TrustCo Bank New York (TRST) Q1 2019 Earnings Call Transcript

TrustCo Bank New York (TRST -3.76%)
Q1 2019 Earnings Call
April 23, 2019 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the TrustCo Bank Corp first-quarter 2019 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 on 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 like to turn the conference over to Mr. Robert McCormick, president and CEO. Mr.

McCormick, the floor is yours, sir.

Robert McCormick -- President and Chief Executive Officer

Thank you. Good morning, everyone. We had a solid first quarter at the bank. We earned $14.6 million in this quarter, essentially flat or down a bit from the first quarter of 2018.

This resulted in a return of assets of 1.17% or a return of equity of 11.93%. Our efficiency ratio ended this quarter at 56%. That's higher than we like. This was driven by new hires.

We had the opportunity to get some good people in a tight labor market. We've also smoothed out some seasonality in the labor. We do not expect this trend to continue and expect improvement in the efficiency ratio long term. Our margin was 3.24% at quarter end.

We are paying more for deposits, but keeping maturities short to provide repricing opportunities later in the year. Net interest income was up over the same quarter last year. Loans were up nicely year over year driven by growth in the residential portfolio. We were flat or down a little from year-end.

We are seeing a solid application volume, and a growing backlog of pending loans. We do see nice deposit growth quarter over quarter, and year over year. Again, we are trying to keep maturities short. Growth also provided liquidity, which we believe will provide opportunity and flexibility for the future.

All non-performing ratios showed improvement quarter over quarter, and year over year. Book value capital equity all had nice growth year over year. We did not open any offices. As usual, Mike Ozimek, our CFO; and Scot Salvador, will give some additional detail.

Then we can answer questions and wrap up the call. I'm proud of our first-quarter results, which will provide us with a great foundation for the rest of 2019. Mike?

Mike Ozimek -- Chief Financial Officer

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the first quarter of 2019. As we noted in the press release, the company saw a net income of $14.6 million, which yielded a return on average assets and average equity of 1.17%, and 11.93%, respectively. Average loans for the first quarter of 2019 grew 6% or $217.8 million to $3.9 billion from the first quarter of 2018.

As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio. Net average portfolio increased by $226.3 million or 7.2% in the first quarter of 2019 over the same period in 2018. This continues the positive shift in our balance sheet from low-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 $74.5 million or 12.2% over the same period last year. This was partially offset by purchases of approximately $67 million of securities at an average yield of approximately 3.15% that settled late in the quarter. The full impact of the late first-quarter rise will be felt in the second quarter of 2019. 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 always has been a source of liquidity to fund loan growth and provide flexibility for balance sheet management. As a result, we continue to hold an average of $503 million of overnight investments during the first quarter of 2019, a decrease of $26 million compared to the same period in 2018, and an increase of $86.2 million or 20.7% compared to the fourth quarter of 2018. 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 $75 million to $95 million of investment securities cash flow during the same time period. This continues to give us significant opportunity and flexibility as we move through 2019.

During the first quarter of 2019, the bank had $15 million of securities called and mature, and approximately $11.9 million of full securities paid down, a yield of approximately 2.2%. On the funding side of the balance sheet, total average deposits increased $156.6 million or 3.8% for the first quarter of 2019 over the same period a year earlier. The increase in deposits was a result of $272.3 million or 25.2% increase in average time deposits. We chose to offer competitive, shorter-term rates, which allowed the bank to gain market share, as well as, retain our existing time deposits.

This strategy drove growth at a relatively low cost that will sustain TrustCo's strong liquidity position, continue to allow us to cross-sell new core relationships, and take advantage of opportunities if they arise. During the same period, our total cost of interest-bearing deposits decreased -- increased to 76 basis points from 41 basis points. Money market deposits increased to 65 basis points from 33 basis points. More importantly, the cost of our core deposits remained relatively unchanged over the same period.

We continue to be proud of our ability to control the cost of interest-bearing deposits during a period which saw multiple rate hikes. While the time deposits' average cost for the first quarter of 2019 increased to 1.79% from 1.07% 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 $1 billion in CDs will mature at an average rate of approximately 1.86%. We do expect the margin to begin to stabilize in the latter part of 2019, particularly in the third and fourth quarter as our shorter-term deposits could reprice and provide opportunity for increased margin expansion.

Our net interest margin decreased to 3.24% in the first quarter of 2019 from 3.29% compared in the first quarter of 2018. This compression in the net interest margin comes from the liabilities side of the balance sheet as a result of the increase in funding cost over the past four quarters driven primarily by the increase in rates required to retain and grow our CD portfolio. These costs were offset over the last 12 months by the continued growth in the loan portfolio, the fed interest rate hikes. Our taxable equivalent net interest income was $39.7 million for the first quarter of 2019, an increase of $414,000 or 1.1% compared to the same period in 2018.

