TrustCo Bank's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.22.14 | About: TrustCo Bank (TRST)

TrustCo Bank Corp NY (NASDAQ:TRST)

Q4 2013 Earnings Conference Call

January 22, 2013 09:00 ET

Executives

Robert J. McCormick - President and Chief Executive Officer

Bob Cushing - Chief Financial Officer

Scot Salvador - Chief Banking Officer

Kevin Timmons - Vice President, Treasurer

Analysts

Alex Twerdahl - Sandler O’Neill

Travis Lan - KBW

Operator

Good morning and welcome to the TrustCo Fourth Quarter 2013 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions)

Before proceeding, we would like to mention that this presentation contains forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “believes,” “anticipates,” “expects,” “should,” “may,” “plans,” “estimates,” and similar references. However, such words are not the exclusive means of identifying such statements. xamples of forward-looking statements include, but are not limited to: projections of revenues, expenses, income or loss, earnings or loss per share, and other financial terms; statements of plans, objectives, and expectations of TrustCo and its management and Board of Directors; statements of future economic performance; and statements of underlying assumptions. Forward-looking statements are based on TrustCo’s current expectations and assumptions regarding its business, the economy, and other future conditions. Because forward- looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict.

TrustCo’s actual results may differ materially from those contemplated in the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: 1) local, regional, national, and international economic conditions and the impact they have on us and on our customers; 2) volatility and disruption in national and international financial markets; 3) government intervention in the U.S. financial system; 4) changes in the level of non-performing assets and charge-offs; 5) changes in estimates of future reserve requirements; 6) adverse conditions in the securities markets that lead to an impairment in the value of securities in our investment portfolio; 7) inflation, interest rate, securities market, and monetary fluctuations; 8) the timely development and the acceptance of new products and services; 9) changes in consumer spending, borrowings, and savings habits; 10) technological changes; 11) the ability to increase market share and control expenses; 12) changes in the competitive environment among banks and other financial service providers; 13) the effects of changes in laws and regulations on which our subsidiaries must comply, including those under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III requirement to the Basel III Accords that is under development; 14) the effect of changes in accounting policies and practices, as maybe adopted by regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters; 15) costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; and 16) our success at managing the risks involved in the foregoing items; and 17) the other factors that are described in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q under the heading Risk Factors.

Any forward-looking statements made by the Company speak only as to the date of which they are made. Factors or events that could cause the company’s actual results to differ may emerge from time-to-time and it’s not possible for the company to predict them all. The company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments, or otherwise, except as maybe required by law. Please also note this event is being recorded.

Now, I would like to turn the conference over to Mr. Robert J. McCormick, President and CEO. Mr. McCormick, please go ahead.

Robert J. McCormick - President and Chief Executive Officer

Thank you, Keith. As the host said, I am Rob McCormick, President and CEO of TrustCo Bank. Joining me today are Bob Cushing, our CFO; Scot Salvador, our Chief Banking Officer; and Kevin Timmons who most of you deal with regularly.

We are very pleased with our fourth quarter and full year results, which continued our pattern of solid profitable growth. Our total deposits grew about $123 million to $3.927 billion. We continue to shift our deposit mix to be less dependent on time accounts about $192 million growth in four categories. We also improved our franchise value by growing average deposits per branch, $28.3 million at year end. Our loan portfolio growth was very good at $224 million. All loan categories benefited from the growth, but most $212 million happens in our residential loan portfolio.

We did not open any new branches in the fourth quarter. We opened one in 2013 and have relocated one since year end. Keep in mind all of our business is generated in our branches. We still plan to open two to four per year on average. We are pleased that our non-performing assets dropped over $9 million in 2013 to just over $52 million. Our net charge-offs also saw a significant drop. We also had two successful bulk sales of hardcore long-term problems, which we realized the gain on. As we have previously reported we are working our way through a bubble and are finally seeing real positive results. Our asset quality ratios have all moved in the right direction in 2013.

