Earnings Call Transcript - TRST Q1 2022

Operator, Operator

Good day and welcome to the TrustCo Bank Corp Earnings Call and Webcast. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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-K. 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. 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, 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, CEO

Thanks, Juan. Thank you for joining us this morning to hear more about our company. We are very pleased with our results. As usual, Mike Ozimek and Scot Salvador are on the call. Mike, as most of you know, is our CFO. He is going to give us a lot of detail on the numbers. Scot will give some color on our loan portfolio, especially credit quality. So let me hit a few of the highlights before we move on. How could we not be pleased with the net income number this quarter? We are pretty sure it's an all-time record, up from last quarter and the same quarter last year. The $17.1 million net income in the first quarter gives us a solid foundation for the rest of the year. Total assets are almost $6.3 billion, up just under 4% from the same quarter in 2021. Growth was driven mostly by our loan portfolio which is up about 4.6% year-over-year. This growth is mostly in our residential mortgage portfolio. We have had some large payoffs in PPP activity in our commercial loan portfolio but we are encouraged by the flattening or slow growth in the home equity portfolio. Our deposit growth has been great, up over all periods reported. We also continued the trend of shedding higher-priced time deposits and replacing them with core deposits. Shareholders' equity is up year-over-year, down quarter-over-quarter as our investment portfolio reprices contemplating current rates. All of our performance ratios are positive. ROA was 1.12%, ROE was 11.6%. Our efficiency ratio was just under 51% for the quarter. We did see continued erosion in the net interest margin but at a much slower pace. We are also encouraged by monthly trends. The loan portfolio is very strong. Nonperforming loans to total loans is 0.43%, nonperforming assets to total assets is 0.31%. Our allowance is over 1% compared to total loans with a coverage ratio of 2.4x. We have implemented CECL and Mike has a lot more detail on that. We are maintaining a large cash position in the securities portfolio with relatively short maturities. We feel this puts us in a good position for a changing rate environment. We are optimistic about the rest of the year. Now Mike will detail the numbers, Scot will talk loans, leaving time for questions. Mike?

