TrustCo Bank Corp NY (TRST) 2015 Q2 法說會逐字稿

Good morning, and welcome to TrustCo Bank Corp second-quarter 2015 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.

More detailed information about these and other risk factors can be found in our press release that preceded this call, and in the risk factors in the forward-looking statements section of our annual report on Form 10-K, and as updated by our quarterly reports on Form 10-Q. Statements are only valid as of the date hereof, and the Company disclaims any obligation to update this information, except as may be required by applicable law.

Today's presentation contains non-GAAP financial measures. The reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release, which is available under the investor relations tab of our website at trustcobank.com.

Please also note: Today's event is being recorded.

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

Thanks, Rocco. Good morning. As the host said, I am Rob McCormick, President of the TrustCo Bank.

Joining me in the room today are Scot Salvador, our Chief Banking Officer; Mike Ozimek, our Chief Financial Officer. I also asked Bob Cushing to join us as a resource to discuss the recent filing and agreement with our primary regulator. Also with us is Kevin Timmons. I thought it would be helpful to have Bob with us, since he has been responsible for compliance since we've had a compliance department.

The plan for today's call is to start with a summary of the agreement, then hit the operating highlights of our Company, providing time for questions and answers. We operate at a time when regulators have enhanced expectations. As most of you have probably picked up, we've entered into an agreement with the Office of the Comptroller of the Currency. The agreement came as a result of our most recent OCC exam, and covers many areas within our Company. We are working on improved systems for our compliance, audit and corporate governance, as well as beefing up and enhancing our policies and procedures in most areas of our Company.

We are certainly not proud of being part of this action, but realize we are not alone in this. The environment we operate in carries a heavy regulatory burden, which all banks are dealing with. We are obviously fully committed to being a compliant Company, with many of the fixes already under way.

Our Board and management team are committed to taking all actions necessary to remedy this agreement. As already said, a lot of corrective actions are being worked on already. We expect the cost of enhancing our operations could be in the range of $2.5 million to $5 million. As most of you know, we are very cost-conscious and hope to stay at the lower end of that range. If there is a bright spot in this dark cloud, we hope to emerge as a stronger Company with standardized systems in place to handle our future growth.

We continue to post very solid operating results. Average loans are up $252 million for the second quarter of 2015, compared to 2014. The vast majority of this growth has occurred in our residential mortgage products.

Commercial loans has been down, as we continue to face competition that, in our opinion, offers low rates with lower credit standards. As we have said before, we are taking a cautious approach, working mostly with our existing customer base.

Our deposits were up over $140 million year over year. Our deposit growth has been very solid, with most going into lower-cost core categories.

We opened one branch during the quarter, bringing our total to 146. We are thrilled to see our average deposits per branch grow by over $940,000 to $28.3 million year over year.

Our core earnings were up almost 5% year over year. Our actual earnings were down. You will remember I told you on this call last quarter, in 2014 we had two real estate sales that were great for our Company, but were one-time events. We should be back to more comparable numbers next quarter.

Our return on average assets was 0.91%, and our return on average equity was 10.6%. Our efficiency ratio is 54.7%, which contemplates at least some of the increased expenses. All of our asset-quality ratios improved during the second-quarter 2015, our non-performing assets to total assets fell to 0.81%, and our quarterly charge-offs were the lowest since the end of 2008. We have a solid, well-capitalized, liquid, very profitable Company, which will get past this setback.

Now I'm going to turn it over to Mike Ozimek to talk about the numbers in detail.

Thank you, Rob.

I'll now review the financial results for TrustCo for the second quarter of 2015. As Rob said, the strength and momentum that we built last year continued into the second quarter of 2015. First, core net income was up 4.9% in the second quarter of 2015, compared to the same period in 2014.

You will remember, included in the second quarter of 2014 results was a gain of $2.4 million on the previously disclosed sale of owned real estate that added $1.6 million to reported after-tax earnings that would affect the comparability to the second quarter of 2015. This would need to be considered when comparing the second-quarter results. Taking this non-recurring item into consideration, comparable core net income was approximately $10.7 million for the second quarter of 2015, compared to $10.2 million for the same period in 2014.

The average loan portfolio increased to $3.2 billion during the second quarter of 2015, an increase of $48 million on average or 1.5% over the first quarter, and $252 million or 8.5% from the second quarter of 2014. As expected, the growth was concentrated in the residential real estate portfolio. This continues a positive shift in the balance sheet from lower-yielding investments to higher-yielding core loan relationships, coupled with the overall growth in our deposits.

