Good morning. And welcome to the Trustco Bancorp First Quarter 2017 Earnings Call and Webcast. All participants will be in listen-only-mode [Operator Instructions]. After today's presentation, there will be an opportunity the question [Operator Instructions].

Before proceeding, we would like to mention that this presentation may contain forward-looking information about Trustco Bancorp New York that's 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 preceded this call and in the risk factors and forward-looking statements sections of our annual report on Form 10-K and as updated by our quarterly reports from Form 10-Q.

Statements are valid only as if the date hereof and the Company disclaims any obligation to update this information except maybe required by applicable law. Today's presentation contains non-GAAP financial measures.

The reconciliations 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 Web site 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..

Thanks Phil. As the host said, I'm Rob McCormick, President of Bank. As usual joining me on the call are Mike Ozimek, our Chief Financial Officer and Scot Salvador, our Chief Banking Officer. Also in the room is Kevin Timmons, who we all deal with regularly.

Welcome all of you to the call and appreciate the opportunity to tell you a little bit more about our Company. As work in the past, we’ll continue to process right at the highlights giving an overview then Mike will detail the numbers and Scot will give some color on our operations, especially the loan portfolio delinquencies or problems.

Let’s get started. We actually closed the branch office during the quarter. An irresponsible landlord in Nyack caused a mold infestation in our branch rather than risk to health and well-being of our employees, and considering the cost of remediation we decided to close the branch. We are in the process of seeking a replacement.

We are now operating 144 branches and our average deposit for branch grew again last quarter. We give the detail in the branches because they are the source of the vast majority of the business we do. Our deposit growth has been good about $60 million year-over-year.

The best part of the growth has been our ability to reduce our dependence on higher cost time and money market accounts, while still posting decent overall growth. Our residential mortgage loans grew by over $190 million year-over-year and our total loan growth is almost $150 million year-over-year.

Our commercial loans are down from the first quarter last year and our home equity loans were down as well. We’re pretty sure lease some of that home equity run-off as being captured in our residential portfolio. We also see some stabilization in commercial loan portfolio; overall, loans in another all-time high at quarter end.

Our non-performing loans and assets were both down from the same period last year to 0.77% and 0.61% respectively. We’re also encouraged by our early stage delinquencies. We ended the quarter with total assets of $4.9 billion, up over $100 million from the same period last year.

All this rolls up to a net income of $10.9 million, which compares favorably to last quarter and the same quarter last year. Our efficiency ratio is 56%, approximately the same from the year end in same quarter last year, also still better than our peer group.

Our capital ratio was almost 9% at quarter-end, up from both year-end and the same quarter last quarter. Most of you know we maintain a large cash position, almost $700 million and about the same size of investment portfolio. We try to keep maturities as short as possible, leaving us the ability to move on our feet.

We continue to operate under a formal agreement with the OCC, while not much can be said about the agreement, we believe to be in the validation phase. Our first quarter here at the Bank was a great start to the year, now Mike will give you some detail on our numbers..

Thank you, Rob and good morning everyone. I will now review Trustco’s financial results for the first quarter of 2017. As we noted in the press release, net income remains solid and increased $10.9 million in the first quarter of 2017 or 5.2% compared to $10.4 million for the first quarter of 2016, and $10.8 million in the fourth quarter of 2016.

Net income yielded a return on average assets and average equity of 0.91% and 10.17% compared to 0.89% and 9.98% in the first quarter of 2016. Now, let’s start with the changes in the balance sheet. We saw continued loan growth during the first quarter of 2017, which is typically slow by seasonal weather conditions in the northeast markets.

As expected, the growth continues to be concentrated in the residential real estate portfolio. The residential mortgage loan portfolio increased by $4.2 million or 1.5% on average during the quarter compared to last quarter, and $185.2 million or 6.8% from the first quarter of 2016.

This continues a positive shift in the balance sheet from lower yielding overnight investments to higher yielding core loan relationships. Total average investment securities, which include the AFS and HTM portfolios increased $7 million during the quarter or 1% and $41.1 million or 6.4% from the first quarter of 2016.

