TRST (2020 - Q3)

Good day, 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 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 on Form 10-Q. The statements are valid only of this 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 today's event is being recorded. At this time, I’d now like to turn the conference over to Mr. Robert J. McCormick, Chairman, President, and CEO. Please go ahead. Robert M

Thanks, Nick. Good morning and thank you for joining us on the call this morning. As usually I'm -- as usual I'm joined by our CFO Mike Ozimek and Scot Salvador, our Senior Lending Officer. Like most places the pandemic has certainly set the agenda this year. We are dealing with a pretty well and we are proud of our hardworking staffs who have conducted themselves professionally throughout the term. Our thoughts and concerns go out to those most affected not only at the bank, but also in the communities we serve. We are pleased with our results to bank, our third quarter income of $14.1 million. We are down year-over-year for the same quarter, but up over a yearend ‘19, in the first two quarters of ‘20. Net interest income had a bit of a rebound in the third quarter to almost $37.2 million driven mostly by a drop in interest rates expense. Our cost of deposits is down and we believe there is additional room for cost to drop further. Mike will have more detail in his presentation. Interest income is also down, but not -- did not keep pace with the cost to funds. We've had decent loan growth with a strong backlog. Scott will have more detail on this. The latest wave of refinances appears to be slowing so we are optimistic with regard to growth. Performance within the loan portfolio was great with non-performing loans to total loans at $0.52 million and non-performing assets to total assets at $0.39 million. The vast majority of loans which were on deferral are now back on repayment. And we are starting to see resolution on some of the PPP loans. Deposit growth has been great with a drop in high cost time categories and strong performance in the core categories. Our total assets top $5.7 billion at the end of the quarter. Our return on average assets was $0.94 million and return on equity was $9.38 million. Our margin was 2.74. We are committed to resuming the stock buyback program at the right time. We are also exploring whether it would be beneficial for the company to do reverse stock split. Looking at our peers the average number of shares outstanding as 38.3 million, whereas TrustCo has 95 million shares outstanding, that actually places us the highest number in the group. Of course a split would increase the share price making the company more attractive to a broader range of institutional and other shareholders. While our net income is down year-over-year considering the circumstances we are very pleased with our results. Now Mike will detail the results. Scott will talk loans leaving time for questions, Mike?

