TrustCo Bank Corp NY (TRST) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the TrustCo Bank Corp first Quarter 2015 Earnings Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. Before proceeding, we would like to mention that this presentation may contain forward-looking information about TrustCo Bank Corp, 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 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 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, Kate. As the operator said, I am Rob McCormick. Joining me on the call today, are Mike Ozimek, our CFO; and Scot Salvador, our Chief Banking Officer. Also in the room is Kevin Timmons, who a lot of you deal with on a regular basis. As is customary, I will provide a brief summary, then turn it over to Mike to detail the numbers, then Scot will discuss operations, leaving time for questions and answers. Our pattern of solid performance continued in the first quarter of 2015. Our total assets grew to over $4.7 billion, driven by an all time high in our loan portfolio, which totaled almost $3.2 billion. Further, most of the growth was residential mortgage loans. We are not a big commercial lender at this point, since in our opinion, a lot of the transactions offer subpar pricing with increased risk. We do work with our existing customer base and seek new opportunities when possible. We do offer consumer loans but nothing indirect. As most of you know, we have a large investment portfolio, with relatively short maturities and a high level of liquidity. This gives us the chance to reinvest, as rates change. Our deposits continue to grow to over $4.1 billion. The real good news on this front, is the year-over-year core deposit growth of $80 million, and average deposits per branch growing by $868,000 to $28.4 million. Our first quarter earnings were a strong $10.7 million, which is actually down 2.7% year-over-year, including a large gain on sale of a building we owned in Florida. Excluding this, earnings were up 7%. As a heads up, we will probably in the same boat next quarter, as we had a large gain on sale, second quarter 2014. Both of these sales were great for our company. Asset quality continues to show improvement. Non-performing assets declined to just over $40 million, down almost $14 million year-over-year. Most every asset quality measure improved this quarter. Non-performing assets to total assets dropped to 0.85%. The coverage ratio increased to 1.4 times. Short term delinquencies also remained in a good position. We did open one branch during this quarter in Florida, bringing our total to 145. Our efficiency ratio was just over 54% at quarter end, still world class, but probably affected by the cost of additional regulatory burden. Our return on average equity was 10.91% at quarter end, this contemplates tangible book value per share at $4.21, compared to $3.93 a year earlier. Now Mike will give detail on the numbers. Mike?

