Earnings Call Transcript - TRST Q2 2021

Operator, Operator

Good day, and welcome to the TrustCo Bancorp Earnings Call and Webcast. Please note, today's event is being recorded. At this time, I would like to turn the conference over to Robert J. McCormick, Chairman, President, CEO. Please go ahead.

Robert McCormick, President & CEO

Good morning, everyone. I'm Rob McCormick, President of the bank. Joining me on this call are Mike Ozimek, our Chief Financial Officer; Scot Salvador, our Senior Lending Officer. We are pleased to report very solid second quarter results here at the bank. Our net income was $14.4 million, greater than the prior quarter and well above the same quarter in 2020. Our net interest income at about $40.1 million was essentially flat over the first quarter of '21 and was about 6.5% greater than the same quarter in 2020. This is driven mostly by our ability to reduce the deposit cost of the bank. We still maintain a 2% margin, which is down from prior quarters. We are managing a very healthy level of liquidity on our balance sheet in anticipation of a changing rate environment. We also continue to maintain a healthy capital level. We continue to pay a solid dividend of over $0.34 per share, which amounts to about a 45.5% dividend payout ratio. Our return on average assets was 0.95% for the quarter, flat versus the first quarter of '21 and greater than the same quarter in 2020. Our return on average equity was over 10% for the quarter, again, flat compared to the first quarter of '21 and greater than the same quarter in 2020. We did not make a provision for loan losses during the quarter. Our nonperforming ratios are very strong at 0.48% for loans and 0.34% for total assets. Also, our loan loss to total loans was 1.15%, with a coverage ratio of 2.4x. The level of our loan loss reserve is constantly under review, and we are looking at a 1/1/22 implementation of CECL. Assets topped $6.1 billion at the end of the quarter, up significantly over last year. This is driven by growth in the loan portfolio, mostly residential mortgages. Commercial loans are down as PPP loans are being forgiven and repaid. We are down to less than a handful of loans on any kind of deferral. Home equity lines of credit continue a downward trend but at a much slower rate. Installment loans are not a big part of our business. As stated earlier, we are holding a large cash position to prepare for a possible changing rate environment. Growth has been very strong quarter-over-quarter and compared to the same period last year. Shareholders' equity is also up quarter-over-quarter and compared to the same period last year. We did close one office this quarter. Pittsfield was not performing up to standard, so we closed it. We did not open any new offices. We are looking at two possible new sites, one in Florida and one in the Northeast. We're facing the same difficulty most of all, with staffing. Hiring and retention have been a challenge. We did complete the 1 for 5 stock split at the end of May and have been active under our stock buyback program. We are happy with our results and look toward the rest of the year with optimism. Now Michael will give a lot more detail on the numbers. Scot will give some color on the loan portfolio. Then we will have time for questions.

