TRST - NASDAQ

Good day and welcome to TrustCo Bank Corp Earning Call and Webcast. All participants will be on listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Before proceeding, we'd like to mention this presentation may contain forward-looking information about TrustCo Bank Corp 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 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 as 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 application 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 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'd like to hand the call over to Robert J. McCormick, Chairman, President and CEO. Please go ahead.

Good morning, everyone, and thank you for joining the call. I'm Rob McCormick, the President of TrustCo Bank. I'm joined today as usual by Kevin Curley, who will talk about lending, and Mike Ozimek, our CFO, who will go into detail on the numbers. The results that we report today reflect our organization's efforts during 2024, which were characterized by achievement of efficiency, the preservation of strength, and the creation of shareholder value. These elements came together to produce an efficiency ratio of 61.5%, capital of 10.84%, and return on average equity of almost 7.5%, all contributing to a net income of $48.8 million. In 2024, home equity lending, both lines and loans presented the greatest opportunity. Our team dug deep and leveraged our extensive branch network and sizable customer base to create loan volume where there otherwise is very little by tailoring offerings to new and existing customers who elected to improve their existing homes rather than buy a new one. This strengthened our customer bonds and enhanced our communities within our footprint. Home equity volume exceeded purchase mortgage volume for the year. Through the third quarter of 2024, we were more efficient, both overall and in the cost of funds, better capitalized and generated better earnings than our peers. Like our performance, our loan products are best-in-class and adaptable. Thus, we enter 2025 liquid, well capitalized and ready to lend. And we come to this position without the resort to borrowings or brokered deposits. Also looking ahead, we continue to invest in technology, intended to further enhance efficiency and improve the customer experience across all business lines. Additionally, we have undertaken an exciting new venture by offering our products and services to the business in the cannabis industry. TrustCo is particularly well suited to this industry, because of our extensive branch network dovetails with the needs of cash intensive retail outlets. We would be remiss if we failed to highlight the extraordinary credit quality that supports our success. Non-performing loans to total loans remain essentially flat year-over-year. Likewise, net charge-offs to average loans are 0.01% this year compared to 0.02% last year. This is a testament to our underwriting and the commitment we make to our customers as a portfolio lender. Now Mike will dive into the numbers. Kevin will provide an update on the loan portfolio. And then we can take your questions. Mike?

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the fourth quarter of 2024. As we noted in the press release, the company saw fourth quarter net income of $11.3 million, an increase of 14.6% over the prior year quarter, which yielded a return on average assets and average equity of 0.73% and 6.70% respectively. Capital remains strong. Consolidated equity to assets ratio was 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 has continued to increase and leading the charge was home equity lines of credit portfolio, which increased $61 million or 17.9% in fourth quarter of '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 over the same period in 2023. For the fourth quarter of 2024, the provision for credit losses was $400,000. The provision recorded for the fourth quarter matched loan growth with no indications of decreasing loan credit quality. Our focus continues to be on traditional residential lending and conservative balance sheet management, which has continued to enable us to produce consistent, high-quality recurring earnings. Our investment portfolio is and always has been a source of liquidity to fund loan growth and provide flexibility for balance sheet management. As a result, we held an average of $504 million of overnight investments during the fourth quarter of 2024, an increase of $43 million compared to the same period in 2023. Given the current levels of cash and the current interest rate environment, the bank will continue to evaluate investing excess liquidity into the market. Retaining and growing deposits has been a key focus throughout 2024. Total deposits ended the quarter at $5.4 billion and was up $127 million compared to the prior quarter. 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 $38.9 million for the fourth quarter of 2024, an increase of $231,000 compared to the prior quarter. Net interest margin for the fourth quarter of 2024 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. The cost of interest bearing liabilities increased to 1.97% in the fourth quarter of '24 from 1.94% in the third quarter of 2024. Throughout 2024, we have been able to lower the rates offered on time deposits, while retaining and growing a significant portion of that product quarter-over-quarter, which continue to bring down the cost of time deposits. The bank has seen the erosion of margin to begin to flatten in the latter half of 2024. On the funding side of the balance sheet, total average deposits increased $31.7 million or 0.6% for the fourth quarter of 2024 over the same period a year earlier. 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 December 31, 2024. Now onto non-interest expense. Total non-interest expense, net of ORE expense, came in at $27.7 million, up $1.7 million from the prior quarter. The increase is a result of higher costs and net occupancy expense, equipment expense, outdoor services and advertising expense. ORE expense net came in at an expense of $476,000 for the quarter as compared to $204,000 in the prior quarter. Given the one-time charge-offs experienced this quarter, we are not -- 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 fourth quarter. We would expect 2024's total recurring non-interest expense, net of ORE expense to be in the range of $27.5 million and $28 million per quarter. This represents less than a 3% increase over the levels in 2024. Now Kevin will review the loan portfolio and non-performing loans.

