TrustCo Bank Corp NY (NASDAQ:TRST)
Q1 2016 Earnings Conference Call
April 22, 2016 09:00 AM ET
Robert McCormick - President and Chief Executive Officer
Michael Ozimek - Senior Vice President and Chief Financial Officer
Scot Salvador - Executive Vice President and Chief Banking Officer
Alexander Twerdahl - Sandler O'Neill
Travis Lan - KBW
Good morning, and welcome to the TrustCo Bank First Quarter 2016 Earnings Conference Call. [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.
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 sections 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 law.
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. As the host said, I'm Rob McCormick, President and CEO. Joining me on the call today are Mike Ozimek, our CFO; and Scott Salvador, our Chief Banking Officer. Also in the room is Kevin Timmons, who most of you know.
As boring as it might be we are going to stick to the usual format. I will hit the highlights, then turn it over to Mike for the detail on the numbers, then Scot will touch on our operations, especially the loan portfolio, which will leave us plenty of time for questions-and-answers. Let us get started.
Another solid quarter at TrustCo Bank, we ended the quarter with total assets of $4,763 million mostly consisting of a loan portfolio of $3.3 billion, a new record. The majority of this portfolio was one and two family, owner-occupied residential mortgages.
We continued to reduce our exposure to commercial loans with a portfolio hanging just under $200 million. At this point in the market cycle we prefer a risk profile that contains the diversity of many smaller residential mortgages spread across all of our service areas.
The seasonality seems to have returned to the mortgage business. As spring arrives our backlog is beginning to build. We hope to have a good 2016 with regard to new loans booked. We also as you know maintain a sizable investment portfolio and a strong liquidity position. Our loans are the best place for us to invest, our cash position and liquidity gives the ability to capitalize on opportunities as they come up.
Our deposit performance has been great. We have grown our core demand, checking and savings, while reducing our exposure to harder money market accounts and [rate chopping] time deposits. As a reminder, we do not accept broker deposits or offer incentive rates for jumbo CDs. Our effort is really to grow the customer base profitably.
Our balance sheet management resulted in margin expansion to 3.13, resulting in increasing net interest income over $1 million when compared to the same quarter last year. Our expenses were elevated to roughly $23 million for the quarter, greater than the same quarter last year. Cost of compliance is certainly a factor.
As a reminder, we are under a formal agreement with the OCC. While we are unable to give great detail on this agreement, we will tell you almost all activities of the bank are under review or validation. We do not know when, but we are confident we will emerge a better bank where the commitment to remain compliant. Our expenses seem to have stabilized and even at this level we continue to maintain a strong efficiency ratio.
Our net income for the quarter was $10.4 million, up from the quarter ended 12/31, and down a little bit from the same quarter last year. Our nonperforming assets fell to 0.76% of the total assets in the first quarter of 2016 and our charge-offs continued the positive trend.
Our tangible equity ratio rose to 8.87% at quarter end and we actually closed one branch this quarter, which is not typical for us. We had an opportunity to consolidate two branches close to each other. We plan on selling the closed branch.
We are pleased with our results, profitable growth, some margin expansion and improving operations should position for continued solid performance.
Now, I will turn it over to Mike to give you some detail on the numbers.
Thanks Rob. I'll now review TrustCo's financial results for the first quarter of 2016. Net income was $10.4 million in the first quarter of 2016 compared to $10.2 million for the fourth quarter of 2015. Despite the continued added cost in response to recent regulatory concerns, net income continues to be solid.
For the quarter our net interest margin was 3.13%, up from 3.08% in the first quarter of 2015, resulting in a taxable equivalent net interest income of $36.2 million this quarter compared to $35.2 million in the first quarter of 2015. The increase in the net interest margin comes from both sides of the balance sheet. On the asset side, we had a 2 basis point increase in the yield earned on average interest-earning assets over the same period last year. This increase came from the 25 basis point rise in the Fed target rate and the continued positive shift in the balance sheet from lower yielding investments to higher yielding core loan relationships.
In addition, our cost of interest-bearing deposits decreased 3 basis points from the first quarter of 2015 to 39 basis points for the quarter, which continues to reflect our pricing discipline with respect to CDs and other non-maturity deposits. This is also a direct result of the growth of our core deposits, which consists of checking, savings and money market deposits.
Our core deposit accounts typically represent longer-term relationships and are lower cost than our time deposits. We saw continued loan growth during what is a normally quiet banking season due to the holidays and weather. The loan portfolio averaged $3.3 billion during the first quarter of 2016, an increase of $122 million on average from the first quarter of 2015 or 3.9%.
The sustained growth continues to be concentrated in the residential real estate portfolio. Total average investment securities, which include the AFS and HTM portfolios, slightly decreased during the first quarter of 2016 by $11.4 million or 1.7% on average from the fourth quarter of 2015. This was primarily the result of cash inflows from the mortgage-backed securities portfolio. In addition, we had approximately $30 million of agency securities called during the middle of the first quarter of 2016, which we replaced with a mix of $30 million of agency and mortgage backed during the latter part of the quarter.
