TRST (2020 - Q2)

Good day, and welcome to 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 preceded this call and in the Risk Factors and Forward-Looking Statements section 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 Web site at trustcobank.com. Please also note that today's event is being recorded. At this time, I would like to turn the conference over to Mr. Robert J. McCormick, Chairman, President, and CEO. Please go ahead. Robert M

Thank you and good morning, everyone. We had a pretty solid second quarter at the Bank, especially in light of the events that are happening around us. First and foremost, we took being essential very seriously which meant to us being there for our customers when they need us. Much of the burden for this fell to the staff in our branches. Their performance has been amazing through this pandemic. Our back office staff especially loan departments have been great too. We’re very proud of how the vast majority of staff members have handled our business during these times. Michael Ozimek and Scot Salvador are on the call today, so let me hit the highlights and then they can give a lot of detail. Then we can answer any questions you may have. Our net income was roughly 11.3 million for the quarter. This is down but putting it in perspective, it is a very solid number. Our net interest expense was down to about 6.9 million for the quarter. Our interest income on our loan portfolio has been essentially flat. Where we lost the ground was the interest we earned on the investment portfolio, especially interest on Fed funds. Tied to our deposit growth, which has been fantastic, we had posted nice growth in all categories, except time accounts. Assuming those funds have also been a lot sticker than we would have expected, probably driven by the nature of our service areas. On the loan side, growth has been driven mostly by residential loans. We were active with PPP loans. We also had our share of payment deferral requests on both the residential and commercial side. We put extra funds into the allowance for the past two quarters resulting in an allowance of over $48 million which is 1.15% of total loans with a coverage ratio of 2.2x. We are beginning to see customers come off deferral and we are working with customers on repayment or forgiveness of their PPP loans. Details will follow on the call for both of these programs. Our Financial Services Department has done pretty well through this and continues to have about 875 million under management. Our capital ratio is 9.75% at quarter end. We have suspended our buyback program but are fully committed to resuming it and even increasing it at the right time. Overall, we had a good quarter and look forward to what the future holds. Now Mike will detail the numbers, Scot will deal with loans, then we can respond to questions. Mike?

