Good morning and welcome to the TrustCo Bank Third Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions.

[Operator Instructions] Before proceeding, we would like to mention that this presentation may contain forward-looking information about TrustCo Bank Corp. New York that is intended to be covered by the Safe Harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

Actual results and trends could differ materially from those set forth in such statements due to various risks, uncertainties and other factors.

More detailed information about these and other risk factors can be found in our press release that proceed this call and in the risk factors and forward-looking statement sections of our Annual Report on Form 10-K and as updated by our quarterly reports on Form 10-Q.

The statements are valid only as of the date hereof, and the company disclaims any obligation to update this information, except as may be required by applicable law. Today's presentation contains non-GAAP financial measures.

The reconciliation of such measures to the most comparable GAAP figures are included in our earnings press release which is available under the Investor Relations tab of our website at trustcobank.com. Please also note this event is being recorded. I would now like to turn the conference over to Mr. Robert J. McCormick, President and CEO.

Please go ahead..

Thank you. As the host said, I'm Rob McCormick, President and CEO of the Bank. Joining me on the call today are Mike Ozimek, our Chief Financial Officer and Scott Salvador, our Chief Banking Officer. Kevin Timmons, who a lot of you deal with on a regular basis is also in the room. Our third quarter 2015 results can best be described as solid.

We ended the quarter with total deposit just shy of $4.1 billion, this is up year-over-year. We're happy that a lot of this growth has come in the core categories. Most of you know we are very proud of our branch network which now numbers a 146 offices.

We did not open any offices during the third quarter, we’re hoping three over the past year and we're encouraged that average deposits for branch continue to grow. Our loan portfolio grew by about $200 million year-over-year, most of its growth took place in the residential mortgage categories.

Our commercial loan portfolio was flat quarter-over-quarter and down year-over-year. We continue to work with our customer base, try not to chase lower margin risk your credits that seem to be so common in these times. Consumer lending continues to be a small part of our business.

There is all good news on the non-performing loan front, almost all of our performance ratios are shown improvement. Our non-performing loan ratio at quarter end was under 1% and non-performing assets to total assets was 0.8%.

Our allowance for loan losses continues over $45 million, just shy of 1.4% of total loans and our non-performing coverage ratios over a 140%. Our net income for the quarter was $10.6 million, flat or down slightly from the third quarter 2014. Our year-to-date 2015 net income $32 million was down about a $1.5 million year-over-year.

Our efficiency ratio is just shy of 55% due to an increase in our non-interest expenses. Our return on assets was 0.91%, return on equity was 10.64% and our margin was 3.08% flat quarter-to-quarter and down year-over-year.

Finally, most of you will remember, we were operating under a formal agreement with the Officers of the Comptroller of the Currency. We'll put all functions of our company under review, especially from a compliance and corporate governance perspective.

You can see some of the – you can see some of the expenses are up, especially salaries, professional services and FDIC and other insurance. We are reviewing many policies and enhancing our compliance and governance functions. We expect expenses to stay high for the short run, then stabilize at a lower number for the long run.

In the meantime, we look for savings in other areas and still have the great efficiency ratio. Now I'm going to turn over to Mike O, who'll give you some detail on the numbers..

Thanks, Rob. I'll now review TrustCo's financial results for the third quarter of 2015. Net income was $10.6 million in the third quarter of 2015 compared to $10.7 million for the third quarter of 2014. Despite the added cost during the third quarter in response to recent regulatory concerns, net income was virtually unchanged.

The average loan portfolio increased to $3.3 billion during the third quarter of 2015 and increase of $40 million on average or 1.2% over the second quarter and $218 million or 7.2% from the third quarter of 2014. As expected the growth was concentrated in the residential real estate portfolio.

This continues a positive shift in the balance sheet from lower-yielding investments to higher-yielding core loan relationships. Total average investment securities which includes the AFS and HTM portfolios also increased during the third quarter by $19.1 million or 2.6% on average over the second quarter of 2015.

This was a result of the additional $35 million in securities purchase during the third quarter of 2015, and the average impact of the purchase of approximately $60 million of securities in late Q2 2015.

