TrustCo Bank Corp NY — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited interim statements; the independent accountant performed a review, not an audit. Dollar figures below are in millions unless stated otherwise.
Business context
TrustCo is a regional bank focused on traditional banking, with a loan portfolio weighted toward residential real estate and operations in New York and nearby states, as well as Florida. Management describes the company as a portfolio lender that generally retains originated loans.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $34.1 | $34.2 | $101.2 | $101.4 |
| Provision for loan losses | $1.5 | $2.9 | $5.5 | $9.0 |
| Noninterest income | $4.4 | $5.2 | $14.9 | $14.8 |
| Noninterest expense | $20.7 | $20.6 | $64.1 | $62.8 |
| Net income | $10.3 | $9.8 | $29.2 | $27.7 |
| Diluted earnings per share | $0.109 | $0.104 | $0.310 | $0.296 |
- Margins and earnings drivers: Tax-equivalent net interest margin was 3.12% for Q3, down from 3.21%; for nine months it was 3.14%, down from 3.20%. Lower loan yields offset growth in average earning assets and lower deposit costs. Q3 diluted EPS rose about 5% year over year, supported in part by lower loan-loss provision.
- Balance sheet at September 30: Total assets were $4.459 billion, up from $4.347 billion at December 31, 2012. Gross loans were $2.835 billion, compared with $2.685 billion; net loans were $2.787 billion. Deposits were $3.894 billion, versus $3.804 billion. Shareholders’ equity was $354.4 million, versus $358.8 million.
- Liquidity and funding: Cash and cash equivalents were $555.6 million, including $510.6 million in federal funds sold and other short-term investments. Short-term borrowings were $185.2 million, up from $159.8 million at year-end. Management cited strong liquidity and traditional deposit funding; the company does not accept brokered deposits.
- Cash flow, nine months: Operating cash flow was $49.3 million, investing cash flow was negative $136.9 million, and financing cash flow was positive $99.2 million. Cash and cash equivalents increased $11.6 million to $555.6 million. Dividends paid were $18.5 million.
- Credit metrics: The allowance for loan losses was $47.7 million, or 1.68% of loans, versus $47.9 million and 1.79% at year-end. Nine-month net charge-offs were $5.7 million, down from $10.4 million. Nonperforming loans were $41.7 million, down from $52.7 million at year-end; foreclosed real estate was $9.8 million.
- Capital: The bank reported Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios of 8.06%, 16.25%, and 17.51%, respectively. The company’s consolidated equity-to-assets ratio was 7.95%. The declared Q3 dividend was $0.065625 per share; management reported a 60.4% quarterly payout ratio.
Material changes versus comparable periods
- Net income improved year over year in both Q3 and the first nine months, while net interest income remained nearly flat and net interest margin declined.
- The provision for loan losses fell $1.4 million in Q3 and $3.5 million for the nine-month period. Nonperforming loans and net charge-offs also declined from the respective prior-year levels cited by management.
- Loan growth was concentrated in residential mortgages: average Q3 loans increased $213.7 million year over year, while average commercial loans declined $15.0 million. The average loan yield fell 37 basis points to 4.59%.
- Available-for-sale securities had a net unrealized loss of approximately $23.0 million at September 30, attributed mainly to interest-rate movements. Accumulated other comprehensive income (loss) shifted from positive $1.6 million at year-end to negative $15.9 million. Management reported no other-than-temporary impairment losses for the first nine months.
- Average interest-bearing deposit costs declined, and total deposit balances increased from year-end. Short-term borrowings also increased.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it expects balance-sheet growth to be profitable over the long term, but noted narrow margins on incremental growth and that it may limit growth or shrink the balance sheet if conditions warrant.
- Management characterized the economic recovery as subdued and identified uncertainty around interest rates, Federal Reserve policy, competition, local economic conditions, real-estate values, and credit performance. It said further deterioration in housing prices or employment could increase credit risk.
- Basel III capital rules were scheduled to take effect beginning in 2015, with the conservation buffer phased in thereafter. Management believed current capital levels would meet the new requirements, while noting potential restrictions on dividends and repurchases if capital fell below applicable thresholds.
- TrustCo agreed to sell a Florida operations-center building for approximately $5.0 million. Its carrying value was about $3.2 million at quarter-end; the company expected a sale in Q4 2013 and an approximately $1.8 million gain. This gain was expected, not yet recognized at September 30.
- The filing reports no material legal proceedings and no other material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Florida building sale closed as expected and whether the projected gain was realized.
- Whether net interest margin stabilizes or continues to compress as loan yields, deposit pricing, and interest rates change.
- Whether the decline in nonperforming loans and charge-offs persists, and whether the allowance remains adequate as the loan portfolio grows.
- How the company and bank meet Basel III requirements and whether those rules affect dividends, repurchases, or capital needs.
- How available-for-sale securities valuations and accumulated other comprehensive loss respond to future interest-rate movements.