TRST (2020 - Q4)

Good morning everyone and welcome to the TrustCo Bank Corp earnings call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your question, you may press star and two. 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 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 applicable law. Today’s presentation contains non-GAAP financial measures. The reconciliation of such of 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’d like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President and CEO. Sir, please go ahead. Robert M

Thank you. Good morning everyone. Thank you for joining us on the call this morning to hear more about our company. As usual, Mike Ozimek and Scot Salvador are on the call with me today. After a brief summary and introduction, Mike will give detail on the numbers and Scot will discuss the loan portfolio, then we can wrap up with questions. We’re sure you’re sick of hearing what a crazy year 2020 was. Our good wishes go out to those impacted by COVID and the pandemic. Our employees performed like champions during this period. We were able to keep most of our branches open and the departments tried to perform in a business-as-usual manner. We provided lots of sanitizer and PPE. We also separated departments and moved some staff off site. It all seems to have worked pretty well, or I guess as well as can be expected. As an essential business, we felt it was necessary to be there for our customers, who seemed to appreciate it. Our net income for 2020 was $52.5 million, a very solid year. The loan portfolio was up about $183 million in total, driven by growth in our residential mortgage outstandings of just under $200 million in commercial loan growth as a result of PPP loans. The home equity loans continued to drop, at a slower pace though. We do believe this is driven by refinance activity, and a lot of it is being captured in our residential portfolio. We’ve talked about that in the past. Our deposit growth, like most, has been over the top, several years’ growth in nine months. The stimulus and enhanced unemployment payments seemed to be much stickier than most of us thought they would be. Our net interest income is up year-over-year. Our margin is down year-over-year but up over the third quarter of 2020. Our ROA was 0.94% for 2020 and our ROE was 9.47. Our efficiency ratio is 56.4 for 2020. Mike will have more detail in his presentation. Our loan portfolio continues to have strong performance. Non-performing loans to total loans and non-performing assets to total assets are both down year-over-year to 0.5% and 0.375% respectively. We did not open any offices in 2020, continuing to operate 148 full service branches. We also operate a financial services department with over a billion dollars under management. We are evaluating a reverse stock split share buyback program and putting our liquidity to work. We are pleased with our results, especially in light of the current circumstances, and we are optimistic as we look forward to 2021. Now Mike and Scot will present, then we’ll have time for questions. Mike?

