TrustCo Bank Corp NY (TRST) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Trustco Bank Corp. NY second-quarter 2011 conference call. (Operator Instructions).

This presentation may contain forward-looking information about Trustco Bank Corp. NY, the Company, 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 could differ materially from those set forth in such statements, due to various risks, uncertainties, and other factors.

Such risks, uncertainties, and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following -- credit risk; the effects of and changes in trade, monetary, and fiscal policies and laws; inflation; interest rates; market and monetary fluctuations; competition; the effect of changes in financial services law and regulations; real estate and collateral values; changes in accounting policies and practices; changes in local market areas and general business and economic trends; and the matters described under the heading risk factors in the recent prospectus supplement, our most recent annual report on Form 10-K, and our other securities filings.

The statements are valid only as of the date hereof, and the Company disclaims any obligation to update this information except as may be required by applicable law.

With us today are Mr. Robert J. McCormick, Chief Executive Officer and President; Mr. Robert T. Cushing, Chief Financial Officer; and Mr. Scot R. Salvador, Chief Banking Officer.

As a reminder, this call is being recorded. I would now like to turn the conference over to Mr. Robert J. McCormick. Mr. McCormack, please go ahead.

Thank you, Amy, and thank you for taking the time to participate in the call to hear about our Company.

As Amy said, with me here today are Bob Cushing, our CFO; Scot Salvador, our Chief Banking Officer; and Kevin Timmons, a Vice President in our finance area.

Year over year, our assets were up 6.2% to over $4 billion. Our net income for the quarter was $7.8 million, up 5.2% from the first quarter of 2011 and up over 9% compared to the second quarter of 2010. Our net income per share for the quarter was $0.10, up 7.5% from 2010.

Our loan portfolio grew to over $2.4 billion, up from the first quarter and up year over year, and all of our growth was in our residential loan portfolio. This growth was with a reduction in nonperforming assets from 1.42% to 1.34% to total assets.

Our strong deposit growth continued, especially in the core category, which we were very encouraged by. Our deposits are now over $3.650 billion and up over $200 million from June of last year.

We opened our Kingston branch during the quarter and we opened our Glenmont branch in July, just after the quarter-end. We now have 136 total offices. The only offices we have pending right now are relocations. We have three pending locations probably over the last -- over the next 18 months, and we do have a couple of irons in the fire on other new locations, but I think as most people on the call know, we plan on opening maybe two to four branches per year. Our major expansion plan is behind us.

Also as most of you probably know, we completed our offering of 15.6 million common shares just after the quarter-end, raising $68.1 million before costs, and this raising should bring our tangible equity to 8.1% of tangible assets.

I'm going to turn it over to Bob Cushing to cover the numbers in more detail.

Thank you. I will review the financial results from Trustco for the second quarter and year-to-date 2011. I'll be following and referring to the data and tables included in the second-quarter press release, which we released last night and filed on a Form 8-K.

As Rob mentioned, overall net income for the quarter is up 9% over the second quarter of 2010, and on a year-to-date basis, we were up 7.7% over last year to $15.1 million.

The primary drivers of this increase in quarterly net income are an increase in average earning assets of $258 million for the second quarter of 2011 over the second quarter of 2010. This was somewhat offset by a reduction in net interest margin from 3.51% to the 3.47%. The combination of these two events resulted in an increase of 5.8% in taxable equivalent net interest income to $34.2 million for the quarter.

The provision for loan losses is down $2.3 million to $4.9 million, reflecting the improving position in our nonperforming loan portfolio.

Noninterest income is down approximately $1.1 million, primarily in the securities gains area. But this reduction also reflects the impact of regulatory changes on overdraft fee income. And noninterest expense is up $2.3 million to $21.6 million, with most of that increase coming from expenses related to our foreclosed properties and personnel costs. Most of the same items that affected the quarter also were the primary drivers for the year-to-date results.

Average earning assets (multiple speakers) [$485] million [had] margin contracted 14 basis points, resulting in about $2.5 million of additional taxable equivalent net interest income, and the provision for loan losses was down $2.4 million.

Looking at the quarterly average balance sheets on pages 10 and 11 of the press release, the primary changes are an increase of $213 million in securities available for sale with an average yield of two hundred and sixty-five -- 2.65%, with virtually all the growth coming in the agency portfolio. We continue to purchase primarily 5-year-old [as] final maturity agency bonds that are callable or have step-up features.

The loan portfolio increased on average about $87 million, with virtually all of that net growth coming from the residential mortgage loan and home equity loan portfolios. Total yield on the loan portfolio decreased from 5.55% to 5.38%.

