Earnings Call: Q3 2021

Oct 22, 2021

Good day, and welcome to the TrustCo Bancorp Earnings Call and Webcast. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Before proceeding, we would like to mention that this presentation may contain forward looking information about TrustCo Bancorp, 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 ks and as updated by our quarterly reports on Form 10 Q. These 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 would like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President and CEO. Please go ahead. Thank you, Nadia, and good morning, everyone. As the host said, I am Rob McCormick, President of the Bank. As usual, I'm joined by Mike Elsimek and Scott Salvador. Mike is our CFO and Scott is our Senior Lending Officer. As we have done in the past, I'll provide a summary hitting the highlights, then turn it over to Mike for a lot of detail on the numbers, then Scott will go over the loan portfolio. We will respond to any questions you have, then we can wrap it up. We had a very solid Q3 at the bank. Our $16,800,000 net income is a record for us and is over 19% greater than the same quarter last year. Assets at the end of the quarter were $6,135,000,000 greater than last quarter and the same quarter last year. The increase in assets is driven by our loan growth in our residential portfolio. Commercial loans are down as a result of the PPP forgiveness. Home equity loans are down much less than prior periods. As we have discussed on this call before, we believe the runoff is being captured in our residential portfolio and we are also working this product a little bit harder with some new programs to encourage new and additional borrowings. Installment loans have never been material at the bank. We have a large cash position and a substantial investment portfolio with pretty short maturities. We maintain bolt in anticipation of and preparation for a changing rate environment. We like a lot of companies have had tremendous deposit growth. This has afforded us the opportunity to shake off some of the higher cost time deposits with nice growth in the traditional core accounts and money market. We were able to increase our equity to over $586,000,000 Our loan portfolio is performing very well, non performing loans to total loans is at 0.46% and non performing assets to total assets are 0.34. Both have improved over prior periods. Our allowance for loan losses to total loans is 1.88 percent with a coverage ratio of 2.3x and that is after recovering $2,800,000 from the reserve. We are prepared for CECL implementation next year. Return on average assets, equity and our efficiency ratio all showed improvement over the period. We continue to pay our healthy dividend. We are operating 147 full service offices after closing 1 and opening Palm Coast in Florida. We are having the same labor difficulties as most. We are exploring loan production offices and plan to open 1 in Naples, Florida. This is much a longer term strategy. We also have worked to expand our lending area to neighboring counties in a few areas. We continue to operate a full service Financial Services department. Now I'll turn it over to Mike and Scott, who have a lot more detail. Mike? Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the Q3 of 2021. As we noted in the press release, the company saw net income of $16,800,000 in the Q3 of 2021, an increase of 19.1 percent over the prior year quarter, which yielded a return on average assets and average equity of 1.08 and 11.40, respectively. Average loans for the Q3 of 'twenty one grew 4.2 percent, to $176,400,000 to $4,400,000,000 from the Q3 of 2020. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio, which increased by 218,200,000 or 5.9 percent in the Q3 of 'twenty one over the same period in 2020. The average commercial loan portfolio decreased 20,700,000 or 8.9 percent over the same period in 2020. This included approximately 23,000,000 of new PPP loans originated in 'twenty one. The bank currently has approximately 21,000,000 of remaining SBA PPP loans. Total average investment securities, which include the AFS and HCM portfolios, increased $19,200,000 or 4.3 percent during the Q3 of 'twenty one over the same period in 2020. During the same period, the bank had 3 securities called at a total par value of 20,000,000 dollars 1 security matured at a par value of 3,500,000 and approximately 28,000,000 of pooled securities were paid down. During the same period, the bank also purchased approximately $4,100,000 of securities. Provision for loan loss for the 3rd quarter was a credit of $2,800,000 a decrease compared to the $1,000,000 provision for loan loss in the same period in 2020. As you may remember, during 2020, management increased certain allowance related qualitative factors based on its assessment of the impact of the current pandemic on economic conditions as well as the perceived risks inherent to specific industries as they relate to the bank's loan portfolio. The decrease during the Q3 of 'twenty one was primarily the result of an adjustment made to pandemic specific provision. The ratio of the allowance for loan losses to total loans was 1.08% as of September 30, 'twenty one compared to 1.17% as of the same period in 2020. The level of the provision for loan losses in the remainder of 'twenty one will 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 a COVID-nineteen financial relief program and included loan modifications such as deferments on residential and commercial loans by request. As of September 30, 21, the bank saw most of these loan deferments return to making regular loan payments. As mentioned in prior quarters, the bank did not adopt CECL as was originally provided by the CARES Act and as part of the COVID-nineteen relief bill signed in December 2020, the bank will adopt CECL on January 1, 2022. 