TrustCo Bank Corp NY — Q1 2013 Form 10-Q
Business context and period: TrustCo is a bank holding company with a traditional community-banking business, including residential real estate lending, deposits, and trust and financial services. This unaudited quarterly report covers the three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012, and operating results are compared with Q1 2012. The independent accountant performed a review, not an audit.
Key financial results
Amounts below are in millions of dollars unless noted.
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior date |
|---|---|---|
| Net interest income | $33.6 | $33.4 in Q1 2012 |
| Net interest margin, taxable-equivalent | 3.19% | 3.23% in Q1 2012 |
| Net income | $9.2 | $8.9 in Q1 2012 |
| Diluted EPS | $0.097 | $0.095 in Q1 2012 |
| Noninterest income | $4.6 | $5.0 in Q1 2012 |
| Noninterest expense | $21.6 | $21.1 in Q1 2012 |
| Provision for loan losses | $2.0 | $3.1 in Q1 2012 |
| Operating cash flow | $7.8 | $11.5 in Q1 2012 |
| Total assets | $4,411.8 | $4,346.6 at Dec. 31, 2012 |
| Loans, net | $2,656.1 | $2,636.8 at Dec. 31, 2012 |
| Total deposits | $3,857.7 | $3,804.2 at Dec. 31, 2012 |
| Short-term borrowings | $171.0 | $159.8 at Dec. 31, 2012 |
| Cash and cash equivalents | $444.8 | $544.0 at Dec. 31, 2012 |
| Shareholders’ equity | $360.9 | $358.8 at Dec. 31, 2012 |
Material changes and operating drivers
- Net income increased about 2.9% year over year. Lower loan-loss provision and lower interest expense more than offset weaker interest income, lower securities gains, and higher operating costs.
- Interest income declined to $37.5 million from $39.3 million; interest expense fell to $3.9 million from $5.9 million. Net interest income rose modestly, while the taxable-equivalent margin narrowed by 4 basis points.
- Average earning assets increased $61.2 million to $4.23 billion, but their average yield fell to 3.56% from 3.79%. Average loans grew $167.7 million to $2.69 billion, while the average loan yield declined 46 basis points to 4.70%.
- Noninterest income fell $0.4 million, mainly because net securities gains decreased to $2,000 from $677,000. Excluding securities transactions, noninterest income increased, supported by customer fees and financial services income.
- Noninterest expense increased $421,000, principally from salaries and benefits, occupancy, and equipment costs. Management attributed higher payroll expense partly to headcount growth.
- Cash and cash equivalents declined $99.2 million during the quarter. Investing cash outflow of $166.3 million, including substantial securities purchases and loan growth, was partly funded by deposit growth and higher short-term borrowings.
- Net charge-offs declined to $2.3 million from $3.3 million in Q1 2012. Nonperforming loans were $49.9 million, down from $52.7 million at year-end; other real estate owned rose to $9.9 million from $8.7 million.
Capital, liquidity, credit and other notable items
- TrustCo Bank reported Tier 1 leverage capital of 8.00%, Tier 1 risk-based capital of 16.16%, and total risk-based capital of 17.42%. Each exceeded the filing’s “well capitalized” thresholds. The parent-company ratios were 8.17%, 16.51%, and 17.77%, respectively.
- The loan-loss allowance was $47.7 million, or 1.76% of loans, versus $47.9 million and 1.79% at year-end. Management cited declining nonperforming loans and charge-offs and improving Florida conditions in explaining the lower provision.
- Residential real estate lending dominated the loan portfolio. Approximately 87% of gross loans were in New York and surrounding states and 13% in Florida. Management warned that deterioration in housing values, employment, or local economic conditions could increase credit risk; it described nonperforming-loan levels as manageable.
- Management characterized liquidity and capital as strong, with substantial liquid assets and access to funding. It said balance-sheet expansion slowed in Q1 and may be limited or reversed if management believes that is beneficial. No specific earnings or financial guidance was provided.
- Interest-rate risk is a key market risk. The company’s model estimated fair value of capital as 14.14% of fair value of assets at current rates; modeled results were 11.92% under an instantaneous 400-basis-point rise and 12.31% under a 100-basis-point decline. Management cautioned that model assumptions are uncertain.
- Available-for-sale securities had a net unrealized gain of $3.3 million at March 31, down from $6.2 million at year-end, mainly reflecting higher long-term rates. Q1 other comprehensive loss was $1.7 million, compared with income of $2.5 million a year earlier. No other-than-temporary impairment was recorded.
- The company declared a quarterly dividend of $0.065625 per share; the reported payout ratio was 67.3%. Management stated it did not expect to contribute to pension and postretirement plans in 2013, but reviews that decision quarterly and may change it.
- Risks include credit and collateral values, interest-rate and market movements, competition, economic conditions, and regulatory change, including potential Basel III requirements. Management also discussed ongoing Dodd-Frank implementation and uncertainty around future rates and Federal Reserve policy.
- No legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective, and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether net interest margin stabilizes as loan yields remain under pressure and deposit costs approach low levels.
- Whether credit quality continues to improve, particularly nonperforming residential loans, Florida exposures, charge-offs, and foreclosed real estate.
- Whether cash and liquidity remain adequate as funds are redeployed into loans and securities, and as short-term borrowings increase.
- The sensitivity of securities fair values, capital, and earnings to interest-rate changes and assumptions in management’s modeling.
- Whether the dividend remains supportable given earnings, the 67.3% payout ratio, and future capital and regulatory requirements.