Edited Transcript of TRST earnings conference call or presentation 23-Jan-19 2:00pm GMT

We continue to see margin expansion to 3.38%. We are paying more for deposits, but our earning assets are 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 was 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?

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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 fourth quarter of 2018.

As we noted in the 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 onetime basis by $880,000.

Now on to 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 ATM 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 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 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 this 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 remained relatively unchanged also over the same period. This -- the exception being an increase of 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 nonmaturity 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 cost 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 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 of provision is driven by the sustained growth of the loan portfolio and a slight uptick in net charge-offs in Q4.

The ratio of the allowance for loan loss to total loans is 1.16% as of December 31, 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, in the past, we would expect a level of provision for 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.

Noninterest 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 reoccurring source of noninterest income. The financial services division had approximately $803 million of assets under management as of December 31, 2018.

Now I want to -- interest expense -- noninterest expense. Total noninterest 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. 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 sales of ORE properties. Given the current level of ORE expense, we are going to hold the anticipated level, the expenses in the range of approximately $100,000 to $600,000 per quarter.

All the other categories of noninterest expense were in line with prior quarters and our expectations for the fourth quarter. As we enter 2019, we would expect first quarter of 2019 total reoccurring noninterest 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 or 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 have 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. One thing we are proud of is expense control at TrustCo Bank, and we expect this to continue into 2019.

And finally, the capital ratio has continued 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 nonperforming loans.

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Scot Reynold Salvador, TrustCo Bank Corp NY - Executive VP & Chief Banking Officer [4]

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