TrustCo Bank Corp NY — Q3 2021 Form 10-Q
Business context and period. TrustCo is a bank holding company focused on traditional banking, with a loan portfolio concentrated in residential real estate mortgages and operations in New York and surrounding states and Florida. This unaudited quarterly report covers the three and nine months ended September 30, 2021; comparisons below are with 2020 unless otherwise noted. Financial amounts are in U.S. dollars; amounts shown in millions are rounded. Per-share amounts reflect the May 28, 2021 1-for-5 reverse stock split.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $39.9 million | $38.2 million | $120.1 million | $114.4 million |
| Provision (credit) for loan losses | $(2.8) million | $1.0 million | $(2.5) million | $5.0 million |
| Noninterest income | $4.3 million | $4.3 million | $13.4 million | $13.1 million |
| Noninterest expense | $24.7 million | $22.7 million | $75.5 million | $70.9 million |
| Net income | $16.8 million | $14.1 million | $45.3 million | $38.6 million |
| Diluted EPS | $0.871 | $0.730 | $2.349 | $2.001 |
| Net interest margin, fully taxable equivalent | 2.65% | 2.73% | 2.71% | 2.86% |
- Profitability and drivers: Q3 net income increased about 19%; nine-month net income increased about 17%. Lower deposit and borrowing costs and a credit to the loan-loss provision supported results, while lower yields on loans and securities and higher operating expenses were offsets. Q3 return on average assets was 1.08% (0.98% prior year) and return on average equity was 11.40% (10.04%).
- Balance sheet at September 30: Assets were $6.13 billion, up from $5.90 billion at December 31, 2020. Gross loans were $4.40 billion, versus $4.24 billion; deposits were $5.24 billion, versus $5.04 billion. Cash and cash equivalents were $1.19 billion, versus $1.11 billion. Shareholders’ equity was $586.7 million, versus $568.2 million.
- Liquidity, funding and debt: Cash and cash equivalents were substantial, with $230.8 million of short-term borrowings outstanding, compared with $214.8 million at year-end. Nine-month operating cash flow was $44.1 million, investing cash flow was negative $155.6 million, and financing cash flow was positive $197.7 million. Deposits grew $203.8 million in the period. Management states the Bank has additional contingent borrowing capacity through the Federal Home Loan Bank and Federal Reserve; it does not use brokered deposits as a regular funding source.
- Credit and capital: The allowance for loan losses was $47.4 million, or 1.08% of loans, versus $49.6 million, or 1.17%, at year-end. Nonperforming loans were $20.2 million, down from $21.1 million at year-end; there were no loans 90 days past due still accruing. The Bank was classified as well capitalized. At September 30, Bank ratios included a 9.15% Tier 1 leverage ratio, 18.90% common equity Tier 1 ratio and 20.15% total risk-based capital ratio.
Material changes versus comparable periods
- Q3 net interest income rose $1.7 million, as a $4.0 million reduction in interest expense more than offset a $2.3 million decline in interest income. For nine months, net interest income increased $5.7 million.
- Net interest margin contracted by 8 basis points in Q3 and 15 basis points for the first nine months. Loan yields fell year over year; the average loan balance grew, while a larger share of earning assets was held in low-yield short-term investments.
- The loan-loss provision shifted to credits of $2.8 million for Q3 and $2.5 million for nine months, compared with provisions of $1.0 million and $5.0 million, respectively, in 2020. Management attributed the reduction to improving economic conditions and credit metrics.
- Noninterest expenses increased $2.0 million in Q3 and $4.6 million year to date. Q3 salary and benefit costs rose $1.0 million; management cited labor-market pressures and higher employee-benefit costs.
- Available-for-sale securities had a $3.8 million net unrealized gain at September 30, down from $9.7 million at year-end, primarily reflecting interest-rate changes. Nine-month other comprehensive income included a $4.4 million after-tax securities loss, versus a $7.6 million gain in 2020.
- Noninterest income was broadly stable in Q3. Nine-month income increased modestly, with higher wealth-management and interchange income partly offset by the absence of $1.2 million in prior-year securities gains.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management says it continues to pursue loan and relationship growth, but may limit growth or shrink the balance sheet if conditions warrant. Management notes that the low-rate environment narrows margins on incremental balance-sheet growth.
- COVID-19 and credit: Management reported no material or systematic adverse financial-statement impacts through September 30, other than allowance adjustments; COVID-related deferrals were not material overall. The filing identifies pandemic-related uncertainty, possible future credit deterioration, lower collateral values and possible effects on earnings, capital and dividends. Q3 disclosures identify $1.8 million of pandemic-related deferrals recorded as nonperforming loans and $1.4 million classified as TDRs.
- Interest-rate risk: Interest rates are identified as the principal market risk. Management’s model estimates fair value of capital at 21.4% of fair value of assets at current rates, 18.3% under a 100-basis-point decline, and 22.2% under a 400-basis-point increase. These are model estimates, not forecasts, and depend on assumptions about rates, prepayments and deposit behavior.
- Accounting change: TrustCo intends to adopt the current expected credit losses standard (CECL) on January 1, 2022. The filing describes ongoing model, data and validation work but does not provide a clear quantified estimate of the adoption impact.
- Capital returns and corporate actions: The company declared a Q3 dividend of $0.340625 per share (split-adjusted), representing a 39.13% payout ratio, and repurchased 50,000 shares for $1.6 million during the quarter. The Board’s repurchase authorization was up to 400,000 split-adjusted shares, with 330,000 remaining at quarter-end. The reverse split was completed May 28, 2021.
- Other matters: The filing reports no legal proceedings and no material changes to previously disclosed risk factors. The independent accountant’s interim review found no material modifications needed; this review is not an audit. A director has an ownership interest in five entities leasing branch premises to the Company; related lease payments owed were $3.7 million, including $525,000 of interest.
Most important facts for investors to verify
- Whether margin pressure persists as loan and securities yields, funding costs and the mix of short-term investments change.
- How CECL adoption on January 1, 2022 affects the allowance, earnings and capital; the filing gives no clear impact estimate.
- Whether credit quality and the allowance remain adequate, particularly given residential-loan concentration and pandemic-related deferrals.
- Whether deposit growth, liquidity and short-term borrowings remain consistent with management’s funding plans and support profitable asset growth.
- Whether capital levels and regulatory approvals continue to support dividends and the remaining share-repurchase authorization.
- How unrealized securities gains or losses and changes in interest rates affect accumulated other comprehensive income, capital and reported results.