Thank you, Rob. I will now review the financial results for TrustCo for the first quarter of 2015. As Rob said, the strength and the momentum that we built last year, continued into the first quarter of 2015. First, core net income was up 7% in the first quarter of 2015, compared to the same period in 2014. You will remember, there was a one-time item recognized in non-interest income during the first quarter of 2014, that would affect comparability for the first quarter of 2015. In Q1 of 2014, we completed the sale of our planned Florida operation center, which generated a profit of approximately $1.6 million on a pre-tax basis, which equates to about $1 million on an after-tax basis. This would need to be considered, when comparing the first quarter results. Taking this onetime item into consideration, comparable core net income was approximately $10.7 million for the first quarter of 2015, compared to $10 million for the same period in 2014. The average loan portfolio increased to $3.2 billion during the first quarter of 2015, an increase of $52 million on average or 1.7% over the fourth quarter, and $250 million or 8.5% from the first quarter of 2014. As you would expect, the growth was concentrated in the residential real estate portfolio. This continues a positive shift in the balance sheet from lower yield investments to high yielding core loan relationships, coupled with overall growth on our deposits. Our total investment securities portfolio, that is both the securities held to maturity and securities available for sale, decreased by $48 million on average, between the fourth quarter of 2014 and the first quarter of 2015. This was primarily the impact of maturities and cash inflows from the mortgage-backed securities portfolio, coupled with a decision to take advantage of market opportunities as they presented themselves, to selectively stay out of longer term duration mortgage backed securities, at a gain of $249,000. The decrease was somewhat offset by a decision to purchase $40 million of relatively short term U.S. government sponsored enterprises' securities late in the first quarter of 2015. On the deposit side, we continue to be successful, increasing balances throughout our branch franchise. Total deposits for the first quarter averaged $4.1 billion, which is an increase of $67 million over the average balance for the fourth quarter of 2014, and up approximately $121 million over the first quarter of 2014 averages. Our cost of interest bearing deposits increased by just one basis point to 43 basis points for the quarter, which continues to reflect our pricing discipline with respect to CDs and other non-maturity deposits. The liquidity provided by the growth on our deposit portfolio and deduction in the securities portfolio, was used to fund the loan growth and increased balances in overnight investments. Our average balance of overnight investments was $653 million for the first quarter of this year, up $73 million over the average balance in the fourth quarter, and up $78 million over the first quarter of 2014 averages. 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 $190 million of investment-securities cash flow during the same time period. As you know, all this liquidity comes at a cost. Our net interest margin decreased to 3.0% in the first quarter, down from 3.17% in the fourth quarter, and 3.13% in the first quarter of last year. We think this is a small price to pay for the opportunity and flexibility that the liquidity provides us, moving into the remainder of the year. You can see that a provision for loan losses has come down by $200,000 during the quarter, as a result of continued positive trends and asset quality measures and delinquencies. Scot will review this in a minute, but let me say, that the decrease in provision for loan losses, was directly attributable to the improving quality of the portfolio, and the ongoing resolution of existing problem loans. Non-interest expense came in at $4.6 million for the first quarter, compared to $4.8 million in the fourth quarter. During the first quarter, we had $249,000 of security gains, similar to the fourth quarter, which had $335,000 of security gains. The most significant reoccurring source of non-interest income is derived from our financial services division, which recorded our annual return preparation fees in the first quarter of $185,000. Our financial services division had approximately $922 million of assets under management as of March 31, 2015. Although things are down slightly, all due to seasonal volumes. Now let's look at non-interest expense; the total non-interest expense came in at $21.9 million, down $383,000 in the fourth quarter and up $1.1 million from the same period last year. The biggest fluctuations compared to the fourth quarter and the first quarter of 2014 occurred in salary expense. As you will remember, during the fourth quarter, we made the annual reclass increasing salary expense by $550,000 and in the first quarter of 2014, we reversed approximately $530,000 of unused bonus accruals. When you take out those adjustments and salary expense, it is generally inline with the fourth quarter, and the increase over the first quarter of 2014 is due to an increase of 38 FTEs ending the quarter at 747. ORE expense came in at $424,000 for the quarter, which is right in line with our expectations for the first quarter. We would expect ORE expenses to stay in the range of $500,000 to $1 million per quarter. All the other categories of non-interest expenses are pretty much in line with prior quarters and our expectations. Going forward, we expect this total reoccurring non-interest expense to be in the area of $21.7 million per quarter, which reflects the company's continued investments in salaries and systems and our retail loan and deposit areas, as well as enhanced regulatory compliance measures. Our efficiency ratio continues to be very solid. First quarter came in at 54.18%, up slightly from the fourth quarter's 53.35%. First and fourth quarter numbers continue to be negatively affected by our decision to retain a large amount of overnight investments. And lastly, capital ratios continue to stay strong at 8.44% at the end of the quarter, up from 8.11% compared to the same period in 2014. Now Scot will review the loan portfolio and non-performing loans.

Thanks Mike. The loan portfolio grew strongly for the first quarter. Total loans increased by $35.1 million compared to $32 million for the first quarter last year. This growth was down from the fourth quarter, as expected due to the first quarter typically being a slower time period. The portfolio grew over 1% in the quarter, and approximately 8.6% on a year-over-year basis. We enjoyed a strong year in 2014, and this quarter's results represent a continuation of that momentum. Within the quarter, residential real estate grew by $46 million, with commercial loans decreasing by $11 million. All of our regions experienced growth, with Florida accounting for 62% of the new residential growth this quarter. The Florida market is strong overall, and our real estate results here continue to build, as our market presence becomes more and more established. The decrease of commercial loans this quarter was primarily due to the payback of some seasonal year-end borrowings, and the sale of some property by our borrowers. The backlog for residential loans at quarter end was solid, up approximately 15% from year end. Most of the rates in both our backlog and new originations continue to be in that high 3% to 4% range. The news on non-performing loans and other asset quality measures continues to be good. Both non-performing loans and non-performing assets declined slightly on the quarter, while on a year-over-year basis, they dropped from $44.9 million to $33.5 million for non-performing loans and from $53.9 million to $40.4 million for non-performing assets. Quarterly net charge-offs were at their lowest levels since 2008, and represents a 0.15% of average charge-offs. The allowance for loan losses totaled $45.9 million and the coverage ratio or the allowance to total non-performing loans, has now climbed to 137%. Rob?

Thanks Scot. That's our report. We are happy to answer any questions you may have.

[Operator Instructions]. The first question comes from Alex Twerdahl of Sandler O'Neill. Please go ahead.

