Earnings Call Transcript - TRST Q2 2024

Operator, Operator

Good day, and welcome to the TrustCo Bank Corp Earnings Call Webcast. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Before proceeding, we would like to mention that this presentation may contain forward-looking information about TrustCo Bank Corp New York, 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 preceded 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-Q. The forward-looking statements made on this call are only valid as of the date 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 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 today's 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 over the conference call to Mr. Robert J. McCormick, Chairman, President, and CEO. Please go ahead.

Robert McCormick, President and CEO

Good morning, everyone, and thank you for joining the call. I'm Rob McCormick, 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 and 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 are seeing early signs of return to normalcy in the housing markets, and our experience as far as 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 with 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 as buyers are active again. Upstate is essentially flat year-over-year. Indicators suggest the housing 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, shows signs of success in what we have seen margin improvement or 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 was 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 the value differentiated TrustCo 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 on them, and our shareholders realize the value they generate. It also bears emphasis that all these results were achieved without resorting to inappropriate deposits or borrowing. We have no debt on our books at a time when some banks struggle to turn a profit. We believe that skies are beginning to clear, and as we look forward to the balance of the year, Mike will bring detail on the numbers. Kevin will give us color on the loan portfolio, then we will take your questions if you have any.

Michael Ozimek, CFO

Thank you, Rob, and good morning, everyone. I'll now review TrustCo's financial results for the second quarter of 2024. As we noted in the press release, the company saw second quarter 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. The consolidated equity to assets ratio was 10.73% for the second quarter of 2024 compared to 10.23% in the second quarter 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 second quarter of 2024 grew 3.8% or $182.2 million to $5 billion from the second quarter of 2023, which is an all-time high. Consequently, overall loan growth has continued to increase, leading the charge as the residential real estate portfolio, which increased by $89.9 million or 2.1% in the second quarter of 2024 over the same period in 2023. Average commercial loans increased by $31.5 million or 12.7%. Home equity lines of credit increased by $61.1 million or 20.1%, and installment loans decreased by $339,000 or 2.2% over the same period in 2023. For the second quarter 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 at the bank through aggressive marketing and product differentiation. Net income was $37.8 million for the second quarter of 2024, an increase of $1.2 million or 3.3% compared to the prior quarter. Net interest margin for the second quarter of 2024 was 2.53%, up 9 basis points from the first quarter of 2024. Yield on earning assets increased to 4.06%, up 7 basis points from 3.99% in the first quarter of 2024. The cost of interest-bearing liabilities increased to 1.97% in the second quarter of 2024 from 1.99% in the first quarter of 2024. Our Wealth Management division continues to be a significant recurring source of noninterest 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 noninterest expense. Total noninterest 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 will continue to hold the anticipated level of expenses to not exceed $250,000 per quarter. All other categories of noninterest expense were in line with our expectations for the second quarter. Now, Kevin will review the loan portfolio and nonperforming loans.

Kevin Curley, Executive Vice President & 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 second quarter actual loans increased by $33 million. Residential loans increased by $31 million with both first mortgages and home equity products seeing increases. Additionally, 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 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 Phase 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. Nonperforming loans decreased to $19.2 million versus $19.4 million last year. Nonperforming loans now stand at 0.38% of total loans versus 0.40% a year ago. Nonperforming assets totaled $21.5 million as of June 30 compared to $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.

Robert McCormick, President and CEO

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

Operator, Operator

We'll now begin the Q&A segment of the conference. Our first question comes from Ian Lapey of Gabelli Funds. Ian, your line is now open.

Ian Lapey, Analyst

Hi, good morning, Rob and team, congratulations on a good quarter. It's great to see the net interest margin expanding after dropping several quarters in a row. I'm curious, you benefited from a lower cost of deposits. Assuming no Fed rate decreases this quarter, do you think you can still drive the cost of deposits down this quarter based on what repricing trends you're seeing?

Robert McCormick, President and CEO

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

Ian Lapey, Analyst

Okay…

Robert McCormick, President and CEO

Because you knew that, Ian. I don't know.

Ian Lapey, Analyst

Yes, I know. The fees for services to customers were down sequentially and year-over-year, fairly significantly in double digits. Is there anything unusual going on there?

Robert McCormick, President and CEO

The only outlier I would mention is NSF fees. We have a specific way we calculate and collect these fees, and while some other fees, particularly in wealth management, have seen significant growth, NSF fees have been a bit higher this year compared to previous months. However, I'd say that's really the only direct impact we've observed on fees over this 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 McCormick, President and CEO

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

Kevin Curley, Executive Vice President & Chief Banking Officer

That sounds about right.

Robert McCormick, President and CEO

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

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 McCormick, President and CEO

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

Ian Lapey, Analyst

Okay. Great. Congratulations again.

Robert McCormick, President and CEO

Thank you.

Operator, Operator

We currently have no further questions. Therefore, I will hand back to our speaker, Rob McCormick for closing remarks.

Robert McCormick, President and CEO

Thanks for joining us this morning. A special shout out to Troy Heidenberg, by the way, on the call. Have a great day.

Operator, Operator

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