Thank you, Rob, and good morning everyone. I will now review TrustCo’s financial results for the second quarter of 2020. As we noted in the press release, the company saw a net income of 11.3 million which yielded a return on average assets and average equity of 0.82% and 8.21%, respectively. Average loans for the second quarter of 2020 grew 7% or 270.5 million to 4.1 billion from the second quarter of 2019. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio. Average residential portfolio increased 257.2 million or 7.6% in the second quarter of 2020 over the same period in 2019. The average commercial loan portfolio increased 33.1 million or 17.4% over the same period in 2019, which included the funding of 46 million in SBA PPP loans. The average investment securities, which include the AFS and HTM portfolios, decreased 141.8 million or 23.1% over the same period last year. During the second quarter of 2020, the Bank added 54.9 million to securities called or matured and approximately 31.6 million of pooled securities paid down. Provision for loan loss for the second quarter was 2 million, an increase compared to the credit of 341,000 in the same period in 2019, which was driven by the sale of the credit card portfolio last year. The ratio of the allowance for loan loss to total loans was 1.15% as of June 30, 2020 compared to 1.14% as of the same period in 2019. Increasing the provision was driven by the growth in loans and the continued uncertainty around the current economic environment resulting from COVID-19. We would expect the level of the provision for loan losses in 2020 will continue to reflect the overall growth to our loan portfolio and could increase as the pandemic continues to influence economic conditions in our geographic footprint. As mentioned last quarter, to support our borrowers experiencing economic hardships, the Bank launched a COVID-19 Financial Relief Program, which includes loan modifications such as deferments on residential and commercial loans by request. As of June 30, 2020, the Bank had 145 residential loan deferments on 660 loans ranging from one to three months. On the commercial side, the Bank has 45 million in commercial loan deferments on 90 loans. The Bank continues to closely monitor the level of deferrals from both residential and commercial customers. Some residential and commercial loan customers have reached the end of the deferral period and have begun making regular payments at quarter end. The Bank did not adopt CECL during the first or second quarter as we continue to be in an environment of regulatory change. As mentioned last quarter, our decision to delay to CECL was to engage in the current regulatory changes and understand how that would shape our current landscape before implementing the new standard. The Bank will adopt CECL as required by the CARES Act at the earlier of the termination of the National Emergency concerning COVID-19 or December 31, 2020. This will likely have the effect of increasing the allowance for loan losses and reducing shareholders’ equity. The company expects to remain well-capitalized under current regulatory calculations. As discussed on 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 the loan growth and provide flexibility for the balance sheet management. As a result, we continue to hold an average of 727 million of overnight funds during the second quarter of 2020, an increase of 181.3 million compared to the same period in 2019 and an increase of 314.9 million or 76.4% compared to the first quarter of 2020. On the funding side of the balance sheet, total average deposits increased 146.2 million or 3.6% for the second quarter of 2020 over the same period a year earlier. The increase in deposits was the result of an 87.9 million or 15.9% increase in average money market deposits, a 29.7 million or 2.6% increase in average savings deposits and a 73.6 million or 8.4% increase in interest-bearing checking account averages offset by the decrease in average time deposits of 45 million. For the same period, our total cost of interest-bearing deposits decreased 64 basis points from 91 basis points. This is driven by a decrease in money market deposits to 54 basis points from 81 basis points and time deposits from 1.62% from 2.09% over the same period last year. As we move into the third quarter of 2020, additional opportunities continue to exists, the CDs repricing [ph] to lower market rates. With that said, the Bank has approximately 338 million in CDs that will mature at an average rate of 1.84%. In the fourth quarter of 2020, approximately 562 million in CDs will mature at an average rate of 1.7%. In total, in the second half of 2020, approximately 900 million of CDs will mature at an average rate of 1.75%. Non-interest income net of security gains came at 3.4 million from the second quarter of 2020, down compared to last quarter, primarily as a result of overdraft fees decreasing approximately $500,000 and financial services fees were down $200,000 from the first quarter of 2020. Our Financial Services Division continues to be the most significant recurring source of non-interest income. The Financial Services Division had approximately 880 million to securities under management as of June 30, 2020. Now onto non-interest expense. Total non-interest expense net of ORE expense came in at slightly below our estimated range of 24 million, down 110,000 compared to the first quarter of 2020. ORE expense came in at a credit of 32,000 from the quarter, which was lower than the first quarter of 2020 expense of 194,000. The low level of net ORE expenses for the quarter was driven by the low level of ORE properties and gains on the sale of existing ORE properties. Given the continued low level of ORE expenses, we are going to decrease the anticipated level of expenses to not exceed $250,000 per quarter going forward. All the other categories of non-interest expense were in line with our expectations for the second quarter. We continue to expect a 2020 total recurring non-interest expense net of ORE expenses to stay in the low end of the range of 24.6 million to 25.1 million per quarter. The efficiency ratio in the second quarter of 2020 came in at 50.3% compared to 56.34% in the first quarter of 2020. 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 always proud of is expense control at TrustCo Bank and we expect this to continue through 2020. Finally, the capital ratios. Consolidated equity to assets ratio was 9.75% at the end of the second quarter, down slightly from the 9.86% compared to the same period in 2019. The Bank is also very proud of its ability to grow shareholder value. Tangible book value per share at June 30, 2020 was $5.73, up 7.7% compared to $5.32 a year earlier. Now Scot will review the loan portfolio and non-performing loans.

