TrustCo Bank: An Income Stock Now Yielding Nearly 5.5%

TrustCo Bank Corp NY (NASDAQ:TRST) remains one of our favorite regional banks to play. Make no mistake, it has been an abysmal time for banks, as net interest margins have been crimped as high rates have led to severe competition for deposit dollars, and banks have to pay up mightily on those deposits.

But not all regional banks are at risk in this environment. One of the reasons we love TRST stock is that when shares do fall, the yield creeps up. Right now, the dividend is safe in our opinion based on performance.

Here is the deal. The climate for banks is tough, but TrustCo is one of the most conservative lenders we have analyzed. The risk right now in our estimation other than margin pressure on the whole sectors is that TrustCo's main line of business is residential mortgages, and as we know, mortgage activity has stalled in this high rate environment. However, the income generated from mortgages that are issues are higher because of those rates. As the yield here is now at 5.5%, we think it is once again time to purchase shares for a long-term income investment.

Let us discuss the recently reported earnings to understand performance and where we see the company going from here.

TrustCo Bank's second quarter headline earnings were indeed mixed

In Q2, despite the pain we keep hearing about mortgage and housing demand, TrustCo once again enjoyed moderately strong loan activity and still had pretty solid returns on assets that resulted in revenue growth. However, the revenue growth came up short of consensus. Revenues were up 1.4% from last year, to $48.65 million, but missed expectations by $0.9 million. The return on average assets and return on average equity came in at 1.09% and 10.61%, respectively.

While these are solid returns, this is a decrease from last year of 11 basis points and 147 basis points, respectively. Both of these metrics were also a touch lower from the sequential quarter. Why? As we have told our members at the start of the year, margins have peaked for banks. In turn, returns in the near term are lower.

But for the long term, we see the brief slow down as an opportunity. With growing assets under management, and respectable returns, revenues were up from last year. And although we have been concerned with net interest margin, margins were up 15 basis points from a year ago to 2.98%. Margins did fall from Q1, however. That said, combined with operating expenses, TrustCo registered earnings per share of $0.86, which was a $0.01 beat against expectations.

In terms of valuation, it's attractive here at $26.60 per share and is now well below book value of $32.66. That book value was up from $32.21 in Q1 and is up from $31.06 last year. We love this discount. That all said, there was solid loan growth, and deposits were up.

Loans grow to an all-time high while deposits remain strong

TrustCo's average loans were another new all-time high up 7.6% vs. a year ago. Total loans were up $346.3 million from last year. Average residential loans, which is the main focus of the banks, were up $205 million, or 5.4% vs. a year ago. Average commercial loans continue to be less of a focus, but still rose $50.1 million from last year, or 25.2%. We also saw TrustCo increase home equity loan balances again despite the high rates we are seeing. Home equity lines of credit were up $59.5 million, or 24.4%. Deposits were also strong. Total average deposits increased from Q1 by $46 million to $5.3 billion.

Folks, despite what is happening on the macro scale, the bank is growing loans and deposits. And despite the fact that deposits cost more, net interest margin rose from last year. This is impressive. But what about the quality of assets?

Asset quality remains high

TrustCo Bank Corp NY continues to have solid asset quality metrics as well. We like the bank. Despite the pressure on the macro side of the equation, TrustCo's asset quality has been consistently strong over the last year, though we saw a slight uptick in non-performing loans. Non-performing assets as a percentage of total assets were 0.34%, an improvement from 0.35% in the sequential quarter, though up from 0.31% last year. The allowance for credit losses on loans to total loans dipped to 0.96% from 1.0% a year ago and from 0.97% in the sequential quarter. However, the bank became a bit less efficient with an efficiency ratio of 54.48%, up from 51.28% a year ago. Still, this is a stellar level of efficiency.

Strong dividend with a low payout ratio

As we mentioned in the open, we think the stock is now an accidental high-yielder, as shares have been slammed down recently resulting in a dividend yield of nearly 5.5% now. But here is the thing. While the security grade of the dividend is an average "C" when it comes to the cash flow of the bank, the payout ratio is just 40.2%, quite safe in our opinion. It would take a large hit to flows to put this in jeopardy. A moderate to major recession would be a risk, but a mild recession should have minimal impact all things considered.

The fact is that TrustCo Bank Corp NY is growing loans and deposits, and is trading well below book value. A 5.5% yield is better than bonds, and there is opportunity for longer-term appreciation in share prices.

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