Earnings Call: Q1 2021

Apr 22, 2021

Good day, and welcome to the TrustCo, Inc. 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. 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 would like to turn the conference over to Mr. Robert J. McCormick, Chairman, President and CEO. Please go ahead. Thank you, and good morning, everyone. As the host said, I'm Rob McCormick, President of the Bank, joined today by Mike Ozimek, our CFO and Scott Salvador, our Chief Lending Officer. As we usually do, I will start with a brief summary hitting the highlights, then Mike will detail the numbers, Scott will talk about loans, then we can wrap up with any questions you may have. There have been several positive events that have occurred at our company recently. We've crossed over the $6,000,000,000 total asset mark. Our Florida deposits now exceed $1,000,000,000 Our Florida loan portfolio now exceeds $1,000,000,000 and our financial services area now has more than $1,000,000,000 under management. These are all positive events for our company and contributed to a very solid Q1 2021. Our net income was over $14,000,000 greater than year end 2020 and the Q1 of 2020. Our net interest income was $40,100,000 for the Q1 of 'twenty one, also greater than year end and Q1 'twenty. Our net interest margin for the Q1 of 'twenty one was 2.78 dollars essentially flat since year end 'twenty and down from Q1 'twenty. Our total deposits were almost $5,200,000,000 This is up significantly over the same quarter of 'twenty when they were roughly $4,500,000,000 dollars This growth has been in all core categories. Higher cost time deposits are actually down about $130,000,000 year over year. We have certainly received deposits from stimulus payments. These deposits seem stickier than most, including us, originally thought they would be. We could see this reverse and draw down as our country reopens. Our loan portfolio has grown to almost $4,300,000,000 another all time high. Vast majority of this growth is in residential mortgage loans. We also had some activity in the commercial loan portfolio driven mostly by the PPP loan program. Home equity loans continue to run off, albeit at a slower pace. We also think most of that runoff is being captured as part of the residential refinances. Installing loans have never been a big part of our business. We have a significant cash position in the relatively large investment portfolio with shorter maturities. We closely monitor this position and look for good opportunities to put these funds to work at higher yields. Our asset quality remains strong. Nonperforming loans to total loans is basically flat at 0.51% and nonperforming assets to total assets are down to 0.36%. Our allowance to total loans is 1.17 percent with a coverage ratio of 2.3x, pretty much flat over the prior periods. Our capital ratios are still strong and shareholders' equity continues to climb. We continue to operate 148 full service offices. We are looking for new opportunities that may end up opening a couple of new locations. We are also looking for better opportunities to relocate existing offices. Our return on average assets was 0.96@quarterend and our return on average equity was just over 10%. Our efficiency ratio was 56.4%. Our dividend payout ratio was 46.7%. We continue to operate a full service financial services department. We are pleased with our Q1 results and optimistic about the rest of 2021. Now Mike and Scott will give more detail on our results. Mike? Thank you, Ram, and good morning, everyone. I'll now review TrustCo's financial results for the Q1 of 2020 one. As we noted in the press release, the company saw net income of $14,100,000 in the Q1 of 2021, which yielded a return on average assets and average equity of 0.96% and 10.01%, respectively. Average loans for the Q1 of 2021 grew 4.3 percent or $173,300,000 to $4,200,000,000 from the Q1 of 2020. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio, which increased by $187,500,000 or 5.2 percent in the Q1 of 2021 over the same period in 2020. Average commercial loan portfolio increased $14,700,000 or 7.4 percent over the same period in 2020. This included $17,100,000 of new PPP loans originated in the Q1. The bank currently has approximately $37,000,000 remaining of SBA PPP loans. Full average investment securities, which include the AFS and HDM portfolios increased $35,100,000 or 7.6 percent during the Q1. During the same period, the bank purchased approximately $132,000,000 of securities approximately $37,900,000 of pooled securities paid down. There are no securities called in the Q1 of 2021. Provision for loan loss for the Q1 was $350,000 a decrease compared to the $2,000,000 in the same period in 2020. The ratio for allowance for loan losses to total loans was 1.17 percent as of March 31, 2021 compared to 1.13% as of the same period in 2020. In the Q1 of 2021, the decreased level of provision was driven by improving economic indicators and the outlook resulting from the COVID-nineteen pandemic. We would expect a level of provision for 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, the bank launched the 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 March 31, 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 current levels limited impact they may have in the overall credit quality of the loan portfolio. As mentioned in the prior quarter, 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, 2022. The company expects to remain well capitalized under