TrustCo Bank Corp NY
Q3 2014 Earnings Call Transcript

Published: 22 Oct 2014

[Operator:]

Good morning, and welcome to the TrustCo Bank Corp Third 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. The statements are valid only as of the date hereof and the company disclaims any obligation to update this information except as maybe required by applicable law. Please also note today's call is being recorded. I would now like to turn the conference over to Mr. Robert McCormick, President and CEO. Please, sir, go ahead.

[Robert McCormick:]

Good morning. As the host said, I'm Rob McCormick, President and CEO. Joining me on the call today are Bob Cushing, our CFO; Scot Salvador, our Chief Banking Officer, and also in the room is Kevin Timmons, who most of you know and hopefully will keep us on track. Thank you for taking the time this morning to hear a little more detail about our third quarter results. As we usually do, I will hit the highlights, Bob will detail the numbers and Scot will talk about some of the operating results. We'll have plenty of time for questions and answers. We continued our pattern of providing very strong, solid financial results in the third quarter 2014. Our net income was $10.7 million, up 5.5% from the same quarter in 2013 while our year-to-date net income was up almost 15% at $33.5 million. Our net income was driven by growth in both loans and deposits. On a year-over-year basis average loans are up $243 million or 8.7% in 2014 and our average deposits are up $111 million for the third quarter over the same period last year. We also had success in building relationships with core deposits up about $84 million year-over-year. It's showing us that the new branch network that we have established is beginning to take hold and being successful. We had some margin improvements of 3.16% in the third quarter. As most of you know, we maintain a strong liquidity position which allows us to move on our feet, take advantage of opportunities as they are presented. We saw continued economic improvement of all of our markets. So we opened two branches, one in Florida and one in Upstate. As most of you know, small, reasonably staffed branches are a big part of our operation, it's how and where we do all of our business. Our assets quality ratios continued to improve, non-performing loans declined to $37.1 million or 1.2% of total loans and 0.95% to total assets. Our efficiency ratio, something we really pride ourselves on, improved year-over-year to 52%. Our tangible equity ratio rose to almost 8.5%. We are very happy with our third quarter results and our year-to-date numbers have been great. Our return on average assets is almost 1% and our return on average equity, 11.84%. Now I am going to turn it over to Bob to detail the numbers.

[Robert Cushing:]

Thanks, Rob. I will review the financial results for TrustCo for the third quarter and year-to-date 2014. The strengths we have noted in prior quarters continued into the third quarter and for the year-to-date results. As Rob noted, net income was $10.7 million for the third quarter of 2014 compared to $10.3 million for the same quarter in 2013. This represents an increase of 4.5%. Likewise, year-to-date results were $33.5 million for 2014 compared to $29.2 million for 2013, an increase of almost 15%. There were no unusual or one-time income items recognized in the quarter that would affect comparability to prior years. As we noted in prior conference calls, there were some onetime income items that occurred in both the first and second quarters of 2014. That need to be considered when comparing the linked, [trailing four] (ph) quarter results. Let's start with the balance sheet growth. Our average balance of interest earnings assets increased by $20.3 million during the quarter to $4.5 billion. That’s up almost $133.2 million from the third quarter of 2013. This growth focused primarily in the loan portfolio with average loans for the quarter up $74.2 million from the second quarter of 2014. We took advantage of market opportunities as they presented themselves to selectively sell out some longer-term securities. During the third quarter we sold approximately $40 million of longer duration mortgage-backed securities that at a gain. This was the primary driver of the reduction in the investment securities portfolio. Overnight investments remained very healthy during the quarter at a tad under $600 million. Yield on interest earning assets increased two basis points to 3.51%. On the funding side of the balance sheet, the third quarter is notoriously a difficult quarter to attract deposits due to the end of 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 increased the average balance of deposits by approximately $18.9 million during the third quarter compared to the second quarter of this year. This quarterly gain continues a long string of growth in our deposit balances. If you look at the third quarter of this year compared to the third quarter of last year, we had average growth of over $110 million. Our cost for interest bearing liabilities crept up slightly to 40 basis points this quarter compared to 38 basis points last quarter and to 40 basis points through the third quarter of last year. So, overall, our cost of interest bearing liabilities remains exceptionally low and well controlled. The increase in the yield on interest bearing assets totally offset the slight increase in our cost of liabilities thereby producing a very stable net interest margin at 3.16%. We continue to look for and to identify opportunities to reduce or control the cost of deposits. We have also undertaken a program to encourage CD customers to extend the terms of their CDs by contacting maturing CD customers early and offering them relatively attractive longer-term renewal rates. This has helped to increase the term to maturity of our CD portfolio by almost 45% for the period from year-end 2013 to September 30, 2014. This is a very substantial change in the life of these CDs, especially when you think about the size of this portfolio at approximately $1.1 billion. 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 tax equivalent net interest income. For the third quarter this year, our tax equivalent net interest income is approximately $1.5 million, greater than it was in the third quarter of last year and is a very sizable increase on a quarter to quarter basis and represents a core increase in earnings for the future. Let me also note again that we retained almost $600 million on average during the quarter in overnight investments. Down very slightly from the average for the second quarter of this year but up almost $50 million from 2013's third quarter. In addition to the liquidity that is on our 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 $135 million of investment securities cash flows during the same time period. You can also see that our provision for loan losses came down by $400,000 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 the provision for loan losses was directly attributable to the improving quality of the portfolio and the ongoing resolution of existing problem loans. Non-interest income came in at $4.9 million for the quarter, up slightly from the second quarter due to some security sales but overall in line with our projections. As you know our business model does not rely on significant sources of non-interest income. The most significant recurring source of non-interest income is derived from our financial services division which has $879 million of assets under management. Non-interest expense came in a little higher than we originally expected and I will get into that in a minute. For the quarter, total non-interest expense was $22.2 million which is an increase over the second quarter by almost $2.8 million. But you need to keep in mind that during the second quarter we had a gain in the sale of a piece of foreclosed property of $2.4 million that helped to drive down the second quarter non-interest expense. If you net that out, we are still up over the second quarter by about $310,000. Let me explain that remaining variance. During the third quarter we received our actuarial valuation reports for our various benefit plans. Prior to receiving these financial reports we used estimates of the anticipated expense and then did a true up adjustment in the third quarter to bring the expected expense in balance with the actuarial reports. This year that true up expense was almost $400,000, which is greater than has been in the past and is the primary driver for the increase in salaries and benefits expense along with the increase in total non-interest expense. This item is not expected to reoccur in the fourth quarter. We took the hit for this item all in the third quarter of 2014. All the other categories non-interest expense are pretty much in line with prior quarters and our expectations. Other real estate expense is up a bit but that's really in line with our cost of holding and disposing of these foreclosed properties. During this year we have disposed off almost 60 properties and we currently have 38 properties in our retail inventory. The summer months are prime time for us to dispose of these properties prior to the fall and winter slowdown. I would expect ORE expense to come in a bit -- down a bit for the fourth quarter and be in the area of $500,000-$750,000 range. Our efficiency ratio continues to be very strong with the quarter at 52.73%, down from the second quarter's 53%. Obviously, these numbers are negatively affected by the onetime expense items as well as our decision to retain a large amount of overnight investments. Again, going forward we continue to be most comfortable with our range of $20.2 million to $20.7 million of recurring, non-interest expense and with ORE expense generally in the range of $500,000 to $1 million. Capital ratios continue to improve and stood at 8.49% at the quarter end, up from 7.94% last year. Now Scot is going to review the loan portfolio and non-performing loans.

