TRST (2019 - Q2)

Good day and welcome to the TrustCo Bank Corp Second Quarter 2019 Earnings Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask question. [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 as updated by quarterly reports of 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. Also please note that 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 M

Thank you, Chuck. Good morning, everyone. We had another very solid quarter at the Bank in 2019 -- the second quarter at the Bank in 2019. We are pleased with our results. Joining me on the call this morning is Mike Ozimek, our CFO; and Scot Salvador, our Chief Lending Officer. Andrea McGuire is in the room with us as well to keep us in line. Our net income for the quarter was $14.7 million, up from our first quarter results and down from year-over-year. We continued to pay out very healthy dividend, and our dividend payout ratio dropping back under 45%. During the quarter, our Board and regulators approved the stock buyback program. We have not executed on this program since we were in a closed window period. [Technical Difficulty] later in the call. We continue to operate 148 full service branch offices. This has been flat for some time as we evaluate new and existing opportunities. Our headcount has dropped as we rightsized our staff and started to return to more normal levels. We sold our credit card portfolio during the quarter. We felt this presented a good opportunity for our shareholders. Going forward, our plan is to co-brand a card with the buyer. All our asset quality ratios showed improvement quarter-over-quarter and year-over-year. Our non-performers to total assets is now under 50 basis points, our allowance to total loans is 1.14, and our coverage ratio hit 2x. Scott has more to tell coming up. Our capital ratios are up quarter-over-quarter and year-over-year. We also have a comfortable level of liquidity. We've had nice deposit and loan growth over all periods. Our margin is down as we are paying more for deposits, but feel as though this is beginning to flat and starting a small rebound. I'm going to hand off to Mike for a deeper dive in the numbers, and then Scott will give details on our loan portfolio. We’re happy with the quarter and believe we are well positioned for the rest of the year. Mike?