On the expense side we reduced our headcount by right sizing the department and brand staff size. Our efficiency ratio improved year-over-year to just over 52%. We lost ground on our margin year-over-year, but had an uptick in the fourth quarter of 3.15%. All of this resulted in a net income of $39.8 million for the year, which is up 6% compared to 2012, also left us with the tangible equity ratio of just under 8%. We also continued to pay our very healthy dividend, for 2014 we are hoping for more of the same. We are going to open a couple of branches, relocate another branch and possibly close or consolidate at least one branch. There is more work to be done on our efficiency ratio. We will continue to be mindful of regulatory changes, deposit loan and other opportunities as they present themselves.

Now, I am going to pass it on to Bob to go over the numbers in great detail.

Bob Cushing - Chief Financial Officer

Thank you, Rob. I will review the financial results for TrustCo for the fourth quarter and year-to-date 2013. The strength and momentum that we built during the year continued into the fourth quarter. Overall balance sheet growth continued during what is normally a relatively quite banking season due to the holidays and weather. Our loan portfolio increased by $67 million on an average during the quarter supported by a slight increase in our funding sources and a shifting in the balance sheet from lower yielding investments to higher yielding core loan relationships. This resulted in net income of $10.6 million for the fourth quarter of 2013, which is an increase of 8.4% over the $9.8 million earned in the fourth quarter of 2012. On a year-over-year basis we recognized net income of $39.8 million in 2013 and $37.5 million in 2012 for a 6.1% increase. Again for the quarter this resulted in return on assets of 94 basis points for 2013 and 91 basis points for 2012. Return on equity increased for the quarter to 11.78% for the fourth quarter of 2013 from 10.88% for the comparable quarter in 2012.

For the quarter our net interest margin increased to 3.15%, up from 3.12% in the third quarter resulting in a taxable equivalent net interest income of $34.6 million this quarter compared to $33.7 million in the fourth quarter of 2012. The increase in the net interest margin comes definitely from the assets out of the balance sheet, as a result of a 4 basis point increase the yield earned on average interest earning assets. Our funding cost remained stable at 40 basis points for both the third and fourth quarters of this year. Average asset growth was centered in the loan portfolio with residential mortgage loans increasing to $2.3 billion, up $61.3 million over the third quarter averages. Commercial loans, home equity credit lines and installment loans all showed also modest increases during the quarter.

Our total investment securities portfolio, that is both securities held to maturity and securities available for sales decreased by almost $26 million on average between the third quarter and the fourth quarter of 2013. This was primarily the impact of maturities and cash inflows from the mortgage-backed securities portfolio coupled with the decision to sell some of our corporate bonds at a slight gain. The decision to sell some of the corporate bonds was in response to the rising rate environment. We also allowed almost $29 million of our overnight investments we used as the funding source for our loan growth.

Deposit balances were again affected by the seasonality of this time of yield. Overall, growth in our average funding sources increased by $3 million between the third and fourth quarters of 2013. As compared to last year’s fourth quarter total funding sources have increased by $166 million, which shows the success we’ve had during the year in attracting and retaining core banking customers. The total cost of interest-bearing liabilities remained constant at 40 basis points during the quarter, which is equal to the third quarter and down four basis points from the fourth quarter of last year.

As we have noted in prior conference calls, we have just about reached the point where our current market rates offered on deposit price Equal just slightly exceed the cost of those maturing funds. Therefore expansion of the net interest margin will come primarily from the asset side of the balance sheet. By way of reference, over the next three months we will have $213 million of CDs maturing at an average annual year of 76 basis points. If those deposits rolled over at current market rates, the average yield would drop to 67 basis points for an overall reduction in these maturing CDs of nine basis points. After that we have $309 million of CDs maturing in the second calendar quarter, at a cost of 70 basis points which would be about the same cost if they rolled over at current rates.

For the third quarter of this year we have $284 million of CDs maturing at an average annual cost of 58 basis points, which is they rolled over at current market rates would increase to 62 basis points. And last but not least if the fourth quarter of 2014 where we have $85 million of CDs maturing at an average annual cost of 46 basis points, which is they rolled over at current market rates would increase to 54 basis points.

