TrustCo Bank Corp NY (TRST) 2016 Q3 法說會逐字稿

Good morning, and welcome to the TrustCo Bank Corp 2016 earnings call and webcast. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions.

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 and 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 and forward-looking statement section of our annual report on Form 10-K, and as updated by our quarterly reports on Form 10-Q. 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 laws.

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. Good morning, everyone. As the host said, I am Rob McCormick. I thank you for joining us this morning to hear a little more about our Company. As usual, joining me on the call today is Scot Salvador, our Chief Banking Officer; and Mike Ozimek, our Chief Financial Officer. Kevin Timmons, who most of you know, is also in the room.

The plan is for me to start with a summary of our quarter hitting the highlights, then turn it over to Mike for detail on the numbers. He will hand off to Scot, who will discuss our operations, mostly the loan portfolio.

We're happy to report a good third quarter here at the bank. Our net income was $10.9 million was greater than second-quarter 2016 and greater than the same quarter last year. Our deposits grew to almost $4.2 billion. This is up about $70 million more than the same period last year.

We're happy to report our time deposits dropped by $10 million during the same period. Meaning, we've been able to grow our base of core deposits, reducing our reliance on the higher-priced time accounts.

Total loans are up to just shy of $3.4 billion. Growth was driven by our residential mortgage lending operations. That portfolio was solidly over $2.8 billion.

Commercial loans were down as we continue not to chase transactions for rate and standards. The combination of loans and deposits resulted in a slight margin expansion from the same time last year to 3.09%. Some would say flat, but we'll take anything we can get.

Now is a good time to remind the group that all of our business is done in our branches. We do not buy loans or except broker deposits. We also do not pay premium rates for large CDs. Those that are regular followers of our Company will remember we have a strong liquidity position and a large investment portfolio with relatively short maturities.

Our asset quality continued to improve as nonperforming assets to total assets fell to 0.64% for the quarter. Our loan-loss reserve is 1.3% of total loans and the allowance coverage ratio was 1.6 times.

We are still operating 145 full-service banking offices. Our efficiency ratio settled down to just over 54% for the quarter, down from recent prior periods. Our tangible equity ratio went over 9% this quarter and our total assets held over $4.8 billion. Our return on average assets was 0.9%, up from the prior year, and our return on average equity was over 10%, down from the prior year due to having a larger equity position.

No update on the formal agreement with OCC. Great progress has been made, and we remain confident we will emerge a stronger Company. We are proud of our third-quarter results and look forward to a strong finish to the year.

Now, I'll turn it over to Mike for the detail on the numbers.

Thank you, Rob. I will now review TrustCo's financial results for the third quarter of 2016. As Rob mentioned, net income increased to $10.9 million in the third quarter of 2016, or 4.5%, compared to the $10.5 million for the prior quarter.

Let's start with the balance sheet growth. Our average balance of interest-earning assets increased by $43.4 million from the second quarter to $4.7 billion. This growth was focused primarily in the loan portfolio. The average loan portfolio increased to $3.4 billion during the third quarter of 2016, an increase of $48.4 million on average, or 1.5%, over the second quarter and $108.7 million, or 3.3%, from the same period in 2015.

As expected, the sustained growth continues to be concentrated in the residential real estate portfolio. This continues a positive shift in the balance sheet from lower-yielding investments to higher-yielding quarter loan relationships.

The total average investment securities decreased during the third quarter of 2016 by $20.4 million, or 2.9% on average, from the second quarter of 2016.

As you'll remember, when rates dropped at the end of the second quarter, we took the opportunity to sell approximately $45 million of mortgage-backed securities for a gain of $668,000. Total sales were replaced during the quarter with investment purchases of approximately $105 million in the mix of agency mortgage-backed securities and corporate bonds during the quarter. We also had a $45 million of agency securities called during the third quarter.

On the funding side of the balance sheet, the third quarter is notoriously a difficult quarter to attract deposits due to the end-of-the-summer doldrums, property and school taxes coming due, and back-to-school focus for a good portion of our customers. In spite of this, we continue to be successful in increasing balances.

