UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2020
Or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________________ to ____________________

Commission file number 0-10592

TRUSTCO BANK CORP NY
(Exact name of registrant as specified in its charter)

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

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

Registrants telephone number, including area code: (518) 377-3311

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of exchange on which registered)
Common Stock, $1.00 Par Value
TRST
The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes.☒ No. ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes.☐ No. ☒

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

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

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

Large Accelerated Filer ☒
Accelerated Filer ☐
Non-Accelerated Filer ☐
Smaller reporting company ☐
     
Emerging growth company ☐

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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

The aggregate market value of the common stock held by non-affiliates as of June 30, 2020, the last business day of the Company’s second fiscal quarter, was $596 million (based upon the closing price of $6.33 on June 30, 2020 as reported on the NASDAQ Global Select Market).

The number of shares outstanding of the registrants common stock as of February 22, 2021 was 96,432,657.

Documents Incorporated by Reference: Portions of the registrant’s Annual Report to Shareholders for the year ended December 31, 2020 are incorporated by reference into Parts I and II, and portion of the registrants Proxy Statement filed for its 2021 Annual Meeting of Shareholders to be filed within 120 days of the registrants fiscal year end are incorporated into Part III.



INDEX

Description
 
Page
    3
       
PART I
   
 
Item 1
3
 
Item 1A
16
 
Item 1B
26
 
Item 2
26
 
Item 3
27
 
Item 4
27
       
PART II
   
 
Item 5
29
 
Item 6
29
 
Item 7
29
 
Item 7A
29
 
Item 8
30
 
Item 9
30
 
Item 9A
30
 
Item 9B
30
       
PART III
   
 
Item 10
30
 
Item 11
30
 
Item 12
31
 
Item 13
31
 
Item 14
31
       
PART IV
   
 
Item 15
32
       
   
32
       
   
37

2

USE OF NON-GAAP FINANCIAL MEASURES
 
The Securities and Exchange Commission (SEC) has adopted certain rules with respect to the use of non-GAAP financial measures by companies with a class of securities registered under the Securities Exchange Act of 1934, such as TrustCo Bank Corp NY. GAAP is generally accepted accounting principles in the United States of America. Under the SEC rules, companies making disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the companys reasons for utilizing the non-GAAP financial measure as part of its financial disclosures.
 
A discussion of certain non-GAAP financial measures, including taxable equivalent net interest income, tax equivalent net interest margin and efficiency ratio, used in this report and in the Annual Report to Shareholders, as well as a reconciliation of these measures to the closest comparable GAAP financial measures, is set forth in the Annual Report to Shareholders included as Exhibit 13 to this Form 10-K and is incorporated herein by reference.
 
PART I
 
Item 1.
Business
 
General
 
TrustCo Bank Corp NY (TrustCo or the Company) is a savings and loan holding company having its principal place of business at 5 Sarnowski Drive, Glenville, New York 12302. TrustCo was incorporated under the laws of New York in 1981 to be the parent holding company of The Schenectady Trust Company, which subsequently was renamed Trustco Bank New York and, later, Trustco Bank, National Association. The Companys principal subsidiary, Trustco Bank (also referred to as the Bank), is the successor by merger to Trustco Bank, National Association.
 
Through policy and practice, TrustCo continues to emphasize that it is an equal opportunity employer. There were 778 full-time equivalent employees of TrustCo at year-end 2020. TrustCo had 11,059 shareholders of record as of December 31, 2020 and the closing price of the TrustCo common stock on that date was $6.67.
 
Subsidiaries
 
Trustco Bank
 
Trustco Bank is a federal savings bank engaged in providing general banking services to individuals, partnerships, and corporations. At year-end 2020, the Bank operated 164 automatic teller machines and 148 banking offices in Albany, Columbia, Dutchess, Greene, Montgomery, Orange, Putnam, Rensselaer, Rockland, Saratoga, Schenectady, Schoharie, Ulster, Warren, Washington, and Westchester counties of New York, Brevard, Charlotte, Hillsborough, Indian River, Lake, Manatee, Martin, Orange, Osceola, Palm Beach, Polk, Sarasota, Seminole, and Volusia counties in Florida, Bennington County in Vermont, Berkshire County in Massachusetts and Bergen County in New Jersey. The largest part of such business consists of accepting deposits and making loans and investments. The Bank provides a wide range of both personal and business banking services. The Bank is supervised and regulated by the federal Office of the Comptroller of the Currency (OCC) and is a member of the Federal Reserve System. Its deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent permitted by law. The Banks subsidiary, Trustco Realty Corp., is a real estate investment trust (or REIT) that was formed to acquire, hold and manage real estate mortgage assets, including residential mortgage loans and mortgage backed securities. The income earned on these assets, net of expenses, is distributed in the form of dividends.  Under current New York State tax law, 60% of the dividends received by the Bank from Trustco Realty Corp. are excluded from total taxable income for New York State income tax purposes. The Bank accounted for substantially all of TrustCos 2020 consolidated net income and average assets.  The Banks other active subsidiaries, Trustco Insurance Agency, Inc. and ORE Property, Inc., did not engage in any significant business activities during 2020 and 2019.
 
Trustco Financial Services, the name under which Trustco Banks trust department operates, serves as executor of estates and trustee of personal trusts, provides asset and wealth management services, provides estate planning and related advice, provides custodial services, and acts as trustee for various types of employee benefit plans and corporate pension and profit sharing trusts. The aggregate market value of the assets under trust, custody, or management of the trust department of the Bank was approximately $996.7 million as of December 31, 2020.
 
3

The daily operations of the Bank remain the responsibility of its officers, subject to the oversight of its Board of Directors and overall supervision by TrustCo. The activities of the Bank are included in TrustCos consolidated financial statements.
 
ORE Subsidiary Corp.
 
In 1993, TrustCo created ORE Subsidiary Corp., a New York corporation, to hold and manage certain foreclosed properties acquired by the Bank. The accounts of this subsidiary are included in TrustCos consolidated financial statements.
 
Competition
 
TrustCo faces strong competition in its market areas, both in attracting deposits and making loans. The Companys most direct competition for deposits, historically, has come from commercial banks, savings associations, and credit unions that are located or have branches in the Banks market areas. The competition ranges from other locally based commercial banks, savings banks, and credit unions to branch offices of the largest financial institutions in the United States. In its principal market areas, the Capital District area of New York State and Central Florida, TrustCos principal competitors are local branch operations of super-regional banks, branch offices of money center banks, and locally based commercial banks and savings institutions. The Bank is the largest depository institution headquartered in the Capital District area of New York State. The Company also faces competition for deposits from national brokerage houses, short-term money market funds, and other corporate and government securities mutual funds.
 
Factors affecting the acquisition of deposits include pricing, office locations and hours of operation, the variety of deposit accounts offered, and the quality of customer service provided. Competition for loans has remained strong with current rates at historic lows. Commercial banks, savings institutions, traditional mortgage brokers affiliated with local offices, and nationally franchised real estate brokers are all active and aggressive competitors. The Company competes in this environment by providing a full range of financial services based on a tradition of financial strength and integrity dating from its inception. The Company competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides to borrowers.
 
Supervision and Regulation
 
Banking is a highly regulated industry, with numerous federal and state laws and regulations governing the organization and operation of banks and their affiliates. As a savings and loan holding company, TrustCo and its non-bank subsidiaries are supervised and regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board). The OCC is the Banks primary federal regulator and supervises and examines the Bank. Under the Home Owners Loan Act of 1934 and OCC regulations, Trustco Bank must obtain prior OCC approval for acquisitions, and its business operations and activities are restricted. Because the FDIC provides deposit insurance to the Bank, the Bank is also subject to its supervision and regulation even though the FDIC is not the Banks primary federal regulator.
 
The following summary of laws and regulations applicable to the Company or the Bank is not intended to be a complete description of those laws and regulations or their effects on the Company and the Bank, and it is qualified in its entirety by reference to the particular statutory and regulatory provisions described.
 
Key Legislation
 
Certain Regulatory Developments Relating to the COVID-19 Pandemic

In response to the COVID-19 pandemic, the U.S. government enacted several fiscal stimulus measures, including the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which was signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021 (“CAA”), which was signed into law  on  December 27, 2020 and extends certain provisions under the CARES Act. Among other things, the legislation includes the following provisions affecting financial institutions like us:

4

The CARES Act authorized the Small Business Administration’s Payment Protection Program (“PPP”), which allowed the SBA to guarantee small business loans to pay for payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt.  The loans are provided through participating financial institution, such as TrustCo, that process loan applications and service the loans.

The CARES Act also allowed  banks to elect to suspend requirements under accounting principles generally accepted in the United States of America (“GAAP”) for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a troubled debt restructurings (“TDRs”), including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or January 1, 2022 (as amended by the CAA). Federal banking agencies are required to defer to the determination of the banks making such suspension.

Section 4012 of the CARES Act directed federal regulatory agencies to temporarily reduce the community bank leverage ratio.  In April 2020, the regulatory agencies published a final rule reducing the ratio to 8% through the end of 2020. Beginning in 2021, the ratio will increase to 8.5% for the calendar year before returning to 9% in 2022. A qualifying institution utilizing the community bank leverage ratio framework that fails to maintain a leverage ratio greater than the required percentage is allowed a two-quarter grace period in which to increase its leverage ratio back above the required percentage. During the grace period, a qualifying institution will be considered well capitalized so long as it maintains a leverage ratio of no more than one percent less than the required percentage. If an institution either fails to meet all the qualifying criteria within the grace period, or fails to maintain a leverage ratio of no more than one percent less than the required percentage, it becomes ineligible to use the community bank leverage ratio framework and must instead comply with generally applicable capital rules, sometimes referred to as Basel III rules.

The CARES Act allowed banks to temporarily postpone the adoption of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”). The provision applies during the period beginning March 27, 2020 to the earlier of (1) the first date of an eligible financial  institution’s fiscal year that begins after  the  date when the COVID-19 nationally emergency is terminated, or (2) January 1, 2022 (as amended by the CAA).
 
Dodd-Frank Wall Street Reform and Consumer Protection Act and Economic Growth, Regulatory Relief and Consumer Protection Act
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) created dramatic changes across the financial regulatory system. Among other matters, the Dodd-Frank Act created the Bureau of Consumer Financial Protection (the “BCFP), to centralize responsibility for consumer financial protection and be responsible for implementing, examining and enforcing compliance with major federal consumer financial laws, imposed new consumer protection requirements in mortgage loan transactions and increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.

In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”), was enacted to modify or remove certain financial reform rules and regulations.  The Regulatory Relief Act amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for community banks such as the Bank, and their holding companies.

The Regulatory Relief Act also expanded the definition of qualified mortgages that may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of 9 percent. Any qualifying depository institution or its holding company that exceeds the “community bank leverage ratio” will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the ratio will be considered to be “well capitalized” under the prompt corrective action rules. In addition, the Regulatory Relief Act included regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

5

Dividends
 
Most of TrustCos revenues consist of cash dividends paid to TrustCo by the Bank, payment of which is subject to various regulatory limitations. The payment of dividends by the Bank to TrustCo is subject to continued compliance with minimum regulatory capital requirements, and the receipt of regulatory approval (or non-objection) from the Banks and the Companys regulators.
 
