Time To Buy TrustCo Bank

As we know not all banks are created equal. It has been a very scary time in the banking sector. While major multinational banks are doing just fine, the regional bank space is a mess. Companies are all over the place in terms of performance. While shares of many bank stocks have been in selloff mode for about three months, some banks are performing just fine. The smallest community-oriented regional banks have been a big question mark. We have been covering the earnings of regional banks to get a sense of whether the sector is really in trouble, or if it's bank-specific issues and not some sort of contagion. Thus far, the damage appears limited. That said, while the higher interest rate environment had been boosting net interest margins, we think that those margins have largely hit their peak, because the cost of funds are increasing. It's quite simple really. Banks are seeing strong competition for deposit dollars. On top of that, banks are now competing with U.S. Treasuries and money market funds which offer strong yields, so to get deposits banks have had to pay up.

We continue our regional bank coverage today with TrustCo Bank Corp. (NASDAQ:TRST), a true community-oriented bank and focused on traditional, simple community banking. This stock is a name we continue to cover after many years and have owned frequently. The company just reported earnings, and the results were weaker than expected, at least on the headline numbers, missing expectations on both the top and bottom lines. That said, we see no signs of broader concern for the bank's overall health. We continue to like the stock for its shareholder-friendly nature and the long-term prospects for financials as interest rates rise. We like buying this regional bank under $30 and we think the stock market is heading much lower in coming months, so you will get a good price.

TrustCo Bank Q1 headline misses

In Q1, there was robust loan activity and decent returns on assets that resulted in revenue strength. Revenues were up 14% from last year, to $51.06 million, but missed expectations by $1.7 million. The return on average assets and return on average equity came in at 1.20% and 11.84%, respectively. This is an increase from last year of 8 basis points and 224 basis points, respectively. Both of these metrics did however did from the sequential quarter as margins have peaked. With growing assets under management, and higher returns, this led to the higher revenues we saw vs. a year ago. Q1 earnings per share of $0.93 was a $0.09 miss against expectations.

In terms of valuation, it's attractive here at $30 per share and is now below book value of $32.21.

That all said, there was solid loan growth, and deposits were up. However, there was a rise in the cost of funds hitting margins.

Loans grow and deposits remain strong

TrustCo's average loans were a new all-time high up 7% vs. a year ago. Average residential loans, which is the main focus of the banks, were up $205 million, or 5.1% vs. a year ago. Average commercial loans continue to be less of a focus but still rose $44 million from last year, or 22.5%. There also was a strong increase in home equity loan balances of nearly $59 million, or 25.3%.

Total average deposits increased from Q4. This quells fear of a run on deposits at TrustCo. This was a key results. Deposits have been tough for banks as there is a lot of competition for customer deposits. Deposits were up $19.6 million in the quarter vs. a year ago.

Asset quality is strong

TrustCo also still has strong asset quality. TrustCo's asset quality and loan loss reserve measures have remained consistently strong over the last year. Non-performing assets as a percentage of total assets keep improving. Non-performing loans improved $0.25 million compared to the year-ago quarter, while total non-performing assets were about flat. The ratio of allowance for credit losses on loans to total loans was 0.97% in Q1, flat from Q4, and down vs. 1.03% a year ago. The total allowance for credit losses on loans was $46.7 million, versus $46.2 million a year ago. The asset quality remains strong.

Great dividend

We love buying TrustCo here thanks to its high dividend yield of nearly 5% now. The company is growing loans and deposits, and is trading below book. A 5% yield is better than bonds, so the added equity risk is cushioned by this great dividend payer.

Final thoughts on TrustCo Bank as we move into 2023

The market has made a big run since March. We think this earnings season will send stocks back lower, and you should be able to get shares much cheaper in the near future. At $30 and below, the stock is a great buy. It's time to do some buying as shares come in further. TrustCo is performing well on the key metrics for banks. This is near 5% yielding stock and you can be paid to wait for a future bounce.

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