Thanks, Mike, and good morning to everyone. Our fourth quarter average loans grew by $105 million or 2.1% year-over-year. The growth centered on our residential mortgages, which increased by $35 million over last year and our home equity loans also increased by $61 million or 17.9%. In addition, our commercial loans grew by $11.7 million over last year. For the fourth quarter, as compared to the third quarter, actual loans increased by $27.2 million. Residential loans increased by over $21 million with both first mortgages and home equity credit lines posting increases. Commercial loans were also higher in the quarter by increasing $6.6 million. Overall, residential activity trends remain similar to those discussed in recent quarters. We remain well positioned in the market and seek to capitalize as market activity develops. As a portfolio lender, we have the flexibility to utilize our control on pricing and the ability to offer various promotions to increase application volume. Rates in the market have increased in recent weeks and our current rate is 6.875% for our base 30-year fixed rate loan. In addition, we have very competitive adjustable rate mortgages with rates in the 6.25% to 6.75% range. Our home equity products continue to see steady demand as they remain attractive to many borrowers that may have low rate mortgages, but they may want to use their home's equity for various projects or large purchases. Overall, we are positive about our loan growth in the quarter and remain focused on driving stronger results in 2025. Moving to asset quality. Asset quality at the bank remains consistently strong. Non-performing loans were $18.8 million at quarter end, $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 versus $21.9 million last quarter and $17.9 million a year ago. Early stage delinquencies also continue to be steady. Net charge-offs for the quarter amounted to $102,000 down from the third quarter to $222,000. Our year-to-date, total net charge-offs are only $230,000 as we posted 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% compared to $50 million with a coverage ratio of 257% at the end of September and $48.6 million at a coverage ratio of 275% at year-end 2023. Rob?

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

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

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

Good morning, Ian. How are you?

I'm doing well. Thanks.

Thank you. Good.

Yes. So maybe just to start. So in '24, you said the home equity provided the best opportunity in '24 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 sort of the trade-off there?

I got to tell you, I think optimism is coming back into the real estate business, Ian. I don't know what you're seeing, but I think we're doing more pre-approvals this time, this year than we have in the past probably 18 months. So we're very encouraged about, I'm 61 years old, I think you know that. But we used to call it the spring market and that kind of faded during a crazy real estate market that we've been in for a period of time. But I think we may end up with a spring market again. So we're actively participating in a lot of home shows and calling on a lot of real estate brokers and things like that in an effort maybe to capture some purchase money mortgages. So, I guess, we're optimistic about purchase money mortgages. We're also optimistic, Ian, about some of the non-TrustCo refinances that are out there. We have a pretty good program for that and eventually people need and want some additional funds.

Yeah, okay.

Hope that gives you a flavor on where we're at.

Yes. Thank you. On the NIM, so we had 100 basis points of cuts since September, but your NIM actually fell a little bit. What would sort of, I mean, not a lot, but what would the spot NIM be now as we're in January?

I mean, we're holding and we're able to -- we are repricing some of our CDs down, right. So that's helping us out. And obviously, on the other side, I mean, if the Fed keeps cutting, that will bring the asset side down, but we're -- I think we're flattening out.

So what are your current rates on CDs?

We have six and this is Kevin Curley. We have six months and nine months at 4.15% and 12 months at 4%.

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

Yes. Throughout the third or fourth quarter, we had a couple of locations that we kind of -- we just -- we cleaned up -- we closed out for the year branches that we left. We've also installed some new ATMs, we put those into service. So some existing fit ups that we are amortizing we wrote off. So those are -- they're pushing the equipment expense line item up, outsourced services and just some expenses that hit the fourth quarter. So we don't expect those to continue at that level.

Okay. And then maybe last one. Credit quality looks good. I think you said earlier delinquencies are steady. What are you worried about as you look forward to '25 and '26? What are you watching on the credit quality side?

We're not concerned about credit quality at all, Ian. We're pretty comfortable with where we're at. We keep a relatively modest commercial portfolio for a company of our size. We've always been pretty reasonable with regard to our lending standards and we're not nervous about credit quality at all.

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

Thank you.

Okay.

Thank you. Thanks, Ian.

Thank you very much. [Operator Instructions] Our next question comes from Greg Roeder of Adirondack Funds. Your line is now open, Greg.

Hi, guys.

Good morning, Greg.

Congrats on a very line on very challenging funding quarter. You mentioned you had dry powder, you're not nervous about credit quality, you're very underweight commercial loans in your book. And I'm curious as to -- as the other lenders are kind of pulling back from commercial real estate, whether it'd be non-owner occupied or small unique multifamily deals or things like that. Do you see the opportunity to kind of increase your exposure there?

Absolutely. I don't think you'll ever see us with $1 billion commercial loan portfolio, Greg, but I certainly wouldn't mind pushing that up a significant number, $300 million or $325 million, something like that long-term. But again we're a little bit contrarian. We like slow and steady. I think you know that about us. And we won't get crazy over it. But if there are opportunities, we think, and we think there will be, just so you know, especially in '26 and '27, and we'd like to seize that opportunity to grab more of that if we could.

Good to hear. And my next question, my last question is on the cannabis opportunity. I'm very curious about that. Is it confined to certain states? I know New York State and Massachusetts and I don't really know much about New Jersey or Florida in terms of their laws and rules and so forth. And I'm curious as to how that works?

We have it open to all states right now in our entire market, but Florida is still medical only and the most activity we've had is New York and Massachusetts so far, right.

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

Yes, sir. Yes, sir.

Okay.

Some of them are not --

And, obviously, no way. Oh, yeah.

No, none yet. Yeah, right.

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

Thank you.

Thank you, Greg.

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

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