[Scot Salvador:]

Thanks, Bob. Our loan portfolio for the third quarter continued to show healthy growth. Overall, the portfolio grew by $77 million or 2.6% on the quarter and $248 million or 8.8% year-over-year. Within the quarter, all our markets showed growth with our Florida region accounting for approximately 37% of the net increase. Residential real estate grew by approximately $79 million for the quarter with commercial loans decreasing by just under $3 million. We are optimistic about the remainder of the year as we have a solid backlog at quarter's end. However, overall activity typically begins to slow in the fourth quarter and we expect that to be reflected again this year. The backlog at quarter-end was roughly equivalent to the same point last year with a majority of the pending loans in the purchase money category. Our most recent 30-year fixed rate was 408% with zero points. The quarter also saw the kick off of our new mobile banking and credit card products over the last several weeks. While we do not anticipate that credit cards will ever make up a significant part of our total loan portfolio, we are happy to have the product offering and are pleased with the initial level of application activity we have experienced. Loan non-performing numbers continue to move in a positive direction on the quarter. Overall, virtually every asset quality indicator showed improvement on both the quarter and year-over-year basis. For the quarter, non-performing assets dropped from $49.2 million to $43.6 million while non-performing loans moved from $40.9 million to $37.1 million. Although the foreclosure process remains lengthy in both New York and Florida, both the non-performing figures contain good evidence of loans moving through the final resolution, which is a positive sign. Non-performing loans stood at 1.2% of loans at September 30 versus 1.47% a year earlier, while the coverage ratio or allowance for loan losses to non-performing loans has climbed to 125% versus 114% last year. Rob?

[Robert McCormick:]

That’s our story. We will be happy to answer any questions anybody has.

[Operator:]

(Operator Instructions) The first question comes from Alex Twerdahl from Sandler O'Neill. Please go ahead.

[Alex Twerdahl:]

Just first off on the reserve. It's been slowly coming down over the past couple of years. Obviously that makes sense given that credit metrics are all moving in the right direction. But what do you think it shakes out given the complexion of your portfolio at the end of the day.

[Robert Cushing:]

Alex, this is Bob Cushing. I mean when you look at the charge-off history coming down from $10 million-$12 million a couple of years ago down to $7.2 million last year and we are on track right now for about $6.5 million to $7 million range for charge-offs. We have no intention, it's not our intention to reduce the [paradigm] (ph) for loan losses to support net income. That’s not the way we run this institution. We like a very healthy reserve. However, as you know, you got the current accounting rules. You have to follow those in the provision methodology, you have to follow them. As a result of that we have been -- economic conditions are improving, charge-offs are reducing, non-performing loans are reducing. So we see the lack of a need for those significant provisions. That’s why it came down to $1.1 million this quarter. Going forward, it's hard to peg that because, again, continued economic conditions are improving. It is our intention to be kind of in line with charge-offs but charge-offs are reducing. So I know it's not a great answer for you but at this stage we are not going to peg a number as a percentage of loans outstanding or as a percentage of charge-offs. But it is our intention to try to stay as close to charge-offs as possible.

