TrustCo Bank Corp NY — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unless stated otherwise, amounts are in millions; income-statement comparisons are year over year, and balance-sheet comparisons are to December 31, 2020. The interim financial statements are unaudited; the auditor performed a review, not an audit.
Business context and financial performance
TrustCo is a regional bank holding company whose lending is concentrated in residential real estate, with operations principally in New York and Florida. Q2 earnings improved from the prior-year quarter, supported by lower funding costs, no loan-loss provision, and higher noninterest income.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $40.1 | $37.7 | $80.2 | $76.2 |
| Provision for loan losses | $0 | $2.0 | $0.35 | $4.0 |
| Noninterest income | $4.7 | $3.4 | $9.1 | $8.8 |
| Noninterest expense | $25.4 | $23.9 | $50.8 | $48.2 |
| Net income | $14.4 | $11.3 | $28.5 | $24.6 |
| Diluted EPS | $0.748 | $0.584 | $1.478 | $1.272 |
Q2 diluted EPS and all other per-share figures reflect the May 28, 2021 1-for-5 reverse stock split. Net interest margin was 2.70% in Q2, down 11 basis points year over year; the six-month margin was 2.74%, down 19 basis points.
Financial position, cash flow, and capital
- At June 30, total assets were $6.12 billion, up $220.8 million from year-end. Net loans were $4.30 billion, up $104.3 million; deposits were $5.23 billion, up $193.3 million.
- Cash and cash equivalents totaled $1.18 billion. Short-term borrowings were $237.8 million, versus $214.8 million at year-end. Shareholders’ equity was $578.6 million.
- For the six months, operating cash flow was $27.7 million, investing cash outflow was $154.8 million, and financing cash inflow was $202.4 million. Cash and cash equivalents increased $75.3 million.
- The Bank was reported as well capitalized. At June 30, its Tier 1 leverage ratio was 9.09%, common equity Tier 1 and Tier 1 risk-based ratios were each 18.73%, and total risk-based capital was 19.99%. The consolidated equity-to-assets ratio was 9.45%.
Material changes and credit quality
- Q2 net income rose about 28% year over year. Management attributed the improvement principally to a $5.0 million reduction in interest expense, partly offset by a $2.5 million decrease in interest income; the loan-loss provision was $2.0 million lower, noninterest income increased $1.3 million, and noninterest expense increased $1.5 million.
- Lower deposit and borrowing rates reduced funding costs, while interest-earning asset yields declined. The average loan balance increased, but average loan yield fell to 3.70% from 4.02%. Residential mortgage loans remain the dominant lending category.
- Nonperforming loans were $20.8 million, compared with $21.1 million at year-end and $21.9 million a year earlier. The allowance for loan losses was $50.2 million, or 1.15% of loans, versus $49.6 million at year-end. The six-month provision was $0.35 million; net recoveries were $0.21 million.
- Management said COVID-related deferrals were not material at June 30, although it identified $1.9 million of pandemic-related deferrals recorded as nonperforming loans and $2.0 million as TDRs. PPP loans outstanding totaled about $32 million.
Outlook, risks, and unusual items
- No specific earnings or financial guidance was provided. Management said it may limit growth or reduce the balance sheet if conditions warrant; excess cash may be deployed into loans or securities as opportunities arise.
- Management reported no material or systematic adverse COVID-19 effect on the period’s results apart from the higher allowance since the pandemic began, but warned prolonged effects could pressure credit quality, net interest income, noninterest income, and asset values.
- Interest-rate risk is significant. Management noted that market rates can affect loan and securities yields, deposit costs, and available-for-sale securities values. Its modeled fair-value-of-capital ratio was 20.5% at current rates and 17.3% under an instantaneous 100-basis-point rate decrease.
- The company intends to adopt CECL on January 1, 2022. It was using a discounted-cash-flow model and continuing model validation and implementation work.
- The company declared a Q2 dividend of $0.340625 per share, adjusted for the reverse split, and repurchased 20,000 shares at an average $36.59. A new program authorized up to 400,000 shares after the split. No material change to previously disclosed risk factors or legal proceedings was reported.
Important facts for investors to verify
- Whether deposit and loan growth can be sustained without further compression in net interest margin.
- Trends in nonperforming loans, pandemic-related deferrals, recoveries, and the adequacy of the allowance as CECL adoption approaches.
- How the substantial cash and short-term investment balances will be deployed, and the resulting effect on yields and liquidity.
- Capital and regulatory constraints on dividends and repurchases, including the Bank’s ability to upstream dividends to the holding company.
- That all share and per-share comparisons used for analysis consistently reflect the 1-for-5 reverse stock split.