TRUSTCO BANK CORP N Y quarterly report, Q3 FY2022

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TrustCo Bank Corp NY — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022. Financial statements are unaudited; the independent accountant conducted a review, not an audit. Unless otherwise noted, dollar amounts below are in millions.

Business context and financial performance

TrustCo is a regional bank holding company whose lending is concentrated in residential real estate, with operations in New York and surrounding states and Florida. It reported higher earnings compared with 2021, principally as rising short-term rates lifted returns on cash and securities and reduced interest expense.

  • Q3: Net interest income was $47.8 million, up from $39.9 million; net income was $19.4 million versus $16.8 million; diluted EPS was $1.013 versus $0.871. Return on average assets was 1.24% (1.08% prior year), and return on average equity was 12.78% (11.40%).
  • First nine months: Net interest income was $130.9 million versus $120.1 million; net income was $54.3 million versus $45.3 million; diluted EPS was $2.835 versus $2.349. Return on average assets was 1.17% (1.00%), and return on average equity was 12.16% (10.50%).
  • Margins: Net interest margin was 3.16% for Q3, up 51 basis points year over year, and 2.88% for the nine months, up 17 basis points. The filing presents taxable-equivalent net interest income of $47.8 million and $130.9 million, respectively.
  • Noninterest income and expenses: Q3 noninterest income was $4.4 million versus $4.3 million; expenses were $26.1 million versus $24.7 million. For the nine months, noninterest income was $14.5 million versus $13.4 million, while expenses declined to $73.9 million from $75.5 million.
  • Credit costs: Q3 provision for credit losses was $0.3 million, compared with a $2.8 million credit in Q3 2021. For the nine months, the company recorded a $0.4 million credit, versus a $2.5 million credit in 2021.

Financial position, liquidity and capital

  • At September 30, total assets were $6.08 billion, down from $6.20 billion at December 31, 2021. Loans before allowance were $4.63 billion, up from $4.44 billion; deposits were $5.28 billion, little changed from $5.27 billion.
  • Cash and cash equivalents were $841.3 million, down from $1.22 billion at year-end. Short-term borrowings fell to $124.9 million from $244.7 million. The filing reports no long-term debt balance.
  • For the first nine months, operating cash flow was $55.8 million; investing activities used $302.4 million, including a $191.1 million net increase in loans; financing activities used $131.7 million. Cash and cash equivalents declined by $378.2 million.
  • Shareholders’ equity was $589.0 million, compared with $601.1 million at year-end. The consolidated equity-to-assets ratio was 9.69%. The Bank was reported as well capitalized; its total risk-based capital ratio was 19.586%, and the consolidated ratio was 20.090%.
  • The company declared a $0.35-per-share Q3 dividend. It repurchased 75,100 shares during the quarter for $2.5 million, with 32,786 shares remaining under the authorized program at September 30.

Material changes and notable items

  • Higher asset yields drove the earnings improvement: Q3 interest income increased $7.4 million year over year, while interest expense decreased $0.5 million. Average loan balances grew, and higher Federal Funds rates sharply increased income from short-term investments. Management said further rate increases would likely raise deposit costs.
  • Available-for-sale securities had $517.6 million amortized cost and $468.2 million fair value at September 30, producing $49.4 million of gross unrealized losses. The after-tax unrealized securities loss for the first nine months was $36.6 million; accumulated other comprehensive loss was $25.2 million. Management attributed the decline mainly to interest rates, stated it did not intend to sell and did not expect to be forced to sell before recovery, and recorded no securities credit-loss allowance.
  • Effective January 1, 2022, TrustCo adopted CECL. Adoption increased the loan credit-loss allowance by $2.4 million and the unfunded-commitment allowance by $2.3 million, and reduced retained earnings by $3.5 million net of tax. The September 30 loan allowance was $45.5 million, or 0.98% of loans; the unfunded-commitment allowance was $3.4 million.
  • Nonperforming loans were $18.7 million, compared with $18.8 million at year-end and $20.2 million a year earlier; none were 90 days past due and still accruing. Nonaccrual residential mortgages accounted for most nonperforming loans. Foreclosed real estate was $0.7 million. Management said it was monitoring Hurricane Ian impacts in Florida and had not identified a material adverse loan-portfolio impact to date.

Outlook, commentary and risks

The filing provides no formal earnings or financial guidance. Management described a strategy of growing customer relationships, loans and deposits, while retaining flexibility to limit growth or shrink the balance sheet if conditions warrant. It expects rising market rates to put upward pressure on interest-bearing liability costs as deposits reprice. Management selected a stagflation economic forecast for credit-loss estimates, citing inflation, rate increases and economic uncertainty.

Key risks discussed include interest-rate and securities-market volatility, an inverted yield curve, inflation and recession concerns, loan concentration in residential real estate and the New York/Florida markets, changes in property values and unemployment, deposit repricing, the pandemic, geopolitical developments including the war in Ukraine, severe weather, cybersecurity and third-party vendor disruptions, and regulatory limits on capital distributions or dividends. Management stated that liquidity was adequate to meet contractual obligations and commitments over the next 12 months and beyond. No material changes to previously disclosed risk factors were reported; legal proceedings were listed as none.

Important facts for investors to verify

  • How deposit costs and net interest margin evolve as rate hikes feed through to deposit pricing, loan yields and the inverted yield curve.
  • Whether the $49.4 million gross unrealized loss in available-for-sale securities remains primarily rate-driven, and whether liquidity needs could require securities sales.
  • Changes in nonperforming loans, delinquencies, charge-offs and the CECL allowances, including the judgmental economic assumptions underlying reserves.
  • Loan growth, funding mix and cash balances, given the substantial decline in cash and the increase in loans during the period.
  • Capital and dividend capacity, including regulatory requirements and the pace of share repurchases.