TRST (2019 - Q4)

Good morning and welcome to the TrustCo Bank Corp 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 and 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 today's event is being recorded. At this time I would like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President, and CEO. Please go ahead. Robert J

Thank you. Good morning, everyone. I'm Rob McCormick, President of the bank. Joining me today on the call are the usual suspects, Michael Ozimek our CFO and Scot Salvador our Chief Lending Officer. Andrea McGuire is also in the room, who a lot of you probably know to keep us in line. I'll give a summary of the quarter, then turn it over to Mike for detail on the numbers, then, Scot, will talk about the loan portfolio leaving time for questions and answers. We had a very good 2019 at the bank. Loans, deposits, total assets, and shareholders equity were all greater than year-end 2018. 2019 net income was down compared to a record 2018 driven by increased cost of deposits. Our total assets topped 5.2 billion, driven by good loan growth. Our total loans were over $4 billion. Our residential portfolio has grown to over 3.5 billion and commercial loans showed modest growth in 2019. We lost ground in the home equity area for the year. We do believe a lot of that runoff is being captured in the residential portfolio as part of refinances. We are also testing a couple of ideas to reverse the home equity trends. It's important to note, too, that all service areas participated in the growth. Interest-bearing deposits reached almost $4 billion at year-end. The growth was in the money market and time deposit categories. On the non-interest-bearing side, demand deposits also posted good solid growth to about 455 million. Our net interest margin remained over 3%. As previously discussed on these calls, we're starting to see deposits reprice downward, Michael will have a lot of detail in this area. We continue to maintain a large investment portfolio with relatively short maturities, all of our asset quality ratios showed improvement in 2019. We ended the year with a loan loss reserve that was 1.09% of total loans with a coverage ratio of 212%. We did not open any new offices in 2019. Our return on assets and equity were 1.06% and 10.41% respectively. We continue to operate a traditional financial services department. Now, Mike is going to give the detail and the numbers and Scott will cover the loan portfolio and we will leave some time for questions at the end. Mike.

Thank you, Rob and good morning, everyone. I'll now review TrustCo's financial results for 2019. As noted in the press release, TrustCo saw net income of 13.9 million and 57.8 million for the quarter and year-ended December 31, 2019, respectively. Average loans for the fourth quarter of 2019 grew 4.4% or 167.8 million to 4 billion from the fourth quarter of 2018. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio. The average residential portfolio increased by 187.7 million or 5.6% in the fourth quarter of 2019 over the same period in 2018. Total average investment securities, which include the AFS and HTM portfolios increased 86.4 million or 15.9% over the same period last year. This was driven by net purchases of approximately $57 million in securities throughout the year. The provision for loan losses for the fourth quarter of 2019 was 200,000, driven primarily by the growth in loans during the period. This is a decrease compared to the $500,000 recorded in the same period in 2018. The ratio of allowance for loan loss to total loans was 1.09% as of December 31, 2019 compared to 1.16% as of the same period in 2018 and reflects the continued improvement in asset quality and economic conditions in our lending areas. We would expect the level of provision for loan losses in 2020 to 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 395.3 million of overnight investments during the fourth quarter of 2019, a decrease of 21.5 million compared to the same period in 2018. During the fourth quarter of 2019, the bank had 70 million of securities called or matured and approximately 21.7 million of pooled securities paid down. On the funding side of the balance sheet, total average deposits increased 218.8 million or 5.2% from the fourth quarter of 2019 over the same period a year earlier. The increase in deposits was a result of a 195 million increase in time deposits, an 83.3 million increase in money market deposits, and $57.6 million increase in demand deposits. They were offset by the decrease in savings and interest-bearing checking of $89.6 million and $27.5 million respectively. During the fourth quarter of 2019, we continued to offer competitive rates which allowed us to gain market share as well as retain a significant portion of our existing time deposits. This strategy will help sustain TrustCo's strong liquidity position at a relatively low cost and 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 90 basis points from 60 basis points. Money market deposits increased to 81 basis points from 49 basis points. However, more importantly, the cost of core deposits remained relatively unchanged over the same period, while time deposits average cost for the fourth quarter of 2019 increased to 2.10% from 1.50% over the same period last year. The average cost decreased 9 basis points from 2.19% compared to the third quarter of 2019. We feel this continues to reflect a pricing discipline with respect to CDs and non-maturity deposits. In the first quarter of 2020 approximately 364 million in CDs will mature at an average rate of 2.22%. In total, in the first half of 2020, approximately 675 million in CDs will mature at an average rate of 2.01%. Our net interest margin decreased slightly to 3.02% in the fourth quarter of 2019 from 3.04% compared to the third quarter of 2019. Our taxable equivalent net interest income was 38.2 million for the fourth quarter of 2019, a decrease of 401,000 or 1.04% compared to the third quarter of 2019. Non-interest income came in at 4.1 million for the fourth quarter of 2019 down compared to last quarter due primarily to approximately $500,000 in recoveries from prior year legal settlements in the third quarter of 2019. Our financial services division continues to be the most significant recurring source of non-interest income. The financial services division had approximately 928 million of assets under management as of December 31, 2019. Now on to non-interest expense. Total non-interest expense net of ORE expense came in below our estimated range at 24.3 million, up 239,000 compared to the third quarter of 2019. We recorded a net ORE benefit of 385,000 for the fourth quarter of 2019. The lower level of net ORE expenses for the quarter was driven by gains on the sale of ORE properties. Given the continued level of low level of ORE expenses, we are going to hold the anticipated level of expense not to exceed $450,000 per quarter. All the other categories of non-interest expense were in line with prior quarters and our expectations for the fourth quarter. We would expect the first quarter of 2020's total non-recurring -- recurring non-interest expense net of ORE expense in the same range of $24.6 million to $25.1 million for the quarter. Efficiency ratio came in the fourth quarter of 2019 at 57.31% compared to 55.17% in the third quarter of 2019. As we've stated in the past, we'll 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 to continue through 2020. On the CECL front the company continues its implementation efforts, testing of various loss estimation methods, and completion of relevant internal controls and processes. This will likely have the effect of increasing allowance for loan losses and reducing shareholders equity depending upon the balance of the company's loan portfolio, economic conditions, and forecasts on the adoption date. The company expects to remain well-capitalized under the current regulatory calculations. And finally, the capital ratios continued to improve. Consolidated equity to assets ratio was 10.31% at the end of the fourth quarter up 43 basis points from 9.88% compared to the same period in 2018. The bank is also very proud of its ability to grow shareholder value. Tangible book value per share at December 31, 2019 was $5.55, up 9.68% compared to $5.06 a year earlier. Now Scot will review the loan portfolio and non-performing loans.

