TrustCo Bank Corp NY (TRST) 2012 Q4 法說會逐字稿

Good morning and welcome to the TrustCo Bank Corp. New York fourth-quarter 2012 earnings conference 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. New York 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 rate, 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 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 J. McCormick. Please go ahead.

Thank you Amy. Thank you. Good morning everyone. Thank you for taking time to hear a little bit more about our company. Joining me this morning is -- are Bob Cushing, Scot Salvador, and Kevin Timmons. As Amy said, I'm Rob McCormick.

As has been our practice in the past, I'll provide a brief summary, then pass on to Bob Cushing who will detail the numbers. Then he'll pass it on to Scot to highlight operations, especially our loan and deposit numbers. This should leave plenty of time for your questions.

Our net income in the fourth quarter was $9.806 million. This was up about 12.5% from the same period in the prior year. We opened two branch offices this year, continuing to fill in holes in our existing service area. As we've said before, we are not looking to expand that service area at all, just provide infill branches at that pace, between two and four, say, a year.

We ended 2012 with a margin of 3.21% -- (sic, see press release) -- which is down year-over-year but stable quarter-over-quarter. Our nonperforming assets to total assets were up year-over-year.

We are still encouraged by our results in this area. Our belief is increases previously discussed is really driven prolonged collection process and not a serious increase in early-stage delinquencies. I think we pretty much have that under control.

Our capital ratio remained firmly above 8%, and our efficiency ratio rose to 2.25 to 53%. This was caused by a spike in expenses during the quarter. We expect improvement next quarter or the continuation of our plan to get the efficiency ratio to something in the 45% range.

Year-over-year, our net income was up a strong 13.4% to $37.534 million. We're pleased with these results.

Total assets grew about 2.5% or $100 million to $4.347 billion. We had net loan growth of about $160 million driven by our residential portfolio. Year-over-year our commercial loan portfolio saw run off of just under $30 million.

In the areas we are serving, there has a lot of predatory pricing in the commercial loan area and we're kind of sitting on the sidelines for the time being, keeping our core customers happy and maintaining the portfolio we have. We try and not to chase low-price transactions.

We continue to remain buried liquid, ready for changes in interest rates. Our deposits on the flip side grew to over $3.8 billion. The big news in this area was the shift to lower-cost deposits after allowing roughly $275 million in time deposits to run off.

I'll turn it over to Bob who can give you a little bit more detail on the numbers.

Thanks Rob. As Rob noted, the fourth quarter and the full year 2012 was very strong or TrustCo, both from a net income perspective as well as balance sheet growth and the restructuring that has occurred during the year. Net income for the quarter was up 12.5% for the fourth quarter of 2012 compared to 2011. And for the full year, we had an increase of 13.4%.

Balance sheet growth has been in virtually all areas of the Company. For the year, the average balance of our interest earning assets were up $247 million with about $150 million of growth in the loan portfolio and the remaining $100 million in the securities portfolio.

We continued during 2012 to have high levels of liquidity with over $460 million in average overnight investments. We ended 2012 with $488 million in overnight investments.

On the funding side, we had approximately $172 million of average growth in deposits supplemented by another $20 million in growth in our cash management accounts, which we show on our balance sheet under the category of short-term borrowings. Average funding sources also benefited this year by having the full impact from of the $67 million of capital raised in the year 2011.

We continue to have pressure on our margin, which for the year was down 20 basis points from 3.40% last year to 3.20% this year. For the quarter, net interest margin stayed even at 3.21% between the third quarter and the fourth quarter of this year.

Deposit flows for the next three months and six months will be significant. And that will provide us added opportunity for additional rate changes. We expect $256 million of CDs at an average cost of 74 basis points will come due in the next three months which, if we retain at the current mix of terms, would reprice at 32 basis points after 42 basis point savings on those deposits and would bring down our overall cost of CDs by 10 basis points, which would in turn be a positive to our net interest margin by between 3 and 4 basis points. Likewise, over the next six months, we have a total of $405 million of CDs maturing at an average cost of 72 basis points which, if we were to retain at the current mix of terms, would reprice to 32 basis points. That represents a reduction of 40 basis points on a portfolio of $405 million on maturing deposits. The overall cost of CDs will be driven down by 15 basis points, and that would have a positive impact on our net interest margin of between 5 and 7 basis points.

