TRUSTCO BANK CORP N Y (TRST) FY 2022 MD&A

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 2022 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 2022 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.

Financial Review

TrustCo made historic progress in 2022 posting record earnings while also celebrating our 120th anniversary.
Among the key results for 2022, in management’s view:

Management believes that the Company was able to achieve these accomplishments, 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, 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 12.60% in 2022 compared to 10.61% in 2021, while return on average assets was 1.22% in 2022 as compared to 1.01% in 2021.

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 the
COVID-19 pandemic.  The Company 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 years ended
December 31, 2022, 2021, and 2020, except for adjustments in the provision for loan losses.  Additionally, 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.  At this time, it is difficult to quantify the impact COVID-19 will have on future periods due to various uncertainties, including the duration, severity, spread, of potential variants and
resurgences of COVID-19.

While the U.S. economy has experienced pockets of growth during 2022, such as the growth in GDP at an annual rate of 3.2% in the third quarter of 2022, the ongoing conflict in Ukraine and
increasing inflation, among other items, put pressure on the economy and growth decelerated compared to 2021.  Commencing in March 2022, the Federal Open Market Committee (“FOMC”) increased the target range for the federal funds rate seven
times in 2022 by a total of 425 basis points, to a range of 4.25% to 4.50% as of end of 2022. At its meeting on February 1, 2023, the FOMC increased the target range for the federal funds by an additional 25 basis points, to a range of 4.50% to
4.75%.  All of these increases were expressly made in response to inflationary pressures, which are currently expected to continue. In its October 2022 “Beige Book”, the FRB noted that national economic activity had expanded at a modest pace
since the previous report, while conditions varied across industries and districts. Rising mortgage rates and elevated housing prices further weakened single-family starts in the second half of 2022 and there were scattered reports of declining
property prices.  Commercial real estate slowed in both construction and sales amid supply shortages and elevated construction and borrowing costs.

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For the year ending 2022, the Dow Jones Industrial Average ended down 8.8%, as compared to growth of 18.7% in 2021.  The S&P 500 Index also was down 19.4% for the year, compared to
growth of 26.9% in 2021.  United States Three Month Treasury Bills experienced an increase in rates ending the year at 4.42%, 54 basis points ahead of the ten-year Treasury yield at year-end of 3.88%.  These yields compare to 2021 year-end
yields of 0.06% for the Three Month Treasury and 1.52% 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
loan products tend to track with the ten-year Treasury yields.  Beginning in 2022 the yield on the two year Treasury bond was 0.73% and increased 368 basis points during the year to close 2022 at 4.41% and the ten-year Treasury bond began 2022
at 1.52% and closed the year up 2.36 basis points to 3.88% at year-end.  These rate changes have a significant implication to the broader economic cycle and reflect the Federal Reserve Board’s desire to address the increase in inflation.

The outlook for the United States economy is anticipated to bring further deceleration in growth compared to 2022.  Growth in business operations and expansion of corporate activities will
be necessary for broad range increases in revenues and profits.

TrustCo like most other banking organizations prices, many of its liabilities (deposits and short term debt) off of the shorter end of the Treasury maturity curve.  The average for the Three
Month Treasury was 205 basis points higher in 2022 than in 2021, with the median yield of 1.83% in 2022 up 178 basis points over the median yield in 2021.  These trends generally reflect an increase in the cost for deposit products that price
off the short term treasury market yields.  At the same time the average yield of the ten-year Treasury has increased to 2.95% in 2022, up 150 basis points from 2021 when the average was 1.45%.  Generally longer term loans are priced consistent
with the changes in the ten-year Treasury markets.  These two trends – higher shorter term rates coupled with an increase in longer term rates – result in increases of both loan and deposit yields.

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.

Overview

2022 results were marked by significant growth in the Company’s loan portfolio.  The loan portfolio grew to a total of $4.73 billion, an increase of $294 million or 6.6% over the 2021 year-end
balance.  Deposits ended 2021 at $5.19 billion, down from $5.27 billion the prior year-end.  The year-over-year increase in loans reflects the success the Company has had in attracting customers to the Bank given its array of loan products.
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 a renewed growth of deposits, as well as net interest income and non-interest income.

