Earnings Call Transcript - TRST Q1 2024

Operator, Operator

Good day, and welcome to the TrustCo Bank Corp Earnings Call and Webcast. Before we begin, we want to highlight that this presentation may include forward-looking information about TrustCo Bank Corp New York that is protected under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results, performance, or achievements may vary significantly from those mentioned in these statements due to various risks, uncertainties, and other factors. More detailed information on these risk factors can be found in our press release leading up to this call and in the Risk Factors and Forward-Looking Statements section of our annual report on Form 10-K, as well as in our quarterly reports on Form 10-Q. The forward-looking statements made during this call are accurate only as of today’s date, and the company does not undertake any obligation to update this information to reflect any changes after this call, except as required by law. During today’s call, we will address certain financial measures derived from our financial statements that are not calculated in accordance with U.S. GAAP. The reconciliations of these non-GAAP financial measures to the closest GAAP figures can be found in our earnings press release, accessible under the Investor Relations section of our website at trustcobank.com. Additionally, please note that today’s event is being recorded. A replay of the call will be available for 30 days, and the audio webcast will be accessible for one year, as detailed in our earnings press release. At this point, I would like to hand the conference over to Mr. Robert J. McCormick, Chairman, President, and CEO. Please proceed.

Robert McCormick, President & CEO

Thank you. Good morning, everyone, and thank you for joining the call. I'm Rob McCormick, the President of TrustCo Bank. I'm joined today, as I usually am, by Scot Salvador and Mike Ozimek. Scot will provide color on lending and credit quality and Mike will follow my comments with detail on the numbers. We ended 2023 in good shape. Our loan portfolio surpassed the $5 billion mark, reaching another all-time high. Our team worked together to retain and grow our customer base, allowing us to lag on some of the deposit rates. We improved our efficiencies by consolidating a few branch locations, and we maintained our rock-solid credit quality during that year that challenged our industry. 2024 is off to a good start. The positive trend on total loans continues to reach yet another all-time high. Income was also positive with net income of $12 million and non-interest income up. Net interest margin was slightly down at 2.44, but generally held steady throughout the quarter. We saw a solid improvement in our return metrics with return on average assets and return on average equity both up from the previous quarter. Earnings per share increased significantly from the end of 2023 and our book value per share also improved. Efficiency ratio has trended favorably down at quarter end. Exceptional credit quality remains a hallmark of TrustCo lending. As those who follow us know, we are a portfolio lender, and the quality of loans we originate supports the stability of the company over the life of the loans, both residential and commercial underwriting standards of rigorous and yield favorable outcomes. Non-performing loans and non-performing assets remain essentially flat, and charge-offs again resulted in a net recovery. We are pleased to report that our stock repurchase program has been reauthorized. We anticipate taking advantage of strategic purchase opportunities as they present themselves. Now Mike will give us detail on the numbers. Scot will give color on the loan portfolio, and then we will take your questions.

