TrustCo Bank Corp NY (TRST) 2012 Q3 法說會逐字稿

Hello, and welcome to the TrustCo Bank Corp. third-quarter 2012 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). This presentation may contain forward-looking information about TrustCo Bank Corp. NY 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 experiences 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 effects 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 on 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 obligations to update this information, except as may be required by applicable law.

Please note that this conference is being recorded.

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

Thanks, Keith. Good morning, everyone. As the host said, I'm Rob McCormick. Joining me today are Bob Cushing, who will cover the numbers in detail; Scot Salvador, who is here to discuss our loan portfolio; and Kevin Timmons, to keep us all in line.

I'm sure most of you have seen our release, which illustrated a good, solid quarter here at TrustCo. Our net income was up 5.7%, to $9,750,000 for the quarter. And year over year, we were up about 13.7%, to $2,728,000. We seem to be on a good track for the balance of this year, setting us up for a good start to 2013.

Our deposits are up roughly $100 million year over year; and, more importantly, we have changed the makeup of our deposits, reducing our exposure to time deposits. We've previously discussed this, and it has seemed to have worked out. Our goal is to continue to grow the Bank, but we will always look for opportunities to improve our position.

Our loan growth was about $130 million year over year, and about $46 million quarter over quarter. This growth was made up in the residential loan portfolio for the most part. Commercial loans were down, due mostly to competition heating up, chasing very few transactions using predatory pricing.

Even after the new OCC guidance requiring bankrupt borrowers who have not reaffirmed the debt to be treated as nonperforming, even if they are current on payments, we showed a reduction in nonperforming loans year over year to just under $50 million. Nonperforming assets were $58.6 million at September 30, 2012, or about 1.36% of total assets. About $4 million of performing consumer loans were put into nonaccrual as a result of this guidance.

Our efficiency ratio dipped back under 50%. We showed margin improvement 3.21%, partly because of our actions with regard to deposits. Our return on equity was just shy of 11%. And we opened one branch in Melbourne, Florida, continuing to fill in our established service area.

Now it's Bob's turn to detail the numbers.

Thanks, Rob. I will review the financial River results for TrustCo for the third-quarter and year-to-date 2012. The overall theme is that we had a very good third quarter, and 2012 is very strong. Net income for the quarter, at $9.8 million, is up about 6% over last year. And on a year-to-date basis, we are up almost 14% over last year.

As Rob noted, we shrunk the balance sheet by approximately $21 million, on average, from the second quarter to the third quarter, while expanding taxable equivalent net interest income by $325,000, thereby creating growth and net interest margin that was up by five basis points to 3.21%.

Let me also just mention that on a year-to-date basis, our balance sheet is almost $300 million greater in 2012 versus 2011. I say that to emphasize that our plans continue to be for steady, controlled growth of our balance sheet for the foreseeable future.

The best way to see the positive impact that shrinking the balance sheet had on our cost of funds is to look at the trend line of the yields on CDs over the last several quarters. From the fourth quarter of 2011 to the first quarter of 2012, our CD yield dropped three basis points to 1.01%. Between the first quarter of 2012 and the second quarter of 2012, our CD yield dropped another four basis points to 97 basis points. But in the third quarter, as a result of our efforts to strategically focus on the higher-costing CDs, we were able to bring down our CD yields by 11 basis points to 86 basis points in a single quarter. That is a pretty impressive reduction in the cost of our CDs, and will help to position us as we move forward.

We would not have been able to get CD yields down to this level without letting some of the higher-priced product run off. We certainly have the strength of our liquidity to take advantage of this situation, and we executed that strategy as anticipated. Going forward into the fourth quarter and into 2013, we would expect to return to modest deposit and balance sheet growth at an annualized rate in the 3% to 3.5% range.

As to the mix of interest-earning assets, we drew down our average overnight investment position by $72 million to $402 million as of quarter end. We continue to rebalance our investment portfolio as opportunities develop to move funds from callable bonds into other investment vehicles.

Again, just a reminder that all of the CMOs and mortgage-backed securities that we own are Ginnie, Freddie, Fannie-backed issuances. Loans continue to show a steady increase in balances, with the portfolio up $47 million since the end of the second quarter. Year over year, our loan growth has been $128 million, or about a 5% increase.

