TrustCo Bank NY - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered strong profitability and margin expansion: net income $15.0M (+19.8% y/y), diluted EPS $0.79, and net interest margin 2.71% (+18 bps y/y), driven by higher loan yields and disciplined deposit pricing.
• Average loans rose $115.6M (+2.3% y/y), led by home equity lines of credit (+17.8% y/y) and commercial (+9.2% y/y); credit quality improved with NPLs down to 0.35% of loans and a coverage ratio of 286%.
• Noninterest income grew y/y on wealth management fees (+13% to $1.8M) and AUM at ~$1.2B, though customer service fees softened sequentially vs. Q1.
• Management reiterated confidence and continued buybacks (169k shares in Q2), highlighting tailwinds from lower CD resets later in 2025/early 2026 and potential margin resilience if the Fed eases, which we view as catalysts for sentiment.

What Went Well and What Went Wrong

What Went Well

• Margin expansion and NII growth: NIM rose to 2.71% (+18 bps y/y), NII to $41.7M (+10.5% y/y), reflecting improved asset yields and prudent deposit pricing. CEO: “Performance has been stellar… our time to shine.”
• Loan growth with strong asset quality: Average loans +$115.6M; HELOCs +17.8% y/y and commercial +9.2% y/y, with net recoveries for a second consecutive quarter and NPLs down to 0.35%.
• Wealth management momentum: Fees +13% to $1.8M; AUM at ~$1.2B, providing recurring noninterest income and diversification.

What Went Wrong

• ORE-related expense uptick: Other real estate expense (net) rose to $522k in Q2 vs. $16k in Q2 2024; management aims to cap at ≤$250k per quarter going forward.
• Sequential softening in certain fees: Fees for services to customers declined to $2.27M vs. $2.65M in Q1 despite y/y stability, moderating total noninterest income sequentially.
• Deposit costs remain elevated in near term: Q&A indicated maturing CDs averaging ~3.91% next quarter and current highest issuance ~4% for 3 months; tailwinds improve later as Q4/Q1 maturities trend to ~3.60% range.

Transcript

Speaker 2

Good day and welcome to the TrustCo Bank Corp NY Robert J. McCormick earnings call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero on your 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 question, you may press star followed by 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. 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 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 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 or reflect any 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. The replay of the call will be available for 30 days, and an audio webcast will be available for one year, as described in our earnings press release. At this time, I would like to turn the conference over to Mr. Robert J. McCormick, Chairman, President, and CEO, to begin. Please go ahead, Robert.

Speaker 0

Thanks, Jamie. Good morning, everyone, and thank you for joining the call. I'm Robert J. McCormick, the President of the Bank. I'm joined today, as usual, by Michael Ozimek, our CFO, who will go through the numbers, and Kevin Curley, our Chief Banking Officer, who will talk about lending. We are very pleased to announce the outstanding year-to-date and year-over-year performance results. Michael will provide the details, but the net income of $15 million for the quarter and nearly $30 million year-to-date is nothing short of stellar. This is, and the numbers support it, our time to shine. The strategy we developed and deployed over the past several years has been to amass capital for the purpose, at least in part, of having low-cost funds available to lend out exactly at this moment.

When the interest rate environment is favorable, loan demand is up, and our competition is scraping to borrow funds to lend out. It is a fundamental principle of TrustCo Bank Corp NY that we take in deposits and lend those funds right back out into the communities where they were gathered. Average deposits are up over the year, and meaningful margin expansion is contributing to our success. Compared to this time last year, margin increased by a solid 7%. Our increased income is, of course, affected by increased loan volume over the period. On the residential side, home equity lines of credit led the way because of the flexibility offered to customers looking to preserve favorable first lien rates. An increase by 18% year over year.

In fact, our team got so good at originating equity loans that we were able to offer a product that promises and delivers a closing within seven days of application. We also successfully executed the strategy of growth in our commercial loans portfolio. That program grew by 11% over the past year. In trademark TrustCo fashion, all of this was accomplished while preserving credit quality. We saw net recoveries for the second quarter, second consecutive quarter in 2025. These successes have served our owners well. All return metrics are up significantly: return on average assets, return on average equity, earnings per share, and efficiency ratio. Also, a double-digit improvement from this time last year.