TrustCo earned a record net income of $75.2 million or $3.93 of diluted earnings per share for the year ended December 31, 2022, compared to $61.5 million or $3.19 of diluted earnings per share
for the year ended December 31, 2021.  Net income before taxes was $99.4 million in 2022 compared to $82.1 million in 2021.

During 2022, the following items had a significant effect on net income:

Management believes that TrustCo performed well in comparison to its peers with respect to a number of key performance ratios during 2022 and 2021, including:

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During 2022, TrustCo’s results were affected by strong loan growth and a changing interest rate environment.  Average loan balances increased 4.9% from 2021 to 2022,
while the total of average Federal Funds Sold and other short-term investments, available for sale securities and held to maturity securities decreased 8.1%. Average net loans increased to 75.7% of average earning assets in 2022 from 73.2% in
2021.  On average for 2022, non-maturity deposits were 81.6% of total deposits, up from 77.5% in 2021.  Overall, the cost of interest bearing liabilities decreased 2 basis points to 0.14% in 2022 as compared to 2021. 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 throughout 2022 and into 2023 will likely cause
the cost of interest-bearing liabilities to increase.

As discussed previously, market interest rates moved significantly during the course of 2022, with shorter term Three Month Treasury rates and longer term rates also
increasing year over year.  However the slope of the yield curve flattened and became negative at times in 2022.  The average daily spread between the ten-year Treasury and the two-year Treasury was negative 0.04 basis points in 2022, down from
an average of 1.18 basis points in 2021 and 50 basis points in 2020.  The spread between the ten-year Treasury and the two-year Treasury changed throughout the year but still ended 2022 at a negative 53 basis points. Generally, a more positive
slope in the yield curve is beneficial for the Company’s earnings derived from its core mix of loans and deposits; however, the increase in the shorter term Treasury rates outpaced the increase in the longer term rates, which resulted in an
inverted yield curve, an indication of a possible recession.

The tables below illustrate the range of key Treasury bond interest rates during 2022 and 2021.

Source: www.treasury.gov

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 in
recent years.

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 our loan balances.  All branches have the same products and features found at other Trustco Bank locations.  Additionally, over the last several years 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, technology, 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.

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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 97.7% and 97.6% of average total assets
for 2022 and 2021, respectively.

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

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

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 returned the range of 0.00% to 0.25%.  However, in an effort address the rising rate of inflation, the Federal Funds rate
increased to a range of 4.25% to 4.50% by the end of 2022, and it further increased to a range of 4.50% to 4.75% in February 2023.

The yield on the ten-year Treasury bond increased by 236 basis points from 1.52% at the beginning of 2022 to the year‑end level of 3.88%.  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.  TrustCo is primarily a
portfolio lender and has not yet to date sold 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.  The Company has begun to originate loans for sale into the secondary market.  This will allow the Company greater flexibility going forward with respect to mortgage rate volatility and the loans we
choose to portfolio.  Higher market interest rates also generally increase the value of retail deposits.

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The increase in the Federal Funds target range in 2022 continues to have a positive impact on earnings and 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 and 2021 relative to historic levels, which also had driven down deposit costs.  However, as interest rates have increased throughout 2022
and into 2023, we have experienced increased yields on our Federal Fund Sold and other short-term investments, investment portfolios, loans, and deposits.

Earning Assets

Average earning assets during 2022 were $6.0 billion, which was an increase of $86.8 million from 2021.  This increase was primarily the result of growth in the average balance of net loans
of $214.4 million and securities available for sale of $17.5 million, offset by decreases of $142.2 million in Federal Funds Sold and other short-term investments and $3.1 million in held-to-maturity securities between 2021 and 2022.  The
increase in the average loan portfolio is the result of an increase in residential mortgage loans, home equity lines of credit, and installment loans, which more than offset a decrease in commercial loans.  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, competitive rates, and closing costs.

Total average assets were $6.2 billion for 2022 and $6.1 billion for 2021.

