TRUSTCO BANK CORP N Y (TRST) FY 2023 MD&A

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

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition for 2023, 2022 and
2021.  This discussion should be read in conjunction with our audited financial statements included in “Consolidated Financial Statements and Notes” herein and Part I, Item 1, “Business” set forth in our Annual Report on Form 10-K for the year
ended December 31, 2023 (“2023 Form 10-K”).  The following analysis contains forward-looking statements about our future revenues, operating results and expectations.  See “Cautionary Note Regarding Forward-Looking Statements” herein for a
discussion of the risks, assumptions and uncertainties affecting these statements, as well as Part I, Item 1A. “Risk Factors” set forth in our 2023 Form 10-K.

For a discussion of a comparison of the years ended December 31, 2022 and December 31, 2021, please refer to "Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein. Unless otherwise indicated, net interest income and net interest margin are presented in this discussion on a non-GAAP, taxable equivalent basis.  See Non-GAAP Financial Measures Reconciliation herein for a reconciliation of
such measures to their most directly comparable GAAP measures.  Balances discussed are daily averages unless otherwise described.  Reclassifications of prior year data are made where necessary to conform to the current year’s presentation.

Financial Review

TrustCo made significant progress in 2023 despite a challenging operating environment and mixed economic conditions.  In management’s view, the key results for 2023 are:

Management believes that the Company was able to achieve these accomplishments, by executing its long-term plan focused on traditional lending criteria and sound 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 9.46% in 2023 compared to 12.60% in 2022, while return on average assets was 0.97% in 2023 as compared to 1.22% in 2022.

The U.S. economy proved to be resilient during 2023, with growth in the GDP during three out of the four quarters of 2023, and showed signs of strength in consumer spending after seeing a rise in
inflation in the prior year. 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, and four times in 2023 by a total of 100
basis point, for a total of 525 basis points, to a range of 5.25% to 5.50% as of end of 2023.  All of these increases were expressly made in response to inflationary pressures.

For the year ended 2023, the Dow Jones Industrial Average ended up 13.7%, as compared to a decline of 8.8% in 2022.  The S&P 500 Index also was up 24.2% for the year, compared to a decline
of 19.4% in 2022.  United States three-month Treasury bills experienced an increase in rates ending the year at 5.45%, 161 basis points ahead of the ten-year Treasury yield at year-end of 3.84%.  These yields compare to 2022 year-end yields of
4.42% for the three-month Treasury bills and 3.88% for the ten-year Treasury bills.  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 2023, the yield on the two-year Treasury bond was 4.41% and decreased 15 basis points during the year to close 2023 at 4.26% and the ten-year Treasury bond began 2023 at
3.88% and closed the year down 4 basis points to 3.84% 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 inflation.

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While interest rate cuts are now expected in 2024 as indicated by market forward interest rates, the specific timing of these cuts is uncertain as Federal Reserve policy rate decisions are
highly dependent on the level of inflation and strength of the labor market. Outside of inflation, the economic uncertainty and market disruptions of 2023 remain in 2024, including geopolitical tensions from conflict in the Middle East, Russia’s
prolonged war in Ukraine, and the strained relationship between the U.S. and China. Moreover, 2024 is an election year, and there are specific risks and uncertainties related to the election and any change in administration that could impact the
economy and fiscal and regulatory policy by varying degrees. Multiple mixed signals make navigating the way ahead difficult as evidenced by the volatility in capital markets, variance in interpretation of the Federal Reserve’s messaging, and wide
ranges of multiple economic outlooks.

TrustCo, like most other banking organizations, prices its liabilities (deposits and short-term debt) in relation to the shorter end of the Treasury maturity curve.  The average for the
three-month treasury was 319 basis points higher in 2023 than in 2022, with the median yield of 5.44% in 2023 up 361 basis points over the median yield in 2022.  These trends generally reflect an increase in the cost for deposit products that
price in relation to the short-term treasury market yields.  At the same time the average yield of the ten-year Treasury has increased to 3.96% in 2023, up 101 basis points from 2022 when the average was 2.95%.  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.  With the expected cuts to
interest rates this year, we anticipate loan demand will strengthen across our residential loan categories.

