TrustCo Bank Corp NY (TRST) 2020 Q1 法說會逐字稿

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

Before proceeding, we would like to mention that this presentation may contain forward-looking information about Trustco Bank Corp NY 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 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 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 this 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 note 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, sir.

Thanks, Eric. Good morning, everyone. Thank you for joining us on the call this morning. Mike Ozimek, our Chief Financial Officer; and Scott Salvador, our Chief Lending Officer, on the call with me today. Also in the room is Andrew MacGuire from the accounting department to keep us in line.

We certainly have had an active first quarter, not unlike most of our industry. We have tried to maintain some stability in our 148 branches. We closed them when we have to, we clean them, sanitize and reopen. The exception being Rockland and Westchester counties. Both lobbies are only by appointment only and with drive-thru service. All locations have been provided gloves, masks and cleaning supplies. Where appropriate, social distancing barriers have been installed, especially in customer contact areas.

We were very active in this SBA PPP program. We were unable to process all of the requests even after running 3 shifts a day to get all the applications in. We have a backlog for when and if the program reopens.

We have also been very active on the payment deferral front dealing with many requests from customers. We are in various stages of this process, which we expect will develop over the next month or so.

Operations throughout the bank have been split up into different locations, and a limited number are working from home. Like everyone, we are using video conference services to limit the number of people in any 1 location. We have also established funds to assist with donations to charitable organizations and employee assistance. We also now have a small dollar -- small dollar amount, short-term personal loan to help out in some instances as well.

In spite of recent events, we actually had a decent quarter. Our net income was just over $13.3 million. Our net interest income is up quarter-over-quarter, caused mostly by a drop in net interest expense. We did have a $2 million provision for loan losses, bringing our allowance to 1.13% of total loans. Nonperforming loans to total loans was flat at 0.51%, and our nonperforming assets to total assets was down to 0.42%, and our coverage ratio was 220%.

Our ROA was 103%, and our ROE was 9.87% for the quarter. We increased our margin to 3.05% and posted growth in our capital ratio to 10.42%. Loans continued to post nice growth, topping $4.05 billion. Our deposits grew over $30 million during the quarter. All of the loan growth occurred in the residential category. On the deposit side, time accounts were down, but others posted growth, which is great.

Mike will now give a lot more detail, and Scott will talk loans, then we'll have time for questions. Mike?

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the first quarter of 2020. As we noted in the press release, the company saw a net income of $13.3 million, which yielded a return on average assets and average equity of 1.03% and 9.87%, respectively. Average loans for the first quarter of 2020 grew by 5.4% or $209 million to $4.1 billion for the first quarter of 2019. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio.

That average residential real estate portfolio increased by $226.7 million or 6.7% in the first quarter of 2020 over the same period 2019 provision for loan losses for the first quarter was $2 million, an increase compared to the $300,000 in the same period in 2019. The ratio of allowance for loan loss to total loans was 1.13% as of March 31, 2020. The increase in the provision was driven by the growth in the loans and the uncertainty around the current economic environment resulting from COVID-19. We would expect the level of provision for loan losses in 2020 to continue to reflect the overall growth in our loan portfolio and could incrementally increase as more clarity becomes available regarding trends in our loan portfolio and economic conditions in our geographic footprint.

As mentioned in our press release, to support our borrowers experiencing economic hardships, the bank launched the COVID '19 Financial Relief Program. This program includes loan modifications, such as the firm its under residential and commercial loans by request. Currently, the bank processed $40.1 million in residential loan deferments on 162 loans ranging from 1 to 3 months. In addition, $35.9 million or 186 loans have been approved for deferment, and formal agreements are being sent to borrowers. We also have $76.4 million or 396 loans the bank is in the process of reviewing for potential to defer. Lastly, the bank has an additional $79.4 million or 483 customers that have requested an application to defer their loan. The bank does not have an estimate of how many of these customers that have requested an application may actually apply for the deferral.

On the commercial side, the bank is has processed in the process of deferring $49 million of loans to approximately 25 borrowers. Bank is actively monitoring the level of deferral requests from both for the residential and the commercial customers, and it's worth noting that we have seen a dramatic decrease in deferral requests over the last 5 days.

Bank did not adopt CECL during the first quarter. We are in an environment of regulatory change. Our decision to delay season 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 -- active earlier, the termination of the national emergency concerning COVID-19 or December 31. 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, 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 the balance sheet. As a result, we continue to hold an average of $412.1 million of overnight investments during the first quarter of 2020, a decrease of $90.1 million compared to the same period in 2019 and an increase of $16.8 million or 4.2% compared to the fourth quarter of 2019. Total average investment securities, which include the AFS and HTM portfolios, increased $24.8 million or 4.6% over the same period last year.

During the first quarter of 2020, the bank also took the opportunity to sell $29 million of securities, resulting in a gain of approximately $1.2 million. Portfolios also add $55 million of securities call to mature and approximately $20 million of pooled securities have paid down. The bank has also purchased $23.5 million of securities at the very end of Q1.

