TrustCo Bank Corp NY (TRST) 2017 Q4 法說會逐字稿

Good morning, and welcome to the TrustCo Bank Corp. Fourth 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. (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 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 the 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. These 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, sir.

Good morning, everyone. I'm Rob McCormick, President of the bank. Scot Salvador, Mike Ozimek and Kevin Timmons are with me on the call today. We'll start with a brief summary of the year, then Michael Ozimek, our CFO, will detail the numbers, and Scott will talk about our operations.

We had a pretty good year at TrustCo Bank. 2017 was a year with many changes, especially in the second half of the year. Sure you're hearing that a lot. Year-over-year total deposits were down overall at the bank. The decrease was driven by runoff in the money market and time deposit categories. We had very good growth in the checking category. The bottom line is we did what we had to do with deposits, not chasing the higher cost categories, growing the lower costs customer accounts. Makes for slower but hopefully longer term cheaper growth.

Loan growth was good in 2017. We ended the year in a very good position with most of the growth coming in the residential mortgage area. Commercial loans were down year-over-year, but that portfolio is much more stable than in the past. Some credit lines were down, but we still view most of that runoff as being captured in our residential mortgage portfolio. The residential category is not a big part of our business.

Our efforts seem to have paid off in the form of continued margin expansion to 3.29%. That was up 13 basis points year-over-year. We ended 2017 with total assets over $4.9 billion, an increase in shareholders' equity to $458 million and a capital ratio of 9.3%.

Net income was $43.1 million in 2017, up from $42.6 million in 2016. This was impacted negatively by $5.1 million as a direct result of the tax change at year-end. Mike has more detail on this. We are pleased to report a net income increase even with significant adjustment at year-end.

As we do with most things, we're trying to take a long view with regard to the new tax policy. Instead of focusing on short-term spending and enhancement, we would rather see the benefit fall to the bottom line for long-term shareholder value.

Ratios were certainly impacted by the adjustment at year-end. ROA and ROE were 0.6% and 6.4% at year-end, and our efficiency ratio showed improvement year-over-year to 53%. We opened a branch in Mahopac during the quarter, bringing our total branches back to 145. We will probably open 2 offices in Florida during 2018, and we have 2 planned relocations elsewhere.

We continue to have a pretty good cash position and the investment portfolio has relatively short maturities. Our trust department had a decent year with a nice increase in income. We're still operating under formal agreement with the OCC and hope to be in the final stages. Nonperforming loans, assets and net charge-offs all showed improvement in 2017, and the allowance grew to over $44 million, resulting in a coverage ratio of 181%. We look optimistically to 2018. Our business model is strong, which should put us in a good position for the future.

Now Mike will give us some detail on the numbers. Mike?

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the fourth quarter of 2017. As we noted in our press release, the company saw an increase in net income to $43.1 million for the full year of 2017 compared to $42.6 million for 2016.

The year-over-year increase in net income came despite the impact of the revaluation of the company's deferred tax assets resulting from the recently enacted tax legislation.

During the quarter, on December 22, the Tax Cuts and Jobs Act was signed into law, which included a reduction of 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 results going forward but also require revaluation of the company's deferred tax assets.

As a result, the company reduced the value of net deferred tax assets by $5.1 million and recorded the reduction as a charge to income tax expense. For 2018, the company is expecting its combined effective tax rate to be approximately 23.5% based on currently known information. This effective rate could be impacted once the tax law changes are fully implemented during 2018.

Income before taxes were $76.7 million for the full year of 2017, an increase of 12.4% compared to $68.3 million for 2016. Income before taxes was also at $19.7 million in the fourth quarter of 2017, an increase of 12.9% compared to $17.5 million for the fourth quarter of 2016.

Net income for the fourth quarter of 2017 yielded a return on average assets and average equity of 0.60% and 6.3% compared to 0.89% and 9.87% in the fourth quarter of 2016.

Now on to changes in the balance sheet. We saw continued strong loan growth during the fourth quarter of 2017. Average loans were up $203 million for the fourth quarter of 2017 compared to the fourth quarter of 2016. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio. That portfolio increased by $68 million or 2.24% on average during the quarter compared to last quarter and $234 million or 8.16% from the fourth quarter of 2016.

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

Total average investment securities, which include AFS and the HTM portfolios, decreased $61.1 million or 9% from the fourth 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'll continue to take advantage of opportunities as they present themselves during 2018 and beyond, keeping in mind the current rate environment that has seen rate hikes back in December 2016 and again in March, June and December of 2017, with a likelihood of more to come. As a result, we continue to carry on average $539.7 million of overnight investments, a decrease of $82.9 million compared to the fourth quarter of 2016.

In addition, we expect the cash flows from the loan portfolio to generate between $400 million and $500 million over the next 12 months, along with approximately $130 million to $140 million of investment securities cash flow during the same time period, all of which will be able to be invested at higher rates. This continued to give us significant opportunity and flexibility as we move into 2018.

During the quarter, we did have $5 million of securities which matured at a yield of approximately 1%. This was offset by purchases of $20 million of agency securities at a yield of approximately 2.3%.

