TrustCo Bank Corp NY — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the same 2019 periods unless otherwise noted. TrustCo is a regional bank holding company operating principally in New York and Florida. Financial statement amounts below are in millions of dollars unless indicated.
Financial performance
- Q3 earnings: Net income was $14.1 million, down 4.3% from $14.7 million; diluted EPS was $0.146 versus $0.152. Return on average assets was 0.98% (1.12% in 2019) and return on average equity was 10.04% (11.19%).
- Nine-month earnings: Net income was $38.6 million, down 12.1% from $43.9 million; diluted EPS was $0.400 versus $0.453. Return on average assets was 0.94% (1.14%) and return on average equity was 9.38% (11.56%).
- Net interest: Q3 net interest income was $38.2 million, down $0.5 million; taxable-equivalent net interest margin fell 31 basis points to 2.73%. For nine months, net interest income was $114.4 million, down $3.2 million; taxable-equivalent margin declined 27 basis points to 2.86%. Lower market rates, particularly on short-term investments, pressured asset yields despite loan and deposit growth and reduced funding costs.
- Noninterest income and expenses: Q3 noninterest income was $4.3 million, down $0.6 million, while expenses fell $1.4 million to $22.7 million. Nine-month noninterest income was $13.1 million, down $1.4 million, and expenses fell $3.0 million to $70.9 million. Q3 income included no securities transaction gain; nine-month income included a $1.2 million securities gain.
- Credit costs and quality: Loan-loss provision was $1.0 million in Q3 and $5.0 million for nine months, versus zero and a $41,000 credit, respectively, in 2019. The allowance rose to $49.1 million from $44.3 million at year-end, or 1.17% of loans versus 1.09%. Nine-month net charge-offs were $194,000, down from $396,000. Nonperforming loans were $21.8 million, versus $20.9 million at year-end; no loans were 90 days past due and still accruing.
- Balance sheet and liquidity: Total assets were $5.74 billion, up from $5.22 billion at year-end. Loans were $4.21 billion, up from $4.06 billion; deposits were $4.90 billion, up from $4.45 billion. Cash and cash equivalents increased to $956.3 million from $456.8 million. Short-term borrowings were $193.5 million, up from $148.7 million; the filing reports no long-term debt balance. Nine-month operating cash flow was $47.9 million, compared with $49.8 million; cash increased $499.5 million.
- Capital and shareholder returns: Shareholders’ equity was $560.5 million, versus $538.3 million at year-end. The Bank was well capitalized; its September 30 Tier 1 leverage, common equity Tier 1, and total risk-based capital ratios were 9.33%, 18.49%, and 19.75%. The quarterly dividend was $0.068125 per share. The company repurchased no shares in Q3; its repurchase program had been suspended in April and expired in June.
Material changes and notable items
- Federal funds sold and other short-term investments averaged $938.1 million in Q3, versus $465.3 million a year earlier, but their average yield dropped to 0.10% from 2.19%. Average loans grew to $4.20 billion from $3.94 billion, while the average loan yield fell to 3.94% from 4.26%.
- COVID-19-related payment deferrals outstanding at September 30 were approximately $7.2 million across 30 loans, down from $189.7 million across 752 loans at June 30. The company reported no material deterioration in delinquencies or nonaccruals among loans that exited deferral.
- TrustCo processed 663 Paycheck Protection Program loans totaling $45.7 million. PPP loans contributed to commercial loan growth and carried a 1% interest rate; origination fees are recognized over the loan term.
- Available-for-sale securities declined to $454.7 million from $573.8 million at year-end. The portfolio had a $10.6 million net unrealized gain at September 30, primarily reflecting interest-rate movements; management reported no other-than-temporary impairment.
- The company elected under the CARES Act to delay adoption of the expected-credit-loss standard (CECL) until the earlier of termination of the COVID-19 national emergency or December 31, 2020. Management expected adoption to increase the allowance and unfunded commitment liability, with the initial adjustment through retained earnings; the amount is not stated.
Outlook, commentary, and risks
Management provided no specific earnings or financial guidance. It said the low-rate environment narrows margins on balance-sheet growth and that it may limit growth or reduce the balance sheet if conditions warrant. Management expects funding costs to continue declining as time deposits reprice, while seeking to deploy excess short-term liquidity into loans and securities as opportunities arise.
Management said COVID-19’s future effects remain difficult to quantify. Potential risks include further credit losses, higher delinquencies and foreclosures, falling collateral values, lower net interest income and fee income, and adverse effects on capital or dividend capacity. Interest-rate risk is material: management’s model estimated fair value of capital at 17.9% of fair value of assets under current rates, 18.7% under a 100-basis-point increase, and 13.8% under a 100-basis-point decrease. These estimates depend on assumptions and are not forecasts.
Unusual item to note: during Q3, the Board elected a director who owns six commercial properties leased by the company. Future lease payments to those properties totaled $4.7 million at quarter-end, including $699,000 of interest. The filing reported no legal proceedings and no material changes to previously disclosed risk factors. The independent accountant performed a review of interim financial information, not an audit.
Important facts for investors to verify
- Whether the elevated cash balance and deposit growth can be deployed profitably without further net interest margin compression.
- Whether the allowance for loan losses adequately reflects the effects of COVID-19 and the timing and size of the eventual CECL adoption adjustment.
- Whether loan deferrals remain low and whether nonperforming loans, charge-offs, and residential real estate exposures change as relief measures expire.
- The maturity and repricing profile of the $1.305 billion time-deposit balance, including $1.185 billion due within one year, and the effect on funding costs.
- The related lease arrangements involving the director’s properties, including governance review, terms, and ongoing payments.
- Whether capital levels and regulatory conditions continue to support dividends, particularly if credit losses rise.