TrustCo Bank Corp NY (TRST) 2015 Q3 法說會逐字稿

Good morning, and welcome to the TrustCo Bank third quarter 2015 earnings conference call. 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 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 forward-looking statement sections of our annual report on Form 10-K, and as updated by our quarterly reports on Form 10-Q. The 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, 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.

Thank you. As the host said, I'm Rob McCormick, President and CEO of the Bank. Joining me on the call today are Mike Ozimek, our Chief Financial Officer, and Scot Salvador, our Chief Banking Officer. Kevin Timmons, who a lot of you deal with on a regular basis, is also in the room.

Our third quarter 2015 results can best be described as solid. We ended the quarter with total deposits just shy of $4.1 billion. This is up year-over-year. We're happy that a lot of this growth has come in the core categories.

Most of you know we are very proud of our branch network, which now numbers 146 offices. We did not open any offices during the third quarter. We've opened three over the past year and we're encouraged that average deposits per branch continue to grow.

Our loan portfolio grew by about $200 million year-over-year. Most of this growth took place in the residential mortgage categories.

Our commercial loan portfolio was flat quarter-over-quarter and down year-over-year. We continue to work with our customer base, trying not to chase lower margin riskier credits that seem to be so common in these times.

Installment lending continues to be a small part of our business. It's all good news on the nonperforming loan front. Almost all of our performance ratios have shown improvement. Our nonperforming loan ratio at quarter-end was under 1%. And nonperforming assets to total assets was 0.8%.

Our allowance for loan losses continues over $45 million, just shy of 1.4% of total loans. And our nonperforming coverage ratio is over 140%.

Our net income for the quarter was $10.6 million, flat or down slightly from the third quarter of 2014. Our year-to-date 2015 net income, $32 million, was down about $1.5 million year-over-year.

Our efficiency ratio is just shy of 55% due to increase in our non-interest expenses.

Our return on assets was 0.91%. Return on equity was 10.64%. And our margin was 3.08%, flat quarter-to-quarter and down year-over-year.

Finally, most of you remember we are operating under a formal agreement, with the Office of the Comptroller of the Currency. We have put all functions of our Company under review, especially from a compliance and corporate governance perspective.

You can see some of the expenses are up, especially salaries, professional services and FDIC and other insurance. We are reviewing many policies and enhancing our compliance and governance functions.

We expect expenses to stay high for the short run, then stabilize at a lower number for the long run. In the meantime, we look for savings in other areas and still have a great efficiency ratio.

Now I'm going to turn it over to Mike O., who will give you some detail on the numbers.

Thanks, Rob. I will now review TrustCo's financial results for the third quarter of 2015.

Net income was $10.6 million in the third quarter of 2015, compared to $10.7 million for the third quarter of 2014. Despite the added cost during the third quarter in response to recent regulatory concerns, net income was virtually unchanged.

The average loan portfolio increased to $3.3 billion during the third quarter of 2015, an increase of $40 million on average or [1.2]% over the second quarter, and $218 million or 7.2% from the third quarter of 2014. As expected, the growth was concentrated in the residential real estate portfolio. This continues the positive shift in the balance sheet from lower-yielding investments to higher-yielding core loan relationships.

Total average investment securities, which includes the AFS and HDM portfolios, also increased during the third quarter by $19.1 million or 2.6% on average over the second quarter of 2015. This was a result of the additional $35 million in securities purchased during the third quarter of 2015, and the average impact of the purchase of approximately $60 million of securities in late Q2 2015. The increase was partially offset by $84 million in investment calls in the latter part of the third quarter, and by the cash inflows from the mortgage-backed securities portfolio.

Total average deposits for the third quarter was $4.2 billion, which is an increase of $144.7 million or 3.6% over the third quarter of 2014. Most of the increase came from our core deposit accounts.

Average core deposits increased $103.3 million from the third quarter of 2014 to the third quarter of 2015. Core deposit counts typically represent longer term relationships and are at a lower cost than time deposits.

