Start Time: 09:00 January 1, 0000 9:24 AM ET
TrustCo Bank Corp NY (NASDAQ:TRST)
Q1 2020 Earnings Conference Call
April 22, 2020, 09:00 AM ET
Company Participants
Robert McCormick – Chairman, President and CEO
Michael Ozimek – EVP and CFO
Scot Salvador – EVP and Chief Lending Officer
Conference Call Participants
Alex Twerdahl – Piper Sandler
Operator
Good day, and welcome to the TrustCo Bank Corp First Quarter 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 of 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 Web site 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.
Robert McCormick
Thanks, Eric. Good morning, everyone. Thank you for joining us on the call this morning. Mike Ozimek our Chief Financial Officer; and Scot Salvador, our Chief Lending Officer are on the call with me today. Also in the room is Andrea McGuire 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 close when we have to. We clean them, sanitize and reopen; the exception being Rockland and Westchester counties. Those 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 their requests even after running three 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 one location. We have also established funds to assist with donations to charitable organizations and employee assistance. We also now have a 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 was 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.
Non-performing loans to total loans is flat at 0.51% and our non-performing 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 margins to 3.05% and posted growth in our capital ratio to 10.42%.
Loans continue to post nice growth topping 4.50 million. Our deposits grew over $30 million during the quarter. All the loan growth occurred in the residential category. On the deposit side, time accounts were down but all others posted group, which is great.
Mike will now give a lot more detail and Scot will talk loans. Then, we’ll have time for questions. Mike?
Michael Ozimek
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 net income of $13.3 million which yield 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 in 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 of 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 will launch the COVID-19 Financial Relief Program. This Program includes loan modifications such as deferments on residential and commercial loans by request.
Currently, the Bank has processed 40.1 million in residential loan deferments on 162 loans ranging from one to three months. In addition, 35.9 million or 186 loans have been approved for deferment and deferment agreements are being sent to borrowers. We also have 76.4 million or 396 loans the Bank is in the process of reviewing for a potential deferment.
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 requested an allocation may actually apply for deferment.
On the commercial side, the Bank has processed or is in the process of deferring $49 million of loans to approximately 25 borrowers. The Bank is actively monitoring the level of deferral requests from both the residential and the commercial customers and it’s worth noting that we have seen a dramatic decrease in deferral requests over the last five days.
The Bank did not adopt CECL during the first quarter. We are in an environment of regulatory change. 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 by the CARES Act at the earlier of 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 on 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 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 added $55 million to securities called or matured and approximately 20 million of pooled securities paid down. The Bank has also purchased 23.5 million in securities 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 the 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%. 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 equivalent 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.
For 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 cost for the first quarter of 2020 decreased 23 basis points to 1.87% from 2.10% from Q4. We show this continues to reflect our pricing discipline with respect to CDs and non-maturity deposits.
As we move into the second quarter of 2020, additional opportunity exists to reprice higher cost CDs for the lower current market rates. The Bank has approximately 300 to 13 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%.
Non-interest income came in at 5.3 million for the first quarter of 2020, up compared to last quarter. The lion share of the increase included 1.2 million of gains in the sales of securities.
Our financial services division continues to be the most significant recurring source of non-interest income. This division had approximately 786 million of assets under management as of March 31, 2020.
Now on to non-interest expense. Total non-interest expense net of ORE expense came in slightly below our estimated range at 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 are going to hold anticipated level expenses not to exceed $450,000 per quarter. All the other categories of non-interest expense were in line with prior quarters and our expectations for the first quarter.
We expect total 2020’s recurring non-interest income expense net of ORE expense to stay in the range of $24.6 million to $25.1 million per quarter. The efficiency ratio in the first quarter of 2020 came in at 56.34% compared to 57.31% in the fourth quarter of 2019.
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 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 9.73% compared to the same period in 2019. The 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 Scot will review the loan portfolio and non-performing loans.
Scot Salvador
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 were pleased with the quarter’s results and proud of our employees’ ability to successfully adapt and deal with the COVID challenges placed before them. 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 around the 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 volumes have slowed with the recent events and the accompanied restrictions on realtors and builders 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 are optimistic about continued growth throughout the quarter.
Mike touched on the loan deferments 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 are hopeful that the vast majority of all borrowers will return to normal payment status once the current situation has passed.
