TrustCo Bank Corp NY (TRST) 2021 Q1 法說會逐字稿

Good day, and welcome to the TrustCo Bank Corp Earnings Call and Webcast. (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 is 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, CEO. Please go ahead.

Thank you. Good morning, everyone. As the host said, I'm Rob McCormick, President of the bank, joined today by Mike Ozimek, our CFO; and Scot 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. Scot 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 billion total asset mark. Our Florida deposits now exceed $1 billion. Our Florida loan portfolio now exceeds $1 billion, and our financial services area now has more than $1 billion under management. These are all positive events for our company and contributed to a very solid first quarter 2021.

Our net income was over $14 million greater than year-end 2020 and the first quarter of 2020. Our net interest income was $40.1 million for the first quarter of '21, also greater than year-end and first quarter '20. Our net interest margin for the first quarter of '21 was 2.78%, essentially flat since year-end '20 and down from first quarter '20.

Our total deposits were almost $5.2 billion. This is up significantly over the same quarter of '20 when they were roughly $4.5 billion. This growth has been in all core categories. Higher cost time deposits are actually down about $130 million year-over-year. We've 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 drawdown as our country reopens.

Our loan portfolio has grown to almost $4.3 billion, 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.

Installment loans have never been a big part of our business. We have a significant cash position in a 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% 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% at quarter end, 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 first quarter results and optimistic about the rest of 2021.

Now Mike and Scot will give more detail on our results. Mike?

Thank you, Rob. Good morning, everyone. I'll now review TrustCo's financial results for the first quarter of 2021. As we noted in the press release, the company saw net income of $14.1 million in the first quarter of 2021, which yields a return on average assets and an average equity of 0.96% and 10.01%, respectively.

Average loans for the first quarter of 2021 grew 4.3% or $173.3 million to $4.2 billion from the first quarter of 2020. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio, which increased by $187.5 million or 5.2% in the first quarter of 2021 over the same period in 2020.

Average commercial loan portfolio increased $14.7 million or 7.4% over the same period in 2020. This included $17.1 million of new PPP loans originated in the first quarter. The bank currently has approximately $37 million remaining of SBA PPC loans.

Total average investment securities, which include the AFS and HTM portfolios, increased $35.1 million or 7.6% during the first quarter. During the same period, the bank purchased approximately $132 million of securities and approximately $37.9 million of full securities paid down. There are no securities called in the first quarter of '21. Provision for loan loss for the first quarter was $350,000, a decrease compared to the $2 million in the same period in 2020. The ratio for allowance for loan losses to total loans was 1.17% as of March 31, 2021, compared to 1.13% as of the same period in 2020.

In the first quarter of '21, the decreased level of provision was driven by improving economic indicators and the outlook resulting from the COVID-19 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-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 March 31, '21, the bank saw most of these loan deferments returned in making regular loan payments. The bank continues to closely monitor the level of deferrals. However, we are very pleased with the current levels and 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-19 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 billion of overnight investments during the first quarter of 2021, an increase of $617 million compared to the same period in '20. Given the elevated level of cash in '21, 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 million or 14.2% for the first quarter '21 over the same period a year earlier. The increase in deposits was a result of $111 million or 18.1% increase in average money market deposits, a $198 million or %17.8 increase in average savings deposits, a $213 million or 24.5% increase in interest-bearing check account averages and a $215 million or 46.9% increase in average noninterest-bearing checking balances. These are partially offset by the decrease in average time deposits of $108 million or 7.9% 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 '21, CDs will continue to reprice down to current market rates. In the second quarter of '21, approximately $226 million of CDs will incur at an average rate of 40 basis points. And in the second half of '21, approximately $645 million of CDs will mature at an average rate of 44 basis points.

Noninterest income came in at $4.4 million for the first quarter of '21, 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 increased fee income on larger balances under management. Our Financial Services division continues to be the most significant reoccurring source of noninterest income and had approximately $1 billion of assets under management as of March 31, '21.

