TrustCo Bank Corp NY (TRST) 2014 Q4 法說會逐字稿

Good day, and welcome to the TrustCo Bank Corp fourth quarter 2014 earnings call and webcast. All participants will be in listen-only mode.

(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.

These 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 today's call is being recorded.

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

Thanks, Hilda. Good morning, everyone. I'm Rob McCormick, President and CEO of the TrustCo Bank.

Joining me on the call today are Mike Ozimek, our new CFO, and Scot Salvador, our Chief Banking Officer. As always, in the room is Kevin Timmons, whom most of you deal with on a regular basis, and Bob Cushing, ready to pounce if Mike messes up.

As most of you know, Bob Cushing, our long-term CFO, has announced his retirement effective May 30, 2015. Bob has been great for our Company for about 20 years. We will certainly miss him, and wish him well on his retirement.

We are lucky to have Mike Ozimek to fill his shoes. Mike has been with us for about 12 years. He has a CPA, a graduate of Siena College, and with KPMG prior to joining our Company. We have every confidence Mike will be successful, and we look forward to him taking a bigger role in our Company.

In the meantime, Bob and Mike are working closely together until the end of May. Mike has been trained by Bob for the last 12 years. Bob will be around through the end of the year on a consulting basis to help with the transition. If you follow our Company, we try to cover things with contingency plans, and it's nice when they work out.

Let's get to 2014. 2014 was certainly a solid year at TrustCo Bank. Our net income was up over 11% in comparison to 2013, almost $44.2 million. We are very pleased with our results.

Our net interest income was up over 4% to about $141.4 million. Our total assets were $4.644 billion at year-end, up about $123 million.

Our loans were up about $250 million to $3.159 billion. The growth occurred almost all in our residential loan portfolio.

As you know, we're not the biggest commercial lender. We maintain a pretty solid portfolio of customers that we've worked with for many, many years. Our total deposits were up over $100 million to $4.320 billion.

We opened five branches during 2014. As most of you who follows us know, our branches are important to us since all of our loans originated and all deposits are gathered through them. I think also most of you know we don't accept brokered deposits, and we do not offer premium rates for large CDs. Most of our deposits are core from that perspective.

We continue to stay well-capitalized and very liquid. Our investment portfolio is just under $750 million at year end, and we try to keep all maturities relatively short.

We continue to see improvement on our nonperforming ratios. Nonperforming loans to total loans improved to 1.08, and nonperforming assets to total assets dropped to 0.87. That bubble is starting to work through at this point in time. Our net interest margin showed improvement in 2014 to 3.16%. Our efficiency ratio remained world-class in the low 50% range. Our return on average assets was 0.97% at year-end, and our return on average equity was at 11.5%.

Overall, we are very proud of our results for 2014. Now for the first time, I turn it over to Mike Ozimek to deal with the numbers. Welcome, Mike.

Thanks, Rob. I will now review the financial results for TrustCo for the fourth quarter and the full year 2014. The strength and the momentum that we built during the year continued into the fourth quarter. We saw sustained loan growth during what is normally a quiet banking season due to the holidays and weather.

The loan portfolio increased by $78 million on average during the quarter and $254 million from the fourth quarter of 2013. This is a positive shift in the balance sheet from the lower yielding investments to higher yielding core loan relationships.

Net income was approximately $10.7 million for the fourth quarter of 2014, compared to $10.6 million for the same quarter in 2013. As Rob said, the full year 2014 results were $44.2 million, compared to $39.8 million for 2013, an increase of 11%. This resulted in a return on assets of 97 basis points over the full year of 2014, and 90 basis points for 2013. Return on equity increased in 2014 to 11.54% from 11.15% for the full year of 2013.

There were no unusual or one-time items, income items, recognized in the fourth quarter that would affect the comparability of the prior years. As we noted in prior conference calls, there were some one-time income items that occurred in both the first and second quarters of 2014 that would need to be considered when comparing the trailing four quarter results.

For the quarter our net interest margin increased to 3.17%, up from 3.16% in the third quarter, resulting in a taxable equivalent net interest income of $35.7 million this quarter, compared to $34.5 million in the fourth quarter of 2013. The increase in net interest margin comes from the asset side of the balance sheet, as a result of a 2 basis point increase in the yield earned on average interest earning assets over the third quarter, partially offset by an increase in funding costs by 2 basis points to 42 basis points compared to last quarter.

Average asset growth was centered in the loan portfolio with residential mortgage loans increasing to $2.5 billion, up $70 million over the third quarter averages, and $237 million compared to the same quarter in 2013. Commercial loans, home equity credit lines, installment loans all showed modest increase during the quarter. We should also note the growth in the installment portfolio is primarily related to the launch of our new credit card products during the fourth quarter.

Our total investment securities portfolio, that is, the securities held to maturity and the securities available for sale, decreased by $71 million on average between third quarter and the fourth quarter of 2014. This was primarily the impact of maturities and cash flows from the mortgage-backed security portfolio, coupled with the decision to take advantage of market opportunities as they presented themselves to selectively sell out of longer-term duration mortgage-backed securities at a gain of $335,000.

