TrustCo Bank Corp NY (NASDAQ:TRST) Q2 2022 Earnings Conference Call July 22, 2022 9:00 AM ET
Company Participants
Robert McCormick – President, Chief Executive Officer
Michael Ozimek – Executive Vice President, Chief Financial Officer
Scot Salvador – Executive Vice President, Chief Lending Officer
Michelle Simmonds – Administrative Vice President
Conference Call Participants
Alex Twerdahl – Piper Sandler
Ian Lapey – Gabelli Funds
Operator
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 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. 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 call over to Mr. Robert J. McCormick, Chairman, President and CEO. Please go ahead.
Robert McCormick
Thank you for joining us this morning to hear more about our very solid second quarter results. I’m Rob McCormick, the CEO of the Bank. Mike Ozimek, our CFO, Scot Salvador and Michelle Simmonds join me on the call today. Michelle manages our residential mortgage portfolio, so we thought it would be nice for you for her to provide a direct report. I will hit the highlights and then turn it over to Michael for added detail, Scot will cover the loan portfolio, and Michelle will talk about mortgages, leaving time for questions.
The second quarter here at the bank was very solid. Our net income of $17.9 million was up significantly over the same period last year and the first quarter of this year; it might even be a record. Our net interest income of over $43 million for the quarter was greater than all periods reported. Certainly the Fed action helped with this, but we have also been able to put some money to work in our loan portfolio, which was up to over $4.5 billion at quarter end. This is up almost $200 million over the last year. As usual, most of the growth happened in our residential mortgage portfolio.
We are encouraged by the activity in our home equity and commercial loan portfolios. I think most of you know installment lending is not a large part of our business.
Deposits also continued to grow in the second quarter to just under $5.4 billion. We continued a trend of growing lower cost core accounts and being less dependent on time deposits. For the most part, the growth in time accounts was the result of a shift in consolidation of accounts from other categories.
Shareholders equity grew to just under $595 million. Our financial service department continues to be very active. They had a decent quarter, comparable to the same quarter last year.
Our loan portfolio performance was strong. Non-performing loans to total loans was 0.41 and non-performing assets to total assets was 0.31. The loan loss reserve was 1% of total loans, sufficient to provide a coverage ratio of 2.4 times.
Our ROA was 1.15. Our ROE was 12.08, both better than all prior periods reported. Our efficiency ratio was under 52%. Margin expanded to 2.83. We continue to pay a healthy dividend. Our payout ratio was just over 37%.
Capital ratios are strong and improving. We continue to operate the same 144 full service offices. We are very proud of our results and look forward to the rest of the year with great optimism.
Now I’ll turn it over to Mike O. He will detail the results, Scot will cover loans, Michelle will talk about mortgages, then we will respond to questions. Mike?
Michael Ozimek
Thank you Rob, and good morning everyone. I will now review TrustCo’s financial results for the second quarter of ’22.
As we noted in the press release, the company saw net income of $17.9 million in the second quarter of ’22, an increase of 23.8% over the prior year quarter, which yielded a return on average assets and average equity of 1.15% and 12.08% respectively. Average loans for the second quarter of ’22 grew 4.6% or $196.2 million to $4.5 billion from the second quarter of ’21.
As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio. The change reached $202 million or 5.3% in the second quarter of ’22 over the same period in ’21. The average commercial loan portfolio decreased $15.9 million or 7.4% over the same period in ’21.
Total average investment securities, which include the AFS and HCM portfolios, increased $62.9 million or 15.1% during the second quarter of 2022 over the first quarter of 2022. During the same period, the bank had approximately $16 million of pooled securities paid down, two maturities totaling $5 million, and purchased approximately $133.7 million in securities.
For the second quarter of ’22, the provision for credit losses was a credit of $491,000. This include a credit to the provision for credit losses on loans of $1 million as a result of improving unemployment and housing price forecasts, and is offset by a provision for credit losses on unfunded commitments of $509,000 as a result of increases in unfunded loans. The ratio of the allowance for loan losses to total loans was 1% as of June 30, 2022 compared to 1.15% as of the same period in ’21.
As discussed on 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 2022, a decrease of $24.8 million compared to the same period in 2021. Given the elevated level of cash and the changing interest rate environment, the bank will continue to evaluate investing excess liquidity into the market.
On the funding side of the balance sheet, total average deposits increased $153.1 million or 2.9% for the second quarter of ’22 over the same period a year earlier. The increase in deposits was a result of a $48.7 million or a 6.7% increase in average money market deposits, a $181.9 million or 13.2% increase in average savings deposits, a $61.3 million or 5.3% increase in interest-bearing checking account averages, and a $90.8 million or 12.1% increase in average non-interest bearing checking balances. These were partially offset by the decrease in average time deposits of $229.5 million or 19.2% over the same period last year.
