TrustCo Bank Corp NY — Q3 2019 Form 10-Q
Business context and reporting period. TrustCo is a regional bank holding company operating primarily in New York and Florida, with lending focused on residential real estate. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are to the corresponding 2018 periods unless stated otherwise. Dollar amounts below are in millions, except per-share data.
Financial performance
- Third quarter: Net interest income was $38.6, down 4.6%; noninterest income was $4.9, up 10.5%; noninterest expense was $24.1, down 1.9%. Net income was $14.7, down 3.2%, and diluted EPS was $0.152 versus $0.157. Return on average assets was 1.12% and return on average equity was 11.19%.
- First nine months: Net interest income was $117.6, down 2.0%; noninterest income was $14.5, up 6.2%; noninterest expense was $73.8, up 1.4%. Net income was $43.9, down 3.3%, and diluted EPS was $0.453 versus $0.470. Return on average assets was 1.14% and return on average equity was 11.56%.
- Margins and funding costs: Tax-equivalent net interest margin fell to 3.04% from 3.35% in Q3 and to 3.13% from 3.32% year to date. Q3 average loan yield was 4.26%, while the average cost of interest-bearing liabilities rose to 0.94% from 0.52%. Deposit interest expense increased $4.6 in Q3, primarily reflecting higher rates and time-deposit balances.
- Balance sheet at September 30: Assets were $5,222.5 versus $4,958.9 at December 31, 2018. Loans, net, were $3,941.0, up $111.7; deposits were $4,461.2, up $186.9. Available-for-sale securities were $662.8, up $161.3. Cash and cash equivalents were $450.7 versus $503.7. Short-term borrowings were $151.1 versus $161.9; no other material debt balance is identified in the provided financial statements.
- Cash flow and capital: Nine-month operating cash flow was $49.8; investing cash outflow was $261.1, including securities purchases and loan growth; financing cash flow was $158.3, principally from deposit growth, partly offset by dividends and borrowings reduction. Ending equity was $526.2. The Bank was reported well capitalized; its total risk-based capital ratio was 19.46% and leverage ratio 9.75%. The quarterly dividend was $0.068125 per share.
Material changes and credit quality
- Average interest-earning assets grew $244.7 year over year in Q3, including average loan growth of $158.4. Higher asset balances and yields did not offset deposit-cost increases and margin compression.
- Nonperforming loans were $21.0 at September 30, down from $25.0 at year-end 2018; none were 90 days past due and still accruing. The allowance for loan losses was $44.3, or 1.11% of loans, versus $44.8 and 1.16% at year-end. There was no Q3 provision; the nine-month provision was a $41,000 credit. Nine-month net charge-offs were $396,000 versus $334,000.
- Available-for-sale securities moved from a $14.1 unrealized loss at year-end to a $0.1 unrealized gain at September 30, principally due to market interest-rate changes. Management said it did not consider the disclosed securities losses other-than-temporary.
- Noninterest income included unusual items: Q3 other income included a $350,000 recovery related to a prior-year legal judgment. Nine-month income also included approximately $176,000 from a credit-card portfolio sale and $349,000 from sales of nonperforming loans.
Outlook, risks, and contingencies
- No specific earnings or financial guidance is provided. Management said it expected margin to stabilize in Q4 as shorter-term time deposits could reprice lower, but noted that competition and the rate environment constrain margins. The company aims to grow customer relationships and loans, while retaining the option to limit growth or shrink the balance sheet if management considers that beneficial.
- Management cited the flat/inverted yield curve, Federal Reserve rate changes, trade and tariff uncertainty, competition for deposits, and regulatory costs as factors affecting results. Risks include local economic and property-value deterioration, loan-credit judgments and allowance adequacy, interest-rate sensitivity, cybersecurity and third-party vendor disruptions, and regulatory restrictions that could affect capital distributions or dividends.
- The company adopted lease accounting on January 1, 2019, recognizing operating-lease right-of-use assets and liabilities; management said the change did not materially affect operating results or key performance metrics. At September 30, lease liabilities were $54.7 and right-of-use assets were $49.6.
- TrustCo was preparing for CECL adoption, expected to be effective in 2020, but said the transition’s financial impact could not yet be reasonably estimated. It planned to finalize methodology, policies, and controls in Q4 2019. The company was also evaluating, but had not decided whether to adopt, the community bank leverage ratio framework.
- The independent accountant performed an interim review, not a full audit, and reported no material modifications needed for GAAP conformity. Management concluded disclosure controls were effective; no material change in internal control was reported. The filing reports no legal proceedings and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether deposit repricing and asset yields stabilize or further compress net interest margin and earnings.
- Whether loan and deposit growth persists, and how the increasing time-deposit mix affects funding costs and liquidity.
- Trends in nonperforming loans, charge-offs, collateral values, and the adequacy of the $44.3 million allowance, particularly ahead of CECL adoption.
- The eventual CECL transition impact and whether the company elects the community bank leverage ratio framework.
- Whether unusual noninterest-income items recur and whether capital, regulatory approvals, and Bank distributions continue to support the dividend.