OCC regulations impose limitations upon all capital distributions by the Bank, including cash dividends. Under the regulations, an application to and the approval of the OCC is required prior to any capital distribution if the institution does not meet the criteria for expedited treatment of applications under OCC regulations (generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation, or agreement with the OCC. If an application is not required, the institution must still provide prior notice of the capital distribution to the OCC and the Federal Reserve Board if, like the Bank, the institution is a subsidiary of a savings and loan holding company. The OCC may disapprove a dividend if the institution would be undercapitalized following the distribution, the proposed capital distribution raises safety and soundness concerns, or the capital distribution would violate a prohibition contained in any statue, regulation or agreement between the bank and a regulator or a condition imposed in a previously approved application or notice.
 
As noted above, a savings institution, such as the Bank, that is a subsidiary of a savings and loan holding company and that proposes to make a capital distribution must also submit written notice to the Federal Reserve Board prior to such distribution, and Federal Reserve Board may object to the distribution based on safety and soundness or other concerns. The Federal Reserve Board may deny a dividend notice if following the dividend, the savings  association will be less than adequately capitalized, the proposed dividend raises safety and soundness concerns or the proposed dividend violates a prohibition contained in any statute, regulation, enforcement action or agreement between the association or holding company and an appropriate federal banking agency, a condition imposed on the association or holding company in an application or notice approved by an appropriate federal banking agency, or any formal or informal enforcement action involving the association or holding company.
 
Compliance with regulatory standards regarding capital distributions could also limit the amount of dividends that TrustCo may pay to its shareholders.
 
See Note 14 to the consolidated financial statements contained in TrustCos Annual Report to Shareholders for the year ended December 31, 2020 for information concerning the Banks regulatory capital requirements.
 
Regulatory Capital Requirements and Prompt Corrective Action.
 
Regulatory Capital Rules. The Company and the Bank are subject to regulatory capital requirements contained in rules published by the Federal Reserve Board, OCC, and FDIC. The rules establish a comprehensive capital framework for all U.S. banking organizations and were effective for the Company and the Bank on January 1, 2015, with full compliance with all of the final rules requirements being phased in over a multi-year schedule. The capital rules were fully phased in effective January 1, 2019.
 
6

The capital rules, among other things, provide a Common Equity Tier 1 (CET1) capital measure. CET1 capital is generally defined as common stock instruments that meet eligibility criteria in the final capital rule (generally, instruments representing the most subordinated claim upon liquidation, having no maturity date and being redeemable via discretionary purchases only with regulatory approval, not being subject to any expectations that the stock will be repurchased, redeemed, or cancelled, and not being secured by the banking organization or any related entity), retained earnings, accumulated other comprehensive income, and common equity Tier 1 minority interests, subject to certain limitations. Tier 1 capital for the Company and the Bank consists of CET1 capital plus additional Tier 1 capital, which generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Also under the capital rules, total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock, and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income (AOCI), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). The Company has made this opt-out election. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
 
Under the capital rules, the minimum capital ratios are:
 
 
4.5% CET1 to risk-weighted assets;
 
6.0% Tier 1 capital to risk-weighted assets;
 
8.0% Total capital to risk-weighted assets; and
 
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (the leverage ratio).

At December 31, 2020, the Bank had a Tier 1 leverage ratio (Tier 1 capital to total average consolidated assets) of 9.38%, CET1 capital ratio (CET1 capital to risk-weighted assets) of  a 18.65%, Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) of 18.65%, and a total capital ratio (total capital to risk-weighted assets) of 19.90%.  Also at December 31, 2020, the Company had a Tier 1 leverage ratio (Tier 1 capital to total average consolidated assets) of 9.65%, CET1 capital ratio (CET1 capital to risk-weighted assets) of 19.19%, a Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) of 19.19% and a total capital ratio (total capital to risk-weighted assets) of 20.44%.
 
The capital rules require the Companys and the Banks capital to exceed the regulatory standards plus a capital conservation buffer in order to avoid constraints on dividends, equity repurchases and certain compensation. To meet the requirement, the organization must maintain an amount of CET1 capital that exceeds the buffer level of 2.5% above each of the minimum risk-weighted asset ratios, (1) CET1 to risk-weighted assets of more than 7.0%, (ii) Tier 1 capital to risk-weighted assets of more than 8.5%, and (iii) total capital (Tier 1 plus Tier 2) to risk-weighted assets of more than 10.5%.
 
The OCC has the ability to establish an individual minimum capital requirement for a particular institution, which would vary from the capital levels that would otherwise be required under the capital regulations, based on such factors as concentrations of credit risk, levels of interest rate risk, and the risks of non-traditional activities, as well as others. The OCC has not imposed any such requirement on the Bank.
 
The capital rules contain standards for the calculation of risk-weighted assets.  The exposure amount for on-balance sheet assets is generally the carrying value of the exposure as determined under GAAP.  A bank may assign a 50% risk weight to a first-lien residential mortgage exposure that:
 
 
is secured by property that is owner-occupied or rented,
 
is made in accordance with prudent underwriting standards, including loan-to-value ratios,
 
is not 90 days or more past due or in nonaccrual status, and
 
is not restructured or modified.

Other first-lien residential exposures, as well as junior-lien exposures if the bank does not hold the first lien, are assigned a 100% risk weight.
 
7

If a banking organization has elected to opt out of the AOCI provisions discussed above, the exposure amount for available for sale or held-to-maturity debt securities is the carrying value (including accrued but unpaid interest and fees) of the exposure, less any net unrealized gains plus any unrealized losses. Exposures to debt directly and unconditionally guaranteed by the U.S. federal government and its agencies receive a 0% risk weight. Exposures conditionally guaranteed by the federal government, Federal Reserve Board, or a federal government agency would receive a 20% risk weight. Further, the capital rules assign a 20% risk weight to non-equity exposures to government-sponsored entities (GSEs) and a 100% risk weight to preferred stock issued by a GSE. A GSE is defined as an entity established or chartered by the federal government to serve public purposes but whose debt obligations are not explicitly guaranteed by the full faith and credit of the federal government. Banking organizations must assign a 20% risk weight to general obligations of a public sector entity (for example, a state, local authority or other governmental subdivision below the sovereign level) that is organized under U.S. law and a 50% risk weight for a revenue obligation of such an entity.
 
Prompt Corrective Action. Federal banking regulations also establish a prompt corrective action capital framework for the classification of insured depository institutions, such as Trustco Bank, into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The federal banking agencies are required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution or its holding company. Such actions could have a direct material effect on an institutions or its holding companys financial condition and activities. Under the prompt corrective action rules currently in effect, an institution is deemed to be (a) well-capitalized if it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of 8.0% or more, has a CET1 risk based capital ratio of 6.5% or more, and has leverage capital ratio of 5.0% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure; (b) adequately capitalized if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more, a CET1 risk based capital ratio of 4.5% or more and has a leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of well-capitalized; (c) undercapitalized if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 6.0%, a CET1 capital ratio less than 4.5% or a Tier 1 leverage capital ratio that is less than 4.0%; (d) significantly undercapitalized if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, a CET1 capital ratio less than 3% or a Tier 1 leverage capital ratio that is less than 3.0%; and (e) critically undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. In certain situations, a federal banking agency may reclassify a well-capitalized institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with supervisory actions as if the institution were in the next lower category.
 
A depository institution is generally prohibited from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized. Undercapitalized institutions also are subject to growth limitations and are required to submit a capital restoration plan to the regulatory agencies. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institutions capital. In addition, for a capital restoration plan to be acceptable, the depository institutions parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institutions total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
 
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator.
 
At December 31, 2020 and 2019, each of TrustCo and Trustco Bank met all capital adequacy requirements to which it was subject under the OCC and FRB regulations.
 
8

Holding Company Activities
 
The activities of savings and loan holding companies are governed, and limited, by the Home Owners Loan Act and the Federal Reserve Boards regulations. In general, TrustCos activities are limited to those permissible for multiple savings and loan holding companies (that is, savings and loan holding companies owning more than one savings association subsidiary) as of March 5, 1987, activities permitted for bank holding companies as of November 12, 1999, and activities permissible for financial holding companies (which are described below). Activities permitted to multiple savings and loan holding companies include certain real estate investment activities, and other activities permitted to bank holding companies under the Bank Holding Company Act. Activities permissible for a financial holding company are those considered financial in nature (including securities and insurance activities) or those incidental or complementary to financial activities.
 
A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another financial institution or savings and loan holding company without the prior written approval of the Federal Reserve Board. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board considers the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the deposit insurance fund, the convenience and needs of the community and competitive factors.
 
The financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Federal Reserve Board, and the Federal Reserve Board has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. The Federal Reserves long-standing source of strength doctrine requires that bank or thrift holding companies serve as a source of financial strength for their depository institution subsidiaries. The phrase source of financial strength is defined as the ability of a company that directly or indirectly owns or controls an insured depository institution to provide financial assistance to such insured depository institution in the event of the financial distress of the insured depository institution. The federal banking agencies are authorized to adopt regulations with respect to this requirement.
 
Securities Regulation and Corporate Governance
 
The Companys common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, and the Company is subject to restrictions, reporting requirements and review procedures under federal securities laws and regulations. The Company is also subject to the rules and reporting requirements of The NASDAQ Stock Market LLC, on which its common stock is traded.
 
Like other issuers of publicly traded securities, the Company must also comply with provisions of the Dodd-Frank Act that require publicly traded companies to give stockholders a non-binding vote on executive compensation, and the Company will also be subject to the Dodd-Frank Act provisions that authorize the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a companys proxy materials.
 
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) implemented legislative reforms intended to address corporate and accounting fraud and contained reforms of various business practices and numerous aspects of corporate governance. For example, Sarbanes-Oxley addresses accounting oversight and corporate governance matters, including the creation of the PCDOB to set and enforce auditing, quality control and independence standards for accountants and have investigative and disciplinary powers; increased responsibilities and codified requirements relating to audit committees of public companies and how they interact with a companys public accounting firm; the prohibition of accounting firms from providing various types of consulting services to public clients and requiring accounting firms to rotate partners among public client assignments every five years; expanded disclosure of corporate operations and internal controls and certification by chief executive officers and chief financial officers to the accuracy of periodic reports filed with the SEC; and prohibitions on public company insiders from trading during retirement plan blackout periods, restrictions on loans to company executives and enhanced controls on and reporting of insider trading.
 
Although the Company has and will continue to incur additional expense in complying with the corporate governance provisions of federal law and the resulting regulations, management does not expect that such compliance will have a material impact on the Companys financial condition or results of operations.
 
9

Federal Savings Institution Regulation
 
Business Activities. Federal law and regulations govern the activities of federal savings banks such as the Bank. These laws and regulations delineate the nature and extent of the activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institutions capital or assets.
 