On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation
(“FDIC”) as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each placed into receivership.  Additionally, following the rapid withdrawal of deposits and large losses reported by Credit Suisse in
Switzerland, Swiss Bank UBS Group AG acquired Credit Suisse in an emergency arrangement brokered by the Swiss government.  Lastly, due to the destabilization of First Republic, the FDIC assisted in arranging a sale of First Republic to JPMorgan
Chase on May 1, 2023. In response to the U.S. bank failures in the spring of 2023, the Federal Reserve established a Bank Term Funding Program (“BTFP”) to offer emergency loans of up to one year to eligible depository institutions pledging
qualifying assets as collateral.  Nevertheless, the closures of those banks and adverse developments affecting other banks over the course of 2023 have resulted in heightened levels of market activity and volatility. For instance, the share price
of a number of regional banks continues to be adversely affected given continuing concerns regarding the liquidity of these banks and the stability of the banking system in general.  The full impact of market volatility from the adverse
developments in the banking industry, along with continued elevated interest rates, will depend on future developments, which are highly uncertain and difficult to predict. Our business and financial results may be impacted by a variety of other
factors as well, such as a government shutdown, a failure by the federal government to raise the federal debt ceiling, or an economic slowdown or recession.

Additionally, in November 2023, the FDIC adopted a final rule to implement a special assessment on banks with total assets greater than $5.0 billion to recover the cost associated with
protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank.  The special assessment will be collected at an annual rate of approximately 13.4 basis points for an anticipated total of eight quarterly
assessment periods, which it estimates will result in total revenue of $16.3 billion. Because (i) the estimated loss pursuant to the systemic risk determination will be periodically adjusted and (ii) assessments collected may change due to
corrective amendments to the amount of uninsured deposits reported for the December 31, 2022 reporting period, the FDIC has retained the ability to cease collection early, extend the special assessment collection period one or more quarters
beyond the initial eight-quarter collection period to collect the difference between actual or estimated losses and the amounts collected, or impose a final shortfall special assessment on a one-time basis after the receiverships for SVB and
Signature Bank terminate. The final rule will be effective April 1, 2024, with the first collection for the special assessment reflected on the invoice for the first quarterly assessment period of 2024 (i.e., January 1 through March 31, 2024),
with a payment date of June 28, 2024. There will be no additional cost to TrustCo as a result of uninsured deposits being under $5 billion.

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, should general housing prices and other economic measures, such as unemployment in the Company’s market areas, deteriorate as a result of continued elevated interest rates, financial sector instability, a potential or actual
default on the federal debt or other reasons, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans.

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Overview

2023 results were marked by significant growth in the Company’s loan portfolio.  The loan portfolio grew to a total of $5.00 billion, an increase of $270 million or 5.7% over the 2022 year-end
balance.  Deposits ended 2023 at $5.35 billion, up from $5.19 billion the prior year-end.  Management believes that the increase in deposits was driven by the Banks effective market and pricing strategy.  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 $58.6 million in net income or $3.08 of diluted earnings per share for the year ended December 31, 2023, compared to $75.2 million in net income or $3.93 of diluted earnings per
share for the year ended December 31, 2022.

During 2023, 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 2023 and 2022, including:

During 2023, TrustCo’s results were affected by strong loan growth and a changing interest rate environment.  Average loan balances increased 7.1% from 2022 to 2023, while
the total of average Federal Funds Sold and other short-term investments, available for sale securities and held to maturity securities decreased 29.4%. Average net loans increased to 82.5% of average earning assets in 2023 from 75.7% in 2022.
On average for 2023, non-maturity deposits were 72.5% of total deposits, down from 81.6% in 2022.  Overall, the cost of interest-bearing liabilities increased 105 basis points to 1.19% in 2023 as compared to 2022. The Company has traditionally
sought to maintain a high liquidity position and taken a conservative stance in its investment portfolio through the use of relatively short-term securities.

As discussed previously, market interest rates moved significantly during the course of 2022 and into 2023, with shorter-term three-month treasury rates increasing year
over year while the longer term ten-year rates decreased slightly, resulting in the slope of the yield curve remaining negative during 2023.  The average daily spread between the ten-year Treasury and the two-year Treasury was negative 0.63 basis
points in 2023, down from an average of negative 4 basis points in 2022.  The spread between the ten-year Treasury and the two-year Treasury changed throughout the year but still ended 2023 at a negative 42 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 and a decrease in the longer-term rates, resulted in a further
inverted yield curve from the prior year, an indication of a possible recession.