On the funding side of the balance sheet, total average interest-bearing deposits increased $60.1 million or 1.5% for the first quarter of 2020 over the same period a year earlier. The increase in these deposits was a result of $16.8 million and $96.2 million of an increase in average time deposits and money market deposits, partially offset by the decrease in savings and interest-bearing checking of $40.3 million and $9.6 million. Over the same period, demand deposits also increased $61 million or 15.3%.

Our net interest margin increased to 3.05% in the first quarter of 2020 from 3.02% compared to the fourth quarter of 2019. Our taxable equipment net interest income also increased to $38.6 million for the first quarter of 2020, an increase of $311,000 compared to Q4 of 2019.

During the first quarter, our total cost of interest-bearing deposits decreased 12 basis points to 78 basis points compared to the fourth quarter of 2019.

Time deposits average costs for the first quarter of 2020 decreased 23 basis points to 1.87% from 2.10% from Q4. We feel this continues to reflect our pricing discipline with respect to CDs and nonmaturity deposits.

As we move into the second quarter of 2020, additional opportunity exists to reprice higher cost CDs to the lower current market rates. Bank has approximately $313 million of CDs that will mature in Q2 at an average rate of 1.76%. In addition, during the third and fourth quarter of 2020, approximately $777 million of CDs will mature at an average rate of 1.89%.

Noninterest income came in at $5.3 million for the first quarter of 2020, up compared to last quarter. The lion's share of the increase included $1.2 million of gains on the sales of securities. Our financial services division continues to be the most significant recurring source of noninterest income. This division had approximately $786 million of assets under management as of March 31, 2020.

Now on to noninterest expense. Total noninterest expense net of ORE expense came in slightly below our estimated range of $24.1 million, down $202,000 compared to the fourth quarter of 2019. ORE expense came in at $194,000 for the quarter, up from the fourth quarter of 2019. Given the continued low level of ORE expenses, we're going to hold anticipated level expenses not to exceed $450,000 per quarter. All the other categories in noninterest expense were in line with prior quarters and our expectations for the first quarter. We expect total 2020's recurring noninterest income expense net of ORE expense in the range of $24.6 million to $25.1 million per quarter.

Efficiency ratio in the first quarter of 2020 came in at 56.34% compared to 57.31% in the first -- in the fourth quarter of 2019. As we 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 are proud of expense control at Trustco Bank, and we expect this to continue through 2020.

And finally, capital ratios continued to improve. Consolidated equity to assets ratio was 10.43% at the end of the first quarter, up 70 basis points from the 9.73% compared to the same period in 2019. Bank is also very proud of its ability to grow shareholder value. Book value per share at March 31, 2020, was $5.68, up 9.7% compared to $5.18 a year earlier.

Now Scott will review the loan portfolio and nonperforming loans.

Thanks, Mike. Good morning, everyone. Despite the events which have transpired in the marketplace, we were still able to post significant loan growth in the first quarter. Loans grew by a combined $37 million or 0.92% in actual numbers. Year-over-year loans climbed $238 million or 6.1%. As a reminder, for last year's first quarter, we saw a decrease in net loans. We are pleased with the quarter's results and proud of our employees' ability to successfully adapt and deal with the COVID challenges placed before. These adaptations have taken a variety of forms, including the ability to conduct loan closings via video conference. The $37 million of loan growth this quarter was centered on a residential first mortgage product with home equity credit lines and commercial loans decreasing by $2.2 million and $3.7 million, respectively. Loan growth occurred in all regions, although our Florida operations exhibited a particularly strong quarter.

Refinance activity has risen significantly over the last several weeks with the drop in interest rates. Our current 30-year fixed rate is 3.49%. These refinances will lead to some increased payoff activity in the portfolio, although we have been quite successful in attracting non-TrustCo refinances, which represent new money to the bank.

Purchase volume has slowed with the recent events and the accompanying restrictions on realtors and builders that have been put in place. Despite this, however, a reduced level of purchase activity does continue, and we expect that the volume will increase quickly once restrictions begin to be eased.

Our loan backlog at the end of March was strong. It was above both year-end and last year's totals. Drawing any comparisons is difficult, however, due to the ongoing disruptions in the marketplace. Forecasting near-term demand is filled with a lot of uncertainty. Our strong backlog, however, should hold us in good stead, and we're optimistic about continued growth throughout the quarter.

Mike touched on the loan deferrals early in the presentation. As stated, the amount of new such requests have slowed dramatically. Many of the involved commercial borrowers are established long-standing customers, and we're hopeful that the vast majority of all borrowers will return to normal payment status once the current situation is passed.

Delinquency and national quality measures remained strong as of 3/31. Nonperforming assets and nonfulfillment loans both decreased slightly on the quarter. Year-over-year, non-performing assets dropped from $26 million to $22 million, while nonperforming loans decreased from $24.7 million to $20.7 million. Early stage delinquencies and net charge-offs were both very low in the quarter. And the coverage ratio or allowance loan losses for loan loss to nonperforming loans increased to 222% at quarter end. Rob?

Thanks, Scot. We're happy to respond to any questions.

(Operator Instructions) Our first question today will come from Alex Twerdahl of Piper Sandler.