Good morning, everyone. Thank you, Mike. Loan production continued at a steady pace during the second quarter and we were able to post solid net growth. Overall, loans increased by 78 million or 1.9% on the quarter in actual numbers. This total included SBA PPP loans of approximately 46 million. Year-over-year, loans have increased 271 million including the SBA PPP loans. Excluding SBA, loan growth totaled 225 million or 5.8% year-over-year. Then quarter’s 32 million of non-SBA loan growth was centered on residential first mortgages which increased by 58 million. Home equity loans decreased by a combined 50 million as low fixed interest rates and other factors continued to push activity towards the first mortgage product. Commercial loans decreased by approximately 11 million in the quarter, excluding the SBA loans. We are pleased with the quarter’s 43 million in combined residential loan growth as our production and closing staffs continue to deal effectively with the challenges presented by the COVID situation. Restrictions have loosened in our New York marketplace with the accompanied reduction in COVID numbers and we expect that the first mortgage market will benefit. The Florida restrictions have stepped up somewhat and we’ll continue to closely monitor the situation. Despite this, however, the Florida real estate market remains quite active. Interest rates, as everyone is aware, have decreased to historic lows and refinancing activity has picked up accordingly. Our current 30-year fixed rate stands at 3.25%. As a portfolio lender, such market conditions present challenges. Although we have been successful in continuing our net growth, we’re managing overall interest rates very carefully. Our backlog at quarter end is solid. It stands above both the first quarter and the same point last year. Refinances do comprise a greater portion of the current backlog which can skew the numbers for purposes of comparison. However, we are pleased with the backlog and remain hopeful of posting continued solid net growth over the coming months. We continue to closely monitor loans previously put on deferment relative to COVID. The situation is obviously fluid and there does exists a lot of uncertainty about the future. However, we do not have an excessive amount of loans on deferment relative to our overall portfolio. And the borrowers on the commercial side are primarily well established customers. Relatively modest-sized our average residential mortgages and mitigating factors as borrowers begin to move off deferment. Overall, asset quality measurements of Bank continue to be good. Non-performing loans increased by approximately 1.2 million on the quarter and are down by approximately 200,000 year-over-year. Given the overall low levels of non-performing loans, some degree of choppiness is expected. Non-performing assets increased by 700,000 in the quarter and decreased by 2 million year-over-year from 24.8 million to 22.8 million. Net charge-offs were essentially zero in the quarter. Our loan loss reserve is solid. And at quarter end, the coverage ratio or allowance for loan loss to non-performing loans stood at 220% versus 200% a year ago. Rob?

Thanks, Scot. We'll be happy to answer any questions you have.

We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Alex Twerdahl from Piper Sandler. Go ahead.

Hi. Good morning, guys.

Good morning, Alex.

Good morning, Alex.

Good morning, Alex.

First off, Scot, I was wondering if you can give us just a little bit more color on the loan pipeline and refi activity and maybe try to put the two – relate the two a little bit more and maybe talk about the refi activity that you saw in the second quarter. How much of that TrustCo was able to retain? And just kind of maybe help us get a little bit better sense for, one, the trajectory of the loan portfolio in terms of balances from here as well as the trajectory of the yield on that portfolio from here.

Right. Well, as you say, Alex, refinance is a big part of the story right now in the real estate market. Just to give you a feel and I think this is pretty consistent where you’re looking around the country, but for the last quarter about 60% of the loans we approved were refinances. If you go back a year, it was less than 30% year-over-year. And that split, it’s probably running right now about 60/40; 60% TrustCo refi versus 40% non-TrustCo. The TrustCo refis obviously drops our yield but we’re keeping the loan, which is a good thing obviously. And having 40% of the refis roughly be non-TrustCo refi, that’s new money to us. So as far as net growth, it does impact net growth, purchase money activity, although as Rob said, it’s good considering everything that’s going on. It is down year-over-year but it’s not bad considering everything that’s been going on, especially in our Florida market. And the amount of non-TrustCo refis that we’re picking up in the backlog gives us confidence that we can continue to post some decent net growth over the coming months.

