U.S. Markets close in 4 hrs 9 mins

Edited Transcript of TRST earnings conference call or presentation 24-Jan-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 TrustCo Bank Corp N Y Earnings Call

GLENVILLE Jan 24, 2017 (Thomson StreetEvents) -- Edited Transcript of TrustCo Bank Corp N Y earnings conference call or presentation Tuesday, January 24, 2017 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Robert McCormick

TrustCo Bank Corp NY - President & CEO

* Mike Ozimek

TrustCo Bank Corp NY - CFO

* Scot Salvador

TrustCo Bank Corp NY - Chief Banking Officer

================================================================================

Conference Call Participants

================================================================================

* Alex Twerdahl

Sandler O'Neill & Partners - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the TrustCo Bank Corp fourth-quarter 2016 earnings call and webcast.

(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 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 statements 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.

--------------------------------------------------------------------------------

Robert McCormick, TrustCo Bank Corp NY - President & CEO [2]

--------------------------------------------------------------------------------

Good morning, everyone. As the host said, I'm Rob McCormick, I thank you for joining us this morning to hear a little more about our Company. As usual, joining me on the call today is Scot Salvador, our Chief Banking Officer and Mike Ozimek, our Chief Financial Officer. Kevin Timmons, who most of you know, is also in the room. The plan is for me to start with a summary of our quarter, hitting the highlights then turn it over to Mike for the detail in the numbers. He will then hand off to Scot, who will discuss our operations, mostly deposits and loan portfolio.

We are happy to report a good fourth quarter here at the Bank. Our net income of $10.8 million was down slightly from third quarter of 2016 but up about 6% from the same quarter last year. Our deposits grew to almost $4.2 billion. This is up about $100 million more than the same period last year. We're happy to report our time deposit dropped by about $50 million, meaning we've been able to grow our base core deposits, reducing our reliance on higher-price time accounts.

Total loans were up to almost $3.4 billion. Growth was driven by our residential mortgage lending operations. That portfolio is solidly over $2.8 billion. Commercial loans were up over last quarter, down year-over-year. I think most of you know our position on commercial loans.

The combination of loans and deposits resulted in slight margin expansion from the same time last year. Our margin 3.11% is a little higher than last year and as I said last quarter, we'll take anything we can get.

Now is a good time to remind the group, all of our business is done in our branches. We do not buy loans or accept broker deposits. We also do not pay premium rates for large CDs. Those that are regular followers of our Company, remember we have a relatively strong liquidity position and a large investment portfolio with short maturities.

Our asset quality continued improvement, as non-performing assets to total assets fell to 0.6% for the quarter. Our loan-loss reserve was at 1.28% of total loans with an allowance coverage ratio that was 1.8 times. We still operate 145 full-service banking offices. Our efficiency ratio of 54.7%, down for the quarter -- down from the same quarter year-end 2015.

Our tangible equity ratio is around 9% this quarter and our total assets held over $4.8 billion. Our return on average assets was 0.9%, up from the prior year. Our return on equity was right around 10%. No update on the formal agreement with the OCC. Great progress has been made. We remain confident we will emerge a stronger Company.

We're proud of our fourth-quarter results and look forward to a solid 2017. Now, I will turn it over to Mike for detail on the numbers.

--------------------------------------------------------------------------------

Mike Ozimek, TrustCo Bank Corp NY - CFO [3]

--------------------------------------------------------------------------------

Thank you, Rob. I will now review TrustCo's financial results for the fourth quarter and full year of 2016. Net income increased to $10.8 million in the fourth quarter of 2016 or 6.1% compared to $10.2 million for the fourth quarter of 2015. The full-year 2016 results were $42.6 million compared to $42.2 million for 2015.

Now let's start with the changes in the balance sheet. We saw sustained loan growth during what is normally a quiet banking season due to holidays and the weather. As expected, the sustained growth continues to be concentrated in the residential real estate portfolio. The residential mortgage loan portfolio increased by $50.4 million or 1.79% on average during the quarter and $155.7 million or 5.74% from the fourth quarter of 2015. This continues a positive shift in the balance sheet from lower-yielding investments to higher-yielding quarter loan relationships.

