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Operator: Good day and welcome to the TrustCo Bank Corp earnings call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero on your telephone keypad. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your question, you may press star and then two. 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, performance or achievements could differ materially from those expressed in or implied by 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 forward-looking statements made on this call are valid only as of the date hereof, and the company disclaims any obligation to update this information except to reflect events or developments after the date of this call, except as may be required by applicable law. During today’s call, we will discuss certain financial measures derived from our financial statements that are not determined in accordance with U.S. GAAP.

The reconciliations of such non-GAAP financial 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 note today’s event is being recorded. A replay of the call will be available for 30 days and an audio webcast will be available for one year, as described in our earnings press release. At this time, I would like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President and CEO. Please go ahead.

Robert McCormick: Thank you and good morning everyone. I’m Rob McCormick, the President of Trustco Bank. As usual, Mike Ozimek and Scot Salvador join me on the call today. We’ll follow our regular format for the call. I will briefly hit the highlights, then Mike, our CFO will give great detail on the numbers, Scot will cover the loan portfolio, leaving time for questions at the time. We had a great year at Trustco in 2022. Our net income was $75.2 million, up over 22% from 2021 and clearly a record. We also completely executed our stock buyback, increased our cash dividend for the second year in a row, and grew our loan portfolio to record levels and celebrated our 120th anniversary. Our loans were up about 5.7% year-over-year.

As you would expect, most of this growth was in our residential mortgage area. We were very encouraged to see all areas perform positively. Commercial loans and home equity lending were both up. Even installment loans, a very small part of our business, was positive. We did see some deposit run-off, especially in the money market category. While we’re not happy about it, we are not surprised. Incredible deposit growth and stimulus money were much stickier than most of us thought they would be. We are taking a cautious approach with regard to deposit pricing now. We continue to stay very liquid in anticipation of an ever-changing rate environment. All of our performance ratios were very solid. Margin was 2.99, up over 2021. Non-performing loans to total loans was 0.37, down from 2021.

Non-performing assets to total assets was 0.33. Our reserve for loan losses was just under 1% of total loans, resulting in a coverage ratio of 2.6 times. Our ROA and ROE were 1.22 and 12.6% respectively, both up from ’21; and finally, our efficiency ratio was just over 50%. We continue to pay a very healthy dividend, resulting in a payout ratio of about 36%. We certainly had a pretty good 2022. We are approaching ’23 with a strong backlog of loans, leaving us optimistic. We are taking a cautious approach in regard to our deposit offerings and closely watching rates. Now Mike will give us a lot of detail on the numbers, Scot will give color on the loan portfolio, then we can take your questions. Mike?

Michael Ozimek: Thank you Rob, and good morning everyone. I will now review Trustco’s financial results for the fourth quarter of 2022. As we noted in the press release, the company saw a year-to-date net income of $75.2 million and $20.9 million in the fourth quarter of 2022, an increase of 28.7% over the prior year quarter which yielded a return on average assets and average equity of 1.38% and 13.91% respectively. Average loans for the fourth quarter of 2022 grew 5.7% over $253.2 million to $4.7 billion from the fourth quarter of 2021. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio, which increased by $181.8 million or 4.6% for fourth quarter of 2022 over the same period in 2021.

The average commercial loan portfolio increased to $21.1 million or 10.4% over the same period in ’21. Total average investment securities, which include the AFS AECM portfolios, remained stable, increasing $2.3 million during the fourth quarter of ’22 over the third quarter of ’22. During the same period, the bank had approximately $11.6 million of pooled securities paid down and purchased approximately $19.1 million of securities. For the fourth quarter of ’22, the provision for credit losses was $50,000. This includes a provision for credit losses on loans of $500,000 and a benefit for credit losses on unfunded commitments of $450,000 as a result of decreases in unfunded loans. The ratio of allowance to loan losses to total loans was 0.97% as of December 31, 2022 compared to 1% as of the same period in ’21.

Our focus continues to be on traditional residential lending and conservative balance sheet management which has continued to enable us to produce consistent, high quality recurring earnings. Our investment portfolio is and always been a source of liquidity to fund loan growth and provide flexibility for balance sheet management. As a result, we held an average of $669 million of overnight investments during the fourth quarter of ’22, a decrease of $454 million compared to the same period in 2021. Given the current level of cash and the changing interest rate environment, the bank will continue to evaluate investing excess liquidity into the market. On the funding side of the balance sheet, total average deposits decreased $25.4 million or 0.5% for the fourth quarter of ’22 over the same period a year earlier.