As discussed in prior calls, our focus continues to be on traditional lending and conservative balance sheet management, which has continued to need less to produce consistent earnings. In regards to our investment portfolio, we will continue to take advantage of opportunities as they present themselves during the remainder of 2017 and beyond.

Keeping in mind, the current environment that has seen rate hikes back in December, and again in March, the strong likelihood of more to come.

As a reminder, we continue to carry $641 million of overnight investments, as well as the cash flow generator of $300 million to $500 million of loan gains coming in over the next 12 months along with approximately $140 million to $150 million of investment securities cash flow during the same time period.

All of which would be able to reap the reinvested at higher rates. This continues to give a significant opportunity and flexibility as we continue into 2017. During the quarter, we do take the opportunity to invest in $45 million of agency securities at a yield of approximately 2.11%.

On the funding side of the balance sheet, total average core deposits were $4.2 billion for the first quarter of 2017, an increase of $74.8 million from the first quarter of 2016. During the same period, our cost of interest bearing deposits decreased 4 basis points to 35 basis points.

We are proud of the ability to reduce the cost of the interest bearing deposits during the same period, which saw multiple rate hikes. We feel this continues to reflect our pricing discipline with respect to CEs and non-maturity deposits. For the quarter, our net interest margin increased to 3.14% from 3.13% compared to the fourth quarter of 2016.

This increase in the net interest income comes from both the asset side of the balance sheet as a result of the continued growth in the loan portfolio and the continued decrease in funding cost, just mentioned over the past four quarters.

The impacts of the growth of the balance sheet coupled with the changes in net interest margin have had a positive impact on the taxable equivalent net interest income. For the first quarter of the year, our taxable equivalent net interest income was $37.4 million or approximately $492,000 greater than it was in the fourth quarter of last year.

This increase was largely the result of the recent fed interest rate changes as we continue to retain $641 million on average during the quarter of overlay investments. There is a sizable increase on a quarter-to-quarter basis and represents a core increase in earnings for the future.

The provision for loan losses remained flat compared to last quarter at $600,000 and decreased $200,000 compared to $800,000 in the first quarter of 2016. Asset quality or loan loss reserve measures improved versus first quarter of 2016 of our mix as compared to the year-end 2016.

The slight increase in NPAs was due to residential real-estate non-performing loans in the New York region; prior to spring as it’s shown that the slight uptick in NPLs is seasonal and not unusual in the first quarter of the year coming out of the holiday months.

We would expect the level of provision for loan losses in 2017 will continue to reflect the overall growth in our loan portfolio, trends in the loan quality and economic conditions in our geographic footprint. Non-interest income came in at $4.7 million for the first quarter, up compared to the $4.5 million in the fourth quarter of 2016.

During the quarter, we saw an increase in our financial services income. As you remember, included in other non-interest income in the first quarter of each year includes the fees earned on tax return preparation services to our financial services customers.

Our financial services division continues to be the most significant recurring source of non-interest income, which had approximately $846 million of assets on our management as of March 31, 2017. Now onto non-interest expense, total non-interest expense net of ORE expense came in at $23.5 million, up $876,000 from the fourth quarter of 2016.

This came in directly within our expected range for first quarter of $23.2 million to $23.7 million.

The primary increase in non-interest expense during the first quarter of 2017 was in salaries and benefits expense, which was $10.2 million for the quarter, up $634,000 compared to the fourth quarter of 2016 and $1.2 million over the same period last year. This was the result of a few items.

First and something we have discussed in prior calls, we have continued to see an increase in the salary and benefits expense line as new hires replace consultants related to the formal agreement. Second, the first quarter of the year always bears the cost of increased employee, federal and state payroll taxes.

And lastly, the Bank also saw an impact of the increased healthcare cost as the new contracted rates for 2017 took effect. ORE expense came in at $499,000 for the quarter, which is down approximately $200,000 for the fourth quarter of 2016. ORE expense has consistently stayed within our expectations for the last five quarters.

