TrustCo Bank NY - Q3 2024

Transcript

Operator (participant)

Ladies and gentlemen, the TrustCo Bank New York third quarter 2024 earnings call will begin shortly with your host, Robert McCormick. We appreciate your patience while we prepare your session today. During the call, we encourage participants to raise a question. You can raise a question by pressing star followed by one on your telephone keypad, and to remove yourself from that line of questioning, it is star followed by two. We appreciate your patience. Good day, and welcome to the TrustCo Bank Corp earnings call webcast. All participants will be on listen-only mode. Should you need assistance, please signal our conference specialist by pressing star followed by zero on your telephone keypad. As to 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 two.

Before proceeding, we would like to mention that this presentation may include forward-looking information about TrustCo Bank Corp NY that is intended to be covered by our 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 other risks and factors can be found in our press release that precedes this call and in our risks and forward-looking statements section of our annual report on Form 10-K, as updated in our quarterly reports, Form 10-Q.

The forward-looking statements made in this call are valid only as of the date hereof, and the company disclaims any obligation to update this information to reflect events or developments after the date of this call, except as may be applicable by law. During today's call, we will discuss certain financial measures derived by our financial statements that are not determined in accordance with the U.S. GAAP. The reconciliations of such non-GAAP financial measures up 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 note also that today's event is being recorded, and a replay of this 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'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)

Thank you, and good morning, everyone, and thank you for joining the call. As the host said, I'm Rob McCormick, the President of TrustCo Bank. I'm joined today, as usual, by Michael Ozimek, our CFO, who will give detail on the numbers, and Kevin Curley, who will give color on lending. On behalf of the entire TrustCo Bank family, I'd like to express thanks for the many expressions of concern and well wishes as Hurricane Milton tore its way across our geographic footprint in Florida. We are happy to report that our people came through the storm in good shape, although a little worse for the wear. Likewise, our facilities withstood the battering, with many opening within a day or so of the storm and all locations open now. Our results this quarter are like those of a baseball team that reliably hits singles and doubles.

There was no grand slam or even a home run, but at the end of the day, we scored runs and posted a win. The solid plays that we executed consisted of holding the line on the cost of deposits, originating new loans at better interest rates, and controlling expenses over the year. We grew our deposits from the third quarter of last year. This was done in part by capitalizing on our strong customer relationships that enabled us to direct some core deposit outflow to favorably priced CDs, and we mostly grew demand deposits. With that said, we're happy to report an increase in our net interest margin over the quarter. Market conditions continued to drive customers to home equity products, and we realized a 6% increase to that portfolio over the quarter, adding to growth of 18% over the year.

The new volume was booked at slightly higher rates. These factors all combined to increase our margin over the quarter. We also saw total loans reach another all-time high at nearly $5.1 billion, which is a win in itself and also highlights the symmetry that we are so proud of between our deposit portfolio and our loan portfolio. We gather deposits in our areas of operation and lend those same funds right back into those communities. Credit quality is on the minds of a lot of investors and analysts. Ours remains stellar, as it has been over a long period of time. Non-performing loans to total loans held steady at 0.38% over the quarter. This speaks to our high underwriting standards and the diligent and effective efforts of our loan processing operation.

The most important one we posted was a very respectable $12.9 million in net income. Now, Mike will dive into the numbers. Kevin will provide an update on the loan portfolio, and then we can take your questions if you have any. Mike?

Michael M. Ozimek (EVP and CFO)

Thank you, Rob, and good morning, everyone. I'll now review TrustCo's financial results for the third quarter of 2024. As we noted in the press release, the company saw third quarter net income of $12.9 million, an increase of 2.6% over the prior quarter, which yielded a return on average assets and average equity of 0.84% and 7.74%, respectively. Capital remains strong. Consolidated equity to assets ratio was 10.95% for the third quarter of 2024, compared to 10.31% in the third quarter of 2023. Book value per share at September 30th, 2024, was $35.19, up 7.3% compared to $32.80 a year earlier.

