TrustCo Bank Corp NY (TRST) 2012 Q2 法說會逐字稿

Good morning and welcome to the TrustCo Bank Corp. NY second-quarter 2012 earnings call. All participants will be in listen only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (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 the 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 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.

Please note this event is being recorded.

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

Good morning, everyone. Thank you for joining us this morning to hear a little bit more about our Company. Joining me today in the room are Bob Cushing, our CFO; Scot Salvador, our Chief Banking Officer; and Kevin Timmons, Vice President and Finance.

We had a very sound second quarter, and we are pleased with the results we posted. As I'm sure most of you have seen, our net income for the quarter was over $9 million. This compares favorably with March 2012 results and is up over 17% from June 2011. We did not open any new branches during the quarter, so the count remained at 137. We do have a few pending as infill to our existing markets or replacements for existing branches.

Our return on average assets was flat quarter over quarter and up almost 8% year over year. Our return on average equity was 10.49%. That is down year over year, but still very good, and it's also seeing the full effect of the capital-raising event that occurred last year.

Nonperforming loans to total loans has essentially remained flat over the reported periods. While we would like to see greater improvement, we are encouraged by the drop in early-stage delinquencies. This gives us confidence that the improvements will come as we work the files through the court system. I think this was a topic of discussion last quarter, actually.

Nonperforming assets to total assets showed some improvement year over year to 1.25%. This shows us we can deal with the problems once we have control of them. Year-to-date net income is up about 18% to $17.975 million. Contributing to that sound quarter was our deposit growth of about $246 million year over year. The mix of deposits has also changed for our benefit as the higher price certificates have become a smaller part of the deposit totals.

We also see additional opportunities for this to continue over the remainder of the year.

Our loan growth has been good through the second quarter, about $132 million all in our residential loan portfolio. With rates the way they are and margins down year over year, but we are beginning to see stability, especially based on some disciplined product pricing we are pushing.

I'm going to turn it over to Bob now to talk about the numbers in more detail.

As Rob noted, I will review the financial results for the second quarter.

I think you can pretty much sum up the second quarter by saying we continued all the positive trends noted during the first quarter. Loans and deposit balances were up significantly, our margin compressed slightly, our efficiency ratio continued at the low level of 52%, and our profitability was up substantially over last year as we see positive trends in our nonperforming assets.

The average balance of loans for the second quarter of 2012 versus the second quarter of 2011 was up $152 million, while the average balance of deposits was up $249 million. The securities portfolio also increased by $125 million during this time period. These changes resulted in a net interest margin of 3.16% for the quarter and 3.19% year-to-date.

As you know, the asset side of the balance sheet is under pressure from these national historic low interest rates, both for refinancing existing loans and from new loan originations and investment purchases. The offset continues to be our ability to reduce CD and core deposit interest rates.

For the quarter, our average cost of interest-bearing liabilities was 58 basis points, down 23% from the second quarter of 2011. For the year-to-date numbers, our cost of interest-bearing liabilities was also down 22% from last year. But all of that is in the past, and the real question is, how much further can we push down these costs going forward?

During the upcoming third quarter, we will have over $500 million of CDs maturing that have an average rate of 1%. At today's rates, if all that money reprices into today's rates, that would have the effect of increasing our net interest margin by 6 basis points.

Likewise, for the fourth quarter, we have over $300 million maturing at a rate of 0.96%. If all of that also repriced at today's rates, that would enhance our margin by an additional 3 to 4 basis points.

So for the remainder of this year, we would expect to see an increase in the margin by about 10 basis points due to the reduced rates on CDs alone. And that will, of course, be mitigated somewhat by whatever squeeze we might experience in margin due to the asset side.

Noninterest revenues were all in line with our expectations and consistent with the first quarter. Noninterest expenses were also in line with our expectations and consistent with the first quarter.

You will note some additional advertising expense during the quarter as we push our loan products going into the home buying season. Advertising expense is a little over $1 million this quarter compared to about $800,000 in the first quarter. For the remainder of the year, we will probably be in the $700,000 to $750,000 range for each of the third and fourth quarters. FDIC and other insurance expense ticked up a bit during the quarter, reflecting the increased deposit balances, and we should expect to see this cost in and around this level for the remainder of the year.

The other relatively large change was the reduction in costs associated with other real estate on our books. This is really the cost of ownership and disposition of properties that we have taken possession of during the foreclosure process. The lower expense is a result of reduced write-down on our property inventory, along with lower losses on the sales from these properties.