Thank you Rob, and good morning everyone. I’ll now review TrustCo’s financial results for the fourth quarter of 2020. As we noted in the press release, the company saw an income of $13.8 million in the fourth quarter of 2020, which yielded a return on average assets and average equity of 0.95% and 9.75% respectively. Average loans for the fourth quarter grew by 5.3% or $214.9 million to $4.2 billion from the fourth quarter of 2019. The growth continues to be concentrated within our primary lending focus, the residential real estate portfolio, which increased $209.1 million or 5.9% in the fourth quarter of 2020 over the same period in 2019. The average commercial loan portfolio increased $32.4 million or 16.8% over the same period in 2019. Total average investment securities, which include the AFS and HDM portfolios, decreased $170.2 million or 27% over the same period last year. During the fourth quarter of 2020, the bank had $20 million of securities called or matured and approximately $36.2 million of pooled securities paid down. The provision for loan loss for the fourth quarter was $600,000, an increase compared to the $200,000 in the same period in 2019. The ratio of the allowance for loan losses to total loans was 1.17% as of December 31, 2020 compared to 1.09% compared to the same period in 2019. The increase in the provision was driven by the growth in the loans, and as mentioned in prior quarters, the continued uncertainty around the current economic environment resulting from COVID-19. We expect the level of provision for loan losses in 2021 to continue to reflect overall growth in our loan portfolio and could increase as the pandemic continues to influence economic conditions by geographic footprint. As mentioned in prior quarters, to support our borrowers experiencing economic hardships, the bank launched a COVID-19 financial relief program that includes loan modifications, such as deferments, on residential and commercial loans by request. As of December 31, 2020, the bank had $2 million in residential loan deferments on eight loans ranging from one to two months. In addition, $599,000 or four loans have been approved for deferment, and deferment agreements are being sent to borrowers. We also have $1.4 million or 10 loans the bank is in the process of reviewing for potential deferment. Lastly, the bank has had an additional $189,000 or four customers that have requested an application to defer their loan. The bank does not have any way of estimating how many of these customers that have requested an application may actually apply for deferment. On the commercial side, the bank had originated a total of $50.7 million in commercial loan deferments, of which all have gone back into repayment as of December. There were no requests to re-defer loans by our commercial loan clients at the end of the year. The bank continues to closely monitor the level of these deferrals; however, we are very pleased with the current levels and the limited impact they may have on the overall credit quality of the loan portfolio. As mentioned in the press release, the bank did not adopt CECL during the fourth quarter as was originally provided by the CARES Act, and we continue to be in an environment of regulatory change. As mentioned in the 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. Furthermore, as part of the COVID-19 relief bill signed in December 2020, the bank will now adopt CECL on January 1, 2022. 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 the current regulatory calculations. 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 $916.2 million of overnight investments during the fourth quarter of 2020, an increase of $520 million compared to the same period in 2019 and an increase of $504 million or 122% compared to the first quarter of 2020. Given the elevated level of cash at the end of year, in 2021 the bank has already begun to invest excess liquidity into the market at current levels. On the funding side of the balance sheet, total average deposits increased $494.1 million or 11.1% in the fourth quarter of 2020 over the same period a year earlier. The increase in deposits was a result of $127.1 million or a 21.8% increase in the average money market deposits, $147.4 million or 13.3% increase in average savings deposits and $172 million or a 19.9% increase in interest-bearing checking account averages, and $185.8 million or a 40.8% increase in average interest bearing checking accounts. This was partially offset by a decrease in average time deposits of $138 million or 9.7% over the same period last year. During the same period, our total cost of interest-bearing deposits decreased to 34 basis points from 90 basis points. This was driven by a decrease in money market deposits to 25 basis points from 81 basis points and time deposits to 95 basis points from 2.10% over the same period last year. This was primarily a result of the federal rate cuts in the first quarter compared with higher deposits, as well as the time deposits re-pricing at lower rates, as they were expected. As we move into 2021, additional opportunities continue to exist as CDs re-price to lower market rates. With that said, in the first quarter of 2021 approximately $339 million in CDs will mature at an average rate of 1.12%. In the second quarter of 2021, approximately $226 million of CDs will mature at an average rate of 40 basis points. In the first half of 2021, approximately $556 million of CDs will mature at an average rate of 83 basis points. In the second half of 2021, $466 million of CDs will mature at an average rate of 53 basis points. Non-interest income came in at $4.1 million for the fourth quarter of 2020, down compared to last quarter primarily as a result of less financial services income in the fourth 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 $997 million of assets under management at 12/31. Now onto non-interest expense. Total non-interest expense net of ORE expense came in at $24.8 million, up $2 million compared to the third quarter of 2020 and slightly over the estimated range of $24 million to $24.7 million. ORE expense came in at an expense of $45,000 for the quarter as compared to a benefit of $115,000 in the prior quarter. The low level of net ORE expenses for the quarter was driven by gains on sales of ORE properties. Given the continued low level of ORE expenses, we are going to continue to hold the anticipated level of expenses not to exceed $450,000 per quarter. All the other categories of non-interest expense were in line with our expectations for the fourth quarter. We would expect that 2021’s total recurring non-interest expense net of ORE expenses to be in the range of $24.5 million to $25 million per quarter. The efficiency ratio remained consistent for the fourth quarter of 2020 as compared to the fourth quarter of 2019, coming in at 57.31% for both quarters. As we have stated in the past, we continue to focus on what we can control by working to identify opportunities to make processes within the bank more efficient. One thing we are proud of expense control at TrustCo Bank, and we expect this to continue through 2021. Finally, the capital ratios. Consolidated equity to assets ratio was 9.63% at the end of the fourth quarter, down 14 basis points from 9.77% in the third quarter due to growth in assets. The bank continues to be proud of its ability to increase shareholder value during these challenging economic times. Book value per share at December 31, 2020 was $5.89, up 6.1% compared to $5.55 a year earlier. Now Scot will review the loan portfolio and non-performing loans.

Okay, thank you Mike. Good morning everyone. For the fourth quarter, total loans in actual numbers increased by $30 million or 0.71%. Year-over-year loans have increased by $182 million or approximately 4.5%. The quarter’s results showed a solid increase in our residential mortgages offset somewhat by a decrease in the commercial loan category. Residential mortgages increased by $49 million on the quarter with commercial loans decreased by $19 million. The majority of the commercial loan decrease is attributable to the SBA PPP loans dropping as the loan forgiveness process commenced, with a smaller amount also tied to some property sales by our existing customers. We are pleased with the quarter’s $49 million in residential loan growth, which represents an approximate 1.2% increase in the residential portfolio. First mortgages increased strongly by approximately $59 million in the quarter as we continue to see solid purchase money demand across all our market areas. This increase was offset by an approximate $10 million decrease in the home equity loan category. Our backlog has decreased from September, which is normal for this time of year, but remains solid. It is above the backlog of last December and contains a good amount of new money. Refinancings remain elevated, which is always a challenge with regard to forecasting net growth; however, refinances have decreased somewhat from levels seen in prior months and we are hopeful that this moderation will continue as the quarter progresses. Our most recent 30-year rates [indiscernible]. As you are aware, a new round of SBA PPP lending has commenced. Demand is obviously hard to forecast, although our best guess is that overall it may end up being a bit less than what we experienced in the earlier round of the SBA program. As mentioned, almost all the customers who previously had payments deferred during the pandemic have returned to normal payment status. Additionally, the bank’s overall asset quality measurements remain good. Non-performing loans decreased from $21.8 million to $21.1 million on the quarter with non-performing assets dropping from $22.2 million to $21.6 million. Year-over-year, non-performing assets have dropped from $22.4 million to the current $21.6 million. Net charge-offs remain very low at $128,000 for the quarter. The coverage ratio or allowance for loan loss in non-performing loans now stands at 235% versus approximately 210% a year ago. Rob?

