TrustCo Bank Corp NY — Q1 2020 Form 10-Q
Business context and period: TrustCo is a regional bank holding company with lending and deposit operations in New York and surrounding states and Florida. This unaudited report covers the three months ended March 31, 2020, compared with Q1 2019; balance-sheet comparisons are to December 31, 2019. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
- Earnings: Net income was $13.3 million, down from $14.6 million; diluted EPS was $0.138 versus $0.150. Return on average assets fell to 1.03% from 1.17%, and return on average equity to 9.87% from 11.93%.
- Interest and margins: Net interest income was $38.6 million, down 3.0%; taxable-equivalent net interest margin declined to 3.05% from 3.24%. Lower short-term investment yields and Federal Reserve rate cuts weighed on interest income.
- Credit costs: Loan-loss provision rose to $2.0 million from $0.3 million, reflecting uncertainty related to COVID-19. Net charge-offs were $0.16 million versus $0.40 million. The allowance was $46.2 million, or 1.13% of loans, compared with $44.3 million, or 1.09%, at year-end.
- Other income and expenses: Noninterest income increased to $5.3 million from $4.6 million, including a $1.16 million securities gain; without that unusual gain, reported noninterest income would have been lower. Noninterest expense declined to $24.3 million from $24.9 million.
- Cash flow and liquidity: Operating cash flow was $14.5 million; investing activities provided $43.6 million and financing activities provided $21.1 million. Cash and cash equivalents rose to $536.1 million from $456.8 million at year-end. Deposits totaled $4.48 billion, up $31.8 million; short-term borrowings were $148.1 million, little changed.
- Balance sheet and capital: Total assets were $5.26 billion; loans before allowance were $4.10 billion, up $37.2 million from year-end. Shareholders’ equity was $548.2 million. The Bank was reported well capitalized, with a 10.06% Tier 1 leverage ratio, 18.47% CET1 ratio and 19.72% total risk-based capital ratio.
- Dividends and repurchases: The quarterly dividend declared was $0.068125 per share, with a 49.41% payout ratio. The company repurchased 489,000 shares for $3.5 million during the quarter, then suspended the program on April 16, 2020.
Material changes versus comparable periods
- Net income fell 8.6% year over year as lower net interest income and the higher loan-loss provision outweighed improved noninterest income and lower expenses.
- Average interest-earning assets increased by $143.2 million and average loans by $209.1 million year over year, but lower yields reduced the margin and taxable-equivalent net interest income.
- Nonperforming loans were $20.7 million, down from $24.7 million at March 31, 2019 and slightly below $20.9 million at December 31, 2019. Loans 90 days or more past due and still accruing were zero.
- Available-for-sale securities increased in fair value to $503.2 million from $573.8 million at year-end in carrying amount terms? The reported carrying amount decreased; unrealized gains increased to approximately $10.0 million from $0.4 million, primarily reflecting market-rate changes.
Outlook, risks and unusual items
- Management said COVID-19’s effects were difficult to quantify and expected a greater negative impact during the remainder of 2020 than in Q1. It cited potential pressure on loan performance, provision expense, net interest income, noninterest income, collateral values, liquidity and capital. No quantified earnings guidance was provided.
- At March 31, COVID-related payment deferrals totaled approximately $4.9 million. By April 28, approved deferrals covered 603 loans totaling $153.5 million. Eligible deferrals continued to be reported as current and accrued interest during the deferral period.
- By April 28, TrustCo had processed 405 PPP loans totaling $33.8 million. The company did not expect to use the PPP Liquidity Facility. PPP activity carries possible processing litigation and SBA-guarantee risks.
- The company elected to delay adoption of the expected-credit-loss standard under CARES Act relief until the earlier of the end of the COVID-19 national emergency or December 31, 2020. On adoption, management expected a cumulative retained-earnings adjustment, but the filing does not provide a clear amount.
- Interest-rate risk remains material: management noted that prolonged low rates could reduce margins and profitability. The filing also identifies regional economic, credit, operational, vendor, cybersecurity and regulatory risks.
- The interim financial statements received an independent accountant’s review, not an audit. The auditor reported no material modifications considered necessary for GAAP conformity.
Most important facts for investors to verify
- How COVID-related deferrals and subsequent borrower performance develop, including whether the $153.5 million reported as of April 28 converts into delinquencies or losses.
- Whether the $46.2 million allowance and future provisions adequately reflect economic deterioration and the delayed credit-loss accounting adoption.
- Whether low rates, deposit repricing and loan yields continue to compress net interest margin and earnings.
- PPP loan origination, fee recognition, SBA guarantees and any related litigation or operational costs.
- Capital, liquidity and dividend capacity if credit losses rise; also the status of the suspended repurchase program.