During the same period, our total cost of interest-bearing deposits decreased 8 basis points from 15 basis points. This was primarily driven by a decrease in time deposits to 22 basis points from 42 basis points over the same period last year.
As we move into the third quarter of 2022, the bank has approximately $199 million in CDs that will mature at an average rate of 12 basis points. In the fourth quarter of 2022, approximately $286 million in CDs will mature at an average rate of 20 basis points. In total during the second half of 2022, approximately $485 million of CDs will mature at an average rate of 16 basis points. The increase in the Fed funds target rate will have an impact on CD pricing as we move through the rest of 2022 and beyond.
Our financial services division continues to be a significant recurring source of non-interest income. They had approximately $909.9 million of assets under management as of June 30, 2022.
Now onto non-interest expense. Total non-interest expense net of ORE expense came in at $24.9 million, up $2.2 million compared to first quarter of 2022 and at the low end of our estimated range of $24.9 million to $25.5 million. The increase from the prior quarter is primarily a result of a decrease in salaries and employee benefit expense due to a true-up to the incentive compensation accrual upon payout in the first quarter of 2022.
ORE expense net came in at an expense of $74,000 for the quarter as compared to expense of just $11,000 in the prior quarter. Given the continued low level of ORE expenses, we are going to continue to hold anticipated level of expense to not exceed $250,000 per quarter. All the other categories of non-interest expense were in line with our expectations for the second quarter. We would expect that 2022’s total recurring non-interest expense net of ORE expense to be in the range of $24.9 million to $25.5 million per quarter.
The efficiency ratio in the second quarter of 2022 came in at 62% compared to 56.9% in the second quarter of 2021.
Finally, capital ratios – consolidated equity to assets ratio was 9.55% for the second quarter of 2022 compared to 9.45% in second quarter of 2021. The bank continues to be proud of its ability to maintain shareholder value during these challenging economic times.
Book value per share at June 30, 2022 was $31.06, up 3.5% compared to $30 a year earlier.
Now Scot will review the loan portfolio and non-performing loans.
Scot Salvador
Thanks Mike, and good morning.
For the second quarter, total loans increased by $76 million in actual numbers, or 1.7%. [Indiscernible] loans have risen by $191 million or 4.4%. The growth continued to be centered in our residential portfolio. On the quarter, residential loans grew by $68 million or 1.6%. For the year, the increase was just under 5% or $204 million. Commercial loans grew by $7.5 million on the quarter after decreasing by $14 million year-over-year due primarily to SBA PPP pay downs.
Purchase money business and residential loans remained active on the quarter with our Florida market continuing its especially strong results. Home equity credit line activity has also picked up with the rise of long term fixed rates. While increasing interest rates and general economic conditions will undoubtedly have an effect on the marketplace as we move forward, our results to date in securing purchase business continued to be solid. Michelle will provide additional details in her presentation on overall loan activity levels and efforts.
Interest rates continued to inch higher in the quarter, and our current 30-year base rate is at 5.49%. Our loan backlog at quarter end was strong and reflects the changing market dynamics. It is up both from the first quarter and the same point last year. Refis are at very low levels in the backlog. The vast majority is made up of purchase money mortgages with a smaller amount of home equity products.
As the quality measurements remain positive, non-performing loans decreased from $19.4 million to $18.7 million on the quarter. This is down from $20.8 million a year ago. Non-performing assets also decreased and have dropped from $21.1 million to $19.4 million year-over-year. Early stage delinquencies remain low and charge-offs again posted a net recovery of $107,000 on the quarter. The coverage ratio of allowance for loan losses in non-performing loans now stands at 242% versus 238% last quarter.
I will now turn it over to Michelle for additional information on our loan portfolio.
Michelle Simmonds
Thank you Scot, and thank you for the opportunity to discuss the bank’s residential lending operation.
The refinance market has decreased considerably over the past several months, but loans for new construction are on the rise. All regions are contributing to the backlog for loans pending closing, but our greatest loan growth is in Florida. Another area where there is an uptick is in our home equity products. With the option of variable or fixed rate, we continue to see that portfolio expand with new loans as well as through increased utilization of existing lines. Not surprisingly, we are also seeing increased interest in our adjustable rate products in all of our operational footprint.