Insurance of Deposit Accounts. Deposits of Trustco Bank are insured by the Deposit Insurance Fund (DIF) of the FDIC, and the Bank is subject to deposit insurance assessments to maintain the DIF. The FDIC determines insurance premiums based on a number of factors, primarily the risk of loss that insured institutions pose to the DIF. Deposit insurance assessments are based on average consolidated total assets minus average tangible equity. Under the FDICs risk-based assessment system, insured institutions with less than $10 billion in assets, such as the Bank, are assigned to one of three categories based on their composite examination ratings, with higher-rated, less risky institutions paying lower assessments. A range of initial base assessment rates applies to each category, adjusted downward based on unsecured debt issued by the institution to produce total base assessment rates. Total base assessment rates currently range from 1.5 to 16 basis points banks in the least risky category to 11 to 30 basis points for banks in the most risky category, all subject to further adjustment upward if the institution holds more than a limited amount of unsecured debt issued by another FDIC-insured institution.
 
The FDIC has the authority to raise or lower assessment rates, subject to limits, and to impose special additional assessments. The Dodd-Frank Act set the minimum reserve ratio to not less than 1.35% of estimated insured deposits or the comparable percentage of the FDICs assessment base. The act also required the FDIC to take the steps necessary to attain the 1.35 percent ratio by September 30, 2020, subject to an offsetting requirement for certain institutions. As of September 30, 2020, the FDIC had announced that the ratio declined to 1.30% due largely to consequences of the COVID-19 pandemic. The FDIC adopted a plan to restore the fund to the 1.35% ratio within eight years but did not change its assessment schedule.
 
FDIC deposit insurance expense totaled $1.0 million, $624 thousand, and $1.5 million, in 2020, 2019, and 2018, respectively. FDIC deposit insurance expense includes deposit insurance assessments and, until 2019, Financing Corporation (FICO) assessments related to outstanding bonds issued by FICO in the late 1980s to recapitalize the now defunct Federal Savings & Loan Insurance Corporation. The final FICO assessment was collected in 2019.
 
Future changes in insurance premiums could have an adverse effect on the operating expenses and results of operations of Trustco Bank, and the Bank cannot predict what insurance assessment rates will be in the future.
 
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OCC. The Bank does not know of any practice, condition or violation that might lead to termination of its deposit insurance.
 
Assessments. The Bank is required to pay assessments to the OCC to fund the agencys operations. The general assessments, paid on a semi-annual basis, is computed upon the Banks total assets, including consolidated subsidiaries, as reported in the Banks latest quarterly financial report. The OCCs assessment schedule includes a surcharge for institutions that require increased supervisory resources. The assessments paid by the Bank for the year ended December 31, 2020 totaled approximately $750 thousand.
 
Community Reinvestment Act. The Community Reinvestment Act (CRA) requires each savings institution, as well as commercial banks and certain other lenders, to identify the communities served by the institutions offices and to identify the types of credit the institution is prepared to extend within those communities. The CRA also requires the OCC to assess an institutions performance in meeting the credit needs of its identified communities as part of its examination of the institution, and to take such assessments into consideration in reviewing applications with respect to branches, mergers and other business combinations, including acquisitions by savings and loan holding companies. In May 2020, the OCC released a final rule amending its regulations under the CRA. The final rule clarifies and expands the activities that qualify for CRA credit, updates where activities count for such credits and seeks to provide more consistent and objective measures for evaluating performance. The final rule became effective on October 1, 2020 but compliance with the amended requirements is not mandatory for the Bank until January 1, 2023.  An unsatisfactory CRA rating may be the basis for denying such an application and community groups have successfully protested applications on CRA grounds. In connection with its assessment of CRA performance, the OCC assigns CRA ratings of outstanding, satisfactory, needs to improve or substantial noncompliance. The Bank was rated satisfactory in its last CRA examination. Institutions are evaluated based on (i) its record of helping to meet the credit needs of its assessment area through lending activities; (ii) its qualified investments; and (iii) the availability and effectiveness of the institutions system for delivering retail banking services. An institution that is found to be deficient in its performance in meeting its communitys credit needs may be subject to enforcement actions, including cease and desist orders and civil money penalties.
 
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Qualified Thrift Lender Test. As a savings institution regulated by the OCC, the Bank must be a qualified thrift lender under either the Qualified Thrift Lender (QTL) test under the Home Owners Loan Act or the Internal Revenue Codes Domestic Building and Loan Association (DBLA) test to avoid certain restrictions on its and the Companys operations and activities. A savings institution may use either test to qualify and may switch from one test to the other; however, the institution must meet the time requirements of the respective test, that is, nine out of the preceding 12 months for the QTL test and at the close of the taxable year for the DBLA test.
 
Under the QTL test, the savings institution must hold qualified thrift investments equal to at least 65% of the institutions portfolio assets. The savings institutions actual thrift investment percentage is the ratio of its qualified thrift investments divided by its portfolio assets. Portfolio assets are total assets minus goodwill and other intangible assets, office property, and liquid assets not exceeding 20% of total assets. An institution ceases to meet the QTL test when its actual thrift investment percentage falls below 65% of portfolio assets for four months within any 12-month period. To be a qualified thrift lender under the DBLA test, a savings association must meet a business operations test and a 60% of assets test. The business operations test requires the business of a DBLA to consist primarily of acquiring the savings of the public and investing in loans. An institution meets the public savings requirement when it meets one of two conditions: (i) the institution acquires its savings accounts in conformity with OCC rules and regulations and (ii) the general public holds more than 75% of its deposits, withdrawable shares, and other obligations. An institution meets the investing in loans requirement when more than 75% of its gross income consists of interest on loans and government obligations, and various other specified types of operating income that financial institutions ordinarily earn. The 60% of assets test requires that at least 60% of a DBLAs assets must consist of assets that thrifts normally hold, except for consumer loans that are not educational loans.
 
These are significant consequences for failing the QTL Test, including activities limitations and branching restrictions. In addition, an institution that fails the QTL test would be prohibited from paying dividends, except under circumstances that are permissible for a national bank, that are necessary to meet the obligations of the institutions holding company, and that are specifically approved by both the OCC and Federal Reserve Bank after a written request submitted by the thrift at least 30 days in advance of the proposed payment. Finally, failure of the QTL Test will subject the institution to enforcement action. If the Bank fails the qualified thrift lender test, within one year of such failure the Company must register as, and will become subject to, the activities restrictions applicable to bank holding companies, unless the Bank requalifies within the year. The activities authorized for a bank holding company are generally more limited than are the activities authorized for a savings and loan holding company. If the Bank fails the test a second time, the Company must immediately register as, and become subject to, the restrictions applicable to a bank holding company. The Bank is currently, and expects to remain, in compliance with the qualified thrift lender test.
 
Transactions with Related Parties. The Banks transactions with affiliates (generally, any company that controls or is under common control with the Bank, including TrustCo) is limited by Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve Boards implementing Regulation W. Under these laws, the aggregate amount of covered transactions between the Bank and any one affiliate is limited to 10% of the Banks capital stock and surplus, and the aggregate amount of covered transactions by the Bank with all of its affiliates is limited to 20% of capital stock and surplus. Certain covered transactions (primarily credit-related transactions) are required to be secured by collateral in an amount and of a type described in Section 23A and Regulation W. Transactions by the Bank with its affiliates must be on terms and under circumstances that are at least as favorable to the Bank as those prevailing at the time for comparable transactions with non-affiliates. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies, and no savings institution may purchase the securities of any affiliate other than a subsidiary.
 
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The definition of covered transactions as used in Section 23A includes credit exposure on derivatives transactions and securities lending and borrowing transactions, as well as the acceptance of affiliate-issued debt obligations as collateral for a loan or an extension of credit.
 
The Bank also is restricted in its ability to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Extensions of credit to those insiders must be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons; may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate. In addition, extensions of credit in excess of certain limits must be approved by the Banks board of directors.
 
Certain non-credit transactions between an insured depository institution and its insiders, such as asset purchase and sales, are prohibited unless the transaction is on market terms and, if the transaction represents more than 10% of the capital stock and surplus of the institution, has been approved in advance by a majority of the disinterested members of the board of directors of the institution.
 
Safety and Soundness Regulations. The federal banking agencies (including the OCC) have adopted certain safety and soundness standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings and compensation, fees, and benefits, as well as other operational and managerial standards as the agency deems appropriate. Interagency Guidelines Establishing Standards for Safety and Soundness set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency (the OCC in the case of the Bank) determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.
 
Enforcement. The Federal Reserve Board and the OCC have extensive enforcement authority over savings institutions and their holding companies, including the Bank and TrustCo. This includes enforcement authority with respect to the actions of the Banks and TrustCos directors, officers and other institution-affiliated parties, including attorneys and auditors. This enforcement authority also includes, among other things, the ability to assess civil money penalties, issue cease-and-desist or removal orders and initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Public disclosure of final enforcement actions by the OCC and the Federal Reserve is required.
 
Institutions in Troubled Condition. Certain events, including entering into a formal written agreement with a banks regulator or being informed by the regulator that the bank is in troubled condition, will require that a bank give prior notice to their primary regulator before adding or replacing any member of the board of directors, employing any person as a senior executive officer, or changing the responsibilities of any senior executive officer so that the person would assume a different senior executive position. Troubled condition banks are prohibited from making, or agreeing to make, certain golden parachute payments to institution-affiliated parties, subject to certain exceptions.
 
Consumer Laws and Regulations. In addition to the other laws and regulations discussed above, the Bank is subject to consumer laws and regulations designed to protect consumers in transactions with financial institutions. These laws and regulations include, among others, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act and the Real Estate Settlement Procedures Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits from, making loans to, or engaging in other types of transactions with, such customers.
 
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The BCFP has adopted rules related to mortgage loan origination and mortgage loan servicing. In particular, the BCFP has issued a rule implementing the ability-to-repay and qualified mortgage (QM) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the QM Rule). The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of qualified mortgage are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a qualified mortgage incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA and VA underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The QM Rule became effective in January 2014.
 
Bank Secrecy Act/Anti-Money Laundering and Customer Identification. The Bank is subject to the Bank Secrecy Act (“BSA”) and other anti-money laundering provisions and requirements, which generally require that it implement a comprehensive customer identification program and an anti-money laundering program and procedures. All financial institutions, including the Company and the Bank, are required to take certain measures to identify their customers, prevent money laundering, monitor certain customer transactions and report suspicious activity to U.S. law enforcement agencies, and scrutinize or prohibit altogether certain transactions of special concern. Financial institutions are also required to respond to requests for information from federal banking regulatory agencies and law enforcement agencies concerning their customers and their transactions. Information Sharing among financial institutions concerning terrorist or money laundering activities is encouraged by an exemption provided from the privacy provisions of the GLB Act (described below) and other laws. Further, the effectiveness of a financial institution in combating money-laundering activities is a factor to be considered in applications submitted by a financial institution for merger or acquisition proposals. The Company has in place a Bank Secrecy Act compliance program, and it engages in very few transactions of any kind with foreign financial institutions or foreign persons.  The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970, was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement-and-investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.
 
Consumer Privacy. The federal banking agencies have prohibited rules regarding the confidential treatment of nonpublic personal information about consumers. These rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy rules affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Because the Company does not sell customer information or give customer information to outside third parties or its affiliates except under limited circumstances (e.g., providing customer information to the Companys data processing provider), the rules have not had a significant impact on the Companys results of operations or financial condition.
 
