TrustCo Bank Corp NY — Q2 2011 Form 10-Q
Business context and reporting period. TrustCo is a New York-based bank holding company focused on traditional banking, with a loan portfolio weighted toward residential real estate. This unaudited quarterly report covers the three and six months ended June 30, 2011; balance-sheet comparisons are to December 31, 2010 unless noted. The independent accountant performed a review, not an audit.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Interest income | $40.5 | $41.1 | $80.1 | $82.4 |
| Net interest income | $33.9 | $31.8 | $66.4 | $63.6 |
| Provision for loan losses | $4.9 | $7.1 | $9.5 | $11.8 |
| Noninterest income | $4.6 | $5.7 | $8.8 | $9.5 |
| Noninterest expense | $21.6 | $19.2 | $42.4 | $39.3 |
| Net income | $7.8 | $7.1 | $15.1 | $14.1 |
| Diluted EPS | $0.100 | $0.093 | $0.196 | $0.183 |
- Margins: Net interest margin, on a fully taxable-equivalent basis, was 3.47% in Q2 versus 3.51% a year earlier; first-half margin was 3.43% versus 3.57%. Q2 net interest income on that basis rose $1.9 million to $34.2 million.
- Balance sheet at June 30: Total assets were $4.07 billion; net loans $2.38 billion; deposits $3.65 billion; short-term borrowings $128.8 million; and shareholders’ equity $268.9 million. Cash and cash equivalents totaled $520.9 million. The filing’s balance sheet lists short-term borrowings; it does not show a separate long-term debt balance.
- Cash flows, first half: Operating activities provided $32.5 million; investing activities used $49.8 million; financing activities provided $94.0 million. Cash and cash equivalents increased $76.6 million to $520.9 million.
- Credit quality: Nonperforming loans were $49.5 million, versus $48.8 million at year-end and $49.9 million at June 30, 2010. Allowance for loan losses was $45.6 million, or 1.88% of loans, versus $41.9 million, or 1.78%, at year-end. First-half net charge-offs were $5.8 million.
- Capital: Tier 1 risk-adjusted capital was 12.88% and total risk-adjusted capital 14.15%; the reported minimum regulatory guidelines were 4% and 8%, respectively. Equity-to-assets was 6.61%. The Q2 dividend was $0.065625 per share; management reported a 65.4% payout ratio based on Q2 EPS.
Material changes versus comparable periods
- Net income increased 9% in Q2 and 8% for the first half. Lower loan-loss provisions helped results; the company attributed the provision decline principally to reduced net charge-offs.
- Average interest-earning assets grew, but yields declined. Q2 average earning assets rose to $3.94 billion from $3.68 billion, while their average yield fell to 4.14% from 4.52%. Lower deposit and borrowing costs partly offset that pressure.
- Q2 noninterest income fell $1.1 million, including a $0.7 million decline in net securities gains. Noninterest expense increased $2.3 million, including $1.3 million more in other real estate expense. First-half noninterest expense rose $3.1 million.
- Compared with year-end, total assets increased $115.5 million, deposits increased $98.4 million, and net loans increased $69.1 million. The allowance rose, while nonperforming loans increased modestly.
- Available-for-sale securities had a net unrealized gain of $2.3 million at June 30; the company reported no other-than-temporary impairment losses for the quarter.
Outlook, commentary, risks and unusual items
- Management provided no specific earnings or revenue guidance. It described subdued economic conditions, continuing housing-market weakness, low interest rates and uncertainty around the economic recovery. The Federal Funds target range remained 0%–0.25%; the 10-year Treasury yield declined to 3.18% during Q2.
- Management said it intended to grow residential lending and maintain significant liquidity, including short-term investments while attractive longer-term opportunities remained limited. It cautioned that lower asset yields and potential fee reductions from regulation could pressure results; fee impacts from regulatory changes could continue for the rest of 2011.
- Credit risks include housing and collateral values, unemployment, delinquencies, and geographic concentration of losses. Florida represented 8.7% of gross loans but 40.6% of nonaccrual loans; management noted greater loss severity there. It characterized nonperforming loans as manageable, while acknowledging possible deterioration if local housing and economic conditions weaken.
- Other identified risks include interest-rate changes, competition, regulatory and tax changes, liquidity access, fiduciary or lender-liability claims, and Trustco Realty’s continued qualification as a REIT. Trustco Realty met the six quarterly asset tests at June 30, 2011; failure to meet applicable REIT or tax requirements could increase the effective tax rate.
- Subsequent equity offering: On July 6, the company sold 15.64 million shares at $4.60 per share, including the underwriters’ over-allotment. Net proceeds were $68.1 million before direct offering costs, intended for general corporate purposes, including investment in the bank. The offering increases the share count and may dilute existing holders.
- Other real estate owned was $4.8 million at June 30, down from $7.4 million at year-end; valuation charges were $1.7 million for Q2 and $2.7 million for the first half. The filing reported no legal proceedings and no material change in previously disclosed risk factors, apart from the additions described in the filing.
Important facts for investors to verify
- Post-offering share count, offering costs, use of proceeds and resulting capital ratios; the filing reported 93,153,585 common shares outstanding as of August 1, 2011.
- Future trends in nonperforming loans, delinquencies, charge-offs and allowance adequacy, particularly for Florida real estate exposures.
- Whether net interest margin pressure continues and whether deposit growth, funding costs and loan growth offset lower asset yields.
- Ongoing foreclosed-property costs and the effect of regulatory changes on customer fees and other revenue.
- Potential changes to REIT qualification, New York tax treatment, and applicable regulatory capital requirements.