TrustCo Announces Fourth Quarter and Full Year 2017 Results; Net Income Before Taxes Up 12.9% Over Prior Year Quarter

Executive Snapshot:

• Continued solid financial results:
  • Key metrics for fourth quarter and full year 2017:
    • Income before taxes of $19.7 million in the fourth quarter of 2017, up 12.9% compared to $17.5 million in the fourth quarter of 2016
    • Income before taxes of $76.7 million for the full year 2017, up 12.4% compared to $68.3 million for 2016
    • Net income rose for the full year 2017 over 2016 despite a $5.1 million charge related to the recently enacted federal tax legislation
    • Return on average assets (ROAA) of 0.60% compared to 0.89% in the fourth quarter of 2016
    • Return on average equity (ROAE) of 6.38% compared to 9.87% in the fourth quarter of 2016
    • Efficiency ratio of 53.13% compared to 54.65% in the fourth quarter of 2016 (Non-GAAP measure; see P. 14 for definition)
       
• Asset quality remains solid:
  • Nonperforming assets (NPAs) fell by $1.7 million compared to December 31, 2016
  • NPAs to total assets improved to 0.56%, compared to 0.60% at December 31, 2016
  • Quarterly net chargeoffs were equal to 0.02% of average loans on an annualized basis, compared to 0.08% for the fourth quarter of 2016
     
• Continued expansion of customer base:
  • Focus on capitalizing on opportunities presented by expanded branch network
  • Average core (non-maturity) deposits per branch grew $480 thousand to $21.4 million from December 31, 2016 to December 31, 2017
  • Average core deposits were $77.1 million higher in the fourth quarter of 2017 compared to the fourth quarter of 2016, an increase of 2.6%
     
• Loan portfolio reaches all-time high:
  • Average loans were up $203 million for the fourth quarter of 2017 compared to fourth quarter of 2016
  • At $3.64 billion as of December 31, 2017, loans reached an all-time high

TrustCo Announces Fourth Quarter and Full Year 2017 Results; Net Income Before Taxes Up 12.9% Over Prior Year Quarter

GLENVILLE, N.Y., Jan. 22, 2018 (GLOBE NEWSWIRE) -- TrustCo Bank Corp NY (TrustCo) (Nasdaq:TRST) today announced fourth quarter of 2017 net income of $7.4 million compared to $10.8 million for the fourth quarter of 2016.  Fourth quarter and full year 2017 results include the impact of the revaluation of the Company’s deferred tax assets resulting from the recently enacted tax legislation, as detailed below.  On a pre-tax basis, earnings rose from $17.5 million in the fourth quarter of 2016 to $19.7 million in the fourth quarter of 2017, an increase of 12.9%.  For the full year 2016, net income rose from $42.6 million to $43.1 million in 2017 while pre-tax earnings rose from $68.3 million to $76.7 million, an increase of 12.4%.

Summary

Robert J. McCormick, President and Chief Executive Officer noted, “We are pleased to be able to report a 13% increase in pre-tax earnings in the fourth quarter of 2017 as compared to the fourth quarter of 2016.  Solid revenue growth and expense control combined to produce a strong quarter and year.  Our focus on traditional lending criteria and conservative balance sheet management has enabled us to produce consistent earnings, maintain strong liquidity and capital and allowed us to continue to grow our business and take advantage of changes in market and competitive conditions.  In terms of our core business, we continue to add customer relationships, which ultimately drive future growth.  We will continue to take advantage of opportunities as they are presented during the coming year and beyond.” 

