TrustBank NY(TRST) - 2019 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Consolidated Interim Financial Statements (Unaudited) This section presents TrustCo Bank Corp NY's unaudited consolidated interim financial statements and related notes for Q3 2019 and 2018 Consolidated Statements of Income Consolidated Statements of Income (Unaudited) - Key Figures (dollars in thousands, except per share data) | Metric | Three months ended Sep 30, 2019 | Three months ended Sep 30, 2018 | Nine months ended Sep 30, 2019 | Nine months ended Sep 30, 2018 | |:---|:---|:---|:---|:---| | Total interest income | $48,528 | $45,738 | $144,605 | $134,050 | | Total interest expense | $9,885 | $5,215 | $27,039 | $14,103 | | Net interest income | $38,643 | $40,523 | $117,566 | $119,947 | | Provision (Credit) for loan losses | $- | $300 | $(41) | $900 | | Total noninterest income | $4,925 | $4,455 | $14,476 | $13,629 | | Total noninterest expenses | $24,070 | $24,544 | $73,839 | $72,794 | | Income before taxes | $19,498 | $20,134 | $58,244 | $59,882 | | Income taxes | $4,790 | $4,935 | $14,311 | $14,470 | | Net income | $14,708 | $15,199 | $43,933 | $45,412 | | Basic EPS | $0.152 | $0.157 | $0.454 | $0.471 | | Diluted EPS | $0.152 | $0.157 | $0.453 | $0.470 | - Net income decreased by $491 thousand (3.23%) for the three months ended September 30, 2019, and by $1,479 thousand (3.26%) for the nine months ended September 30, 2019, compared to the respective prior year periods[9] Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (Unaudited) - Key Figures (dollars in thousands) | Metric | Three months ended Sep 30, 2019 | Three months ended Sep 30, 2018 | Nine months ended Sep 30, 2019 | Nine months ended Sep 30, 2018 | |:---|:---|:---|:---|:---| | Net income | $14,708 | $15,199 | $43,933 | $45,412 | | Net unrealized gain (loss) on securities available for sale, net of tax | $1,790 | $(3,010) | $10,499 | $(9,556) | | Other comprehensive income (loss), net of tax | $1,703 | $(3,204) | $10,238 | $(9,848) | | Comprehensive income | $16,411 | $11,995 | $54,171 | $35,564 | - Comprehensive income significantly increased for both the three-month and nine-month periods ended September 30, 2019, primarily due to a positive shift in net unrealized holding gains on securities available for sale, net of tax, compared to losses in the prior year[12] Consolidated Statements of Financial Condition Consolidated Statements of Financial Condition (Unaudited) - Key Figures (dollars in thousands) | Metric | September 30, 2019 | December 31, 2018 | |:---|:---|:---| | Total assets | $5,222,469 | $4,958,913 | | Loans, net of deferred net costs | $3,985,319 | $3,874,096 | | Allowance for loan losses | $44,329 | $44,766 | | Net loans | $3,940,990 | $3,829,330 | | Total deposits | $4,461,167 | $4,274,247 | | Total liabilities | $4,696,306 | $4,469,042 | | Total shareholders' equity | $526,163 | $489,871 | - Total assets increased by $263,556 thousand (5.31%) from December 31, 2018, to September 30, 2019, driven by increases in loans and securities available for sale[14] - Total deposits increased by $186,920 thousand (4.37%) from December 31, 2018, to September 30, 2019[14] Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Changes in Shareholders' Equity (Unaudited) - Key Figures (dollars in thousands) | Metric | Balance at Jan 1, 2019 | Net income | Other comprehensive income, net of tax | Cash dividend declared | Stock options exercised | Purchase of treasury stock | Sale of treasury stock | Stock based compensation expense | Balance at Sep 30, 2019 | |:---|:---|:---|:---|:---|:---|:---|:---|:---|:---| | Capital Stock | $100,175 | - | - | - | $20 | - | - | - | $100,200 | | Surplus | $176,710 | - | - | - | $98 | - | $(443) | $(12) | $176,395 | | Undivided Profits | $256,397 | $43,933 | - | $(19,788) | - | - | - | - | $280,542 | | Accumulated Other Comprehensive (Loss) Income, net of tax | $(10,309) | - | $10,238 | - | - | - | - | - | $(71) | | Treasury