TrustCo Bank Corp NY (TRST) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the TrustCo Bank Corp.'s Second Quarter 2013 Earnings Call and Webcast. [Operator Instructions] Before proceeding, let mention 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 registration statement. Such forward-looking statements are subject to factors that could cause actual results to differ materially for 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 and changes in, trade, monetary and fiscal policies and laws, including interest rate policies in the Board of Governors of the fiscal -- Federal 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 and 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 ended December 31, 2012 and in our subsequent securities filings. Please also note this event is being recorded. I would now like to turn the conference over to Robert J. McCormick, President and CEO. Please go ahead.

Thank you, and thank you for joining us this morning. As the operator said, I'm Rob McCormick, President and CEO of the bank. Joining me on the call are Bob Cushing, our CFO; and Scott Salvador, our Chief Banking Officer. Also with us in the room is Kevin Timmons to keep us in line. I'm going to hit the highlights summarizing our results, then Bob and Scott will detail the numbers in our operations then we'll have some time for questions. We are pleased with our second quarter results. Our net income of $9,763,000 was up about 7.7% over the comparable period last year. This continues the positive trend of significant net increases for quite some time now. Our ROA was up to about 0.88%. Our ROE was up to 10.83%. We showed an improvement in our already world-class efficiency ratio to 53.5% and remain committed to further improvement. Our margin dipped to 3.1%. As most of you know, we maintain a very liquid balance sheet with relatively short maturities. This was done in -- this has been done in anticipation of higher rates. We believe this will pay off, as we are beginning to see those higher rates. And we were -- we are going to cautiously begin putting some of these funds to work. We continue our commitment to maintaining a very liquid balance sheet. All of our asset quality ratios improved during this quarter. This improvement included last quarter as well as the comparable period last year. Nonperforming loans, 1.57; nonperforming assets, 1.21%; and our coverage ratio stood at 1.1x. Our allowance stood at $47,600,000 after a $2 million addition this quarter. The allocation was the same as last quarter and down from a year ago. We did sell some nonperforming loans during the quarter. These were long-term, hard core problems that would have taken a protracted period to resolve. This was a great opportunity to unload these. Our short-term delinquencies continue to look good, and we anticipate continued improvement overall in the problem loan area. On the business side, we showed growth in both loan -- our loan portfolio and total deposits. Our loan portfolio ended the quarter at $2,762,000,000. Most of the growth was centered in the residential portfolio. The commercial loan, home equity and installment portfolios all showed modest growth. We have been doing few more installment loans recently. We're not trying to conquer the indirect business, just trying to provide our customers with an outlet. We are also planning to reintroduce our own credit card in the first half of 2014. We do not anticipate this will be a huge part of our business, but we have had significant interest from our current customer base. Our deposits were up $35 million overall. As most of you know, time deposits were down significantly year-over-year. This was a conscious move to chase the hotter money out of the bank. We are very pleased our core deposits have more than compensated for those losses. So it looks like it worked. We believe there may be 2 smaller opportunities to do the same over the next 12 months. Our branches remain focused on getting the checking, savings and mortgage from our customers. We did not open any branches this quarter. We do have plans to open a few new branches and relocate a couple over the next 2 years. We believe these will be all very good opportunities. Now I'm going to turn it over to Bob Cushing for some more detail.

