Q3 2018 TrustCo Bank Corp N Y Earnings Call
GLENVILLE Oct 24, 2018 (Thomson StreetEvents) -- Edited Transcript of TrustCo Bank Corp N Y earnings conference call or presentation Tuesday, October 23, 2018 at 1:00:00pm GMT
TEXT version of Transcript
================================================================================
Corporate Participants
================================================================================
* Michael M. Ozimek
TrustCo Bank Corp NY - Senior VP & CFO
* Robert Joseph McCormick
TrustCo Bank Corp NY - President, CEO & Director
* Scot Reynold Salvador
TrustCo Bank Corp NY - Executive VP & Chief Banking Officer
================================================================================
Conference Call Participants
================================================================================
* Alexander Roberts Huxley Twerdahl
Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research
================================================================================
Presentation
--------------------------------------------------------------------------------
Operator [1]
--------------------------------------------------------------------------------
Good morning, and welcome to the TrustCo Bank Corp. Third Quarter 2018 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 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, President and CEO. Please go ahead.
--------------------------------------------------------------------------------
Robert Joseph McCormick, TrustCo Bank Corp NY - President, CEO & Director [2]
--------------------------------------------------------------------------------
Good morning, thank you for joining us today to find out a little more about our company's third quarter results. Joining me on the call this morning are Scot Salvador, our Chief Lending Officer; and Mike Ozimek, our Chief Financial Officer.
It's unfortunate to start on a somber note, but we would be remiss if we didn't talk about Kevin Timmons, who most of you knew at least by name. We lost Kevin this quarter. He was a wonderful person who did a lot for our company and always had the shareholders' interest at heart. He was a family man, a good person and a friend. We certainly miss him very much.
We had a solid quarter at the bank. Our net income for the quarter was about $15.2 million, up significantly over the same quarter last year. We continue to operate 148 full-service branch offices. Our ROA and ROE both showed improvement over the same quarter last year to 1.24% and 12.84%, respectively. Our efficiency ratio was flat quarter-over-quarter and up slightly over the same quarter last year, ending this quarter at 53.4%.
We continued to show margin expansion to 3.35%, up quarter-over-quarter and better than the same quarter last year. Capital ratios and asset quality ratios were all improved this quarter, both over last year and last quarter. Our allowance for loan losses is at 1.17% with a coverage ratio of 1.9x. Our loan portfolio continues the pattern of solid growth, the only category not up year-over-year is home equity lines of credit. We believe at least part of this runoff is being captured in our residential mortgage loan portfolio.
Our total deposits are up over the same quarter last year but down quarter-over-quarter. As previously discussed, we are doing what we feel we have to with regard to deposit growth, trying to maintain some pricing discipline. We are becoming a little more aggressive in the deposit area with a focus on core growth. We continue to operate a full-service financial services department.
Now Mike will detail the numbers. Scot will talk about the loan portfolio. Then we can respond to any questions. Mike?
--------------------------------------------------------------------------------
Michael M. Ozimek, TrustCo Bank Corp NY - Senior VP & CFO [3]
--------------------------------------------------------------------------------
Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the third quarter of 2018.
As we noted in the press release, the company saw an increase in net income to $15.2 million, up 20.7% compared to $12.6 million for the third quarter of 2017. Net income yielded a return on average assets and average equity of 1.24% and 12.84% compared to 1.02% and 11.06% in the third quarter of 2017.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law, which included a reduction in 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.
Now on to changes in the balance sheet. Strong loan growth continued during the quarter -- third quarter of 2018. Average loans were up $241.7 million or 6.8% for the third 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 $253.8 million or 8.4% in the third 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 included the AFS and HTM portfolios, decreased $70.7 million or 11.2% from the third 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 a likelihood of more to come. As a result, we continue to hold an average of $486.6 million of overnight investments during the third quarter of 2018, a decrease of $135.3 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 $350 million and $450 million over the next 12 months, along with approximately $80 million to $90 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 the fourth quarter of 2018.
