Earnings Call Transcript - TRST Q1 2023

Operator, Operator

Good day and welcome to the TrustCo Bank Corp Earnings Call and Webcast. Before proceeding, we would like to mention that this presentation may contain forward-looking information about TrustCo Bank Corp NY that is intended to be covered by the safe harbor forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Actual results, performance or achievements could differ materially from those expressed in or implied by 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 forward-looking statements made on this call are valid only as of the date hereof and the company disclaims any obligation to update this information to reflect events or developments after the date of this call, except as may be required by applicable law. During today’s call, we will discuss certain financial measures derived from our financial statements that are not determined in accordance with the U.S. GAAP. The reconciliations of such non-GAAP financial measures to most comparable GAAP figures are included in our earnings press release which is available under the Investor Relations tab of our website. Please note that today’s event is being recorded. A replay of the call will be available for 30 days and an audio webcast will be available for 1 year as described in our press release. At this time, I would like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President, CEO. Please go ahead.

Robert McCormick, President & CEO

Thank you and good morning, everyone. As the host said, I’m Rob McCormick, President of the Bank. Joining me on the call today are Mike Ozimek, our CFO; and Scot Salvador. We appreciate you taking time to hear more about our company. At the time of any changes in the banking industry, we have had a very solid first quarter of 2023. Our numbers are strong and demonstrate great stability in the face of some difficult conditions. Our net income of $17.7 million and 7% loan growth were both up year-over-year. Deposits were also up almost $20 million to about $5.2 billion from year-end. No surprise, we have seen a lot of shift to time deposits as rates have risen. These accounts are over $250 million since year-end. Our loan portfolio was up about $312 million year-over-year. We also set another all-time high for loans. Asset quality remained strong with the drop in nonperforming loans to 0.4% of total loans compared to 0.43% last year. We remain in a net recovery position regarding charge-offs. Our investment portfolio remains in decent shape with relatively short maturities. Net income of $17.7 million was up just 4% from last year. Our net interest income was up significantly to $47 million for the quarter. Our ROA and ROE were 1.2% and 11.84% for the first quarter of ‘23, both up from 22%. We also had an increase in book value from $32.31 to $30.85 last year. We maintained a strong capital position at 10.17%, up from 9.44% last year. Overall, a solid quarter and we approach the balance of the year with cautious optimism. Now, Mike will detail the numbers, Scot will talk loans, leaving time for questions.