Total average core deposits increased $51.2 million for third quarter of 2015 when compared to the third quarter of 2016 and $29.4 million compared to the second quarter of 2016. While average total deposits for the third quarter were $4.2 billion and our cost of interest-earning bearing deposits decreased to 37 basis points for the quarter, which continues to reflect our pricing discipline with respect to CDs and non-maturity deposits.

Our net interest margin for the third quarter was 3.09%, the same as the second quarter of 2016 and a basis point higher than the third quarter of 2015. The impact of the growth in the balance sheet coupled with the changes that we've made in net interest margin had a pretty significant impact on taxable equivalent net interest income.

For the third quarter of this year, our taxable equivalent net interest income was $36.7 million, or approximately $612,000 greater than it was in the third quarter of last year. And that was a very sizable increase on a quarter-to-quarter basis and represents a core increase in earnings for the future.

While we also note that we retained $684 million on average during the quarter in overnight investments, up slightly for the average for the second quarter of this year and up $31.5 million from 2015's third quarter.

In addition to the liquidity that is on our balance sheet, the current rate environment -- in the current rate environment, we continue to expect that we'll have between $350 million and $550 million of loan payments come in over the next 12 months, along with approximately $150 million of investment securities cash flow during the same time period. This continues to give us opportunity and flexibility during the remainder of 2016 and into 2017.

Our provision for loan losses decreased slightly to $750,000 in the third quarter of 2016, compared to $800,000 in the first and second quarter of 2016 and the third quarter of 2015. Asset quality and loan-loss reserve measures remain solid and improving over the second quarter of 2016 and the third quarter of 2015. As a result, we continue to expect a level of provision for our loan losses in 2016 and into 2017 will continue to reflect the improving credit quality of the portfolio and economic conditions in our geographic footprint and the ongoing efforts to resolve our existing problem loans.

Noninterest income net of securities gains came in at $4.7 million for the third quarter, up compared to the $4.5 million in the second quarter of 2016 and $4.4 million in the same period last year. Included in other noninterest income in the third quarter of 2016 is a $469,000 gain from the sale of our Union Street branch location.

One of the most significant reoccurring source of noninterest income is derived from our financial services division. Our financial services division had approximately $863 million of assets under management as of September 30, 2016.

Now, on to noninterest expense. Total noninterest expense net of ORE expense came in at $22.2 million, down $1.4 million from the second quarter of 2016. During the third quarter of 2016, FDIC and other insurance expense was $1.1 million, a decrease of $822,000 compared to the second quarter of 2016.

In regard to the FDIC insurance-related expense, as you know, under a rule adopted by the FDIC in 2011, regular assessment rates for all banks declined when the reserve ratio reached 1.15%. The FDIC reserve ratio did reach the required 1.15% as of June 30, 2016. As a result, banks with total assets of less than $10 billion will have substantially lower assessment rates under the 2011 rule. Therefore, we expect FDIC and other insurance expense remain at this level going forward.

We continue to expect the estimated total annualized cost related to the agreement to remain elevated. The added costs continue to reflect the Company's ongoing investment in additional personnel and systems within the retail loan, deposit and regulatory compliance areas.

The good news: these costs have leveled off as we complete the implementation of the requirements of the formal agreement. Overall, however, noninterest expenses will significantly decrease due to the decrease in FDIC insurance expense.

ORE expense came in at $895,000 for the quarter, which is up from last quarter in large part due to the increased taxes paid on properties owned during the quarter. ORE expenses consistently stayed within our expectations for the last five quarters. We continue to expect ORE expenses to stay in the range of approximately $500,000 to $1 million per quarter going forward.

All of the other categories of noninterest expense are in line with prior quarters and our expectations. Going forward, we will continue to expect total reoccurring noninterest expense, net of ORE expense, to decrease going forward and remain in the area of $22.5 million to $23 million per quarter.

Our efficiency ratios saw a reduction during the quarter due to the decreased costs discussed earlier. As always, we will continue to focus on what we can control by working to identify opportunities to make the processes within the bank more efficient.