First off, Mike, you went through the number of loans that have requested payment deferrals. I missed a lot of it. Can you go -- would you just mind going through it again, just running through all different categories, (inaudible)?

Absolutely. So we have $40.1 million, so $41 million of residential deferments that have been deferred so far in a range from 1 to 3 months. We have an additional $35.9 million worth of loans that agreements are being sent to borrowers. Then we have an additional $76.4 million that we're in the process of reviewing for potential deferment. And the last piece is an additional $79.4 million of aspirin application. We've not gotten anything back.

Okay. And then could you just remind us some of the characteristics of the loan portfolio just in terms of the average size, average LTV, et cetera? I know you've been through it before, but I think maybe it's worth reminding some of those characteristics?

Yes, Alex, this is Scot. I mean, as far as on the real estate side, when the approvals are average at around $200 million now, when you look across the bank, but that's at the point of approval. So for loans that are in the seasoned loans, it's significantly below $200 million in terms of average. And loan-to-value, it's portfolio-wide, 75% on average. It's higher than add on approval. I think it's in excess of 80% on approvals. But when you look at the whole portfolio, which, of course, season loans and everything else. It's in the mid-70% as far as loan value is concerned. And it's primarily all 1-4 family individual owner-occupied properties spread throughout our geographic region.

Really 1 and 2 families.

Yes, 1 or 2 families. There is some duplexes and whatnot. That's a smaller piece.

Great. And then do you have any exposure in your commercial portfolio? I know it's a small piece of the overall pie, but in the commercial portfolio, any exposure to some of the sort of more at-risk categories, whether it be restaurants, hospitality, transportation, energy, et cetera?

Very limited. Hospitality, we've said and Rob, I think, as highlighted in prior quarters, the last couple of years, we've really been cautious on the commercial side based on what was going on in the marketplace that we thought was a little too aggressive, especially with hotel motels and that type lending. So we've really steered away from that. I mean we have some seasoned ones in our portfolio, but not many at all. We do have some limited amount of hospitality restaurant, that type stuff. But again, most of what we have are seasoned bars have been around for quite a while. And we don't have any real concentrations in it.

Okay. And then, Mike, in terms of CECL, I know you guys chose to not adopt it as of January 1. Do you have any sense or a range for what the adjustment would have been should you have adopted it?

I -- we're not -- we really haven't released a range as far as how much we have, how much the opening adjustment will be. But it wouldn't -- it's not a so it's not in the -- it's not a material increase, we say that, as far as overall increase to the allowance.

Okay. And then just as you think about capital, you TCE is now over 10.4%. You did buy back about almost 0.5 million shares during the quarter before suspending the program. Can you talk a little bit about how you're thinking about capital today as it relates to the dividend as it relates to maybe potentially reopening that share buyback? And why you suspended, et cetera, when you have so much excess capital?

I think just preserving capital in these times, Alex, was a good idea for a lot of reasons. We are fully committed to a buyback. Our plan would be to renew and roll over or increase the buyback program to its initial start. I think it comes up in June again, but we are fully committed to a buyback long term. And I've told you before, just about everything is on the table, dividend, buyback, you name it. And I just -- I don't think it's an appropriate time to extend capital because the time to keep capital if you need it.

Okay. Understood. And then just as we talk about the margin, or switching gears to the margins. The disclosure in the 10-K suggests that NII should drop around 10% in the down 100 scenario, if I read it correctly. We're now down to 150 on the short end, 130 in the long end. Can you talk a little bit about some of the differences in the assumptions that are contemplated in that scenario versus what you're actually seeing play out following the drops in rates recently?

Right. So I mean, just -- I guess I'll answer it in reverse first. I mean, I think when you take a look at what's really playing out right now, I think you're going to see that the margin is going to come under some near-term pressure. I mean, obviously, the Fed, down to 10 basis points on the Fed right now. But I mean, I really like our ability to reprice $770 million worth of CDs in the near term. That's really going to help us out as it starts to bleed in. As far as assumptions that we have in our model, 1 of the things that we've always said that we have is we have very sticky board of --. And as rates start to -- we're already at a lower level base on deposits. So there's just so far that they can come down. And then we have short-term money that's kind of -- on the asset side that's going to reprice down. So obviously, you see that impact right away.

But on the flip side, the good part is that our cash flow that we have. We've always talked about in the past how much cash flow that our loan portfolio spins off. Our investment portfolio spins off. And then you're seeing that we can reprice those deposit portfolio as the rates come down. So I mean we can continue to make loss. Our pipeline on our real estate portfolio still solid. We're still closing loans. And as we start to come out of this, I think we'll continue to do more of that.

Great. And then you did mention that you guys are participating in the PPP program. Do you have just sort of initial the size of that program or loans you're able to fund thus far?

Yes. I think in -- as far as total applications received, it was a little under $50 million, Alex. And as Rob said, we're only able to get about half of that through the system, the other is still pending. So roughly half of that $50 million has been approved, and the other half is pending that will proceed once now the program is getting back geared up.

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

Thank you for taking time out of your day, and stay healthy -- stay safe and healthy.

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