Great. Thanks for that. And then just – obviously you guys are kind of swimming in liquidity right now and I know there’s a number of factors that have caused that; obviously stimulus customer behavior, deferrals, et cetera. But how do you kind of plan for that liquidity to level to normalize? Where do you see it normalizing in this environment? And does it mean that you can get more aggressive on lowering CD and other deposit rates or are there other sort of levers that you have to sort of bring that liquidity level down?

Yes, definitely, Alex, we agree that – you’re kind with swimming probably with liquidity. There’s a lot of money on the balance sheet and we’re lowering rates virtually every week at least when we have our rate committee and the trajectory on all deposit rates is down, there’s no question. I think the nature – and I said it in the introduction that the nature of our customers is probably a little more conservative, the areas we service on the conservative side, especially upstate New York, and people haven’t had any place to really spend the money. So that stimulus was much sticker than we thought. And again, I think because of the nature of our customer and our core deposits, which is a great benefit, that money has stayed with us a lot longer than any of us would have expected. It’s a good problem though, Alex. I’d rather have that problem than on the other side.

Totally agree with that. But as you think about the 900 million of CDs that are going to reprice over the next six months at 1.75, where do you envision – if those are going to go into other CD products, what would the rate be on those today?

25 basis points, maybe less.

Great. And then in terms of the deferrals that are going to be coming due I guess in the next month or so, do you have sense for the percentage of those that could be extended to the 180 days versus ones that would roll off in July?

If I could just take a step back on that and pay a compliment and you know this, we’re a conservative underwriter and we’re very cautious about lending our shareholders money and the company’s money. And I think it’s proven because if you compare us to our peer group, our deferrals are well under 5% which is a pretty high bar to set. And we also – I don’t think we have a delinquent commercial loan on our balance sheet right now. So that speaks to the groundwork that our team has done for the past three years. So if I can give them a little bit pat on the back or a compliment, that’s it. And that starts with very standard, strong underwriting which is a hallmark of this company, Alex. So we’re very comfortable with that. As far as the deferrals go, I’m amazed how many people have quietly just begun repaying. And only about 15% of the people that are coming up off the first 60-day deferral are even requesting additional deferrals and we’re doing that 30 days at a time. So as comfortable as you can be with the deferral process and people not paying you, I think we’re at that position. I also have to say about commercial loans and you know we’re a pretty conservative people with regard to commercial lending. I don’t think we have a commercial loan that’s on total deferral. I think they’re paying escrow, they’re paying principal, they’re paying interest, one of those items. Most are paying interest only with escrow. So it’s not like we’re on total deferral with regard to the commercial lending either. So I guess no banker’s comfortable with people not paying you, but I think we’re as comfortable as anybody could be in that position. Sorry for the longwinded answer.

No, it’s helpful. And just remind us the average – if you have it, the average mortgage payment for your customers, where is that right now?

It’s Scot, Alex. If you look at the average origination size, we’re a little above 200,000 on terms of – about 220,000 if you want to zero in on it as far as – that’s new originations. The loans in the books are obviously average smaller than that. So if you want to back into your average payment off the 220,000 figure with interest rates at 3.25%, you can come in where the payment is. It is on the modest side as far as residential mortgage is concerned.

Yes, great. And then just final question from me just looking at the customer service fees in the second quarter, down for fairly obvious reasons I would say. Have you seen any of that sort of rebound in the third quarter?

One thing that we saw was interchange fees, right? Interchange fees also kind of took a dip, but that really – it was a short-term dip a month or two when really COVID started to hit. So that did come back and that was a positive. Overdraft being down, that’s a function of the balances that we have in the Bank that we kind of talked about. But the good side is that people are spending the money. We are seeing it in interchange.

And our loan fees have been phenomenal, Alex, just so you know. Obviously that doesn’t make up for overdraft fees because it’s spread out over – we amortize it over a period of time. But our loan fees, we’ve certainly built up a nice backlog that we’ll be taking in over the next several years.

Great. Thanks for taking my questions.

Thank you.

Thanks.

Thanks.

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

Thanks for joining in today to hear more about our company and have a great day.

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