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The tables below illustrate the range of key Treasury bond interest rates during 2023 and 2022.

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, and 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.  Branches in all geographies 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.  The Company also took the opportunity in 2023 to close and relocate several underperforming branches.

Asset/Liability Management

In managing its balance sheet, TrustCo utilizes funding and capital sources within 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 97.9% and 97.7% of average total assets for 2023 and
2022, 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.

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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 and 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 5.25% to 5.50% by the end of 2023.

The yield on the ten-year Treasury bond remained relatively flat decreasing by only 4 basis points from 3.88% at the beginning of 2023 to the year‑end level of 3.84%.  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.  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 continued to originate
loans for sale into the secondary market throughout 2023.  We believe that this has allowed the Company to have greater flexibility with respect to mortgage rate volatility and the loans we choose to include in our portfolio.  Higher market
interest rates also generally increase the value of retail deposits.

The increase in the Federal Funds target range throughout 2022 and the first half of 2023, as well as the continued elevated interest rates in the second half of 2023, 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 remained elevated in 2023, we experienced increased yields on our Federal Fund Sold and other short-term investments,
investment portfolios, loans, and deposits.

Earning Assets

Average earning assets during 2023 were $5.9 billion, which was a decrease of $104.5 million from 2022.  This decrease was primarily the result of a decrease in Federal Funds Sold and other
short-term investments of $448.0 million, partially offset by increases in net loans on $323.9 million and securities available for sale of $21.0 million. The increase in the average loan portfolio is the result of an increase in all loan
categories with residential mortgage loans in the forefront.  TrustCo continues to prioritize the growth of residential real estate loans throughout the TrustCo Bank branch network through an effective marketing campaign, competitive rates, and
closing costs.

Total average assets were $6.0 billion for 2023 and $6.2 billion for 2022.

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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

Loans

In 2023, the Company experienced another year of significant loan growth.  The $269.7 million increase or 5.7% in the Company’s gross loan portfolio from December 31, 2022 to December 31, 2023
was due to higher balances in all loan categories.  Average loans increased $323.9 million during 2023 to $4.88 billion.  Interest income on the loan portfolio increased to $187.5 million in 2023 from $162.2 million in 2022.  The average yield
increased 28 basis points to 3.84% in 2023 compared to 3.56% in 2022.

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LOAN PORTFOLIO

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 for qualified borrowers, quick loan decisions, and fast closings were identified and marketed.  The
average balance of residential real estate mortgage loans was approximately $4.29 billion in 2023 and approximately $4.08 billion in 2022.  Income on residential real estate loans increased to $154.2 million in 2023 from $140.4 million in 2022.
The yield on the portfolio increased from 3.44% in 2022 to 3.60% in 2023.  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 increased by $49.5 million from $206.1 million in 2022 to $255.7 million in 2023.  Average commercial loans included $21.0 million and $22.3 million of commercial real
estate construction loans in 2023 and 2022, respectively.  The average yield on the commercial loan portfolio increased to 5.20% for 2023 from 4.93% in 2022, primarily as a result of higher interest rates on originations and repricing of variable
rate loans due to the current rate environment.  Interest income on commercial loans was $13.3 million in 2023 compared to $10.2 million in 2022, up also primarily as a result of the interest rate environment and more originations.

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 2023, the average balance of home equity credit lines was $313.9 million, an increase from $254.2
million in 2022.  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 6.03% for 2023 and 4.31% for 2022
reflecting increases in the prime lending rate that occurred in 2022 and 2023.  Interest income on home equity credit lines increased from $11.0 million in 2022 to $18.9 million in 2023.  Management expects that the anticipated decline in
interest rates during 2024 should increase demand for residential mortgages.

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At December 31, 2023 and 2022, the Company had approximately $29.1 million and $36.4 million of real estate construction loans, respectively.  Of the $29.1 million in real estate construction
loans at December 31, 2023, approximately $8.0 million was secured by first mortgages to residential borrowers with the remaining $21.1 million were loans to commercial borrowers for residential construction projects.  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 comprised of 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, 2023.  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, 2023 due after December 31, 2024 according to type and loan category:

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INVESTMENT SECURITIES

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

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, 2023, 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, 2023, 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, 2023 the Company did not consider any of the unrealized losses to be other than
temporary.

