TRST (2021 - Q4)

Good day, and welcome to the TrustCo Bank Corp Earnings Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Before proceeding, we would like to mention that the 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 the variation 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 an update by our quarterly reports on Form 10-Q. The statements are valid only as of the date hereof, and the company’s disclaimer. Any obligation to update this information, except as may be required by applicable law. Today’s presentation contains non-GAAP financial measures. The reconciliation of which measures to the most comparable GAAP figures are included in our earnings press release, which is available under Investor Regulations [sic] [Relations] tab of our website at 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 M

Thank you. Good morning, everyone. As the host said, I am Rob McCormick, President of the bank. Thank you for joining us this morning to hear a little bit about – little more about our results. We had a very good year at the bank in 2021. Our net income was $61.5 million, up over 17% from the prior year and an all-time record for our company. Loans were up just under $200 million to $4.4 billion, which is also an all-time high. Our performance ratios all showed improvement over prior periods, non-performing loans to total loans and total assets were 0.42% and 0.31%, respectively, with a coverage ratio of 236% and a loan loss reserve amounting to 1% of loans. We are now operating under CECL, and Mike Ozimek will have detail on that in his presentations. Deposits also posted nice growth in 2021, about $231 million to about $5.3 billion. Interest expense continued to drop in keeping with the market growth in core accounts, with less dependence on time deposits. We continue to have a large investment portfolio with a tremendous cash position. We have done this in anticipation of a changing rate environment. Our financial services area continues their good performance with $1 billion under management. ROA and ROE, both showed improvement year-over-year. We increased our cash dividend executed on a reverse stock split and stayed active in our buyback program. We also increased our capital ratios and shareholders equity. We continue to take a full service essential approach while operating under varying COVID protocols, to close one branch and open one in Palm Coast, Florida. As I think you all know, Florida has become a large part of our business. We are taking the opportunity to introduce Eric Schreck, who runs that operation for us to give a brief update. After Eric, he will turn it over to Mike Ozimek for details on the numbers; and then Scot Salvador will break down loans leaving us time for some questions. As we begin 2022, our 120th-year by the way, we do so with optimism. We are pleased with 2021, but look forward to and aware of 2022. Eric?

Thanks, Rob. This is my first time on the call. I thought I would briefly recap some Florida facts and milestones. TrustCo’s Florida branch network of 53 offices encompasses 15 counties. 37 of the offices are within Central Florida. The remainder are split between the East Coast, North of South Florida and the West Coast around the Sarasota area. All 53 locations were open de novo. As of 12/31/19, Florida loans outstanding exceeded $1 billion for the first time. As of 12/31/20, deposits followed suit ending the year over $1 billion as well. Total deposits in Florida ended 2021 up for the year, despite significant CD maturities, which rolled over into core savings and money market accounts. Taking advantage of more favorable Florida labor market, TrustCo moved its Deposit Operations Department to Florida in 2021. Operations joins our call center, which relocated from New York to Florida a few years earlier. Deposit operations is located at our Florida headquarters in Longwood, Florida. Among our 53 offices in Florida is our newest office, which opened in late September. Palm Coast is our first office in Flagler County on the East Coast and is adjacent to existing offices in Volusia County. Finally, we recently signed a lease to open a loan office in Naples, Florida. Next is Mike Ozimek to discuss the numbers.