Our total investment securities portfolio -- that is both securities held to maturity and securities available for sale -- decreased slightly by $7.6 million on average between the first quarter of 2015 and the second quarter of 2015. This was primarily the impact of maturities and cash inflows from mortgage-backed securities portfolio. The decrease was somewhat offset by our decision to purchase approximately $60 million in a combination of relatively short-term US government-sponsored enterprise securities and mortgage-backed securities during the latter part of the second quarter of 2015.

On the deposit side, we continued to be successful, increasing balances throughout our branch franchise. Total deposits for the second quarter averaged $4.1 billion, which is an increase of $73 million over the average balance for the first quarter of 2015, and up approximately $139 million over the second quarter of 2014 averages. Our cost of interest-bearing deposits decreased by 2 basis points to 40 basis points for the quarter, which continues to reflect our pricing discipline with respect to CDs and other non-maturity deposits.

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 increased balances in the overnight investments. Our average balance of overnight investments was $683 million for the second quarter of this year, up $30 million over the average balance in the first quarter, and up $76 million over the second quarter of 2014 averages. In addition to the liquidity that is on our balance sheet in the current rate environment, 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 $195 million of investment securities cash flow during the same time period.

As we've discussed before, all this liquidity comes at a cost. Our net interest margin decreased slightly to 3.07% in the second quarter, down from 3.08% in the first quarter, and 3.16% in the second quarter of last year. This increased liquidity gives us opportunity and flexibility moving into the remainder of the year.

You can see that our provision for loan losses has remained level at $800,000 in the second quarter of 2015 compared to the first quarter of 2015, and down $700,000 compared to $1.5 million recorded during the second quarter of 2014. This decreased level of provision remains the result of continued positive trends in asset-quality measures and delinquencies. Scot will review this in a minute, but let me say that the decrease in the provision for loan losses was directly attributable to the improving quality of the portfolio and ongoing resolution of existing problem loans.

Non-interest income came in at $4.5 million for the second quarter, compared to $4.6 million for the first quarter. The decrease comes from the first quarter, where we had $249,000 of securities gains and $0 in the second quarter of 2015. Also during the first quarter, our financial services division recorded their annual tax return preparation fees of $185,000. The decrease from these non-interest income items is offset due to an increase in fees for services to customers, which are up $167,000 due to increased seasonal volume. Our financial services division had approximately $938 million of assets under management as of June 30, 2015.

Now on to non-interest expenses: Total non-interest expense came in at $22.1 million, up $274,000 from the first quarter, and up $2.7 million from the same period last year. The biggest fluctuation compared to the first and second quarter of 2015 occurred in professional fees and other expenses. Included in the second-quarter numbers are approximately costs of $500,000 associated with additional legal and consulting expenses.

We've estimated the additional cost of implementing the recommendations in the agreement will range between $2.5 million and $5 million annually. We would expect, over the next several quarters, we will be experiencing increased non-interest expense that will level off probably in about a year, as we complete implementation of the requirements of the agreement. We will work throughout this process to identify opportunities to make the process more efficient. As discussed last quarter, these added costs reflects the Company's continuing investment in their systems within the retail loan and deposit areas, as well as enhanced regulatory compliance measures.

In the area of other real estate expenses, as mentioned earlier, the large increase from the second quarter of 2014 to the second quarter of 2015 is related to a $2.5-million gain on sale of a specific piece of owned real estate. ORE expense came in at $201,000 for the quarter, which is slightly below our expectations for the second quarter. We would expect ORE expense to stay in the range of $500,000 to $1 million per quarter.

All the other categories in non-interest expense are pretty much in the line with prior quarters and our expectations. Going forward, we would expect our total reoccurring non-interest expenses to be in the area of $22 million to $22.7 million per quarter.

Our efficiency ratio continues to be very solid. Second quarter came in at 54.71%, up slightly from the first quarter's 54.18%.

The first- and second-quarter numbers continue to be negatively affected by our decision to retain a large amount of overnight investments and the increased cost associated with implementing the recommendations of the agreement. And finally, capital ratios continue to stay strong at 8.48% at the end of the quarter, up from the 8.38% compared to the same period in 2015.

Now Scot will review the loan portfolio and non-performing loans.

