TrustCo Bank Corp NY (NASDAQ:TRST)
Q1 2014 Results Earnings Conference Call
April 22, 2014, 09:00 AM ET
Robert J. McCormick - President and CEO
Bob Cushing - CFO
Robert M. Leonard - EVP
Kevin Timmons - VP, Treasurer
Alex Twerdahl - Sandler O’Neill
Travis Lan - KBW
Good morning, and welcome to the TrustCo Bank Corp First Quarter Earnings Call and Webcast. All participants will be in a 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 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, uncertainties and other factors. Please review risk factors in our most recent annual report on Form 10-K and our other -- excuse me -- 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 note this event is being recorded.
I would now like to turn the conference over to Mr. Robert J. McCormick, President and CEO. Mr. McCormick, please go ahead.
Thank you, Denise. Good morning, everyone. Thanks for joining us today. As the operator said, I'm Rob McCormick, President and CEO of TrustCo Bank. Joining me in the room today are Bob Cushing, our CFO; and Bob Leonard, Executive Vice President responsible for various areas of the bank. Scot Salvador is unable to attend today. Bob is pinch hitting for him. And as always, Kevin Timmons joins us who most of you deal with on a regular basis.
I'll provide you with a brief summary, then turn it over to Bob Cushing, who'll give you details on the numbers, and Bob Leonard will detail some of our operations, especially our non-performing area and the loan portfolio. Then we can wrap up with your questions.
We completed the first quarter of 2014 continuing a pattern of posting very solid operating results. Our net income for the quarter was over $11 million. That is up over 20% from the same quarter a year earlier.
Our assets are up $167 million year-over-year. That is just shy of 4%. Leading this growth is our residential mortgage portfolio, up about $221 million year-over-year and a very positive $36 million quarter-over-quarter.
Our commercial loan portfolio was down from year-end, but up from the same period last year. Again, as we've told you before, we are not looking for big growth here, but we'll take advantage of opportunities as our customers become more active.
Deposits also posted great growth, about $130 million year-over-year and $60 million over year-end. We are very pleased with the growth in all categories, not just centered in the higher price time accounts. And I think as most of you joined us before known and have heard from us before, keep in mind, we do not accept broker deposits and we don't offer premium rates. So an argument could be made that even our CDs are core accounts.
We did not open any new branches during the quarter, but we have plans for a couple of new offices and a couple of relocations by year-end. We did have one relocation during the quarter. We moved one branch out of an enclosed mall. We always referenced our branches on these calls since all of our business comes through them.
We made great progress in all of our performance ratios. Our ROA is just shy of 1%, our ROE is upto 12.09%, our efficiency ratio improved to 51.28% and our margin was down slightly to 3.13%.
Our non-performing assets are down almost $6 million from the same quarter last year. Non-performing loans down almost $5 million for the same period. All of our asset quality ratios have improved year-over-year. A small uptick from year end was driven by one loan required to be placed in TDR status, a seasoned loan on our books that has never missed the payment. And we fully expect to collect 100% of the loan.
We continue to have a very significant investment portfolio with short maturities and a very liquid position. Our capital ratio is 8.11.
Now, I'm going to turn it over to Bob to give you further details.
Thank you, Rob. I will review the financial results for TrustCo for the first quarter of 2014. The strength we noted in the fourth quarter of last year continued into the first quarter results. As Rob noted, net income was up over 20% between 2013 and 2014. First quarter's net income was $11 million, which was equal to $11.06 per share and annualized return on equity of 12.09%.
These results reflect a couple of one-time items. First, we completed the sale of our planned Florida operation center, which generated a profit of approximately $1.6 million on a pretax basis, which equates to about $1 million on an after tax basis.
And the other item is the impact on net income of the recently enacted New York State budget. Included in this budget is a reduction in the corporate tax rates from 7.1% to 6.5% beginning for us in calendar year 2016. Normally that will be viewed as a positive for net income and it will be in calendar year 2016. But in the meantime, we have to revalue our deferred tax assets at these new lower rates.
This caused us to take $200,000 of additional tax expense in the first quarter. The good news is that in 2016 we will, in fact, have less tax expense and that will be a positive for the bottom line moving forward.
Other than these two items, the best way for me to sum up the results for the first quarter would be to say they were business as usual for TrustCo. The average balance of the loan portfolio grew to $2.9 billion between the quarter -- during the quarter, which was an increase of $57 million over the fourth quarter 2013 average and up over $233 million over the first quarter of 2013 average balances. And as Rob said, as you'd expect, the growth was concentrated in the residential real estate portfolio.
On the deposit side, we continued to be successful increasing balances throughout our branch franchise. Total deposit for the first quarter averaged $3.9 billion, which was an increase of $40 million over the average balance for the fourth quarter of 2013 and up approximately $142 million over the first quarter 2013 averages.
Our cost of interest bearing deposits stayed constant at 38 basis points for the quarter, which continues to reflect our pricing discipline with respect to CDs and other non-returning deposits.
