TRUSTCO BANK CORP N Y quarterly report, Q2 FY2016

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TrustCo Bank Corp NY — Q2 2016 Form 10-Q

Business context and period. TrustCo is a regional bank holding company focused on traditional banking, particularly residential real estate lending, with operations in New York and surrounding states and Florida. This unaudited report covers the quarter and six months ended June 30, 2016; comparative operating results are for the corresponding 2015 periods. Unless otherwise noted, dollar amounts below are in millions.

Financial performance and condition

  • Q2 earnings: Net income was $10.5 million, versus $10.7 million a year earlier; diluted EPS was $0.109, versus $0.113. Return on average assets was 0.88% (0.91% prior year) and return on average equity was 9.88% (10.66%).
  • First-half earnings: Net income was $20.9 million, versus $21.4 million; diluted EPS was $0.219, versus $0.225. Return on average assets was 0.88% (0.92%) and return on average equity was 9.93% (10.78%).
  • Revenue and margin: Q2 net interest income was $36.3 million, up from $35.7 million; noninterest income was $5.2 million, up from $4.5 million. First-half net interest income was $72.5 million, versus $70.8 million, and noninterest income was $9.8 million, versus $9.1 million. Tax-equivalent net interest margin rose to 3.09% in Q2 from 3.07%, and to 3.11% for the first half from 3.08%.
  • Expenses and provision: Q2 noninterest expense rose to $24.0 million from $22.1 million; first-half expense rose to $47.4 million from $44.0 million. Loan-loss provision was unchanged at $0.8 million for Q2 and $1.6 million for the first half, year over year.
  • Balance sheet at June 30: Total assets were $4.83 billion, up from $4.73 billion at year-end 2015. Gross loans were $3.34 billion, up from $3.29 billion; deposits were $4.18 billion, up from $4.10 billion. Cash and cash equivalents were $758.4 million, versus $718.2 million. Short-term borrowings were $190.5 million, slightly below $191.2 million at year-end.
  • Capital and equity: Shareholders’ equity was $430.3 million, compared with $413.3 million at year-end. The Bank’s June 30 capital ratios included an 8.65% Tier 1 leverage ratio and an 18.58% total risk-based capital ratio; both exceeded the filing’s “well capitalized” thresholds. The company declared a Q2 dividend of $0.065625 per share.
  • Cash flow, first half: Operating cash flow was $27.2 million, compared with $30.8 million in 2015. Investing activities used $55.4 million (versus $99.4 million); financing activities provided $68.4 million (versus $75.7 million). Cash and cash equivalents increased $40.2 million.

Material changes versus comparable periods

  • Net income and EPS declined modestly in both Q2 and the first half, despite higher net interest income and margin. Higher average earning assets, including loan growth, supported net interest income.
  • Q2 noninterest income benefited from $668,000 of securities gains, with no such gains in Q2 2015. First-half securities gains were $668,000, up $419,000 from the prior-year period.
  • Expense increases were notable: Q2 FDIC and other insurance costs rose $932,000 and salaries and benefits rose $770,000. First-half increases included $1.9 million in insurance, $1.3 million in salaries and benefits, and $671,000 in professional services. Management attributed higher staffing costs partly to headcount growth from 760 to 801.
  • Asset quality was broadly stable: nonperforming loans were $28.2 million, versus $28.3 million at year-end 2015 and $32.5 million at June 30, 2015. The allowance for loan losses was $44.1 million, or 1.32% of loans, versus $44.8 million and 1.36% at year-end. Net charge-offs were $1.1 million in Q2.
  • Available-for-sale securities moved from a $7.5 million net unrealized loss at year-end to a $4.4 million net unrealized gain at June 30, largely reflecting interest-rate movements. The portfolio had $86,000 of gross unrealized losses; management attributed them to rates, not credit quality, and reported no other-than-temporary impairment.

Outlook, commentary, risks and unusual items

  • Management described a low-rate, flattening yield curve and persistent economic and regulatory uncertainty. It expects to pursue loan and relationship growth where profitable, but said narrow incremental margins could lead it to limit growth or reduce the balance sheet if conditions warrant. No specific earnings or growth guidance was provided.
  • The Bank remains subject to a formal OCC agreement entered into in July 2015, requiring actions covering compliance, governance, internal audit, strategic and capital planning, and loan review. The company estimated compliance costs at approximately $5.0 million annually; related legal and consulting costs contributed to elevated professional-services expense.
  • The agreement restricts Bank dividends and capital distributions: they require compliance with the approved capital plan and OCC approval under applicable rules. This may affect the holding company’s ability to receive capital from the Bank and pay shareholder distributions.
  • Management cited potential risks from interest-rate changes, credit quality and property values, regional economic conditions, competition, regulatory actions, and the ability to originate residential mortgages and control expenses. It noted that deterioration in housing prices or employment could increase credit risk.
  • The securities gain and the change in unrealized securities values affected reported income and comprehensive income, respectively. The company reported no material legal proceedings and no material changes to previously disclosed risk factors. The interim financial statements received an independent accountant’s review, not an audit.

Important facts for investors to verify

  • Progress, remaining requirements, and potential consequences under the OCC formal agreement, including the estimated annual compliance cost and distribution restrictions.
  • Whether expense growth—especially insurance, staffing, and professional services—continues to outpace revenue growth.
  • Trends in residential mortgage and other loan growth, delinquency and nonperforming-loan levels, charge-offs, and allowance adequacy.
  • How interest-rate and yield-curve changes affect net interest margin, securities values, loan demand, and deposit costs.
  • Liquidity and capital positions, including the Bank’s ability to meet regulatory capital-plan requirements and the implications for parent-company dividends.