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

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

Loans

In 2022, the Company experienced another year of significant loan growth.  The $294.4 million increase or 6.6% in the Company’s gross loan portfolio from December 31, 2021 to December 31,
2022 was due to higher balances in all loan categories except for home equity loans.  Average loans increased $214.4 million during 2022 to $4.55 billion.  Interest income on the loan portfolio increased to $162.2 million in 2022 from $159.2
million in 2021.  The average yield decreased 11 basis points to 3.56% in 2022 compared to 3.67% in 2021.

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LOAN PORTFOLIO

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

Through marketing, pricing and a customer-friendly service delivery network, TrustCo has attempted to distinguish itself from other mortgage lenders by highlighting the uniqueness of its loan products, and also by
offering competitive interest rates to expand the loan portfolio.  Specifically, low closing costs, no escrow or private mortgage insurance, quick loan decisions and fast closings were identified and marketed.  The fact that the Company holds
mortgages in its loan portfolio rather than selling them into secondary markets was also highlighted to customers.  The average balance of residential real estate mortgage loans was approximately $4.07 billion in 2022 and approximately $3.88
billion in 2021.  Income on real estate loans increased to $140.4 million in 2022 from $138.8 million in 2021.  The yield on the portfolio decreased from 3.57% in 2021 to 3.44% in 2022.  The vast majority of TrustCo’s real estate loans are
secured by properties within the Bank’s market areas.

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

Average commercial loans of $206.1 million in 2022 decreased by $4.0 million from $210.1 million in 2021, primarily because of PPP loan payoffs.  Average commercial loans included $22.3 million
and $19.4 million of commercial real estate construction loans in 2022 and 2021, respectively.  The average yield on the commercial loan portfolio decreased to 4.93% for 2022 from 5.19% in 2021, primarily as a result of more PPP loans being
forgiven during 2021.  Interest income on commercial loans was $10.2 million in 2022 compared to $10.9 million in 2021, down primarily as a result of more income recognized on the forgiveness of the PPP loans in 2021 as compared to 2022.

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

TrustCo has a strong position in the home equity credit line product in its market area.  During 2022, the average balance of home equity credit lines was $254.2 million, an increase from
$233.6 million in 2021.  Trustco Bank competes with both regional and national companies for these lines of credit and faces stiff competition with respect to interest rates, closing costs, and customer service for these loans.  TrustCo
continuously reviews changes made by competitors with respect to the home equity credit line product and adjusts its offerings to remain competitive while meeting evolving needs.  TrustCo’s average yield on this portfolio was 4.31% for 2022 and
3.77% for 2021 reflecting increases in the prime lending rate that occurred in 2022.  Interest income on home equity credit lines increased from $8.8 million in 2021 to $11.0 million in 2022.

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At December 31, 2022 and 2021, the Company had approximately $36.4 million and $37.3 million of real estate construction loans, respectively.  Of the $36.4 million in real estate construction
loans at December 31, 2022, approximately $14.1 million was secured by first mortgages to residential borrowers with the remaining $22.3 million were loans to commercial borrowers for residential construction projects.  Of the $37.3 million in
real estate construction loans at December 31, 2021, approximately $17.9 million was secured by first mortgages to residential borrowers and the remaining $19.4 million were loans to commercial borrowers for residential construction projects.
The vast majority of the Company’s construction loans are in the Company’s New York market.

LOAN MATURITY SCHEDULE

The following table sets forth the maturities of our loan portfolio at December 31, 2022.  Loans having no stated maturity and overdrafts are shown as due in one year or less.  Loans are
stated in the following table at contractual maturity and actual maturities could differ due to prepayments.

