TrustCo Bank Corp NY — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; interim financial statements are unaudited. Unless noted, dollar amounts are in millions. Comparisons are with the corresponding 2014 period or December 31, 2014, as applicable.
Business context
TrustCo is a regional bank focused on traditional banking, with lending concentrated in residential real estate. At June 30, 2015, 81.3% of gross loans were in New York and surrounding states and 18.7% in Florida. Management described a competitive, low-rate environment and continued to prioritize loan growth while maintaining substantial liquid assets.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $35.7 | $35.5 | $70.8 | $70.1 |
| Provision for loan losses | $0.8 | $1.5 | $1.6 | $3.0 |
| Noninterest income | $4.5 | $4.5 | $9.1 | $10.3 |
| Noninterest expense | $22.1 | $19.4 | $44.0 | $40.2 |
| Net income | $10.7 | $11.8 | $21.4 | $22.8 |
| Diluted EPS | $0.113 | $0.125 | $0.225 | $0.241 |
- Margins and earnings drivers: Taxable-equivalent net interest margin was 3.07% in Q2 versus 3.16% a year earlier; for the first half it was 3.08% versus 3.15%. Higher average earning assets lifted taxable-equivalent net interest income by $0.2 million in Q2 and $0.7 million for the half, but lower margins and higher expenses contributed to lower net income. Q2 return on average assets was 0.91% and return on average equity was 10.66%.
- Balance sheet at June 30: Assets were $4,741.3 million, up from $4,644.4 million at year-end; gross loans were $3,242.9 million, up from $3,158.3 million; deposits were $4,137.4 million, up from $4,032.2 million. Cash and cash equivalents totaled $678.6 million. Short-term borrowings were $170.8 million, down from $189.1 million. Shareholders’ equity was $402.5 million.
- Cash flows, first half: Operating activities provided $27.9 million, investing activities used $96.5 million, and financing activities provided $75.7 million. Cash and cash equivalents increased $7.1 million to $678.6 million. Net loan growth used $90.6 million of cash; deposits increased $105.2 million.
- Credit quality: Nonperforming loans were $32.5 million, down from $34.0 million at year-end and $40.9 million a year earlier. The allowance for loan losses was $45.6 million, or 1.41% of loans, versus 1.47% at year-end. First-half net charge-offs were $2.4 million, compared with $3.8 million in 2014. No loans were 90 days past due and still accruing interest.
- Capital and distributions: The Bank’s June 30 ratios included 8.37% Tier 1 leverage, 16.85% common equity Tier 1, and 18.11% total risk-based capital; the filing states the Bank remained well capitalized. TrustCo declared a Q2 dividend of $0.065625 per share; the reported Q2 payout ratio was 58.15%.
Material changes, outlook, and risks
- Net income fell 9.2% in Q2 and 6.0% for the first half year over year. The lower loan-loss provision partly offset expense pressure.
- Q2 noninterest expense rose $2.7 million year over year. A major comparison item was a $2.4 million gain on a foreclosed property recorded in Q2 2014; excluding other real estate expense, Q2 expenses still increased $0.8 million. Professional-services costs also rose, partly due to OCC-related legal and consulting work. First-half noninterest income was lower largely because 2014 included a $1.6 million gain on the sale of a Florida administrative-center property.
- Subsequent regulatory event: On July 21, 2015, the Bank entered into a formal agreement with the OCC following an examination. Required actions include compliance plans, governance and internal-audit improvements, a strategic plan, a revised capital plan, and improvements to loan review. The company estimated compliance costs of $2.5 million to $5.0 million annually. Failure to comply could lead to further supervisory or enforcement action.
- Outlook: The filing provides no specific earnings or revenue guidance. Management said it expected growth to be profitable but may limit growth or reduce the balance sheet if conditions warrant. It highlighted uncertainty around interest rates, loan demand, regulatory requirements, operating costs, and the ability to originate residential mortgages. Management also said pension and postretirement plan contributions were not expected in 2015, subject to quarterly review.
- Other risks and unusual items: Management identified interest-rate risk as the principal market risk. Its modeled fair-value-of-capital-to-assets ratio declined from 22.93% at current rates to 19.73% under an instantaneous 400-basis-point rate increase. The available-for-sale securities portfolio had a net unrealized loss of $8.6 million at June 30, primarily attributed to interest-rate movements; management reported no other-than-temporary impairment losses. The auditor performed an interim review, not an audit, and reported no material modifications it believed were needed.
Investor verification priorities
- Monitor OCC agreement milestones, compliance costs, and any further regulatory action or restrictions affecting capital distributions and dividends.
- Track whether expense growth—especially professional services, staffing, and other real estate costs—continues to pressure earnings.
- Assess trends in nonperforming loans, delinquencies, charge-offs, and allowance coverage as the loan portfolio expands.
- Review net interest margin, deposit pricing and maturities, and securities valuation as interest rates and the yield curve change.
- Confirm capital ratios and dividend capacity under the revised capital plan and applicable regulatory requirements.