TrustCo Bank Corp NY (TRST) 2014 Q1 法說會逐字稿

Good morning and welcome to the TrustCo Bank Corp. first-quarter earnings call and webcast. All participants will be in a 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 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.

Please review risk factors in our most recent annual report on Form 10-K and our other securities filings for detailed information. 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 Mr. Robert J. McCormick, President and CEO. Mr. McCormick, please go ahead.

Thank you, Denise, good morning, everyone, thanks for joining us today. As the operator said, I'm Rob McCormick, President and CEO of TrustCo Bank. Joining me in the room today are Bob Cushing, our CFO, and [Bob Leonard], Executive Vice President responsible for various areas of the Bank. Scot Salvador is unable to attend today; Bob is pinch hitting for him. And as always Kevin Timmons joins us who most of you deal with on a regular basis.

I will provide you with a brief summary then turn it over to Bob Cushing who will give you details on the numbers and Bob Leonard will detail some of our operations, especially our nonperforming area and the loan portfolio. Then we can wrap up with your questions.

We completed the first quarter of 2014 continuing a pattern of posting very solid operating results. Our net income for the quarter was over $11 million, that is up over 20% from the same quarter a year earlier. Our assets are up $167 million year over year, that is just shy of 4%. Leading this growth is our residential mortgage portfolio up about $221 million year-over-year and a very positive $36 million quarter over quarter.

Our commercial loan portfolio is down from year end but up from the same period last year. Again as we told you before, we're not looking for big growth here, but will take advantage of opportunities as our customers become more active.

Deposits also posted great growth, about $130 million year-over-year and $60 million over year-end. We are very pleased with the growth in all categories, not just centered in the higher priced time accounts. And I think as most of you who've joined us before know and have heard from us before, keep in mind we do not accept broker deposits and we don't offer premium rates. So an argument could be made that even our CDs are core accounts.

We did not open any new branches during the quarter but we have plans for a couple of new offices and a couple of relocations by year end. We did have one relocation during the quarter; we moved one branch out of an enclosed mall.

We always reference our branches on these calls since all of our business comes through them. We made great progress in all of our performance ratios; our ROA is just shy of 1%, our ROE is up to 12.09%, our efficiency ratio improved to 51.28% and our margin was down slightly to 3.13%.

Our nonperforming assets are down almost $6 million from the same quarter last year. Nonperforming loans down almost $5 million for the same period. All of our asset quality ratios have improved year over year. A small uptick from year-end was driven by one loan required to be placed in TDR status, a seasoned loan on our books that has never missed a payment and we fully expect to collect 100% of the loan.

We continue to have a very significant investment portfolio with short maturities and a very liquid position. Our capital ratio is 8.11%. Now I'm going to turn it over to Bob to give you further details.

Thank you, Rob. I will review the financial results for TrustCo for the first quarter of 2014. The strength we noted in the fourth quarter of last year continued into the first-quarter results. As Rob noted, net income was up over 20% between 2013 and 2014. The first-quarter's net income was $11 million, which was equal to $0.116 per share and annualized return on equity of 12.09%.

These results reflect a couple of one-time items. First, we completed the sale of our planned Florida operation center which generated a profit of approximately $1.6 million on a pretax basis, which equates to about $1 million on an after-tax basis. And the other item is the impact on net income of the recently enacted New York State budget.

Included in this budget is a reduction in corporate tax rates from 7.1% to 6.5% beginning for us in calendar year 2016. Normally that would be viewed as a positive for net income and it will be in calendar year 2016. But in the meantime we have to revalue our deferred tax asset at these new lower rates. This caused us to take $200,000 of additional tax expense in the first quarter.

The good news is that in 2016 we will in fact have less tax expense and that will be a positive for the bottom-line moving forward. Other than these two items the best way for me to sum up the results for the first quarter would be to say they were business as usual for TrustCo.

The average balance of the loan portfolio grew to $2.9 billion during the quarter, which was an increase of $57 million over the fourth quarter 2013 average and up over $233 million over the first quarter of 2013 average balances. And as Rob said, as you would expect, the growth was concentrated in the residential real estate portfolio.

On the deposit side we continue to be successful increasing balances throughout our branch franchise. Total deposits for the first quarter averaged $3.9 billion, which was an increase of $40 million over the average balance for the fourth quarter of 2013 and up approximately $142 million over the first quarter 2013 averages.

Our cost of interest-bearing deposits stayed constant at 38 basis points for the quarter, which continues to reflect our pricing discipline with respect to CDs and other non-returning deposits. Our total investment [series] portfolio, including the available for sale and held to maturity portfolios, decreased by $55 million from the average balance in the fourth quarter 2013 to $946 million balance for the first quarter of 2014.

