TrustCo Bank Corp NY (TRST) 2013 Q3 法說會逐字稿

Good morning, and welcome to the TrustCo Bank Corp. third-quarter earnings call and webcast. All participants will be in listen-only mode. (Operator Instructions). Before proceeding, this presentation may contain forward-looking information about TrustCo Bank 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 materially 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 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 now would like to turn the conference over to Mr. Robert J. McCormick, President and CEO. Mr. McCormick, please go ahead.

Thanks, Keith. Good morning, everyone. As Keith said, I'm Rob McCormick, President and CEO of TrustCo Bank. As always, joining me in the room are Bob Cushing, our CFO; Scot Salvador, Chief Banking Officer; and Kevin Timmons, who most of you know.

We're happy to report solid third-quarter earnings here TrustCo Bank. Our net income for the quarter was $10.3 million, up 5.1% from the same quarter in 2012. Partially driving the rise in earnings was continued loan growth. Our average loans were up $214 million, or 8.3% year-over-year. The loan growth all occurred in the residential portfolio. Our commercial portfolio has fallen about $5 million year-over-year. This is mostly a result of very aggressive pricing from competitors chasing far too few transactions.

Our deposits show continued growth of $118 million, to almost $3.9 billion. We also continue to see growth in all the right areas, losing the higher-priced time deposits and growing the core, or lower-cost deposits. We continue to maintain a healthy investment portfolio, keeping our maturities relatively short. Nonperforming loans and assets have improved significantly year-over-year, showing $8.2 million and $7.1 million drops, respectively. This puts our nonperforming loan ratio and 1.47, down from 1.92 last year; and our nonperforming asset ratio at 1.16, down from 1.36 last year.

Our loan-loss allowance, at just under $48 million, provides a solid coverage ratio, and amounts to about 1.7% of total loans. We have backed down on our provision year-over-year. Our efficiency ratio has improved year-over-year, continuing to hang just over 50%. And as we previously reported, we do see additional opportunity for improvement. We opened one branch office this quarter in Ormond Beach, Florida. This brings our total to 139 offices. Average deposits per branch continue to rise.

We continue to maintain an appropriate level of staffing, resulting in an increase of average assets per employee. Margins expanded over the quarter, and we will watch for additional opportunities as they come up to take advantage of them. Again, we are pleased with a good, solid quarter.

Now I'm going to ask Bob Cushing to provide some additional detail on the numbers.

Thank you, Rob. I will review the financial results for TrustCo for the third quarter. The basic story is that we continued into the third quarter with the trends and activities that we began earlier this year. Overall balance sheet growth was modest. We deployed additional assets into our loan portfolio. We continued to grow core banking relationships; brought down our levels of nonperforming assets; and adhered to our philosophy of strong expense controls.

All of this resulted in net income of the quarter of $10.3 million, an increase of 5.1% over last year's third-quarter net income of $9.8 million. Earnings per share came in at a tad under $0.11 per share this year compared to the $0.104 per share last year. Return on equity and return on assets continued strong, at 11.6% and 91 basis points, respectively, for the quarter. Our efficiency ratio continued to decline, and was 51.2% for the quarter compared to 53.5% last quarter.

Our net interest margin expanded to 3.12%, reflecting the loan growth, but still somewhat held back by the large balance of overnight investments. Our average cost of funds remains low at 40 basis points, while interest-bearing liabilities increased by $21 million to $3.8 billion. Asset growth was confined to our loan portfolio, which increased by $70 million during the quarter, with a yield on these earning assets decreasing to 4.59%, down 5 basis points during the quarter. Overnight investments continued strong at $551 million for the quarter compared to $530 million last quarter.

We continue to believe that the loan portfolio provides us the best opportunity to deploy the funds we have gathered, and we are patiently waiting for better opportunities in the securities portfolio. As of September 30, 2013, the balance sheet reflects $23 million of unrealized depreciation in our available-for-sale portfolio. That is down slightly from the $24.5 million depreciation at June 30.

Deposit balances were affected by some of the seasonality that occurs in this quarter. As mentioned earlier, our total interest-bearing liabilities increased by $21 million, and our average cost of funds dropped to 40 basis points. We continue to be very disciplined in our pricing of deposits, so as to help to ensure that we are attracting core banking customers versus merely transaction accounts.

Net interest margin was up 2 basis points in the second quarter, to 3.12%, and contributed to an increase of $550,000 of taxable equivalent net interest income for the third quarter over the second quarter of this year. For the remainder of this year, and going into 2014, we expect that any increase in net interest income will come from an expanded balance sheet; changing the redeployment of our asset mix; and from repricing opportunities on our loans and investments. So, said another way, what we would expect any increase in net interest income to be driven by our assets coming in at slightly higher yields.

Over the next three months we have $142 million of CDs maturing at an average cost of 66 basis points, which, if we use today's renewal rates, would drive down that average cost to 61 basis points. We have utilized the strategy in the third quarter, and are expected to continue into the fourth quarter of offering relatively attractive CD rates for slightly longer terms in certain regions, such as a 2-year CD at 1%. We think that our balance sheet would benefit by these slightly longer-term CDs, and that our P&L can afford the uptick in CD costs.

