TrustCo Bank Corp NY — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; balance-sheet comparisons are to December 31, 2019 unless stated otherwise. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted. TrustCo is a bank holding company operating through Trustco Bank, with lending markets in New York and surrounding states and Florida.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $37.7 | $39.2 | $76.2 | $78.9 |
| Provision (credit) for loan losses | $2.0 | $(0.3) | $4.0 | $(0.04) |
| Noninterest income | $3.4 | $4.9 | $8.8 | $9.6 |
| Noninterest expense | $23.9 | $24.9 | $48.2 | $49.8 |
| Net income | $11.3 | $14.7 | $24.6 | $29.2 |
| Diluted EPS | $0.117 | $0.151 | $0.254 | $0.302 |
| Net interest margin, taxable-equivalent | 2.81% | 3.11% | 2.93% | 3.17% |
Q2 net income declined about 23% year over year; first-half net income declined about 16%. Q2 return on average assets was 0.82% versus 1.14%, and return on average equity was 8.21% versus 11.60%. The filing attributes weaker results chiefly to lower interest rates and net interest margin, higher credit-loss provisioning amid pandemic uncertainty, and reduced fee income; lower expenses partly offset these pressures.
Balance sheet, liquidity and capital
- Total assets were $5.68 billion, up from $5.22 billion at year-end. Net loans were $4.13 billion, versus $4.02 billion; deposits rose to $4.87 billion from $4.45 billion.
- Cash and cash equivalents were $952.8 million, up from $456.8 million. Management described liquidity as strong and identified Federal Home Loan Bank and Federal Reserve borrowing capacity as contingent sources. The Bank said it did not plan to use the PPP Liquidity Facility.
- Short-term borrowings were $177.3 million, compared with $148.7 million at year-end. The filing reports no long-term borrowings as a separate balance-sheet line item.
- First-half operating cash flow was $28.3 million versus $30.4 million in 2019. Cash increased by $496.0 million, supported by a $415.3 million increase in deposits and other financing inflows.
- Shareholders’ equity was $553.4 million, up from $538.3 million; the equity-to-assets ratio was 9.75%, compared with 10.43% at year-end. The Bank was categorized as well capitalized; its total risk-based capital ratio was 19.576% and consolidated ratio was 20.050%.
Credit quality and material changes
- The allowance for loan losses increased to $48.1 million from $44.3 million at year-end, or 1.15% of loans versus 1.09%. First-half net charge-offs were $173,000. Nonperforming loans were $21.9 million, compared with $20.9 million at year-end; there were no loans 90 days past due and still accruing.
- COVID-19-related payment deferrals totaled approximately $189.7 million across 752 loans at June 30, including $45.0 million of commercial loans and $144.7 million of residential, home-equity and installment loans. The filing also describes the total as approximately $190 million. These qualifying deferrals remained current and accruing under applicable relief provisions. As of July 10, the initial deferral period had expired for 231 loans totaling $43.3 million; about 74% had begun repayment, while the remainder were being evaluated for extensions.
- The company processed 663 Paycheck Protection Program loans totaling $45.7 million by June 30. Commercial loan growth was partly driven by PPP lending.
- Available-for-sale securities fell to $432.7 million from $573.8 million; the portfolio had a $10.9 million net unrealized gain at June 30, primarily reflecting interest-rate changes. The company recorded a $1.155 million securities gain in the first half.
Outlook, risks and unusual items
- Management said the full-year effect of COVID-19 was difficult to quantify. It cited potential pressure on credit quality, loan-loss provisions, net interest income, fee income, collateral values and capital from an extended downturn. Management stated that no material or systematic adverse effect had been identified in the first half other than increased loan-loss provisioning.
- The Federal Reserve’s rate cuts lowered the federal funds target to 0.00%–0.25%. Management noted that low rates have compressed asset yields and margins; it expects deposit costs to continue repricing lower, but provided no quantified earnings or margin guidance.
- The company suspended its share repurchase program on April 16 after repurchasing 489,000 shares for $3.5 million in Q1. It declared a Q2 dividend of $0.068125 per share; management noted that future dividends depend partly on the Bank’s ability to distribute capital and on regulatory requirements.
- TrustCo elected to delay adoption of the current expected credit loss standard under CARES Act relief until the national emergency ends or December 31, 2020, whichever occurs first. Management expected a one-time retained-earnings adjustment to increase the credit-loss allowance and unfunded commitment liability upon adoption.
- The interim financial statements received an accountant’s review, not an audit. The review report stated that the firm was not aware of material modifications needed for GAAP conformity. Management reported effective disclosure controls and no material change in internal control during the quarter.
Investor verification priorities
- Track deferral expirations, repayment performance, further extensions and any migration into delinquency, nonaccrual status or TDR classification.
- Assess whether the $48.1 million allowance adequately reflects pandemic-related risks and how CECL adoption could affect reserves, earnings and capital.
- Monitor net interest margin and funding costs as assets and deposits reprice in the near-zero-rate environment.
- Reconcile reported liquidity growth with deposit inflows, short-term borrowings and the deployment of excess cash into loans or securities.
- Verify that dividend capacity remains supported by Bank capital, regulatory conditions and future earnings, particularly with share repurchases suspended.