Thank you, Eric, and good morning, everyone. I will now review TrustCo’s financial results for the fourth quarter of 2021. As we noted in the press release, the company saw a net income of $16.2 million in the fourth quarter of 2021, an increase of 17.6% over the prior year, which yielded a return on average assets and average equity of 1.05% and 10.92%, respectively. Average loans for the fourth quarter of 2021 grew 4.4% or $185.3 billion to $4.4 billion from the fourth quarter of 2020. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio, which increased $223.3 million or 5.9% in the fourth quarter of 2021 over the same period in 2020. The average commercial loan portfolio decreased $22.7 million or 10.1% over the same period in 2020. This included approximately $23 million of new PPP loans originated in 2021. Bank currently has approximately $10 million in remaining of SBA PPP loans. Total average investment securities, which includes the AFS and HTM portfolios, increased $32.8 million or 7.1% during the fourth quarter of 2021 over the same period in 2020. During the same period, the bank had approximately $25.8 million of pooled securities that paid down. For the same period, the bank also purchased approximately $3.4 million of securities. The provision for loan loss for the fourth quarter was $3 million – a credit of $3 million, a decrease compared to the $600,000 provision for loan loss in the same period of 2020. As mentioned last quarter, during 2020, management increased certain allowance-related qualitative factors based on its assessment of the impact of the current pandemic and economic conditions as well as the perceived risks inherent to specific industries as they relate to the bank’s portfolio. The decrease in provisions during the fourth quarter of 2021 was a result of sustained improvement in asset quality trends and economic conditions. The ratio of the allowance for loan losses to total loans was 1% as of December 31, 2020, compared to 1.17% as of the same period in 2020. As mentioned in prior quarters, bank did not really adopt CECL as originally provided by the Cares Act. And as part of the COVID-19 Relief bill signed in December 2020, the bank adopted CECL on January 1, 2022. The company expects to remain a well-capitalized financial institution under current regulatory calculations. As discussed in prior calls, our focus continues to be on traditional lending and conservative balance sheet management, which has continued to enable 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 $1.1 billion of overnight investments during the fourth quarter of 2021, an increase of $207 million compared to the same period in 2020. Given the elevated level of cash as we head into 2022, the bank will continue to evaluate investing excess liquidity into the market. On the funding side of the balance sheet, total average deposits increased $297.5 million or 6% for the fourth quarter of 2021, over the same period a year earlier. The increase in deposits was a result of $52.9 million or 7.5% increase in average money market deposits, a $203 million or 16.1% increase in average savings deposits, 115 or a 11.1% increase in interest bearing checking account averages, and $155 million or 24.2% increase in average non-interest bearing checking balances. These are partially offset by the decrease in average time deposits of $228 million, or 17.8% over the same period last year. For the same period, our total cost of interest bearing deposits increased 11 basis points from 34 basis points. This is primarily driven by a decrease in money market deposits to 10 basis points from 25 basis points over time deposits to 32 basis points from 95 basis points over the same period last year. As we move into 2022, additional opportunities continued to exist as CDs reprice to lower market rates. With that said, the bank has approximately $277 million CDs, that will mature at an average rate of 37 basis points in the first quarter of 2022. The second quarter of 2022, approximately $224 million CDs will mature at an average rate of 24 basis points. And in the second half of 2022, approximately $372 million of CDs will mature at an average rate of 20 basis ones. Our financial services division continues to be a significant recurring source of non-interest income, and they had approximately $1.1 billion of assets under management as of December 31, 2021. Now onto non-interest expense. Total non-interest expense net of ORE expense came in at $26.2 million, up $1.6 million compared to the third quarter of 2021 and slightly above our estimated range of $24.9 million to $25.4 million. The increase from prior quarter is primarily a result of increases in seasonal net occupancy expenses and increased advertising expenses. ORE expense came in net at an income of $28,000 for the quarter as compared to an expense of $32,000 in the prior quarter. Given the continued low level of ORE expenses, we’re going to do decrease the anticipated level of expenses not to exceed $250,000 per quarter. All the other categories in non-interest expense were in line with our expectations for the fourth quarter. You would expect that 2022’s total recurring non-interest 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 fourth quarter of 2021 came in at 58.5% compared to 57.31% in the fourth quarter of 2020. Finally, the capital ratios. Consolidated equity to asset ratio increased slightly was 9.7% at the end of the fourth quarter, up 14 basis points from 9.56% from the third quarter of 2021. The bank continues to be proud of its ability to increase shareholder value during these challenging economic times. Book value per share at December 31, 2021 was $31.28, up 6.2% compared to $29.46 a year earlier. These amounts are adjusted for the reverse stock split, which occurred in the second quarter of 2021. Now Scot will review the loan portfolio and non-performing loans.

Good morning, and thank you, Mike. In the fourth quarter, total loans increased $42 million in actual numbers of 0.96%. Year-over-year, loans increased by $194 million or 4.6%. This marks another quarter of steady loan growth, which has continued unabated over the last couple of years despite the pandemic and assorted challenges, which have been presented. We’re very grateful to our employees for their combined efforts in achieving these results. Residential real estate grew $47 million in the quarter, or 1.1%. Year-over-year, the increase was $207 million. Commercial loans decreased by $4.5 million in the quarter, which includes ongoing PPP forgiveness. The growth in the residential portfolio was spread fairly evenly between our New York and Florida markets on the quarter. Activity in both areas remains good, though a slowdown during the holiday and mid-winter periods is typical. Our expectations are that due to pent-up demand and interest rates remaining relatively low, we should see good levels of activity as we exit the mid-winter period. Our loan backlog at year-end remained solid. It is down from September, which is normal given the time of year. However, we are pleased with where we stand. Purchase money has remained active in all our regions and refinances have continued to drop. This is reflected in the makeup of our current backlog. Interest rates have edged up a bit recently and our current base 30-year fixed rate stands at three and three eights percent. Non-performing and delinquency numbers continued to be – non-performing loans dropped from $21.2 million to $18.7 million in the quarter, while non-performing assets decreased from $20.7 million to $19.1 million. Improvements were also showing year-over-year in both categories. Net charge-offs totaled $83,000 in the quarter. The coverage ratio or allowance to non-performing loans is at 236% as of December, up slightly from the prior year. Rob?

Thank you, Scot. We’re happy to answer any questions you might have.

I’m here. Are you ready for question-and-answer?

Whenever everyone else is.

Wonderful. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alex Twerdahl, Piper Sandler. Alex, your line is unmuted. Please go ahead.

Hey, good morning, guys.

Good morning, Alex.

Good morning, Alex.

Good morning, Alex.

