TrustCo Bank Corp NY (TRST) 2014 Q2 法說會逐字稿

Good morning and welcome to the TrustCo Bank Corp's second-quarter earnings call and webcast.

(Operator Instructions).

Before proceeding we would like to mention that this presentation may contain forward-looking information about TrustCo Bank Corp NY that is intended to be covered by the Safe Harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Actual results and trends could differ materially from those set forth in such statements due to various risks, uncertainties and other factors. 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 also note this event is being recorded.

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

Good morning, everyone. Welcome to the TrustCo Bank's second-quarter earnings call. As Kate said, I am Rob McCormick, President and CEO of TrustCo Bank.

Joining me on the call today are Bob Cushing, our CFO, and Scot Salvador, our Chief Banking Officer. Kevin Timmons, who most of you deal with regularly, is in the room to keep us in line.

We had a very good second quarter at TrustCo Bank. The plan for this call is that I will hit the highlights, Bob and Scot will give detail on the numbers and then we will have time for questions and answers.

Our net income was over $11.8 million. This is over 20% greater than the same period in 2013. We also saw a strong rise in year-to-date net income to over $22.8 million.

Our strong net income provided us with a return on average assets over 1% and a return on average equity of 12.5%, all significantly greater than the same period in 2013. Our net interest margin saw an expansion to 3.16%; that is up 6 basis points in the same period in 2013.

Total deposits grew to $3.995 million. This is up over $100 million from June 30, 2013. We were also very happy to continue the pattern of being less dependent on CDs or higher cost deposits.

Loans grew to over $3.6 billion driven by our residential mortgage portfolio. New application volume is down but so are the payouts resulting in very nice growth. I think we have grown every month this year except for February.

Our capital ratio was over 8.38% at quarter end. The balance sheet is still very liquid with significant investment portfolio with short maturities. And Bob is going to touch on that.

We opened two new offices this quarter, Warrensburg, New York and Stuart, Florida. They are just expansions of our existing marketplace service area. We also relocated our Longwood, Florida branch.

On nonperforming loan and asset ratios have improved to 1.36% and 1.07% respectively. Most of you know we are very proud of our efficiency ratio which improved to under 53%, down from last year. Just as a recap, loans were up, deposits were up, net income is up, nonperforming loans are down, margins up, efficiency ratio is down and return on equity is up.

I think we had a pretty good quarter. Bob, would you provide more detail?

Sure. Thanks, Rob. I'll review the financial results for TrustCo for the second-quarter and year-to-date 2014.

The strength noted in the first quarter continued into the second quarter resulting in a very very strong first half of 2014. As Rob noted, net income for the second quarter of this year was $11.8 million compared to $9.8 million last year an increase of 20.9%. Likewise, year-to-date results for 2014 were $22.8 million this year and $18.9 million last year.

These results generated return-on-average equity of 12.5% for the second quarter of 2014 and 12.3% for the year. Both the quarter and year-to-date results benefited by a couple of one-time items.

We noted in our press releases this year that we had a one-time income item in both the first quarter and second quarter of 2014. In the first quarter we had the gain in the sale of the Florida proposed corporate headquarters, which generated a pretax gain of $1.8 million. And in the second quarter we sold a piece of other real estate that we had in our portfolio for quite a while at a pretax gain of $2.4 million.

Also during the second quarter we had a sale of long-term nonperforming assets of $1.8 million at a gain of $164,000, which was offset by $151,000 of property taxes we had to pay on these assets sold. So the loan sale did not result in any meaningful impact on the P&L but it did help to reduce nonperforming assets. These gains allowed us to remain highly liquid while at the same time post meaningful increases in both net income and other performance criteria.

Complementing these one-time items the quarter reflects our progress in expanding our balance sheet through core deposit growth and increases in residential retail loan customers. On average total deposits increased by $55 million from the first quarter of this year and by $116 million over the second quarter of last year's average balances.

The average cost of interest-bearing liabilities continued to decrease by 2 basis points during the quarter to come in at 38 basis points as compared to 40 basis points for the first quarter of this year and 41 basis points for the second quarter of 2013. Average loans have increased by $45 million from the first quarter of 2014 to the second quarter and by $239 million over the second quarter of 2013 average balances.

These are both very significant increases in average balances and reflect our determination to continue to capture loan volume. The expansion in the net interest margin for the quarter from 3.13% in the first quarter to 3.16% in the second quarter of this year reflects hard work on both the earning asset side and the deposit side of the balance sheet. We continue to look for and identify opportunities to reduce or control the cost of deposits.

We have also undertaken a program to encourage customers to extend the terms of their CDs by contacting maturing CD customers early and offering them relatively attractive longer-term rates. This has helped increase the average term to maturity of our CD portfolio by almost 25% in the period from yearend 2013 to June 30, 2014. This is a pretty substantial change when you think about the $1.1 billion we have in CDs.

The impact of the growth of the balance sheet coupled with the changes we have made in net interest margin have had a pretty significant impact on taxable equivalent net interest income. For the second quarter of this year our tax equivalent net interest income is $35.5 million, which is an increase of almost $2 million over 2013's second quarter. That is a very sizable increase on a quarter-to-quarter basis and represents the most significant driver for the increase in net income in the future.

