TrustCo Bank Corp NY (TRST) 2018 Q2 法說會逐字稿

Good morning, and welcome to the TrustCo Bank Corp.'s Second 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. 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 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 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.

Thank you. Good morning, everyone. I'm Rob McCormick, President of the bank. Presenting with me today are Michael Ozimek, our CFO; and Scot Salvador.

As we always do, I will begin with a brief summary, then Mike will detail the numbers, Scot will talk about operations, especially loans. And then we'll take questions, if there are any.

Our loan portfolio continued to show nice growth into the second quarter. Our average loans are up $228 million year-over-year and over $100 million since year-end 2017. Almost all of the growth is in our residential mortgage loans. Our commercial loan portfolio seems to have stabilized and showed small growth in the second quarter. Home equity loans are down year-over-year, but we think most of that runoff is being captured in the residential portfolio. Installments, while up, are not a significant part of our business. Nonperforming loans also showed improvement over last year and last quarter.

Our savings accounts and money market accounts are down year-over-year, while demand in checking deposits are up. Overall, deposits are up since year-end and over last year. Total assets at the end of the year -- at the end of the second quarter were just under $5 billion and shareholders' equity was up for all reported periods.

Our net income was a strong $15.4 million, up overall periods, roughly 24% greater than the second quarter of 2017. Mike will give much greater detail later in this call. Our capital ratio was 9.52% at quarter end, up from the same period last year. Our nonperforming assets to total assets continued to improve to 0.54%. Our allowance to total loans remained in the 1.2% range and coverage flat at 1.8x.

From a performance perspective, our return on average assets improved to 1.24%, return on equity to 13.17%, efficiency ratio was 53.7%, and our margin improved to 3.30%. We continue to operate a full service trust department with over $880 million under management. We opened 3 offices this quarter, Mahopac, Vero Beach, Florida and Winter Park, Florida, bringing our total office count to 148. We had a pretty good quarter and are having a good year.

Now Mike and Scot will give some detail, then time for questions. Mike?

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the second quarter of 2018.

As we noted in the press release, the company saw an increase in net income of $15.4 million, up 25.9% compared to $12.2 million for the second quarter of 2017, and $14.8 million in the first quarter of 2018. Net income yielded a return on average assets and average equity of 1.26% and 13.26% compared to 1.0% and 11.05% in the second quarter of 2017. On December 22, the Tax Cuts and Jobs Act was signed into law, which included a reduction in federal statutory corporate tax rate from 35% to 21% effective January 1, 2018. The lower tax rate continues to have a significant beneficial impact on results going forward.

Now onto the changes in the balance sheet. Strong loan growth continued during the second quarter of 2018. Average loans are up $228 million or 6 point (technical difficulty) second 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 $246 million or 8.3% in the second 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 and cash flow from our investment portfolios.

Total average investment securities, which include the AFS and HTM portfolios, decreased $108.5 million or 15.8% from the second 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 the possibility of more to come in 2018. As a result, we continue to carry on average $549.4 million of overnight investments, a decrease of $94.2 million compared to the second quarter of 2017, which as noted earlier, was used to partially fund loan growth.

In addition, we expect the cash flow from the loan portfolio to generate between $325 million and $425 million over the next 12 months, along with approximately $80 million to $90 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 a significant opportunity and flexibility as we move into the second half of 2018.

During the quarter, we did have $45 million of securities [that paid down] or matured at a yield of approximately 1.5%. This was offset by purchases of $15 million of securities at a yield of approximately 3.45%. On the funding side of the balance sheet, total average deposits increased $32 million or 0.8% for the second quarter of 2018 over the same period a year earlier. During this period, our total cost of interest-bearing deposits increased to 47 basis points from 34 basis points. More importantly, the cost of our core deposits, including demand, remained relatively unchanged also over the same period. The exception being an increase in money market costs to 35 basis points from 32 basis points in the preceding quarter. 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 on pricing discipline with respect to CDs and nonmaturity deposits. Over the second half of 2018, approximately $261 million CDs will mature at an average rate of 0.82%.

Our net interest margin increased to 3.32% from 3.21% compared to the second quarter of 2017. This increase in net interest margin comes from 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, offset by the increase in funding costs over the past 4 quarters. The impacts of the growth in the balance sheet coupled with the changes in net interest margin continue to have a positive impact on the taxable equivalent net income. Our taxable equivalent net interest income was $40.1 million for the second quarter of 2018, an increase of $1.6 million compared to the same period in 2017.

The provision for loan losses held steady at $300,000 in the second quarter of 2018 compared to the first quarter of 2018, and decreased from $550,000 in the same period in 2017. The ratio of loan loss to total loans was 1.19% as of June 30, 2018 compared to 1.26% at 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 as in the past, we would expect our level of provision for loan losses in 2018 will continue to reflect the overall growth in the 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 2018, a decrease of $184,000 compared to $4.7 million last quarter. The decrease comes from the first quarter of 2018, which was related to the first -- 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 $882 million of assets under management as of June 30, 2018.

Now onto noninterest expense. Total noninterest expense net of ORE expense came in at $23.8 million, flat compared to the first quarter of 2018. One item of note, during the quarter, FDIC and other insurance expense decreased due to the bank being released from the formal agreement. ORE expense came in at $294,000 for the quarter, which is down $78,000 from the first quarter of 2018. 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 again going to lower our anticipated level of expense to the range of approximately $100,000 to $600,000 per quarter.

All the other categories of noninterest expense are in line with prior quarters and our expectations for the second quarter. As we continue into 2018, we would expect the third quarter of 2018's total reoccurring noninterest expense net of ORE expense to increase approximately 3% to a range of 23.9% to $24.4 million per quarter.

The efficiency ratio in the second quarter of 2018 came in at 53.35% compared to 53.33% in the second quarter of 2017. As we've stated in the past, we will continue to focus on what we can control by working to identify opportunities to make processes within the bank more efficient. And finally, the capital ratios continue to improve. The consolidated tangible equity to tangible assets ratio was 9.52% at the end of the second quarter, up from 9.08% compared to the same period in 2017.

Now Scot will review the loan portfolio and nonperforming loans.

Thanks, Mike. For the second quarter, our overall loan activity and net growth were strong. Total loans increased by $74 million in actual numbers, an increase of 2% on the quarter. Year-over-year, the net loan increase was $233 million or 6.6%. Residential loans increased by $67 million on the quarter with commercial loans increasing by $6 million. The increase in the residential portfolio was spread throughout our regions with our Greater New York marketplace enjoying a particularly strong quarter of growth. Mortgage activity increased as the quarter progressed and with refinances at relatively low levels, we saw strong amount of purchase money business being transacted. We are hopeful this momentum will carry into the third quarter.

Our current 30-year fixed mortgage rate stands at 4.5%. Our loan backlog at quarter end was solid. It is up significantly from the first quarter, which is normal given the time of the year and is roughly equivalent to where it stood at the end of last year's second quarter. Asset quality metrics remain strong and continue to show improvement. Nonperforming loans were $24.1 million at quarter end compared to $24.8 million in March, and $24.5 million a year ago. Nonperforming assets at $26.27 million also showed improvement for both the quarter and the year. Net charge-offs also remained at very low levels, totaling only 0.02% on an annualized basis for the second quarter. The coverage ratio or allowance for loan losses to nonperforming loans stands at 184% compared to 179% in March and 180% a year ago.

Rob?

Thanks, Scot. We are happy to answer any questions.

(Operator Instructions) Showing no questions at this time, I would like to turn the conference back over to Robert J. McCormick for any closing remarks.

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

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