TrustCo Bank Corp NY (TRST) 2011 Q3 法說會逐字稿

Good morning and welcome to the TrustCo Bank Corp. NY third-quarter 2011 earnings conference call and webcast. All participants will be in listen only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please also note this event is being recorded.

The Company would like to remind you that all remarks today may include forward-looking statements based on current expectations that involve risks and uncertainties that could cause the Company's results to differ materially from management's current expectations. Please refer to the risk factors which can materially affect results outlined in the Company's corporate filings with the Securities and Exchange Commission and the Company's earnings release.

I would now like to turn the conference over to Robert J. McCormick, President and CEO. Mr. McCormick, please go ahead sir.

Thank you for joining us this morning to hear a little bit more about our bank. As the operator said, I am Rob McCormick. Joining me this morning are Bob Cushing, and Scot Salvador, who will be part of the presentation. And in the room with us is Kevin Timmons.

We were pleased with our results this quarter. Net income was a solid $9.2 million, which was up over 10% from the same quarter last year and also up from the second quarter of this year.

Our results were impacted last year this quarter by a one-time tax event, which we warned about last call, and we were pleased to have overcome the one-time event to beat that quarter.

Things are pretty good at TrustCo and improving. Detail will follow, but some of the highlights are our office count stayed at 135. After the quarter we did relocate one of our offices and have one new office in the hopper. Our return on average assets was up to 0.88%. Our efficiency ratio has improved to about 47%. Our return on average assets was down to about 11%, due mostly to the additional capital we raised. Our non-performing assets were also down to 1.27%.

We now have 100% reserve coverage to our nonperforming loans. Our reserve stands at 1.93%, up from what -- last quarter and on its way to the 2% mark. Our nine-month comparables are also showing very positive trends. Our deposit growth we are very pleased with at over 6% in what appears to be all the right categories. And our loan growth was almost 5% on a year-over-year basis.

We are pleased with where our Company is now and where we think it is going, continuing to improve our performance. And, Bob, could you give us some additional detail on the financial statements?

Thank you, Rob. As Rob mentioned, the third-quarter results were very strong across the board. The stated net income is $9.2 million, an increase of 10.4% over the third quarter 2010, and an increase of 18.8% over the second quarter of this year.

As we noted in the press release, for our third-quarter earnings one thing to keep in mind in comparing the third quarter 2011 to the third quarter of 2010 is, as Rob mentioned, that one-time positive tax item in 2010 of about $840,000. If you were to take that one-time income item out of the 2010 results, the increase between the third quarter of 2010 and the third quarter of 2011 would be approximately 23%.

Loans and deposits have continued to show strong growth during the quarter with loan balances up $51 million and deposits and short-term borrowings up $42 million between June 30, 2011 and September 30, 2011. That is solid growth and it came from throughout our franchise.

The remainder of the balance sheet is pretty much in line with prior quarters. You will note that during the quarter we increased our holdings of mortgage-backed securities by approximately $130 million, and decreased our investment in US agency securities by approximately $60 million. All of the mortgage-backed securities are agency issued bonds with no private-label securities or other exotic investments. We made these investments to increase the amount of cash flow coming off the investment portfolio and to add a little duration to our portfolio.

Our capital ratios increased from 6.59% at June 30 to 8.04% at September 30 as a result of the $68 million of new capital we raised earlier this year and approximately $3 million of retained net income.

Our operating expenses were approximately in line with the third quarter of 2010 and down by $3.1 million compared to the second quarter of 2011, centered primarily in three areas.

FDIC insurance expense is down approximately $600,000 due to our reduced insurance cost reflected during the quarter. Professional fees are down approximately $500,000 due primarily to our annual meeting expenses being recorded in the second quarter and a reduction of $1.3 million in write-offs of our other real estate portfolio.

Other expense -- the other expense category is also down for the quarter by $900,000 compared to the second quarter and down by 1. -- $170,000 compared to the third quarter of 2010. Approximately half of the reduction in the third quarter compared to the second quarter is due to a decrease in the amount of write-offs for property tax advances.

The combination of the increase in net interest income and the reduction in our operating expenses resulted in an operating efficiency of 46.5% for the third quarter this year versus 51.3% for the second quarter of 2011 and 49.1% for the third quarter of last year.

The last item I will cover is the impact of all this on our net interest margin. We had a 9 basis point decrease in net interest margin for the second quarter to the third quarter of this year, with the entire decrease due to the asset side of the balance sheet.