To remain competitive, we are always looking for fresh ideas for new products and for enhancements to existing ones. For example, we have recently implemented our Hometown Hero mortgage program for active duty and veteran members of the military, police officers and firefighters. This unique product is one of the ways we show appreciation for the vitally important segment of the communities that we serve. It offers attractive incentives, and we have seen much interest in it.
Overall, being a portfolio lender with a variety of products charging no private mortgage insurance, offering very competitive rates all with low closing costs positions us to do well in every market.
Now I’ll turn it back to Rob.
Robert McCormick
Thank you Michelle. We’ll be happy to answer any questions you have.
Question-and-Answer Session
Operator
[Operator instructions]
Our first question for today comes from Alex Twerdahl from Piper Sandler. Alex, your line is now open.
Alex Twerdahl
Hey, good morning.
Robert McCormick
Hi Alex.
Alex Twerdahl
First off, you guys historically mostly put on the one to four family, and HELOC picked up a bit this quarter, which I guess makes sense given the rates and uncertainty around what’s going to happen with rates, and also the economy from here. In terms of future growth, is it still going to be predominantly one to four family, or do you think it’s going to be more of an equal mix shift with that HELOC product or the home equity product making up a much bigger component of growth over the next couple quarters?
Robert McCormick
Well, the home equity product, we used to be a leader in the home equity area many, many years ago, Alex, but that kind of went out of favor for a period of time as a product. We are seeing some new interest in it, which we’re happy about – it’s a prime based product, we underwrite them the right way, we underwrite them to 80% of loan to value, so we are happy to pick it up. We don’t ever see it eclipsing our residential first product, though. It’s a nice supplement, a nice second source, but we never see it really taking over the residential first mortgages.
Alex Twerdahl
Okay, and what’s the–I think you said 5.49 on the first liens. What’s the current rate on a home equity loan right now?
Scot Salvador
Well, for a teaser rate for the first one year at 3.49, Alex, and then it goes to a fully indexed prime even.
Alex Twerdahl
Okay, got it.
Scot Salvador
Tried to go with a lower rate with six months, but people like the one-year teaser, and if they take X-amount of dollars–if they take $7,500, we pay the closing costs with a three-year recapture, so if they pay the loan off within the three years, we get the money back for the closing costs.
Alex Twerdahl
Got it, okay. Can you talk a little bit about what you’re seeing in terms of just any pressures on deposits in any of your markets? Certainly deposit betas, I think, were negative this quarter, which is awesome to see; but with rates going higher, I think many investors and analysts are assuming that deposits betas are going to start picking up more meaningfully in the second half of the year. I’m just curious what you guys are seeing and if there’s any differences between the Florida and the New York markets.
Robert McCormick
Yes, I mean, we’re hearing the same things. I have to say we’ve had probably a modest amount or a slight amount of pressure on the deposits. As of right now, all our retainage ratios are still very, very strong. We’re certainly seeing some customers looking for higher rate opportunities.
I’ve heard the same thing, that the second quarter is going to be–you know, the next Fed increase is going to be for the customers. I’ve heard that as well, but I guess based on our retainage right now, we’re pretty comfortable with where we’re at, and we’ll take that as it comes.
Alex Twerdahl
Got it. I think in the press release, you mentioned something about aggressive marketing and product differentiation. I think you talked a little bit about some of the product differentiation with the Hometown Heroes program. In terms of the aggressive marketing, is that something that is going to be–that we’re going to see more obvious in the expense line in coming quarters?
Robert McCormick
That’s pretty much patted down, I think, at this point in time. I don’t think you’ll see a big spike in the advertising. We are taking advantage of different sources of advertising, free or less expensive – I can’t say cheap, right, because that’s a quality issue. But we’re looking at less expensive alternatives with regard to marketing, we’re trying to do more and more in social media and more and more on the internet, and more and more direct contact with our customers, so I don’t think you’re going to see a big spike in the advertising or marketing line.
Print advertising, you know Alex, it’s outrageously expensive, and even some of the television medias are also very expensive, so we’re trying to find alternate ways to do it.
Alex Twerdahl
Got it. Then just a follow-up question for me, just on the–
Robert McCormick
Oh, hang on – just a side note, we’re also big on surveying our customers to find out where they came from, and some of those results are pretty interesting too, so.
Alex Twerdahl
Yes. Final question just for me on the reserve and how to think about provisioning. We’ve had four quarters now of negative provisioning. A lot of economists are projecting a recession later this year, if we’re not already in one. What are the factors that would cause that HCL to go higher? Is it more based on unemployment or GDP, or is it more based on the–I mean, obviously your current credit metrics as well as loss histories play a factor in that too, but can you help us maybe get a better sense for the weightings around the different components of calculating that HCL?