The reduction in the average balance was all due to normal principal payments and certain securities being called. Jumping ahead to a potential question, we expect approximately $135 million of cash flow to come from our securities portfolio over the next 12 months.

The liquidity provided by the growth in the deposit portfolio and the reduction in the securities portfolio was used to fund the loan growth and the increased balances in the overnight investments. Our average balance of overnight investments was $575 million for the first quarter of this year, up $53 million over the average balance in the fourth quarter and up over $169 million from the first quarter of 2013 averages.

And just to finish off this discussion of liquidity, if you look at the period end balance sheet you will see that we ended the quarter with $687 million of overnight deposits. Now all of this liquidity comes at a cost; our net interest margin decreased 2 basis points between the fourth quarter of 2013 and the first quarter of 2014. We think this is a small price to pay for the opportunity and the flexibility that the liquidity provides us moving into the remainder of this year.

To put that in perspective, if we wanted to make up the 2 basis points and have the tax (inaudible) equivalent net interest margin the same for the first quarter of 2014 as the fourth quarter of 2013, we would have had to only invest $50 million at a spread of 2%. So what that tells us is that protecting the margin moving forward this liquidity would be relatively straightforward.

That brings us down to noninterest income and noninterest expense. Total noninterest income was $5.8 million for the quarter, which if you back out the gain on the sale of the building would have been $4.2 million for the quarter, down $645,000 from the fourth quarter and down $390,000 from the first quarter of 2013.

Our financial services division recorded their annual tax return preparation fees in the first quarter of 2014 of $186,000. Other fees are down all due to volume. Noninterest expense came in at $20.8 million for the quarter, just about equal to the fourth quarter of 2013 and down $756,000 from the first quarter of 2013. ORE expense came in at $855,000 for the quarter which was right in line with our expectations for the first quarter.

One item I would like to point out is salary expense. During the first quarter of 2014 we reversed approximately $530,000 of unused bonus accruals, these were bonus accruals built up during 2013 but were not paid out in 2014 once all the bonus criteria were finalized. We would expect salaries and benefit expense to be in the $8 million range for the second quarter.

We continue to feel most comfortable with total recurring noninterest expense in the $20.2 million to $20.7 million range and with ORE expense adding between $500,000 and $1 million per quarter. Our effective tax rate is up a bit this quarter due to the write-down of our New York State deferred tax asset. For the remainder of this year we expect our effective tax rate to be in the 38% range.

We continue to build up our capital ratios which show tangible equity to asset ratio increasing from 7.99% at year-end to 8.11% by the end of the first quarter. Now Bob Leonard is going to walk us through the loan portfolio and nonperforming assets.

Thanks, Bob. We showed strong loan growth for the first quarter compared to the first quarter of 2013. Average loans grew by $233 million with residential mortgages increases $226 million and commercial loans increasing by $6 million.

For the quarter net loans were up approximately $36 million. We are pleased with the overall loan growth and consider it another exceptional quarter. Compared to last year we are seeing a decrease in refinancing and an increase in the volume of purchased money mortgages.

Recently residential loan activity has picked up as we entered the spring market and we expect that this will be reflected in the loan totals over the next several months. Loan growth for the first quarter occurred across all the markets we serve.

The backlog of our mortgage loans remains strong. Compared to March 31, 2013 pending commitments were up about $11 million to approximately $61 million. Although up slightly from the fourth quarter, nonperforming loans and nonperforming assets both showed improvement versus the first quarter 2013. Nonperforming loans and nonperforming assets both declined approximately 10% at March 31, 2014 compared to March 31, 2013.

In January new rules from the CFPB went into effect relating to qualified mortgages. We have been able to adapt quickly to changes and we don't anticipate any long-term impact in our mortgage lending. Now I will turn it back to Rob McCormick.

That is our story and we would be happy to answer any questions anyone might have.

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

First, I just wanted to ask a little bit more detail on the liquidity management and kind of how you are thinking about it. It seems to me that even just to get down to like 10% range of cash on your balance sheet, which is sort of maybe where you feel comfortable with it now, you have about $275 million of excess liquidity that could go to work fairly easily.

What do we have to see in the long end of the yield curve, or in rates on mortgage-backed securities, for example, for you to just say, okay, this is where we feel comfortable putting back liquidity to work today?

This is Bob Cushing. Alex, as far as our liquidity is concerned we have spent a lot of time over the last several years building up that liquidity level to this $680 million range. Our objective is to deploy that opportunistically as rates rise. So it is not going to be per se a bell ringing and then all that money is going to go flowing out the door. What we will be looking for is a back up.