Thank you, Mike and good morning. As Rob and Mike have stated the bank posted strong loan growth in the fourth quarter of 2019. Overall loans increased by 77 million in the quarter in actual numbers. This was divided between 70 million in the residential portfolio and a $7 million increase in commercial loans. The commercial loan totals did include some temporary year-line advances, but the majority was composed of new term facilities. Year-over-year loans have increased 188 million or just under 5%. Growth in residential portfolio was steady over the last several months and the final total of 70 million topped the results of the final quarter over the last several years. This is attributable to both a good starting backlog and a continuation of solid demand. We're pleased to report the bank achieved a milestone in the quarter as our Florida region surpassed 1 billion in total loan outstanding. Loans in Florida now constituted to approximately 25% of our total loan book, the vast majority of which is comprised of residential first mortgages. As most of you know, we have purchased no loans in Florida with everything have been originated for our loan portfolio through our branch network. We're proud of this achievement and look forward to continued growth. Overall loan activity slowed late in 2019 and through the holidays as is normal for this point in the year. The backlog as of 12/31/19 has dropped from the third quarter, but remains more than 15% above where we stood at the end of 2018. For the first quarter of 2019, we recorded a small decrease in net loans. This year given the increased backlog and continued demand, we're hopeful of having positive net loan growth for the first quarter, although it remains a slower part of the loan cycle. Our current 30 year fixed rate stands at 3.58%. As far as delinquencies and non-performers are concerned, the news remains good. Non-performing assets decreased by approximately $1 million in the quarter, with non-performing loans decreasing slightly. Year-over-year non-performing loans dropped from 25 million to 20.9 million or 0.51 % of total loans. Non-performing assets decreased from 26.7 million to 22.4 year-over-year. Early stage delinquencies remain very low and net charge offs totaled 212,000 for the quarter and only 608,000 for all to 2019. The coverage ratio or allowance for loan losses to non-performing loans now stands at 212% as of year-end up from 179% last year. Rob.

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

[Operator Instructions]. And our first question today comes from Alex Twerdahl from Piper Sandler. Please go ahead with your question.

Hey, good morning, guys.

Good morning, Alex.

Just first off, I want to touch on capital which I think is a question I ask just about every quarter, but now TCE at 10.3% seems to be well above what you guys need to run with and I know you’ve got the buyback in place and obviously haven't used that much, if any, due to the share price. I am just kind of wondering how you're thinking about capital, what the sort of comfort range is and whether or not we're going to see that level go down at any time in the next year or so?

Yeah, as we have said in the call in the past, Alex, obviously everything's on table with regard to that. The share price has been strong so that the approved buyback program really hasn't been executed -- so it has been executed. So we're looking at other options and then seeing that. But like you said, we're overly confident in the capital level we have, let's put it that way.

Things like M&A back on the table, it's been a long time since you guys have done any acquisitions?