If you compare the third quarter to the fourth quarter of this year, you will see the significant benefits that we derive from the strategy we executed during the third quarter and early fourth quarter to allow some of the higher-cost CDs to mature and either leave the Bank or move into lower-cost deposit products. The full impact of that deposit outflow can be seen in the fourth quarter's decrease of almost $90 million in total interest-bearing deposits of $3.47 billion. But if you look inside the numbers, you will note that the average total time deposits decreased by $132 million during that time period. So in essence, we are able to retain approximately $40 million of maturing time deposits into other TrustCo deposit accounts. This helps to bring down our yield on interest-bearing deposits another 6 basis points to 42 basis points and helps to shore up our core deposit customers.

The provision for loan losses was $3 million for the quarter and helps to bring our allowance of loan losses to $47.9 million at year-end. There's been a lot of news among bankers, regulators, and analysts about the whole concept of reserve releases. And if you look at our raw numbers, you may conclude that, during 2012, we brought down or had a reserve release of $790,000 during the year. That is actually not the case.

If you remember back in the third quarter, we noted that we adopted new OCC guidance on the issue of Chapter 7 bankruptcy loans. And as a result, we had transferred $4.8 million of performing loans into nonaccrual status, and we had taken a charge off of $800,000 against these loans. So the reduction in our allowance for loan losses is directly related to the adoption of these new accounting rules that require the Chapter 7 loans to be written off versus simply to be included in reserve balances.

Had we not adopted this new OCC guidance, our allowance for loan losses would be virtually identical at the beginning and end of 2012. This is not to say that sometime in the future there may in fact be a period when our permission is less than our charge-offs, but I just wanted to point out that that did not occur this year.

The loan line has some changes I'd like to cover. First is trust fee income. For the fourth quarter, it looks a little high. And that's because we recorded a one-time increase in trust fee income of $600,000 related to a change from the cash-based accounting to accrual-based accounting for fee recognition purposes.

Trust assets under management continue to be in the $825 million to $830 million range. Otherwise, non-interest income for the quarter and the year are in line with expectation. Going forward, excluding the possible impact of securities transactions, we would expect total non-interest income to be in the $4.5 million of $4.8 million range each quarter.

Non-interest expense for the quarter came in at $21.2 million, up $500,000 from the third quarter and up $1.6 million over the same quarter last year. There are some reclassification entries that we make at year-end around the salaries and benefits area that help to get the totals in line for reporting on the W-2s. During the year, these expenses are included in equipment and other expenses and then are reclassified to salaries and benefits in December.

We also made a reclassification entry for ATM fees and expenses. In prior presentations, we had always shown these fees net and included in non-interest expense. For the financial statements included in this press release, we have made a reclassification entry to show the ATM expenses gross with the income included in service fees to customers and included non-interest income with the offset to other expenses as part of non-interest expense. In essence, we are grossing up non-interest income and non-interest expense to show the component parts versus netting them as we had done in prior presentations. This resulted in reclassification entries of between $500,000 and $700,000 each quarter. Again, there was no impact on the bottom line but simply a grossing up of the income statement. This was done to bring our external reporting into balance with the call report requirements. This did have a negative impact on our efficiency ratio by 1%. The efficiency ratio of 52% for 2012 would have been 51% had we not made this reclassification entry.

So going back, overall, the overall causes for the increase in the quarter are $500,000 of non-interest expense. We had an increase of $290,000 paid in real estate taxes for nonperforming loans. We expense of such payments but we continue to pursue the borrowers for collection of these advances. And we had a write-off, a one-time write-off, of the remainder of a contract of ATM maintenance with one of our vendors that was in dispute during the year. This increased our expenses during the quarter by approximately $300,000. Again, this is a one-time item that we recorded in the fourth quarter of 2012. That gives you some insight into the overall increases in non-interest expense.

The only other thing I would point out is that other real estate expense for the quarter was down to $375,000 as compared to $1.2 million in the third quarter. Each quarter, we revalued the entire ORE portfolio. We (inaudible) pricing our properties (inaudible) to attract buyers and to move them off our books. The write-downs taken in the third quarter were not repeated in the fourth quarter as property values in our market territories have somewhat stabilized. While at the same time, the cost to maintain these properties has remained stable. We have approximately 55 properties in ORE with the oldest one we have owned for about 16 months and the vast majority of our properties for less than six months.

