TrustCo Bank Corp NY (TRST) 2018 Q1 法說會逐字稿

Good morning, and welcome to the TrustCo Bank Corp. First Quarter 2018 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 is preceded -- 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 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 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.

Good morning, everyone. Thank you for joining us this morning to hear more about our first quarter results. As always Michael Ozimek, our CFO; and Scot Salvador, our Chief Banking Officer are joining me -- joining on the call with me. They will cover the details after a brief summary, Kevin Timmons is also with us in the room.

As the release shows we had a pretty good first quarter this year. Total assets were up and continued to range just under the $5 billion mark. Our mortgage portfolio grew to almost $3.2 billion, up about $40 million from year-end and about $240 million over the same quarter last year. The resi loan categories were flat to down a little for the quarter. We continued to maintain a decent size investment portfolio and a healthy cash position, investments are mostly agencies and mortgage backs with relatively short maturities.

We're a little more active in the deposit area with growth in all areas except money market. We continue to be pleased with the growth in core deposits, total deposits totaled $4.2 billion for the quarter, up over the last quarter and last year.

Our shareholders' equity topped $462 million and our tangible capital ratio was at 9.36%, greater than year-end and the same quarter last year, these are after paying our dividend. The nonperforming loans, total loans and nonperforming assets to total assets were essentially flat quarter-over-quarter but down over the same quarter last year. Net charge-offs were down, the loan loss reserve was 1.21% of loans for the coverage ratio of 179%.

Our return on assets and return on average equity were 1.23% and 13%, respectively, both better than the first quarter of 2017. Our efficiency ratio was 54%, also better than the first quarter of 2017. We were able to expand the margins since the first quarter of '17 to 3.29%, we continued to operate a full-service financial services department, we did not open any new offices during the quarter but did relocate one. We have 2 new and 2 relocations on the horizon. Our first quarter was a pretty good one, we look forward to the rest of the year.

Now Mike will go over the numbers, Scot will detail the loan portfolio and operation, and then we're going to have time for questions. Mike?

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the first quarter of 2018. As we noted in the press release, the company saw an increase in net income to $14.8 million, up 35.3% compared to $10.9 million for the first quarter of 2017 and $7.4 million in the fourth quarter of 2017.

Net income yielded a return on average assets and average equity of 1.23% and 13.07% compared to 0.91% and 10.17% in the first quarter of 2017. 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 the results going forward. For 2018, the company is expecting its combined effective tax rate to be approximately 24%, based on currently known information.

Now onto changes in the balance sheet. We saw a continued strong loan growth during the first quarter of 2018. Average loans were up $211 million, or 6.1% for the first quarter of 2018 compared to the same period in 2017. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio. That portfolio increased by $236.7 million, or 8.1% in the first quarter over the same period in 2017. This 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, cash flow from our loan and investment portfolios as well as growth in core funding from customers.

Total average investment securities, which included the AFS and HTM portfolios, decreased $78 million or 11.37% from the first quarter of 2017. 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 high-quality reoccurring earnings. Our investment portfolio is and has always been a source of liquidity to fund loan growth and provide flexibility for balance sheet management. Keeping in mind the current environment that has seen 4 rate hikes in the past year with a likelihood of more to come in 2018. As a result, we continue to carry on average $528.9 million of overnight investments, a decrease of $112.2 million compared to the first quarter of 2017, which as noted earlier, was used to fund loan growth. In addition, we expect the cash flow from the loan portfolio to generate between $350 million and $400 million over the next 12 months, along with approximately $90 million to $100 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 a significant opportunity and flexibility as we move into 2018. During the quarter, we did have $35 million of securities, which were called to mature at a yield of approximately 1.85%. This was offset by purchases of $45 million of securities at a yield of approximately 2.67%.