Yes. First question for me. Just as I think about the book yield on the residential portfolio is 3.48 during the quarter, your new loan yield is only just a little bit below that. Can you talk a little bit about sort of the distribution of rate in the book? And sort of what’s, like, if the bulk of the book is now in that 3.50-ish range and sort of, I guess what I’m getting at is how much more overall residential loan yield compression is possible to see if rates stay steady kind of hovering just below 3.50-ish?

Yes, go ahead.

Sure. So Alex, there is – I mean, so let’s start, I’m going to give you a little bit of, like you said, a background on the book yield. There are definitely loans we have in the portfolio that are at higher rates that have not refinanced down at rates that we would traditionally have been refinanced. So we’re talking some that are in the 4s in north of 4 range. If we continue to put on mortgages in that 3, three and eight three in a quarter range, what we’ve seen through book yields start to compress is about a cup of 1 to 2 basis points per month. What we’ve also seen that’s also kind of, I guess, increasing that on a quarter-to-quarter basis because of the, I guess the robust housing market that we’ve seen. We have seen some loans, and I’ve been in non-accrual for a period of time, pay off, right? And so we’ve been able to recapture some of that non-accrual interest and record that in the period in which they’ve paid off. So that’s also kind of helped out debt yield. But if you take all that out, net-net, and if loan rates continue to stay down, you’ll see a couple of basis points per month kind of compression, I would say.

But just generally speaking out, the refinance wave has really dramatically slowed. And I’m not sure we continue to see the rates drop off, right, we have in the past. And the vast majority of those loans are in the ranges that you’re talking about right now. And we certainly have people, I think, we probably have loans that are booked as high as 8% and 9%, and we send them a personal card every year. But for the most part, if people haven’t refinanced by now, I think that tremendous activity has slowed.

Got it. And then second question for me. Just – you talked about the – your cash position and sort of waiting to be opportunistic around higher rates and rates dropped about 50 basis points on the 10-year, depending on, I guess, which minute we’re talking versus where we were about a quarter ago. So I’m just wondering, what are you looking for in order to put cash to work? And where do you feel comfortable with that cash position going over time? How are you going to ladder it out, because certainly rates have been certainly moving higher?

We don’t have a specific rate in mind, we’re going to ring the bell and invest, Alex. We’re managing the balance sheet the way we feel is appropriate. And we’ll invest that as we feel is – we’re comfortable with the rates and can move forward. Term is also a big issue to where do the rates fit in at the right time and where do the maturities fill in fit into our plans going forward. So there are a number of things and a number of factors that are involved there. And what opportunities there are at the time, what opportunities elsewhere there are at the time, what’s happening with the deposits, all of those factors weigh in, but there’s no specific rate that we’re going to ring the bell and invest in.

Right. Have you done any security purchases so far in the first quarter?

Yes, just a modest amount.

Yep.

Okay. And then as I think about the CECL adjustments and where we are today versus kind of where your reserve is – where we are today in the economy versus where your reserve is, I would expect any adjustment for CECL, which I guess was adopted 24 days ago, to be pretty modest. Is there anything that I’m missing there? I mean, is there going to be any sort of real change to the reserve?

No, Alex. I mean, as you know, we haven’t released the adjustment yet type of thing as far as disclosing it. But no, I would not expect a material adjustment up or down from where we’re at today throughout the end of the year.

And then as I think about the expense guide, which hasn’t really changed much for 2022, or 2021, it suggests that it seemed possible that expenses could be close to flat. I know that wage inflation has been a pressure at a number of other banks that we’ve been talking to so far this month. I’m just wondering if there’s some of that in sort of normal salary increases fully reflected in that 24.9 to 25.5 per quarter expense guidance?

No question. We’ve seen our share that, Alex, is a, I think, that’s not just even an industry, but a nationwide epidemic, with regard to wages, just attracting people to work, and retaining people takes more and more every day. Right. You saw that in the year-over-year number? Sorry, go ahead.

No, I was going to ask if you’re seeing a number of open spots today that need to be filled as the year progresses?

Question. We are encouraged by the progress of bringing that number down, but there are still a significant number of open positions.

Okay. Final question…

Moving operations to Florida has certainly helped in that category. We hire very good people in Florida, and they seem to stay with us in a long time.

Is that just because there’s more people down there that are qualified for the positions? Or do you have less money?

Probably there’s a – it’s a service-based economy. And there are a number of employers that we can draw from not only competitors, but other industries, and they’re very well trained people typically and do very well with our company.

Okay. And then just a final question from me on capital and the dividend increases – the modest dividend increase in the fourth quarter. Is that just to kind of normalize the dividend with the stock split? Or is it indicative of maybe a new strategy to try to increase the dividend more regularly?

Well, it certainly normalize the dividend, and I think everybody likes dividend increases, like I can’t give you a forward-looking statement on that. But I think everybody likes a little dividend increase.

And then – all right. Well, thank you for taking my questions.

Thanks, Alex.

Thanks, Alex.

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

Thank you for your time this morning, and have a great day.