Third quarter of 2016 came in at 54.11%, down from the second quarter's 57.7%. Even with the noted decrease in expenses, third-quarter numbers continue to be negatively affected by our decision to retain a large amount of overnight investments and increased costs associated with implementing the recommendations in the agreement. I would expect the fourth quarter's efficiency ratio to end in this range.

And finally, the capital ratios continues to improve. Consolidated tangible equity and tangible assets ratio increased to 9.04% at the end of the third, quarter up from 8.71% compared to the same period in 2015.

Now Scot will review the loan portfolio and nonperforming loans.

Okay, thanks, Mike. Net loans for the third quarter increased by $44 million. This result included a $6 million decrease in commercial loans, with the residential portfolio increasing by $50 million. Year-over-year loans have increased by $106 million, or 3.2%, with the third quarter's increase equating to 1.3% growth.

As previously discussed, we continue to be mindful with regard to commercial loans. We believe some may have become too aggressive in this area with regard to both loan pricing and terms. When the credit cycle eventually turns, we feel this cautious approach will hold us in good stead.

Growth for the third quarter occurred in all our main market areas. Our Florida region continued its strong results and on a net basis accounted for approximately two-thirds of the residential loan growth. Rates have increased just slightly in recent days, and our current 30-year fixed rate is 3 5/8%, up from 3.5%.

Our loan backlog was solid as of quarter-end. It is down slightly from the second quarter, which is normal given seasonal factors, and up approximately 15% from the prior year. Reflected in this year-over-year increase is an uptick in refinance activity versus last year's very low numbers.

Nonperforming loans continue to show improvement on the quarter. As of September 30, nonperforming loans totaled $26 million versus $28.2 million in June. Net charge-offs were also down. And at 0.10%, the annualized net charge-off ratio for the third quarter was at the lowest level since the first quarter of 2008. The coverage ratio, or the allowance for loan losses to nonperforming loans, stands at $1.6 million versus $1.4 million a year ago. Rob?

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

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

First off, I think I just missed some of the commentary that you had. You said in terms of mortgages that are scheduled to reprice or mature this year, you said $315 million to $515 million, or $350 million to $550 million?

We -- I said -- so what it is is that's total cash flows, Alex, on the mortgage portfolio, and that was $350 million to $550 million.

Okay. And it was $150 million on the securities?

That is correct.

Okay. And then what did you say you were buying -- you said you bought $105 million of securities? I think you said it was mixed agencies and corporate bonds. Is that correct?

That is correct. Mortgage backs and corporates and agencies.

Okay. You said in the prepared remarks that the provisions in the future should reflect improving credit quality. Do we take that as sort of like a gradual downward $800,000 to $750,000 -- to $750,000 for a while. Do you think that with the reserves being 1.3% of loans, credit obviously moving in the right direction, I mean, if you accelerate the reserve release a little bit faster?

You know, it really depends here -- there's a couple of things. One is obviously model that we have, and the model really drives the calculation. But the other side is really where the charge-offs are. You saw our charge-offs start to come down a little bit, so what we have provided came down a little bit. But we see a little bit of acceleration going forward potentially, but it really is dependent on those first two things.

Okay. And has anything changed as we kind of get to a point in the credit cycle and the interest rate cycle where, assumably rates have to go up at some point in time and there's -- people are projecting, are starting to talk about the next downturn. Has anything changed in your underwriting standards recently in terms of LTVs that you'll allow or anything along those lines?

We've always been a conservative lender -- you know that, Alex -- and we've start to our knitting. And that's kind of our discussion with regard to some of the commercial lending. Some of the standards have dropped and some of the pricing has also dropped with it, and you can't give price and standards up. So we've just worked with our existing customers, people who know us and people we know. So hopefully, it serves us well in the next cycle.

Great. That's all my questions. Thank you.

(Operator Instructions) It seems we have no other questions at this time. So I would like to turn the conference back over to Mr. McCormick for any closing remarks.

Thank you for your interest in our Company, and have a great week.

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