Stock | $(33,102) | - | - | - | - | $(35) | $2,234 | - | $(30,903) | | Total Shareholders' Equity | $489,871 | $43,933 | $10,238 | $(19,788) | $118 | $(35) | $1,791 | $(6) | $526,163 | - Total shareholders' equity increased by $36,292 thousand from January 1, 2019, to September 30, 2019, primarily driven by net income and other comprehensive income, partially offset by cash dividends[16][17] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Unaudited) - Key Figures (dollars in thousands) | Cash Flow Activity | Nine months ended Sep 30, 2019 | Nine months ended Sep 30, 2018 | |:---|:---|:---| | Net cash provided by operating activities | $49,771 | $48,833 | | Net cash used in investing activities | $(261,063) | $(139,421) | | Net cash provided by (used in) financing activities | $158,260 | $(56,703) | | Net decrease in cash and cash equivalents | $(53,032) | $(147,291) | | Cash and cash equivalents at end of period | $450,677 | $465,449 | - Net cash used in investing activities significantly increased to $(261,063) thousand in 2019 from $(139,421) thousand in 2018, primarily due to higher purchases of securities available for sale and net increase in loans[20] - Net cash provided by financing activities turned positive at $158,260 thousand in 2019, compared to net cash used of $(56,703) thousand in 2018, mainly driven by a net increase in deposits[20] Notes to Consolidated Interim Financial Statements (1) Financial Statement Presentation - The unaudited Consolidated Interim Financial Statements include the accounts of TrustCo Bank Corp NY and its principal subsidiary, Trustco Bank, with significant intercompany accounts and transactions eliminated[23] - Prior period amounts are reclassified when necessary to conform to the current period presentation[23] (2) Earnings Per Share Earnings Per Share Reconciliation (in thousands, except per share data) | Metric | Three months ended Sep 30, 2019 | Three months ended Sep 30, 2018 | Nine months ended Sep 30, 2019 | Nine months ended Sep 30, 2018 | |:---|:---|:---|:---|:---| | Net income | $14,708 | $15,199 | $43,933 | $45,412 | | Weighted average common shares | 96,907 | 96,555 | 96,825 | 96,453 | | Stock Options | 70 | 134 | 72 | 134 | | Weighted average common shares including potential dilutive shares | 96,977 | 96,689 | 96,897 | 96,587 | | Basic EPS | $0.152 | $0.157 | $0.454 | $0.471 | | Diluted EPS | $0.152 | $0.157 | $0.453 | $0.470 | (3) Benefit Plans Net Periodic Benefit (dollars in thousands) | Metric | Three months ended Sep 30, 2019 (Pension) | Three months ended Sep 30, 2018 (Pension) | Three months ended Sep 30, 2019 (Other Postretirement) | Three months ended Sep 30, 2018 (Other Postretirement) | |:---|:---|:---|:---|:---| | Net periodic benefit | $(367) | $(446) | $(303) | $(538) | | Metric | Nine months ended Sep 30, 2019 (Pension) | Nine months ended Sep 30, 2018 (Pension) | Nine months ended Sep 30, 2019 (Other Postretirement) | Nine months ended Sep 30, 2018 (Other Postretirement) | |:---|:---|:---|:---|:---| | Net periodic benefit | $(1,100) | $(1,336) | $(911) | $(891) | - The Company does not expect to make contributions to its pension and postretirement benefit plans in 2019[26] (4) Investment Securities (a) Securities available for sale Securities Available for Sale (dollars in thousands) | Metric | September 30, 2019 | December 31, 2018 | |:---|:---|:---| | Amortized Cost | $662,642 | $515,531 | | Gross Unrealized Gains | $3,199 | $58 | | Gross Unrealized Losses | $3,082 | $14,126 | | Fair Value | $662,759 | $501,463 | - Total securities available for sale increased by $161,296 thousand (32.16%) in fair value from December 31, 2018, to September 30, 2019[28] Proceeds from Sales and Calls of Securities Available for Sale (dollars in thousands) | Metric | Nine months ended Sep 30, 2019 | Nine months ended Sep 30, 2018 | |:---|:---|:---| | Proceeds from calls/paydowns | $101,306 | $64,925 | | Proceeds from