TrustCo Bank Corp NY (NASDAQ:TRST)
Q4 2015 Earnings Conference Call
January 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
Kevin Timmons - Vice President and Treasurer
DeForest Hinman - Walthausen & Co.
Good morning, and welcome to the TrustCo Bank Corp fourth quarter 2015 earnings conference call. [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.
More detailed information about these and other risk factors can be found in our press release that proceed 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 note this event is being recorded.
I would now like to turn the conference over to Mr. Robert J. McCormick. Please go ahead, sir.
Thank you. Good morning, everyone. As the host said, I'm Rob McCormick, President and CEO of TrustCo Bank. 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 deal with on a regular basis.
Thank you for your interest in our company and joining us for update today. As has become customary, I will open this up, hitting the highlights, Mike will give detail on our financial performance, then turn it over to Scot for an update on loans, deposits and non-performing. We can wrap up with questions-and-answers.
As the release said, fourth quarter at the Bank and even the entire year can best be described as solid. We ended the year with total deposits over $4.1 billion. This was up about $94 million on average over yearend 2014. This was a good year for deposits with nice growth in all of the lower cost categories. We also frontloaded a lot of our growth to earlier in the year. Combined, this gave us the ability to reduce our exposure to higher cost deposit categories.
Our loans were up this year and ended at almost $3.3 billion. That's an all-time high. This amounted to about $163 million in average growth. The vast majority of the growth took place in our residential categories.
Our commercial loans were down as we've previously reported. There are some crazy things happening in the commercial loan area causing a run-off. We are happy to take a cautious approach, continuing to work with our existing customer base. The result was a margin of 3.14% for the quarter, up from 3.08% at September 30, 2015, and down slightly from fourth quarter 2014.
We have total assets of $4.7 billion, up over $90 million on a year-over-year basis. Our tangible equity ratio was up slightly to 8.72%. Our core net income was $42.2 million for the year, up from $41.5 million in 2014. Please recall, we had two large one-time items that increased 2014 earnings. Our efficiency ratio ended the year at 55.4%. That's down from the prior quarter, but up from yearend '14 and still weigh better than our peers.
We continue to see improvement in asset quality and non-performing assets fell by $5.7 million compared to yearend '14. Our non-performing asset ratio improved to 0.73%. Our net charge-offs in 2015 fell to $5.3 million, down from $6.5 million in 2014. Our non-performing loans also fell to 0.86% from 1.08% at the end of '14.
We did opened two branches in 2015, bringing our total to 146. Our average deposits per branch continue to grow. And just as a reminder, we continue to do all of our business through our branch network, still do not accept brokered deposits or pay a premium for large accounts.
We continue to operate under formal agreement with the OCC. We are unable to go into great detail with regard to this agreement. We have made a number of corrective measures in both policy and practice, and we feel we are at least on the right track and are going through tremendous amounts of validation to make sure we stay on track.
Now, I'm going to let Mike go over the numbers. Mike?
Thank you, Rob. I'll now review TrustCo's financial results for the fourth quarter of 2015. Net income was $10.2 million for the fourth quarter of 2015 compared to $10.7 million for the fourth quarter of 2014. As Rob said, despite a continued added cost during the fourth quarter in response to recent regulatory concerns, net income continues at a solid level.
The loan portfolio averaged $3.3 billion during the fourth quarter of 2015, an increase of $163 million on average from the fourth quarter of 2014 or 5.2% and $23 million over the third quarter. The sustained growth continues to be concentrated on the residential real estate portfolio. This continues the positive shift in the balance sheet from the lower-yielding investments to higher-yielding core loan relationships.
The total average investment securities, which include AFS and HTM portfolios, decreased during the fourth quarter by approximately $97 million or 12.9% on average over the third quarter of 2015. This was the result of approximately $46 million in securities called during the fourth quarter of 2015, and the average impact of the additional calls of approximately $84 million of securities in the later part of Q3 2015 and by the cash inflows of other mortgage-backed securities portfolio. That decrease was offset by approximately $50 million of investment purchases made in the fourth quarter of 2015.
Average core deposits increased $109 million or 3.8% from the fourth quarter of 2014 to the same period in 2015. As we have discussed before, our core deposit accounts typically represent longer-term relationships and are lower cost than time deposits. Our cost of interest-bearing deposits decreased 2 basis points from the fourth quarter of 2014 to 39 basis points for the quarter, which continues to reflect our pricing discipline with respect to CDs and other non-maturity deposits.
Our average balance of overnight investments was $670 million for the fourth quarter of this year, up $17.3 million over the average balance in the third quarter. In addition to the liquidity that is on our balance sheet and 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, and approximately $100 million to $150 million of investment securities cash flow during the same time period. This continues to give us opportunity and flexibility moving into 2016.
Our net interest margin benefit during the quarter from the increase in yield on earning assets and a 2 basis point reduction in interest bearing liabilities. As a result, it increased to 3.14% in the fourth quarter, up from 3.0% in the third quarter and down slightly from 3.17% in the fourth quarter of last year.