Michael Ozimek, CFO

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the first quarter of 2024. As you noted in the press release, the company saw first quarter net income of $12.1 million, an increase of 23.13% over the prior quarter, which yielded a return on average assets and average equity of 0.80% and 7.54%, respectively. Capital remains strong. Consolidated equity to assets ratio was 10.51% for the first quarter of 2024, compared to 10.17% in the first quarter of '23. Book value per share at March 31, '24 was $34.12, up 5.6% compared to $32.31 a year earlier. Average loans for the first quarter of 2024 grew by 5.2% or $249.4 million to $5 billion from the first quarter of '23, an all-time high. Loan growth has continued to increase and occurred in all of our loan categories, leading the charge with the residential real estate portfolio as usual, which increased by $146.6 million or 3.5% in the first quarter over the same period in 2023. Average commercial loans increased by $38.3 million or 16%. Home equity lines of credit increased to $61.7 million or 21.2%, and installment loans increased by $2.8 million or 21.1% over the same period of '23. For the first quarter of '24, the provision for credit losses was $600,000. Retaining deposits has been a key focus during '23 and into 2024. Although core deposits were down compared to the prior quarter, total deposits, as of March 31, 2024, increased by $4.4 million from the end of '23 and remain at $5.4 billion. As we move forward, our objective is to continue to offer competitive product offerings of the bank through aggressive marketing and product differentiation. Net interest income was $36.6 million for the first quarter of '24, a decrease of $10.4 million compared to the same period in '23. Net interest margin for the first quarter of 2024 was 2.44%, down 77 basis points for the first quarter of '23. Yield on interest-earning assets increased to 3.99%, up by 30 basis points from 3.69% in the first quarter of 2023. The cost of interest rate bearing liabilities increased to 1.99% in the first quarter of 2024 from 0.63% in the first quarter of 2023. During the first quarter of 2024, we have been able to lower the rates offered on time deposits while continuing to retain and grow that product. This should bring down the cost of time deposits over time. The bank has seen the erosion of margin beginning to slow when comparing to decrease to prior quarters, and we are optimistic that we are nearing the bottom of this rate cycle. Our Wealth Management division continues to be a significant recurring source of non-interest income. They had approximately $1 billion of assets under management as of March 31, 2024. Now on to non-interest expense. Total non-interest expense net of ORE expense came in at $24.8 million, down $4 million from the prior quarter. As mentioned in the earnings release, the decrease is primarily a result of lower salaries and employee benefit costs in the current quarter and a litigation settlement in the prior quarter. ORE expense net came in at $74,000 for the first quarter as compared to $12,000 in the prior quarter. Given the continued low level of ORE expenses, we're going to continue to hold anticipated level of expenses not to exceed $250,000 per quarter. All of the other categories in non-interest expense were in line with our expectations for the quarter. We would expect 2024's total recurring non-interest expense, net of ORE expense, to be in the range of $26.9 million to $27.4 million per quarter.

Scott Salvador, Executive VP

Good morning, everyone. Thanks, Mike. Total loans grew by $206 million or 4.3% year-over-year in actual numbers, ending the first quarter just over $5 billion. The growth was centered on residential mortgages, which increased by $172 million with an additional increase of $33 million coming from commercial. On the quarter, loans grew by approximately $2.5 million as residential loans decreased slightly and commercial loans increased by $5.5 million. We're pleased to have grown the loan portfolio by over $200 million over the past year in what has been a challenging environment. First quarter's activity reflects recent trends with home equity products continuing to post overall growth. The purchase money market continues with nationwide themes as interest rates and other market conditions restrained volume versus prior years. However, we remain well positioned in the market and seek to not only capitalize on the increased market activity as it develops, but we're also looking to take increased market share from our competitors. Our advantageous portfolio product, combined with our ability to implement varied promotions allows us to control our own pricing versus the market, putting us in a unique position to do so. Rates in the market have moved back up in recent weeks, and we currently stand at 6.99% for our base 30-year fixed rate. As stated, we have been keeping our rates sharp with the goal of increasing market share and driving more volume as we enter the main selling season. Our committed loan backlog stands roughly equivalent to the end of last quarter. More recent activity has picked up, however, and we have a good amount of loans in the earlier stages of the processing cycle. This should translate to increased committed backlog numbers and net portfolio growth as we move forward. Asset quality measures remained good. Non-performing loans were $18.3 million as of quarter end versus $19.2 million at 3/31/23. Non-performing assets totaled $20.6 million versus $21 million a year ago. Net charge-offs in the quarter amounted to a $42,000 net recovery. This follows upon three consecutive years stretching back to 2021 when net charge-offs for the year were in a recovery position. Our allowance for credit losses to total loans remained essentially flat in the quarter at 0.98%. The coverage ratio or allowance for credit losses to non-performing loans stands at 269%, as of March, up from 244% a year ago.

Robert McCormick, President & CEO

That's our story, and we're happy to take any questions anyone might have.

Operator, Operator

Our first question is from Alex Twerdahl from Piper Sandler.

Alexander Roberts Twerdahl, Analyst

First, Scot, you mentioned the backlog at the end of the quarter was similar to the end of the year. However, it seems that the second quarter is usually the strongest quarter for loan growth. We've seen that in the last couple of years. Obviously, the spring and home buying season is a real thing. Based on what you're seeing in the market, despite the backlog being kind of similar, would you expect the second quarter to again show similar growth trends to what we've seen in the last couple of years?

