TRUSTCO BANK CORP N Y annual report, FY2016

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TrustCo Bank Corp NY — 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016; filed March 3, 2017. TrustCo is a savings and loan holding company whose principal subsidiary, Trustco Bank, provides banking services, primarily in New York and Florida. The Bank accounted for substantially all of TrustCo’s 2016 consolidated net income and average assets.

Financial position and key metrics

  • Capital at December 31, 2016: Bank Tier 1 leverage ratio 8.83%, CET1 ratio 17.24%, Tier 1 risk-based ratio 17.24%, and total capital ratio 18.49%. TrustCo’s corresponding ratios were 9.11%, 17.78%, 17.78%, and 19.04%. The filing states both met applicable capital requirements; the Bank was considered well-capitalized.
  • Other reported figures: Trustco Realty’s net deferred tax asset was $12.1 million. FDIC deposit insurance expense was $4.7 million in 2016, versus $5.0 million in 2015 and $2.6 million in 2014. The Bank held $5.5 million of FHLB of New York stock.
  • Scale: The Bank operated 145 banking offices and 157 ATMs. Trust department assets under trust, custody, or management were approximately $845.7 million.
  • Revenue, net income, cash flow, margins, debt, deposits, loans, liquidity balances, and year-over-year operating changes: The supplied filing text refers these details to the incorporated 2016 Annual Report to Shareholders (Exhibit 13) but does not provide clear values. It likewise does not give a clear dividend amount for the year.

Material changes and notable items

  • The Company became subject to consolidated regulatory capital requirements beginning in 2015; 2016 was the second implementation year of the new capital rules. The capital conservation buffer was being phased in and stood at 0.625% for 2016.
  • In the fourth quarter, 76,134 shares were purchased at an average $5.59 per share, all in connection with employee incentive stock option exercises; none were purchased under a publicly announced repurchase plan.
  • At year-end, TrustCo common stock closed at $8.75. The filing reports 95,862,943 shares outstanding as of March 1, 2017.

Outlook, risks, and contingencies

  • OCC Formal Agreement: The Bank has been subject to a July 21, 2015 agreement requiring actions involving governance, internal audit, strategic and capital planning, loan review, and other areas. Management said required documentation due by the filing date had been submitted, but OCC determines compliance. Noncompliance could lead to further enforcement, and related efforts increase non-interest expense.
  • Interest rates: Management warns that rising funding costs could outpace asset-yield increases, compressing spread and net interest margin. Rate changes can also affect securities values, loan demand, prepayments, and borrower repayment capacity.
  • Credit and geographic concentration: The lending business is weighted toward one-to-four-family first mortgages. Approximately 78.5% of loans were secured by property in New York markets and 21.5% in Florida, exposing the Bank to local economic and real-estate downturns. The allowance for loan losses is identified as a critical estimate.
  • Dividends: Bank distributions to the parent require compliance with the approved capital plan and applicable OCC requirements, and may require regulatory approval or notice. Restrictions could limit TrustCo’s ability to pay shareholder dividends or repurchase shares.
  • Accounting change: CECL was expected to take effect for the Company for fiscal years beginning after December 15, 2019. Management was evaluating the impact and could not estimate the one-time allowance adjustment or total effect.
  • Other risks: The filing highlights regulatory and compliance costs, potential tax-law changes affecting the $12.1 million deferred tax asset, cybersecurity and third-party service-provider risks, competition, liquidity access, and possible loss of REIT tax status. Trustco Realty met the stated REIT tests for 2016.
  • The Company reported no unresolved SEC staff comments, no accountant disagreements, and no pending legal proceeding that management believed would be material to consolidated equity or financial condition. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the fourth quarter.

Important facts for investors to verify

  1. Review Exhibit 13 for audited income, balance-sheet, cash-flow, margin, credit-quality, liquidity, and comparative-period figures omitted from the supplied text.
  2. Check the Bank’s continuing compliance with the OCC Formal Agreement and any effect on operating costs, lending, and capital distributions.
  3. Assess loan-loss reserves and delinquency/nonperforming-loan trends, especially across the New York and Florida portfolios.
  4. Confirm dividend capacity and funding sensitivity under changing interest rates, including regulatory restrictions on Bank-to-parent distributions.
  5. Monitor CECL implementation and any potential deferred-tax-asset remeasurement if tax rates change.