TrustCo saw continued solid loan growth in the fourth quarter of 2017 compared to the prior year, led by an increase in residential mortgages.  Loan portfolio expansion was funded by a combination of utilizing a portion of our strong cash balances and cash flow from investments, as well as growth in funding from customers and expansion of shareholders equity.  The continued shift toward loans helped offset the margin impact from continued comparatively low yields on cash and investments and the continued decline in loan yields.  The Federal Reserve decision to raise the target Federal Funds rate has contributed to our results during 2017 as our cash position immediately repriced upward, and is likely to continue to do so in 2018 to the extent there are additional rate increases.  While total average deposits were down slightly in the fourth quarter of 2017 versus the prior year, core deposits were up $77.1 million over that time frame.  The shift towards increased core deposits contributed to our cost of funds remaining flat from the fourth quarter of 2016 to the fourth quarter of 2017.   The gain in core deposits was led by demand deposits and low cost interest bearing checking deposits.  TrustCo’s strong liquidity position continues to allow it to take advantage of opportunities as they arise.

On December 22, 2017 the Tax Cuts and Jobs Act (the "Act") was signed into law, which includes a reduction of the statutory corporate tax rate from 35% to 21%.  The lower tax rate will have a significant beneficial impact on results going forward, but also resulted in the revaluation of net deferred tax assets, as noted, based on the lower tax rate. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted through income tax expense as changes in tax laws are enacted.  The rate reduction is effective January 1, 2018. Included in results for the fourth quarter and full year 2017 is a reduction in the value of net deferred tax assets of $5.1 million, which is recorded as additional income tax expense for the quarter ended December 31, 2017. This charge had a negative impact on our reported net income, earnings per share, return on average equity and return on average assets.

Details

Average loans were up $202.6 million or 5.9% in the fourth quarter of 2017 over the same period in 2016. Average residential loans, our primary lending focus, were up $234.0 million or 8.2% in the fourth quarter of 2017, over the same period in 2016.  Overall loan growth was constrained by a $29.0 million decline in average outstandings on home equity lines of credit and a $2.4 million decline in average commercial loans. Average deposits were down $12.8 million or 0.3% for the fourth quarter of 2017 over the same period a year earlier.  The decrease in deposits was the result of a $89.9 million decline in average time deposits as the company focused on less costly non-maturity deposits.  Excluding time deposits, core deposit accounts, which consist of checking, savings and money market deposits, were up $77.1 million from the fourth quarter of 2016 to the fourth quarter of 2017.  Within core, money market balances were down $5.9 million, checking balances were up $90.6 million (including interest bearing and non-interest bearing balances) and savings were down $7.6 million.  Core deposits typically represent longer term customer relationships and are generally lower cost than time deposits.  The cost of interest bearing deposits remained flat at 0.36% in the fourth quarter of 2017 relative to the fourth quarter of 2016.  The cost of core deposits, including demand, declined one basis point to 0.13% over this same time frame.  Mr. McCormick noted that, “The year-over-year growth of our loans and core deposit base reflect the long term strategic focus of the Company.”

For the fourth quarter of 2017, return on average assets and return on average equity were 0.60% and 6.38%, respectively, compared to 0.89% and 9.87% for the fourth quarter of 2016.  Diluted earnings per share were $0.076 for the fourth quarter of 2017, compared to $0.113 for the fourth quarter of 2016.  Overall expense control remains a key area of focus.  Total operating expenses increased by $171 thousand in the fourth quarter of 2017 as compared to the fourth quarter of 2016, with increases in compensation and several other categories partly offset by declines in professional services expenses, ORE costs and several other categories.  The modest increase in expenses was more than offset by a $2.1 million increase in revenue (net interest income plus non-interest income).  As noted, the revaluation of the net deferred tax assets is included in income taxes, creating an unusually high effective tax rate for the fourth quarter of 2017.  As noted, this reduced fourth quarter net income, which led to lower earnings per share, ROAA and ROAE.  For 2018 the Company is expecting its combined effective tax rate to be approximately 23.5%, based on currently known information.  The actual effective tax rate could be impacted by currently unknown aspects of how the tax law changes will be implemented and/or by management decisions to adapt to the new law. 