On the funding side of the balance sheet, total average core deposits increased to $77.1 million from the fourth quarter of 2016. During the same period, our cost of interest-bearing deposits remained unchanged at 36 basis points. 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 3.13% compared to the fourth quarter of 2016. This increase in 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 control of funding costs over the past 4 quarters.

The impacts of the growth of the balance sheet, coupled with the changes in the net interest margin, continue to have a positive impact on taxable equivalent net interest income. For the fourth quarter of the year, our taxable equivalent net interest income increased to $39.3 million. Provision for loan losses decreased to $300,000 in the fourth quarter of 2017 compared to $550,000 in the third quarter of 2017 and $600,000 in the fourth quarter of 2016.

The ratio of loan loss to total loans was 1.21% as of December 31, 2017, compared to 1.28% at December 31, 2016, and reflects the continued improvement in the assets' quality and economic conditions in our lending area. Scot will get into the details how 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 and our geographic footprint.

Noninterest income came in at $4.3 million for the fourth quarter of 2017, a decrease of $566,000 compared to $4.9 million last quarter. The decrease over the third quarter of 2017 was related to the fees earned on several large estates settled by our financial services division during the third quarter of 2017. Our financial services division continues to be the most significant recurring source of noninterest income. Financial services division had approximately $890 million of assets under management as of December 31, 2017.

Now on to noninterest expense. Total noninterest expense, net of ORE expense, came in at $23.1 million, down approximately $100,000 from the third quarter of 2017. ORE expense came in approximately $400,000 for the quarter, which is up $126,000 from the third quarter of 2017. 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 on the sales of ORE properties, we're going to lower our anticipated level of expense to the range of approximately $300,000 to $800,000 per quarter. All the other categories of noninterest expense are in line with prior quarters and our expectations. As we enter into 2018, we expect the total reoccurring noninterest expense net of ORE expense to continue at the levels seen during 2017, which is in the range of $23.2 million to $23.7 million per quarter.

The efficiency ratio in the fourth quarter of 2017 came in at 53.13% compared to 54.65% in the fourth quarter of 2016. As we've stated in the past, we'll continue to focus on what we can control by working to identify opportunities that 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 fourth quarter, up from the 8.88% compared to the same period in 2016.

Now Scot will review the loan portfolio and the nonperforming loans.

Okay. Thanks, Mike. The bank's loan growth for the fourth quarter was strong. Overall, total loans increased by $58 million or 1.6%. Year-over-year, they have increased by $206 million or 6%. Virtually all of the $58 million in growth for the quarter was in the residential portfolio, with commercial loans down just slightly.

Mortgage growth in the quarter was spread throughout all regions. Purchase money business remained solid and that, combined with the relatively low level of refinance activity, led to strong net growth. Some equity credit lines declined by $2.5 million, which is offset by a $3.5 million increase in our fixed rate home equity loan product this quarter.

Our loan backlog at year-end was solid. It was down from the third quarter, which is normal given the time of year, but up over 10% from the same point last year. While the first part of the year is typically slower, we are optimistic about posting continued net growth on the quarter. Our current 30-year fixed rate is 3.99%.

The recent enacted federal tax laws contain several provisions regarding the deductibility of mortgage interest. However, given our relatively low average loan size and the fact that we are not big originators of jumbo loans, we are not anticipating a significant effect upon our overall loan activity.

Our asset quality metrics remain strong. Nonperforming loans were down slightly in both the quarter and the year. Nonperforming assets were up slightly on the quarter and down $1.7 million year-over-year.

Charge-offs have reached extremely low levels. For the fourth quarter, the net charge-off of $212,000 equates to a 0.02% annualized net charge-off ratio, nonperforming loans to total loans of 0.67% versus 0.73% last year and finally, the coverage ratio or allowance to loan losses to total nonperforming loans stands at 180%.

Rob?

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

(Operator Instructions) And our first question comes from Alex Twerdahl of Sandler O'Neill.

Can you just -- I joined the call just a couple of minutes late. So I'm sorry if you already addressed this. But Scot, did you give some color on the state of the mortgage pipeline going into 2018?

Yes, Alex. I was saying, it's down at year-end. The pipeline was down from the end of the third quarter, which is normal because of the time of year. But year-over-year, we're up about 10% from where we were last year.

Okay. And are you guys seeing any -- we've seen a little bit of a rise in the 10-year, not obviously anything to write home about. But have you seen any of that reflect through into pricing on mortgages yet? Or is it still too early?

It's still too early.

Okay. What about on the deposit side? Five rate hikes later, you guys, have basically been able to keep your deposit costs flat, up, I think, 2 basis points or something like that. Are you seeing any pressures from any parts or any pockets of your market to increase deposit costs faster in 2018 or at all?

There are certain CD categories that have become more competitive, Alex, but overall, no, not a tremendous amount of pressure.

Okay. And are those categories actually drawing in any additional deposits?

I don't think so. I think they're handling the maturities. The people that are very aggressive with regard to the pricing appear to be in the -- like the 15 to just shy of 2-year mark. And it looks like they're trying to keep what they have. Personal opinion, I don't really have any direct knowledge of that.

(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.

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

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