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TrustCo Bank New York (NASDAQ:TRST)
Q4 2019 Earnings Call
Jan 22, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the TrustCo Bancorp 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 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-D.

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 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, today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Robert J. McCormick, chairman, president, CEO. Please go ahead.

Robert McCormick -- Chairman, President, and Chief Executive Officer

Thank you. Good morning, everyone. I'm Rob McCormick, president of the bank. Joining me today on the call are the usual suspects, Mike Ozimek, our CFO; and Scot Salvador, our chief lending officer; Andrea McGuire is also in the room, who a lot of you probably know, to keep us in line.

I'll give a summary of the quarter, then turn it over to Mike for detail on the numbers, then Scot will talk about the loan portfolio, leaving time for questions and answers. We had a very good 2019 at the bank. Loans, deposits, total assets and shareholders' equity were all greater than year-end 2018. 2019 net income was down compared to a record 2018, driven by increased cost of deposits.

Our total assets topped $5.2 billion, driven by good loan growth. Our total loans were over $4 billion. Our residential portfolio has grown to over $3.5 billion. And commercial loans showed modest growth in 2019.

We lost ground in the home equity area for the year. We do believe a lot of that runoff is being captured in the residential portfolio as part of refinances. We are also testing a couple of ideas to reverse the home equity trends. It's important to note too that all service areas participated in the growth.

Interest-bearing deposits reached almost $4 billion at year-end. The growth was in the money market and time deposit categories. On the noninterest-bearing side, demand deposits also posted good solid growth to about $455 million. Our net interest margin remained over 3%.

As previously discussed on these calls, we're starting to see deposits repriced downward. Michael will have a lot of detail in this area. We continue to maintain a large investment portfolio with relatively short maturities. All of our asset quality ratio showed improvement in 2019.

We ended the year with a loan loss reserve that was 1.09% of total loans with a coverage ratio of 212%. We did not open any new offices in 2019. Our return on assets and equity were 1.06% and 10.41%, respectively. We continue to operate a traditional financial services department.

Now Mike is going to give the detail on the numbers. And Scot will cover the loan portfolio, and we'll leave some time for questions at the end. Mike?

Mike Ozimek -- Chief Financial Officer

Thank you, Rob, and good morning, everyone. I'll now review TrustCo's financial results for 2019. As noted in the press release, TrustCo saw a net income of $13.9 million and $57.8 million for the quarter and year-ended December 31, 2019, respectively. Average loans for the fourth quarter of 2019 grew 4.4%, or $167.8 million, to $4 billion from the fourth quarter of 2018.

As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio. The average residential portfolio increased by $187.7 million, or 5.6% in the fourth quarter of 2019, over the same period in 2018. Total average investment securities, which include the AFS and HTM portfolios, increased $86.4 million or 15.9% over the same period last year. This was driven by net purchases of approximately $57 million in securities throughout the year.

The provision for loan losses for the fourth quarter of 2019 was $200,000, driven primarily by the growth in loans during the period. This is a decrease compared to the $500,000 recorded in the same period in 2018. The ratio of allowance for loan loss to total loans was 1.09% as of December 31, 2019, compared to 1.16% as of the same period in 2018 and reflects a continued improvement in asset quality and economic conditions in our lending areas. We would expect the level of provision for loan losses in 2020 to continue to reflect the overall growth in our loan portfolio, trends in loan quality, and economic conditions in our geographic footprint.

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 $395.3 million of overnight investments during the fourth quarter of 2019, a decrease of $21.5 million compared to the same period in 2018. During the fourth quarter of 2019, the bank had $70 million of securities called or matured and approximately $21.7 million of pooled securities paid down.

On the funding side of the balance sheet, total average deposits increased $218.8 million or 5.2% for the fourth quarter of 2019 over the same period a year earlier. The increase in deposits was a result of a $195 million increase in time deposits, a $83.3 million increase in money market deposits, and $57.6 million increase in demand deposits. They were offset by the decrease in savings and interest-bearing checking of $89.6 million and $27.5 million, respectively. During the fourth quarter of 2019, we continued to offer competitive rates, which allowed us to gain market share as well as retain a significant portion of our existing time deposits.

