Earnings Call: Q2 2021

Jul 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 attruscobank.com. Please also note, today's event is being recorded. At this time, I would like to turn the conference over to Robert J. McCormick, Chairman, President and CEO. Please go ahead. Good morning, everyone. I'm Rob McCormick, President of the Bank. Joining me on this call are Mike Ozimek, our Chief Financial Officer Scott Salvador, our Senior Lending Officer. We are pleased to report a very solid second quarter results here at the bank. Our net income was $14,400,000 greater than the prior quarter and well above the same quarter in 2020. Our net interest income at about $40,100,000 was essentially flat over the Q1 of 'twenty one and was about 6.5% greater than the same quarter in 2020. This is driven mostly by our ability to reduce deposit costs of the bank. We still maintain a 2% margin. This 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 a healthy capital level. We continue to pay a solid dividend over $0.34 per share, which amounts to about a 45.5 percent dividend payout ratio. Our return on average assets was 0.95% for the quarter, flat for the Q1 of 'twenty 1 and greater than the same quarter in 2020. Our return on average equity was over 10% for the quarter, again flat compared to the Q1 of 'twenty one and greater than the same quarter in 2020. We did not make a provision for loan losses during the quarter. Our non performing ratios are very strong at 0.48 percent for loans and 0.34 percent 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 were looking at a 1onetwenty 2 implementation of CECL. Assets topped $6,100,000,000 at the end of the quarter, up significantly over last year. This is being driven by growth in the loan portfolio, mostly residential mortgage. Commercial loans is 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 continued a downward trend, but at a much slower rate and installment loans are not a big part of our business. As stated earlier, we are holding a large cash position to prepare for possible changing rate environment. Growth has been very strong quarter over quarter and the same period last year. Shareholders' equity is also up quarter over quarter and 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 2 possible new sites, one in Florida and one in the Northeast. We are having the same difficulty most are 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, Scott will give some color on the loan portfolio, then we'll have time for questions. Mike? Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the Q2 of 2021. As we noted in the press release, the company saw a net income of $14,400,000 in the Q2 of 2021, which yielded a return on average assets and average equity of 0.95% and 10.05 percent respectively. Average loans for the Q2 of 2021 grew 3.8% or $158,600,000 to $4,300,000,000 from the Q2 of 2020. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio, which increased by $193,900,000 or 5.3% in the Q2 of 2021 over the same period in 2020. The average commercial loan portfolio decreased $8,100,000 or 3.6 percent over the same period in 2020. This included approximately $23,000,000 of new PPP loans originated in 2021. The bank currently has approximately $32,000,000 remaining of SBA PPP loans. Total average investment securities, which include the AFS and HTM portfolios increased $13,300,000 or 2.6 percent during the Q2 of 2021. During the same period, the bank had one security call at a par of $5,000,000 1 security also matured at a par value of $5,000,000 and approximately $35,700,000 of pooled securities were paid down. There were no purchases of securities in the Q2 of 2021. There was no provision for a loan loss for the Q2, a decrease compared to the $2,000,000 in the same period in 2020. The ratio of allowance for loan losses to total loans was 1.15% as of both June 30, 2021, 2022. In the Q2 of 2021, the decreased level of provision was driven by the improved asset quality trends and economic conditions. We would expect the level of provision for the loan losses in 2021 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, bank launched a COVID-nineteen 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, 2021, the bank 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 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-nineteen relief bill signed in December 2020. The bank will adopt CECL on January 1, 'twenty two. 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 $1,100,000,000 of overnight investments during the Q2 of 2021, an increase of $399,300,000 compared to the same period in 2020. On the funding side of the balance sheet, total average deposits increased $508,000,000 or 10.8 percent for the Q2 of 2021 over the same period a year earlier. The increase in deposits was a result of $88,000,000 or 13 point 3% increase in average money market deposits, a 215% or 18.4 percent increase in average savings in deposits, a $196,000,000 or 20.6% increase in interest bearing checking account averages and $204,000,000 or 37.1 percent increase in average non interest bearing checking deposits. These are partially offset by the decrease in average time deposits of $194,000,000 or 13.9 percent 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 was 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 Q3 of 2021, additional opportunities continue to exist as CDs reprice to lower market rates. With that said, the bank has approximately $179,000,000 in CDs that will mature at an average rate of 36 basis points. In the Q4 of 'twenty one, approximately $512,000,000 in CDs will mature at an average rate of 43 basis points. In total, during the second half of twenty twenty one, approximately $692,000,000 of CDs will mature at an average rate of 41 basis points. Non interest income came in at $4,700,000 for the Q2 of 2021, 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 They add approximately $1,100,000,000 of assets under management as of June 30, 'twenty one. Now on to noninterest expense. Total noninterest expense net of ORE expense came in at $25,500,000 up $404,000 compared to the Q1 of 'twenty one. Salary and Benny expense was relatively flat as compared to last quarter. Professional services were up $182,000 Advertising expenses was up $195,000 and other expenses was up $349,000 as compared to last quarter. These increases were partially offset by a decrease in net occupancy expense of $258,000 as compared to last quarter. ORE expenses came in at an income of $60,000 for the quarter as 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 non interest expenses were in line with our expectations for the Q2. We would expect the 20 21's total reoccurring non interest expense net of ORE expense to remain in the range of $24,900,000 to $25,400,000 per quarter. The efficiency ratio in the Q2 of 2021 came in at 56.91% compared to 58.3% in the Q2 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 one basis point from 9.44% from the Q1 of 2021. 