Below is transcript of the TrustCo Bank Corp NY (NASDAQ:TRST)’s Fourth Quarter 2014 Earnings Call, held on Thursday, January 22, 2015, at 9:00 a.m. ET. Mckinley Capital Management, Royce & Associates and D E Shaw was among TrustCo Bank Corp NY (NASDAQ:TRST) shareholders at the end of the third quarter.
TrustCo Bank Corp NY (NASDAQ:TRST) is a savings and loan holding company. The Company’s principal subsidiary is Trustco Bank (the Bank). The Bank is a federal savings bank engaged in providing general banking services to individuals, partnerships, and corporations.
Company Executives:
Robert J.McCormick, President and Chief Executive Officer, TrustCo Bank Corp NY
Michael Ozimek, Chief Financial Officer, TrustCo Bank Corp NY
Scott Salvador, Chief Bank Officer, TrustCo Bank Corp NY.
Analysts:
Alex Twerdahl, Sandler O’Neill
Travis Lan, KBW.
Operator
Good day and welcome to the TrustCo Bank Corp fourth Quarter 2014 earnings call and webcast. All participants will be in listen-only mode. Before proceeding, we would like to mention that this presentation may contain forward-looking information about TrustCo Bank Corp NY that is intended to be covered by this safe harbor for forward-looking statements provided by Private Securities Litigation Reform Act of 1995. After results, could differ materially from those facts forcing such a statement 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 above the date hereof and the company disclaims any obligation to update the information except as may be required by applicable law. Please also note today’s call is being recorded. I would now like to turn the conference over to Mr. Robert J. McCormick, President and CEO. Please go ahead.
Robert J. McCormick, President and Chief Executive Officer
Good morning everyone. I’m Rob McCormick, President and CEO of TrustCo Bank. Joining me on the call today, Michael Ozimek, our new CFO and Scott Salvador, Chief Banking Officer. As always in the room is Kevin Timmons, who most of you deal with on a regular basis, and Bob Cushing ready to pounce if Mike messes up. As most of you know Bob Cushing, our long term CFO has announced his retirement effective 5-30-2015. Bob has been great for our company for about 20 years. We will certainly miss him and wish him well on his retirement. We are lucky to have Michael Ozimek to fill his shoes. Mike has been with us for about 12 years. He is a CPA, a graduate of Siena College and with KPMG prior to joining our company. We have every confidence Mike would be successful and we look forward to him taking a bigger role in our company. In the meantime, Bob and Michael working all this week together until the end of May. Mike has been trained by Bob for the last 12 years. Bob will be around to the end of the year on a consulting basis to help with the transition. If you follow our company, we try to cover things with contingency plans and it’s nice when they work out.
Let’s get to 2014. 2014 was certainly a solid year for TrustCo Bank. Our net income was up over 11% in comparison to 2013, almost $44.2 million. We are very pleased with our results. Our net interest income was up over 4% to about $141.4 million. Our total assets were $4.644 billion at year end, up about $123 million. Our loans are up about $250 million to $3.159 billion . That’s a growth occurred in almost all in our residential loan portfolio. As you know we’re not the biggest commercial lender. We maintain a pretty solid portfolio of customers that we’ve worked with for many many years.
Our total deposits were up over $100 million to $4.320 billion. We open five branches during 2014. As most of you who’d follow us know our branches are important to us, since all of our loans originated and all deposits are gathered through them. I think also most of you know we don’t accept broker deposits and we do not offer premium rates for large CDs. Most of our deposits are core from that perspective. We continue to stay well-capitalized and very liquid. Our investments portfolio is just under $750 million at year-end. We try to keep all maturities relatively short. We continue to see improvement on our non-performing ratios and non-performing loans. And total loans improves to 1.08% and non-performing assets to total assets drop to .87% That probably is starting to work through at this point in time.
Our net interest margin showed improvement in 2014 to 3.16%. Our efficiency ratio remain world class, and a little 50% range. Our return on average assets is .97% at year end, and our return on average acquisition is 11.5%. Overall we are very proud of our results for 2014. Now for the first time , we turn you over to Michael Ozimek, to deal with the numbers. Welcome Mike.
