TrustCo Bank Corp NY (TRST) 2020 Q3 法說會逐字稿

Good day, and welcome to the TrustCo Bank Corp earnings Call and Webcast. (Operator Instructions)

Before proceeding, we'd like to mention that this presentation may contain forward-looking information about TrustCo Bank Corp New York and 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 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 of this date hereof, and the company disclaims any obligations to update this information, except as may be required by applicable law.

Today's presentation contains non-GAAP financial measures. The reconciliation 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.

Thanks, Nick. Good morning, and thank you for joining us on the call this morning. As usual, I'm joined by our CFO, Michael 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 hard-working staff who've 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 of the bank, our third quarter income of $14.1 million. We are down year-over-year for the same quarter, but up over year-end '19 and the first 2 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 rate 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 of funds. We have had decent loan growth with a strong backlog. Scot 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 nonperforming loans to total loans at 0.52% and nonperforming assets to total assets at 0.39%. 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% and return on equity was 9.38%. 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. That actually places us at the highest number in the group.

Of course, the 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. Scot 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. That 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 to $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, decreased $222.6 million or 33.3% over the same period last year. During the third quarter of 2020, the bank had $10 million of 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.

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 would expect the level of provision for loan losses in 2020 will continue to reflect the overall growth in 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 deferment, totaling $2 million. There were no requests to redefer loans by our commercial clients. Bank continues to closely monitor the level of deferrals from both residential and commercial customers. Bank 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 delay -- 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 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 $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 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 as CDs reprice 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%.

Noninterest 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 noninterest income. Financial Services division had approximately $899 million of assets under management as of September 30, 2020.

Now on to noninterest expense. Total noninterest 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 on a lower stock price at the end of Q3.

ORE expense came at 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 are going to continue to lower the anticipated level of expenses not to exceed $400,000 per quarter. All the other categories in noninterest 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 noninterest 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 will continue to focus on what we can control by working to identify opportunities that 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 Scot will review the loan portfolio and nonperforming loans.

Thank you, Mike, and good morning. As discussed, our loan portfolio posted continuing growth for the third quarter. Overall loans increased 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 in our 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 are 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 a bit. This slowdown 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 30-year mortgages are currently [3.125] 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.

Nonperforming loans were essentially flat in the quarter and totaled $21.8 million versus $21 million a year ago. This equates to 0.52% of total loans. Nonperforming 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 or allowance for loan loss and nonperforming loans stands at 225%.

Rob?

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

(Operator Instructions) First question is from Alex Twerdahl, Piper Sandler.

A couple of 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, you'll reinstate it when you feel it's prudent. What kind of things are you waiting for to see? We've seen a few banks started to 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. I mean all of the above, Alex. We're looking at it on a pretty standard basis, I think. 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 loan growth. Is it -- do you think that there's a level of where the sort of the 10-year treasury in 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, Scot, 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 thing, the word goes out in the community, so to speak, and people rush to refi.

And you've seen that happen pretty consistently over the last 20 years if 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 it could always go lower, you have a hard time seeing that happening. And the refinance slowdown, it takes time to work through the system. The requests, call it, 60 days, whatever you want a -- number you want to hang on it before those actually turn into closings. But there's no doubt that the slowdown in refi request 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 as those refis start to slow down, it should definitely benefit us.

Okay. And then moving on to the margin. Given the dynamics of the CDs repricing in 4Q and 1Q, Mike, and kind of given liquidity levels, I mean, maybe even taking up the liquidity levels because I think those are a little bit harder to predict. I mean do you think that the movement down in the liabilities and repricing the 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 what we're seeing as -- 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 it be interest-bearing checking or savings account, 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 into the investment portfolio at this stage of the game, but we have started to move some money into the market. And I think -- and we will continue to do that to kind of help offset what you're talking about.

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.

Conference has now concluded. Thank you for attending the presentation. You may now disconnect.