TrustCo Bank Corp NY (TRST) 2017 Q3 法說會逐字稿

Good morning, and welcome to the TrustCo Bancorp Third 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 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 that 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.

Thanks, Gary. Good morning, everyone. I'm Rob McCormick, President of the bank. Mike Ozimek, our CFO; and Scot Salvador, our Chief Banking Officer, will be presenting with me today. Kevin Timmons is with us to keep us on track.

We're happy to report another solid quarter at TrustCo, up 15% in the third quarter. Our loan portfolio grew to $3.58 billion. This is up both quarter-to-quarter and year-over-year. We're up about $234 million over 2016 quarter end at $3.39 billion. As usual, most of the growth occurred in residential mortgages.

Our commercial loan portfolio is up quarter-over-quarter but down slightly over the same quarter in 2016. Home equity credit lines continued on a downward trend. We believe we are retaining a large portion of this in our mortgage portfolio through refinances. We're not a big -- we're not big on installment loan and that portfolio stays relatively flat. We do see the credit line runoff slowing and hope for some opportunity in the commercial loan area in the future.

Quality loan portfolio continued to improve. Nonperforming loans to total loans and total assets dropped to 0.69% and 0.56%, both lower than the same quarter in 2016.

Our allowance to total loans stood at a solid 1.23% with a coverage ratio of almost 180% and stable net charge-offs. Our deposits stayed pretty flat year-over-year. We are happy to see the growth in demand in interest-bearing checking in the lower end of the cost range also building customer relations.

We did not open any branches during the quarter but have several new opportunities in the pipeline. We continue to operate 144 full service offices. Thankfully, we had very little impact from Hurricane Irma. Our average deposits per branch continues to go up, ending the quarter almost $29 million. As the release says, we are believers of strong, friendly branch network. We continue to have a large investment portfolio with relatively short maturities and a strong liquidity position.

Most of you know, we operate a full service trust department of over $850 million under management. Our net income in the first 9 months of 2017 was $35.8 million, up 12.5% from the $31.8 million in 2016.

Our margin improved 17 basis points to 3.26. Our return on average assets and equity for the quarter were just over 1% and just over 11%, respectively, better than the same 3 months last year. Our efficiency ratio of 52.8% also improved over 2016. The first 9 months of the bank have been good. We look forward to closing 2017 strong.

Now Michael will detail the numbers, Scot will discuss loans and then we'll have time for questions. Mike?

Thank you, Rob, and good morning, everyone.

I will now review Trustco's financial results for the third quarter of 2017. As you noted in the press release, net income increased to $12.6 million in the third quarter of 2017 or 15% compared to $10.9 million for the third quarter of 2016. Net income yielded a return on average assets and average equity of 1.02% and 11.06% compared to 0.90% and 10.05% in the third quarter of 2016.

Let's again start with the changes in the balance sheet. We continued strong loan growth during the third quarter of 2017, which is typically a strong season in all of our markets. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio. That portfolio increased by $76.8 million or 2.6% on average compared to the last quarter and $216 million or 7.7% from the third quarter of 2016. As noted before, 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, decreased $53.5 million during the quarter or 7.8% and $52.8 million or 7.7% from the third 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 '16, and again in March and June of this year, with a likelihood of more to come. As a result, we continue to carry $622 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 $140 million to $150 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 start to close out 2017.

During the quarter, we did have $25 million of securities called and matured at a yield of approximately 3.8%. This is offset by purchases of $10 million of agency securities.

On the funding side of the balance sheet, total average core deposits increased $89.8 million from the third quarter of 2016. During the same period, our cost of interest-bearing deposits decreased 3 basis points to 34 basis points.

We continue to be proud of the ability to reduce 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 in our maturity deposits.

Our net interest margin increased to 3.26% from 3.09% compared to the third 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, the Fed rate hikes, as mentioned before, and the continued decrease in the 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 third quarter of the year, our taxable equivalent net interest income was $39.2 million or approximately $2.5 million greater than it was in the third 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 remained steady at $550,000 compared to last quarter and decreased $200,000 compared to the third quarter of 2016. The ratio of loan loss to total loans was 1.23% as of September 30, 2017 compared to 1.3% at September 30, 2016, and reflects the 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 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 $4.9 million for the third quarter of 2017, an increase of $350,000 compared to $4.5 million last quarter. The increase over the second quarter of 2017 was related to the fees earned on several large estates settled by the Financial Services division during the third quarter of 2017. Our Financial Services division continues to be the most significant reoccurring source of noninterest income. Our Financial Services division had approximately $876 million of assets under management as of September 30, 2017.

Now on to noninterest expense. Total noninterest expense net of ORE expense came in at $23.3 million, up approximately $300,000 from the second quarter of 2017. This expected increase noted in the last quarter's call came in on target. The primary increase in noninterest expense during the third quarter of 2017 was in salaries and benefits expense, which was $10.4 million for the third quarter of 2017, up $800,000 compared to last quarter. Approximately $500,000 of the increase over the second quarter of 2017 was related to the company's equity incentive plans.

