Exhibit 13

graphic

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 164 Automatic Teller Machines throughout the Bank’s market areas.  The Company serves 5 states and 33 counties with a broad range of community banking services.
Financial Highlights

(dollars in thousands, except per share data)
 
Years ended December 31,
 
   
2020
     
2019
     
Percent Change
 
Income:
                     
Net interest income
 
$
153,580
     
$
155,807
       
(1.43
)%
Net Income
   
52,452
       
57,840
       
(9.32
)
Per Share:
                           
Basic earnings
   
0.544
       
0.597
       
(8.88
)
Diluted earnings
   
0.543
       
0.597
       
(9.05
)
Book value at period end
   
5.89
       
5.55
       
6.13
 
Average Balances:
                           
Assets
   
5,553,636
       
5,161,820
       
7.59
 
Loans, net
   
4,163,399
       
3,926,199
       
6.04
 
Deposits
   
4,742,452
       
4,409,060
       
7.56
 
Shareholders' equity
   
553,632
       
513,489
       
7.82
 
Financial Ratios:
                           
Return on average assets
   
0.94
 
%
   
1.12
 
%
   
(16.07
)
Return on average equity
   
9.47
       
11.26
       
(15.90
)
Consolidated tier 1 capital to:
                           
Total assets (leverage)
   
9.65
       
10.25
       
(5.85
)
Risk-adjusted assets
   
19.19
       
18.99
       
1.05
 
Common equity tier 1 capital ratio
   
19.19
       
18.99
       
1.05
 
Total capital to risk-adjusted assets
   
20.44
       
20.24
       
0.99
 
Net loans charged off to average loans
   
0.0001
       
0.0002
       
(50.00
)
Allowance for loan losses to nonperforming loans
   
2.35
 
x
   
2.12
 
x
   
10.85
 
Efficiency ratio*
   
56.38
 
%
   
56.13
 
%
   
0.45
 
Dividend Payout ratio
   
50.12
       
45.60
       
9.91
 

Per Share information of common stock
 
Basic
   
Diluted
   
Cash
   
Book
   
Range of Stock
Price
 
   
Earnings
   
Earnings
   
Dividend
   
Value
   
High
   
Low
 
                                     
2020
                                   
First quarter
 
$
0.138
   
$
0.138
   
$
0.0681
   
$
5.68
   
$
8.77
   
$
4.52
 
Second quarter
   
0.117
     
0.117
     
0.0681
     
5.73
     
7.23
     
4.92
 
Third quarter
   
0.146
     
0.146
     
0.0681
     
5.81
     
6.27
     
5.07
 
Fourth quarter
   
0.143
     
0.143
     
0.0681
     
5.89
     
6.69
     
5.30
 
                                                 
2019
                                               
First quarter
 
$
0.150
   
$
0.150
   
$
0.0681
   
$
5.18
   
$
8.60
   
$
6.91
 
Second quarter
   
0.152
     
0.151
     
0.0681
     
5.32
     
8.22
     
7.38
 
Third quarter
   
0.152
     
0.152
     
0.0681
     
5.42
     
8.34
     
7.48
 
Fourth quarter
   
0.143
     
0.143
     
0.0681
     
5.55
     
9.03
     
7.89
 

*The Efficiency Ratio is determined by a method other than in accordance with generally accepted accounting principles (“GAAP”), which is presented in the Non-GAAP Financial Measures Reconciliation presented herein.

Page 1 of 102



Financial Highlights
1
   
President’s Message
3
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
4-34
   
Glossary of Terms
35-37
   
Management’s Report on Internal Control Over Financial Reporting
38
   
Report of Independent Registered Public Accounting Firm
39-41
   
Consolidated Financial Statements and Notes
42-91
   
Branch Locations
92-97
   
Officers and Board of Directors
98-99
   
General Information
100-101
   
Share Price Information
102
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 102


graphic
President’s Message
Dear fellow shareholders,

Good teams become great because they have solid fundamentals.  Great teams become extraordinary by having something extra that even the great teams don’t have.  Exactly what that is varies greatly, but I am proud to say that the people who make up the team at Trustco Bank have demonstrated over the past year that they possess that something extra.

