TrustCo Bank Corp NY (TRST) 2013 Q4 法說會逐字稿

Good morning and welcome to the TrustCo fourth-quarter 2013 earnings conference call and webcast.

All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions).

Before proceeding, we would like to mention that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as believes, anticipates, expects, should, may, plans, estimates, and similar references. However, such words are not the exclusive means of identifying such statements. Examples of forward-looking statements include but are not limited to projections of revenues, expenses, income or loss, earnings or loss per share and other financial terms, statements of plans, objectives and expectations of TrustCo and its management and Board of Directors. Statements of future economic performance, statements of underlying assumptions, and future (technical difficulty) are only assumptions. Forward-looking statements are based on TrustCo's current expectations, assumptions, earnings, business, the economy, and other future conditions. As forward-looking statements relate to the future, they are subjected to inherent uncertainties, risks, and changes in circumstances and are difficult to predict. TrustCo's actual results may differ materially from those contemplated in the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance.

Factors that could cause actual results to differ from those discussed in the forward-looking statements include but are not limited to, one, local, regional, national and international economic conditions and the impact they have on us and on our customers; two, volatility and disruption of the national and international financial markets; three, government intervention in the US financial system; four, changes in the level of nonperforming assets and charge-offs; five, changes in estimates of future reserve requirements; six, adverse conditions in the securities markets that lead to an impairment in the value of securities in our management portfolio; seven, inflation, interest rate, securities market and monetary fluctuations; eight, the timely development and the acceptance of new products and services; nine, changes in consumer spending, borrowing and savings habits; ten, technological changes; eleven, the ability to increase market share and control expenses; twelve, changes in the competitive environment among banks and other financial service providers; thirteen, the effects of changes in laws and regulations on which we and our subsidiaries must comply, including those under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III requirements of the Basel III accords that is underdevelopment; fourteen, the effect of changes in accounting policies and practices as may be adopted by regulatory agencies as well as by the Public Company Account and Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters; fifteen, cause and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries and the result of regulatory examinations reviews; and sixteen, our success in managing the risks involved in the foregoing items; and seventeen, the other factors described in the company's annual report on Form 10-K and quarterly reports on Form 10-Q under the heading "Risk Factors".

Any forward-looking statements made by the company speak only as to the date of which they are made. Factors or events that could cause the company's actual results to differ may emerge from time to time and it is not possible for the company to predict them all. The company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future developments or otherwise, except as may be required by law.

Please also note this event is being recorded.

Now, I would like to turn the conference over to Mr. Robert J. McCormick, President and CEO. Mr. McCormick, please go ahead.

Thank you, Keith. As the host said, I am Rob McCormick, President and CEO of TrustCo Bank. Joining me today are Bob Cushing, our CFO, Scot Salvador, our Chief Banking Officer, and Kevin Salvador, who most of you deal with regularly.

We are very pleased with our fourth-quarter and full-year results which continued our pattern of solid profitable growth. Our total deposits grew about $123 million to $3.927 billion. We continue to shift our deposit mix to be less dependent on time accounts, about $192 million growth in core categories. We also improved our franchise value by growing average deposits per branch $28.3 million at year-end.

Our loan portfolio growth was very good, $224 million. All loan categories benefit from the growth. But most, $212 million, happens in our residential loan portfolio.

We did not open any new branches in the fourth quarter. We opened one in 2013 and have relocated one since year-end. Keep in mind all of our business is generated in our branches. We still plan to open two to four per year on average.

We are pleased that our nonperforming assets dropped over $9 million in 2013 to just over $52 million. Our net charge-offs also saw a significant drop. We also had two successful bulk sales of hard-core long-term problems which we realized a gain on.

As we have previously reported, we are working our way through a bubble and are finally seeing real positive results. Our asset quality ratios have all moved in the right direction in 2013.

On the expense side, we reduced our headcount by rightsizing the department and branch staff size. Our efficiency ratio improved year-over-year to just over 52%.

We lost ground in our margin year-over-year but had an uptick in the fourth quarter to 3.15%. All of this resulted in a net income of $39.8 million for the year, which is up 6% compared to 2012, also left us with a tangible equity ratio of just under 8%.

We also continue to pay our very healthy dividend for 2014. We are hoping for more of the same. We're going to open a couple of branches, relocate another branch, and possibly close or consolidate at least one branch.

There is more work to be done on our efficiency ratio. We will continue to be mindful of regulatory changes, deposit, loan and other opportunities as they present themselves.

Now, I'm going to pass it on to Bob to go over the numbers in great detail.

Thank you Rob. I will review the financial results for TrustCo for the fourth quarter and year-to-date 2013.