As of June 30, we had approximately 60 properties in inventory, and during the year, we have sold 50 properties, which is on track with the number of units sold last year through the second quarter. The reduced write-downs and losses on disposition reflect somewhat the stabilization of prices we see in the Florida marketplace and the relatively low levels of loss and write-downs on our repossessed properties in our capital district marketplace. Going forward, we would expect to see total other real estate expense in the range between $600,000 and $1 million for each of the third and fourth quarters.

Though we are pleased with the second-quarter OREO expense numbers, we do not believe that one quarter results make a trend. So we are cautiously optimistic with respect to these costs going forward.

Our effective tax rate was a touch over 37% for the second quarter, right in line with the first-quarter tax rates. Our efficiency ratio came in at 52.2%, down slightly from the 52.5% in the first quarter. We continue to work on lowering expenses to bring down this ratio, but the reality is that the best way to meaningfully affect this ratio moving forward will be to expand our net interest margin.

On a consolidated basis, our tangible equity to asset ratio came in at 7.90% at quarter-end. Let me turn it over now to Scot to review our loan portfolio and nonperforming assets.

Okay. Thanks, Bob. For the second quarter, loans grew by $36 million or 1.4%. Year-over-year average loan growth totaled $151.9 million or 6.3%. All of the growth for the first quarter was in the residential portfolio with commercial loans remaining unchanged at $235 million.

The $36 million in actual second-quarter growth is compared to a net $3 million gain for the first quarter. Loan application volume has been solid in all our market areas, and we have been able to achieve the stated growth, despite a refinance market that has been very active with the drop in rates near historic levels over the last couple of months.

Nonperforming assets were $55.3 million at quarter-end versus $54.9 million as of 3/31. Nonperforming loans were $51.5 million versus $51.2 million the prior quarter. Both these totals include a $2.6 million increase in the commercial portfolio with the residential nonperforming loans decreasing on the quarter. The bank's allowance to their loan loss now stands at 1.88% of the total loan portfolio at quarter-end, unchanged from a year ago. The coverage ratio of the allowance to nonperforming loans stands at 93.3% versus 92% as of June 30, 2011.

Lastly, the allowance to annualized second-quarter charge-offs remains strong at 3.4 times. Rob?

That is our story. Thank you for listening. We will take any questions.

Alex Twerdahl, Sandler O'Neill.

Good morning, guys. The first question is you briefly touched on the level of early-stage delinquencies dropping quarter to quarter. Do you guys have some numbers to go with that for the 30- to 90-day bucket, Scot, and could you break that out for the New York portfolio and for the Florida portfolio?

Sure, Alex. As we mentioned last quarter, the early-stage delinquencies had dropped about 50% year over year, and we have maintained fairly consistent numbers through the second quarter. Total -- let me get the numbers for you here -- Florida, 30 to 89 days; for the second quarter, Alex, about $2.6 million; and New York and other states about $8.6 million.

And that is roughly flat from the March 31?

Actually that is down a couple of million from the first quarter. It is actually down. I can give you the contrast, Alex. Let me make sure I have the right numbers. New York and other states was $9.2 million 3/31 and Florida was $4.6 million.

Great. Thank you. And then, Bob, as far as the available for sale securities that reprice on a quarterly basis and the hit to the yields on those, can you just tell us maybe a dollar amount that would reprice in the third quarter and the fourth quarter, and are those basically at market rates? So, I guess, market rates have probably dropped a little bit during the quarter. So what are you buying today with the proceeds?

Alex, on the repricing, these are pretty much five-year and under fixed-rate securities that just get basically called away as rates are dropping. So what we are seeing basically is, if you look at rates where we are right now, that portfolio is pretty much at market right now. If rates stayed where they are -- you know, rates came down the last couple of days type of thing -- but if they stayed at where they are at quarter-end, we don't have an awful lot coming due per se. So it is really a question of what happens to rates with respect to calls.

Right now we don't have to give any calls that we have been notified of, but every quarter with rates continuing to drop down in the marketplace, we see a couple of hundred million dollars each quarter being called.

Okay. Great. And then for the new residential mortgages that you are putting on today, what is the average rate they put on in the quarter?

Well, most recently, right now we are at 4.125%, 30 years. We were at 3.99% for a short period of time. As we said before, the vast majority of what we do is at the 30-year level. So the great preponderance of it is going on at that rate, Alex.

Great. That is all my questions for now. Thanks, guys.

Collyn Gilbert, Stifel Nicolaus.

Good morning, gentlemen. Could you remind us what the average LTV is of the resi portfolio?

Overall the new loans are in the 80% to 90% bucket. I would say the majority of the dollars.

That is the new origination, but what about currently?

The total portfolio, if you are looking at the total balance in the portfolio with the amortization of loans and then somewhat the stabilization in appraisal values, we run that periodically, and I think it is right in the low 70%, in the mid-70% range.

