TrustCo Bank Corp NY (NASDAQ:TRST) Q3 2022 Earnings Conference Call October 25, 2022 9:00 AM ET
Company Participants
Robert J. McCormick – Chairman, President, and CEO
Michael M. Ozimek – EVP and CFO
Scot R. Salvador – EVP, Commercial Banking
Conference Call Participants
Alexander Twerdahl – Piper Sandler
Operator
Good day and welcome to the TrustCo Bank Corp Earnings Call and Webcast. All participants will be in a listen-only mode. [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-Q. 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 contains non-GAAP financial measures. The 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 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 J. McCormick
Good morning, everyone and thank you for joining us today to hear more about our bank. As is usual Mike Ozimek our CFO and Scot Salvador is joining me on the call today. After a brief summary, hitting the highlights, Mike will give a lot of detail on the numbers, then Scot will give some color on loans, and we can wrap up with any questions you may have. We had another good quarter at the bank, 19.4 million earned was another record, driven mostly by our net interest income. We were able to grow our loan portfolio by about — million and put some of our cash balances to work while maintaining pricing discipline on deposits.
Good news on the loan front, adjusted all categories participated in the growth. We saw some opportunity in commercial loans, reversed the downtrend in home equity lending, and even saw installment loans grow. Most of the growth did take place in the residential category. Deposit dropped quarter-over-quarter back to about the level it was a year ago. Most of the deposit runoff took place in the time category. We took the opportunity to lose some of the CD dollars focusing on more relationship driven products. The effort had a positive result and our margin increased from 2.65% to 3.16% year-over-year. Loans continued strong performance in non-performing loans and total loans 0.4% at month end and non-performing assets to total assets was 0.32%. Our allowance is just under 1% at 0.98% after $300,000 contribution. The allowance covers non-performing loans 2.4 times.
Our return on average assets was 1.24% greater than last quarter and last year. Same is true for return on average equity which was 12.78% at quarter end. Efficiency ratio was well under 50% at quarter end better than prior periods. We sold a large investment portfolio with a strong fit funds position. We expect we will have to raise our depositories to stay competitive, but we are taking a cautious approach. Good news is loan pricing is up. We are not setting any records, volume has been decent with a strong backlog mostly new construction loans waiting to close.
I would also like to send kind words out to our employee base in the State of Florida. They performed admirably through Hurricane Ian and we’re very pleased how both our customers, shareholders, and employees handled that storm. We are pleased with our results and look forward to a strong end of year. Now Mike will detail the numbers, Scot will talk loans leaving time for questions. Mike.
Michael M. Ozimek
Thank you Rob and good morning everyone. I will now review TrustCo’s financial results for the third quarter of 2022. As we noted in the press release, the company saw a net income of $19.4 million in the third quarter of 2022, an increase of 15.5% over the prior year quarter, which yielded a return on average assets and average equity of 1.24% and 12.78% respectively. Average loans for the third quarter of 2022 grew 4.9% or 213.5 million to 4.6 billion from the third quarter of 2021. As expected the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio which increased 185 or 4.7% in the third quarter of 2022 over the same period in 2021. The average commercial loan portfolio decreased 3.3 million or 1.6% over the same period in 2021.
In response to Hurricane Ian in Florida, the bank continues to assess the impact on the counties that we do business in. We are currently monitoring all customer contact in the affected counties and to date have not identified circumstances that would have a material adverse impact on the performance of our loan portfolio. Total average investment securities which include the AFS and HCM portfolios, increased 50.2 million or 10.5% during the third quarter of 2022 over the second quarter of 2022. During the same period the bank had approximately $14.8 million of pooled securities and pay down, one maturity of 5 million, and purchased approximately 6.6 million of securities.
For the third quarter of 2022 the provision for credit losses was $300,000. This includes a provision for credit losses on loans of 100,000 and also a provision for credit losses on unfunded commitments of 200,000 as a result of increases in unfunded loans. The ratio of allowance for loan losses to total loans was 0.98% at September 30, 2022 compared to 1.08% at the same period in 2021. As discussed in prior calls, our focus continues to be on traditional lending, 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 have held an average of 919 million in overnight investments during the third quarter of 2022, a decrease of 248 million compared to the same period in 2021.
On the funding side of our balance sheet, total average deposits increased 105.1 million or 2% for the third quarter of 2022 over the same period a year earlier. The increase in deposits was a result of 6.2 million or a 0.8% increase in average money market deposits, a 149 million or 10.4% increase in average savings deposits, a $41.6 million or 3.6% increase in interest-bearing check averages, and a $79 million or 10.1% increase in non-interest-bearing checking balances. These are partially offset by the decrease in average time deposits of 170.6 million or 14.8% over the same period last year. During the same period, our total cost of interest-bearing deposits decreased 10 basis points from 14 basis points. This was primarily driven by a decrease in time deposits to 26 basis points from 40 basis points over the same period last year.
