TrustCo Bank Corp NY (TRST) 2011 Q4 法說會逐字稿

Good morning and welcome to the TrustCo Bank Corp fourth-quarter 2011 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would like to remind everyone that, when used in this conference call, the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties which could cause actual results to differ materially from those anticipated or suggested by such statements.

These risks could include credit risk, the effects of and changes in monetary and fiscal policies and laws, inflation, interest rates, the effect of changes in financial services laws and general business and economic trends. For further discussion of these risks and uncertainties, please see TrustCo's filings with the SEC.

In addition, during today's call, the discussion may include certain non-GAAP financial measures. TrustCo believes that these non-GAAP financial measures provide information that is important to investors and useful in understanding the Company's financial condition and performance. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures.

You can find a reconciliation of these measures to the GAAP financial measures in the press release and on the Investor Relations portion of the Company's website at www.trustcobank.com.

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

Thank you and thank you for joining us this morning to discuss our Company, especially our year-end results. As said, I am Rob McCormick, President and CEO. Joining me today is Bob Cushing, our CFO, and Scot Salvador, our Chief Banking Officer. Also in the room with us is Kevin Timmons to keep us on track.

We are pleased with our results and financial trends at the bank. Our total assets grew over 7% to $4.243 billion. This is driven mostly by $155 million growth in our residential mortgage portfolio. Our commercial loan portfolio saw modest decrease. Most of you know we are pretty conservative lenders so we are happy to stay on the sidelines and wait for commercial lending activity to return to a more normal status. Whatever that might be.

Our deposit showed impressive growth of $181 million. This is even more impressive when you consider we were able to maintain our pricing discipline, reducing our CD exposure and still grow our deposits by over 5%.

As you know we have no borrowings and are funded by our deposit customers. We are beginning to see significant improvement in nonperforming assets. Our total nonperforming assets were down over $2 million or around 4%. The court system certainly continues to be a frustration but we are seeing brighter light at the end of the tunnel especially the significantly lower net charge-offs.

All of our published ratios showed improvement. We are happy to see an efficiency ratio under 50%, nonperforming loans under 2% and our allowance at almost 2% of total loans.

Our new branch activity continued at a pretty slow pace. In New York we moved our Malta branch, opened up a Niskayuna branch that will end up being a relocation and, in Florida, we opened a Juno Beach branch which will define the southern border of our service area.

Now I'm going to ask our CFO Bob Cushing to further detail our results.

Thank you. I will be following up on some of the highlights that Rob just reviewed and focus on major trends noted during the quarter. As Rob said, net income for the fourth quarter was $8.7 million, up 26% over a year ago. This helped to contribute to a full year result of $33.1 million up 12.8% over last year. The fourth-quarter results are down approximately $500,000 from the third quarter which is in line with our expectations. Traditionally, the fourth quarter is one of our slowest times of year reflecting a reduction in lending activities around the holidays and a general slowdown in customer activities.

Analyzed loan growth for the fourth quarter was about 6.5% compared to the third quarter annualized growth rate of 8.5%. Since the majority of our lending revolves around residential mortgages, it is not surprising that people do not want to move into new homes during the holidays.

For the quarter we recorded a return on average assets of 83 basis points compared to 71 basis points a year ago and our fourth-quarter return on average equity came in at 10.15% for 2011 compared to 10.49% last year. This reduction in return on equity reflects the increased equity position as a result of the new capital raised earlier this year.

Our margin for the quarter reflected further compression to 3.35% compared to 3.38% for the third quarter. This is in line with our expectations for the quarter and reflects the pressure on the margin primarily from the asset side of the balance sheet. If you look at the third quarter to the fourth quarter, our interest earning assets had a decrease of 7 basis points to 3.94% while our interest-bearing liabilities had a reduction in their cost of funds of only 4 basis points to 68 basis points.

On the average balance sheet, the trends we noted during the year continued into the fourth quarter. The average balance of Federal funds sold and other short-term investments was $445 million for the quarter and at year end stood at $489 million.