Okay. So what would keep your borrowers from coming into a TrustCo branch and re-signing their mortgage down to that 4.125%? Because I know we ask this every quarter -- it is still a mystery in some respects -- but just the fact that your loan yield has held up as much as it has. (multiple speakers). I'm trying to under -- (multiple speakers).

Well, I think a lot of them -- the answer is twofold, I think. First of all, a lot of them have done that. Our refinance activity, as I mentioned in the presentation, has been very strong this spring. So there have been a lot of borrowers who have been coming and doing just that.

But the fact of the matter is there is also a lot of borrowers that have for various reasons just have not squeezed the trigger yet. They think rates might go lower. Their loan balance is such that they don't pay a lot of attention to it. The reasons are varied, but we have seen over the years there are a lot of borrowers that are sticky, for lack of a better word, and don't jump on it as fast as you might expect.

But, again, there has been a lot of people that have come in, and refinance activity has gone up.

Okay. So you still think it is more borrower behavior than that there is a large percentage of the portfolio that is well in excess -- that may see LTVs higher than 100% that just cannot refinance?

There might be some of that who think they cannot or under a perception that they cannot. A lot of it might be in their minds thinking that they cannot do things, but no, I don't think that is the major reason at all. I really don't.

Okay. And then just, Bob, just to try to get a little bit of a sense of what your balance sheet strategy is here, especially just on the earnings assets side, I mean you guys have done a good job of keeping that interest income steady at that $39 million level these last two quarters. Is that part of the strategy? I mean should we assume that the mix of those earning assets will adjust such that you can try to hold that line steady, or are you just finding you are more at the mercy of the market, and it is going to go wherever refinancing and repricing activity goes?

Well, a bit of it -- the answer is a little bit of both on that. Do the degree we have to respond to the marketplace, we have to respond, and market pressures are such that we have got to look at competitors relative to the rates that Scot was talking about relative to refinancing and things.

So our goal is, from a target perspective, our goal is to have that $300 million number in mind. We will continue to be judicious. We look at that Fed fund position, and we like having the liquidity. We have been kind of moving through this long period of time with these low interest rate interests and held onto it and still been able to hold that net interest income number we wanted to achieve.

So we are not going to -- we are not going to do something crazy to get the $39 million, but on the other hand, we do have our eye on it. And, as I said earlier, our main goal relative to the income side is to look at the opportunities relative to deposits and to see that we can bring those deposits. And all the numbers I quoted were just the CD numbers, and we still have opportunities we think relative to our core and take actions there that are appropriate.

Okay. So then do you think like all-in that you could see the net interest income grow?

Well, I think I was hinting at the issue of our goal relative to our efficiency ratios to bring that down below 50%, and we have got targets below that number.

From a cost perspective -- expense perspective, there is a little bit of room to move on the expense side, but the real opportunity for us to drive that efficiency ratio down below that 50% number is by expanding our net interest margin. And that is -- it is a tough goal to achieve, but that is our goal is to continue to expand the top line.

As you know, we do not have a lot of other lines of business. Our main line of business, besides the Trust department, is the Bank, and from that perspective, we don't have a lot of fee income and those types of things. We don't have insurance income and that. So our focus is to drive net interest income up as much as we can. But we are focused also on not doing anything crazy with the balance sheet. You are not going to see us move hundreds of millions of dollars out of that fund position at these very, very low rates. If rates pop up and we have an opportunity to invest and get better yield on it, of course, we will take advantage of that. But in the meantime, we have suffered through these periods of time; we are not going to make a mistake now.

Okay. That is helpful. And then you talked about the strong selling season. Do you anticipate loans -- and looking at the pipeline where things stand now that loan growth will pick up in the third quarter from here, or should we not expect much change?

A lot of that has to do -- you know, there are two sides of it. The volume has been strong. We have been pleased with it. The wildcard is the refinance activity in terms of what happens with rates because that obviously has a dramatic effect on the net growth.

So if refinance activity remains strong in terms of a lot of refinancings going on, it is probably going to be pretty consistent as we go forward. If rates tick up and refinance activity slows, that could have a very positive effect on the net growth.

Okay. And then just one final question. On your HELOCs, do you know what percent of those are where you guys have the seconds but you don't have the first?

I don't have an exact percentage in front of me, but we have looked at that, and a great majority of them are behind our sales. I don't have the exact percentage, but it is a large majority of them were behind our sales.

Okay. That is helpful. That is all I had. Thanks, guys.

(Operator Instructions). Showing no further questions, I would like to turn the conference back over to management for any closing remarks.

Thank you, everyone, for listening, and have a great day.

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