Good day, and welcome to the TrustCo Bank Corp Earnings Call and Webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero on your keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your question, you may press star and two.
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.
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 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 one year, as described in our earnings press release. At this time, I would like to turn the conference over to Mr. Robert J. McCormick, Chairman, President, CEO. Please go ahead.
Morning, everyone, and thank you for joining the call. As the host said, I'm Rob McCormick, President of TrustCo Bank. I'm joined as usual with Scott Salvador and Mike Ozimek. Scott will provide color on lending and credit quality, and Mike will follow my comments with detail on the numbers. In 2023, we crossed an important milestone. Our loan portfolio surpassed $5 billion. During the year, we grew residential loans over $192 million and grew our commercial portfolio by over $50 million.
We are very happy to report that our loan growth was accomplished without borrowing or broker time deposits. While many see merit in these devices, we think the better practice is funding loan growth from our deposits. That's the TrustCo way. On the subject of deposits, it is noteworthy that our team managed a difficult year very well. Because they had already done the hard work of establishing customer relationships, our bankers were able to grow our total deposits.
While some funds shifted from core to time, the important thing is we kept the customer, retained the deposits, and created the opportunity for funds to flow back into core. Of course, the resulting increase in cost of funds affected our margin. The effect was less than it would have been had we borrowed or purchased deposits. In other words, in classic TrustCo fashion, our team turned a potential negative into a positive. Also, in 2023, we cleaned up some things that could have hampered us in the future. Like many banks across the country, we were faced with litigation involving overdraft fees.
We chose to resolve these matters in the way that best benefits our customers and shareholders. Although final court approval is pending, we consider it all resolved and that matter behind us. We also took a hard look at our branch network and made the decision to close three locations that did not meet our expectations. We are leaner and more efficient coming into 2024. Also worthy of comment is the fact that our credit quality remains extraordinary. Non-Performing Assets to total assets were 0.29% at year-end. That is the lowest this metric has been in over 17 years.
Again, quite an accomplishment by our team in a challenging environment. Finally, as noted in the press release, all of this good work springs from our rock-solid capital position. We took advantage of investment opportunities that were in line with our strategy, preserving capital and maintaining maximum flexibility.
Because of this, we had cash on hand to fund our loan growth and did not need to chase higher price deposits. No one knows exactly where rates will go or what other factors might come up this year, but we are confident in our position and ready to capitalize on opportunities that arise. Now, Mike will give us detail on the numbers, Scott will cover lending, and then we'll take your questions. Mike?
Thank you, Rob, and good morning, everyone. I will now review TrustCo's financial results for the fourth quarter of 2023. As we noted in the press release, the company saw a year-to-date net income of $58.6 million, which yielded a return on average assets and average equity of 0.97% and 9.46%, respectively. Capital remains strong. Consolidated equity to assets ratio was 10.46% for the fourth quarter of 2023, compared to 10% for the fourth quarter of 2022. Book value per share at December 31st, 2023, was $33.92, up 7.5% compared to $31.54 a year earlier.
Average loans for the fourth quarter of 2023 grew 6.6% or $309.9 million- $5 billion from the fourth quarter of 2022, an all-time high. Consequently, loan growth has continued to increase and occurred in all of our loan categories, and leading the charge was the residential real estate portfolio, as always, which increased by $192.2 million or 4.26% in the fourth quarter of 2023 over the same period in 2022. Average commercial loans increased $50.5 million or 22.6%.
Home equity lines of credit increased to $61.8 million or 22.2%, and installment loans increased $5.5 million or 50.3% over the same period in 2023. For the fourth quarter of 2023, the provision for credit losses was $1.35 million. The additional provision this quarter is a reflection on the current economic environment and not an indication of existing credit issues at the bank. Retaining deposits has been a key focus for 2023. Although core deposits were down compared to prior year, total deposits as of December 31, 2023, increased to $158 million- $5.35 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. As we have mentioned, we understood the big inflows of deposits during the pandemic were temporary, and that is why we did not invest that liquidity into securities or loans, but retained that liquidity on the balance sheet for when that depositors were to absorb those funds. This gave us the flexibility to strategically price core deposits while retaining core customers.
Net interest income was $38.6 million for the fourth quarter of 2023, a decrease of $10.6 million, or 21.5% compared to the same period in 2022. The interest margin for the fourth quarter of 2023 was 2.6% compared to the fourth quarter of 2022. Yield on interest earnings to assets increased to 3.93%, up 39 basis points from 3.54% in the fourth quarter of 2022.