Going forward, we see continued cost controls over the salaries and benefits area along with reductions in other real estate expense, insurance and professional fees. We are planning for about $20 million to $21 million of total non-interest expense for each quarter next year with the exception of the first quarter, which will be slightly higher, in at about $21.5 million due to the FICA tax we started with the new year.

Our effective tax rate came in at 37%, which is right in line with our expectations. Unless something happens dramatically to the tax rate on banks or corporations, we expect our effective tax rate to remain at this level for the future.

From a balance sheet perspective, the fourth quarter saw a return of deposit growth. As we noted in the last quarter's call, we purposefully planned to have deposit outflows during the third quarter as a large number of relatively higher priced CDs were maturing. That program was completed successfully and we have returned to our plan for modest growth in deposits and to focus that growth on our core deposit balances. Between the end of the third quarter and the end of the fourth quarter of 2012, demand deposits increased by $8.2 million.

Interest-bearing checking was up $23.2 million. Savings increased by $30.6 million and our money market accounts were virtually flat. Offsetting this growth was a reduction in amounts for CDs of $33.7 million.

From a balance sheet management perspective, we are very pleased the program that we undertook and we believe that this restructuring of our deposit balances will be very positive for the future.

Scot will get into some of the loan growth numbers in a minute. Our (inaudible) portfolio and liquidity position continue to be extremely strong. We continue to believe is in our best interest to remain short-term in our investment philosophy and to focus on strong credit and liquidity.

Our capital position continues to be strong, in excess of regulatory guidelines for a well-capitalized institution. Our tangible capital asset ratio is at 8.24% at year-end, 2012 versus 7.97% a year ago.

Turn it over to Scot.

Thanks Bob. For the year, total loans on an actual basis grew by $163 million, or 6.5%. This included growth of $191.6 million in the residential portfolio and a $28.6 million decline of commercial loans. For the fourth quarter, there was an increase in total loans of $78.8 million, or 3%. This strong result was driven by a $76.5 million increase in our residential portfolio. The $76 million increase in fourth-quarter residential loans follows upon a $46 million increase in the third quarter.

We had reported to you previously that our backlog of pending loans was solid and the net growth we were able to achieve in the fourth quarter, typically not the strongest quarter of the year, is something we are very pleased with. This growth was spread across all our market areas. Although activity has slowed somewhat during the holiday and early new year period, as is normal, we are satisfied with our year-end backlog and are hopeful of a productive first quarter.

Nonperforming loans totaled $52.7 million as of year-end compared to $48.8 million as of 12-31-11 while nonperforming assets totaled $61.4 million at December compared to $54 million as of last year. It is important to note when considering these figures that the latest numbers include approximately $4 million of performing consumer loans that were reclassified during 2012 to nonaccrual status as a result of the new OCC guidance regarding consumer bankruptcies. Excluding this amount, 12-31-12 nonperforming loans and assets would have been approximately $48.7 million and $57.4 million respectively.

At year-end, nonperforming loans were equal to 1.96% of total loans compared to 1.93% last year. The allowance for loan loss remains strong at 1.79% of total loans and covers annualized fourth quarter charge-offs by 4.9 times. This is up from 3.7 times the prior year. The coverage ratio of the allowance in nonperforming loans stood at 91% as of year-end.

Rob?

That's our story. We'd be happy to entertain any questions you might have.

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

Good morning guys. First off, I actually dialed into the call just a couple minutes late, and it sounded, Rob, like you said in your opening remarks that you had a goal for the efficiency ratio of 45% range. I was just wondering if you could comment a little bit further on that, talk about maybe the timeline and what it should take you to get to that range if that is in fact the goal.

Certainly, we have a goal of hitting that 45%. You know we operate pretty efficiently. In the past, it's been significantly even lower than that. And as far as time frame goes, I hate to commit to a specific period, but I think you'll see some dramatic improvement over the next year.

This is Bob Cushing. As a follow-up on that, I didn't help Rob in any fashion by adding that, by making that one reclassification change that we did, we did in fact hurt our contingency ratio by 1%. And that change going forward will have the same impact. So for the current year, at 52% for the current year, we are looking for next year to be at that 50% level and then, as Rob says, driving down below that to the 45% goal.

You've got to remember, Alex, even at our worst, it is still world class.

