TrustCo Bank Corp NY (TRST) Q1 2013 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the TrustCo First Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note that all statements in this news release that are not historical are forward-looking statements within the meaning of the Securities Exchange Act of 1934 as amended. The forward-looking statements may include statements regarding future events or performance and statements regarding TrustCo's ability to offer and sell securities under its shelf registrations statement. Such forward-looking statements are subject to factors that could cause actual results to differ materially from TrustCo from those discussed. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases, have affected and in the future, could affect TrustCo's actual results and could cause TrustCo's actual financial performance to differ materially from that expressed in any forward-looking statement: credit risk, the effects of changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Financial Reserve System, inflation, interest rates, market and monetary fluctuations, competition, the effect of changes in financial services, laws and regulations, including laws concerning taxation, banking and securities, real estate and collateral values, changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board, changes in local market areas in general business and economic trends and the matters described under the heading Risk Factors in our annual report on Form 10-K for the year ending December 31, 2012, and in our subsequent securities filings. Ladies and gentlemen at this time, please note that today's event is being recorded. And I would like to turn the conference call over to Mr. Robert McCormick, President and CEO. Mr. McCormick, you may begin.

Good morning, everyone. Again, I'm Rob McCormick, President and CEO. On the call with me this morning are Bob Cushing, our CFO; Scott Salvador, Chief Banking Officer; and Kevin Timmons, who deals with most of the shareholder issues. The plan for the call is I will give a brief summary then turn it over to Bob who will detail the numbers. Scott will talk about our operations then we'll wrap it up with your questions. We have very solid first quarter results. While job recovery has been very slow, we have seen improvement in the real estate market. Upstate New York continues to be stable and slower. Florida has seen great improvement as investors and consumers have reentered the market. We think Florida has also seen some benefit from the stock market gains as people seemed more open to travel. And the other areas which we do business are pretty stable. We did not open or relocate any branches during the quarter. Again, we probably will never have a year that we don't open some branches. We do have plans to open 3 branches and possibly relocate 2 at this time. These plans run between now and the first quarter of 2014. I know there's been some talk about branches in the paper recently, but keep in mind we opened smaller branches and we open them with open floor plans, modest staffing levels and they're relatively cost effective. Our net income for the quarter was $9.2 million. It was up roughly 3% from the same quarter in 2012. We've established a nice pattern of income increases -- net income increases and they're worth 44% over the last 4 years. Our return on average assets and return on equity were 0.86% and 10.35%, compared to 0.84% and 10.45% for the first quarter of 2012. Our efficiency ratio was 54%, continuing at a world class pace. Our margin was 3.19%, down 2 basis points. Keep in mind we are continuing to stay very liquid with a large investment portfolio and relatively short maturities. Our tangible capital [indiscernible] solidly over 8%. Nonperforming loans to total loans and nonperforming assets to total assets, both showed improvement to 1.84% and 1.35%, respectively. Our allowance to total loans is basically flat at 1.76% for total loans, but our coverage ratio improved to 100%. We are very pleased with our growth. Loans were up $20 million on a net basis. Our mortgage portfolio was up $30 million. We also had a very decent -- have a very decent backlog of pending new business. Our deposits were up almost $50 million over the first quarter. Now I'm going to turn it over to Bob to give us some more detail on the numbers.

