TrustCo Bank Corp NY — Q1 2012 Form 10-Q
Business context and reporting period. TrustCo is a regional bank holding company focused on traditional banking, with lending and deposit operations in New York and nearby states and Florida. This unaudited quarterly report covers the three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011 unless noted. The interim financial statements were reviewed by the independent accountant, not audited.
Financial performance and condition
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $39.3 | $39.6 in Q1 2011 |
| Net interest income | $33.4 | $32.5 in Q1 2011 |
| Net interest margin | 3.23% | 3.40% in Q1 2011 |
| Noninterest income | $4.5 | $4.3 in Q1 2011 |
| Noninterest expense | $20.6 | $20.8 in Q1 2011 |
| Provision for loan losses | $3.1 | $4.6 in Q1 2011 |
| Net income | $8.9 | $7.4 in Q1 2011 |
| Diluted earnings per share | $0.095 | $0.096 in Q1 2011 |
| Total assets | $4,374.4 | $4,243.6 at Dec. 31, 2011 |
| Deposits | $3,851.4 | $3,736.0 at Dec. 31, 2011 |
| Cash and cash equivalents | $525.5 | $532.9 at Dec. 31, 2011 |
| Net loans | $2,475.8 | $2,472.6 at Dec. 31, 2011 |
| Short-term borrowings | $159.0 | $147.6 at Dec. 31, 2011 |
| Shareholders’ equity | $344.6 | $338.5 at Dec. 31, 2011 |
- Cash flow: Operating activities provided $11.5 million; investing activities used $140.4 million, largely reflecting securities purchases net of sales, calls and maturities; financing activities provided $121.4 million, including $115.4 million of deposit growth. Cash and cash equivalents decreased $7.5 million during the quarter.
- Credit quality: Nonperforming loans were $51.2 million, versus $48.8 million at year-end 2011 and $50.4 million in Q1 2011. The allowance for loan losses was $48.5 million, or 1.92% of loans. Net charge-offs were $3.3 million, up from $2.8 million in Q1 2011.
- Capital and distributions: TrustCo Bank’s Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 7.74%, 15.87% and 17.13%, respectively; each exceeded the stated “well capitalized” regulatory threshold. The company’s consolidated equity-to-assets ratio was 7.87%. The quarterly dividend was $0.065625 per share; the reported payout ratio was 68.9%.
Material changes versus comparable periods
- Net income increased about 21% year over year, while diluted EPS was slightly lower. Management attributed the difference in part to the larger share base following the July 2011 stock offering, which raised $67.6 million net.
- Net interest income rose $0.8 million despite lower interest income, as interest expense declined more. The margin fell 17 basis points to 3.23%; average interest-earning assets grew to $4.17 billion, while their average yield declined to 3.79% from 4.14%.
- The loan-loss provision decreased $1.5 million year over year, but net charge-offs increased. Nonperforming loans rose from year-end, with commercial and residential balances both contributing.
- Net securities transaction gains increased to $0.7 million from $0.3 million. Other comprehensive income was $2.5 million, primarily reflecting unrealized gains on available-for-sale securities; the portfolio’s net unrealized position shifted to a $2.5 million gain from a $1.7 million loss at year-end.
- Deposits increased $115.4 million from year-end. Available-for-sale securities rose to $1.09 billion from $917.7 million, while held-to-maturity securities declined to $178.9 million from $216.3 million.
Outlook, management commentary and risks
- The filing provides no quantified company earnings or revenue guidance. Management described a subdued and uncertain economic environment, with continued housing-market and foreclosure concerns, unemployment, volatile markets and uncertainty about future interest rates and regulation.
- Management said it would maintain substantial liquidity and invest short-term funds in loans or securities as suitable opportunities arise. It cited the Federal Reserve’s expectation, as described in the filing, that exceptionally low federal funds rates could persist through at least late 2014; this is not company guidance.
- Interest-rate risk is a central exposure. Management reported that its modeled fair value of capital as a percentage of fair value of assets was 14.28% at current rates, 14.30% with a 100-basis-point increase, 12.58% with a 400-basis-point increase, and 12.24% with a 100-basis-point decrease. The filing cautions that model assumptions are uncertain.
- Florida accounted for 9.6% of gross loans but 29.9% of nonperforming loans; management noted greater housing-price declines and loss severity in Florida. It also warned that worsening housing prices or employment in its markets could raise credit risk and nonperforming loans.
- The securities portfolio had unrealized losses in some positions, but management reported no other-than-temporary impairment losses in the quarter. It said the affected securities were investment grade or government-sponsored and that it did not expect to have to sell them before recovery.
- No legal proceedings were reported, and the filing stated there were no material changes to the risk factors in the 2011 Form 10-K. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the 17-basis-point decline in net interest margin continues, particularly as asset yields reset lower and deposit costs approach a floor.
- Trends in nonperforming loans, charge-offs and allowance adequacy, including the disproportionate contribution of Florida to problem loans and losses.
- The composition, valuation and credit quality of the expanded securities portfolio, and the sustainability of securities gains and unrealized gains.
- The effect of the 2011 stock offering on per-share earnings and the sustainability of the dividend relative to earnings and capital needs.
- Liquidity and funding developments, including deposit growth, short-term borrowings and the deployment of substantial short-term investments.