Michael Ozimek, CFO

Thank you, Rob and good morning, everyone. I will now review TrustCo’s financial results for the first quarter of 2023. As you noted in the press release, the company saw first quarter net income of $17.7 million, an increase of 3.8% over the prior year quarter which yielded a return on average assets and average equity of 1.2% and 11.84%, respectively. Capital remains strong. The consolidated equity to assets ratio was 10.17% for the first quarter of 2023 compared to 9.44% in the first quarter of 2022. Book value per share at March 31, ‘23 was $32.31, up 4.7% compared to $30.85 a year earlier. Average loans for the first quarter of ‘23 grew 7% or $312 million to $4.8 billion for the first quarter of 2022. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio which increased $205 million or 5.1% in the first quarter of ‘23 over the same period in ‘22. Average commercial loans and home equity lines of credit also increased $43.9 million or 22.5% and $58.8 million or 25.3%, respectively, over the same period in 2022. For the first quarter of ‘23, provision for credit losses was $300,000. We are now actively retaining deposits which is evident in the quarter-over-quarter results. Total deposits as of March 31, ‘23, increased $19.6 million to $5.2 billion from December 31, ‘22. As we move forward, our objective is to continue to encourage customers to retain these funds in the expanded product offerings of the bank through aggressive marketing and product differentiation. We understood the big inflows of deposits during the pandemic were temporary and that is why we did not invest the liquidity into securities or loans or retain that liquidity on balance sheet for when the depositors would start to absorb the funds. This gave us flexibility to strategically price deposits while retaining core customers. Net interest income was $47 million for the first quarter of ‘23, an increase of $6.9 million or 17.1% compared to the same period in ‘22, driven by solid liquidity, loan growth, and the recent increases in the Fed funds target rate. The net interest margin for the first quarter was 3.21%, up 55 basis points from 2.66% in the first quarter of ‘22. The yield on interest-earning assets increased to 3.69%, up 95 basis points from 2.74% in the first quarter of ‘22. At the same time, the cost of interest-bearing liabilities only increased to 63 basis points for the first quarter of ‘23 from 10 basis points in the first quarter of ‘22. The increase in net interest income of $6.9 million is primarily a result of our ability to maintain a $576.9 million average cash balance at the Federal Reserve Bank during the first quarter of ‘23 and being able to retain low-cost deposit balances at competitive market rates. Our Financial Services division continues to be a significant recurring source of noninterest income. They had approximately $922 million of assets under management as of March 31, ‘23. Now, on to noninterest expense. Total noninterest expense net of ORE expense came in at $27.4 million. The increase from the prior quarter is primarily a result of an increase in salaries and employee benefit expense which is typical in Q1 annually, as some of the payroll tax and benefit expenses reset and adjust. ORE expense came in at an expense of $225,000 for the quarter as compared to $101,000 in the prior quarter. Given the continued low level of ORE expenses, we’re going to continue to hold the anticipated level of expense to not exceed $250,000 per quarter. All the other categories of noninterest expense were in line with our expectations for the first quarter. We would expect ‘23’s total recurring noninterest expense, net of ORE expense, to be in the range of $26.9 million to $27.3 million per quarter.

Scot Salvador, Loan Portfolio Manager

Thanks, Mike and good morning. For the first quarter, total loans increased by a combined $66 million in actual number. Year-over-year, the increase totaled $335 million. The first quarter’s growth equated to 1.4%, while the annual increase was 7.5%. We are pleased to post continued growth in the quarter and especially gratified with an annual net increase of well over $300 million. The growth in both the quarter and for the year was spread across all our lending categories. Residential loans increased by $48 million in the quarter by $275 million year-over-year. Commercial loans showed a similar pattern, increasing by $15 million in the quarter and by $54 million year-over-year. Home equity loans also continued on a growth trajectory, as discussed in prior quarters, increasing by $10 million in the quarter and by $57 million year-over-year. General market activity in the residential arena continues on a similar pattern that I discussed last quarter. Overall purchase volume is down versus a year ago due to increased interest rates and market conditions. As we enter the spring and early summer selling season, however, we expect that overall activity will increase and have already seen some early signs in this regard with recent application volumes. Our backlog was solid as of quarter end. Some of the heavy construction loan volume we captured last year has been completed and closed on our books. The end result is that our current outstanding backlog stands roughly equivalent to where it was at the same point last year. Interest rates have moved quite a bit over the last several months as everyone is well aware. Currently, our 30-year fixed rate stands at 6.25%. Asset quality measurements remained strong. Nonperforming loans were down to $19.1 million versus $19.4 million a year ago and up slightly on the quarter. Nonperforming assets also continue to balance at low levels, totaling 0.35% of assets versus 0.31% at the start of the year. Early-stage delinquencies remain low and charge-offs totaled a slight net recovery in the quarter. The coverage ratio or allowance for loan loss and nonperforming loans now stands at 243% versus 238% a year ago.

Robert McCormick, President & CEO

Thanks, Scot. Any questions?

Ian Lapey, Analyst

Rob and team, congratulations on the strong earnings despite the banking crisis. Can you share some insights about the impressive deposit performance? How did that trend throughout the quarter and in April, and what impact did the bank failures have on your business?