Federal Reserve System
 
Federal Reserve Board regulations require savings institutions to maintain reserves against their transaction accounts. The reserve for transaction accounts effective as of January 14, 2021 was as follows:
 
Amount of transaction accounts
Reserve Requirement
   
$0 to $21.1 million
0% of amount.
   
Over $21.1 million and up to $182.9 million
3% of amount.
   
Over $182.9 million
10% of amount over $182.9 million

The Bank is in compliance with these requirements.
 
Federal Home Loan Bank of New York. The Bank is a member of Federal Home Loan Bank (FHLB) of New York, which is one of 11 regional FHLBs that serve as reserve or central banks for their members. The FHLBs are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system and makes loans or advances to members. The Bank is also required to purchase and maintain stock in the FHLB of New York at or above levels specified in the FHLB of New York capital plan. As of December 31, 2020, the Bank owned $5.5 million in FHLB of New York stock, which was in compliance with its obligations.
 
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Human Capital Resources
 
Our Human Capital Strategic Plan guides us on our journey to foster a multicultural, collaborative, and inclusive work environment that promotes the exchange of different ideas, philosophies and perspectives, which continues to be a top priority at TrustCo.

Headcount

As of December 31, 2020, we had 881 employees, all based in the United States, with 619 employees (70%) at bank branches, 246 (28%) located in corporate offices and 16 (2%) in call centers.

We have not experienced any employment-related work stoppages due to the Covid-19 pandemic and consider relations with our employees to be good. Specifically, in response to local government and health guidelines around the Covid-19 pandemic, some departmental staff members have been approved to work remotely, and remaining internal staff have been relocated to separate offices, while other offices have been reorganized accordingly. Glass barriers have been installed where necessary, and staff has regularly been encouraged to utilize video conferencing platforms. All branches and internal corporate offices have been provided with face coverings and cleaning supplies, and staff are encouraged to disinfect surface areas consistently.

Hiring & Promotion Practices

At TrustCo we are continuously educating our hiring managers about recruitment and selection processes, and we strive to build our workforce from within when possible. All employees are eligible to apply for open department and branch positions following their introductory period, and during 2020, 155 (roughly 18%) of our employees were promoted within the Bank. If the best candidate for an available position is not identified from within our existing talent pool, we will look externally for the best talent, and our recruitment strategy focuses on searching for candidates directly through our participation in job fairs and social media advertising, and through our professional networks and other associations that represent diverse groups. Additionally, we have an active recruitment incentive program which awards existing employees for referring new employees to the Bank, which in turn helps us diversify our workforce.

Talent Development

We believe in investing for the future which includes the future of our workforce, and we actively encourage and support the growth of our employees throughout their educational and career development, ensuring employees are given opportunities to develop and refine their skills to be successful within the Bank’s competitive environment. We aim to accomplish this through a multitude of training and development programs, which include opportunities to engage in interdepartmental experiential learning, voluntary training seminars, ongoing training through our Cornerstone platform, tuition reimbursement program, BSA-AML certificate program with Schenectady County Community College and certification reimbursement for certain levels of employment. Currently, we have 58 (6.5%) employees that hold professional certificates and/or licenses. Additionally, our employees participated in over 16,400 hours of training, which included a recently expanded course on Diversity in the Workplace. We take great pride in our mentoring program which was started by our CEO and was structured to allow newly hired assistant managers to report directly to the CEO for their first 10 weeks, and then met regularly for one-on-one mentoring sessions and professional development. The mentoring program has been expanded so that in addition to the CEO, all of the Bank’s executive vice presidents now mentor new assistant manager-level employees in the same manner. The professional success, job satisfaction, and retention of program graduates has been monitored and preliminary results are excellent. Currently, more than 40 people have been mentored through the program.

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Employee Feedback

Through our training and mentoring programs, we actively encourage employee feedback. Following each training session, employees complete evaluations designed to provide constructive feedback on their trainer’s knowledge, the overall training structure, and the employee’s confidence in their ability to be successful in their new role. We are also gathering data on an ongoing basis which focuses on the tenure of current staff. We’ve consistently improved our average tenure over the past four years, with an average tenure of about 5 years currently Furthermore, the Human Resources Department conducts stay and exit interviews, which capture feedback from high turnover positions. These interviews are used to improve processes and procedures and inform future policy.

Diversity and Inclusion

We recognize that everyone deserves respect and equal treatment, regardless of race, color, religion, sex (including gender identity, sexual orientation, and pregnancy), national origin, age (40 or older), disability or genetic information. TrustCo is committed to creating an inclusive environment that promotes diversity, equity and inclusion through training, recruiting and recognition practices to support our employees. Our Human Capital Strategic Plan focuses on identifying areas of opportunity to further diversify our workforce over time. As of December 2020, approximately 65% of our workforce is female, 35% is male, with 38% from minorities (defined as those who identify as Black or African American, Hispanic or Latino, American Indian or Alaska Native, Asian, Native Hawaiian or other Pacific Islander, and/or two or more races).  Additionally, our inclusion efforts focus on age, where we seek to recruit younger candidates to create long-term career potential, while seeking to retain our experienced team members for the many benefits their presence yields.

Employee Compensation and Benefits

Our human capital strategy objectives include identifying, recruiting, retaining, incentivizing and integrating our existing and future employees. We strive to attract and retain the most talented employees by offering compensation and benefit structures that support their health, financial and emotional well-being, which includes competitive base salaries, annual bonuses, generous paid time off balances and Holiday Pay, an Employee Stock Purchase Club Program, life insurance, a 401(k) plan, the Trustco Bank Scholarship Program, a Tuition Reimbursement Program, a Student Loan Benefit Program, an Employee Assistance Program for mental and emotional support and various Company-organized wellness competitions.

Foreign Operations
 
Neither TrustCo nor the Bank engage in any operations in foreign countries or have outstanding loans to foreign debtors.
 
Statistical Information Analysis
 
The Managements Discussion and Analysis of Financial Condition and Results of Operations are included in TrustCos Annual Report to Shareholders for the year ended December 31, 2020, which contains a presentation and discussion of statistical data relating to TrustCo, is hereby incorporated by reference. This information should not be construed to imply any conclusion on the part of the management of TrustCo that the results, causes, or trends indicated therein will continue in the future. The nature and effects of governmental monetary policy, supervision and regulation, future legislation, inflation and other economic conditions and many other factors which affect interest rates, investments, loans, deposits, and other aspects of TrustCos operations are extremely complex and could make historical operations, earnings, assets, and liabilities not indicative of what may occur in the future.
 
Critical Accounting Policies
 
Pursuant to recent SEC guidance, management of the Company is encouraged to evaluate and disclose those accounting policies that are judged to be critical policies, or those most important to the portrayal of the Companys financial condition and results of operations, and that require managements most difficult subjective or complex judgments. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent subjectivity and uncertainty in estimating the levels of the allowance required to cover credit losses in the portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in TrustCos Annual Report to Shareholders for the year ended December 31, 2020, is a description of this critical policy and the other significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.
 
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Availability of Reports
 
TrustCos annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports can be obtained free of charge from its Internet site, www.trustcobank.com under the Investor Relations tab. These reports are available on the Internet site as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The information found on the Companys website is not incorporated by reference in this or any other report the Company files or furnishes to the SEC. These reports are also available on the SECs website at http://www.sec.gov.
 
Forward-Looking Statements
 
Statements included in this report and in future filings by TrustCo with the SEC, in TrustCos press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Forward-looking statements can be identified by the use of such words as may, will, should, could, would, estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.
 
TrustCos 2021 Annual Report to Shareholders, which is included as Exhibit 13 hereto, contains a list of certain important factors, in addition to the factors described under Item 1A. Risk Factors that in some cases have affected and in the future could affect TrustCos actual results, and could cause TrustCos actual financial performance to differ materially from that expressed in any forward-looking statement. The list should not be construed as exhaustive, and TrustCo disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.
 
Investors should not rely upon forward-looking statements as predictions of future events. Although TrustCo believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur.
 
Item 1A.
Risk Factors

The following are general risk factors affecting the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business operations. Any of these risks could materially and adversely affect our business, financial condition or results of operations. In such cases, you may lose all or part of your investment.
 
Risks Related to the COVID-19 Pandemic

The COVID-19 outbreak could adversely affect our business activities, financial condition and results of
operations.

Our banking business, and the business of our industry generally, is dependent upon the willingness and ability of customers to conduct banking and other financial transactions. The spread of COVID-19 has caused, and we expect it to continue to cause, severe disruptions in the U.S. economy, including in the geographic areas in which we operate. Such economic disruptions could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans, negatively impact national and regional economic conditions, result in declines in loan demand and originations, the value of loan collateral (particularly in our home mortgage loan portfolio), and deposit availability, and negatively impact the implementation of our growth strategy. The spread of COVID-19 may result in a significant decrease in business and/or cause customers to be unable to meet existing payment or other obligations. The effects of the economic disruptions created by the COVID-19 pandemic, depending on their extent, could materially and adversely affect our liquidity and financial condition, and the results of our operations could be materially and adversely affected.

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While the spread of COVID-19 has minimally affected our operations as of December 31, 2020, we may experience temporary closures of offices and/or suspension of certain services. Although we maintain contingency plans for a pandemic, the spread of COVID-19 could negatively affect key employees, including operational management personnel and those charged with preparing, monitoring, and evaluating our financial reporting and internal controls. Such a spread or outbreak could also negatively impact the business and operations of third-party service providers who perform critical services for us. If COVID-19, or another highly infectious or contagious disease, spreads or the response to contain COVID-19 is unsuccessful, we could experience a material adverse effect to our business, financial condition, and results of operations.

Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of Federal Reserve actions. Market interest rates have declined significantly. Yields on the 30-year Treasury notes and 10-year Treasury notes, which significantly influence home mortgage interest rates, are at historic lows. On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%, and on March 15, 2020, it further reduced the target federal funds rate by 100 basis points to 0.00% to 0.25% and announced a quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. The Federal Reserve reduced the interest that it pays on excess reserves from 1.60% to 1.10% on March 3, 2020, and then to 0.10% on March 15, 2020. We expect that these reductions in interest rates, especially if prolonged, could adversely affect net interest income and margins and profitability.

The extent to which the COVID-19 pandemic affects our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

As a participating lender in the SBA’s Paycheck Protection Program, the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the Payment Protection Program and risks that the SBA may not fund some or all Payment Protection Program loan guaranties.

The COVID-19 pandemic and its impact on the economy have led to actions including the enactment of the CARES Act,  which included the establishment of a loan program administered through the SBA referred to as the Payment Protection Program (“PPP”). Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria.

We have experienced increased volume of loan originations, particularly SBA loans pursuant to the PPP. Certain of these SBA loans have mandated interest rates that are lower than our usual rates and may not be purchased by the SBA or other third parties within expected timeframes. In addition, borrowers may draw on existing lines of credit or seek additional loans to finance their businesses. These factors may result in reduced levels of capital and liquidity being available to originate more profitable loans, which will negatively impact our ability to serve our existing customers and our ability to attract new customers.

We may be exposed to the risk of litigation, from both customers and non-customers that approached us regarding PPP loans, regarding our process and procedures used in processing applications. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by related litigation could have a material adverse impact on our business, financial condition and results of operations.

