TrustCo Bank Corp NY — Q1 2019 Form 10-Q
Business context and period. TrustCo is a bank holding company focused on traditional banking, with lending markets in New York and surrounding states and Florida. This unaudited report covers the three months ended March 31, 2019; income and cash-flow comparisons are with Q1 2018, while balance-sheet comparisons are with December 31, 2018. Amounts below are in millions unless stated otherwise.
Financial performance and position
- Earnings: Net income was $14.6 million, down from $14.8 million; diluted EPS was $0.150 versus $0.153. Return on average assets was 1.17% versus 1.23%, and return on average equity was 11.93% versus 13.07%.
- Interest income and margin: Net interest income rose to $39.7 million from $39.3 million. Taxable-equivalent net interest margin narrowed to 3.24% from 3.29%; net interest spread fell to 3.11% from 3.22%. Average earning assets increased to $4.91 billion from $4.80 billion, and their average yield rose to 3.87% from 3.64%.
- Funding costs: Interest expense increased to $7.7 million from $4.2 million, largely reflecting higher time-deposit costs. The average rate paid on interest-bearing liabilities rose to 0.77% from 0.42%. Average loan yield increased to 4.28% from 4.19%.
- Other income and expenses: Noninterest income was $4.6 million versus $4.7 million. Noninterest expense increased to $24.9 million from $24.2 million, including a $1.0 million increase in salaries and benefits; lower ORE expense and FDIC/insurance costs partly offset the increase. The effective tax rate was 24.2% in both periods.
- Balance sheet and liquidity: Total assets were $5.16 billion, up from $4.96 billion at year-end. Deposits increased to $4.41 billion from $4.27 billion, while loans before allowance declined slightly to $3.86 billion from $3.87 billion. Cash and cash equivalents rose to $619.2 million from $503.7 million. Short-term borrowings were $159.8 million, down from $161.9 million.
- Cash flows: Operating activities provided $12.6 million versus $12.0 million. Investing activities used $27.8 million versus $24.5 million; financing activities provided $130.7 million versus $17.0 million, principally reflecting deposit growth. Cash and cash equivalents increased by $115.5 million during Q1 2019.
- Credit and capital: The allowance for loan losses was $44.7 million, or 1.16% of loans, compared with $44.8 million, or 1.16%, at year-end. Net charge-offs were $395,000 versus $90,000. Nonperforming loans were $24.7 million, down from $25.0 million at year-end; none were 90 days past due and still accruing. Shareholders’ equity was $501.7 million versus $489.9 million. The Bank was reported well capitalized; its total risk-based capital ratio was 19.56%.
- Dividend: The Q1 dividend declared was $0.068125 per share; the reported payout ratio was 45.23%.
Material changes, outlook, and risks
- Loan growth and higher asset yields supported net interest income, but higher deposit costs compressed the margin. Management said it expects the margin to begin stabilizing later in 2019, with possible expansion in Q3 and Q4 as shorter-term time deposits reprice. This is management’s expectation, not formal earnings guidance.
- Management continues to emphasize residential mortgage lending and traditional deposits, while noting strong competition and narrower margins on incremental balance-sheet growth. It may limit growth or shrink the balance sheet if conditions warrant.
- Credit risk is concentrated in real estate lending and is sensitive to local economic conditions, property values, and borrower performance. Approximately 76% of gross loans were in New York and surrounding states and 24% in Florida; residential real estate loans made up most nonperforming loans. Management reported no identified material risk beyond loans already classified as nonperforming, but cautioned that deterioration in housing prices or employment could increase credit risk.
- Interest-rate risk is a key market risk. Management reported that a flatter yield curve is unfavorable for a portfolio mortgage lender. Its model showed fair value of capital relative to fair value of assets of 21.24% at current rates, 18.12% with rates up 400 basis points, and 16.90% with rates down 200 basis points; results depend on model assumptions.
- Unrealized losses on available-for-sale securities were $9.5 million at March 31, down from $14.1 million at year-end. Management attributed the losses to interest rates and concluded the securities were not other-than-temporarily impaired; continued valuation changes remain a risk.
- Adoption of the lease accounting standard on January 1, 2019 recognized approximately $53.0 million of right-of-use assets and $58.2 million of lease liabilities. The filing says adoption did not materially affect operating results or operating cash flows. At March 31, lease liabilities were $56.7 million.
- The allowance for loan losses is a critical estimate. The company was evaluating the expected-credit-loss standard (CECL), effective for it in 2020, and expected model validation, policy development, and parallel runs to continue during 2019.
- Other disclosed risks include regulatory requirements and examinations, deposit competition and repricing, cybersecurity and third-party vendor disruptions, and the ability of the Bank to support parent-company dividends subject to regulatory constraints. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit pricing and time-deposit repricing stabilize or improve net interest margin as management anticipates.
- Trends in loan growth, delinquencies, net charge-offs, nonperforming loans, and the adequacy of the allowance—particularly for residential real estate exposures.
- The sensitivity of earnings, securities values, and capital to interest-rate and yield-curve changes, including assumptions in the company’s rate-risk model.
- Deposit growth and funding mix, including the role of short-term borrowings and the company’s substantial cash and short-term investment balances.
- Progress and potential financial-statement effects of CECL implementation, and the company’s capacity to maintain dividends under regulatory capital requirements.
Filing review: Crowe LLP reported that its review of the interim financial information identified no material modifications needed for conformity with U.S. GAAP; this was a review, not an audit of the interim period.