Our total investment securities portfolio including the available for sales and held to maturity portfolios decreased by $55 million from the average balance in the fourth quarter 2013 to $946 million of balance for the first quarter of 2014. The reduction in the average balance was all due to normal principle payments and certain securities been called.
Jumping ahead to a potential question, we expect approximately $135 million of cash flow to come from our securities portfolio over the next 12 months.
The liquidity provided by the growth in the deposit portfolio and the reduction in the securities portfolio was used to fund the loan growth and the increased balances in the overnight investments. Our average balance of overnight investments was $575 million for the first quarter of this year, up $53 million over the average balance in the fourth quarter and up over $169 million from the first quarter of 2013 averages.
And just to finish off this discussion of liquidity, if you look at the period end balance sheet, you will see that we ended the quarter with $687 million of overnight deposits. Now all of this liquidity comes at a cost. Our net interest margin decreased two basis points during -- between the fourth quarter of 2013 and the first quarter of 2014. We think this is a small price to pay for the opportunity and flexibility that the liquidity provides us moving into the remainder of this year.
To put that in perspective, if we wanted to make up the two basis points and have the taxable equivalent net interest margin the same for the first quarter of 2014 as the fourth quarter of 2013, we would have had to only invest $50 million at a spread of 2%. So what that tells us is that protecting the margin moving forward with this liquidity would be relatively straight forward.
That brings us down to non-interest income and non-interest expense. Total non-interest income was $5.8 million for the quarter, which if you back out the gain in the sale of building would have been $4.2 million for the quarter, down $645,000 from the fourth quarter and down $390,000 from the first quarter of 2013.
Our financial services division recorded their annual tax return preparation fees in the first quarter of 2014 of $186,000. Other fees are down all due to volume. Non-interest expense came in at $20.8 million for the quarter, just about equal to the fourth quarter of 2013 and down $756,000 from the first quarter of 2013. ORE expense came in at $855,000 for the quarter, which was right in line with our expectations for the first quarter.
One item I'd like to point out is salary expense. During the first quarter of 2014 we reversed approximately $530,000 of unused bonus accruals. These were bonus accruals built up during 2013, but were not paid out in 2014 once all the bonus criteria were finalized. We would expect salaries and benefit expense to be in the $8 million range for the second quarter.
We continue to feel most comfortable with total recurring non-interest expense in the $20.2 million to $20.7 million range, and with ORE expense adding between $500,000 and $1 million for quarter. Our effective tax rate is up a bit this quarter due to the write down of our real estate deferred tax asset. For the remainder of this year we expect our effective tax rate to be in the 38% range.
We continue to build up our capital ratios which show tangible equity asset ratio increasing from 7.99% at year end to 8.11% by end of the first quarter.
Now Bob Leonard is going to walk us through the loan portfolio and non-performing assets.
Thanks Bob. We showed strong loan growth for the first quarter. Compared to the first quarter of 2013 average loans grew by $233 million with residential mortgages increasing $226 million and commercial loans decreasing by $6 million.
The quarter net loans were up approximately $36 million. We are pleased with the overall loan growth and consider it another exceptional quarter. Compared to last year, we're seeing decrease in refinancing and an increase in the volume of purchase money mortgages.
Recently residential loan activities picked up as we entered the spring market and we expect that this will be reflected in the loan totals over the next several months. Loan growth for the first quarter occurred across all the markets we serve.
The backlog of our mortgage loans remained strong compared to March 31, 2013. Pending commitments were up about $11 million to approximately $61 million. Although up slightly from the fourth quarter, non-performing loans and non-performing assets both showed improvement versus the first quarter of 2013. Non-performing loans and non-performing assets both declined approximately 10% at March 31, 2014 compared to March 31, 2013.
January new rules from the CFPB went into effect relating to qualified mortgages. We've been abele to adapt quickly to changes and we don't anticipate any long-term impact in our mortgage lending.
Now, I'll turn it back to Rob McCormick.
That's our story and we'd be happy to answer any questions anyone might have.
We will now begin the question-and-answer session. (Operator Instructions)
Our first question is from Alex Twerdahl from Sandler O’Neill. Please go ahead.
Alex Twerdahl - Sandler O’Neill
Hi. Good morning, guys.
Hi Alex, how are you?
Alex Twerdahl - Sandler O’Neill
Great. Thanks. First, I just wanted to ask a little bit more detail on the liquidity management and kind of how you are thinking about it. It seems to me that even just to get down to like 10% range of cash on your balance sheet, which is sort of maybe where you feel comfortable to fit now, you have about $275 million of excess liquidity that could go to work fairly easily.
What do we have to see in the long end of the yield curve, or in rates on mortgage-backed securities, for example, for you to just say, okay, this is where we feel comfortable putting back liquidity to work today?
Alex, its Bob Cushing. Alex, as far as our liquidity is concerned, we spent a lot of time over the last several years in building up that liquidity level to this $680 million range. Our objective is to deploy that opportunistically as rates rise. So it is not going to be per se a bell ring and then a lot of money is going to go flowing up the door.