As we move into the fourth quarter of 2022, the bank has approximately $302 million in CDs that will mature at an average rate of 19 basis points. In the first quarter of 2023, approximately $226 million in CDs will mature at an average rate of 22 basis points. And in the first half of 2023, approximately $392 million of CDs will mature at an average rate of 26 basis points. Our Financial Services division continues to be a significant recurring source of non-interest income. We have approximately 865 million of assets under management as of September 30, 2022.
Now on to non-interest expense. Total non-interest expense net of ORE expense came in at 26 million, up 1.1 million compared to the second quarter of 2022 at the high end of our estimated range. The increase in the prior quarter is primarily a result of an increase in salaries and employee benefit expense, net occupancy and other expenses partially offset by decreases in equipment, professional services, and outsourced services. As mentioned in the press release, the modest increase in expenses was more than offset by an $8 million increase in revenue, which consists of net interest income plus non-interest income and resulted in a notable improvement in the bottom line.
ORE expense net came in at an expense of $124,000 for the quarter as compared to an expense of 74,000 for the prior quarter. Given the continued low level of ORE expenses, we’re going to continue to hold the anticipated level of expenses not to achieve $250,000 per quarter. All the other categories of non-interest expense were in line with our expectations for the third quarter. We’d expect the fourth quarter of 2022 as total recurring non-interest expense net of ORE expense to be in the range of $25.5 million to $26 million per quarter. Efficiency ratio in the third quarter of 2022 came in at 49.9% compared to 56.4% in the third quarter of 2021.
And finally capital ratios. Consolidated equity to asset ratio was 9.69% for the third quarter of 2022 compared to 9.56% in the third quarter of 2021. The bank continues to be proud of its ability to maintain shareholder value during these challenging economic times. Book value per share at September 30th was up to $30.89, up 1.3% compared to $30.50 a year earlier. Now Scot will review the loan portfolio and non-performing loans.
Scot R. Salvador
Good morning, everyone and thanks, Mike. Bank continued to produce strong loan growth for the third quarter. Overall loans increased in actual numbers by 89 million in the quarter or just under 2%. Year-over-year loans have grown by 233 million or 5.3%. All of our regions showed growth, although Florida continued to post particularly strong results. 89 million in loan growth consisted of a 71 million increase in residential loans and a 17 million increase in the commercial loan portfolio. Home equity loans increased by 15 million, which continues a growth trend in that category.
Overall, we were pleased to put forward meaningful growth in the quarter in all of our lending areas. As everyone is well aware, our rates in the residential area continued their upward trend on the quarter. Currently, our 30-year base rate stands at 6% and 7% to 8% [ph]. This sharp upward movement has contributed to a slowing of recent purchase volume. The time of year also plays a role as we enter the fall season. However, our backlog remains solid, benefiting from the heavy purchase volume we experienced earlier this year. That volume included a lot of construction loans, and by their nature, have a longer lag time between loan origination and loan booking and in a standard [Cough]. Our backlog at quarter end is about equivalent to where we ended the second quarter and above that of last year. Although the fourth quarter traditionally marks the beginning of a slower time period, we do expect to continue posting net growth.
As mentioned at prior meetings, we have in recent times added a limited number of loan originators to complement our Branch Managers. Over the next several months, we plan to expand these efforts and add additional loan originators to our network. We feel this will be a positive move, which should increase our coverage and enable us to capture a larger market share in all regions. The news with regard to asset quality remains good. Non-performing loans decreased slightly in the quarter and year-over-year have dropped from $20.2 million to $18.7 million as of September. Non-performing assets followed a similar pattern. Charge-offs on the quarter posted a net recovery of 132,000. Early-stage delinquencies remain solid and finally, the coverage ratio or allowance for loan loss and non-performing loans was 244% as of quarter end versus 242% last quarter and 235% a year ago. Rob?
Robert J. McCormick
Thanks, Scot. We are happy to field any questions you have.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. Our first question comes from Alex Twerdahl from Piper Sandler. Alex, please go ahead.
Alexander Twerdahl
Hey, good morning guys.
Robert J. McCormick
Good morning Alex.
Alexander Twerdahl
Hey, first off, just wanted to think about loan growth here and you talked about your new loan yields at 6% and 7%, 8%, seems like it’s pretty much in line with the market. However, you guys have a slightly different balance sheet than a lot of other banks out there, and you’re carrying a lot of loans with yields well below that. And I’m just kind of thinking, why not just drop that rate a little bit and bring in more production to kind of expedite the remixing of that loan yield, the book yield is much higher faster?
Robert J. McCormick
The markets we’re serving, Alex, our rate is pretty good. We shop that some weeks almost on a daily basis. So we think our 6% and 7% and 8% [ph] is pretty good compared to the competitors in the markets we’re doing business in. Most of them are hanging right around 7%.
