TrustCo Bank Corp NY — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; balance-sheet comparisons are to December 31, 2013 unless stated otherwise. Amounts below are in U.S. dollars. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context and results
TrustCo is a regional bank focused on traditional banking, especially residential real-estate lending, serving New York and nearby states and Florida. Management said it continued to prioritize loan growth while holding funds in short-term investments when securities offered less attractive returns.
- Q3 earnings: Net income was $10.7 million, up 4.5% from $10.3 million; diluted EPS was $0.113 versus $0.109. Return on average assets was 0.92% versus 0.91%; return on average equity was 10.96% versus 11.64%.
- Nine-month earnings: Net income was $33.5 million, up from $29.2 million; diluted EPS was $0.354 versus $0.310.
- Interest income and margins: Q3 interest and dividend income was $39.6 million versus $37.9 million. Net interest income was $35.6 million versus $34.1 million. Taxable-equivalent net interest margin rose to 3.16% from 3.12%; nine-month margin was 3.15% versus 3.14%.
- Other income and expenses: Q3 noninterest income was $4.9 million versus $4.4 million, including $0.4 million of securities gains. Noninterest expense rose to $22.2 million from $20.7 million. For nine months, noninterest expense fell to $62.4 million from $64.1 million, principally reflecting a gain on sale of real estate.
- Balance sheet and liquidity: Assets were $4.58 billion, up from $4.52 billion. Net loans increased to $3.04 billion from $2.86 billion; deposits rose to $3.99 billion from $3.93 billion. Cash and cash equivalents were $630.7 million, compared with $583.0 million. Short-term borrowings declined to $180.0 million from $204.2 million.
- Cash flow, nine months: Operating activities provided $36.2 million, compared with $49.3 million in 2013; investing activities used $6.0 million versus $136.9 million; financing activities provided $17.4 million versus $99.2 million. Cash and cash equivalents increased $47.6 million to $630.7 million.
- Capital and shareholder returns: Shareholders’ equity was $389.5 million, up from $361.8 million; equity equaled 8.50% of assets. The Bank’s Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 8.33%, 16.60%, and 17.86%, respectively. The quarterly dividend was $0.065625 per share; the reported payout ratio was 58.1%.
Material changes and asset quality
- Loan growth and a modest increase in net interest margin supported higher net interest income. Average loans grew by $243 million year over year in Q3, while the average loan yield fell 7 basis points to 4.52%.
- The Q3 provision for loan losses declined to $1.1 million from $1.5 million; nine-month provision was $4.1 million versus $5.5 million. The allowance was $46.5 million, or 1.51% of loans, compared with 1.64% at year-end 2013. Q3 net charge-offs were $1.5 million versus $1.4 million a year earlier.
- Nonperforming loans were $37.1 million, down from $43.4 million at year-end 2013 and $41.7 million at September 2013. There were no loans 90 days past due and still accruing. Foreclosed real estate was $6.4 million versus $8.7 million at year-end.
- Nine-month results included a $1.6 million gain from selling a planned Florida regional administrative building. Securities gains were $0.4 million in 2014’s nine-month period versus $1.4 million in 2013. The available-for-sale portfolio’s net unrealized loss narrowed to $12.8 million from $30.1 million at year-end; management attributed unrealized changes mainly to interest rates and recorded no other-than-temporary impairment losses.
- Other comprehensive income was $10.3 million for the first nine months, compared with a $17.5 million loss in 2013, largely reflecting securities valuation changes.
Outlook, commentary, and risks
- No specific earnings or financial guidance was provided. Management said balance-sheet expansion slowed in Q3 and that it may limit growth or reduce the balance sheet if conditions warrant. It expects its residential mortgage products to remain competitive, including if long-term rates rise.
- Management described liquidity and capital as strong and said it believed the company would comply with Basel III capital requirements taking effect in 2015. The company’s current capital ratios are not necessarily comparable to ratios it will report once subject to the new requirements. A capital conservation buffer will phase in beginning in 2016; falling below it can constrain dividends, repurchases, and certain discretionary payments.
- Interest-rate risk is central: management noted a flatter yield curve, uncertainty about Federal Reserve policy, and the potential for rate changes to affect loan demand, securities values, funding costs, and profitability. The company’s model showed fair value of capital at 22.98% of fair value of assets in the current-rate case, declining to 20.15% under an instantaneous 400-basis-point increase and 20.82% under a 100-basis-point decrease.
- Credit exposure is concentrated in real estate, particularly residential mortgages, and repayment depends partly on economic conditions in the company’s markets. Management said current nonperforming loans were manageable but warned that deterioration in housing prices or employment could increase credit risk and losses. Regulatory changes, competition, operating costs, and the ability to maintain loan growth and liquidity are additional risks.
- Management cited a $200,000 deferred-tax-asset write-down in Q1 due to New York tax-law changes. It also reported that pension and postretirement plan contributions were not expected in 2014, subject to quarterly review.
- The company reported no material change to previously disclosed risk factors, no legal proceedings, and effective disclosure controls; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth and net interest margin can persist as loan yields remain under pressure and the yield curve stays relatively flat.
- Trends in nonperforming loans, delinquencies, charge-offs, and the allowance relative to loan growth and real-estate exposure.
- How much reported earnings depend on unusual real-estate and securities gains, and whether higher operating costs continue.
- The sensitivity of earnings, securities values, and capital to interest-rate changes, and the company’s transition to Basel III requirements.
- Deposit mix, time-deposit maturities, short-term borrowing needs, and the sustainability of liquidity and dividend levels.