“While some banks have backed away from branches, a customer-friendly branch franchise continues to be the key to our long term plans.  We continue to make good progress expanding loans and deposits throughout our entire branch network.  We expect that trend to continue as the newer branches continue to mature.”

“At December 31, 2017, our average deposits per branch were $28.8 million, compared to $28.9 million a year earlier, while average core deposits per branch were $21.4 million compared to $20.9 million over the same time period.  While total deposit growth is important, TrustCo strives to maximize customer relationships through attracting and increasing core deposit balances.  We have always designed our branches to be smaller and more cost effective than those built by many of our competitors.  We use open floor plans that help maximize the value of our branches.  We remain mindful that fully achieving our goals for newer branches will take time and continued work.  We believe success in growing customer relationships provides basic building blocks that will help drive profit growth for the coming years.”

Asset quality and loan loss reserve measures continued to improve versus December 31, 2016.  Nonperforming loans (NPLs) were $24.4 million at December 31, 2017, compared to $25.1 million at December 31, 2016.  NPLs were equal to 0.67% of total loans at December 31, 2017, compared to 0.73% at December 31, 2016.  The coverage ratio, or allowance for loan losses to NPLs, was 181.2% at December 31, 2017, compared to 175.1% at December 31, 2016.  Nonperforming assets (NPAs) were $27.6 million at December 31, 2017 compared to $29.3 million at December 31, 2016.  The ratio of loan loss allowance to total loans was 1.21% as of December 31, 2017, compared to 1.28% at December 31, 2016 and reflects both the improvement in asset quality and economic conditions in our lending areas.  The allowance for loan losses was $44.2 million at December 31, 2017 compared to $43.9 million at December 31, 2016.  The provision for loan losses was $300 thousand for the fourth quarter of 2017, compared to $600 thousand in the fourth quarter of 2016.  Net chargeoffs for the fourth quarter of 2017 decreased versus the fourth quarter of 2016, falling to $212 thousand from $660 thousand in the year earlier period.  The annualized net chargeoff ratio was 0.02% for the fourth quarter of 2017, compared to 0.08% in the fourth quarter of 2016. 

The net interest margin for the fourth quarter of 2017 was 3.29%, up 16 basis points versus the fourth quarter of 2016, as increases in short term interest rates led to significantly higher earnings on cash, while slightly better returns were also achieved in the investment portfolio.  Loan yields did decline, but that was more than offset by higher volumes in terms of income.  During the same period, the cost of interest bearing liabilities increased one basis point, reflecting TrustCo’s strong funding base.

For the full year 2017, net income was $43.1 million, up 1.2% as compared to $42.6 million in the full year 2016, or $0.448 and $0.445, respectively, per diluted share.  As noted, the revaluation of the net deferred tax asset reduced net income by $5.1 million in the fourth quarter and full year 2017.  On a pre-tax basis, income was $76.7 million for 2017, up 12.4% as compared to the $68.3 million reported for 2016.

At December 31, 2017 the equity to asset ratio was 9.34%, compared to 8.89% at December 31, 2016.  Book value per share at December 31, 2017 was $4.76 compared to $4.52 a year earlier.

TrustCo Bank Corp NY is a $4.9 billion savings and loan holding company and through its subsidiary, Trustco Bank, operated 145 offices in New York, New Jersey, Vermont, Massachusetts, and Florida at December 31, 2017.

In addition, the Bank’s Financial Services Department offers a full range of investment services, retirement planning and trust and estate administration services. The common shares of TrustCo are traded on the NASDAQ Global Select Market under the symbol TRST.

A conference call to discuss fourth quarter 2017 results will be held at 9:00 a.m. Eastern Time on January 23, 2018.  Those wishing to participate in the call may dial toll-free 1-888-339-0764.  International callers must dial 1-412-902-4195.   Please ask to be joined into the TrustCo Bank Corp NY / TRST call.  A replay of the call will be available for thirty days by dialing 1-877-344-7529 (1-412-317-0088 for international callers), Conference Number 10116075. The call will also be audio webcast at: http://services.choruscall.com/links/trst180123.html, and will be available for one year. 

