TrustCo Bank New York (TRST) Q3 2019 Earnings Call Transcript

TrustCo Bank New York (TRST -2.15%)
Q3 2019 Earnings Call
Oct 22, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the TrustCo Bank Corp. third-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 has preceded this call and in the risk factors and Forward-looking Statement 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 acceptable law. Today's presentation contains non-GAAP financial measures. The reconciliations of such measures to most comparable GAAP features 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, chairman and CEO.

Please go ahead.

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

Thank you. Another 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'll provide a summary of the quarterly report then turn it over to Mike for some detail, then Scot can talk about the loan portfolio, leaving time for questions and answers. Our net income for the third quarter of 2019 was $14.7 million, up from the second-quarter '19 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 overall 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. All of our asset quality ratios showed improvement over prior periods with nonperforming 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 on his presentation. Deposits continued a nice -- a trend of nice growth, mostly in interest-bearing categories.

We are entering a period of heavy CD maturities. We expect renewal rates to be significantly lower. As previously discussed on these calls, the lower rate renewals should add support to our margin. Mike has more detail on his part of the call.

Based on current activities -- current market activities, our margin ended the quarter at 3.04%. We did not open any offices this quarter. Our efficiency ratio is just over 55%. We continued to operate a solid trust department with assets under management of about $890 million.

We continue to manage a significant investment portfolio, keeping the final maturity right around five years. We are proud of our results during some challenging times. We are looking forward to continued solid performance of the bank. Now Mike is going to give us lots of details in the numbers, then Scot will cover the loan portfolio.

Mike?

Mike Ozimek -- Chief Financial Officer

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 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 include the AFS and HTM portfolios, increased $107.3 million or 19.2% over the same period last year. This was driven by a purchase of $82.9 million in securities throughout the quarter at an average yield of approximately 2.5%.

Provision for loan losses was 0 for the third quarter of 2019, compared to the $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 and reflects the 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 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 to further 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 and $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. On 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 a $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 and $39 million, respectively.

During the third quarter of 2019, we continued to offer competitive short-term rates to allow 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. 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 cost of interest-bearing deposits during a period which saw multiple rate hikes. While time deposits average cost for the third quarter of 2019 increased to 2019 -- to 2.19% from 1.133% over the same period last year, we feel this continues to reflect our pricing discipline with respect to CDs and nonmaturity deposits. We would expect margin to begin to stabilize over the next two quarters.

In the fourth quarter of 2019, $348.4 million of our term deposits will reprice from a yield of 2.28% to current market rates, ranging from 1.45% to 1.7%. In addition, $366.4 million of CDs will reprice 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. Our 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 in 2018. Noninterest 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 reoccurring source of noninterest income. The financial services division had approximately $896 million of assets under management as of September 30, 2019. Now on to noninterest expenses. Total noninterest expense net of ORE 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 approximately $70,000 of additional expenses for various benefit plans due to the true up of our 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 as future assessment credits from the FDIC is dependent upon the FDIC reserve ratio exceeding its required threshold. ORE 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 sale of ORE properties. Given the continued low level of ORE expenses, we are not going -- we're going to hold the anticipated level of expenses 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 third quarter. We would expect the third quarter of 2019's total reoccurring noninterest expense and the fourth quarter of 2019's total nonrecurring interest expense net of ORE expense to stay in the range of $24.6 million to $25.1 million per quarter. Efficiency ratio within 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 while working to identify opportunities to make the processes within the bank more efficient.

One thing that 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 continued to improve. Consolidated equity in the 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 its 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 nonperforming loans.

Scot Salvador -- Chief Lending Officer

Thank you, Mike, and good morning. The loan portfolio in the third quarter saw 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 are currently originating at 3.58% for a 30-year mortgage. While the drop in rates from year-end fueled an increase in refinance activity, it has also benefited the buy-in side, and overall purchase money activity remained 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 expect to post a continuation of solid net growth in the fourth quarter. Asset quality measurements remained strong overall. Nonperforming assets and nonperforming loans each improved, both on the quarter and for the year. Nonperforming assets dropped from $26.1 million to $23.4 million year over year, while nonperforming loans decreased by $2.8 million.

Nonperforming loans now stand at 0.53% of total loans or $21 million. Early stage delinquencies continued at very low levels, and net charge-offs totaled only $36,000 for the quarter. The coverage ratio or allowance for loan losses to nonperforming loans continues to strengthen and now stands at 210%. Rob?

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

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

Questions & Answers:

Operator

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

Alex Twerdahl -- Sandler O'Neill -- Analyst

Hey, good morning, guys.

Mike Ozimek -- Chief Financial Officer

Good morning, Alex.

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

Good morning, Alex.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Just first off, I wanted to drill into the NIM just a little bit more. I appreciate the commentary on the CDs that are set to reprice over the next six months or so or in a year. And obviously, you guys should get some pretty good benefit from that. So just given that we had that cut in September, looking for another cut, I guess, next week now and the amount of liquidity, etc.

that you guys have in your balance sheet, is it conceivable 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 in terms of the lows?

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

Alex, when you look at it, we get another cut. And dependent 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.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. And then that kind of was my next question is that CDs are clearly going to be repricing lower but money market accounts I'm 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 if there's still a lot of competition in -- for those -- for that product?

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

Yes. We have, let's call it, about $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 board rates dependent 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.

Alex Twerdahl -- Sandler O'Neill -- Analyst

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

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

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 renewals. We're not looking to bring a ton of new money into it.

Our liquidity position is pretty good right now.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Right. OK. So I mean, I just see the average CDs went up sequentially from the second quarter to the third quarter. Is 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 there.

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

Correct.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Good call. OK. Just shifting gears just to talk about capital. I feel like I ask this question just about every quarter.

But now your TCE is north of 10%, it seems like it's going to continue to chug in higher in the absence of growth. Does the buybacks make more sense now than they used to? Or is there a level that that thinking starts to change?

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

Yes. You know we have a 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.

Alex Twerdahl -- Sandler O'Neill -- Analyst

So it's really dependent more on the stock price than a need to use capital.

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

That's correct. We're also buying our shares back for the dividend reinvestment plan in the open market now, too.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. All right. I think that's all my questions for now. Appreciate all the guidance you guys give ahead of time, and thanks for taking my questions.

Mike Ozimek -- Chief Financial Officer

OK. Thank you.

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

Thanks, Alex.

Operator

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.

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

Thanks for taking time to hear more about our company. Have a great day.

Operator

[Operator signoff]

Duration: 20 minutes

Call participants:

Robert J. McCormick -- President, Chairman, and Chief Executive Officer

Mike Ozimek -- Chief Financial Officer

Scot Salvador -- Chief Lending Officer

Alex Twerdahl -- Sandler O'Neill -- Analyst

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