TrustCo Bank Corp NY Q1 2023 Earnings Call Transcript

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April 25, 2023

Key Takeaways

  • TrustCo reported Q1 net income of $17.7 million, a 3.8% year-over-year rise, with ROA improving to 1.2% and ROE to 11.84%.
  • Average loans grew 7% year-over-year (+$312 million) to a record high, with balanced growth across residential real estate, commercial loans, and home equity lines.
  • Total deposits increased by $19.6 million from December to $5.2 billion, driven by a $250 million shift into time deposits as TrustCo deploys targeted products to retain core customers.
  • Net interest income rose 17.1% to $47 million and net interest margin expanded 55 basis points to 3.21%, benefiting from higher asset yields and low-cost funding.
  • Asset quality remained strong with nonperforming loans down to 0.4% of total loans, a coverage ratio of 243%, and a consolidated equity-to-assets ratio of 10.17%, up from 9.44% a year ago.
AI Generated. May Contain Errors.
Earnings Conference Call
TrustCo Bank Corp NY Q1 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good day, and welcome to the TrustCo Bancorp Earnings Call and Webcast. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Before proceeding, we would like to mention that this presentation may contain Forward looking information about TrustCo Bancorp New York 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 this 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 ks and as updated by our quarterly reports on Form 10 Q.

Operator

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 All 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.

Operator

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 the Nautio 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.

Operator

McCormick, Chairman, President and CEO. Please go ahead.

Speaker 1

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 Ozelbeck, our CFO and Scott Salvador. We appreciate you taking time to hear more about our company. At the time of any change in the banking industry, we have had a very solid Q1 of 2023.

Speaker 1

Our numbers are strong and demonstrate great stability in the face of some difficult conditions. Our net income of $17,700,000 and 7% loan growth We're both up year over year. Deposits were also up almost $20,000,000 to about $5,200,000,000 from year end. No surprise, we've seen we have seen a lot of shift to time deposits as rates have risen. These accounts are up over $250,000,000 since year end.

Speaker 1

Our loan portfolio was up about $312,000,000 year over year. We also set another all time high for loans. Asset quality remains strong with a 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.

Speaker 1

Net income of $17,700,000 was up under just 4% from last year. Our net interest income was up significantly to $47,000,000 for the quarter. Our ROA and ROE were 1.2% and 11.84% for the Q1 of 'twenty 3, both up from 'twenty 2. We also had an increase in book value from $32.31 to $30.85 last year. We continued a strong capital position at 10.17%, up from 9.44% last year.

Speaker 1

Overall, a solid quarter, and we approach the balance of the year with cautious optimism. Now Mike will detail the numbers, Scott will talk loans, leaving time for questions. Mike?

Speaker 2

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the Q1 of 2023. As we noted in the press release, the company saw 1st quarter net income of $17,700,000 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 remained strong. Consolidated equity to assets ratio was 10.17 percent for the Q1 of 2023 compared to 9.44% in the Q1 of 2022.

Speaker 2

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 Q1 of 2023 grew 7 percent or $312,000,000 to $4,800,000,000 for the Q1 of 2022. As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio, which increased $5,000,000 or 5.1 percent in the Q1 of 2023 over the same period in 2022. Average commercial loans and home equity lines of credit also increased $43,900,000 or 22.5 percent $58,800,000 or 25.3 percent, respectively, over the same period in 2022. For the Q1 of 2023, provision for credit losses was 300,000 We are now actively retaining deposits, which is evident in the quarter over quarter results.

Speaker 2

Total deposits as of March 31, 23 increased $19,600,000 to $5,200,000,000 from December 31, 2022. 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, but retain that liquidity on balance sheet for when the depositors We'll start to absorb the funds. This gave us flexibility to strategically price deposits while retaining core customers. Net interest income was $47,000,000 for the Q1 of 2023, an increase of 6,900,000 We're 17.1% compared to the same period in 2022, driven by solid liquidity, loan growth and the recent increases in the Fed Funds target rate.

Speaker 2

Net interest margin for the Q1 of 2023 was 3.21%, up 55 basis points From 2.66 percent in the Q1 of 2022. The yield on interest earnings assets increased to 3.69%, Up 95 basis points from 2.7 4 percent in the Q1 of 2022. At the same time, the cost of interest bearing liabilities only increased to 63 basis points in the Q1 of 2023 from 10 basis points in the Q1 of 2022. The increase in net interest income of $6,900,000 primarily a result of our ability to maintain a $576,900,000 average cash balance at the Federal Reserve Bank during the Q1 of 'twenty 3 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.

Speaker 2

They had approximately $922,000,000 of assets under management as of March 31, 23. Now on to noninterest expense. Total noninterest expense, net of ORE expense, came in at $27,400,000 The increase From the prior quarter, it's 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 $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 Categories of non interest expense were in line with our expectations for the Q1.

Speaker 2

We would expect 23s total recurring non interest Expense. Net of ORE expense to be in the range of $26,900,000 to $27,300,000 per quarter. Now, Scott will review the loan portfolio and non performing loans. Thanks, Mike, and

Speaker 3

good morning. For the Q1, total loans increased by a combined $6,000,000 an actual number. Year over year, the increase totaled $335,000,000 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 300,000,000 The growth in both the quarter and for the year was spread across all our lending categories. Residential loans increased by $48,000,000 on the quarter By $275,000,000 year over year. Commercial loans showed a similar pattern, increasing by $15,000,000 on the quarter and by $54,000,000 year over year.