The strength and momentum that we built during the year continued into the fourth quarter. Overall balance sheet growth continued during what is normally a relatively quiet banking season due to the holidays and weather.

Our loan portfolio increased by $67 million on average during the quarter, supported by a slight increase in our funding sources and a shifting in the balance sheet from lower-yielding investments to higher-yielding core loan relationships. This resulted in net income of $10.6 million for the fourth quarter of 2013, which is an increase of 8.4% over the $9.8 million earned in the fourth quarter of 2012.

On a year-over-year basis, we recognized net income of $39.8 million in 2013 and $37.5 million in 2012 for a 6.1% increase. Again, for the quarter, this resulted in a return on assets of 94 basis points for 2013 and 91 basis points for 2012.

The return on equity increased for the quarter to 11.78% for the fourth quarter of 2013 from 10.88% for the comparable quarter in 2012.

For the quarter, our net interest margin increased to 3.15%, up from the 3.12% in the third quarter, resulting in a tax equivalent net interest income of $34.6 million this quarter compared to $33.7 million in the fourth quarter of 2012. The increase in the net interest margin comes strictly from the assets out of the balance sheet as a result of a 4 basis point increase in the yield earned on average interest-earning assets.

Our funding costs remain stable at 40 basis points for both the third and fourth quarters of this year. Average asset growth was centered in the loan portfolio with residential mortgage loans increasing to $2.3 billion, up $61.3 million over the third-quarter averages. Commercial loans, home equity credit lines and installment loans all showed -- all saw modest increases during the quarter.

Our total investment securities portfolio, that is both securities held to maturity and securities available for sale, decreased by almost $26 million on average between in the third quarter and the fourth quarter of 2013. This was primarily the impact of maturities and cash inflows on the mortgage-backed securities portfolio coupled with the decision to sell some of our corporate bonds at a slight gain. The decision to sell some of the corporate bonds was in response to the rising rate environment. We also allowed almost $29 million of our overnight investments to be used as the funding source for our loan growth.

Deposit balances were again affected by the seasonality of this time of year. Overall growth in our average funding sources increased by $3 million between the third and fourth quarters of 2013. As compared to last year's fourth quarter, total funding sources have increased by $166 million, which shows the success we have had during the year in attracting and retaining core banking customers.

The total cost of interest-bearing liabilities remained constant at 40 basis points during the quarter, which is equal to the third quarter and down 4 basis points from the fourth quarter of last year.

As we have noted in prior conference calls, we have just about reached the point where our current market rates offered on deposit products equals were slightly exceeds the cost of those maturing funds. Therefore, expansion of the net interest margin will come primarily from the assets out of the balance sheet.

By way of reference, over the next three months, we will have $213 million of CDs maturing at an average annual yield of 76 basis points. If those deposit rolled over at current market rates, the average yield would drop to 67 basis points for an overall reduction in these maturing CDs of 9 basis points. After that, we have $309 million of CDs maturing in the second calendar quarter at a cost of 70 basis points, which would be about the same cost if they rolled over at current rates.

For the third quarter of this year, we have $284 million of CDs maturing at an average annual cost of 58 basis points, which, if they rolled over at current market rates, would increase to 62 basis points.

And last but not least is the fourth quarter 2014, where we have $85 million of CDs maturing at an average annual cost of 46 basis points, which, if they rolled over at current market rates would, increase to 54 basis points.

Noninterest income for the quarter was $4.8 million, up slightly from the third quarter's $4.4 million. Security gains during the quarter were $188,000. Also during the fourth quarter, we sold $1 million of nonperforming loans at a net gain of $212,000. Otherwise, all the subcategories of noninterest income came in at our expected levels.

The gross changes in various line items of noninterest expense is always interesting to explain in the fourth quarter. We do a couple of reclass entries at year-end so that our payroll and benefits expenses matchup with our W-2s and our final payroll registers. This requires a movement of expense balances for the year from other expenses and equipment expense categories up to salaries. But if you start at the bottom line and look at total noninterest expense, you will see it came in for the fourth quarter at $20.9 million compared to $20.7 million for the third quarter and $21.2 million for the fourth quarter of 2012. If you take out other real estate expense and get down to the core operating expenses for TrustCo, you get $20.5 million for the fourth quarter compared to $19.7 million for the third quarter and $20.8 million for the fourth quarter of 2012. All of these periods are relatively in line with each other. The main increase between the third quarter and the fourth quarter this year is a $300,000 increase in advertising expense due to ramped up spending in the fourth quarter for the holidays.