Mike Ozimek, CFO

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the second quarter of 2021. As we noted in the press release, the company saw a net income of $14.4 million in the second quarter of 2021, which yielded a return on average assets and average equity of 0.95% and 10.05%, respectively. Average loans for the second quarter of 2021 grew 3.8% or $158.6 million to $4.3 billion from the second quarter of 2020. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio, which increased by $193.9 million or 5.3% in the second quarter of 2021 over the same period in 2020. The average commercial loan portfolio decreased $8.1 million or 3.6% over the same period in 2020. This included approximately $23 million of new PPP loans originated in 2021. The bank currently has approximately $32 million remaining of SBA PPP loans. Total average investment securities, which include the AFS and HTM portfolios, increased $13.3 million or 2.6% during the second quarter of '21. During the same period, the bank had one security call at a par of $5 million. One security also matured at a par value of $5 million and approximately $35.7 million of pooled securities were paid down. There were no purchases of securities in the second quarter of '21. The result provision for loan loss for the second quarter was a decrease compared to the $2 million in the same period in 2020. The ratio of allowance for loan losses to total loans was 1.15% as of both June 30, '21 and 2022. In the second quarter of '21, the decreased level of provision was driven by the improved asset quality trends and economic conditions. We would expect the level of provision for loan losses in '21 to continue to reflect the overall growth in our loan portfolio and 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 included loan modifications such as deferments on residential and commercial loans by request. As mentioned in the press release, as of June 30, '21, the banks saw most of these loan deferments return to making regular loan payments. The bank continues to closely monitor the level of deferrals. However, we are very pleased with the low current levels and limited impact they may have on the overall credit quality of the loan portfolio. As mentioned in prior quarters, the bank did not adopt CECL as originally provided by the CARES Act and as part of the COVID-19 relief bill signed in December 2020. The bank will adopt CECL on January 1, '22. 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 held an average of $1.1 billion of overnight investments during the second quarter of '21, an increase of $399.3 million compared to the same period in 2020. On the funding side of the balance sheet, total average deposits increased $508 million or 10.8% for the second quarter of '21 over the same period a year earlier. The increase in deposits was a result of an $88 million or 13.3% increase in average money market deposits, a $215 million or 18.4% increase in average savings deposits, a $196 million or 20.6% increase in interest-bearing checking account averages, and a $204 million or 37.1% increase in average noninterest-bearing checking deposits. These are partially offset by the decrease in average time deposits of $194 million or 13.9% over the same period last year. During the same period, our total cost of interest-bearing deposits decreased to 15 basis points from 64 basis points. This is primarily driven by a decrease in the money market deposits to 13 basis points from 54 basis points and time deposits to 42 basis points from 162 over the same period last year. As we move into the third quarter of '21, additional opportunities continue to exist as CDs reprice to lower market rates. With that said, the bank has approximately $179 million in CDs that will mature at an average rate of 36 basis points. In the fourth quarter of '21, approximately $512 million in CDs will mature at an average rate of 43 basis points. In total, during the second half of '21, approximately $692 million of CDs will mature at an average rate of 41 basis points. Noninterest income came in at $4.7 million for the second quarter of '21, up compared to last quarter, primarily as a result of increased fees for services to customers as we have seen overdraft and interchange fees start to pick up. Our Financial Services division continues to be the most significant recurring source of noninterest income, adding approximately $1.1 billion of assets under management as of June 30, '21. Now on to noninterest expense. Total noninterest expense net of ORE expense came in at $25.5 million, up $404,000 compared to the first quarter of '21. Salary and benefit expense was relatively flat compared to last quarter. Professional services were up $182,000. Advertising expenses were up $195,000. Other expenses were up $349,000 compared to last quarter. These increases were partially offset by a decrease in net occupancy expense of $258,000 compared to last quarter. ORE expenses came in at an income of $60,000 for the quarter compared to an expense of $239,000 in the prior quarter. Given the continued low level of ORE expenses, we are going to decrease the anticipated level of expense not to exceed $350,000 per quarter. All the other categories of noninterest expenses were in line with our expectations for the second quarter. We would expect the 2021 total recurring noninterest expense net of ORE expense to remain in the range of $24.9 million to $25.4 million per quarter. The efficiency ratio in the second quarter of '21 came in at 56.91% compared to 58.3% in the second quarter of 2020. We will continue to focus on what we can control by working to identify opportunities to make the processes within the bank more efficient. We have always been proud of expense control at TrustCo Bank, and we expect this to continue throughout 2021. And finally, the capital ratios. Consolidated equity to asset ratio remained flat and was 9.45% at the end of the second quarter, up 1 basis point from 9.44% from the first quarter of '21. The bank continues to be proud of its ability to increase shareholder value during these challenging times. Book value per share at June 30, 2021 was $30, up 4.7% compared to $28.67 a year earlier. These amounts are adjusted for the reverse stock split. Now Scot will review the loan portfolio and nonperforming loss.

