TRST - NASDAQ

Good day and welcome to the TrustCo Bank Corp Earnings Call and Webcast. [Operator Instructions] 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 at trustcobank.com. 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.

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 see -- 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 under 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 continued the strong capital position at 10.17%, up from 9.44% last year. Overall, a solid quarter and we approached the balance of the year with cautious optimism. Now, Mike will detail the numbers, Scot will talk loans, leaving time for questions. Mike?

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. 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 of was 3.21%, up 55 basis points from 2.66% in the first quarter of ‘22. The yield on interest earnings 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. Now, Scot will review the loan portfolio and nonperforming loans.

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 to 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. Rob?

Thanks, Scot. Any questions?

[Operator Instructions] We have our first question from Ian Lapey from Gabelli Funds.

Rob and team, congratulations. Really good earnings considering the banking crisis. Yes, so just a few -- can you talk a little bit -- obviously, the deposit performance was impressive. Can you talk about how that trended during the quarter and so far in April and just generally what the impact of sort of the bank failures? What did you see as that was going on in your business?

Well, Ian, we -- as Mike said in his presentation, we stayed liquid and had the ability to kind of make decisions appropriately. And if we had to let some higher-priced stuff run off, we did it. And that liquidity position allowed us to afford the position to do that. So we -- our deposit trends have been very good. What we’ve been trying to do is retain customers and not let them walk out the door. So we’ve been selectively offering programs. We have a 7- to 11-month special that seems to be very effective. And our core group of customers seems to be sticking with us and we’re doing pretty well with them and actually bringing some money back, Ian, that maybe they were offered crazy specials for a 3-month period and that’s now expiring, so they’re coming back to more stability. So we’re pretty pleased with our deposit trends right now.

Okay. And then is -- in a period of crisis, sometimes there’s opportunity and I think your -- the benefits of your branch network certainly came through this quarter. Any thoughts about utilizing that to sort of expand your core offerings, whether it’s other loan products or financial services maybe as some opportunities present themselves?

No question about it, Ian. We used the phrase Come Home to TrustCo. It’s something that our branding polling and things like, as I said, is very strong with regard to that. And I think people is -- there’s a flight to safety and our customers seem very, very comfortable with where we’re at and how we run the company. And also the Bauer rating is a big thing in certain parts, especially in Florida. And our product offerings are constantly under evaluation. So -- and certainly, we’re doing a lot more calling and a lot more contact with our customers and I think it’s welcomed.

Okay. And then on the expenses, I guess, most of the increase was in salaries. And if I compare it to a year -- I understand you said there’s some seasonality. But if I compare it to a year ago, it looks like salary and employee benefits are up 44% and the headcount is only up by 1%. So is there anything unusual in that year-over-year comparison? And I’m assuming maybe incentive comp is playing a role given the strong results but maybe if you could just talk about the big increase...

Mike can give you a lot more detail, Ian but I mean we’re having some -- generally we’re having some of the same issues that every industry is having with the labor market, where we are having to pay people more money to retain them. And we have a lot of companies that are poaching us. Mike can go into a little bit more detail. There was a true-up of our pension funds and a couple of other adjustments that impacted that as well. You want to touch on that, Mike?

Yes. The only thing I would add is everything you said, Rob but in the first quarter of 2022, we had a downward adjustment of about $2 million that kind of rolled through from the ‘21. And so when you -- on really apples-to-apples, it was -- that number would really be closer to $11.2 million compared to where we are now. So that first quarter of ‘22 was our -- was pushed down.

Okay, good. Sorry, I missed that. So that -- yes, that’s more reasonable. And then last question. So on the share repurchase, I noticed you announced it sort of in mid-March, in the middle of the crisis. Is there any change in thoughts on that? I know it’s not a big amount, about 1% of the shares. But how do you feel about that versus retaining capital in the current environment? And how do you generally feel about your capital position?

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.

Our next question comes from Alex Twerdahl from Piper Sandler.

First question, just curious, any updated thoughts on sort of the overall complexion of the balance sheet? Obviously, you sit on a lot of cash still. You guys have always sat on a pretty fair amount of cash. But I’m just curious, a lot of that cash is there to absorb or, I guess, dampen the impact to higher rates. And it’s been -- it’s done its job. I’m just curious if that 10.5% has to stay there. Or just given with all the pressure on deposits if you can use some of that position to manage loan growth or deposit liquidity or anything like that, that -- and when maybe we can see that number come down a little bit over the next couple of quarters.

Well, there’s no plan to bring it down, Alex but it’s certainly -- 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, 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.

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.

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.

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.

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, that could pick up with new volume in early, I guess, mid-2023?

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.

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

Correct.

Okay. And then just final question. Anything -- we haven’t seen a lot of issues with credit across really any of the banks that have reported so far. I’m just curious in your markets if there’s anything that’s concerning you today. You don’t have a lot of office. Just anything that we should be thinking about.

The residential portfolio, it’s small chunks and it’s diversified by its nature. So we like -- that’s part of the reason we like residential lending because it -- just by the nature of the portfolio, it is diversified with many different borrowers, many different properties located in a lot of different places. So that’s a good part of why it appeals to us.

Our next question comes from Nick Ripostella from NR Management.

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 [ph].

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

Is this better? Yes, in other words, is it not some -- if you -- with the book value north 32, if all things being equal, if the stock were at 25 or something like that in this environment, would it not be something that would be more advantageous than kind of waiting until later in the year? And then, the final thing is with regard to the dividend, is there any hope for you actually might increase the dividend this year?

Well, the first question, I think you have to put interest rates and staffing as the two number one priorities, if you will and I’m not sure where I would rate either one of them, Nick. But even though we’re pretty comfortable with our position and how we can deal with interest rates, a changing interest rate environment certainly puts us on a high alert. And staffing, I mean, as I said earlier in the call, we have issues constantly with staffing, like every industry does now. I know you see the help wanted signs and I’m sure, even in your own business, you see changes like that. So I think you have to include that in concerns going forward. And also something Ian brought up the cost of staffing as well. And then with regard to the share repurchase, you noticed I hedged a little bit when I answered that question earlier. As I said, we are fully committed to a share repurchase program. It’s just the timing of it. And certainly, the lower the share price moves when compared to book value certainly makes it more appealing to us. We are cognizant of the fact that we work for our shareholders and we want to make the best deal for them possible. So there’s a balance between retaining the capital and the liquidity and getting a great deal on the share repurchase. And then number three, the dividend -- we are a dividend play very much. A lot of our shareholders are in it for the dividend. Our dividend return right now is astronomical and our payout is much higher than our peer group. But there’s only one way I would like to see that dividend go and that’s up. We never make forward-looking statements or make any promises with regard to the dividend but I think our shareholders like dividend increases and like the cash dividend returns.

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

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