TrustCo Bank Corp NY (TRST) 2017 Q2 法說會逐字稿

Good morning, and welcome to the TrustCo Bank Corp Second Quarter 2017 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 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 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 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 on 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, Brandon. Good morning, everyone. Another Monday morning call. Thank you for starting your week with us. I'm Rob McCormick, President of the bank. Scot Salvador, our Chief Banking Officer; and Mike Ozimek, our CFO, are joining me on the call. As usual, Kevin Timmons, who a lot of you deal with regularly, is in the room with us.

We had a good second quarter at the bank. Our loan portfolio is up about $150 million year-over-year, hitting a new all-time high of just over $3.5 billion. This growth was all in the residential mortgage portfolio. Commercial loans and installment loans were flat. Home equity loans were down, but we feel a lot of that runoff is captured in our residential mortgage portfolio through refinances. We are pleased that all of our service areas are participating in this growth.

We're also pleased our nonperforming loans and assets both continued to improve to 0.7% and 0.57%, respectively. Our allowance to total loans sits at 1.26%, down from the prior quarter, providing coverage ratio of 1.8x. Scot will give more detail later in the call, but this is very solid performance.

Deposits posted the growth we needed. We're also happy to see our lower-cost accounts grow, allowing us to reduce our dependence on higher-cost time accounts. We are certainly seeing some benefit from the recent Fed increases, while continuing to maintain a high level of liquidity. Our total assets are over $4.9 billion, and our shareholders' equity is over $447 million. We continue to operate 144 branch offices.

Our net income for the quarter was $12.2 million, up $1.7 million or 17% from the same period in 2016. Our return on average assets and return on equity, over 1% and 11.05%, respectively, up from 0.8% and 9.8% in 2016. Our efficiency ratio was 53%, which also improved over 2016.

We continue to work our way out of the formal agreement with the OCC. We are pleased with our second quarter results and look forward to the rest of the year.

Now Mike O. will give you some detail on the numbers. Mike?

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the second quarter of 2017. As noted in the press release, net income increased to $12.2 million in the second quarter of 2017 or 17% compared to $10.5 million in the second quarter of 2016. Net income yielded a return on average assets and average equity of 1% and 11.05% compared to 0.88% and 9.88% in the second quarter of 2016.

Let's again start with the changes in the balance sheet. We saw strong loan growth during the second quarter of 2017, which is typically a strong season in the Northeast markets. As expected, the growth continues to be concentrated within our primary lending focus: The residential real estate portfolio. That portfolio increased by $47 million or 1.6% on average during the quarter compared to last quarter and $200 million or 7.2% from the second quarter of 2016. This is noted before continued depositors' shift in the balance sheet from lower-yielding overnight investments to a higher-yielding core loan relationships.

Total average investment securities, which include the AFS and HTM portfolios, decreased $2 million during the quarter or 0.29% and $19.7 million or 2.8% from the second quarter of 2016. As discussed in prior calls, our focus continues to be on traditional lending, 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 advantages 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 2016, again in March and June this year, with a likelihood of more to come. As a result, we continue to carry $644 million of overnight investments.

In addition, we expect the cash flow from the loan portfolio to generate between $400 million and $500 million over the next 12 months, along with approximately $160 million to $170 million of investment securities cash flow during the same time period, all of which would be able to be invested at higher rates. This continues to give us significant opportunity and flexibility as we continue in 2017.

During the quarter, we did have $35 million of agency securities called at a yield of approximately 2.35%.

On the funding side of the balance sheet, total average core deposits increased $110.3 million from the second quarter of 2016. During the same period, our cost of interest-bearing deposits decreased 4 basis points to 34 basis points.

We continue to be proud of the ability to reduce the cost of interest-bearing deposits during the 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 3.21% from 3.09% compared to the second 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 Fed rate hikes, as mentioned before; and the continued decrease of funding costs 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 taxable equivalent net interest income. For the second quarter of the year, our taxable equivalent net interest income was $38.5 million or approximately $2.2 million greater than it was in the fourth quarter of last year. That 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 decreased $50,000 compared to last quarter to $550,000, and decreased $250,000 compared to the second quarter of 2016. The ratio of loan loss to total loans was 1.26% as of June 30, 2017, compared to 1.32% in June 2016 and reflects the improvement in asset quality and economic condition in our lending areas. Scot will get into the details, however, we would expect the level of provision for loan losses in 27 (sic) [2017] will continue to reflect the overall growth in our loan portfolio, trends in loan quality and economic conditions in our geographic footprint.

Noninterest income came in at $4.5 million for the second quarter of 2017 compared to the $4.7 million last quarter. As you will remember, included in other and noninterest income, the first quarter of each year includes the fees earned on tax prep fees to our Financial Services customers. Our Financial Services division continues to be the most significant reoccurring source of noninterest income. The Financial Services division had approximately $845 million of assets under management as of June 30, 2017.

Now on to noninterest expense. Total noninterest expense net of ORE expense came in at $22.9 million, down approximately $600,000 from the first quarter of 2017. This expected decrease noted in last quarter's call came in even better than our target. The primary decrease in noninterest expense during the second quarter of 2017 was in salaries and benefits expense, which was $9.6 million for the quarter, down $651,000 compared to last quarter. As discussed before, the first quarter of the year always bears the cost of increase employee and federal state payroll taxes and increased expenses related to the employees' health care as we enter the new plan year.

Another highlight was ORE expense. This line also beat our expectations and came in at approximately 0 for the first quarter, which is down $500,000 from the first quarter of 2017. This was the result of expenses on the low end of our expected range and higher-than-normal gains on the sale of ORE property. This is encouraging sign of the stabilization of the housing markets in our territories. Given low level of net ORE expenses we are experiencing, we are adjusting our guidance downward, going forward, to the range of approximately $400,000 to $900,000 per quarter.

