Image source: The Motley Fool.
Trustco Bank Corp N Y (TRST 3.74%)
Q4 2018 Earnings Conference Call
Jan. 23, 2019, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good morning, and welcome to the TrustCo Bank Corp Fourth Quarter 2018 Earnings Call and Webcast. All participants will be in listen-only mode.
(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 statement 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, Chairman, President and CEO. Please go ahead.
Robert Joseph McCormick -- Chairman, President and Chief Executive Officer
Thanks, Sean, and thank you for taking time out of your day to hear more about our Company and our 2018 results. I'm Rob McCormick, President of the Bank. Joining me on the call today are Mike Ozimek, our Chief Financial Officer and Scot Salvador our Chief Lending Officer. Also in the room with us is Andrea McGuire from the Accounting Department to keep us in line.
As we've done in the past, I will start out with a summary, hitting high points; then Mike will detail the numbers; Scot will talk about loans; then we can respond to any questions you may have.
2018 was a very solid year here at the Bank. We hit a record high net income of $61.4 million. This was up over 42% from 2017, driven by strong performance and benefits from the Jobs and Tax Act. Our loan growth hit another all-time -- our loan portfolio hit another all-time high of almost $3.9 billion, driven mostly by growth in our residential mortgage portfolio. We should note, all loan categories experienced some growth in 2018. Our deposits also grew in 2018, as previously reported. We are trying to be cautious with regards to deposit pricing.
Performance ratios at the end of 2018 were all very sound. Non-performing loans-to-total loans dropped to 0.64%; non-performing assets-to-total assets dropped to 0.54%. Our allowance to total loans was 1.16% with the coverage ratio of just under 180%. Total allowance also grew year-over-year.
We continue to see margin expands to 3.38%. We are paying more for deposits, but our earning assets were able to outpace the cost. Our return on assets improved to 1.3% and our return on equity was 13.18%. Our dividend payout ratio is just over 41% even after our increase in the cash dividend. How could you not be happy with our 2018 results? We do realize that every year cannot be record breaking, but we remain optimistic about 2019.
Now Mike will detail the numbers, Scot will give some detail on operations; then we'll respond to questions. Mike?
Michael M. Ozimek -- Senior Vice President and Chief Financial Officer
Thank you, Rob, and good morning everyone. I will now review TrustCo's financial results for the fourth quarter of 2018. As we noted in their press release, the Company saw an increase in net income to $16 million, up 118% compared to $7.4 million for the fourth quarter of 2017. Net income yielded a return on average assets and average equity of 1.30% and 13.18% compared to 0.60% and 6.38% in the fourth quarter of 2017.
On December 22, 2017, 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 continues to have a significant beneficial impact on the results going forward.
The effective tax rate was 18.9% in the fourth quarter of 2018 compared to 62.6% in the same period a year ago. The decrease in effective rate for the fourth quarter of 2018 was partially driven by the implementation of a tax planning strategy that reduced taxes on a one-time basis by $880,000.
Now, onto the changes in the balance sheet; strong loan growth continued during the fourth quarter of 2018. Average loans were up $244 million or 6.8% for the fourth 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 $256 million or 8.2% in the fourth 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 cash balances and cash flow from our investment portfolios.
Total average investment securities, which include the AFS and HTM portfolios decreased $73.7 million or 11.9% from the fourth 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 recurring 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 four rate hikes in the past 12 months with the possibility of more rate hikes to come. As a result, we continue to hold an average of $416.8 million of overnight investments during the fourth quarter of 2018, a decrease of $122.9 million compared to the same period in 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 $375 million and $475 million over the next 12 months, along with approximately $60 million to $70 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 move into 2019.
During the quarter, we did have $14.8 million of securities that paid down or matured at a yield of approximately 2.4%. On the funding side of the balance sheet, total average deposits increased $77.1 million or 1.86% for the fourth quarter of 2018 over the same period a year earlier. During the same period, our total cost of interest bearing deposits increased to 60 basis points from 36 basis points.
More importantly, the cost of our core deposits, including demand, remains relatively unchanged also over the same period. The exception being an increase in money market cost to 0.49% from 0.33% over the same period. We continue to be proud of our ability to control the cost of interest bearing deposits during the period, which saw multiple rate hikes.
As further evidenced, our CDs average cost for the fourth quarter of 2018 increased only 60 basis points over the same period last year. We feel this continues to reflect our pricing discipline with respect to CDs and non-maturity deposits. Over the next 12 months, approximately $960 million in CDs will mature at an average rate of 1.39%.