We see the 10-year treasury right now at 2.70%, that is better than it was, but we certainly are not jumping in with both feet. When you start to see that back up above the 3% range you will see us take advantage of those opportunities.

And from that perspective we will, like we always do, we bleed things in. So we will not be putting hundreds of millions of dollars to work at any point in time, we will bleed it in as rates rise. We've waited this long to get to this stage and, as Rob said on other calls, we just don't want to be foolish and do it all at one time and then find rates continue to back up. We went to have dry powder as rates are increasing.

That is helpful. And then, Bob, I think you said that there was about $61 million in the residential backlog today. Can you just tell me what the blended rate of that would be -- on new product?

Yes, between [4.25], [4.50].

Okay. That is all of my questions right now. Thank you very much.

(Operator Instructions). Travis Lan, KBW.

Just following up on Alex's question, do you think that this is the peak level of the cash balance as a percent of assets, or is there -- I understand you want to preserve flexibility for when rates rise. But is there any kind of short-term securities reinvestment that you guys are expecting?

Well, we have about $135 million of cash flow coming off of our securities portfolio over the next 12 months. So we would want to reinvest part of that, so at least stabilize the margin and stabilize net interest income.

So from that perspective we continue to have opportunities on the deposit side to bring rates down slightly. And what we are going to do basically is offset that with opportunities relative to the securities portfolio. So you will see us invested little bit but we are not going crazy.

All right, got you. Okay, and then over the years we have kind of discussed how potential rate increases would change the duration of the mortgage portfolio if at all. I just wonder if you guys have seen anything -- any metrics that you could look at that would say is it still seven or eight year duration on the mortgage portfolio are you seeing anything different? I know rates haven't risen, but --.

No, that is a great question. And when we look at it we monitor that daily. Realistically we have got models that we run on a monthly basis looking at that type of information. If you look at the last 12 months our average life of our loan portfolio is kind of stretched out to the higher end of the range that we deal with.

We always talk about our range being six to eight years in that range. And so, if you look at the last 12 months worth of cash flows it came in at 8.6 years. If you look at our last (inaudible) study that we published which was at year end, 12-31, it came in at 8.5 years.

So those two things line up in that we kind of -- we have begun to move -- seen our portfolio move to the slightly longer end of our historical range. We are not outside the historical range based on that, but if you look at the last quarter, the first quarter of 2014 we did pop up that average based on those not slightly (inaudible) but just looking at the cash flows, that increased to about 10 years.

All of those numbers, Travis, are right in line when we are doing our modeling and rate shocking our portfolio we expect that with the rates being done the way they are relative to the new originations. They'll be down about the two-year window where we would start to see that stretching of that portfolio out a little bit.

But that based on our expectations and based on our history we'd expect that to come back in again back to our historical range. So it's actually -- the portfolio is reacting very much like the way we modeled it at this stage. So we're actually quite pleased or encouraged that we have our hands around the cash flows.

Got you, that is helpful. And then just on the deposit side, how do you guys think about modeling like the deposit beta or anything a kind of a rising rate environment? I know you have a really stable low-cost funding base, but just how do kind of think about the way your customers are going to react to rising rates if and when that happens?

Again, we model that under a lot of different scenarios relative to 100 basis points, 200 basis points, gradual shocks. We also recognize when we look back and we have studied other time periods where we have had rising rate environments and we have looked at the reaction of our portfolio. How much it would change in rates to be allowed to occur in savings as an example when there is a 100 basis point change in the 10-year treasury? Or how much do we have in money markets?

So we have got very good historical facts looking at what we actually did do during those time periods and how that impacted our deposit flows. So we studied that -- I guess the answer is that from that perspective we think we'll be very successful in dragging our heels relative to rates rise.

And we think that because of the mix of deposit we have, as Rob said, we are not chasing the high-cost CD money. We are really not chasing the money market money. The money that we chase is interest-bearing checking and savings. Those will not rise dollar for dollar or point for point as interest rates rise. So that is where we see the benefit for TrustCo.

We are never a rate leader, we are never the highest rate in any of the markets we are doing business in. So in our opinion most of our customers are choosing us for a different reason whether it is location or multiple locations or service perspective. So we are never out soliciting the higher-priced money as we are looking to build customer relationships. So we think they are choosing us for a different reason, not necessarily rate.

Got you. Thanks, guys.

Showing no further questions at this time, this will conclude our question-and-answer session. I would like to turn the conference over to Mr. McCormick for any closing remarks.

Thank you for joining us this morning and have a great day.

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