On the funding side of the balance sheet, total interest-bearing liabilities increased by $231 million, and our average cost of these funds decreased to 76 basis points, down from 1.14% last year. Also, our average balance of demand deposits increased by about $7 million during this time period.

Looking within the categories of deposits, you will see the continued shift of funds away from the higher-cost time deposits and into our interest-bearing checking, money market, and savings accounts. Total average deposits are up $227 million during the quarter, while time deposits are down $134 million, which means that our growth in demand deposits, interest-bearing checking, savings, and money market accounts was $360 million, which is phenomenal growth in these core deposit areas.

As I mentioned earlier, the net interest margin for the quarter was 3.47%, and for the year, 3.43%. So overall from a balance-sheet management perspective, we have continued to follow our traditional strategy of developing core deposit customer relationships and using those funds to invest in a combination of overnight Fed funds sold; a high-quality, low-risk investment portfolio; and our bread-and-butter residential loan product.

Noninterest income is primarily derived from our trust department, which generated $1.2 million of income during the quarter and $2.8 million year to date. Our service fees to customers is down slightly from a year ago, reflecting the reduced amount of overdraft fee income, and we had the variance of about $700,000 in the net securities transactions which I mentioned earlier.

Overall, we do not generate a significant amount of fee income, and our philosophy is not to nickel and dime our customers with fees, but rather to have customers that do not incur overdraft fees but instead provide us healthy levels of core deposit balances.

Noninterest expense is dominated by the personnel costs and costs associated with our branches. Personnel costs were up 6.8% for the second quarter of 2011 versus 2010, primarily due to the increased cost of our benefit programs.

Let me go over some of the ratios. Our efficiency ratio for the quarter is 51%, our return to average equity was 11.8%, and return on average assets was 77 basis points. Tangible assets -- tangible equity [and] tangible assets was 6.59% and our dividend payout ratio was 65%.

Let me note one last item, and that is the effective tax rate. For the second quarter and year-to-date 2011, our effective tax rate was between 35% and 36%, which is about the same for 2010. As we noted in our second-quarter press release, the effective tax rate for the third quarter of 2010 was approximately 27%, benefiting from certain one-time items that drove down the effective tax rate. These items are not expected to repeat themselves in the third quarter of 2011, and our effective tax rate for the third quarter should be approximately equal to the rate we have experienced so far this year.

Now I'll turn it over to Scot Salvador, and he will review the non-performing asset portfolio.

Okay, as Rob said earlier, our nonperforming asset numbers saw some improvement quarter over quarter. Specifically, on page nine of our release, you'll see total non-performing loans drop in the quarter to $49.5 million as of June 30, versus $50.4 million as of 3/31.

Total nonperforming assets were also down from $57.1 million to $54.4 million as of June 30. These movements also decreased our corresponding nonperforming ratios to 2.04% of total loans and 1.34% of total assets. These figures are compared to 2.14% and 1.42% as of 3/31. Our reserves to total loans increased slightly to 1.88% as of June 30, t while our allowance coverage to nonperforming loans remains steady at 0.9 times.

Within the nonperforming portfolio, we also saw a continuing improvement in our Florida numbers, as total Florida nonperforming loans dropped from $21.6 million to $20 million, and Florida nonperforming assets fell from $26.9 million to $24.1 million. This drop was a continuation of positive trends from preceding quarters, and we feel this downward movement is particularly significant since in the last several years our average loss rates on our New York properties has been well under those in Florida.

Within the New York and other states, our total nonperforming loans increased slightly from $28.4 million to $29.3 million, while total nonperforming assets were virtually unchanged at $30.3 million. Rob?

Thanks, Scot.

Just to cover a little bit more on Florida, we have reported our numbers to the FDIC, and I don't think the official report is out yet, but we are encouraged by our growth results in Florida. Our deposits should be in the $540 million range, a little bit better than that. And we're also very encouraged by the growth in core, continuing the trend that we're experiencing in the rest of our franchise.

We continue to have 43 branches within the state of Florida, nothing pending to be opened. We look for locations within the confines of our existing marketplace on a regular basis, and again, the majority of our expansion plan is behind us, and we would expect to open between two and four branches per year for the whole -- the entire bank.

We are encouraged again by the results, not only in Florida but bank-wide, and feel things are pretty good here at Trustco Bank.

I'm going to turn it back to Amy to field the questions.

(Operator Instructions). Alex Twerdahl, Sandler O'Neill.

During the quarter, it seems like you saw some pretty good loan growth and also some pretty good deposit growth. I was just wondering if you could share with us which geographies were the strongest and which were the weakest with respect to these categories.

Good morning, Alex. We saw growth really across all of our -- all of the markets, Alex, and the mother ship, or upstate New York, was the strongest. But we also posted some very solid growth in the state of Florida and downstate.