Thank you, Rob. Good morning, everyone. I will now review TrustCo’s financial results for the second quarter of 2019. As we noted it in the press release, the company saw a net income of $14.7 million, which yielded a return on average assets and average equity of 1.14% and 11.6%, respectively. Average loans for the second quarter of 2019 grew 4.8% or $176.6 million to $3.9 billion from the second 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 $191.1 million or 6% in the second quarter of 2019 over the same period in 2018. Total average investment securities, which include the AFS and HTM portfolios increased $36.8 million or 6.4% over the same period last year. This was driven by purchases of approximately $108 million in securities throughout the quarter at an average yield of approximately 2.9%. Provision for loan losses decreased compared to $300,000 in the same period in 2018. The second quarter of 2019 reflected the sale of the credit card portfolio which resulted in a gain of approximately $176,000 and reduced the required loan loss reserve allocated to this portfolio by $540,000. The negative second quarter 2019 provision for loan losses of $341,000 includes the reduction of the allocated reserve and the normal quarterly provision for loan losses of approximately $200,000. The ratio of the allowance for loan loss of total loans was 1.14% as of June 30, 2019, compared to 1.19% as of the same period in 2018, and it reflects the continued improvement in asset quality and economic conditions in our lending areas. As always, Scott will get into the details. However as in the past, we would expect the level of the 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. 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 loan growth and provide flexibility for balance sheet management. As a result, we continue to hold an average of $545.7 million of overnight investments during the second quarter of 2019, a decrease of $3.7 million compared to the same period in 2018 and an increase of $42.7 million or 8.5% compared to the first quarter of 2019. In addition, we expect the cash flow from the loan portfolio to generate between $400 million and $500 million over the next 12 months, along with approximately $100 million to $130 million of investment securities cash flow during the same time period. This continues to give us significant opportunity and flexibility as we continue to move through 2019. During the second quarter of 2019, the Bank had $15 million of securities called and matured and approximately $14.3 million of pooled securities paid down. On the funding side of the balance sheet total average deposits increased $197.7 million or 4.7% for the second quarter of 2019 over the same period a year earlier. The increase in average deposits was a result of $301.5 million or 26.5% increase in time deposits, a $24.3 million or 4.6% increase in money market deposits and a 21.4% -- $21.4 million or 5.4% increase in demand deposits offset by the decrease in savings and interest bearing checking of $122.5 million and $26.9 million, respectively. During the second quarter of 2019, we continued 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 as they arise. Compared to the same period last year, our total cost of interest-bearing deposits increased to 91 basis points from 47 basis points. Money market deposits increased 81 basis points from 35 basis points. More importantly, the cost of core interest bearing checking and savings deposits remained relatively unchanged at 4 basis points and 13 basis points, respectively, over the same period. 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. Our time deposits, average costs for the second quarter of 2019 increased to 2.09% from 1.23% over the same period of 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 $988 million CDs will mature at an average rate of 2.11%. We would expect margins to begin to stabilize in the latter part of 2019, particularly in the third and fourth quarter as $482 million of our shorter term time deposits will reprice from an average yield of 2.04% and should provide opportunity for increased margin expansion. Our net interest margin decreased to 3.11% in the second quarter of 2019 from 3.32% compared to the second 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 require to retain and grow our CD and money market portfolios. These costs were partially 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 $39.2 million for the second quarter of 2019, a decrease of $927,000 or 2.4%, compared to the same period in 2018. Non-interest income came in at $4.9 million for the second quarter of 2019, up slightly compared to the last quarter, due primarily to the $176,000 gain on the sale of our credit card portfolio. Our financial services division continues to be the most significant recurring source of non-interest income. The financial services division had approximately $886 million of assets under management as of June 30, 2019. Now, on to non-interest expense, total non-interest expense net of ORE expense came in at the low end of our estimated range at $24.7 million, down $200,000 compared to the first quarter of 2019. A couple of items to note: salaries and benefits expense increased again for the second quarter of 2019; the bank is now successfully executed a targeted effort to hire and restructure certain functions FTEs [ph] have now settled into their expected range. In addition, during the second quarter we recorded approximately $542,000 of additional expenses for our various benefit plans to true up our future estimated benefit and liabilities, primarily due to the increase in stock prices at quarter end. ORE expense came in at $210,000 for the quarter, which was consistent for the second quarter of 2018, expense of $294,000. The low level of net ORE expenses for the quarter was driven by gains on sale of our ORE properties. Given the continued low level of ORE expenses, we are going to hold the anticipated level of expense to not exceed $450,000 per quarter. All the other categories of non-interest expense were in line with prior quarters and our expectations for the second quarter. We expect the third quarter of 2019’s total recurring non-interest expense net of ORE expense to stay to the low end of the $24.6 million to $25.1 million per quarter range. The efficiency ratio in the second quarter of 2019 came in at 55.98% compared to 56.1%, the first quarter of 2019. As we move into the second half of 2019, 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, and we expect to continue this through 2019. On the CECL front, the company continues its implementation efforts, testing various loss estimation methods and development of relevant internal controls and processes. So this will likely have the effect of increasing the allowance for loan losses and reducing shareholders equity dependent upon the balance of the company's loan portfolio, economic conditions and forecasts at the adoption date. The company expects to remain a well-capitalized institution under current regulatory calculations. And finally, the capital ratios continue to improve. Consolidate equity assets ratio was 9.86% at the end of the second quarter, up 33 basis points from the 9.53% 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 June 30, 2019 was 5.32% up 9.24% to $4.87 a year earlier. Additionally during the second quarter it was announced that the Board of Directors approved a stock repurchase program. Under the stock repurchase program TrustCo may purchase up to 1 million shares of its common stock or approximately 1% of its current outstanding shares. Repurchases can be made at management's discretion over the next 12 months at prices management considers to be attractive in the best interest of both TrustCo and there shareholder. Now, Scot will review the loan portfolio and nonperforming loans.

Thanks, Mike and good morning. Total loans increased by $45 million on the quarter, and actual numbers. This included a $48 million increase in residential mortgages and a decrease of approximately $3 million in our installment loans associated with the sale of our credit card portfolio. Commercial loans were essentially flat for the quarter. Year-over-year the loan portfolios increased $165 million or 4.4% all the growth occurring in our residential area. On the quarter, the $45 million loan increase equated to growth of 1.2% all of our regions saw increased activity with net growth being spread throughout. The increased activity over the first quarter stem from several factors, including the normal seasonal pick up and the Bank taking a more aggressive posture with regard to loan originations. As previously communicated in the first quarter, we have pull back somewhat as we allow deposits to catch up a bit with our recent strong loan growth. With the drop in interest rates we've also seen a pickup in refinance activity this quarter versus the same period a year ago. Our loan backlog has grown quickly with the increased activity and now stands significantly above where we ended the first quarter. It was behind last year's ending second quarter by more than 10%. Although this spread has continued to shrink as we progress into July. We look for continued net growth during the third quarter. Rates have come down attributing to the increased refinance activity and we now stand at 3.75% for a 30-year mortgage. The news regarding asset quality measurements continues to be good, nonperforming loans dropped from $24.7 million to $22.1 million on the quarter, with nonperforming assets decreasing from $26 million to $24.8 million. Early-stage delinquencies remained very solid and there was a 0% annualized net charge-off ratio on the quarter. Our coverage ratio or allowance for loan losses to nonperforming loans now stands at 200% versus 181% in March. Bob?

