Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three month period ended March 31, 2023, with comparisons to the corresponding period in 2022, as applicable. Net interest margin is presented on a fully taxable equivalent basis in this discussion. The consolidated interim financial statements and related notes, as well as the Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 1, 2023 (the “2022 Form 10-K”), should also be read in conjunction with this review. Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period’s presentation.
Following this management discussion and analysis are the tables “Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential” which gives a detailed breakdown of TrustCo’s average interest earning assets and interest bearing liabilities for the three month periods ended March 31, 2023 and 2022.
Economic Overview
During the first quarter of 2023, financial markets rebounded despite inflationary worries, higher interest rates, supply-chain bottlenecks, the war in Ukraine, and banking sector concerns. For the first quarter of 2023, the S&P 500 Index was up 7.0%, Nasdaq was up 16.8%, and the Dow Jones Industrial Average was up 0.4% compared to the fourth quarter of 2022. The 10‑year Treasury bond averaged 3.65% during Q1 2023 compared to 3.83% in Q4 2022, a decrease of 18 basis points. The 2‑year Treasury bond average rate decreased 4 basis points to 4.35%, which further inverted the yield curve over the prior quarter. Consequently, the spread between the 10‑year and the 2-year Treasury bonds decreased from a -0.56% on average in Q4 to -0.70% in Q1. Generally, steeper yield curves are favorable for portfolio mortgage lenders like TrustCo, and the table below illustrates the range of rate movements for both short term and longer term rates. Commencing in March 2022, the Federal Open Market Committee (“FOMC”) increased the target range for the federal funds rate seven times in 2022 and twice in 2023 by a total of 475 basis points, to a range of 4.75% to 5.00% as of March 31, 2023. In May 2023, the FOMC increased the target range again by 25 basis points. All of these increases were expressly made in response to inflationary pressures, which are currently expected to continue. Spreads of most asset classes to the comparative treasury yield, including agency securities, corporates, municipals and mortgage-backed securities, continue to be down as compared to the levels seen before the pandemic. Accordingly, changes in rates and spreads continue to be effected by global economic concerns.
| | | | 3 Month | | | 2 Year | | | 5 Year | | | 10 Year | | | 10 - 2 Year | |
| | | | Yield (%) | | | Yield (%) | | | Yield (%) | | | Yield (%) | | | Spread (%) | |
| | | | | | | | | | | | | | | | | |
Q1/22 | | Beg of Q1 | | | 0.06 | | | | 0.73 | | | | 1.26 | | | | 1.52 | | | | 0.79 | |
| Peak | | | 0.59 | | | | 2.35 | | | | 2.55 | | | | 2.48 | | | | 0.89 | |
| Trough | | | 0.08 | | | | 0.77 | | | | 1.37 | | | | 1.63 | | | | 0.04 | |
| End of Q1 | | | 0.52 | | | | 2.28 | | | | 2.42 | | | | 2.32 | | | | 0.04 | |
| Average in Q1 | | | 0.31 | | | | 1.46 | | | | 1.83 | | | | 1.95 | | | | 0.49 | |
| | | | | | | | | | | | | | | | | | | | | | |
Q2/22 | | Beg of Q2 | | | 0.52 | | | | 2.28 | | | | 2.42 | | | | 2.32 | | | | 0.04 | |
| Peak | | | 1.83 | | | | 3.45 | | | | 3.61 | | | | 3.49 | | | | 0.44 | |
| Trough | | | 0.53 | | | | 2.37 | | | | 2.55 | | | | 2.39 | | | | -0.05 | |
| End of Q2 | | | 1.72 | | | | 2.92 | | | | 3.01 | | | | 2.98 | | | | 0.06 | |
| Average in Q2 | | | 1.10 | | | | 2.72 | | | | 2.95 | | | | 2.93 | | | | 0.21 | |
| | | | | | | | | | | | | | | | | | | | | | |
Q3/22 | | Beg of Q3 | | | 1.72 | | | | 2.92 | | | | 3.01 | | | | 2.98 | | | | 0.06 | |
| Peak | | | 3.40 | | | | 4.30 | | | | 4.21 | | | | 3.97 | | | | 0.04 | |
| Trough | | | 1.73 | | | | 2.82 | | | | 2.66 | | | | 2.60 | | | | -0.51 | |
| End of Q3 | | | 3.33 | | | | 4.22 | | | | 4.06 | | | | 3.83 | | | | -0.39 | |
| Average in Q3 | | | 2.75 | | | | 3.38 | | | | 3.23 | | | | 3.10 | | | | -0.28 | |
| | | | | | | | | | | | | | | | | | | | | | |
Q4/22 | | Beg of Q4 | | | 3.33 | | | | 4.22 | | | | 4.06 | | | | 3.83 | | | | -0.39 | |
| Peak | | | 4.46 | | | | 4.72 | | | | 4.45 | | | | 4.25 | | | | -0.25 | |
| Trough | | | 3.45 | | | | 4.10 | | | | 3.61 | | | | 3.42 | | | | -0.84 | |
| End of Q4 | | | 4.42 | | | | 4.41 | | | | 3.99 | | | | 3.88 | | | | -0.53 | |
| Average in Q4 | | | 4.19 | | | | 4.39 | | | | 4.00 | | | | 3.83 | | | | -0.56 | |
| | | | | | | | | | | | | | | | | | | | | | |
Q1/23 | | Beg of Q1 | | | 4.42 | | | | 4.41 | | | | 3.99 | | | | 3.88 | | | | -0.53 | |
| Peak | | | 5.06 | | | | 5.05 | | | | 4.34 | | | | 4.08 | | | | -0.38 | |
| Trough | | | 4.52 | | | | 3.76 | | | | 3.39 | | | | 3.37 | | | | -1.07 | |
| End of Q1 | | | 4.97 | | | | 4.10 | | | | 3.66 | | | | 3.55 | | | | -0.55 | |
| Average in Q1 | | | 4.78 | | | | 4.35 | | | | 3.80 | | | | 3.65 | | | | -0.70 | |
The United States economy experienced several areas of concern throughout 2022 continuing into 2023. Economic conditions can vary significantly over geographic areas, with strength concentrated in and around major population centers on the coasts and in certain areas where economic activity has been driven by specific regional factors.
On March 10 and March 12, 2023, Silicon Valley Bank and Signature Bank, respectively, were closed by regulators with the FDIC appointed as receiver. The closures of those banks and adverse developments affecting other banks over the past two months have resulted in heightened levels of market activity and volatility. The impact of market volatility from the adverse developments in the banking industry along with continued high inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict. Our businesses and financial results may be impacted by a variety of other factors as well, such as a failure by the federal government to raise the federal debt ceiling and an economic slowdown or recession.