We also allowed $18.4 million of our overnight investments uses the funding source for our loan growth. However, overnight investments still remain at a very healthy level for the fourth quarter decreasing to $580 million from $598 million in the third quarter. At year end, the Fed fund balance was approximately $630 million, up about $41 million from the last quarter end.

Fourth quarter deposit balances were again effected by the seasonality in this time of year. Overall, our average funding sources decreased by $14.4 million between the third and fourth quarters of 2014. This is consistent with prior-year fourth quarter results. However, as compared to last year's fourth quarter, the total average funding sources have increase by $90 million. This shows the success we've had during the year in attracting and retaining core banking customers.

The total cost of interest-bearing liabilities increased slightly to 42 basis points during the quarter, which is 2 basis points more than the third quarter of 2014 and the fourth quarter of last year. As we've noted in prior conference calls, we have just about reached the point where our current market rates offered on deposit products equals or slightly exceeds the cost of funds in those maturing funds. Therefore, the expansion in interest margin will come primarily from the asset side of the balance sheet.

In addition to the liquidity that is on the balance sheet, we expect that we will have between $200 million and $400 million of loan payments coming in over the next 12 months along with approximately $150 million of investment securities cash flow during the same time period. You can see that our provision for loan loss has come down by $100,000 during the quarter, as a result of continued positive trends in loan charge-offs and delinquencies. Scot will review this in a minute, but let me say that the decrease in provision for loan losses which is directly attributable to the improving credit quality of the portfolio and ongoing resolution of existing problem loans.

Non-interest income came in at $4.8 million for the quarter, compared to $4.9 million for the third quarter. During the fourth quarter, similar to the third quarter we had approximately $350,000 of security gains. As you know, our business model does not rely on significant sources of non-interest income. The most significant recurring sources of non-interest income is derived from our financial services division, which has approximately $918 million of assets under management at year-end.

The gross change of various line items in non-interest expenses is always interesting to explain in the fourth quarter. We do a couple of re-class entries at year end, so that our payroll and benefit expenses match up with our W-2s and our final payroll registers. This requires movement of our expense balances for the year from other expenses and equipment expense categories up to salaries. But if you start at the bottom line, and you look at total non-interest expense, you'll see that it came in at $22.2 million in the fourth quarter, flat compared to the third quarter, and $20.9 million for the fourth quarter of 2013.

The re-classed entry I mentioned moves approximately $400,000 out of other expenses. It reduces equipment expense by $140,000, and it moves the total of $550,000 up to salary and benefits expense. So, if you compare the salary expense for the third and fourth quarters to 2014, you'll see an increase of $730,000, $550,000 of which is the re-classed entry from other expenses. That leaves an increase of approximately $180,000 that really exists between the third and the fourth quarters.

That increase is a result of increased employee salaries due to slightly increased FTE numbers, regular salary increases, and year-end bonus accruals that were paid in early 2015. The vast majority of the increase in equipment expense over third quarter is non-repeating expenses from write-offs of equipment on items no longer in service.

Other real estate expense is down slightly which is in line with our cost of holding and disposing of the foreclosed properties. During this year, we have disposed of almost 75 properties, and we currently have 37 properties on our retail inventory. All the other categories of non-interest expense are pretty much in line with prior quarters and our expectations. Going forward, we will be most comfortable with a range of $21 million to $21.7 million for recurring nonoperating expenses and with ORE expense generally in the range of $500,000 to $1 million per quarter.

Our efficiency ratio continues to be very solid. Fourth quarter came in at 53.35%, up slightly from the third quarter's 52.72%. Obviously, fourth and third quarter numbers are negatively effected by our decision to retain a large amount of overnight investments.

Lastly, capital ratios continue to improve and stood at 8.46% at the end of the quarter, up from 7.99% at last year end. Now Scot will review the loan portfolio and nonperforming loans.

Okay. Thanks, Mike.

For fourth quarter our loan portfolio continued to steadily increase. Total loans grew by $75 million with our year-over-year growth tallying at approximate at $250 million. Loans grew by 2.45% in the quarter and 8.59% on the year. These are very solid growth numbers, and we were pleased with both the quarter and the year-end results. As has been the norm, the vast majority of the quarter's loan growth was in the residential portfolio, accounting for over $70 million of the increase.

Commercial loans increased by $3.6 million in the quarter with our small installment portfolio also showing $1.2 million in growth as our new credit card product was rolled out. We experienced residential loan growth throughout our markets with Florida this quarter accounting for approximately 42% of our net increase.

Our loan backlog at year end was solid, though down from the third quarter. A decrease in loan activity is normal at this point in the year, and the first quarter's net loan growth is typically the slowest of the year. Most of our recent origination have been in the 4% range for a 30-year mortgage.

Nonperforming loan and asset quality measurements continue to improve on the quarter, with significant improvements posting on a year-over-year basis. Nonperforming assets fell $3.1 million during the quarter to $40.5 million and declined $11.7 million for the full year. Nonperforming loans decreased to 1.08% of loans at year end versus 1.49% a year earlier. Early-stage delinquencies remain low, and the quarter's net charge-off totaled with the lowest since the fourth quarter of 2008.