Thanks, Mike.

We experienced solid loan growth in the second quarter of 2015. Total loans grew by $49.3 million or 1.5%, with residential mortgages rising by $51.4 million and commercial loans decreasing by $2.7 million. Our Florida market showed strong results on the quarter, and accounted for over 70% of the net loan growth. Our home-equity loans increased modestly, with the vast majority of the increase occurring in our first-mortgage product.

On a year-over-year basis, net loans increased by $237 million or 7.9%. The loan backlog at quarter end was solid, down slightly from our quarter-ending March number. Our 30-year loans are currently priced at 3.99% and over the last couple of months have fluctuated between the 3.99% and 4.25% range.

On the non-performing loans side, virtually every indicator improved both on a quarter and on a year-over-year basis. Non-performing assets declined to $38.6 million from $40.4 million at March 31, and $49.2 million as of June 2014. Non-performing loans also showed similar levels of improvements. Both these categories include the sale of approximately $1.1 million of non-performing loans in the second quarter.

Early-stage delinquencies remain very strong on a Bank-wide basis, while non-performing loans have now dropped to 1% of total loans versus 1.36% a year earlier. The coverage ratio, or allowance for loan losses to non-performing loans, was 140% as of June, versus 137% in March and 115% a year earlier.

Rob?

Thanks, Scot. We would be happy to answer any questions you might have.

(Operator Instructions)

Alex Twerdahl, Sandler O'Neill.

Good morning, guys.

Good morning, Alex.

First, Rob, I wanted to ask a little bit more about the OCC agreement. Do you expect that this will in any way change your growth plans going forward, either with respect to loan growth or the branch expansion plan?

We would certainly hope not, Alex. It might change the way we're operating a little bit, but our business plan should remain unchanged.

Okay, great. I got kicked off the call in the middle there. So I missed the beginning of Scot's remarks. Did you comment on what the pipelines are looking like as of the end of June, and whether or not the change in the 10-year has made business better our business worse, or how that's kind of affected things?

Yes I did comment on that. The backlog is solid. We're down slightly from the quarter ending March. Perspective-wise we are little behind where we were this point last year in the backlog, ahead of where we were the year before, kind of in between. The rates have had a little bit of effect; activity has flattened out a little bit. But very recently, over the last couple of weeks, we've seen an uptick. So hopefully it's going to continue in that direction.

Okay. Then, Mike, you mentioned that -- I think you bought $60 million in mortgage-backed securities at the end of the second quarter. Was that a function of what the rate environment was doing, or was it a function of needing to use [excess] liquidity? And do you think that we're going to see some more of those purchases in the third quarter?

First of all, it wasn't 100% mortgage-backed securities; it was about $10 million worth of mortgage-backed and about $50 million worth of agencies. It was -- and it was a little bit of a combination of both. Obviously, you saw what the 10-year did, and we were able to kind of -- what we have always said -- go in a little bit, and we put -- what we put to work was about what we expected to do in that little bit of a tick-up. But going forward it's going to be about the same thing. We will invest -- to kind of keep the cash balances where they are, we would probably expect to invest about the same.

Okay. So the investments will probably be a complement to the loan growth. If you have somewhere around $400 million to $600 million of liquidity coming off the balance sheet in the next 12 months, that will be -- to the extent it can be loan growth, it will be, and the rest of it will be purchases of securities?

Right. We're going to look to opportunistically invest. As we get opportunities to get in -- and we purchased in around that [$2 million to $2.10 million] range on those securities, so when we see those opportunities, we will do that to keep our cash balances in line with where they have been so far.

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

(Operator Instructions)

DeForest Hinman, Walthausen and Company.

Hi, just had a few questions. Also on the OCC agreement. Can you kind of give us a better understanding of what the issues were that came up within the audit or review that they did, and really help us understand what changed within the last year or so that made there be these issues that I guess weren't there last year?

DeForest, the agreement is pretty self-explanatory from that perspective; and you know our hands are somewhat tied with regard to the relationship with the OCC. There's not a lot of color or disclosure we can give as part of -- as what the results of the exam were. But just generally speaking, we are enhancing policies and procedures. We are enhancing some of the functions, especially in the compliance, governance and audit areas, and working on those types of things.