Okay, so let's look at some of the details. The reclass entries we mentioned, the reclass entry we record moves almost $400,000 out of other expenses, it reduces equipment expense by $130,000 and it moves the total of $530,000 up to salary and benefits expense. So if you compare the salaries expense for the third and fourth quarters of 2013, you will see an increase of $729,000, $530,000 of which is this reclass entry from other expenses. That leaves an increase of approximately $200,000 that really exists between the third and fourth quarters. That $200,000 is the result of employee salaries that will be earned in 2013, but paid in the first couple days of 2014, which then requires employer payroll taxes to be recorded because the salary caps all restart for the first payroll period in the new year.

Net occupancy expense is up $315,000 from the third quarter to the fourth quarter of 2013. You will also notice a similar increase in occupancy expense that occurred last year in the first quarter of 2013.

We lease the majority of our branches and each year, our landlords have a settling up process they go through for common area maintenance charges, snow removal, lawn maintenance, and taxes. Annually, that occurs anywhere between the fourth quarter and the first quarter of each year. We do not know the amount of these settlements and therefore have to wait until we receive notices of required payments. Sometimes they come in in the fourth quarter, other times they come in the first quarter.

Equipment expense is down slightly but that is all due to the $130,000 reclass entry we talked about earlier.

Other real estate expense is down as a result of the stabilization of write-downs on foreclosed properties and the quickness with which we have been able to sell properties. The quicker we can clean up a house and get it on the market, the less operating costs we are incurring. This has a positive effect on utilities, maintenance, and property taxes for these units. We sold 121 foreclosed properties during this year.

I should also mention that, as part of the nonperforming loan sale that I noted earlier, we also sold 11 ORE properties to the same buyer at a slight gain.

That brings us down to other expenses, which decreased by $381,000 between the third and fourth quarters. I mentioned earlier that we moved almost $400,000 out of other expenses to salaries, and that accounts for the total decrease in other expenses.

Overall, our expense control systems worked well in the fourth quarter, and we are confident that we can manage the Bank along these same lines moving forward. We feel most comfortable moving forward with recurring operating expenses in the $20.2 million to $20.7 million range, and with other real estate expenses adding another $500,000 to $1 million each quarter.

Just to remind you that for the first quarter of 2014, the operating expenses will be slightly higher than our $20.7 million range due primarily to the increased payroll taxes in the first quarter. But that will trail down as the year goes on, and we'll bring it back in line with what our expectations are for the year.

Income tax rates are in line at 37.4%, which is what we expected for the year -- for the quarter. Tangible equity asset ratio, as Rob mentioned, came in at 7.99% from the 7.94% last quarter. For regulatory purposes, we are a well-capitalized institution and we exceed all the risk-based capital requirements.

Next is Scot to review the loan portfolio and nonperforming assets.

Good morning, everyone. The loan portfolio continued to show strong growth during the fourth quarter. Total loans increased by $73.8 million, which led to a $224 million increase for the full year. We ended the year with a portfolio of just over $2.9 billion with gains equating to growth of 8.35% on the year and 2.6% on the quarter.

Residential real estate and commercial loans grew by $63.2 million and $10.6 million respectively on the quarter with the commercial loan figure including some more temporary year-end borrowings. We are especially pleased with the results for residential real estate since, although the growth was down a bit from the third quarter as we expected, the $63 million net increase represents a very strong fourth quarter.

Growth continues in all our major market areas with our Florida region accounting for approximately 35% of the total increase on the quarter.

Recent loan activity has slowed a bit as is normal for this time of year. However, our backlog of penny loans at year-end was good, slightly ahead of last year's totals, and we are optimistic about achieving solid first-quarter results.

Nonperforming loans and nonperforming assets both declined significantly on the year. Nonperforming loans dropped from $52.7 million at 12-31-2012 to $47.4 million, while nonperforming assets dropped from $61.4 million to $52.1 million. For the quarter, nonperforming assets and loans increased by $569,000 and $1.7 million effectively. However, both these totals were affected by one-time items, including a commercial loan relationship of $2.2 million entering the nonperforming category. There was also a bulk sale of nonperforming assets totaling just over $1.6 million at a slight gain. Excluding these items, nonperforming loans would have been essentially flat on the quarter with nonperforming assets up slightly. The fourth quarter is often the most difficult with respect to nonperformers, and this year's results are significantly improved over the fourth quarter of last year. Going forward, we look for a continuation on the improving trend for nonperformers.

Nonperforming loans totaled 1.49% at year-end compared to 1.96% a year earlier and the allowance covered the analyzed fourth quarter charge-offs by 7.9 times compared to 4.9 times a year earlier.

Bob?

That's our story, and we would be happy to entertain any questions anyone might have.