TrustCo believes that its long-term focus on traditional banking services and practices historically has enabled the Company to avoid significant impact from asset quality problems, and that the Company’s strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with its past practice. Management believes that TrustCo has not engaged in the types of high risk loans and investments that led to the widely reported problems in the industry during the 2007-2009 financial crisis. Nevertheless, the Company may experience increases in nonperforming loans (“NPLs”) relative to historical levels from time to time.
Should general housing prices and other economic measures, such as unemployment in the Company’s market areas, deteriorate as a result of higher interest rates, financial sector instability, a potential or actual default on the federal debt or other reasons, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans.
Financial Overview
TrustCo recorded net income of $17.7 million, or $0.93 of diluted earnings per share, for the three months ended March 31, 2023, compared to net income of $17.1 million, or $0.89 of diluted earnings per share, in the same period in 2022. Return on average assets was 1.20% and 1.12%, respectively, for the three months ended March 31, 2023 and 2022. Return on average equity was 11.84% and 11.60%, respectively, for the three months ended March 31, 2023 and 2022.
The primary factors accounting for the change in net income for the three months ended March 31, 2023 compared to the same period of the prior year were:
| • | An increase of $6.9 million, or 17.1%, in net interest income compared to the first quarter of 2022. |
| • | An increase of $500 thousand in provision for credit losses for the first quarter of 2023 compared to the first quarter 2022. |
| • | A decrease of $514 thousand in noninterest income for the first quarter of 2023 compared to the first quarter of 2022. |
| • | An increase of $4.9 million in noninterest expense for the first quarter 2023 compared to the first quarter 2022, primarily as a result of a decrease in salaries and employee benefits in the first quarter of 2022 due to a true-up to the incentive compensation accrual upon payout, as well as increases in various other employee benefit plan expenses. |
Asset/Liability Management
The Company strives to generate its earnings capabilities through a mix of core deposits funding a prudent mix of earning assets. Additionally, TrustCo attempts to maintain adequate liquidity and reduce the sensitivity of net interest income to changes in interest rates to an acceptable level while enhancing profitability both on a short‑term and long‑term basis.
TrustCo’s results are affected by a variety of factors including competitive and economic conditions in the specific markets in which the Company operates and, more generally, in the national economy, financial market conditions and the regulatory environment. Each of these factors is dynamic, and changes in any area can have an impact on TrustCo’s results. Included in the Annual Report on Form 10-K for the year ended December 31, 2022 is a description of the effect interest rates had on the results for the year 2022 compared to 2021. Many of the same market factors discussed in the 2022 Annual Report, including instability in the financial services sector and heightened global economic concerns, continued to have a significant impact on results through the first quarter of 2023.
TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations and rates paid on deposits and charged on loans. In the experience of management, the absolute level of interest rates, changes in interest rates and customers’ expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period.
Interest rates have a significant impact on the operations and financial results of all financial services companies. One of the most important interest rates used to control national economic policy is the “Federal Funds” rate. This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating. Beginning in the second half of 2019, the Federal Reserve Board began lowering the rate in response to a slowing economy. During the first quarter of 2020, the target range for the Federal Funds rate was significantly decreased to 0.00% to 0.25% as a result of the COVID-19 pandemic. However, as discussed above, the FOMC increased the target range for the federal funds rate seven times in 2022 and twice in 2023 by a total of 475 basis points, to a range of 4.75% to 5.00% as of March 31, 2023. In May 2023, the FOMC increased the target range again by 25 basis points.
The interest rate on the 10-year Treasury bond and other long-term interest rates have significant influence on the rates for new residential real estate loans. These changes in interest rates have an effect on the Company relative to the interest income on loans, securities, and Federal Funds sold and other short-term instruments as well as the interest expense on deposits and borrowings. Residential real estate loans and longer‑term investments are most affected by the changes in longer term market interest rates such as the 10‑year Treasury. The Federal Funds sold portfolio and other short‑term investments are affected primarily by changes in the Federal Funds target rate. Deposit interest rates are most affected by short term market interest rates. Also, changes in interest rates have an effect on the recorded balance of the securities available for sale portfolio, which are recorded at fair value. Generally, as market interest rates increase, the fair value of the securities will decrease and the reverse is also generally applicable. Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae. The Company establishes rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive. Higher market interest rates also generally increase the value of retail deposits.
TrustCo’s principal loan products are residential real estate loans. As noted above, residential real estate loans and longer‑term investments are most affected by the changes in longer term market interest rates such as the 10-year Treasury. The 10‑year Treasury yield was down 18 basis points, on average, during the first quarter of 2023 compared to the fourth quarter of 2022, however, it was up 170 basis points as compared to the first quarter of 2022.
While TrustCo has been affected by changes in financial markets over time, management believes that the impacts have been mitigated by the Company’s generally conservative approach to banking. The Company utilizes a traditional underwriting process in evaluating loan applications, and since originated loans are retained in the portfolio, there is a strong incentive to be conservative in making credit decisions. For additional information concerning TrustCo’s loan portfolio and nonperforming loans, please refer to the discussions under “Loans” and “Nonperforming Assets,” respectively. Further, the Company does not rely on borrowed funds to support its assets and maintains a significant level of liquidity on the asset side of the balance sheet. Management believes that these characteristics provide the Company with increased flexibility and stability during periods of market disruption and interest rate volatility.
A fundamental component of TrustCo’s strategy has been to grow customer relationships and the deposits and loans that are part of those relationships. The Company has significant capacity to grow its balance sheet given its extensive branch network. The Company expects that growth to be profitable. The current interest rate environment, however, has narrowed the margin on incremental balance sheet expansion. While the Company has not changed its fundamental long term strategy in regard to utilizing its excess capacity, management continually evaluates changing conditions and may seek to limit growth or reduce the size of the balance sheet if its analysis indicates that doing so would be beneficial.
For the first quarter of 2023, the net interest margin is 3.21%, up 55 basis points versus the prior year’s quarter. The quarterly results reflect the following significant factors:
| • | The average balance of securities available for sale increased by $109.7 million and the average yield increased 72 basis points to 2.26%. |
| • | The average balance of Federal funds sold and other short-term investments decreased $610.3 million; however the average yield increased 441 basis points to 4.61% which was enough to offset the decrease in the average balance. |
| • | The average loan portfolio grew by $312.0 million to $4.76 billion and the average yield increased 21 basis points to 3.73% in the first quarter of 2023 compared to the same period in 2022. |
| • | The average balance of interest bearing liabilities (primarily deposit accounts) decreased $240.5 million and the average rate paid increased 53 basis points to 0.63% in the first quarter of 2023 compared to the same period in 2022. |
During the first quarter of 2023, the Company continued to focus on its strategy to expand its loan portfolio by offering competitive interest rates. Management believes the TrustCo residential real estate loan product is very competitive compared to local and national competitors. Competition remains strong in the Company’s market areas.
