TrustCo Bank Corp NY — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014 unless noted. TrustCo is a regional bank focused principally on residential mortgage lending, with operations in New York and nearby states and Florida. Financial amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Interest income | $39.325 | $38.446 |
| Net interest income | $35.165 | $34.656 |
| Net interest margin, fully taxable equivalent | 3.08% | 3.13% |
| Provision for loan losses | $0.800 | $1.500 |
| Noninterest income | $4.623 | $5.759 |
| Noninterest expense | $21.857 | $20.801 |
| Income before taxes | $17.131 | $18.114 |
| Net income / diluted EPS | $10.715 / $0.113 | $11.011 / $0.116 |
| Operating cash flow | $15.312 | $2.832 |
- Net income declined about 2.7%. Higher average earning-asset balances and lower loan-loss provision were offset by weaker margin, higher expenses, and lower reported noninterest income.
- Noninterest income fell year over year largely because Q1 2014 included a $1.6 million gain from sale of a planned Florida administrative building. Q1 2015 included $0.249 million in securities gains, versus $0.006 million in Q1 2014. Excluding securities gains and the prior-year building gain, management said noninterest income increased $0.177 million.
- Average loans increased $249.6 million to $3.17 billion, while average loan yield fell 10 basis points to 4.42%. Average interest-earning assets rose to $4.58 billion; their yield declined to 3.45% from 3.48%.
- Noninterest expense increased $1.056 million. Salaries and benefits rose $0.889 million, partly reflecting higher staffing and annual compensation increases; FTE headcount was 747 versus 709. Other real estate expense declined $0.431 million.
- At March 31, total assets were $4.741 billion, loans before allowance were $3.194 billion, deposits were $4.117 billion, and shareholders’ equity was $400.5 million. Cash and cash equivalents totaled $750.1 million, up from $671.4 million at year-end.
- Short-term borrowings were $194.7 million, versus $189.1 million at year-end. The filing reports no long-term debt balance.
- Net cash provided by financing activities was $85.0 million, principally reflecting $84.9 million of deposit growth. Investing activities used $21.6 million, including a $38.7 million net increase in loans, partly offset by securities proceeds. Cash dividends paid were $6.2 million.
Asset quality, liquidity and capital
- Nonperforming loans were $33.5 million, down from $34.0 million at December 31, 2014 and $44.9 million at March 31, 2014. No loans were 90 days past due and still accruing interest.
- The allowance for loan losses was $45.9 million, or 1.44% of loans, compared with $46.3 million and 1.47% at year-end. Net charge-offs were $1.183 million versus $2.179 million in Q1 2014. Management attributed the lower provision to improving nonperforming-loan and charge-off trends and generally better Florida economic conditions.
- Foreclosed real estate was $7.0 million, up from $6.4 million at year-end. Residential mortgage loans in foreclosure had a recorded investment of $18.4 million.
- Management described liquidity and capital as strong. The Bank’s March 31 ratios included 8.39% Tier 1 leverage, 16.57% common equity Tier 1 and 17.83% total risk-based capital; the Bank continued to meet the “well-capitalized” regulatory classification. Consolidated equity to assets was 8.45%.
- The declared quarterly dividend was $0.065625 per share; management reported a 58.1% payout ratio based on Q1 EPS.
Outlook, commentary and risks
- No specific earnings or financial guidance was provided. Management said it expects balance-sheet growth to be profitable, 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.
- Management emphasized its traditional underwriting and residential mortgage strategy, and said it believes its loan features remain competitive. It also noted strong competition and uncertainty about future interest rates; a flatter yield curve is generally unfavorable for mortgage-lender profitability.
- Interest-rate and prepayment risk are principal market risks. The filing’s model showed estimated fair value of capital at 21.07% of fair value of assets at current rates, compared with 22.75% under a hypothetical +100-basis-point shock and 20.85% under a -100-basis-point shock. These are model estimates, not forecasts.
- Other cited risks include deterioration in local economies, housing or collateral values, loan delinquencies and charge-offs; regulatory and compliance costs; competition; and the ability to originate mortgages and control overhead. Management stated that risk factors were not materially changed from the 2014 Form 10-K.
- Unrealized losses on available-for-sale securities were $3.1 million at March 31, versus $6.2 million at year-end; management attributed them primarily to interest-rate changes and recorded no other-than-temporary impairment in Q1.
- The new revenue-recognition standard was under evaluation. Adoption of the residential-foreclosure accounting clarification had no material effect. The interim statements were reviewed by the independent accounting firm, not audited; the review report stated that the firm was unaware of material modifications needed for GAAP conformity.
- The company reported no legal proceedings and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth can continue to offset margin pressure, particularly if rates and the yield curve move unfavorably.
- Trends in nonperforming loans, foreclosures, net charge-offs and allowance coverage, including the portfolio’s geographic and residential real-estate concentration.
- Whether higher staffing, compliance and other operating costs persist, and how recurring noninterest income develops after excluding one-time items and securities gains.
- The sustainability of deposit growth and the liquidity profile, including the $1.040 billion of time deposits maturing within one year.
- Capital and dividend capacity as Basel III requirements and the capital conservation buffer phase in; also verify the effect of regulatory approvals on distributions from the Bank to the parent.