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We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced by us, such as an issue with the eligibility of the borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid the guaranty, seek recovery of any loss related to the deficiency from us.

Risks Related to Our Business
 
Certain interest rate movements may hurt earnings and asset values.
 
Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments, and interest paid on deposits and borrowings. Over any specific period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice-versa. In addition, the individual market interest rates underlying our loan and deposit products may not change to the same degree over a given time period. In any event, if market interest rates should move contrary to our position, earnings may be negatively affected. Interest rates have in recent years hit historical low levels.  From December 2015 through December 2018, the U.S. Federal Reserve increased its federal funds target rate from a range of 0.00% - 0.25% to a range of 2.25% - 2.50%.  However, beginning in June 2019, the Federal Reserve began lowering the target rate in response to a slowing economy and in March 2020 quickly lowered the target rate back to 0.00% - 0.25% in response to the COVID-19 pandemic and the objective of injecting liquidity into the banking system and stimulating the credit markets.  Lower rates have helped lead to a lower cost of funds, but have also lowered the yields we earn on loans, securities, and short-term investments. To the extent that the Federal Reserve or general market conditions for deposits change rates further, our cost of funds may rise faster than the rates we earn on loans and investments, potentially causing a compression of our interest rate spread and net interest margin, which would have a negative effect on Trustco Banks profitability.

We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans. Decreases in interest rates often result in increased prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Conversely, increases in interest rates often result in slowed prepayments of loans and mortgage-related securities, reducing cash flows and reinvestment opportunities.
 
Changes in interest rates also affect the value of the Banks interest-earning assets, and in particular the Banks securities portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on shareholders equity.
 
We are exposed to credit risk in our lending activities.
 
There are inherent risks associated with our lending and trading activities. Loans to individuals and business entities, our single largest asset group, depend for repayment on the willingness and ability of borrowers to perform as contracted. A material adverse change in the ability of a significant portion of our borrowers to meet their obligation to us, due to changes in economic conditions, interest rates, natural disaster, acts of war, or other causes over which we have no control, could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans, and could have a material adverse impact on our earnings and financial condition.
 
If our allowance for loan losses (“ALLL”) is not sufficient to cover actual loan losses, our earnings could decrease, and a new accounting standard may require us to increase our ALLL.
 
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Our borrowers may not repay their loans according to the terms of the loans, and, as a result of the declines in home prices, the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which could have a material adverse effect on our operating results. When determining the amount of the ALLL, we make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In deciding on the adequacy of the allowance for loan losses, management reviews past due information, historical charge-off and recovery data, and nonperforming loan activity. Also, there are a number of other factors that are taken into consideration, including: the magnitude, nature and trends of recent loan charge-offs and recoveries, the growth in the loan portfolio and the implication that it has in relation to the economic climate in the Banks market territories, and the economic environment in the Upstate New York territory primarily (the Companys largest geographical area) over the last several years, as well as in the Companys other market areas. A significant portion of the allowance is determined using qualitative factors. The determination of qualitative factors involves subjective judgement and subjective measurement. If our assumptions and analysis prove to be incorrect, our ALLL may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance which is maintained through provisions for loan losses. Material additions to our allowance would materially decrease our net income.
 
Additionally, TrustCo will adopt ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) effective January 1, 2022, as provided by the CARES Act and further extended under the COVID-19 Relief Bill, which became law in December 2020.  This standard will require financial institutions to determine periodic estimates of lifetime expected credit losses on financial instruments and other commitments to extend credit.  This will change the current method of providing allowances for credit losses that are probable, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses.
 
We may not be able to meet the cash flow requirements of our depositors or borrowers or meet our operating cash needs to fund corporate expansion and other activities.

Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of Trustco Bank is used to make loans and to repay deposit liabilities as they become due or are demanded by customers. Liquidity policies and limits have been established by our board of directors, and our management monitors the overall liquidity position of Trustco Bank to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. Trustco Bank is also a member of the Federal Home Loan Bank which provides funding to members through advances and other extensions of credit that are typically collateralized with securities or mortgage-related assets. Our securities portfolio can be used as a secondary source of liquidity, and additional liquidity could be obtained from securities sold under repurchase agreements, non-core deposits, and debt or equity securities issuances in public or private transactions. If we were unable to access any of these funding sources when needed, we might not be able to meet the needs of our customers, which could adversely affect our financial condition, our results of operations, cash flows and our level of regulatory capital.

We are subject to claims and litigation pertaining to fiduciary responsibility and lender liability.

Some of the services we provide, such as trust and investment services, require us to act as fiduciaries for our customers and others. In addition, loan workout and other activities may expose us or Trustco Bank to legal actions, including lender liability or environmental claims. From time to time, third parties make claims and take legal action against us pertaining to the performance of our fiduciary responsibilities or loan-related activities. If these claims and legal actions are not resolved in a manner favorable to us, we may be exposed to significant financial liability and/or our reputation could be damaged. Either of these results may adversely impact demand for our products and services or otherwise have a harmful effect on our business and, in turn, on our financial condition, results of operations and prospects.

Risks Related to Market Conditions
 
A prolonged economic downturn, especially one affecting our geographic market area, will adversely affect our operations and financial results.
 
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Our primary lending emphasis is the origination of one-to-four family first mortgage loans on residential properties; therefore, we are particularly exposed to downturns in the U.S. housing market. The primary risks inherent in our one- to four-family loan portfolio are declines in economic conditions, elevated levels of unemployment or underemployment, and declines in residential real estate values. Any one or a combination of these events may have an adverse impact on borrowers ability to repay their loans, which could result in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions.
 
Additionally, we have a concentration of loans secured in New York and Florida. Approximately 72.1% of our loan portfolio is comprised of loans secured by property located in our markets in and around of New York, and approximately 27.9% is comprised of loans secured by property located in Florida. This makes us vulnerable to a downturn in the local economy and real estate markets. Adverse conditions in the local economy such as inflation, unemployment, recession, natural disasters, or other factors beyond our control could impact the ability of our borrowers to repay their loans. Decreases in local real estate values could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure. Currently, there is not a single employer or industry in the area on which the majority of our customers are dependent.
 
Market volatility levels have experienced significant variations in recent years and a return to very high volatility levels could adversely affect us.

The stock and credit markets have been experiencing significant variations in volatility levels in recent years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers underlying financial strength. Current volatility levels have diminished significantly from the peak, but a return to higher levels could cause the Company to experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition, and results of operations.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, banks, investment banks, mutual funds, and other institutional entities. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. Any such losses could be material and could materially and adversely affect our business, financial condition and results of operations.

The trust wealth management fees we receive may decrease as a result of poor investment performance, in either relative or absolute terms, which could decrease our revenues and net earnings.

Our Trustco Financial Services department derives its revenues primarily from investment management fees based on assets under management. Our ability to maintain or increase assets under management is subject to a number of factors, including investors’ perception of our past performance, in either relative or absolute terms, market and economic conditions, and competition from investment management companies. Financial markets are affected by many factors, all of which are beyond our control, including general economic conditions, securities market conditions, the level and volatility of interest rates and equity prices, competitive conditions, monetary and fiscal policy and investor sentiment. A decline in the value of the assets under management would decrease our income.  Further certain of our investment advisory and wealth management clients can terminate, with little or no notice, their relationships with us, reduce their aggregate assets under management, or shift their funds to other types of accounts with different rate structures.

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Risks Related to Compliance and Regulation

The regulatory capital rules could slow our growth, cause us to seek to raise additional capital, or both.

As discussed under Regulation and Supervision - Regulatory Capital Requirements and Prompt Corrective Action, the Company and the Bank are subject to regulatory capital requirements. The new capital rules impose stringent capital requirements on the Company and the Bank and generally require banking organizations to hold high-quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand periods of financial stress. The rules include required minimum capital ratios for all banking organizations and a capital conservation buffer that is in addition to each capital ratio.

The application of these stringent capital requirements for us could, among other things, result in lower returns on equity, require us to limit the growth we may otherwise seek, require the raising of additional capital, and result in regulatory actions such as prohibitions on the payment of dividends, the payment of bonuses to employees or the repurchase of shares if we were unable to comply with such requirements. If Trustco Bank fails to comply with its capital requirements, the OCC will have the authority to take “prompt corrective action,” depending on the Bank’s capital level. Currently, the Bank is considered “well-capitalized” for prompt corrective action purposes. If it were 22 to be designated by the OCC in one of the lower capital levels - “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized” - the Bank would be required to raise additional capital and also would be subject to progressively more severe restrictions on operations, management, and capital distributions; replacement of senior executive officers and directors; and, if it became “critically undercapitalized,” to the appointment of a conservator or receiver.

We currently anticipate that we will continue to be well-capitalized in accordance with the regulatory standards.

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.

We are subject to extensive regulation, supervision, and examination by the OCC, FRB, and FDIC. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a banks operations, reclassify assets, determine the adequacy of a banks loss allowances, and determine the level of deposit insurance premiums assessed. The Dodd-Frank Act significantly affected the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies and will continue to do so.  Any change in banking regulations and oversight, and the regulation of other agencies, such as the BCFP and the U.S. Department of Housing and Urban Development, whether in the form of regulatory policy, new regulations or legislation, or additional deposit insurance premiums, could have a material impact on our operations.  New or revised rules may increase our regulatory compliance burden and costs and restrict the financial products and services we offer to our customers.
 
Further, there may be additional laws and regulations, or changes in policy, affecting lending and funding practices, regulatory capital limits, interest rate risk management, and liquidity standards and the legislative and regulatory responses to the COVID-19 pandemic have resulted, and future responses may result in significant changes. The federal bank regulatory agencies may require us to maintain capital ratios in excess of regulatory requirements, and new laws and regulations may increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the products we offer, the fees we can charge and our ongoing operations, costs, and profitability.
 
Changes in tax laws may adversely affect us, and the Internal Revenue Service or a court may disagree with our tax positions, which may result in adverse effects on our business, financial condition, results of operations or cash flows.
 
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The Company operates in an environment that imposes income taxes on its operations at both the federal and state levels to varying degrees. Strategies and operating routines have been implemented to minimize the impact of these taxes. Consequently, any change in tax legislation could significantly alter the effectiveness of these strategies. The Tax Cuts and Jobs Act (which we refer to as the “Tax Act”), enacted on December 22, 2017, significantly affected United States tax law, including by changing how the United States imposes tax on certain types of income of corporations and by reducing the United States federal corporate income tax rate to 21%. It also imposed new limitations on a number of tax benefits, including certain executive compensation deductions, deductions for certain transportation fringe benefits provided to employees and entertainment expenses, among others. There can be no assurance that future tax law changes will not increase the rate of the corporate income tax significantly; impose new limitations on deductions, credits or other tax benefits; or make other changes that may adversely affect the performance of an investment in our stock. In addition, we have taken and may in the future take positions with respect to a number of unsettled issues for which Internal Revenue Services (“IRS”) guidance is unavailable. There is no assurance that the IRS or a court will agree with the positions taken by us, in which case tax penalties and interest may be imposed that could adversely affect our business, financial condition, results of operations and cash flows.

The recent changes in the federal tax laws may have an adverse effect on the market for, and the valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, like New York. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.
 