Average loans for the third quarter of 2024 grew 2.6% or $127 million to $5 billion from the third quarter of 2023, an all-time high. Overall, loan growth has continued to increase, and leading the charge was the residential real estate portfolio, as usual, which increased by $60.4 million or 1.2% in the third quarter of 2024 over the same period in 2023. Home equity lines of credit increased $60 million or 18.7%. Average commercial loans increased $18.1 million or 6.9%, and installment loans decreased $1.5 million or 9.5% over the same period in 2023. For the third quarter of 2024, the provision for credit losses was $500,000. Retaining deposits has been a key focus throughout 2024.

Total deposits ended the quarter at $5.3 billion, and as we move forward, our objective is to continue to offer competitive product offerings of the bank through aggressive marketing and product differentiation. Net interest income was $38.7 million for the third quarter of 2024, an increase of $883,000 or 2.3% compared to the prior quarter. The net interest margin for the third quarter of 2024 was 2.61%, up eight basis points from the second quarter of 2024, resulting in two consecutive quarters of an increase in net interest margin. The yield on interest-earning assets increased to 4.11%, up five basis points from 4.06% in the second quarter of 2024.

The cost of interest-earning liabilities decreased to 1.94% in the third quarter of 2024 from 1.97% in the second quarter of 2024. Throughout 2024, we have been able to lower the rates offered on time deposits while continuing to retain a significant portion of the product quarter-over-quarter, which should continue to bring down the cost of time deposits. The bank has seen erosion of margins begin to turn around last quarter, and we are optimistic going forward. Our wealth management division continues to be a significant recurring source of non-interest income. They had approximately $1.3 billion of assets under management as of September 30th, 2024. Now on to non-interest expense. Total non-interest expense, net of ORE expense, came in at $26 million, down $447,000 from the prior quarter.

The decrease is the result of lower costs and salaries and benefits, net occupancy, equipment expense, outsourced services, and advertising expense, partially offset by the increase in professional services and FDIC and other insurance during the quarter. ORE expense net came in at an expense of $204,000 for the quarter, as compared to $16,000 in the prior quarter. Given the continued low level of ORE expenses, we are 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 third quarter. We'd expect 2024's total recurring non-interest expense, net of ORE expense, to be in the range of $26.9 million-$27.4 million per quarter.

Now, Kevin will review the loan portfolio and nonperforming loans.

Kevin M. Curley (EVP and Chief Banking Officer)

Thanks, Mike, and good morning to everyone. Our average loans grew by $127 million or 2.6% year-over-year. The growth centered on residential mortgages, which increased by $40 million over last year, and our home equity loans also increased by $61 million or 18.4%. In addition, our commercial loans grew by $12 million year-over-year. For the third quarter, actual loans increased by $33 million. Residential loans increased by $35 million, with both first mortgages and home equity credit lines posting increases. Commercial loans and some loans were slightly lower for the quarter. We remain well-positioned in the market and seek to capitalize as market activity develops. Our portfolio products, combined with the flexibility to utilize our control on pricing and our ability to offer various promotions, put us in a great position.

We have been keeping our rates very competitive, with the goal of increasing volume. Rates in the market have increased in recent weeks, and our current rate is 6.25% for our base thirty-year fixed-rate loan. In addition, we have very competitive adjustable-rate mortgages with rates below 6%. Our home equity products continue to see steady demand as they remain attractive to many borrowers that may have low-rate mortgages, but may also want to use their home's equity for various projects or large purchases. Overall, we are pleased with the loan growth in the quarter and remain focused on driving stronger results. Now, moving to asset quality. Asset quality at the bank remains strong. Nonperforming loans were 19.4 million at quarter end, 19.2 million last quarter, and just under 18 million a year ago.