The cost of interest spending to liabilities increased to 1.72% in the fourth quarter of 2023 from the fourth quarter of 2022. We continue to be optimistic as we enter 2024. The majority of our CD portfolio has a three to nine -month maturity and will give us the opportunity to reprice these CDs in the near term as rates potentially fall. Our wealth management division continues to be a significant recurring source of non-interest income. They had approximately $967 million of assets under management as of December 31, 2023. Now on to non-interest expense. Total non-interest expense, net of ORE expense, came in at $28.8 million, up $1.5 million from the prior quarter.
As mentioned in the earnings release, this increase is primarily the result of non-recurring expenses for a litigation settlement and also for branch closures. This was offset by decreases in various other categories of expenses. ORE expense, net, came in at an income of $12,000 for the quarter, as compared to the expense of $163,000 in the prior quarter. Given the continued low level of ORE expenses, we're going to continue to hold the anticipated level of expense not to exceed $250,000 in the 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 remain in the range of $26.9 million-$27.4 million. We are optimistic of expenses in 2024. Now, Scott will review the loan portfolio and non-performing loans.
Good morning, everyone. Thanks, Mike. Total loans for the fourth quarter increased by $43 million in actual numbers of 0.9%. Year-over-year, the increase was $270 million, or 5.7%. Residential loans again led the increases with a total of $37 million in quarterly growth. This was split between $22 million in first mortgages and $15 million in a home equity product. The full year showed similar trends, with $160 million of first mortgage growth and $62 million in home equities.
Commercial loans continued to grow, increasing by $5 million on the quarter and by $43 million year-over-year. Overall, residential activity and market trends remain similar to those discussed in the most recent quarters. We continue to post solid net growth in our first mortgage product, although overall purchase activity is reflective of nationwide trends and is slower than in prior year. The midwinter holiday period is, of course, also a slower time of year, although we expect activity to pick up as we begin to enter the early stages of the new season.
The recent decrease in interest rates, although modest, is also a positive factor, which should help overall activity. The home equity products continued to perform well overall, with a good amount of activity and net growth. The loan backlog is down from quarter end, which is normal for this time of year, and also down year- over- year. This should begin to build as we progress forward and overall activity increases.
Interest rates have come down somewhat, as mentioned, and we currently stand at 6.375% for our base 30-year fixed rate. We always have a variety of promotions and product enhancements we are working on. We expect to utilize our status as primarily a portfolio lender to help spur activity and increase growth. Asset quality remains strong overall. Non-performing assets totaled $17.9 million as of 12/31. This is down from $19.1 million in September and $19.6 million a year ago.
Non-performing loans have remained relatively flat at $17.7 million, down approximately $200,000 from last quarter and up about the same amount from a year ago. This total equates to 0.35% of non-performing loans to total loans, down slightly from 0.37% the prior year. Net charge-offs for the quarter totaled $248,000. For the full year, our charge-offs equated to a net recovery of $46,000. The loan loss allowance now stands at 0.97% of total loans as of year-end. Finally, the coverage ratio or allowance for credit losses to non-performing loans was 275% in December, compared to 263% a year ago. Rob?
That's our story, and we're happy to answer any questions any of you might have.
Thank you. As a reminder, if you would like to ask a question today, you may do so now by pressing star, followed by the number one on your telephone keypad. If you change your mind and would like to be removed from the queue, please press star and then two. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. Our first question comes from the line of Alex Twerdahl with Piper Sandler. Alex, please go ahead. Your line is now open.
Good morning, guys.
I was just first hoping that maybe you could, sort of just help us get a sense for how the NIM might react to some Fed rate cuts. I think the first one is now modeled in for May, according to the forward curve. And as you kind of think about the CDs that, Mike, you alluded to repricing, you know, relatively quickly versus some of the assets that are more tied to the shorter end of the curve, you know, like, how should we expect the NIM to react to the first couple cuts, you know, if and when we get them?
We've already, we've already started backing CD rates down from their high, Alex. And, most people are going very short with regard to CDs. So we're optimistic with regard to repricing those to current market conditions at a lower rate later in the year. It's interesting, if you offer a four just a 4.9% CD for three months or a, a 4.75 for six to nine months, everybody takes the 4.90. So it, it's interesting to watch how the consumer is reacting to that. And, I do hope we are optimistic with regard to repricing deposits through the balance of the year.
