TrustCo Bank NY - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered solid profitability and margin expansion: net income $14.3M, diluted EPS $0.75, ROAA 0.93%, ROAE 8.49%, and NIM 2.64% (+20 bps YoY; +4 bps QoQ) as loan repricing and disciplined deposit costs drove net interest income higher.
• Credit metrics remained strong and stable: NPLs 0.37% of loans, coverage ratio 269.8%, NPAs 0.33% of assets; net recoveries of $258K in the quarter.
• Capital and shareholder returns: equity-to-assets 10.85%; Board authorized repurchase of up to 1,000,000 shares (~5% OS), and continued the $0.36 quarterly dividend (declared May 21, payable July 1).
• Deposits and loans both up YoY (average loans +$104.7M, +2.1%; average deposits +$103.3M, +1.9%) with home equity lines leading growth (+17.3% YoY); management emphasized digital engagement and pricing discipline as deposit cost tailwinds in a potential lower-rate environment.
• Wall Street consensus (S&P Global) was not available for EPS or revenue, so a beat/miss assessment cannot be determined this quarter; monitoring estimate updates is warranted given margin and fee-income momentum [Values retrieved from S&P Global]*.

What Went Well and What Went Wrong

What Went Well

• Margin and spread improved: NIM rose to 2.64% (+20 bps YoY; +4 bps QoQ), spread to 2.21% (+21 bps YoY), as loan yields rose and cost of interest-bearing liabilities fell to 1.92%; management highlighted repricing loans at market rates and disciplined deposit costs as drivers.
• Fee income momentum: Trustco Financial Services fees increased 16.7% to $2.1M; assets under management reached ~$1.1–1.2B, with fees now ~42.6% of noninterest income; management emphasized recurring nature of these revenues.
• Strong capital and shareholder returns: equity-to-assets 10.85%; authorized up to 1M share buyback with intent to fully execute; dividend of $0.36 continued, supporting total return profile.

Quote: “We added loans at current market rates, which repriced our current loan portfolio higher… funded entirely by our own deposits… favorably repriced our time deposits… yielded net income of $14.3 million and boosted all return metrics significantly year-over-year.” — Robert J. McCormick.

What Went Wrong

• Noninterest expense increased YoY: total noninterest expense rose to $26.3M (+$1.4M YoY), driven by salaries/benefits, equipment, professional services, and outsourced services; though management expects recurring ORE expense not to exceed $250K per quarter.
• Investment income softer: lower interest/dividend income from securities and short-term investments partially offset the benefit of higher loan yields (company commentary).
• Limited external estimate context: S&P Global consensus EPS and revenue were unavailable, constraining beat/miss analysis and potentially delaying sell-side narrative alignment [Values retrieved from S&P Global]*.

Transcript

Operator (participant)

Good day and welcome to TrustCo Bank Corp NY Earnings Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please call the conference specialist by pressing the star key followed by zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your question, you may press star and then two. 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 for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. As a result, performance or achievements could differ materially from those expressed or implied by such statements due to various risks, uncertainties, and other factors.

More detailed information about these risks and other factors can be found in the press release that precedes this call in the Risks and Forward-Looking Statements section of our annual report, Form 10-K, and is updated by our quarterly reports, Form 10-Q. The forward-looking statements made in this call are valid only as of the day hereof, and the company disclaims any obligations to update the 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 U.S. GAAP. The reconciliations of such non-GAAP financial measures to the most comparable GAAP figures are included in our earnings press release, which is available under the Investor Relations tab on our website at trustcobank.com.

Please also note that today's event is being recorded. A replay of the call will be made available for 30 days, and an audio webcast will be made available for one year, as described in our earnings press release. At this time, I'd like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President, CEO. Please go ahead.

Robert J. McCormick (Chairman, President, and CEO)

Good morning, everyone, and thank you for joining the call. I'm Robert J. McCormick, President of TrustCo Bank. I'm joined today, as usual, by Kevin Curley, who will be talking about lending, and Mike Ozimek, our CFO, who will go through the numbers. We are very pleased to report that 2025 is off to a strong start. Every category of deposits is up, with low-cost core and business accounts, including cannabis accounts, making significant contributions. Time deposits are also up year-over-year. We are realizing the impact of a renewed focus on digital channels for account opening. These improvements are a result of hard work over the long haul. Our people are focused on building and maintaining strong customer relationships and offering top-tier products to permit effective management of the cost of funds. Increases in deposits are especially good for us because we lend those funds right back out.

Our lending is funded organically by deposits gathered through our own network, not borrowed funds or brokered CDs. Significantly, commercial lending is up 8%, with the total now topping $300 million. On the residential side, home equity products are leading the way. Total loans are up over $100 million from the first quarter of last year. Success in these areas has resulted in meaningful margin improvement of more than 8% year-over-year. Net interest margin now sits at 2.64%. All return metrics are up significantly, with earnings per share, return on average assets, and return on average equity all up 27%, coming in at $0.75 per share, 0.93%, and 8.49%, respectively. Consolidated equity to assets remains exemplary at 10.85%, up 3% year-over-year. Shareholders' equity is also strong, up 6% year-over-year.