maturities | $10,052 | $45,000 | | Gross realized gains | $- | $- | | Gross realized losses | $- | $- | (b) Held to maturity securities Held to Maturity Securities (dollars in thousands) | Metric | September 30, 2019 | December 31, 2018 | |:---|:---|:---| | Amortized Cost | $19,705 | $22,501 | | Gross Unrecognized Gains | $1,131 | $577 | | Gross Unrecognized Losses | $- | $154 | | Fair Value | $20,836 | $22,924 | - The held to maturity portfolio consists solely of residential mortgage-backed securities and collateralized mortgage obligations[33] (c) Other-Than-Temporary Impairment - Management evaluates securities for other-than-temporary impairment (OTTI) at least quarterly, considering factors like the extent and duration of fair value decline, issuer's financial condition, macroeconomic conditions, and intent/likelihood of selling the security[36][37] - As of September 30, 2019, the Company does not consider its U.S. government sponsored enterprises, residential mortgage-backed securities, corporate bonds, or SBA-guaranteed participation securities to be other-than-temporarily impaired, as declines in fair value are attributed to interest rate changes, not credit quality, and there is no intent or requirement to sell before recovery[40][41][42][43] (5) Loans and Allowance for Loan Losses Recorded Investment in Loans by Loan Class (dollars in thousands) | Loan Class | September 30, 2019 | December 31, 2018 | |:---|:---|:---| | Commercial real estate | $173,267 | $171,553 | | Other Commercial | $19,176 | $24,593 | | First mortgages (1-4 family) | $3,418,907 | $3,287,877 | | Home equity loans | $89,740 | $88,831 | | Home equity lines of credit | $273,526 | $289,540 | | Installment | $10,703 | $11,702 | | Total loans, net | $3,985,319 | $3,874,096 | | Less: Allowance for loan losses | $44,329 | $44,766 | | Net loans | $3,940,990 | $3,829,330 | Non-Accrual Loans by Loan Class (dollars in thousands) | Loan Class | September 30, 2019 | December 31, 2018 | |:---|:---|:---| | Commercial real estate | $852 | $639 | | Other Commercial | $36 | $6 | | First mortgages (1-4 family) | $16,495 | $20,014 | | Home equity loans | $337 | $247 | | Home equity lines of credit | $3,252 | $4,027 | | Installment | $13 | $19 | | Total non-accrual loans | $20,985 | $24,952 | | Total nonperforming loans | $21,015 | $24,986 | Allowance for Loan Losses Activity (dollars in thousands) | Metric | Nine months ended Sep 30, 2019 | Nine months ended Sep 30, 2018 | |:---|:---|:---| | Balance at beginning of period | $44,766 | $44,170 | | Total loan chargeoffs | $934 | $660 | | Total recoveries | $538 | $326 | | Net loans charged off | $396 | $334 | | (Credit) provision for loan losses | $(41) | $900 | | Balance at end of period | $44,329 | $44,736 | - NPLs decreased by $4.0 million (16.0%) from December 31, 2018, to September 30, 2019. Residential real estate loans constituted the majority of NPLs ($20.1 million) at September 30, 2019[47][163][164] - The allowance for loan losses decreased slightly from $44,766 thousand at December 31, 2018, to $44,329 thousand at September 30, 2019, with a credit provision for loan losses of $(41) thousand for the nine months ended September 30, 2019[53] (6) Fair Value of Financial Instruments - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)[76][77] - Securities available for sale are primarily classified as Level 2, valued using independent pricing services and models[78][82] - Other Real Estate Owned (OREO) and Impaired Loans are classified as Level 3, with fair values commonly based on recent real estate appraisals and adjustments for differences between comparable sales and income data[79][80] Fair Value Measurements at September 30, 2019 (dollars in thousands) | Asset/Liability | Carrying Value | Level 1 | Level 2 | Level 3 | Total Fair Value | |:---|:---|:---|:---|:---|:---| | Financial Assets: | | | | | | | Cash and cash equivalents | $450,677 | $450,677 | - | - | $450,677 | | Securities available for sale | $662,759 | - | $662,759 | - | $662,759 | | Held to maturity securities | $19,705 | - | $20,836 | - | $20,836 | | Net loans | $3,940,990 | - | - | $3,990,429 | $3,990,429 | | Financial Liabilities: | | | | | | | Demand deposits | $453,439 | $453,439 | - | - | $453,439 | | Interest bearing deposits | $4,007,728 | $2,550,505 | $1,456,107 | - | $4,006,612 | | Short-term borrowings | $151,095 | - | $151,095 | - | $151,095 | (7) Accumulated Other Comprehensive Income (Loss) Accumulated Other Comprehensive Income (Loss) Balances (dollars in thousands) | Component | Balance at Jan 1, 2019 | Other Comprehensive Income (loss)- Before Reclassifications (9M 2019) | Amount reclassified from Accumulated Other Comprehensive Income (9M 2019) | Balance at Sep 30, 2019 | |:---|:---|:---|:---|:---| | Net unrealized holding loss on securities available for sale, net of tax | $(10,416) | $10,499 | - | $83 | | Net change in overfunded position in pension and postretirement plans | $423 | - | - | $423 | | Net change in net actuarial loss and prior service credit on pension and postretirement benefit plans, net of tax | $(316) | - | $(261) | $(577) | | Total Accumulated other comprehensive loss, net of tax | $(10,309) | $10,499 | $(261) | $(71) | - Accumulated other comprehensive loss significantly improved from $(10,309) thousand at January 1, 2019, to $(71) thousand at September 30, 2019, primarily due to a positive change in net unrealized holding loss on securities available for sale[88] (8) Revenue from Contracts with Customers Non-Interest Income (dollars in thousands) | Source | Three months ended Sep 30, 2019 | Three months ended Sep 30, 2018 | Nine months ended Sep 30, 2019 | Nine months ended Sep 30, 2018 | |:---|:---|:---|:---|:---| | Overdraft fees | $931 | $935 | $2,630 | $2,586 | | Other Service Charges on Deposits | $124 | $125 | $343 | $335 | | Interchange Income | $970 | $1,003 | $3,785 | $3,478 | | Wealth management fees | $1,517 | $1,516 | $4,933 | $4,927 | | Other (a) | $1,383 | $876 | $2,785 | $2,303 | | Total non-interest income | $4,925 | $4,455 | $14,476 | $13,629 | - Revenue from contracts with customers, recognized within Non-Interest Income, includes service charges on deposits (transaction-based, account maintenance, overdraft fees), interchange income (card-issuing bank fees, volume incentives, ATM charges), and wealth management fees (financial/estate planning, trustee, investment management)[93][94][95] (9) Operating Leases - The Company adopted ASU 2016-02 (Leases) effective January 1, 2019, recognizing a lease liability of approximately $58.2 million and a ROU asset of approximately $53.0 million, with no material impact on key performance metrics or operating results[97][98][106][107] Operating Lease Costs (dollars in thousands) | Metric | Three months ended Sep 30, 2019 | Three months ended Sep 30, 2018 | |:---|:---|:---| | Operating lease cost | $2,007 | $1,954 | | Variable lease cost | $497 | $492 | | Total Lease costs | $2,504 | $2,446 | | Metric | Nine months ended Sep 30, 2019 | Nine months ended Sep 30, 2018 | |:---|:---|:---| | Operating lease cost | $5,828 | $5,794 | | Variable lease cost | $1,472 | $1,546 | | Total Lease costs | $7,300 | $7,340 | Future Minimum Lease Payments (dollars in thousands) | Year ending December 31, | Amount | |:---|:---| | 2019 | $1,967 | | 2020 | $7,820 | | 2021 | $7,818 | | 2022 | $7,300 | | 2023 | $6,978 | | Thereafter | $32,600 | | Total lease payments | $64,483 | | Less: Interest | $9,752 | | Present value of lease liabilities | $54,731 | (10) Regulatory Capital Requirements - The Company and Bank are subject to Basel III rules, with full compliance phased in by January 1, 2019, including a 2.5% capital conservation buffer[103] - As of September 30, 2019, both the Company and Bank meet all capital adequacy requirements and the Bank is categorized as 'well capitalized' under prompt corrective action