Michael Ozimek, Chief Financial Officer
Thanks Rob. I will now review the financial results for TrustCo for the fourth quarter in the full year 2014. The straight momentum that we built during the year continued into the fourth quarter. We saw sustained long growth during what is normally a quiet banking seasons due to holidays and weather. The loan portfolio increased by $78 million on average during the quarter and $254 million from the fourth quarter of 2013. This is a positive shift in the balance sheet from the lower yielding investments to higher yielding core loan relationships. Net income was approximately $10.7 million for the fourth quarter of 2014 compared to $10.6 million for the same quarter in 2013.
As Rob said, the full year 2014 results were $44.2 million compared to $39.8 million for 2013, an increase of 11%. This resulted in a return on assets of 97 basis point about a full year 2014, 90 basis point for 2013. Return on equity increased in 2014 to 11.54% from 11.15% for the full year of 2013. There are no unusual or one time items, income items recognizing the fourth quarter that will affect the comparability to prior years. As we noted in prior conference calls, there were some one-time income items that occurred in both the first and second quarters of 2014. That would need to be considered when trailing fourth quarter results.
For the quarter our net interest margin increase of 3.17% up from 3.16% in the third quarter resulting in a taxable of 4.91% interest income of $35.7 million this quarter. Compared to $34.5 million in the fourth of 2013. The increase in net interest margin come from the active side of the balance sheet as result of a 2 basis point increase and yield earned on average interest earning assets over the third quarter. Partially offset by an increase in funding cost by 2 basis points up 2 new basis points compared to the 2 the last quarter. Average asset growth was centered in the loan portfolio which residential mortgage alone is increasing to $2.5 billion up $70 million on our third quarter averages and $237 million compared to the same quarter in 2013. Commercial loans, home equity credit lines, installment loans all showed a modest increase during the quarter. We should also note the growth in installment portfolio is primarily related to the launch of our new credit product during the fourth quarter.
Our total investment securities portfolio — that is the securities held to maturity and the securities available for sale — increased by $71 million on an average between third quarter and the fourth quarter of 2014. This is — it was the primarily the impact of maturities and cash flows from our mortgage-backed securities portfolio, coupled with the decision to take advantage of market opportunities as they presented themselves to selectively sell out of loan return duration mortgage-backed securities at a gain of $335 thousand. We also allowed $18. 4 million of our overnight investments uses the funding source for our loan growth. However, overnight investments still remain at a very healthy new level for the fourth quarter, decreasing to $580 million from $598 million in the third quarter. At year end the federal fund bounces approximately $630 million, up about $41 million from the last quarter end.
Fourth quarter deposit balances were again effective by the seasonality in this time of the year. Over all our average funding sources decreased by $14. 4 million between the third and fourth quarters of 2014. This is consistent with prior year fourth quarter results. However as compared to last years fourth quarter, the total average funding sources have increased by $9 million, which shows the success we’ve had during the year in attracting and retaining core banking customers. The total cost of interest rate liabilities increased slightly to 42 basis points during the quarter, which is two basis points more than the third quarter of 2014 in the fourth quarter of last year.
As we’ve noted in prior conference calls we have just about reach the point where current market rates offered on deposit products equals or slightly exceeds the cost of funds in those maturing funds. Therefore, the expansion entries part will come primarily from the asset side of the balance sheet. In addition to the liquidity that is on the balance sheet, 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 $150 million of investment security cash flow during the same time period. You could see our provision for our loan losses come down by $100,000 during the quarter during the quarter as a result of continued positive trends and loan charge-offs. Scott will review this in a minute. But let me say that the decrease in provision for our loan losses which is directly attributable to the improving credit quality of the portfolio and ongoing resolution of existing problem loss.
Non-interest income came at a 4.8 million for the quarter compared to $4.9 million for the third quarter. During the fourth quarter similar to the third quarter, we have approximately $350 thousand of security gains. As you know, our business model do not rely on significant sources of non-interest income. The most significant recurring source of non-interest income is derived from our financial services division which has approximately $918 million of assets under management at year-end. There gross change to various line items to non-interest expenses is always interesting to explain in the fourth quarter. We do a couple of request entries in year-end so that our payroll and benefit expenses match up with our W-2s and our final payroll registers. This requires movement of our expense balances for the year from other expenses and equivalent expense categories off to salaries. But if you start on the bottom line and look at the total non-interest expense, you’ll see that it came in at $22.2 million in the fourth quarter. Flat compared to the third quarter at $20.9 million for the fourth quarter of 2013.
