TrustCo Bank Corp NY (TRST) 2017 Q1 法說會逐字稿

Good morning, and welcome to the TrustCo Bank Corp. First Quarter 2017 Earnings and Call -- Earnings Call and Webcast. (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 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 report from Form 10-Q. 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 Investigator Relations (sic) [ 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.

Thanks, Phil. As the host said, I'm Rob McCormick, President of the 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 a lot of you 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 worked in the past, so we continue the process before I hit the highlights, giving you 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 a branch office during the quarter. An irresponsible landlord in Nyack caused a mold infestation in our branch. Rather than risk the health and well-being of our employees and considering the cost for remediation, we decided to close to branch. We are in the process of seeking a replacement. We're now operating 144 branches, and our average deposit per branch grew again last quarter. We give the detail on 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 was 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 at least some of that home equity runoff is being captured in our residential portfolio. We also see some stabilization in our commercial loan portfolio. Overall, loans hit another all-time high at quarter-end.

Our nonperforming 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 year-end and the 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 year. Most of you know we maintain a large cash position, almost $700 million and about the same size 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 a -- 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 the 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 remained solid. It increased to $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 is expected, the growth continues to be concentrated in the residential real estate portfolio. The residential mortgage loan portfolio increased by $42.2 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 the 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 enable us 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, there's a strong likelihood of more to come. As a reminder, we continue to carry $641 million of overnight investments as well as a cash flow generated of $300 million to $500 million of loan payments 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 be reinvested at higher rates. This continues to give us significant opportunity and flexibility as we continue into 2017. During the quarter, we did 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 interest-bearing deposits during the same period we saw multiple rate hikes. We feel this continues to reflect our pricing discipline with respect to CDs 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 costs just mentioned over the past 4 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 overwrite investments. That is a sizable increase on a quarter-to-quarter basis. It 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 and loan loss reserve measures improved versus first quarter of 2016 or were mixed as compared to year-end 2016. The slight increase in NPAs was due to residential real estate nonperforming loans in the New York region. Prior experience has shown us that this 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.

Noninterest income came in at $4.7 million for the first quarter, up compared to the $4.5 million in the fourth quarter 2016. During the quarter, we saw an increase of -- in our Financial Services income. As you remember, included in other noninterest 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 most -- continues to be the most significant reoccurring source of noninterest income, which had approximately $846 million of assets on our management as of March 31, 2017.

Now on to noninterest expense. Total noninterest expense net of ORE expense came in at $23.5 million, up $876,000 from the fourth quarter of 2016. This came in directly with our -- within our expected range for the first quarter of $23.2 million to $23.7 million. The primary increase in noninterest 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 fourth quarter of 2016 and $1.2 million over the same period last year. This was a 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 health care costs as the new contracted raise 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 5 quarters. We continue to expect ORE expenses to stay in the range of approximately $500,000 to $1 million per quarter going forward. All the other categories in noninterest expense were in line with prior quarters and our expectations. Moving forward into 2017, we will continue to expect total reoccurring noninterest 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 while working to identify opportunities to make the processes within the bank more efficient. And finally, the capital ratios continue to remain solid. The consolidated tangible equity to 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 Scot will review the loan portfolio and nonperforming loans.

Okay. Thanks, Mike. 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 $148 million or 4.5%. Residential loans increased by $25.7 million on the quarter with commercial loans decreasing by 6.8%, which included some significant paydowns on existing lines of credits. All regions posted increases although Florida totaled over 80% of the net residential growth in the quarter.

We were 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%.

Nonperforming loan measures continue to be solid. Nonperforming loans totaled $26.4 million at quarter-end or 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 nonperforming loans was 167% on March 31 versus 146% the prior year.

Rob?

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

(Operator Instructions) Our first question comes from Alex Twerdahl from Sandler O'Neill.

First off, just want to ask about deposit rates. So far, we had a couple of rate hikes. You guys haven't done really anything to raise the cost of 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 kind of deposit betas 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, and more frequently, as needed. And again, people -- none of our competitors have moved on rates either. So -- and we also feel very confident in the fact that we've been able to kind of back off the CDs and money market account and focus more on our core growth. Also, the cash position we have and the liquidity and capital positions we have, we think, gives us greater flexibility to, again, move on our feet and take that 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 increases.

Right, okay. And then if the 10-year stays kind of in this range that we've seen over the last couple of months, so sort of like 2.25% to 2.50% range, call it, and therefore, the mortgage yields -- you guys have kind of been around 3.99% 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?

Guess, everyone?

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

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

We are; we're getting there. There's not much left to refinance at that point -- at this point.

Right, right, right. And then just a final question for me. You alluded to the tax prep season in the first quarter. I think last year, it was 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 a little more for 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.