regulations[103][104] Bank Only Capital Ratios (dollars in thousands) | Metric | As of Sep 30, 2019 (Amount) | As of Sep 30, 2019 (Ratio) | Well Capitalized Minimum | Adequately Capitalized Minimum | |:---|:---|:---|:---|:---| | Tier 1 leverage capital | $509,531 | 9.751% | 5.000% | 4.000% | | Common equity tier 1 capital | $509,531 | 18.202% | 6.500% | 7.000% | | Tier 1 risk-based capital | $509,531 | 18.202% | 8.000% | 8.500% | | Total risk-based capital | $544,641 | 19.456% | 10.000% | 10.500% | Consolidated Capital Ratios (dollars in thousands) | Metric | As of Sep 30, 2019 (Amount) | As of Sep 30, 2019 (Ratio) | Minimum for Capital Adequacy plus Capital Conservation Buffer | |:---|:---|:---|:---| | Tier 1 leverage capital | $525,680 | 10.057% | 4.000% | | Common equity tier 1 capital | $525,680 | 18.767% | 7.000% | | Tier 1 risk-based capital | $525,680 | 18.767% | 8.500% | | Total risk-based capital | $560,811 | 20.021% | 10.500% | (11) New Accounting Pronouncements - The Company adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing a lease liability of approximately $58.2 million and a ROU asset of approximately $53.0 million, with no material impact on key performance metrics or operating results[106][107] - The Company is evaluating the impact of ASU 2016-13 (CECL) on its consolidated financial statements, with plans to finalize its methodology and internal controls in Q4 2019. The impact on the allowance for credit losses for the investment portfolio is not expected to be significant[108][109][110][112] - The Company is also evaluating ASU 2019-04 and ASU 2019-05, which provide clarification and targeted transition relief for CECL[111][112] Report of Independent Registered Public Accounting Firm - Crowe LLP, the independent registered public accounting firm, has reviewed the consolidated interim financial information and is not aware of any material modifications needed for conformity with GAAP[114] - Crowe LLP expressed an unqualified opinion on the Company's consolidated financial statements for the year ended December 31, 2018[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses TrustCo Bank Corp NY's financial condition and operating results for Q3 2019, including economic context and key financial metrics Forward-looking Statements - The report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from projections[119] - Key factors that could affect results include the ability to originate mortgage loans, maintain noninterest expense levels, make accurate credit risk judgments, and the effects of trade, monetary, fiscal policies, and regulatory changes[120] Introduction - Financial markets in Q3 2019 were influenced by trade negotiations and political developments, with US equity markets showing strength (S&P 500 up 1.7%, Dow Jones up 1.2%)[124] - The yield curve remained flat, with the 10-year Treasury bond averaging 1.80% (down 54 bps QoQ) and the 2-year Treasury bond averaging 1.69% (down 44 bps QoQ). The Federal Reserve decreased the target federal funds rate by 50 basis points during Q3 2019[124] - The spread between the 3-month and 10-year Treasury yields averaged a negative 23 basis points in Q3 2019, indicating an inverted yield curve[124] Overview Key Financial Performance (dollars in millions, except per share data) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---| | Net Income | $14.7 | $15.2 | $43.9 | $45.4 | | Diluted EPS | $0.152 | $0.157 | $0.453 | $0.470 | | Return on Average Assets (ROAA) | 1.12% | 1.24% | 1.14% | 1.24% | | Return on Average Equity (ROAE) | 11.19% | 12.84% | 11.56% | 13.00% | - Net interest margin decreased to 3.04% in Q3 2019 from 3.35% in Q3 2018, leading to a $1.9 million decrease in taxable equivalent net interest income[130] - Salaries and employee benefits increased by $964 thousand in Q3 2019, while FDIC and other insurance, advertising, and other real estate expense decreased[130] Asset/Liability Management - TrustCo aims to