The loan portfolio dropped 6 basis points, reflecting the new loan volume at lower rates than the portfolio. The total securities portfolio, that is both the available for sale and the held-to-maturity portfolios, experienced a decrease in the yield of 12 basis points. These were somewhat offset by a reduction in the cost of liabilities from 76 basis points to 72 basis points on the funding side, and result in a very healthy margin for the quarter of 3.38% and for the year-to-date of 3.42%. Now I will turn it over to Scot.

Thanks, Bob. As Bob said, we had a good quarter of loan growth with total loans increasing $51 million from $2.428 billion as of 6/30 to $2.479 billion. All of our growth was centered in our residential portfolio, primarily in first mortgages with balances increasing $55.7 million or 2.6% to $2.231 billion. This gain was spread throughout our market areas and follows upon 3.3% of residential loan growth we recorded in the second quarter.

The third quarter also saw a decrease in both charge-offs and non-performing assets. Net charge-offs dropped 3% to $2.879 million with almost all the charge-offs centered in the residential portfolio.

Non-performing assets dropped 2.4% from $54.4 million to $53.1 million, which follows upon a 4.8% decrease in the prior quarter. Nonperforming ratios also strengthen on the quarter with nonperformers as a percentage of total loans decreasing from 2.04% to 1.89%. The allowance for loan loss increased from 1.88% to 1.93% of gross loans, with a coverage ratio of the allowance to total nonperforming loans increased to 101.7% from 92% as of 6/30.

And now I will turn it back to Rob.

That is our story. Again, we are very proud of the quarter and very proud of our Company, and we would be happy to entertain any questions you might have.

We will now begin the question and answer session. (Operator Instructions). Alex Twerdahl, Sandler O'Neill.

First I was just wondering if you could give us a little bit of guidance in that OREO expense line. Is there any sort of seasonality that happens there or is it kind of just totally dependent on how that -- how the OREO bucket and how the different loans are coming out of foreclosure?

Hey, Alex, it is Bob Cushing. There really isn't a seasonality. It really has to do with the loans as they are moving through the portfolio. And what we try to do, as you know, we just try to move them out of the ORE properties as quickly as we can.

So during the summer months we want to take advantage of the opportunity to get in as people are coming down into, let's say, the Florida area or Upstate New York as they are visiting the area, to move those properties. So we took write-downs with the intention of moving those properties out of the portfolio.

We do, as you know, take (inaudible) write-offs on the portfolio as they're going through the nonperforming category. So we don't really wait until the end of the year until they get into ORE. We are doing it throughout the process.

Right. But is that something then -- as you mentioned the summer months being a little bit heavier in the real estate market, is that something in the second quarter we should generally see that be a high -- you know, a little bit elevated or is that just totally dependent on how the bucket looks?

We think we've got the properties written down to their values as they are right now. We've got about 54 properties in the portfolio at this moment. We've got them written down to that area. We -- again, that will be based on updated appraisals and the trends in those particular markets.

Okay, thanks. And then secondly, maybe you can just give us an update on how you're looking at your liquidity position right now with cash and equivalents at 11% of assets. What is the target there, and how does that translate through to the net interest margin in the next couple of quarters, given where rates are both in securities and in 1-4 family loans?

Again, Alex, you know how we run our balance sheet. Pretty much we like to have a strong level of liquidity. It is up a little bit more than we generally like it to be at, but opportunities relative to investments, as you point out, are pretty limited. We take advantage of the loan portfolio as it presents itself.

And we like core customer deposits. We don't want to turn core customers away from that perspective, so we are willing to take on those deposits, put them in the liquidity portfolio. It is up around 420 right now. As we see opportunities we will bring that down and make investments. But we are not going to try to go all out and suffer from a long-term perspective relative to these low rates we are in right now.

Right. That makes sense. What rate are you currently offering the new mortgage loans at?

4.75%.

4.75%.

And can you just give us an update, maybe on just how the pipelines looked at 9/30 versus 6/30?

The pipeline is strong. We have -- Alex, this is Scot. We have had a good summer and early fall and we have a good, strong pipeline. There is a seasonality to it, as you know. And as we enter into the fourth quarter and head toward the holidays, we do expect activity to slow down some, which is typical. But our pipeline right now is solid; we are very, very pleased with it.