For the first quarter of 2014, we have $213 million of CDs maturing with an average cost of 78 basis points. That will reprice down by 10 basis points to 66 basis points at today's rates. The second quarter of 2014 has $289 million maturing at 73 basis points. And that would reprice at basically the same yield as it is today. And finally, in the third quarter of 2014, has $276 million maturing at a cost of 58 basis points. That would reprice to 61 basis points at today's CD rates.

So there are some slight opportunities to continue our downward pressure on CD rates. But, for the most part, that strategy has run its course. Noninterest income was in line with our expectations and prior quarters' results. There were no security gains this quarter, versus the $1.4 million recorded in the second quarter. Noninterest expense came in at $20.7 million this quarter compared to $21.9 million in the second quarter, and $20.6 million in the third quarter of 2012.

The current period results are right in line with what we have been saying all along. Core operating expenses should come in between $20 million and $20.5 million each quarter. If you take out the ORE expense for the quarter of $946,000, our recurring noninterest expense was $19.7 million in this quarter compared to $20.4 million for the second quarter of this year, and $19.7 million for the third quarter of last year.

In the various categories of noninterest expense, it is actually hard for me to pick out any items to highlight. Our expense control systems were all functioning as expected, and results are in line with our expectations for the quarter and the year. For the remainder of this year, we continue to see noninterest expense in these same levels of between $20 million and $20.5 million for the quarter.

In the area of ORE operations, we have disposed of 83 properties this year, which is about the same as in 2012. And we currently have 5 commercial properties and 42 residential properties in our inventory. These are all relatively newer property acquisitions for us, and we do not hold onto them for long periods of time. And, finally, capital remains strong, with a tangible equity to tangible asset ratio of 7.94% at September 30, versus the 7.81% at the end of the second quarter.

And (technical difficulty) now for the loan portfolio review and nonperforming loans.

Okay, thanks, Bob. Strong growth in our loan portfolio continued for the third quarter, with total loans increasing by $72.5 million to $2.834 billion. Year-to-date growth now totals $150 million. Residential mortgages were again the driver of this growth, with an approximate $74 million quarterly increase, while home equity credit lines increased by $2.6 million. Commercial loans declined by $4.1 million.

The quarter's $72 million in loan growth was up from the second quarter's $59 million, and last year's $46 million. Although total volume of loans has lessened on a year-over-year basis, due to the decrease in refinance activity, the net growth of $150 million for 2013 is up significantly from $85 million at this point in 2012. The decrease in refinances has slowed pay off levels, and we have also benefited from a strong amount of purchase business that we've captured in our markets this year.

This transition is illustrated by the fact that for the third quarter of 2012 approximately 75% of our loan originations, excluding home equities, were refinances. This past quarter, 62% of our business was purchases, with only 38% refinance. Recent loan activity has been steady and our backlog is good, roughly on par with this point in 2012. Loan volumes do typically slow a bit as we get deeper into the fourth quarter and approach the holiday season, but we still anticipate continued growth in the coming months.

Asset quality indicators continued to improve across the board in the quarter, with nonperforming loans decreasing from $43.4 million to $41.7 million; and nonperforming assets declining to $51.6 million from $53.8 million. Net charge-offs also dropped in the quarter by $700,000, although a portion of this decrease was due to one-time commercial loan recoveries. These improvements follow up on recent trends, and we expect that going forward we should continue to gain positive (technical difficulty).

At quarter-end, nonperforming loans were equal to 1.47% of total loans versus 1.96% at year-end. The coverage ratio, or allowance for loan losses to nonperforming loans, was 114% at September 30; versus 91% as of December, 2012.

Rob?

That's our report for the third quarter, and we'd be happy to entertain any questions anyone might have, Keith.

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

Hello. Good morning, guys. First off, Scot, I was wondering if you could just tell us what kind of rates new loans are coming on today.

Sure, Alex. Good morning. Currently, right now we're at 4.5%, Alex. That's bounced around a little bit over the last several weeks. Anywhere between 4.5% to 4.75% is where we've been recently. But as of today, we're at 4.5%.

Okay. And as you look at the distribution of rates as you get a little bit further out, and what might come off your books relatively soon, can you talk a little bit about the distribution there of the rates? And what is coming off today, what sort of rates are coming off the balance sheet?

Yes. Alex, it's Bob Cushing. The refinancing activity, as Scott mentioned, has slowed down pretty dramatically. And as a result, what we're seeing, refinancing rate-wise, is not far from what we're actually bringing loans on -- back of the books on today. So we are seeing that steepening of the curve, that leveling off of the downward pressure on our yield on the residential loan portfolio.

So I tell you, it's in the 5% range, but not much above 5% range in refinancing. So really it looks like a lot of normal principal payments that are occurring. And they are refi-ing either away from us, or to us, at the lower rate at the 4.5% to 4.75%.

Okay, great. That's helpful. And then you gave a little bit of detail on what's in the REO bucket. But as a line item, that's a little bit more hard to -- a little bit harder to predict. Can you give us a little bit more -- talk a little bit about some of the workings there that, as you cure properties, as you get them off your books, what kind of expenses are associated with them? And is it safe -- would it be fair to extrapolate 83 properties offloaded in the first nine months? Could you extrapolate the expense associated with that to the 47 properties that you have in your inventory right now?