This strategy will help sustain TrustCo's strong liquidity position at relatively low cost and continue to allow us to cross-sell new core relationships and take advantage of opportunities as they arise. During this same period, our total cost of interest-bearing deposits increased to 90 basis points from 60 basis points, money markets deposits increased to 81 basis points from 49 basis points. However, more importantly, the cost of core deposits remained relatively unchanged over the same period. While time deposits average cost for the fourth quarter of 2019 increased to 2.10% from 1.50% over the same period last year, the average cost decreased 9 basis points from 2.19% compared to the third quarter of 2019.

We feel this continues to reflect a pricing discipline with respect to CDs and non-maturity deposits. In the first quarter of 2020, approximately $364 million in CDs will mature at an average rate of 2.22%. In total, in the first half of 2020, approximately $675 million of CDs will mature at an average rate of 2.01%. Our net interest margin decreased slightly to 3.02% in the fourth quarter of 2019 from 3.04% compared to the third quarter of 2019.

Our taxable equivalent net interest income was $38.2 million for the fourth quarter of 2019, a decrease of $401,000 or 1.04% compared to the third quarter of 2019. Noninterest income came in at $4.1 million for the fourth quarter of 2019, down compared to last quarter, due primarily to approximately $500,000 of recoveries from prior year legal settlements in the third quarter of 2019. Our Financial Services division continues to be the most significant recurring source of non-interest income. The financial services division had approximately $928 million of assets under management as of December 31, 2019.

Now on to noninterest expense. Total noninterest expense net of ORE expense came in below our estimated range at $24.3 million, up $239,000 compared to the third quarter of 2019. We recorded a net ORE benefit of $385,000 for the fourth quarter of 2019. The low level of net ORE expenses for the quarter was driven by gains on the sale of ORE properties.

Given the continued level of -- a low level of ORE expenses, we are going to hold the anticipated level of expenses not to exceed $450,000 per quarter. All the other categories of noninterest expense were in line with prior quarters and our expectations for the fourth quarter. We would expect the first quarter of 2020's total nonrecurring -- reoccurring noninterest expense net of ORE expense to stay in the range of $24.6 million to $25.1 million per quarter. Efficiency ratio came in, in the fourth quarter of 2019 at 57.31%, compared to 55.17% in the third quarter of 2019.

As we've stated in the past, we will continue to focus on what we can control by working to identify opportunities to make the processes within the bank more efficient. One thing we are proud of is expense control at TrustCo Bank. We expect this to continue through 2020. On the CECL front, the company continues its implementation efforts, testing of various loss estimation methods, and completion of relevant internal controls and processes.

This will likely have the effect of increasing allowance for loan losses and reducing shareholders' equity dependent upon the balance of the company's loan portfolio, economic conditions and forecasts on the adoption date. The company expects to remain well-capitalized under the current regulatory calculations. And finally, the capital ratios continued to improve. Consolidated equity-to-assets ratio was 10.31% at the end of the fourth quarter, up 43 basis points from 9.88% compared to the same period in 2018.

The bank is also very proud of its ability to grow shareholder value. Tangible book value per share at December 31, 2019 was $5.55, up 9.68% compared to $5.06 a year earlier. Now Scot will review the loan portfolio and nonperforming loans.

Scot Salvador -- Chief Lending Officer

Thank you, Mike, and good morning. As Rob and Mike have stated, the bank posted strong loan growth in the fourth quarter of 2019. Overall, loans increased by $77 million in the quarter in actual numbers. This was divided between $70 million in the residential portfolio and a $7 million increase in commercial loans.

The commercial loan totals did include some temporary year-end line advances, but the majority was composed of new term facilities. Year-over-year loans have increased to $188 million or just under 5%. Growth in the residential portfolio was steady over the last several months, and the final total of $70 million topped the results for the final quarter over the last several years. This is attributable to both a good starting backlog and a continuation of solid demand.

We're pleased to report the bank achieved a milestone in the quarter as our Florida region surpassed $1 billion in total loan outstandings. Loans in Florida now constitute approximately 25% of our total loan book, the vast majority of which is comprised of residential first mortgages. As most of you know, we purchased no loans in Florida with everything having been originated for our own portfolio through our branch network. We are proud of this achievement and look forward to continued growth.

Overall, loan activity slowed late in 2019 and through the holidays, as is normal for this point in the year. The backlog as of 12/31/19 has dropped from the third quarter but remains more than 15% above where we stood at the end of 2018. For the first quarter of 2019, we recorded a small decrease in net loans. This year, given the increased backlog and continued demand, we are hopeful of having positive net loan growth for the first quarter, although it remains a slower part of the loan cycle.