On the funding side of the balance sheet, we already covered one of the major changes that occurred during the quarter. The other major change being the continued growth in all of our core deposit categories. Our core deposit balances increased by $86 million during the quarter; and by $350 million, comparing September 30, 2012, to 2011.

We realize that some of these increases were the result of CD customers repositioning their funds as they wait for increased interest rates. However, we also feel that increased savings, checking and money market accounts provide our branch personnel with tremendous opportunities for cross-selling.

If we look below the line, we have non-interest income pretty much in line with prior quarters and prior years. We had modest security gains during the quarter as we decided to lighten up on some of our corporate bond positions. Trust fee income is down approximately $250,000 between the second and third quarters, as a result of final settlements of a couple of estates in the second quarter that were not repeated in the third quarter. Often, as estates have their final settlement, there are some fee income that we have yet to recognize that are brought into income in the month of settlement.

Total trust assets under management increased during the quarter by $30 million to $833 million as of September 30. Service fee income is up $222,000 over the second quarter to $2.6 million. About half of that increase is due to the collection of prepayment penalties on loans. And the other half represents increased income from our ATM network, and debit card interchange fees based upon usage.

We continue to feel that non-interest income should average about $4 million a quarter moving forward. Non-interest expense was $20.0 million for the third quarter, down slightly from the second quarter of $20.5 million, and pretty much in line with our expectations. ORE expense has almost doubled in the second quarter due to two factors -- property taxes and write-downs.

Property tax bills that came in for September are all expensed as we pay them, and that amounted to an increase over the second quarter of approximately $160,000. In addition, we had approximately $245,000 more in write-downs of ORE properties; and $60,000 more in losses on sales of ORE properties, as compared to the second quarter.

Quarterly, we perform a review of all ORE properties to ensure proper accounting values. These values are based upon appraisals and brokers' input on the value of the property. We are aggressive in writing down properties with the intention of moving them off of our books. At quarter end, we had approximately 59 properties in inventory; and for the year, we have sold about 75 units, which is similar to the number of sales for last year.

Other non-interest expense is down approximately $820,000 from the second quarter to the third quarter of this year. This decrease is due to the following -- a $450,000 decrease in property and school taxes that we paid on nonperforming loans. For the most part, these property taxes related to the September 2011 billing cycle from the municipalities. If these loan customers do not bring their taxes current within six months, we make an assessment of values on the property, and, if appropriate, we pay the taxes. Taxes paid under these circumstances are always expensed, which happened primarily in the second quarter of 2012.

Next, we had about $100,000 of expenses relating to the annual meeting, proxy, and annual report distribution that occurred during the second quarter and did not repeat again in the third quarter. And we had expected approximately $40,000 less in contributions due to the seasonality of requests from the community.

All of this has resulted in an efficiency ratio that has again dropped below 50%, to 49.18% for the quarter. We are extremely diligent and focused on controlling our operating costs, with the intention of continuing to drive down our efficiency ratio so that we are consistently below the 50% mark, and on track to hit our goal of 45%.

Our effective tax rate is slightly elevated this quarter, to 38.4%, compared to about 37% for the prior quarters. We filed our federal and state tax returns this quarter; and, as a result, decided to increase our reserve by $200,000 against our open tax return positions.

Though we each quarter we evaluate all of our open tax return positions, it is especially effective when this review is done in connection with the completed tax returns. We felt an increase in the reserves were warranted based upon this review, and we do not expect this to continue into the fourth quarter. We expect the effective tax rate to return to approximately 37% in the fourth quarter.

We continue to see our total non-interested expense to be in the $19.5 million to $20 million range on a quarterly basis going forward. Our consolidated tangible capital position continued to increase during the quarter, coming in at 8.27% at period-end, 9/30/2012. We believe this level of capital allows us to continue to grow our balance sheet while remaining diligent to the regulatory concerns for bank capital levels.

Next, Scot is going to review our loan growth and nonperforming assets.

Thanks, Bob. During the third quarter, total loans grew by $46.3 million or 1.81%. Year over year, on an average basis, loans grew by $134.7 million or 5.5%. We are pleased with the $46 million in third-quarter loan growth, as it followed upon increases of $36 million and $3 million, respectively, in the prior two quarters.