The increase was partially offset by $84 million in investment cost in the later part of the third quarter, and by the cash inflows from the mortgage back securities portfolio. Total average deposits for the third quarter was $4.2 billion, which is an increase of $144.7 million or 3.6% over the third quarter of 2014.

Most of the increase came from a core deposit accounts. Average core deposits increased $103.3 million from the third quarter of 2014 to the third quarter of 2015. Core deposit accounts typically represent longer term relationships and are at a lower cost than time deposits.

Our cost of interest bearing deposits held at 40 basis points for the quarter, which continues to reflect our pricing discipline with respect to CDs and other non-maturity deposits. Our average balance of overnight investments was $652 million for the third quarter of this year, down $30.8 million or the average balance in the second quarter of 2015.

During the quarter, the growth of the loan portfolio was funded by the decrease in the overnight investments, as well as an increase in average deposits and borrowings of approximately $19 million.

In addition to the liquidity that is in our balance sheet in the current rate environment, we expect that it'll have between $200 million to $400 million of loan payments coming in over the next 12 months, all along with approximately $190 million of investment securities cash flow during the same time period.

This continues to give us opportunity and flexibility moving into the fourth quarter in 2016. Our net interest margin increased to 3.8% in the third quarter, up from 3.07% in the second quarter and down from 3.16% in the third quarter of last year.

You can see that our provision for loan losses has remained level at $800,000 at third quarter of 2015, compared to the second quarter of 2015, and down $300,000 compared to the $1.1 million recorded during the third quarter of 2014.

This decrease level of provision remains a result of continued positive trends in asset quality measures and delinquencies.

Scott will review this in a minute, but let me reiterate that the level of the provision for loan losses is directly attributable to the continued improving quality of the portfolio and economic conditions in our geographic footprint and the ongoing resolution for existing private loans.

Non-interest income came in at $4.4 million for the third quarter, relatively unchanged compared to $4.5 million in the second quarter. Our financial services division had approximately $895 million of assets under management as of September 30, 2015. Now on to interest expenses.

Total non-interest expense came in at $23.5 million, up $1.3 million from both the second quarter of 2015 and the same period last year. The biggest fluctuations in the third quarter of 2015 compared to last quarter, certain salaries, employee benefits and FDIC and other short insurance expenses.

Salaries and benefits benefited by approximately $840,000 as a result of the reduction and liability related to our stock based compensation plan, and other senior benefit plans.

The increase in the FDIC and other insurance expenses is related to an additional $1.2 million in the FDIC premium expense which is a direct result of our most recent regulatory exam. We expect the FDIC and other insurance expense lines to be approximately $1.9 million per quarter going forward.

One other item to note, the other expense line includes a onetime charge of approximately $300,000 related to the issuance of EMV enabled debit cards. We continue to expect the estimated additional annualized costs of implementing the recommendations in the agreement will be approximately $5 million annually.

These added costs reflects the company's continued investment in our systems within the retail loan and deposit areas as well as enhanced regulatory compliance measures.

We would expect over the next several quarters to continue to experience increase legal and consulting expense, however that will level off in about a year as we complete implementation of the requirements of our agreement.

Including the third quarter numbers, our cost of approximately $500,000 associated with the increase in legal and consulting costs. As noted last quarter, you will see a continued shift from professional services to the salary and benefits line.

ORE expense came in at $806,000 for the quarter, which is within our expectations and in a large part due to increased taxes paid on properties owned during the quarter. We still expect ORE expenses to stay in the range of $500,000 to $1 million per quarter.

All the other categories of non-interest expenses are in line with prior quarters and our expectations. Going forward, we would expect this total reoccurring non-interest expenses to be in the area of $22.7 million to $23.2 million per quarter.

During the quarter our effective tax rate decreased to 34.3% in the third quarter of 2015, down from 37.6% last quarter and 37.9% in the third quarter of 2014. The decrease is a result of a tax benefit recorder related to the filing of our 2014 tax return during the most recent quarter.

We expect that our effective tax rate to return to previous levels in the fourth quarter of 2015 and going forward. Our efficiency ratio continues to be strong just like the increase cost discussed earlier.

We will continue to focus on what we can control by working throughout this process to identify opportunities to make the processes within the bank more efficient. Third quarter of 2015 came in at 56.04%, up slightly from the second quarter's 54.71%.