Speaker 3

Home equity loans also continued on a growth trajectory as discussed in prior quarters, increasing by $10,000,000 on the quarter and by $57,000,000 year over year. General market activity in the residential arena continues on a similar pattern to 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.

Speaker 3

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.

Speaker 3

Non performing loans were down to $19,100,000 versus $19,400,000 a year ago and up slightly on the quarter. Non performing assets also continued to bounce at low levels, totaling 0.35 percent of assets versus 0.31% at the start of the year. Early stage delinquencies remain low and charge offs totaled a slight net recovery on the quarter. The coverage ratio or allowance for loan loss to non performing loans Now stands at 2 43% versus 2.38% a year ago.

Speaker 1

Rob? Thanks, Scott. Any questions?

Speaker 4

We have our first question from Ian Lapay from Gabelli Funds. Ian, your line is now open. Please go ahead.

Speaker 5

Hi, Rob and team. Congratulations. Good morning. Good morning. Really good earnings considering the banking crisis.

Speaker 5

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?

Speaker 1

William, 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. And That liquidity position allowed us or afforded the position to do that. So we our deposit trends have been very good. What we've been trying to do is paying customers and not let them walk out the door.

Speaker 1

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 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.

Speaker 5

Okay. And then as in a period of crisis, sometimes there's opportunity and I think 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.

Speaker 1

Multiplice about it, Ian. We use the phrase come home to TrustCo. It's something that Our branding, polling and things like that, as I said, is very strong with regard to that. And I think people 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.

Speaker 1

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.

Speaker 5

Okay. And then on the expenses, I guess most of the increase was in salaries. And if I compare 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

Speaker 1

Mike can give you a lot more detail, Ian, but I mean we're having some of 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?

Speaker 2

Yes. The only thing I would add is everything you said, Rob. But in the Q1 of 2022, we had a downward adjustment of about $2,000,000 They kind of roll through from the 'twenty one. And so when you on really apples to apples, it was that number would really be closer to 11,200,000 Compared to where we are now. So that Q1 of 'twenty two was pushed down.

Speaker 5

Okay, good. Sorry, I missed that. So 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.

Speaker 5

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?

Speaker 1

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.

Speaker 5

Okay. Okay. Again, congrats on good results in a tough time.

Speaker 2

Thank you. Thank you. Thanks.

Speaker 4

Our next question comes from Alex Twerdahl from Piper Sandler. Alex, your line is now open. Please go ahead.

Speaker 1

Hey, good morning guys.

Speaker 3

Good morning. Good morning, Alex.

Speaker 6

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 I've 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 of 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 maybe we can see that number come down a little bit over the next couple of quarters.

Speaker 1

Well, there's no plan to bring it down, Alex, but it's certainly an 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, a little bit based on market conditions if somebody is doing something crazy with deposits and And things like that. But overall, we're pretty comfortable with the position we're in, and we feel it buys a lot of credibility in the markets and With regulators and things like that. So we're pretty comfortable with where we're at.

Speaker 7

Okay.

Speaker 6

And then as we think about the residential mortgage portfolio And I appreciate, Scott, 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?

Speaker 3

Yes. I mean, the payoffs, Alex, as you might imagine, are very well I mean, the refis are probably as low as I've ever seen since I've been here. Now you do have some selling going on. I mean, with the increase in 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.

Speaker 3

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 We've

Speaker 1

also been doing a lot of home equity based 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.

Speaker 6

Yes. Okay. Just as you think about the residential piece, which is the biggest chunk of the portfolio and The yields moving high over the next couple of quarters 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-twenty 23?

Speaker 1

Yes. I mean, we're not going to forecast that number, but I think we're pretty happy with where that's going. Is that a good way of saying it? Yes, absolutely.

Speaker 2

So those lottery, ones that are closed through the pipeline are kind of pushed when the higher ones are closed.

Speaker 3

Correct. Yes.

Speaker 6

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.

Speaker 1

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 just by the nature of the portfolio, it is diversified with many different borrowers, many Properties located in a lot of different places. So that's what a good part of why it appeals to us.

Speaker 6

Okay. Thanks for taking my questions.

Speaker 2

Thank you. Thank you.

Speaker 4

Our next question comes from Nick

Speaker 7

I'm immune to the Trust Cool situation here. And so far, I 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?

Speaker 7

In other words, if with book value

Speaker 1

Nick, I'm having a tough time hearing on the second question. You

Speaker 7

seem to be breaking up sooner. Yes, the share repurchase Yes. In other words, is it not some if with the book value north of 32, Yes. 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?

Speaker 1

Well, the first question, I think you have to put interest rates and staffing as the 2 number one priorities, if you will, and I'm not sure where I would Great. Either one of them, Nick. But even though we're pretty comfortable with our position and how we can deal with interest rates, the 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 health 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.

Speaker 1

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 asked 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.

Speaker 1

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 3, the dividend. We are a dividend play very much. A lot of our shareholders are in it for the dividend.

Speaker 1

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.

Speaker 7

Okay. Thank you so much.

Speaker 1

You charge for the 4th question too, Nick. Just a second.

Speaker 7

Okay. Well,

Speaker 4

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

Speaker 1

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

Speaker 4

Ladies and gentlemen, this concludes today's call. You can now disconnect your lines. Thank you.

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