Our net interest margin increased to 3.38% from 3.29% compared to the fourth quarter of 2017. This increase in the net interest margin comes from the asset side of the balance sheet as a result of continued growth in the loan portfolio and the Fed rate hikes, as mentioned before, offset by the increased funding costs over the past four 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 taxable equivalent net interest income. Our taxable equivalent net interest income was $40.7 million for the fourth quarter of 2018, an increase of $1.5 million compared to the same period in 2017.
Provision for loan losses increased to $500,000 in the fourth quarter of 2018 compared to $300,000 in the same period in 2017. The increase in provision is driven by the sustained growth of the loan portfolio and the slight uptick in net charge-offs in Q4. The ratio of allowance for loan loss to total loans is 1.16% as of December 31st, 2018 compared to 1.21% as 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, as in the past, we do expect the level of provision for our loan losses in 2019 will continue to reflect the overall growth in our loan portfolio, trends in loan quality and economic conditions in our geographic footprint.
Non-interest income came in at $4.5 million for the fourth quarter of 2018, in line compared to last quarter. Our Financial Services division continues to be the most significant recurring source of non-interest income. The Financial Services division had approximately $803 million of assets under management as of December 31st, 2018.
Now, on to interest expense -- non-interest expense; total non-interest expense net of ORE expense came in at $24.9 million compared to the third quarter of 2018. A couple of items to note, the decrease in salaries and benefits expense for the fourth quarter was driven by the true-up of the liability-based equity awards as a result of the lower period-end stock price and the increase in net occupancy expense was a result of additional charges related to rent and building expenses.
ORE expense came in at $37,000 for the quarter, which is down $491,000 from the third quarter of 2018. The low level of net ORE expenses for the quarter was partially driven by the gain on sale of ORE properties. Given the current level of ORE expense, we are going to hold the anticipated level of expenses in the range of approximately $100,000 to $600,000 per quarter.
All the other categories of non-interest expense were in-line with prior quarters and our expectations for the fourth quarter. As we entered 2019, we would expect first quarter of 2019 total recurring non-interest expense net of ORE expense to increase 3% to the range of $24.6 million to $25.1 million per quarter. In this tight labor market, we pay to hire and retain top quality talent.
Efficiency ratio in the fourth quarter of 2018 came in at 55.06% compared to 53.13% in the fourth quarter of 2017. As we've stated in the past, we'll continue to focus on what we can control by working to identify opportunities to make the processes within the bank more efficient. One thing that we are proud of is expense control across the Bank and we expect this to continue into 2019.
And finally, the capital ratios continue to improve. The consolidated tangible equity to tangible assets ratio was 9.87% at the end of the fourth quarter, up from the 9.33% compared to the same period in 2017.
Now, Scot will review the loan portfolio and non-performing loans.
Scot Reynold Salvador -- Executive Vice President and Chief Banking Officer
Okay. Thank you, Mike. Loans continue to grow on a solid pace for the fourth quarter 2018. Overall loans increased by $48 million on the quarter in actual numbers are 1.26%. This included a $41 million net increase in residential mortgages with commercial loans increasing by $5 million. Year-over-year, loans have increased by $238 million or 6.5%. The vast majority of this increase was centered in our 30-year mortgage product, with approximately $10 million of commercial growth included.
The pattern of companywide mortgage growth we have experienced in 2018 continued in the fourth quarter with all our regions posting solid increase. Our Downstate New York market continue to do well, and for the year, have posted an increase in overall mortgage activity approaching 30%. While still a smaller piece of our overall operations, we are nonetheless pleased to see this rise in our Downstate activity.
Mortgage rates increase then began to ease again later in the fourth quarter. While we have not seen a major effect on overall mortgage activity, the change in rates obviously do play a role and likely have contributed to the declining balances in the home equity credit line portfolio. Our results this quarter included an approximate $4 million decrease in such balances.
Our current 30-year fixed mortgage rate stands at 4.99%. Our backlog is down significantly from the third quarter, which is normal, given the seasonal slowdown in the fourth quarter. Year-over-year, the backlog is down just over 10% which includes a lower amount of pending refinances due to changes in interest rate.
Looking closer at the year-over-year numbers, the purchase money backlog is down only approximately 6%. Our asset quality measurements remain strong. Early stage delinquencies remain very low, and both non-performing loans and non-performing assets are solid at 0.64% and 0.54% of total loans respectively. We expect these ratios will display some choppiness given their low levels, and for the year both ratios were down, while increasing slightly on the quarter.
