Trustco Bank Corp (TRST) Q2 2021 Earnings Call Transcript

Trustco Bank Corp (TRST 0.07%)
Q2 2021 Earnings Call
Jul 22, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the TrustCo Bank Corp Earnings Call and Webcast. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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. 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. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Robert J. McCormick, Chairman, President, and CEO. Please go ahead.

Robert J. McCormick -- Chairman, President, and Chief Executive Officer

Good morning, everyone. I'm Rob McCormick, President of the Bank, joining me on this call are Mike Ozimek, our Chief Financial Officer; and 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 of 2021 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 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 2021 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 2021 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 2.4 times. 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 the 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 is not performing up to standard, so we closed it. We did not open any new offices. We are looking at two possible new sites, one in Florida and one in the Northeast. We are having the same difficulty most are with staffing, hiring and retention has been a challenge. We did complete the one 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 towards the rest of the year with optimism.

Now, Michael will give a lot more detail on the numbers and Scot will give some color on the loan portfolio, then we'll have time for questions. Mike?

Michael M. Ozimek -- Executive Vice President and Chief Financial Officer

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 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 2021.

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 2021. There is no 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, 2021 and 2022. In the second quarter 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 the economic conditions in our geographic footprint.

As mentioned in prior quarters, to support our borrowers experiencing economic hardships, Bank launched a COVID-19 financial relief program and includes 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 a low current levels and limited impact it may have an 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, 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 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 2021, 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 2021 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 non-interest bearing checking deposits. These were 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 a 54 basis points and time deposits to 42 basis points from 162 basis points over the same period last year.

As we move into the Third Quarter of 2021, additional opportunities continue to exist as CDs reprice to lower market rates. But 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 2021, approximately $512 million in CDs were matured at an average rate of 43 basis points. In total, during the second half of 2021, approximately $692 million of CDs will mature at an average rate of 41 basis points. Non-interest income came in at $4.7 million for the second quarter of 2021, up compared to last quarter, primarily as a result of increased fees for services to customers as we have seen overdraft in the interchange fees start to pick up. Our Financial Services division continues to be the most significant recurring source of non-interest income. They add approximately $1.1 billion of assets under management as of June 30, 2021.

Now on to non-interest expense. Total non-interest expense, net of ORE expense came in at $25.5 million, up $404,000 compared to the first quarter of 2021. Salary and benefit 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're 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 second quarter.

We would expect the 2021’s total reoccurring 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 second quarter of 2021 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. It was 9.45% at the end of the second quarter, up 1 basis point from the 9.44% from the first quarter 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 Scot will review the loan portfolio and nonperforming loans.

Scot R. Salvador -- Executive Vice President and Chief Lending Officer

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%. 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 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 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 a return to normal payment status. Nonperforming loans decreased to $20.8 million from $21.6 million on the quarter and are down approximately $1 million year-over-year. Nonperforming assets decreased to $21.2 million from $22.1 million on the quarter and are down approximately 500,000 year-over-year. Early stages [Indecipherable] remained 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?

Robert J. McCormick -- Chairman, President, and Chief Executive Officer

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

And, the first question will be from Alex Twerdahl with Piper Sandler. Please go ahead.

Alexander Twerdahl -- Piper Sandler -- Analyst

Hey, good morning guys.

Robert J. McCormick -- Chairman, President, and Chief Executive Officer

Good morning, Alex.

Scot R. Salvador -- Executive Vice President and Chief Lending Officer

Good morning, Alex.

Alexander Twerdahl -- Piper Sandler -- Analyst

Now first off, Scott, can you just repeat what you said about the loan pipelines. I think you said down 10% from the first quarter, just want to make sure you heard -- I heard you correctly.

Scot R. Salvador -- Executive Vice President and Chief Lending Officer

Yeah, yeah, you're right, we're down about 10% from the first quarter and as I said, well above where we stood last year at this point.

Alexander Twerdahl -- Piper Sandler -- Analyst

Okay. And when you talked about the rates, you talked about your advertise rate at 2.99%. Is that typically where these loans come on or a lot of them come on a little bit higher than that?

Scot R. Salvador -- Executive Vice President and Chief Lending Officer

The majority had come on at that rate [Indecipherable] 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.

Alexander Twerdahl -- Piper Sandler -- Analyst

Okay. And, then when I look at deposit costs, obviously, you've done a great job of reducing the cost of deposits and cost of funds over the last year and we’re 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, the big reductions have happened, Is that the right thinking?

Michael M. Ozimek -- Executive Vice President and Chief Financial Officer

Yeah, as we continue to chase more CDs out, Alex, there could be some movement, and I think you're bringing the last water out of the chamois but I still think there is some water to be wrung out.

Alexander Twerdahl -- Piper Sandler -- Analyst

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?

Michael M. Ozimek -- Executive Vice President and Chief Financial Officer

I mean we'd like to which [Indecipherable] a little bit higher than they are right now. You know, we try -- generally speaking, we are trying and keep maturities as short as we possibly can. And we're not thrilled with the cash position right now, but we just think it would be foolish at this point to jump into the [Indecipherable] it's all right now.

Alexander Twerdahl -- Piper Sandler -- Analyst

Okay. So if the tenure stays downward is right now, it probably just continue to see liquidity stay at roughly the same levels.

Robert J. McCormick -- Chairman, President, and Chief Executive Officer

As long as it can stand it. Yes.

Alexander Twerdahl -- Piper Sandler -- Analyst

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, 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 hasn't really been part of the equation at TrustCo over the last decade or so, but maybe you could make some more sense just in a challenging rate environment?

Robert J. McCormick -- Chairman, President, and Chief Executive Officer

Yeah, [Indecipherable]. I mean, I think you know our position. [Indecipherable] And we work for our shareholders, not shareholders of other companies. So if the right opportunity came along we would be more than happy [Indecipherable] management team here, and 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 -- is all on the table for review at different times in different periods.

Alexander Twerdahl -- Piper Sandler -- Analyst

Great, thanks for taking my questions.

Robert J. McCormick -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

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.

Robert J. McCormick -- Chairman, President, and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 19 minutes

Call participants:

Robert J. McCormick -- Chairman, President, and Chief Executive Officer

Michael M. Ozimek -- Executive Vice President and Chief Financial Officer

Scot R. Salvador -- Executive Vice President and Chief Lending Officer

Alexander Twerdahl -- Piper Sandler -- Analyst

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