TrustCo Bank Corp NY (TRST) Earnings Call Transcript

Good day, and welcome to the TrustCo Bank Corp Earnings Call and Webcast. [Operator Instructions] Before proceeding, we would like to mention that 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 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 or during today's call will discuss certain financial measures derived from our financial statements that are not determined in accordance with U.S. GAAP. The reconciliation of such non-GAAP financial measures to the most comparable GAAP figures are included in our earnings 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 1 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. Please go ahead.

Good morning, everyone, and thank you for joining the call. I'm Rob McCormick, the Chairman of TrustCo Bank. I'm joined today, as usual, by Mike Ozimek, our CFO, who will go through the numbers; and Kevin Curley, our Chief Banking Officer, who will talk about lending. Like a well-oiled and efficiently operating machine, all of the elements of the time tested TrustCo Bank business model worked together in a favorable market environment to produce another quarter of stellar financial results. Our loan and investment portfolios continued to reprice favorably with lower-yielding assets mature and were replaced by higher loan originations with and better yielding investments. The machine was fueled by growth in lower cost deposits, increased loan origination provides the outlet for the machines production. In combination, these elements resulted in increased net interest margin year-over-year, and of course, this was done without compromising credit quality. While all of that good work was being done, we continue to execute on our capital deployment strategy, primarily through share buybacks. And our buyback program began in 2020 and to date has seen the reacquisition of more than 2.3 million shares of company stock. The current phase of the program is to continue on pace and just completed, we'll have we will have repurchased nearly 16% of TrustCo's outstanding shares during '25 and '26. It is playing that we remain committed to the generation of meaningful and sustainable shareholder value. It is also point to see that we remain convinced that the best acquisition we can make is TrustCo Bank. We are also very pleased to have moved into the building in Longwood that we repurposed into our new regional headquarters for our operation in the Sunshine State. The great state of Florida is a key part of our success, and this new building enhances our visibility there and provides a foundation on which more great things can metro. Now Mike is going to go into details on the numbers, and then Kevin will take care of loans, and then we can answer questions if you have.

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the second quarter of '26. As we noted in the press release, the company continued to see strong financial results for the second quarter of '26, marked by increases in both net income and net interest income of TrustCo Bank during the second quarter of '26 compared to the second quarter of '25. This performance is underscored by rising net interest income and sustained loan and deposit growth across core lending and deposit categories. This resulted in second quarter net income of $17 million, an increase of 12.8% over the prior year quarter, which yielded a return on average assets and average equity of 1.04% and 10.22%, respectively. Capital remains strong. Consolidated equity assets ratio was 10.5% for the second quarter of '26 compared to 10.91% in the second quarter of '25. Book value per share at June 30, '26 was $38.53, up 48% compared to 36.5% a year earlier. We also repurchased 10.5% of TrustCo outstanding common stock under the 2025 and 2026 stock repurchase programs through the acquisition of over 1 million shares in '26 following the purchase of 1 million shares in 2025. We reinforce 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 the franchise and our focus on capital optimization. Credit quality continues to be consistent as we saw nonperforming loans modestly increased to $21.8 million in the second quarter of '26 from $17.9 million in second quarters of '25. Our continued full and solid underwriting within our loan portfolio and conservative lending standards positions us to manage credit risk effectively to the current environment. Average loans for the second quarter of '26 grew 3.8%, $197.5 million to $5.3 billion from the second quarter of '25 million, another all-time high. This uptick continues to reflect a strong local economy and increased demand for credit. For the second quarter of '26, provision for credit losses was $650,000 and the ratio of the allowance for loan losses to total loans was 1.01% as of '26 and 0.99% for June of '25. Our focus goes to be on traditional lending, which has enabled us to produce consistent high-quality recurring earnings. Retaining and growing deposits has been a key focus as we navigated through 2026. Total deposits ended the quarter at $5.7 billion. It was up $191 million compared to the prior year quarter. We leave the increase in these deposits compared to the same period in '25, continues to indicate strong customer confidence in the bank's competitive deposit offering. The bank's continued emphasis on relationship combined with the competitive product offerings, anginal capabilities has continued to a stable deposit base that supports ongoing loan growth and expansion. Net interest income was $45.6 million for the second quarter of '26, an increase of $3.8 million or 9.2% compared to the prior year quarter. Net interest margin for the second quarter of '26 was 2.87%, up 16 basis points from the prior year quarter. Yield on interest-earning assets increased to 4.27%, up 8 basis points from the prior year quarter. And then the cost of interest-bearing liabilities decreased to 1.79% in the second quarter of '26 from 1.91% in the second quarter of '25. The bank is well positioned to continue delivering strong net interest income performance even as the Federal Reserve contemplates rate changes in the months ahead. The bank remains committed to maintaining competitive deposit offerings laundering financial stability and continued support for our communities banking needs. Our Wealth Management division continues to be a significant recurring source of noninterest income. They had approximately $1.39 billion of assets under management as of June 30, 26. The majority of this fee income is recurring, supported by long-term advisory relationships and a growing managed assets. Additionally, as mentioned in the press release, the company marked its Visa Class C common stock to fair value accorded a gain of $844,000 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 $28.2 million, up $1.3 million prior quarter. The increase is primarily the result of higher employee benefit costs and professional fees in the current quarter. These expense categories are expected to return to normalized levels next quarter, consistent with historical quarterly trends. ORE expense net came in at an expense of $112,000 for the quarter as compared to $28,000 in the prior quarter. We're going to continue to hold the anticipated level of expense to not exceed $250,000 per quarter. All of the other categories of noninterest expense were in line with our expectations for the second quarter. We would expect '26 total recurring noninterest expense, net of ORE expense, to be in the range of $27.3 million to $27.8 million per quarter. Now Kevin will review the loan portfolio and nonperforming loss.