Okay. So, I mean, I take from your tone that you'd expect that sort of the pace of repricing of the deposits, the rate which accelerated a little bit in the fourth quarter, that that should abate in the first quarter. Is that reasonable expectation?
That would be the hope.
Okay. And then, when I look at the ACL, went up about two basis points during the quarter. And I think you alluded to just some macro, some changes in macro forecasts. You know, what specifically, I guess, is it one geography versus the other? Or I guess, what specifically, has been driving that ACL? And is that something that, I guess, should creep higher a little bit, you know, as maybe a little bit more uncertainty develops in 2024?
Well, it certainly could creep higher if uncertainty continues. I can tell you that it is, you can see the non-performing numbers are, they're better. I mean, they're really are flat, so that's not what's driving the calculation. It is, however, some of the macro numbers, as you alluded to, on some of the unemployment forecasts, some of the housing numbers, that type of thing. That's what drove it a little bit in the fourth quarter.
So, if to the extent that that gets worse, we could see a little more. But I think that was a healthy provision for the fourth quarter. And I don't see us trending well above 1%, but I think so I'm comfortable where we are now. We've been in a net recovery position for a very long period of time now. Right. Correct. That's correct. Yep.
Yeah. I guess just back to sort of the deposit strategy. You guys have always kept a pretty healthy level of cash on the balance sheet, and that looks like it grew into the end of the year. As I think about that, just relative to the amount of capital you have, it seems like you have so much capital that gives you a lot of flexibility to sort of create liquidity if needed. You know, I guess, do you need to carry such a high level of cash, or is that something that you know maybe can run down and give you a little bit more just a little bit more flexibility with deposit pricing and maybe a little bit more aggressiveness you know in lowering your deposit costs as you know as maybe we're now at a peak in rates?
A s much or more about that than we do. Liquidity certainly keeps the wolves off the door and gives you great flexibility to do what you have to with regard to deposit pricing. So I wouldn't want to see a crazy increase in cash levels, but where we're at right now is not a bad position for the economic conditions and some of the things we're facing. The industry.
Okay. And then just final, final question for me, just on expenses. You know, you guys talked about closing three branches and making some tough decisions. Obviously, it's a challenging revenue environment, so that makes a lot of sense. Are there more, are there more initiatives underway? I mean, I know you gave the guidance for the year, but, you know, are there more things you're looking at, you know, if the revenue environment remains challenged to be able to trim expenses?
Yeah. There are a number of relocations that are pending right now in our branch network, not necessarily closures. Every branch that comes up for maturity is evaluated, and all options are open at that point in time. An analysis is done on profitability and influence on the company and everything else, and a decision and a risk assessment is made, and then the decision is made whether we should continue with that lease or not. We have two or three pending relocations right now that we think are great opportunities for our company. Just like we did with Wilton last year.
If you're, I don't know how closely you track us, but we moved our Wilton branch up the road next to a very popular convenience store, and it's been a great move for us, out of, out of a former enclosed mall. So those types of things are opportunities for us, and we're very happy to take advantage of them. We have further consolidation you'll see in our Rotterdam locations. We're closing a branch there and selling that, so you'll see more coming.
Okay, that's helpful. And actually, one more question, if I could, just on capital.
Sure, Alex.
You guys have a pretty healthy level of TCE stock, still trading below tangible book value. Is the buyback something that you would put back on the table, in the near term?
Yeah. We like the idea of the buyback. You know, we have an approved program, Alex, and we've been active in the past with regard to buybacks and we like that idea, especially with regard to book value.
Okay. Great, appreciate you taking my questions.
Thank you.
Our next question comes from the line of Ian Lapey with Gabelli Funds. Ian, please go ahead.
Hi, good morning, Rob. Congrats on a solid year in a tough, tough environment.
Good morning, Ian.
Good morning. A few questions. First, you talked last quarter about Split the Difference loan product. Can you give an update on how that's going?
It was not very well received, Ian, and we kind of walked away from that. I was actually shocked how poorly received it was. I do have to say, if you had talked to our mortgage originators, they would say it did introduce us to questions and comments on a lot of real estate transactions, but we didn't get a lot of people to bite on it.
Okay. Yeah, it seemed like a sensible thing, but okay.
I thought so, too.
Next, yeah, on credit, obviously terrific $46,000 in net recovery. What do you expect, though, over the next couple of years for charge-offs? I mean, I assume that it can't stay this good, but when you're underwriting, you know, what would be a good expectation for charge-offs?