The beauty of our deployed capital strategy is that we can support the lending in the way we have while preserving our ability to execute on an authorized share repurchase program, which we have done and likely will continue. I will conclude where I started. Performance has been stellar. The results in the first half of 2025 established positive momentum that we believe may extend into 2026. Now, Mike will go into the details. Mike?

Speaker 4

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the second quarter of 2025. As we noted in the press release, the company saw standout results for the second quarter of 2024, marked by increases in both net income and net interest income of TrustCo Bank during the second quarter of 2025 compared to the second quarter of 2024. This performance is underscored by rising net interest income, continued margin expansion, and accredited loan growth across key portfolios. The results in the second quarter: net income of $15 million, an increase of 19.8% over the prior year quarter, which yielded a return on average assets and average equity of 0.96% and 8.73%, respectively. Capital remains strong. Consolidated equity to assets ratio was 10.91% for the second quarter of 2025 compared to 10.73% in the second quarter of 2024.

Book value per share on June 30, 2025 was $36.75, up 6.6% compared to $34.46 a year earlier. During the second quarter of 2025, TrustCo repurchased 169,000 shares of common stock under the previously announced share repurchase program. We remain committed to returning value to shareholders through a disciplined share repurchase program, which reflects our confidence in the long-term strength of the franchise and our focus on capital optimization. Average loans for the second quarter of 2025 grew 2.3%, or $115.6 million, to $5.1 billion from the second quarter of 2024, an all-time high. Consequently, overall loan growth has continued to increase, and leading the charge was the home equity lines of credit portfolio, which increased by $64.7 million, or 17.8% in the second quarter of 2025 over the same period in 2024. The residential real estate portfolio increased $27.9 million, or 0.6%.

The average commercial loans increased $25.8 million, or 9.2%, and installment loans decreased $2.9 million over the same period in 2024. This uptick continues to reflect a strong local economy and increased demand for credit. For the second quarter of 2025, the provision for credit losses was $650,000. Retaining deposits has been a key focus as we navigate through 2025. Total deposits ended the quarter at $5.5 billion and was up $213 million compared to the prior year quarter. We believe the increase in these deposits compared to the same period in 2024 continues to indicate strong customer confidence in the bank's competitive deposit offerings. The bank's continued emphasis on relationship banking, combined with competitive product offerings and digital capabilities, has continued to be a stable deposit base that continues to support ongoing loan growth and expansion.

Net interest income was $41.7 million for the second quarter of 2025, an increase of $4 million, or 10.5% compared to the prior year quarter. The net interest margin for the second quarter of 2025 was 2.71%, up 18 basis points from the prior year quarter. Yield on interest earning assets increased to 4.19%, up 13 basis points from the prior year quarter. The cost of interest bearing liabilities decreased to 1.91% in the second quarter of 2025 from 1.97% in the second quarter of 2024. The bank is well positioned to continue delivering strong net interest income performance, even as the Federal Reserve signals a potential easing cycle in the months ahead. 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 $1.2 billion of assets under management as of June 30, 2025. Non-interest income attributable to wealth management and financial services fees increased 13% to $1.8 million, driven by strong client demand and higher assets under management. These revenues now represent 37.5% of non-interest income. The majority of this fee income is recurring, 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 OREA expense came in at $25.7 million, down $600,000 from the prior year quarter. OREA expense net came in at an expense of $522,000 for the quarter, as compared to $16,000 in the prior year quarter. We're going to continue to hold the anticipated level of expense not to exceed $250,000 per quarter for OREA expense. All of the other categories of non-interest expense were in line with expectations for the second quarter.

Now, Kevin will review the loan portfolio and non-performing loans.

Speaker 3

Thanks, Mike, and good morning to everyone. Our loans grew by $115.6 million, or 2.3% year over year. The growth was centered on our home equity loans, which increased by $64.7 million, or 17.8% over last year, and residential mortgages, which increased by $27.9 million. In addition, our commercial loans grew by $25.8 million, or 9.2% over last year. For the second quarter, actual loans increased by $40.6 million, as total residential loans grew by $29.4 million, and commercial loans were also higher, increasing by $11.5 million for the quarter. Overall, residential activity trends remain similar to those discussed in recent quarters. Our home equity lines of credit continue to see consistent demand as customers continue to use their equity in their home for home improvements, education purposes, or paying off higher cost loans, such as credit cards.

