Earnings Call Transcript - TRST Q4 2023

Operator, Operator

Good day, and welcome to the TrustCo Bank Corp Earnings Call and Webcast. All participants will be in a 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 NY that is intended to be covered by the Safe Harbor for 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 US GAAP. The reconciliations of such non-GAAP financial 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 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 one year as described in our earnings press release. At this time, I would like to turn the conference over to Mr. Robert J. McCormick, Chairman, President, CEO. Please go ahead.

Robert J. McCormick, CEO

Good morning, everyone, and thank you for joining the call. As the host said, I'm Rob McCormick, President of TrustCo Bank. I'm joined today, as usual, by Scot Salvador and Mike Ozimek. Scot will provide color on lending and credit quality, and Mike will follow my comments with details on the numbers. In 2023, we crossed an important milestone, our loan portfolio surpassed $5 billion. During the year, we grew residential loans by over $192 million and our commercial portfolio by over $50 million. We are very happy to report that our loan growth was accomplished without borrowing or brokered time deposits. While many see merit in these devices, we think the better practice is funding loan growth from our deposits. That's the TrustCo way. On the subject of deposits, it is noteworthy that our team managed a difficult year well. Because they had already done the hard work of establishing customer relationships, our bankers were able to grow our total deposits. While some funds shifted from core to time, the important thing is we kept the customers, retained the deposits, and created the opportunity for funds to flow back into core. Of course, the resulting increase in the cost of funds affected our margin. The effect was less than it would have been had we borrowed or purchased deposits. In other words, in classic TrustCo fashion, our team turned a potential negative into a positive. Also, in 2023 we cleaned up some things that could have hampered us in the future. Like many banks across the country, we were faced with litigation involving overdraft fees. We chose to resolve these matters in the best way that benefits our customers and shareholders. Although final court approval is pending, we consider it resolved and that matter behind us. We also took a hard look at our branch network and made the decision to close three locations that did not meet our expectations. We are leaner and more efficient coming into 2024. Also worthy of comment is the fact that our credit quality remains extraordinary. Non-performing assets to total assets were 0.29% at year-end. That is the lowest this metric has been in over 17 years. Again, quite an accomplishment by our team in a challenging environment. Finally, as noted in the press release, all of this good work springs from our rock-solid capital position. We took advantage of investment opportunities that were in line with our strategy, preserving capital and maintaining maximum flexibility. Because of this, we had cash on hand to fund our loan growth and did not need to chase higher-priced deposits. No one knows exactly where rates will go or what other factors might come up this year, but we are confident in our position and ready to capitalize on opportunities that arise. Now, Mike will give us details on the numbers, and Scot will cover lending, and then we'll take your questions.

Michael M. Ozimek, CFO

Thank you, Rob. And good morning, everyone. I will now review TrustCo's financial results for the fourth quarter of 2023. As we noted in the press release, the company saw a year-to-date net income of $58.6 million, which yielded a return on average assets and average equity of 0.97% and 9.46%, respectively. Capital remains strong. The consolidated equity to assets ratio was 10.46% for the fourth quarter of 2023 compared to 10% for the fourth quarter of 2022. Book value per share at December 31, 2023, was $33.92, up 7.5% compared to $31.54 a year earlier. Average loans for the fourth quarter of 2023 grew 6.6%, or $309.9 million, to $5 billion from the fourth quarter of 2022, an all-time high. Consequently, loan growth continued to increase and occurred in all of our loan categories, with the residential real estate portfolio leading the charge, increasing by $192.2 million, or 4.26%, in the fourth quarter of 2023 over the same period in 2022. Average commercial loans increased by $50.5 million, or 22.6%; home equity lines of credit increased by $61.8 million, or 22.2%; and installment loans increased by $5.5 million, or 50.3% over the same period in 2023. For the fourth quarter of 2023, the provision for credit losses was $1.35 million. The additional provision this quarter reflects the current economic environment and is not an indication of existing credit issues at the bank. Retaining deposits has been a key focus during 2023. Although core deposits were down compared to the prior year, total deposits as of December 30, 2023, increased by $158 million to $5.35 billion from the end of 2022. As we move forward, our objective is to continue to offer competitive products of the bank through aggressive marketing and product differentiation. As we have mentioned, we understood the big inflows of deposits during the pandemic were temporary and that is why we did not invest that liquidity into securities or loans or retain that liquidity on the balance sheet for when depositors would absorb those funds. This provided us the flexibility to strategically price core deposits while retaining core customers. Net interest income was $38.6 million for the fourth quarter of 2023, a decrease of $10.6 million or 21.5% compared to the same period in 2022. Net interest margin for the fourth quarter of 2023 was 2.6%. The yield on interest-earning assets increased to 3.93%, up 39 basis points from 3.54% in the fourth quarter of 2022. And the cost of interest-bearing liabilities increased to 1.72% in the fourth quarter of 2023 as compared to the fourth quarter of 2022. We continue to be optimistic as we enter 2024. The majority of our CD portfolio has a three to nine-month maturity, which will give us the opportunity to reprice these CDs in the near term as rates potentially fall. Our wealth management division continues to be a significant recurring source of non-interest income, with approximately $967 million of assets under management as of December 31, 2023. Now on to non-interest expense. Total non-interest expense, net of ORE expense, came in at $28.8 million, up $1.5 million from the prior quarter. This increase primarily results from non-recurring expenses for a litigation settlement and also for branch closures. This was offset by decreases in various other categories of expenses. ORE expense net came in at an income of $12,000 for the quarter as compared to the expense of $163,000 in the prior quarter. Given the continued low level of ORE expenses, we're going to continue to hold anticipated level of expense not to exceed $250,000 per quarter. All the other categories of non-interest expenses were in line with our expectations for the fourth quarter. We would expect 2024's total recurring non-interest expense, net of ORE expenses, to remain in the range of $26.9 million to $27.4 million. We are optimistic about expenses in 2024. Now, Scot will review the loan portfolio and non-performing loans.