Our ability to pay dividends is subject to regulatory limitations and other limitations that may affect our ability to pay dividends to our stockholders or to repurchase our common stock.
 
TrustCo is a separate legal entity from its subsidiary Trustco Bank, and does not have significant operations of its own. The availability of dividends from Trustco Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors that the OCC or the Federal Reserve Board could assert that payment of dividends or other payments may result in an unsafe or unsound practice. In addition, TrustCo is subject to consolidated capital requirements and is required to serve as a source of strength to Trustco Bank. If the Bank is unable to pay dividends to TrustCo, or if TrustCo is required to retain capital or contribute capital to the Bank, we may not be able to pay dividends on our common stock or to repurchase shares of common stock.
 
We may be subject to a higher effective tax rate if Trustco Realty Corp. (“Trustco Realty”) fails to qualify as a real estate investment trust (“REIT”).

Trustco Realty, a subsidiary of Trustco Bank, operates as a REIT for tax purposes. Trustco Realty was established to acquire, hold and manage mortgage assets and other authorized investments to generate net income for distribution to its shareholders.

 For an entity to qualify as a REIT, it must meet certain organizational tests and it must satisfy the following six asset tests under the Internal Revenue Code each quarter: (1) at least 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of a taxable REIT subsidiary; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of a taxable REIT subsidiary; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of a taxable REIT subsidiary; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 25% of the value of its total assets. At December 31, 2020, Trustco Realty met all six quarterly asset tests.

Also, a REIT must satisfy the following two gross income tests each year: (1) at least 75% of its gross income must be from qualifying income closely connected with real estate activities; and (2) 95% of its gross income must be derived from sources qualifying for the 75% test and dividends, interest, and gains from the sale of securities. In addition, a REIT must distribute at least 90% of its taxable income for the taxable year, excluding any net capital gains, to maintain its non-taxable status for federal income tax purposes. For 2020, Trustco Realty had met the two annual income tests and the distribution test.

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If Trustco Realty fails to meet any of the required provisions and, therefore, does not qualify to be a REIT, our effective tax rate would increase.

Changes in accounting standards could impact reported earnings.

The accounting standard setting bodies, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change financial accounting and reporting standards that govern the preparation of our consolidated statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, we could be required to apply a new or revised accounting standard retroactively, which could affect beginning of period financial statement amounts.

Risks Related to Competition

Strong competition within the Bank’s market areas could hurt profits and slow growth.

The Bank faces intense competition both in making loans and attracting deposits. This competition comes principally from other banks, savings and loan associations, credit unions, mortgage companies, other lenders, and institutions offering uninsured investment alternatives. Many of our competitors have competitive advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, more aggressive marketing campaigns and better brand recognition, and the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs.

Competition has made it more difficult for the Bank to make new loans and at times has forced the Bank to offer higher deposit rates. Price competition for loans and deposits might result in the Bank earning less on loans and paying more on deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits and to hire and retain experienced employees. Management expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. The Banks profitability depends upon its continued ability to compete successfully in its market areas.

Consumers and businesses are increasingly using non-banks to complete their financial transactions, which could adversely affect our business and results of operations.
 
Technology and other changes are allowing consumers and businesses to complete financial transactions that historically have involved banks through alternative methods. For example, the wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks. The diminishing role of banks as financial intermediaries has resulted and could continue to result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the potential loss of lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition and results of operations.
 
Risks Related to Cybersecurity, Third Parties, and Technology
 
Our business could be adversely affected by third-party service providers, data breaches, and cyber-attacks.
 
We face the risk of operational disruption, failure, or capacity constraints due to our dependency on third-party vendors for components of our business infrastructure. While we have selected these third-party vendors through our vendor management process, we do not control their operations. As such, any failure on the part of these business partners to perform their various responsibilities could also adversely affect our business and operations. Our assets that are at risk for cyber-attacks include financial assets and non-public information belonging to customers. We use several third-party vendors who have access to our assets via electronic media. Certain cyber security risks arise due to this access, including cyber espionage, blackmail, ransom, and theft. We employ many preventive and detective controls to protect our assets and provide recurring information security training to all employees. To date, we have not experienced any material losses relating to cyber-attacks or other information security breaches, but there can be no assurance that we will not suffer such attacks or attempted breaches, or incur resulting losses, in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement Internet and mobile banking to meet customer demand, and the current economic and political environment. As cyber and other data security threats continue to evolve, we may be required to expend significant additional resources to continue to modify and enhance our protective measures or to investigate and remediate any security vulnerabilities.

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A failure in or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt our businesses, and adversely impact our results of operations, liquidity and financial condition, as well as cause reputational harm.
 
The potential for operational risk exposure exists throughout our organization and, as a result of our interactions with, and reliance on, third parties, is not limited to our own internal operational functions. Our operational and security systems, infrastructure, including our computer systems, data management, and internal processes, as well as those of third parties, are integral to our performance. We rely on our employees and third parties in our day-to-day and ongoing operations, who may, as a result of human error, misconduct, malfeasance or failure, or breach of third-party systems or infrastructure, expose us to risk. We have taken measures to implement backup systems and other safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact and rely. For example, strategic technology project implementation challenges may cause business interruptions. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. Our financial, accounting, data processing, backup or other operating or security systems and infrastructure may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control which could adversely affect our ability to process these transactions or provide these services. There could be sudden increases in customer transaction volume; electrical, telecommunications, or other major physical infrastructure outages; natural disasters such as earthquakes, tornadoes, hurricanes, and floods; disease pandemics; and events arising from local or larger scale political or social matters, including terrorist acts. We continuously update these systems to support our operations and growth and to remain compliant with all applicable laws, rules and regulations globally. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones, including business interruptions. Operational risk exposures could adversely impact our results of operations, liquidity and financial condition, as well as cause reputational harm.
 
Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, could severely harm our business.
 
As part of our financial institution business, we collect, process, and retain sensitive and confidential customer information. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. If information security is breached, information can be lost or misappropriated, resulting in financial loss or costs to us. Any security breach involving confidential customer information, whether by us or by our vendors, could severely damage our reputation, expose us to the risks of litigation and liability or disrupt our operations and have a material adverse effect on our business.
 
We could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, our computer systems.
 
We rely heavily on information systems to conduct our business and to process, record, and monitor our transactions. Risks to the systems result from a variety of factors, including the potential for bad acts on the part of hackers, criminals, employees and others. As one example, in recent years, some banks have experienced denial of service attacks in which individuals or organizations flood the banks website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. We are also at risk for the impact of natural disasters, terrorism, and international hostilities on our systems or for the effects of outages or other failures involving power or communications systems operated by others. These risks also arise from the same types of threats to businesses with which we deal.
 
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Potential adverse consequences of attacks on our computer systems or other threats include damage to our reputation, loss of customer business, litigation, and increased regulatory scrutiny, which might also result in financial loss and require additional efforts and expense to attempt to prevent such adverse consequences in the future.
 
We rely on communications, information, operating and financial control systems, and technology from third-party service providers, and we may suffer an interruption in those systems that may result in lost business. Further, we may not be able to substitute providers on terms that are as favorable if our relationships with our existing service providers are interrupted.
 
We rely heavily on third-party service providers for much of our communications, information, operating and financial controls systems, and technology. Any failure or interruption or breach in security of these systems could result in failures or interruptions in our customer relationships management, general ledger, deposit, servicing, and/or loan origination systems. We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. The occurrence of any failure or interruption could have a material adverse effect on our business, financial condition, results of operations, and cash flows. If any of our third-party service providers experience financial, operational, or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, We cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems, without the need to expend substantial resources, if at all. Any of these circumstances could have a material adverse effect on our business, financial condition, results of operations and cash flows.
 
Other Risks

Our proposed reverse stock split may not result in a proportional increase in the per share price of our common stock.
 
On February 16, 2021, we announced that our Board of Directors plans to seek approval at our 2021 annual shareholder meeting for a reverse stock split of our common stock at a ratio of 1 for 5, as determined by our Board of Directors, and to reduce the number of authorized shares of our common stock from 150,000,000 to 30,000,000. The effect of the reverse stock split on the market price for our common stock cannot be accurately predicted. In particular, we cannot assure you that, if our Board of Directors decides to proceed with the reverse stock split, the price of shares of the common stock after the reverse stock split will increase proportionately to the price of shares of our common stock immediately before the reverse stock split. The market price of our common stock may also be affected by other factors which may be unrelated to the reverse stock split or the number of shares issued and outstanding.
 
Furthermore, even if the market price of our common stock does rise following the reverse stock split, we cannot assure you that the market price of our common stock immediately after the proposed reverse stock split will be maintained for any period of time. Moreover, because some investors may view the reverse stock split negatively, we cannot assure you that the reverse stock split will not adversely impact the market price of our common stock. There is also the possibility that liquidity may be adversely affected by the reduced number of shares which would be issued and outstanding when the reverse stock split is effected. Accordingly, our total market capitalization after the reverse stock split may be lower than the market capitalization before the reverse stock split.

New lines of business or new products and services may subject us to additional risks.
 
From time to time, we may develop and grow new lines of business or offer new products and services within our existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition. All service offerings, including current offerings and those which may be provided in the future, may become more risky due to changes in economic, competitive and market conditions beyond our control.
 
Provisions in our articles of incorporation and bylaws and New York law may discourage or prevent takeover attempts, and these provisions may have the effect of reducing the market price of our stock.
 
Our articles of incorporation and bylaws include several provisions that may have the effect of discouraging or preventing hostile takeover attempts, and therefore, making the removal of incumbent management difficult. The provisions include requirements of supermajority votes to approve certain business transactions. In addition, New York law contains several provisions that may make it more difficult for a third party to acquire control of us without the approval of the board of directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding stock. To the extent that these provisions are effective in discouraging or preventing takeover attempts, they may tend to reduce the market price for our stock.
 
We are dependent upon the services of our management team.
 
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We are dependent upon the ability and experience of a number of our key management personnel who have substantial experience with our operations, the financial services industry and the markets in which we offer our services. It is possible that the loss of the services of one or more of our senior executives or key managers would have an adverse effect on our operations. Our success also depends on our ability to continue to attract, manage and retain other qualified middle management personnel as we grow. We cannot assure you that we will continue to attract or retain such personnel.
 
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
 
Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by TrustCo in reports we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
 
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
 
If the business continuity and disaster recovery plans that we have in place are not adequate to continue our operations in the event of a disaster, the business disruption can adversely impact our operations.
 
External events, including terrorist or military actions, or an outbreak of disease, and resulting political and social turmoil could cause unforeseen damage to our physical facilities or could cause delays or disruptions to operational functions, including information processing and financial market settlement functions. Additionally, our customers, vendors and counterparties could suffer from such events. Should these events affect us, or our customers, or vendors or counterparties with which we conduct business, our results of operations could be adversely affected.
 
The Company’s risk management framework may not be effective in mitigating risk and loss.
 
The Company maintains an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that it faces. These risks include interest rate, credit, liquidity, operations, reputation, compliance, and litigation. While the Company assesses and improves this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate all risk and limit losses in its business. If conditions or circumstances arise that expose flaws or gaps in the Companys risk management program, or if its controls break down, the performance and value of its business could be adversely affected.
 
Item 1B
Unresolved Staff Comments
 
None.
 