In terms of fundamentals, Trustco Bank offers one of the best residential mortgage products in the market and maintains the highest level of customer service.  We also have made substantial investment in technology that has greatly enhanced our online and mobile banking offerings, rolling out a completely updated customer experience that includes real-time account alerts, secure messaging, enhanced bill pay, and more.  Our commercial loan portfolio is based upon deep and long-standing relationships and is built upon the highest standards of underwriting and credit quality.  Our Financial Services Department offers investment products with Trustco’s trademark personal touch.

This year our team proved that it has that “something extra” and demonstrated beyond question that the people of Trustco Bank are extraordinary.  Banks were deemed essential in the context of the COVID-19 pandemic and the resulting business shutdown.  Our team members embraced this critical role and quickly developed innovative ways to fulfil our mission safely.  The Hometown Bank continued to meet the needs of our customers and the communities that we serve in the face of the greatest challenges we have faced as a society.  Our diverse team was able to excel in the face of hardship because, by the time we faced adversity, we had already built a robust and sustainable organization.

We crossed a major milestone this year.  In the great state of Florida, we now have over $1 billion in deposits. While 31 of the largest banks have left this region, since entering the market in 2003, Trustco’s hometown approach to banking has been embraced by this new and expanding market.

The success in the Florida market also was realized company-wide. The bank’s strong performance overall is detailed in the financials reported. Both loans and deposits were up in 2020 over 2019. Average loans were up 6.0% and average deposits were up 7.6%. The gains were made up primarily of low-cost core accounts, which lead to the decrease in our cost of interest bearing liabilities from 0.88% in 2019 to 0.57% in 2020. Despite the difficult economic conditions of 2020, we still posted a strong return on average equity at 9.47% and return on average assets at 0.94%.

The skill and resiliency of our management team also has enabled us to maintain our focus on the future of both this venerable institution and the communities that we serve.  Like many of you, our shareholders, we are mindful of the need to reduce our exposure to climate- change risks in lending, among other important social and governance matters.  Comprehensive and detailed information about our many and varied efforts on these fronts can be found on our corporate sustainability page at www.trustcobank.com/sustainability.  There also is a new human capital management section in our 10-K filing.

We are excited to announce the promotion of our Florida Regional President Eric W. Schreck to Executive Vice President.  We are all very proud of Eric’s success in spearheading our highly successful expansion into the Sunshine State.  We also added to our management team by promoting Suzanne Breen to Vice President of our Retail Lending Department. Also in 2020, we note the retirement of a great friend and colleague, Mary-Jean Riley. Her more than 40-year career stands as an inspiration to us all.

It is traditional in this letter to note the passing of members of the Trustco family.  This year, that tradition strikes close to home for me.  My father, the first McCormick to serve as Chairman, President, and CEO of this great company, died peacefully in August.  He is sorely missed.

Thank you for the trust you have placed in the Trustco team.  We move forward with enthusiasm and readiness for the challenges and opportunities ahead.

Yours sincerely,
graphic

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

Page 3 of 102


graphic

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 2020 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 non-GAAP, 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 2020 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.

COVID-19 Impact

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

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

Loan modifications

We began receiving requests from our borrowers for loan deferrals in March 2020 and agreed with many borrowers to modify their loans. Modifications included the deferral of principal and/or interest payments for terms generally up to 90 days. Requests are evaluated individually and approved modifications are based on the unique circumstances of each borrower. We are committed to working with our clients to allow time to work through the challenges of this pandemic. At this time, it is uncertain what future impact loan modifications related to COVID-19 difficulties will have on our financial condition, results of operations and provision for loan losses. Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of troubled debt restructuring (“TDR”) classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period.  Loans not meeting the CARES Act or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures.

