TRST (2019 - Q3)

Good morning and welcome to the TrustCo Bank Corp Third 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 questions. [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 has 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 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. Please also note that this event is being recorded. I would now like to turn the conference over to Mr. Robert J. McCormick, President, Chairman and CEO. Please go ahead. Robert J

Thank you. Though a solid quarter here at TrustCo Bank, good morning everyone and thank you for taking time out of your day to hear more about our company. Joining me on the call today are Mike Ozimek our CFO and Scot Salvador our Chief Lending Officer. As we usually do I will provide a summary of the quarter, the report and then turn it over to Mike for some details and Scot can talk about the loan profile leaving time for questions-and-answers. Our net income for the third quarter of 2019 was $14.7 million, up from the second quarter 2019 and down from our record 2018. Our total assets ended the quarter at over $5.2 billion with a return on average assets of 1.12. Shareholders equity rose to over $526 million up over all comparable periods. Our healthy dividend is almost 45% payout ratio, our capital ratio topped 10% and our return on equity was 11.19% for the quarter. Overall asset quality ratio showed improvement over prior periods with non-performing assets to total assets of 0.45. Our allowance amounts to over 1.1% of total loans with a coverage ratio of 2.1 times. Loans showed nice growth over all periods driven mostly by residential mortgages. We expect to have a decent growth year and the backlog is especially strong for this time of year. Scot will give more detail in his presentation. Deposits continued a nice -- a trend of nice growth mostly in interest bearing categories. We are entering a period of heavy CDE maturities, we expect renewal rates to be significantly lower so as previously discussed on these calls the lower rate renewal should add support to our margin. Mike has more detail on his part of the call. Based on current activities, current market activities or margin end of the quarter of 3.04%. We did not open any offices this quarter. Our efficiency ratio is just over 55%. We continue to operate a solid Trust department with assets under management about $890 million. We continue to manage significant investment portfolio keeping the final maturity right around five years. We are proud of our results and during some challenging times, we are looking forward to continued solid performance at the bank. Now Mike is going to give us lots of details on the numbers then Scot will cover the loan portfolio. Mike.

Thank you Rob and good morning everyone. I will now review TrustCo's financial results for the third quarter of 2019. As we noted in the press release the company saw income of $14.7 million which yielded a return on average assets -- return on average assets and average equity of 1.12% and 11.19% respectively. Average loans for the quarter of 2019 grew 4.2% or 158.4 million to 3.9 billion from the third quarter of 2018. As expected the growth continues to be concentrated within our primary lending focus, residential real estate portfolio. That average portfolio increased by 175.6 million or 5.3% in the third quarter of 2019 over the same period in 2018. Total average investment securities which includes AFS and HDM [ph] portfolios increased 107.3 million or 19.2% over the same period last year. This is driven by purchase of 82.9 million in securities throughout the quarter and an average yield of approximately 2.5%. Provision for loan losses was zero for the third quarter of 2019 compared to 300,000 in the same period in 2018. The ratio of allowance for loan loss to total loans was 1.11% as of September 30, 2019 compared to 1.17% as of the same period in 2018 that reflects the continued improvement in the asset quality and economic conditions in our lending areas. Scot 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 and 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 the balance sheet management. As a result we continue to hold an average of 465.3 million of overnight investments during the third quarter of 2019, a decrease of 21.3 million compared to the same period in 2018 and a decrease of 80.4 million or 14.7% compared to the second quarter of 2019. In addition we expect the cash flow from the loan portfolio to generate between 500 million to 600 million over the next 12 months along with approximately 150 million to 170 million of investment securities cash flow in the same time period. This continues to give us significant opportunity and flexibility as we continue to move through 2019. During the third quarter of 2019 the bank had 40 million of securities called or matured and approximately 17.8 million of pooled securities paid down. The funding side of the balance sheet total average deposits increased 236.4 million or 5.6% for the third quarter of 2019 over the same period a year earlier. The increase in deposits was a result of 301.1 million or 26% increase and 58.8 million or 11.5% increase in average time deposits and money market deposits respectively. Offset by the decrease in savings and interest bearing checking of 118 million [ph] and 39 million respectively. During the third quarter of 2019 we continued to offer competitive shorter term rates to allow the bank to gain market share as well as retain 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 95 basis points from 51 basis points. Money market deposits increased 83 basis points from 42 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 costs of interest bearing deposits during a period which saw a multiple rate hikes. Our time deposits average costs for the third quarter of 2019 increased in 2019 to 2.19% from 1.33% over the same period last year. We feel this continues to reflect our pricing discipline with respect to CDs and non maturing deposits. We would expect margins to begin to stabilize over the next two quarters. In the fourth quarter of 2019 348.4 million of our term deposits were repriced from a yield of 2.28% to current market rates ranging from 1.45% to 1.7%. In addition 366.4 million of CDs were repriced during the first quarter of 2020 at an average yield of 2.21%. In total over the next 12 months approximately 1.1 billion of CDs will mature at an average rate of 2.2%. Our net interest margin decreased to 3.04% in the third quarter of 2019 from 3.35% compared to the third 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. A taxable equivalent net interest income was 38.6 million for the third quarter of 2019, a decrease of 1.9 million or 4.6% compared to the same period of 2018. Non-interest income came in at 4.9 million for the third quarter of 2019 up slightly compared to last quarter. Our financial services division continues to be the most significant recurring source of non-interest income. The financial services division had approximately 896 million of assets under management as of September 30, 2019. Now on to non-interest expenses, total non-interest expense net of overall expense came in at the low end of our estimated range at 24 million down 655,000 compared to the second quarter of 2019. A couple of items to note, salaries and benefits expense held steady for the third quarter of 2019. While during the third quarter we recorded approximate $70,000 of additional expenses for various benefit plans due to the trueup of future estimated benefit liabilities primarily due to the increase in the stock price at quarter end. FDIC and other insurance expense down $316,000 due to the FDIC assessment credit received during the quarter as the FDIC reserve ratio was met for the third quarter of 2019. The level of expense for this category where we reviewed quarterly is future assessment credits from the FDIC is dependent upon the FDIC earned ratio exceeding its required threshold. Quarterly expense came in at 33,000 for the quarter as compared to the third quarter of 2018 expense of 528,000. The low level of net ORE expenses for the quarter was driven by gains on sales of ORE properties. Given the continued low level of ORE expenses we are not going -- we are going to hold off anticipating a level of expenses not exceeding $450,000 per quarter. All the other categories of non-interest expense were in line with prior quarters and our expectations for the third quarter. We do expect the third quarter of 2019 total reoccurring non-interest expense in the fourth quarter of 2019 total non-recurring interest expense net of ORE expense to stay in the range of 24.6 million to 25.1 million per quarter. Efficiency ratio in the third quarter of 2019 came in at 55.17% compared to 55.98% in the second quarter of 2019. 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 and we expect this to continue through 2019. On the CECL front, the company continues its implementation efforts and development of relevant internal controls and processes. This will likely have an 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 financial institution under current regulatory calculations. And finally, the capital ratios continue to improve. Consolidated equity assets ratio was 10.07% at the end of the third quarter, up 30 basis points from the 9.77% 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 September 30, 2019 was $5.42 up 9.94% compared to $4.93 a year earlier. Now Scot will review the loan portfolio and non-performing loans.

