TrustCo Bank Corp NY — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unless otherwise noted, financial amounts below are in U.S. dollars; statements report dollar amounts in thousands. Interim statements are unaudited. The independent accountant performed a review, not an audit, and reported no material modifications needed for conformity with U.S. GAAP.
Business context and results
TrustCo is a regional bank focused primarily on residential real estate lending, with operations in New York and nearby states and Florida. Management emphasized loan growth, traditional deposit funding, liquidity, and conservative underwriting.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest income | $42.1 million | $40.2 million | $83.2 million | $80.2 million |
| Net interest income | $38.5 million | $36.3 million | $75.9 million | $72.5 million |
| Provision for loan losses | $0.55 million | $0.80 million | $1.15 million | $1.60 million |
| Noninterest income | $4.5 million | $5.2 million | $9.2 million | $9.8 million |
| Noninterest expense | $22.9 million | $24.0 million | $46.9 million | $47.4 million |
| Net income | $12.2 million | $10.5 million | $23.2 million | $20.9 million |
| Diluted earnings per share | $0.127 | $0.109 | $0.241 | $0.219 |
Q2 net income increased about 17% year over year; first-half net income increased about 11%. Tax-equivalent net interest margin rose to 3.21% from 3.09% in Q2 and to 3.17% from 3.11% for the first half. Q2 return on average assets was 1.00% and return on average equity 11.05%; first-half figures were 0.96% and 10.62%, respectively.
Financial position, cash flow and credit
- At June 30, total assets were $4.92 billion, up from $4.87 billion at year-end 2016. Net loans were $3.46 billion, up from $3.39 billion; total deposits were $4.21 billion, up from $4.20 billion.
- Cash and cash equivalents were $707.1 million, essentially unchanged from $707.3 million at December 31, 2016. Securities available for sale were $605.5 million. Short-term borrowings were $233.6 million, compared with $209.4 million at year-end; the filing reports no long-term debt balance.
- For the first six months, operating cash flow was $32.2 million, investing cash use was $57.2 million, and financing cash flow was $24.9 million. Cash and cash equivalents decreased by $0.1 million.
- Shareholders’ equity was $447.4 million, versus $432.7 million at year-end. The consolidated equity-to-assets ratio was 9.09%. The Bank’s June 30 capital ratios included 8.91% Tier 1 leverage, 17.36% common equity Tier 1 and 18.62% total risk-based capital; the Bank met the regulatory “well-capitalized” definition.
- Nonperforming loans were $24.5 million, down from $25.1 million at year-end and $28.2 million a year earlier. No loans were 90 days past due and still accruing. The allowance for loan losses was $44.2 million, or 1.26% of loans; Q2 net chargeoffs were $0.44 million.
Changes, outlook and risks
- Higher average earning assets and improved funding costs supported net interest income: Q2 average interest-earning assets rose $105.7 million year over year, while the average rate paid on interest-bearing liabilities fell four basis points to 0.35%. Loan growth was led by residential mortgages, although the average loan yield declined six basis points to 4.23%.
- Noninterest income was lower mainly because Q2 2016 included $668,000 of securities gains; there were no securities gains in Q2 2017. Lower FDIC insurance, equipment and other real-estate expenses partly offset higher salaries and occupancy costs. Management attributed the salary increase principally to higher staffing.
- Management said it expects quarterly FDIC expense to remain near the Q2 2017 level, excluding balance-sheet growth. It sees capacity for profitable balance-sheet growth but may limit growth or shrink the balance sheet if conditions warrant. The filing gives no quantified earnings or revenue guidance.
- 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 said costs to implement recommendations are expected to remain elevated. Bank dividends and capital distributions require compliance with the approved capital plan and OCC approval, creating a potential constraint on the parent company’s dividends.
- Key exposures include interest-rate and yield-curve changes, competition for mortgage lending and deposits, regional economic and property-value conditions, credit losses, and regulatory requirements. Management noted that a flatter yield curve can pressure mortgage lenders. The securities portfolio had a $6.7 million net unrealized loss at June 30, attributed by management to interest-rate changes rather than credit deterioration; management did not consider the affected securities other-than-temporarily impaired.
- Management did not expect pension or postretirement plan contributions in 2017, subject to quarterly review. The filing reports no material change in previously disclosed risk factors and no legal proceedings. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Progress and compliance status under the OCC formal agreement, including its effect on operating costs, capital planning and permitted dividends.
- Whether loan growth, net interest margin and deposit costs remain favorable as rates and the yield curve change.
- Credit trends, especially residential mortgage delinquencies, nonperforming loans, chargeoffs and the adequacy of the allowance.
- Liquidity and funding developments, including the rise in short-term borrowings and the availability of contingent funding sources.
- Implementation effects of forthcoming accounting standards, particularly the expected-credit-loss standard and lease accounting; management was still evaluating the credit-loss standard’s impact.