TrustCo Bank Corp NY — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Unaudited consolidated interim financial statements were reviewed by Crowe Horwath LLP, not audited.
Financial performance and position
Unless stated otherwise, amounts are in USD millions. Year-over-year comparisons are with Q1 2017.
| Metric | Q1 2018 / March 31, 2018 | Comparison |
|---|---|---|
| Interest income | $43.5 | $41.1, up 5.9% |
| Net interest income | $39.3 | $37.4, up 5.1% |
| Noninterest income | $4.7 | $4.7, broadly unchanged |
| Net income | $14.8; diluted EPS $0.153 | $10.9; diluted EPS $0.114 |
| Net interest margin, taxable-equivalent | 3.29% | 3.14%, up 15 basis points |
| Return on average assets / equity | 1.23% / 13.07% | 0.91% / 10.17% |
| Total assets | $4,931.6 | $4,908.0 at Dec. 31, 2017 |
| Total loans / net loans | $3,667.0 / $3,622.6 | Total loans were $3,636.4 at Dec. 31, 2017 |
| Deposits | $4,235.1 | $4,173.3 at Dec. 31, 2017 |
| Short-term borrowings | $203.9 | $243.0 at Dec. 31, 2017 |
| Shareholders’ equity | $462.1 | $458.3 at Dec. 31, 2017 |
| Cash and cash equivalents | $617.2 | $612.7 at Dec. 31, 2017 |
Net cash provided by operating activities was $12.0 million, investing activities used $24.5 million, and financing activities provided $17.0 million. Cash and cash equivalents increased $4.4 million during the quarter. The allowance for loan losses was $44.4 million, or 1.21% of loans; provision expense was $0.3 million and net charge-offs were $0.09 million.
Material changes versus the comparable period
- Net income rose about 35%, supported by higher net interest income and a $1.8 million reduction in income tax expense. The effective tax rate fell to 24.2% from 37.5%, principally following the federal corporate tax-rate reduction.
- Average interest-earning assets increased $19.9 million to $4.80 billion. Average loans increased $210.9 million to $3.65 billion, while short-term investments and available-for-sale securities declined on average.
- Interest expense increased $0.5 million, with higher costs on time deposits; average interest-bearing deposit cost rose to 0.41% from 0.35%. Noninterest expense increased slightly to $24.2 million: higher outsourced services and occupancy costs were partly offset by lower professional-services expense.
- Net unrealized losses on available-for-sale securities increased: the portfolio’s net unrealized loss was $15.9 million at quarter-end versus $8.7 million at year-end. Other comprehensive loss was $5.3 million after tax, largely reflecting market-rate changes.
- Nonperforming loans were $24.9 million, versus $24.4 million at year-end and $26.4 million a year earlier. Foreclosed real estate declined to $2.2 million from $3.2 million at year-end.
Outlook, management commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management says it intends to grow customer relationships and loans where growth is profitable, while noting that the rate environment has narrowed margins on incremental growth and that it may limit growth or reduce balance-sheet size if warranted.
- Management cites a flattening yield curve as a challenge for a portfolio mortgage lender. Interest-rate exposure is material; the company identifies interest-rate risk as its principal market risk. Its modeled fair value of capital as a percentage of fair value of assets declines from 24.36% at current rates to 20.12% under an instantaneous 400-basis-point rate increase.
- Credit and operating risks include changes in housing and collateral values, local economic conditions, loan delinquencies and loss estimates; deposit competition and funding costs; regulatory requirements; cybersecurity and third-party vendor disruptions; and possible changes in customer demand. The loan portfolio is geographically concentrated, with 76.7% in New York and surrounding states and 23.3% in Florida.
- The OCC terminated the Bank’s July 2015 regulatory agreement, effective February 7, 2018. The agreement had covered compliance, governance, audit, capital planning and strategic planning, among other matters.
- TrustCo adopted revenue-recognition and financial-instrument accounting updates in Q1 without significant financial-statement impact. It also early-adopted guidance to reclassify $1.346 million of stranded tax effects from accumulated other comprehensive income to retained earnings. The company is evaluating the expected impact of the forthcoming leases and credit-loss standards.
- The Bank reported regulatory capital ratios above applicable minimums and met the “well-capitalized” definition. Management said it expected no pension or postretirement plan contributions in 2018, subject to quarterly review. No material changes to previously disclosed risk factors or legal proceedings were reported.
Important facts for investors to verify
- Whether net interest margin can hold up as deposit costs rise and the yield curve remains relatively flat.
- Whether loan growth remains profitable and whether asset quality, delinquencies and the $44.4 million allowance remain appropriate as the portfolio expands.
- How interest-rate movements affect the available-for-sale securities portfolio, accumulated comprehensive loss and reported capital.
- Whether the lower tax rate and resulting earnings improvement persist, and how tax-law effects compare with underlying operating performance.
- Whether liquidity, capital distribution capacity and dividend payments remain supported by bank-level regulatory requirements and funding conditions.