Our provision for loan losses has increased to $1.3 million for the fourth quarter of 2015 compared to $800,000 in the third quarter of 2015, and up $300,000 compared to the $1 million recorded during the fourth quarter of 2014. This increased level of provision in the fourth quarter was a result of a single commercial loan charge-off. We do not expect this level of provision to be recurring.
In fact, we continue to see positive trends in virtually all asset quality measures and delinquencies. The level of provision for loan losses in 2016 will reflect the continued improving quality of the portfolio and economic conditions in our geographic footprint and ongoing resolution of existing problem loans.
Non-interest expense came in at $4.4 million for the fourth quarter, up slightly from the third quarter of 2015. Our financial services division had approximately $842 million of assets under management as of December 31, 2015. Now, on to non-interest expenses. Total non-interest expense came in at $23.1 million, down approximately $350,000 from the third quarter and up approximately $870,000 from the same period last year.
During the quarter, in the fourth quarter of 2015, salary and benefits expense included two items of note. It benefited by approximately $850,000 as a result of the decision of management to eliminate a liability related to the 2015 annual cash bonuses for the senior executive officers. It also included an additional $550,000 of salary expense reclassed from other expense categories to salary and benefits. As mentioned in the past, we do these reclass entries at yearend, so our payroll and benefit expense match our W2s and our final payroll registers.
We continue to expect the estimated total annualized cost of implementing the recommendations in the agreement will be approximately $5 million annually. These added cost reflected company's continued investment in our systems within the retail loan and deposit areas as well as enhanced regulatory compliance measures.
We expect over the next several quarters to continue to experience increased professional services expense. However, that will start to level off in 2016, as we complete implementation of other requirements of the agreement. As noted last quarter, you will see a continued shift from professional services to the salary and benefits expense line, as new hires replace consultants moving forward.
ORE expense came in at $570,000 for the quarter, which is within expectations. We expect ORE expense to stay in the range of $500,000 to $1 million per quarter. All the other categories of non-interest expenses are in line with prior quarters and our expectations. Going forward, we expect 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. Fourth quarter 2015 came in at 55.37%, down slightly from the third quarter of 56.04%.
As noted in prior calls, fourth 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 the efficiency ratio to stay generally in this range.
And finally, the capital ratios continues to stay strong. Consolidated tangible equity tangible assets ratio improved to 8.72% at the end of the fourth quarter, up from 8.46% compared to the same period in 2014.
Now, Scot will review the loan portfolio and non-performing loans.
Thanks, Mike. The loan portfolio grew by $11.3 million on the quarter in actual numbers, with the residential portfolio growing $16.2 million and commercial loans decreasing $5.4 million, as we continue to be very mindful in that area. Year-over-year, total loans have increased to $135 billion or 4.3% with residential loans increasing by $153 million. Residential loans on a quarter grew by $15.4 million in Florida as the activity continue to be solid in that region throughout the year. New York and the other areas had net residential increase of approximately $1 million.
The quarter saw a very successful implementation of new TRID regulations in all our regions. Interest rates, which did increase slightly for a brief period around the Fed's tightening, have settled back down, and we're currently at 3.99% for a 30-year fixed rate. This rate has remained fairly steady for a protracted period.
Our backlog at yearend is down approximately 15% from the third quarter, which represents a fairly typical slowdown for the holiday period and about 9% lower on a year-over-year basis. We would expect activity to pick up as we progress further into the first quarter. The news remains positive with respect to asset quality.
Early stage delinquencies remain strong and non-performing assets dropped to $34.7 million at December from $37.8 million in September and $40.5 million at December 2014. Overall, asset quality indicators continue to improve, with non-performing loans and outstanding at 0.86% of total loans versus 1.08% a year earlier. The coverage ratio or allowance in non-performing loans is now at a 158%, up from 141% in September. Rob?
Thanks, Scot. We're happy to respond to any questions you have.
[Operator Instructions] And our first question will come from the DeForest Hinman from Walthausen & Co.
Can you talk more about the things you are worried about on the commercial lending side? You've said this last couple of calls, but maybe can you delve into it in a little bit more detail and talk about what you're seeing in the New York market and what you're seeing in the Florida market and why that gives you pause?
I think some of the rates that are being offered are very attractive to borrowers and much less attractive to the lender. And I don't think it's priced, not that it's easy to price to risk, but I don't think the premium for commercial loan or the risk that goes along with the commercial loan is baked into the rates that are being offered. You're also seeing -- I don't know if credit standard slide or just go to a point we're not comfortable with, especially unit values and multifamily housing and some of the hotel and motel financing that's going on right now.
Is this in both the New York market or is it more related to the Florida market?
No. New York market too. What you find in the New York market is many, many, many competitors are chasing far too few transactions, and it becomes almost a fever pitch.
Do you have any commentary on construction activity in the capital region at all? With a lot of multifamily units going up, do you think the market is getting a little ahead of itself or do you think the building is measured in this area?
I would stop at your initial comment that there's a lot of multifamily housing going up in the capital district. I don't know if the population growth is matching that construction.
Having no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. McCormick for any closing remarks.
End of Q&A
Thank you for joining us, everyone, this morning. And if you're on Washington or New York or Philadelphia, good luck with the storm this weekend. Have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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