TrustCo Bank Corp NY — Q1 2014 Form 10-Q
Period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013 unless otherwise noted. Amounts are in U.S. dollars. Interim financial statements are unaudited; the independent accountant conducted a review, not an audit.
Business context and results
TrustCo is a regional bank focused on traditional banking, with lending markets in New York and surrounding states and Florida. Residential real estate loans are its principal loan product. Management described subdued economic conditions and a low-rate environment, while noting that a somewhat steeper yield curve can benefit mortgage lenders.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Interest and dividend income | $38.4 million | $37.5 million in Q1 2013 |
| Net interest income | $34.7 million | $33.6 million in Q1 2013 |
| Net interest margin, taxable-equivalent | 3.13% | 3.19% in Q1 2013 |
| Provision for loan losses | $1.5 million | $2.0 million in Q1 2013 |
| Noninterest income | $5.8 million | $4.6 million in Q1 2013 |
| Noninterest expense | $20.8 million | $21.6 million in Q1 2013 |
| Net income / diluted EPS | $11.0 million / $0.116 | $9.2 million / $0.097 in Q1 2013 |
| Net cash from operating activities | $2.8 million | $7.8 million in Q1 2013 |
| Total assets | $4.58 billion | $4.52 billion at December 31, 2013 |
| Loans, net | $2.89 billion | $2.86 billion at December 31, 2013 |
| Deposits | $3.99 billion | $3.93 billion at December 31, 2013 |
| Cash and cash equivalents | $733.1 million | $583.0 million at December 31, 2013 |
| Short-term borrowings | $195.4 million | $204.2 million at December 31, 2013 |
| Shareholders’ equity | $371.8 million | $361.8 million at December 31, 2013 |
Net interest income after the loan-loss provision was $33.2 million, versus $31.6 million a year earlier. The allowance for loan losses was $47.0 million, or 1.60% of loans, compared with $47.7 million, or 1.64%, at year-end. Nonperforming loans were $44.9 million, up from $43.4 million at year-end but below $49.9 million a year earlier; there were no loans 90 days past due and still accruing interest.
The Bank reported a Tier 1 leverage ratio of 8.10% and total risk-based capital of 17.93%; TrustCo’s consolidated equity-to-assets ratio was 8.12%. The company declared a quarterly dividend of $0.065625 per share, with a stated payout ratio of 56.4% based on Q1 EPS.
Material changes and notable items
- Net income increased about 20% year over year. Management attributed the improvement to higher average earning assets, a lower loan-loss provision, increased noninterest income, and lower expenses; the net interest margin declined six basis points.
- Average loans grew by $233.5 million year over year, while the average loan yield fell 18 basis points to 4.52%. Average interest-bearing liabilities increased, but their average cost declined to 0.40% from 0.43%.
- Noninterest income included a $1.6 million gain from the sale of a planned Florida regional administrative building. Excluding that gain, fees and other income were lower year over year, mainly due to lower interchange fees and overdraft charges.
- Expenses included a $529,000 reversal of an accrual for 2013 bonuses. The company also recorded a $200,000 deferred-tax-asset write-down related to New York State tax-law changes; the effective tax rate rose to 39.2% from 37.4%.
- Available-for-sale securities had a $22.6 million net unrealized loss at quarter-end, improved from $30.1 million at year-end, principally reflecting market interest-rate changes. The company recognized no other-than-temporary impairment losses in the quarter.
- Cash and cash equivalents increased by $150.1 million during the quarter. Operating cash flow was lower year over year; investing cash flows included substantial securities calls and maturities, and financing cash flows included deposit growth and dividend payments.
Outlook, risks, and contingencies
No formal earnings or financial guidance was provided. Management said it remains focused on loan and relationship growth but may limit growth or reduce the balance sheet if conditions warrant; it also noted that low rates constrain margins on incremental growth. Management expected the company to meet forthcoming Basel III capital requirements based on its current balance sheet and capital levels, while acknowledging that the rules could affect returns, capital needs, dividends, and repurchases.
Key risks identified include credit deterioration from weaker employment, housing, or local economic conditions; changes in interest rates and securities values; the ability to originate residential mortgages and control overhead; regulatory changes and compliance costs; and the possibility that regulators could require higher loss allowances or other actions affecting income or capital. The portfolio is concentrated in residential real estate lending and regional markets. Management described nonperforming loans as manageable, but noted that they remain above historical levels. No legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were considered effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth and deposit growth can continue without further margin compression, given the 3.13% Q1 net interest margin.
- Whether nonperforming loans, charge-offs, and the 1.60% allowance-to-loans level remain appropriate as credit conditions evolve, particularly in residential real estate and Florida.
- How much of the year-over-year earnings increase is repeatable after excluding the building-sale gain and bonus-accrual reversal, and accounting for the tax-law-related deferred-tax write-down.
- The company’s exposure to interest-rate movements through its securities portfolio, mortgage lending, and sizable short-term investment balances.
- The company’s capital and dividend capacity as Basel III requirements take effect, including any regulatory limits on distributions.