Residential loans increased by $63.9 million on the quarter, more than offsetting an approximate $18 million decrease in the commercial portfolio. [March's] activity was spread across all our market areas, and we have a solid backlog of pending loan requests entering the fourth quarter.

In total, for the first nine months, we have booked $611 million in residential mortgages versus $572 million for all of 2011, in part reflecting the increased amount of refi activity in the marketplace.

Nonperforming loans decreased on the quarter from $51.5 million to $49.9 million, while nonperforming assets totaled $58.6 million versus $55.3 million in June. Both of these categories include $4 million of consumer loans reclassified into nonaccrual status as a result of new OCC guidance regarding consumers who have discharged their debt in bankruptcy without reaffirming it.

This reclassification is now included, despite the fact that the vast majority of these borrowers remain current on their obligations with the Bank. Excluding the effect of implementing the new OCC guidance, nonperforming loans and nonperforming assets would have dropped on the quarter to $45.9 million and $54.6 million, respectively.

The above totals also include a commercial loan relationship totaling $4.8 million that was transferred from the nonperforming loan to the ORE category.

Early-stage delinquencies in the 30- to 89-day category remained strong, totaling 0.48% at quarter end, which should translate into continued future improvement in nonperforming loans. Additionally, within the existing 30- to 89-day category of $12.6 million, there was approximately $4 million of loans that have already been identified as nonaccrual.

As of September 30, the allowance for loan loss to total loans stood at 1.82%, and covered annualized third-quarter charge-offs 3.3 times. Nonperforming loans equaled 1.92% of total loans, down from 2.01% as of June 30. And finally, the coverage ratio -- or allowance for loan losses to nonperforming loans -- was 94.9% at quarter end, versus 93.3% in June.

Excluding the effects of implementing the new OCC guidance, TrustCo would have had nonperforming loans equal to 1.76% of total loans, and a coverage ratio of 104.9% at quarter end.

Rob?

That's our story. We would be happy to try and answer any questions you might have. So, Keith, if you could line them up.

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

Good morning, guys. First off, can you just remind us, the balances of CD scheduled to reprice in the fourth quarter and what the average rate is that they will be coming off the books at?

Sure, Alex. Right now -- this is Bob Cushing -- right now, we're looking at about $309 million coming in in the fourth quarter, having an average rate of all three districts -- upstate, downstate, and Florida -- of 95 basis points. If you take where each of those will reprice in their district -- and what I was looking at was the highest rate in those districts that we currently offer -- if you average that out, it's a 57 basis point average. So we're going to pick up about 38 basis points on the $309 million coming due in the fourth quarter.

If you don't mind, I'll just go over the first quarter of 2013.

Yes, might as well.

We have $251 million coming due in the first quarter of 2013. Again, with those three districts, the average rate that we're paying on that is 75 basis points. And, again, if we do nothing with respect to those rates, and we offer the same rates we're offering today, that would have a blended rate of 55 basis points; again, based on the percentages in each of those districts. So we're looking at another 20 basis points pick up in CD rates in the first quarter of 2013.

Great. And then can you also share with us the rates that you are booking new loans at right now? And maybe, Scot, just give us some figures surrounding what the pipelines look like at 9/30 versus 6/30?

Sure, Alex. We've been booking most recently at first mortgages, for 30-year, at 3.99%. We'll tweak with that rate from week to week a little bit. But that's about where we've been most recently. And as far as the pipeline is concerned, we ended the third quarter, Alex, with a backlog of about $76 million, which we're pleased with. We've had a good spring and summer season. And, as you know, the backlog as of June was about $58 million, so we're up pretty significantly over June. And we feel we're in a good position going into the fourth quarter.

Great. And then, Bob, maybe you could give us a little bit of guidance on the cash balances. I saw it come down a little bit as the balance sheet shrank over the quarter. But is there any guidance that we should be thinking about with respect to cash balances? Is there a certain amount that you need to keep on your balance sheet, either for regulatory reasons or for Basel III compliance reasons?

Alex, as far as the amount of liquidity, in round numbers we have $400 million of cash on our balance sheet. To run the branches, and to do the daily flows that we would need, we need to keep around $80 million to $100 million in cash. So we always look at everything above about $100 million to be a discretionary amount that we're leaving in liquidity, for interest rate risk purposes and for opportunistic investing as we move forward.