The strategy on the funding side of the balance sheet was to offer competitive shorter term rates which allowed the Bank to maintain our existing deposits. This strategy drove growth at a relatively low cost that management believes should sustain TrustCo’s strong liquidity position and continue to allow us to cross sell new relationships and take advantage of opportunities as they arise.
Earning Assets
Total average interest earning assets decreased from $6.05 billion in the first quarter of 2022 to $5.86 billion in the same period of 2023 with an average yield of 3.69% in the first quarter of 2023 and 2.74% in the first quarter of 2022. There was a continued shift in the mix of assets towards a lower proportion of Federal Funds sold and other short-term investments to securities available for sale and loans. Interest income on average earning assets increased $12.6 million in the first quarter of 2023 from the prior year period, on a tax equivalent basis. This increase was primarily driven by the higher interest rates on Federal Funds sold and other short-term investments and securities available for sale, which resulted from the increases in the Federal Funds target rate throughout 2022, and also from interest income on loans due to an increased volume of originations year over year at higher interest rates.
Loans
The average balance of loans was $4.76 billion in the first quarter of 2023 up from $4.44 billion in the comparable period in 2022. The yield on loans also increased 21 basis points to 3.73%.
Compared to the first quarter of 2022, the average balance of residential mortgage loans, commercial loans, installment loans, and home equity loans all increased. The average balance of residential mortgage loans was $4.21 billion in 2023 compared to $4.01 billion in 2022, an increase of 5.1%. The average yield on residential mortgage loans increased by 8 basis points to 3.50% in the first quarter of 2023 compared to 2022, primarily as a result of the higher interest rate environment.
TrustCo actively markets the residential loan products within its market territories. Mortgage loan rates are affected by a number of factors including rates on Treasury securities, the Federal Funds target rate and rates set by competitors and secondary market participants. TrustCo aggressively markets the unique aspects of its loan products thereby attempting to create a differentiation from other lenders. These unique aspects include low closing costs, fast turn-around time on loan approvals, and no escrow or mortgage insurance requirements for qualified borrowers. Assuming a continued rise in long-term interest rates, the Company would anticipate that the unique features of its loan products will continue to attract customers in the residential mortgage loan area.
Commercial loans, which consist primarily of loans secured by commercial real estate, increased $43.9 million to an average balance of $238.9 million in the first quarter of 2023 compared to the same period in the prior year. The average yield on this portfolio was down 12 basis points to 5.06% compared to the prior year period, primarily as a result of the less origination income recognized on forgiven PPP loans as compared to the prior year period. The Company remained selective in underwriting commercial loans in recent periods as the apparent risk/reward balance has been less favorable in many cases.
The average yield on home equity credit lines increased 202 basis points to 5.73% during the first quarter of 2023 compared to the prior year period. The average balances of home equity lines increased 25.3% to $291.3 million in the first quarter of 2023 as compared to the prior year.
Securities Available for Sale
The average balance of the securities available for sale portfolio for the first quarter of 2023 was $516.2 million compared to $406.5 million for the comparable period in 2022. The increase in the balance reflects new investment purchases partially offset by routine paydowns, and calls and maturities. The average yield was 2.26% for the first quarter of 2023 compared to 1.54% for the first quarter of 2022. The increase in average yield is a result of higher yields on bonds purchased in 2022 as a result of the current interest rate environment. This portfolio is primarily comprised of agency issued residential mortgage backed securities, bonds issued by government sponsored enterprises (such as Fannie Mae, the Federal Home Loan Bank, and Freddie Mac), Small Business Administration participation certificates, corporate bonds and municipal bonds. These securities are recorded at fair value with any adjustment in fair value included in other comprehensive income, net of tax.
The net unrealized loss in the available for sale securities portfolio was $38.3 million as of March 31, 2023 compared to a net unrealized loss of $43.5 million as of December 31, 2022. The decrease in the net unrealized losses in the portfolio is the result of changes in market interest rate levels.
Held to Maturity Securities
The average balance of held to maturity securities was $7.5 million for the first quarter of 2023 compared to $9.5 million in the first quarter of 2022. The decrease in balances reflects routine paydowns. No new securities were added to this portfolio during the period. The average yield was 4.14% for the first quarter of 2023 compared to 3.79% for the year earlier period. TrustCo expects to hold the securities in this portfolio until they mature or are called.
The net unrealized loss in the held to maturity securities portfolio was $179 thousand as of March 31, 2023 compared to a net unrealized loss of $217 thousand as of December 31, 2022. The decrease in the net unrealized losses in the portfolio is the result of changes in market interest rate levels.
As of March 31, 2023, this portfolio consisted solely of residential mortgage-backed securities. The balances for these securities are recorded at amortized cost.
Federal Funds Sold and Other Short-term Investments
The 2023 first quarter average balance of Federal Funds sold and other short-term investments was $576.9 million, a $610.3 million decrease from the $1.19 billion average for the same period in 2022. The yield was 4.61% for the first quarter of 2023 and 0.20% for the comparable period in 2022. Interest income from this portfolio increased $6.0 million from $572 thousand in 2022 to $6.6 million in 2023. While the average balances decreased year over year, the increase in the Federal Funds target rate throughout 2022 and into 2023 resulted in an increase in interest income over the same period in the prior year.
The Federal Funds sold and other short-term investments portfolio is utilized to generate additional interest income and liquidity as funds are waiting to be deployed into the loan and securities portfolios.
Funding Opportunities
TrustCo utilizes various funding sources to support its earning asset portfolio. The vast majority of the Company’s funding comes from traditional deposit vehicles such as savings, demand deposits, interest-bearing checking, money market and time deposit accounts.
Total average interest bearing deposits (which includes interest bearing checking, money market accounts, savings and time deposits) decreased $123.9 million to $4.35 billion for the first quarter of 2023 versus the first quarter in the prior year, and the average rate paid increased from 0.09% for 2022 to 0.62% for 2023. Total interest expense on these deposits increased $5.7 million to $6.7 million in the first quarter of 2023 compared to the year earlier period. From the first quarter of 2022 to the first quarter of 2023, interest bearing checking account average balances were down 4.9%, certificates of deposit average balances were up 20.4%, non‑interest demand average balances were up 1.0%, average savings balances decreased 4.7% and money market balances were down 24.1%. While average balances are down from a year ago, we have begun retaining more deposits compared to the last quarter, and continue to encourage customers to retain these funds in the expanded product offerings of the Bank through aggressive marketing and product differentiation.
As of March 31, 2023, the maturity of total time deposits was as follows:
(dollars in thousands)
Under 1 year | | $ | 1,109,775 | |
1 to 2 years | | | 75,997 | |
2 to 3 years | | | 3,096 | |
3 to 4 years | | | 612 | |
4 to 5 years | | | 90,728 | |
Over 5 years | | | 93 | |
| | $ | 1,280,301 | |
As of March 31, 2023 and December 31, 2022, approximately $924.1 million and $968.6 million, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.