Non-interest income for the quarter was $4.8 million up slightly from the third quarter’s $4.4 million. Security gains during the quarter were 188,000. Also during the fourth quarter we sold $1 million of non-performing loans at a net gain of $212,000. Otherwise all of the sub categories of non-interest income came in at our expected levels. The gross changes in verifying items of non-interest expense 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 benefits expenses match up with our W-2s and our final payroll registers. This requires a movement of expense balances for the year from other expenses and equipment expense categories up to salaries. But if you start at the bottom line and look at total non-interest expense you will see that it came in for the fourth quarter at $20.9 million compared to $20.7 million for the third quarter and $21.2 million for the fourth quarter of 2012.

If you take out other real estate expense and get down to the core operating expenses for TrustCo you get $20.5 million for the fourth quarter compared to $19.7 million for the third quarter and $20.8 million for the fourth quarter of 2012. All of these periods are relatively in line with each other. The main increase between the third quarter and the fourth quarter of this year has a $300,000 increase in advertising expense due to ramp-up spending in the fourth quarter for the holidays.

Okay. So let’s look at some of the details. The re-class entry we mentioned we record – the re-class entry we record moves almost $400,000 out of other expenses. It reduces equipment expense by $130,000 and it moves the total of $530,000 up to salary and benefits expense. So if you compare the salaries expense for the third and fourth quarters of 2013 you will see an increase of $729,000, $530,000 of which is this re-class entry from other expenses. That leads an increase of approximately $200,000 that really exists between the third and fourth quarters. That $200,000 is a result of employee salaries that will be earned in 2013 but paid in the first couple of days in 2014 which then requires employer of payroll tax is reported because the salary caps or (restored) for the first payroll period in the New Year.

Net occupancy expenses up $315,000 from the third quarter and the fourth quarter of 2013. You will also note this is still an increase in occupancy expense that occurred last year in the first quarter of 2013. We lease the majority of our branches and each year Orlando have a settling-up process they go through for common area maintenance charges, snow removal, lawn maintenance and taxes. Annually that occurs anywhere between the fourth quarter and the first quarter of each year. We do not know the amount of these settlements and therefore have to wait until we receive notices that require payments. Sometimes they come in the fourth quarter, other times they come in the first quarter. Equipment expense was down slightly but that is all due to the $130,000 re-class entry we talked about earlier.

Other real estate expense is down as a result of the stabilization of write-downs on foreclosed properties and the quickness with which we have been able to sell properties. The quicker we can cleanup the house and get it on the market, the less operating costs we were incurring. This has the positive effect on utilities, maintenance and property taxes for these units. We sold 121 foreclosed properties during this year. I should also mention that as part of those non-performing loan sales that you noted earlier, we also sold 11 ORE properties to the same buyer at a slight gain. And that brings us down to other expenses, which decreased by $381,000 between the third and fourth quarters. I mentioned earlier that we moved almost $400,000 out of other expenses to salaries and that accounts to the total decrease in other expenses.

Overall, our expense control systems worked well in the fourth quarter and we are confident that we can manage the bank along these same lines moving forward. We feel most comfortable moving forward with recurring operating expenses in the $20.2 million to $20.7 million range and with other real estate expenses adding another $500,000 to $1 million each quarter. Just to remind you that for the first quarter of 2014, the operating expenses will be slightly higher than our $20.7 million range due primarily to the increased payroll taxes in the first quarter, but that will drill down as the year goes on and we’ll bring it back in line with what our expectations are for the year.

Income tax rates are in line at 37.4% which is what we expected for the year – for the quarter. Tangible equity asset ratio, as Rob mentioned, came in at 7.99% from the 7.94% last quarter. For regulatory purposes, we are a well-capitalized institution and we exceed all the risk-based capital requirements.

Next is Scott to review the loan portfolio and non-performing assets.

