TrustCo Bank Corp NY — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited consolidated interim results. TrustCo is a regional bank focused principally on residential mortgage lending, with operations concentrated in New York and Florida. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Interest income | $41.3 | $42.5 | Down $1.2 |
| Net interest income | $40.1 | $40.1 | Nearly unchanged |
| Net interest margin | 2.66% | 2.78% | Down 12 basis points |
| Noninterest income | $5.2 | $4.4 | Up $0.8 |
| Noninterest expense | $22.8 | $25.3 | Down $2.6 |
| Net income | $17.1 | $14.1 | Up 21%; diluted EPS $0.89 vs. $0.73 |
| Operating cash flow | $11.0 | $8.7 | Cash and cash equivalents increased $53.1 during Q1 |
Financial position and credit
- At March 31, total assets were $6.28 billion, up from $6.20 billion at year-end 2021. Gross loans were $4.46 billion; net loans were $4.42 billion.
- Deposits totaled $5.35 billion, up $81.9 million from year-end. Short-term borrowings were $248.4 million, versus $244.7 million at year-end. Cash and cash equivalents were $1.27 billion.
- Shareholders’ equity was $592.9 million, down from $601.1 million at year-end. The $14.5 million after-tax other comprehensive loss, primarily reflecting securities valuation declines, more than offset retained earnings growth.
- Available-for-sale securities had a $19.2 million gross unrealized loss at quarter-end, largely attributed by management to higher interest rates. Management stated it did not intend, and did not expect to be required, to sell the securities before recovery.
- Nonperforming loans were $19.4 million, compared with $18.8 million at year-end and $21.6 million a year earlier. No loans were 90 days past due and still accruing. The loan-loss allowance was $46.2 million, or 1.03% of loans; the allowance for unfunded commitments was $2.7 million.
- The Bank remained well capitalized. Its Tier 1 leverage, common equity Tier 1, and total risk-based capital ratios were 9.29%, 18.74%, and 20.00%, respectively. The company declared a $0.35-per-share dividend and repurchased 18,114 shares for $0.6 million.
Material changes and unusual items
- Net income increased mainly because the provision for credit losses was $0.6 million lower year over year, noninterest income rose $0.8 million, and noninterest expense fell $2.6 million. Net interest income was essentially flat.
- Expense reduction included an approximately $2 million favorable true-up to incentive compensation accruals upon payout and lower employee benefit costs. Management said salaries and benefits were expected to return to historical levels in future periods. A $268,000 gain on sale of a building also contributed to noninterest income.
- TrustCo adopted CECL on January 1, 2022. Adoption increased the loan allowance by $2.4 million and the unfunded-commitment allowance by $2.3 million, and reduced retained earnings by $3.47 million after tax. Prior-year credit-loss figures use the prior accounting method and are not fully comparable.
- Q1 cash from operations was $11.0 million; investing activities used $36.1 million and financing activities provided $78.2 million. The financing inflow primarily reflected deposit growth.
Outlook, commentary, and risks
- No specific earnings or financial guidance was provided. Management described plans to continue pursuing loan and relationship growth, while noting that the interest-rate environment has narrowed margins on incremental balance-sheet growth; it may limit growth or shrink the balance sheet if considered beneficial.
- Management cited inflation, higher interest rates, supply-chain and workforce challenges, the war in Ukraine, pandemic uncertainty, and a flattening yield curve as relevant economic pressures. The Federal Reserve raised its target rate in March 2022, and management anticipated further increases.
- For CECL estimates, management selected a stagflation forecast scenario, with an eight-quarter reasonable-and-supportable forecast period. It cited potential credit exposure from regional and product concentrations, unemployment, property values, and economic conditions.
- Interest-rate risk is material: higher rates can reduce available-for-sale securities’ fair value and affect loan yields, deposit costs, and funding competition. Management reported substantial liquidity and access to Federal Home Loan Bank and Federal Reserve borrowing, among other contingent sources.
- The company reported no material COVID-19 loan deferrals at quarter-end, no material change to previously disclosed risk factors, and no legal proceedings. It cautioned that unanticipated credit losses could affect capital and dividend capacity.
Important facts for investors to verify
- Whether net interest margin stabilizes or declines as rates and deposit costs adjust, and whether excess liquidity can be redeployed at attractive returns.
- Whether the $19.2 million unrealized securities loss remains temporary and whether any liquidity needs could require securities sales.
- How CECL assumptions, including the stagflation scenario, affect loan and unfunded-commitment allowances in subsequent quarters.
- Whether the favorable compensation accrual adjustment and building-sale gain make Q1 expense and income levels unrepresentative of recurring results.
- Trends in nonperforming residential loans, delinquency levels, and property values, as well as the bank’s capital and dividend capacity.