Hey, good morning guys.

Hi Alex.

I am just trying to get a little bit better feel for how you plan on using some of this liquidity that you have. And when I look forward to sort of the various interest rate scenarios that could materialize over the next 12 months or so, it seems like the most likely scenario is for the short end of the curve to kind of come up in the long end [ph] to stay, right around that 2% range. So in that scenario, how would you deploy excess liquidity, such that to shield NII, and if the plan is just to go on by securities at 2% in that scenario, why not just use some of that liquidity to buy them now and sort of pre-fund that idea?

Alex it’s a good question. We have waited this long to really start to deploy some of that cash. And yes, we are going to start to look to see that yield curves start to change. And what you will see is, when that yield curve starts to change, we will kind of [indiscernible] on a little bit. We will go in $25 million, $50 million, in that range, and if the rates do -- if they start to get in your eyes [ph], you will see it start to [indiscernible] a little bit more. That's basically what we're seeing.

Okay. And then of the $190 million of investment securities that will -- cash flow over the next 12 months, is that like pretty even amount each quarter, or is it front-loaded or back loaded?

Its pretty even. In the current rate environment where we are -- obviously, rates change, so that could change that cash flow slightly, but that's pretty even.

Okay. And then, Scot I might have missed it, if you would have talked about where the loan pipelines were at March 31st?

Yeah Alex, the pipeline looks good as of quarter end. We are up about 15% off year end and a little ahead of where we were last year also.

Great. Thank you very much for taking my questions.

Thanks Alex.

The next question comes from Travis Lan of KBW. Please go ahead.

Thanks. Good morning guys.

Hey Travis.

Good morning Travis.

Just following up on Alex's question on the liquidity, I know Mike you talked about holding excess liquidity this quarter, and you brought cash kind of back to where you were a year ago. But a year ago, you did put a lot of that to work in the second quarter, it sounds like there maybe a shift, in terms of the way you think about it, where now you want to hold this excess liquidity longer to -- had to put to work in a rising rate environment, whereas a year ago, you put more to work in the short term. Is that kind of a shift, or not?

No Travis, I mean, I don't necessarily see a shift. We will continue to invest. I mean, we have to continue to keep that NIM stabilized. So as that cash flow comes in, we will invest. We are not going to let that cash balances that we have kind of get out of hand.

We are trying to stay disciplined Travis. If we have held our liquidity position for this long, we certainly don't want to get crazy, and we want to do it the right way, and try not to make a mistake.

Right, right; and that makes sense. And I just wonder like, I mean, you have held it for this long and to your point, maybe there hasn't been a change in the way you think about your liquidity. But at the same time, the NIM which was holding pretty steady in the kind of three high teens, now broke 3.10. I guess what changed this quarter maybe in the market, that caused that NIM to break through that 3.10 level, and what would you expect? You said stability, does that mean you rebound a little bit above 3.10, or do you think there is still more pressure to come?

3.08 is obviously reflective of a lower rate environment, and what you said the pressure is from the asset side. And obviously, when we start to invest, we will start to see that improve. But the good news on the NIM is, that we have been able to really control our deposit costs. I mean, we have been pretty successful for that over the last year or so. But in the short term, we see ourselves probably in the 3.05 -- in that range.

Okay. All right, that's helpful. And then, kind of getting back to Alex's other question, Mike, could you just remind us of the rate sensitivity that you guys see to a flattening curve in the scenario that he laid out with rising short term rates and kind of flat long term rates?

That's great. As the rates starts to increase, I mean, that's really what we want to see, as rates go up, we have held that liquidity for a long time and we will continue to make loans and that's a scenario that we want to see, and we will rebuild our investment portfolio, we will put some of that money to work.

That's kind of our sweet spot.

Got you. Okay. All right, and then just on the provision, Mike, what's your outlook if charge-offs kind of remain around this mid-teen basis point level going forward?

We are definitely encouraged to see the continued and improving credit quality and the [indiscernible] that we see, and then over the next year, we definitely expect that to continue. With that -- and we see that, our charge-offs and our provision will kind of stay in step of each other. So going forward for the rest of the year, we do see ourselves in that $800,000 to $1 million range.

Got you. All right. Thank you very much.

[Operator Instructions]. There are no further questions at this time. That concludes our question-and-answer session. I would like to turn the conference back over to Mr. McCormick for any closing remarks.

Thank you for your interest in our company. Have a great day.