[Robert McCormick:]

We can't really peg a number on percentage.

[Alex Twerdahl:]

Okay. And then you said loan payments over the next 12 months were somewhere around $200 million to $400 million. What about for security cash flows? Do you have that number over the next 12 months?

[Robert Cushing:]

I think I have noted, it was about $135 million.

[Alex Twerdahl:]

$135 million. And then just finally. It looks like deposit rates, especially on money market accounts just creeped up just a basis point during the quarter. But I was a little surprised, was that reserve promotion that you ran over the summer to get some new customers or is that indicative of maybe the market is starting to (indiscernible) more for deposits in anticipation of rising rates at some point.

[Robert Cushing:]

No, I wouldn’t say it's that, Alex. What we really have is maybe tiered money-market account and we have seen some of our customers putting a little bit more money and kind of popping into a higher tier. So that gives them a little bit of a better rate from that perspective. The only thing just to note is that we have gone out of our way to work with our customers to give them to lock in to a little bit more long-term CDs. So we are experiencing a little bit -- we feel we can afford to do it now and lock these customers into this slightly higher CD rate and a little bit of a longer term on it.

[Operator:]

(Operator Instructions) The next question comes from Travis Lan from KBW. Please go ahead.

[Travis Lan:]

Just on the CD question. Could you just give us a sense for kind of what rates you need to offer to attract the longer-term deposits and what terms or how far out depositors are willing to go?

[Scot Salvador:]

Well, there is not a magic rate but in this environment anything in the 1% range, give or take, really seems to catch people's attention. Most of our rates are not that high but we have in a couple of instances going out to 1% on a longer-term. People will go surprisingly long to get that considering it's, on relative terms is not a high rate. We have had success getting people to go out as long as three years to obtain that. So that kind of gives you a feel. Again, there is no magic number but that really seems to catch people's attention.

[Travis Lan:]

Got you. And then is there is any price -- do you guys notice any pricing or competitive differential on either the loan or deposit side when you compare New York to Florida?

[Scot Salvador:]

You know it depends. I mean both markets are highly competitive and I wouldn’t say there is a constant theme. It really depends on who is pushing for deposits in any particular market. Which institution is hot for money, so to speak, and how competitive you want to be with them. But I think over time it's been surprisingly even between the two regions. Again, one region might be hotter than another in a given quarter but I wouldn’t say there is a constant theme of one being higher than another, no.

[Travis Lan:]

Got you. Okay. And then residential yields were pretty stable in the quarter. Do you have a sense for where the origination yields were in the third quarter?

[Robert Cushing:]

Yes. Most of what we are doing in the third quarter was in the low 4s. Depending on the week, it was anywhere from 4 1/8s to 4 3/8s. But most of our 30-year stuff that we did fell very within that range.

[Travis Lan:]

And then just last one from me. Obviously, rates have been pretty volatile here. Do you have a sense for what degree of the recent pullback in the benchmark is going to flow through to the offering rates? Have you seen any competitive pressure maybe to offer something lower than where you guys were in the third quarter? Just kind of how that interest rate volatility could impact pricing for you?

[Scot Salvador:]

We see it -- we haven't seen a lot of it so far. I mean no doubt if rates go down and stay down, we are probably going to see a little bit more of it. But the good news there is, I think we have demonstrated pretty well over the last several years that we don’t always have to be the lowest rate in town to obtain business. So, again, if rate is down and stayed down we probably will see some pressure. We might have to respond a little bit. But thankfully, we don’t always have to be lowest rate to do business.

[Robert McCormick:]

We have been building that reputation for years too, Travis. As Scot said, service based and local servicing, local contact. Things handled in your branch by your branch manager. Most of our customers have grown to appreciate that.

[Operator:]

(Operator Instructions) I think we have Alex again. Alex, please go ahead.

[Alex Twerdahl:]

Thank you. Just wanted to ask another question here. Just given the interest rate environment kind of move in the wrong direction for what we all kind of thought and hoped for. How has your stance towards acquisitions changed over the past couple of months? Maybe call it year-to-date. And is there an increased desire to do some sort of, maybe like small banking deal where they had more of a commercial focus, whether it be in the New York region or in the Florida region?

[Robert McCormick:]

We have always said, Alex, no one would like to do an acquisition more than us as a management team. But we know who we work for. We work for our own shareholders and it's not our job to enhance the values of other companies' shareholders. So it would have to be the right transaction at the right price for the right reason.

[Operator:]

(Operator Instructions) I guess this concludes our question-and-answer session. I would like now to turn the conference back over to Mr. Robert McCormick for any closing remarks.

[Robert McCormick:]

Thanks for participating in the call today and thanks for your interest in our company. Have a great day.

[Operator:]

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