Provision for loan losses remained relatively consistent over the last 4 quarters at $300,000 in the first quarter of 2019 compared to the same period in 2018. The consistent provision is driven by the sustained growth in the loan portfolio and only a slight uptick in net charge-offs during Q1. The ratio of allowance for loan loss to total loans was 1.16% as of March 31, 2019, compared to 1.21% as of the same period in 2018 and reflects the continued improvement in asset quality and economic conditions in our lending areas. Scot will get into the details while, as in the past, we would expect the level of provision for loan losses in 2019 will continue to reflect the overall growth on our loan portfolio, trends in loan quality and economic conditions of our geographic footprint.

non-interest income came in at $4.6 million for the first quarter of 2019, up slightly 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 $867 million of assets under management as of March 31, 2019. Now on to non-interest expense.

Total non-interest expense net of ORE expense came in at $24.9 million, flat compared to the fourth quarter of 2018. A couple of items to note. Salaries and benefits expense increased for the first quarter as we made successfully executed a targeted effort to hire and expand certain functions, which has now been largely completed. In this tight labor market, we would pay to hire or retain top-quality talent.

ORE expense came in with a -- at a net income of $24,000 for the quarter, which was consistent with the fourth-quarter expense of $37,000. The low level of net ORE expenses for the quarter was driven by gains on sale of ORE properties. Given the continued low level of ORE expenses, and increasing level of ORE properties, we are going to lower the anticipated level of expense to not exceed $450,000 per quarter. While the other categories of non-interest expense were in line with prior quarters and our expectations for the first quarter, we would expect the second quarter of 2019's total reoccurring non-interest expense, net of ORE expense, to stay in the range of $24.6 million to $25.1 million per quarter.

The efficiency ratio in the first quarter of 2019 came in at 56.1%, compared to 55.06% in the fourth quarter of 2018. As we stated in the past, we will continue to focus on what we can control by working to identify opportunities to make the processes used within the bank more efficient. One thing we are proud of is expense control at TrustCo Bank and we expect this to continue through 2019. A couple of items to note related to new accounting standards.

At January 1, 2019, TrustCo adopted ASU 2016-02, Leases, which provides guidance to enhance the transparency and comparability of financial reporting related to leasing agreements. Under this new lease standard, most leases will be required to be recognized on the balance sheet as right-of-use assets and corresponding lease liabilities. As of March 31, 2019, the new standard resulted in the recording of additional net leased assets and lease liabilities of approximately $51.6 million and $56.7 million, respectively. The standard did not materially impact our consolidated net earnings.

On the CECL front, the company continues its implementation efforts, testing various loss estimation models and development of relevant internal controls and processes. This will likely have the effect of increasing the allowance for loan losses and reducing shareholders' equity, depending upon the balance of the company's loan portfolio, economic conditions and forecast at the adoption date. The company expects to remain a well-capitalized financial institution under current regulatory calculations. And finally, the capital ratios continued to improve.

Consolidated equity-to-assets ratio was 9.73% at the end of the first quarter, up 3.95% from the 9.36% compared to the same period in 2018. The bank is also very proud of its ability to grow shareholder value. Book value per share at March 31, 2019, was $5.18, up 7.92%, compared to the $4.80 a year earlier. Now Scot will review the loan portfolio and non-performing loans.

Scot Salvador -- Chief Banking Officer and Executive Vice President

Thank you, Mike. The loan portfolio has grown $194 million as of March 31st versus the prior year in actual numbers. This equates to growth of 5.3%. Growth has been centered in our residential portfolio increasing by $185 million with commercial and installment loans increasing by $5 million and $4 million, respectively.

On the quarter, loans decreased by $13 million with residential loans dropping by $8 million and commercial loans decreasing by $6 million. First quarter of the year is typically the slowest due to seasonal factors, a situation which was accentuated a bit due to the rise in interest rates earlier in the year. Additionally, we took advantage of the slower season and the strong results we enjoyed last year and focused on building additional liquidity in the early stages of 2019. Our loan backlog at quarter end was down about 10% from year-end, reflecting the prior mentioned factors.

However, as we enter our billing season, we feel we are well-positioned for the remainder of the year. We expect to see increased backlog and growth as we move forward. Our current 30-year fixed rate stands at 4.18%. Asset quality measurements are solid with continued slight improvement shown.

As of quarter end, non-performing loans and non-performing assets stood at $24.7 million and $26 million versus $25 million and $26.7 million as of year-end. Early stage delinquencies remained very low in the 30-day to 90-day category. Net charge-offs did edge up slightly on the quarter to $395,000 due to a non-performing loan sale, but still equated to an annualized net charge-off ratio of only 0.04%. Our allowance for loan losses now stands at $44.7 million and the coverage of our allowance to non-performing loans is at 181% versus 179% a year ago.

Rob?