The section and capital position will support our authorized million-share repurchase and allow us to operate from a position of strength and afforded flexibility in a dynamic environment. All of this success was accomplished while maintaining our exceptional asset quality. Non-performing loans to total loans remained flat at a negligible 0.37%, and we realized a net recovery during the quarter. The results announced today illustrate the success that can be had through staying consistent with our mission and meeting our customers where they are. Be that holding on to great mortgage rates they got two years ago, trying to anticipate where CD rates may go in the next year, or seeking enhanced digital experience. We did this by offering them great home equity products, flexible and competitive CD options, and better online and mobile banking.

I look forward to seeing how our team elevates the relationships we have with our customers in order to navigate the remainder of 2025 and beyond. Now, Mike will give us detail on the numbers, and Kevin will give color on the loan portfolio. Mike.

Mike Ozimek (CFO)

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the first quarter of 2025. As we noted in the press release, the company saw a robust start to 2025, marked by growth in both the loan and deposit portfolios of TrustCo Bank during the first quarter of 2025 compared to the first quarter of 2024. This performance underscores the bank's commitment to serving its community through increased residential and commercial lending and adapting effectively to the evolving financial landscape. This resulted in the first quarter net income of $14.3 million, an increase of 17.7% over the prior year quarter, which yielded a return on average assets and average equity of 0.93% and 8.49%, respectively. Capital remained strong. Consolidated equity to assets ratio was 10.85% for the first quarter of 2025 compared to 10.51% for the first quarter of 2024.

Book value per share at March 31st, 2025, was $36.16, up 6% compared to $34.12 a year earlier. During the first quarter of 2025, TrustCo also announced a stock repurchase program of up to 1 million shares, or approximately 5% of TrustCo's current outstanding shares of common stock. This repurchase initiative is part of the bank's broader capital management strategy, and it is intended to enhance shareholder value while maintaining flexibility to support future growth. Average loans for the first quarter of 2025 grew 2.1%, or $104.7 million, to $5.1 billion for the first quarter of 2024, at an all-time high. Consequently, overall loan growth has continued to increase, leading the charge with the home equity lines of credit portfolio, which increased by $61 million, or 17.3%, the first quarter of 2025, over the same period in 2024.

The residential real estate portfolio increased $26.2 million, and average commercial loans increased $20.7 million, or 7.5%, over the same period in 2024. This uptick continues to reflect a strong local economy and increased demand for credit. For the first quarter of 2025, the provision for credit losses was $300,000. Retained deposits has been a key focus as we move into 2025. Whole deposits ended the quarter at $5.5 billion. It was up $142 million compared to the prior year quarter. We believe the increase in these time deposits compared to the same period in 2024 continues to indicate strong customer confidence in the bank's competitive deposit offerings. As we move forward, despite a complex economic environment, we believe that our strategic focus on relationship banking and solid financial practices has positioned us for continued success.

Net interest income was $40.4 million for the first quarter of 2025, an increase of $3.8 million, or 10.4%, compared to the prior year quarter. Net interest margin for the first quarter of 2025 was 2.64%, up 20 basis points from the prior quarter. During the same time period, the yield on interest-earning assets increased to 4.13%, up 14 basis points, and the cost of interest-bearing liabilities decreased to 1.92% for the first quarter of 2025, from 1.99%. As the Federal Reserve signals potential interest rate reductions in 2025, the bank is proactively preparing to navigate the evolving rate environment. In this context, the bank anticipates that a lower interest rate environment will provide opportunities to manage deposit costs more effectively, thereby supporting net interest margin. The bank remains committed to maintaining competitive deposit offerings while ensuring financial stability and continued support for our community's banking needs.

Our wealth management division continues to be a significant recurring source of non-interest income. They had approximately $1.1 billion of assets under management as of March 31st, 2025. Non-interest income attributable to wealth management and financial services fees increased by 16.7%, or $2.1 million, driven by strong client demand and higher assets under management. These revenues now represent 42.6% of non-recurring income. The majority of this fee income is recurring and supported by long-term advisory relationships and a growing base of managed assets. Now on to non-interest expense. Total non-interest expense, net of ORE expense, came in at $26.3 million, up $1.4 million from the prior year quarter. The increase is primarily the result of higher costs in salary and employee benefits, equipment expense, professional services, outsourced services, and some other expenses.

ORE expense net came in at an expense of $28,000 for the quarter as compared to $74,000 in the prior year quarter. We are going to continue to hold the anticipated level of expense not to exceed $250,000 per quarter. All of the other categories of non-interest expense were in line with our expectations for the first quarter, and we would expect 2025's total recurring non-interest expense, net of ORE expense, to be consistent with prior year's guidance. Now, Kevin will review the loan portfolio and non-performing loans.