No, I'm just trying to get a sense for what it will be going forward. And then you've done a pretty good job keeping the margin elevated. Could you talk a little bit about how you balance the actual net interest margin level versus putting on average earning assets and growing the balance sheet, which might actually wind up hurting the margin a little bit but allow earnings to grow a little bit more than we've seen over the past couple quarters?

I think what our goal is is to not try to buy in at this stage to a low rate long-term environment. Our concern is that right now, yes, if we did put more money to work, we could in fact have an enhanced interest income line, net interest income line. But what we would be doing in the long run is suffering as the rate environment changes.

So it is a balancing act, as you say, Alex, and it's our plan basically. The focus is to keep the margin. We like the 320 range. We recognize it has an opportunity to slip down below that, but our objective is to try to keep our powder dry, have opportunities in the loan portfolio which we see as being the best place to put our money to work, while at the same time holding extra cash in reserve. As rates do change we will have the opportunity to reinvest them. I know we've been saying that for some time now, but we've been disciplined about it and that is our plan. I think 2012 we are very, very pleased with the growth in our loan portfolio which has taken off some of the pressure.

Considering the season, I think Scot touched on this in his part of the talk. Considering the seasonality that's returned to the loan application process, we're pretty pleased with where we are headed and where we ended last year with regard to low volume.

I think we'd like to see a little -- maybe a little larger commercial loan portfolio, but as I said, we are unwilling to do what we need to do to keep those loans. You're seeing commercial loans priced under residential at this point. So --

No, I agree. Loan growth looks very solid.

What about deposit growth? You did a nice job in 2012 remixing deposits as you detailed earlier in this call and in the release. But as it relates to this overall deposit balances and sort of filling in a lot of that branch network as part of the long-term strategy, do you think, in 2013, we will see meaningful deposit growth pick up again?

I think you'll see a comparable year, maybe a better year than we had this year. As Bob said, we see some repricing opportunities certainly in the first half of 2013, and who knows what will happen in the second half. I think we'll see some continued growth as those branches fill. And we've seen some tremendous progress with regard to that already, Alex. Customers bring more customers. That's the key.

Yes, okay. Just one final question, just to clarify, Bob, in your comments. The $20 million to $21 million in non-interest expense per quarter, does that include OREO expense or does that exclude OREO expense?

In the past, we've always excluded ORE expense.

Okay, thank you very much.

Travis Lan, Stifel Nicolaus.

Thanks. Good morning guys. Bob, assuming that the increase in service fees is sustainable this quarter, what kind of trends do you guys see that drove the strength there?

Service fees themselves are -- the only other -- you are going to (inaudible) from customers, Travis, the $3.3 million, $3.386 million. That's being driven by volumes. And those are -- we believe those are sustainable because we are continuing to attract additional customers into our product mix. We are not a big -- I don't want to mislead anybody in this, we are not a big fee company. We don't charge a lot of fees. The fees we do charge we do collect. And people that come to us recognize they are coming for services, but they also recognize we are not going to nickel-and-dime them.

Okay.

We had a great year in our mortgage department with regard to fee collection. We have a program where we set your closing date at application, and we hit it 84% the time, but we do our closings in-house and charge for that. So the fee income has been really terrific coming out of the mortgage department, especially in the fourth quarter. We expect that to continue into '13.

And then following up on the comment that, Rob, you made about the 45% efficiency, and then Alex's question as well, even if we put kind of a 50% target in 2013, assuming that margin pressure continues and you guys continue to add branches to your comment that it would be 2 to 4 a year, where do you see -- what kind of specific strategies do you guys have in place, or what do you see as leverage to push efficiency down, given the environmental challenges?

What we signed -- usually the branches we sign Travis, as you know, we open very efficient branches and smaller branches that can become profitable in a very short period of time. And efficiency ratio could be achieved through the growth of those branches and additional income coming in that way, as well as rigid expense control. I think we still have room in our expenses to push them down even further.

Okay. All right. And then Bob, just to clarify, you said you have $256 million of CDs you're pricing this quarter, and then what is it, an additional $405 million in the second quarter this year? Is that correct?

No, it's $256 million for the first three months, and then of total of $405 million for the first six months.

Got you, okay, so another $150 million in the three months following. Okay.