Thanks, Rob. I'll review the balance sheet changes, the margin, and the major items that affected our net income. We had a strong first quarter and we are pleased with the growth across all regions of our company. As we get into the numbers, you'll see why we are so pleased with the first quarter results. Growth at TrustCo comes from core banking operations and we do not rely on transaction-type activities to achieve our net income results. From year end 2012 to March 31, 2013, we increased the total assets of the company by $65 million to $4.4 billion. Total loans increased by $19 million. Investment securities increased by $140 million, offset by an $83 million decrease in overnight investments. On the funding side of the balance sheet, total deposits and short-term borrowings increased by $65 million, with increases pretty much across the board. If you look at the average balance sheet for the first quarter of 2013 versus 2012, you'll note overall growth in assets was pretty much coming from the loan portfolio with an average increase in loans of $168 million. That loan growth was funded through deposit and short-term borrowings growth of $54 million, and $160 million reduction in overnight investments. All things considered, the impact of overall -- on overall net interest margins was pretty flat between 2012 and 2013. For the first quarter, our net interest margin came in at 3.19%, down 2 basis points from the fourth quarter of 2012, which in turn was down an additional 2 basis points from the first quarter of 2012. So overall, we have been able to hold on to margin by strict deposit pricing disciplines and continuing our focus on growing our core banking relationships to our real estate mortgage products. We've been moving money out of the overnight investment portfolio, but still averaged $406 million for the first quarter of 2013. So we have plenty of liquidity to work with. The result is that even though we had a slight downtick in net interest margin, we've offset that with our overall growth in earning assets, thereby producing a taxable equivalent net interest income of $33.7, million which is right on top of the net interest income for the fourth quarter and first quarter of 2012. We have always said that we would redeploy our liquidity as appropriate to support our margin and take advantage of our market share opportunities. During the first quarter we met both of those objectives. We continued to grow our loan portfolio and we supported our net interest income for the quarter. Scott is going to review the nonperforming loans and charge-off information in a minute, but the impact to the improvement in that area allowed us to reduce our provision from loan losses to $2 million this quarter, down from the $3 million last quarter and the $3.1 million 1 year ago. Looking ahead, noninterest income, you'll note it's pretty much in line with prior quarters and consistent with our expectations for the year. For financial services income during the first quarter of 2013, we recorded $180,000 of fees for tax return preparation services. This is an annual event that occurs in the first or second quarter of each year, depending upon the timing of when those services are performed. So for the remainder of the year, financial services income will be in the $1.25 million per quarter range. We currently have approximately 3 quarters of $1 billion of assets under management. Fees for services to customers are in line with the first quarter of 2012. These fees tend to vary with the volume of activity, which is totally disposed up in the first quarter of the year, and picks up in the third and fourth quarters. So these results are in line with our expeditious. Also during the quarter you'll note that we do not have any net gains or losses on securities transactions. That compares to $677,000 in the first quarter of 2012, and $763,000 in the fourth quarter of 2012. Moving over now to noninterest expense, you'll note that total noninterest expense came in at $21.6 million, which is up a little less than 2% over the first quarter and fourth quarter of 2012. There are lots of different things that drive these numbers up and down each quarter, but if you focus on the big picture items, with respect to noninterest expense, the following items were the primary drivers of those variances. When you compare the first quarter of 2012 to the first quarter of 2013, the first thing you'll note is that we have approximately 25 more employees. Total salary and employee benefits between those 2 time periods is up by about $400,000, or 5.6%, with about 1/2 of that increase coming from new employees and the remainder coming from merit increases. We'd expect our salary expenses going forward into the remainder of 2013 to moderate slightly off of the first quarter, and come down to between $7.8 million and $7.9 million each quarter. Advertising expense is down to $700,000 for the quarter, and in line with our expectations for the year of approximately $3 million. FDIC insurance expense is up slightly, because of the larger balance sheet and we would expect that to continue for the remainder of this year. Other real estate expense is down from the first quarter of 2012 by $200,000. We currently have 53 properties in inventory, we have sold 31 properties during the quarter, which is slightly ahead of the pace of sales from last year's first quarter. This category of expense changes quarter-to-quarter, primarily due to property revaluations and property taxes. We have been somewhat encouraged lately during the revaluation process as we see property values stabilize and in some cases, begin to increase. Moving forward for the remainder of the year, we would expect total noninterest expense, excluding the effects of ORE, to be in the $20 million to $20.5 million range. And our expectations for total noninterest expense, including ORE, should be somewhere right around the $21 million to $21.5 million range. Capital ratios continued strong during the quarter, with tangible equity, tangible assets coming in at 8.17%. Let me address the deposit cash flows of the next 3 months to 1-year period. We have been very aggressive in repricing deposits down, as the opportunity develops with respect to our own cash needs and the impact of local competitors. Over the next 3 months, bringing us out to June 30, we have $150 million of CDs maturing that have a yield of 66 basis points. And if they reprice at current rates, they will come in at a blended rate of approximately 56 basis points, for about a 10 basis points pickup. After that, going out to the next 3-month time period, bringing us out to September 30, we would expect cash flows of about $237 million from maturing CDs. And based upon current rates, there would be no pickup in CD rates. They would all reprice into products at approximately equal cost to us between the yield on the CDs maturing and the current offering rate for similar CDs. So we have a bit of an anomaly during that time period. If you go out to the fourth quarter of this year, in the first quarter of 2014, you will see we have $138 million maturing in the fourth quarter and $196 million maturing in the first quarter of 2014. Which both groups provide us about 24 basis points of pickup opportunity. The CDs in those 2, 3-month time periods have cost today of approximately 80 basis points. And when they would rollover, they will rollover into products that currently cost approximately 56 basis points. So that would give us the opportunity to move those CD rates down by 24 basis points. We continue to believe that TrustCo is well-positioned for changes in the future, and we are encouraged by our first quarter results. Scott?