Page 4 of 102


The following table shows the number of loans and the outstanding loan balances of borrowers in payment deferral, as a result of COVID-19, at December 31, 2020, September 30, 2020 and June 30, 2020:

(Dollars In Thousands)
December 31, 2020
September 30, 2020
June 30, 2020
                   
New York and Other states*:
Number of loans
 
Outstanding loan balance
Number of loans
 
Outstanding loan balance
Number of loans
 
Outstanding loan balance
Commercial
-
 
$ -
5
 
$ 1,351
79
 
$ 39,630
Residential mortgage loans
6
 
1,264
13
 
2,780
441
 
94,028
Home equity line of credit
-
 
-
-
 
-
13
 
641
Installment loans
-
 
-
1
 
88
5
 
150
Total
6
 
$ 1,264
19
 
$ 4,219
538
 
$ 134,449
                   
                   
Florida:
Number of loans
 
Outstanding loan balance
Number of loans
 
Outstanding loan balance
Number of loans
 
Outstanding loan balance
Commercial
-
 
$ -
1
 
$ 574
5
 
$ 5,392
Residential mortgage loans
2
 
600
10
 
2,387
205
 
49,745
Home equity line of credit
-
 
-
-
 
-
1
 
9
Installment loans
-
 
-
-
 
-
3
 
86
Total
2
 
$ 600
11
 
$ 2,961
214
 
$ 55,232
                   
Total:
Number of loans
 
Outstanding loan balance
Number of loans
 
Outstanding loan balance
Number of loans
 
Outstanding loan balance
Commercial
-
 
$ -
6
 
$ 1,925
84
 
$ 45,022
Residential mortgage loans
8
 
1,864
23
 
5,167
646
 
143,773
Home equity line of credit
-
 
-
-
 
-
14
 
650
Installment loans
-
 
-
1
 
88
8
 
236
Total
8
 
$ 1,864
30
 
$ 7,180
752
 
$ 189,681

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


As of December 31, 2020, of the loans that are no longer in deferral, 13 loans totaling $1.4 million are delinquent over 30 days, and 7 loans totaling $770 thousand are in non-accrual status.

Page 5 of 102


The commercial loans that were granted payment deferral due to COVID-19 in 2020 included various types of businesses. As of December 31, 2020 there were no commercial loans in deferral; however, the following table shows the commercial loans and the outstanding loan balances, by industry, at the time the principal and interest deferrals were approved as of September 30, 2020 and June 30, 2020:

 (Dollars In Thousands)
 
September 30, 2020
   
June 30, 2020
 
                         
New York and Other states*
 
Number
of loans
   
Outstanding
loan
balance
   
Number
of loans
   
Outstanding
loan
balance
 
Fitness and Recreational Sports Centers
   
-
   
$
-
     
7
   
$
11,534
 
Lessors and Property Managers of Nonresidential Buildings
   
-
     
-
     
7
     
6,551
 
Lessors and Property Managers of Residential Buildings
   
-
     
-
     
31
     
9,818
 
Other various businesses
   
-
     
-
     
14
     
2,558
 
Lessors of Nonresidential Buildings - Self Storage Units
   
-
     
-
     
2
     
2,238
 
New Single-Family Housing Construction
   
-
     
-
     
3
     
1,921
 
Food Service
   
5
     
1,351
     
5
     
1,351
 
Retail
   
-
     
-
     
4
     
1,349
 
New Single-Family Housing Construction - Land Development
   
-
     
-
     
3
     
1,260
 
Commercial Construction
   
-
     
-
     
3
     
1,050
 
 
   
5
   
$
1,351
     
79
   
$
39,630
 
 
                               
Florida:
 
Number
of loans
   
Outstanding
loan
balance
   
Number
of loans
   
Outstanding
loan
balance
 
Fitness and Recreational Sports Centers
   
-
   
$
-
     
-
   
$
-
 
Lessors and Property Managers of Nonresidential Buildings
   
-
     
-
     
2
     
4,533
 
Lessors and Property Managers of Residential Buildings
   
-
     
-
     
1
     
46
 
Other various businesses
   
-
     
-
     
1
     
319
 
Lessors of Nonresidential Buildings - Self Storage Units
   
-
     
-
     
1
     
494
 
New Single-Family Housing Construction
   
-
     
-
     
-
     
-
 
Food Service
   
1
     
574
     
-
     
-
 
Retail
   
-
     
-
     
-
     
-
 
New Single-Family Housing Construction - Land Development
   
-
     
-
     
-
     
-
 
Commercial Construction
   
-
     
-
     
-
     
-
 
 
   
1
   
$
574
     
5
   
$
5,392
 
 
                               
Total:
 