All the other categories of noninterest expense are in line with prior quarters and our expectations. Moving forward into 2017, we would expect total reoccurring noninterest expense, net of ORE expense, to decrease going forward to the range of $22.8 million to $23.3 million per quarter.

The efficiency ratio in the second quarter of 2017 came in at 53.33% compared to 57.7% in the second quarter of 2016. As we have 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. Consolidated tangible equity and tangible assets ratio was 9.08% at the end of the second quarter, up from 8.9% compared to the same period in 2016.

Now Scot will review the loan portfolio and nonperforming loans.

Okay, Mike. Thanks. The loan portfolio saw good increase in activity over the last several months, and we posted strong net growth for the second quarter. Total loans in actual numbers on the quarter increased $59 million or 1.72%. Annually, they have increased $165 million or just under 5%. The quarter's growth of 1.7% compares to 1.2% for the same period last year. Residential mortgages increased by $59.8 million in the quarter, with commercial loans decreasing by $1.4 million and installment loans increasing by $1 million.

Our greater New York market had a particularly strong showing, and for the quarter accounted for 57% of the residential mortgage growth. Part of this is due to the seasonal nature of the upstate New York marketplace, where we're still pleased to see such strong growth posted in the region over this period.

Interest rates have remained relatively steady on our loan offerings, and we are currently at 3.99% for a 30-year mortgage. Our loan backlog reflects increased activity and is strong as of month-end. We are up significantly since the first quarter and also up over 20% since the same point last year. Although mortgage activity typically slows a bit entering the fall months, we are hopeful that the third quarter will show continued solid increases.

Nonperforming loan levels continue to show improvement. Nonperforming loans were $24.5 million as of 6/30 versus $26.4 million in March and $28.2 million in June of last year. The results for this quarter include the sale of approximately $1.4 million of nonperforming loans. Early-stage delinquencies, which bumped up slightly around year-end, have settled back down and are at very low levels. Charge-offs are also very low, totaling on a net basis only $878,000 through 6 months, versus $3.8 million for all of 2016.

Given the low levels we have reached in these categories, we might expect some choppiness going forward. Although at this point, negative trends are not evident. The coverage ratio or allowance for loan losses to nonperforming loans was 180% as of 6/30 versus 156% a year ago.

Bob?

Thanks, Scot. We'll be happy to respond to any questions you may have.

(Operator Instructions) First question comes from Alex Twerdahl with Sandler O'Neill.

First off, Scot, I wanted to just drill into a little bit more into the loan yields. You said the yield on new loans is about 3.99%. But given what we saw during the quarter, where the actual yield in the overall portfolio actually rebounded by a basis point, it seems maybe like it had bottomed in the first quarter. Going forward, what's coming on the balance sheet? What's going off the balance sheet, et cetera? I mean, do you think that we're going to see the overall yield on that portfolio continue to creep higher? Or do you think it's going to be just stabilized in that kind of 4.17%, 4.18% range? Or do you think that there's some more give that could actually cause it to go down at the 10-year space, basically, where it is right now?

Yes, no. Alex, I think you said it correctly when you said the yield has pretty much bottomed. I mean, as you know, the yield on the existing portfolio's come way down and we're in that 3.99% range. I think we've bumped up to 4.125% just briefly, but we've basically been 3.99%. So we've seen some improvement, but I think at this point, we might look to hold steady as we move forward, obviously, depending what happens with rates. But given where they are now, that's what I would expect.

Alex, this is Mike Ozimek. We also -- we saw a couple of pickups within the quarter that kind of bumped that up a little bit. So I'd echo what Scot says. We're kind of nearing the bottom, but we could see a little bit of pressure from that side going forward, given that we are still putting them on at around 4%.

Okay. And then just to drill in a little bit more to the expense guidance. What was it specifically that drove the beat versus your guidance this quarter? I know you said salaries and benefits came in better than expected, but is that because some positions just became vacant and didn't need to be filled and will be filled in future quarters? Or is there something in the benefits line that kind of will be nonrecurring? Or what really drove that specific item to be lower than expected?

It was -- the biggest piece of it, Alex, was the last piece that you mentioned there. There is a piece within the benefits line that we were able to kind of true up. As I mentioned during the call, in the first quarter we have to estimate some of our benefit plan expenses, and so we trued that up in the second quarter.

Okay. So the first quarter and the second quarter, so maybe sort of an average of the first 2 quarters would be the kind of the right run rate for salaries and benefits going forward?

Yes. That's a good way to say it, but you would also -- you do have to take out a little -- you have to take out some for the payroll -- tax expenses to kind of reset.

Okay, okay. And then just finally, you guys had some really nice growth in some of the lower-costing deposit categories and some of the higher-costing deposit categories kind of declined sequentially. Can you just talk a little bit? You're in 2 sort of distinct markets. There's been a lot of question marks about what's going to happen with deposit costs, what has happened over the last couple of months with the couple of rate hikes we've had or what will happen going forward. Are you guys starting to see any leakage in what you need to offer customers to bring them in? Or are you seeing any distinction between the 2 markets, the upstate New York and the Florida market, in terms of the competitive landscape? And if there's going to be any pressures? Or have -- if there's been any pressures so far on deposit costs pushing a little bit higher?

There's been no pressure on deposit costs, Alex. Any deposits we've lost, we've lost -- it was a conscious decision with regard to CDs. Our core growth has been fantastic, both numbers and dollars. And it's a little slower growth, but we believe it's better growth long term. So we haven't seen any pressure.

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

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

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