Operator
Good day and welcome to the TrustCo BankCore Earnings Call and Webcast. All participants will be in a 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 and then one. To withdraw your question, you may press star one again. Before proceeding, we would like to mention that this presentation may contain forward-looking information about TrustCo Bank Corps New York 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 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 of our website at trustcobank.com. Please also note that today's event is being recorded. A 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 call over to Mr. Robert J. McCormick, Chairman, President, and CEO. Please go ahead.
Good morning, everyone, and thank you for joining the call. As Chase said, I'm Rob McCormick, President of the Trusco Bank. I'm joined today, as usual, by Mike Ozemeck, our CFO, who will go through the numbers, and Kevin Curley, our Chief Banking Officer, will talk about lending. We think it's best to describe the results this quarter as a result of positive financial momentum. Looking at year-over-year results, deposits have grown each quarter, average loans have grown each quarter, and net income has grown each quarter. For the same period, return on average assets has improved each quarter, return on average equity has improved each quarter, and net interest margin has improved each quarter. This is not happening by accident. Our team has worked diligently in all areas to solidify customer relationships. We have reached out to customers with deposits and no loans to encourage equity borrowing and refinancing. we have provided incentives to loan customers to utilize our deposit products and become real customers at Trusco Bank. We've taken a fresh look at our loan and deposit offerings and the systems that deliver them. We've made enhancements to improve customer service experience as well. With all those factors coming together and trending favorably, we are optimistic about the company's ability to maintain positive momentum into 2027. Investors and customers can be on the lookout for exciting announcement about our lending operation the coming months. We are also very pleased to have two new directors on board. Patty Fusco is likely known to many people in the New York market, provides expertise in human resources, and Brian Gunther is a highly experienced real estate professional from the West Coast of Florida. His addition to the board expands our geographic diversity. Now Mike's going to talk about the numbers. Kevin will touch on the loan portfolio, and then we can take your questions. Thank you, Robin.
Good morning, everyone. I will now review Trusco's financial results for the third quarter of 2026. As we noted in the press release, the company continued to see strong financial results from the third quarter of 2026, marked by increases in both net income and net interest income during the third quarter of 2026 compared to the third quarter of 2025. This performance is underscored by rising net interest income and sustained loan and deposit growth across core lending and deposit categories. This resulted in the third quarter net income of $17.3 million, an increase of 6.5% over the prior year quarter, which yielded a return on average assets and average equity of 1.05% and 10.57% respectively. Capital remains strong. Consolidated equity to asset ratio was 9.72% for the third quarter of 2026, compared to 10.9% in the third quarter of 2025. Book value per share at September 3026 was 38 dollars and 20 cents up 2.4 percent compared to 37 dollars and 30 cents a year earlier driving these changes trusco repurchased 13.2 percent of outstanding common stock under the 2025 and 2026 stock repurchase programs through the acquisition of over 1.5 million shares in 2026 following the purchase of 1 million shares in 2025 reinforcing a disciplined long-term capital allocation strategy we remain committed to returning value to shareholders through a disciplined share repurchase program which reflects our confidence in the long-term strength of our franchise and the focus on capital optimization additionally during the third quarter the bank declared an increased quarterly cash dividend of 40 cents per share or dollar sixty per share on an annualized basis the declared dividend represent an increase of 5.3% over their prior dividend amount, which continues the bank's commitment in paying dividends for over a century. Credit quality continues to be stable, as we saw non-performing loans modestly increase to $21.1 million in the third quarter of 26, from $18.5 million in the third quarter of Our continued focus on solid underwriting within our loan portfolio and conservative lending standards positions us to manage credit risk effectively in the current environment. Average loans for the third quarter of 26 grew 4.6% or $238 million to $5.4 billion from the third quarter of 25. This loan growth continues to reflect the strength of our local markets and ongoing demand for credit. For the third quarter of 26, the provision for credit losses was $850,000. The increase in the overall provision expense is being driven by loan growth and changes in economic forecasts rather than the softening in the underlying credit performance. The ratio for the allowance for loan losses to total loans was 1.01% as of September 3026 and 1% as of September 2025. Our focus continues to be on traditional lending and conservative balance sheet management, which has continued to enable us to produce consistent high-quality recurring earnings. Retaining and growing deposits has been a key focus as we finish up 2026. Total deposits ended the quarter at $5.7 billion. It was up $203 million compared to the prior quarter. We believe the increase in these deposits compared to the same period in 2025 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 contributed to a stable deposit base that supports ongoing loan growth and expansion. Net interest income was $47 million for the third quarter of 26, an increase of $3.9 million or 9.1% compared to the prior year quarter. The net interest margin for the third quarter of 26 was 2.95%, up 16 basis points from the prior year quarter. Yield and interest-earning assets increased to 4.35 percent, up 10 basis points from the prior year quarter. The cost of interest-sparing liabilities decreased to 1.79 percent in the third quarter of 26, from 1.9 percent in the third quarter of 25. The bank is well-positioned to continue delivering strong net-interest income performance, even as the Federal Reserve contemplates further rate changes 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 1.37 billion of assets under management as of september 30th 26 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 orary income came in at 28 million down 300 000 from the prior quarter orary income net came in at a credit of 12 000 for the quarter as compared to an expense of 8 000 in the prior year quarter we're going to continue to guide the anticipated level of expense not to exceed 200 000 per quarter all the other categories and non-interest expense were in line with our expectations for the third quarter. We would expect 2026 total recurring non-interest expense net of ORE expense to be in the range of $27.8 to $28.2 million per quarter. Now Kevin will review the loan portfolio and non-performing loans.