The request entry I mention moves approximately $400 thousand out of other expenses. It reduces equipment expense by $140 thousand and it moves a total of $550 thousand after salary and benefits expense. So if you compare the salary and expense for the third and fourth quarters of 2014, you’ll see an increase of $730 thousand, $550 thousand of which is the request entry from other expenses. That leaves an increase of approximately $180 thousand that really exist between the third and fourth quarters. That increases the result of increase employees salaries due to slightly increase after numbers, regular salary increases and year end bonuses accrued that we pay in the early 2015. There’s majority of the increase in equipment expenses over third quarter is non-repeating expenses for write offs of equipment and items no longer in service.
Other real estate expense is down slightly, which is why we are in line with our cost of holding and disposing our foreclosed properties. During this year we have disposed of almost 75 properties and we currently have 37 properties on our retail inventory. All the other categories of management expenses are pretty much in line with prior quarters on our expectations. Going forward, we would be most comfortable with the range of $21 million to $21.7 million for recurring non-operating expenses. And our operating expense generally in the range of $500 thousand to $1 million per quarter. Our efficiency ratio continues to be very solid. Fourth quarter came in at 53.35%, up slightly from the third quarter’s 52.73%. Obviously fourth and third quarter numbers are negatively affected by by our decision to retain a large amount of overnight investments. And last weeks capital ratios continue to improve and stood at 8.4%, 8.46% at the end of the quarter, up from 7.99% at last year end. Now Scott will review the loan portfolio and non-performing loans.
Scott Salvador, Chief Banking Officer
Okay thanks Mike. Our fourth quarter loan portfolio continue to steadily increase. Home loans grew by $75 million with our year-over-year growth coming in at approximately $250 million. Loans grew by 2.45% in the quarter and 8.59% on the year. These are very solid growth numbers and we are please about the quarter and the year end results. As has been the norm, the day after the quarters long growth was in the residential portfolio, accounting for over $70 million of the increase. Commercial loans increased by $3.6 million in the quarter, but our small installment portfolio also showing $1.2 million in growth as our new credit card product is rolled out. We experience residential loan growth lateral markets with four to this quarter accounting for approximately 42% of our net increase.
Our loan backlog the year end was solid, but down from the third quarter. A decrease in loan activity is normal at this point of the year and the first quarter’s net loan growth is typically the slowest of the year. Most of our recent originations have been in the 4% range for a 30-year mortgage. Non-performing loans and asset quality measurements continue to improve on the quarter with significant improvements posted on year-over- year basis. Non-performing assets fell $3.1 million during the quarter to $40.5 million and declined $11.7 million for the full year. Non-performing loans decreased to 1.08% of loans on year-end versus 1.49% a year earlier. Early stage delinquencies remain low and the quarters net charge up total with the lowest since the fourth quarter of 2008. Finally the covered ratio allowance from our loan losses to nonperforming loans was 136% at year- end versus a 110% a year earlier. Bob?
Mr. Robert J.McCormick, President and Chief Executive Officer
That’s our story and we’d be happy to answer any questions you might have.
Question and Answer Session
Operator
Thank you. We will now begin the question and answer session. The first question comes from Alex Twerdahl with Sandler O’Neill. Please go ahead.
Alex Twerdahl, Sandler O’Neill
Hey good morning guys.
Mr. Robert J.McCormick, President and Chief Executive Officer
Good morning Alex.
Alex Twerdahl, Sandler O’Neill
Could you just — Scott you mentioned that new mortgages are going on around 4% today. Can you remind us back in the middle of 2012 when the tenure really was like in the 150% range where mortgage and rates bottomed for you guys?
Scott Salvador, Chief Bank Officer
Yeah, they bottomed way around this range, Alex, to be honest with you. I mean, we’ve come down low for slightly under 4 — when I say slightly under 4, I’m talking high 3s. I mean, well occasionally really just to stir up the market and kind of draw some attention, we’ve occasionally dropped down a little lower on a couple of days special or one week special type of thing but, really where we bottomed in the past and most recently is right around the 4% range maybe high 3’s.
Alex Twerdahl, Sandler O’Neill
Okay, thank you. And then, can you talk about — as you prepare for potentially the short end of the curve to go higher towards the end of the year, or early next year. Can you talk about going out a little bit longer on CDs which I think is something you’ve been doing over the past couple of months versus maybe putting up some borrowing with some interest rates swaps or something a little bit more sophisticated like that?