Our cost of interest-bearing deposits held at 40 basis points for the quarter, which continues to reflect our pricing discipline with respect to CDs and other non-maturity deposits.

Our average account balance of overnight investments was $652 million for the third quarter of this year, down $30.8 million over the average balance in the second quarter of 2015. During the quarter, the growth of the loan portfolio was funded by the decrease in the overnight investments, as well as an increase in average deposits and borrowings of approximately $19 million.

In addition to the liquidity that is on our balance sheet, in the current rate environment, we expect that we'll have between $200 million and $400 million of loan payments coming in over the next 12 months, along with approximately $190 million of investment securities cash flow during the same time period. This continues to give us opportunity and flexibility moving into the [fourth] quarter in 2016.

Our net interest margin increased to 3.08% in the third quarter, up from 3.07% in the second quarter and down from 3.16% in the third quarter of last year.

You can see that our provision for loan losses has remained level at $800,000 in the third quarter of 2015 compared to the second quarter of 2015, and down $300,000 compared to $1.1 million recorded during the third 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 reiterate that the level of the provision for loan losses is directly attributable to the continued improving quality of the portfolio and economic conditions in our geographic footprint and the ongoing resolution of existing problem loans.

Non-interest income came in at $4.4 million for the third quarter, relatively unchanged compared to $4.5 million in the second quarter. Our financial services division had approximately $895,000 assets under management as of September 30, 2015.

Now, on to interest expense. Total non-interest expense came in at $23.5 million, up $1.3 million from both the second quarter of 2015 and the same period last year. The biggest fluctuations in the third quarter of 2015, compared to last quarter, occurred in salaries and employee benefits and FDIC and other insurance expenses.

Salaries and benefits benefited by approximately $840,000 as a result of the reduction in the liability related to our stock-based compensation plan and other senior benefit plans.

The increase in the FDIC and other insurance expenses is related to an additional $1.2 million in the FDIC premium expense, which is a direct result of our most recent regulatory exam. We expect the FDIC and other insurance expense line to be approximately $1.9 million per quarter going forward.

One other item to note, the other expense line includes a one-time charge of approximately $300,000 related to the issuance of EMV-enabled debit cards.

We continue to expect the estimated additional annualized cost of implementing the recommendations in the agreement will be approximately $5 million annually. These added costs reflect the Company's continued investment in our systems within the retail loan and deposit areas, as well as enhanced regulatory compliance measures.

We would expect, over the next several quarters, to continue to experience increased legal and consulting expense. However, that will level off in about a year as we complete implementation of the requirements of our agreement.

Included in the third quarter numbers are costs of approximately $500,000 associated with the increase in legal and consulting costs. As noted last quarter, you will see a continued shift from professional services to the salary and benefits line.

ORE expense came in at $806,000 for the quarter, which is within our expectations, in a large part due to increased taxes paid on properties owned during the quarter. We still expect ORE expenses to stay in a range of $500,000 to $1 million per quarter.

All the other categories in non-interest expense are in line with prior quarters and our expectations. Going forward, we'd expect total reoccurring non-interest expenses to be in the area of $22.7 million to $23.2 million per quarter.

During the quarter, our effective tax rate decreased to 34.3% in the third quarter of 2015, down from 37.6% last quarter and 37.9% in the third quarter of 2014. The decrease is a result of a tax benefit recorded related to the filing of our 2014 tax return during the most recent quarter. We expect that our effective tax rate to return to previous levels in the fourth quarter of 2015 and going forward.

Our efficiency ratio continues to be strong, despite the increased cost discussed earlier. We will continue to focus on what we can control by working throughout this process to identify opportunities to make the processes within the bank more efficient. The third quarter of 2015 came in at 56.04%, up slightly from the second quarter's 54.71%.

It should be noted the third 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 recommendation of the agreement. I would expect the efficiency ratio to stay in this range or up slightly.

