TRST (2021 - Q3)

Good day and welcome to the TrustCo Bank Corp earnings call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero on your keypad. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your question, you may press star and then two. Before proceeding, we would like to mention that this presentation may contain forward-looking information about TrustCo Bank Corp 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. As a result 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 call over to Mr. Robert J. McCormick, Chairman, President and CEO. Please go ahead. Robert M

Thank you Nadi, and good morning everyone. As the host said, I am Rob McCormick, President of the bank. As usual, I’m joined by Mike Ozimek and Scot Salvador. Mike is our CFO and Scot is our Senior Lending Officer. As we have done in the past, I’ll provide a summary hitting the highlights, and then turn it over to Mike for a lot of detail on the numbers and Scot 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 third quarter at the bank. Our $16.8 million 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 billion, 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’re also working this product a little bit harder with some new programs to encourage new and additional borrowings. Installment loan have never been material at the bank. We have a large cash position and a substantial investment portfolio with pretty short maturities. We maintain both an 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 million. 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 at 0.34%. Both have improved over prior periods. Our allowance for loan losses to total loan is 1.08% with a coverage ratio of 2.3 times, and that is after recovering $2.8 million 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 one 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 one in Naples, Florida. This is a much 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 services financial services department. Now I’ll turn it over to Mike and Scot, who have a lot more to detail. Mike?

Thank you Rob, and good morning everyone. I will now review TrustCo’s financial results for the third quarter of 2021. As we noted in the press release, the company saw net income of $16.8 million in the third quarter of 2021, an increase of 19.1% 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 third quarter of ’21 grew 4.2% or $176.4 million to $4.4 billion from the third quarter of 2020. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio, which increased by $218.2 million or 5.9% in the third quarter of ’21 over the same period in 2020. The average commercial loan portfolio decreased $20.7 million or 8.9% over the same period in 2020. This included approximately $23 million of new PPP loans originated in ’21. The bank currently has approximately $21 million of the remaining SBA PPP loans. Total average investment securities, which include the AFS and HCM portfolios, increased $19.2 million or 4.3% during the third quarter of ’21 over the same period in 2020. During the same period, the bank had three securities called at a total par value of $20 million. One security matured at a par value of $3.5 million and approximately $28 million of pooled securities were paid down. During the same period, the bank also purchased approximately $4.1 million of securities. The provision for loan loss for the third quarter was a credit of $2.8 million, a decrease compared to the $1 million 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 third quarter of ’21 was primarily the result of an adjustment made to pandemic-specific provision. The ratio of the allowance for loan losses to total loans is 1.08% as of September 30, 2021 compared to 1.17% as of the same period in 2020. The level of the provision for loan losses in the remainder of ’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 a COVID-19 financial relief program and included loan modifications such as deferments on residential and commercial loans by request. As of September 30, 2021, 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-19 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 recurring earnings. Our investment portfolio is and 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 $1.2 billion of overnight investments during the third quarter of ’21, an increase of $228.6 million compared to the same period in 2020. Given the elevated level of cash in ’21, 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 $348.2 million or 7.1% for the third quarter of ’21 over the same period a year earlier. The increase in deposits was the result of a $56.3 million or 8.3% increase in average money market deposits, a $207.6 million or 17% increase in average savings deposits, a $129.4 million or 12.6% increase in interest-bearing checking account averages, and a $157.9 million or 25.4% increase in average non-interest bearing checking balances. These were partially offset by the decrease in average time deposits of $202.9 million or 15% over the same period last year. During the same period, our cost 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 fourth quarter of ’21, additional opportunities continue to exist as CDs re-price to lower market rates. With that said, the bank has approximately $524 million in CDs that will mature at an average rate of 42 basis points. In the first quarter of 2022, approximately $254 million in CDs will mature at an average rate of 40 basis points. In the first half of ’22, approximately $418 million 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 $1.1 billion of assets under management as of September 30, 2021. Now onto non-interest expense. Total non-interest expense net of ORE expense came in at $24.7 million, down $835,000 compared to the second quarter of ’21 and slightly below our estimated range of $24.9 million to $25.4 million. Salary and benefit expense was down $494,000 due to overall decrease in FTEs and effect of the lower stock price on benefit accruals. ORE expense 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 in non-interest expense were in line with our expectations for the third quarter. We would expect that 2021’s total recurring non-interest 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 third quarter of ’21 came in at 55.82% compared to 53.61% in the third quarter of 2020. We have always been proud of expense control at TrustCo Bank and we expect to continue throughout 2021 and beyond. Finally, the capital ratios. Consolidated equity to assets ratio increased slightly and was 9.56% at the end of the third quarter, up 11 basis points from 9.45% from the second quarter of ’21. 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, 2021 was $30.50, up 5.1% compared to $29.03 a year earlier. These amounts are adjusted for the reverse stock split which occurred in the second quarter of 2021. Now Scot will review the loan portfolio and non-performing loans.

Thanks Mike and good morning everybody. For the third quarter, the bank continued to record strong loan growth. Overall loans increased by $47 million in actual numbers, or 1.1%. Year-over-year loans increased by $182 million or 4.3%. The residential portfolio showed growth of $56 million on the quarter. Year-over-year, growth totaled $210 million in residential loans, or 5.3%. Commercial loans decreased by $9 million 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 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 refinance continues 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 second quarter. It remains solid overall, however, and contains a good amount of new money. We are pleased with where we stand entering the fourth 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 3.75%. Asset quality measurements remain strong. On the quarter, non-performing loans dropped from $20.8 million to $20.2 million and non-performing assets decreased from $21.1 million to $20.7 million. Year-over-year, slightly larger decreases were posted in both categories. Early stage link fees remain low and our allowance for loan losses now stands at 1.08%. Charge-offs continue to remain very light and equated to just above zero for the quarter on a net basis. The coverage ratio, or our allowance for loan losses to non-performing loans now stands at 235%, up from 225% a year ago. Rob?

Thanks Scot. We’re happy to answer any questions you have.

[Operator instructions] Our first question today comes from Alex Twerdahl of Piper Sandler. Alex, please go ahead. Your line is open.

Good morning guys.

Good morning Alex.

I was just first off, Rob, hoping you could talk a little bit more about the strategy, the expansion strategy. I think the new geographies kind of around the residential product 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 [indiscernible] in 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 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 one to four 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, so.

Okay, so it’s just a continued expansion of that footprint.

Same with Palm Coast, by the way. I’m sorry?

Okay, that makes sense, that makes sense.

And then 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 in Port Orange.

Are you seeing a lot of success? I mean, are you able to give us some color around 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 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. Scot, I missed what you said about the pipeline going into the fourth quarter. Can you repeat that?

Yes, so we’re down about 10% from where we were in the second quarter, 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, maybe put that into context relative to where it was in the second quarter, 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. 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. 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 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 in the short term, and what sort of opportunities you’re waiting for.

Right. You know, we definitely spent a lot of time looking at it year out and we get to a conscious decision of no, if we’re not 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 to kind of help ourselves along, we’re going to continue to hold. There’s no downside right now, the way we look at it, for not putting that money to work. In six months if it’s higher, then that’s a better spot for us.

Okay, so is there something, 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, 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. Just a 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’s down to 110 of tangible book value. Is there a specific price that it gets more attractive to utilize that buyback more? Is it capital levels beyond or earnings beyond the dividend that you’d consider allocating toward 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 close window period around earnings time, you can’t buy, so 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.

Thank you Alex. This concludes our Q&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.