We continued to expect ORE expenses stay in the range of approximately $500,000 to $1 million per quarter going forward. All of the other categories of non-interest expenses are in line with prior quarters and our expectations.

Moving forward into 2017, we will continue to expect total reoccurring non-interest expense net of ORE expense to remain in the area of $23.2 million to $23.7 million per quarter. The efficiency ratio in the first quarter of 2017 came in at 55.81% compared to 56.22% in the first quarter of 2016.

As we have stated in the past, we will continue to focus on what we can control, but we’re working to identify opportunities to make the processes within the Bank more efficient. And finally, the capital ratios continued to remain solid.

The consolidated tangible equity and tangible assets ratio was 8.97% at the end of the first quarter, up from 8.87% compared to the same period in 2016. Now, Scott will review the loan portfolio and non-performing loans..

For the first quarter, overall net loan growth totaled $18.5 million. This compares to net growth of $8.1 million in the first quarter of last year. Year-over-year loans have increased to $148 million or 4.5%.

Residential loans increased by $25.7 million on the quarter with commercial loans decreasing by $6.8 million, which included some significant pay downs on existing lines of credit. All regions posted increases that totaled over 80% of the net residential growth in the quarter.

We are pleased the quarter’s loan growth was increased over 2016 and we had a solid loan backlog as of March 31. The backlog is up over 10% from both year end and the first quarter of last year. Although, it is early in the season, we feel we are well positioned to post solid growth for this year.

After climbing just marginally, interest rates have settled back down and our current 30 year fixed rate is at 3.99%. Non-performing loan measures continue to be solid. Non-performing loans totaled $26.4 million at quarter-end of 0.77% of total loans, this compares to $30.4 million and 0.92% of total loans to prior year.

Net charge-offs levels remained very low, totaling only 0.05% on an annualized basis for the first quarter. The coverage ratio or allowance for loan losses versus non-performing loans was 167% at March 31st versus 146% at prior year.

Rob?.

Thanks Scot.

We’re happy to respond to any questions you have?.

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

First off, I just want to ask about deposits rates. So far we’ve had a couple of rate hikes you guys haven't done really anything to raise the cost to deposits, which is great to see. But I think there is some expectation across the industry that from here on out deposit costs may somewhat track fed funds at some point.

So I'm just curious what deposit data as you guys foresee over the next couple of rate hikes and how that's going to hit the margin?.

We shop rates every week, Alex, more frequently as needed; and again, none of our competitors have moved on rates either. And we also feel very confident in the fact that we've been able to back off the CDs and money market account, and focus more on our core growth.

Also the cash position we have and liquidity and capital positions we have, we think gives us greater flexibility to again move on our feet and take the appropriate deposit action. And I would hope that the increases in deposits wouldn't match the Fed funds increases. I would hope that they'd be less than the fed fund increases..

And then as the 10 year space that you ranged and we've seen in the last couple of months is sort of like 225 to 250 range call it; and therefore, the mortgage yields you guys have been around 399 for a while. How much more compression is there in the residential mortgage portfolio.

Does it go all the way down to 4% and is that something that will happen over the course of this year or next quarter, or how much more compression can we expect?.

Do you have specific on that?.

Alex, when we take a look at it over the last -- we look at obviously on a month-to-month basis. But even on quarters we're getting take or two 1 or 2 basis points per quarter, maybe a little bit more. So that compression will come down, but we're going to be above that 4% mark..

So we're almost to the end of the compression on residential mortgage yield….

Yes, we're getting that. Not much to refinance that point -- at this point..

And then just final question from me, you alluded to the tax prep fees in the first quarter, I think last year, is something like $180,000.

Is that a similar amount in 2017?.

It's up just a little bit it's up around $200,000 or little north of that..

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Robert J. McCormick for closing remarks..

Thanks for taking the time today. Have a great week. Thanks..