At December 31, 2023, the carrying value of securities available for sale amounted to $452.3 million, compared to $481.5 million at year-end 2022.  For 2023, the average
balance of securities available for sale was $501.1 million with an average yield of 2.27%, compared to an average balance in 2022 of $480.1 million with an average yield of 1.97%.  The taxable equivalent income earned on the securities available
for sale portfolio in 2023 was $11.4 million, compared to $9.4 million earned in 2022.

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, 2023, the fair value of TrustCo’s portfolio of securities available for sale carried gross unrealized gains of approximately $286 thousand and gross
unrealized losses of approximately $32.5 million.  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.   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, 2023, the Company held $6.5 million of held to maturity securities, compared to $7.7 million at December 31, 2022.  For 2023, the average balance of held
to maturity securities was $7.1 million, compared to $8.6 million in 2022.  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 3.97% in 2022 to 4.20% in 2023 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 $343 thousand in 2022 to $296 thousand in 2023, 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, 2023 was $6.4 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, 2023 there were $136 thousand of unrecognized losses and $74 thousand of unrecognized gains on securities in this portfolio.

Securities Gains

During 2023, 2022 and 2021, TrustCo did not recognize any net gains from securities transactions.  There were no sales or transfers of held to maturity securities in 2023,
2022 or 2021.

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.

Securities pledged totaled $155.3 million, which results in $303.4 million in unpledged securities.  In addition to unpledged securities, TrustCo had $578.0 million of
cash and cash equivalents and borrowing capacity of $938.6 million as of December 31, 2023.

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SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELD

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
for TrustCo to monitor both maturity dates and call dates.  The level of calls in 2020 was higher than the 2021, 2022 and 2023 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, 2023.  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, 2023 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 2023, the average balance of Federal Funds sold and other short-term investments was $521 million, a decrease from $969 million in 2022.  The average rate earned on
these assets was 5.10% in 2023 and 1.47% in 2022. 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 $529 million for 2023, compared to $607 million at year-end 2022.  While yields on investment
securities with acceptable risk characteristics were insufficient to justify shifting overnight liquidity into other investment types during 2023, 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 2024 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.

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Deposits: Average total deposits were approximately $5.2 billion in 2023, compared to approximately $5.3 billion in 2022, a decrease of $82.9 million.  Changes in deposit categories
(average balances 2023 versus 2022) included: demand deposits down $54.9 million, interest-bearing checking deposits down $122.4 million, savings down $229.0 million, money market down $139.5 million and time deposits up $462.9 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.

The Company has been proactive in retaining deposits, which is evident since total deposits have increased since December 31, 2022.  Total deposits as of December 31, 2023 increased $158.0 million to $5.35 billion
from December 31, 2022.  As we move forward, TrustCo’s objective is to continue to encourage customers to retain these funds in the expanded product offerings of the Bank through aggressive marketing and product differentiation.  The Company
understood the big inflows of deposits during the pandemic were temporary and that is why it did not invest that liquidity into securities or loans, but instead retained that liquidity on the balance sheet for when depositors would start to
absorb the funds. This gave the Company flexibility to strategically price deposits while retaining core customers.

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 2023, 2022 and 2021.  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 $(30.7) million,
$(22.0) million, and $3.3 million in 2023, 2022, and 2021, respectively, of net unrealized (loss) gain, 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 increased as a result of higher deposit rates throughout the year as a result of the current 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 continue to increase in 2024 until the Federal Reserve lowers rates.

Other Funding Sources

The Company had $114.6 million of average short‑term borrowings outstanding during 2023, compared to $177.6 million in 2022.  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 0.88% in 2023 and 0.42% in 2022.
This resulted in interest expense of approximately $1.0 million in 2023, compared to $740 thousand in 2022.

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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, 2023 and 2022, approximately $1.03 billion and $968.6 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.

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VOLUME AND YIELD ANALYSIS

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, 2023, 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, 2023 and 2022, 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 46.71% of net income in 2023 and 35.86% of net income in 2022. The Company executed a 1 for 5 reverse stock split on May 28, 2021.  The per-share
dividend paid was $1.44 in 2023 and $1.41 in 2022, 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.