Fantastic. That is all my questions for now. Thanks a lot.

Collyn Gilbert, Stifel Nicolaus.

Just to follow-up on the loan growth commentary. Scot, you had talked about that you are seeing kind of growth throughout your market. Could you just break it down a little bit more maybe into the split between Florida and New York in terms of the growth this quarter and what you are seeing going forward?

Sure. Yes, we have seen growth throughout our markets, which we're very pleased about. Florida has been strong and getting stronger, frankly. Last quarter I think net growth, slightly over 10%, around the 12% range, was attributable to Florida, with the rest being the New York and other areas.

As you know, the Florida portfolio is a little under 10% of the total portfolio now and it has been strong throughout the summer. Second quarter -- that is down a little bit from second quarter. It will vary a little bit from quarter to quarter, but right around 12% of the growth was attributable to Florida for the last quarter.

Okay. That is very helpful. And then how about the split between purchase and refi for the overall portfolio?

Purchase has been -- they are studied to slow down but, again, spring and early fall they were strong. Percentagewise of our total applications they were running somewhere between one-third and one-half our total applications through the summer months, which is a very strong number. We were promoting them strongly, both through the branches and through our advertising, and we saw some good effect to that.

Okay, that's helpful. Then on the security strategy, you had mentioned that you wanted to extend duration. Is that what was driving then the shift in moving more into held-to-maturity from available-for-sale, or just talk a little bit about that strategy?

In the held-to-maturity portfolio it is going to be a small portfolio overall, and that is our intention. We saw some calls and prepayments on the held-to-maturity portfolio, so we just put a little bit back in there to bring that back up to where we are comfortable with the cash flow.

The reality is in the held-to-maturity portfolio we really do it based on decision based on yield in that portfolio -- in that particular security. And as we see it, a good yielding opportunity we try to put it there and just let it sit there to maturity.

Okay, that's helpful. Then just you had mentioned insurance expense was down. Was there something specific that was driving that are how do we think about that line item?

The FDIC insurance expense, we continue to have a bit of an over accrual going into the third quarter from the second quarter. The number is dropping as rapidly as they had relative to the FDIC insurance premium. We had to wait to see our actual invoice come in, which did come in the third quarter, so the remainder of that accrual was reversed in the third quarter.

So what would you see now relative to insurance expense is about what you will see going forward.

Okay, so this was a good run rate? (multiple speakers).

Give or take. That is all based on deposit growth. And we continue to look at what the FDIC does relative to its own recapitalization.

Okay. Then just one final question. Just on the purchase activity that you are seeing in each of your markets, in New York and in Florida, would you see say that the activity is better or worse than what we are seeing on a national -- than the national figures would suggest? Is the media exploiting it too negatively or how would you view that?

Collyn, this is Scot again. I think there are a couple of ways of looking at that. I think the activity is down. There is no doubt about it, I think the media is not wrong on that. But individually from our perspective we are faring well. I think it is a combination of lack of some of the competitors that used to be in the marketplace that aren't there anymore. Some of the competitors that are out there don't have the heavy appetite in terms of their not in a position to be able to look for the loans.

So we -- although the whole marketplace I wouldn't characterize it as strong, we have seen some strengthening, both in New York and in Florida, and we seem to be getting more than our fair share of the pie that is out there.

Okay, that is very helpful. That is all I had. Thanks.

Jamie Waller, Sherpa Investments.

Congratulations on a good quarter. It looks like you're managing the challenges well. One of the questions I had was the pre-paid -- you had -- I think -- Bob Cushing, I think you mentioned the prepay of some of the real estate taxes. I didn't quite catch that. Could you elaborate?

Certainly. When we go through -- we are continuously throughout the year looking at property taxes on customer balances relative to whether they paid them or whether they are behind. As we do that we make an assessment as to whether the customer is going to be able to make their payments on the property taxes.

We will make a decision to pay them to protect our interests. To the degree that we pay those property taxes -- we will continue to collect the full balance. We will go after the customer relative to the full balance, but we write those property tax advance off.

Okay, so that only relates to the nonperforming loans, none of the other assets are being prepaid?

What happens is -- Jamie, is what we will do is we will look at -- we do the search -- we do the search of the entire portfolio throughout the year. It is not just the nonperforming, but also the performing loans. To the degree that a performing loan, we find that they are behind in their taxes, again, we will try to work with them to get themselves caught up to date or see what kind of arrangements they have made with the municipality.

