Earnings Call Transcript - TRST Q4 2024

Operator, Operator

Good day and welcome to TrustCo Bank Corp's Earnings Call and 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, which 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 risks and other 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 and are updated by our Quarterly Reports Form 10-Q. The forward-looking statements made in 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 US GAAP. 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. 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'd like to hand the call over to Robert J. McCormick, Chairman, President and CEO. Please go ahead.

Robert McCormick, CEO

Good morning, everyone, and thank you for joining the call. I'm Rob McCormick, the President of TrustCo Bank. I'm joined today by Kevin Curley, who will talk about lending, and Mike Ozimek, our CFO, who will provide detailed numbers. The results we report today reflect our organization's efforts during 2024, characterized by efficiency, strength, and the creation of shareholder value. These elements produced an efficiency ratio of 61.5%, capital of 10.84%, and a return on average equity of almost 7.5%, contributing to a net income of $48.8 million. In 2024, home equity lending, both lines and loans, presented the greatest opportunity. Our team leveraged our extensive branch network and sizable customer base to generate loan volume by tailoring offerings to customers who chose to improve their existing homes rather than buy new ones. This strengthened our relationships and enhanced our communities. Home equity volume exceeded purchase mortgage volume for the year. Through the third quarter of 2024, we were more efficient, better capitalized, and generated superior earnings than our peers. Our loan products are best-in-class and adaptable, thus entering 2025, we are liquid, well capitalized, and ready to lend without resorting to borrowings or brokered deposits. Looking ahead, we continue to invest in technology to enhance efficiency and improve customer experience across all business lines. Additionally, we are excited to offer our products and services to the cannabis industry, fitting as our branch network aligns with the needs of cash-intensive retail outlets. Our extraordinary credit quality supports our success, with non-performing loans to total loans remaining essentially flat year-over-year and net charge-offs at 0.01% this year, compared to 0.02% last year, demonstrating our strong underwriting as a portfolio lender. Now Mike will dive into the numbers and Kevin will provide an update on the loan portfolio. Then we can take your questions.

Michael Ozimek, CFO

Thank you, Rob, and good morning, everyone. I will review TrustCo's financial results for the fourth quarter of 2024. As noted in the press release, the company saw fourth quarter net income of $11.3 million, an increase of 14.6% over the previous year, yielding a return on average assets and average equity of 0.73% and 6.70% respectively. Capital remains strong with a consolidated equity to assets ratio of 10.84% for the fourth quarter of 2024 compared to 10.46% in the fourth quarter of 2023. Book value per share at December 31, 2024, was $35.56, up 4.8% compared to $33.92 a year earlier. Average loans for the fourth quarter of 2024 grew 2.1%, or $104.9 million, to $5.1 billion for the fourth quarter of 2023, another all-time high. Loan growth continues to surge, led by a home equity lines of credit portfolio, which increased $61 million or 17.9% in fourth quarter '24 over the same period in 2023. The residential real estate portfolio increased $34.9 million, average commercial loans increased $11.7 million or 4.3%, and installment loans decreased $2.6 million. For the fourth quarter of 2024, the provision for credit losses was $400,000, matching loan growth with no indications of decreasing loan credit quality. Our focus remains on traditional residential lending and conservative balance sheet management, enabling us to produce consistent, high-quality recurring earnings. Our investment portfolio remains a source of liquidity for loan growth and balance sheet flexibility. We held an average of $504 million in overnight investments during the fourth quarter of 2024, an increase of $43 million compared to the same period in 2023. Given current levels of cash and interest rate environment, we will continue to evaluate investing excess liquidity into the market. Retaining and growing deposits has been key throughout 2024, with total deposits ending the quarter at $5.4 billion, up $127 million compared to the prior quarter. Moving forward, our objective is to continue offering competitive products through aggressive marketing and differentiation. Net interest income was $38.9 million for the fourth quarter of 2024, an increase of $231,000 compared to the prior quarter, while net interest margin was 2.60%, down one basis point from the prior quarter. Yield on interest earning assets increased to 4.12%, up one basis point from the prior quarter, and the cost of interest-bearing liabilities increased to 1.97%. We've been able to lower rates on time deposits while still growing this product quarter-over-quarter, bringing down costs. On the funding side, total average deposits increased by $31.7 million or 0.6% for the fourth quarter of 2024 over the same period a year earlier. Our wealth management division remains a significant recurring source of non-interest income, with approximately $1.2 billion of assets under management as of December 31, 2024. Regarding non-interest expenses, total non-interest expense, net of ORE expense, came in at $27.7 million, up $1.7 million from the prior quarter, driven by higher occupancy expenses, equipment expenses, outdoor services, and advertising expenses. ORE expense net was $476,000 for the quarter compared to $204,000 in the prior quarter. We anticipate recurring non-interest expenses to be in the range of $27.5 million to $28 million per quarter, representing less than a 3% increase over levels in 2024. Now Kevin will review the loan portfolio and non-performing loans.