Total average investment securities, which includes the AFS and HTM portfolios, decreased $4.3 million during the quarter or 0.63% and increased $22.8 million or 3.47% on average from the fourth quarter of 2015. As you have heard in prior calls, our focus is on traditional lending and conservative balance sheet management. This has enabled us to be able to produce consistent earnings.

In regards to our investment portfolio, we will continue to take advantage of opportunities as they are presented during 2017 and beyond, fully aware of the potential for a sustained rising rate environment. During the last month of the quarter, we did take the opportunity to invest $20 million in a mix of mortgage-backed securities and agencies at an average of yield of approximately 2.3%.

On the funding side of the balance sheet, in spite of the third-quarter dip which is a notoriously difficult quarter to attract deposits due to property and school taxes coming due and back-to-school focus for a good portion of our customers, we continued to be successful increasing balances year-over-year. Average core deposits increased $41 million from the fourth quarter of 2015 when compared to the fourth quarter of 2016.

Total average deposits increased $71 million to $4.2 billion compared to the fourth quarter of 2015. All while our cost of interest-bearing deposits decreased 3 basis points to 36 basis points for the quarter compared to the same period last year. These trends continue to reflect our pricing discipline with respect to our CDs and non-maturity deposits.

For the quarter, our net interest margin increased to 3.13%, up from 3.09% compared to the third quarter of 2016. The increase in net interest income comes from both the asset side of the balance sheet as a result of the continued growth on our loan portfolio and a continued decrease in funding costs when compared to the third quarter of 2016 and the fourth quarter of 2015.

The impacts of growth of the balance sheet coupled with the changes we have made in net interest margin have had a pretty significant impact on taxable equivalent net interest income. For the fourth quarter of this year, our taxable equivalent net interest income was $36.9 million or approximately $643,000 greater than it was in the fourth quarter of last year. That is a very sizable increase on a quarter-to-quarter basis and represents a core increase in earnings for the future. But we also note that we continue to retain approximately $623 million on average during the quarter in overnight investments.

In addition to the liquidity that is on our balance sheet, in the current rate environment, we continue to expect that we will have between $300 million and $500 million of loan payments coming in over the next 12 months, along with approximately $125 million of investment securities cash flow during the same time period. This gives us an opportunity and flexibility as we move into 2017.

Our provision for loan losses continued to decrease coming in at $600,000 for the fourth quarter of 2016 compared to $750,000 in the third quarter and $800,000 in the first and second quarter of 2016 and $1.3 million in the same period last year. Asset quality and loan-loss reserve measures remain solid and improving over third quarter of 2016 and fourth quarter of 2015.

As a result, we will continue to expect a level of provision for loan losses. In 2017, we'll continue to reflect improving credit quality of the portfolio and economic conditions of our geographic footprint and ongoing efforts to resolve our existing problem loans. Non-interest income, net of securities gains came in at $4.5 million for the fourth quarter, down compared to $4.7 million in the third quarter of 2016.

As you will remember, included in other non-interest income in the third quarter of 2016 was the $469,000 gain from the sale of one of our Union Street branch locations. The decrease in other non-interest income was partially offset by an increase in fees for services to customers, primarily related to seasonal increase in interchange fees.

In addition, we saw an increase in financial services income. As you know, the most significant reoccurring source of non-interest income is derived from our financial services division. The financial services division had approximately $842 million of assets under management as of December 31, 2016.

Now on to non-interest expense. Total non-interest expense, excluding ORE expense, came in at $22.6 million, up $490,000 from the third quarter of 2016; however, directly in our expected range for the fourth quarter of $22.5 million to $23 million. The gross change of various line items of non-interest expenses is always interesting to explain in the fourth quarter.