During the quarter, we did have $16.7 million of securities that paid down or matured at a yield of approximately 2.25%. This was offset by purchases of $1.1 million of securities at a yield of approximately 3.45%. On the funding side of the balance sheet, total average deposits increased $47.3 million or 1.13% for the third quarter of 2018 over the same period a year earlier. During the same period, our total cost of interest-bearing deposits increased to 51 basis points from 34 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 42 basis points from 35 in the preceding quarter.
We continue to be proud of our ability to control the cost of our interest-bearing deposits during a period which saw multiple rate hikes. We feel this continues to reflect our pricing discipline with respect to our CDs and nonmaturity deposits. Over the next 12 months, approximately $927 million in CDs will mature at an average rate of 1.32%.
Our net interest margin increased to 3.35% from 3.26% compared to the third quarter of 2017. This increase in net interest margin comes from the asset side of the balance sheet as a result of the continued growth in the loan portfolio and the Fed rate hikes as mentioned before, offset by the increase in funding costs 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 the taxable equivalent net interest income. Our taxable equivalent net interest income was $40.5 million for the third quarter of 2018, an increase of $1.3 million compared to the same period in 2017.
The provision for loan losses held steady at $300,000 in the third quarter of 2018 compared to the first and second quarter of 2018 and down from $550,000 compared to the same period in 2017. The ratio of loan loss to total loans was 1.17% as of September 30, 2018, compared to 1.23% at the same period in 2017, and reflects continued improvement in asset quality and economic conditions in our lending areas. Scot will get into the details; however, as in the past, we would expect a level of provision for loan losses, and 2018 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 third quarter of 2018, a slight decrease of $40,000 compared to last quarter. Our Financial Services division continues to be the most significant recurring source of noninterest income. The Financial Service division had approximately $886 million of assets under management as of September 30, 2018.
Now on to noninterest expense. Total noninterest expense net of ORE expense came in at $24 million, up slightly compared to the second quarter of 2018. One item of note, FDIC and other insurance expenses now at its expected level. ORE expense came in at $528,000 for the quarter, which is up $234,000 from the second quarter of 2018. This increase was largely attributable to one commercial ORE property charge-off during the quarter of $170,000.
Given the current level of ORE expenses, we're going to hold the anticipated level of expense in the range of approximately $100,000 to $600,000 per quarter. All the other categories and noninterest expense are in line with prior quarters and our expectations for the third quarter. As we close out 2018, we would expect the fourth quarter 2018 total reoccurring noninterest expense, net of ORE expenses, stay in the range of $23.9 million to $24.4 million per quarter. The efficiency ratio in the third quarter of 2018 came in at 53.39% compared to 52.79% in the third 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.
And finally, the capital ratios continued to improve. Consolidated tangible equity to tangible assets ratio was 9.76% at the end of the third quarter, up from 9.33% compared to the same period in 2017.
Now Scot will review the loan portfolio and nonperforming loans.
--------------------------------------------------------------------------------
Scot Reynold Salvador, TrustCo Bank Corp NY - Executive VP & Chief Banking Officer [4]
--------------------------------------------------------------------------------
Thanks, Mike. As Rob and Mike stated, the bank continued to enjoy strong loan growth for the third quarter of 2018. For the quarter, total loans increased by $85 million in actual numbers or 2.27%. This was up from a 2% increase in the second quarter. Virtually all the growth was in our residential portfolio with commercial loans remaining level. All our regions posted net increases on the quarter with our growth equating to a year-over-year rise of just under 7%. Refinance activity remains at relatively low levels, while purchase money business continues to be solid overall.
Mortgage interest rates have climbed by about 0.5% over the last quarter. Currently, we are originating at 5 1/8% for 30 years. Although loan activity typically begins to slow a bit as we enter the fall season, overall originations have been good despite the increasing rates. The loan backlog at quarter-end was about 15% below last year's, which included a bit more refinance activity and above that of the prior September.