Number
of loans
   
Outstanding
loan
balance
   
Number
of loans
   
Outstanding
loan
balance
 
Fitness and Recreational Sports Centers
   
-
   
$
-
     
7
   
$
11,534
 
Lessors and Property Managers of Nonresidential Buildings
   
-
     
-
     
9
     
11,084
 
Lessors and Property Managers of Residential Buildings
   
-
     
-
     
32
     
9,864
 
Other various businesses
   
-
     
-
     
15
     
2,877
 
Lessors of Nonresidential Buildings - Self Storage Units
   
-
     
-
     
3
     
2,732
 
New Single-Family Housing Construction
   
-
     
-
     
3
     
1,921
 
Food Service
   
6
     
1,925
     
5
     
1,351
 
Retail
   
-
     
-
     
4
     
1,349
 
New Single-Family Housing Construction - Land Development
   
-
     
-
     
3
     
1,260
 
Commercial Construction
   
-
     
-
     
3
     
1,050
 
 
   
6
   
$
1,925
     
84
   
$
45,022
 

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


Page 6 of 102


Paycheck Protection Program (PPP) and Liquidity

As part of the CARES Act, approved by the President on March 27, 2020 the Small Business Administration (SBA) was authorized to guarantee loans under the PPP for small businesses that meet the necessary eligibility requirements in order to keep their workers on the payroll. The Company began accepting applications on April 3, 2020.  During the year, the Company granted 663 PPP loans totaling $46 million of which 514 PPP loans totaling $29 million remain outstanding at December 31, 2020.  The Company received loan origination fees from the SBA which are being recognized over the life of the loan using the effective yield method.

On April 9, 2020, the FDIC, Federal Reserve and OCC created the Paycheck Protection Program Liquidity Facility (PPPLF) to bolster the effectiveness of the PPP by providing liquidity to and neutralizing the regulatory capital effects on participating financial institutions. We do not intend to utilize the liquidity relief offered by the PPPLF as we do not expect our participation in the PPP to have a negative impact on our liquidity position, capital resources, financial condition or results of operations.

Asset impairment

At this time, we do not believe there exists any impairment to our goodwill, long-lived assets, right of use assets, held to maturity investment securities or available-for-sale investment securities due to the COVID-19 pandemic. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets.

Provision for loan losses

See “Allowance for Loan Losses” for more information.

Preventative measures

The Company has instituted preventative measures at branch and back office locations to protect the health of both our customers and employees, including regular deep cleaning of facilities, adhering to CDC guidelines, and practicing “social distancing.”  These additional expenses did not have a material impact on the Company for the year ended December 31, 2020.

Federal Reserve Board Actions

The Federal Reserve Board has taken several actions to support the flow of credit to households and businesses.  Some of these pertinent actions include:

The establishment of the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, and the Primary Dealer Credit Facility;
The expansion of central bank liquidity swap lines;
Steps to enhance the availability and ease terms for borrowing at the discount window;
The elimination of reserve requirements;
Guidance encouraging banks to be flexible with customers experiencing financial challenges related to the COVID-19 and to utilize their liquidity and capital buffers in doing so;
expanding access to its PPPLF for additional SBA-qualified lenders;
Statements encouraging the use of daylight credit at the Federal Reserve Board.

Financial Review

TrustCo made significant progress in 2020 despite a challenging operating environment and mixed economic conditions as a result of the current pandemic.  Among the key results for 2020, in management’s view:

Net income after taxes was $52.5 million or $0.543 diluted earnings per share in 2020;
Period-end loans were up $182 million for 2020 compared to the prior year;
Period-end deposits were up $587 million for 2020 compared to the prior year;
Nonperforming assets declined $823 thousand or 3.7% to $21.6 million from year-end 2019 to year-end 2020;
At 56.38%, the efficiency ratio remained better than our peer-group levels (see Non-GAAP Financial Measures Reconciliation), and;

Page 7 of 102


The regulatory capital levels of both the Company and the Bank continued to remain very strong at December 31, 2020 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 as a result of the pandemic 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 9.47% in 2020 compared to 11.26% in 2019, while return on average assets was 0.94% in 2020 as compared to 1.12% in 2019.