Okay. Thanks, Bob. Total loans during the first quarter of 2013 grew by $19 million, with residential mortgages increasing by $25.7 million, the commercial loans dropping by $6.9 million. We are pleased with these overall loan production and considered a strong first quarter. The $19 million in net growth is up significantly from $3 million of growth from the first quarter of 2012. The combination of both increased application volume and lower refinance activity account for the improvement. Recent residential loan activity has picked up as we enter the spring season, and we expect that this will be reflected in the loan totals over the next several months. For the past quarter, growth in the residential portfolio occurred across all our markets, with particularly strong activity on our Florida service area, as that market continues to improve. Nonperforming loans and assets both showed improvement in the quarter, as did every asset quality indicator. Nonperforming loans dropped from $52.7 million to $49.9 million from December to March, while nonperforming assets declined to $59.7 million from $61.4 million over the same period. Nonperforming loans were 1.84%. Total loan is at 3.31% versus 1.96% at year end. The coverage ratio or allowance for loan losses to nonperforming loans was 95.6% at 3/31, compared to 91% as of December. And finally, charge-offs also showed improvement on the quarter, totaling $2.3 million versus $3.3 million in last year's first quarter, and $12.8 million for all of 2012. Early-stage delinquencies also continued to show improvement, which is a positive indication as we look to the future. Rob?

That's our story. We're pleased with our results and we're optimistic about our future. And we're happy to answer any questions you have.

[Operator Instructions] And our first question comes from Alex Twerdahl from Sandler O'Neill.

I just wanted touch on something you said, Bob, in your commentaries about redeploying liquidity to support the -- I think you said to support the margin, but did you mean to support net interest income?

Yes, net interest income.

Okay. And then, so can you just talk a little bit about how the recent Fed commentary and rates remaining low for a fairly extended period of time sort of affects your current strategy, as it has to do with the cash position you have right now? And then also maybe talk about in the securities portfolio, what kinds of things you do to support the net interest income whether or not you're willing to take a little bit more credit risks today than you had in the past?

Okay. On the FOMC question, Alex, we have repositioned the balance sheet to take advantage of market changing opportunities as rates change. We want to take advantage of that. So what we've done in the last quarter is indicative of our plans. We redeployed the opportunity -- the money in the loan portfolio first and foremost, being that, that's the best place to put it, but again as you know first quarter is always a little bit of a lighter time period for loan originations. So as rates were backing up at times during the quarter -- now I know the 10-year treasury today is around 1.65% or thereabouts, but at 1 point time during the quarter it topped up over 2%. We look at those as opportunities to buy and redeploy our cash, our available liquidity. So we are trying to be very opportunistic with respect to redeployment of that liquidity. So for the standpoint of the FOMC being long-term for the foreseeable future at a lower rate environment, our plan continues to be the same. We need the best value, continues to be to redeploying the loan portfolio. We like the 60-40 split, from the standpoint of investments in our loan portfolio compared to investments in our securities portfolio. As rates do backup -- even though the 2% 10-year isn't the greatest in the world, but better than it was at 1.65%. So when we see opportunities to reinvest at a little bit higher rate, we will continue to do that. As far as our credit stands on the investment portfolio, that is something that we do not bend on. We're not looking to change our credit profile. The investment portfolio is not intended to take on additional risks. So though we may look at the different products, more mortgage-backed securities, we're looking at a little bit of the FPA product. We are looking for government guaranteed product. We're not looking to extend duration on maturities. We're trying to keep it pretty short term, in that 1- to 5-year range with the average lives. We will, however, shift the mix around a bit to take advantage of what might be a better opportunity. And you have seen in the last quarter, we moved out of agency paper and moved more heavily into mortgage-backs. But again, that's just the shift based on what we thought were better opportunities.

I mean, that's the beauty of the liquidity, Alex. That gives us the flexibility to move on our feet and make the moves that Bob just described. We've written liquidity out this long, we're not going to bend that credit standards now.

Okay, that makes sense. And then, Scott, can you just talk a little bit about on the new production for mortgage loans today, what the rates are they're putting on in the first quarter and sort of -- and then also talk a little bit about the volume of loans that either repay or refinance out of the portfolio in the first quarter?

Sure. We're, right now, actually at 3.99% for 30 years. Over the last several weeks, couple of months, we've bounced around, up and down a little bit. But we really haven't gone any lower than as I should say and have been right around 4% for the past couple of months. And as we speak, we're at 3.99%. And refinance, I mean, that is a big difference this year versus last year, with what's been going on with rates. The first quarter last year there was a lot of refinance activity going on. Now we get our fair share of that. We always like to remind people of that, that we are able to retain a lot of what goes on here in the bank, but of course you do lose some of it. But year-over-year, it's down about 40% in terms of if you take the total refinance activity, first quarter to first quarter, it's down about 40%, which is really a reflection of what's going on with rates, which is the primary driver, as you know, of the refinance activity.