Scott Salvador, Executive VP

Yes. I mean, the second quarter, as I said, normally builds upon the first quarter. The first quarter is normally our slowest quarter of the year for net growth. And it's all relative, obviously, to what's going on overall, but we have seen some activity pick up recently, which will translate to increased backlog. And there's always a delay, obviously, between when the applications come in and when they hit the bottom line. But we have seen the activity start to pick up, which is positive, and we should see the benefit of that as we start to move forward.

Alexander Roberts Twerdahl, Analyst

Okay. Great. And then do you have handy just the amount of normal amortization that you would see in the mortgage portfolio in the given quarter?

Scott Salvador, Executive VP

It depends. Roughly $15 million to $20 million, probably $17 million or $18 million, if you want to throw out a number, that's probably not a bad number to throw out.

Alexander Roberts Twerdahl, Analyst

Right. That's about per month, about $18 million per month.

Scott Salvador, Executive VP

Yes. I'm sorry, I said for the quarter. Yes.

Alexander Roberts Twerdahl, Analyst

Okay. That's great. And then if we do see loan growth pick up a little bit in the second quarter, a couple of percent, would the expectation be to fund that with deposit promotions? Or would you fund it with cash on hand? Obviously, you guys have a lot of liquidity to deploy whenever you decide to.

Robert McCormick, President & CEO

That would be a good problem to have, Al, a good decision that we've got to make. We could certainly step up and do more promotions and grow the deposits that way or utilize the excess cash we have on the balance sheet now.

Alexander Roberts Twerdahl, Analyst

Could you provide more details? You mentioned that you're reducing the rate on time deposits. Does this apply to time deposits as they mature? Are you actually able to lower the rate on them? Or is a lower rate necessary to keep that deposit when it transitions into time deposits? In other words, are we nearing the peak on time deposit rates, or is there still room for rates to rise further, given that they may remain high for an extended period?

Robert McCormick, President & CEO

Not being as smart, Alex, but yes, the answer to the question is yes, because we're attempting to price to retain those accounts and maturity, having them roll over, and we're actively working those accounts and working with our customers to hopefully retain them. And I would say, based on the current rate environment, we probably are close to the peak of time deposits. And people are even throwing out longer terms, Alex.

Alexander Roberts Twerdahl, Analyst

Say that one more time?

Robert McCormick, President & CEO

People are actually considering longer terms on CDs, and customers have been beginning to look at them for, probably, the past six to nine months, or maybe even a year if you even looked at anything more than five months.

Alexander Roberts Twerdahl, Analyst

And so is that something that you have been willing to offer the longer-term products? I know that in the past, you've highlighted the short nature of that portfolio as being something that could really benefit when rates get cut.

Robert McCormick, President & CEO

Yes, priced appropriately, we do offer a longer-term rate.

Alexander Roberts Twerdahl, Analyst

Okay. And then can you just give us a little bit more color? Maybe I missed it in the prepared remarks, but salaries and benefits dropped pretty dramatically, causing you to beat that expense guide pretty meaningfully in the first quarter. Can you just talk about sort of how you found that additional savings and what really drove that?

Michael Ozimek, CFO

Yes, sure. So we had about $1 million there, and about $600,000 of it was related to being able to take down some of the incentive pool that we had, due to lower production from the prior year. And then also some of the liability-based awards get revalued at the end of every quarter, and that was about $300,000 or $400,000, right? So that was also another downward adjustment. So we picked up about $1 million in the first quarter there. That could turn around if the stock price goes up, but that's what drove that.

Alexander Roberts Twerdahl, Analyst

Okay. So those are kind of things that you would expect not to recur, so that $26.9 million to $27.4 million that's where you expect to be in the second, third and fourth quarter.

Michael Ozimek, CFO

Right. And that's a conservative number. I mean, it could be a little high, but correct. I mean, that $1 million will load back into the second quarter, correct.

Alexander Roberts Twerdahl, Analyst

Okay. That's all my questions for now.

Michael Ozimek, CFO

Correct. Yes, right. I mean you mentioned the liability base awards can go wherever, and then also the performance incentives.

Operator, Operator

We currently have no further questions. This concludes our question-and-answer session. I would like now to turn the conference back over to Robert J. McCormick for any final remarks.

Robert McCormick, President & CEO

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

Operator, Operator

The conference call has now concluded. Thank you for attending today's presentation, and you may now disconnect.