Scot Salvador - Chief Banking Officer

Okay, Bob. Good morning everyone. The loan portfolio continued to show strong growth during the fourth quarter. Total loans increased by $73.8 million, which lead to a $224 million increase for the full year. We ended the year with a portfolio of just over $2.9 billion with gains equating to growth of 8.35% on the year and 2.6% on the quarter. Residential real estate and commercial loans grew by $63.2 million and $10.6 million respectively on the quarter with the commercial loan figure including some more temporary the year end borrowings. We are especially pleased with results for residential real estate since although the growth was a down a bit from the third quarter as we expected, the $63 million net increase represents a very strong fourth quarter. Growth continued in all our major market areas with our Florida region accounting for approximately 35% of the total increase on the quarter. Recent loan activity has slowed a bit as it is normal for this time of the year. However, our backlog of pending loans at year end was good, slightly ahead of last year’s totals and we are optimistic about achieving solid first quarter results.

Non-performing loans and non-performing assets both declined significantly on the year. Non-performing loans dropped from $52.7 million at December 31, 2012 to $47.4 million, while non-performing assets dropped from $61.4 million to $52.1 million. For the quarter, non-performing assets and loans increased by $569,000 and $1.7 million respectively. However, both these totals were affected by one-time items, including a commercial loan relationship of $2.2 million entering the non-performing category. The results were bulk sale of non-performing assets totaling just over $1.6 million had a slight gain. Excluding these items, non-performing loans would have been essentially flat on the quarter with non-performing assets up slightly.

The fourth quarter is off to the most difficult with respect to non-performers and this year, as a result, was significantly improved over the fourth quarter of last year. Going forward, we look for continuation on the improving trend for non-performers. Non-performing loans totaled 1.49% at year end compared to 1.96% a year earlier and the allowance cover the NOI’s fourth quarter charge-offs by 7.9 times compared to 4.9 times a year earlier. Rob?

Robert J. McCormick - President and Chief Executive Officer

That’s our story. We’d be happy to entertain any questions anyone might have.

Question-and-Answer Session

Operator

Yes, thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Alex Twerdahl from Sandler O’Neill.

Alex Twerdahl - Sandler O’Neill

Hey, good morning guys.

Robert J. McCormick

Good morning Alex.

Alex Twerdahl - Sandler O’Neill

First off, Bob, I just missed the amount of CDs that are set to re-price in the first quarter, can you just run through that number again?

Robert J. McCormick

Sure, one second

Bob Cushing

$213 million.

Alex Twerdahl - Sandler O’Neill

$213 million. And what was the rate on those?

Robert J. McCormick

76.

Bob Cushing

In the first quarter, the $213 million, you are right, 76.

Alex Twerdahl - Sandler O’Neill

And then you do a good job obviously we all know that the key to the TrustCo story relies in the cash flow as you do a good job relying on the liability side. I was wondering if there is anyway that you could give us a sense for the amount of securities that are said to mature or re-price through 2014?

Bob Cushing

We have on average about $200 million a year that comes – that mature between the cash flows and maturities.

Alex Twerdahl - Sandler O’Neill

Okay. And do you have any sense for where those are right now and obviously the market did tell you where they can go in terms of rates?

Bob Cushing

The yields on the overall portfolio, I don’t have a feel for that, Alex, I am sorry, but I would say it’s indicative of the yields in the overall portfolio.

Alex Twerdahl - Sandler O’Neill

Okay, that’s helpful. And then Scot, you talked about the pipeline being relatively healthy, can you give us a sense for what rates are looking like on the pipeline today. They are pretty close to the national average in the sort of 4.60, 4.70 range or is there something else going on?

Scot Salvador

Yes. Now, that looks probably right. We have been bouncing around the 4.5 range give or take Alex for a while, sometimes right on it, sometimes a little above sometimes a little below. So that’s about where pipeline sits right in that range.

