TRUSTCO BANK CORP N Y quarterly report, Q2 FY2019

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TrustCo Bank Corp NY — Q2 2019 Form 10-Q

Business context and reporting period. TrustCo is a regional bank holding company with lending and deposit operations in New York and surrounding states and Florida. This unaudited quarterly report covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods; balance-sheet comparisons are primarily to December 31, 2018. Crowe LLP conducted an interim review and reported no material modifications needed for GAAP conformity; this was not an audit.

Financial performance and position

  • Q2 earnings: Net income was $14.7 million, or $0.151 diluted EPS, versus $15.4 million, or $0.160, a year earlier. Return on average assets was 1.14% (1.26% prior year) and return on average equity was 11.60% (13.26%).
  • First-half earnings: Net income was $29.2 million, or $0.302 diluted EPS, compared with $30.2 million, or $0.313. Six-month ROAA was 1.15% versus 1.24%; ROAE was 11.76% versus 13.17%.
  • Net interest: Q2 net interest income was $39.2 million, down from $40.1 million; taxable-equivalent net interest margin fell to 3.11% from 3.32%. For the first half, net interest income was $78.9 million versus $79.4 million and margin was 3.17% versus 3.30%.
  • Other income and expenses: Q2 noninterest income increased to $4.9 million from $4.5 million, while noninterest expense rose to $24.9 million from $24.1 million. First-half amounts were $9.6 million and $49.8 million, respectively, compared with $9.2 million and $48.3 million.
  • Credit costs: Q2 included a $341,000 credit to the loan-loss provision, compared with a $300,000 provision in Q2 2018. First-half provision was a $41,000 credit versus a $600,000 provision. The allowance was $44.4 million, or 1.14% of loans, at June 30.
  • Balance sheet and liquidity: Total assets were $5.23 billion, up from $4.96 billion at year-end. Net loans were $3.86 billion; cash and cash equivalents were $560.2 million; available-for-sale securities were $633.5 million. Deposits totaled $4.46 billion, up from $4.27 billion, and short-term borrowings were $166.7 million, versus $161.9 million. Shareholders’ equity was $515.6 million, up from $489.9 million.
  • Cash flow and distributions: First-half operating cash flow was $30.4 million, investing cash outflow was $154.8 million, and financing cash flow was $180.9 million. Cash and cash equivalents increased $56.4 million. Dividends paid were $13.2 million; the Q2 declared dividend was $0.068125 per share.
  • Capital: The Bank was categorized as well capitalized. At June 30, its Tier 1 leverage, common equity Tier 1, Tier 1 risk-based and total risk-based ratios were 9.685%, 18.236%, 18.236% and 19.491%, respectively. Consolidated equity-to-assets was 9.86%.

Material changes versus comparable periods

  • Q2 interest income increased to $48.7 million from $44.8 million, but interest expense more than doubled to $9.5 million from $4.7 million, largely reflecting higher deposit costs, especially time deposits. The resulting net interest income and margin declined despite growth in average earning assets.
  • Average loans increased by $176.6 million year over year to $3.88 billion in Q2; average interest-earning assets increased by $210.0 million to $5.04 billion. Deposit competition and repricing raised the average rate paid on interest-bearing liabilities to 0.91% from 0.47%.
  • Nonperforming loans declined to $22.1 million from $25.0 million at December 31, 2018 and $24.2 million at June 30, 2018. Foreclosed real estate increased to $2.6 million from $1.7 million at year-end.
  • Available-for-sale securities increased to $633.5 million from $501.5 million at year-end. Their net unrealized loss narrowed to $2.3 million from $14.1 million, mainly due to market interest-rate changes; the improvement also contributed to higher comprehensive income.
  • Operating lease accounting adopted January 1, 2019 added right-of-use assets and lease liabilities; at June 30 these were $51.1 million and $56.2 million. Management said adoption did not materially affect key performance metrics or operating results.

Outlook, commentary and risks

  • Management said it expects net interest margin to begin stabilizing later in 2019, particularly in the third and fourth quarters, as shorter-term time deposits may reprice lower. This is commentary, not formal earnings guidance.
  • Management remains focused on growing customer relationships and loans, while noting that the current rate environment narrows margins on incremental balance-sheet growth and that it may limit growth or reduce the balance sheet if warranted.
  • Management described liquidity and capital as strong and said it does not expect a significant change in inherent portfolio credit risk at June 30. It cautioned that deterioration in housing prices, employment or local economies could increase credit risk and nonperforming loans.
  • Key exposures include interest-rate and yield-curve movements, deposit pricing and competition, credit quality and collateral values, geographic economic conditions, regulatory costs and restrictions, and third-party, technology and cybersecurity disruptions. The loan portfolio is concentrated in residential real estate; 75.5% was in New York and surrounding states and 24.5% in Florida.
  • The Q2 negative provision was partly driven by the sale of the remaining credit-card portfolio, which generated a reported gain of approximately $176,000 and reduced the required loan-loss reserve by $541,000. First-half net charge-offs were $360,000 versus $266,000 in 2018.
  • The company reported no material changes to previously disclosed risk factors and no legal proceedings. Management stated disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether deposit pricing and time-deposit repricing deliver the margin stabilization management anticipated, given the Q2 margin decline and sharp rise in interest expense.
  • Loan and deposit growth, funding mix, cash deployment, and the maturity profile of time deposits; $1.01 billion of time deposits mature within one year.
  • Trends in nonperforming loans, delinquencies, foreclosed real estate, charge-offs and allowance adequacy, including the effect of the credit-card portfolio sale.
  • Interest-rate sensitivity assumptions: the company’s model estimated fair value of capital at 20.33% of fair value of assets at current rates, falling to 14.91% under an instantaneous 200-basis-point rate decrease.
  • Dividend capacity and regulatory constraints: payment by the holding company depends on Bank distributions and continued compliance with capital requirements.
  • Implementation progress and potential impact of the expected-credit-loss standard (CECL), which the company was preparing to adopt in 2020.