Scot Salvador, Senior Lending Officer

Thanks, Mike, and good morning, everyone. The bank posted strong loan growth for the second quarter. Overall, loans grew by $80 million in actual numbers. This equates to growth of 1.9%. Year-over-year loans have increased by $172 million or 4.1%. Our first mortgage increased by $90 million in the quarter with home equity products decreasing by a combined $6.9 million. Commercial loans decreased by $2.9 million, which includes the activities around the SBA PPP programs. We are very pleased with the net loan growth for the quarter. Activity was strong throughout all regions. Although refinances do remain elevated, they are down from the peak periods. The purchase money market remains very active. We have seen increased instances where potential homebuyers are unable to proceed due to either the inability to find a suitable home or pricing pressures pushing beyond budgetary means. This upward pressure does seem to be beginning to flatten out somewhat; however, as homebuilders restock their inventory, things will likely begin to ease more noticeably. Our loan backlog is good. It is down approximately 10% from the first quarter and well above where we stood last year. The summer months are typically a little slower than the spring market, although we expect that overall market activity will remain solid due to pent-up demand and continuing low-interest rates. Our current 30-year rate stands at 2.99%. The news regarding asset quality measurements remains good. Virtually all loan deferrals previously granted have returned to normal payment status. Nonperforming loans decreased to $20.8 million from $21.6 million in the quarter and are down approximately $1 million year-over-year. Nonperforming assets decreased to $21.2 million from $22.1 million in the quarter and are down approximately $500,000 year-over-year. Early-stage delinquencies remain very low, and charge-offs for the quarter equated to a net recovery of $164,000. The coverage ratio or allowance to nonperforming loans now stands at 240%, up from 220% last quarter. Rob?

Robert McCormick, President & CEO

Thanks, Scot. That's our story, and we're happy to answer any questions you may have.

Operator, Operator

And the first question will be from Alex Twerdahl with Piper Sandler.

Alex Twerdahl, Analyst

First off, Scot, can you just repeat what you said about the loan pipeline? I think you said down 10% from the first quarter. I just want to make sure I heard you correctly.

Scot Salvador, Senior Lending Officer

Yes, you're right, Alex. We're down about 10% from the first quarter and, as I said, well above where we stood last year at this point.

Alex Twerdahl, Analyst

Okay. And when you talk about the rates, you talk about your advertised rate at 2.99%. Is that typically where these loans come on? Or did a lot of them come on a little bit higher than that?

Scot Salvador, Senior Lending Officer

The majority have come in at that rate, Alex. Roughly 30% or 35% of them are slightly higher than that, while the rest are at the base rate.

Alex Twerdahl, Analyst

Okay. When I look at deposit costs, you've done a great job reducing the cost of deposits and funds over the last year. Are we close to the bottom at this point? I know you went through $692 million of CDs at 41 basis points. It seems like most of the significant reductions have already occurred. Is that the right thinking?

Robert McCormick, President & CEO

Yes. As we continue to chase more CDs out, Alex, there could be some movement. And I think you're wringing the last water out of the chamois, but I still think there is some water to be wrung out.

Alex Twerdahl, Analyst

Can you discuss your significant liquidity position? Interest rates have not been favorable recently. What opportunities are you considering to invest some of that liquidity in securities or other ventures?

Robert McCormick, President & CEO

We would like to see interest rates increase a bit more than they currently are. Generally, we aim to keep our maturities as short as possible. We're not particularly pleased with our current cash position. However, we believe it would be unwise to enter the market without adequate returns.

Alex Twerdahl, Analyst

Okay. So if the 10-year stays downward as it is right now, we'll probably just continue to see liquidity stay at roughly the same levels?

Robert McCormick, President & CEO

As long as we can stand it, yes.

Alex Twerdahl, Analyst

Got it. Can you discuss the capital? I know you have a buyback in place, and you executed some of it in the second quarter. How do you view the buyback moving forward? Do you think you can be more aggressive with it, considering your capital continues to build and your liquidity is healthy? Are there any other opportunities, like mergers and acquisitions, that TrustCo hasn't considered in the last decade but could be viable given the current challenging rate environment?

Robert McCormick, President & CEO

Yes. I mean I think you know our position. And we work for our shareholders, not the shareholders of other companies. So if the right opportunity came along, we would be more than happy to talk to others. I would like to merge more of the management team here. I mean we’re very well equipped to do it. But it would have to be accretive to our shareholders. And as to the other items you mentioned, I mean dividend buyback, you name it, it is all on the table for review at different times and different periods.

Operator, Operator

Ladies and gentlemen, 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, President & CEO

Thank you for your interest in our company. We hope you have a great day.

Operator, Operator

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