The following table shows the loans as of December 31, 2022 due after December 31, 2023 according to type and loan category:

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The following table sets forth the amortized cost and fair value of our securities portfolio at the dates indicated:

INVESTMENT SECURITIES

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

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

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

The designation of securities as “available for sale” is made at the time of purchase, based upon management’s intent and ability to hold the securities for an indefinite
period of time.  These securities are available for sale in response to changes in market interest rates, related changes in prepayment risk, needs for liquidity, or changes in the availability of and yield on alternative investments.  At
December 31, 2022, some securities in this portfolio had fair values that were less than the amortized cost due to changes in interest rates and market conditions and not related to the credit condition of the issuers.  At December 31, 2022,
the Company did not intend to sell, and it is not likely that the Company will be required to sell, these securities before market recovery.  Accordingly, at December 31, 2022 the Company did not consider any of the unrealized losses to be
other than temporary.

At December 31, 2022, the carrying value of securities available for sale amounted to $481.5 million, compared to $407.7 million at year-end 2021.  For 2022, the average
balance of securities available for sale was $480.1 million with an average yield of 1.97%, compared to an average balance in 2021 of 462.7 million with an average yield of 1.44%.  The taxable equivalent income earned on the securities
available for sale portfolio in 2022 was $9.4 million, compared to $6.7 million earned in 2021.

Securities available for sale are recorded at their fair value, with any unrealized gains or losses, net of taxes, recognized as a component of shareholders’ equity.
Average balances of securities available for sale are stated at amortized cost.  At December 31, 2022, the fair value of TrustCo’s portfolio of securities available for sale carried gross unrealized gains of approximately $35 thousand and gross
unrealized losses of approximately $43.6 million.  At December 31, 2021, the fair value of TrustCo’s portfolio of securities available for sale carried gross unrealized gains of approximately $3.9 million and gross unrealized losses of
approximately $3.9 million.   As previously noted, in both periods, unrealized losses were related to market interest rate levels and were not credit related.

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Held to Maturity Securities: At December 31, 2022, the Company held $7.7 million of held to maturity securities, compared to $9.9 million at December 31, 2021.  For
2022, the average balance of held to maturity securities was $8.6 million, compared to $11.7 million in 2021.  Similar to securities available for sale, cash flow from these securities has been reinvested in higher yielding assets, such as
loans, or temporarily held in Federal Funds Sold and other short-term investments to fund future loan growth or future investment opportunities.  The average yield on held to maturity securities increased slightly from 3.71% in 2021 to 3.97% in
2022 due primarily to normal pay downs and prepayments on the mortgage-backed securities held in the portfolio.  Interest income on held to maturity securities declined from $435 thousand in 2021 to $343 thousand in 2022, reflecting the decline
in average balances.  Held to maturity securities are recorded at amortized cost.  The fair value of these securities as of December 31, 2022 was $7.6 million.

The designation of securities as “held to maturity” is made at the time of purchase, based upon management’s intent and ability to hold the securities until final
maturity.  At December 31, 2022 there were $217 thousand of unrecognized losses and $90 thousand of unrecognized gains on securities in this portfolio.

Securities Gains: During 2022 and 2021, TrustCo did not recognize any net gains from securities transactions. During 2020, TrustCo recognized approximately $1.2 million
from net gains from securities transactions.   There were no sales or transfers of held to maturity securities in 2022, 2021 or 2020.

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

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SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD

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

Maturity and call dates of securities: Many of the securities in the Company’s portfolios have a call date in addition to the stated maturity date.  Call dates allow the issuer to redeem the
bonds prior to maturity at specified dates and at predetermined prices.  Normally, securities are redeemed at the call date when the issuer can reissue the security at a lower interest rate.  Therefore, for cash flow, liquidity and interest
rate management purposes, it is important to monitor both maturity dates and call dates.  The level of calls in 2020 was higher than the 2021 and 2022 levels due to the significant reduction in interest rates in early 2020 as a result of the
pandemic.  Given the current interest rate environment, the probability of future calls will depend on market interest rate levels.  The tables labeled “Securities Portfolio Maturity and Call Date Distribution,” show the distribution, based on
both final maturity and call date of each security, broken out by the available for sale and held to maturity portfolios as of December 31, 2022.  Mortgage backed securities, collateralized mortgage obligations and Small Business Administration
securities are reported using an estimate of average life.  Actual maturities may differ from contractual maturities because of securities’ prepayments and the right of certain issuers to call or prepay their obligations without penalty.  The
table, “Securities Portfolio Maturity Distribution and Yield,” shows the distribution of maturities for each of the securities portfolios, based on final maturity, as well as the average yields at December 31, 2022 on each type/maturity
grouping.