On the deposit side, as mentioned a moment ago, we continue to be successful increasing balances throughout our branch franchise. Total average deposits for the first quarter averaged $4.1 billion, which is an increase of $39.9 million over the same period last year. Average core deposits increased $85.8 million or 3% when compared to the first quarter of 2015.
Our average balance of overnight investments was $676 million for the first quarter of this year, up $6 million over the average balance in the fourth quarter of 2015. In addition to the liquidity that is on our balance sheet in the current rate environment, we expect that we will have between $200 million and $400 million of loan payments coming in over the next 12 months, along with approximately $100 million to $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.
Our provision for loan losses has decreased to $800,000 for the first quarter of 2016 compared to $1.3 million in the fourth quarter of 2015, and is in line with the first three quarters of 2015. As you may recall, the increased level of provision in the fourth quarter of 2015 was the result of a single commercial loan charge-off.
Asset quality and loan loss reserve measures mostly improved versus March 31, 2015, over a mixed compared to year-end 2015. The slight increase in NPAs was due to residential real estate non-performing loans in the New York region. Prior experience has shown us that this slight up-tick is seasonal and not unusual in the first quarter of the year coming out of the holiday months. We would expect that level of the provision for loan losses in 2016 will continue to reflect the overall improving credit quality of the portfolio and economic conditions in our geographic footprint and ongoing resolution of existing problem loans.
Non-interest income came in at $4.6 million for the first quarter, up from $4.4 million in the fourth quarter of 2015 and flat compared to the same period last year, which included $249,000 of security gains. The most significant recurring source of non-interest income is derived from our financial services division, which recorded their annual tax return preparation fees in the first quarter of $150,000. Our financial services division had approximately $844 million of assets under management as of March 31, 2016.
Now onto interest expenses. Total non-interest expense came in at $23.4 million, up $331,000 from the fourth quarter of 2015. During the first quarter of 2016, salaries and benefits expense was $9 million, up $961,000 compared to the fourth quarter of 2015, and $522,000 over the same period last year. The increase over prior quarters can be broken down into several pieces. First, as you remember, the fourth quarter of 2015 salaries and benefits expense benefited by approximately $300,000 net as a result of a couple of items. The primary item was the decision of management to eliminate the $850,000 liability related to the 2015 annual cash bonuses of senior executive officers, offset by normal year-end payroll reclass entries of $550,000. Second and something we have discussed in prior calls, we have now started to see an increase in the salary and benefits expense line, as new hires start the process of replacing the consultants.
And finally the first quarter of the year always bears the cost of increased employee federal and state payroll taxes, and the bank also saw the impact of increased healthcare cost as the new contracted rates for 2016 took effect.
Other expenses saw a decrease compared to the fourth quarter of approximately $880,000, primarily due to approximately $400,000 in cost of issuance of new chip cards and $200,000 of property tax expense on problem loans during the fourth quarter of 2015 with no comparable expense in 2016.
We continue to expect the estimated total annualized cost of implementing the recommendations in the agreement will be approximately $5 million annually. These added costs reflect the company's continued investment in our systems within the retail loan and deposit areas as well as enhanced regulatory compliance measures.
Over the next several quarters we will continue to experience increased professional services expense. However, that will start to level off later in 2016 and into 2017 as we complete implementation of the requirements of the formal agreement.
ORE expense came in at $519,000 for the quarter, which is down slightly from last quarter. This stayed consistent within our expectations for the last five quarters. We continue to expect the ORE expense to stay in the range of $500,000 to $1 million per quarter going forward. All the other categories of non-interest expense are in line with prior quarters and our expectations. Going forward, we would expect that total reoccurring non-interest expense to be in the area of $23 million to $23.5 million per quarter.
Our efficiency ratio continues to be strong, despite the increased cost discussed earlier. We will continue to focus on what we can control by working to identify opportunities to make the processes within the bank more efficient. First quarter of 2016 came in at 56.22%, up slightly from the fourth quarter of 53.37%.
As noted in prior calls, first quarter numbers continue to be negatively affected by our decision to retain a large amount of overnight investments and the increased costs associated with implementing the recommendations of the agreement. I would expect that the efficiency ratio to end 2016 in this range.
And finally, capital ratios continued to improve. The consolidated tangible equity to tangible assets ratio increased to 8.87% at the end of the first quarter, up from 8.44% compared to the same period in 2015.
Now, Scot will review the loan portfolio and non-performing loans.
Okay. Thanks, Mike. For the first quarter total loans increased by $8.1 million. Year-over-year they were up $108 million or 3.4%. Excluding commercial loans, residential mortgages were up 4% over last year or $120 million. The quarter saw a decrease of almost $5 million for commercial loans as we continue to be very mindful and cautious in that area.
Residential loans grew by just over $13 million with all of the net growth occurring in our Florida marketplace. Mortgage activity during the first quarter picked up later and at a more measured pace than that seen in recent cycles. A return to seasonality, prolonged flat interest rates, mixed markets and a slew of regulatory changes across the mortgage industry have all contributed to the current environment.