Thanks Scot. Any questions?

[Operator instructions] Our first question today comes from Alex Twerdahl from Piper Sandler. Please go ahead with your question.

Hey, good morning guys.

Hi Alex, how are you?

I’m well, thanks. First off, Mike, in your prepared remarks, you talked about some uses of liquidity early in 2021. I was just wondering if you could clarify what the strategy is for laddering that liquidity into securities, how much you plan to do per quarter, and what the current rate is that you’re able to put that on at.

Sure. I’ll give you a feel of what we’ve done so far. We did about $60 million so far, kind of spread around agencies in pooled securities, very limited corporates, and we put that in, I’d say an average rate of about 60, a little north of 60, 62 basis points. That’s what we’ve done so far. I think we’re--what we are doing is we’re watching what the 10 year is doing and we’re watching where rates are going, so I think what we’re going to do is we’re going to kind of--every few weeks, kind of take a look at it, take another chunk and bring that liquidity balance down. We’ve always kind of said around that 900 - you know, $800 million to $900 million range is where we like to sit at, so I don’t think we would see us bringing liquidity down to the $500 million level, but we will bring it down from where we’re at. Having said that, there is a strong likelihood of additional stimulus funds that may come out. If that happens, that will increase how much we put to work. We don’t want to let that cash balance get too high. You can see where the average balance was for the quarter, but you can see where we ended actual cash at the end of the year, and that triggered us to kind of--you know, we’ve got move a little bit, put a little bit into the market.

Right, and can you remind us how much of the securities portfolio comes due per quarter, or matures?

Yes, we’re in the neighborhood of--so on the pooled securities right now, prepayments are pushing somewhere in the neighborhood of $30 million, so that’s on a quarterly basis. Right there, you’re looking at elevated prepayment levels, $120 million to $150 million worth of cash flow from that portfolio, then calls you could have anywhere between another $50 million to $100 million on that side. That spins off a lot, so you’ve got to do a decent amount just to kind of keep flat.

Okay, so the $60 million so far in the first quarter, you’ll at least reinvest what rolls or what prepays, and then take some additional stabs at putting liquidity to work every couple weeks? Is that the right way to think about it?

Yes, yes.

Okay.

We’re also looking forward, Alex, to our loan backlog building up as spring approaches and there’s more activity with regard to that, and hopefully having a great year with regard to mortgage lending.

Right. What would be sort of the, I don’t know, restraining factor in how much you could grow loans, because clearly that is the best use of the additional liquidity, the excess liquidity?

The only restraining factor would be the growth of the company itself - you know that with regard to capital, but what hurt us with regard to refinancing, and Scot alluded to it in his presentation, is sometimes people are shopping for the lowest possible 15-year rate, and because we’re a portfolio lender, we tend not to do that, so that’s the only way we really lose loans, is very short term refinances.

Okay, and then in terms of the yield compression on the mortgage portfolio, Scot, you said what the new rate was on mortgages but the line broke up a little bit, I missed it. I was hoping you could repeat that, and then just how you guys think about sort of the progression for yields coming--you know, if there’s an end in sight to the compression on the residential mortgages as you look forward today.

Yes Alex, the rate, it’s right around 3%, Alex. We’ve been slightly below it, slightly above it, but we’ve been hovering right around that 3% for 30-year rate. It’s hard to say what’s going to happen with the rates. We’ve seen it--obviously it’s competitively driven, you know that, and we’ve seen it both ways, to be honest with you. We’ve seen as the 10-year has gone down, we’ve seen competitors kind of sticking a little bit higher on their 30-year rate than we would have thought, which was encouraging. But on the flipside as the 10-year has kicked up a little bit, there’s been some real reluctance of lenders to raise the rate. I think everyone’s kind of looking at each other to see what’s going to happen as we move forward, so we’re not expecting the rates to shoot up anytime soon, that’s for sure, but hopefully we’re not going to see much more compression either.

Got it. Then finally on capital and--you know, you’re sitting with 9.6% tangible common equity at the end of the year. You could probably argue that that’s probably weighed down by at least 100 basis points due to the excess liquidity, so you had a lot of excess capital the way we look at it with potential growth coming. Why not get a little bit more aggressive with the buyback? What’s holding you back from doing that at this point?

I think buybacks went out of favor, Alex, and we’re looking to get back into that. I alluded to it in my comments, but there is an approval process that goes along with that and I think you will see us back in the buyback program and more aggressively than we were before. Does that summarize it, Mike?

Yes.

Great, well thank you for taking my questions.

Thank you.

Ladies and gentlemen, I’m showing no additional questions. I’d like to turn the floor back over to Robert J. McCormick for any closing remarks.

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

Ladies and gentlemen, with that we’ll conclude today’s conference call. We do thank you for attending today’s presentation. You may now disconnect your lines.