
     
17,088
     
246
     
1.44
 
Small Business Administration-guaranteed participation securities
   
63,430
     
1,339
     
2.11
     
73,996
     
1,547
     
2.09
     
86,407
     
1,801
     
2.08
 
Mortgage backed securities and collateralized mortgage obligations-commercial
   
2,769
     
37
     
1.33
     
9,963
     
109
     
1.09
     
10,284
     
133
     
1.29
 
Other
   
685
     
18
     
2.63
     
685
     
16
     
2.34
     
683
     
16
     
2.34
 
Total securities available for sale
   
547,721
     
11,820
     
2.16
     
617,180
     
12,061
     
1.95