So we would say that we have about $300 million of available, investable funds. But, unfortunately, with rates -- and from an investment portfolio -- being as low as they are, we don't see ourselves going hog wild to try to invest that in the near future. We see ourselves, as I mentioned earlier, we've done what we wanted to do relative to the CD portfolio. And our intentions are to grow back some of the balances over the next year -- very modestly, 3% to 3.5% -- on a cash position. I would expect our cash to fluctuate between $350 million and $400 million moving forward.

Okay, that's great. And then just one final question. Can you update us on what the foreclosure timeline is in New York State? And is that what's keeping NPL balances somewhat elevated, just the time in which it takes to foreclose upon properties?

It's over 1000 days, Alex, on average. That is certainly keeping that bubble there. We are encouraged because we believe we're toward the end of our bubble. And just anecdotally, there are more and more sales we're are seeing regularly, and we're able to move that through our pipeline and dispose of those properties pretty quickly. And we're also encouraged -- continue to be encouraged by the early-stage delinquencies that are dropping.

Great. Thanks, Rob. That's it for me.

Travis Lan, Stifel Nicolaus.

Thanks. Good morning, gentlemen. Just a couple questions. First, have you -- given your exposure to high LTV mortgages, have you guys calculated the impact that risk weighting changes under Basel III could potentially have on your capital position?

Travis, this is Bob Cushing. Again, our whole high loan to value loans -- our average loan to value in our portfolio is, I think, is around 77%, 75%, on average. So though we have a position of those that are 80% and above; on average it's 75%, 77%, in that range. And no, we have not done the calculation of the Basel III impact.

Okay. Asking one of Alex's question a little bit differently, if you -- the outlook for interest rates is, it has kind of continued to push out that we're going to have low rates for so much longer. Has that at all changed the way that you guys value your liquidity and your willingness to add loans? I know you guided to 3%, 3.5% balance sheet growth. But is that being restricted more by the economy and environment, or by capital? Because it doesn't appear to be restricted at all by your liquidity.

We're very disciplined, Travis, relative to the growth in the balance sheet and how much we will be willing to put on. We try to balance out the growth -- our loan portfolio, we have a really great engine, relative to our branch network, to grow our loan balances. Again, we are very disciplined in how much growth in the loan portfolio will take.

We want to balance that off with the growth in liquidity so as to have a good mix, relative to interest rate risk management from that perspective. The whole thing kind of comes together -- it is a capital constraint. We want to make sure we stay within the capital guidelines. We have certain amount of appetite for new loans, relative to how much we want to put on the books -- that is, the customers we want to have.

And we are very -- our branch network is very strong, with respect to the ability to generate deposits. And as you can see with the growth in core deposits, it's been very, very impressive.

Yes, that's helpful. Thank you. I'm assuming that it is -- but is the entire impact of the OCC guidance baked in at this point, and it's all behind you?

The guidance is --

We took it very seriously, Travis, and I think we have that covered.

Travis, as you can appreciate, that's an evolving area, right now, with the OCC. It came out very late in third quarter. Other regulators have yet to pipe in on what their positions are going to be. As Rob says, we took it very seriously. We went through our portfolio. And we believe we have it properly identified.

Sure. Okay. And then, last one, beyond your CD customers that have shifted out of CDs and into more liquid accounts, what are you guys seeing in the competitive deposit market that's allowing for you to continue to grow or add customers?

One thing that we've always been able to capitalize throughout our history -- and we're continuing to do it -- is we compete very well against the megabanks, if you will, who will sometimes take their eye off customer service; will sometimes look to excessive fees to pad the bottom line; and what have you.

Both in our upstate market and now in the Florida market, we have been able to find a niche where we can provide the customer service and the low level of fees that customers are looking for. But in both markets, we have a large enough branch network to provide them the convenience they need. So it's been a formula for success for us for a long time, and we're just continuing to capitalize on that.

And that's the key to it, Travis. We've opened a lot of branches, as you guys know, over a period of time. And we have a lot of very convenient locations. And we've enhanced our checking account and savings account products. We still offer a passbook. So we don't fight the tide; we try and do what the customers like us to do, and do it as profitably as we can.

Thank you very much.

(Operator Instructions). All right, there is nothing else at the present time, so I would like to turn the call back over to Robert McCormick for any closing remarks.

Thank you for your interest in our Company, and thanks for listening this morning. Have a great day.