TRST (2021 - Q2)

Good day, 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 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-K 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 Robert J. McCormick, Chairman, President, CEO. Please go ahead. Robert M

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 a 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 '21 and was about 6.5% greater than the same quarter in 2020. This is driven mostly by our ability to reduce deposit cost 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% dividend payout ratio. Our return on average assets was 0.95% for the quarter, flat for 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 were 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 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 a 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, 1 in Florida and 1 in the Northeast. We're having 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?

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, 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 the loan losses in '21 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-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 $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 $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. They add 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 as compared to last quarter. Professional services were up $182,000. Advertising expenses were 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 noninterest expenses were in line with our expectations for the second quarter. We would expect the 2021 total reoccurring 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.

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. 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 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 [indiscernible] 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?

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

[Operator Instructions] And the first question will be from Alex Twerdahl with Piper Sandler.

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.

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.

Okay. And when you talk about the rates, you talk about your advertiser 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?

The majority have 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 million 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 chamois, 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 them 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 right now. But we just think it would be foolish at this point to jump into the pool [indiscernible] right now.

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?

As long as we 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? Do 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&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?

Yes. We’re [indiscernible]. I mean I think you know our position [indiscernible]. 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 [indiscernible]. 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.

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.

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

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