Good morning, and welcome to the TrustCo Bank Corp First Quarter 2018 Earnings Call and Webcast. 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 NY 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 preceded this call and in the risk factors and forward-looking statements section 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 reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release, which is available under the Investors 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..

Good morning, everyone. Thank you for joining us this morning to hear more about our first quarter results. As always, Mike Ozimek, our CFO and Scot Salvador, our Chief Banking Officer are joining me - joining on the call with me. They will cover the details after a brief summary. Kevin Timmons is also with us in the room.

As the release shows, we had a pretty good first quarter this year. Total assets were up and continued to range just under the $5 billion mark. Our mortgage portfolio grew to almost $3.2 billion, up about 40 million from year end and about 240 million over the same quarter last year.

The rest of the loan categories were flat to down a little for the quarter. We continued to maintain a decent sized investment portfolio and a healthy cash position. Investments are mostly agencies and mortgage backed with relatively short maturities. We're a little more active in the depositary with growth in all areas, except money market.

We continue to be pleased with the growth in core, total deposits, total 4.2 billion for the quarter, up over last quarter and last year. Our shareholders' equity topped 462 million and our tangible capital ratio was at 9.36%, greater than yearend and the same quarter last year. These are after paying our dividends.

The non-performing loans to total loans and non-performing assets to total assets were essentially flat quarter over quarter, but down over the same quarter last year. Net charge offs were down. The loan loss reserve was 1.21% of loans with a coverage ratio of 179%.

Our return on assets and return on average equity were 1.23% and 13% respectively, both better than the first quarter of 2017. Our efficiency ratio was 54%, also better than the first quarter of 2017. We were able to expand the margin since the first quarter of '17 to 3.29. We continue to operate a full service financial services department.

We did not open any new offices during the quarter, but did relocate one. We have two new and two relocations on the horizon. Our first quarter was a pretty good one. We look forward to the rest of the year. Now, Mike will go over the number, Scot will detail the loan portfolio on operation and then we get our time for questions.

Mike?.

Thank you, Rob and good morning, everyone. I will now review TrustCo's financial results for the first quarter of 2018. As we noted in the press release, the company saw an increase in net income to 14.8 million, up 35.3% compared to 10.9 million for the first quarter of 2017 and 7.4 million in the fourth quarter of 2017.

Net income yielded a return on average assets and average equity of 1.23% and 13.07% compared to 0.91% and 10.17% in the first quarter of 2017. On December 22, the Tax Cuts and Jobs Act was signed into law, which included a reduction in the federal statutory corporate tax rate from 35% to 21%, effective January 1, 2018.

The lower tax rate will have a significant beneficial impact on the results going forward. For 2018, the company is expecting its combined effective tax rate to be approximately 24% based on currently known information. Now, on to changes in the balance sheet. We saw a continued strong loan growth during the first quarter of 2018.

Average loans were up 211 million or 6.1% for the first quarter of 2018 compared to the same period in 2017. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio. That portfolio increased by 236.7 million or 8.1% in the first quarter over the same period in 2017.

This continues the positive shift in the balance sheet from lower yielding overnight investments to higher yielding core loan relationships. Our loan portfolio expansion was funded by a combination of utilizing a portion of our strong cash balances, cash flow from our loan and investment portfolios as well as growth in core funding from customers.

Total average investment securities, which included the AFS and HTM portfolios, decreased 78 million or 11.37% from the first quarter of 2017.

As discussed in prior calls, our focus continues to be on traditional lending and conservative balance sheet management, which has continued to enable us to produce consistent high quality reoccurring earnings.

Our investment portfolio is and has always been a source of liquidity to fund the loan growth and provide flexibility for balance sheet management, keeping in mind the current environment that is seen four rate hikes in the past year with the likelihood of more to come in 2018.

As a result, we continue to carry on average 528.9 million of overnight investments, a decrease of 112.2 million compared to the first quarter of 2017, which as noted earlier was used to fund loan growth.

In addition, we expect the cash flow from the loan portfolio to generate between 350 million and 400 million over the next 12 months, along with approximately 90 million to 100 million of investment securities cash flow during the seam time period, all of which would be able to be invested in higher rates.

This continues to give us significant opportunity and flexibility as we move into 2018. During the quarter, we did have 35 million of securities, which recall that matured, had a yield of approximately 1.85%. This was offset by purchases of 45 million of securities at a yield of approximately 2.67%.