Thank you. As Rob noted, net income came in at $9.8 million, an increase of approximately 7.7% from the second quarter of 2012. That resulted in earnings per share of $0.104 per share. For the year, our net income was $18.9 million, an increase of 5.3% over the first 6 months of 2012. So as Rob said, we are very pleased with both the second quarter and the first half of 2013 results. Return on equity and return on assets for the quarter were both very healthy at 10.83% and 88 basis points, respectively. During the quarter, we made the decision to lighten up on some of our investment portfolio, and we sold approximately $125 million of mortgage-backed securities, corporate bonds and agency callable bonds. And this generated a gain of approximately $1.4 million. This was done early in the quarter before the recent run-up in yields on the 10-year treasuries. We put all the proceeds from that sale into the federal funds sold portfolio, which accounts for the increase in the average and the actual balance in that account. This obviously has an impact on the yields we're earning on our assets and accounts for approximately a 6 basis point reduction in our net interest margin for the quarter. It is one thing to make the decision to sell part of the investment portfolio, but we also made the decision to put those proceeds into cash and not reinvest them back into the marketplace. We held the higher levels of federal funds sold during the quarter, earning 25 basis points, with to belief that higher interest rates were at hand. That decision has proven to be a good one in light of where loan investment rates are today. Our average earning asset balance increased by approximately $100 million from the first quarter to the second quarter of this year, and the net interest margin dropped by 9 basis points to 3.10%. As I mentioned, 6 of the 9 basis point reduction comes from the shift of funds from the investment portfolio to the federal funds sold portfolio. The remainder of the squeeze on net interest margin comes from the growth of our loan portfolio and the continued refinancing that occurred during the quarter. The average balance of loans increased by approximately $40 million, while the yield decreased by 6 basis points. We continue to benefit from reductions in our cost of funds. The overall cost of our interest-bearing liabilities decreased again this quarter by 2 basis points to an overall cost of 41 basis points. Likewise, we had a 5% increase in the average balance of our demand deposits, which brought the balance to $301 million for the second quarter. As a result of the recent run-up in market interest rates, we have recorded a pre-tax $24 million unrealized depreciation in our securities available for sale portfolio. Going forward, we would expect to continue to grow our assets at these higher interest rates. We have increased our new loan origination rates from their lows by approximately 100 basis points during this period. Likewise, we have approximately $600 million of overnight federal funds sold, which we could use to support or expand our net interest margin, should we choose to. Non-interest income for the quarter without the gain on securities sales was approximately $4.5 million, which is right in line with our prior quarters and prior years. The TrustCo Financial Services Department has approximately $773 million of assets under management, which is about the same as the first quarter. Non-interest expense was $21.9 million for the quarter, up almost $820,000 from the second quarter of 2012. If you remove the impact of ORE expense from the quarters, you will see that, for the second quarter of 2013, we have recurring expenses of $20.4 million, which is just about equal to the second quarter of 2012, which was also $20.4 million. The increase in ORE expense is directly related to a charge-off we took on a commercial property we have in inventory and was based on the current indications we are receiving from interested third-party potential bidders on that property. So even though we had an appraisal that supported the prior balance, we thought it was wise to write down the carrying value of the property to current bidders' indications. As we have said in prior quarters' calls, our intention is to move quickly through the foreclosure process on nonperforming loans so that we can get control of the properties and dispose of them quickly. We certainly want the best price possible, but we also recognize the value of moving a non-earning asset off of our books. During 2013, we have disposed of slightly more than 60 properties, which is ahead of the pace from 2012. We are very encouraged by these results. Other than ORE expense, all other expense categories came in at the level we anticipated. Last quarter, I indicated that we intend -- we expected non-interest expense without the impact of ORE expense to come in somewhere in the $20 million to $20.5 million range. So our $20.4 million is right inside that range. We continue to expect recurring non-interest expense to stabilize in this $20 million to $20.5 million range, and we anticipate that other real estate expense will come back down to more normalized levels of between $500,000 and $1 million. Tangible capital ratios took a hit this quarter, as a result of the unrealized depreciation in the available for sale portfolio, with our tangible asset to equity ratio coming in at 7.83% at quarter end. As you know, for regulatory purposes, at the bank level, the capital ratios exclude the other comprehensive income items, so we continue to be at about 8% leverage ratio, Tier 1 capital to risk-adjusted assets of 16.4% and total capital to risk-adjusted assets of 17.7%. Let me finish by noting that, over the next 3 months, we will have $236 million of CDs that are repricing, and it is our intention to drag our heels during this period of rising rates. CDs generally price off the shorter end of the yield curve. And as you know, there's really not been much of an increase in that part of the market. So we will -- we believe we will be able to hold down our deposit costs as we move forward. As I noted in last quarter's conference call, these $236 million of maturing CDs have a slightly lower yield than the rates we currently offer on new CDs. So when these maturing CDs roll over, we will see a slight increase in their cost. This will result in about $60,000 per quarter of additional CD interest expense and will only have a rounding impact on net interest margin. We have another $149 million of CDs maturing in the fourth quarter of this year, which have a higher yield than current market rates. This will provide us the opportunity to reprice them down by approximately 24 basis points. Likewise, the first quarter of 2014 has $193 million of maturing CDs that will also provide us an opportunity to reprice them down to current CD rates, thereby picking up an additional 24 basis points on those CDs. Assuming current rates stay about the same during these time periods, we will drive down our average cost of funds and increase our net interest margin to 3.12%. Next, Scott is going to review our loan portfolio.