Nonperforming loans now stand at 0.38% of total loans, compared to 0.38% last quarter and 0.36% a year ago. Nonperforming assets totaled $21.9 million as of September 30th, versus $21.5 million last quarter and $19.1 million a year ago. Our early-stage delinquencies also continue to be steady, and charge-offs for the quarter amounted to $222,000, and a year-to-date total of only $128,000. At quarter end, our allowance for loan losses was a solid $50 million, with a coverage ratio of 257%, compared to $47.2 million and a coverage ratio of 264% in September of 2023. Rob?

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

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

Operator (participant)

Thank you very much. We'd now like to open the lines for Q&A. If you would like to ask a question, please press star followed by one on your telephone keypad, and to remove yourself from the line of questioning, it is star followed by two. We will allow just a moment for any questions to filter through. Our first question comes from Ian Lapey of Gabelli Funds. Ian, your line is now open.

Ian Lapey (Portfolio Manager)

Hi, good morning, Rob and team. Congrats on-

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

Morning, Ian

Ian Lapey (Portfolio Manager)

A good quarter. Yeah, a few questions. I guess first on the hurricanes, good to hear, you know, the people in your properties are okay. Any thoughts about credit issues that might result from damage to maybe some of the homes that you have mortgaged?

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

We've been through quite a few of these storms, unfortunately, at this point, Ian, but, and we've never had those types of issues before. We do establish, for people who have had losses in one way or another that we have the mortgages on their homes, reserve accounts at the bank and disburse those funds as they complete the work to restore their home, but we're not even seeing a lot of that this time around, Ian, so it seems like it's not gonna be a big impact overall.

Ian Lapey (Portfolio Manager)

Okay, good. On the CDs, can you just review sort of what the pricing is for maturing CDs compared to new CDs that you're issuing now?

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

Most of our customers like the three-month, believe it or not, right now, Ian. So most of the customers at maturity are going into a three-month rate. We are offering a pretty attractive twelve-month rate, too, but it's about a 60/40 split right now between people taking the three-month and the twelve-month.

Ian Lapey (Portfolio Manager)

How much are you saving when, you know, versus when you have one maturing and versus issuing a new one?

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

The rate for three months is in the 4.5 range, and the rate for 12 months is in the 4% range.

Ian Lapey (Portfolio Manager)

Okay. And then on the financial services, really strong quarter, and you mentioned $1.3 billion in AUM. Was the increase in revenues from financial services driven by higher AUM, or was there anything unusual in the quarter?

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

Assets under management are up year-over-year, and we are proactive with regard to our fees, so the combination of the two have been a very positive effect in our financial services or in trust. I got to tell you, Ian, he has assembled. Pat LaPorta runs that unit for us, and Pat and Kevin have assembled a very strong team in the trust department or the financial services area, so they're doing a lot of seminars and a lot of customer contact, and I hope it continues. I really do, because they're on a very good trend right now.

Ian Lapey (Portfolio Manager)

Okay. Great. And then last question. So obviously, the capital position is, I think the strongest of any bank I follow. As you sort of have maybe reached an inflection point with your NIM now starting to improve, what are you thinking about in terms of capital? How do you prioritize growth? I see your branches are down year-over-year. Is that something you want to add branches or increase dividend or share repurchases with the stock below tangible book?

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

Yep.

Ian Lapey (Portfolio Manager)

Just sort of maybe you can talk about how you're thinking about those options.

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

As we see that light at the end of the tunnel, and it gets brighter over time, we're certainly going to look at all of those things. We are an advocate and a fan of a share buyback program, and there are a couple of areas generally that we're looking at for possible new branch expansion, so those would be probably the two biggest priorities that we would have.

Ian Lapey (Portfolio Manager)

Okay.

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

Just trying to keep our-

Ian Lapey (Portfolio Manager)

Okay, great.

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

Powder dry through this period of time to go. Okay.

Ian Lapey (Portfolio Manager)

Yeah.

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

That's great.

Ian Lapey (Portfolio Manager)

Okay. Congrats. Yep.

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

All right, Ian.

Operator (participant)

Thank you very much, Ian. We currently have no further questions, so I'd like to hand back to Robert J. McCormick for any closing remarks.

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

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

Operator (participant)

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