Another highlight for this -- for the third quarter -- for the second quarter in a row was ORE expense. This line beat our expectations and came in at approximately $275,000 for the quarter, which is up $280,000 from the second quarter of 2017. This was the result of expenses within our expected range and solid gains in the sale of ORE property. This continues to be an encouraging sign of the stabilization of the housing markets in our territories. Given the mix of ORE expenses and the current level of gains and sales in ORE properties we are experiencing, we are going to hold our guidance to the range of approximately $400,000 to $900,000 per quarter.

All the other categories in noninterest expense are in line with prior quarters and our expectations. As we close out 2017 and enter 2018, we would expect total reoccurring noninterest expense, net of ORE expense, to return to the level seen earlier in the year, which is a slight increase to the range to $23.2 million to $23.7 million per quarter. The efficiency ratio in the third quarter of 2017 came in at 52.79% compared to 54.11% in the third 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. The consolidated tangible equity to tangible assets ratio was 9.33% at the end of the third quarter, up from the 9.04% compared to the same period in 2016.

Now Scot will review the loan portfolio and nonperforming loans.

Okay, Mike. Thanks.

The bank continued to experience solid loan growth in the third quarter. Overall, total loans increased $70 million or 2%. Year-over-year, the increase has totaled $191 million or 5.6%. Residential mortgages grew by $66 million on the quarter with commercial loans increasing by $4 million. The residential mortgage growth occurred in all our market areas.

Our greater New York market accounted for approximately 58% of the net increase with the rest occurring in Florida. We have seen solid purchase [money] in overall loan activity throughout the summer and early fall months and are pleased with the performance results here today. Through 9 months, the net growth in our residential portfolio was up approximately 30% over last year. Good loan activity, combined with a slower refinance market have contributed to this increase.

We began the fourth quarter with a strong loan backlog. It is roughly equivalent to where we ended the last quarter and up over 20% from the same point last year. Loan production typically slows in the fourth quarter due to seasonal factors. Despite this, we are optimistic about posting solid growth in the upcoming quarter. Rates have remained in the high 3% range over the last couple of months, and we are currently at 3.99% for a 30-year mortgage.

Nonperforming loans remained relatively flat since the end of the second quarter and are down $1.5 million year-over-year. Currently, nonperforming loans are equal to 0.69% of total loans or $24.6 million. Nonperforming assets stand at $27.5 million, down $3.3 million year-over-year. Our loan allowance stands at 1.23% of total loans as of September 30. This compared to an annualized net charge off ratio of 0.07% for the third quarter. Early-stage delinquencies in the portfolio continued to remain strong.

Rob?

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

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

First question. I'm just wondering, as I look at the expenses in the expense guidance, if it's possible to quantify -- I know you've been kind of running a little bit heavy over the last couple of years due to the regulatory agreement, which, hopefully, we're underway working out of, but when that's lifted, is there any way to quantify what expenses could potentially go away?

And the biggest piece of that, Alex, that we still see is in the consulting side. And you -- and what we do see is it's a little choppy now. The reality is we've hired a lot of the people that kind of do the work in-house. But you do see -- if there's anything, there's quarter-to-quarter, there could be a few hundred thousand dollars each quarter that kind of go in there. So there isn't much left.

Okay. And then just looking at deposits, deposits declined a little bit sequentially. I'm just wondering if you think that could be potentially correlated to the fact that you guys really haven't raised rates at all. If people are coming in looking for higher deposit rates and going somewhere else or have you seen any sort of pressure in either of the upstate New York market or in the Florida market with respect to deposit cost, because clearly you've been able to keep the actual rates very low, as we've had 4 rate hikes.

And we felt it was more important to keep the rates low, Alex, and maintain our margin rather than change some of the CD money that's been out there. We've been very encouraged by our growth in core, which is really what we're looking to do, we're looking to build customers in long-term. We think that will benefit the shareholders more than chasing the CDs or the hotter money itself. We come in and out of that market as we need to, Alex; kind of maintain customer relationships. We're trying to tie accounts together and things like that so -- but we're not looking to book a lot of hot money.

Okay. And then the -- I think you alluded to some several, I guess -- several large estates that were settled in the third quarter that elevated the TrustCo Financial Services line? Can you quantify what that was? Is that maybe around $400,000? Is that...

That's about it. It's a little inside of that but that's -- you're right on target.

Okay. And then just as I think about the tax rate came down a little bit in the third quarter, is that due to some of the equity incentive stuff that gets issued in the third quarter? Is that going to go back to 37.5% in the fourth quarter?

Look, you hit the first part. It's the equity incentives but it was on exercises. So that's the benefit that we record on that.

Okay. But going back to 37.5% is the decent rate to use for the fourth quarter, you think?

Yes. Unless we have any other discreet items, but yes, that's where we should be.

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

As always, thank you for your interest in our company. We hope to talk to you in January and have a good day. Thanks.

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