Let me also note that for the quarter we retained approximately $670 million in average overnight investments, which is an increase of $31 million from the first quarter of this year. So we continue to believe that there is true value in retaining our opportunities to invest these overnight funds in longer-term securities and loans as rates change. In addition to the liquidity sitting on our balance sheet, we expect that we will have $450 million of total loan payments coming in over the next 12 months along with $150 million of investment securities cash flows during the same time periods.

Let's move to non-interest income which came in at $4.5 million for the quarter which is in line with prior quarters when you ex-out the one-time items and the security gains. As you know our business model does not rely on significant sources of other non-interest income. The most significant recurring source of non-interest income is derived from our financial services division, which has $878 million of assets under management.

Non-interest expense came in at $19.4 million for the second quarter of this year. But you need to keep in mind that there was a gain in the sale of other real estate of $2.4 million netted against ORE expense. Likewise, we had additional property tax expenses totaling $500,000 as a result of the loan sale and the annual property taxes that we pay on nonperforming loans.

Our efficiency ratio was 53% for the quarter down slightly for a year-ago second quarter. If you remove the effect of the property taxes paid in nonperforming loans, the efficiency ratio for the quarter would have been 51.8%.

I know that this gets a little tied up with the one-time items but let's look at the total non-interest expense for the second quarter. Total non-interest expense was $19.4 million. If you take out the effect of the $2.4 million gain on the sale of the ORE property and the $500,000 in added property tax expense to be paid, the adjusted total non-interest expense would've been $21.3 million, which would include ORE expense of approximately $700,000.

We have said for some time now that we are most comfortable with recurring non-interest expense in the $20.2 million to $20.7 million range and with ORE expense adding another $500,000 to $1 million per quarter of additional expense. Our results for the second quarter fall squarely inside these ranges and we continue to feel comfortable with these ranges moving forward.

Individual components of non-interest expense change primarily based upon volume and some seasonality. Salary and benefits are up from the first quarter but right in line with our expectations for the year. Equipment expense is up slightly due to the added cost of converting our PCs from the XP operating system to the Windows-based operating system.

Professional services are up slightly but that is due principally to the loan sale this quarter and our annual meeting expenses. FDIC and other insurance expense is up due to the increased deposit balances. And other non-interest expense is up due to the added property taxes we have already been talking about.

So overall non-interest expense is in line with our expectations for the year. Capital ratios continue to improve with a tangible equity asset ratio of 8.38% at the end of the second quarter compared to 7.83% a year ago. Now Scot is going to review the loan portfolio and nonperforming loans.

Okay, thanks, Bob. As far as the loan portfolio is concerned, total net loans grew a strong $65 million, or 2.2% in the quarter. This follows upon approximate growth of $32 million in the first quarter and equates to year-over-year growth of $243 million, or 8.8%.

Our $62 million of the -- over $62 million of the quarter's growth was in the residential portfolio with commercial loans increasing just over $2 million. Home equity loans grew by $1.7 million with the remainder of the residential increase occurring in our first mortgage product.

Our Florida market continues to show strong activity with the growth in Florida accounting for approximately 47% of the second quarter's net loan growth. Overall loan activity grew steadily in the second quarter as is typical for the time of year. We are pleased with our results and we ended the quarter with a backlog of approved loans larger than both the first quarter and the corresponding second quarter of last year.

With regard to nonperforming loans virtually all asset quality indicators showed improvement on both the quarter and the year. Nonperforming assets dropped from $53.9 million to $49.2 million this quarter, while on a year-over-year basis nonperforming loans to total loans dropped to 1.36% from 1.57% a year earlier.

Included in the second-quarter results as was noted earlier was the sale of approximately $1.8 million of nonperforming assets to a third party at a small net gain. Early-stage delinquencies remain strong in all our markets and further improved quarter-over-quarter to levels we have not seen in quite some time.

We consider this a positive future indicator with regard to nonperformers. Rob?

We are pleased with the quarter and that is our story. And I guess I will turn it back over to Kate to get the questions lined up.

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

Good morning. Just looking at the balance sheet it looks like you've put about $100 million of cash to work during the quarter.

A good chunk of it went into the securities portfolio. Can you just give us a little more color, Bob, on what you are buying in the securities portfolio in terms of duration, rate, etc.?

Really it's actually really the first quarter really was kind of the odd quarter if you really look at it. At the end of the first quarter we had about $120 million of securities that either matured or were called back into cash.

So if you look at the end of the first quarter you will see the securities portfolio was lower than the average balance it was for the first quarter and the cash position went up by about $120 million. Early in the second quarter we reinvested that back into similar securities which for us represents call latencies in the five-year or under final maturity and mortgage-backed securities, again with the average life on mortgage-backed securities under five years.

The yield on those portfolios are in the 2% to 2.5% range. And if you look at the average balance for the second quarter you'll see the average balance for the second quarter is pretty much in line with the end of quarter balances. So the rest of the second quarter we really didn't do any purchases.