Mike Ozimek, CFO

Thank you, Rob and good morning, everyone. I will now review TrustCo's financial results for the first quarter of 2022. As we noted in the press release, the company saw net income of $17.1 million in the first quarter of 2022, an increase of 21.3% over the prior year quarter, which yielded a return on average assets and average equity of 1.12% and 11.6%, respectively. Average loans for the first quarter of 2022 grew 4.6% or $195.2 million to $4.4 billion from the first quarter of '21. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio which increased by $218.6 million or 5.8% in the first quarter of '22 over the same period in '21. The average commercial loan portfolio decreased $17.8 million or 8.4% over the same period in '21. The bank continues to receive SBA PPP loan payoffs and currently has approximately $3 million outstanding at March 31, '22. Additionally, there were no COVID-related deferments as of March 31, '22. Total average investment securities, which include the AFS and HTM portfolios, decreased $12.3 million or 2.9% during the first quarter of '22 over the fourth quarter of '21. During the same period, the bank had approximately $18.6 million of pooled securities paid down, one maturity of $5 million and purchased approximately $44.1 million of securities. As mentioned last quarter, the bank adopted CECL on January 1, 2022. The opening adjustment was a $2.4 million increase in the allowance for credit losses on loans and an increase in unfunded commitments of $2.3 million and a corresponding decrease in deferred tax assets of $1.2 million, resulting in a net decrease to shareholders' equity of $3.5 million. For the first quarter of 2022, total provision for credit losses was a credit of $200,000. This includes a credit to the provision for credit losses on loans of $500,000 as a result of improving unemployment and housing price forecasts and is offset by a provision for credit losses on unfunded commitments of $300,000 as a result of increases in unfunded loans as our loan pipeline builds. The ratio of the allowance for loan losses to total loans was 1.03% as of March 31, '22 compared to 1.17% as of the same period in '21. As discussed in prior calls, our focus continues to be on traditional lending and conservative balance sheet management which has enabled 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 $1.2 billion in overnight investments during the first quarter of '22, an increase of $157.6 million compared to the same period in '21. Given the elevated level of cash and the changing interest rate environment, the bank will continue to evaluate and invest excess liquidity into the market. On the funding side of the balance sheet, total average deposits increased $223.4 million or 4.4% for the first quarter of '22 over the same period a year earlier. The increase in deposits was a result of $66.1 million or a 9.1% increase in average money market costs, a $212.9 million or 16.2% increase in average savings deposits, a $106.9 million or 9.9% increase in interest-bearing checking account averages, and $135.3 million or a 20.1% increase in average noninterest-bearing checking balances. These were partially offset by the decrease in average time deposits of $297.8 million or 23.6% over the same period last year. During the same period, our total cost of interest-bearing deposits decreased 9 basis points from 20 basis points. This was primarily driven by a decrease in money market deposits to 11 basis points from 16 basis points and time deposits to 23 basis points from 54 basis points over the same period last year. As we navigate through 2022, the bank has approximately $264 million in CDs that are maturing at an average rate of 21 basis points in the second quarter of '22. In the third quarter of '22, approximately $165 million of CDs will mature at an average rate of 13 basis points. In the second half of 2022, $415 million of CDs will mature at an average rate of 18 basis points. Our average Financial Services division continues to be a significant recurring source of noninterest income. It had approximately $1 billion of assets under management as of March 31, '22. Now on to noninterest expense. Total noninterest expense, net of ORE expense, came in at $22.8 million, down $3.5 million compared to the fourth quarter of '21 and below our estimated range of $24.9 million to $25.5 million. The decrease from the prior quarter is primarily a result of the decrease in salaries and employee benefits expense due to a true-up to the incentive compensation accrual upon payout in the first quarter of 2022 as well as decreases in various other employee benefit plan expenses. ORE expense came in net at an expense of $11,000 for the quarter as compared to income of $28,000 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 fourth quarter. We would expect 2022's total recurring noninterest 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 first quarter of 2022 came in at 50.6% compared to 56.4% in the first quarter of '21. And finally, the capital ratios. The consolidated equity to assets ratio was flat at 9.44% for both the first quarter of '22 and '21. The bank continues to be proud of its ability to maintain shareholder value during these challenging economic times. Book value per share at March 31 was $30.85, up 4.2%, compared to $29.60 a year earlier. These amounts are adjusted for the reverse stocks which occurred in the second quarter of '21. Now, Scot will review the loan portfolio and nonperforming loans.

Scot Salvador, Loan Officer

Okay. Thanks, Mike and good morning. Total loans continued on a positive growth trajectory for the first quarter. Overall loans increased by approximately $26 million or 0.6% in actual numbers. Year-over-year, the increase totaled $195 million or 4.6%. Real estate loans increased by $33 million in the quarter or 0.8%. This was offset by an $8 million decrease in commercial loans which included ongoing SBA PPP paydowns. We are pleased with the quarter's real estate increase of $33 million in what is traditionally the year's lowest net growth period. Recent activity trends have continued with refinances now constituting only a small portion of the applications versus a year ago. The purchase side of the equation remains strong, however, and our recent purchase volume was actually up a bit from where it was last year. While it's true interest rates have risen, pent-up demand combined with a strong job market and borrower liquidity have seen a continued strong demand for homes across all of our market regions. Our home equity credit line portfolio is also experiencing a positive trend. Loan balances have stabilized and even increased a bit after several years of decline. On the quarter, home equity lines increased by approximately $5 million to $236 million. A number of factors have contributed to this, including a slowing of the refinance market, whereby many existing lines were being paid down as part of the existing first mortgage refinance. The stabilization of the home equity portfolio should be a positive factor for overall net loan growth going forward. All of our regions experienced good overall activity in a strong purchase market this quarter. Florida continues to be particularly active, however, with no signs of decreasing volumes as of this date. After many months of stagnation, interest rates increased significantly on the quarter. Currently, our 30-year base rate stands at 5.125%. This is a full 2% higher than where it stood not too long ago. As a portfolio lender, we have a degree of flexibility with our rates. This puts us in an advantageous position in a rising rate environment as we can sometimes lag the market just a bit as rates rise in order to grab a greater market share. We will continue to be opportunistic in this regard as we move forward while still benefiting from the rising rates. Our backlog at quarter end was good. It is up significantly from year-end and we expect it will continue to grow as we enter the heart of the spring market. We're optimistic that the backlog, combined with ongoing activity levels, should provide for increased net growth in the second quarter. Asset quality measurements continue to be strong. Nonperforming loans stood at $19.4 million at quarter end, up approximately $650,000 in the quarter and down from $21.6 million a year ago. Such choppiness is expected given the ongoing low levels. Nonperforming assets are $19.7 million versus $22.1 million a year ago. Early-stage delinquencies also continued to be low. Charge-offs posted a net recovery of $58,000, the second consecutive quarter of negative net charge-offs. The coverage ratio or allowance for loan losses to nonperforming loans now stands at 238% versus 231% a year ago. Rob?

