TrustCo Bank Corp NY (TRST) 2012 Q1 法說會逐字稿

Good morning and welcome to the TrustCo Bank Corp NY first-quarter 2012 earnings call. All participants will be in listen only mode. (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 and trends 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 laws 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 prospectus supplement and prospectus for the offering to which this communication relates; 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.

After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Robert McCormick. Please go ahead, sir.

Good morning, everyone, and thank you for taking the time out of your day to hear a little bit more about our Company. Joining me on the call today are Bob Cushing, our CFO; Scot Salvador, our Chief Banking Officer; and Kevin Timmons from Investor Relations. And again, I am Rob McCormick, the CEO.

We had a very solid first quarter here at TrustCo Bank. Our net income was roughly $8.9 million, up significantly from the $7.4 million for the same period in 2011. Our deposits were up about 6% year-over-year to $3.761 billion, and our loans were also up over 7% from the same period in 2011 to over $2.5 billion. We are very encouraged by those numbers.

Our nonperforming loans were up a little bit over 12/31, but our nonperforming assets were down from year-over-year -- from year-end and also from the same quarter last year. We think this reflects the prolonged litigation it takes to bring a delinquent loan to final resolution. Scot will have more detail on early stage delinquencies, which are very encouraging.

Our efficiency ratio remained flat at 52%. While this is very good by any measure, we expect further improvement for the remainder of this year. And it is important to note that our loan and deposit growth has been good in all of the service areas that we're in, not just in one area or skewed to a particular area.

Our loan loss reserve hit 1.92% of total loans, which gives us 1 to 1 coverage. All this boils down to a return on assets of 0.84 for the three months and a return on equity of 10.45 for the first quarter.

Now I am going to turn it over to Bob Cushing to further detail the numbers.

Thanks, Rob. As Rob noted, I will review the financial results for the first quarter of 2012. If we start at the net interest margin, you will see the margin came in at 3.23% for the quarter, down 12 basis points from the fourth quarter of 2011 and down from the 3.40% in the first quarter of 2011.

That lower margin was earned on $4.2 billion of interest earning assets, which was an increase of $85 million over the fourth quarter of 2011, and an increase of $306 million over the first quarter of 2011.

So we are growing our balance sheet but at a reduced margin. This resulted in a net interest income of $33.4 million this quarter compared to almost $34 million in the fourth quarter and $32.5 million in the first quarter of 2011. Part of the reason for the margin compression continues to be our desire to remain liquid and to retain that excess liquidity in the overnight investments category.

The average rounds of overnight investments was $512 million for the first quarter of 2012, which is an increase of $68 million over the fourth quarter and $113 million over the first quarter of 2011. Though we continue to see growth in the loan and securities portfolios, we continue to be cautious about fully investing increased deposit flow.

On the cash inflow side of the balance sheet we had significant growth in virtually all categories of deposits, primarily focused in the low-cost deposit categories of interest-bearing checking, savings and demand deposits. The yield on interest-bearing liabilities continued to decrease to 65 basis points for the quarter, which is down 3 basis points from the fourth quarter of 2011 and down 18 basis points from a year-ago's first quarter.

Even though rates, and primarily CD rates, are extremely low, we still have the opportunity over the next six months to reprice maturing CDs at lower renewal rates.

The provision for loan losses was $3.1 million for the quarter, which is down substantially from the prior year and the prior quarter, reflecting our positive trends with respect to overall problem loans and property values.

Non-interest income is up slightly, primarily due to increased trust fee income and security gains recognized during the quarter. The increase in trust fee income is the result of fees assessed to trust accounts for their annual tax returns. This amounts to approximately $200,000 each year in the first quarter. All other categories of noninterest income were in-line with prior periods.

Non-interest expense was $20.6 million for the first quarter, which was an increase of $1.7 million over the fourth quarter of 2011, but down $200,000 from a year ago. When comparing the first quarter of this year to the fourth quarter of 2011, please remember a few things that happened in the first quarter of each year, and specifically the first quarter this year.

FICO limits and unemployment insurance all start over again, and as a result we have people that have hit the limits by the fourth quarter, but now we have to start over again because of the new calendar year. This amounts to an additional $330,000 of expense in the first quarter, which will tail down in the second quarter and for the remainder of the year.