Thank you Mike and good morning. So a continuation of the positive momentum evidenced in the prior several months. Overall total loans increased by 79 million on the quarter in actual numbers. This equates to growth of just over 2%. Year-over-year loans have grown by 159 million. Residential loans increased by 76 million on the quarter with commercial and installment loans increasing by 1.9 million and 1.2 million respectively. We were especially pleased with the quarter as the real estate growth was spread throughout all of our regions. Mortgage rates have stabilized after the recent decreases. We're currently originating at 3.58% [ph] for a 30 year mortgage. While the drop in rates from year end fueled an increase in refinance activity it has also benefited the buying side and overall purchase money activity remains solid in all our regions. We expect this to continue although overall mortgage activity does typically begin to slow a bit as the fourth quarter progresses. Our backlog reflects the positive momentum from the last six months and stands above where we ended the second quarter and more than 10% over the same point last year. While the current backlog does contain more refinances versus purchases than it did a year ago we are nonetheless pleased with our position and expects to post a continuation of solid net growth in the fourth quarter. Asset quality measurements remain strong overall. Non-performing assets and non-performing loans each improved both on the quarter and for the year. Non-performing assets dropped from 26.1 million to 23.4 million year-over-year while non-performing loans decreased by 2.8 million. Non-performing loans now stand at 0.53% of total loans or 21 million. Early stage delinquencies continue at very low levels and net charge offs totaled only 36,000 for the quarter. The coverage ratio or allowance for loan losses to non-performing loans continues to strengthen and now stands at 210%. Bob.

Thanks Scot. We are happy to answer any questions anybody might have.

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

Good morning guys.

Good morning Alex.

I just first off wanted to drill into the NIM just a little bit more. Appreciate the commentary on the CDs that are set to reprice over the next six months or so or a year and obviously you guys should get some pretty good benefits from that. But just given that we had the cut in September looking for another cut I guess next week now in the amount of liquidity, etc you guys have in your balance sheet is it conceivable that the margin could dip below 3% before starting to rebound or you have a pretty good level of confidence that kind of where right now with the lows?

Alex, when you look at it we get another cut depending on what we have to pay to keep some of the money market deposits and also the CDs. It definitely could continue to go down. We expect some stabilization but it could dip.

Okay and then that kind of was my next question is that CDs are clearly going to be repricing lower but money market accounts just kind of curious what you're seeing in your market if you think that there's some room for those to start to adjust lower as well or there's still a lot of competition for that product?

We have let's call it about a $150 million worth of money market deposits. They're still in teasers that are going to roll down from the higher levels. We have another teaser out there for $125 million for about four months that may roll into that. The rest of the portfolio really is in your board rates depending on what tier they're in. So they're going to come down, they're not all going to go down to the board rate. So it depends on where they go.

Okay, and then to bring in new money to CDs, do you still need to have some promotions that are a bit above the market?

I don't know if that's true or not Alex. We're not testing that water right now. We grew the deposits earlier in the year and we're kind of working on the renewal -- working on the renewals. We are not looking to bring a ton of new money into it, our liquidity position is pretty good right now.

Right, okay. So I mean I just see the average CDs went up sequentially from the second quarter to the third quarter and that kind of the end of all the promotion activity and then from here hopefully stability. But really the name of the game is trying to get some costs out of their -- Okay, just shifting to the -- shifting gears just to talk about capital a little bit, I feel like I ask this question every quarter but now your TCE is north of 10%. And it seems like it's going to continue chugging higher in the absence of growth, do buybacks make more sense now than they used to or is there a level that thinking starts to change?

You know we have yet to be executed buyback program that's in place and we're watching the market and trying to time it appropriately and do the right thing with regard to the buyback. But yes, the answer to your question is yes.

So it is really dependent more on the stock price right now -- a need to use capital?

It is correct. We're also buying our shares back through the dividend reinvestment plan in the open market now too.

Okay, I think that's all my questions for now. Appreciate all the guidance you guys gave ahead of time. And thanks for taking my questions.

Thank you.

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

Thanks for taking time to know more about our company, have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.