During the first quarter of 2020 financial markets were drastically influenced by the economic conditions that resulted from the COVID-19 pandemic.  Stocks suffered their worst quarterly declines since the financial crisis in late 2008 as the pandemic led to shutdowns of significant portions of the global economy.  For the first quarter of 2020, the S&P 500 Index was down 19.6% and the Dow Jones Industrial Average was down 11.15%.  By the end of the year both of these indexes ended at all-time highs, and posted double-digit gains in the fourth quarter of 2020.  For the year ending 2020, the Dow Jones Industrial Average ended up rebounding with growth of 7.25%, as compared to growth of 25.3% in 2019.  The S&P 500 Index likewise rebounded with growth of 16.26% for the year, compared to growth of 33.1% in 2019.  Continued uncertainty relative to the pandemic hung over markets throughout the year.  United States Three Month Treasury Bills experienced a significant decline in rates in the beginning of the year as a result of drastic rate reductions, ending at 0.09%, 84 basis points behind the ten-year Treasury yield at year-end of 0.93%.  These yields were down from 2019 year-end yields of 1.55% for the three month Treasury and 1.92% for the ten-year Treasury yields.  These rates are important to the banking industry because deposit rates tend to track the changes in the shorter term treasury markets and the mortgage loans products tend to track with the ten-year Treasury yields.  Beginning in 2020 the yield on the two year Treasury bond was 1.58% and decreased 145 basis points during the year to close 2020 at 0.13% whereas the ten-year Treasury bond began 2020 at 1.92% and closed the year down 99 basis points to 0.93% at year-end.  These rate changes have a significant implication to the broader economic cycle and reflect the Federal Reserve Board’s desire to decrease shorter term rates to help economic expansion and provide for target levels of employment as a result of the pandemic.

The outlook for the United States economy is anticipated to bring continued economic recovery.  Growth in business operations and expansion of corporate activities will be necessary for broad range increases in revenues and profits.

Unemployment increased significantly during the first half of 2020 as a result of government mandates affecting certain industries and the uncertainties of the pandemic and declined by the end of the year, but did not return to the historical lows reached a year earlier.  The Federal Reserve Board action to decrease short term rates was to help offset the impact of the pandemic on the economy, including unemployment.

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 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.  The average for the three month Treasury was 175 basis points lower in 2020 than in 2019, with the median yield of 0.12% in 2020 down 205 basis points over 2019.  These trends generally reflect a decrease in the cost for deposit products that price off of the short term treasury market yields.  At the same time the average yield of the ten-year Treasury has decreased to 0.89% in 2020, down 125 basis points from 2019 when the average was 2.14%.  Generally longer term loans are priced consistent with the changes in the ten-year treasury markets.  These two trends – the decline in shorter term rates coupled with less of a decline in longer term rates – result in the spread of these yields widening, which is a positive trend to the banking industry, but did not mitigate historical low rates putting pressure on banking net interest margins.

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 even in these uncertain times.  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.

Page 8 of 102


Overview

The 2020 results were marked by continued growth in the Company’s loan portfolio.  The loan portfolio grew to a total of $4.24 billion, an increase of $182 million or 4.5% over the 2019 year-end balance.  Deposits ended 2020 at $5.04 billion, up from $4.45 billion the prior year-end.  The year-over-year increases in loans and deposits reflect the success the Company has had in attracting customers to the Bank, as well as the belief that in the current pandemic environment there is a desire of customers to have additional funds in the safety and security offered by TrustCo’s long history of conservative banking.  Also contributing to the increase in retail deposits was federal stimulus checks sent to eligible customers from the Internal Revenue Service.  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 $52.5 million or $0.543 of diluted earnings per share for the year ended December 31, 2020, compared to $57.8 million or $0.597 of diluted earnings per share for the year ended December 31, 2019.  Net income before taxes was $69.4 million in 2020 compared to $76.5 million in 2019.

During 2020, the following had a significant effect on net income:
a decrease of $2.2 million in net interest income from 2019 to 2020 primarily as a result of the cut in the federal funds rate;
an increase of $5.4 million in the provision for loan losses to $5.6 million in 2020;
a decrease in non-interest income of $1.4 million, and;
a decrease in non-interest expense of $2.0 million.