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SECURITIES PORTFOLIO MATURITY AND CALL DATE DISTRIBUTION

Debt securities available for sale:

Held to maturity securities:

Federal Funds Sold and Other Short-term Investments

During 2022, the average balance of Federal Funds sold and other short-term investments was $969 million, a decrease from $1.1 billion in 2021.  The average rate earned on
these assets was 1.47% in 2022 and 0.13% in 2021. TrustCo utilizes this category of earning assets as a means of maintaining strong liquidity.  The Federal Funds sold and other short-term investments portfolio is significantly affected by
changes in the target Federal Funds rate, as are virtually all short-term interest-sensitive instruments.

The year-end balance of Federal Funds sold and other short-term investments was approximately $607 million for 2022, compared to $1.2 billion at year-end 2021.  While yields on investment
securities with acceptable risk characteristics were insufficient to justify shifting overnight liquidity into other investment types during 2022, some funds were shifted into higher yielding loans.  Management will continue to evaluate the
overall level of Federal Funds sold and other short-term investments in 2023 and will make appropriate adjustments based upon market opportunities and interest rates.

Funding Sources

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

Deposits: Average total deposits were approximately $5.3 billion in 2022, compared to approximately $5.2 billion in 2021, an increase of $114.1 million.  Changes in deposit categories (average
balances 2022 versus 2021) included: demand deposits up $88.8 million, interest-bearing checking deposits up $55.6 million, savings up $155.6 million, money market up $6.6 million and time deposits down $192.5 million.  While many customers
remain in one product type for many years, others may move funds between product types to maximize the yield earned or as a result of increased or decreased liquidity needs.  The balance in time deposits over $250 thousand is not the result of
any incentive pricing as TrustCo does not offer premium rates on large certificates of deposit.

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MIX OF AVERAGE SOURCES OF FUNDING

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AVERAGE BALANCES, YIELDS AND NET INTEREST MARGINS

Portions of income earned on certain commercial loans, obligations of states and political subdivisions, and equity securities are exempt from federal and/or state taxation.  Appropriate
adjustments have been made to reflect the equivalent amount of taxable income that would have been necessary to generate an equal amount of after tax income.  Federal and state tax rates used to calculate income tax on a tax equivalent basis
were 21% and 6%, respectively, for 2022, 2021 and 2020.  The average balances of securities available for sale and held to maturity were calculated using amortized costs.  Included in the average balance of shareholders’ equity is $(22.0)
million, $3.3 million, and $7.1 million in 2022, 2021, and 2020, respectively, of net unrealized gain (loss), net of tax, in the available for sale securities portfolio.  The gross amounts of the net unrealized income (loss) has been included
in cash and noninterest earning assets.  Nonaccrual loans are included in average loans.

The overall cost of interest bearing deposits decreased slightly as a result of lower deposit rates during the first half of the year, however, during the second half of the year the Company
began to raise rates in response to the rising interest rate environment.  The Company strives to maintain competitive rates on deposit accounts and to attract customers through a combination of competitive interest rates, quality customer
service, and convenient banking locations.  In this fashion, management believes TrustCo is able to attract deposit customers looking for a long-term banking relationship and to cross-sell banking services utilizing the deposit account
relationship as the starting point.  Given the current interest rate environment, the Company expects the cost of interest bearing deposits to increase in 2023.

Other funding sources: The Company had $177.6 million of average short‑term borrowings outstanding during 2022, compared to $232.8 million in 2021.  The decrease over the prior year is
attributable to customer behavior and the products they choose.  These borrowings represent customer repurchase accounts, which behave more like deposit accounts than traditional borrowings.  The average cost of short-term borrowings was 0.42%
in 2022 and 0.39% in 2021.  This resulted in interest expense of approximately $740 thousand in 2022, compared to $909 thousand in 2021.