Loans on average grew by $47 million during the fourth quarter compared to the third quarter. Total average interest-bearing liabilities were up slightly for the quarter over the third quarter. As you know, we try and control the growth of the balance sheet by the way we price and market our products and primarily our deposit products. The growth in the average balance sheet for the quarter reflects our determination to match balance sheet growth with opportunities to deploy that growth profitably on the asset side of the ledger.

The provision for loan losses was $4.2 million for the quarter and $18.8 million for the year. Both amounts are down from the $5.1 million recorded in the third quarter of 2011 and the $23.2 million for the full year 2010. In a minute, Scot will get into some of the details of our loan portfolio and our charge-offs. Our allowance for loan losses is $48.7 million at year end and completely covered all of our nonperforming loans.

Non-interest income was essentially flat for the fourth quarter compared to the third quarter of this year. Our business model does not rely on significant amounts of fee income and we go out of our way not to nickel and dime our customers with fees. Non-interest expense is in line with our expectations for the quarter at a little under $19 million. If you look at the last five quarters you will see that the average balance for non-interest expense has been about $20 million each quarter so our fourth-quarter results of under $19 million shows positive movement from the earlier parts of 2011.

Quarter over quarter, salaries and benefits expense looks like it is up about $550,000 to $7.6 million. The vast majority of that increase is really a reclassification of expenses for year end to the salary line that during the year is included in equipment expense and other expense. We make this year end reclass in advance of preparing the year-end W-2s for our employees. So in effect if you take that reclassification out, salary expense is in line with third-quarter results.

ORE expense at $1.3 million is up from the third quarter by about $500,000. This increase is essentially the result of writing down two of our commercial real estate properties due to updated validations -- valuations, excuse me, that we received during the quarter. Overall our efficiency ratio for the quarter was 46.7% down from 53.3% for the same period last year.

Likewise, our efficiency ratio dipped below 50% for the year at 49.2% in 2011 and 50.8% in 2010. We continue to see opportunities to control and reduce our operating expenses and expect to see continued progress in bringing down our efficiency ratio. As you know, our target is to get that ratio down below 25% in the near future.

The effective tax rate for the quarter was 40% and on a year-to-date basis, the effective tax rate was 37%. These rates are slightly higher than we had been running for the year as a result of a $450,000 writedown we recorded in the quarter against our tax receivable accounts. Upon filing our 2010 tax returns in the fourth quarter of this year we completed our review of open tax accounts.

This review identified that $450,000 of our tax receivables were no longer collectible as a result of the current and deferred tax items that we had remaining outstanding. Primarily this write-off is the result of reflecting for financial reporting purposes tax receivables at higher effective tax rates than was actually realized once the tax returns were filed. As we said in the press release, we see this as a one-time item and do not expect this to have any impact on the effective tax rates going forward.

Our capital ratios continued stronger in the quarter, tangible equities and tangible assets were 7.97% at year-end.

Scot is now going to review the loan portfolios.

Thanks, Bob. As was mentioned, loan growth continued for the fourth quarter and showed strong results for the year. For the quarter, loans grew by 1.7% or $42.4 million to $2.521 billion. This increase occurred across all market areas and was almost exclusively in our residential portfolio.

For the year we were very pleased with our loan growth as outstandings increased by just over 7% or $166 million. This was compared to $73 million of growth in 2010.

Nonperforming assets ended the year at $54 million versus $56.2 million as of 12/31/10, a 3.9% decrease. For the quarter, nonperforming loans increased approximately $2 million. This was primarily due to lower levels of transfers to ORE on the quarter with new additions to nonperforming loans remaining essentially flat quarter over quarter. Ratio of nonperforming assets to total assets remained at 1.27% quarter over quarter, down from 1.42% as of 12/31/10.

Our coverage ratio of allowance to total nonperforming loans stands at 99.9% while our allowance for loan losses to total loans remained at 1.93% at year end versus 1.78% the prior year. Rob?

We are now at the point we can try and answer any questions you may have.

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

Good morning. First, I was wondering if you could give me a little bit more clarification on a couple of the expense items. Specifically the FDIC insurance assessments. Why did that drop off in the fourth quarter from the third quarter?

Bob.

Good morning, Alex. The FDIC insurance expense for the fourth quarter came in at $577,000. The third quarter was $835,000. It was down about $258,000. We came into the fourth quarter with an overaccrual of that account of about $150,000. We knew we were going to have to take care of that into the fourth quarter.