For purchase and refinance activity, we are well situated in the market and are ready to capture more growth as these segments pick up. Also, as a portfolio lender, we are uniquely positioned to manage pricing and implement promotions to increase lending value. In all our markets, rates continue to be moving in approximately 50 basis point range, and our current rate is 6.5% for our base 30-year fixed-rate loan. In addition, our home equity products remain a very attractive option for customers with rates starting below 7%. Commercial loan activity remains strong this quarter and continues to contribute to our portfolio growth. Overall, we are encouraged about our loan growth this quarter and are committed to driving stronger results moving forward. Now moving to asset quality. Asset quality at the bank remains very strong. Our early-stage delinquencies for our portfolio continue to be steady.

Charge-offs for the quarter amounted to a net recovery of $9,000, which follows a net recovery of $258,000 in the first quarter. Non-performing loans were $17.9 million at this quarter end, $18.8 million last quarter, and $19.2 million a year ago. Non-performing loans to total loans decreased to 0.35% at this quarter end compared to 0.37% last quarter and 0.38% a year ago. Non-performing assets also decreased to $19 million at quarter end, versus $20.9 million last quarter and $21.5 million a year ago. At quarter end, our allowance for credit losses remained very solid at $51.3 million with a coverage ratio of 286% compared to $50.6 million with a coverage ratio of 270% in the first quarter and $49.8 million at a coverage ratio of 259% a year ago. Rob?

Speaker 0

That's our story. We're happy to answer any questions anyone might have.

Speaker 2

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ian Lapey from Gabelli Funds. Your line is open. Please go ahead.

Speaker 1

Good morning, gentlemen. Congratulations. Great, great quarter. Just a couple.

Speaker 0

Thank you, Ian, and good morning to you.

Speaker 1

Thanks. Rob, you talked about strong local demand. Is that in Florida as well?

Speaker 0

I missed the first part of the question, Ian. I'm sorry. Something must have faded in and out.

Speaker 1

The strong local demand that you referred to, is that in Florida as well as in the Northeast?

Speaker 0

Across the markets, the best demand, the better of the two categories, has been Florida, Ian, but we've had very strong demand locally as well.

Speaker 1

Okay, great. What is the, in terms of the certificates of deposit that will be maturing in the next quarter, what is the rate for maturing certificates of deposit as opposed to ones you're currently issuing?

Speaker 0

We're still gaining ground, but not as much ground as we were gaining. Ian, do you have the number in?

Speaker 1

Yeah, sure. What's coming due is about at the average rate is $391. Okay. And what are you paying now?

Speaker 0

The highest is $400, but that's for three months.

Speaker 1

Okay, last one.

Speaker 0

One thing is, as we go, Ian, I'll just add to that. That's over the next quarter, but as you look out, we gain some ground in future quarters, and what's coming due in Q4 and Q1 of next year are lower. They're in the $360 range. We're going to make some more ground up as we go forward.

Speaker 1

Okay, great. Last one, in terms of the strong commercial loan growth, what types of borrowers are you lending, and what's the rough mix between secured and unsecured?

Speaker 0

The vast majority, Ian, probably in the over 90% range, is real estate-related in commercial loans. We're doing smaller multifamily projects and very small office offerings, some owner-occupied and some investment. The vast majority of the commercial loan portfolio is secured by real estate.

Speaker 1

Okay, great. Thank you very much.

Speaker 0

Thank you.

Speaker 2

As a reminder, to ask a question, please press star followed by one on your telephone keypad.

Speaker 0

I missed.

Speaker 2

We currently have no further questions, so I'd like to turn the conference call back to Robert J. McCormick for any closing remarks.

Speaker 0

Thank you for your interest in our company, and we appreciate you spending a couple of minutes with us this morning. Have a great day.

Speaker 2

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