Average short-term borrowings for the first quarter of 2023 were $131.9 million compared to $248.5 million in the same period in 2022. The decrease in the average balance from the prior year period is primarily a result of a shift of funds into time deposits. The average rate increased during this period from 0.38% in 2022 to 0.88% in 2023. The short-term borrowings of the Company are cash management accounts, which represent retail accounts with customers for which the Bank has pledged certain assets as collateral.
The Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet. The Bank is a member of the Federal Home Loan Bank of New York (“FHLBNY”) and is an eligible borrower at the Federal Reserve Bank of New York (“FRBNY”) and has the ability to borrow utilizing securities and/or loans as collateral at either. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a potential contingent funding source within its Asset/Liability Management Policy. Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness.
Net Interest Income
Taxable equivalent net interest income was up $6.9 million from $40.1 million in the first quarter of 2022 to $47.0 million in the first quarter of 2023. The net interest spread was up 43 basis points to 3.06% in the first quarter of 2023 compared to the same period in 2022. As previously noted, the net interest margin was up 55 basis points to 3.21% for the first quarter of 2023 compared to the same period in 2022.
Nonperforming Assets
Nonperforming assets include nonperforming loans (“NPLs”), which are those loans in a non‑accrual status and loans past due three payments or more and still accruing interest. Also included in the total of nonperforming assets are foreclosed real estate properties, which are included in other assets and categorized as other real estate owned.
The following describes the nonperforming assets of TrustCo as of March 31, 2023:
Nonperforming loans and foreclosed real estate: Total NPLs and non-accrual loans were $19.2 million as of March 31, 2023, compared to $17.5 million at December 31, 2022, and $19.4 million as of March 31, 2022. There were no loans as of March 31, 2023 and 2022 and December 31, 2022 that were past due 90 days or more and still accruing interest.
As of March 31, 2023, nonperforming loans primarily include a mix of commercial and residential loans. Of total nonperforming loans of $19.2 million as of March 31, 2023, $18.2 million were residential real estate loans, $874 thousand were commercial loans and mortgages and $121 thousand were installment loans, compared to $16.8 million, $533 thousand and $106 thousand, respectively at December 31, 2022.
A significant percentage of nonperforming loans are residential real estate loans, which are historically lower-risk than most other types of loans. Net recoveries were $78 thousand on residential real estate loans (including home equity lines of credit) for the first quarter of 2023 compared to net recoveries of $97 thousand for the first quarter of 2022. Management believes that these loans have been appropriately written down where required.
Ongoing portfolio management is intended to result in early identification and disengagement from deteriorating credits. TrustCo has a diversified loan portfolio that includes a significant balance of residential mortgage loans to borrowers in the Capital Region of New York and Central Florida, and avoids concentrations to any one borrower or any single industry. TrustCo has no advances to borrowers or projects located outside the United States. TrustCo continues to identify delinquent loans as quickly as possible and to move promptly to resolve problem loans. Efforts to resolve delinquencies begin immediately after the payment grace period expires, with repeated, automatically generated notices, as well as personalized phone calls and letters. Loans are placed in nonaccrual status once they are 90 days past due, or earlier if management has determined that such classification is appropriate. Once in nonaccrual status, loans are either brought current and maintained current, at which point they may be returned to accrual status, or they proceed through the foreclosure process. The collateral on nonaccrual loans is evaluated periodically, and the loan value is written down if the collateral value is insufficient.
The Company originates loans throughout its deposit franchise area. As of March 31, 2023, 67.0% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 33.0% were in Florida. Those figures compare to 68.0% and 32.0%, respectively at December 31, 2022.
Economic conditions vary widely by geographic location. As a percentage of the total nonperforming loans as of March 31, 2023, 14.7% were to Florida borrowers, compared to 85.3% to borrowers in New York and surrounding areas. For the three months ended March 31, 2023, New York and surrounding areas experienced net recoveries of approximately $59 thousand and there was net charge-offs of $6 thousand in Florida.
Other than loans currently identified as nonperforming, management is aware of no other loans in the Bank’s portfolio that pose material risk of the eventual non-collection of principal and interest. Also as of March 31, 2023, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources.
TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loan modifications, as individually evaluated loans. There were $986 thousand of commercial mortgages and commercial loans classified as individually evaluated as of March 31, 2023 compared to $646 thousand at December 31, 2022. There were $23.9 million of individually evaluated residential loans as of March 31, 2023 compared to $25.0 million at December 31, 2022.
As of March 31, 2023 and December 31, 2022 the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.
As of March 31, 2023 there was $1.9 million of foreclosed real estate compared to $2.1 million at December 31, 2022.
Allowance for credit losses on loans: The Company implemented CECL on January 1, 2022. Under this standard, allowances have been established for loans and commitments to lend. The allowance for credit losses on loans (“ACLL”) replaced the previous allowance for loan losses (“ALLL”). The Company recorded a net decrease to undivided profits of $3.5 million, net of $1.2 million in deferred tax balances as of January 1, 2022 for the cumulative effect of adopting CECL.
In the first quarter of 2023, the Company recorded a provision for credit losses of $300 thousand, which includes a provision for credit losses on loans of $600 thousand as a result of continued growth in the loan portfolio, offset by a benefit for credit losses on unfunded commitments of $300 thousand as a result of a corresponding decrease in unfunded loans.
The Company evaluated several external forecasts in choosing the forecast element for the economic components of the allowance for credit losses on loans. The Company selected the stagflation forecast and there have been no changes in the economic modeling since its adoption on January 1, 2022.
From December 31, 2022 to March 31, 2023, the actual performance was in line with the forecasted performance pertaining to key variables such as unemployment rates, consumer price indices, and Gross Metro Product. The increase in the ACLL during the first quarter of 2023 was primarily a result of loan growth and an increase in the expected life of loans.
See Note 5 of the financial statements for additional discussion related the process for determining the provision for credit losses.
The allocation of the allowance for credit losses on loans as follows:
(dollars in thousands) | | As of
March 31, 2023
|
|
| As of
December 31, 2022 | �� |
| | Amount | | | Percent of Loans to
Total Loans
| | | Amount
| | | Percent of Loans to
Total Loans | |
Commercial
| | $ | 2,459
| | | | 4,67
| % | | $
| 2,343
| | | | 4.41
| % |
Real Estate - construction
| | | 326
| | | | 0.64
| % | | | 385
| | | | 0.77
| % |
Real Estate mortgage - 1 to 4 family
| | | 39,412
| | | | 88.19
| % | | | 38,859
| | | | 88.51
| % |
Home equity lines of credit
| | | 4,277
| | | | 6.18
| % | | | 4,280
| | | | 6.05
| % |
Installment Loans
| | | 211
| | | | 0.32
| % | | | 165
| | | | 0.26
| % |
| | $ | 46,658
| | | | 100.00
| % | | $ | 46,032
| | | | 100.00
| % |
As of March 31, 2023, the allowance for credit losses on loans was $46.7 million, compared to $46.2 million as of March 31, 2022 and $46.0 million at December 31, 2022. The allowance represents 0.97% of the loan portfolio as of March 31, 2023 compared to 1.03% as of March 31, 2022 and 0.97% at December 31, 2022.