Robert McCormick, CEO

Thanks, Scot. We're happy to answer any questions anybody has.

Operator, Operator

Our first question comes from Alex Twerdahl from Piper Sandler. Please proceed, Alex, your line is now open.

Alex Twerdahl, Analyst

Hey good morning, guys.

Robert McCormick, CEO

Good morning, Alex. How are you doing?

Alex Twerdahl, Analyst

Thanks. First, I wanted to revisit some of your comments, Scot, regarding the strategy to lag the market to increase loan volume. Can you explain if there is sufficient volume available to significantly boost this output? If so, what would your targets be if you are offering loans slightly below the current market rate, which is around 5%?

Scot Salvador, Loan Officer

Yes. Well, it's a balancing act, Alex. The good news is there is a lot of volume out there and activity out there in the market. As I said, we're seeing across all our regions continued strong demand. So it's a competitive thing. We're always looking at where the competitors are. And it's amazing what 0.08% or sometimes even 0.25% can do for just over a couple of days. Borrowers, when they're looking for a home, they look at rates, they're very active. And you don't have to lag by much or for very long to draw some attention. So it's not a dramatic thing. But again, 0.08% here or 0.25% there for over a couple day period can really spike up a little bit of volume. And as I said, the good news is the activity out there continues to be strong.

Alex Twerdahl, Analyst

Right. So if the activity is there and you have a little bit of control over it, I mean, would you kind of suggest that loan growth sort of looks in that mid-single-digit pace that it's been growing over the last couple of years? Or do you think that given the amount of cash on the balance sheet and sort of some of the dynamics that have happened in the rate environment that maybe that can accelerate, maybe approach high single digits or even more than that over the next couple quarters?

Scot Salvador, Loan Officer

Yes, I believe a continuation makes sense due to numerous factors, including rising rates. However, we also face a decrease in refinance activity compared to last year, which saw significant refinancing on our part as well as some activity shifting away. Currently, the backlog shows a substantial drop in refinances, which is a positive indication for net growth. Therefore, I think maintaining our current approach is likely a good plan, and I hope we can keep it going.

Alex Twerdahl, Analyst

Got it. When I consider the overall yield on the residential mortgage portfolio, it's been declining over the past couple of years and is currently at 3.42%. Given the rates on loans in the backlog heading into the second quarter and the overall makeup of that portfolio, do you believe that 3.42% marks the lowest point for the yield on that portfolio?

Robert McCormick, CEO

If it's not the bottom, it's darn close to the bottom, Alex. And the difficulty is it can take 30 to 60 days to close a lot of the new production. So if the 3.42% isn't rock bottom, we're pretty close to rock bottom.

Alex Twerdahl, Analyst

Right. And then talk to me a little bit about maybe the strategy to take advantage of putting some more of the cash to work in the securities portfolio. Obviously, you had a nice run-up since we last spoke in the 10-year and presumably also security yields. Is there more of an appetite with the 10-year approaching 3% to actually deploy some cash into some securities?