Should be noted, the third quarter numbers continue to be negatively affected by our decision to retain a large amount of overnight investments and the increased costs associated with implementing the recommendation of the agreement. I would expect the efficiency ratio to stay in this range or up slightly.

And, finally, capital ratios continue to stay strong at 8.71% at the end of the third quarter, up from the 8.49% compared to the same period in 2015. Now, Scot will review the loan portfolio and non-performing loans..

Okay, thanks Mike. For the third quarter total loans grew by $39.1 million or 1.2%, year-over-year loans have increased by a $199 million or 7.2%. Growth on the quarter was focused in the residential portfolio with commercial loans decreasing just slightly less than a $1 million.

Equity loans increased $1.8 million with the remainder of the growth occurring in the first mortgage product. Our Florida market continues to perform well, within the residential portfolio approximately 52% of the net growths tend from Florida this quarter.

The market is relatively strong in Florida and our real estate product continues to gain recognition in the market place. Our current 30 year fixed rate is 3.99%. Rates have been fairly stagnant and most of our originations have ranged between 3.99% and 4% and 8% in recent times.

Purchase money business has remained steady over the last couple of quarters, the refinance activity has dropped to low levels given the protracted period of flat rates. Our backlog is roughly equivalent to last year at this point in terms of number of loans, but is down about 10% in dollar volume due to the loan composition.

Home equity loans were a bit higher as of quarter end, was slightly less in the purchase money category versus last year. The news continues to be good in the non-performing loan area with virtually all category shown improvement both quarter and year-over-year.

Non-performing assets declined to $37.8 million from $38.6 million last quarter and $43.6 million last year. Non-performing loans were equal to 0.97% of total loans as of September versus 1% in June, and 1.2% the year earlier.

Early stage delinquencies remain at low levels and the 30 day, 9 day category in which they're going to blow which stood at this point last year. The coverage ratio of allowance from loan losses to non-performing loans now stands at a 141% versus 140% in June and a 125% a year earlier.

Rob?.

Thanks, Scott. We're happy to answer any questions you might have..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alex Twerdahl of Sandler O'Neill. Please go ahead..

Hey good morning, guys..

Good morning, Alex..

Good morning, Alex..

Thanks for all the additional color, very helpful as usual. I wanted to ask as I usually do on this call about the uses of the excess cash, obviously itself is pretty high.

Is your goal right now given the outlook for interest rate still just to maintain NII basically where it is or have you considered putting more of it to work or extending out on the yield curve a little bit to get a little bit more in earnings?.

Yeah Alex, this is Mike. Our outlook really hasn’t changed. We've always been an opportunistic investor. And the good thing we still seeing growth in our loan portfolio, and right now that’s where we see the best place to put our money.

We will continue to invest some in the fourth quarter but yeah, we don’t necessarily, at least where the rates are right now, we don’t really envision that being a huge number. Alex, we really start to see a pick up in the long end of the curve.

So, we may see our cash number start to raise a little bit in the fourth quarter depending on what really plays out..

We've been able to sustain the net interest income as well Alex, and sure we'll post a little growth in that area..

Yeah, I know.

And then on the cost of fund side, have you felt the need to extend out often since longer term CD promotions or anything that would affect the cost of funds in the coming quarter or two?.

No. We've been able to be pretty conservative with our CDs actually and we've even chased a little money out of the bank Alex that we felt was little higher price at this point in time. That’s what that core growth and our core customers are – that’s where their core growth in our core customers really come into play and give us some advantage.

And like I said, we've been able to extend a little bit and really haven't bumped the cost at all..

Okay, that’s great. And then just finally Scott, you gave some good color on the pipelines, but just how do you think about – have you seen the number of applications changing as the tenure changes and as the rate shifts around a little bit.

I mean how should we think about potential loan growth when rates start to go up? Your customers really – are they really not that sensitive to where the rates are or do you think that there is kind of a rush right now to buy houses and refinance and whatnot with the possibility of rates going up potentially next year?.

Yeah, actually I would kind of say just almost the opposite, Alex. I mean rates have been so low for so long that the rush of people flooding into capture the low rates. I mean anyone who is going to do that just for rates say pretty much has done it.