The decrease in deposits was the result of a $94.5 million decrease in average money market deposits and a decrease in average time deposits to $72.2 million. These were offset by a $78.6 million increase in average savings deposits, a $12.5 million increase in interest-bearing checking account averages, and a $50.2 million increase in average non-interest bearing checking balances. During this same period, our total cost of interest-bearing deposits increased to 25 basis points from 11 basis points. This was primarily driven by an increase in time deposits to 74 basis points from 32 basis points over the same period last year. As we move into 2023, the bank has approximately $211 million of CDs that will mature at an average rate of 22 basis points in the first quarter of ’23.

In the second quarter of ’23, approximately $234 million in CDs will mature at an average rate of 1.15%, and in the second half of ’23 approximately $367 million in CDs will mature at an average rate of 1.87. Our financial services division continues to be a significant recurring source of non-interest income. They had approximately $954 million of assets under management as of December 31, 2022. Now onto non-interest expense. Total non-interest expense net of ROE expense came in at $26.3 million, up $284,000 compared to the third quarter of ’22 and slightly over our estimated range of $24.9 million to $25.5 million. The increase from prior quarter is primarily a result of an increase in seasonal Q4 salaries and employee benefit expense and equipment expense, partially offset by decreases in net occupancy expenses, professional services, and outsourced services.

ROE expense net came in at an expense of $101,000 for the quarter as compared to an expense of $124,000 in the prior quarter. Given the continued low level of ROE expenses, we are going to continue to hold the anticipated level of expense not to exceed $250,000 per quarter. All the other categories of non-interest expense were in line with our expectations for the third quarter and fourth. We would expect 2023’s total recurring non-interest expense net of ROE expense to be in the range of $26.2 million to $26.7 million per quarter. The efficiency ratio in the fourth quarter of ’22 came in at 48.8% compared to 58.5% in the fourth quarter of ’21. Finally the capital ratios. Consolidated equity to assets ratio was 10% for the fourth quarter of ’22 compared to 9.7% in the fourth quarter of ’21.

The bank continues to be proud of its ability to maintain shareholder value during these challenging economic times. Book value per share at December 31, 2022 was $31.54, up 0.8% compared to $31.28 a year earlier. Now Scot will review the loan portfolio and non-performing loans.

Scot Salvador: Thanks Mike and good morning everyone. The bank enjoyed strong loan growth for the fourth quarter. Overall loans grew a combined $104 million or 2.2% in actual numbers. Year-over-year loans grew $294 million or 6.6%. The loan growth in the fourth quarter was spread across all our lending categories and market areas. Real estate increased by $88 million on the quarter and by $261 million year-over-year. First mortgages showed the largest quarterly growth at $72 million while home equity loans continued the recent upward trajectory and increased by $16 million on the quarter. Commercial loans also continued their recent growth path and increased by $14 million in the quarter and by $31 million year-over-year. We were very pleased to see the ongoing loan growth given the changes in market conditions over recent months.

Purchase activity has slowed with the season and increased interest rates, but we continue to benefit from our strong market position and the solid loan backlog we carried into the fall season. Interest rates have eased a bit recently and our current 30-year base rate stands at 5.99%. Moving forward, we plan to keep our rates very competitive and be opportunistic as conditions warrant in terms of grabbing additional market share. Our loan backlog was strong at year end. It was down from the third quarter, which is normal, but well above that of last year. A significant portion of the backlog contains new money to the bank, given the very low levels of refinance activity. As mentioned previously and in addition to our existing branch network personnel, we are moving to add some additional loan originators in the residential area.

In conjunction with this, we will in the first quarter begin to originate some secondary market products in addition to our normal portfolio loans. We will be originating Fannie Mae, Freddie Mac, and VA loan initially with additional product offerings likely to be added over time. While our portfolio product is still our primary focus, having the ability to access the secondary market will give us additional flexibility and opportunity for fee income. Although our initial steps will be modest, we are excited about this initiative and feel it holds a lot of potential for the bank. Asset quality measurements continued to be good in the fourth quarter. Non-performing loans dropped from $18.7 million to $17.5 million in the quarter while non-performing assets increased slightly to stand at $19.6 million.

As a percent of total loans, non-performing loans now stand at 0.37% versus 0.42% a year ago. Charge-offs showed a slight net recovery on the quarter and a $312,000 net recovery on the year. The ratio, or allowance for credit losses to non-performing loans, climbed to 263% at year end versus 236% a year ago. Rob?

Robert McCormick: Thanks Scot. We are happy to answer any questions you might have.

Operator: Okay, thank you everyone. We will now begin the question and answer session. Our first question today comes from Alex Twerdahl from Piper Sandler. Alex, your line is now open. Please go ahead.

Alex Twerdahl: Hey, good morning guys.

Robert McCormick: Morning Alex.

Alex Twerdahl: First off, talking about deposits, which is certainly the biggest focus for any bank right now, I think, Rob, in your prepared remarks you said that you were taking a more cautious approach to deposit pricing now. I’m just curious if you can elaborate on that a little bit.