Finally, the coverage ratio or allowance for loan losses to nonperforming loans was 136% at year end versus 110% a year earlier. Rob?

That's our story, and we'd be happy to answer any questions you might have.

(Operator Instructions)

The first question comes from Alex Twerdahl with Sandler O'Neill. Please go ahead.

Good morning, guys.

Good morning, Alex.

Scot, you mentioned that new mortgages are going on around 4% today. Can you remind us, back in the middle of 2012, when the 10-year really was in the 1.50% range, where mortgage rates bottomed for you guys?

Yes, they bottomed right around this range, Alex, to be honest with you. We have come down low 4%, slightly under 4%. When I say slightly under 4%, I'm talking high 3%s. We'll occasionally, really just to stir up the market and draw some attention, we've occasionally dropped down a little lower on a couple-day special or a one-week special type thing, but really where we bottomed in the past and most recently is right around the 4% range, maybe high 3%s.

Okay. Thank you. Then, can you talk about, as you prepare for potentially the short end of the curve to go higher towards the end of the year, early next year, can you talk about going out a little bit longer on CDs, which I think is something you've been doing over the past couple of months, versus maybe putting on some borrowings with some interest rate swaps or something a little bit more sophisticated like that?

We've been looking at the CDs from an opportunistic point of view. We view it as a chance, not just on the rate side, but on the relationship side, too. As Rob said earlier, we don't have any broker deposits. We don't buy any CDs.

So, we're not going to put a high rate out there just to bring in a flood of money; but, as you said, we have recently been putting a little bit higher rate out there. We've done an 18-month term. We've even gone out as far as a three-year term -- not crazy high, but in the 1%, 1%-plus range on a couple of occasions.

Again, the goal is two-fold, we always think. Number one, we do want to lock in some of the money for longer terms, and we've been successful at that. If you look back over the last year, 18 months, our CD portfolio duration has really transitioned. We have moved a lot of that money out longer in terms of maturity, which is definitely a good thing, but we do it strategically. We really want to get a customer out of it, hopefully that we're going to have for the long term. That's our basic philosophy on that.

Okay. Then just a final question: A couple years ago, when we were looking at credit, the time frame to foreclose on a property in upstate New York, I think, was over 1,000 days. Has that come down meaningfully recently?

Not meaningful -- not significantly, Alex. Our bubble has gotten significantly smaller, but it's probably just shy of three years now, but it has not come down significantly.

It's actually probably a little better in Florida, but we have nothing in Florida.

Yes. Okay, great. Thank you, guys, for taking my questions.

(Operator Instructions)

The next question comes from Travis Lan with KBW. Please go ahead.

Thanks. Good morning, guys.

Hi, Travis. How are you?

Good, thanks. Mike, just to clarify your expense guidance, you said the $21 million to $21.7 million quarterly -- that's excluding OREO, right?

That's correct; $21 million to $21.7 million, and then $500,000 to $1 million on the OREO side.

Got it. Thanks. Okay.

Then, if you could talk a little bit about your own NIM outlook, obviously there's been some interest rate volatility, and you guys have been able to offset a lot of that with your balance sheet flexibility. At what point do you see, if ever -- what will it take in the environment to see this NIM get put under pressure?

We don't typically forecast or give guidance on our margin going out, but we're positioned I think pretty decent on our balance sheet right now.

Rates are only going one way, let's face it, Travis. The longer we can delay that or put that back to invest that funds, I think the better off we'll be. We're not seeing the pressures that you're describing at this point in time. So, the longer we can take that pause, and hold that cash, and wait for the rates to rise, I think we're in a better position.

Got it. Okay. Then -- (multiple speakers)

[It gives] us more flexibility to move, if we have to.

Right. Yes, and that's worked so well to this point.

Right. That's right.

Just a little bit on the loan growth outlook: Mike, you mentioned that obviously the fourth quarter was strong, for what's typically a seasonally weak quarter. What are you guys looking at for 2015, in terms of activity?

We see the growth. We had a good 2014. We see really the same thing from 2015. We are over $200 million -- in that $225-million range year over year. We expect really the same thing going forward into 2015.

That's where we see opportunity. Right now, on the investment side, where the rates are right now, we're not going to go hog wild and start really investing tons of money in the investment side, but we see opportunity in the loan side.

Okay. All right.

Something that didn't come up in this call, Travis, we usually throw this stat out, at least at the annual meeting and usually on the call, is the average deposits per branch. That continues to rise, which is really, at 144 locations, small increases in every branch is really what we're banking on, and will provide the prosperity for the future.

To this point, you haven't seen deposit competition really pick up from a rate perspective?

The deposit world is competitive, but we do pretty well in that market. The number of locations we have and some of the other services we offer certainly put us in a better competitive position than most of the banks we're dealing with.

Got it. All right. Thank you, guys, very much.

Thank you.

(Operator Instructions)

This concludes our question-and-answer session. I'd like now to turn the conference back over to Mr. Robert McCormick for any closing remarks.

Thanks for taking some time this morning, and thanks for your interest in the Bank. Hope you all have a great day.

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