On the funding side of the balance sheet, total average deposits decreased $15.6 million or 0.4% for the first quarter of 2018 over the same period a year earlier. During the same period, our total cost of interest-bearing deposits increased 41 basis points from 35 basis points. More importantly, the cost of our core deposits including demand remained flat at 0.13% over the same period. We continue to be proud of our ability to control the cost of interest-bearing deposits. During the period, we saw multiple rate hikes. We feel this continues to reflect our pricing discipline with respect to CDs and nonmaturity deposits.

Our net interest margin increased to 3.29% from 3.14% compared to the first quarter of 2017. This increase in the net interest margin 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 net interest margin, continue to have a positive impact on the taxable equivalent net interest income. For the first quarter of the year, our taxable equivalent net interest income increased to $39.3 million. The provision for loan losses held steady at $300,000 in the first quarter of 2018 compared to the fourth quarter of 2017 and decreased from $600,000 in the same period in 2017.

The ratio of a loan loss to total loans was 1.21% as of March 31, 2018, compared to 1.28% at the end of the same period in 2017 and reflects the continued 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 2018, we'll 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 $4.7 million for the first quarter of 2018, an increase of $391,000 compared to $4.3 million last quarter. The increase over the fourth quarter of 2017 was related to the fees earned by our Financial Services division for tax preparation services during the first quarter of 2018. Our Financial Services division continues to be the most significant reoccurring source of noninterest income. The Financial Services division had approximately $846 million of assets under management as of March 31, 2018.

Now onto noninterest expense. Total noninterest expense, net of ORE expense came in at $23.8 million, up approximately $648,000 from the fourth quarter of 2017.

ORE expenses came in at $372,000 for the quarter, which is down $29,000 from the fourth quarter of 2017. This continues to be an encouraging sign of the stabilization of the housing prices in our market territories. Given the current level of ORE expenses, we are going to lower the anticipated level of expense to the range of approximately $200,000 to $700,000 per quarter. All the other categories of noninterest expense are in line with prior quarters and our expectations for the first quarter.

As we continue into 2018, we would expect the second quarter of 2018's total reoccurring noninterest expense, net of ORE expense to continue at the level seen during 2017, which is in the range of $23.2 million to $23.7 million per quarter. We will review this guidance again in July 2018. The efficiency ratio in the first quarter 2018 came in at 54.05% compared to 55.81% in the first quarter of 2017.

As we have stated in the past, we will 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 9.36% at the end of the first quarter, up from 8.97% compared to the same period in 2017.

Now Scot will review the loan portfolio and nonperforming loans.

Okay. Thanks, Mike. For the first quarter, total loans increased by $30.5 million in actual numbers or 0.84%. Year-over-year loans have increased by $218 million or 6.3%. The $30 million increase represent solid growth for the first quarter, which is typically a slower period. It compares favorably to last year with the first quarter net growth in 2017 totaling $18 million. The growth risk spread throughout our markets and consists of an approximately $32 million increase in residential mortgages and just over a $1 million decrease in commercial loans. Our fixed rate mortgage products increased by $39 million with home equity credit lines decreasing by $7 million.

Activity has picked up, and our loan backlog at quarter looks positive. It is up over 10% from both year-end and the period ending March 31 of last year.

Interest rates have begun to edge up slightly and our current 30-year fixed-rate stands at 4.38%. This marks the first time in recent memory that the new origination rate stands above existing loan portfolio yield. As our quality measures remained solid showing continued improvement year-over-year. Nonperforming loans were $24.9 million at March 31, versus $26.4 million last year, this equates to 0.68% of total loans. Nonperforming assets showed a similar improvement, declining from $29.6 million last year to $27 million in March. Charge-offs remained very low and for the first quarter, the net charge-off total of $90,000 equals an annualized ratio of only 0.01%.

The coverage ratio or allowance for loan losses to nonperforming loans stands at 178% as of March 31, compared to 167% as of March 2017. Rob?

