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Financial Services - Banks - Regional - NASDAQ - US
$ 32.89
-0.544 %
$ 626 M
Market Cap
11.75
P/E
EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2017 - Q2
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Operator

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

Robert McCormick President, Chief Executive Officer & Chairman of the Board

Thanks Brandon. Good morning, everyone. Another Monday morning call, thank you for starting your week with us. I'm Rob McCormick, President of Bank. Scot Salvador, our Chief Banking Officer and Mike Ozimek, our CFO are joining me on the call. As usual, Kevin Timmons who a lot of you deal with regularly is in the room with us.

We had a good second quarter at the Bank. Our loan portfolio was up about $150 million year-over-year, heading a new all-time high of just over $3.5 billion. This growth result on the residential mortgage portfolio.

Commercial loans and installment loans were flat, home equity loans were down but we feel a lot of that runoff is captured in our residential mortgage portfolio through refinances. We are pleased that all of our service areas are participating in this growth.

We are also pleased our non-performing loans and assets both continue to improve to 0.7% and 0.57% respectively. Our allowance to total loans sits at 1.26% down from the prior quarter providing coverage ratio of 1.8 times. Scot will give more detail later in the call but this is very solid performance. Deposits falls at the growth we needed.

We are also happy to see our lower cost accounts grow allowing us to reduce our dependence on higher cost time accounts. We're certainly seeing some benefit from the recent Fed increases or continuing to maintain a high level of liquidity. Our total assets are over $4.9 billion and our shareholders equity is over $447 million.

We continue to operate 144 branch offices. Our net income for the quarter was $12.2 million up $1.7 million or 17% from the same period in 2016. Our return on average assets and return on equity are over 1% and 11.05% respectively up from 0.88% and 9.8% in 2016. Our efficiency ratio was 53% which also improved over 2016.

We continue to work our way out of the formal agreement with the OCC. We are pleased with our second quarter results and look forward to the rest of the year. Now Michael will give you some detail on the numbers.

Mike?.

Mike Ozimek

Thank you, Rob and good morning everyone. I will now review TrustCo's financial results for the second quarter of 2017. As you noted in the press release, net income increased to $12.2 million in the second quarter of 2017 or 17% compared to $10.5 million in the second quarter of 2016.

Net income yielded a return on average assets and average equity of 1% and 11.05% compared 0.88% and 9.88 % in the second quarter of 2016. Let's again start with the changes in the balance sheet. We saw our strong loan growth during the second quarter of 2017, which is typically a strong season in the Northeast markets.

As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio. That portfolio increased by $47 million, a 1.6% on average during the quarter compared to last quarter and $200 million or 7.2% from the second quarter of 2016.

This as noted before continues a positive shift in the balance sheet from lower yielding overnight investments to higher yielding core loan relationships. Total average investment securities which include the AFS and HTM portfolios decreased $2 million during the quarter or 0.29% and $19.7 million or 2.8% from the second quarter of 2016.

As discussed in prior calls, our focus continues to be on traditional lending, conservative balance sheet management which has continued to enable us to produce consistent earnings.

In regards to our investment portfolio, we will continue to take advantages of opportunities as they present themselves during the remainder of 2017 and beyond, keeping in mind the current environment that has seen rate hikes back in December 2016 again in March and June this year with a likelihood of more to come.

As a result, we continue to carry 644 million of overnight investments.

In addition, we expect the cash flow for the loan portfolio to generate between $400 million to $500 million over the next 12 months along with approximately $160 million to $170 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 continue in 2017. During the quarter we did have $35 million of agency securities core at a yield of approximately 2.35%. On the funding side of the balance sheet, total average core deposits increased $110.3 million from the second quarter of 2016.

During the same period, our cost of interest-bearing deposits decreased four basis points to 34 basis points. We continue to be proud of the ability to reduce the cost of interest bank 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 3.21% from 3.09% compared to the second quarter of 2016.

This increase in the net interest income comes from both the asset side of the balance sheet as a result of the continued growth in the loan portfolio and the federal rate hikes as mentioned before and the continued decrease in funding costs over the past four quarters.

