TrustCo Bank Corp NY — Q1 2016 Form 10-Q
Business context and period. TrustCo is a bank holding company operating primarily in New York and Florida, with a substantial residential mortgage portfolio. This unaudited report covers the three months ended March 31, 2016; income and cash-flow comparisons are with Q1 2015, while balance-sheet comparisons are with December 31, 2015. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior date |
|---|---|---|
| Interest income | $40.0 | $39.3 in Q1 2015 |
| Net interest income | $36.2 | $35.2 in Q1 2015 |
| Provision for loan losses | $0.8 | $0.8 in Q1 2015 |
| Noninterest income | $4.6 | $4.6 in Q1 2015 |
| Noninterest expense | $23.4 | $21.9 in Q1 2015 |
| Net income / diluted EPS | $10.4 / $0.109 | $10.7 / $0.113 in Q1 2015 |
| Net interest margin, taxable-equivalent | 3.13% | 3.08% in Q1 2015 |
| Return on average assets / equity | 0.89% / 9.98% | 0.93% / 10.91% in Q1 2015 |
| Total assets | $4,763.3 | $4,735.0 at December 31, 2015 |
| Loans, gross / net | $3,301.4 / $3,257.0 | $3,293.3 / $3,248.5 at December 31, 2015 |
| Deposits | $4,142.5 | $4,100.4 at December 31, 2015 |
| Cash and cash equivalents | $760.2 | $718.2 at December 31, 2015 |
| Short-term borrowings | $169.5 | $191.2 at December 31, 2015 |
| Shareholders’ equity | $423.0 | $413.3 at December 31, 2015 |
| Allowance for loan losses | $44.4; 1.34% of loans | $44.8; 1.36% at December 31, 2015 |
| Operating cash flow | $16.1 | $16.8 in Q1 2015 |
| Cash and cash equivalents, net change | Increase of $42.0 | Increase of $78.7 in Q1 2015 |
Material changes and management commentary
- Net income fell about 2.9% year over year despite higher net interest income; higher operating expenses more than offset the benefit of improved margin and earning-asset growth.
- Noninterest expense rose $1.6 million, led by a $0.9 million increase in FDIC and other insurance costs, $0.6 million in professional services, and $0.5 million in salaries and benefits. Professional fees included legal and consulting work related to the OCC agreement. Headcount increased from 747 to 784 year over year.
- Average loans increased $122.3 million year over year to $3.30 billion, while the average loan yield declined 9 basis points to 4.33%. Management attributed the yield pressure to lower market rates on new originations and runoff of higher-rate loans.
- Average available-for-sale securities declined $82.5 million year over year. Management said it temporarily favored cash availability for lending over additional securities purchases. Average short-term investments increased, and their yield rose to 0.50% from 0.25%.
- Nonperforming loans were $30.4 million, up from $28.3 million at year-end but down from $33.5 million a year earlier. Net charge-offs were $1.2 million in both Q1 2016 and Q1 2015. No loans were 90 days past due and still accruing interest.
- The available-for-sale portfolio moved from a $7.5 million net unrealized loss at year-end to a $0.6 million net unrealized gain at quarter-end. The filing attributes unrealized movements principally to interest-rate changes and says impaired securities were not considered other-than-temporarily impaired.
Outlook, risks, and unusual items
- OCC Formal Agreement: TrustCo Bank entered into an agreement with the OCC in July 2015 requiring actions involving compliance, governance, internal audit, strategic and capital planning, and loan review. The company estimates compliance costs of approximately $5.0 million annually. Bank dividends or capital distributions are subject to its capital plan and OCC approval.
- Outlook: No numerical earnings or revenue guidance is provided. Management says it expects balance-sheet growth to be profitable but notes that low rates compress margins on incremental growth and that it may limit growth or shrink the balance sheet if warranted. It expects its residential loan product features to remain competitive, including if long-term rates rise.
- Interest-rate and liquidity risks: Management cited a flattening yield curve, uncertainty over future Federal Reserve actions, competition, and possible effects of changing rates on loan yields, funding costs, and securities values. The company reports significant liquid assets and contingent funding options, including brokered deposits, which it has not used as a funding source.
- Credit and geographic risks: Most loans are residential real estate loans, and borrowers are concentrated in the company’s regional markets. Management warns that weaker housing prices or employment could raise credit risk and nonperforming loans. Residential loans in foreclosure with recorded investment were $14.9 million.
- Capital and distributions: The Bank reported a 17.37% common equity tier 1 ratio and an 18.62% total risk-based capital ratio at March 31, 2016, above the stated “well capitalized” thresholds. The company declared a quarterly dividend of $0.065625 per share; its ability to distribute capital remains subject to regulatory requirements and the OCC agreement.
- Other items: Other real estate owned was $5.7 million; a $0.3 million valuation charge was recorded in Q1. The filing reports no material changes to previously disclosed risk factors, no legal proceedings, and no material changes in internal control over financial reporting. The interim financial statements received an accountant’s review, not an audit.
Important facts for investors to verify
- Progress and remaining milestones under the OCC Formal Agreement, actual compliance costs versus the estimated $5.0 million annual cost, and any effects on Bank capital distributions or the parent-company dividend.
- Whether expense growth—especially insurance, professional services, and staffing—continues, and whether revenue and net interest margin can offset it.
- Trends in nonperforming loans, delinquencies, foreclosures, charge-offs, and allowance adequacy, particularly given the increase in nonperforming loans since year-end.
- Loan growth and yields, deposit mix and pricing, and the company’s substantial short-term investment balance as interest rates and the yield curve change.
- Capital and liquidity metrics, including the effect of regulatory requirements and any changes to contingent funding plans.