And stagnation in rates were they don’t change and they're flat for protracted periods which is what we've been in this summer that really has a doweling down effect on the activity because people tend to move when rates move and it goes into the papers, it goes into the news, plus those who are sitting on the fence say, if it's going down here is a great rate I should grab it, or if it's going up they say, we're going to do something, maybe we should do it before they go up higher.

So, the flat rates really kind of dowels out the market and if rates start to move, initially how rates go way up of course that could have a negative effect, but if they start to move you might actually see a little jump start in the market as people wake up and say, boy, it's time to do something..

Okay, that’s very helpful. Thanks for take my questions..

Thanks, Alex..

[Operator Instructions] Our next question comes from Travis Lan of KBW. Please go ahead..

Yeah, thanks, good morning guys..

Good morning, Travis..

Good morning, Travis..

Scott, just following up on that last question, so the kind of pull back in the loan growth rate at least what you're on paste to put on this year is more a product of the refinance activity slowing than any design on your part to slow the growth, is that right?.

Yeah absolutely, so it's not a design thing. It is great, we tried to refinance, but also on the purchase side as I just said, there has been a little flattening on the purchase side also but it's certainly nothing but by design.

I mean our loan flow numbers show that our market share is still there, flow has been good frankly as they re-bounce from the situation they were in and our market recognition grows there. So we've kind of ahead of the paste last year in Florida. But overall it's not by design, it's just really a function of the market and what's going on..

Got it, okay.

And then you had said I think that origination yields on the mortgage book are around 4% give or take, how does that compared to the rate on the mortgages that are rolling off?.

I think it's slightly below the rates that our loan are rolling off, but again rates have been so flat for so long that that’s spread between what's rolling off and what we're booking on is really – has really tightened up. It's still as little bit lower but not nearly what it was before Travis..

And what does that then indicate for kind of the outlook for margin, assuming no change in rates seems like then there wouldn’t be a whole lot of pressure going forward.

Does that make sense?.

Absolutely, I mean you could see it come down a little bit in the long-term. Where that yield that you can see where the yield in that portfolio is, it has kind of steadily come down, not by a long but it has come down a few basis points every quarter going back. But the good thing is that where it's coming down is close to where we're originating..

Got it, okay.

Reserve to loans I think you guys have mentioned this, but just to kind of clarify it's come down fairly consistently, is that something that you would expect to continue if loss rates kind of stay in this range or is there a point at which the reserve to loan ratio kind of stabilizes there a little down for it?.

Mike, on to you..

I'm sorry.

Can you repeat the question?.

Sorry.

So reserve to loan is obviously has come down in conjunction with the non-performing improvement which you guys have mentioned, is there a point though at which the reserve to loan ratio reaches a level where it's low enough and will remain stable at some point?.

We spend a lot of time on analysis of loan loss reserves, Travis, it's not like the old days. So, if the numbers continue to improve I would imagine that would continue to come down. I mean we have to be mindful the fact that we lend money for living and there is risk involved in everything.

So in our opinion, the higher the reserve we can maintain the better off we will be long-term, but the analysis has really become exhausted. And we're also hoping to post additional loan growth that could keep the loan loss reserve where it is, bring the ratio down but keep the dollars the same..

Right, okay. All right, and then just the last one, could you just update us, I mean you gave us a good review of kind of the expense impact of the OCC agreement, but just from a qualitative perspective where you guys think you stand, maybe give an example of specific improvements that have been made.

And then just kind of your own outlook for the sustainability of the dividend, can you just remind us how that process works that'd be great..

Well, we're making I think very good progress, we're meeting dates. Our hands are kind of tied you know that Travis with regard to an OCC agreement, there isn't a lot we can disclose or discuss publicly but we're hitting the dates that are required and submitting what we think are very good responses to the issues raised in the formal agreement.

And we continue to plan to pay that dividend, it's – we haven't been told it's in any jeopardy or are there any difficulties with it. So we plan to just continue to pay..

Okay, all right I appreciate it..

This concludes our question-and-answer session. I would like to turn the conference back over to Robert McCormick for any closing remarks..

I just like to thank you all for your interest on our company and have a great day..