Now to noninterest expense. Total noninterest expense net of ORE expense came in at $25.1 million, up $311,000 compared to the fourth quarter of 2020 and slightly overestimated range of $24.5 million to $25 million. Salary and benefits expense increased to $698,000 as a result of a couple of items. The primary item was an increase in benefit liabilities and increased share price. And the second -- the first quarter of the year always bears the cost of increased employee payroll taxes, and the bank also saw the impact of increased health care costs as the new contracted range for 2021 took effect.

ORE expense came in at $239,000 for the quarter as compared to an expense of $45,000 for the first quarter. 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 noninterest expense were in line with our expectations for the first quarter. We would expect that 2021's total reoccurring noninterest expense net of ORE expense to be in the range of $24.9 million to $25.4 million per quarter. The efficiency ratio for the first quarter of '21 came in at 56.35% compared to 56.34% in the first quarter of 2020. One thing we are always proud of is expense control at TrustCo Bank, and we expect this to continue throughout '21.

And finally, the capital ratios. Consolidated equity-to-asset ratio was 9.44% at the end of the first quarter, down '19 basis points from 9.63% from the fourth quarter 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, '21, was $5.92, up 4.2% compared to $5.68 a year earlier.

Now Scot will review the loan portfolio and nonperforming loans.

Okay, Mike, thank you, and good morning. In the first quarter, total loans grew by $25 million in actual numbers or 0.6%. Year-over-year loans have increased by 4.1% or $170 million. Loan growth in the quarter consisted of $21 million of residential growth and $4.5 million 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 million in the quarter, with an (inaudible) decrease in our home equity loans, netting to the $21 million residential growth number. The first quarter is typically the bank's loans with regard to loan growth. Activity levels have increased steadily and are currently strong in all of our lending regions.

Purchase money lending has been particularly active in all areas. Refinances remain elevated, although below the peak period 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 increased net loan growth for this quarter, given both the ongoing strong activity levels and our current backlog. This potential growth wherever 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. Nonperforming loans totaled $21.6 million in the quarter. This compares to $21.1 million in December and $20.7 million a year ago. Such choppiness is to be expected as we continue with these very low levels. Nonperforming assets totaled $22.1 million compared to $22 million in March of 2020.

Charge-offs actually netted to a $46,000 recovery in the quarter. The allowance for loan losses is down 1.17% of total loans, with the coverage ratio or the allowance to nonperforming loans standing at 231%.

Rob?

Just before we turn to questions, I did want to mention we were named the best (inaudible) last paper in a reader poll. And I tell you this is 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 attribute to them. It shows how well they performed.

So we're now happy to answer any questions you might have.

(Operator Instructions) Our first question comes from Alex Twerdahl from Piper Sandler.

First off, just wanted to start with some of the most recent comments you were making, Scot, on the loan pipeline and your optimism, et cetera. 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 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 first quarter 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, the 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 mentioned the advertiser 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?

No, they are as of now, ALS. We have been hired that. As of most recently, we're at 3.25%. So we -- in recent weeks, we've 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 million of purchases that you did in the first quarter? Or have you done additional in the second quarter? 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. I mean so far, we haven't done anything in the second quarter. So the initial comments were what we did in the first, you see where we're at now at 100 -- a little over $1 billion or pushing $1 billion -- $1.1 billion. 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 SIM that comes in, what happens with our overall deposit balances. There's been a lot of talk in the market that 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, starting to spend a little bit of money. 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 that kind of helps out a little bit.

Okay. So around $1 billion sort of the -- is plenty. And if more cash comes in, in the second quarter, 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 repricing 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. I take 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 million shares repurchase activity or repurchase authorization during the quarter. Talk a little bit about how you plan to use that authorization? Did you do any of the first quarter? And sort of what is it based on price? Is it based on? What's it based on that -- getting to that 2 million?

Yes. We didn't make a buy in the first quarter. On a buyback program, you know the first quarter is problematic because you're preparing the proxy and the annual report. So there are quite a few closed window periods during that time. We are certainly looking at buybacks, and it's based on all the above. The capital position of the company, the price of the stock and what the activity has been in recent times.

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, and have a great day.