What we're looking for is a back up. We see the 10-year treasury right now to $270 million. That is better than it was, but we certainly are not jumping with both feet. When you start to see that back up above the 3% range you'll see us take advantage of those opportunities.
And from that perspective, we will like we always do, we bleed things in. So we will not be putting hundreds of millions of dollars or work at any point in time. We'll bleed it in as rates rise. We are -- we waited this long to get to this stage as Rob said on the other calls, we just don't want to be foolish and take it -- do it all at one time and then find rates continue to back up. We want to have powder -- dry powder as rates are increasing.
Alex Twerdahl - Sandler O’Neill
Okay. That's helpful. And then, Bob, I think you said that there was about $61 million in the residential backlog today. Can you just tell me what the blended rate of that would be on new product?
Yeah. Between $4.25 million to $4.50 million.
Alex Twerdahl - Sandler O’Neill
Okay. That's all my questions right now. Thank you very much.
Our next question is from Travis Lan from KBW. Please go ahead, sir.
Travis Lan - KBW
Thanks. Good morning, guys.
Morning, Travis. How are you?
Travis Lan - KBW
Okay. Thanks. Just following up on Alex's question, do you think that this is the peak level of the cash balance as a percent of assets, or is there -- I understand you want to preserve flexibility for when rates rise, but is there any kind of short-term securities reinvestment that you guys are expecting?
Well, we have about $135 million of cash flow coming off of our securities portfolio over the next 12 months. So we would want to reinvest part of that to slightly stabilize -- margin stabilized net interest income.
So from that perspective, we continue to have opportunities on the deposit side to bring rates down slightly. And what we're going to do basically is offset that with opportunities relative to securities portfolio. So you'll see invest a little bit, but we're not going crazy.
Travis Lan - KBW
All right. Got you. Okay. And then, over the years we've kind of discussed how potential rate increases would change the duration of the mortgage portfolio if at all. I just wonder if you guys have seen anything, any metrics that you could look at that'd say is it still seven or eight year duration on the mortgage portfolio, or are you seeing anything different? I know rates haven't risen, but…
That's a great question. When we look at it, we monitor that daily, but realistically we've got models that we run on a monthly basis. We're looking at those types -- this type of information. If you look at the last 12 months, average life of our securities -- average life of our loan portfolio is kind of stretched out to the higher end of the range that we deal with.
We always talk about our range being six to eight years in that range, and so if you look at the last 12 months worth of cash flows that came in at 8.6 years. If you look at our last [site] (ph) study that we published which was at year end 12-31 it came in at 8.5 years, so those two things line up about -- we kind of moved, seen our portfolio moved to the slightly longer end of our historical range.
We're not outside the historical range based on that, but if you look at the last quarter, the first quarter of 2014, we did pop up that average life based on those, nothing slight to say, but just looking at the cash flows that increased to about 10 years.
All of those numbers, Travis, are right in line when we were doing our modeling and rate shocking our portfolio, we expect to be the rates being down the way they are irrelative to the new originations.
Then we'd have like a two-year window where we'd start to see that stretching of that portfolio out a little bit. But that based on our expectations and based on our instinct, we'd expect that to come back in, again back to our historical range.
So it's actually the portfolio is reacting very much like what we modeled it at this stage. We're actually quite pleased and encouraged that we have our hands around the cash flows.
Travis Lan - KBW
Got you. That's helpful. And then just on the deposit side, how do you guys think about modeling like the deposit beta or anything in kind of a rising rate environment? I know you have a really stable low-cost funding base, but just how do kind of think about the way your customers are going to react to rising rates if and when that happens?
Again, we model that under lots of different scenarios relative to 100 basis points, 200 basis points gradual shocks. We also recognize when we look back and we've studied other time periods where we've had rising rate environments, and we looked at the reaction of our portfolio.
How much to be changed in rates to be allowed to occur in savings as an example when there's 100 basis point change in the 10-year treasury. Well, how much do we have in money markets?
So we've got very good historical facts looking at what we actually did do during those time periods and how that impacted our deposit flows. So we study that and I guess the answer is that from that perspective there will be -- we think we'll be very successful in dragging our heals relative to rates rise.
And we think that because of the mix of deposits we have, as Rob said, we are not chasing that high cost CD mine. We're really not chasing the money market money. The money that we chase is interest-bearing checking and savings, those will not rise dollar-for-dollar or point-for-point as interest rates rise, so that's where we see the benefit to TrustCo.
And we're never a great leader, Travis. We're never the highest mark -- highest rate in any of the markets we're doing business in; so in our opinion, most of our customer choosing us for a different reason, whether it's location or multiple locations or service perspective. So we're never out soliciting the higher price money as we're looking build customer relationships. So we think they're choosing us for a different reason, not necessarily rate.
Travis Lan - KBW
Got you. Thanks guys.
Showing no further questions at this time. This will conclude our question-and-answer session. I would like to turn the conference over to Mr. McCormick for any closing remarks.
Thank you for joining us this morning and have a great day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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