You've been with us for several years. We're a pretty conservative company, Ian, and I certainly agree, economic conditions and some of the changes, could, could drive a little bit more with regard to charge-off, but we don't see them skyrocketing. Our backlog and our shorter-term, delinquencies are not climbing. We have a very good handle on our collections, and, we just don't see them skyrocketing over the near term or really even increasing markedly over the near term.
So I think we're pretty comfortable with where we're at. As far as the net recovery, we've been in a net recovery position for so long now, excuse me, I don't know how long that can continue, but we don't, we don't see that turning out turning dramatically to a significant loss.
Okay. Great. And then lastly, so you've got about $238 million in residential mortgage-backed securities. And I know this is, most other banks have much more proportionally, but why would you buy any of these, given that your, you know, the core business is to hold fixed-rate mortgages? Maybe that's.
And generally, what you're saying.
Why, why buy?
Yeah.
Excuse me?
Generally, we agree with what you're saying, that, but we see good opportunities in the mortgage backs, and that's when we jump in and out of them. Sometimes along your line of thinking, the agencies work pretty well for us, but there have been opportunities to grab some rate on mortgage backs and have jumped in. But, I mean, the bank's portfolio is really a big mortgage-backed security, so generally speaking, we agree with you.
Right. So why not then, because I've been struggling with all banks owning this security, given, you know, short-term funding. So for you, it looks like yours are yielding about 2.3%. Why wouldn't you sell those and get a tax refund, and then you could reinvest in either keeping it in cash or one to two -year treasuries earning, you know, double, and then position yourself? You know, as you said in the release, you know, there could be a number of different interest rate environments. We don't really know, but it seems like that would protect you from a risk management standpoint as well.
That certainly gets tempting with the way the rate situation is right now, and we do evaluate that pretty regularly. We've looked at that portfolio a number of times and what the tolerance is for that loss. But overall, we're pretty comfortable with where we're at, but any opportunity we have to do something like that, we would try and take advantage of. You want to add any color to that, Mike?
Oh, I agree with you. We definitely look at it. I mean, when we've looked at it in the past, you know, the loss that would generate when we bought higher securities, you know, if you were to go out and buy higher securities, it was just longer than what, you know, I guess our.
Payback
O ur tolerance was and our payback window, we thought was appropriate. So, but we definitely look at that. We've looked at that in the past.
Certainly, others have done that, Ian.
Okay, great.
Okay.
Yeah, no, I just, I've been surprised with all, how much? And like I said, you've done much better than the vast majority of others, but it just seems like a strange investment for a bank to make. Anyway.
Thank you.
Okay. Well, great. Thanks, guys. And again, congrats on a good year.
Thanks.
Thank you.
Same to you.
Our next question comes from the line of Greg Roeder with Adirondack Funds. Greg, please go ahead. Your line is open.
Good morning. Hey, just a question on time deposits. Good morning. Time deposits in the quarter were up, like, 16%, sequentially. Total deposits were up for the first time, you know, meaningfully. So I'm curious, is you saying that it's a move from core to time, and I get that, but it was probably a little bit more than that. I'm just curious is if you could provide some more colors to, you know, new accounts, bigger accounts. Did you go out longer in, on the term?
Well, we're very much relationship driven, Greg. So a lot of the time deposit accounts come with the requirement for core. And I said in my part of the presentation that we work with our existing customers and work those relationships as much as we possibly can, and work our customer base and our portfolios to see who has what product and try and cross-sell additional products to those customers.
So I think certainly core has risen as a function of the time deposits coming in. And I would say that it's as much a shift as it is new time deposits. You know, there was desperation. The rates had been so low, low for so long. There had been a lot of desperation, in the population for higher rates so that, you saw a lot of people take the jump into time at that point in time. So but I think our relationships are generally strong.
So when perhaps .
All right, Greg.
Perhaps when the 10 years started kind of moving back down, people kind of made the jump and tried to lock in. Is that fair?
I would agree with that. I would say, I think we were slower to move than most, and I think that speaks to our customer base and the strength of our customer base. And, I do think we were slower to move, but when the rates did start to drop and you saw significant change, I think people looked at opportunity.
Great. Well, thank you very much and good year.
Thank you. Thank you. Same to you.
We have no further questions, so I'll hand the call back to Robert for closing comments.
Thank you for your interest in our company, and have a great day.
Thank you everyone for joining us today. This concludes our call, and you may now disconnect your lines.