Thanks, Mike, and good morning to everyone. Our average loans grew by $197.5 million or 3.8% year-over-year. This is an improvement over last quarter's report of year-over-year growth of $158.9 million. The growth was centered in our residential loan portfolio with our first mortgage segment growing by $142 million or 22%, and our home equity was growing by $44.8 million or 10.4% over last year. In addition, our commercial loans grew by $13.4 million or 4.4% over last year. For this quarter, actual loans increased by $87.1 million compared to the first quarter. Purchase mortgage loans, including refinances, grew by $62.8 million. Home equity loans grew by $19.3 million and commercial loans were higher by $5.7 million for the quarter. During the second quarter, mortgage rates were lower in the beginning of the quarter. They increased slightly and have leveled off to a 6.25% to 6.5% range over the past weeks. Our mortgage origination activity showed solid momentum during the quarter. Purchase loan volume was steady throughout the quarter. Refinance activity was strongest earlier in the period as customers moved to lock in lower rates before market rates increased. As rates moved higher later in the quarter, refinance activity moderate. -- our home equity all products produced consistent demand in all our markets throughout the quarter. We continue to offer highly competitive mortgage products with our 30-year fixed rate loans and various ARM options. In addition, our home equity products continue to offer customers low-cost alternatives to other forms of credit, such as personal loans and credit cards. Overall, we are pleased with the loan growth in the quarter and remain committed to delivering strong results moving forward. Now moving to asset quality. As a portfolio lender, we originate loans to hold through maturity. This reinforces our disciplined approach to underwriting and risk management. Asset quality, the bank remains very strong. Our early-stage delinquencies in our portfolio continue to remain within their normal range. Charge-offs for the quarter amounted to a net recovery of $88,000, which follows a net recovery of $39,000 in the first quarter and a total of $317,000 in recoveries over the past year. Overall, we've had 6 straight quarters of net recoveries. Nonperforming loans were $21.8 million at this quarter end, $21.5 million last quarter and $17.9 million a year ago. Nonperforming loans to total loans was 0.4% for the quarter end compared to 0.41% last quarter and 0.35% a year ago. Nonperforming assets were $23 million at quarter end, versus $22.8 million last quarter and $19 million a year ago. At quarter end, our allowance for credit losses remained solid at $54.1 million with a coverage ratio of 29% and compared to $53 million with a coverage ratio of 240% at the end of the first quarter and $51.3 million and a coverage ratio of 286% a year ago. Rob?

Sorry, I'm hacking a little bit, but that's our story, and we're happy to take any questions you might have.

[Operator Instructions] Your first question comes from the line of Ian Lapey with Gabelli Funds.

Can we start with the -- just want to make sure, Rob, that I understood what you said. So the increase -- last quarter, you had guided to $26.7 million to $27.3 million, and it came in at 28.2%. And you said that was also nonrecurring things. Could you just go in again to what the extra expense on this quarter?

Yes, absolutely. So I mean, 2 big lines, salary employee benefits. About half of that was some salary increases that we pushed through and that will be recurring about half of that increase in salary and benefits are related to incentive comp programs that as the large piece of that, as our stock price continues to go up, we revalue those plans. Some of that expense pushes through that first quarter. So if stock price keeps going up, we would see that. But if it remains steady, that line item will go down to a more normalized level. Same thing with professional fees that pop a little bit in the quarter for some consulting, legal and accounting fees that won't continue to recur.

Okay. And then you said, now the guidance is $27.3 million to $27.8. And so is that increase? Is that basically what you said about the salary increases?