TrustCo Bank Corp NY — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated interim statements; filed November 2, 2012. Unless noted, dollar amounts below are in millions.
Financial performance and position
- Third-quarter results: Net interest income was $34.2 million, versus $34.1 million a year earlier. Net income rose to $9.75 million from $9.23 million; diluted EPS was $0.104 versus $0.100.
- Nine-month results: Net interest income was $101.4 million, versus $100.5 million. Net income increased to $27.7 million from $24.4 million, while diluted EPS was unchanged at $0.296.
- Net interest margin: Tax-equivalent margin was 3.21% for Q3, down from 3.38%; for the first nine months it was 3.20%, down from 3.42%. Lower asset yields were partly offset by reduced deposit costs.
- Credit costs: Loan-loss provision was $2.9 million for Q3, versus $5.1 million, and $9.0 million for nine months, versus $14.6 million. Nine-month net charge-offs were $10.4 million, compared with $8.7 million.
- Other income and expenses: Q3 noninterest income increased to $4.6 million from $3.8 million, including $0.67 million of net securities gains. Noninterest expense rose to $20.0 million from $18.4 million. Nine-month noninterest income was $13.1 million versus $12.6 million; expenses were $61.2 million versus $60.8 million.
- Cash flow: Operating cash flow for nine months was $45.9 million, down from $62.0 million. Investing activities used $174.7 million and financing activities provided $38.4 million; cash and cash equivalents declined $90.3 million to $442.6 million.
- Balance sheet at September 30: Assets were $4.32 billion, up from $4.24 billion at December 31, 2011. Net loans were $2.56 billion; deposits were $3.78 billion; short-term borrowings were $161.8 million; shareholders’ equity was $357.6 million.
- Liquidity and capital: Cash and cash equivalents totaled $442.6 million. Bank regulatory capital ratios were 8.00% Tier 1 leverage, 16.16% Tier 1 risk-based, and 17.42% total risk-based, each above the filing’s well-capitalized thresholds. The company’s tangible equity-to-tangible-assets ratio was 8.27%.
- Dividend: The company declared $0.065625 per share for Q3; the reported payout ratio was 63.1% of quarterly EPS.
Material changes and notable items
- Average earning assets expanded, but lower yields—especially on loans and securities—reduced quarterly interest income. Deposit costs also declined, helping contain funding expense.
- Core deposits grew while certificates of deposit declined; management said it adjusted pricing to encourage this shift. The company reported that it does not accept brokered deposits.
- Following third-quarter OCC guidance concerning Chapter 7 borrowers who did not reaffirm discharged debt, TrustCo reclassified approximately $10.1 million of residential loans as troubled debt restructurings (TDRs). About $4.0 million was moved to nonaccrual, and an $804,000 collateral deficiency was charged off.
- Total nonperforming loans were $49.9 million, versus $48.8 million at year-end 2011. Other real estate owned increased to $8.7 million from $5.3 million. The allowance for loan losses was $47.4 million, or 1.82% of loans, compared with $48.7 million, or 1.93%, at year-end.
- Available-for-sale securities had a $10.5 million net unrealized gain at September 30, compared with a $1.7 million net unrealized loss at year-end, primarily reflecting lower long-term rates. No other-than-temporary impairment losses were recognized in 2012.
Outlook, commentary and risks
- No specific earnings or financial guidance was provided. Management said its long-term strategy remains to grow customer relationships, loans and deposits, but noted that low rates have narrowed margins on incremental growth and that it may limit growth or reduce the balance sheet if conditions warrant. Expansion slowed in Q3.
- Management described economic conditions as subdued and the housing market as troubled. It considered current credit risk manageable, but warned that deterioration in local housing prices or employment could increase classified and nonperforming loans.
- Key sensitivities include interest rates and yield-curve movements, credit quality and collateral values, competition, economic conditions in TrustCo’s New York-area and Florida markets, and banking regulation. Proposed Basel III capital rules were still under evaluation.
- Management stated that disclosure controls were effective and that no material changes in internal control over financial reporting occurred during the quarter. The independent accountant performed a review, not an audit, and reported no material modifications needed for GAAP conformity.
- The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the increase in TDRs and nonperforming loans reflects the OCC-driven reclassification, and how subsequent delinquency, collateral and charge-off trends develop.
- Whether the allowance remains adequate as loan balances grow and net charge-offs exceed the prior-year nine-month level.
- Whether margin pressure persists, particularly if asset yields fall faster than deposit costs or the yield curve changes.
- The sustainability and composition of deposit growth, liquidity levels, and reliance on short-term borrowings.
- The eventual effect of Basel III and other regulatory changes on capital requirements and operating results.