Earnings Call Transcript - TRST Q3 2020

Operator, Operator

Good day, and welcome to the TrustCo Bank Corp Earnings Call and Webcast. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 McCormick, Chairman, President, and CEO

Thanks, Nick. Good morning, and thank you for joining us on the call this morning. 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 it pretty well, and we are proud of our hardworking staff 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. Our third-quarter income was $14.1 million. We are down year-over-year for the same quarter, but up over year-end ‘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 expenses. Our cost of deposits is down, and we believe there is additional room for costs to drop further. Mike will have more details in his presentation. Interest income is also down, but did not keep pace with the cost of funds. We've had decent loan growth with a strong backlog. Scott will have more details on this. The latest wave of refinances appears to be slowing, so we are optimistic regarding 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 topped $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 a reverse stock split. Looking at our peers, the average number of shares outstanding is 38.3 million, whereas TrustCo has 95 million shares outstanding, which places us with 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, and Scott will talk about loans, leaving time for questions. Mike?

Michael Ozimek, CFO

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. The 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 in 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 securities, corporate bonds, and agency securities. The provision 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 in our loan portfolio. 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, which 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 $145 million on 668 loans as of June 30, 2020. On the commercial side, the bank has a total of 6 loans in deferment, totaling $2 million. There were no requests for re-deferral for loans by our commercial clients, and the 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 in an environment of regulatory change. As mentioned in prior quarters, our decision to delay CECL was to engage with 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 has enabled 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 $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 a $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 was 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 are 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 to 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. The 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 compared to the second quarter of 2020 and below our estimated range of $24.6 million to $25.1 million. This was 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 with 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 the sale of ORE properties. Given the continued low level of ORE expenses, we are going to continue to lower the anticipated level of expenses not to exceed $400,000 per quarter. All other categories in 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 recurring 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 identifying opportunities to make processes within the bank more efficient. We continue to be proud of expense control at TrustCo Bank. Finally, the capital ratios. The consolidated equity to assets ratio was 9.77% at the end of the third quarter, up 2 basis points from the 9.75% in the second quarter. The bank is also very proud of its ability to grow shareholder value. The 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.

Scot Salvador, Senior Lending Officer

Thank you, Mike, and good morning. As discussed, our loan portfolio posted continued growth for the third quarter. Overall loans increased in actual numbers by $37 million or 0.9%. Year-over-year loans increased by $229 million or 5.75%. All of the growth was centered on residential mortgages in 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, as seen across the industry. We're especially pleased to be able to post solid net growth despite the ongoing refinance activity. Most recently, we have seen a significant decrease in new refinance requests as the rush begins to burn itself out. This slowdown in refinance 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 refinances. We do, however, 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 in the quarter. Our current rates for a 30-year mortgage are currently between 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 last quarter and $23.4 million a year ago. Charge-offs remained very low and on a net basis totaled only $21,000 in the quarter. Our loan loss reserve is strong at 1.1% of total loans, and the coverage ratio, our allowance for non-performing loans, stands at 225%. Rob?

Robert McCormick, Chairman, President, and CEO

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

Operator, Operator

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

Alex Twerdahl, Analyst

Hey, good morning, guys.

Robert McCormick, Chairman, President, and CEO

Hey, Alex, how are you?

Michael Ozimek, CFO

Hey, good morning, Alex.

Alex Twerdahl, Analyst

Thank you. I have a couple of questions. First, you mentioned the buyback in your earlier comments, Rob. I'm curious about what factors you're monitoring before deciding to reinstate it. Some banks have already started to bring back their buybacks. Once you do reinstate it, will it be based on a percentage of earnings, or how do you plan to approach the buyback?

Robert McCormick, Chairman, President, and CEO

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

Alex Twerdahl, Analyst

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 loan growth, do you think that there's a level where the sort of the 10-year treasury and national mortgage rates have 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?

Scot Salvador, Senior Lending Officer

Yes, absolutely, Alex. I mean, as a portfolio lender, as you know, for us, it's net growth that matters. So the refis do have an impact on us. 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 or half a point type of thing, the word gets out in the community, and people rush to refinance. You've seen that happen pretty consistently over the last 20 years as rates have come down slowly. I think it's the degree of change that matters. At this point, rates are very low, and as you well know, while they could always go lower, it’s hard to see that happening. The refinance slowdown takes time to work through the system, the requests, call it six days, but there's no doubt that the slowdown in refi requests will eventually work its way through and should benefit us in terms of net growth. Our overall demand has been strong; beyond refis, our purchase demand has been strong, and we have a good pipeline. So as those refis start to slow down, it should definitely benefit us.

Alex Twerdahl, Analyst

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 upon 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?

Michael Ozimek, CFO

Yes, I think we have a decent amount of room to go. I mean, we're seeing in the CD portfolio that people are staying shorter, opting for lower rates in the CD portfolio. Some of them, instead of extending back out, we have seen some migration from CDs into interest-bearing checking or savings accounts, which helps. We've started to purchase some securities, but 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 we will continue to do that to help offset what you're talking about.

Alex Twerdahl, Analyst

Okay, great. Thank you for taking my questions.

Robert McCormick, Chairman, President, and CEO

Thank you, Alex.

Operator, Operator

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.

Robert McCormick, Chairman, President, and CEO

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

Operator, Operator

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