TRST (2022 - Q1)

Good day and welcome to the TrustCo Bank Corp Earnings Call and Webcast. All participants will be in 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 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 [ph]. 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 contain 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 M

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 in 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 to trend of shedding high -- shedding off higher-priced time deposits and replacing them with core. 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 51.5 -- 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. 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 relative 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?

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 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 forecast 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 continued to enable us to produce consistent high-quality reoccurring 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 were 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. And 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, employee -- and employee benefits expense as a result of a true-up to the incentive compensation control -- 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 came in 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. 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.

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 refis 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 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 5.1/8% [ph]. 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?

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

[Operator Instructions] Our first question comes from Alex Twerdahl from Piper Sandler. Please Alex, your line is now open.

Hey good morning, guys.

Good morning, Alex. How you’re doing?

Good. Thanks. First off, I wanted to ask or maybe kind of go back to some of your comments, Scot, you made about being able to lag the market on the way up to try to get a little bit more volume on the loans. Can you talk a little bit about like -- is there enough volume that you can have -- you can kind of open the sort of the taps, to use that metaphor, as much as you'd like to pull in the volume? And if that's the case, sort of what would your targets be if you're putting on loans maybe just a little bit below the market today which maybe could be around 5%?

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.

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?

Yes. No, I think a continuation is -- makes sense because there's a lot of factors at play and there is -- rates are rising. But on the flip side, we don't have the refinances we had before, Alex. Last year, as you're well aware, we had a tremendous amount of refinance activity, some of which was coming to us but some of which was going away from us. And now when you're looking at the backlog, the refinances are way down which is a positive thing when you're talking net growth. So I think the continuation of what we've been doing is probably not a bad idea. And hopefully, we're able to continue that.

Got it. And then when I just think about the overall yield on that portfolio, the resi mortgage portfolio, it's obviously been declining over the last couple of years, now at 3.42%. Just given the rates that are on loans that are in the backlog going in the second quarter and the complexion of that overall book, do you think that, that 3.42% represents a bottom of where the yield on that portfolio is -- will be?

If it's not the bottom, it's darn close to the bottom, Alex. And the difficulty is it can take 60 days or 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.

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?

Yes, Alex. I mean you could see we did some in the first quarter. We're continuing to look at it in the second quarter. And the strategy there is we're staying short kind of a mix of pooled securities and corporates. We're staying -- some of those mortgage-backed securities, we're going in, call it, a four year to five year average life. We're around 3%, depending on how much duration we're putting on but maybe a little bit below 3%, a little bit above 3%. We're putting stuff on in securities portfolio that were potentially above what we were doing loans not that long ago, a year ago type of thing. So it's definitely very attractive and we're definitely looking at that space. And I think probably more of what we've done so far in the first quarter is probably likely going forward in the quarters going out given where our cash position is.

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

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

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?

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.

Okay. In your commentary about the CD repricing, I think you said $264 million at 24 basis points in the second quarter. Are those to the point where they'll start repricing higher? Or is there still -- are you seeing that competition for CDs in your markets to still be pretty reasonable?

It's been pretty -- the pricing control has been pretty good, Alex and we're not repricing higher now. And our -- we're losing a little ground in that portfolio but that's almost by design because our retention has been so high with existing customers. So I think we're handling the CDs very well, CD maturities very well.

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?

Well, I mean, I can give you a kind of like an overview. I mean if you're looking at margin and really NII, the way we look at it is -- I mean, you know the balance of our overall cash portfolio. We'll see what the Fed is going to do here in a few weeks. That's going to be very accretive to margin going forward. As you already asked, we're -- that tail of the loan pipeline is -- we're closing anything that was below that 3.42% and we're into the higher numbers, right? So that's going to be also very beneficial going forward in our quarters. So I think this first quarter was, I think, the bottom for NII and margin. And I think good things to come in the remaining quarters of this year. It's going to -- I think, going to start to move forward, move up going forward.

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?

Absolutely. So if you take a look at the overall down for the quarter, we were off $3.5 million. About 2/3 of that, about $2 million of that was that true-up that we're talking about. So that will come back in the second quarter. And then if you look at expenses going out, right, our FTEs, we were at a low level at the end of the first quarter. We're still actively hiring. So overall, salary expense will trend upward slightly. But the other components of that down $3.5 million, as our stock price is down, our liability-based equity awards true up on a quarterly basis to where the stock price is, right? So that was a positive benefit in the first quarter. If our stock price goes up, that will obviously kind of be a negative impact or additional expense in the quarter. And so that's two pieces of it, $2 million that -- $200,000 on the stock base, $400,000, call it, on stock-based comp. And then another few hundred thousand dollars of the down which will carry us for the rest of the year in the quarters. As you know, we have the postretirement benefit plan and the pension plan that we have. And so with rates where they are, that's an additional positive benefit of a few hundred thousand dollars a quarter, each quarter going out that we're now -- we're able to record. So I mean that's kind of a positive pickup in the quarters going forward. When you take a look at it, based on our guidance, we add back a couple of million dollars and hire a few more people, that kind of gets us to the bottom of the range that I -- of the guided range that I have, that $24.9 million.

Got it. That's very helpful. And then last question, just on the buyback, 18,000 shares. It seems like you guys are really toeing into the buyback. Is there -- just given now that CECL is in the rearview mirror and your commentary on credit was pretty positive and certainly, you have plenty of capital, does the buyback get a little bit more consideration in the next couple of quarters?

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.

Okay. Thank you for taking my questions.

Thank you. Take care, Alex.

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.

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

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