generate earnings through core deposits funding a prudent mix of interest-earning assets, maintaining adequate liquidity, and reducing interest rate sensitivity[132] - The Company's traditional underwriting process and retention of originated loans in its portfolio incentivize conservative credit decisions[138] - The net interest margin for Q3 2019 was 3.04%, down 31 basis points from the prior year's quarter, influenced by increased interest-bearing deposits and a narrowed margin on balance sheet expansion[139][140][143] Earning Assets Average Interest Earning Assets (dollars in millions) | Metric | Q3 2019 | Q3 2018 | YoY Change | |:---|:---|:---|:---| | Total Average Interest Earning Assets | $5,082.7 | $4,838.1 | +$244.6 | | Average Yield | 3.82% | 3.78% | +4 bps | Average Loan Portfolio (dollars in millions) | Loan Type | Q3 2019 Average Balance | Q3 2018 Average Balance | YoY Change | Q3 2019 Yield | Q3 2018 Yield | |:---|:---|:---|:---|:---|:---| | Total Loans | $3,940.7 | $3,782.3 | +$158.4 | 4.26% | 4.23% | | Residential Mortgage Loans | $3,465.1 | $3,289.5 | +$175.6 | 4.13% | 4.13% | | Commercial Loans | $190.5 | $188.8 | +$1.7 | 5.45% | 5.25% | | Home Equity Lines of Credit | $275.0 | $294.5 | $(19.5) | 4.95% | 4.60% | Securities and Short-term Investments (dollars in millions) | Asset Type | Q3 2019 Average Balance | Q3 2018 Average Balance | YoY Change | Q3 2019 Yield | Q3 2018 Yield | |:---|:---|:---|:---|:---|:---| | Securities Available for Sale | $647.5 | $536.2 | +$111.3 | 2.34% | 2.18% | | Held to Maturity Securities | $20.2 | $24.1 | $(3.9) | 3.70% | 3.86% | | Federal Funds Sold & Other Short-term Investments | $465.3 | $486.6 | $(21.3) | 2.19% | 1.98% | - The net unrealized gain in the available for sale securities portfolio was $117 thousand as of September 30, 2019, a significant improvement from a net unrealized loss of $14.1 million as of December 31, 2018, primarily due to changes in market interest rates[149] Funding Opportunities Average Interest Bearing Accounts (dollars in millions) | Metric | Q3 2019 Average Balance | Q3 2018 Average Balance | YoY Change | Q3 2019 Average Rate Paid | Q3 2018 Average Rate Paid | |:---|:---|:---|:---|:---|:---| | Total Interest Bearing Accounts | $4,026.2 | $3,823.3 | +$202.9 | 0.95% | 0.51% | | Interest Bearing Checking | $874.2 | $913.2 | $(39.0) | 0.02% | 0.05% | | Money Market Accounts | $567.6 | $508.8 | +$58.8 | 0.83% | 0.42% | | Savings Accounts | $1,126.9 | $1,244.9 | $(118.0) | 0.11% | 0.13% | | Time Deposits | $1,457.5 | $1,156.4 | +$301.1 | 2.19% | 1.33% | - Total interest expense on deposits increased by $4.6 million to $9.5 million in Q3 2019 compared to the prior year, reflecting higher average balances and increased rates paid[155] Average Short-term Borrowings (dollars in millions) | Metric | Q3 2019 Average Balance | Q3 2018 Average Balance | YoY Change | Q3 2019 Average Rate | Q3 2018 Average Rate | |:---|:---|:---|:---|:---|:---| | Short-term Borrowings | $160.2 | $183.8 | $(23.6) | 0.90% | 0.60% | - The Company maintains contingent funding alternatives, including FHLBNY and FRBNY borrowing capacity, and considers brokered deposits as a contingent source[156] Net Interest Income Net Interest Income, Spread, and Margin | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---| | Taxable Equivalent Net Interest Income | $38.6 million | $40.5 million | $117.6 million | $119.9 million | | Net Interest Spread | 2.88% | 3.26% | 2.98% | 3.24% | | Net Interest Margin | 3.04% | 3.35% | 3.13% | 3.32% | - Taxable equivalent net interest income decreased by $1.9 million (4.69%) for the three months and $2.4 million (2.00%) for the nine months ended September 30, 2019, compared to the prior year periods[159][160] Nonperforming Assets Nonperforming Assets (dollars in millions) | Metric | Sep 30, 2019 | Dec 31, 2018 | Sep 30, 2018 | |:---|:---|:---|:---| | Total Nonperforming Loans (NPLs) | $21.0 | $25.0 | $23.8 | | Non-accrual