Item 2.
Properties
 
TrustCos executive offices are located at 5 Sarnowski Drive, Glenville, New York, 12302, in a facility owned by the Company. The Company operates 148 banking offices, of which 25 are owned and 123 are leased from others on market terms.
 
In the opinion of management, the physical properties of TrustCo and the Bank are suitable and adequate to meet our requirements and are being fully utilized.  These properties are located in New York, New Jersey, Vermont, Massachusetts and Florida.
 
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Item 3.
Legal Proceedings
 
The nature of TrustCos business generates a certain amount of litigation against TrustCo and its subsidiaries involving matters arising in the ordinary course of business. In the opinion of management of TrustCo, there are no proceedings pending to which TrustCo or any of its subsidiaries is a party, or of which its property is the subject which, if determined adversely to TrustCo or such subsidiaries, would be material in relation to TrustCos consolidated shareholders equity and financial condition.
 
Item 4.
Mine Safety Disclosure
 
Not applicable.
 
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Information about our Executive Officers
 
The following is a list of the names and ages of the executive officers of TrustCo and their business history for the past five years:
 
Name, Age and
Position
With Trustco
 
Principal Occupations Or Employment Since January 1, 2008
 
Year First
Became
Executive of
TrustCo
         
Robert J. McCormick,
Age 57,
President and Chief Executive Officer
 
Chairman, President and Chief Executive Officer of TrustCo from January 2009 to December 2010, President and Chief Executive Officer of TrustCo since January 2004, Executive Officer of TrustCo since 2001 and President and Chief Executive Officer of Trustco Bank since November 2002. Chairman of TrustCo and Trustco Bank from November 2008 to December 2010. Director of TrustCo and Trustco Bank since 2005. Robert J. McCormick is the son of Robert A. McCormick. Joined Trustco Bank in 1995.
 
2001
         
Scot R. Salvador,
Age 54,
Executive Vice President and Chief Lending Officer
  Executive Vice President and Chief Lending Officer of TrustCo and Trustco Bank since January 2004. Executive Officer of TrustCo and Trustco Bank since 2004. Joined Trustco Bank in 1995.    2004
         
Robert M. Leonard,
Age 58,
Executive Vice President and Chief Risk Officer
  Secretary or Assistant Secretary of TrustCo and Trustco Bank since 2003. Executive Vice President of TrustCo and Trustco Bank since 2013. Senior Vice President of TrustCo and Trustco Bank from 2010 to 2013. Administrative Vice President of TrustCo and Trustco Bank from 2004 to 2010. Executive Officer of TrustCo and Trustco Bank since 2003. Joined Trustco Bank in 1986.   2003
         
Michael M. Ozimek
Age 46,
Executive Vice President and Chief Financial Officer
  Executive Vice President of TrustCo and Trustco Bank since December 2018. Senior Vice President and Chief Financial Officer since December 2014. Administrative Vice President of TrustCo and Trustco Bank from June 2010 to December 2014. Vice President of Trustco Bank from 2004 to June 2010.   2014
         
Eric W. Schreck
Age 54,
Senior Vice President
and Treasurer
 
Treasurer of TrustCo since 2010. Senior Vice President and Florida Regional President since 2009. Executive Officer of TrustCo and Trustco Bank since 2010. Joined Trustco Bank in 1989.
  2010
         
Michael Hall
Age 55,
General Counsel and Corporate Secretary
  Secretary of TrustCo and Trustco Bank since 2016. Vice President of Trustco Bank since 2015. Joined Trustco Bank in 2015. Prior to 2015, attorney in private practice.  
2016
         
Kevin M. Curley
Age 55,
Executive Vice President and Chief Operations Officer
 
Executive Vice President and Chief Operations Officer of TrustCo and Trustco Bank since December 2018. Joined Trustco Bank in 1990.
 
2018

28

PART II

Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

TrustCos common stock is traded on The NASDAQ Stock Market, LLC under the symbol TRST. TrustCo had approximately 11,014 shareholders of record as of February 22, 2021, and the closing price of TrustCos common stock on that date was $6.95.

The following details the purchase of shares of TrustCos common stock made by or on behalf of TrustCo in the fourth quarter of the year ended December 31, 2020.

Issuer Purchases of Equity Securities

Period
 
(a)
Total
Number
of Shares
Purchased*
   
(b)
Average
Price
Paid Per
Share
   
(c)
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
   
(d)
Maximum
Number
of Shares
that May
Yet
Be
Purchased
Under
the Plans
or
Programs
 
                         
October 1 to October 31, 2020
   
-
   
$
-
     
-
     
-
 
November 1 to November 30, 2020
   
-
   
$
-
     
-
     
-
 
December 1 to December 31, 2020
   
-
   
$
-
     
-
     
-
 
Total
   
-
   
$
-
     
-
     
-
 
*Purchase relates to an employee exercise of incentive stock options.

The TrustCo Annual Report to Shareholders for the year ended December 31, 2020, which is filed as Exhibit 13 hereto, contains a graph comparing the yearly percentage change in the Companys cumulative total shareholder return on its common stock with the cumulative return of the Russell 2000 and the SNL Bank and Thrift indices. Such graph is incorporated herein by reference.

Item 6.
Selected Financial Data

The information required by this this Item 6 is incorporated herein by reference from the table captioned FIVE YEAR SUMMARY OF FINANCIAL DATA in TrustCos Annual Report to Shareholders for the year ended December 31, 2020, which is filed as Exhibit 13 hereto.

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information required by this this Item 7 is contained in TrustCos Annual Report to Shareholders for the year ended December 31, 2020, which is filed as Exhibit 13 hereto and incorporated herein by reference.

Item 7A.
Quantitative and Qualitative Disclosures about Market Risk

The information required by this Item 7A is contained in TrustCos Annual Report to Shareholders for the year ended December 31, 2020, which is filed as Exhibit 13 hereto and incorporated herein by reference.

29

Item 8.
Financial Statements and Supplementary Data

The consolidated financial statements, together with the report thereon of Crowe LLP, and the required supplementary financial data are included in TrustCos Annual Report to Shareholders for the year ended December 31, 2020, which is filed as Exhibit 13 hereto and incorporated herein by reference.

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.
Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures are procedures that are designed with the objective of ensuring that information required to be disclosed in the Companys reports filed under the Securities Exchange Act of 1934, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures are effective to satisfy the objectives for which they are designed.

Management’s Report on Internal Control over Financial Reporting, together with the report thereon of Crowe LLP is included in TrustCos Annual Report to Shareholders for the year ended December 31, 2020, which is filed as Exhibit 13 hereto, are incorporated herein by reference.

There have been no changes in the Companys internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the Companys quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

Item 9B.
Other Information

None.

PART III

Item 10.
Directors, Executive Officers and Corporate Governance

The information required by this Item 10 is incorporated herein by reference to the disclosure under the headings Information on TrustCo Directors and Nominees and Information on TrustCo Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance in the Companys Proxy Statement (Schedule 14A) for its 2021 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the Companys fiscal year-end. TrustCo has adopted a code of conduct that applies to all employees, including its principal executive, financial and accounting officers. A copy of this code of conduct will be provided without charge upon written request. Requests and inquiries should be directed to: Robert M. Leonard, Executive Vice President, TrustCo Bank Corp NY, P.O. Box 1082, Schenectady, New York 12301-1082. The required information regarding TrustCos executive officers is contained in PART I in the item captioned Executive Officers of TrustCo.

Item 11.
Executive Compensation

The information required by this Item 11 is incorporated herein by reference to the Companys Proxy Statement (Schedule 14A) for its 2021 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the Companys fiscal year-end.

30

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item 12 is incorporated herein by reference to the Companys Proxy Statement (Schedule 14A) for its 2021 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the Companys fiscal year-end. Additional information concerning the Companys equity compensation plans is set forth in Part II, Item 5 hereof.

The following table provides information, as of December 31, 2020, regarding securities authorized for issuance under TrustCos equity compensation plans.

 
Plan category
 
Number of
securities to
be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
   
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
   
Number of
securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected
in column (a))
(c)
 
Equity compensation plans approved by security holders
   
519,091
   
$
6.67
     
1,242,793
 
Equity compensation plan not approved by security holders
   
N/A
     
N/A
     
N/A
 
Total
   
519,091
   
$
6.67
     
1,242,793
 

Item 13.
Certain Relationships, Related Transactions and Director Independence

The information required by this Item 13 is incorporated herein by reference to the Companys Proxy Statement (Schedule 14A) for its 2021 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the Companys fiscal year-end.

Item 14.
Principal Accountant Fees and Services

The information required by this Item 14 is incorporated herein by reference to the Companys Proxy Statement (Schedule 14A) for its 2021 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the Companys fiscal year-end.

31

PART IV

Item 15.
Exhibits, Financial Statement Schedules

The following financial statements of TrustCo and its consolidated subsidiaries, and the accountants report thereon are filed as a part of this report.

Consolidated Statements of Condition -- December 31, 2020 and 2019.

Consolidated Statements of Income -- Years Ended December 31, 2020, 2019 and 2018.

Consolidated Statements of Comprehensive Income -- Years Ended December 31, 2020, 2019 and 2018.

Consolidated Statements of Changes in Shareholders’ Equity -- Years Ended December 31, 2020, 2019 and 2018.

Consolidated Statements of Cash Flows -- Years Ended December 31, 2020, 2019 and 2018.

Notes to Consolidated Financial Statements.

Financial Statement Schedules

Not Applicable. All required schedules for TrustCo and its subsidiaries have been included in the consolidated financial statements or related notes thereto.

Supplementary Financial Information

Summary of Unaudited Quarterly Financial Information for the years ended December 31, 2020 and 2019.

Exhibits

 Exhibit No.
Description
   
Amended and Restated Certificate of Incorporation of TrustCo Bank Corp NY,  incorporated by reference to Exhibit 3.1 to TrustCo Bank Corp NY’s Quarterly Report on Form 10-Q, filed August 8, 2019.
   
Amended and Restated Bylaws of TrustCo Bank Corp NY, dated May 23, 2019, incorporated by reference to Exhibit 3.2 to TrustCo Bank Corp NY’s Quarterly Report on Form 10-Q, filed August 8, 2019.
   
Description of Capital Stock incorporated by reference to Exhibit 4(a) to Amendment No. 1 to TrustCo Bank Corp NY Annual Report in Form 10-K/A, filed May 12, 2020.
   
Amended and Restated Trust For Deferred Benefits Provided under Employment Agreements of Trustco Bank, National Association and TrustCo Bank Corp NY, dated September 18, 2001 incorporated by reference to Exhibit 10(b) to TrustCo Bank Corp NY’s Annual Report on Form 10-K, for the year ended December 31, 2001.
   
Amended and Restated Trust Under Non-Qualified Deferred Compensation Plans of Trustco Bank, National Association and TrustCo Bank Corp NY, dated September 18, 2001, incorporated by reference to, Exhibit 10(c) to TrustCo Bank Corp NY’s Annual Report on Form 10-K, for the year ended December 31, 2001.

32

Amended and Restated Trustco Bank and TrustCo Bank Corp NY Supplemental Retirement Plan, effective as of January 1, 2008, incorporated by reference to Exhibit 99.6 to TrustCo Bank Corp NY’s Current Report on Form 8-K filed December 22, 2008.
   