On the funding side of the balance sheet, total average deposits decreased 15.6 million or 0.4% for the first quarter of 2018 over the same period a year earlier. During the same period, our total cost of interest bearing deposits increased 41 basis points from 35 basis points.

More importantly, the cost of our core deposits, including demand, remained flat at 0.13% over the same period. We continue to be proud of our ability to control the cost of interest bearing deposits, during a period which saw multiple rate hikes. We feel this continues to reflect our pricing discipline with respect to CDs and non-maturity deposits.

Our net interest margin increased to 3.29% from 3.14% compared to the first quarter of 2017. This increase in the net interest margin comes from both the asset side of the balance sheet as a result of the continued growth in the loan portfolio, the Fed rate hikes as mentioned before and the continued control funding costs over the past four quarters.

The impacts of the growth of the balance sheet coupled with the changes in net interest margin continued to have a positive impact on the taxable equivalent net interest income. For the first quarter of the year, our taxable equivalent net interest income increased to $39.3 million.

The provision for loan losses held steady at 300,000 in the first quarter of 2018 compared to the fourth quarter of 2017 and decreased from 600,000 in the same period in 2017.

The ratio of loan loss to total loans was 1.21% as of March 31, 2018 compared to 1.28% at the end of the same period in 2017 and reflects the continued improvement in asset quality and economic conditions in our lending areas.

Scot will get into the details, however, we would expect the level of provision for loan losses in 2018 will continue to reflect the overall growth in our loan portfolio, trends in loan quality and economic conditions in our geographic footprint.

Non-interest income came in at $4.7 million for the first quarter of 2018, an increase of $391,000 compared to the 4.3 million last quarter. The increase over the fourth quarter of 2017 was related to the fees earned by our financial services division for tax preparation services during the first quarter of 2018.

Our financial services division continues to be the most significant reoccurring source of non-interest income. The financial services division had approximately 846 million of assets under management as of March 31, 2018. Now onto non-interest expense.

Total non-interest expense, net of ORE expense came in at 23.8 million, up approximately 648,000 from the fourth quarter of 2017. ORE expenses came in at 372,000 for the quarter, which is down 29,000 from the fourth quarter of 2017. This continues to be an encouraging sign of the stabilization of the housing prices in our market territories.

Given the current level of ORE expenses, we're going to lower the anticipated level of expense to the range of approximately 200,000 to 700,000 per quarter. All the other categories of non-interest expense are in line with prior quarters and our expectations for the first quarter.

As we continue into 2018, we would expect the second quarter of 2018's total reoccurring non-interest expense, net of ORE expense, to continue at the level seen during 2017, which is in the range of 23.2 million to 23.7 million per quarter. We will review this guidance again in July 2018.

The efficiency ratio in the first quarter of 2018 came in at 54.05% compared to 55.81% in the first quarter of 2017. As we've stated in the past, we will continue to focus on what we can control by working to identify opportunities to make the processes within the bank more efficient. And finally, the capital ratios continue to improve.

The consolidated tangible equity to tangible assets ratio was 9.36% at the end of the first quarter, up from 8.97% compared to the same period in 2017. Now, Scot will review the loan portfolio and non-performing loans..

Okay. Thanks, Mike. For the first quarter, total loans increased by 30.5 million in actual numbers or 0.84%. Year-over-year, loans have increased by 218 million or 6.3%. The $30 million increase represents solid growth for the first quarter, which is typically a slower period.

That compares favorably to last year with the first quarter net growth in 2017 totaling 18 million. The growth was spread throughout our markets and consisted of an approximate $32 million increase in residential mortgages and just over $1 million decrease in commercial loans.

Our fixed rate mortgage products increased by 39 million, with some equity credit lines decreasing by 7 million. Activity has picked up and our loan backlog at quarter end looks positive. It is up over 10% from both the year end and the period ending March 31 of last year.

Interest rates have begun to hedge up slightly and our current 30-year fixed rate stands at 4.375%. This marks the first time in recent memory that the new origination rate stands above the existing loan portfolio yield. Asset quality measures remain solid, showing continued improvement year-over-year.

Non-performing loans were 24.9 million at March 31 versus 26.4 million last year. This equates to 0.68% of total loans. Non-performing assets showed a similar improvement, declining from 29.6 million last year to 27 million in March.

Charge-offs remain very low and for the first quarter, the net charge-off total of 90,000 equals an annualized ratio of only 0.01%. The coverage ratio allows for loan losses to non-performing loans stand at 178% as of March 31 compared to 167% as of March 2017.