Net recoveries for the three-month period ended March 31, 2023 were $53 thousand and $58 thousand for the prior year period.
During the first quarter of 2023, there were no commercial or residential loan charge-offs and $48 thousand of consumer loan charge-offs compared with $36 thousand of commercial loan charge-offs and $11 thousand of consumer loan charge-offs in the first quarter of 2022. During the first quarter of 2023 were no commercial loan recoveries and $101 thousand for residential mortgage and consumer loan recoveries, compared to no commercial loan recoveries and $105 thousand for residential mortgage and consumer loan recoveries in the first quarter of 2022.
Liquidity and Interest Rate Sensitivity
TrustCo seeks to obtain favorable sources of funding and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Management believes that TrustCo’s earnings performance and strong capital position enable the Company to easily secure new sources of liquidity. The Company actively manages its liquidity through target ratios established under its liquidity policies. Continual monitoring of both historical and prospective ratios allows TrustCo to employ strategies necessary to maintain adequate liquidity. Management has also defined various degrees of adverse liquidity situations which could potentially occur and has prepared appropriate contingency plans should such a situation arise. As noted, the Company has a number of contingent funding alternatives available in addition to the large cash and cash equivalents position and the investment securities positions it maintains on its balance sheet. As previously stated, the Bank is a member of the FHLBNY and is an eligible borrower at the FRBNY and has the ability to borrow utilizing securities and/or loans as collateral at either institution. The Bank does not utilize brokered deposits as a part of its funding strategy, but does incorporate them as a contingent funding source within its Asset/Liability Management Policy. Like other contingent funding sources, brokered certificates of deposits may be tested from time to time to ensure operational and market readiness. Management believes that the Company has adequate sources of liquidity to cover its contractual obligations and commitments over the next twelve months and beyond.
The Company uses an industry standard external model as the primary tool to identify, quantify and project changes in interest rates and prepayment speeds taken both from industry sources and internally generated data based upon historical trends in the Bank’s balance sheet. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in market interest rates are also incorporated into the model. This model calculates an economic or fair value amount with respect to non-time deposit categories since these deposits are part of the core deposit products of the Company. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the fair value of capital or precisely predict the impact of fluctuations in interest rates on the fair value of capital.
Using this model, the fair value of capital projections as of March 31, 2023 are referenced below. The base case (current rates) scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of March 31, 2023. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp, 200bp, 300bp, and 400bp.
| | Estimated Percentage of | |
| | Fair value of Capital to | |
As of March 31, 2023 | | Fair value of Assets | |
+400 BP | | | 25.40 | %
|
|
+300 BP | | | 25.50 | | |
+200 BP | | | 26.60 | | |
+100 BP | | | 27.30 | | |
Current rates | | | 26.80 | | |
-100 BP | | | 25.70 | | |
-200 BP | | | 23.20 | | |
-300 BP | | | 20.00 | | |
-400 BP | | | 15.10 | | |
Noninterest Income
Total noninterest income for the first quarter of 2023 and 2022 was $4.7 million and $5.2 million, respectively. The decrease over the same period in the prior year was primarily related to a decrease of $223 thousand in interchange fees and a $268 thousand gain on the sale of a building in the prior year. Financial Services income was down $59 thousand to $1.8 million in the first quarter of 2023 as compared to the year-ago period, primarily as a result of lower market values of assets under management. The fair value of assets under management was $922 million as of March 31, 2023, $918 million as of December 31, 2022 and $1.03 billion as of March 31, 2022.
Noninterest Expenses
Total noninterest expenses were $27.7 million for the three months ended March 31, 2023, compared to $22.8 million for the three months ended March 31, 2022. Significant changes included an increase in salaries and employee benefits primarily as a result of a $2 million favorable true-up to the incentive compensation accrual upon payout in the first quarter of 2022, as well as increases in various other employee benefit plan expenses. Other significant changes were increases in equipment expense, professional services, FDIC and other insurance and other real estate expense, net. These increases were offset by a decrease in advertising expense. Full time equivalent headcount increased from 769 as of March 31, 2022 to 776 as of March 31, 2023 and represents a normal fluctuation of headcount.
Income Taxes
In the first quarter of 2023, TrustCo recognized income tax expense of $5.9 million compared to $5.6 million for the first quarter of 2022. The effective tax rates were 25.0% and 24.8%, respectively, for the first quarters of 2023 and 2022.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios.
Banking regulators have moved towards higher required capital requirements due to the standards included in the “Basel III” banking capital reform measures and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as a general trend towards reducing risk in the banking system by providing a greater capital margin.
Total shareholders’ equity as of March 31, 2023 was $614.7 million compared to $592.9 million as of March 31, 2022. TrustCo declared a dividend of $0.36 per share in the first quarter of 2023. This results in a dividend payout ratio of 38.59% based on first quarter 2023 earnings of $17.7 million.
The capital rules, which are generally applicable to both the Company and the Bank, include several measures; specifically, a Tier 1 leverage ratio, a common equity tier 1 (“CET1”) capital ratio, a tier 1 risk-based capital ratio and a total risk-based capital ratio. The rules also impose a capital conservation buffer that requires the Company and the Bank to maintain additional levels of Tier 1 common equity over the minimum risk-based capital levels before they may pay dividends, repurchase shares or pay discretionary bonuses.