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AVERAGE DEPOSITS BY TYPE OF DEPOSITOR

MATURITY OF TIME DEPOSITS IN EXCESS OF THE FDIC INSURANCE LIMIT

As of December 31, 2022 and 2021, approximately $968.6 million and $705.5 million, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and
assumptions used for the Bank's regulatory reporting requirements.

VOLUME AND YIELD ANALYSIS

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Capital Resources

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

Both TrustCo and Trustco Bank are subject to regulatory capital requirements.  The regulatory capital rules contain a Tier 1 leverage ratio of 4.0% of consolidated assets, a common equity
Tier 1 minimum capital requirement of 4.5% of risk-weighted assets, a minimum Tier 1 capital to risk-based assets requirement of 6.0% of risk-weighted assets, and a total risk-based capital ratio or 8.0% of risk-weighted assets.  In addition,
the Company and the Bank are required to maintain additional levels of Tier 1 common equity (known as the capital conservation buffer) above the minimum risk-based capital levels in order to avoid restrictions on dividends, repurchase shares,
or payment of discretionary bonuses.

As of December 31, 2022, the capital levels of both TrustCo and the Bank exceeded the minimum standards, including with the capital conservation buffer taken into account.

Under the OCC’s “prompt corrective action” regulations, a bank is deemed to be “well-capitalized” when its CET1, Tier 1, total risk-based, and leverage capital ratios are at least 6.5%, 8%,
10%, and 5%, respectively.  A bank is deemed to be “adequately capitalized” or better if its capital ratios meet or exceed the minimum federal regulatory capital requirements, and “undercapitalized” if it fails to meet these minimal capital
requirements.  A bank is “significantly undercapitalized” if its CET1, Tier 1, total risk-based and leverage capital ratios fall below 3%, 4%, 6%, and 3%, respectively and “critically undercapitalized” if the institution has a ratio of tangible
equity to total assets that is equal to or less than 2%.  At December 31, 2022 and 2021, Trustco Bank met the definition of “well-capitalized.”

The federal bank regulatory agencies have adopted rules creating a “community bank leverage ratio” framework designed to simplify capital requirements for qualifying
banks and bank or thrift holding companies. The new rule was effective as of January 1, 2020.  Although TrustCo would qualify to take advantage of the community bank leverage ratio framework, it has decided it would not opt-in to the framework.

The Company’s dividend payout ratio was 35.86% of net income in 2022 and 42.95% of net income in 2021. The Company executed a 1 for 5 reverse stock split on May 28, 2021.  The per-share
dividend paid was $1.41 in 2022 and $1.37 in 2021, adjusted for the reverse split.  The Company’s ability to pay dividends to its shareholders is dependent upon the ability of the Bank to pay dividends to the Company.  The payment of dividends
by the Bank to the Company is subject to continued compliance with minimum regulatory capital requirements.

TrustCo’s consolidated Tier 1 risk-based capital was 18.93% of risk-adjusted assets at December 31, 2022, and 19.54% of risk‑adjusted assets at December 31, 2021.  Consolidated Tier 1
capital to assets (leverage ratio) at December 31, 2022 was 10.39%, as compared to 9.61% at year-end 2021.  Note 14 to the financial statements includes information on all regulatory capital ratios.

TrustCo maintains a dividend reinvestment and stock purchase plan (DRSPP) with approximately 6,987 participants.  During 2022, $2.2 million of dividends paid on the shares held in this plan
were reinvested in shares of the Company.  The DRSPP also allows for additional purchases of stock by participants and has a discount feature (up to 5%) that can be activated by management as a tool to raise capital. To date, the discount
feature has not been utilized.