Alexander Twerdahl
Okay. And are you — have you been able to figure out when you do that kind of stuff, if there is a — like how much of a spike is there that can be turned on and off, if you drop the rates and you were kind of 8% or half or whatever below the market, have you been able to sort of discern what — how much more quickly you could potentially bring in volume if you wanted to?
Robert J. McCormick
I like spiking actually, Alex. I say, shaking the trees because any change produces mortgage applications, which is a good thing. So even if we go up Alex on 8 or so, all those people who have been sitting on the fence want to get the application in. And the same happens if you drop the rate as well. So staying at the same rate for prolonged periods of time doesn’t really benefit anyone. So I like that idea of shaking the trees or opening the spigot to get a slug of loans in a relatively short period of time. And stop me if you guys disagree, but I think depending on the situation where rates are and what the market is, your volume could pick up by a multiple of two or three times for the next couple of days if you make a significant change in the rate.
Alexander Twerdahl
Okay. That’s helpful color. And then on deposits, it’s obviously a very hot topic given the very quick rise in interest rates, and a lot of your competitors are seeing deposit costs start to rise, really starting in the third quarter and the expectations are going to pick up from here. I’m just curious how you guys are thinking about your deposit profile, your ability to lag on deposit costs, and maybe you can kind of run us through some of the characteristics in terms of the granularity and some of the other characteristics of why you’ve been able to keep deposit costs very low and maybe could continue to?
Robert J. McCormick
Well, you said it earlier, our balance sheet is a little bit different. We built the balance sheet contemplating increasing rates. So we were able to kind of take a pause and let the market adjust while we kind of held back on increases. I think long term, you’re going to see us have to raise our rates, but we’re going to do so cautiously and hopefully, on a relationship basis. We’re looking for customers not necessarily hot money.
Alexander Twerdahl
Great. I guess to that point, your cash position, which is still pretty elevated, it’s 15% or 14% at the end of the quarter. That’s down meaningfully over the last couple of quarters, which is obviously, as we expected, it’s still somewhat elevated, I think, relative to what you normally run. I’m just curious, as rates rise and we get into a much different rate environment, how low would you let that cash position decline because certainly, the asset sensitivity, you’re going to have to start worrying about have rates going the other way at some point in the next couple of months?
Robert J. McCormick
Yes, I couldn’t give you a specific number, but we’re certainly prepared to see that go a little bit lower. And we look at all the factors that go along with it, what the liquidity position is, loan-to-deposit ratio, what loan volume is, how much of the money we’re going to need to fund our future commitments. There are a number of factors. It’s not as simple as just putting a number on it. But I guess we are prepared to see that drop a little bit, although I think that dropping the deposit runoff has certainly slowed even since quarter end.
Alexander Twerdahl
Okay. Mike, your expense guidance for the fourth quarter, I don’t think it’s changed a huge amount. But I’m just curious how you’re thinking about that heading into 2023, just given all the inflationary pressures and some of these new programs with hiring additional people in the branches that you alluded to earlier?
Michael M. Ozimek
Yes. I mean when you take a look at the lines that we have, I mean salaries and benefits, I mean it’s no secret, we have to pay more for some of the people that we have. Our FTEs are down a little bit, but we’re paying up. So I think where the salaries and benefits are right now is going to be — that’s probably a more normal range, right. And then that’s really the one to talk about. The other ones are some of the expenses were up, but really nothing notable. Other expense lines up a little bit more, just some seasonality type of stuff. So I think that will kind of pull back a little bit, but — so I guess we’re comfortable in that range. But it’s all about salaries right now. It’s keep paying the people that we have and to attract new ones.
Alexander Twerdahl
Okay. So the 12 — a little bit over $12 million in salaries and benefits, maybe that kind of creeps up mid-single digits over the next year or so on an annual percentage basis and everything else is kind of moves up with inflation?
Michael M. Ozimek
Yes, yes. I don’t see — there’s nothing that I see on the other lines that would really give me pause that I see anything more than normal, like you said, inflationary type rate. Even I guess, even less than that inflation is been too high, but…
Alexander Twerdahl
Okay. And then just final question for me just relates to the capital position. You guys have a pretty healthy capital position with our account tangible common equity almost 10%. And the stock is just kind of hovering in a little bit above tangible book value. I’m just curious how you’re thinking about things like buybacks, which has not ever really been a huge part of the story here but just wondering if that’s changed just given what’s going on in the market.
Robert J. McCormick
Yes. I mean we like both buybacks and dividends, Alex. A lot of our shareholders are very interested in dividends, and we’re in dividend funds and everything else. So a combination of buybacks and dividends are certainly important to us and both are under constant consideration.
Alexander Twerdahl
Okay. Well, thank you for taking my questions.
Robert J. McCormick
Thank you.
Operator
[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back to Robert J. McCormick for any closing remarks.
Robert J. McCormick
Thank you for your interest in our company, and have a great holiday season.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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