TrustCo Bank Corp NY — Q1 2017 Form 10-Q
Business context and reporting period. TrustCo is a bank holding company focused on traditional banking, with a loan portfolio concentrated in residential real estate. This unaudited report covers the three months ended March 31, 2017; income and cash-flow comparisons are with Q1 2016, while balance-sheet comparisons are with December 31, 2016. Unless otherwise noted, amounts below are in millions of dollars.
Key financial results
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $10.947; $0.114 | Q1 2016: $10.409; $0.109 |
| Net interest income; provision for loan losses | $37.400; $0.600 | Q1 2016: $36.182; $0.800 |
| Taxable-equivalent net interest margin | 3.14% | Q1 2016: 3.13% |
| Noninterest income; noninterest expense | $4.727; $24.019 | Q1 2016: $4.572; $23.439 |
| Return on average assets; return on average equity | 0.91%; 10.17% | Q1 2016: 0.89%; 9.98% |
| Operating cash flow | $11.316 | Q1 2016: $16.119 |
| Total assets; net loans | $4,886.743; $3,404.888 | Dec. 31, 2016: $4,868.806; $3,386.696 |
| Deposits; short-term borrowings | $4,198.469; $220.946 | Dec. 31, 2016: $4,196.163; $209.406 |
| Cash and cash equivalents | $683.191 | Dec. 31, 2016: $707.274 |
| Shareholders’ equity | $438.700 | Dec. 31, 2016: $432.686 |
| Allowance for loan losses; nonperforming loans | $44.048; $26.424 | Dec. 31, 2016: $43.890; $25.060 |
Performance and material changes
- Net income increased about 5% year over year. Higher average earning assets and a slightly wider net interest margin lifted net interest income; lower loan-loss provision also helped.
- Average interest-earning assets rose $149.3 million to $4.78 billion. Average loans increased $142.5 million to $3.44 billion, while the average loan yield declined 14 basis points to 4.19%. Average interest-bearing deposit rates fell 4 basis points to 0.35%.
- Noninterest expense rose $580,000. Salaries and benefits increased $1.207 million and other expense rose $558,000; lower FDIC and other insurance expense, down $943,000, partly offset those increases. The effective tax rate was 37.5%, versus 37.0% a year earlier.
- Net charge-offs decreased to $442,000 from $1.164 million in Q1 2016. The allowance was 1.28% of loans, versus 1.34% at March 31, 2016. Nonperforming loans rose from year-end but were below $30.4 million at March 31, 2016.
- Cash and cash equivalents fell $24.1 million during the quarter. Investing activities used $43.3 million, largely reflecting securities purchases and loan growth; financing activities provided $7.9 million. Dividends paid were $6.284 million.
Outlook, risks and unusual items
- No specific earnings or growth guidance was provided. Management said it expects balance-sheet growth to be profitable, but may limit growth or reduce the balance sheet if conditions warrant. Management continues to pursue residential mortgage lending and deposit relationships.
- Interest-rate and margin sensitivity remain central risks. Management cited competition, the low-rate environment, potential changes in Federal Reserve policy, and the possibility that long-term rate movements affect loan demand, securities values and funding costs.
- The Bank remains subject to a 2015 formal agreement with the OCC requiring actions involving compliance, governance, internal audit, strategic and capital planning, and loan review. Management expects related implementation costs to remain elevated. Bank dividends or capital distributions require compliance with the approved capital plan and regulatory approval, which also affects the holding company’s dividend capacity.
- At March 31, the Bank reported capital ratios above well-capitalized thresholds, including a 17.34% common equity Tier 1 ratio and an 18.60% total risk-based capital ratio. The consolidated total risk-based ratio was 19.15%. Management described liquidity and capital as strong; cash and cash equivalents were $683.2 million, with FHLB and Federal Reserve borrowing capacity and brokered deposits available as contingent funding.
- Available-for-sale securities had a $6.1 million net unrealized loss, which management attributed primarily to interest rates and did not consider other-than-temporary impairment. Other real estate owned was $3.2 million; the quarter included $188,000 of valuation write-downs and a $191,000 gain on sale.
- The company adopted share-based payment accounting guidance effective January 1, 2017, with no material impact. The auditor performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity. Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting. No legal proceedings or material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- Progress and any remaining requirements under the OCC formal agreement, including its cost, impact on operations, and restrictions on Bank dividends.
- Trends in nonperforming loans, delinquencies, charge-offs and allowance adequacy, particularly given the portfolio’s residential real-estate concentration and geographic exposure.
- Whether loan growth and asset yields can offset lower loan yields, rate changes and competitive pressure without weakening underwriting or margins.
- Cash-flow trends and reliance on short-term borrowings and contingent funding sources, alongside the company’s liquidity and capital position.
- The sustainability of expense levels, particularly salaries and other expenses, and the stated expectation that quarterly FDIC expense will remain near Q1 levels excluding balance-sheet growth.
- Dividend capacity and approvals under the Bank’s capital plan and OCC requirements; the filing reports a Q1 dividend of approximately $0.0656 per share.