TRUSTCO BANK CORP N Y quarterly report, Q3 FY2023

Full document

TrustCo Bank Corp NY — Q3 2023 Form 10-Q

Business context and period: Regional bank with a loan portfolio concentrated in residential real estate, operating mainly in New York and Florida. This unaudited filing covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted. Dollar amounts below are in millions unless stated otherwise.

Key financial metrics

  • Quarterly earnings: Net income was $14.7 million and diluted EPS was $0.77, versus $19.4 million and $1.01 a year earlier. Return on average assets was 0.96% (1.24%); return on average equity was 9.32% (12.78%).
  • Nine-month earnings: Net income was $48.8 million and diluted EPS was $2.57, versus $54.3 million and $2.84. Return on average assets was 1.08% (1.17%); return on average equity was 10.57% (12.16%).
  • Revenue and margins: Q3 interest income rose to $57.6 million from $49.0 million, but interest expense increased to $15.3 million from $1.2 million. Net interest income fell to $42.2 million from $47.8 million; reported Q3 net interest margin was 2.85%, down 31 basis points. For nine months, net interest income increased to $133.2 million from $130.9 million and margin rose to 3.01% from 2.88%. Noninterest income was $4.6 million in Q3 and $13.8 million for nine months, versus $4.4 million and $14.5 million, respectively.
  • Expenses and credit costs: Noninterest expense was $27.5 million in Q3, up from $26.1 million, and $82.5 million for nine months, up from $73.9 million. Q3 provision for credit losses was $0.1 million; the nine-month period recorded a $0.1 million benefit.
  • Balance sheet and liquidity: Assets were $6.05 billion at September 30, up from $6.00 billion at year-end 2022. Cash and cash equivalents were $507.3 million, down from $650.6 million. Deposits were $5.23 billion, up from $5.19 billion; short-term borrowings were $103.1 million, down from $122.7 million. Management says liquidity sources are adequate for obligations and commitments, including FHLB and Federal Reserve borrowing capacity.
  • Loans and credit quality: Gross loans were $4.96 billion, up from $4.73 billion at year-end; net loans were $4.91 billion. The allowance for credit losses on loans was $47.2 million, or 0.95% of loans. Nonperforming loans were $17.9 million, compared with $17.5 million at year-end; allowance coverage of NPLs was 264.2%. No loans were 90 days past due and still accruing.
  • Cash flow: Nine-month operating cash flow was $46.3 million, compared with $55.8 million. Investing activities used $191.1 million, largely reflecting $227.0 million of net loan growth; financing activities provided $1.5 million. Cash and cash equivalents declined by $143.3 million over the period.
  • Capital and shareholder returns: Shareholders’ equity was $623.9 million, versus $600.0 million at year-end. The Bank was categorized as well capitalized; its September 30 CET1 ratio was 18.40% and total risk-based capital ratio 19.65%. The quarterly dividend was $0.36 per share. No shares were repurchased during the quarter or nine-month period.

Material changes and management commentary

  • Q3 earnings declined primarily because deposit and other funding costs rose faster than asset yields. Time-deposit interest expense rose sharply as average time-deposit balances and rates increased.
  • Loan growth and higher yields supported interest income: average Q3 loans were $4.92 billion, up $337.6 million year over year, with an average yield of 3.89%, up 32 basis points. Management said deposit competition remains strong and higher funding costs have narrowed the margin on incremental balance-sheet growth.
  • Available-for-sale securities had a $49.0 million net unrealized loss at September 30, compared with $43.5 million at year-end. Management attributed the decline to interest rates, said it did not intend or expect to be required to sell the securities before recovery, and recorded no securities credit-loss allowance.
  • Estimated uninsured deposits were $956.7 million, compared with $968.6 million at year-end. The filing describes the estimate as based on regulatory-reporting assumptions.
  • Management selected a stagflation forecast for its credit-loss estimate, anticipating a slight economic decline and a slight increase in unemployment over the next two years. No change to the allowance methodology was reported.

Outlook, risks and unusual items

  • The filing provides no quantified earnings, margin, or growth guidance. Management maintains a long-term strategy to grow customer relationships, loans, and deposits, but says it may limit growth or shrink the balance sheet if conditions warrant.
  • Principal risks include further rate changes and deposit-cost pressure, inflation and economic slowdown, borrower credit deterioration, financial-sector instability and depositor behavior, and volatility or further declines in securities values. Management said it had not been directly affected by the 2023 bank failures and believed its liquidity and capital were strong.
  • The FDIC proposed a special assessment for banks with more than $5 billion in assets to recover costs associated with protecting uninsured depositors after bank failures. TrustCo said the final assessment was uncertain; it expected recognition in the period a final rule is published. The filing does not provide a clear estimate of TrustCo’s eventual charge.
  • Interest-rate sensitivity modeling estimated fair value of capital at 25.9% of fair value of assets in the base case; the estimate ranged from 22.1% at a 400-basis-point increase to 18.5% at a 400-basis-point decrease. These are model estimates, not forecasts.
  • Ordinary-course litigation was disclosed, but management said no pending proceeding was expected to be material to consolidated equity or financial condition. The auditor performed an interim review, not an audit, and reported no material modifications it believed were needed.

Important facts for investors to verify

  1. Whether deposit pricing and mix stabilize enough to arrest the decline in quarterly net interest margin and earnings.
  2. Trends in deposit retention, time-deposit maturities, uninsured deposits, and available contingent borrowing capacity.
  3. Loan delinquencies, nonperforming loans, charge-offs, and the adequacy of the allowance under changing economic conditions.
  4. The size and timing of any final FDIC special assessment and its effect on expenses and earnings.
  5. Changes in unrealized securities losses, liquidity needs, and capital ratios; also confirm that dividends remain within regulatory constraints.