Business context and reporting period
TrustCo Bank Corp NY is a bank holding company focused on traditional banking, with lending and deposit operations in New York and surrounding states and Florida. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods unless otherwise stated. The independent accountant performed a review, not an audit.
Financial performance and position
Amounts below are in millions of dollars except per-share data and ratios; reported financial statement amounts are in thousands.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $33.5 | $33.9 | $67.1 | $67.3 |
| Provision for loan losses | $2.0 | $3.0 | $4.0 | $6.1 |
| Noninterest income | $5.9 | $4.6 | $10.5 | $9.6 |
| Noninterest expense | $21.9 | $21.0 | $43.4 | $42.2 |
| Net income | $9.8 | $9.1 | $18.9 | $18.0 |
| Diluted EPS | $0.104 | $0.097 | $0.201 | $0.192 |
- Net income rose about 8% for the quarter and 5% for the half-year. The quarter’s reported noninterest income benefited from $1.4 million of net securities gains, versus $0.1 million a year earlier.
- Tax-equivalent net interest margin was 3.10% in Q2, down from 3.16%; for the first half it was 3.15%, down from 3.19%. Tax-equivalent net interest income declined $0.4 million in Q2 and $0.3 million for the half-year. Loan growth was offset by lower asset yields.
- At June 30, total assets were $4.44 billion, loans net of allowance were $2.71 billion, deposits were $3.89 billion, and shareholders’ equity was $348.6 million. Since December 31, 2012, loans increased about $78 million and deposits about $89 million.
- Cash and cash equivalents totaled $628.8 million, up from $544.0 million at year-end. Six-month operating cash flow was $31.5 million; investing cash outflow was $41.0 million and financing cash inflow was $94.3 million. Short-term borrowings were $176.3 million, up from $159.8 million at year-end. The filing reports no long-term debt balance in the presented balance sheet.
- The allowance for loan losses was $47.6 million, or 1.72% of loans, versus $47.9 million and 1.79% at year-end. Six-month net charge-offs were $4.3 million, compared with $6.8 million a year earlier.
- TrustCo Bank’s June 30 capital ratios were 8.00% Tier 1 leverage, 16.41% Tier 1 risk-based, and 17.67% total risk-based; each exceeded the filing’s well-capitalized thresholds. The company declared a $0.065625-per-share Q2 dividend.
Material changes, outlook, and risks
- Rising market rates materially reduced the fair value of available-for-sale securities: the portfolio’s net unrealized position moved from a $3.3 million gain at March 31 to a $24.4 million loss at June 30. The resulting six-month after-tax other comprehensive loss was $18.4 million; it reduced equity but was not reported as a credit impairment. Management recorded no other-than-temporary impairment losses and attributed the declines primarily to interest rates.
- Nonperforming loans were $43.4 million at June 30, down from $49.9 million at March 31 and $51.5 million at June 30, 2012. Nonperforming assets also included $10.3 million of foreclosed real estate. Management cited improving Florida conditions and lower nonperforming loans as factors behind the lower loan-loss provision, while noting continued exposure to local economic conditions and collateral values.
- Q2 noninterest expense increased $0.8 million year over year, mainly because other-real-estate expense rose $0.8 million, including a large commercial property write-down. A separate disclosure reports $1.1 million of ORE write-downs for the first half.
- Management gave no specific earnings or financial forecast. It expects to pursue profitable relationship and loan growth, but said low rates have narrowed margins and that it may limit growth or shrink the balance sheet if warranted. Rate movements, prepayments, deposit competition, credit conditions, regulation, and economic conditions could affect results. Under the company’s model, fair value of capital relative to assets was estimated at 18.19% at current rates and 11.63% under an instantaneous 400-basis-point increase; model assumptions are uncertain.
- After quarter-end, TrustCo agreed to sell a planned Florida regional operations center for approximately $5.0 million; its June 30 carrying value was approximately $3.2 million. Closing was expected in Q3 2013, with a possible leaseback of part of the building.
- The company said it expected to continue meeting the “well capitalized” definition under new Basel III rules, while evaluating their impact. It identified no material change in previously disclosed risk factors; legal proceedings were reported as none.
Important facts for investors to verify
- Whether margin pressure and lower loan yields continue, and how higher market rates affect securities values, funding costs, and mortgage demand.
- Whether the declines in nonperforming loans, charge-offs, and Florida credit losses persist; monitor ORE balances, write-downs, and allowance coverage.
- How much reported earnings depend on securities gains and whether such gains recur.
- Deposit mix and maturities, short-term borrowing levels, and liquidity under changing rate and funding conditions.
- Completion and final economics of the Florida operations-center sale, including any leaseback terms.
- Capital-rule implementation and the sensitivity of the company’s capital and earnings to the assumptions in its interest-rate model.