The Bank and the Company reported the following capital ratios as of March 31, 2023 and December 31, 2022:
(Bank Only) | | | | | | | | | | | Minimum for | |
| | | | | | | | | | | Capital Adequacy plus | |
| | As of March 31, 2023 | | | Well | | | Capital Conservation | |
(dollars in thousands) | | Amount | | | Ratio | | | Capitalized(1) | | | Buffer (1)(2) | |
| | | | | | | | | | | | |
Tier 1 leverage ratio | | $ | 619,731 | | | | 10.305 | % | | | 5.000 | % | | | 4.000 | % |
Common equity tier 1 capital | | | 619,731 | | | | 18.470 | | | | 6.500 | | | | 7.000 | |
Tier 1 risk-based capital | | | 619,731 | | | | 18.470 | | | | 8.000 | | | | 8.500 | |
Total risk-based capital | | | 661,764 | | | | 19.723 | | | | 10.000 | | | | 10.500 | |
| | | | | | | | | | | Minimum for | |
| | | | | | | | | | | Capital Adequacy plus | |
| | As of December 31, 2022 | | | Well | | | Capital Conservation | |
(dollars in thousands) | | Amount | | | Ratio | | | Capitalized(1) | | | Buffer (1)(2) | |
| | | | | | | | | | | | |
Tier 1 leverage ratio | | $ | 609,998 | | | | 10.116 | % | | | 5.000 | % | | | 4.000 | % |
Common equity tier 1 capital | | | 609,998 | | | | 18.431 | | | | 6.500 | | | | 7.000 | |
Tier 1 risk-based capital | | | 609,998 | | | | 18.431 | | | | 8.000 | | | | 8.500 | |
Total risk-based capital | | | 651,462 | | | | 19.684 | | | | 10.000 | | | | 10.500 | |
(Consolidated)
| | | | | | | | Minimum for | |
| | | | | | | | Capital Adequacy plus | |
| | As of March 31, 2023 | | | Capital Conservation | |
(dollars in thousands) | | Amount | | | Ratio | | | Buffer (1)(2) | |
| | | | | | | | | |
Tier 1 leverage ratio | | $ | 637,524 | | | | 10.594 | % | | | 4.000 | % |
Common equity tier 1 capital | | | 637,524 | | | | 18.995 | | | | 7.000 | |
Tier 1 risk-based capital | | | 637,524 | | | | 18.995 | | | | 8.500 | |
Total risk-based capital | | | 679,570 | | | | 20.248 | | | | 10.500 | |
| | | | | | | | | | Minimum for | |
| | | | | | | | | | Capital Adequacy plus | |
| | As of December 31, 2022 | | | Capital Conservation | |
(dollars in thousands) | | Amount | | | Ratio | | | Buffer (1)(2) | |
| | | | | | | | | | | | |
Tier 1 leverage ratio | | $ | 626,628 | | | | 10.390 | % | | | 4.000 | % |
Common equity Tier 1 capital | | | 626,628 | | | | 18.929 | | | | 7.000 | |
Tier 1 risk-based capital | | | 626,628 | | | | 18.929 | | | | 8.500 | |
Total risk-based capital | | | 668,102 | | | | 20.182 | | | | 10.500 | |
(1) | Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized |
(2) | The March 31, 2023 and December 31, 2022 common equity tier 1, tier 1 risk-based, and total risk-based capital ratios include a capital conservation buffer of 2.50 percent |
In addition, as of March 31, 2023, Trustco’s consolidated equity to total assets ratio was 10.17% compared to 10.00% at December 31, 2022 and 9.44% as of March 31, 2022.
As of March 31, 2023, the capital levels of both TrustCo and the Bank exceeded the minimum standards, including with the current capital conservation buffer taken into account.
Under the Office of the Comptroller of the Currency’s (“OCC”) “prompt corrective action” regulations, a bank is deemed to be “well capitalized” when its CET1, Tier 1, total risk-based and leverage capital ratios are at least 7%, 8.5%, 10.5% and 5%, respectively. A bank is deemed to be “adequately capitalized” or better if its capital ratios meet or exceed the minimum federal regulatory capital requirements, and “undercapitalized” if it fails to meet these minimal capital requirements. A bank is “significantly undercapitalized” if its CET1, Tier 1, total risk-based and leverage capital ratios fall below 3%, 4%, 6% and 3%, respectively and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. As of March 31, 2023 and 2022, Trustco Bank met the definition of “well capitalized.”
As noted, the Company’s dividend payout ratio was 38.59% of net income for the first quarter of 2023 and 39.36% of net income for the first quarter of 2022. The per-share dividend paid in both the first quarter of 2023 and the fourth quarter of 2022, was $0.36, and it was $0.35 in the first quarter of 2022. The Company’s ability to pay dividends to its shareholders is dependent upon the ability of the Bank to pay dividends to the Company. The payment of dividends by the Bank to the Company is subject to continued compliance with minimum regulatory capital requirements. The OCC may disapprove a dividend if the Bank would be undercapitalized following the distribution; the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
TrustCo maintains a dividend reinvestment plan (DRP) with approximately 6,922 participants. The DRP allows participants to reinvest dividends in shares of the Company. The DRP also allows for additional purchases by participants and has a discount feature (up to a 5% for safe harbor provisions) that can be activated by management as a tool to raise capital. To date, the discount feature has not been utilized.
Share Repurchase Program
On March 17, 2023 the Company’s Board of Directors authorized, and the Company announced, another share repurchase program of up to 200,000 shares, or approximately 1% of its currently outstanding common stock. There were no repurchases during the three months ended March 31, 2023.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, income taxes and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
During the three months ended March 31, 2023, there were no significant changes to our critical accounting policies and estimates as described in the financial statements contained in the 2022 Form 10-K other than what is set forth immediately below.
Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy given the measurement uncertainty and subjective judgement necessary in evaluating the levels of the allowance required to cover the life-time losses in the loan portfolio and the material effect that such judgments can have on the results of operations.
TrustCo Bank Corp NY
Management’s Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders’ equity is the unrealized loss, net of tax, in the available for sale portfolio of $29.5 million in 2023 and $8.9 million in 2022. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship
of such variances to each other.
