TrustCo Bank Corp NY — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The interim financial statements are unaudited; the independent accountant performed a review, not an audit. Unless otherwise noted, financial amounts below are in millions of dollars.
Business context
TrustCo is a traditional banking company focused primarily on residential real estate lending and deposit funding, with operations concentrated in New York and surrounding states and a smaller Florida portfolio. Management described weak economic conditions, volatile markets, very low interest rates, and ongoing housing-market stress. It cited strong liquidity and capital and said it avoids higher-risk lending practices.
Financial results and key metrics
- Q3 earnings: Net income was $9.2 million, up from $8.4 million a year earlier. Diluted EPS was $0.100, down from $0.109, reflecting the larger share count following the July stock offering.
- Nine-month earnings: Net income was $24.4 million versus $22.4 million; diluted EPS was $0.296 versus $0.292.
- Interest income and margin: Q3 total interest income was $40.6 million versus $40.1 million; net interest income was $34.1 million versus $31.6 million. The fully taxable-equivalent net interest margin was 3.38%, down 4 basis points year over year. For nine months, net interest income was $100.5 million versus $95.2 million and the margin was 3.42%, down 10 basis points.
- Credit costs: Q3 loan-loss provision was $5.1 million, down from $5.9 million; nine-month provision was $14.6 million, down from $17.7 million. Net charge-offs were $2.9 million for Q3 and $8.7 million for nine months, versus $4.3 million and $14.5 million, respectively, in 2010.
- Noninterest items: Q3 noninterest income was $3.8 million versus $4.8 million, including securities gains of $0.2 million versus $0.9 million. Q3 noninterest expense fell to $18.4 million from $19.0 million. Nine-month noninterest income declined to $12.6 million from $14.4 million, while expenses increased to $60.8 million from $58.3 million.
- Balance sheet at September 30: Total assets were $4.193 billion, up from $3.955 billion at December 31, 2010. Gross loans were $2.479 billion versus $2.355 billion; net loans were $2.431 billion. Deposits were $3.681 billion versus $3.554 billion.
- Allowance and asset quality: The allowance for loan losses was $47.8 million, 1.93% of loans, compared with $41.9 million and 1.78% at year-end 2010. Nonperforming loans were $47.0 million, down from $50.6 million at September 30, 2010 and $48.8 million at year-end. There were no loans 90 days past due and still accruing. Nonaccrual loans were $46.7 million; foreclosed real estate was $6.1 million.
- Cash flow and liquidity: Nine-month operating cash flow was $62.0 million; investing activities used $229.9 million, principally reflecting securities purchases and loan growth; financing activities provided $199.5 million. Cash and cash equivalents ended at $475.8 million, up from $444.3 million at year-end.
- Funding and debt: Short-term borrowings were $143.1 million, up from $124.6 million at year-end, and the balance sheet included $10.0 million due to a broker. The filing reports no long-term debt balance. Management said it does not accept brokered deposits.
- Capital: Shareholders’ equity was $337.8 million, up from $255.4 million at year-end. The consolidated equity-to-assets ratio was 8.06%. Bank leverage, Tier 1 risk-adjusted, and total risk-adjusted capital ratios were 8.00%, 15.69%, and 16.96%, respectively.
Material changes versus comparable periods
- Higher average earning assets and lower funding costs supported net interest income growth, while lower asset yields compressed margins. Average interest-earning assets rose to $4.07 billion in Q3 from $3.74 billion; average interest-bearing liability costs fell to 0.72% from 1.02%.
- The company completed a public offering on July 6, 2011, issuing 15.64 million shares at $4.60 per share and receiving $67.6 million in net proceeds. The proceeds were invested in earning assets. The offering increased capital but diluted per-share results.
- Q3 and nine-month credit provisions and charge-offs declined year over year. Management attributed the lower provision in part to reduced net charge-offs.
- Loans grew, particularly residential mortgages and home-equity lines. Securities available for sale increased to $990.6 million from $891.6 million at year-end; the portfolio’s net unrealized loss narrowed to $1.9 million from $9.3 million.
- During Q3, new accounting guidance led the company to classify certain modified loans as troubled debt restructurings (TDRs); $1.3 million of residential loan modifications were included in individually evaluated loans. Management said the impact on the allowance was not material.
Outlook, commentary, risks and unusual items
- No specific earnings, revenue, or margin guidance was provided. Management said results for the interim periods are not necessarily indicative of full-year results.
- Management expects to maintain liquidity and may deploy short-term investments into loans or securities as opportunities arise. It noted that future interest rates and economic conditions remain uncertain and that low rates may pressure asset yields and margins.
- Key disclosed risks include credit deterioration, housing and collateral values, unemployment and local economic conditions, interest-rate movements, competition, regulation and regulatory changes, and market volatility. Florida represented 8.7% of loans but 33.5% of nonaccrual loans at quarter-end; management cited greater housing-related loss severity there.
- Management reported no other-than-temporary impairment losses on securities in Q3. It said corporate bonds were investment grade and current on interest payments, while acknowledging market-price pressure on financial-sector bonds.
- The company recorded $2.9 million of other-real-estate valuation charges for the first nine months of 2011, including $0.2 million in Q3. Q3 2010 tax expense had been reduced by one-time items; the Q3 2011 effective tax rate was 35.9% versus 27.4%.
- Management identified the allowance for loan losses as a critical accounting estimate. It reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no legal proceedings or material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether loan growth, lower funding costs, and net interest income can offset continued yield and margin pressure.
- Trends in nonperforming loans, delinquencies, charge-offs, TDRs, and allowance coverage, especially in Florida and residential real estate.
- Whether the $67.6 million stock-offering proceeds generate sufficient returns to offset share dilution.
- Exposure to short-term funding, deposit mix and maturities, and the sustainability of the reported liquidity and capital levels.
- Potential effects of regulatory changes, low interest rates, securities valuation movements, and economic or housing-market deterioration.