Delinquency and national quality measures remains strong as of 3/31. Non-performing assets and non-performing loans both decreased slightly on the quarter. Year-over-year, non-performing assets dropped from 26 million to 22 million and non-performing 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 on allowance loan losses – for loan loss to non-performing loans increased to 222% at quarter end. Rob?
Robert McCormick
Thanks, Scot. We’re happy to respond to any questions.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions]. Our first question today will come from Alex Twerdahl of Piper Sandler. Please go ahead with your questions.
Alex Twerdahl
Hi. Good morning, guys.
Robert McCormick
Hi, Alex. How are you?
Michael Ozimek
Good morning, Alex.
Alex Twerdahl
Doing okay. Thanks. 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 the different categories one at a time?
Michael Ozimek
Absolutely. So we have 40.1 million of residential deferments that have been deferred so far in a range from one to three months. We have an additional $35.9 million worth of loans that agreements are being sent to borrowers. Then we have any 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 have asked for an application, we’ve not gotten anything back.
Alex Twerdahl
Okay. Thank you for going through that again. And then can 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 us some of those characteristics?
Scot Salvador
Yes. Alex, this is Scot. As far as on the real estate side, when the approvals are averaging 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 an excess 80% on approvals. But when you look at the whole portfolio, which of course seasoned loans and everything else, it’s in the mid-70% as far as loan to value is concerned. And it’s primarily all one to four family – individual owner occupied properties spread throughout our geographic region.
Michael Ozimek
Really one in two families.
Scot Salvador
Yes, one in two families. There is some duplexes and whatnot, but that’s a smaller piece.
Alex Twerdahl
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?
Scot Salvador
Very limited. Hospitality, we’ve said and Rob I think has highlighted in prior quarters the last couple of years that we’ve really been cautious of the commercial side based on what was going on in the marketplace that we felt was little too aggressive especially with hotels, motels and that type of lending. So we really steered away from that. We had 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 borrowers that have been around for quite a while. And we don’t have any real concentrations in there.
Alex Twerdahl
Okay. And then, Mike, in terms of CECL, I know you guys chose to not adopt it as of January 1st. Do you have any sense or a range for what the adjustment would have been should you have adopted it?
Michael Ozimek
We really haven’t released a range as far as how much we have, how much the opening adjustment would be. But it’s not a material increase I’d say that as far as overall increase to the allowance.
Alex Twerdahl
Okay. And then just as you think about capital, you’ve got TCEs now over 10.4%. You did buy back 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 dividend, as it relates to maybe potentially reopening that share buyback, why you suspended, et cetera, when you have so much excess capital?
Robert McCormick
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 rollover 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, buybacks, you name it. And just I don’t think it’s an appropriate time to expend capital. I think this is the time to keep capital if you need it.
Alex Twerdahl
Okay, understood. And then just as you talk about the margin or switching gears to margin, the disclosure in the 10-K suggest that NII should drop around 10% in the down 100 scenario if I read it correctly. We’re now down 150 on the short end, 130 on 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?
Robert McCormick
Right. I guess I’ll answer it in reverse first. 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. Obviously, the Fed – down to 10 basis points on the Fed right now. I really like our ability to reprice $770 million within CDs really in the near term. That’s really going to help us out as that starts to bleed in. As far as assumptions that we have in our model, one of the things that we’ve always said that we have is we have very sticky core deposits. And as rates starts to – we’re already at a lower level of rates on deposits, so there’s just so far that they can come down. And then we have short-term money on the asset side that’s going to reprice down. So obviously you see that impact right away. But on the flipside, the good part is, is that our cash flow that we have. We always talked about in the past how much cash flow that our loan portfolio spins off, our investment portfolio spins off and you’re seeing that that we can reprice those in our deposit portfolio as the rates come down. And we can continue to make loans. Our pipeline on our real estate portfolio still is 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.
Alex Twerdahl
Great. And then you did mention that you guys are participating in the PPP program. Do you have just sort of an initial size of that program or loans you’re able to fund thus far?
Michael Ozimek
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 that the program is getting back geared up.
Alex Twerdahl
Great. I think that’s all my questions for now. Thanks for the time and I’ll get back in the queue.
Robert McCormick
Thanks, Alex.
Michael Ozimek
Thank you.
Scot Salvador
Thanks, Alex.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Robert J. McCormick for any closing remarks.
Robert McCormick
Thank you for taking time out of your day and stay safe and healthy.
Operator
The conference has now concluded. Thank you very much for attending today’s presentation. You may now disconnect.
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