Safe Harbor Statement 
All statements in this news release that are not historical are forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended.  Forward-looking statements can be identified by words such as "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding our expectations for our performance during 2018, the impact of Federal Reserve actions regarding interest rates and the growth of loans and deposits throughout our branch network, our ability to capitalize on economic changes in the areas in which we operate and the extent to which higher expenses to fulfill operating and regulatory requirements recur or diminish over time.  Such forward-looking statements are subject to factors that could cause actual results to differ materially for TrustCo from those discussed. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect TrustCo’s actual results and could cause TrustCo’s actual financial performance to differ materially from that expressed in any forward-looking statement:  our ability to continue to originate a significant volume of one-to-four family mortgage loans in our market areas; our ability to continue to maintain noninterest expense and other overhead costs at reasonable levels relative to income; our ability to comply with the supervisory agreement entered into with Trustco Bank’s regulator and potential regulatory actions if we fail to comply; restrictions or conditions imposed by our regulators on our operations that may make it more difficult for us to achieve our goals; the future earnings and capital levels of Trustco Bank and the continued ability of Trustco Bank under regulatory rules and the supervisory agreement to distribute capital to TrustCo, which could affect our ability to pay dividends; results of supervisory monitoring or examinations of Trustco Bank and TrustCo by our respective regulators; our ability to make accurate assumptions and judgments regarding the credit risks associated with lending and investing activities; the effect of changes in financial services laws and regulations and the impact of other governmental initiatives affecting the financial services industry; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board, inflation, interest rates, market and monetary fluctuations; adverse conditions on the securities markets that lead to impairment in the value of securities in our investment portfolio; changes in law and policy accompanying the new presidential administration and uncertainty or speculation pending the enactment of such changes; the perceived overall value of our products and services by users, including in comparison to competitors’ products and services and the willingness of current and prospective customers to substitute competitors’ products and services for our products and services; changes in consumer spending, borrowing and saving habits; technological changes and electronic, cyber, and physical security breaches; real estate and collateral values; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the FASB or PCAOB; changes in local market areas and general business and economic trends, as well as changes in consumer spending and saving habits; our success at managing the risks involved in the foregoing and managing our business; and other risks and uncertainties under the heading “Risk Factors” in our most recent annual report on Form 10-K and, if any, in our subsequent quarterly reports on Form 10-Q or other securities filings.

Non-GAAP Financial Measures Reconciliation

Tangible equity as a percentage of tangible assets at period end is a non-GAAP financial measure derived from GAAP-based amounts. We calculate tangible equity and tangible assets by excluding the balance of intangible assets from shareholders’ equity and total assets, respectively. We calculate tangible equity as a percentage of tangible assets at period end by dividing tangible equity by tangible assets at period end. We believe that this is consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of risk-based capital ratios. 

The efficiency ratio is a non-GAAP measure of expense control relative to revenue from net interest income and fee income.  We calculate the efficiency ratio by dividing total noninterest expenses as determined under GAAP, but excluding other real estate expense, net, by net interest income (fully taxable equivalent) and total noninterest income as determined under GAAP, but excluding net gains on the sale of nonperforming loans and securities and other non-routine items from this calculation.  We believe that this provides a reasonable measure of primary banking expenses relative to primary banking revenue. 

We believe that these non-GAAP financial measures provide information that is important to investors and that is useful in understanding our financial results. Our management internally assesses our performance based, in part, on these measures.  However, these non-GAAP financial measures are supplemental and not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these measures, this presentation may not be comparable to other similarly titled measures reported by other companies. A reconciliation of the non-GAAP measures of tangible common equity, tangible book value per share, efficiency ratio, net income and net income per share to the underlying GAAP numbers is set forth below.