Mike Ozimek, CFO

Yes, Alex. We made some moves in the first quarter, and we are looking to continue that in the second quarter. Our strategy is to remain short with a mix of pooled securities and corporate bonds. For mortgage-backed securities, we're targeting an average life of around four to five years. We're currently seeing yields around 3%, fluctuating slightly below or above that. The investments we're making in the securities portfolio could potentially yield better returns than the loans we were offering about a year ago. This area seems very attractive, and we are definitely exploring it further. I believe that what we've accomplished in the first quarter is likely to be repeated in the upcoming quarters, considering our current cash position.

Alex Twerdahl, Analyst

Okay. So more than what you've been doing. On the...

Mike Ozimek, CFO

Yes. More than last year, absolutely. More of the same in the first quarter.

Alex Twerdahl, Analyst

I mean the first quarter was just, I think you said, $44 million of security purchases. So that's kind of the pace that you'd be suggesting as reasonable for the second quarter?

Mike Ozimek, CFO

We'll look at it. I think if you looked at it, I'd say that's probably a good baseline. If the opportunity is there, we could be higher.

Alex Twerdahl, Analyst

In your commentary about the CD repricing, you mentioned $264 million at 24 basis points in the second quarter. Are those at a point where they'll start repricing higher? Or do you still see reasonable competition for CDs in your markets?

Robert McCormick, CEO

The pricing control has been effective, and we're not increasing prices right now. We are losing a bit of ground in that portfolio, but that's almost intentional because our retention with existing customers has been very high. Overall, I believe we are managing the CD maturities quite well.

Alex Twerdahl, Analyst

Okay. You also mentioned the monthly trends in the NIM and showing some encouragement relative to what we saw for the whole quarter. Do you have those, the monthly NIM numbers handy?

Mike Ozimek, CFO

I can provide an overview. When we consider margin and net interest income, we assess the overall balance of our cash portfolio. We'll understand the Federal Reserve's actions in a few weeks, which should positively impact our margin. As you noted, we're closing loans below 3.42% and moving to higher rates, which will also be advantageous in the upcoming quarters. I believe the first quarter marked the lowest point for net interest income and margin, and I anticipate positive developments in the remaining quarters of this year. I expect to see improvements moving forward.

Alex Twerdahl, Analyst

Got it. And then can you just give me a little bit more color on the expense, the true-up to the comp payout that you referred to that impacted comp expenses in the first quarter? Do you have an exact amount of what that was? And kind of what's the normalized level of expenses for the quarter?

Mike Ozimek, CFO

Certainly. In the recent quarter, we experienced a decline of $3.5 million, with approximately $2 million attributed to the true-up we discussed. This amount is expected to be recovered in the second quarter. Regarding our expenses, our full-time equivalent (FTE) count was low at the end of the first quarter, but we are actively hiring, which will lead to a slight increase in salary expenses. The remaining components of the $3.5 million decrease are related to our stock price being down, which affects our liability-based equity awards that adjust quarterly. This had a positive impact in the first quarter, but if our stock price rises, it will result in an additional expense in the subsequent quarter. Specifically, $200,000 was related to our stock base, with another $400,000 pertaining to stock-based compensation. There are also a few hundred thousand dollars in reductions that will carry through the rest of the year, influenced by our postretirement benefit and pension plans, which, with current rates, provide a positive benefit of several hundred thousand dollars each quarter. So, looking ahead, these factors contribute positively in the upcoming quarters. Based on our guidance, if we add back a couple of million dollars and hire a few more people, that positions us towards the lower end of our projected range, which stands at $24.9 million.

Alex Twerdahl, Analyst

Got it. That's very helpful. And then for my last question about the buyback of 18,000 shares, it seems like you are really starting to engage with the buyback. Now that CECL is behind you and your comments on credit are quite positive, and considering you have ample capital, will the buyback receive more consideration in the next couple of quarters?

Robert McCormick, CEO

I think you'll see us much more active with the buyback, Alex. We're in a closed window right now but when the window opens, it wouldn't surprise me if we got back in it very actively.

Alex Twerdahl, Analyst

Okay. Thank you for taking my questions.

Robert McCormick, CEO

Thank you. Take care, Alex.

Operator, Operator

Thank you. This concludes our question-and-answer session. I would like to turn the call back to Robert J. McCormick for any closing remarks.

Robert McCormick, CEO

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

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.