TrustCo Bank Corp NY — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; interim financial statements are unaudited. Dollar amounts are in millions unless otherwise stated. TrustCo is a bank holding company whose principal lending business is residential real estate.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total interest income | $53.9 | $41.3 |
| Net interest income | $47.0 | $40.1 |
| Provision (credit) for credit losses | $0.3 | ($0.2) |
| Noninterest income | $4.7 | $5.2 |
| Noninterest expense | $27.7 | $22.8 |
| Net income | $17.7 | $17.1 |
| Diluted EPS | $0.93 | $0.89 |
| Net interest margin, fully taxable equivalent | 3.21% | 2.66% |
Net income rose about 3.8% year over year. Management reported return on average assets of 1.20% versus 1.12%, and return on average equity of 11.84% versus 11.60%. Net interest income increased $6.9 million (17.1%), while the provision, lower noninterest income and higher expenses partly offset the increase. The prior-year expense comparison benefited from a roughly $2 million favorable incentive-compensation accrual true-up.
Financial position, liquidity and capital
- At March 31, 2023, total assets were $6.05 billion, up from $6.00 billion at year-end 2022. Loans before allowance were $4.80 billion, versus $4.73 billion; net loans were $4.75 billion.
- Total deposits were $5.21 billion, up $19.6 million from year-end. Time deposits increased to $1.28 billion from $1.03 billion, while savings and checking balances declined. Short-term borrowings were $134.3 million, up from $122.7 million.
- Cash and cash equivalents were $637.0 million, compared with $650.6 million at year-end. Q1 operating cash flow was $18.8 million; investing activities used $56.8 million, chiefly reflecting $66.3 million of net loan growth; financing activities provided $24.4 million. Cash declined $13.6 million during the quarter.
- Estimated uninsured deposits were $924.1 million, approximately 17.7% of deposits, versus $968.6 million at December 31, 2022. Management said liquidity sources were sufficient and cited access to Federal Home Loan Bank and Federal Reserve borrowing, with brokered deposits available as a contingency source.
- The allowance for credit losses on loans was $46.7 million, or 0.97% of loans, compared with $46.0 million and 0.97% at year-end. Nonperforming loans were $19.2 million, up from $17.5 million; none were 90 days past due and still accruing. The filing reports $53,000 of net loan recoveries in Q1.
- Available-for-sale securities had a $38.3 million net unrealized loss at quarter-end, down from $43.5 million at year-end. Management attributed the losses primarily to interest rates, said it did not intend to sell and did not expect to be required to sell these securities before recovery.
- Bank regulatory capital ratios included a 10.305% Tier 1 leverage ratio, 18.470% common equity Tier 1 ratio and 19.723% total risk-based capital ratio. The Bank was classified as well capitalized. Consolidated equity-to-assets was 10.17%, versus 10.00% at year-end.
Changes, outlook and risks
- Higher market rates drove asset yields and interest income higher, particularly on short-term investments: their average yield rose to 4.61% from 0.20%. Deposit costs also rose: the average rate on interest-bearing deposits increased to 0.62% from 0.09%. Management reported a 55-basis-point year-over-year increase in net interest margin.
- Average loans grew $312 million year over year to $4.76 billion, while average interest-earning assets declined to $5.86 billion from $6.05 billion. Average short-term investments fell to $576.9 million from $1.19 billion.
- Noninterest income fell $0.5 million, mainly reflecting lower interchange fees and a $268,000 building-sale gain in Q1 2022. Wealth-management income also declined; assets under management were $922 million, compared with $1.03 billion a year earlier.
- Management described its long-term strategy as growing customer relationships, loans and deposits, but said narrower margins on incremental balance-sheet growth could lead it to limit growth or reduce the balance sheet if conditions warrant. No numerical earnings or margin guidance was provided.
- Management said recent bank failures had not directly affected TrustCo and did not present a significant risk in its assessment, while acknowledging uncertainty and potential depositor behavior changes. Key risks include deposit competition and outflows, rising funding costs, interest-rate and securities-value exposure, credit deterioration, inflation, economic slowdown, financial-sector stress and regulatory changes. The filing also highlights risks from a potential U.S. debt-ceiling disruption.
- Interest-rate sensitivity modeling estimated fair value of capital at 26.8% of fair value of assets at current rates; the estimate ranged from 25.4% under a 400-basis-point rate increase to 15.1% under a 400-basis-point decrease. These are model estimates, subject to assumptions.
- The Board authorized a new repurchase program of up to 200,000 shares on March 17, 2023; none were repurchased in the quarter. The declared quarterly dividend was $0.36 per share. The independent accountant performed an interim review, not a full audit, and reported no material modifications needed to the interim statements.
Investor verification priorities
- Track deposit levels, mix, pricing and uninsured-deposit trends, especially the shift toward time deposits and potential funding needs.
- Assess whether net interest margin gains persist as deposit costs reprice and rates, the yield curve and loan demand change.
- Review loan delinquencies, nonperforming balances, geographic and residential real-estate exposure, and whether the allowance remains adequate under changing economic forecasts.
- Monitor the available-for-sale securities unrealized loss and the company’s liquidity and ability to hold securities through recovery.
- Verify capital ratios, dividend capacity and any repurchases against regulatory limits and evolving banking-sector requirements.