To the degree that we are uncomfortable with that, we will put the loan in nonaccrual status at that time. To the degree that there is opportunity for us to protect our interest, we will protect it by paying the taxes ourselves, but we don't want to have that on our books, so what we will do is write that off.

Another question on the Florida portfolio. Have you considered increasing the amount of conforming loans that you do sell and retain only for processing and servicing?

We do not sell any of our loans from that perspective, so our Florida loans follow the same basic process we follow in New York, which is we originate principally for portfolio.

Is it your hypothesis that the Orlando market has bottomed out from a pricing perspective? We read in the press, again, the popular media, that some of the rates of transactions have increased and some of the underwater homes have finally been repriced to more reasonable, more affordable rates. Is that where you all are?

This is Scot again. Yes, we do think there has been a bottoming. As we have said before, I think we are going to bounce along here at the bottom. It is certainly not a straight line by any stretch of the imagination, but we do think the fall has for the large part ended, and we are going to bounce along here at the bottom.

We see that in the activity. We see that in the amount of buyers that are out there for properties as we offer them. And we do think we have reached a firming point in the market.

Great, thanks a lot for your answers.

(Operator Instructions). John Stewart, Sandler O'Neill Asset Management.

I just wanted to follow up on some of Alex's questions with regard to the margin going forward. If I just compare the period-end balance sheet to the average it seems like you are in much better shape with regard to the margin in the fourth quarter.

You know, the short-term position is down. The bond portfolio is up, loans are up. Is it fair to say that we will get some of this quarter's margin decline back in the fourth quarter, just as you put some of that cash to work -- the proceeds from the offering?

The intentions were during the offering discussions we indicated that we would see a compression in the third quarter with some -- as a result of raising and what we saw that was going on. We expected that we would be able to return to like a 3.40% margin.

We would say though, John, that the world with respect to rates and the Fed's new operation Twist, other things that are going on, make it quite a challenge relative to the investment portfolio.

We are seeing great opportunities in the loan portfolio, but again, you know what is available in the securities portfolio. On the positive side, we made some -- took some steps toward the end of the third quarter that will pay a positive result for margin into the fourth quarter.

So I wouldn't -- I don't want to predict where we are, but I think that -- and we had felt comfortable in that 3.40% area earlier on, and the 3.38%, 3.40% is not a bad place for us to be.

Okay, can you talk -- I guess, talk maybe a little bit more specifically about what you did on the deposit side at the end of the third quarter?

Again, it gets down to being able to price relative to your CDs and your other types of investments in comparison to your market. If you look at TrustCo traditionally compared to our peer group averages we are able over a long period of time to price upwards of 40 basis points significantly below the market with respect to interest-bearing liabilities. We saw an opportunity in the third quarter to take a little bit more interest -- you know, interest rates down, which we did in fact do.

Okay, great. And then just to follow up on some of the expense color. You did give a lot of detail with regard to the property tax write-offs being down and professional fees and so on and so forth. I realize there is noise with regard to the OREO expense just based on how properties are moving through. But overall do you feel like this is a good run rate that we can use just to think about for the next couple of quarters?

Again, if you look at the last couple of quarters, I think this last quarter at $700,000 probably is the low watermark from that perspective. What we are seeing is an opportunity -- the court systems are starting to kind of flush through properties out of the foreclosure process into the ORE, so I would actually see -- I would tend to think that number is going to come up from the third quarter.

I think that if you look at the last say four or five quarters, we have been in that $1.3 million to $1.5 million range, and I think that is probably more reflective of what is going on. Not because the existing properties are going to require any additional write-downs from what we can see right now, but we are going to see more properties coming out of the nonperforming category into ORE. And I think our style -- our style is to do what we have to do to move these things out of ORE and turn them back into earning assets.

But apart from the OREO-related costs, are we at a good level?

I think that the current -- the fourth -- the third quarter is a low -- I would call that a low watermark at $700,000. I think it would be closer to the $1.3 million to $1.5 million going forward.

Okay, all right, thank you, guys.

(Operator Instructions). I am showing no further questions at this time, so I would like to turn the conference back over to our speakers for any final remarks.

Thank you very much for joining us this morning, and we thank you for your support and confidence. Have a good day, everyone.

The conference is now concluded. And we thank you for attending today's presentation. You may now disconnect your lines.