We do a couple of reclass entries at year-end so our payroll and benefits expense match up with our W-2s and our final payroll registers. This requires a movement in expense balances for the year from other expenses and equipment expense categories up to salaries. During the fourth quarter of 2016, salaries and benefits expense included an additional $580,000 of salary expense reclassed from equipment and other expense categories to salaries and benefits.

ORE expense came in at $721,000 for the quarter, which is down from last quarter in part due to increased taxes paid on properties owned the third quarter of 2016. ORE expense has consistently stayed within our expectations for the last five quarters. We continue to expect ORE expenses [staying] in the range of approximately $500,000 to $1 million per quarter.

Going forward, given the normal increase in operating costs and the continued increase in salary and benefits expense as employees have taken over the responsibilities of most of the consultants related to the [formal] agreement, we expect total reoccurring non-interest expense, excluding ORE expense, to increase approximately 3% from our prior guided range during 2016, which will give us approximately $23.2 million to $23.7 million per quarter for 2017.

We will see the first quarter of 2017 at a higher end of the range, as in prior years, we will see the cost of increased employee federal and state payroll taxes and the impact of increased healthcare costs, as the new contracted rates for 2017 take effect in Q1 of 2017. As we have stated in the past, we will continue to focus on what we can control by working to identify opportunities to make the processes within the Bank more efficient.

The efficiency ratio came in for the fourth quarter of 2016 at a solid 54.65%, up from the third quarter's 54.11% and down from the 55.37% in the fourth quarter of 2015. It is also worth mentioning, the fourth quarter's efficiency ratio continues to be suppressed by our decision to obtain a large amount overnight investments.

Finally, the capital ratios continue to remain solid. The consolidated tangible equity and tangible asset ratio was 8.88% at the end of the fourth quarter, up from 8.72% compared to the same period in 2015. Now, Scot will review the loan portfolio and non-performing loans.

--------------------------------------------------------------------------------

Scot Salvador, TrustCo Bank Corp NY - Chief Banking Officer [4]

--------------------------------------------------------------------------------

Okay, Mike, thanks. For the fourth quarter, we experienced solid growth in loan portfolio. Total loans increased $43 million and year-over-year have increased $137 million. The quarter's net growth of $43 million represents a 1.26% increase and is significantly above last year's fourth quarter. Residential loans grew by $41 million in the quarter, with commercial loans increasing $1.5 million.

Our Florida market provided 65% of the net growth for the quarter as customer awareness of our product continues to increase and market activity remains strong. The holidays and year-end are traditionally a slower period for mortgage activity. Although down approximately 19% from the third quarter, backlog at year-end is up approximately 8% over last year.

We expect that loan activity will pick up as we progress deeper into the quarter and are pleased to be starting the new year with a backlog ahead of last year's total. Rates have risen modestly in recent weeks and our current 30-year fixed rate is 3.99%. Non-performing loans decreased on both the quarter and the year. At year-end, they stood at $25 million, down from $26 million in September and $28.3 million last year.

On a percentage basis, non-performing loans were equal to 0.73% of total loans in December versus 0.86% last year. The net charge-offs for the fourth quarter decreased year-over-year and on an annualized basis of 0.08% are at their lowest level since the first quarter of 2008. The coverage ratio or allowance for loan-loss in non-performing loans stands at 175% at year-end, up from 158% the prior year. Rob?

--------------------------------------------------------------------------------

Robert McCormick, TrustCo Bank Corp NY - President & CEO [5]

--------------------------------------------------------------------------------

Thanks, Scot. We would be pleased to answer any questions you may have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Alex Twerdahl, Sandler O'Neill.

--------------------------------------------------------------------------------

Alex Twerdahl, Sandler O'Neill & Partners - Analyst [2]

--------------------------------------------------------------------------------

First off, I was wondering if you can just talk about what your expectations are for both loan demand as well as sort of extended duration in your loan portfolio if rates continue to rise? It seems like we've been talking about when rates rise for a long time. But in the case today, it seems like maybe it's a little bit better for the 10-year to continue going higher. What are your expectations for -- have you seen -- you talked about the pipeline a little bit. But have you seen a change really in customer demand? What are your expectations for the duration?