Expense for our annual report and printing and mailing the report and proxy all happened in the first quarter of this year. This was an additional $160,000. The request for contributions tends to be higher in the first quarter of each year and that amounted to about $280,000 more than in the fourth quarter of last year.

A number of the benefit plans, office leases and contracts renewed each calendar year, and to the degree that there are any escalators or any impact based upon the number of participants, those figures are all reworked for the new year. This had a combined increase of approximately $250,000.

As your advertising expense is up $200,000 over the fourth-year, reflecting our decision to hold back a little of the advertising in the fourth quarter of 2011 and to save that money for a bigger splash in the first quarter of 2012.

Outsourced services appear to be up by $200,000 during the first quarter. This is due to some over-accruals of expense in 2011 that were recognized in the fourth quarter, thereby driving down the quarterly expense and explaining that quarter-over-quarter variance.

I also want to point out that even though for the year the FDIC insurance expense will be down approximately $1.1 million, the actual first quarter of 2012 versus the fourth quarter of 2011 is an increase of almost $300,000. For the year we are anticipating FDIC insurance to be in the $3.5 million range compared to last year when it came in at $4.7 million.

This resulted in an efficiency ratio of 52.5%, up slightly from a year ago when it was 52.2%. We expect further reductions in this ratio as our operating expenses for the remainder of the year will be reduced by these first-quarter one-time items.

Our effective tax rate was 37% for the quarter, which is in-line with effective tax rate we experienced for calendar year 2011. And, last, but not least, our tangible equity to tangible asset ratio came in at 7.87% at March 31, 2012, which places us well above the level required for a well-capitalized bank.

I will turn this over to Scot now for a review of our loan portfolio.

Thanks, Bob. For the first quarter total loans grew by $3 million, with residential mortgages increasing by $16 million compared to a $13 million decrease in our commercial portfolio. Year-over-year the total loan portfolio increased by approximately $165 million or 7%.

As anticipated, recent mortgage activity has increased as we enter the spring market and we expect to see a corresponding pickup in net loan growth for this quarter. Growth to date has been comparable to last year, and we are pleased with our current backlog, which is greater than last year and is spread across all of our major market areas.

Nonperforming assets were $54.9 million at quarter end compared to $54 million as of 12/31/11, and $57.1 million as of 3/31/11. Nonperforming loans were $51.2 million as of March compared to $48.8 million at year-end. These results include approximately $2.2 million of additions from the commercial portfolio.

Early-stage delinquencies of the entire residential portfolio continue to show strong improvement, with residential loans in the 30 to 89 day category totaling $7.9 million as of 3/31/12 versus $15.3 million in the prior year. This 48% decrease in the 30 to 89 day category is very encouraging. And although we face a lengthy court-driven resolution process for problem loans in our market areas, this decrease should nonetheless eventually translate into corresponding improvements in nonperforming loans and assets.

At quarter end the allowance for loan loss stood at a strong 1.92% of total loans and covered annualized first-quarter charge-offs by 3.7 times. The coverage ratio of the allowance to nonperforming loans stood at 94.9% as of 3/31/12 compared to 86.7% as of 3/31/11. Rob.

That is our story, and we can open it up to questions whenever we are ready.

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

My first question, Scot, as it relates to the nonperforming loan bucket, is there some seasonality in the real estate markets that makes it easier to foreclose and actually get some NPLs off the books in the warmer months?

Well, yes, I think there is, Alex. It is not so much in the foreclosure process itself, but in the sales end of it with the ROE similar to the residential market in general, not as much, but there is a seasonal effect in terms of the holidays tends to have a slowdown in terms of sales and will typically pick up steam as we enter the new year.

You must have been a collector at one time, Alex, which is to say a judge will never throw a family out at Christmas time.

Yes, right. And then as that relates to the OREO expense in the expense line, can you just correct me if I'm wrong, but that generally ticks up a bit in the second quarter as you -- after foreclosing upon some properties, sprucing them up a little bit to get them ready for sales?

It is Bob Cushing. Yes, that is correct. It is going to be in some ways depending upon the number of properties in the ORE category. We are seeing however write-downs. Once we get them into ORE, and we try to move them through as quickly as we can, our sales have been pretty brisk this year and the write-downs associated with having to take any further discounts have been less than in prior years. So we are encouraged that from an expense perspective we are starting to see kind of a moderating of that expense.