Our current 30-year fixed rate stands at 3.625%. As far as delinquencies and nonperformers are concerned, the news remains good. Nonperforming assets decreased by approximately $1 million in the quarter with nonperforming loans decreasing slightly. Year-over-year nonperforming loans dropped from $25 million to $20.9 million or 0.51% of total loans.

Nonperforming assets decreased from $26.7 million to $22.4 million year-over-year. Early stage delinquencies remained very low and net charge-offs totaled $212,000 for the quarter and only $608,000 for all of 200 -- 2019. The coverage ratio, or allowance for loan losses to nonperforming loans, now stands at 212% as of year-end, up from 179% last year. Rob?

Robert McCormick -- Chairman, President, and Chief Executive Officer

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

Questions & Answers:


Operator

[Operator instructions] And our first question today comes from Alex Twerdahl from Piper Sandler. Please go ahead with your question.

Alex Twerdahl -- Piper Sandler -- Analyst

Hey. Good morning, guys.

Robert McCormick -- Chairman, President, and Chief Executive Officer

Morning, Alex.

Scot Salvador -- Chief Lending Officer

Hey, Alex.

Mike Ozimek -- Chief Financial Officer

Good morning, Alex.

Alex Twerdahl -- Piper Sandler -- Analyst

Just first off, I want to touch on capital, which I think is a question I ask just about every quarter. But now TCE at 10.3% seems to be well above what you guys you need to run with? And I know you get the buyback in place and obviously, haven't used that much, if any, due to the share price. I'm just kind of wondering if -- how you're thinking about capital, what the sort of comfort range is, and whether or not we're going to see that level go down at any time in the next year or so?

Robert McCormick -- Chairman, President, and Chief Executive Officer

Yes. As we've said in the call in the past, Alex, obviously, everything is on the table with regards to that. The share price has been strong so that the approved buyback program really hasn't been -- well, it hasn't been executed. So we're looking at other options and then seeing that.

But like you said, we're overly confident in the capital level we have. Let's put it that way.

Alex Twerdahl -- Piper Sandler -- Analyst

Are things like M&A back on the table? It's been a long time since you guys have done any acquisitions.

Robert McCormick -- Chairman, President, and Chief Executive Officer

Yes, you know how we've always felt like that. We work for our shareholders. We don't work for the shareholders of other companies, so we'd have to be accretive in the right deal. I can tell you nobody would like to do an acquisition more than the people sitting at this table, but it would have to be right for our shareholders, not the shareholders of another company.

Alex Twerdahl -- Piper Sandler -- Analyst

OK. Yes, I mean some of the deals that have been announced in Upstate New York, and not all of them are in your geography, but would any of those have been interesting to you?, guys?

Robert McCormick -- Chairman, President, and Chief Executive Officer

Yes, I think that one, particularly in Columbia County, probably would have been a nice idea for us because it would have been a nice extension to our current marketplace. Also, as you pointed out, we haven't done an acquisition in a while so it might be nice to do a small one, dip your toe in the water.

Alex Twerdahl -- Piper Sandler -- Analyst

Got it. And then just wanted to go talk about the margin a little bit. We saw a pretty decent 5-basis-point decline in the yield on residential mortgages. Obviously, you mentioned, Scot, the new production is coming on at 3.625%, which is kind of, I guess, well below the book yield right now.

But as you kind of look out the trajectory of refis, new production, the pipeline, et cetera, how do you envision that overall yield coming down over the next couple of quarters, assuming no real change in the rate environment?

Mike Ozimek -- Chief Financial Officer

Well, I think that's a big portfolio. So it does move like a dinosaur. I mean, it does continue to tick down. If we're -- you could do the math.

We're putting -- the volume that we're putting on a monthly and a quarterly basis, that will start to come down so.

Robert McCormick -- Chairman, President, and Chief Executive Officer

Also a holding commercial loan portfolio helps that. And as I said in the -- in my part of the presentation, we're also looking into a couple of different avenues of home equity credit lines to see if we can stem the runoff on that, which also helps with the return on that. But as Mike said, that's a large portfolio. And even at $222 million in new volume, it's not going to move that quickly.

And we're also bringing deposits down. We brought the CD portfolio down by 9 basis points. We're not offering anything with a 2 in the front of it. So I would imagine you're going to continue to see that CD portfolio repriced downward.

