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Edited Transcript of TRST earnings conference call or presentation 23-Jul-19 1:00pm GMT

Q2 2019 TrustCo Bank Corp N Y Earnings Call

GLENVILLE Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of TrustCo Bank Corp N Y earnings conference call or presentation Tuesday, July 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael M. Ozimek

TrustCo Bank Corp NY - Executive VP & CFO

* Robert Joseph McCormick

TrustCo Bank Corp NY - President, CEO & Chairman of the Board

* Scot Reynold Salvador

TrustCo Bank Corp NY - Executive VP & Chief Lending Officer

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Conference Call Participants

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* Alexander Roberts Huxley Twerdahl

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good morning, and welcome to the Trustco Bank Corp. Second Quarter 2019's 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 factors can be found in our press release that preceded this call and the risk factors and forward-looking statements' sections of our annual report on Form 10-K as updated by quarterly reports or 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 trustcorp -- 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.

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Robert Joseph McCormick, TrustCo Bank Corp NY - President, CEO & Chairman of the Board [2]

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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 a 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're on 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 had 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 the card with the buyer.

All of our asset-quality ratios showed improvement quarter-over-quarter and year-over-year. Our nonperformers to total assets is now under 50 basis points, our allowance to total loans is 1.14%, and our coverage ratio hit 2x. Scot 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 have had nice deposit loan growth over all periods. Our margin is down as we are paying more 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 Scot 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?

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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 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 the 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 a reduction of the allocated reserve and the normal quarterly provision for loan losses of approximately $200,000. 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. It reflects the continued improvement in asset quality and economic conditions in our lending areas. As always, 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 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 reoccurring 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 continued 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 and will sustain TrustCo's strong liquidity position to 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 interest-bearing deposits during a period which saw multiple rate hikes. While time deposits average cost for the second quarter of 2019 increased to 2.09% from 1.23% 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 $988 million CDs will mature at an average rate of 2.11%. We do -- we would expect margin 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 liabilities side of the balance sheet as a result of the increase in funding cost over the past 4 quarters, driven primarily by the increase in rates required 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 rates hikes. Our taxable equivalent net interest income was 3 -- $39.2 million for the second quarter of 2019, a decrease of $927,000 or 2.4% compared to the same period in 2018. Noninterest 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 noninterest income. The Financial Services division had approximately $886 million of assets under management as of June 30, 2019.

Now on to the noninterest expense. Total noninterest 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 has now successfully executed a targeted effort to hire and restructure certain functions. FTEs 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 benefits and liabilities primarily due to the increase in stock price at quarter-end.

ORE expense came in at $210,000 for the quarter, which is consistent for the second quarter of 2018, an expense of $294,000. 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, we are going to hold the anticipated level of expense to not exceed $450,000 for core. All the other categories of noninterest expense were in line with prior quarters and our expectations for the second quarter. We would expect the third quarter of 2019's total reoccurring noninterest expense net of ROE 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% in 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 of various loss estimation methods and development of relevant internal controls and processes. This will likely have the effect of increase in the allowance for loan losses and reducing shareholders equity dependent upon balance of the company's loans 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 continued to improve. Consolidated 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 the stock repurchase program. Under the stock repurchase program, TrustCo made 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 and in the best interest of both TrustCo and its shareholders.

Now Scot will review the loan portfolio and nonperforming loans.

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

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That, Mike, and good morning. Total loans increased by $45 million on the quarter in 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 concurring 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 pickup and the bank taking a more aggressive posture with regard to loan originations. As previously communicated, in the first quarter, we have pulled back somewhat as we allowed deposits to catch up a bit with our recent strong loan growth. With the drop in interest rates, we have 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 the 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% and 3.75% for the 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. Rob?

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Robert Joseph McCormick, TrustCo Bank Corp NY - President, CEO & Chairman of the Board [5]

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

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Questions and Answers

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Operator [1]

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The first question comes from -- I'm sorry (Operator Instructions) The first question comes from Alex Twerdahl of Sandler O'Neill.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [2]

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First off, Mike, you ran through the amounts of CDs that are expected to reprice over, I think, the next 3 and 12 months. Could you -- you went through them kind of quickly. Can you just repeat those?

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Michael M. Ozimek, TrustCo Bank Corp NY - Executive VP & CFO [3]

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Yes, absolutely. It's $488 million over the next 3 months and almost $1 billion over the next 12 months, it's $988 million.

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

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And the $988 million is at an average, 2.11%; and the $482 million is at an average yield of 2.04%.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [5]

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Okay. And where -- if those were repricing today, over the next 3 months, I guess, maybe doesn't change that much. Where would the 2.04%, where would that go to in terms of the rates?

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Robert Joseph McCormick, TrustCo Bank Corp NY - President, CEO & Chairman of the Board [6]

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For the $165 million range, Alex, depending on what they pick. We were pushing 6 to 9 months mostly.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [7]

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Okay. All right. So that's -- I mean so, I guess, the strategy, which is to bring in a lot of deposits and then there is some pretty good opportunity to lower the -- to lower those costs of deposits over the next 3 months, over the next year, which is, I guess, where the margin stability is going to come from the next 2 quarters. But kind of as you guys project forward, we've seen some pretty decent margin compression over the last quarters. Are we going to be able to make some of that back up over the next 2 quarters? Or we really should be expecting just kind of stability in sort of the north of $310 million, $315 million-ish range?

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Robert Joseph McCormick, TrustCo Bank Corp NY - President, CEO & Chairman of the Board [8]

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That is the goal or the objective. We 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.

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Michael M. Ozimek, TrustCo Bank Corp NY - Executive VP & CFO [9]

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But keep in mind we also have some room in money markets that are potentially [going to Re-NI] teasers right now that would roll out at some of the teaser rates then also we have some room in some of the savings deposits.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [10]

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

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Robert Joseph McCormick, TrustCo Bank Corp NY - President, CEO & Chairman of the Board [11]

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I think that's a good range.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [12]

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Okay. And then as we look at the capital levels, $985 million, 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 2?

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Robert Joseph McCormick, TrustCo Bank Corp NY - President, CEO & Chairman of the Board [13]

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

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [14]

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Okay. And then you did talk a little bit about sort of staffing levels, and you say in the press release that you've been -- you had a targeted effort to hire and/or attain talent. Is that just kind of filling some positions that were vacant? Or are there new people that you are hiring to kind of extend into some other product lines?

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Robert Joseph McCormick, TrustCo Bank Corp NY - President, CEO & Chairman of the Board [15]

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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 industry-wide, 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 and especially in that manager/assistant manager level over the first quarter and late last year and took that advantage.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [16]

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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?

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Robert Joseph McCormick, TrustCo Bank Corp NY - President, CEO & Chairman of the Board [17]

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Well, 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 are doing all 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're in the process of installing. We're backing that up -- that's a [Fiser] based system, we're backing that up with [Imperial]. So we're taking all those technology upgrades on, and our efficiency ratio is still at 55%.

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Scot Reynold Salvador, TrustCo Bank Corp NY - Executive VP & Chief Lending Officer [18]

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You didn't need to whine about it.

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Operator [19]

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

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Robert Joseph McCormick, TrustCo Bank Corp NY - President, CEO & Chairman of the Board [20]

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

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Operator [21]

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