The impacts of the growth of the balance sheet coupled with the changes in net interest margin have had a positive impact on the taxable equivalent net interest income. For the second quarter of the year, our taxable equivalent net interest income was $38.5 million or approximately $2.2 million greater than it was in the fourth quarter of last year.

That is a sizeable increase on a quarter-to-quarter basis and represents a core increase in earnings for the future. The provision for loan losses decreased 50,000 compared to last quarter to 550,000 and decreased 250,000 compared to the second quarter of 2016.

The ratio of loan loss total loans is 1.26% as of June 30, 2017 compared to 1.32 percentage in 2016, and reflects the improvement in asset quality and economic conditions in our lending areas.

Scott will get into the details, however we would expect our level of provision for loan losses in 2017 will continue to reflect our overall growth in our loan portfolio, trends and loan quality and economic conditions in our geographic footprint.

Non-interest income came in at $4.5 million for the second quarter of 2017 compared to $4.7 million last quarter. As you'll remember, included in our other non-interest income in the first quarter of each year includes the fees earned on tax prep fees or financial services customers.

Our financial services division continues to be the most significant recurring source of non-interest income. The financial services division had approximately $845 million of assets under management as of June 30, 2017.

Now onto non-interest expense, total non-interest expense net of ORE expense came in at $22.9 million down approximately $600,000 from the first quarter of 2017. This expected decrease noted in last quarter's call came in even better than our target.

The primary decrease in non-interest expense during the second quarter of 2017 was in salaries and benefits expense which was $9.6 million for the quarter down $651,000 compared to last quarter.

As discussed before, the first quarter of the year always bears the cost of increased employee, federal and state payroll taxes and increased expenses related to employee's healthcare as we enter new plan year. Another highlight was ORE expense.

This might also be their expectations and came in at approximately zero for the first quarter which is down $500,000 from the first quarter of 2017. This was a result of expenses on our low-end of our expected range and higher than normal gains on the sale of ORE property.

This is encouraging signs of stabilization of the housing markets in our territories. Given low level of net ORE expenses we are experiencing, we are adjusting our guidance downward going forward to the range of approximately 400,000 to 900,000 per quarter.

All of the other categories of non-interest expense going in line with prior quarters in our expectations. Moving forward into 2017, we would expect total reoccurring non-interest expense net of ORE expense to decrease going forward to the range of $22.8 million to $23.3 million per quarter.

Efficiency ratio in the second quarter of 2017 came in at 53.33% compared to 57.7% in the second quarter of 2016. As we've stated in the past, we will continue to focus on what we can control by working to identify opportunities to make the processes within the bank more efficient. And finally, the capital ratios continue to improve.

Consolidated tangible equity to tangible assets ratio was 9.08% at the end of the second quarter up from 8.9% compared to the same period in 2016. Now Scott will review the loan portfolio and nonperforming loans..

Scot Salvador

Okay Mike, thanks. The loan portfolio saw good increase in activity over the last several months and we posted strong net growth for the second quarter. Total loans and actual numbers on the quarter increased $59 million or 1.72%. Annually they have increased $165 million or just under 5%.

The quarter's growth of 1.7% compares to 1.2% for the same period last year. Residential mortgages increased by $59.8 million on the quarter with commercial loans decreasing by $1.4 million and installment loans increasing by 1 million.

Our Greater New York market had a particularly strong showing and for the quarter accounted for 57% of the residential mortgage growth. Part of this is due to the seasonal nature of the upstate New York marketplace but we are still pleased to see such strong growth posted in the region over this period.

Interest rates have remained relatively steady on our loan offerings and we are currently at 3.99% for a 30 year mortgage. Our loan backlog reflects increased activity and is strong as of month end. We're up significantly since the first quarter and also up over 20% since the same point last year.

Although mortgage activity typically slows a bit entering the four months, we're hopeful that the third quarter will show continued solid increases. Non-performing loan levels continue to show improvement. Non-performing loans were $24.5 million as of 6/30 versus $26.4 million in March and $28.2 million in June of last year.