Second Amended and Restated TrustCo Bank Corp NY Performance Bonus Plan, effective as of January 1, 2008, incorporated by reference to Exhibit 99.5 to TrustCo Bank Corp NY’s Current Report on Form 8-K filed December 22, 2008.
   
Amendment No. 1 to Second Amended and Restated TrustCo Bank Corp NY Performance Bonus Plan, effective January 1, 2010, incorporated by reference to Exhibit 99(e) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed January 19, 2010.
   
Form of 2008 Amended and Restated Employment Agreement between Trustco Bank, TrustCo Bank Corp NY and Robert J. McCormick, Robert T. Cushing and Scot R. Salvador, effective as of January 1, 2008, incorporated by reference to Exhibit 99.8 to TrustCo Bank Corp NY’s Current Report on Form 8-K filed December 22, 2008.
   
Second Amended and Restated TrustCo Bank Corp NY Directors Performance Bonus Plan, effective as of January 1, 2008, incorporated by reference to Exhibit 99.4 to TrustCo Bank Corp NY’s Current Report on Form 8-K filed December 22, 2008.
   
Amendment No. 1, Second Amended and Restated TrustCo Bank Corp NY Directors Performance Bonus Plan, effective January 1, 2010, incorporated by reference to Exhibit 99(f) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed January 19, 2010.
   
Service Bureau Processing Agreement by and between Fidelity Information Services, Inc. and TrustCo Bank Corp NY dated March 3, 2004 incorporated by reference to Exhibit 10(b) to TrustCo Bank Corp NY’s Quarterly Report on Form 10-Q, for the quarter ended March 31, 2004.
   
Agreement between Fiserv Solutions, Inc. and Trustco Bank, National Association, dated November 14, 2001 incorporated by reference to Exhibit 10(o) to TrustCo Bank Corp NY’s Annual Report on Form 10-K, for the year ended December 31, 2001.
   
Restatement of Trustco Bank Senior Incentive Plan, effective as of January 1, 2008, incorporated by reference to Exhibit 99.9 to TrustCo Bank Corp NY’s Current Report on Form 8-K filed December 22, 2008.
   
Form of Amendments to 2008 Amended and Restated Employment Agreement between Trustco Bank, TrustCo Bank Corp NY and each of Robert J. McCormick, Robert T. Cushing and Scot R. Salvador, incorporated by reference to Exhibit 99.1 to TrustCo Bank Corp NY’s Current Report on Form 8-K filed March 17, 2009.
   
First Amendment to Restatement of Trustco Bank Senior Incentive Plan, incorporated by reference to Exhibit 99.2 to TrustCo Bank Corp NY’s Current Report on Form 8-K filed November 18, 2009.
   
Amended and Restated TrustCo Bank Corp NY 2010 Equity Incentive Plan dated as of March 21, 2017, incorporated by reference to Exhibit 10(a) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed March 24, 2017.
   
Amended and Restated 2010 Directors Equity Incentive Plan dated March 17, 2015, incorporated by reference to Exhibit 10(b) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed March 23, 2015.

33

Form of Incentive Stock Option Award Agreement under the TrustCo Bank Corp NY Amended and Restated 2010 Equity Incentive Plan, incorporated by reference to Exhibit 10(a) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed November 20, 2015.
   
Director Incentive Stock Option Award Agreement dated November 15, 2011, incorporated by reference to Exhibit 10(c) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed November 18, 2011.
   
Employment Agreement among Trustco Bank, TrustCo Bank Corp NY And Robert M. Leonard, effective November 19, 2013, incorporated by reference to Exhibit 10(a) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed November 25, 2013.
   
Performance-Based Stock Appreciation Unit Agreement dated as of January 21, 2014, incorporated by reference to Exhibit 10(a) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed January 24, 2014.
   
Trustco Bank Executive Officer Incentive Plan (Amended and Restated as of February 16, 2016), incorporated by reference to Exhibit 10(a) to TrustCo Bank Corp NY’s Form 8-K filed February 17, 2016.
   
Consulting Agreement between TrustCo Bank Corp NY and Robert T. Cushing effective December 22, 2017, incorporated by reference to Exhibit 10.1 to TrustCo Bank Corp NY’s Current Report on Form 8-K filed November 22, 2017.
   
Form of 2017 Performance Share Award Agreement under the TrustCo Bank Corp NY Amended and Restated 2010 Equity Incentive Plan, incorporated by reference to Exhibit 10(a) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed November 27, 2017.
   
Form of 2017 Restricted Stock Unit Award Agreement under the TrustCo Bank Corp NY Amended and Restated 2010 Equity Incentive Plan, incorporated by reference to Exhibit 10(b) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed November 27, 2017.
   
Form of 2017 Directors Restricted Stock Unit Award Agreement under the TrustCo Bank Corp NY Amended and Restated 2010 Directors Equity Incentive Plan, incorporated by reference to Exhibit 10(c) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed on November 27, 2017.
   
Form of 2018 Performance Share Award Agreement under the TrustCo Bank Corp NY Amended and Restated 2010 Equity Incentive Plan, incorporated by reference to Exhibit 10(a) to TrustCo Bank Corp NY’s Current Report on Form 8-K, filed November 23, 2018.
   
Form of 2018 Restricted Stock Unit Agreement under the TrustCo Bank Corp NY Amended and Restated 2010 Equity Incentive Plan, incorporated by reference to Exhibit 10(b) to TrustCo Bank Corp NY’s Current Report on Form 8-K, filed November 23, 2018.
   
Form of 2018 Directors Restricted Stock Unit Agreement under the TrustCo Bank Corp NY Amended and Restated 2010 Equity Incentive Plan, incorporated by reference to Exhibit 10(c) to TrustCo Bank Corp NY’s Current Report on Form 8-K, filed November 23, 2018.
   
Form of Employment Agreement between TrustCo Bank Corp NY and each of Kevin M. Curley and Michael M. Ozimek, effective December 18, 2018, incorporated by reference to Exhibit 10(a) to TrustCo Bank Corp NY’s Current Report on Form 8-K filed December 18, 2018.

34

Form of 2019 Performance Share Award Agreement under the TrustCo Bank Corp NY 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10(a) to TrustCo Bank Corp NY’s Current Report on Form 8-K, filed November 20, 2019.
   
Form of 2019 Restricted Stock Unit Agreement under the TrustCo Bank Corp NY 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10(b) to TrustCo Bank Corp NY’s Current Report on Form 8-K, filed November 20, 2019.
   
Form of 2019 Directors Restricted Stock Unit Agreement under the TrustCo Bank Corp NY 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10(c) to TrustCo Bank Corp NY’s Current Report on Form 8-K, filed November 20, 2019.
   
Form of 2020 Performance Share Award Agreement under the TrustCo Bank Corp NY 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10(a) to TrustCo Bank Corp NY’s Current Report on Form 8-K, filed November 18, 2020.
   
Form of 2020 Restricted Stock Unit Agreement under the TrustCo Bank Corp NY 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10(b) to TrustCo Bank Corp NY’s Current Report on Form 8-K, filed November 18, 2020.
   
Form of 2020 Directors Restricted Stock Unit Agreement under the TrustCo Bank Corp NY 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10(c) to TrustCo Bank Corp NY’s Current Report on Form 8-K, filed November 18, 2020.
   
Portions of Annual Report to Security Holders of TrustCo for the year ended December 31, 2020.
   
List of Subsidiaries of TrustCo.
   
Consent of Independent Registered Public Accounting Firm.
   
Power of Attorney.
   
Rule 13a-14(a)/15d-14(a) Certification of Robert J. McCormick, principal executive officer.
   
Rule 13a-14(a)/15d-14(a) Certification of Michael M. Ozimek, principal financial officer.
   
Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer.
   
101.INS
XBRL Instance Document.
   
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
   
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
   
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
   
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
   
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
   
104
Cover Page Interactive Data File (formatted as Inline XBRL and Contained in Exhibit 101)

35

*
Management contract or compensatory plan or arrangement.

**
Filed herewith.
   

Item 16.
Form 10-K Summary

Not applicable.
36

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
TrustCo Bank Corp NY
   
Date: February 26, 2021
By:
/s/ Michael M. Ozimek
 
   
Michael M. Ozimek
 
   
Executive Vice President and Chief Financial Officer
 

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name and Signature
 
Title
 
Date
         
/s/ Robert J. McCormick
       
Robert J. McCormick
 
Chairman, President and Chief Executive Officer
(principal executive officer)
 
 
 February 26, 2021
         
/s/ Michael M. Ozimek
       
Michael M. Ozimek
 
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
 

February 26, 2021
         
*
       
Dennis A. DeGennaro
 
Chairman
 
February 26, 2021
         
*
       
Brian C. Flynn
 
Director
 
February 26, 2021
         
*
       
Thomas O. Maggs
 
Director
 
February 26, 2021
         
*
       
Dr. Anthony J. Marinello
 
Director
 
February 26, 2021
         
*
       
Kimberly A. Russell
 
Director
 
February 26, 2021
         
*
       
Lisa M. Lucarelli
 
Director
 
February 26, 2021
         
*
       
Frank B. Silverman
 
Director
 
February 26, 2021

* By:
/s/ Robert M. Leonard
 
Robert M. Leonard, as Agent
 
Pursuant to Power of Attorney


37



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.

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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
 
$
5,403,000
     
5,023,914
     
4,822,577
     
379,086
     
201,337
     
100.0
%
   
100.0
%
   
100.0
 

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

Loans

In 2020, the Company experienced another year of solid loan growth despite the challenges of the pandemic.  The $182.3 million increase or 4.5% in the Company’s gross loan portfolio from December 31, 2019 to December 31, 2020 was due to higher residential and commercial balances, which offset lower balances in other loan categories.  Average loans increased $237.2 million during 2020 to $4.16 billion.  Interest income on the loan portfolio decreased to $166.0 million in 2020 from $166.6 million in 2019.  The average yield decreased 25 basis points to 3.99% in 2020 compared to 4.24% in 2019.

Page 12 of 102


LOAN PORTFOLIO

(dollars in thousands)
 
As of December 31,
 
   
2020
   
2019
   
2018
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Commercial
 
$
198,328
     
4.7
%
 
$
181,635
     
4.5
%
 
$
183,598
     
4.7
%
Real estate - construction
   
24,749
     
0.6
     
28,532
     
0.7
     
26,717
     
0.7
 
Real estate - mortgage
   
3,769,582
     
88.8
     
3,573,106
     
87.9
     
3,362,539
     
86.8
 
Home equity lines of credit
   
242,194
     
5.7
     
267,922
     
6.6
     
289,540
     
7.5
 
Installment loans
   
9,617
     
0.2
     
11,001
     
0.3
     
11,702
     
0.3
 
Total loans
   
4,244,470
     
100.0
%
   
4,062,196
     
100.0
%
   
3,874,096
     
100.0
%
Less: Allowance for loan losses
   
49,595
             
44,317
             
44,766
         
Net loans (1)
 
$
4,194,875
           
$
4,017,879
           
$
3,829,330
         

 
Average Balances
 
   
2020
   
2019
   
2018