Thank you, Rob. And good morning, everyone. I will now review TrustCo’s financial results for the third quarter of 2020. As we noted in the press release, the company saw a net income of $14.1 million, which yielded a return on average assets and average equity of 0.98% and 10.04% respectively. Average loans for the third quarter of 2020 grew 6.5% or $254.6 million to $4.2 billion from the third 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 by $237.6 million or 6.9% in the third quarter of 2020 over the same period in 2019. The average commercial loan portfolio increased $41 million or 21.5% over the same period in 2019, which included the funding of $46 million in SBA PPP loans. Total average investment securities, which include the AFS and HTM portfolios, increased $222.6 million or [33.3%] over the same period last year. During the third quarter of 2020, the bank had $10 million securities called or matured, and approximately $34.5 million of pooled securities paid down. We also purchased a $65 million mix of shorter duration mortgage backed security corporate bond and agency securities. Revision for loan loss for the third quarter was $1 million, a decrease compared to the $2 million provision in the second quarter of 2020. The ratio of the allowance for loan loss to total loans was 1.17% as of September 30, 2020, compared to 1.15% as of June 30, 2020. The level of provision has been driven by the growth in loans and the continued uncertainty around the current economic environment resulting from COVID-19. We can expect the level of the provision for loan losses in 2020 will continue to reflect the overall growth on our loan portfolio. And while cautiously optimistic, we will continue to monitor how the pandemic continues to influence economic conditions in our geographic footprint. As mentioned in prior quarters to support our borrowers experiencing economic hardships, the bank launched the COVID-19 Financial Relief Program, and includes loan modifications such as deferments on residential and commercial loans by request. As of September 30, 2020, the bank has $5 million in residential loan deferments on 24 loans, a decrease from the $145 million on 668 loans as of June 30, 2020. On the commercial side, the bank has a total of 6 loans in deferments, totaling $2 million. There were no requests of re-deferral for loans by our commercial clients, bank continues to closely monitor the level of deferrals from both residential and commercial customers. They did not adopt CECL during the third quarter as we continue to be an environment of regulatory change. As mentioned in prior quarters, our decision to delay 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 on 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 a well capitalized financial institution under current regulatory calculations. As discussed in prior calls, our focus continues to be on traditional lending and conservative balance sheet management, which is 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 long growth and provide flexibility for balance sheet management. As a result, we continue to hold an average of $938 million of overnight investments during the third quarter of 2020, an increase of $472.8 million compared to the same period in 2019. On the funding side of the balance sheet, total average deposits increased $442.3 million or 9.9% for the third quarter of 2020 over the same period a year earlier. The increase in deposits was a result of $114.8 million or 20.2% increase in average money market deposits, a $96 million or 8.5% increase in average savings deposits, and a $150.3 million or 17.2% increase in interest-bearing checking account averages offset by the decrease in average time deposits of $102.3 million. During the same period, we were able to decrease the total cost of interest bearing deposits to 52 basis points from 92 basis points. This is driven by a decrease in money market deposits to 37 basis points from 83 basis points and time deposits of 1.39% from 2.19% over the same period last year. As we move into the fourth quarter of 2020, additional opportunities continue to exist. The CDs re-priced to lower market rates. With that said, the bank has approximately $566.5 million in CDs that will mature at an average rate of 1.68%. In the first quarter of 2021, approximately $342.1 million in CDs will mature at an average rate of 1.15%. Non-interest income came in at $4.3 million for the third quarter of 2020 up compared to last quarter primarily as a result of increased fees for services customers for overdraft and ATM fees. And increased financial services income in the third quarter of 2020, driven by the increase in the market and estate fees. Our Financial Services Division continues to be the most significant recurring source of non-interest income. Financial Services Division had approximately $899 million of assets under management as of September 30, 2020. Now onto non-interest expense. Total non-interest expense net of ORE expense came in at $22.8 million down $1.8 million -- $1.2 million compared to the second quarter of 2020 and below our estimated range of $24.6 million to $25.1 million. This is primarily driven by a decrease in salary expense due to lower FTEs and lower expenses related to the liability based equity awards valued at a lower stock price at the end of Q3. ORE expense came in a benefit of $115,000 for the quarter, which was higher than the prior quarter benefit of $35,000. The low level of net ORE expenses for the quarter was again driven by gains on sale of ORE properties. Given the continued low level of ORE expenses, we're going to continue to lower the anticipated level of expenses not to exceed $400,000 per quarter. All the other categories and non-interest expense were in line with our expectations for the third quarter. Based on continued lower costs, we would expect the fourth quarter of 2020 total reoccurring non-interest expense net of ORE expense to decrease to the range of $24.2 million to $24.7 million. The efficiency ratio in the third quarter of 2020 came in at 53.61% compared to 58.3% in the second quarter of 2020. 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. We continue to be proud of expense control at TrustCo Bank. And finally, the capital ratios. Consolidated equity to assets ratio was 9.77% at the end of the third quarter up 2 basis points from the 9.75% from the second quarter. The bank is also very proud of its ability to grow shareholder value. Tangible book value per share at September 30, 2020 was $5.81, up 7.2% compared to $5.42 a year earlier. Now Scott will review the loan portfolio and non-performing loans.

Thank you, Mike and good morning. As discussed our loan portfolio posted continued growth for the third quarter. Overall loans increase in actual numbers by $37 million or 0.9%. Year-over-year loans have increased by $229 million or 5.75%. All of the growth was centered on residential mortgages on the quarter with a $48 million increase in our first mortgage product offsetting an $11 million decrease in home equity loans. Commercial loans were essentially flat on the quarter. Refinance activity was very heavy this quarter has been seen across the industry. We're especially pleased to be able to post solid net growth despite the ongoing refi activity. Most recently, we have seen a significant decrease in new refinance requests as the rush begins to burn itself out of it. This slow down in refi activity will undoubtedly play out on a widespread basis and should eventually benefit us both in terms of net growth and overall margin pressure. Our loan backlog was strong at quarter end. Although the total numbers are somewhat inflated due to the amount of pending refis. We do also have a good amount of new money in the pipeline. We're now entering the fourth quarter which is typically a slower period. However, given the strong backlog we hope to post continued growth on the quarter. Our current rates for a 30-year mortgage are currently [3.88 %] to 2.99% depending on region. The news regarding loan delinquencies and deferrals has been good as Mike touched on earlier. The vast majority of our residential mortgages have come-off deferral with only a very limited commercial exposure remaining. All commercial loans which were previously on deferral are currently paying as agreed. Non-performing loans were essentially flat on the quarter and totaled $21.8 million versus $21 million a year ago. This equates to 0.52% of total loans. Non-performing assets totaled $22.2 million at quarter end, down from $22.8 million in last quarter and $23.4 million a year ago. Charge-offs remained very low and on a net basis totaled only $21,000 on the quarter. Our loan loss reserve is strong at 1.1% of total loans and the coverage ratio, our allowance for loan -- non-performing loans stands at 225%. Rob?