Great. And then for the REO property that you sold during the quarter that you kind of had hedged in your portfolio, are there any more of those that could be sold in the next couple of quarters?

Nothing exactly like that, Alex. We certainly have other ORE property.

But that was a long-term holding, was unapproved, an unimproved vacant land that took a very very long time to sell. We took a wait-and-see approach for quite some time and then it was on our books for nothing and the right buyer came along and finally was able to put something together. So nothing like that.

Right. And then, Scot, just in terms of the pipeline you said is larger than it was at the end of the first quarter and the year ago.

Could you just give us some color on what the rates are on that portfolio today versus what's on your books already? Not on the portfolio, on the pipeline today?

Sure. Alex, today we are originating today at a 4 1/8, that's on a 30-year loan, obviously. And the backlog is probably in that range, maybe a little bit higher on an average if you average it altogether, a little bit higher than 4 1/8 in the background, more in the 4.25. The backlog might be more in the 4.25 to 4.5 range.

Okay, that's great. And then just finally a couple of quarters ago, Rob, you mentioned that you were going to get back into the card business. And is that something that is still going on, or we haven't really heard much about it in I guess in a couple of quarters?

Alex, we are about to issue our first test cards this month. And they will be branded MasterCard. There will be four separate cards including a corporate card.

And again we are not trying to conquer that business or compete with the big guys but we have a lot of customers who like to deal with our branches one-on-one. I think you know that.

Like to be able to make their payments in the branches and we've had some outcry for a card. So we are going to dip our toe back into that water very shortly.

Okay, great. That's all my questions for now. Thank you.

Travis Lan, KBW.

This is actually Collyn Gilbert calling for Travis. Good morning, guys.

So just to circle back on the CDs that you did this quarter. What were the terms that you are looking for and I'm just trying to get an understanding of where customer behavior is that they are willing to extend. So just on yield and duration I would be curious to know about that.

What we are doing is we are reaching out to customers before their maturities to see that we can get them to either roll into the existing terms they had or to some slightly longer terms that we are offering. So we had actually at one point in time we had a five year CD out there that we were trying to get people interested in. We did hit some people to move out that far.

The rate even out that far was not a very large rate if you look at historical numbers, but in the 1% to 1.5% range. What we have now is an 18-month and a 24-month-type of terms that we are trying to entice people into. And again, it is into that 1% range.

Okay, that's helpful.

That's the range though, Collyn, that works, to Bob's point. The 18 month to two year seems to work best for our customers.

Okay. And it seems like the trigger has to be somewhere above that 1% level to get them to come in?

Certainly 1%.

1% is the magic number.

Okay, okay, that's helpful. And then just given your comments on credit and your outlook seems pretty positive there, how should we think about provisions going forward? Do you anticipate them to match the net charge-offs or do you want to see reserves maybe start to fall, or how should we think about the provision from here?

We tend to be pretty conservative individuals and we look at a long-term horizon relative to losses. And 2008, 2009, 2010 are still in our memory from that perspective. So we like the idea of having reserves in the levels that we are at right now in the total dollar amount.

So we see ourselves pretty much providing at the level of net charge-offs. And in that range we are in that $1.5 million range and that's about what we think is appropriate.

Okay, okay, that's helpful. And then just one final question, do you guys have a sense for what you average annual operating expenses are for your branches? How are you thinking about breakeven now in terms of level of deposits?

Our deposit -- we look at a new branch operation to be in a breakeven mode in that $8 million to $10 million range of deposits. And again assuming a normal distribution of loan growth in the same time from that same operation.

So we like that 60%/40% split between loans and deposits -- I'm sorry between loans and investments. So we can get about 60% of the deposit flow back in the form of loans. The other 40% we will invest through either Fed funds or the securities portfolio.

As far as operating costs are concerned we continue to drive down operating costs. As you know we kind of look at the smaller branch footprints, the 1,800 to 2,000, 2,200-square-foot locations with the drive-thru end cap, those types of things. And from a staffing model we have been -- there's been a little bit of a -- when you over staff at the beginning of a branch, when a branch first comes on board, so that we have a lot of splash, a lot of opportunity to market in the community.

But as they stabilize those operating costs come down. Those costs probably are in the $250,000 to $300,000 range.

Okay, okay, that's helpful. That's all we had. Thanks.

You know, Collyn, for years we have opened what people are opening now. We opened, as Bob said, smaller branches, open floor plans and very customer-friendly set up. So that certainly helps us with our cost basis.

Got it. Okay, super. All right, thanks, guys.

Alex Twerdahl, Sandler O'Neill.

Hi, guys. I was just looking through my notes and I'm not sure I got what you guided for expenses going forward. Can you just repeat that?

We continue to feel comfortable with that $20.2 million to $20.7 million operating expense range with another $500,000 to $1 million in the ORE expense. We are reaffirming what we were.

Okay, great. Thank you.

(Operator Instructions). As there are no questions at this time this concludes our question-and-answer session. I would like to turn the conference back over to Mr. McCormick for any closing remarks.

Thank you for your interest in the Bank and thanks for taking the time this morning. Have a great day.

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