--------------------------------------------------------------------------------

Robert McCormick, TrustCo Bank Corp NY - President & CEO [3]

--------------------------------------------------------------------------------

As Scot said, our backlog is pretty good as we entered 2017, Alex. I think you are seeing the drying up of the refinance, but that's a double-edged sword for us. We get the benefit of not having our portfolio refinanced away from us, so we retain those loans. The purchase volumes and the purchase numbers have been pretty good on that front.

As far as extension, we have not really seen tremendous extension within our portfolio so far. I think we are staying under the same parameters we were staying under.

--------------------------------------------------------------------------------

Alex Twerdahl, Sandler O'Neill & Partners - Analyst [4]

--------------------------------------------------------------------------------

Okay, Great. Then, it seems like really over the last 1.5 years, we've seen kind of a steady decline in the level of reserves to total loans, 2 basis points per quarter, call it, for the last six or seven quarters. Is that something we should expect as we continue into 2017?

--------------------------------------------------------------------------------

Robert McCormick, TrustCo Bank Corp NY - President & CEO [5]

--------------------------------------------------------------------------------

There's going to be a lot of action. Mike can speak to this and Kevin -- but there's going to be a lot of action loan-loss reserve generally speaking. As management, Alex, I don't think you can have a large enough loan-loss reserve. So this constant pressure on both sides to keep that reasonable and rational and on the other side to make sure it's bolstered enough. But we're going to go almost to a loan by loan analysis with regard to reserves, so who knows what will happen when we fully implemented that. (multiple speakers) But I would like to go as high as we possibly could

--------------------------------------------------------------------------------

Alex Twerdahl, Sandler O'Neill & Partners - Analyst [6]

--------------------------------------------------------------------------------

Is there a look-back period in terms of charge-offs that helps to govern where the reserve needs to be?

--------------------------------------------------------------------------------

Mike Ozimek, TrustCo Bank Corp NY - CFO [7]

--------------------------------------------------------------------------------

I think it's about four years, isn't it?

--------------------------------------------------------------------------------

Robert McCormick, TrustCo Bank Corp NY - President & CEO [8]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Alex Twerdahl, Sandler O'Neill & Partners - Analyst [9]

--------------------------------------------------------------------------------

Four years for that, okay. Then finally, it seems like in the last two quarters the tax rate's just jumped up a little bit over 1%. What is the right tax rate to use for 2017?

--------------------------------------------------------------------------------

Robert McCormick, TrustCo Bank Corp NY - President & CEO [10]

--------------------------------------------------------------------------------

Mike?

--------------------------------------------------------------------------------

Mike Ozimek, TrustCo Bank Corp NY - CFO [11]

--------------------------------------------------------------------------------

Where we ended 2016 is where you need to be.

--------------------------------------------------------------------------------

Alex Twerdahl, Sandler O'Neill & Partners - Analyst [12]

--------------------------------------------------------------------------------

38%-ish?

--------------------------------------------------------------------------------

Mike Ozimek, TrustCo Bank Corp NY - CFO [13]

--------------------------------------------------------------------------------

We always look to improve upon that, but that's where we're at right now.

--------------------------------------------------------------------------------

Alex Twerdahl, Sandler O'Neill & Partners - Analyst [14]

--------------------------------------------------------------------------------

Okay. All right. Thanks for taking my questions.

--------------------------------------------------------------------------------

Robert McCormick, TrustCo Bank Corp NY - President & CEO [15]

--------------------------------------------------------------------------------

Thanks, Alex.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

This concludes the question-and-answer session. I would now like to turn the conference back over to Mr Robert McCormick for any closing remarks.

--------------------------------------------------------------------------------

Robert McCormick, TrustCo Bank Corp NY - President & CEO [17]

--------------------------------------------------------------------------------

Thank you for your interest in our Company and enjoy the rest of your week. Thank you.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.