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, reoccurring earnings. Our investment portfolio has always been a source of liquidity to fund loan growth and provide flexibility for balance sheet management. As a result, we held an average of $1,200,000,000 of overnight investments during the Q3 of 'twenty one, an increase of $228,600,000 compared to the same period in 2020. Given the elevated level of cash in 'twenty one, the bank did invest some excess liquidity into the market during the beginning of the year. On the funding side of the balance sheet, total average deposits increased $348,200,000 or 7.1 percent for the Q3 of 'twenty one over the same period a year earlier. The increase in deposits was a result of $56,300,000 or 8.3 percent increase in average money market deposits, a $207,600,000 or 17% increase in average savings deposits, a $129,400,000 or 12.6 percent increase in interest bearing checking account averages, and a $157,900,000 or 25.4 percent increase in average non interest bearing checking balances. These are partially offset by the decrease in average time deposits of $202,900,000 or 15% over the same period last year. During the same period, our cost of total of interest bearing deposits decreased 14 basis points from 52 basis points. This was primarily driven by a decrease in money market deposits to 11 basis points from 37 basis points and time deposits to 40 basis points from 139 basis points over the same period last year. As we move into the Q4 of 'twenty one, additional opportunities continue to exist as CDs repriced to lower market rates. With that said, the bank has approximately $524,000,000 in CDs that will mature at an average rate of 42 basis points. In the Q1 of 2022, approximately $254,000,000 in CDs will mature at an average rate of 40 basis points. In the first half of 'twenty two, approximately $418,000,000 of CDs will mature at an average rate of 36 basis points. Our Financial Services division continues to be a significant recurring source of non interest income. They had approximately $1,100,000,000 of assets under management as of September 30, 'twenty Now on to non interest expense. Total non interest expense, net of ORE expense, came in at $24,700,000 down $835,000 compared to the Q2 of 'twenty one and slightly below our estimated range of $24,900,000 to 25,400,000 dollars Salary and benefit expenses down $494,000 due to the overall decrease in FTEs and effect of the lower stock price on benefit accruals. ORE expense came in net came in at an expense of $32,000 for the quarter as compared to an income of $60,000 in the prior quarter. Given the continued low level of ORE expenses, we are going to continue to hold the anticipated level of expenses to not exceed $350,000 per quarter. All the other categories of non interest expense were in line with our expectations for the Q3. We expect the 2020 one's total reoccurring non interest expense, net of our expense, to remain in the range of $24,900,000 to $25,400,000 per quarter. The efficiency ratio in the Q3 of 'twenty one came in at 55.82 percent compared to 53.61 percent in the Q3 of 2020. We have always been proud of expense control at TrustCo Bank and we expect this to continue throughout 2021 and beyond. And finally, the capital ratios. Consolidated equity to assets ratio increased slightly and was 9.56% at the end of the 3rd quarter, up 11 basis points from 9.45% from the Q2 of 'twenty 1. The bank continues to be proud of its ability to increase shareholder value during these challenging economic times. Book value per share at September 30, 'twenty one was $30.50 up 5.1% compared to 2,9.03 a year earlier. These amounts are adjusted for the reverse stock split, which occurred in the Q2 of 2021. Now, Scott will review the loan portfolio and non performing loans. Thanks, Mike, and good morning, everybody. For the Q3, the bank continued to record strong loan growth. Overall loans increased by $47,000,000 in actual numbers or 1.1 percent. Year over year loans increased by $182,000,000 or 4.3 percent. The residential portfolio showed growth of $56,000,000 in the quarter. Year over year growth totaled $210,000,000 in residential loans or 5.3%. Commercial loans decreased by $9,000,000 on the quarter, which includes ongoing pay downs on the bank's SBA PPP program. Residential real estate remains active in all our market areas. The results of increased prices and lowered inventory levels has hampered some of the individual borrowers and their ability to find and secure a home for purchase. However, overall, the demand for purchase money remains at satisfactory levels. On the refinance side of things, activity is down significantly from where it stood a year ago at this point. Mortgage rates do remain low, however, and though down from last year's frantic pace, there still remains an elevated degree of refinance activity. Whether refinances continue to decrease to still lower levels in the near term is uncertain and largely dependent upon whether mortgage rates begin to increase to some significant degree. Our mortgage backlog has come down approximately 10% since the Q2. It remains solid overall, however, and contains a good amount of new money. We are pleased with where we stand entering the 4th quarter and optimistic about continuing to post satisfactory net loan growth. Interest rates, although having ticked up slightly of late, continue to remain at low levels. Currently, our 30 year fixed rate stands at 3.25. Asset quality measurements remain strong. On the quarter, non performing loans dropped from $20,800,000 to $20,200,000 and non performing assets decreased from $21,100,000 to 20.7 dollars Year over year slightly larger decreases were posted in both categories. Early stage delinquencies remain low and our allowance for loan losses now stands