March was significantly stronger than the preceding two months however. Our backlog is up approximately 25% over the low point of the quarter and slightly ahead of the year-end total. If the current momentum continues we would expect to see improved net loan growth during the second quarter.
Mortgage originations over the last couple of months have mostly been in the 3.75% range for 30 years, down slightly from the prior quarter. Nonperforming loans totaled $30.4 million at 3/31/16 versus $28.3 million at year-end. The slight increase in the quarter was primarily due to seasonal factors around year-end and is not uncommon for the holiday period.
Year-over-year nonperforming loans were down approximately $3 million from $33.5 million last year. Nonperforming assets at $36 million are also up slightly from year-end and down from $40.4 million in the prior year. Early-stage delinquencies in the 30 to 89 day category remain strong and the annualized net charge-offs to average loans for the first quarter totaled a strong 0.14%. This compares to the allowance for loan losses to total loans of 1.34%.
Thanks, Scot. That is our story. We will be happy to answer any questions you may have.
[Operator Instructions] The first question comes from the Alexander Twerdahl of Sandler O'Neill. Please go ahead.
Hi, good morning guys.
Hi, Alex, how are you?
I just wanted to touch back on some of those commentary that you had about the commercial loan portfolio, I know it has never really been a main focus of yours, but it seems like maybe the language has changed a little bit, and now you are actively getting out of commercial loans or is it just the same focus you have always had?
No. It is the same focus we have always had Alex. If I said it the wrong way I'm sorry, but it is the same approach we have always had. We have a very strong commercial capacity. It is not like we dislike commercial loans. We just prefer the risk profile the way it is right now.
Okay. So $200 million or whatever the portfolio is roughly that price will stay around the same level, it is not going to be declining meaningfully over the next several quarters?
I mean first – I mean $225 million wouldn’t kill me either Alex, if the right opportunity came. We continue to work with our existing customers. We have a great group of good, solid customers that we are very familiar with and very comfortable with, and we continue to do that.
Okay. Thank you. And then in terms of liability expenses, we are pretty much at bottom right now in terms of cost of funds, do you have any big [CDs] that are coming due in 2016 that could potentially even reprice a little bit lower given what is going on in the rate environment right now?
I think there is always a little bit of opportunity Alex, but the big slugs I think are behind us at this point in time.
Okay. All right. That is all my questions right now.
The next question comes from Travis Lan of KBW. Please go ahead.
Thanks. Good morning everyone.
Good morning Travis.
Good morning Travis.
Just thinking about the liquidity position, when you guys think about putting some of your excess cash to work is the higher mortgage rate scenario the only thing that would accelerate that or would you be willing to maybe add more leverage elsewhere if for example like the short-end rose and mortgage rates didn't change?
Yes. We are opportunistic investors Travis. So we put it wherever it is best at the time to get the highest return for our shareholders.
Okay, all right. That is helpful. And I know – you guys mentioned there is some seasonal impact, but still this first quarter was slower on the loan growth side than other recent first quarters and growth has been pretty slow now for two straight quarters. I know you mentioned that the pipelines are rebuilding but when you think about kind of what has happened in the last two quarters is that due to kind of a strategic decision to slow up a little bit, maybe competitive pressures or a lack of demand, is there anything that you guys can point to?
It is nothing on our part. We haven't made the choice to slow down or back off. I think there is a little bit to say – I think there is a little bit to be said about the market, but I think we are very encouraged by the results that are coming out right now with regard to the pipeline and the application volume we are seeing.
Okay. All right, and then if we look at 2015, I think loan growth in Florida comprised maybe 70% or so of the total loan growth and you mentioned that it is all of the growth in the first quarter, what is the dynamic or strategy there and then do you expect that to kind of continue for the rest of the year?
We had very strong performance in the state of Florida, and we are very pleased with that. And the effort is the same as it is in the other markets we serve. The product is essentially the same. The processing is the same. The approvals are centralized. So we take a very cautious approach, but we are very encouraged by the activity in the state of Florida.
Is there anything specific that you guys prefer what you see in Florida now versus what you see in kind of New York?
No. I think we built a solid good group of employees there and a good solid group of branches that are very customer friendly and very convenient, and I think when you compare us to some of the big players that are in the Florida market we compete very, very well against them.
Okay, and pricing I assume is the same down there on the mortgage side?
Okay, and then typically there is a pretty meaningful sequential decline in first quarter deposit fees and that was more moderate this quarter, they performed pretty well. Was there anything that jumps out at you to drive that?
No. We really see – sometimes in the first quarter you actually do see a little bit less of some of the fees. Fourth quarter people usually tend to spend a little more. You see a little more of those overdraft fees. But nothing that really jumps out.
Okay, and then just last one, could you just remind us of your expectations for the reserve to loan ratio going forward assuming that credit remained strong?
We are going to stay in about the same page. Maybe you have seen, net charge-offs in the range where they have been, $1.1 million, $1.2 million and then provision around $800,000 or so. It may come down a little bit, but we are going to stay at about the same spot.
[Operator Instructions] There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. McCormick for closing remarks.
Thank you for your interest in our company and have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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