Thanks Mike and good morning to everyone. Our average loans grew by $238.1 million or 4.6 percent year over year. This is an improvement over the last quarter's report of year-over-year growth of $197.5 million. The growth was centered in our residential loan portfolio, with our first mortgage segment growing by $177.3 million, or 4%, and our home equity loans growing $50 million, or 11.4%, over last year. In addition, our commercial loans grew by $13.5 million, or 4.3%, over last year. For the third quarter, actual loans increased $77.1 million compared to the second quarter. Purchased mortgage loans, including refinances, grew by $53.6 million. Home equity loans grew by $13.9 million, and commercial loans were higher by $10 million for the quarter. During the third quarter, mortgage rates were below 6.5% in the beginning of the quarter and then increased to over 7% by the end of the quarter. As noted previously, we have the flexibility to strategically manage pricing and introduce targeted promotion to drive lending volume. Our mortgage origination activity, as well as our purchase loan volume, were steady throughout the quarter. In addition, our home equity products continue to produce consistent demand as customers are able to use their equity to meet their borrowing needs. Overall, we are pleased with the loan growth during the quarter and remain committed to delivering strong results moving forward. Moving to asset quality. As a portfolio lender, we originate loans through maturity. This reinforces our disciplined approach to underwriting and risk management. Asset quality at the bank remains very strong. Our early stage elinquencies and our portfolio continue to remain within their normal range. Charge-offs for the quarter amounted to a net recovery of $30,000, which follows a net recovery of $88,000 in the second quarter and a total of $171,000 in recoveries over the past year. Overall, we have had seven straight quarters of net recoveries. Not performing loans were $21.1 million at this quarter end, $21.8 million last quarter, and $18.5 million a year ago. Not performing loans to total loans was 0.39% quarter end compared to 0.4% last quarter and 0.36% a year ago. Non-performing assets were $22.3 million at quarter end, $23 million last quarter, and $19.7 million a year ago. At quarter end, our allowance for credit losses remained solid at $55.2 million, with a coverage ratio of 262% compared to $54.1 million with a coverage ratio of 249% at the end of the second quarter and 51.9 million and a coverage ratio of 281% a year ago.
That's our story. We're happy to answer any questions anybody might have.
Operator
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, 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 1 again. At this time, we will pause momentarily to assemble our roster. Your first question comes from the line of Ian LaPay with Gabelli Funds. Your line is open. Please go ahead.
Good morning, Rob and team. congratulations on another strong quarter morning thank you can you just talk about obviously during the quarter there was a sharp increase in interest rates particularly the 10-year mortgage rates can you just talk about the impact on the both the loan and deposit business certainly certainly the change affected us in some ways, Ian, but, you know, we've always maintained a pretty liquid position and stay well capitalized.
So we kind of let some of it run off a little bit and work our way to higher price stuff and work our way back into it. So I think it's been a very effective thing for us. Some people are going a little bit longer on CDs and some of the loan volumes are down.
But as I said in my introduction was that we're trying to pick up more equity loans and do more business that way and it's we've been successful at it so far did you see sort of just a you know in terms of customer behavior just any type of like freezing in terms of plans to either refi or purchase a new home you're talking about encouraging people to refi or yes you know what you're seeing in terms of customer behavior given the sharp rate increase in rates?
You know, we operate in pretty conservative areas, especially in upstate New York. So we have not seen a real change in customer behavior.
And then next on credit, first, congratulations on another quarter of net recoveries. Very impressive. Just given, and you mentioned the allowances, the increase in the allowance was driven mostly by sort of a deteriorating economic outlook. Can you just talk about sort of how you're positioning the loan portfolio for a more challenging environment and, you know, what you're sort of focused most on in terms of potential risk there?
Our underwriting is always conservative, Ian.
And so we're paying the course and trying not to get crazy with regard to any of the loans that are being made.
We're watching everybody around us kind of change their stripes and kind of do different things. We're trying to stay the course. And part of that allowance increase is driven by loan growth so that we're back funding that through the CECL model. So between a combination of the Q factors, and Mike can tell you 100 times more than I can tell you about it, But between a combination of the Q factors and the loan growth, that's how we ended up. But our customers have come to know us and come to know what to expect of us. And we're pretty comfortable with where we're at.
Okay, great. That's all for me. Congrats again. Thank you, Ian.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Robert J. McCormick for any closing remarks.
Thank you for your interest in our company. I hope you have a great day.
Operator
This concludes today's call. Thank you for attending today's presentation. You may now disconnect.