Robert McCormick, President & CEO

Well, as Mike mentioned in his presentation, we maintained our liquidity and were able to make informed decisions. When necessary, we allowed some higher-priced products to run off. This strong liquidity enabled us to take that position. Our deposit trends have been positive. We are focused on retaining customers and preventing them from leaving. We have been selectively offering programs, including a 7- to 11-month special that has proven effective. Our core customer base is remaining loyal, and we are seeing positive movement as some customers return after their short-term offers expire, seeking more stability. Overall, we are quite satisfied with our current deposit trends.

Ian Lapey, Analyst

In a time of crisis, there are often opportunities, and it seems that the advantages of your branch network were evident this quarter. Do you have any thoughts about using that to potentially expand your core offerings, whether it be additional loan products or financial services as new opportunities arise?

Robert McCormick, President & CEO

No question about it, Ian. We used the phrase Come Home to TrustCo. Our branding polling indicates that it’s very strong, and it seems that people are seeking safety. Our customers appear very comfortable with where we are and how we operate the company. The Bauer rating is significant in certain regions, especially in Florida. We continuously evaluate our product offerings and are increasing our outreach and contact with our customers, which appears to be well-received.

Ian Lapey, Analyst

Okay. Regarding the expenses, it seems that most of the increase is attributed to salaries. When comparing it to a year ago, salary and employee benefits have risen by 44%, while the headcount has only increased by 1%. Is there anything unusual in that year-over-year comparison? I assume that incentive compensation might be a factor due to the strong results, but could you elaborate on the significant increase?

Robert McCormick, President & CEO

Mike can provide more details, Ian, but we are facing some common challenges that many industries are encountering with the labor market, particularly the need to increase salaries to retain employees. Additionally, there are several companies competing for our talent. Mike can elaborate further. There was a true-up of our pension funds and a few other adjustments that also affected this situation. Would you like to add anything, Mike?

Michael Ozimek, CFO

Yes. I would add that in the first quarter of 2022, we experienced a downward adjustment of approximately $2 million that carried over from 2021. Therefore, when comparing apples-to-apples, that figure would actually be closer to $11.2 million in relation to our current position. Thus, the first quarter of 2022 was affected negatively.

Ian Lapey, Analyst

Okay, good. Sorry, I missed that. Yes, that’s more reasonable. And then for my last question, on the share repurchase, I noticed you announced it around mid-March during the crisis. Is there any change in your thoughts on that? I know it's a small amount, about 1% of the shares, but how do you feel about it compared to retaining capital in the current environment? Also, how do you generally view your capital position?

Robert McCormick, President & CEO

I would say that we’re committed to the share repurchase, Ian. I don’t know about the timing. If we move forward with that or when we move forward with that, it would probably be later in the year.

Alex Twerdahl, Analyst

First question, could you share any updated thoughts on the overall condition of the balance sheet? You still have a significant amount of cash, which has been a consistent presence for you. I'm interested in knowing if this cash, which has helped mitigate the effects of rising rates, needs to remain at the current level of 10.5%. With the ongoing pressures on deposits, is there a chance you could leverage some of that cash to support loan growth or manage deposit liquidity? When might we expect that percentage to decrease over the next few quarters?

Robert McCormick, President & CEO

Well, there’s no plan to bring it down, Alex, but that certainly would be an opportunity if we felt there was reason to do that. As you said, the liquidity position has certainly helped us and continues to help us through what could be some challenging times. So we’re pretty comfortable with where we’re at right now and that can fluctuate, obviously, a little bit based on market conditions, if somebody is doing something crazy with deposits and things like that. But overall, we’re pretty comfortable with the position we’re in, and we feel it buys us a lot of credibility in the markets and with regulators and things like that. So we’re pretty comfortable with where we’re at.

Alex Twerdahl, Analyst

Okay. And then as we think about the residential mortgage portfolio and I appreciate, Scot, your comments on the pipelines being healthy going into the spring buying season, I’m just curious what you’re seeing on the other side in terms of payoffs. Presumably, that’s slow just given what’s happened with rates. But just as we think about new loans coming on versus what’s on the books, I’m just trying to figure out how quickly that overall book yields could rise from here just given what you’re seeing on both new originations plus what’s coming off the books.