current regulatory calculations. As discussed in prior calls, our focus continues beyond 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 $1,000,000,000 of overnight investments during the Q1 of 2021, an increase of $617,000,000 compared to the same period in 2020. Given the elevated level of cash in 2021, the bank has begun to invest excess liquidity into the market at current levels. On the funding side of the balance sheet, total average deposits increased $630,000,000 or 14.2 percent for the Q1 of 2021 over the same period a year earlier. The increase in deposits was a result of $111,000,000 or 18.1 percent increase in average money market deposits, a $198,000,000 or 17.8% increase in average savings deposits, a $213,000,000 or 24.5 percent increase in interest bearing check account averages and a $215,000,000 or 46.9 percent increase in average non interest bearing checking balances. These are partially offset by the decrease in average time deposits of 108,000,000 dollars or 7.9 percent over the same period. During this time period, our total cost of interest bearing deposits decreased to 20 basis points from 78 basis points. This is primarily driven by a decrease in money market deposits to 16 basis points from 72 basis points and time deposits to 54 basis points from 1.88% over the same period last year. As we move through 2021, CDs will continue to reprice down to current market rates. In the Q2 of 2021, approximately $226,000,000 of CDs will mature at an average rate of 40 basis points. And in the second half of twenty twenty one, approximately $645,000,000 of CDs will mature at an average rate of 44 basis points. Non interest income came in at $4,400,000 for the Q1 of 2021, up compared to last quarter, primarily as a result of increased financial services income related to the fees earned by our financial services division for tax preparation services and the increased fee income on larger balances under management. Our Financial Services Division continues to be the most significant reoccurring source of non interest income and had approximately $1,000,000,000 of assets under management as of March 31, 2021. Now on to non interest expense. Total non interest expense net of ORE expense came in at $25,100,000 up $311,000 compared to the Q4 of 2020 and slightly overestimated range of 24 $500,000 to $25,000,000 Salary and benefits expense increased $698,000 as a result of a couple of items. The primary item was an increase in benefit liabilities due to the increased share price. And the second the Q1 of the year always bears the cost of increased employer payroll taxes and the bank also saw the impact of increased health care costs as the new contracted rates for 2021 took effect. ORE expense came in at $239,000 for the quarter as compared to an expense of $45,000 for the Q1. Given the continued low level of ORE expenses, we are going to continue to hold anticipated level of expense not to exceed $450,000 per quarter. All the other categories of non interest expense were in line with our expectations for the Q1. We would expect that 20 20 1's total reoccurring non interest expense net of ORE expense to be in the range of $24,900,000 to $25,400,000 per quarter. The efficiency ratio for the Q1 of 2021 came in 56.35% compared to 56.34% in the Q1 of 2020. One thing we are always proud of is the expense control at TrustCo Bank and we expect this to continue throughout 2021. And finally, the capital ratios. Consolidated equity to asset ratio was 9.44 percent at the end of the Q1, down 19 basis points from 9.63% from the Q4 of 2020 due to the growth in assets. The bank continues to be proud of its ability to increase shareholder value during these challenging times. Book value per share at March 31, 'twenty one was $5.92 up 4.2% compared to $5.68 a year earlier. Now Scott will review the loan portfolio and non performing loans. Okay, Mike. Thank you and good morning. In the Q1, total loans grew by $25,000,000 in actual numbers or 0.6%. Year over year loans have increased by 4.1 percent or $170,000,000 Loan growth on the quarter consisted of $21,000,000 of residential growth and $4,500,000 on the commercial side. Commercial loan figures include the bank's ongoing activity with regards to SBA PPP lending programs. Our first mortgage product increased by $32,000,000 on the quarter with an $11,000,000 decrease in our home equity loans netting to the $21,000,000 residential growth number. The Q1 is typically the bank's slowest with regard to loan growth. Activity levels have increased steadily and are currently strong in all of our lending regions. Purchase lending has been particularly active in all areas. Refinances remain elevated, although below the peak periods of last year. Properties are selling quickly in most all areas and a lack of inventory in the more modest price ranges is a common occurrence. Interest rates have continued to hover in the lower 3% range over recent weeks. Currently, our 30 year rate stands at 2.99%. Our loan backlog at quarter end was strong. It reflects both the active purchase money market and the overall level of mortgage activity. It is well above the totals for both year end and the same point last year. We are optimistic regarding the increased net loan growth for this quarter given both the ongoing strong activity levels and our current backlog. This potential growth, however, will continue to be impacted to some degree by the elevated refinance levels, at least in the short term. Overall