TrustCo performed well in comparison to its peers with respect to a number of key performance ratios during 2020 and 2019, including:
return on average equity of 9.47% for 2020 and 11.26% for 2019, compared to medians of 9.11% in 2020 and 10.51% in 2019 for a peer group comprised of all publicly traded banks and thrifts tracked by S&P Global Market Intelligence with assets of $2 billion to $10 billion, and
an efficiency ratio, as calculated by S&P Global Market Intelligence, of 56.38% for 2020 and 56.13% for 2019, compared to the peer group medians of 57.45% in 2020 and 57.84% in 2019.

During 2020, TrustCo’s results were affected by the growth of deposits, strong loan growth and a shift in asset mix.  Despite the changes in the interest rate environment and the effects from the pandemic during 2020, the Company was able to continue to attract and retain deposits.  On average for 2020, non-maturity deposits were 71.5% of total deposits, up from 67.9% in 2019.  Overall, the cost of interest bearing liabilities decreased 31 basis points to 0.57% in 2020 as compared to 2019.  Average loan balances increased 6.0% from 2019 to 2020, while the total of federal funds sold and other short-term investments, available for sale securities and held to maturity securities increased 13.2%, average net loans decreased to 77.1% of average earning assets in 2020 from 78.2% in 2019.  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 2020 as well as the current pandemic resulted in maturing and called securities being reinvested in loans and bonds, with any remaining funds continuing to be held in Federal funds sold and other short-term investments.

As discussed previously, market interest rates moved significantly during the course of 2020, with both shorter term and longer term rates decreasing versus year‑end 2019.  Overall, trends in market rates caused a steepening of the yield curve, on average, during the year.  The average daily spread between the ten-year Treasury and the two-year Treasury was 50 basis points in 2020, up from an average of 17 basis points in 2019 and 38 basis points in 2018.  The spread increased later in the year, ending 2020 at 80 basis points.  Generally, 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 9 of 102


The tables below illustrate the range of key Treasury bond interest rates during 2019 and 2020.

 
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(%)
 
2020
                             
Beginning of Year
   
1.55
     
1.58
     
1.69
     
1.92
     
0.34
 
Peak
   
1.59
     
1.58
     
1.67
     
1.88
     
0.83
 
Trough
   
-
     
0.11
     
0.19
     
0.52
     
0.12
 
End of Year
   
0.09
     
0.13
     
0.36
     
0.93
     
0.80
 
Average
   
0.36
     
0.39
     
0.53
     
0.89
     
0.50
 
Median
   
0.12
     
0.17
     
0.36
     
0.74
     
0.52
 
                                         
2019
                                       
Beginning of Year
   
2.45
     
2.48
     
2.51
     
2.69
     
0.21
 
Peak
   
2.49
     
2.62
     
2.62
     
2.79
     
0.34
 
Trough
   
1.52
     
1.39
     
1.32
     
1.47
     
(0.04
)
End of Year
   
1.55
     
1.58
     
1.69
     
1.92
     
0.34
 
Average
   
2.11
     
1.97
     
1.95
     
2.14
     
0.17
 
Median
   
2.17
     
1.83
     
1.84
     
2.07
     
0.17
 

Source: www.treasury.gov

In addition to changes in interest rates, deterioration in economic conditions as a result of the pandemic have impacted the allowance for loan losses.  The increase in the provision for loan losses from $159 thousand in 2019 to $5.6 million in 2020 negatively affected net income.  Net charge‑offs decreased from $608 thousand in 2019 to $322 thousand in 2020.  Total nonperforming loans increased $215 thousand from 2019.  Details on nonperforming loans and net charge-offs are included in the notes to the financial statements.  The increase in the provision for loan losses is primarily driven by the continued uncertainty in the current economic environment resulting from COVID-19.

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 newest branches added to our “network.”

The Company continually looks for opportunities to open new offices each year by filling in or extending existing markets.  The Company has experienced continued growth in all markets as measured by the growth in deposit and loan balances.  All branches have the same products and features found at other Trustco Bank locations.  Additionally, the Company has made significant investments in the online and mobile banking platforms, including new automated tools.  With a combination of competitive rates, excellent service and convenient locations, management believes that as branches mature, they will continue to attract deposit and loan customers.  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.