Scot Salvador, Loan Portfolio Manager

Yes. I mean, the payoffs, Alex, as you might imagine, are very well. I mean the refis are probably as low as I’ve never seen them since I’ve been here. But you do have some selling going on. I mean, with the increasing pricing, you have some people that are motivated to sell their house. So you do have some payoffs that roll through because of that, people selling. But in general, the payoff side of the balance sheet is pretty low. And purchases volume is down, as I said in my remarks, because of market conditions. But we’re coming into the season, as you just said. So over the next couple of months, we should see a pickup on that as we move forward.

Robert McCormick, President & CEO

We’ve also been doing a lot of home equity prime-based home equity lending which certainly improves the return, Alex. And I think that this change in credit score with interest rates could also be a very positive impact on our portfolio.

Alex Twerdahl, Analyst

Yes. Okay. But just as you think about the residential piece which is the biggest chunk of the portfolio and just the yields moving higher over the next couple of quarters, they have been kind of moving higher by, call it, 3 basis points per quarter over the last few quarters. Do you think that could pick up with new volume in early, I guess, mid-2023?

Robert McCormick, President & CEO

Yes. I mean, we’re not going to forecast that number but I think we’re pretty happy with where that’s going. That’s a good way of saying it.

Michael Ozimek, CFO

Yes, absolutely. So those lower rate loans that are closing through the pipeline are kind of pushed through when the higher ones are closed.

Robert McCormick, President & CEO

Correct.

Alex Twerdahl, Analyst

Okay. And then just a final question. We haven't seen many credit issues with the banks that have reported so far. I'm just curious if there is anything concerning you in your markets today. You don't have a lot of office. Is there anything we should be aware of?

Robert McCormick, President & CEO

The residential portfolio consists of small segments and is inherently diversified. This diversification is one reason we are attracted to residential lending, as it includes a variety of borrowers and properties situated in numerous locations. This aspect makes it quite appealing to us.

Operator, Operator

Our next question comes from Nick Ripostella from NR Management.

Nick Ripostella, Analyst

Okay, I’m new to the TrustCo situation here. And so far, like what I see, I’m right here not far from your Leesburg branch. And I was just wondering if you could, in the big picture, give me your top 2 or 3 kind of challenges you see over the next 12 to 24 months. And then the share repurchase, I know you answered that question. But let’s say all things being equal, isn’t it price sensitive to some degree? In other words, if with book value north of 33.

Robert McCormick, President & CEO

Nick, I’m having a tough time hearing you on the second question. You seem to be breaking.

Nick Ripostella, Analyst

Is this better? Yes, in other words, is it not some kind of advantage to look at the book value above 32? If all things were equal and the stock were at 25 or so in this environment, would it not make more sense to act now rather than waiting until later in the year? Lastly, regarding the dividend, is there any chance that you might increase it this year?

Robert McCormick, President & CEO

The first question involves prioritizing interest rates and staffing. While we are confident in our ability to manage interest rates, changes in that environment require our attention. Staffing continues to be a challenge, similar to other industries, and we observe the effects in the job market. It's an ongoing concern. Cost of staffing is another factor to consider. Regarding share repurchase, we are committed to it, but timing is essential. A lower share price in relation to book value makes it more attractive for us. We understand our responsibility to shareholders and want to secure the best deal for them, balancing capital retention and liquidity with the share repurchase. As for dividends, they are a significant aspect of our strategy, with many shareholders focused on them. Our current dividend yield is substantial, and our payout exceeds that of our peers. We aim to increase the dividend, although we do not guarantee future increases, as our shareholders typically appreciate higher dividends and cash returns.

Operator, Operator

We currently have no further questions. I would like to hand the floor back to the management team.

Robert McCormick, President & CEO

Thank you for your interest in our company and have a great day, everyone.

Operator, Operator

Ladies and gentlemen, this concludes today’s call. You can now disconnect your lines. Thank you.