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

We will now begin the question-and-answer session. [Operator Instructions]. At this time, we'll pause momentarily to assemble the roster. First question is from Alex Twerdahl, Piper Sandler. Please go ahead.

Hey, good morning, guys.

Hey, Alex, how are you?

Hey, good morning Alex.

Well, thanks. Okay. A couple questions for me. First off, you mentioned the buyback early in your prepared remarks, Rob. I was wondering if -- I think you said, that you're monitoring it, and you'll reinstate it when you feel it's prudent, what kinds of things you waiting for to see, we've seen a few bank started reinstate buybacks. And then, once reinstated, is there -- would you consider it as a percentage of earnings or how would you think about actually utilizing the buyback?

Yes. All of the above Alex, we're looking at it on a pretty standard basis like thing. And certainly regulatory issues play into that. So we wanted to see how the deferrals returning to repayment came out, and how CECL might be implemented. So I would imagine you'd see us sometime in early ‘21 consider something like that.

Okay. And then, in the moving parts of the loan pipeline and sort of getting loans, either attracting loans, but also turning them into actual long growth, is it -- do you think that there's a level of where the sort of the 10-year treasury and national mortgage rates has to go for loan demand at TrustCo to pick up more meaningfully or at least stop refinance activities and what would that level be? And then maybe just kind of -- I think you alluded to a little bit, Scott, in your prepared remarks about refis coming down? Is that something that will actually allow loan growth to pick up a little bit more meaningfully in the coming quarters?

Yes, absolutely Alex. I mean, as a portfolio lender, as you know, we are -- it's a net growth that matters. So the refis do have an impact on us. And I don't think it's an absolute rate that makes the difference in terms of activity, although the rate matters, obviously, I think it's really the degree of change. When rates drop significantly quarter half point type of thing, the word goes out and the community so to speak and people rush to refi. And you've seen that happen pretty consistently over the last 20 years have rates have come slowly down. So I really think it's a degree of change that matters. But at this point, rates are very low, as you well know and, although they could always go lower, you have a hard time seeing that happening. And the refinance slow down, it takes time to work through the system, the requests, call it 6-day is, whatever you want to -- number you want to hang on it before those actually turned into closings. But there's no doubt that the slowdown in refi requests, will eventually work its way through the system and should benefit us in terms of net growth. Our overall demand has been strong, I mean, other than refis, our purchase demand has been strong, we have a good pipeline. So those refis start to slowdown, it should definitely benefit us.

Okay. And then, moving on to the margin, given the dynamics of the CDs re-pricing in 4Q and 1Q. Mike, and kind of given liquidity levels, I mean, maybe even picking up the liquidity levels, I think it’s a little bit harder to predict. Do you think that the movement down in the liabilities and re-pricing of CDs will be enough to offset the continued yield compression on assets?

Yes, I think we have a decent amount of room to go. I mean, we're -- what we're seeing, as you know, in the CD portfolio, people are staying shorter. So they are going with lower rates in the CD portfolio. And then some of them, instead of extending back out on the CD portfolio, we have seen some migration from CDs into whether the interest rate checking or savings accounts, that type of thing. So that helps out. And then on the liquidity, we have started to purchase some securities, obviously, staying very short, we're not going to put, hundreds of millions of dollars in the investment portfolio at this stage of the game. We have started to move some money into the market. And I think -- and we will continue to do that to kind of help to offset what you're talking about.

Okay, great. Thank you for taking my questions.

Thank you, Alex.

This concludes our question and answer session. Now I’d like to turn the conference back over to Mr. McCormick for closing remarks. Please go ahead.

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

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