| | Three months ended | | | Three months ended | | | | | | | | | | |
(dollars in thousands) | | March 31, 2023 | | | March 31, 2022 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Average | | | Interest | | | Average | | | Average | | | Interest | | | Average | | | Change in | | | Variance | | | Variance | |
| | Balance | | | | | | Rate | | | Balance | | | | | | Rate | | | Interest | | | Balance | | | Rate | |
| | | | | | | | | | | | | | | | | | | | Income/ | | | Change | | | Change | |
Assets | | | | | | | | | | | | | | | | | | | | Expense | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U. S. government sponsored enterprises | | $ | 120,692 | | | $ | 692 | | | | 2.29 | % | | $ | 61,755 | | | $ | 86 | | | | 0.55 | % | | $ | 606 | | | | 141 | | | | 465 | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | 287,046 | | | | 1,585 | | | | 2.20 | % | | | 261,124 | | | | 1,087 | | | | 1.67 | % | | | 498 | | | | 118 | | | | 380 | |
State and political subdivisions | | | 34 | | | | - | | | | 6.74 | % | | | 41 | | | | 1 | | | | 6.73 | % | | | (1 | ) | | | (1 | ) | | | - | |
Corporate bonds | | | 85,578 | | | | 521 | | | | 2.43 | % | | | 52,977 | | | | 233 | | | | 1.76 | % | | | 288 | | | | 178 | | | | 110 | |
Small Business Administration-guaranteed participation securities | | | 22,129 | | | | 117 | | | | 2.12 | % | | | 29,871 | | | | 154 | | | | 2.06 | % | | | (37 | ) | | | (61 | ) | | | 24 | |
Other | | | 686 | | | | 2 | | | | 1.17 | % | | | 686 | | | | 2 | | | | 1.17 | % | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total securities available for sale | | | 516,165 | | | | 2,917 | | | | 2.26 | % | | | 406,454 | | | | 1,563 | | | | 1.54 | % | | | 1,354 | | | | 375 | | | | 979 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Federal funds sold and other short-term Investments | | | 576,931 | | | | 6,555 | | | | 4.61 | % | | | 1,187,201 | | | | 572 | | | | 0.20 | % | | | 5,983 | | | | (2,199 | ) | | | 8,182 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Held to maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage backed securities and collateralized mortgage obligations-residential | | | 7,542 | | | | 78 | | | | 4.14 | % | | | 9,541 | | | | 90 | | | | 3.79 | % | | | (12 | ) | | | (55 | ) | | | 43 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total held to maturity securities | | | 7,542 | | | | 78 | | | | 4.14 | % | | | 9,541 | | | | 90 | | | | 3.79 | % | | | (12 | ) | | | (55 | ) | | | 43 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Federal Reserve Bank and Federal Home Loan Bank stock | | | 5,797 | | | | 110 | | | | 7.59 | % | | | 5,604 | | | | 62 | | | | 4.43 | % | | | 48 | | | | 2 | | | | 46 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial loans | | | 238,870 | | | | 3,024 | | | | 5.06 | % | | | 194,989 | | | | 2,525 | | | | 5.18 | % | | | 499 | | | | 871 | | | | (372 | ) |
Residential mortgage loans | | | 4,212,878 | | | | 36,913 | | | | 3.50 | % | | | 4,007,886 | | | | 34,197 | | | | 3.42 | % | | | 2,716 | | | | 1,827 | | | | 889 | |
Home equity lines of credit | | | 291,326 | | | | 4,119 | | | | 5.73 | % | | | 232,535 | | | | 2,125 | | | | 3.71 | % | | | 1,994 | | | | 630 | | | | 1,364 | |
Installment loans | | | 13,323 | | | | 216 | | | | 6.56 | % | | | 8,974 | | | | 156 | | | | 7.03 | % | | | 60 | | | | 127 | | | | (67 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans, net of unearned income | | | 4,756,397 | | | | 44,272 | | | | 3.73 | % | | | 4,444,384 | | | | 39,003 | | | | 3.52 | % | | | 5,269 | | | | 3,455 | | | | 1,814 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest earning assets | | | 5,862,832 | | | | 53,932 | | | | 3.69 | % | | | 6,053,184 | | | | 41,290 | | | | 2.74 | % | | | 12,642 | | | | 1,578 | | | | 11,064 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for credit losses on loans | | | (46,290 | ) | | | | | | | | | | | (46,759 | ) | | | | | | | | | | | | | | | | | | | | |
Cash & non-interest earning assets | | | 175,097 | | | | | | | | | | | | 207,308 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 5,991,639 | | | | | | | | | | | | 6,213,733 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing checking accounts | | | 1,133,383 | | | | 66 | | | | 0.02 | % | | $ | 1,191,496 | | | $ | 44 | | | | 0.01 | % | | | 22 | | | | (14 | ) | | | 36 | |
Money market accounts | | | 600,855 | | | | 814 | | | | 0.55 | % | | | 791,689 | | | | 214 | | | | 0.11 | % | | | 600 | | | | (360 | ) | | | 960 | |
Savings | | | 1,456,242 | | | | 530 | | | | 0.15 | % | | | 1,527,975 | | | | 156 | | | | 0.04 | % | | | 374 | | | | (52 | ) | | | 426 | |
Time deposits | | | 1,160,969 | | | | 5,272 | | | | 1.84 | % | | | 964,158 | | | | 546 | | | | 0.23 | % | | | 4,726 | | | | 133 | | | | 4,593 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest bearing deposits | | | 4,351,449 | | | | 6,682 | | | | 0.62 | % | | | 4,475,318 | | | | 960 | | | | 0.09 | % | | | 5,722 | | | | (293 | ) | | | 6,015 | |
Short-term borrowings | | | 131,867 | | | | 285 | | | | 0.88 | % | | | 248,535 | | | | 234 | | | | 0.38 | % | | | 51 | | | | (640 | ) | | | 691 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest bearing liabilities | | | 4,483,316 | | | | 6,967 | | | | 0.63 | % | | | 4,723,853 | | | | 1,194 | | | | 0.10 | % | | | 5,773 | | | | (933 | ) | | | 6,706 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | | 816,565 | | | | | | | | | | | | 808,695 | | | | | | | | | | | | | | | | | | | | | |
Other liabilities | | | 84,092 | | | | | | | | | | | | 83,633 | | | | | | | | | | | | | | | | | | | | | |
Shareholders’ equity | | | 607,666 | | | | | | | | | | | | 597,552 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 5,991,639 | | | | | | | | | | | $ | 6,213,733 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income, tax equivalent | | | | | | | 46,965 | | | | | | | | | | | | 40,096 | | | | | | | $ | 6,869 | | | | 2,511 | | | | 4,358 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest spread | | | | | | | | | | | 3.06 | % | | | | | | | | | | | 2.63 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest margin (net interest income to total interest earning assets) | | | | | | | | | | | 3.21 | % | | | | | | | | | | | 2.66 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tax equivalent adjustment | | | | | | | - | | | | | | | | | | | | - | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | | | 46,965 | | | | | | | | | | | | 40,096 | | | | | | | | | | | | | | | | | |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The information presented in the “Liquidity and Interest Rate Sensitivity” section of Part I, Item 2 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
As detailed in the Annual Report on Form 10-K as of December 31, 2022, the Company is subject to interest rate risk as its principal market risk. As noted in the Management’s Discussion and Analysis for the three month periods ended March 31, 2023 and 2022 the Company continues to respond to changes in interest rates in such a way that positions the Company to meet short term earning goals and also allows the Company to respond to changes in interest rates in the future. Consequently, for the first quarter of 2023, the Company had an average balance of Federal Funds sold and other short-term investments of $576.9 million compared to $1.2 billion in the first quarter of 2022. As investment opportunities present themselves, management plans to invest funds from the Federal Funds sold and other short-term investment portfolio into the securities available for sale, securities held to maturity and loan portfolios. TrustCo does not engage in activities involving interest rate swaps, forward placement contracts, or any other instruments commonly referred to as “derivatives.” Additional disclosure of interest rate risk can be found under “Liquidity and Interest Rate Sensitivity” and “Asset/Liability Management” in the Management’s Discussion and Analysis section of this document.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation of those disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer of the Company concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
In designing and evaluating the Company’s disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
An investment in the Company involves risks, including the risks discussed in Item 1A. “Risk Factors” of the Company’s 2022 Form 10-K, which risk factors have not materially changed except as set forth below. The risk factors below supersede the similarly captioned risk factors set forth in the 2022 Form 10-K and supplement the other risk factors in the 2022 Form 10-K. The risk factors below reflect modifications to the nature of the risks that have developed since the date on which the 2022 Form 10-K was filed.