All right, great. And then just as it relates to the loan pipeline you talked about the backlog has been fairly strong. Can you talk about are those new loans, are they refi loans? And if they are refi loans are those ones that you already have on your books? And kind of just sort of just trying to peg how that relates to overall loan growth.

Yes, Alex, this is Scot. Yes, it is both. The pipeline is up. We are up about just shy of 40% as of the end of March over last year. But as you point out, that does include refis, and the refinance market has been more brisk this spring than last. So there is some refinance in there of TrustCo's loans.

But you need to remember, we also do our fair share -- more than our fair share really of refinance of other bank loans, which is obviously new money to us. So we are very pleased with our pipeline at this point in time as we head toward May.

Right, that sounds great. And the refis that you're doing of your own loans are those -- would those be loans that you -- would they have refied once already through the cycle and therefore maybe the rate doesn't come down so much more or is it, guys, that maybe you haven't done it yet and then you lose a bigger chunk of the yield on those loans?

No, I think that is fair to say. Most of the quote unquote higher rate loans have already refied. I mean, there is a straggler here and there, but to your point, most people have refied once already or it is a newer loan to begin with. So although we might lose some rate typically it is not a significant amount.

Great, thanks. That is all my questions for now. Thank you.

Collyn Gilbert, Stifel Nicolaus.

Scot, just to follow up on the mortgage pipeline comment, do you have specific dollars that you can tie to where the pipeline stood at the beginning of the quarter and where it stands now?

Well, I can give you quarter-over-quarter in terms of year-over-year that might give you a feel. As of the end of March we stood last year about $44 million, and this year we are about $61 million. And April has been strong. We have not seen a letup in terms of applications in April. It has been a good month to date.

Okay, and the pipeline going into the fourth quarter, I'm sorry, what was that? Do you have that dollar number?

I think -- I can get it for you. Hang on a moment. Right around $52 million -- between $52 million, and $53 million.

Okay, that is helpful. And then just the FDIC expense that you talked about was elevated this quarter, but expected to be down for the year. What was going on there that caused that?

It is Bob Cushing. On the FDIC expense for the year 2011, as you know there is a recalibration of how that expense was going to be charged to institutions. We got that information about midyear and then adjusted into the third quarter of 2011 what that accrual was. We didn't adjust it down enough, so in the fourth quarter we had to take another adjustment down. So as a result it was -- kind of in the fourth quarter it was kind of positively influenced by a little bit of that of kind of a truing up of that accrual.

Going into 2012 we have got a model that the FDIC has put out that we're using relative to calculating net expense, and then predicting the deposit flow. So we are a little bit more confident in the expense going into 2012 than we were into 2011.

Okay, but was it elevated this quarter though beyond where it was in the fourth quarter?

Yes, yes. If you look at the page 5 of the press release, the FDIC insurance expense, which is primarily all the insurance expense in that line, fourth-quarter 2011 is $577,000; first-quarter of 2012 is $880,000, that is a $300,000 swing.

Really last year what you had really was a fourth-quarter reversal of over expensing in the previous part of 2011 or came in in the fourth quarter as we trued that number up with this new schedule or new model we had from the FDIC. For 2012 we were just basing it based on the actual expense and actual deposit flows.

Okay, okay. And then just a question on deposit costs. Do you see the opportunity to go lower there? And then also tying into that question is what is the competitive landscape look like in your markets in terms of new banks coming in trying to take either deposit share or loan share?

On the -- as I mentioned in my presentation earlier, that we do have on the CD market -- on the CD portfolio coming due between now and, as I used it, the term of six months -- for the next six months we have about $700 million of CDs maturing, that have a yield higher than the current renewal rates.

And if you look at from now to year-end that is almost $1 billion. It is a little bit under $1 billion of CDs that mature. And those all in that time period have the opportunity to reprice down. They are, I would say they're in and about the 1% range. And current rates where they are right now there would be probably somewhere between 30 and 40 basis point pickup opportunity.

Okay. And then how about just the competitive landscape. In terms of the banks coming into the market, is there change much in the competitive landscape in your areas?

No, we think we are competing very well against the major players in the area. And there are really no new banks on the horizon or no new startups or people branching into the area that strongly.

Okay, okay. That was all I had. Thanks.

John Stewart, Sandler O'Neill Asset Management.

