TrustCo Bank Corp NY — Q2 2014 Form 10-Q
Business context and reporting period. Regional bank holding company with lending and deposit operations in New York and surrounding states and Florida. The filing covers the quarter and six months ended June 30, 2014; income and cash-flow figures below are compared with the same 2013 periods unless noted. Dollar amounts are in millions except per-share data. Interim statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Interest income | $39.2 | $37.3 | $77.6 | $74.8 |
| Net interest income | $35.5 | $33.5 | $70.1 | $67.1 |
| Provision for loan losses | $1.5 | $2.0 | $3.0 | $4.0 |
| Noninterest income | $4.5 | $5.9 | $10.3 | $10.5 |
| Noninterest expense | $19.4 | $21.9 | $40.2 | $43.4 |
| Net income | $11.8 | $9.8 | $22.8 | $18.9 |
| Diluted EPS | $0.125 | $0.104 | $0.241 | $0.201 |
- Q2 net interest margin, on a fully taxable-equivalent basis, was 3.16%, up from 3.10%; the six-month margin was 3.15%, unchanged. Q2 taxable-equivalent net interest income increased $1.9 million; the six-month increase was $2.9 million.
- Q2 interest-earning assets averaged $4.49 billion, up $155.5 million year over year. Average loans were $2.97 billion, up $238.8 million; the average loan yield declined 11 basis points to 4.53%. Average interest-bearing liability cost fell to 0.38% from 0.41%.
- Six-month operating cash flow was $24.4 million, down from $31.5 million. Investing activities used $20.4 million; financing activities provided $34.5 million. Cash and cash equivalents ended at $621.5 million, up from $583.0 million at December 31, 2013.
- At June 30, total assets were $4.59 billion, net loans $2.96 billion, deposits $4.00 billion, and shareholders’ equity $385.0 million. From year-end, loans rose about $98.1 million and deposits rose $68.1 million. Available-for-sale securities declined to $811.8 million from $863.8 million.
- Short-term borrowings were $181.5 million, down from $204.2 million at year-end; the filing reports no long-term borrowings in the presented balance sheet. The bank reported strong liquidity, including substantial cash and short-term investments.
- Bank capital ratios at June 30 were 8.21% Tier 1 leverage, 16.57% Tier 1 risk-based, and 17.83% total risk-based. Consolidated equity was 8.39% of assets. The quarterly dividend declared was $0.065625 per share.
Material changes and asset quality
- Net income rose about 21% in Q2 and 21% for the first six months. Higher loan balances, lower loan-loss provisions, and improved net interest income contributed. The six-month provision was $1.0 million lower than in 2013.
- Reported expense comparisons benefited materially from real-estate items: Q2 included a $2.4 million gain on sale of other real estate owned (ORE), compared with ORE expense in the prior-year quarter. The first six months also included a $1.6 million gain on sale of a planned Florida regional administrative building. These items should not be assumed recurring.
- Nonperforming loans were $40.9 million, down from $43.4 million at both December 31, 2013 and June 30, 2013. ORE was $8.3 million versus $8.7 million at year-end. Loans 90 days or more past due and still accruing were nil.
- The allowance for loan losses was $46.9 million, or 1.56% of loans, versus $47.7 million and 1.64% at year-end. Six-month net charge-offs were $3.8 million. Management attributed the lower provision to improving nonperforming-loan and charge-off trends, including better conditions in Florida.
- Unrealized losses on available-for-sale securities improved: net unrealized loss was $11.2 million at June 30 versus $30.1 million at year-end. The filing attributes portfolio valuation changes mainly to interest rates and reports no other-than-temporary impairment losses.
Outlook, commentary, and risks
- Management said it expects balance-sheet growth to be profitable, but noted that low rates narrow margins on incremental growth and that it may limit growth or reduce the balance sheet if appropriate. It continued to favor loan growth over additional securities purchases where loans offered better relative returns.
- Management expects its traditional residential mortgage products to remain competitive, including if long-term rates rise; this is an expectation, not quantified guidance. The filing provides no specific earnings or revenue forecast.
- Key exposures include interest-rate and yield-curve changes, loan origination and credit performance, real-estate collateral values, local economic conditions, competition, and regulatory costs. Management noted that NPLs remained above historical levels but were declining and considered manageable.
- Basel III capital rules were scheduled to begin applying to the company and bank in 2015, with the capital conservation buffer phased in from 2016. Management believed current capital levels would meet the new requirements, while acknowledging possible effects on returns, capital needs, dividends, and repurchases.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- How much of earnings growth is sustainable after separating the ORE and building-sale gains from recurring operations.
- Whether loan growth continues to offset declining yields, and how margins respond to changes in rates and deposit costs.
- Trends in nonperforming loans, charge-offs, collateral values, and allowance coverage, particularly across New York and Florida.
- The durability and deployment of the large cash and short-term investment balance, and the bank’s reliance on short-term borrowings.
- Actual capital treatment under Basel III and any implications for dividends or share repurchases.