On June 7, 2019 the Company’s Board of Directors authorized a share repurchase program of up to 1,000,000 shares.  During the three months ended March 31, 2020, the Company repurchased a
total of 489 thousand shares at an average price per share of $7.11 for a total of $3.5 million under its Board authorized share repurchase program.  The shares purchased as of March 31, 2020 represented 0.51% of our common shares outstanding.
On April 16, 2020 the Company announced that it had suspended its share repurchase program.  On February 18, 2021 the Company’s Board of Directors authorized another share repurchase program of up to 2,000,000 shares and was adjusted to 400,000
shares as a result of the approval of the Reverse Stock Split, and represented approximately 2% of its then currently outstanding common stock.  During the year ended December 31, 2021, the Company repurchased a total of 70 thousand shares at
an average price per share of $32.82, for a total of $2.3 million under its Board authorized share repurchase program.  On March 9, 2022 the Company’s Board of Directors authorized another share repurchase program of up to 200,000 shares, or
approximately 1% of its then currently outstanding common stock.  During the year ended December 31, 2022, the Company repurchased a total of 200,000 shares at an average price per share of $33.44, for a total of $6.7 million, under its Board
authorized share repurchase program.

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Risk Management

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

Credit Risk

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

Management has also developed policies and procedures to monitor the credit risk in relation to the Federal Funds sold portfolio.  TrustCo maintains an approved list of third party banks to
which Trustco can sell Federal Funds and monitors the credit rating and capital levels of those institutions.  At December 31, 2022, virtually all of the Federal Funds sold and other short-term investments were funds on deposit at the Federal
Reserve Bank of New York (“FRBNY”) and the Federal Home Loan Bank of New York (“FHLBNY”).  The Company also monitors the credit ratings on its investment securities and performs initial and periodic reviews of financial information for the
issuers of corporate and municipal bonds.

Nonperforming Assets

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

Nonperforming assets at year-end 2022 and 2021 totaled $19.6 million and $19.1 million, respectively.  Nonperforming loans as a percentage of the total loan portfolio were 0.37%
in 2022 and 0.42% in 2021.  As of December 31, 2022 and 2021, there were $7.6 million and $6.5 million, respectively, of loans in non-accruing status that were less than 90 days past due.

At December 31, 2022, nonperforming loans included a mix of commercial and residential loans.  Of the total non-accrual loans of $17.5 million, $16.9 were residential real estate loans and $533 thousand were
commercial loans.  It is the Company’s policy to classify loans as nonperforming if three monthly payments have been missed.  Economic conditions generally improved as compared to the prior year.  The majority of the Company’s loan portfolio
continues to come from its historical market area in Upstate New York.  As of December 31, 2022, 68.0% of loans are in New York, including both the Upstate and Downstate areas, as well as nominal loan balances in adjoining states.  The
remaining 32.0% of the loan portfolio are Florida loans.  At December 31, 2022, 13.1% of nonperforming loans were in Florida and 86.9% were in the Company’s New York area markets.  At December 31, 2022 nonperforming Florida loans amounted to
$2.3 million compared to $2.0 million at December 31, 2021.

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TrustCo has identified nonaccrual commercial and commercial real estate loans, all loans restructured under a TDR, and residential non-accrual loans over 180 days past
due as individually evaluated loans.

There were $646 thousand and $232 thousand of commercial loans classified as individually evaluated as of December 31, 2022 and 2021, respectively.  In addition, there
were $25.0 million and $18.3 million of residential TDRs individually evaluated at December 31, 2022 and 2021, respectively.

Ongoing portfolio management is intended to result in early identification and disengagement from deteriorating credits.  TrustCo has a diversified loan portfolio that
includes a significant balance of residential mortgage loans to borrowers in the Capital Region of New York and avoids concentrations to any one borrower or any single industry.

There are inherent risks associated with lending; however based on its review of the loan portfolio, including loans classified as nonperforming, management is aware of
no other loans in the portfolio that pose significant risk of the eventual non-collection of principal and interest.  As of December 31, 2022, there were no other loans classified for regulatory purposes that management reasonably expects will
materially impact future operating results, liquidity, or capital resources.  TrustCo has no advances to borrowers or projects located outside the United States.  The Bank makes loans to executive officers, directors and to associates of such
persons in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions.  None of these loans involve more than normal risk of
collectability or present other unfavorable features.