asset quality measurements remained strong. Non performing loans totaled $21,600,000 in the quarter. This compares to $21,100,000 in December $20,700,000 a year ago. Such choppiness is to be expected as we continue at these very low levels. Non performing assets totaled $22,100,000 compared to $22,000,000 in March of 2020. Charge offs actually netted to a $46,000 recovery on the quarter. The allowance for loan losses is down 1.17 percent of total loans with the coverage ratio or the allowance to non performing loans standing at 2 31%. Rob? Just before we turn to questions, I did want to mention we were named the best bank finance paper in a reader poll. And I tell you this only because on prior calls, I told you how our employees have performed, especially during a pandemic year. So I think that's a very nice tribute to them, shows how well they performed. So we're now happy to answer any questions you might have. We will now begin the question and answer session. Our first question comes from Alex Twerdahl from Piper Sandler. Please go ahead. Hey, good morning guys. Good morning, Alex. Good morning, Alex. First off, just wanted to start with some of the most recent comments you were making, Scott, on the loan pipeline and your optimism, etcetera. If you had to kind of boil it all down to sort of a growth rate for expected loan growth for the residential portfolio for 2021, I mean, would you say that sort of mid single digits is right, high single digits, lower than that? How can can you maybe just help us frame it a little bit better? Well, it's difficult to forecast, Alex. As you know, there's a lot of variables that come into play, not just on the volume side, but when you're talking about the refinance angle and everything else, there is a lot of variables. So it's difficult to forecast. But that being said, as I said in my remarks, our Q1 is typically our slowest quarter of the year given coming off the holidays. Our backlog is very strong and the activity in the marketplace is strong. So I would hope that we're going to post good net growth for the next certainly the next quarter and hopefully remainder of the year and pick up significantly from where we are now. But I can't put any specific numbers on it. Okay. And you'd mentioned the advertised rate was $2.99 Is that roughly where most of these loans are coming on or are they coming out a little bit higher than that? They are as of now, Alex. We have been higher than that. As of most recently, we are at 3.25%. So in recent weeks, we have been more in that range. But just within the last day or so, we've come down to where we are at 2.99%. Okay. And then, Mike, when you're talking about the cash balances and being a little bit elevated, I think you said you've begun to invest excess liquidity at current levels. Is that in reference just to the $132,000,000 of purchases that you did in the Q1? Or have you done additional in the Q2? And maybe just help us get a little bit more understanding on how you're thinking about sort of laddering that cash in over the next couple of quarters? Yes, sure. So far, we haven't done anything in the Q2. So the initial comments were what we did in the first. You see where we're at now, a little over $1,000,000,000 pushing $1,100,000,000 We're going to look at that. And it is a metering of how much money is going out into our loan portfolio. So, and as another round of stimulus comes in, what happens with our overall deposit balances. There's been a lot of talk in the market. We feel our deposits are sticky. They are hanging around. But as this country opens up and if we start to see some of those funds run out, people actually go out, start to spend a little bit of money on that. That's all going to come into play. So, I guess what I would say is our cash balance is where they are now. I would not expect them to get a lot larger. So, if that kind of helps out a little bit. Okay. So, around $1,000,000,000 is sort of the is plenty. And if more cash comes in, in the Q2, then the expectation would be to ladder that. And it's not using loan growth, the expectation would be to go out and purchase some securities? Right. Okay. And then on the liability side, we're pretty much at the bottom in terms of I know you talked about the CD repricings from 40 and 44 basis points later this year. Where are new CDs coming on? And how much more room do you think there is to lower cost of deposits? I think the highest rate we're offering right now is 15 basis points. So I think there's still room for repricing, Alex. I agree with you. We're bouncing along the bottom. Is that a good way of saying it or a popular way of saying it? But I think there is still a little bit more room, but I don't know how much. Understood. And then as you think about capital deployment, I know you reauthorized the 2,000,000 shares of repurchase activity or repurchase authorization during the quarter. Talk a little bit about how you plan to use that authorization? Did you do any in the Q1? And sort of what is it based on price? Is it based on what's it based on that again, do that $2,000,000 Yes. We didn't make a buy in the Q1. On a buyback program, you know the Q1 is problematic because you're preparing the proxy and the annual report. So there are quite a few close window periods during that time. We are certainly looking at buybacks, and it's based on all of the above. The capital position of the company, the price of the stock and what the activity has been in recent times.