TrustCo Bank NY - Q2 2024

Transcript

Operator (participant)

Good day, and welcome to the TrustCo Bank Corp NY earnings call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing 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, then one. To withdraw your questions, you may press star and two. Before proceeding, we would like to mention that this presentation may contain forward-looking information about TrustCo Bank Corp NY, and this 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 or implied by 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 precedes this call and in the Risk Factors and Forward-Looking Statements section of our annual report, Form 10-K, as updated by our quarterly reports on Form 10-K. The forward-looking statements made on this call are only valid as of the day hereof, and the company disclaims any obligation 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 to the 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 Investors Relations tab on our website at trustcobank.com.

Please also note that today's event is being recorded. A replay of today's call will be available for 30 days, and an audio webcast will be available for 1 year, as described in our earnings press release. At this time, I would like to turn over the conference call 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 Rob McCormick, the President of the bank. I'm joined today, as usual, by Mike Ozimek, our CFO. Also joining me today is Kevin Curley. Kevin is an Executive Vice President, newly promoted Chief Banking Officer. Kevin has been with the bank for over 30 years and brings a wealth of experience to his new position. He will give color on lending, and Mike will give detail on the numbers. I believe we're seeing early signs of a return to normalcy in the housing markets. In our experience, Florida is leading the way on this, with new construction seeming to catch up with demand. Inventory is still tight in the Northeast.

In New York, we are seeing some loosening in the downstate market, median days in the market declining over the last year and the number of new listings increasing, suggesting that sellers are coming off the sidelines and buyers are active again. Upstate is essentially flat year-over-year. Indicators suggest that HELOC volume will trend down while purchase volume trends up. Overall, we believe the trend is positive. As Kevin will detail, average loans are up, and this has contributed positively to net income and net interest margin, which improved 4% and 3.7%, respectively. We also have retained competitively priced time deposits. Our strategy with respect to pricing, both in terms of loans and deposits, is showing signs of success and what we have seen, margin improvement. We saw some expected contraction. Good strategy, well executed, yields favorable outcomes.

Several other measures also were very favorable this quarter. Earnings per share grew, and book value is up almost $2 over this time last year. We also saw improvements in our return metrics. ROA and ROE both grew over the quarter. These strong results increased income and value, differentiates from any institutions in our sector. TrustCo's thoughtful and conservative strategy has proven successful over the long haul. Although it is something we mention quarter-after-quarter, the recurring themes of excellent liquidity, strong capital, and superior credit quality warrant repeating. TrustCo consistently performs well with regard to these measures. We are proud to report about them, and our shareholders realize the value they generate. It also bears emphasis that all of these results were achieved without resorting to brokered deposits or borrowing.

We have no debt on our books at a time when some banks struggle to turn a profit. We believe that the sky, skies are beginning to clear, and we-- as we look forward to the balance of the year, Mike Ozimek. Now, Mike will detail-- give us detail on the numbers. Kevin will give us color on the loan portfolio, then we will take your questions if you have any. Mike?

Michael M. Ozimek (CFO)

Thank you, Rob, and good morning, everyone. I'll now review TrustCo's financial results for the Q2 of 2024. As we noted in the press release, the company saw Q2 net income of $12.6 million, an increase of 3.5% over the prior quarter, which yielded a return on average assets and average equity of 0.82% and 7.76%, respectively. Capital remains strong. Consolidated equity-to-assets ratio was 10.73% for the Q2 of 2024, compared to 10.23% the Q2 of 2023. Book value per share at June 30, 2024, was $34.46, up 5.5% compared to $32.66 a year earlier.

Average loans for the Q2 of 2024 grew 3.8% or $182.2 million to $5 billion from the Q2 of 2023 at an all-time high. Consequently, overall loan growth has continued to increase. Leading the charge was the residential real estate portfolio as usual, which increased by $89.9 million, or 2.1%, in the Q2 of 2024 over the same period in 2023. Average commercial loans increased $31.5 million or 12.7%. Home equity lines of credit increased $61.1 million, or 20.1%, and installment loans decreased $339,000, or 2.2%, over the same period of 2023. For the Q2 of 2024, the provision for credit losses was $500,000.

Retaining deposits continues to be a focus in 2024. Total deposits ended the quarter at $5.3 billion and were up $18.5 million compared to the prior year. As we move forward, our objective is to continue to offer competitive product offerings in the bank through aggressive marketing and product differentiation. Net income was $37.8 million for the Q2 of 2024, an increase of $1.2 million, or 3.3% compared to the prior quarter. Net interest margin for the Q2 of 2024 was 2.53%, up 9 basis points from the Q1 of 2024. Yield on earning assets increased to 4.06%, up 7 basis points from 3.99% in the Q1 of 2024.

Cost of interest-bearing liabilities increased to 1.97% in the Q2 of 2024, from 1.99% in the Q1 of 2024. 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 June 30, 2024. Additionally, as mentioned in the press release, the company marked its Visa Class C common stock to fair value and recorded a gain of $1.4 million based on the conversion privilege of the Visa Class C common stock. Now on to non-interest expense. Total non-interest expense, net of ORE expense, came in at $26.4 million, up $1.4 million from the prior quarter. The increase is primarily the result of higher employee benefit costs in the current quarter.

ORE expense net came in at $16,000 for the quarter, as compared to $74,000 in the prior quarter. Given the continued low level of ORE expenses, we're going to continue to hold the anticipated level of expenses to not exceed $250,000 per quarter. All the other categories of non-interest expense were in line with our expectations for the Q2. Now, Kevin will review the loan portfolio and non-performing loans.