Kevin Curley, Lending Officer

Thanks, Mike, and good morning to everyone. Our fourth quarter average loans grew by $105 million or 2.1% year-over-year. This growth centered on our residential mortgages, which increased by $35 million, and our home equity loans also increased by $61 million or 17.9%. Additionally, our commercial loans grew by $11.7 million year-over-year. For the fourth quarter compared to the third quarter, actual loans increased by $27.2 million. Residential loans grew by over $21 million, with both first mortgages and home equity credit lines seeing increases. Commercial loans also increased by $6.6 million in the quarter. Overall, our residential activity trends remain consistent with those discussed in recent quarters. We are well-positioned in the market and aim to capitalize as market activity develops. As a portfolio lender, we have the flexibility to control pricing and offer various promotions to increase application volume. Rates in the market have increased recently, with our current rate at 6.875% for our base 30-year fixed rate loan, and competitive adjustable rate mortgages in the 6.25% to 6.75% range. Our home equity products continue to see steady demand as they are appealing to borrowers who may want to use their home's equity for various projects or large purchases. Overall, we are positive about our loan growth this quarter and remain focused on driving stronger results in 2025. Moving to asset quality, our asset quality remains strong. Non-performing loans were $18.8 million at quarter end, down from $19.4 million last quarter and just under $18 million a year ago. Non-performing loans now stand at 0.37% of total loans compared to 0.38% last quarter and 0.35% a year ago. Non-performing assets totaled $21 million as of December 31, down from $21.9 million last quarter and $17.9 million a year ago. Early stage delinquencies continue to be steady, with net charge-offs for the quarter amounting to $102,000, down from $222,000 in the third quarter. Year-to-date, total net charge-offs are only $230,000 as we saw net recoveries in the first and second quarters of 2024. At quarter end, our allowance for credit losses remained solid at $50.2 million, with a coverage ratio of 267%.

Robert McCormick, CEO

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

Ian Lapey, Analyst

Hi, Rob. Good morning. Congratulations on a good quarter and year.

Robert McCormick, CEO

Good morning, Ian. How are you?

Ian Lapey, Analyst

I'm doing well. Thanks.

Robert McCormick, CEO

Thank you. Good.

Ian Lapey, Analyst

So maybe just to start. In '24, you said the home equity provided the best opportunity for growth and the numbers show that. How are you thinking about '25 with the fixed rate mortgage at 6.875% that you mentioned? Is that tipping back to being more attractive or just talk about the trade-off there?

Robert McCormick, CEO

I have to tell you, I think optimism is returning to the real estate business, Ian. I'm not sure what you're seeing, but I believe we're conducting more pre-approvals this year than we have in the past 18 months. So we are encouraged — I am 61 years old, as you know, but we used to call it the spring market. That faded during the crazy real estate market we've been in, but I think we might see a spring market again. We are actively participating in many home shows and reaching out to real estate brokers to capture some purchase money mortgages. We're also optimistic about non-TrustCo refinances available. People eventually need and want additional funds.

Ian Lapey, Analyst

Yes. Thank you. On the NIM, we've had 100 basis points of cuts since September, but your NIM actually fell a little bit. What would the spot NIM be now as we're in January?

Michael Ozimek, CFO

I mean, we're holding and we're able to — we are repricing some of our CDs lower, which helps us. The Fed's cuts will bring the asset side down, but I think we're flattening out.

Ian Lapey, Analyst

So what are your current rates on CDs?

Kevin Curley, Lending Officer

We have six-month and nine-month CDs at 4.15% and 12-month CDs at 4%.

Ian Lapey, Analyst

Okay. And then on the expenses, the equipment expense and outsourced services jumped significantly both sequentially and year-over-year. Was there anything unusual in those lines that drove these increases?

Michael Ozimek, CFO

Yes. In the fourth quarter, we had a couple of locations we closed out for the year and installed new ATMs, which pushed the equipment expenses up. We also incurred some heightened expenses in outsourced services, but we don't expect these levels to persist.

Ian Lapey, Analyst

Okay. And lastly, credit quality looks good. You said earlier delinquencies are steady. What worries you as you look forward to '25 and '26? What are you monitoring on the credit quality side?

Robert McCormick, CEO

We're not concerned about credit quality at all, Ian. We're comfortable where we stand. We maintain a modest commercial portfolio and are reasonable with our lending standards, so we're not apprehensive about credit quality.

Ian Lapey, Analyst

Okay. Good to hear. Thanks, guys, and I'll talk to you next quarter.

Robert McCormick, CEO

Thank you.

Ian Lapey, Analyst

Okay.

Michael Ozimek, CFO

Thank you. Thanks, Ian.

Operator, Operator

Thank you very much. We'd now like to open the lines for Q&A. Our first question comes from Ian Lapey of Gabelli Funds. Ian, your line is now open.

Gregory Roeder, Analyst

Hi, guys.

Robert McCormick, CEO

Good morning, Greg.

Gregory Roeder, Analyst

Congrats on a very strong quarter, especially in a challenging funding environment. You mentioned having dry powder, not being nervous about credit quality, and being underweight in commercial loans. As other lenders pull back from commercial real estate, do you see an opportunity to increase your exposure there?

Robert McCormick, CEO

Absolutely. You won't see us with a $1 billion commercial loan portfolio, but I would like to increase it to about $300 million or $325 million in the long term. We're a little contrarian; we prefer slow and steady growth. We see opportunities in 2026 and 2027 and would like to seize those opportunities.

Gregory Roeder, Analyst

Good to hear. My last question is about the cannabis opportunity. Is it confined to certain states? I know New York and Massachusetts but not much about New Jersey or Florida's laws. How does that work?

Robert McCormick, CEO

We have it open to all states in our market; however, Florida is still medical only. The most activity has been in New York and Massachusetts so far.

Gregory Roeder, Analyst

So you're essentially going to bank on the deposit side for the small retail operators?

Robert McCormick, CEO

Yes, that’s correct.

Gregory Roeder, Analyst

Okay. That's it. Thanks a lot. Good luck in '25.

Robert McCormick, CEO

Thank you.

Michael Ozimek, CFO

Thank you, Greg.

Operator, Operator

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

Robert McCormick, CEO

Thank you for your interest in our company. We hope you have a great day. See you next quarter.

Operator, Operator

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