Net charge offs totaled only $803,000 for the year versus $1.7 million last year. This translates to an annualized charge off ratio of only 0.05%. The coverage ratio or allowance for loan losses to the non-performing loans now stands at 179%. Rob?
Robert Joseph McCormick -- Chairman, President and Chief Executive Officer
Thanks, Scot. We'll take any questions you have.
Questions and Answers:
Operator
We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Alex Twerdahl with Sandler O'Neill. Please go ahead.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Hey, good morning, guys.
Robert Joseph McCormick -- Chairman, President and Chief Executive Officer
Good morning, Alex.
Michael M. Ozimek -- Senior Vice President and Chief Financial Officer
Good morning, Alex.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Hey first off, just wanted to ask you a question Rob, it's kind of higher level as it relates to capital, you guys have been accreting tangible capital basically as far back as my model go, it almost 10% today. Seems like it should be more than enough given the credit characteristics in your portfolio, the growth that you've had et cetera, how do you think about sort of the level of capital? You've increased the dividend slightly recently, dividend increases the dividend payout ratio, buybacks things like that. Is that something that is going to become more of a focus in 2019?
Robert Joseph McCormick -- Chairman, President and Chief Executive Officer
As I said to you in the last call, Alex, all of that is on the table at this point in time. There are a number of initiatives we're looking at. We would agree with you, we do think a 10% capital level is a benefit from a regulatory perspective. I think 10% banks are going to be looked at differently than other banks and that's just my speculation at this point. But I think all of what you've referenced is on the table.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Okay. And then just wanted to drill in a little bit more to kind of what's happening in the margin, and starting with deposits, you guys put on a bunch of time deposits in the fourth quarter. Can you just kind of update us on sort of what the strategy is for deposits and liquidity and sort of managing those balances and sort of what kind of time deposits you're putting on? Is it driven by some promotions you guys are doing or is it more driven by customer demand?
Robert Joseph McCormick -- Chairman, President and Chief Executive Officer
It's a mix bag Alex. So, it's a little bit of everything. What we're trying to do is keep the maturities relatively short on our CDs. We like a nine-month product that distinguishes ourselves from the competition and we've had some success in that area. You also have to remember you have Snowbirds returning to the Florida market. The West Coast of Florida has been very good to us especially, so that there's customer opportunity there and we just thought it was a good time to maybe put some deposits on the books.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Okay. And are those, do you think mostly new customers coming in or are they existing customers just kind of increasing their accounts and adding some duration to their portfolios?
Robert Joseph McCormick -- Chairman, President and Chief Executive Officer
Well, the vast majority would be new customers because the quote specials that you offer is at least new money, Alex. They wouldn't necessarily be new customers but new money to the Bank.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Okay, understood. And then just kind of, as it relates to the margin you've had some nice margin expansion over the last couple of quarters. A lot of that's being driven by just deploying cash obviously, which is certainly accretive to the margin, but you brought that cash position down from nearly 14% at the beginning of 2017, it's now 8.5% on average.
Is there -- as you kind of look forward and obviously no one knows what the Fed is going to do next year and what the yield curve is going to look like, but how do you think about managing that cash position, is -- how much would you actually kind of deploy over the next couple of quarters?
Robert Joseph McCormick -- Chairman, President and Chief Executive Officer
You've been following us for a long time, and we would say that was execution of a plan, that's been in existence for a long time. When the rates gave us the opportunity, we deployed that cash, as we always told our shareholders we would. And I think we're pretty comfortable with the level we're at. If there is opportunity to grow the cash position, we probably would.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Okay, great. Thanks for taking my questions.
Operator
At this time, there are no further questions. This will conclude our answer-and-question session. I would like to turn the conference back over to Robert J. McCormick for any closing remarks.
Robert Joseph McCormick -- Chairman, President and Chief Executive Officer
Thanks for your interest in our Company and have a great day everybody.
Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
Duration: 19 minutes
Call participants:
Robert Joseph McCormick -- Chairman, President and Chief Executive Officer
Michael M. Ozimek -- Senior Vice President and Chief Financial Officer
Scot Reynold Salvador -- Executive Vice President and Chief Banking Officer
Alex Twerdahl -- Sandler O'Neill -- Analyst
Transcript powered by AlphaStreet
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
