TrustCo Bank Corp NY
Q4 2014 Earnings Call Transcript

Published: 22 Jan 2015

[Operator:]

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. 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 J. McCormick, President and CEO. Please, sir, go ahead.

[Rob McCormick:]

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, who most of you deal with on a regular basis, and Bob Cushing ready to pounce if Mike messes up. As most of your know Bob Cushing our long term CFO has announced his retirement effective 5/30/2015. 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 is a CPA, a graduate of Siena College, and with KPMG prior to joining our company. We have every confidence that 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 its 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 as a growth occurred almost all in our residential loan portfolio. As you know we are not the biggest commercial lender, we maintain a pretty solid portfolio of customers that we work 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 that also most of you know we don’t accept broker 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 non-performing ratios. Non-performing loans to total loans improved to 1.08% and non-performing assets to total assets dropped to 0.87%. 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 a low 50% range. Our return on average assets is 0.970% at year end and our return on average equity was 11.5%. Overall we are very proud of our results for 2014. Now for the first time, I'll turn it over to Mike Ozimek, to deal with the numbers. Welcome Mike.

[Mike Ozimek:]

Thanks Rob. I will now review the financial results for TrustCo for the fourth quarter and the full year 2014. The strength of momentum that we built during the year continued into the fourth quarter. We saw sustained loan growth during what is normally a quite banking season due to the holidays and weather. The loan portfolio increased by $78 million 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 of our full year of 2014, 90 basis points for 2013. Return on equity increased in 2014 to 11.54%, and 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 fourth 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 the two basis point increase in the yield earned on average interest earnings assets over the third quarter, partially offset by an increase in funding cost by two basis points to 40 basis points compared to the 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 a modest increase during the quarter. We should also know the growth in the installment portfolio is primarily related to the launch of our new credit card product 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 which incurred in the fourth quarter of 2014. It was primarily the impact of maturities and cash flows from the mortgage bank securities portfolio coupled with the decision take advantage of market opportunities as they presented themselves to selectively sell out of longer term duration mortgage bank securities at a gain of 335,000. We also allowed $18.4 million of our overnight investments used as the funding source for our loan growth. However, overnight investments still remained 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 affected by the seasonality at 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 increased by $9 million. It shows the success we had during the year in attracting and retaining core banking customers. The total cost of interest bank liabilities increased slightly to 42 basis points during the quarter, which is two 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 to – 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 losses came 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 the 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 W2s and our final payroll registers. This requires movement of our expense balances for the year from other expenses and a quick expense categories upto salaries. But if you start at the bottom line, and look at total non-interest expense, you will 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-class entry I mentioned moves approximately $400,000 out of other expenses, it reduces equipment expense by $140,000 and it moves to total of $550,000 upto salary and benefit expense. So if you compare the salaries expense for the third quarter and fourth quarter of 2014, you will see an increase of 730,000. 550,000 of which is the re-class entry from other expenses. That leaves an increase of approximately 180,000 that really exist between the third and fourth quarters. Net increase is a result of increase 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 inline with our cost of holding and disposing of the foreclosed properties. During this year we have disclose of almost of 75 properties and we currently have 37 properties on our retail and inventory. All the other categories of non-interest expense are pretty much inline with prior quarters on our expectations. Going forward, we will be most comfortable with a range of $21 million to $21.7 million for recurring non-operating expenses and with OREO 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 52.73%. Obviously fourth and third quarter numbers are negatively affected by our decision to retain a large amount of overnight investment. And 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 non-performing loans.

[Scot Salvador:]

Thanks Mike. For the fourth quarter our loan portfolio continued to steadily increase. Our total loans grew by $75 million with our year-over-year growth tallying an approximately $250 million. Loans grew by 2.45% in the quarter and 8.59% on the year. These are very solid growth numbers and we are 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 shown $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 quarters net loan growth is typically the slowest of the year. Most of our recent originations had been in the 4% range for a 30-year mortgage. Non-performing loan and asset quality measurements continue to improve on the quarter with significant improvements posting on a year-over-year basis. Non-performing assets fell $3.1 million during the quarter to $40.5 million and declined $11.7 million for the full year. Non-performing loans decreased to 1.08% of loans at year end versus 1.49% a year earlier. Early stage delinquencies remained 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 non-performing loans was 136% in year end versus 110% at year earlier. Rob?

[Rob McCormick:]

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

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Alex Twerdahl with Sandler O'Neill. Please go ahead.

[Alex Twerdahl:]

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?

[Scot Salvador:]

Yes, they bottomed right around this range, Alex, to be honest with you. We have come down at low for slightly under four when I say slightly under four, I'm talking high threes. I mean, we will occasionally really just to stir up the market and kind of draw some attention, we have occasionally drop down a little lower on a couple days special are one week special type thing. But really, where we bought them in the past and most recently is right around the 4% range maybe high threes.

[Alex Twerdahl:]

Okay. Thank you. And 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?

[Scot Salvador:]

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, you know we don't have any brokerage deposits. We don’t buy any CDs. So we’re not going to put a higher rate out there just to bring in a flood of money. But as you said, we have recently been putting little bit higher rate out there. We’ve done an 18 months term. We've even going out as far as a three year term. I'm not crazy high, one plus range on a couple of occasions and again the goal is too full 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 the long term. So that’s kind of our basic philosophy on that.

[Alex Twerdahl:]

Okay. Then just a final question

[Rob McCormick:]

Not significantly Alex. Our bubble has gotten significant smaller, but it's still - 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.

[Alex Twerdahl:]

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

[Operator:]

[Operator Instructions] The next question comes from Travis Lan with KBW. Please go ahead.

[Travis Lan:]

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

[Mike Ozimek:]

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

[Travis Lan:]

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?

[Mike Ozimek:]

We don't typically forecast our - give guidance on our margin going out. But we are 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 will be. And we are 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.

[Travis Lan:]

Got it. Okay. Then –

[Mike Ozimek:]

Flexibility to move we have to.

[Travis Lan:]

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

[Mike Ozimek:]

That’s right.

[Travis Lan:]

Just a little bit on the loan growth outlook

[Mike Ozimek:]

We see the growth, we had a good 2014, we see really same thing from 2015. We are over $200 million – in that $225 million range year-over-year and 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 are not going to hog wild and start really investing tons of money in the investment side, but we see opportunity on the loan side.

[Rob McCormick:]

It certainly didn’t come up in the call Travis. We usually throw the 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 144 locations, small increases in every branches is really what we’re banking on and we’ll provide the prosperity for the future.

[Travis Lan:]

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

[Rob McCormick:]

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

[Travis Lan:]

All right. Thank you guys very much.

[Operator:]

[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.

[Rob McCormick:]

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

[Operator:]

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