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

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

First, I just want to drill in a little bit more on what you guys are seeing on deposits, and clearly the nontime deposits, you've been able to keep the rates very low there. But on the time deposits, ticked up a little bit during the quarter. Is that due to some promotions? Or kind of what's driving that extended duration? And then in the past, I think you provided some numbers on the amount of time deposits that matured during a specific quarter and the year, and I was wondering if you could provide those numbers to us?

We have been more active in that area, Alex, we think if we can get the money a little bit earlier in the year, we'll be better off long term. I think the rates will only be higher toward the end of the year. We haven't been certainly leading the market we try to never do that. But we kind of just been staying with the market, keeping what we have and looking at people of multiple accounts of this as well and trying to drive it more from a relationship perspective. As far as the pending maturities or what's coming up over the next short period of time.

I mean the average deposits or the CDs that are maturing, Alex, most of them turnover within the next -- other -- a significant portion turnover within 12 or 13 months, that's the average that we have.

Okay. So it's really extending the duration on the securities portfolio is what's driving that a little bit higher?

Yes.

Okay. And then, I wanted just to ask a question about the reserve, which we know we've discussed a lot in the past but given the fact the charge-off is just 90 basis points, seem like they are pretty much under control, net nonperforming loans had been kind of at a level where don't probably expect too much fluctuation, from here on out. The reserve at 121, seems to me like it may be is a little bit elevated still, should we expect that to, based on historical loss trends and things like that, will it be fair to expect that to come down a little bit over the next couple of quarters?

Yes, there is a couple of things that come into play. The amount of provision that we put on is definitely depended upon the growth in our loan portfolio. So as that starts to drive up, that starts to require more provision, just how it works. However, we do expect it to -- if the nonperformers remain at a level of where they are, and net charge-offs really stay low where they are and when we announce what we expect going forward, we would expect that to kind of continue to creep down.

Okay. And then just a final question, you got the OCC order finally lifted in the middle of the quarter, expense guidance doesn't really change that much, is there -- are there some different moving parts in expenses that we could expect to decline following that order? Or is it -- have those expenses mostly been taken out at this point?

There's nothing specific, Alex, but I think you're going to see a continued downward trend, as we find opportunities to consolidate and make the operation a little bit smoother. But I think you've already seen some of that happen with some of the staffing and the consultant numbers.

The next question comes from Nicholas Karzon with Franklin Templeton.

First, I wanted to start off and ask about the capital levels, with the OCC agreement lifted, I mean, as you look at the capital balance is growing if you look at the TCE ratio, how does that impact your view for dividends or potential capital return, and what levels are you targeting?

Sure. So as you can see, the capital levels are going to continue to grow. All things are on the table, we're taking a look at if it makes sense to potentially raise and then return some of that additional capital as the year goes on. There's nothing to announce right now but our targets are going to be slightly elevated from where we are right now.

Got it. And then secondly on the margin, with the inflection in loan yields that you're seeing and also securities yield also looking -- moving up and deposit costs marginally higher, can you help me understand that the NIM trajectory over the course of the year and what we might expect?

At least on the -- I guess, if you start on the asset side, we are originating loans right now above where we're at, where are the super schedule, where it actually is projected. But there is a tail on that and we do have some loans that we are closing, and we committed to from before that are kind of keeping that overall real estate portfolio at a flat level, depending on what the Fed does going forward we're expecting a couple of more rate rises, obviously, that keeps it moving in the right direction. And then on investing, I can tell you that we are not planning to go out and invest a ton of money over the next couple of quarters. We haven't done that in the past, and right now we're looking at, what the Fed has basically put out, we're not looking to invest a ton of money. On the deposit site, you can see where -- we've not had to move our core deposit rates a ton and really have been able to keep them flat inside of the rate hikes. As the rate start to tick up, I'm sure we'll start to see a little bit a movement there. In CDs, what we're doing right now is we're paying for the CDs now versus 3 quarters from now or 2 quarters from now, when obviously those rates will continue to be elevated. So that's kind of the pieces of it.

It does sound like there's a positive trajectory?

Yes, we will agree.

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

Thank you 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.