Robert McCormick -- President and Chief Executive Officer

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

Questions and Answers:

Operator

[Operator instructions] The first question we have will come from Alex Twerdahl of Sandler O'Neill. Please go ahead.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Hey, good morning, guys.

Scot Salvador -- Chief Banking Officer and Executive Vice President

Good morning, Alex.

Robert McCormick -- President and Chief Executive Officer

Good morning, Alex.

Alex Twerdahl -- Sandler O'Neill -- Analyst

First off, I just want to drill in a little bit onto some of the last stuff you were talking about, Scot, with both trend from liquidity in the first quarter with the expectation of increased backlogs and loan growth as the year progresses. What kind of -- what gives you the confidence that -- I mean, it seems like you really boosted cash a lot, you know, expecting a stronger loan growth. Are you planning to do some additional promotions or adjust rates? Or kind of what gives you the sort of confidence that that loan growth will pick up? I mean I know, seasonally, it always does in the second quarter, but should we expect more than what we've seen in past years?

Scot Salvador -- Chief Banking Officer and Executive Vice President

Well, you know, I'd just say, Alex, we are seasonal, especially in the New York area. And we feel the market demand is there. You know, we positioned ourselves in the first quarter, as Rob and Mike said, to provide some additional liquidity. Now we're looking to grow.

We are seeing the application volume pick up. We are confident that we're gonna build the backlog and grow as we move forward. I mean, we're coming off a very good year, as you know, Alex. We had a great year last year.

So to say, you know, we're gonna do more than we did last year, I certainly wouldn't want to sit here, and say that 'cause we're coming off a very good year or two. But again, we are positioning ourselves to be more aggressive and look to build the backlog and grow as we move forward from here.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. And then, you know, sort of as that relates to the margin. I think, you guys mentioned that the margin you sort of expect more stability in the latter half of the year. Is that just because that that backlog is still building right now and any loan growth we see in the second quarter might come on kind of later in the quarter whereas the rates on the deposits are gonna be there for the whole time?

Robert McCormick -- President and Chief Executive Officer

It's a mix of everything, Alex. Our -- the backlog is building, our application volume has been tremendous for the -- in the recent past so that we expect that backlog to continue to grow and have a very solid year with growth to loan growth. And then any deposits we're putting on the books, we've kept a relatively short leash on. Most of what we're booking percentage-wise is six to nine months, so we have a shot at that apple later in the year, hopefully, to bring the costs down and reprice those deposits.

So the combination, I think, is a winner for us.

Mike Ozimek -- Chief Financial Officer

As you get into that fourth quarter, all of the CDs that are coming due are really fully in action at that point. So --

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. And then the CD growth that you had in the quarter, is that mostly driven by branch volume and promotions?

Robert McCormick -- President and Chief Executive Officer

All branch volume. We have no broker deposits, Alex.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. And then so, you know, the expectation is just the rates across the country, just given the shape of the yield curve, and expectation for rate hikes and potential rate reductions over the next couple of months, is -- implies that a lot of these things, as they mature, likely will reprice lower. That's really what that's kind of --

Robert McCormick -- President and Chief Executive Officer

Yeah, that will be the ultimate goal.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. And then just, you know, switching gears to talk about expenses a little bit. It seems like the expense guidance has been updated to be about 3% higher than prior guidance, which is pretty typical for what we've seen in a lot of community banks. But is that really just -- is it mostly just inflation that is driving that higher? Or is it things like the CECL implementation, and some tech spend, and some other enhancements that have to always go into the operations that are kind of pushing that expense number higher as the year progresses?

Robert McCormick -- President and Chief Executive Officer

Certainly, cybersecurity, and some of the tech expenses have been pretty heavy, especially for a company our size, and somebody smaller, too, but just with inflation built into that. We have a very lean and efficient tech area, I think you know that, and we stay pretty focused in that area. So I don't expect to get -- that to get out of control. We do have a new teller package we were installing and a couple of other things, a couple of another -- other initiatives in that area, so that might have been a little bit of reason for the bump.

Mike Ozimek -- Chief Financial Officer

And on the CECL side, you know, we're not spending -- you know, we're spending normal amounts of money, but we're not -- you know, that's not a huge piece of the increase at all.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. Thanks for taking all my questions.

Robert McCormick -- President and Chief Executive Officer

Thanks, Alex.

Mike Ozimek -- Chief Financial Officer

Thanks, Alex.

Operator

Well, at this time, we're showing no further questions. We'll go and conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. Robert J.

McCormick for any closing remarks. Sir?

Robert McCormick -- President and Chief Executive Officer

Thank you for your interest in our company, and have a great day, everyone.[Operator signoff]

Duration: 25 minutes

Call Participants:

Robert McCormick -- President and Chief Executive Officer

Mike Ozimek -- Chief Financial Officer

Scot Salvador -- Chief Banking Officer and Executive Vice President

Alex Twerdahl -- Sandler O'Neill -- Analyst

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