TrustCo Bank Corp NY — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and financial performance
TrustCo is a regional bank focused on traditional banking, with a loan portfolio concentrated in residential real estate and operations in New York and surrounding states and Florida. Interim statements are unaudited; Crowe Horwath LLP reported that its review identified no material modifications needed for GAAP conformity.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $36.7 | $36.1 | $109.1 | $106.9 |
| Net interest margin, taxable-equivalent | 3.09% | 3.08% | 3.10% | 3.08% |
| Provision for loan losses | $0.75 | $0.80 | $2.35 | $2.40 |
| Noninterest income | $4.7 | $4.4 | $14.5 | $13.4 |
| Noninterest expense | $23.0 | $23.5 | $70.5 | $67.5 |
| Net income | $10.9 | $10.6 | $31.8 | $32.1 |
| Diluted EPS | $0.114 | $0.111 | $0.333 | $0.337 |
Q3 return on average assets was 0.90% and return on average equity 10.05%; nine-month figures were 0.89% and 9.97%, respectively. The filing does not provide a conventional operating margin measure; net interest margin is the key bank margin disclosed.
Financial position, cash flow and credit
- Balance sheet at September 30: Assets were $4.813 billion, up from $4.735 billion at year-end 2015. Gross loans were $3.388 billion versus $3.293 billion; net loans were $3.344 billion. Deposits were $4.168 billion versus $4.100 billion.
- Liquidity and funding: Cash and cash equivalents were $664.4 million, down from $718.2 million. Available-for-sale securities were $654.5 million, up from $601.0 million. Short-term borrowings declined to $179.2 million from $191.2 million. The company cites FHLB and Federal Reserve borrowing capacity and brokered CDs as contingent sources; it does not use brokered deposits as a regular funding source.
- Cash flow, nine months: Operating activities provided $41.0 million, investing activities used $133.8 million, and financing activities provided $39.1 million. Cash and equivalents decreased $53.7 million. Net loan growth used $101.3 million.
- Credit quality: Nonperforming loans were $26.0 million, down from $28.3 million at year-end 2015 and $31.9 million at September 2015. There were no loans 90 days past due and still accruing. The allowance for loan losses was $44.0 million, or 1.30% of loans, compared with $44.8 million and 1.36% at year-end. Nine-month net charge-offs were $3.2 million.
- Capital: Shareholders’ equity was $435.6 million, compared with $413.3 million at year-end. The Bank reported a 17.11% common equity tier 1 ratio and 18.37% total risk-based capital ratio; management said the Bank exceeded “well capitalized” thresholds. The declared Q3 dividend was $0.065625 per share.
Changes versus comparable periods
- Q3 net income rose 3% year over year, while nine-month net income declined about 1%; diluted EPS followed the same direction.
- Net interest income increased in both periods, supported by loan growth, a modestly higher margin and lower deposit funding costs. Average loan yield declined, and securities balances and yields were lower.
- Q3 noninterest expense fell year over year, mainly because FDIC and other insurance expense declined $1.1 million, partly offset by $1.2 million higher salaries and benefits. For nine months, expenses rose $3.0 million, including higher salaries and insurance costs.
- Noninterest income increased, including a $469,000 Q3 gain from sale of a former branch site and higher nine-month securities gains.
- Available-for-sale securities shifted from a $7.5 million net unrealized loss at December 31, 2015 to a $4.3 million net unrealized gain at September 30, 2016, primarily reflecting interest-rate changes.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management said balance-sheet growth is expected to be profitable but that low rates constrain margins on incremental growth; it may limit growth or reduce the balance sheet if circumstances warrant.
- Management expects quarterly FDIC expense to remain around Q3 levels, excluding balance-sheet growth. Regulatory-agreement implementation costs are expected to remain elevated, including costs for personnel and systems.
- The Bank has been subject to a formal OCC agreement since July 2015 requiring actions involving compliance, governance, internal audit, strategic and capital planning, and loan review. Bank dividends or capital distributions require compliance with its approved capital plan and OCC approval under applicable rules.
- Key exposures include a flattening yield curve and interest-rate changes, competition for residential mortgage lending, credit and property-value conditions in its markets, and dependence on successful loan origination and expense control. Management noted that deterioration in housing prices or employment could increase classified and nonperforming loans.
- The filing states there were no material changes to previously disclosed risk factors and no legal proceedings reported. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track progress and costs under the OCC formal agreement, including any restrictions on Bank capital distributions and the holding company’s ability to pay dividends.
- Assess whether loan growth and funding-cost reductions can sustain net interest margin as rates and the yield curve change.
- Review credit trends, particularly residential mortgage delinquencies, charge-offs, foreclosures, nonperforming loans and allowance adequacy.
- Separate recurring earnings from the former-branch sale gain and securities gains, and monitor salary, insurance and regulatory-compliance expense trends.
- Confirm liquidity and capital remain adequate as cash balances change, loans grow, and regulatory capital-buffer requirements phase in.