Rob?.

Thanks, Scot. We're happy to answer any questions you may have..

[Operator Instructions] And our first question comes from Alex Twerdahl with Sandler O'Neill..

And first, I just want to drill in a little bit more on what you guys are seeing on deposits. And clearly, the non-time deposits, you've been able to keep the rates very low there, but on the time deposits, ticked up a little bit during the quarter.

Is that due to some promotions or kind of what's driving that extending duration? And then, in the past, I think you've provided some numbers on the amount of time deposits that mature during a specific quarter and the year.

And I was wondering if you can provide those numbers to us?.

Yeah. We have been more active in that area, Alex. We think, if we can get the money a little bit earlier in the year, we'll be better off long term. I think the rates will only be higher towards the end of the year.

We haven't been certainly leading the market, we try to never do that, but we've kind of just been staying with the market, keeping what we have and looking at people with multiple accounts of those as well and trying to drive it more from a relationship perspective.

As far as the pending maturities or what's coming up over the next short period of time -.

I mean, the average deposits are - the CDs that are maturing, Alex, most of them turned over within the next, other significant portion turn over within 12 to 13 months. That's the average that we have..

Okay. So it's really extending the duration on the securities portfolio is what's driving that a little bit higher..

Yes..

Okay. And then wanted just to ask a question about the reserve, which we know we've discussed a lot in the past, but given the fact the charge-off is just 90 basis points, seem like they're pretty much under control. Net non-performing loans have been kind of at a level where don't probably expect too much fluctuation from here on out.

The reserve at 121 seems to me like it maybe is a little bit elevated still.

Should we expect that to, based on historical loss trends and things like that, would it be fair to expect that to come down a little bit over the next couple of quarters?.

There's a couple of things that come into play. The amount of provision that we've put on is definitely dependent upon the growth in our loan portfolio. So as that starts to drive up, that starts to require more provision, just that's how it works.

However, we do expect that if the non-performers remain at a level of where they are and net charge-offs really stay where they are and we - and that's what we expect going forward, we would expect that to kind of continue to creep down..

Okay. And then just a final question, you get the OCC order finally lifted in the middle of the quarter. Expense guidance doesn't really change that much.

Are there some different moving parts in expenses that we can expect to decline following that order or have those expenses mostly been taken out at this point?.

There's nothing specific, Alex. But I think you're going to see a continued trend, downward trend, as we find opportunities to consolidate and make the operation a little bit smoother. But you were - I think you've already seen some of that happen with some of the staffing in the consultant numbers..

The next question comes from Nicholas Karzon with Franklin Templeton..

First, I wanted to start off and ask about the capital levels.

With the OCC agreement lifted and as you look at the capital balances growing, look at the TCE ratio, how does that impact your view for dividends or potential capital return and what levels are you targeting?.

Sure. So, obviously as you can see, the capital levels are going to continue to grow. All things are on the table. We're taking a look at, if it makes sense to potentially raise and return some of that additional capital as the year goes on.

There's nothing to announce right now, but our targets are going to be slightly elevated from where we are right now..

Got it. And then secondly on the margin, with the inflection in loan yields that you're seeing and also the securities you're also looking, but moving up and deposit costs marginally higher, can you help me understand the NIM trajectory over the course of the year and what we might expect..

At least on the, so I guess if you start in the asset side, we are originating loans right now above where we're at, where the super schedule, where it actually is projected, but there is a tail on that.

We do have some loans that we are closing that we committed to from before that are kind of keeping that overall real estate portfolio at a flat level. Depending on what the Fed does going forward, we're expecting a couple more rate rises. Obviously, that keeps it moving in the right direction.

And then on investing, I can tell you that we are not planning to go out and invest a ton of money over the next couple of quarters. We haven't done that in the past and then right now looking at what the Fed has basically put out, we're not looking to invest a ton of money.

On the deposit side, you can see where we've not had to move our core deposit rates a ton and really have been able to keep them flat inside of the rate highs.

As the rate starts to tick up, I'm sure we'll start to see a little bit of movement there and the CDs here, what we're doing right now is we're paying for the CDs now versus three quarters from now or two quarters from now when obviously those rates will continue to be elevated. So that's kind of the -.

It does sound like there's a positive trajectory..

Yeah..

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

Thank you for your interest in our company and have a great day..