The costs associated with the ORE properties are the normal cost of insurance, maintenance, property taxes, those types of things that we have to maintain on them. When we take possession of a property, we will button it up as far as doing a review to see if there is any things that need to be done to it to stabilize it and to improve it for getting it ready for sale.

We don't want to spend a ton of money in getting these properties ready for sale. But, on the other hand, we're not looking for fire sale sales, either. So we will spend some money to either put in some appliances, paint, paper, carpet, that type of thing. As far as expenses going forward, it's really more affected by the distribution between New York and Florida.

The Florida properties, earlier on -- years ago -- used to take pretty big hits trying to move those properties. Today, those properties are not difficult to move. They move relatively quickly. The New York properties, once we get our hands on them, do, in fact, have some time period associated with disposing of them. So we do, in fact, then incur the costs associated with property taxes and the rest.

Write-downs -- we try to be very hard on the write-downs, relative to the time period that we have them in the nonperforming loan category. So when they move over to ORE, if we're moving them relatively quickly, the write-downs are pretty light and pretty nominal, because the write-downs have occurred as loans rather than as ORE. On the other hand, if we get a piece of property and we have to hold onto it for several quarters, those properties will have additional write-downs because we do want to move them along.

As far as going forward, we had about $1 million, $1.5 million -- last quarter was probably our top, at $1.5 million. We kind of average in that $750,000 to $1 million range. And I think the flow of the inventory, we'd say that's about the right number.

Okay. That's quite helpful. Thank you. That's all my questions for now.

Travis Lan, KBW.

Thanks. Good morning, guys. Just staying on credit for second -- as credit continues to improve, can you just talk a little bit about your outlook for the reserve?

The reserve, as you -- Travis, this is Bob Cushing. And the reserve, as you know, is heavily affected by the modeling you have to do relative to the adequacy allowance for loan losses. And that is influenced by charge-offs, to a great degree. The charge-off history and the nonperforming loan portfolio affect the level of the allowances necessary. Those numbers coming down will have the impact of lowering the required reserves.

I would say, as Scot brought up, though, the third quarter was heavily influenced by that recovery of about $500,000, in that range. So if you looked at our charge-offs in the third quarter of about $1.4 million, if you added that back -- because that really is -- recoveries by their nature are nonrecurring. That one in particular is not one that I would expect -- I would want to model into the models themselves. So I think that the charge-offs around the $2 million level -- $1.8 million, $2 million level on a quarterly basis -- is what we're looking at.

Got you. That's helpful. And, obviously, to offset some of the asset yield pressure, you guys have continued to grow loans as a percentage of earning assets. How willing are you to allow that mix shift to continue here?

We've always enjoyed that 60/40 split between loans and investments. That's been our philosophy. But as we see the investment opportunities lag, and the loan opportunities are available to us, we will shift that around a bit. If you're asking do we have target percentages, no. We don't do target percentages. But we will let that drift upwards a bit on the loan portfolio.

Okay. Without saying that there's targets, do you have thresholds or a cap where you would be willing to let loans run as a percentage of that?

There's no formal cap, Travis, no.

Okay, all right.

(Multiple speakers) opportunity is.

Got you. All right. On the securities side, can you just talk about the moving pieces that there may be in terms of yield and duration of what's being purchased? I know, obviously, you said you're waiting for better opportunities. But the securities yield ticked up in the quarter, and just wanted to hear a little bit more.

That really relates to a little bit of extension in the mortgage-backed securities portfolio. As far as the buy side, during the quarter we did very little on the buy side during the quarter itself. We continue, as you know, to be very focused on the high-quality stuff. We don't look to -- we don't want a lot of stories that we have to pay attention to in the securities portfolio, so we are buying -- what we do buy is the agency papers themselves.

As far as quarter to quarter, let me just give you a little flavor on the weighted average life. So, in the second quarter, the weighted average life in the portfolio was about -- just at five years, on the money. For 9/30, that came down very slightly to 4.98. So the lives themselves have pretty much stayed constant during that time period. And then modified duration was 4.50 at 6/30; and it's 4.40 at 9/30, so no big changes there either.

Going forward, we are looking -- rates are up significantly over where they were, but we still see volatility in the securities portfolio. So from that perspective, we like the customer relationships we're building in the loan portfolio. So though we will redeploy into the securities portfolio, we're not chomping at the bit, at this stage.

So when you say that, are you managing the securities portfolio? It sounds like you're managing it more to yield than duration. Does that make sense?

Well, we have a five-year -- our goal is to keep that portfolio under five years from an average life perspective. And as far as the yield is concerned, absolutely. This is a portfolio that's designed to provide additional enhancement to liquidity and yield.

Got it. All right. Thank you, guys.

(Operator Instructions). All right, there are no more questions at the present time, so I'd like to turn the call back over to management for any closing remarks.

Thanks for your interest in our Company, and thanks for taking the time this morning to listen in. Have a great day.

Thank you. This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.