Scott Salvador, Chief Bank Officer
We’ve been looking at this CDs from an opportunistic point of view. We view it as a chance not just on the rates side, but on the relationship side too. As Rob said earlier, we don’t have any broker deposits, we don’t buy any CD, so we’re not gonna put a high rate out there just to bring in a flood of money. But as you said, we have been recently putting a little bit higher rate out there. We got an 18-month term. We’ve even gone out as far as the three-year term. Not crazy high but the one-one plus range on a couple of occasions And again, the goal is two-fold, we always think. Number one, we do want to lock-in some of the money for longer terms and we’ve been successful at that. If you look back over the last year or 18 months, our CD portfolio duration has really transitioned . We have moved a lot of that money out longer in terms of maturity which is definitely a good thing. But we do it strategically. We really want to get a customer out of it. Hopefully that we gonna have for the long term. So that’s kind of our basic philosophy on that.
Alex Twerdahl, Sandler O’Neill
Okay, and then just a final question. A couple of years ago when we’re looking at credit, the time frame to foreclose on a property now in Upstate New York I think was over a thousand days. Has that come down meaningfully, recently?
Scott Salvador, Chief Bank Officer
Not significantly Alex. Our bubble has gotten significantly smaller but it might probably just shy of 3 years now. But it has not come down significantly. It’s actually a little bit better in Florida, but we have nothing in Florida. So..
Alex Twerdahl, Sandler O’Neill
Yeah. Okay great.Thank you guys for taking my questions.
Operator
The next question comes from Travis Lan, with KBW. Please go ahead.
Travis Lan, KBW
Thanks good morning guys. Mike, just to clarify your expense guidance. You said the $21 million to $21.7 million quarterly, that’s excluding OREO right?
Michael Ozimek, Chief Financial Officer
That’s correct. That $21 million to $21.7 million and then $500 thousand to $1 million on the OREO side.
Travis Lan, KBW
A lot of thanks. Okay. And then just kind a — if you did talk a little bit about your NIM outlook. Obviously there’s been some interest rate volatility and you guys have been able to offset a lot of that with your balance sheet flexibility. But at what point kinda do you see, if ever, what will it take in the environment to kinda see this NIM get put under pressure?
Michael Ozimek, Chief Financial Officer
We don’t typically forecast our — give guidance on our margin going out. But we’re positioned pretty decent on our balance sheet right now. Picture only go one way, let’s face it, Travis, so the longer we can delay that or put that back and invest that fund I think the better off will be. And we’re not seeing the pressures that you’re describing at this point in time. So, the longer we can take that pause and hold that cash and wait for the rates to rise, I think we’re in a better position. We have more flexibility to move if we have to.
Travis Lan, KBW
Right, yeah and that worked so well up to this time. Just a little bit on the longer outlook. Mike you mentioned that obviously the fourth quarter was strong for a typically seasonally weak quarter.Just what do you guys looking for ’15 in terms of activity?
Michael Ozimek, Chief Financial Officer
You know we see the growth and we had a good ’14, we are really seeing the same thing for ’15. We are reaching $200 million — $225 million range year-over-year. And we expect really the same thing going forward into ’15. And that’s where we see opportunity. Right now you know I mean, on the investment side, where the rates are right now. Were not gonna go hog wild and start you know really investing tons of money in investment side but we see opportunity in the loan side.
Travis Lan, KBW
Okay, alright.
Robert J.McCormick, President and Chief Executive Officer
We got something coming up in this Fall, Travis. We usually fill all the stat out, at least at the annual meeting and usually on the call, the average deposits for branch. That continues to rise, which is really you know at a 144 locations, small increase in every branch is really what we’re banking on and we’ll provide the prosperity for the future.
Travis Lan, KBW
And to this point you haven’t seen deposit competition really pick up, you know from the rate perspective?
Robert J.McCormick, President and Chief Executive Officer
The deposit world is competitive but we do pretty well on that market and the number of locations we have and some of the other services we offer certainly put us in the better competitive position than most of the banks we’re dealing with.
Travis Lan
Got it. Alright thank you guys very much.
Operator
This concludes our question and answer session. I’d like to turn the conference back over to Robert McCormick for any closing remarks.
Robert J.McCormick, President and Chief Executive Officer
Thanks for taking some time this morning and thanks for your interest in the bank. Hope you all have a great day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