Alex Twerdahl - Sandler O’Neill

Okay. And then maybe just give us a little bit more color on credit, we have kind of been sort of had sort of similar level of NPLs for a while now. And I know the nature of residential loans is that they take a while to workout, but to the extent that it’s faster to work through foreclosures, are we still looking at 1000 plus days in New York state to get through foreclosures or sort of what kind of timeframe do you think that we could actually see NPL start to decrease relatively meaningfully? And I know there will be a tail and that will probably go on for a while for some of these loans, but just a little more color there?

Robert J. McCormick

I think the 1000 days are significantly down in Florida, Travis. I can’t say about New York state especially the counties were doing business and you might be as much as the happy year of the 1000 days in the state of Florida. They really put an initiative to bring retired judges back, which cleaned up that backlog. And I think that’s improving on a regular basis. And as Bob said in his presentation, most of these are houses. So the faster we can get the house clean it up and get it on the market, we can get rid of them pretty quickly. So, Upstate New York, we still have the full judicial process and I don’t think they have been as progressive as Florida. And I think we are still – it might be down a little bit, Alex, but I don’t see it’s down much of three-year mark, especially with the bankruptcy involved. And our non-performers, I mean, we were on a great track for improvement, but we had that one commercial relationship that Scot alluded to, that it’s an illness issue with him. And I think he would have seen much better numbers had that not happened. Just as a passing note, I don’t think that loan is even 60 days delinquent at this point in time. We proactively put it into non-accrual though.

Alex Twerdahl - Sandler O’Neill

Okay, great. That’s very helpful. That’s all my questions for now. Thanks.

Operator

Thank you. And the next question comes from Travis Lan with KBW.

Travis Lan - KBW

Thanks guys. Good morning.

Robert J. McCormick

Hi, Travis. How are you?

Travis Lan - KBW

Good, thanks. Bob, just I missed the answer to Alex’s question about the securities cash flows, you said $200 million a year or was that…

Bob Cushing

It’s approximately between calls the maturities and the cash flows or interest and principal payments on the mortgage backs.

Travis Lan - KBW

Okay, alright. And then just including occupancy income costs, do you guys have a sense for what the average costs will be to your branches is, I mean, not on an individual basis, but just in aggregate, what kind of a good estimate would be for the average annual cost per branch?

Robert J. McCormick

I don’t. It’s a tough answer because the branches vary both. Obviously, the rental cost was spot to spot, but also the staffing, our larger branches with more transaction count carry more staff with them obviously. So it does vary quite a bit from branch to branch.

Travis Lan - KBW

Okay, alright. And then have you – do you guys think that the duration of the mortgage portfolio has changed at all over the last couple of years and maybe if you have a sense for where it is today or if it’s been fairly stable?

Bob Cushing

It continues to – Travis, we continue to monitor that through our (indiscernible) analysis. And it has extended slightly, but not significantly from that perspective. So we are in the – our range has always been in that 6.5 to 8-year range. We might be in the upper end of that range right now.

Travis Lan - KBW

Okay, alright. That’s helpful. And then the last one is just kind of I would ask this question about credit, how you guys were thinking about reserves to loans at this point or I guess the way that you will continue to provide for charge-offs?

Bob Cushing

Well, again, we continue – we start with a philosophy that we like to be, we like healthy reserves, however we are not going to tie down to our percentage of originations or our percentage of loan portfolio from that perspective. At this stage our charge-offs and our vision kind of match each other and we think that the reserves unless we see something change dramatically we think the reserve levels are adequate in this environment. We also are mindful of the fact that products are out there relative to change in the methodology associated with how reserves are calculated.

Travis Lan - KBW

Alright, thanks so much guys.

Bob Cushing

Thanks, Travis.

Robert J. McCormick

Thank you.

Operator

Thank you. (Operator Instructions) Alright. If there are no more questions at the present time, I would like to turn the call back over to management for any closing remarks.

Robert J. McCormick - President and Chief Executive Officer

We are looking at 2014 optimistically. We think our company will have a great year. Thank you for listening and thank you for interest in our company.

Operator

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may all disconnect your phone lines. Have a nice day.

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