TrustCo Bank Corp NY — Q3 2017 Form 10-Q
Business context and reporting period. TrustCo is a bank holding company with a loan portfolio concentrated in residential real estate and operations in New York and surrounding states and Florida. This unaudited report covers the three and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest income | $42.8m | $40.5m | $125.9m | $120.7m |
| Net interest income | $39.2m | $36.7m | $115.1m | $109.1m |
| Provision for loan losses | $0.55m | $0.75m | $1.70m | $2.35m |
| Noninterest income | $4.9m | $4.7m | $14.1m | $14.5m |
| Noninterest expense | $23.5m | $23.0m | $70.5m | $70.5m |
| Net income | $12.6m | $10.9m | $35.8m | $31.8m |
| Diluted earnings per share | $0.131 | $0.114 | $0.372 | $0.333 |
- Q3 return on average assets was 1.02% versus 0.90%; return on average equity was 11.06% versus 10.05%. For the nine months, those measures were 0.98% versus 0.89% and 10.77% versus 9.97%.
- Tax-equivalent net interest margin increased to 3.26% from 3.09% in Q3, and to 3.20% from 3.10% for the nine months. Q3 average interest-earning assets rose $55.8m to $4.80bn; average loans increased $171m year over year.
- At September 30, total assets were $4.87bn, net loans $3.53bn, deposits $4.17bn, short-term borrowings $216.5m, total liabilities $4.42bn and shareholders’ equity $454.9m. Total assets were nearly unchanged from year-end 2016; net loans grew about $147.5m, while deposits declined about $30.8m.
- Cash and cash equivalents were $624.2m, down from $707.3m at year-end. For the nine months, operating cash flow was $47.5m, investing cash outflow $90.0m and financing cash outflow $40.5m, resulting in an $83.1m decrease in cash and equivalents. Net loan growth used $152.3m of cash.
- The Bank reported September 30 capital ratios of 9.07% Tier 1 leverage, 17.76% common equity Tier 1 and 19.02% total risk-based capital; it met the “well-capitalized” regulatory definition. The company’s consolidated equity-to-assets ratio was 9.34%.
Material changes versus comparable periods
- Q3 net income rose $1.7m year over year, principally on higher net interest income and Financial Services income, partly offset by higher salaries and benefits and other expenses. Nine-month net income rose $4.0m.
- Q3 salary and benefits expense increased $1.4m; management cited higher staffing, the effect of the higher share price on liability-based stock compensation, and other factors. Headcount increased to 815 from 790 a year earlier.
- Nine-month noninterest income fell $0.4m, chiefly because 2016 included $0.7m of securities gains. No securities sale gains were recorded in 2017. Nine-month expenses were approximately flat: higher salaries were offset principally by lower FDIC/insurance and other real estate expenses.
- Q3 Financial Services income included approximately $497,000 from settlements of several estates, above amounts previously accrued. Management described this as a driver of the year-over-year increase.
Outlook, risks and unusual matters
- The filing gives no quantified earnings or revenue guidance. Management intends to grow customer relationships and loans, considers its residential mortgage products competitive, and expects growth to be profitable; it also said it may limit growth or reduce the balance sheet if conditions warrant. Management noted that the low-rate environment narrows margins on incremental growth.
- The Bank remains subject to a 2015 formal agreement with the OCC requiring actions involving compliance, governance, internal audit, strategic and capital planning, and loan review. The Bank’s dividends or capital distributions require compliance with its approved capital plan and OCC approval. Management expects elevated implementation costs.
- The loan portfolio is predominantly residential real estate and geographically concentrated: 77.2% was in New York and nearby states and 22.8% in Florida. Management warned that deterioration in housing prices, employment or regional economic conditions could raise credit risk.
- Nonperforming loans were $24.6m, down from $25.1m at year-end 2016 and $26.0m at September 2016. The allowance for loan losses was $44.1m, or 1.23% of loans, versus 1.28% at year-end. Nine-month net charge-offs were $1.5m, compared with $3.2m in 2016.
- Available-for-sale securities had a $5.8m net unrealized loss at September 30, versus $11.3m at year-end, which management attributed to interest-rate movements rather than credit quality; management did not consider the securities other-than-temporarily impaired. Interest-rate risk remains material, and the filing’s model shows fair value of capital declining as rates rise.
- The company declared a Q3 dividend of $0.065625 per share, with a reported payout ratio of 50.07%. Dividend capacity depends on the Bank’s capital-plan compliance and regulatory approval. Management also identified interest-rate changes, competition, regulatory constraints, credit quality, real-estate values, and operational, vendor and cybersecurity events among relevant risks.
- The auditor performed a review of interim financial information, not an audit, and reported no material modifications it believed were needed for GAAP conformity. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The filing reports no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Progress and costs under the OCC formal agreement, including the approved capital plan and restrictions or approval requirements affecting dividends.
- Whether loan growth can continue without deterioration in delinquencies, nonperforming loans, charge-offs or allowance adequacy.
- Sustainability of the improved net interest margin as rates, deposit costs, loan yields and the yield curve change.
- How much Q3 Financial Services income from estate settlements was nonrecurring, and whether salary and staffing costs continue to rise.
- Liquidity and funding trends, including deposit levels, short-term borrowings and the deployment of substantial cash and short-term investments.