And in addition we were budgeting -- for our internal purposes we were budgeting a growth in our balance sheet of about $50 million which is really where it came in. So we had to keep in mind that our last two quarters of growth in the balance sheet was $125 million and significantly above the $50 million that we were budgeting for the fourth quarter.

So it was kind of a way to hedge our bets. We had a little bit of an extra cushion in the FDIC insurance premium coming into the fourth quarter.

Looking forward I would say that a more normalized rate would be around the $850,000 mark.

Okay. Thank you. And then also is there some seasonality in the insurance line item that caused it to drop off in the fourth quarter and expect that to the tick again in the beginning of the year? Or is that a good run rate going forward of the sort of $600,000 mark?

On the FDIC and other insurance?

On the -- just advertising.

Advertising? Advertising is a bit seasonal. As you get into the holiday seasons people are pretty much distracted. So I would say that if you were to look at around $650,000 to $700,000 going forward that would probably be more normalized.

Great. And then you alluded briefly earlier, Rob, to the backlog in the court systems. Can you just give us an update on how long it takes to get loans through or into foreclosure both upstate and in Florida?

I think New York is the worst and I think we've crossed the 1,000-day mark in New York now. I think the average foreclosure takes 1,016 days in New York. The last published report I think was 986 days. And Florida, believe it or not, is significantly less than that. But certainly they shouldn't receive an award for their timing.

Right. And then just lastly on the pipeline I know that there is a little bit of seasonality as you mentioned earlier on your one to four family product in the fourth quarter, but can you give us an update on what the pipelines looked like at year-end versus 9/30 and help us get an idea of what to expect for loan growth in the first quarter?

Scot.

Sure. Yes, there is seasonality as you said and the pipeline does come down a little bit in the fourth quarter versus the end of the third, which is normal. But all things considered, we were pleased with the loan activity we had toward the tail end of the year and the pipeline entering the new year, it is about 20% higher than it was this time last year. So we are pretty pleased where we are sitting.

Fantastic. That's all my questions for now. Thanks a lot.

Collyn Gilbert of Stifel Nicolaus.

Good morning, gentlemen. Just, Scot, on the loan side or maybe, Bob, if you could answer this, what are the rates that you are seeing on your current one to four family mortgage originations? And then both in the New York market and in the Florida market?

Yes. Right now we are at 4.5% in both markets. That's bounced around a little bit week by week but it has been pretty much in that neighborhood for the last several weeks.

Okay and most of what you're doing is 30 year?

Yes. Yes, we will get some lower, but I would say the preponderance of what we're doing is 30 year.

Okay and I am just trying to sort of rectify the borrowers behavior in your base. The fact that these guys are putting on or refinancing with you at maybe even in some cases 100 basis points, I don't know, 75 basis points higher than if they went through loans and GSE types of structures. Just trying to understand -- I know you guys have talked about it in the past, but maybe walk through again what the behavior and the borrower base is that they are willing to take that kind of rate when they most likely could get it a lot lower.

Right. Well, I mean there are several factors that come into play. First from the competitors' end, the thing you really need to remember there and we stress with customers is only about 10% of the people give or take walking through a competitor's door get their advertised rate. Virtually all of them use scaled rates. They tie it to loan-to-value, they tie it to credit score, they tie it to a variety of other factors. So while they might average a significantly lower rate 80% or 90% of the people, by the time they end up at closing, get a lot higher rate than they expected when they walked through the door. As you know our advertised rate is our rate.

And the other factor is our product does differentiate itself. I mean, our costs are lower. You can get into our mortgage upfront especially in a purchase type situation for a lot less dollars than you can for almost all our competitors. You apply right across the manager's desk. It is very convenient, kind of the old-fashioned way of doing it. Virtually none of our competitors do it that way. We hold our mortgages, as you know, Collyn, service them for their life so if there are any issues, again the customer can just come into the branch, either pay their mortgage payment across the teller's window, they have a question that can speak to a manager about it. So when you add all of those factors up, it really does put us in a good position.

And they are able to close here, Collyn, too. Our average closing last month I think was 51 days.

Okay, that's helpful.

Stands up pretty well to any one of our competitors.