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

Good morning, guys. First off, Bob, I just missed the amount of CDs that are set to reprice in the first quarter. Can you just run through that number again?

Sure. Hold on one second.

$213 million.

$213 million. And what was the rate on those?

76.

On the first quarter, the $213 million -- you are right. It's 76 basis points.

Lucky guess.

(inaudible).

And then you do a good job. Obviously, we all know that the key to the TrustCo story lies in the cash flows, and you do a good job of laying on the liability side. I was wondering if there's any way you could give us a sense for the amount of securities that are set to mature or reprice through 2014.

We have on average about $200 million a year that comes due -- mature between the cash flows and maturities.

Okay. And do you have any sense for where those are right now? And obviously, the market will dictate where they can go in terms of rates.

The yield on the overall portfolio, I don't have a feel for that, Alex. I'm sorry. But I would say it's indicative of the yield in the overall portfolio.

Okay. That's helpful. And then Scot, you talked about the pipeline being relatively healthy. Can you give us a sense for what rates are looking like on the pipeline today? Are they pretty close to the national average in the 4.60%, 4.70% range or is there something else going on?

Yes, that's about right. We have been bouncing around the 4.5% range, give or take, Alex, for a while, sometimes right on it, sometimes a little above, sometimes a little below. So that's about where the pipeline sits, right in that range.

Okay. And then maybe just give us a little bit more color on credit. We've kind of been sort of had a similar level of NPLs for a while. Now, I know the nature residential loans is that they take a while to work out, but to the extent it's faster to work through a foreclosure. Are we still looking at 1000-plus days in New York State to get to foreclosure? Or sort of what kind of timeframe do you think we could actually see NPLs start to decrease like relatively meaningfully? I know there will be a tail and it will probably go on for a while for some of these loans. But give us a little more color there.

I think the 1000 days is significant down in Florida, Travis. I can't say that about New York State, especially the counties we are doing business in. You might be as much as a half a year off the 1000 days in the state of Florida. They really put in an initiative to bring retired judges back which cleaned up that backlog, and I think that's improving on a regular basis. And as Bob said in his presentation, most of these are houses, so the faster we can get the house cleaned up and get it on the market, we can get rid of them pretty quickly.

So, upstate New York, we still have the full judicial process. And I don't think they have been as Progressive as Florida. And I think we're still -- it might be down a little bit, Alex, but I don't see us down much off the three-year mark, especially with a bankruptcy involved.

And our nonperformers, we were on a great track for improvement, but we had that one commercial relationship that Scot alluded to that -- it's an illness issue with him. And I think you would've seen much better numbers had that not happened.

Just as a passing note, I don't think that loan is even 60 days delinquent at this point in time. We proactively put it into nonaccrual though.

Great. That's very helpful. That's all my questions for now. Thanks.

Travis Lan, KBW.

Thanks, guys. Good morning. Bob, I missed the answer to Alex's question about the securities cash flows. Did you say $200 million a year, or was that --?

Approximately. Between calls, the maturities, and the cash flows for interest and principal payments on the mortgage backs.

Okay, all right. And then just including occupancy and comp costs, do you guys have a sense for what the average cost of each of your branches is, not on an individual basis but just in aggregate, what kind of a good estimate would be for the average annual cost of a branch?

I don't -- it varies. It's a tough answer because the branches vary both obviously in the rental costs in spot to spot but also the staffing our larger branches with more transaction count carry more staff with them obviously, so it does vary quite a bit from branch to branch.

Okay. All right. And then have you -- do you guys think that the duration of the mortgage portfolio has changed at all over the last couple of years, and maybe if you have a sense for where it is today or if it's been fairly stable?

We continue to monitor that through our [life-ing] and decay analysis. And it has extended slightly but not significantly from that perspective. So, our range has always been that in that 6.5 to 8 year range, and we might be in the upper end of that range right now.

Okay, all right. That's helpful. Then the last one is just kind of -- I ask this question about credit, how you guys are thinking about reserve to loans at this point, or I guess the way you will continue to provide for charge-offs.

Again, we continue -- we start with the philosophy that we like healthy reserves. However, we are not going to tie it down to a percentage of originations or a percentage of the loan portfolio from that perspective. At this stage, our charge-offs and our provision kind of match each other and we think that the reserves, unless we see something change dramatically, we think the reserve levels are adequate in this environment. We also are mindful of the fact that FASB has got their project out there relative to changing the methodology associated with how reserves are calculated.

All right. Thanks very much guys.

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

We are looking at 2014 optimistically. We think our company will have a great year. Thank you for listening and thank you for your interest in our company.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may disconnect your phone lines. Have a nice day.