TrustCo Bank Corp NY — Q3 2018 Form 10-Q
Business context and reporting period. TrustCo is a regional bank holding company focused on traditional banking, with lending markets in New York and nearby states and Florida. This unaudited report covers the quarter and nine months ended September 30, 2018, compared with the same 2017 periods; balance-sheet comparisons are to December 31, 2017. Crowe LLP conducted an interim review, not an audit.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $40.5 million | $39.2 million | $119.9 million | $115.1 million |
| Provision for loan losses | $0.3 million | $0.6 million | $0.9 million | $1.7 million |
| Noninterest income | $4.5 million | $4.9 million | $13.6 million | $14.1 million |
| Noninterest expense | $24.5 million | $23.5 million | $72.8 million | $70.5 million |
| Net income | $15.2 million | $12.6 million | $45.4 million | $35.8 million |
| Diluted earnings per share | $0.157 | $0.131 | $0.470 | $0.372 |
- Margins and returns: Taxable-equivalent net interest margin was 3.35% in Q3, up from 3.26%; nine-month margin was 3.32%, up from 3.20%. Q3 return on average assets was 1.24% (1.02% prior year) and return on average equity was 12.84% (11.06%).
- Balance sheet at September 30: Total assets were $4.89 billion, versus $4.91 billion at year-end. Gross loans were $3.83 billion, up from $3.64 billion; deposits were $4.20 billion, up from $4.17 billion. Cash and cash equivalents were $465.4 million, down from $612.7 million.
- Funding and liquidity: Short-term borrowings were $176.4 million, down from $243.0 million at year-end. The filing reports substantial cash and securities holdings and access to Federal Home Loan Bank and Federal Reserve borrowing against eligible collateral; it does not use brokered deposits as a regular funding source. No long-term borrowings are shown on the balance sheet.
- Cash flow, nine months: Operating cash flow was $48.8 million; investing activities used $139.4 million, primarily reflecting loan growth; financing activities used $56.7 million. Cash and cash equivalents declined $147.3 million over the period.
- Credit and capital: Nonperforming loans were $23.8 million, down from $24.3 million at year-end. The allowance for loan losses was $44.7 million, or 1.17% of loans, compared with 1.21% at year-end. The Bank’s September 30 ratios included 9.65% Tier 1 leverage and 19.21% total risk-based capital; regulators classified the Bank as well-capitalized. Consolidated equity was $477.1 million.
Material changes versus prior periods
- Q3 net income rose about 21% year over year; nine-month net income rose about 27%. Lower income taxes were a major contributor: Q3 tax expense fell to $4.9 million from $7.4 million, and the effective tax rate was 24.5% versus 36.9%, primarily reflecting the federal tax-rate reduction enacted in 2017.
- Higher loan balances and yields on short-term investments supported net interest income. Q3 average loans grew $241.7 million year over year to $3.78 billion; the average loan yield edged down one basis point to 4.23%.
- Interest expense increased as deposit rates rose, especially on time deposits. Q3 interest expense was $5.2 million versus $3.6 million, while total noninterest expenses also increased.
- Unrealized losses on available-for-sale securities increased: the portfolio’s net unrealized loss was $21.7 million at September 30 versus $8.9 million at year-end. Nine-month other comprehensive loss was $9.8 million, principally from securities valuation changes; management attributed the declines to interest rates rather than credit quality and reported no other-than-temporary impairment.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management says it expects balance-sheet growth to be profitable but notes that the rate environment narrows margins on incremental growth and that it may limit growth or shrink the balance sheet if warranted.
- Management described a flattening yield curve as unfavorable for a portfolio mortgage lender. The 10-year/2-year Treasury spread averaged 0.25% in Q3, down from 0.44% in Q2; the Federal Reserve raised its target range to 2.00%–2.25% on September 26, 2018. Interest-rate changes may affect loan demand, deposit costs, securities values and net interest income.
- Key risks include competition, loan and collateral performance, regional economic conditions, regulatory and capital requirements, vendor or cybersecurity disruptions, and potential changes in funding needs. Management cautioned that weaker housing prices or employment in its markets could increase credit risk. The loan portfolio is concentrated in residential real estate, and 23.8% of gross loans were in Florida.
- The company declared a Q3 dividend of $0.068181 per share; the payout ratio was 43.29%. Bank-to-parent dividends remain subject to regulatory capital and approval requirements.
- Management reported no material changes to the risk factors in the 2017 Form 10-K, no legal proceedings, and effective disclosure controls. The company adopted revenue-recognition guidance in 2018 without a material financial-statement adjustment; it was evaluating the forthcoming lease standard and expected-credit-loss standard.
Important facts for investors to verify
- Whether loan growth and higher asset yields continue to offset rising deposit costs and the pressure from a flatter yield curve.
- The sustainability of earnings growth after separating the benefit of lower tax expense from operating performance.
- Trends in nonperforming and past-due loans, charge-offs, allowance coverage and residential real-estate exposure by geography.
- The effect of further interest-rate moves on the securities portfolio, accumulated other comprehensive loss, capital and liquidity.
- Future deposit mix, cash levels, short-term borrowings, dividend capacity and the eventual impact of the expected-credit-loss accounting standard.