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

[Operator Instructions] The first question comes from Alex Twerdahl of Sandler O'Neill. Please go ahead.

Hey. Good morning guys.

Good morning, Alex.

First off, Mike, you ran through the amount of CDs that are expected to reprice, over I think the next three and 12 months, could you -- you went through them kind of quickly, can you just repeat those?

Yes, absolutely, $488 million over the next three months and almost $1 billion over the next 12 months, it’s $988 million, and that $998 million is at an average of 2.11% and the $482 million is at an average yield of 2.04%.

Okay. And if those were repricing today over the next three months, I guess, maybe doesn't change that much, where were the 2.04%, where would that go to in terms of the rates?

For the 165 range, Alex, depending on what they pick, we’ve been pushing six to nine months mostly.

Okay. All right. So, I guess, the strategy which is to bring in a lot of deposits and then there is some pretty good opportunity to lower those cost of deposits over the next three months, over the next year, which is I guess where the margin stability is going to come from the next two quarters. But kind of as you guys project forward, we’ve seen some pretty decent margin compression over the last two quarters, are we going to be able to make some of that back up over the next two quarters or are we really should be expecting just kind of stability in sort of the north of 310, 315-ish range?

That’s the goal or the objective. We’d like to run the place with a decent liquidity level, so the idea was to bring in the deposits and deploy them into the loan portfolio over the balance of the year and hopefully gain some ground on the margin.

We also have some room in money markets that are potentially going to [indiscernible] teasers right now that would roll out at some of the teaser rates. And then also we have some room in some of the savings deposits.

Okay. So I mean, do you think sort of stability between 310 and 315 or do you think you can get higher than that based on kind your current outlook for what you’re seeing in your markets?

I think that’s a good range.

Okay. And then, as we look at the capital levels, 985, obviously very strong, you guys run a pretty conservative balance sheet. So one, where do you think the capital levels should be? And then you did authorize the 1 million shares of buyback, is that something that we should expect you to go through in the next quarter or two?

We haven’t -- as we said, talked Alex, we haven’t executed on the buyback plan because we’ve been in a closed window period. But we definitely expect to use that to our shareholders’ advantage as needed. And in the capital levels, I mean, we like to run it with a healthy capital level, you know that, redeploying it to the benefit of the shareholders is something that we’re looking at. We’ve increased the dividend, we increased the dividend last year. We executing a stock buyback plan this year. So, really everything is on the table.

Okay. And then you did talk a little bit about sort of staffing levels. And you said in the press release that you’ve had a targeted effort to hire and retain talent, is that just kind of filling in some positions that were vacant, or are there new people that you’re hiring to kind of extend into some other product lines?

It’s a mix. And we’re looking at -- with branch activity, we’re looking at possibly some restructures with regard to branch management and branch staffing levels. Transaction counts are down industrywide, you know that. So, we’re looking at other opportunities and maybe where we can redeploy some people in better places to serve us. I just think that -- I think there is still room in the headcount to come down, but we had an opportunity to bring some good people on, especially in that Manager, Assistant Manager level over the first quarter and late last year and took that advantage.

Okay. And then maybe as it kind of relates to expenses and a lot of banks are talking about finding places to reduce expenses, but all that kind of savings gets reinvested very quickly back into technology and the user interface and experience and things like that. Can you maybe talk a little bit about where you are in that sort of process of getting up to where you need to be from your sort of digital and your mobile and all that kind of standpoint?

That’s the beauty of TrustCo Bank, as Mike said in his presentation Alex. And you know this from our past we're hawkish with regard to expense. And we’re doing all of those technology upgrades and our efficiency ratio is at 55%. I mean, over the past year we have a new mortgage origination package, we have a new teller package that we are in the process of installing, we’re backing that up, that’s a Fiserv based system and we are backing that up with Imperial. So, we’re taking all of those technology upgrades on, and our efficiency ratio is still at 55%.

Fantastic, thanks for taking my questions.

This concludes our question-and-answer session. I would like to turn the conference back over to Robert McCormick for any closing remarks.

Thanks for your interest in our company. I hope you all have a good day.

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.