Yeah, you know, how we've always felt like that. We work for our shareholders. We don’t work for the shareholders of other companies. So, we'd have to be accretive in the right deal. I can tell you nobody would like to do an acquisition more than the people sitting at this table, but it would have to be right for our shareholders, not the shareholders of another company.

Okay, I mean some of the deals that have been announced in Upstate New York and not all of them are in your geography, but would any of those have been interesting to you guys?

Yeah, I think that the one particularly in Columbia County, probably would've been a nice idea for us because it would have been a nice extension of our current marketplace. Also, as you pointed out, we haven't done an acquisition in a while, so it might be nice to do a small one, dip your toe in the water.

Got it and then just wanted to go talk about the margin a little bit. You know, we saw a pretty decent 5-basis-point decline in the yield on residential mortgages. Obviosuly you mentioned Scot, the new production is coming on at 3.625%, which is kind of I guess well below the book yield right now. But as you kind of look out the trajectory of refi's, new production, the pipeline, et cetera, how do you envision that overall yield coming down over the next couple of quarters assuming no real change in the rate environment?

I think that is a big portfolio, so it does move like a dinosaur. I mean, it does continue to tick down if were to – you could do the math. We are putting the volume that we are putting on, on a monthly and a quarterly basis, and that will start to come down.

So, also holding commercial loan portfolio helps that, and as I said in my part of the presentation, we're also looking into a couple of different avenues of home equity credit lines to see if we can stem the run off on that, which also helps with the return on that. But as Mike said, that's a large portfolio, and even if $227 million [ph] in new volume, it's not going to move that quickly. And we're also bringing deposits down. You know, we've brought the CD portfolio down by 9 basis points, we're not offering anything with a 2 in the front of it. So, I would imagine you're going to continue to see that CD portfolio reprice downward and there'll be benefit from that as well.

Yeah. So, I mean I guess just thinking, we saw 5 basis points of resi mortgage yield compression in the fourth quarter. My assumption is the new production in the first quarter is going to be much less. Was refi activity outsized in the fourth quarter that kind of caused that to come down more than it typically would have, and so kind of over the rest of the -- I guess as we look into 2020, I mean, we're not going -- are we going to see any more quarter where we have 5 basis points of compression or is it going to be more like kind of 1, 2, 3 basis points per quarter if rates stay where they are and new production stays where it is?

I think it was a combination of things in the fourth quarter as you see Alex. I mean, the production was strong overall, so we put -- thankfully, we've put quite a few loans on the books and had good net growth, and And there was second half of the year the refinance activity was significantly higher than a year ago so that came into play too. But as you say, the first quarter is a slower part of the year just in terms of loan cycle and loan production. So you're going to see less dollars going on in the first quarter. So, correspondingly, you're just going to have less of an effect.

Okay, and then when you talk about the HELOC in different avenues, I mean that would be pretty small potatoes relative to the size of the residential production, correct?

Yeah, but when you look at a prime rate where it is right now, it could have an impact on the return. I don't know exactly what those -- I haven’t run those numbers exactly but you have an outsized prime rate right now, so that I think and most of those HELOCs are based on the prime. So, I think it could have more of an impact overall.

Okay, understood.

Also looking at our portfolio that’s had some runoffs, so that if you are able to stem and the runoff and posted a little bit of growth, it wouldn't be the worst thing in the world.

That makes sense. And then just going back talking about the CDs, over the quarter I think you had something like 350 million of CDs that were scheduled to reprice pretty meaningfully lower, like up to 50 basis points lower as of the last conference call. Is that what you saw, do you see all that repricing activity come through as expected or did you wind up having to offer a little bit higher rates on some of the new or some of the CDs as they rolled over in order to keep them in the bank?

I think you saw a combination in the portfolio. You saw some of it move to money market account, some of it reprice within the CD portfolio and then some of it shopped and went some places that are still offering a 2% CD. So we did have some run off in that portfolio and some changes with regard to that as a result of the repricing.

Okay, so the 364 that is scheduled to reprice in the first quarter from 222, how much of that would you anticipate staying at the bank and how much of that -- what sort of a new rate would you have to offer to kind of keep what you tried to stay in the bank?

So you are right. We have 364 million out of the CDs that come to at 222 overall in the first quarter of this year. And the rates that we offer right now are 150 to 175. Obviously we tried to push -- it is going to be dependent on the customer's choice, whether they go with what term if they go, whether on the lower end of the range or the higher end of that range. So, we've been -- we've had decent luck on retaining most of that portfolio, as evidenced by what happened in the fourth quarter.

Okay, alright that's all my questions for now.

The estimated range to look at.

Yeah, I appreciate all the color, all the additional color and the guidance. That's all my questions for now. Have a great day.

Thanks Alex.

[Operator Instructions]. And ladies and gentlemen I am showing no additional questions, I'd like to turn the conference call back over to Robert McCormick for any closing remarks.

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

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.