TrustCo Bank Corp NY
Q4 2020 Earnings Call Transcript

Published: 22 Jan 2021

[Operator:]

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.

[Robert McCormick:]

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.

[Michael Ozimek:]

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.

[Scot Salvador:]

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 . 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.

[Robert McCormick:]

Thanks Scot. Any questions?

[Operator:]

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

[Alex Twerdahl:]

Hey, good morning guys.

[Robert McCormick:]

Hi Alex, how are you?

[Alex Twerdahl:]

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.

[Michael Ozimek:]

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.

[Alex Twerdahl:]

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

[Michael Ozimek:]

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.

[Alex Twerdahl:]

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?

[Michael Ozimek:]

Yes, yes.

[Alex Twerdahl:]

Okay.

[Robert McCormick:]

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.

[Alex Twerdahl:]

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?

[Robert McCormick:]

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.

[Alex Twerdahl:]

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.

[Scot Salvador:]

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.

[Alex Twerdahl:]

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?

[Robert McCormick:]

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?

[Michael Ozimek:]

Yes.

[Alex Twerdahl:]

Great, well thank you for taking my questions.

[Robert McCormick:]

Thank you.

[Operator:]

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.

[Robert McCormick:]

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

[Operator:]

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.