And finally, capital ratios continue to stay strong at 8.71% at the end of the third quarter, up from the 8.49% compared to the same period in 2015.

Now Scot will review the loan portfolio and nonperforming loans.

Okay. Thanks, Mike. For the third quarter, total loans grew by $39.1 million or 1.2%. Year-over-year loans have increased by $199 million or 7.2%. Growth in the quarter was focused in the residential portfolio, with commercial loans decreasing just slightly, less than $1 million.

Home equity loans increased $1.8 million, with the remainder of the growth occurring in the first mortgage product.

Our Florida market continues to perform well. Within the residential portfolio, approximately 52% of the net growth stemmed from Florida this quarter. The market is relatively strong in Florida. And our real estate product continues to gain recognition in the marketplace.

Our current 30-year fixed rate is 3.99%. Rates have been fairly stagnant and most of our originations have ranged between 3.99% and [4.125]% in recent times.

Purchase money business has remained steady over the last couple of quarters, but refinance activity has dropped to low levels given the protracted period of flat rates.

Our backlog is roughly equivalent to last year's at this point in term of numbers of loans, but is down about 10% in dollar volume due to the loan composition. Home equity loans were a bit higher as of quarter-end, with slightly less in the purchase money category versus last year.

The news continues to be good in the nonperforming loan area, with virtually all categories showing improvement both quarter and year-over-year.

Nonperforming assets declined to $37.8 million from $38.6 million last quarter, and $43.6 million last year.

Nonperforming loans were equal to 0.97% of total loans as of September versus 1% in June and 1.2% a year earlier.

Early stage delinquencies remain at low levels. And the 30-day [and 90-day] category is significantly below where it stood at this point last year.

The coverage ratio, or allowance for loan losses to nonperforming loans, now stands at 141% versus 140% in June and 125% a year earlier.

Rob?

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

We will now begin the question-and-answer session. (Operator Instructions) Alex Twerdahl, Sandler O'Neill.

Thanks for all the additional color; very helpful, as usual. I wanted to ask, as I usually do on this call, about the uses of the excess cash. Obviously, it still fits pretty high. Is your goal right now, given the outlook for interest rates, still just to maintain NII basically where it is? Or have you considered putting more to work extending out on the yield curve a little bit to get a little bit more in earnings?

Alex, this is Mike. Our outlook really hasn't changed. We've always been an opportunistic investor. And the good thing is we've still seen growth in our loan portfolio. And right now, that's where we see the best place to put our money. We will continue to invest some in the fourth quarter, but won't necessarily -- at least where the rates are right now, we don't really envision that being a huge number unless we really start so see a pickup in the long end of the curve. So we may see our cash numbers start to rise a little bit in the fourth quarter, depending on what really plays out.

We've been able to sustain the net interest income as well, Alex, and show a little -- post a little growth in that area, so --

Yes, I know. And then on the cost of funds side, have you felt the need to extend out and offering some [significant] longer term CD promotions, or anything that would affect the cost of funds in the coming quarter or two?

No, we've been able to be pretty conservative with our CDs actually. And we've even chased a little money out of the bank, Alex, that we felt was a little higher priced at this point in time. That's where that core growth in our core customers really come into play and give us some advantage. And I've got to say, we've been able to extend a little bit and really haven't bumped the cost at all so --

Okay. That's great. And then just finally, Scot, you gave some good color on the pipeline, but just how do you think about -- have you seen the number of applications changing as the 10-year changes and as rate shifts around a little bit? How should we think about potential loan growth when rates start to go up? Do your customers really -- are they really not that sensitive to where the rates are, or do you think that there's kind of a rush right now to buy houses and refinance and whatnot with the possibility of rates going up potentially next year?

Actually, I would kind of say just almost the opposite, Alex, and that rates have been so low for so long that the rush of people flooding in to capture the low rates -- anyone who was going to do that just for rates sake pretty much has done it. And stagnation in rates where they don't change and are flat for a protracted period, which is what we've been in this summer, that really has a dulling-down effect on the activity because people tend to move when rates move.