loans | $21.0 | $25.0 | $23.8 | | Other Real Estate Owned (OREO) | $2.4 | $1.7 | N/A | | Allowance for Loan Losses (ALL) | $44.3 | $44.8 | $44.7 | | ALL as % of Loan Portfolio | 1.11% | 1.16% | 1.17% | - NPLs decreased by $4.0 million (16.0%) from December 31, 2018, to September 30, 2019. Residential real estate loans constituted the majority of NPLs ($20.1 million) at September 30, 2019[163][164] - There was no provision for loan losses for Q3 2019, compared to $300 thousand for Q3 2018. Net chargeoffs for Q3 2019 were $36 thousand[174] - At September 30, 2019, 75.1% of the gross loan portfolio was in New York and surrounding areas, and 24.9% in Florida. Florida borrowers accounted for 8.6% of total nonperforming loans[167][168] Liquidity and Interest Rate Sensitivity - TrustCo actively manages liquidity through target ratios and contingency plans, utilizing its strong capital position and contingent funding alternatives like FHLBNY and FRBNY borrowing capacity[177] - The Company uses an external model to project changes in interest rates and prepayment speeds, incorporating historical behavior of deposit rates and balances[178] Estimated Percentage of Fair Value of Capital to Fair Value of Assets (as of Sep 30, 2019) | Interest Rate Scenario | Estimated Percentage | |:---|:---| | +400 BP | 18.30% | | +300 BP | 18.90% | | +200 BP | 19.40% | | +100 BP | 19.80% | | Current rates | 19.70% | | -100 BP | 17.40% | Noninterest Income Total Noninterest Income (dollars in millions) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---| | Total Noninterest Income | $4.9 | $4.5 | $14.5 | $13.6 | - Noninterest income for Q3 2019 increased by $400 thousand, primarily due to a $560 thousand increase in other income, including a $350 thousand recovery from a prior year legal judgment[181] - For the nine months ended September 30, 2019, noninterest income increased by $847 thousand, driven by the sale of the credit card portfolio ($176 thousand gain), sale of non-performing loans ($349 thousand gain), and the legal judgment recovery ($350 thousand)[182] Noninterest Expenses Total Noninterest Expenses (dollars in millions) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---| | Total Noninterest Expenses | $24.1 | $24.5 | $73.8 | $72.8 | - Noninterest expenses decreased by $400 thousand for Q3 2019, with decreases in FDIC and other insurance, advertising, and other real estate expense, partially offset by a $964 thousand increase in salaries and employee benefits[183] - Full-time equivalent headcount increased from 807 at September 30, 2018, to 823 at September 30, 2019[183] Income Taxes Income Tax Expense and Effective Tax Rates (dollars in millions) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---| | Income Tax Expense | $4.8 | $4.9 | $14.3 | $14.5 | | Effective Tax Rate | 24.6% | 24.5% | 24.6% | 24.2% | Capital Resources Shareholders' Equity and Dividend (dollars in millions) | Metric | Sep 30, 2019 | Sep 30, 2018 | |:---|:---|:---| | Total Shareholders' Equity | $526.2 | $477.1 | | Dividend Declared (per share) | $0.068125 | $0.068125 | | Dividend Payout Ratio (Q3) | 44.85% | 43.29% | Consolidated Capital Ratios (dollars in thousands) | Metric | As of Sep 30, 2019 (Amount) | As of Sep 30, 2019 (Ratio) | Minimum for Capital Adequacy plus Capital Conservation Buffer | |:---|:---|:---|:---| | Tier 1 leverage capital | $525,680 | 10.057% | 4.000% | | Common equity tier 1 capital | $525,680 | 18.767% | 7.000% | | Tier 1 risk-based capital | $525,680 | 18.767% | 8.500% | | Total risk-based capital | $560,811 | 20.021% | 10.500% | - Both TrustCo and Trustco Bank exceeded minimum capital standards, including the fully phased-in capital conservation buffer, as of September 30, 2019[190] - The Company is evaluating the new community bank leverage ratio framework, effective January 1, 2020, which simplifies capital requirements for qualifying banks[191][196] Critical Accounting Policies - Management