And there'll be benefit from that as well.

Alex Twerdahl -- Piper Sandler -- Analyst

Yes. So I mean, I guess, just thinking, we saw 5 basis points of resi mortgage yield compression in the fourth quarter. My assumption is the new production in the first quarter is going to be much less -- is -- was refi activity outsized in the fourth quarter that kind of caused that to come down more than it typically would have? And so kind of over the rest of the -- I guess as we look into 2020 -- I mean we're not going to -- are we going to see any more quarters where we had 5 basis points of compression? Or is it going to be more like kind of 1, 2, 3 basis points per quarter if rates stay where they are and new production stays where it is?

Scot Salvador -- Chief Lending Officer

I think it was a combination of things in the fourth quarter, as you say, Alex, I mean production was strong overall. So we put -- thankfully, we put quite a few loans on the books and had good net growth. And there was -- the second half of the year, the refinance activity was significantly higher than a year ago. So that came into play, too.

But as you say, the first quarter is a slower part of the year, just in terms of loan cycle and loan production. So you're going to see less dollars going on in the first quarter. So, you know, correspondingly, you're just going to have less of an effect.

Alex Twerdahl -- Piper Sandler -- Analyst

OK. And then when you talk about the HELOC in different avenues, I mean, that would be pretty small potatoes relative to the size of the residential production, correct?

Robert McCormick -- Chairman, President, and Chief Executive Officer

Yes. But when you look at a prime rate, where it is right now, it could have an impact on the return. I don't know exactly what the -- I haven't run those numbers exactly, but you have an outsized prime rate right now, so that I think -- and most of those HELOCs are based on the prime. So I think it could have more of an impact overall.

Alex Twerdahl -- Piper Sandler -- Analyst

OK. Understood.

Robert McCormick -- Chairman, President, and Chief Executive Officer

You're also looking at portfolio that's had some runoff, so that if you're able to stem the runoff and posed a little bit of growth, it wouldn't be the worst thing in the world.

Alex Twerdahl -- Piper Sandler -- Analyst

That makes sense. And then just going back to talking about the CDs. Over the quarter, I think you had something like $350 million of CDs that were scheduled to reprice pretty meaningfully lower, like up to 50 basis points lower as of the last conference call. Is that what you saw? Do you see all that repricing activity come through as expected? Or did you wind up having to offer a little bit higher rates on some of the new or some of that --those CDs as they rolled over in order to keep them in the bank?

Robert McCormick -- Chairman, President, and Chief Executive Officer

Maybe you saw -- I think you saw a combination in the portfolio. You saw some of it moved to a money market account, some of it reprice within the CD portfolio, and then some of it shopped and went some places that are still offering a 2% CD. So we did have some runoff in that portfolio and some changes with regard to that as a result of the repricing.

Alex Twerdahl -- Piper Sandler -- Analyst

OK. So the $364 million that's scheduled to reprice in the first quarter from $222 million, how much of that would you anticipate staying at the bank? And how much of that -- what sort of a new rate would you have to offer to kind of keep what you expect to stay in the bank?

Mike Ozimek -- Chief Financial Officer

So I mean -- so you're right. We have $364 million of CDs that are [Inaudible] at $222 million over, call it, in the first quarter of this year. I mean, the rates that we're offering right now are 1.50% to 1.75%. You know, obviously, we try to push -- it is going to be dependent on the customer's choice, whether they go -- with turn if they go whether on the lower end of that range or the higher end of the range.

So we've had decent lock on retaining most of that portfolio, as evidenced by what happened in the fourth quarter.

Alex Twerdahl -- Piper Sandler -- Analyst

OK. All right. That's all the questions for now.

Mike Ozimek -- Chief Financial Officer

We have that range to look at.

Robert McCormick -- Chairman, President, and Chief Executive Officer

Thanks, Alex.

Mike Ozimek -- Chief Financial Officer

Thanks, Alex.

Operator

[Operator instructions] And ladies and gentlemen, I'm showing no additional questions. I'd like to turn the conference call back over to Robert McCormick for any closing remarks.

Robert McCormick -- Chairman, President, and Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 25 minutes

Call participants:

Robert McCormick -- Chairman, President, and Chief Executive Officer

Mike Ozimek -- Chief Financial Officer

Scot Salvador -- Chief Lending Officer

Alex Twerdahl -- Piper Sandler -- Analyst

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