Q3 2023 TrustCo Bank Corp NY Earnings Call

Participants

Michael M. Ozimek; Executive VP & CFO; TrustCo Bank Corp NY

Robert Joseph McCormick; President, CEO & Chairman of the Board; TrustCo Bank Corp NY

Scot Reynold Salvador; EVP of Commercial Banking; TrustCo Bank Corp NY

Presentation

Operator

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 achievements, statements, 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. 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 Investors Relations tab of our website, trustcobank.com. Please also note that today's event is being recorded. A replay of the call will be available for 30 days, and the 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, Chairman, President and CEO. Please go ahead.

Robert Joseph McCormick

Good morning, everyone, and thank you for joining the call. As the host said, I'm Rob Cormack, the President of TrustCo Bank. With me as usual are Mike Ozimek and Scot Salvador. We'll follow a regular format for the call. I will provide highlights. Mike, our CFO, will provide a detailed review of the numbers. and Scot will cover the loan portfolio, leaving time for questions at the end. Our second quarter results here at the bank are very strong. What differentiates us from others is something we are really proud of. We have not wavered from our business model, maintaining our tried and true lending practices and careful balance sheet management. While this may be feeling pressure to keep up with competitors' rates, we'll be borrowing to fund their growth, we remain focused on our own blueprint. We don't plan for just 3 months, 3 years ago and maybe longer. We knew the tide would turn and we kept our powder dry. That planning has enabled us to stay well capitalized, debt free and is now supporting organic loan growth.
Our portfolio reached an all-time high over the quarter, hitting a milestone of $5 billion with our industry-leading first mortgage product making up the lion's share. We strategically grew all aspects of our loan portfolio through responsible and choice lending. We have not sacrificed quality for quantity. In Q3, we saw nonperforming loans to total loans of just 0.36%, the best in at least 15 years as well as our seventh consecutive quarter for net recoveries. We continue to build upon our granular and diversified deposit foundation and have seen all categories of the portfolio rebound from the beginning of the year. Our average deposit relationship was $15,000, which is proof of the success of our relationship building focus. Our customers know that they can rely on our strength and stability through market ups and downs. Also during the quarter, we rolled out a new split to difference loan product which enables us to reprice lower interest rate loans while retaining those critical customer relationships.
In addition to the benefits of repricing, it works out great for customers who have felt trapped by their low rate mortgage. We have received great feedback on the initiative and is making TrustCo Bank a topic of conversation where we might not have been before. Overall, we expect that if the product takes off, will further contribute to the upward trend of our loan portfolio yield. As always, we are very proud of our substantial dividend, which we have paid every quarter since 1904. Our shareholders have been able to count on us through all economic conditions. Whatever comes next, TrustCo Bank is ready to capitalize on the opportunities presented. Now Mike will give us detail on the numbers. Scot will give color on the loan portfolio. and then we will take your questions. Mike?

Michael M. Ozimek

Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the third quarter of 2023. As we noted in the press release, the company saw a third quarter net income of $14.7 million, which yielded a return on average assets and average equity of 0.96% and 9.32%, respectively. Capital remained strong. Consolidated equity to assets ratio was 10.31% for the third quarter of 2023 compared to9.69% in the third quarter of 2022. The Book value per share at September 30, '23 was $32.80, up 6.2% compared to $30.89 a year earlier. Average loans for the third quarter grew 7.4% or $337.6 million to $4.9 billion for the third quarter of '22. Loan growth has continued to increase and occurred in all of our loan categories, leading the charge was our residential real estate portfolio, as always, which increased by $219.4 million or 5.3% in the third quarter of 23% over the same period in 2022. Average commercial loans increased $53.6 million. Home equity lines of credit increased $58.9 million and installment loans increased $5.7 million over the same period in 2022. For the third quarter of 2023, the provision for credit losses was $100,000. Retaining deposits has been a key focus during 2023. Although deposits were down compared to prior quarter, total deposits as of September 30, 2023, increased $41.6 million or $5.23 billion from the end of 2022. 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 $42.2 million for the third quarter of 2023, a decrease of $5.6 million or 11.7% compared to the same period in 2022. Net interest margin for the third quarter of '23 was 2.85%, down 31 basis points from the third quarter of '22. The yield on interest-bearing assets increased to 3.88% and up 64 basis points from 3.24% in the third quarter of 2022.
Our Financial Services division continues to be a significant recurring source of noninterest income. We had approximately $902 million of assets under management as of September 30, 2023. Now on to noninterest expense. Total noninterest expense net of ORE expense came in at $27.3 million, which is consistent with prior quarters. ORE expense net came in at an expense of $163,000 for the quarter as compared to an expense of $148,000 in the prior quarter. Given the continued low level of ORE expenses, we are going to continue to hold the anticipated level of expenses not to exceed $250,000 per quarter. Salary expenses down due to a decrease in overall salary expense and a decrease in our liability-based equity awards due to a lower stock price. All the other categories in noninterest expense were in line with our expectations for the third quarter. We would expect 2023's total recurring noninterest expense net of ORE expense to be in the range of $26.9 million to $27.4 million per quarter. Now Scot will review the loan portfolio and nonperforming loans.

Scot Reynold Salvador

Good morning, and thanks, Mike. For the third quarter, total loans increased by $73 million in actual numbers or 1.5%. Year-over-year, the increase was $331 million or 7.2%. This quarter marked a continuation of strong loan growth for the bank coming on the heels of an $87 million increase in the second quarter. The loan increases were spread among all loan categories. Residential loans increased by a combined $56 million with first mortgages increasing by $33 million and our home equity products climbing by $23 million.
Commercial loans increased by $17 million in the quarter. As previously stated, the combination of increased interest rates and some new personnel in our commercial loan area has allowed us to be a bit more active versus prior years. Overall purchase activity in our residential markets has slowed, reflecting nationwide trends. Increased interest rates have obviously played the largest role in this, although other factors such as the time of year also begin to come into play -- help offset this, we are putting a lot of focus into capturing a bigger piece of the existing pie in all our regions. Our status as a portfolio of lenders an advantage in this regard. One example, as Rob mentioned, is a current promotion whereby existing TrustCo mortgage customers who sell and purchase a new home can obtain a reduction off of current rates by maintaining their financing with TrustCo.
Interest rates continue to rise and we currently stand at (inaudible) for our 30-year base rate. The higher rates have continued to drive growth in our home equity products as people elect to stay and improve their existing home rather than purchase a new one or refinance our first mortgage. The loan backlog has come down somewhat from last quarter and year-over-year. This reflects both the current marketplace and time of the year. It does contain a good amount of new money, however, given almost a complete lack of refis and we expect to post continued growth in the quarter. The news on asset quality remains good. Nonperforming loans stand at $17.9 million as of September, down from $19.4 million in June and also down year-over-year. Nonperforming assets declined to $19.1 million from $20.8 million last quarter. A year ago, they stood at $19.4 million.
Charge-offs posted another small net recovery on the quarter and now total a combined $294,000 net recovery year-to-date.
Early stage delinquencies remained solid. The allowance for credit losses stands at 0.95% of total loans and 264% of nonperforming loans. This is up from a coverage ratio of 244% a year ago. Rob?

Question and Answer Session

Robert Joseph McCormick

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

Operator

Thank you. (Operator Instructions)
Okay. We have no questions registered. So I would like to hand back to Mr. McCormick for closing remarks.

Robert Joseph McCormick

Thank you for your interest in our company and joining us today, and have a great day.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.