considers the accounting policy related to the allowance for loan losses to be a critical accounting policy due to the inherent uncertainty in evaluating required allowance levels and its material effect on operating results[199][200] STATISTICAL DISCLOSURE I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL Average Balance Sheet, Interest Income/Expense, and Rates/Yields (3 Months Ended Sep 30, 2019 vs 2018) (dollars in thousands) | Metric | 2019 Average Balance | 2019 Interest | 2019 Average Rate | 2018 Average Balance | 2018 Interest | 2018 Average Rate | Change in Interest | |:---|:---|:---|:---|:---|:---|:---|:---| | Total interest earning assets | $5,082,743 | $48,529 | 3.82% | $4,838,082 | $45,741 | 3.78% | $2,788 | | Total interest bearing liabilities | $4,186,340 | $9,885 | 0.94% | $4,007,052 | $5,215 | 0.52% | $4,670 | | Net interest income, tax equivalent | | $38,644 | | | $40,526 | | $(1,882) | | Net interest spread | | | 2.88% | | | 3.26% | | | Net interest margin | | | 3.04% | | | 3.35% | | Average Balance Sheet, Interest Income/Expense, and Rates/Yields (9 Months Ended Sep 30, 2019 vs 2018) (dollars in thousands) | Metric | 2019 Average Balance | 2019 Interest | 2019 Average Rate | 2018 Average Balance | 2018 Interest | 2018 Average Rate | Change in Interest | |:---|:---|:---|:---|:---|:---|:---|:---| | Total interest earning assets | $5,013,737 | $144,608 | 3.85% | $4,822,537 | $134,060 | 3.71% | $10,548 | | Total interest bearing liabilities | $4,143,267 | $27,039 | 0.87% | $4,009,878 | $14,103 | 0.47% | $12,936 | | Net interest income, tax equivalent | | $117,569 | | | $119,957 | | $(2,388) | | Net interest spread | | | 2.98% | | | 3.24% | | | Net interest margin | | | 3.13% | | | 3.32% | | Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's primary market risk is interest rate risk, actively managed to meet earning goals and respond to future interest rate changes - Interest rate risk is the Company's principal market risk[209] - The Company manages interest rate risk to meet short-term earning goals and respond to future changes in interest rates[209] - 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[209] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures, concluding they were effective with no material changes in internal control - The Company's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2019[210][211] - No changes in internal control over financial reporting materially affected or are reasonably likely to materially affect internal control over financial reporting during the quarter[213] PART II. OTHER INFORMATION Item 1. Legal Proceedings No legal proceedings to report for the period - No legal proceedings[214] Item 1A. Risk Factors No material changes to previously disclosed risk factors in the Company's Annual Report on Form 10-K for 2018 - No material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018[214] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities and use of proceeds[214] Item 3. Defaults Upon Senior Securities No defaults upon senior securities to report for the period - No defaults upon senior securities[214] Item 4. Mine Safety No information to report regarding mine safety - No mine safety information[214] Item 5. Other Information No other information to report for the period - No other information[214] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including certifications and XBRL taxonomy documents - Exhibits include Crowe LLP Letter, Rule 13a-15(e)/15d-15(e) Certifications of Robert J. McCormick and Michael M. Ozimek, Section 1350 Certifications, and XBRL Taxonomy Extension Documents[214] SIGNATURES The report is signed by the Chairman, President, CEO, and Executive Vice President, CFO on November 7, 2019 - The report is signed by Robert J. McCormick, Chairman, President and Chief Executive Officer, and Michael M. Ozimek, Executive Vice President and Chief Financial Officer, on November 7, 2019[215][216]