TrustCo Bank Corp NY — Q2 2022 Form 10-Q
Business context and period. TrustCo is a bank holding company whose principal lending business is residential real estate. This unaudited quarterly report covers the three and six months ended June 30, 2022; balance-sheet comparisons are to December 31, 2021 unless noted. Crowe LLP performed an interim review, not an audit.
Financial results and condition
Dollar amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $43.1 | $40.1 | $83.2 | $80.2 |
| Noninterest income | $4.9 | $4.7 | $10.1 | $9.1 |
| Noninterest expense | $25.0 | $25.4 | $47.8 | $50.8 |
| Net income | $17.9 | $14.4 | $35.0 | $28.5 |
| Diluted EPS | $0.933 | $0.748 | $1.822 | $1.478 |
| Net interest margin, taxable-equivalent basis | 2.83% | 2.70% | 2.74% | 2.74% |
- Profitability: Q2 net income rose about 24% year over year; six-month net income rose about 23%. Q2 return on average assets was 1.15% and return on average equity was 12.08%; six-month figures were 1.13% and 11.84%, respectively.
- Drivers: Q2 net interest income increased $2.9 million, reflecting higher income on interest-earning assets and lower interest expense. The Q2 credit-loss provision was a $0.5 million credit, versus no provision in Q2 2021. Noninterest income rose $0.2 million and noninterest expense declined $0.4 million. For the first half, lower compensation expense was a major contributor to reduced expenses; management cited a favorable $2.0 million incentive-compensation accrual true-up in Q1.
- Balance sheet at June 30: Total assets were $6.227 billion; gross loans were $4.541 billion and net loans $4.495 billion. Deposits were $5.397 billion, short-term borrowings $147.3 million, and shareholders’ equity $594.6 million. Compared with year-end, loans increased $101.8 million and deposits increased $128.7 million, while short-term borrowings declined $97.4 million.
- Liquidity and cash flow: Cash and cash equivalents were $1.046 billion, down from $1.219 billion at year-end. For the first half, operating cash flow was $33.0 million, investing cash outflow was $221.2 million, and financing cash inflow was $14.9 million. The Bank also identified Federal Home Loan Bank and Federal Reserve borrowing capacity, with eligible collateral, as contingent funding sources.
- Credit quality: The allowance for credit losses on loans was $45.3 million, or 1.00% of loans. Nonperforming loans were $18.7 million, compared with $18.8 million at year-end and $20.8 million a year earlier; no loans were 90 days past due and still accruing. The portfolio is concentrated in residential real estate: first mortgages totaled $4.018 billion, and 69.4% of loans were in New York and nearby states, with 30.6% in Florida.
- Capital and shareholder returns: The Bank was categorized as well capitalized. At June 30, its Tier 1 leverage, common equity Tier 1, and total risk-based capital ratios were 9.39%, 18.34%, and 19.59%, respectively. The company declared a $0.35-per-share dividend and repurchased 75,000 shares for $2.4 million during Q2.
Material changes, outlook, and risks
- CECL adoption: Effective January 1, 2022, TrustCo adopted the expected-credit-loss standard. Adoption increased the loan allowance by $2.4 million and the unfunded-commitment allowance by $2.3 million, and reduced retained earnings by $3.5 million net of tax. The company selected a stagflation forecast for its credit-loss estimates, citing inflation and economic uncertainty.
- Securities valuation: Available-for-sale securities had a $28.6 million gross unrealized loss at June 30, compared with a near-zero net unrealized position at year-end. The company attributed the decline primarily to rising interest rates, reported no credit-loss allowance on these securities, and said it did not intend to sell them or expect to be required to sell before recovery. The resulting after-tax securities loss contributed to a $21.6 million first-half other comprehensive loss.
- Management outlook: No numerical earnings or revenue guidance is provided. Management described a strategy of growing customer relationships and residential lending while funding growth with deposits, but said it may limit growth or shrink the balance sheet if conditions warrant. It anticipated further rate increases at the time of filing and noted that the yield curve had flattened, which can constrain mortgage-lender margins.
- Risk factors: Management highlighted inflation, rising interest rates, possible yield-curve inversion, the Russia-Ukraine conflict, supply-chain disruption, COVID-19 uncertainty, borrower credit deterioration, property values, and securities-market volatility. Higher rates can increase short-term asset yields but also pressure securities fair values, funding costs, loan demand, and borrowers’ ability to repay. The company reported no COVID-related loan deferrals at June 30.
- Other disclosures: The filing reports no legal proceedings and says disclosure controls were effective, with no material change in internal control over financial reporting during the quarter. The board adopted an amended executive medical reimbursement plan in May 2022.
Important facts for investors to verify
- Whether deposit pricing and funding costs rise fast enough to offset changes in loan and investment yields, and how that affects net interest margin.
- Whether the large unrealized available-for-sale securities loss changes, and whether any liquidity needs could require securities sales before recovery.
- How loan delinquencies, nonperforming loans, charge-offs, and CECL assumptions evolve, particularly under weaker economic and housing conditions.
- Whether loan and deposit growth, share repurchases, and dividends remain consistent with capital, liquidity, and regulatory constraints.
- The filing’s reported figures and comparisons, noting CECL adoption changed the credit-loss accounting basis for 2022 versus prior periods.