Scot R. Salvador, CRO

Good morning, everyone. Thanks, Mike. Total loans for the fourth quarter increased by $43 million in actual numbers or 0.9%. Year-over-year, the increase was $270 million or 5.7%. Residential loans again led the increases with a total of $37 million in quarterly growth. This was split between $22 million in first mortgages and $15 million in home equity lines. The full year showed similar trends with $160 million of first mortgage growth and $62 million in home equities. Commercial loans continued to grow, increasing by $5 million on the quarter and by $43 million year-over-year. Overall, residential activity and market trends remain similar to those discussed in the most recent quarters. We continue to post solid net growth in our first mortgage product, although overall purchase activity is reflective of nationwide trends and is slower than in the prior year. The midwinter holiday period is, of course, also a slower time of year, although we expect activity to pick up as we begin to enter the early stages of the new season. The recent decrease in interest rates, although modest, is also a positive factor that should help overall activity. The home equity products continue to perform well overall, with a good amount of activity and net growth. The loan backlog is down from quarter-end, which is normal for this time of year, and also down year-over-year. This should begin to build as we progress forward and overactivity increases. Interest rates have come down somewhat, as mentioned, and we currently stand at 6.38% for our base 30-year fixed rate. We always have a variety of promotions and product enhancements we are working on. We expect to utilize our status as primarily a portfolio lender to help spur activity and increase growth. Asset quality remains strong overall. Non-performing assets totaled $17.9 million as of December 31. This is down from $19.1 million in September and $19.6 million a year ago. Non-performing loans have remained relatively flat at $17.7 million, down approximately $200,000 from last quarter and up about the same amount from a year ago. This total equates to 0.35% of non-performing loans to total loans, down slightly from 0.37% in the prior year. Net charge-offs for the quarter totaled $248,000. For the full year, our charge-offs equated to a net recovery of $46,000. The loan loss allowance now stands at 0.97% of total loans as of year-end. Finally, the coverage ratio or allowance for credit losses to non-performing loans was 275% in December compared to 263% a year ago. Rob?

Robert J. McCormick, CEO

That's our story, and we're happy to answer any questions any of you might have.

Operator, Operator

Thank you. Our first question comes from the line of Alex Twerdahl with Piper Sandler. Alex, please go ahead. Your line is now open.

Alex Twerdahl, Analyst

Good morning, guys.

Robert J. McCormick, CEO

Good morning, Alex.

Michael M. Ozimek, CFO

Good morning, Alex.

Alex Twerdahl, Analyst

I was just first hoping that maybe you could sort of just help us get a sense for how the NIM might react to some Fed rate cuts. I think, the first one is not modeled in for May according to the forward curve. And as you kind of think about the CDs that, Mike, you alluded to repricing relatively quickly versus some of the assets that are more tied to the short end of the curve, like, how should we expect the NIM to react to the first couple cuts if and when we get them?

Robert J. McCormick, CEO

We've already started to reduce CD rates from their peak, Alex. Most customers are opting for shorter-term CDs, so we're hopeful that we can adjust those rates to align with current market conditions at a lower level later this year. It's interesting to see that when we offer a 4.9% CD for three months or 4.75% for six to nine months, everyone tends to choose the 4.90%. It's fascinating to observe how consumers are responding to that. We remain optimistic about adjusting deposit rates for the rest of the year.

Alex Twerdahl, Analyst

Okay. So, I mean, I take from your tone that you'd expect that sort of the pace of repricing of the deposits, the rate which accelerated a little bit in the fourth quarter, that that should abate in the first quarter. Is that a reasonable expectation?