Okay and then just LTVs of the new originations in the New York market and then also in the Florida market.

I don't have the exact percentage in front of me, but I would say 80s probably in the low -- last time we looked at it, I think it was in the low 80s is probably a pretty good number.

And then how about Florida?

I would say about the same. It was consistent.

And then just in terms of deposit repricing, is there opportunity to go any lower within your deposit products?

Collyn, it's Bob Cushing here. We continue to see opportunities relative to the -- not only the rate, but also the mix. You know, we have been very successful in bringing in a great deal of balances of deposits into the savings, checking, money market accounts, and we are holding our own relative to the CDs. But again so we see opportunities in both pricing of the product and also moving of the balances.

Because it does seem like your money market is a little bit higher than perhaps where the peers are. So do you see that product coming down or do you see really the shift from CDs into money markets as -- I don't know maybe it is both as you just said.

I think the best way to look at it is both there's opportunities in both sides.

Plus we have a couple -- we have a couple of peers with regulatory pricing on the money markets, Collyn, in the area that might not be showing up in the shop you are looking at. But there are quite -- we are seeing quite a few teaser rates out on money markets which we haven't done. But trying to keep the core base of customers in that product.

And then just finally and I know, Scot, you sort of touched on this going into the quarter, but just the overall sort of application activity for mortgages. I mean, do you anticipate as robust of a year in 2012 as you saw in 2011? And maybe if you give a little color as to the split between refi and purchases just to help us understand where the momentum is coming.

Yes, sure, I mean I definitely hope so. Let's put it that way. We had a great year this year. We are hoping we are going to be able to have a similar type year in 2012. The market seems to be holding up relatively well such as it is. I mean, we've discussed before it is not a robust market, but it does seem to be holding up. Our product in Florida and downstate really seems to be taking hold. We are seeing in Florida the word is getting out in the realtor community and the borrowers where, again, we have enough experience in the market now, they are starting to realize our product is a little bit different.

So we do see it taking hold down there and we think that trend is going to continue. So obviously I can't predict it for sure, but we are hopeful we are going to have another good year. And as far as purchased refi right now I mean, recently, we have had about 25% roughly purchase out of our application volume. We are slightly under that which for this time of year is good. As Bob mentioned earlier, this is not a type year or a type time of year where a lot of people look to buy new homes.

So we have been pretty pleased with our purchase volume, and you know hopeful going into the new year.

Okay. That's great. Thanks very much.

(Operator Instructions). John Stewart of Sandler O'Neill.

Just a couple of quick questions. If you could -- I think you indicated there were some OREO write-downs in the quarter. Can you just let us know how much of the OREO expense that was?

On the ORE expense we had total write-downs both commercial and residential of about $530,000. About $230,000 of that was commercial and the rest was residential. And for the third quarter just to put in perspective that was about $200,000 in total.

And then just on the trust fees, they were down quite a bit versus 3Q. Does that have something to do with just the way you guys price your trust business maybe off of September 30 asset values. So you know those are obviously a lot lower than they probably are now. Can you just give a little color there?

On the trust fee income, the trust fee income has the two component parts. One is the recurring fee based on asset values and the other is the kind of the nonrecurring based on the settlements of the states and that type of thing, when you get extra fee income from those activities.

So I would say that the flow, there is a little bit of a difference in the flow of accounts that are repricing during each and every quarter but I wouldn't say it is dramatic. It has more to do with the amount of recurring versus nonrecurring fees in the fourth quarter. I think it was down slightly in the fourth quarter compared to the third quarter.

And then finally, I think you had talked in the past just about the reserve trending back towards 2% of loans. Do you feel differently about that now just kind of given some of the credit performance that you are seeing and that you alluded to in the prepared remarks or how do we think about the reserve at this point?

I guess we are not prepared to back off the 2% rate right now, but certainly things are looking much, much better. So at some point in the future we may reconsider that.

Great. That was all. Thanks.

And showing no additional questions in the queue, I would like to turn the call back over to Mr. McCormick for any closing remarks.

Thanks for joining us this morning. Things are good at TrustCo. We have a plan which we are executing to the best of our ability and we appreciate your support and look forward to continued sound results from our Company.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.