Kevin Curley (EVP and Chief Banking Officer)

Thanks, Mike, and good morning to everyone. Our loans grew by $104.7 million, or 2.1%, year-over-year. The growth was centered on residential mortgages, which increased by $26.2 million over last year, and our home equity loans increased by $61 million, or 17.3%. In addition, our commercial loans grew by $20.7 million, or 7.5%, over last year. For the first quarter, actual loans increased by $18.1 million, as total residential loans grew by $2.8 million, and commercial loans were also higher in the quarter, increasing by $15.9 million. Overall, residential activity trends remained similar to those discussed in recent quarters. Our home equity products continue to see steady demand as they remain attractive to borrowers that have low-rate mortgages but may want to use their home's equity for various projects or large purchases.

For purchase activity, we are well positioned in the market and look to capitalize as this mortgage segment picks up. Also, as a portfolio lender, we have the flexibility to use our control on pricing and the ability to offer various promotions to increase application volume. Rates in the market have been moving in a 50 basis point range, and our current rate is 6.5% for our base 30-year fixed-rate loan. We have been keeping our rates very competitive with the goal of increasing market share. Overall, we are positive about our loan growth in the quarter and remain focused on driving stronger results moving forward. Moving to asset quality. Asset quality at the bank remains very strong. Non-performing loans were $18.76 million at this quarter end, $18.8 million last quarter, and $18.28 million a year ago.

Non-performing loans to total loans remained very low at 0.37% at this quarter end compared to 0.37% last quarter and also 0.37% a year ago. Non-performing assets totaled $20.9 million at quarter end, whereas $21 million last quarter and $20.6 million a year ago. Our early-stage liquidities also continue to be steady, and charge-offs for the quarter amount to a net recovery of $258,000 compared to the fourth quarter's $102,000 charge. At quarter end, our allowance for credit losses remained solid at $50.6 million, with a coverage ratio of 270%, compared to $50.2 million with a coverage ratio of 267% at year-end and $49.2 million and a coverage ratio of 269% a year ago. Rob?

Robert J. McCormick (Chairman, President, and CEO)

We hope to answer any questions you might have.

Operator (participant)

Thanks very much. We've now opened the lines for Q&A. If you'd like to ask a question, please press star followed by one on your telephone keypad now. To move yourself to the line of questioning will be star followed by two. As a reminder to raise a question will be star followed by one. Our first question comes from Ian Lapey of Gabelli Funds. Ian, your line is now open.

Ian Lapey (Portfolio Manager)

Hi, good morning. Congratulations on a good start to the year. A couple of questions.

Mike Ozimek (CFO)

Thank you. Good morning to you.

Ian Lapey (Portfolio Manager)

First. Thank you. The press release references a strong local economy. I'm just curious, is that the Capital District, or is that all of your markets? Maybe you can just expand a little bit on that because the market's telling us maybe not so strong economy.

Mike Ozimek (CFO)

I would say, yeah, I would say we're located in, we're very stable and strong markets. In the Capital District, we don't have the highs and lows that a lot of other economies and a lot of other markets have because of the employment base here and the service-based economy. Even the locations we are in in Florida, we're not really in South Florida, the Naples area and Bonita Springs and some of the places we've heard other difficulties. We're more concentrated in the Central Florida area, and that still remains pretty strong.

Ian Lapey (Portfolio Manager)

Okay. Good. What are you seeing as sort of a follow-on in terms of residential home price trends? Are they stable? Have they been increasing over the year in most of your markets?

Mike Ozimek (CFO)

Stable and not increasing. You're not seeing values drop, but the expectation of 10%-15% annual returns on real estate are not happening.

Ian Lapey (Portfolio Manager)

Right. Okay. My other topic is the share repurchase announcement. Just curious, a couple of things, because at around the same time a year ago, you announced a plan for about 1% but did not repurchase any shares. Now you are doing up to 5%, so significantly bigger. Maybe what changed in terms of the size, and do you have more of an intention to execute as compared to a year ago?

Mike Ozimek (CFO)

Yeah. I think the 5% kind of contemplated the fact that we did not execute on the 1%. I think the tone and tenor towards share repurchases is more favorable this year and now than it was in prior periods. Our intent would be to fully execute on the 5% this year.

Ian Lapey (Portfolio Manager)

Okay. Maybe as a follow-up, in terms of capital, obviously very strong, 10.84% TCE. Even if you did all the 5% right away, that would still only drop to about 10.4%. What sort of target capital ratio is it? Are you contemplating?

Mike Ozimek (CFO)

I do not know if we want to tell the target capital ratio that we have, but we would certainly have room to make another repurchase and still maintain a very strong capital position comfortably. That is a good way of answering that, Ian.

Ian Lapey (Portfolio Manager)

Okay. Great. Congratulations.

Mike Ozimek (CFO)

Thank you.

Operator (participant)

Thank you very much. As a reminder, if you would like to raise a question, please press star followed by one on your telephone keypad now. At this time, we have no further questions. I'd like to hand back to Robert J. McCormick for any closing remarks.

Robert J. McCormick (Chairman, President, and CEO)

As I see Troy Heidenberg on the call roster, and I can't believe I'm seeing Eric Schreck as a private investor instead of a coworker. I hope you all guys all have a nice day, and thank you for your interest in our company.

Operator (participant)

As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.