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TrustCo’s consolidated Tier 1 risk-based capital was 18.90% of risk-adjusted assets at December 31, 2023, and 18.93% of risk‑adjusted assets at December 31, 2022.  Consolidated Tier 1 capital
to assets (leverage ratio) at December 31, 2023 was 10.79%, as compared to 10.39% at year-end 2022.  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 6,696 participants.  During 2023, $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 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 $7.0 million, under its Board authorized share repurchase program.  On
March 17, 2023 the Company’s Board of Directors authorized, and the Company announced, another share repurchase program of up to 200,000 shares, or approximately 1% of its currently outstanding common stock.  There were no repurchases during
2023.

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, 2023, 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 2023 and 2022 totaled $17.9 million and $19.6 million, respectively.  Nonperforming loans as a percentage of the total loan portfolio were 0.35% in
2023 and 0.37% in 2022.  As of December 31, 2023 and 2022, there were $7.5 million and $7.6 million, respectively, of loans in non-accruing status that were less than 90 days past due.

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At December 31, 2023, nonperforming loans included a mix of commercial and residential loans.  Of the total non-accrual loans of $17.7 million, $16.6 were residential real estate loans and $850 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, 2023, 65.1% of loans are in New York, including both the Upstate and Downstate areas, as well as nominal loan balances in adjoining states.  The remaining
34.9% of the loan portfolio are Florida loans.  At December 31, 2023, 14.7% of nonperforming loans were in Florida and 85.3% were in the Company’s New York area markets.  At December 31, 2023 nonperforming Florida loans amounted to $2.6 million
compared to $2.3 million at December 31, 2022.

The Company places loans on non-accrual at the time the loan is 90 days delinquent unless facts and circumstances warrant classification of non-accrual even if the borrower is not 90 days past
due.

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, 2023, 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 2023 and 2022 there were $194 thousand and $2.1 million of foreclosed real estate, respectively.  We generally initiate foreclosure
proceedings on real estate loans when a loan enters non-accrual status based upon non-payment, unless the borrower is paying in accordance with an agreed upon modified payment agreement. We obtain an updated appraisal upon the commencement of
legal action to calculate a potential collateral shortfall and to reserve appropriately for the potential loss. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure action
is completed, the property securing the loan is transferred to Other Real Estate Owned (“OREO”) status. We generally attempt to utilize all available remedies, such as note sales in lieu of foreclosure, in an effort to resolve non-accrual loans
and OREO properties as quickly and prudently as possible in consideration of market conditions, the physical condition of the property and any other mitigating circumstances. We have not initiated any expected or imminent foreclosure proceedings
that are likely to have a material adverse impact on our consolidated financial statements. In the event that a non-accrual loan is subsequently brought current, it is returned to accrual status once the doubt concerning collectability has been
removed and the borrower has demonstrated performance in accordance with the loan terms and conditions for a period of generally at least six months.  Although the length of time to complete a foreclosure has
remained elevated in recent years, TrustCo, as a portfolio lender, has generally not encountered issues such as lost notes and other documents, which have been a problem in the foreclosure process for many other mortgagees.

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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 $44.3 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, 2023, the Company recorded a provision for credit losses of $1.3 million, which includes a provision for credit losses on loans of $2.5 million as a result of
increased unemployment forecast offset by a sustained low level of NPL’s and charge-offs, and a benefit for credit losses on unfunded commitments of $1.3 million as a result of a corresponding decrease in unfunded commitments.  For the year ended
December 31, 2022, the Company recorded a credit to the provision for credit losses of $341 thousand, which included 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 NPLs 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. 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 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 Moody’s
stagflation forecast for December 31, 2023 for economic modeling, consistent with the prior year.

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.

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 2023 and 2022 were $46
thousand and $312 thousand, respectively.  The decrease in net recoveries was primarily the result of more gross charge offs in the New York residential segment of the portfolio, partially offset by more recoveries in New York for all segments.
New York commercial, residential, and installment gross recoveries were up $125 thousand, down $58 thousand, and up $38 thousand, respectively, from 2023 to 2022. Total gross charge-offs in 2023 were $547 thousand versus $152 thousand in 2022.
There were no Florida commercial charge-offs in either 2023 or 2022, and New York commercial charge-offs decreased $40 thousand from 2023 to 2022.  Residential gross charge-offs were up $347 thousand from 2023 to 2022 and gross installment
charge‑offs increased $88 thousand from 2023 to 2022.  The changes in gross and net charge-offs in these categories reflected economic and real estate market changes.

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 credit losses.

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SUMMARY OF LOAN LOSS EXPERIENCE