For the loan portfolio, during the second quarter, total loans grew by $58.7 million or 2.17%. This growth was comprised of a $53.6 million increase in our residential portfolio and a $4.3 million rise in commercial loans. Year-over-year, the total loan portfolio has increased 7.92% with approximately $200 million to $300 million of growth. We were especially pleased with the second quarter residential loan growth as it built upon the momentum we had gathered during the spring season. The $53 million in growth compares favorably to a $19 million increase in the first quarter and a $36 million increase in the second quarter of last year. All market areas participated, with the continuation of strong activity from our Florida market. Our backlog of pending loans at quarter end remains solid. And although activity often slows a bit over the summer, we do look for continued growth in the coming months. Nonperforming loans and other asset quality indicators all showed improvement during the second quarter. Nonperforming loans decreased to $43.4 million as of 6/30 from $49.9 million at 3/31, while nonperforming assets also dropped from $59.7 million to $53.8 million as of 6/30. Included in these results was a sale of 17 nonperforming residential loans with a total net principal balance of $855,000 for a gain of $50,000. We do not, at this time, have any other loan sales scheduled, although we will continue to evaluate future opportunities as they arise. Nonperforming loans were equal to 1.57% of total loans at quarter end, down from 1.96% at year end. The allowance for the second quarter covered annualized net charge-offs by 5.8x, while the covered ratio or allowance for loan loss to nonperforming loans was 109.5% at June 30 compared to 91% at 12/31. Although the foreclosure process remains lengthy in both our primary market areas, we have been encouraged by the strong demand for most properties once we have been able to obtain title. This has been especially true in recent months in our Florida market. Rob?

That's our story, and we'd be happy to answer any questions that you have.

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

Bob, did you say that you've increased loan offering rates by about 100 basis points since the rates started to rise?

From our low at the end of the period to where we are today it's up by about 100 basis points.

Okay. How have you seen that that's impacted mortgage application volumes? I know it's a short sample period but…

We've been pretty solid, Travis, because at the higher rates, we could be more competitive. We're at 4 5/8% right now, and we're seeing much more purchase business now than we are refinance business. So we're encouraged by the results, actually. We've also built the reputation that we can get loans closed, which the real estate community appreciates in the markets we serve.

Got you. Rob, in the press release, sounds like your comments indicated that there's been some reengagement in Florida, not that you backed off entirely at any point. But could you talk about that a little bit? And then, whether are your branch expansion model, kind of extends there as well?

Travis, it's Bob Cushing. Was your question some reengagement in Florida?

Well, just in the press release, some of Rob's comments said that -- or seemed to indicate that you're seeing positive trends in Florida, and I think that's kind of on the back burner maybe for the last couple quarters. Just wanted to hear a little bit more about that and whether your branch expansion...

Well, we've built a terrific branch network, you know that, throughout Central Florida, Travis. And we have 2 new branches planned on the East Coast to Florida kind of infill. If you remember, we opened Juno Beach to define kind of the southern border of our market area. And then, we were in Port Orange, which is just north of Daytona. So we're going to infill in Stuart and Ormond Beach, and those are our 2 newest branches. We're very encouraged by our results in Florida, and things are pretty good there. As Scott alluded to, if we do take something back, it goes very, very quickly. The real estate market is pretty good there, and the quality of the applications we're looking at I don't think has ever been higher, Travis.

And is that on both...

Loan demand in Florida has been a positive for us. This last -- this whole year really has been a positive.

And would that be on both the consumer and the commercial side?

Well, we're not a big commercial lender, period, Travis, as you know, and we don't do a lot of commercial lending in the state of Florida. So while there has been additional opportunity, mostly in the residential area, most of the growth has been consumer.

Got you. And then, just the last question. So based on what we've seen in the interest rate environment in the last few weeks in terms of stability as opposed to kind of this continued run up higher in the 10-year, do you expect to kind of reutilize more liquidity in the short term, or do you think you should maintain kind of this level of excess liquidity for the foreseeable future?

Well, as I said, we're going to cautiously release some of the funds and begin investing. We agree with the stability -- the point you made with regard to stability, and it appears the rates have tailed off from a rising perspective. So we're going to put some of the money to work.

[Operator Instructions] As we have no further questions, this concludes our question-and-answer session. I would like to turn the conference back to Robert McCormick for any closing remarks.

Thank you for joining us this morning, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.