It goes into the papers; it goes into the news. Plus those who are sitting on the fence say, geez, it's going down, here's a great rate; I should grab it. Or if it's going up, they say, geez, if we're going to do something, maybe we should do it before they go up higher. So the flat rates really kind of dulls out the market and if rates start to move, initially if rates go way up, of course, that could have a negative effect. But if they start to move, you might actually see a little jump-start in the market, as people wake up and say, boy, it's time to do something.

Okay. That's very helpful. Thanks for taking my questions.

(Operator Instructions) Travis Lan, KBW.

Scot, just following up on that last question, so the kind of pullback in the loan growth rate -- at least what you're on pace to put on this year -- is more a product of the refinance activity slowing than any design on your part to slow the growth? Is that right?

Yes, absolutely. It's not a design thing. It is greatly tied to refinance, but it's also on the purchase side. As I just said, there has been a little flattening on the purchase side also, but it's certainly nothing by design. Our loan flow numbers show that our market share is still there. Our float has been good, frankly, as they rebound from the situation they were in and our market recognition grows there. So we're kind of ahead of the pace the last year in Florida, but overall, it's not by design. It's just really a function of the market and what's going on.

Got it. Okay. And then you had said, I think, that origination yields on the mortgage book are around 4%, give or take. How does that compare to the rate on the mortgages that are rolling off?

I think it's slightly below the rates that are rolling, but again, rates have been so flat for so long that that spread between what's rolling off and what we're booking them on is really -- has really tightened up. It still is a little bit lower, but not nearly what it was before, Travis.

And what does that then indicate for kind of the outlook for margin, assuming no change in rates? It seems like then there wouldn't be a whole lot of pressure going forward. Does that make sense?

Absolutely. You could see it come down a little bit in the long term where that yield -- you can see where the yield in that portfolio is. It has kind of steadily come down, not by a lot, but it has come down a few basis points every quarter going back. But the good thing is, is that where it's coming down to is close to where we're originating so --

Got it. Okay. Reserve to loans -- I think you guys have mentioned this, but just to kind of clarify. It's come down fairly consistently. Is that something that you would expect to continue if loss rates kind of stay in this range? Or is there a point at which the reserve to loan ratios kind of stabilizes? Is there a low bound for it?

(Inaudible).

I'm sorry, could you repeat the question?

Sorry. So reserve to loans obviously has come down in conjunction with the nonperforming improvement, which you guys have mentioned. Is there a point though at which the reserve to loan ratio reaches a level where it's low enough and will remain stable at some point?

We spend a lot of time on analysis on loan loss reserve, Travis. It's not like the old days. So if the numbers continue to improve, I would imagine that would continue to come down. We have to be mindful of the fact that we lend money for a living and there's risk involved in everything. So in our opinion, the higher the reserve we can maintain, the better off we will be long term. But the analysis has really become exhaustive. And we're also hoping to post additional loan growth that could keep the loan loss reserve where it is, bring the ratio down, but keep the dollars the same.

Right, okay. And then just last one -- if you could just update us. You gave us a good review of kind of the expense impact of the OCC agreement, but just from a qualitative perspective, where you guys think you stand, maybe give an example of specific improvements that have been made. And then just kind of your own outlook for the sustainability of the dividend, if you can just remind us how that process works, that would be great.

We're making, I think, very good progress. We're meeting dates. Our hands are kind of tied. You know that, Travis, with regard to an OCC agreement, there isn't a lot we can disclose or discuss publicly. But we're hitting the dates that are required and submitting what we think are very good responses to the issues raised in the formal agreement. And we continue to plan to pay that dividend. We haven't been told it's in any jeopardy or there are any difficulties with it, so we plan to just continue to pay.

Okay. All right. I appreciate it.

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

I'd just like to thank you all your interest in our Company, and have a great day.

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