Robert J. McCormick, CEO

That would be the hope.

Alex Twerdahl, Analyst

The allowance for credit losses increased by about 2 basis points during the quarter. You mentioned some changes in the macro forecast. Could you clarify if this is driven by one specific region or if there are other factors influencing the allowance for credit losses? Also, should we expect it to rise a bit more as uncertainty grows in 2024?

Michael M. Ozimek, CFO

That certainly could increase if uncertainty persists. I can say that the non-performing numbers are showing improvement and are essentially flat. That is not what is influencing the calculation. However, some macroeconomic indicators, such as unemployment forecasts and housing data, contributed to the change in the fourth quarter. If those conditions deteriorate, we might see a slight increase. Nevertheless, I believe that the provision for the fourth quarter was appropriate, and I don’t expect us to trend significantly above 1%. Overall, I feel comfortable with our current position.

Robert J. McCormick, CEO

We've been in a net recovery position for a very long period of time now.

Michael M. Ozimek, CFO

At some point you have to recognize that.

Robert J. McCormick, CEO

Correct. That's correct.

Michael M. Ozimek, CFO

Yup.

Alex Twerdahl, Analyst

Yeah. I guess, just back to sort of the deposit strategy, you guys have always kept a pretty healthy level of cash on the balance sheet, and that looks like it grew into the end of the year. As I think about that, just relative to the amount of capital you have, it seems like you have so much capital that gives you a lot of flexibility to sort of create liquidity if needed. I guess, do you need to carry such a high level of cash or is that something that maybe can run down and give you a little bit more flexibility with deposit pricing and maybe a little bit more aggressiveness in lowering your deposit costs as maybe we're now at a peak in rates?

Robert J. McCormick, CEO

You know as much or more about that than we do. Liquidity certainly keeps the wolves off the door and gives you great flexibility to do what you have to with regard to deposit pricing. So, I wouldn't want to see a crazy increase in cash levels, but where we're at right now is not a bad position for the economic conditions and some of the things we're facing in the industry.

Alex Twerdahl, Analyst

Okay. And then just a final question for me, just on expenses. You guys talked about closing three branches and making some tough decisions. Obviously, it's a challenging revenue environment, so that makes a lot of sense. Are there more initiatives underway? I mean, I know you gave the guidance for the year, but are there more things you're looking at if the revenue environment remains challenged to be able to trim expenses?

Robert J. McCormick, CEO

Yeah. There are a number of relocations that are pending right now in our branch network, not necessarily closures. And every branch that comes up for maturity is evaluated and all options are open at that point in time. An analysis is done on profitability and influence on the company and everything else, and a decision and a risk assessment is made, and then the decision is made whether we should continue with that lease or not. We have two or three pending relocations right now that we think are great opportunities for our company, just like we did with Wilton last year. I don't know how closely you track us, but we moved our Wilton branch up the road next to a very popular convenience store, and it's been a great move for us out of a former enclosed mall. So, those types of things are opportunities for us, and we're very happy to take advantage of them. We have further consolidation, you'll see in our Rotterdam locations. We're closing a branch there and selling that. So, you'll see more coming.

Alex Twerdahl, Analyst

That's helpful. I have one more question regarding capital. You have healthy levels of TCE stocks still trading below tangible book value. Is a buyback something you would consider in the near term?

Robert J. McCormick, CEO

Yeah. We like the idea of the buyback. We have an approved program, Alex, and we've been active in the past with regard to buybacks, and we like that idea, especially with regard to book value.

Alex Twerdahl, Analyst

Okay. Great. I appreciate you taking my questions.

Robert J. McCormick, CEO

Thank you.

Operator, Operator

Our next question comes from the line of Ian Lapey with Gabelli Funds. Ian, please go ahead.

Ian Lapey, Analyst

Hi. Good morning, Rob. Congrats on a solid year in a tough, tough environment.

Robert J. McCormick, CEO

Good morning, Ian.

Ian Lapey, Analyst

Good morning. A few questions. First, you talked last quarter about a split the difference loan product, can you give an update on how that's going?

Robert J. McCormick, CEO

It was not very well received, Ian, and we kind of walked away from that. I was actually shocked how poorly received it was. I do have to say, if you talk to our mortgage originators, they would say it did introduce us to questions and comments on a lot of real estate transactions, but we didn't get a lot of people to bite on it.

Ian Lapey, Analyst

Okay. It seems like a sensible thing, but it wasn't very well received.

Robert J. McCormick, CEO

I thought so too.

Ian Lapey, Analyst

Next on credit, we achieved a significant net recovery of $46,000. What are your expectations for charge-offs over the next couple of years? I assume it can't remain this favorable, but when you're underwriting, particularly with the current higher rates, what would be a reasonable expectation for charge-offs?