at 1.08%. Charge offs continue to remain very late and equated to just above 0 for the quarter on a net basis. The coverage ratio or our allowance for loan losses to non performing loans now stands at 2 35%, up from 2 25% a year ago. Rob? Thanks, Scott. We're happy to answer any questions you have. Our first question today comes from Alex Treidl of Piper Sandler. Alex, please go ahead. Your line is open. Good morning, guys. Good morning, Alex. Good morning, Alex. I was just first off, Rob, hoping that you could talk a little bit more about the strategy, the expansion strategy. I think the new geographies kind of around the residential products certainly make a lot of sense, but maybe talk a little bit more about both the expectations there as well as the thought process around NLPO and Naples. It's a great way to dip our toe into the water, Alex. It's a dollar bet instead of a much larger bet. We leased about 850 Square Feet in end cap in a strip center. We're paying very little for it. And as long as we can get the right originators in that office, we can think we can make some hay for it. I think as you know, the West Coast of Florida especially has been particularly good to the bank. And I just think a further expansion is in order and a very good idea. I also think it might be a great opportunity to expand into full service branches down the road into that area. Okay. And is that primarily going to be originating 1 to 4 family or is there other products that it's going to be focused on? Yes. Yes. And remember, we go as far south now as Englewood, if you're not familiar with Florida, which is in the same county as Naples or the next county up from Naples. Okay. So it's just a continued Same with Palm Coast, by the way. I'm sorry? Okay. That makes sense. That makes sense. Same with Palm Coast. The branch we just opened in Palm Coast is the same thing. That's in Flagler County, which is very close to Ormond Beach and Port Orange. Are you seeing a lot of success? I mean, are you able to give us some color around sort of the mortgage production out of Florida versus the Upstate New York piece? Is there are they pretty equal or is there still a big tilt towards the towards Upstate New York? We're very pleased with the mortgage production in Florida and it's getting very comparable to the other areas that we serve. Okay. Scott, I missed what you said about the pipelines going into the Q4. Could you repeat that? Yes. So we're down about 10% from where we were in the Q2, Alex, which is not uncommon for this time of year, but it's a good solid pipeline. It's got a lot of new money. So we're pretty pleased with where we stand and we think we should be able to continue to post some good growth this quarter. Okay. And when you talk about the new money, can you maybe put that into context relative to where it was in the Q2, the sort of refi versus new money proportions? Yes. Well, it's more if you look back a year, it's probably a better comparison. Last year at this point, we had a little bit higher backlog, but the percentage of refinances in that backlog was much more significant. And as I said in my presentation, there's still an elevated level of refinance activity, but it's nothing like it was last year. So although the backlog is down a little bit percentage wise from last year, the percentage of refis is down significantly versus purchase money and that sort of thing. Okay, great. And then with the 10 year kind of creeping up a little bit here and just sort of sitting on the amount of cash and seeing the sort of runoff on the securities portfolio, Mike, I was hoping maybe you could talk a little bit more about the thought process around actually putting a little bit more cash to work into securities kind of in the short term and sort of what sort of opportunities you're waiting for? Right. We definitely spent a lot of time looking at it here, Alex. I mean, we get to a conscious decision of no for not investing. It is getting a little bit higher. We are talking to some of our investing. It is getting a little bit higher. We are talking to some of our guys out in the field, some of the brokers out there to take a look at it. But until it really gets to a spot where we need to invest and kind of to help ourselves along, we're going to continue to hold them. There's no downside right now way we look at it for not putting that money to work. In 6 months, if it's higher, that's a better spot for us. Okay. So it's is there sort of something that is a specific number you're looking for in terms of when you'll start to put money to work or how much you'll start to ladder out? No, no, not right now. It's based on the need that we have, Alex, and where the rates are going and where we think the trending is going at that point. I guess higher would be the answer. Yes. Okay. And then just final question for me. You guys did a little bit in the buyback. What are you kind of thinking about for the share repurchase program, the stock is down to 110 of tangible book value? Is there a specific price that it gets more attractive to utilize that buyback more? Is there a capital level beyond or earnings beyond the dividend that you'd be consider allocating towards the buyback? Or what's the thought process there? No, we're going to stay active in the buyback, Alex. You know when you have a closed window period around earnings time, you can't buy. So that we were active, I think, right up until the window closed. And we would anticipate being active again in the future. Okay. Thanks for taking my questions. Thank you. Thanks. Thank you, Alex. This concludes our Q and A session. I would like to turn the conference back over to Robert J. McCormick for any closing remarks. Thank you for your interest in our company and have a great day. The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.