Bob, I apologize, but would you mind just going back? I realize you just gave a pretty good explanation on the FDIC insurance cost linked quarter, but can you just go back and highlight again the expenses that you have deemed to be nonrecurring as we go forward that showed up in the first quarter?

Yes. If we look at the total noninterest expense between the fourth quarter of 2011 and the first quarter of 2012, so we have -- fourth-quarter 2011 we have $18.9 million of noninterest expense going up to $20.7 million. So it is a $1.7 million increase.

The FICO limits and the FICO and the unemployment insurance, that has an impact of -- at the beginning of each year of about $330,000 this year, and that is based on the fact that all of the employees are now eligible for the full FICA. And as the year goes on, that will tail down pretty dramatically into the second quarter. Especially then employment insurance, that falls off like a rock right after the first quarter. So that is $330,000.

The annual report we have about $160,000 of annual report expense. Again, it comes in either in the first quarter or second quarter of each year. This year it came in in the first quarter. We expensed all of that, so compared to the fourth quarter that would be a pickup of expense of $160,000.

Contributions, they tend -- I think, local community charitable organizations toward the end of the year know that the new year kind of may be a new budget type of thing. So we have a tendency to see a much higher level of contribution requests coming in in the first quarter of each year. And this year compared to the fourth quarter that was about $280,000 of additional expense between the first quarter and the fourth quarter of last year.

Our benefit plans, our pension plan, our retirement plan, supplemental plans, the benefit plans, as well as office leases and some of the contracts, all have calendar year renewals. And to any degree there're any escalators, or number of participants might affect the expense itself, all that is refigured or reworked at the beginning of the year. That had an impact of $250,000 of additional expense.

Advertising, I mentioned, was down $200,000. And that was really a decision we made -- I'm sorry, advertising was up $200,000. That was a decision we made in the fourth quarter of last year. We decided not to spend the full allotment of advertising expense in the fourth quarter. We put -- we saved a little bit of that to be spent in the first quarter of this year.

So if you look at advertising expense it looks like it went up $200,000. The reality of that is that there is $100,000 that we just brought over from the prior year that we didn't spend and decided to spend it more wisely in the first quarter of 2012.

And then the last thing is that outsourced services. That is -- that category -- that expense itself is really dependent upon the number of accounts and the volume of transactions, because that is how much we paid the third party vendors.

In 2012 we made -- or 2011 -- we made an estimate of what those expenses were. We had over-accrued those expenses going into the fourth quarter, so again, we trued that up. And then in the first quarter of 2012 it looks like there is a big variance year-over-year, but there really isn't. In between the fourth quarter and the first quarter is just kind of a reversing of that one accrual in the fourth quarter of last year.

And then I mentioned the FDIC insurance also is up. And again I just want to reiterate on the FDIC insurance there is not a premium change on that. The rate for -- the dollar amount per thousand of deposits is exactly the same as it was prior years. So it is not a change in risk profile or anything of that nature. I don't want to give you that impression. It really was getting our arms around the new methodology that the FDIC was using to calculate FDIC insurance expense.

And for 2011 with the growth we had in the balance sheet and in deposits we were expensing in anticipation of that growth at a higher rate than actually we had to expense during 2011. So as we got into year-end and we got this new worksheet that we were using, we then adjusted that figure to be the exact amount that it should be.

That adjustment was made in the fourth quarter, so that it looks like quarter-over-quarter, fourth quarter to first quarter there is this big swing. The reality is it was really just -- if you look more at like say third quarter of last year versus the first quarter this year you will see it is a very, very slight change.

Okay, thanks.

Does that help?

Yes, yes that was great. Thank you.

I am sorry to go into such detail, but I just wanted to cover that.

No, and I appreciate that. Thank you. And then just one other quick question on the expense side. How much -- I know it was a generally mild winter, but how much of seasonal occupancy costs would you say are in there this quarter?

The big savings were really in the snowplowing and salting and that type of thing. And it really is -- it is not a tremendous amount for us. A lot of that is built into our CAM charges already with respect to the landlords. And we won't see some of those benefits until the CAMs get reconfigured later in the year. So it really was not that much, maybe $100,000.

Okay. All right, great, thanks guys.

(Operator Instructions). Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Robert McCormick for any closing remarks.

As always, thank you for listening to us and hearing about our Company, and always, thank you for your interest in our Company. Have a great day.

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