Edited Transcript of TRST earnings conference call or presentation 23-Apr-19 1:00pm GMT

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?

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Michael M. Ozimek, TrustCo Bank Corp NY - Executive VP & CFO [3]

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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 nonmaturity 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 4 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.

Noninterest 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 noninterest income. The Financial Services division had approximately $867 million of assets under management as of March 31, 2019.

Now on to noninterest expense. Total noninterest 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 to make 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 noninterest 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 noninterest 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.