TRUSTCO BANK CORP N Y quarterly report, Q2 FY2023

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TrustCo Bank Corp NY — Q2 2023 Form 10-Q

Business and reporting period: TrustCo is a bank holding company operating primarily in New York and Florida, with a loan portfolio concentrated in residential real estate. This unaudited quarterly report covers the three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods unless otherwise noted. Dollar amounts below are in millions unless stated otherwise.

Financial performance and position

  • Q2 earnings: Net income was $16.4 million, or $0.86 per diluted share, versus $17.9 million, or $0.93, a year earlier. Return on average assets was 1.09% (1.15%); return on average equity was 10.61% (12.08%).
  • First-half earnings: Net income was $34.1 million, or $1.79 per diluted share, versus $35.0 million, or $1.82. Return on average assets was 1.14% (1.13%); return on average equity was 11.22% (11.84%).
  • Interest income and margin: Q2 total interest income rose to $56.1 million from $44.2 million, while interest expense increased to $12.0 million from $1.1 million. Net interest income rose to $44.1 million from $43.1 million. Net interest margin was 2.98%, up from 2.83%; net interest spread was 2.74%, down from 2.80%. For the first half, net interest income was $91.0 million versus $83.2 million, and margin was 3.10% versus 2.74%.
  • Other income and expenses: Q2 noninterest income declined to $4.6 million from $4.9 million, including a $0.6 million decrease in financial services income. Noninterest expenses rose to $27.3 million from $25.0 million, primarily reflecting higher salaries and benefits. First-half noninterest income was $9.3 million versus $10.1 million; expenses were $55.0 million versus $47.8 million.
  • Assets, loans, and deposits: At June 30, total assets were $6.08 billion, up from $6.00 billion at year-end 2022. Gross loans were $4.89 billion, up from $4.73 billion; deposits were $5.26 billion, up from $5.19 billion. Cash and cash equivalents totaled $603.4 million, compared with $650.6 million at year-end.
  • Credit quality: The allowance for credit losses on loans was $46.9 million, or 0.96% of loans, versus $46.0 million, or 0.97%, at year-end. Nonperforming loans increased to $19.4 million from $17.5 million; the allowance-to-nonperforming-loans coverage ratio was 241.6%. There were no loans 90 days past due and still accruing. Q2 included a $0.5 million credit to provision, attributable to lower unfunded commitments, and no loan-loss provision.
  • Cash flow and funding: For the first half, operating cash flow was $34.4 million; investing cash outflow was $124.7 million, including $153.3 million of net loan growth; financing cash inflow was $43.0 million. Cash and equivalents decreased $47.2 million. Short-term borrowings were $113.8 million, down from $122.7 million at year-end; the filing reports no long-term borrowings on the balance sheet.
  • Capital and securities: Shareholders’ equity was $621.4 million, versus $600.0 million at year-end. The Bank was classified as well capitalized; its CET1 ratio was 18.48% and total risk-based capital ratio 19.73%. Available-for-sale securities had a $42.0 million gross unrealized loss at quarter-end, attributed by management to interest-rate changes. The after-tax accumulated other comprehensive loss was $26.2 million.

Material changes and management commentary

  • Higher rates increased yields on loans, securities, and short-term investments, supporting net interest income. However, deposit costs rose sharply: the average rate paid on interest-bearing deposits was 1.07% in Q2 versus 0.08% a year earlier, with time-deposit expense a major contributor.
  • Average loan balances grew, while average short-term investments fell year over year. Management says it intends to deploy liquidity into loans and securities as investment opportunities arise, but notes that the rate environment has narrowed margins on incremental balance-sheet growth and that it may limit growth or shrink the balance sheet if warranted.
  • Management describes liquidity and capital as strong and says the company was not directly affected by recent bank failures. It estimates uninsured deposits at approximately $953 million at June 30, 2023. Contingent funding sources include the Federal Home Loan Bank and Federal Reserve; brokered deposits are a contingency, not a regular funding source.
  • The FDIC had proposed a special assessment on banks above $5 billion in assets to recover costs related to protecting uninsured depositors. TrustCo expected a final rule later in 2023 and collection over an estimated eight quarters beginning in Q1 2024; the filing does not provide a clear estimate of TrustCo’s potential expense.
  • No specific earnings or financial guidance is provided. The company declared a $0.36-per-share Q2 dividend and authorized a repurchase program of up to 200,000 shares; no shares were repurchased during the quarter. No legal proceedings were reported. The independent accountant performed an interim review, not an audit.

Outlook, risks, and contingencies

Key disclosed risks include further interest-rate changes and deposit repricing, inflation and higher operating costs, pressure on borrowers and collateral in an economic downturn, competition for deposits and loans, and volatility or liquidity stress in the financial sector. The filing also highlights potential effects of U.S. debt-limit or government-shutdown events and increased regulatory costs, including the proposed FDIC assessment. Rate changes can affect both net interest income and the fair value of securities and equity. TrustCo’s interest-rate sensitivity model estimates fair value of capital at 26.3% of fair value of assets at current rates, versus 24.2% under an instantaneous 400-basis-point increase and 16.3% under a 400-basis-point decrease; these are model-based estimates with uncertain assumptions.

Investor verification points

  • Track deposit mix, uninsured balances, time-deposit maturities, and deposit pricing to assess funding stability and margin pressure.
  • Monitor loan growth alongside delinquencies, nonperforming loans, charge-offs, and the adequacy of the credit-loss allowance.
  • Assess whether higher funding costs continue to outpace asset-yield increases and how net interest margin responds to rate changes.
  • Review the unrealized securities losses, available liquidity and borrowing capacity, and any impact on capital if securities must be sold.
  • Confirm the final FDIC assessment rules and TrustCo’s resulting expense, and monitor dividend capacity and any use of the authorized repurchase program.