At year-end 2022 and 2021 there were $2.1 million and $362 thousand of foreclosed real estate, respectively.  Although the length of time to complete a foreclosure has
remained elevated in recent years, TrustCo, as a portfolio lender, has not encountered issues such as lost notes and other documents, which have been a problem in the foreclosure process for many other mortgagees.

Allowance for Credit Losses on Loans

On January 1, 2022, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses" (referred to as “CECL” and as Accounting Standards Codification Topic 326 (“ASC 326”)).
Under this standard, allowances have been established for loans and commitments to lend. The allowance for credit losses on loans (“ACLL”) replaces the previous allowance for loan losses (“ALL”). Upon adoption of CECL, the ACLL increased by
$2.4 million to $46.6 million from $44.2 at December 31, 2021 under the ALL.  The allowance for credit losses on unfunded commitments (“ACLUC’) increased from $18 thousand to $2.4 million and is recorded in accrued expenses and other
liabilities. The Company recorded a net decrease to undivided profits of $3.5 million, net of $1.2 million in deferred tax balances as of January 1, 2022 for the cumulative effect of adopting CECL.

For the year ended December 31, 2022, the Company recorded a credit to the provision for credit losses of $341 thousand, which includes a credit to the provision for credit losses on loans of
$900 thousand as a result of improving unemployment, housing price forecasts and a sustained low level of NPL’s and charge-offs, and a provision for credit losses on unfunded commitments of $659 thousand as a result of a corresponding increase
in unfunded commitments.

During 2022, the FOMC increased the target federal funds rate on six occasions totaling 4.25 basis points. Rising inflation weighs on consumers’ purchasing power by slowing spending and
driving monetary tightening. Inflation has reached a forty-year high, and labor and supply chain challenges have been heightened by the global impacts of the Russian invasion of Ukraine. Management has taken into consideration the possible
effects of these changes qualitatively within the CECL ACLL and ALCUC.

The Company evaluates several external forecasts in choosing the forecast element for the economic components of the allowance for credit losses on loans. The Company selected the stagflation
forecast for both January 1, 2022 and December 31, 2022 for economic modeling.

The following changes in forecasts from January 1, 2022 to December 31, 2022 impacted the reserves:

See Notes 1 and 4 of the consolidated financial statements for additional discussion related to the adoption of CECL, and the process for determining the provision for credit losses.

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The table, “Summary of Loan Loss Experience”, includes an analysis of the changes to the allowance for the past five years.  Net loans recovered in 2022 and 2021 were
$322 thousand and $122 thousand, respectively.  The increase in net recoveries was primarily the result of lower gross charge offs in the New York residential segment of the portfolio, partially offset by less recoveries in New York for all
segments.   New York commercial, residential, and installment gross recoveries were down $28 thousand, $14 thousand, and $47 thousand, respectively, from 2022 to 2021. Total gross charge-offs in 2022 were $152 thousand versus $430 thousand in
2021.  There were no Florida commercial charge-offs in either 2022 or 2021, and New York commercial charge-offs increased $10 thousand from 2022 to 2021.  Residential gross charge-offs were down $316 thousand from 2022 to 2021 and gross
installment charge‑offs increased $28 thousand from 2022 to 2021.  The changes in gross and net charge-offs in these categories reflected economic and market changes.  As mentioned above, the Company adopted CECL on January 1, 2022, which
resulted in a credit in 2022 of $900 thousand to the provision for credit losses on loans primarily as a result of improving unemployment and housing price forecasts.   The $5.5 million credit to the provision for loan losses in 2021, under the
incurred loss method, was primarily driven by improvements in asset quality trends and economic conditions, as well as adjustments to the pandemic specific provision made in 2020.  The allowance for credit losses on loans decreased from $46.6
million at the CECL adoption date of January 1, 2022, or 1.05% of total loans at that date, to $46.0 million at December 31, 2022, or 0.97% of total loans at that date.

Conditions in most of the Bank’s market areas are stabilizing or improving as compared to 2022 however, should general economic conditions weaken and/or real estate
values begin to decline again, the level of problem loans may increase, as would the level of the provision for loan losses.

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SUMMARY OF LOAN LOSS EXPERIENCE