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 97.3% of average total assets for 2020 and 2019.

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.

Page 10 of 102


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.  From December 2015 through December 2018, the U.S. Federal Reserve Board increased its federal funds target rate from a range of 0.00% - 0.25% to a range of 2.25% - 2.50%. Beginning in the second half of 2019, the Federal Reserve Board began lowering the rate in response to a slowing economy.  During the first quarter of 2020 the rate was significantly decreased again as a result of the global pandemic related to COVID-19, and has returned the range of 0.00% to 0.25%.

The yield on the ten-year Treasury bond decreased by 99 basis points from 1.92% at the beginning of 2020 to the year‑end level of 0.93%.  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 decrease, the fair value of the securities will increase 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.

The decrease in the Federal Funds target range had a negative impact on earnings on the Company’s cash position.  The net effect of market changes in interest rates during 2020 was that yields earned on both the investment portfolios and loans remained quite low in 2020 relative to historic levels, which also drove down deposit costs.

Earning Assets
Average earning assets during 2020 were $5.4 billion, which was an increase of $379.1 million from 2019.  This increase was primarily the result of growth in the average balance of net loans of $237.2 million and in Federal Funds sold and other short‑term investments of $270.9 million, offset by decreases of $123.0 million in securities available for sale and $4.3 million in held-to-maturity securities between 2019 and 2020.  The increase in the loan portfolio is the result of a significant increase in residential mortgage loans, which more than offset net decreases in the other loan categories.  The increase in residential 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.  The decrease in securities available for sale is primarily the result of increased calls as a result of the current interest rate environment as described above.

Page 11 of 102


Total average assets were $5.6 billion for 2020 and $5.2 billion for 2019.

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)
                   
2020
vs.
   
2019
vs.
   
Components of
Total Earning Assets
 
   
2020
   
2019
   
2018
   
2019
   
2018
   
2020
   
2019
   
2018
 
Loans, net
 
$
4,163,399
     
3,926,199
     
3,746,082
     
237,200
     
180,117
     
77.2
%
   
78.1
%
   
77.7
 
                                                                 
Securities available for sale (1):
                                                               
U.S. government sponsored enterprises
   
38,508
     
156,292
     
155,381
     
(117,784
)
   
911
     
0.7
     
3.1
     
3.2
 
State and political subdivisions
   
111
     
167
     
414
     
(56
)
   
(247
)
   
-
     
-
     
-
 
Mortgage-backed securities and collateralized mortgage obligations-
residential
   
333,093
     
345,718
     
294,732
     
(12,625
)
   
50,986
     
6.2
     
6.9
     
6.1
 
Corporate bonds
   
50,982
     
34,637
     
30,310
     
16,345
     
4,327
     
0.9
     
0.7
     
0.6
 
Small Business Administration-guaranteed participation securities
   
44,379
     
53,269
     
63,430
     
(8,890
)
   
(10,161
)
   
0.8
     
1.1
     
1.3
 
Mortgage-backed securities and collateralized mortgage obligations-
commercial
   
-
     
-
     
2,769
     
-
     
(2,769
)
   
-
     
-
     
0.1
 
Other
   
686
     
685
     
685
     
1
     
-
     
-
     
-
     
-
 
Total securities available for sale
   
467,759
     
590,768
     
547,721
     
(123,009
)
   
43,047
     
8.6
     
11.8
     
11.3
 
                                                                 
Held-to-maturity securities:
                                                               
Mortgage-backed securities and collateralized mortgage obligations
   
16,376
     
20,643
     
24,801
     
(4,267
)
   
(4,158
)
   
0.3
     
0.4
     
0.5
 
Total held-to-maturity securities
   
16,376
     
20,643
     
24,801
     
(4,267
)
   
(4,158
)
   
0.3
     
0.4
     
0.5
 
                                                                 
Federal Reserve Bank and Federal Home
                                                               
Loan Bank stock
   
7,381
     
9,123
     
8,907
     
(1,742
)
   
216
     
0.1
     
0.2
     
0.2
 
Federal funds sold and other short-term investments
   
748,085
     
477,181
     
495,066
     
270,904
     
(17,885
)
   
13.8
     
9.5
     
10.3
 
                                                                 
Total earning assets