TrustCo Bank Corp NY — Q2 2018 Form 10-Q
Business context and reporting period. TrustCo is a regional bank focused principally on residential mortgage lending and traditional deposit services in New York and surrounding states and Florida. This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods unless otherwise noted. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Interest income | $44.8 | $42.1 | $88.3 | $83.2 |
| Net interest income | $40.1 | $38.5 | $79.4 | $75.9 |
| Provision for loan losses | $0.3 | $0.6 | $0.6 | $1.2 |
| Noninterest income | $4.5 | $4.5 | $9.2 | $9.2 |
| Noninterest expense | $24.1 | $22.9 | $48.3 | $46.9 |
| Net income | $15.4 | $12.2 | $30.2 | $23.2 |
| Diluted EPS | $0.160 | $0.127 | $0.313 | $0.241 |
- Q2 net income increased about 26%; six-month net income rose about 30%. Management attributed the improvement primarily to stronger net interest income and lower income taxes following the federal tax-rate reduction.
- Taxable-equivalent net interest margin was 3.32% in Q2, up 11 basis points year over year, and 3.30% for the first half, up 13 basis points. Q2 return on average assets was 1.26% and return on average equity was 13.26%; first-half figures were 1.24% and 13.17%, respectively.
- Q2 income tax expense was $4.8 million versus $7.3 million; the effective tax rate was 23.8% versus 37.5%. First-half tax expense was $9.5 million versus $13.9 million.
- At June 30, total assets were $4.94 billion, loans before allowance were $3.74 billion, deposits were $4.26 billion, and shareholders’ equity was $470.8 million. Loans increased $104.7 million and deposits increased $82.0 million from year-end 2017.
- Cash and cash equivalents were $586.6 million, down from $612.7 million at year-end. Short-term borrowings were $182.7 million, down from $243.0 million; the filing reports no long-term borrowings. Management cited additional contingent borrowing capacity through the Federal Home Loan Bank and Federal Reserve.
- For the six months, operating cash flow was $33.0 million, investing cash outflow was $69.6 million, and financing cash inflow was $10.5 million. Net cash and cash equivalents declined $26.1 million.
- The allowance for loan losses was $44.5 million, or 1.19% of loans, compared with $44.2 million and 1.21% at year-end. Six-month net charge-offs were $0.3 million; nonperforming loans were $24.2 million, little changed from $24.4 million at year-end.
- Bank regulatory capital ratios included a 9.46% Tier 1 leverage ratio, 17.82% common equity Tier 1 ratio, and 19.08% total risk-based capital ratio. The Bank met the regulatory definition of “well-capitalized.”
Material changes versus prior periods
- Q2 interest income increased $2.7 million and net interest income increased $1.6 million; higher average loan balances and yields on short-term investments supported growth. Average loans rose $228.1 million year over year, while the average loan yield edged down one basis point to 4.22%.
- Deposit interest expense increased, notably on time deposits; the average rate on interest-bearing deposits rose to 0.47% from 0.34% in Q2 2017. Higher funding costs partially offset asset-yield gains.
- Q2 noninterest expense rose $1.2 million, including higher salaries, equipment, and outsourced services; lower FDIC and other insurance expense partly offset these increases. First-half noninterest expense rose $1.3 million.
- The available-for-sale securities portfolio’s net unrealized loss widened to $17.6 million at June 30 from $8.9 million at year-end, primarily due to interest-rate changes. The resulting first-half other comprehensive loss was $6.6 million after tax.
- Cash dividends declared were $0.1312 per share for the first half, including $0.065625 per share in Q2, unchanged from Q2 2017.
Outlook, commentary, risks, and unusual items
- Management said it intends to grow customer relationships and loans and expects growth to be profitable, but noted that the current rate environment narrows the margin on incremental growth and that it may limit growth or reduce the balance sheet if conditions warrant. No specific earnings or financial guidance was provided.
- Management highlighted a flattening yield curve as unfavorable for portfolio mortgage lenders. It also noted that the Federal Reserve’s June 2018 rate increase had only a limited effect on Q2 results; further rate moves, competition for deposits, and deposit repricing could affect margins.
- Key stated risks include local economic and property-value deterioration, loan delinquencies and allowance estimates, competition and loan growth, regulatory constraints, market declines in securities, trade and tariff uncertainty, cybersecurity and third-party vendor disruptions, and the possibility that tax-law benefits are offset by business or competitive effects.
- Management considered securities unrealized losses to reflect interest rates rather than credit deterioration and reported no intent or expected need to sell before recovery. The company reported no material change in previously disclosed risk factors and no legal proceedings.
- The 2017 Tax Cuts and Jobs Act reduced the reported effective tax rate. The company also reclassified $1.346 million of stranded tax effects from accumulated other comprehensive income to retained earnings in Q1 2018. The new expected-credit-loss standard was still under evaluation.
- The independent accountant performed a review of interim financial information, not a full audit, and reported no material modifications that should be made for GAAP conformity.
Important facts for investors to verify
- Whether loan growth and net interest margin can be sustained as market rates, the yield curve, and deposit pricing change.
- Credit quality trends, especially residential delinquencies, nonperforming loans, charge-offs, and the adequacy of the $44.5 million loan-loss allowance.
- The duration and potential effects of the $17.6 million unrealized securities loss, including implications for capital and liquidity if securities were sold.
- Deposit mix and repricing, including the $946.9 million of time deposits scheduled to mature within one year.
- Whether earnings growth remains supported after the one-time comparative benefit of the lower federal tax rate, alongside higher compensation and technology-related expenses.
- Regulatory capital and the Bank’s ability to upstream dividends to the parent; the company’s declared dividend is subject to regulatory and capital restrictions.