Robert McCormick: We’re trying to do what we have to do to retain what we have, Alex. We’re much more in a hold pattern than a growth pattern with regard to deposits, keeping what we need and not really going out there full force. You’re not seeing a 4% rate in our offerings right now.

Alex Twerdahl: Okay, so a quarter or two ago, you were more willing to hold the rate and sort of let some excess run off, and now the target is to keep deposits at least flat and maybe grow them a little bit?

Robert McCormick: Yes, I mean, a little more runoff wouldn’t bother us probably either, Alex. It depends on what we have to pay for those deposits.

Alex Twerdahl: Okay, and then as we kind of balance that against excess cash, which you guys still have a pretty elevated excess cash position relative to many other banks out there, and I know it’s a big part of your interest rate management strategy, I’m just curious how low we could see that cash and equivalents get down to as a percentage of assets.

Robert McCormick: I’m reluctant to give a specific percentage, but as you said, there’s a lot of room there, so we’re pretty comfortable with where we’re at. Again, as I said in the presentation, we’re pretty optimistic about ’23.

Alex Twerdahl: Okay. In terms of what you’re seeing on the residential loan portfolio, there was clearly a normal pace of pay-downs that you get in any interest rate environment as people move and pass away, upgrade and everything like that. I’m just curious if you’re seeing any change, or maybe it’s a little bit early to kind of draw any sort of trends after a quarter or two, but any sort of change in what you maybe normally would have expected from normalized pay-down activity in the residential loan portfolio?

Robert McCormick: There’s been no change in average life, Alex.

Alex Twerdahl: No change in average life? Okay. Then just a final question from me, when I think about expenses, and you gave the expense guidance, you talked about looking to add some additional originators, that’s all incorporated into the expense guidance for 2023, correct?

Robert McCormick: Yes, that’s correct.

Alex Twerdahl: Great, well thanks for taking my questions.

Robert McCormick: Thank you Alex.

Operator: Thank you Alex. Just a reminder, if you would like to ask a question, please press star, one. Our next question is from Ian Lapey from Gabelli Funds. Ian, your line is now open. Please go ahead.

Ian Lapey: Good morning Rob. Congratulations on a great year. Just a couple. Obviously the credit quality looks really good in terms of what you’ve disclosed. Any increase in delinquencies that you’re seeing in either Florida or New York in the residential mortgages?

Robert McCormick: No. Early stage delinquencies still look very, very good, Ian. There’s no change across the board in delinquencies.

Ian Lapey: Okay, great. Then I noticed there is a $314,000 increase in commercial loan NPLs in Florida. Is that one loan, is it collateralized, and any color you can provide on that?

Robert McCormick: It’s a residential mortgage on a multi-family.

Ian Lapey: Okay, and then bigger picture, I guess a big competitor announced that they’re reducing exposure to residential mortgages–

Robert McCormick: Ian, that’s not a residential mortgage. That’s a commercial loan secured by a UCC with very strong guarantees. I’m sorry.

Ian Lapey: Okay. Okay, and then last one from me, can you talk about the competitive environment in residential mortgage underwriting? Obviously a big competitor announced they’re pulling back. Then also, any color–I’m not sure of the history, have you done secondary market originations in the past? Just a little more color on sort of what’s driving that decision to target that market.

Robert McCormick: Ian, I think you know our profile. We’re a pretty conservative underwriter always, so we don’t really change from–change our colors with regard to that. We try and stay conservative all of the time, and that maintains consistency which the market certainly appreciates. We have never originated secondary market, whether it’s Fannie Mae, Freddie Mac, FHA or VA. We do have a small relationship with a local mortgage banker that we buy loans on an individual basis from, but this is a new venture to us. We have hired very experienced, qualified people who have a long history of working in the mortgage banking industry to assist us with this, and so far, so good. We’ve originated our first VA residential mortgage and things seem to be going very well.

Ian Lapey: Okay, great. What about the competitive environment in terms of other banks or fintechs in the residential origination business?

Robert McCormick: Yes, that’s to do, Ian. Everyone comes in and out of the mortgage business, and one firm is hot and heavy for a period of time and then they back down and maybe lose a little market share, but there’s always someone coming up to fill those shoes. That’s again why we try and stay consistent. We’re not really looking to be a market leader with regard to residential mortgage lending, we just want to be a consistent performer and be able to fill our coffers and not worry about what the rest of the world is doing. As long as we’re able to do that, we welcome the competition.

Ian Lapey: Okay, great, and congrats again, great year.

Robert McCormick: Thank you.

Operator: Perfect, thank you Ian. This concludes our question and answer session. I would like to turn the conference back to Robert J. McCormick for any closing remarks. Robert?

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

Operator: The conference call has now concluded. Thank you for attending today’s presentation. You may now disconnect.