Great. The 3.99% that you said, is that the rate that you advertise for new products? Or is that the rate that's actually kind of the average rate that actually gets put on the books?

Well, both. I mean that's one of the things that's kind of a key to our success here, Alex, is the rate that we advertise and the rate we put on the books are one and the same. Unlike many banks where they advertise one rate, but they really work on a tiered system. So you go in, you pay -- you apply, you pay your application cost and fees and appraisal fees. But then based on loan to value, based on credit score, based on the strings to the application, very few people end up getting the advertised rate. At TrustCo, we have 1 rate. So you either qualify the mortgage or you don't. And if you do qualify, that's the rate you get, which is really a -- it's a strong selling point for us in the marketplace.

Okay, that's very helpful. And then just, Rob, maybe just some final commentary here on M&A. And I know where your stance has been in the past, but just kind of as the rate environment remains to be difficult, has your stance changed at all on the desire, want to maybe acquire another company or another business just to diversify a little bit away from 1 to 4 family residential mortgages?

We're constantly looking, and we look at a lot of prospects and we certainly get some packages on places. But we feel our best strategy is to focus on growing the new branches we've opened over the past 7 to 10 years and not dilute our ownership by making an acquisition that would be -- could be potentially questionable. As our focus has been staying on the de novo growth that we've completed, and really making them profitable and moving forward from there. If an opportunity came along, that would be something we would certainly entertain, but it's not our focus.

[Operator Instructions] Our next question comes from Travis Lan from KBW.

Rob, can you start on the branches? Obviously other banks are seeing their customer preferences kind of shifting away from brick-and-mortar, but what is it about your customer base that could be different from some -- what other banks are seeing?

I think our typical customer profile, Travis, likes the brick-and-mortar operation, at least for initial contact. We certainly have a tremendous number of people signed up for bill pay for Internet banking. But most of our initial contact come through our brick-and-mortar establishments. They service billboards. Our customers find our ATM locations very, very convenient. And again, we're opening small customer-friendly branches. We're not opening the 4,000 to 5,000 square foot, multi-million dollar branches. So I think our typical customer likes the brick-and-mortar and likes the fact that there are many TrustCos in a particular area.

Got you, okay. Scott, in the quarter in terms of mortgage originations, do you have a sense for what percent of the quarter's production was in 30-year fixed? Was is 100% or anything?

Yes. The vast -- to a vast majority, it is. That continues to be the case as in prior quarter, that the 30-year fix is primarily what we're booking.

Okay. And then, I know historically the loan portfolio duration has been kind of roughly 8 years. But how do you think that's changed, if at all, after kind of seeing historically lower rates for the last couple years, do you think that's extended a little?

Travis, this is Bob Cushing. We study that each month. We look at the life of our loan portfolio. And again, we've been at these lower rates for a while now. So from that perspective we're starting to actually see some impact as to whether it is extending, or what the impact is. Prior to the 2008 time period, we were looking at an average life that was kind of in the 6-year range. We kind of extend it to the 8-year time period and it's pretty much stabilized right around there. So we haven't seen, as a result of the continued refinancing in new production we're putting on, any significant increase up to where we now, which is around -- right around the 8-year mark.

Got you. Okay, that's helpful. And then just finally, Scott, on reserved to loans, I mean, what do you think is kind of an optimal level that you can trend down to?

On the percentage, Travis?

Yes. Just the reserve as a percentage of loans.

Travis, this is Bob. We constantly look at the production of loans relative to the amount of reserves necessary. And recognizing that we have a fixed-rate, real estate-based mortgage portfolio, those reserve levels could trend down pretty substantially. But we feel most comfortable with a very healthy reserve. And we don't want to go through a standpoint in our situation where as you had a few years ago, where it started to draw down reserves that these bigger banks and you find out that you really needed them based on economic cycle. So right now, we're in the 170 type of thing. Could that go down to the 150? Sure it could. But we believe, philosophically, in a healthy reserve. So we're not looking to drain that, as you can see during the quarter, we only had $2.3 million of charge-offs and $2 million in provision. We kind of like those types of ratios.

[Operator Instructions] And sir, at this time, I'm showing no additional questions, and would like to turn the conference call back over for any closing remarks.

Just generally, thanks for your interest in our company and have a good day.

And everyone, that concludes today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.