Kevin M. Curley (EVP and Chief Banking Officer)

Thanks, Mike, and good morning to everyone. Our average loans grew by $182 million or 3.8% year-over-year. The growth centered on residential mortgages, which increased by $89.9 million over last year. Our home equity loans also increased by $61 million or 20.1%, and our commercial loans grew by $31.5 million or 12.7% over last year. The Q2, actual loans increased by $33 million. Residential loans increased by $31 million, with both first mortgages and home equity products posting increases. In addition, our commercial loans increased by $3.3 million. We remain well-positioned in the market and seek to capitalize as market activity develops. Our portfolio product, combined with the flexibility to utilize various promotions and the control we have on pricing, allows us to be in a great position.

Rates in the market have decreased in recent weeks, and we currently stand at 6.375% for our base 30-year fixed-rate loan. We have been keeping our rates very competitive with the goal of increasing volumes. More recent market activity on the purchase side has seen steady progress, and we continue to focus our efforts on capturing a larger piece of the current market. Overall, we are pleased with our loan growth in the quarter and year-over-year. Now moving to asset quality. Asset quality at the bank remains strong. Non-performing loans decreased to $19.2 million versus $19.4 million last year. Non-performing loans now stand at 0.38% of total loans versus 0.40% a year ago.

Non-performing assets total $21.5 million as of June 30, versus $20.8 million a year ago. Our early-stage delinquencies also continue to be steady, and charge-offs for the quarter amounted to a net recovery of $52,000. At quarter end, the allowance for credit losses was $49.8 million, with a coverage ratio of 259.4%, compared to $46.9 million and a coverage ratio of 241.6% in 2023. Rob?

Michael M. Ozimek (CFO)

That's our story, and we're happy to answer any questions you might have.

Operator (participant)

We'll now begin the Q&A segment of the conference. Just as a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. To remove yourself from that line of questioning, please press star followed by two. Our first question comes from Ian Lapey of Gabelli Funds. Ian, your line is now open.

Ian Lapey (Analyst)

Hi, good morning, Rob and, and team. Congrats on, a good quarter. I guess, first of all, on the, great to see the NIM, expanding after obviously dropping several quarters in a row. Just curious, you benefited from a lower, cost of deposits. Assuming no Fed in- rate decreases this quarter, do you think you can, you know, still drive that cost of deposits down this quarter based on sort of what repricing trends you're seeing?

Michael M. Ozimek (CFO)

That's the goal, Ian. We're watching that very, very closely, and we're maintaining the balance between what we have to do to keep our liquidity at an acceptable level,

Robert J. McCormick (Chairman, President and CEO)

without going into the deposit or borrowing markets and funding our loans and requirements in cash as we need it. So that would be the goal, to continue to try and drag that number down.

Ian Lapey (Analyst)

Okay, um-

Robert J. McCormick (Chairman, President and CEO)

Yeah.

Ian Lapey (Analyst)

Yeah. Um-

Robert J. McCormick (Chairman, President and CEO)

I think you knew that, Ian.

Ian Lapey (Analyst)

Yeah, I know. The fees for services to customers was down sequentially and year over year, you know, fairly significantly, double digit. Anything unusual going on there?

Robert J. McCormick (Chairman, President and CEO)

The only, the only outlier I think would be NSF fees, Ian. You recall that we were caught in that trap with the NSF fees, so the way we calculate NSF fees and how we collect NSF fees. Some of the other fees, though, you know, our wealth management has been on a great tear of growth, and a couple of other areas have been kind of making up for that. But some months, believe it or not, NSF fees are still a little bit higher or higher than the prior months, but it's I would say that's really the only impact we've had on, directly on fees over the period.

Ian Lapey (Analyst)

Okay. And then great growth in the HELOC portfolio. Just curious, what percent roughly is going to existing customers? And then what is the loan-to-value, if you include, obviously, the first lien that's ahead of you?

Robert J. McCormick (Chairman, President and CEO)

If you have your first mortgage with TrustCo, you can get up to a 90% loan-to-value, and I think it's about 60/40 split between existing TrustCo customers and new customers. I'm looking at Kevin Curley.

Ian Lapey (Analyst)

That sounds about... Yes.

Robert J. McCormick (Chairman, President and CEO)

So I think that's about the split, Ian. We've been known for a very long time to be a strong home equity lender. We were an early adopter years and years and years ago, and have always maintained that strong reputation. So we draw from the greater market, and with some of the bigger banks not offering home equity credit lending, it kind of drives people to us, and we do get non-customers apply here.

Ian Lapey (Analyst)

Okay, great. And then, last question. Rob, you mentioned the housing market is starting to show some signs of life. Are you seeing any increase in payoffs or refis of your existing residential mortgage book?

Robert J. McCormick (Chairman, President and CEO)

No, I would say stable to down, Ian. We're still experiencing not huge percentages, but it's very stable and trending a little bit down.

Ian Lapey (Analyst)

Okay, great. And, congratulations again.

Robert J. McCormick (Chairman, President and CEO)

Thank you.

Operator (participant)

We currently have no further questions, and therefore, I will hand back to our speaker, Robert McCormick, for closing remarks.

Robert J. McCormick (Chairman, President and CEO)

Thanks for joining us this morning. Special shout-out to Troy Heidenberg, by the way, on the call. So have a great day.

Operator (participant)

This concludes today's call. Thank you to everyone for joining. You may now disconnect your lines.