Great. And could you share with us what the pipelines for the loan portfolio look like at 630 and compare those to 631?

The pipeline is very strong. We have a lot of very solid credits in our pipeline and our residential portfolio, and I think again, having just completed the road shows and presentations, we're continuing to see the trend of very good credits and very good customers appreciating the way we do business, so we have a pretty strong pipeline of applications pending to close.

Great. And then on the balance sheet, it looked like liquidity ticked up a bit at the end of the quarter, I think to around 13% of assets. Bob, maybe you could give us a little bit of guidance on how you manage the level of liquidity on the balance sheet and what the target there is?

Thanks, Alex. At the -- toward the end of the quarter and month of June, second half of June, we saw a number of our agency bonds -- there was a drop in rates. And as a result, we had a number of bonds called.

We traditionally like to run our balance sheet with a 60/40 split between the investments in our loan portfolio and in our securities portfolio, including the overnight Fed funds. So what we're looking at right now is, we didn't want to go back out and reinvest all that money that was called, so we [let] that build up at the end of the quarter onto the balance sheet itself. We will be redeploying that in -- early in July.

Great, and then, Scot, credit obviously started to get a little bit better. It ticked down just a bit. Do you think we've reached the inflection point? Do you think the NP has continued to decline? And maybe help to quantify this by giving us some numbers on what early-stage delinquencies were, both at 6/30 and maybe over the past couple of quarters, or at least how they've trended?

Absolutely, Alex. We really do feel we've reached that turning point. Undoubtedly, nothing is a 90-degree turn. It's probably going to bump along at the bottom for a little bit, but we really do feel the worst is behind us.

The new inflows into nonperformers were down significantly this quarter. We had about $6.5 million new coming in versus $9.5 million in the quarter before, and the early-stage delinquencies were also looking strong, both in New York and importantly in Florida. The early-stage delinquencies in Florida as a percentage of delinquencies are far lower than they were not too long ago. So, we are encouraged.

Great, and then just lastly, just maybe give us a little update on your thinking regarding the reserve. Especially given your credit metrics, it seems like 1.88% is a fairly healthy reserve. Should we expect to see that sort of trend up closer to 2% or do you think 1.88% is adequate, or do you think that maybe at some point we see that start to come down a little bit?

We'd like to see that tick up to the 2% level, and then have the allocations tail off from there, Alex.

John Stewart, Sandler O'Neill.

I actually just had a couple of clarifying questions on the expense base. It looked like, just on a couple of lines, they were a bit heavier than normal. In -- I guess, is there anything, professional fees or otherwise, in there related to the offering that may not continue?

John, it's Bob. We had a very small amount that we put into that, about $40,000.

And then, how about on OREO? They were up about $0.5 million. Is there maybe a write-down in there that took place this quarter?

That is correct. We had a commercial write-down this quarter that we took.

And how much was that?

$600,000. I'm sorry. I'm sorry. I got the wrong one. I was doing loans on ORE.

On ORE, the write-downs themselves for the quarter are up a little bit over prior quarter. That represents the resolution of property that we're selling out through the foreclosure process. I apologize for the earlier comment. It is all in the residential portfolio, nothing in commercial, and it's just a flow of getting rid of the properties.

We did wind up -- with the summer time coming along, we wanted to take advantage of the Florida opportunities to sell out towards the end of the winter season type of thing.

Okay, so there's no write-downs of existing assets or valuation allowances or anything taken? It's just kind of normal course sales.

Each month, John, we go through a revaluation in quarter. Each month, we look at property coming in, and then each quarter we [go over] all values of the properties.

We do write them down based on updated appraisals. Even though we haven't sold them, we're continually repricing them to the -- what looks like current values. The increase during that time period was probably 50-50 split between the amount that we were increasing the write-downs on existing properties and the amount on the resolution of ORE properties as a result of sales.

Okay. And then, finally, your other expenses were up about $400,000. Is there anything kind of one-time-ish in there?

It's not really a one time, John, but is on a regular basis. We have real estate properties. As we get properties into OR -- into nonperforming, we look to see if there are any past-due taxes, and to the degree there are past-due taxes that are appropriate, we make the decision to advance and pay the taxes.

What we've done in the past and continue to do is we do not capitalize them. We actually just expense those through the P&L, so during the quarter we had basically first- and second-quarter evaluations done, and we got those in in the second quarter and we just pushed those all through. And that was about, my recollection, about $250,000.

(Operator Instructions). This concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

We'd like to thank everyone for participating, and thank you for your support.

The conference is now concluded. Thank you for attending today's presentation. Please disconnect your lines.

Thank you, Amy.

Thanks.