The soundness of other financial institutions could adversely affect us.
Recent events relating to the failures of certain banking entities in March and April 2023, including Silicon Valley Bank, Signature Bank and First Republic Bank, has caused general uncertainty and concern regarding the liquidity adequacy of the banking sector as a whole. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, banks, investment banks, mutual funds, and other institutional entities. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. Any such losses could be material and could materially and adversely affect our business, financial condition and results of operations. In addition, we anticipate increased regulatory scrutiny and new regulations directed towards regional banks similar in size to us, designed to address the recent negative developments in the banking industry, all of which may increase our costs of doing business and reduce our profitability.
Any failure by the U.S. federal government to increase the debt ceiling or any government shutdown could adversely affect the U.S. and global economy and our liquidity, financial condition and earnings.
U.S. debt ceiling and budget deficit concerns have increased the possibility of credit-rating downgrades and economic slowdowns, or a recession in the United States or globally. The U.S. federal government hit its borrowing limit, or debt ceiling, on January 19, 2023. If the government fails to increase the debt limit, the U.S. government’s sovereign credit rating may be downgraded and the U.S. government could default on its debts, which could adversely affect the U.S. and global financial markets, banking systems, and economic conditions. Absent intervention by the Federal Reserve, these developments could cause interest rates and borrowing costs to further increase, which may negatively impact our ability to access the debt markets, including the corporate bond markets, on favorable terms. In addition, disagreement over the federal budget has previously caused the U.S. federal government to shut down for periods of time. An extended period of shutdown of portions of the U.S. federal government could negatively impact the financial performance of certain customers and could negatively impact customers’ future access to certain loan and guaranty programs. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.
Changes in interest rates, including recent and possible future increases fueled by inflation, may significantly impact our financial condition and results of operations
Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments, and interest paid on deposits and borrowings. The level of net interest income is primarily a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the FRB (the “FOMC”), and market interest rates.
Over any specific period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice-versa. In addition, the individual market interest rates underlying our loan and deposit products may not change to the same degree over a given time period. In any event, if market interest rates should move contrary to our position, earnings may be negatively affected. Commencing in March 2022, the FOMC increased the target range for the Federal Funds rate seven times in 2022 and twice in 2023 by a total of 475 basis points, to a range of 4.75% to 5.00% as of March 31, 2023. In May 2023, the FOMC increased the target range again by 25 basis points. All of these increases were expressly made in response to inflationary pressures, which are currently expected to continue. In its April 2023 “Beige Book”, the FRB noted that overall economic activity was little changed in recent weeks, while conditions varied across industries and districts. Regional banks continued to report widespread declines in loan demand, ongoing credit tightening, and modestly rising mortgage delinquency rates. More locally, in the New York district, the district in which the Company’s primary operations are located, the FRB stated that regional economic activity was little changed, though goods production picked up noticeably. In addition, inflationary pressures moderated somewhat but remained widespread while conditions in the broad finance sector deteriorated sharply coinciding with recent stress in the banking sector.
There can be no assurances as to any future FOMC conduct. If the FOMC further increases the targeted Federal Funds rates, overall interest rates likely will rise, which will positively impact our interest income but may further negatively impact the entire national economy, including the housing industry in the markets we serve, by reducing refinancing activity and new home purchases. In addition, deflationary pressures, while possibly lowering our operational costs, could have a significant negative effect on our borrowers and the values of collateral securing loans, which could negatively affect our financial performance. A significant portion of our loans have fixed interest rates (or, if adjustable, are initially fixed for periods of five to 10 years) and longer terms than our deposits and borrowings. Our net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Increases in interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay adjustable rate loans. Decreases in interest rates often result in increased prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Conversely, increases in interest rates often result in slowed prepayments of loans and mortgage-related securities, reducing cash flows and reinvestment opportunities.
Changes in interest rates also affect the value of the Bank’s interest-earning assets, and in particular the Bank’s securities portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on shareholders’ equity.
Inflationary pressures and rising prices may affect our results of operations and financial condition.
Inflation rose sharply at the end of 2021 and has continued rising in 2022 and 2023 at levels not seen for over 40 years. Inflationary pressures are currently expected to remain elevated throughout 2023. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Share Repurchase Program
The following table provides certain information with respect to the Company’s purchases of its common shares during the three months ended March 31, 2023:
| | Issuer Purchases of Common Shares | |
Period | | Total numbers of shares purchased | | | Average price paid per share | | | Total number of shares purchased as part of publicly announced plans or programs | | | Maximum number of shares that may yet be purchased under the plans or programs (1) | |
January 1, 2023 through January 31, 2023 | | | - | | | $ | - | | | | - | | | | - | |
February 1, 2023 through February 28, 2023 | | | - | | | | - | | | | - | | | | - | |
March 1, 2023 through March 31, 2023 | | | - | | | | - | | | | - | | | | 200,000 | |
Total | | | - | | | $ | - | | | | - | | | | 200,000 | |
| (1) | On March 17, 2023 the Company’s Board of Directors authorized, and the Company announced, another share repurchase program of up to 200,000 shares, or approximately 1% of its currently outstanding common stock. There were no repurchases during the three months ended March 31, 2023. |
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
None.
None.
Exhibit No. | Description |
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| Amended and Restated Certificate of Incorporation of TrustCo Bank Corp NY, as amended, incorporated by reference to Exhibit 3.1 to TrustCo Bank Corp NY’s Quarterly Report on Form 10-Q, filed August 5, 2021. |
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| Amended and Restated Bylaws of TrustCo Bank Corp NY, dated May 23, 2019, incorporated by reference to Exhibit 3.2 to TrustCo Bank Corp NY’s Quarterly Report on Form 10-Q, filed August 8, 2019. |
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| Crowe LLP Letter Regarding Unaudited Interim Financial Information |
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| Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer. |
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| Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer. |
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| Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer. |
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101 | Sections of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language), submitted in the following files: |
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101.INS | Instance Document |
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101.SCH | XBRL Taxonomy Extension Schema Document |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| By: /s/ Robert J. McCormick |
|
| Robert J. McCormick |
| Chairman, President and Chief Executive Officer |
| By: /s/ Michael M. Ozimek | |
| Michael M. Ozimek |
| Executive Vice President and Chief Financial Officer |
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Date: May 9, 2023 | |