And I know historically you guys have put out a target that loans would remain 60% of earning assets or 60/40 split on loans to securities. Is there any change to that target? Obviously, you know, the environment continues to be difficult, and it's more attractive to you maybe from a current earnings perspective to increased loans, kind of shift that mix, or do see growing securities again kind of rebalance that?

No, I would think just the opposite. You could see loans exceed the 60%. I mean, we certainly keep the 60/40 target but we could exceed the 60% in the loan area for at least a brief period of time.

And then I wanted to revisit something we talked about last quarter, the BASEL III issue. First I guess, do you know what percentage of your residential portfolio have LTVs above 80%? And then following up on that, have you determined the impact that the risk weighting changes will have on your BASEL III capital?

We've run through the BASEL III constellations, and looked at them again with our current balance sheet. Excuse me, I'm kind of shifting my papers for a second. The capital ratios, we will be in excess, safely in excess, of the BASEL III requirements with respect to where we end up. Again, these are all based on some preliminary -- our best guess and interposition of what we've got, but we are looking at the total capital ratio with a BASEL III of 10.5%. We'd probably come in somewhere in the 13.5% to 14% range.

Okay. And then sort of a two-part big picture question here, Bob, starting with you. If we assume that today's interest rate and economic environment persists, how much longer do you really think that the excess liquidity and the funding cost reduction opportunities can kind of delay or push off really significant margin compression? Obviously, with the nature of the asset side of your business, it seems, withstanding any change in the environment, that it's going to come at some point. So how long do you think we can push off that real pressure?

As we brought up earlier, we have six months worth of opportunities in front of us relative to the current CDs that are maturing. After that, when I look past that, I see another set of bubbles coming in in the May to October time period where we again have opportunities in there to bring rates down. So I'm looking at 2013 still providing us, assuming rates, using your example, for kind of things stay as they are, where we are right now. I still see opportunity for 2013 on our CD portfolio. And again, we have other deposit products that we have not changed rates in terms of their money market cash management in a while. We'd also look at those should this continue to persist.

As far as being squeezed to finally make an investment type of thing, we would again -- our plan is for 2013 and '14 to stay short-term in our investment portfolio. And as Rob mentioned, maybe that will squeeze down to 35% of the balance sheet, in that range. But that's kind of what we are thinking. We'd rather see the loan growth be steady and solid and repricing the CDs down than do anything kind of foolish with the liquidity.

We've ridden it out for this long, Travis, with regard to that liquidity position and the short-term nature of the portfolio. So we think it would be almost suicidal to start investing at this point after having ridden it out for this long.

Right. Then I guess Rob --

This can't continue for three years now, so eventually we will be right.

I don't know Travis. I think we will be right eventually.

Yes, well, my dad used to tell me even a blind squirrel finds an acorn once in a while.

Exactly.

So Rob, just kind of thinking big picture then, what's your thoughts on the monoline business model you guys are running right now? And with these kind of pressures, is this something that's really sustainable, do you think, kind of given the environment we've been in? Obviously, it's kind of restating the question because, as you said, you've made it this long and you're absolutely right about that. But is there anything kind of -- as you look at it, if this were to be sustained for another three or four years, is there any strategic change to the business that you would foresee being something that you guys would look at? Or I know commercial lending right now is kind of something that's a sleeping opportunity for you. But just kind of maybe your thoughts on the way the monoline business model can be successful in this environment.

And certainly Travis, we look at opportunities all the time and evaluate opportunities all the time. I know people have jumped into indirect lending big time, and a lot of people are on the commercial loan train right even with the rate environment as it stands. And we certainly stand ready to take advantage of any opportunity that comes along.

We do have a very strong commercial capability. We do have an installment lending capability. But we feel that the process and the way we are running it right now is the most effective and efficient way for us to continue. And we have been very successful at it over the years. And we think there's additional opportunity within the areas we serve.

You have to remember the markets we serve are really a service-driven economy both in Florida and Upstate. And the one thing people -- that drives our economy to a great extent is housing, and that's true in even the areas we are in Florida. So we think there's a tremendous opportunity for us going forward, and that's what the de novo expansion provided for us. We have outlets and the ability to grow the Bank.

All right, thank you very much.

(Operator Instructions). We show no further questions at this time. I would like to turn the conference back over to Mr. McCormick for any closing remarks.

Thanks very much for your interest in our Company and listening to us this morning. We appreciate the confidence you have in us. Have a good day.

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