TRST (2019 - Q1)

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 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 la6w. 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 McCormick, President and CEO. Mr. McCormick the floor is yours sir. Robert M

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 return of equity of 11.93. Our efficiency ratio ended this quarter at 56%. That's higher than we liked. This was driven by new hires. We had the opportunity to get some good people in a tight labor market. We can also smooth out some seasonality in the labor. We do not expect this trend to continue and expect improving the efficiency ratio long-term. Our margin was 3.24% at quarter end. We are paying more for deposits but keeping maturity short to provide repricing opportunities later in the year. Net interest income was up to over the same quarter last year. Loans were up nicely year-over-year driven by growth in the residential portfolio. We are flat or down a little from your end. We are seeing solid application volume and a growing backlog of pending loans. We did see nice deposit growth quarter-over-quarter and year-over-year. Again we are trying to keep maturity short. Growth also provided liquidity which we believe will provide opportunity and flexibility for the future. All non-performing ratio 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 Scott 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 have provided us with a great foundation for the rest of 2019. Mike?

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 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. At average portfolio increased by 226.3 million, or 7.2% the first quarter of 2019 over the same period in 2018. This continues the positive shift in a balance sheet from low yielding overnight investments to higher yielding core long relationships. At long 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 includes the AFS and HTM portfolios decreased 74.5 million, or 12.2% over the same period last year. This was partially offset by purchases and approximately 67 million in securities, at an average yield of approximately 3.15% instead of late in the quarter. The full impact of the late first quarter wise 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 recurring earnings. Our investment portfolio is and always has been a source of liquidity to fund long 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 a 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. In the first quarter of 2019, the bank had 16 million of securities called and matured, 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 signed deposits. We chose to offer competitive shorter term rates, which allowed the bank to gain market share as well as retaining our existing time deposits. The 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 as they arise. During the same period, our total cost of interest bearing deposits 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. For the time deposits, average costs 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 mature at an average rate of approximately 1.86%. We do expect the margins 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 opportunities 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 liability side of the balance sheet as a result of the increase in funding costs 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 and 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 four quarters at 300,000 in the first quarter 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 the 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. Scott will get into the details. However, as 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 and loan quality and economic conditions in our geographic footprint. Non-interest income came in at 4.6 million for the first quarter of 2019, up slightly compared to the 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 is to make successfully executed a targeted effort to hire and experience certain functions, which has now been largely completed. In this tight labor market we will stay to hire and retain capital already count [ph]. ORE expensive came in 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're going to lower the anticipated level of expense to not exceed 450,000 per quarter. All the other categories in non-interest expense were in line with prior quarters and our expectations for the quarter. We would expect the second quarter of 2019's total recurring 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 66.1% compared to 55.06% in the fourth quarter of 2018. 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. One thing we are proud of is expense control at TrustCo Bank and we expect this continue through 2019. And couple of items to note, we laid the new accounting standards. At January 1, 2019 TrustCo adopted ASU number 2016-02, “Leases”, which provides guidance to enhance the transparency and compatibility of financial reporting related to leasing agreements. Under this new lease standard, most leases are 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 lease assets and lease liabilities of approximately 51.6 million and 56.7 million respectively. The standard net did not materially impact our consolidated net earnings. On the C sell front the company continues its implementation efforts, testing of various loss estimation models and development of relevant internal controls and processes. This will likely have the effect of increasing the allowance for losses and in reducing shareholders equity, dependent upon the balance of the company's own portfolio, economic conditions and forecasts at the adoption day. The company expects to remain a well-capitalized financial institution under current regulatory calculations. And finally, the capital ratios continue to improve. Consolidate 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.

Thank you, Mike. The loan portfolio is growing 194 million as of March 31, versus the prior year in actual numbers. This equates to growth of 5.3%. Growth has been setting 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 and was down about 10% from your end, reflecting the prior mentioned factors. However, as we enter our busy 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 up for one 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 remain very low in the 30 to 89 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 loss is 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?

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

And thank you sir. We will not begin to question-and-answer session. [Operator Instructions] The first question we have will come from Alex Twerdahl of Sandler O'Neill. Please go ahead.

Hey, good morning guys.

Good morning Alex.

Good morning.

Good morning Alex.

First off, just want to drill in a little bit onto some of the last stuff you're talking about Scot, with bolstering some 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 expecting stronger loan growth, are you planning to do some additional promotions or adjust rates or kind of what gives you the sort of the confidence that that loan growth will pick up seasonally, it always does in the second quarter, but should we expect more than what we've seen in past years?

Well, as you say, Alex, we are we are seasonal especially in the New York area and we feel the market demand is there. We position ourselves in the first quarter, as Rob and Mike said to provide some additional liquidity and now we're looking to grow. We are seeing the application volume pick up, we are confident that we're going to 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 we're going to do more than we did last year. I certainly wouldn't want to sit here and say that, because we're coming off a very good year or two. But again, we are positioned ourselves to be more aggressive and look to build the backlog and grow as we move forward from here.

Okay and then 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 long growth we've seen in second quarter might come on kind of later in the quarter, whereas the rates on the deposits are going to be there for the whole time.

It's a mix of everything Ales. The backlog is building. Our application volume has been tremendous for the - in the recent past, so that we expect that backlog continue to grow and have a very solid year with regard to loan growth and in any deposits we're putting on the books, we've kept a relatively short leash on, most of what we're thinking percentage wise is six to nine months, so have a shot at that apple later in the year hopefully to bring the cost down and reprice those deposits. So the combination I think is a winner for us.

As you get into that fourth quarter, all the CDs that are coming through are really fully annex at that point, so.

Okay, and then the CD growth that you added in the quarter, is that mostly driven by branch volume and promotions?

Of branch volumes, we have no broker deposits Alex.

Okay. And then, so the expectation is just that the rates across the country just given the shape of the yield curve and the expectation for rate hikes and potential rate reductions over the next couple months implies that a lot of these things as they mature likely will repriced lower. That's really what that's [indiscernible]?

Yeah, that would be the hope and the goal.

Okay. And then just switching gears to talk about expectations a little bit, it seems like the expense guidance has been updated to be at 3% higher than prior guidance, which is pretty typical from what we've seen a lot of community banks. Was that really just - is it mostly just inflation that is driving that higher? Or is it things like the seasonal fermentation and some tax 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.

Certainly cyber security and some of the tech expenses have been pretty heavy, especially for a company our size and some of the smaller too, but there's some 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 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 other initiatives in that area. So that might have been a little bit of reasons to pop.

And on the C sells we're not spending. We're spending normal amounts of money, but we're not, - that's not a huge piece of the increase at all.

Okay, thanks for taking all my questions.

Thanks Alex.

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

Thank you for your interest in our company and have a great day everyone.

All right, thank you, sir and you also have a great day. Again, we thank you all for attending today's presentation. At this time, you may disconnect you lines. Thank you. Take care, everyone.