The results for this quarter include the sale of approximately $1.4 million of nonperforming loans. Early stage delinquencies which bumped up slightly around year-end have settled back down and are at very low levels. Charge-offs are also very low totaling on a net basis only 878,000 through six months versus 3.8 million for all of 2016.

Given the low levels we've reached in these categories, we might expect some choppiness going forward although at this point negative trends are not evident. The current ratio or allowance for loan losses to nonperforming loans was 180% as of 6/30 versus 156% a year ago.

Rob?.

Robert McCormick President, Chief Executive Officer & Chairman of the Board

Thanks Scott. We'll be happy to respond any questions you may have..

Operator

[Operator Instructions] First question come from Alex Twerdahl with Sandler O'Neill. Go ahead..

Alex Twerdahl

First off Scott, I wanted to just drill into a little bit more into the loan yields. You said the yield on new loans is about 3.99, but given what we saw during the quarter were the actual yield in overall portfolio actually rebounded by a basis points since maybe like it had bottomed in the first quarter.

Going forward what's coming on in the balance, what's going off the balance sheet et cetera, I mean do you think they were going to see the overall yield on that portfolio continue to creep higher or do you think it's going to be just stabilizing that kind of 4.17, 4.18 range or you think that there's some more give that could actually cause it go down at the 10 year space basically where it is right now..

Scot Salvador

I think you said you correctly when you said the yield is pretty much bottomed. As you know, the yield on the existing portfolios come way down and we're in that 3.99 range. I think we bumped up to 4.08 just briefly but we basically been at 3.99.

So you know we've seen some improvement but I think at this point we might look to hold steady as we move forward obviously depending what happens with rates but given where they are now that's what I would expect..

Mike Ozimek

We saw a couple of pickups within the quarter that bumped up a little bit, so I would echo what Scott says, we are kind of nearing the bottom but we could see a little bit of pressure from that side going forward given that we're still putting around 4%..

Alex Twerdahl

And then just drilling a little bit more to the expense guidance, what was it specifically that drove the beat versus your guidance this quarter.

I know you said salaries and benefits came in better than expected but is that because some positions just became vacant and then need to be filled and will be filled in future quarters or is there something in the benefits line that kind of non-recurring or what really drove that specific item to be lower than expected..

Scot Salvador

The biggest piece of it Alex was to - there is the last piece that you mentioned there. There was a piece within the benefits line that we were able to true-up. As I mentioned during the call in the first quarter, we have to estimate some of our benefit plan expenses and so we true that up in the second quarter..

Alex Twerdahl

So the first quarter and the second quarter - so maybe sort of an average to the first two quarters would be Scott on the right round pace for salaries and benefits going forward..

Scot Salvador

That's a good way to say but you would also - you do have to take out a little - you have take out some for the payroll tax expenses to kind of reset..

Alex Twerdahl

And then just finally you guys hit some really nice growth in some of the lower cost in deposit categories and some of the higher cost in deposit categories kind of declined sequentially.

Can you just talk a little bit, you are in two sort of distinct markets, there has been a lot of question marks about what's going to happen with deposit costs, what has happened over the last couple of months with the couple of rate hikes you had or will happen going forward.

Are you guys starting to see any leakage in what you need to offer customers to bring them in or are you seeing any distinction between the two markets other state New York and Florida market in terms of the competitive landscape and if there is going to be any pressures or if there has been any pressure so far on deposit costs pushing a little bit higher..

Robert McCormick President, Chief Executive Officer & Chairman of the Board

There has been no pressure on our deposit costs Alex. Any deposits we've lost it was a conscious decision with regard to CDs. Our core growth has been fantastic both numbers and dollars and it's a little slower growth but we believe it's better growth long-term. So we haven't seen any pressure..

Operator

[Operator Instructions] This concludes our question-and-answer session. I'd like to turn the conference back over to Robert J. McCormick for any closing remarks..

Robert McCormick President, Chief Executive Officer & Chairman of the Board

Thank you for your interest in our Company and have a great week..

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