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 Scott will review the loan portfolio on non performing loans. Thanks Mike and good morning everyone. The bank posted strong loan growth for the Q2. Overall loans grew by $80,000,000 in actual numbers. This equates to growth of 1.9%. Year over year, This equates to growth of 1.9%. Year over year loans have increased by $172,000,000 or 4.1%. First mortgages increased by $90,000,000 on the quarter with home equity products decreasing by a combined 6,900,000 dollars Commercial loans decreased by $2,900,000 which includes the activities surrounding 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 their peak periods. The purchase money market remains very active and 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 the budgetary means. This upward pressure does seem as it's beginning to flatten out somewhat, however, and as homebuilders restock their inventories, things will likely begin to ease more noticeably. Our loan backlog is good. It is down approximately 10% from the Q1 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 percent. The news regarding asset quality measurements remains good. Virtually all loan deferrals previously granted have returned to normal payment status. Non performing loans decreased to $20,800,000 from $21,600,000 on the quarter and are down approximately $1,000,000 year over year. Non performing assets decreased to $21,200,000 from $22,100,000 on the quarter and are down approximately $500,000 year over year. Early stage delinquency remained very low and charge offs for the quarter equated to a net recovery of $164,000 The coverage ratio or allowance to non performing loans now stands at 2 40%, up from 2.20% last quarter. Rob? Thanks, Scott. That's our story and we're happy to answer any questions you may have. Thank you. We will now begin the question and answer session. And the first question will be from Alex Twerdahl with Piper Sandler. Please go ahead. Hey, good morning guys. Good morning, Alex. Good morning, Alex. Hey, first off, Scott, can you just repeat what you said about the loan pipelines? I think you said down 10% from the Q1. Just want to make sure I heard you correctly. No, yes, you're right. We're down about 10% from the Q1. And as I said, well above where we stood last year at this point. Okay. And then when you talk about the rates, you talked about your advertised rate at 2.99%. Is that typically where these loans come on? Or does a lot of them come on a little bit higher than that? The majority come on at that rate, Alex. Maybe these are rough numbers, but maybe 30% of them, 35% of them come in a little higher than that and the remainder come in at the base rate. Okay. And then when I look at deposit costs, obviously, you've done a great job reducing the cost of deposits and cost of funds over the last year. Are we pretty much close to the bottom at this point? I know you Mike, you went through $692,000,000 of CDs at 41 basis points. But certainly, it seems like most of the big reductions have happened. Is that the right thinking? 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 Shammy, but I still think there is some water to be wrung out. Okay. And then can you talk a little bit about you're sitting on a huge liquidity position. Rates have certainly not been anyone's friend over the last couple of weeks. But what are you looking for in terms of opportunities to actually deploy some of that liquidity into securities or other opportunities? I mean, we'd like to see the risk move a little bit higher than they are right now. We try and generally speaking, we try and keep maturities as short as we possibly can. And we're not thrilled with the cash position we're at now, but we just think it would be foolish at this point to jump into the full with the way the figures are right now. Okay. So if the tenure stays down where it is right now, we'd probably just continue to see liquidity stay at roughly the same levels? As long as you can stand it, yes. Got it. And then maybe you can talk a little bit about just the capital. And I know you got the buyback in place, you did a little bit this quarter or in the second quarter. How are you thinking about the buyback? You think you can get a little bit more aggressive with that just sort of given the capital is continuing to build and liquidity is obviously very healthy? And are there other opportunities, perhaps M and A that haven't really been part of the equation at TrustCo for the last decade or so, but maybe could make some more sense just in a challenging rate environment? I mean, I think you know our position. We're well aware of who we work and we work for our shareholders, not shareholders of other companies. So if the right opportunity came along, we would be more than happy to talk to people and we would like to emerge more than the management team here and we're very well equipped to do it, but it would have to be accretive to our shareholders. And as the other items you mentioned, I mean dividend, buyback, you name it, is all on the table for review at different times and different periods. Great. Thanks for taking my questions. Thank you. 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.