Michael Ozimek
Yes, so you hit the high points there, Alex. Unemployment is a big factor, and you know, one of the things too is when we take a look at it, we also take a look at it in the markets that we serve, so a big part of our CECL is the numbers in the upstate New York markets and then also the Florida market, so taking a look at those kind of separate in the loan balances and the loan growth in those areas, and then layering in what you just started to hit – GDP in that area, unemployment in that area, and then overall loan growth in that area. Those are the major components, but it is bifurcated, I guess, when we look at it and when we calculate our reserve.
We follow just as much as you, and we’ll see where unemployment and some of those numbers start to go over the next few quarters, so. It could turn around.
Alex Twerdahl
Great, thanks for taking my questions.
Robert McCormick
Thank you Alex.
Operator
Thank you. Our next question comes from Ian Lapey of Gabelli Funds. Ian, your line is now open.
Ian Lapey
Hi, good morning, and congratulations on a strong quarter. I was just hoping, could you talk about the competitive environment for underwriting mortgages, sort of who your toughest competitors are, whether they’re traditional branch-based lenders like you or fintechs or others, and then maybe similarly talk about the competition for deposits and who the toughest competitors are. Maybe we could start with that.
Robert McCormick
From a market share perspective, in this area, Ian, the credit unions are very strong competitors in the upstate area. Downstate it shifts to some of the internet lenders and even Wells has a very large presence in especially Westchester County, and then Florida is the same way. Obviously you can’t discount Truist, but Wells Fargo and some of the internet lenders are very formidable in the Orlando area, the central Florida area.
As far as deposits go, it’s full scale. We compete against everyone. I know that sounds crazy, but anybody can come into the deposit market hot and heavy at any particular time, especially with regard to CD gathering. We’re focused, as I said in the presentation, more on the core and our locations and some of the side things do us very, very well in that area attracting customers. They’re domestic ATMs, you don’t have the foreign charges that go along with it. There are a lot of very positives, a lot of locations, a lot personal contact, so hopefully we’re doing a good job in the battle for core accounts.
But CDs and large deposits, people can come in and out of the market at any time, and I’m not telling you anything you don’t know but many of the internet banks right now are doing some crazy stuff with regard to deposit pricing, so we’re certainly hearing and seeing a little bit about that now.
Ian Lapey
Okay, thanks. So if you look at the next three years, what do you see as the biggest constraint on growth? Is it finding attractive mortgages to underwrite, is it growing your deposit base, or both?
Robert McCormick
Well, all of the above, and both of those items certainly, Ian, and I would also add the labor market, hiring and finding qualified people, getting them to stay long enough to be trained and be productive members of our team. That’s another big issue.
Ian Lapey
Okay, and then on the Trustco–
Robert McCormick
From a positive perspective, Ian–no, go ahead. You go ahead.
Ian Lapey
No, no. Why don’t you finish and then I’ll ask the next one.
Robert McCormick
Well, from a positive perspective, the balance sheet we’ve built, and you see this, is built to withstand and prosper during off times, so we feel we’re in a pretty good position that if a recession or some difficulties do come about, we’ll be standing strong and be able to withstand whatever might be thrown at us.
Ian Lapey
Okay, yes. I agree. Then I was just going to ask on Trustco financial services, it looked like considering the tough both stock and bond markets, it was a pretty good quarter. Can you just remind me what–I think you said $909 million in AUM. What products are you offering there, and have you been gaining share generally in that area?
Robert McCormick
I would say it’s a traditional trust department, Ian, very much. We’re attempting to convert that and get more investment management accounts and some different accounts just from a diversity perspective, but it is very much a traditional trust department – a lot of custody accounts, a lot of estate administration, those types of items.
Ian Lapey
Okay, and then last one, what is your branch growth strategy over the next three years?
Robert McCormick
Well, we’re very much in a greenfield mode. During the de novo period, I think we opened 18 branches in one year – that was our top year. We’re certainly not going to that. I think you’ll probably see us a net even over the next three years because there are several branches that we will probably close, that have not performed up to our expectations, so at lease renewal we’ll probably opt to close them. But there are a couple of other markets, like the Port St. Lucie area in Florida along the treasure coast, and a couple of other areas in New York that we would like to infill with additional locations. It will probably be a net–pretty much a net zero over the next three years between closures and new branches.
Ian Lapey
Okay, that’s it. Thank you.
Robert McCormick
Thank you Ian.
Operator
Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. McCormick for any closing remarks.
Robert McCormick
Thank you for your interest in our company, and have a great day. Try and stay cool here in the northeast.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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