DeForest, this is Bob Cushing. What we can say also is that from a regulatory perspective, though we can't get into the details of our exam, in general, there are areas of emphasis that the regulators go through. Several years ago during the credit crisis, the emphasis is very much on liquidity, capital and asset quality. More recently as the Comptroller of the Currency, Curry has indicated in speeches and some articles, the focus has shifted to regulatory compliance, rules, regulations and risk management.

And that's really what our agreement reflects; it's an opportunity as Rob says, to -- there has been a stepped-up expectation by the regulators with respect to these areas -- both regulators, investors as well as customers. We will be responding to that to ensure that we address the issues brought up during the exam and make sure that we've got them corrected. We are working hand-in-hand with our Board to make sure we meet that regulator's expectations.

Is it more along the lines of the documentation of the policies and procedures? I am not trying to imply they don't exist, but sometimes the regulators get in there and there might be a plan, but it's not exactly how they want it to look. Is it more along the lines of that?

Certainly a lot of enhancement, DeForest. I agree with your assessment.

Okay, thank you. There was a reference in there potentially about issues with the dividend. Do you anticipate any issues with the payment of the dividend or will that continue as normal?

We do not anticipate any difficulty with the dividend.

Okay, thank you.

Travis Lan, KBW.

Good morning. Does the $22 million to $22.7 million expense guidance -- I assume that includes the full impact of regulatory investment and excludes OREO cost; is that right?

That is correct, Travis.

How did you guys arrive at the stated expense range in terms of the regulatory compliance investment of $2.5 million to $5 million?

We took a look at the different areas that we have. And we took a look at what it's going to cost in personnel expenses and what it's going to cost in some of the consultants that we are going to need to hire to kind of supplement us.

Okay, and so how does that -- I guess, how does that range kind of break down between hiring and professional fees or consulting as you said? And then what -- is that all of this is permanent investment that needs to be made, or is there a portion of it that goes away over time?

Certainly some of it's going to be, there is going to be ramp up cost. So we're going to spend a little bit more in the beginning. But if you take a look at our income statement, really where most of the expenses have been so far has been in the professional fees area, so that's where you have seen the spike. Some of the increases in salaries has not really come to fruition yet. We've started to hire, so I think what you will see is, you'll start to see a shift of some of the professional fees over time start to come down and some of that going into salaries.

Okay, got it. What's your expected timeline to resolution here? I assume you can't call them back in to have them review everything you've done; you have to wait till the next regulatory exam. But based on what you've seen at other banks under similar agreements, do you think one year is a reasonable expectation for this to be lifted? Or do you think there's the potential for it to extend longer than that?

We're on a regular exam schedule, Travis. So it's difficult to say. The agreement itself has no term, so one year might be a little optimistic, but we can talk in terms of exam cycles, probably better. One exam cycle is probably optimistic but -- (multiple speakers)

That makes sense, I agree and I just wanted to see what you guys thought. So I guess in simple terms, I mean this doesn't -- and it's been asked, but this doesn't really impact the business at all? It's just you guys need to spend more in the back office, but you do have to submit a capital plan. What do you think that kind of scrutiny will be?

We have right now a capital plan in place we've had for a number of years. They've asked for enhancements of the plan and to make some more -- as far the stressing scenarios, do some more additional stressing. So from that perspective, the capital plan -- we'll submit it and hopefully they'll be able to accept it.

I think from one perspective, Travis, it was a good wake-up where we'll have systems that are in place that are long-standing and will withstand future growth within the Company. That would be the objective. That these are not one-time fixes; these are systematic changes that we will make within our Company that will provide us a platform really for the growth in the future.

Right. Got it. Just turning to the business, Rob, I think you mentioned that competitors are -- you're seeing competitors lower credit standards. Is that what's maybe weighed on your growth a little bit year to date, and then how do you think that impacts the growth for the rest of the year?

We are seeing that more in the commercial area, Travis, than in the residential mortgage area. Some of the commercial lending that's being done, especially in the multifamily and hotel/motel areas has been somewhat predatory. So I certainly think that's impacted our commercial loan portfolio. We're about $210 million right now. And you know we have never been a huge commercial lender, but we might like to see that a little higher than that.

Okay. But your core residential product -- there still seems to be decent demand there?

Yes, very sound.

All right, thank you guys very much.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to our speakers for any final remarks.

Thank you for taking time to hear about our Company. Have a great day.

Thank you for your time. Today's conference has now concluded and we thank you all for your attending today's presentation. You may now disconnect your lines. Have a great day.