Robert J. McCormick, CEO

You've been with us for several years. We're a pretty conservative company, and I certainly agree economic conditions and some of the changes could drive a little bit more with regard to charge-off, but we don't see them skyrocketing. Our backlog and our shorter-term delinquencies are not climbing. We have a very good handle on our collections, and we just don't see them skyrocketing over the near term, or really even increasing markedly over the near term. So, I think we're pretty comfortable with where we're at. As far as the net recovery, we've been in a net recovery position for so long now. Excuse me. I don't know how long that can continue, but we don't see that turning dramatically to a significant loss.

Ian Lapey, Analyst

Okay. Great. Lastly, you have about $238 million in residential mortgage-backed securities, and while most other banks hold more proportionally, I'm curious why you choose to buy any of these, considering your core business focuses on holding fixed-rate mortgages.

Robert J. McCormick, CEO

Generally what you're saying is correct, but we see good opportunities in the mortgage backs, and that's when we jump in and out of them. Sometimes, along your line of thinking, the agencies work pretty well for us, but there have been opportunities to grab some rate on mortgage backs and we have jumped in. But the bank's portfolio is really a big mortgage-backed security. So, generally speaking, we agree with you.

Ian Lapey, Analyst

I understand your point, but I've been concerned that all banks are holding this security due to short-term funding issues. It appears your securities are yielding around 2.3%. Why not sell them to get a tax refund and then reinvest, either in cash or in one or two-year treasuries that could be earning double? As you mentioned in your release, there could be various interest rate scenarios, and this approach seems like it would offer a protective measure from a risk management perspective.

Robert J. McCormick, CEO

That certainly gets tempting with the way the rate situation is right now. And we do evaluate that pretty regularly. We've looked at that portfolio a number of times and what the tolerance is for that loss. Overall, we're pretty comfortable with where we're at. But any opportunity we have to do something like that, we would try and take advantage of. You want to add any color to that, Mike?

Michael M. Ozimek, CFO

I agree. We definitely look at it. I mean, when we've looked at it in the past, the loss that would generate when we bought higher securities, if you were to go out and buy higher securities, it was just longer than what I guess our tolerance was and our payback window we thought was appropriate. So, but we definitely look at that. We've looked at that in the past.

Robert J. McCormick, CEO

Certainly, others have done that, Ian.

Ian Lapey, Analyst

Okay, great.

Robert J. McCormick, CEO

Okay.

Ian Lapey, Analyst

Yes, I have been surprised by the amount involved. As I mentioned, you have performed significantly better than many others, but it still appears to be an unusual investment for a bank to pursue.

Robert J. McCormick, CEO

Thank you, Ian.

Ian Lapey, Analyst

Okay, well, great. Thanks, guys. And, again, congrats on a good year.

Robert J. McCormick, CEO

Thanks.

Michael M. Ozimek, CFO

Thank you.

Robert J. McCormick, CEO

Same to you.

Operator, Operator

Our next question comes from the line of Greg Roeder with Adirondack Funds. Greg, please go ahead.

Greg Roeder, Analyst

Good morning. I have a question about something.

Robert J. McCormick, CEO

Good morning, Greg.

Greg Roeder, Analyst

Good morning. Time deposits increased by 16% sequentially this quarter. Total deposits have risen significantly for the first time. I'm interested in your comment about the shift from core to time deposits, but it seems like there may be more to it. Could you elaborate on whether this change involved new accounts, larger accounts, or extending terms?

Robert J. McCormick, CEO

No. Well, we're very much relationship-driven, Greg, so a lot of the time deposit accounts come with the requirement for core. And I said in my part of the presentation that we work with our existing customers and work those relationships as much as we possibly can and work our customer base and our portfolios to see who has what product and try and cross-sell additional products to those customers. I would say that it's as much a shift as new time deposits. There was desperation. The rates had been so low for so long, there had been a lot of desperation in the population for higher rates. So that you saw a lot of people take the jump into time at that point in time. But I think our relationships are generally strong.

Greg Roeder, Analyst

So, when yes.

Robert J. McCormick, CEO

Go ahead, Greg.

Greg Roeder, Analyst

Perhaps, when the tenures started kind of moving back down, people kind of made the jump and tried to lock in, is that fair?

Robert J. McCormick, CEO

I would agree with that. I would say, we were slower to move than most, and I think that speaks to our customer base and the strength of our customer base, and I do think we were slower to move. But when the rates did start to drop and you saw a significant change, I think people looked at opportunity.

Greg Roeder, Analyst

Great. Well, thank you very much, and good year.

Robert J. McCormick, CEO

Thank you.

Michael M. Ozimek, CFO

Thank you.

Robert J. McCormick, CEO

Same to you.

Operator, Operator

We have no further questions, so I'll hand the call back to Robert for closing comments.

Robert J. McCormick, CEO

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

Operator, Operator

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.