Summary
- A well-run regional bank with a 4.6% dividend yield.
- The bank will face pressures that all other major financials will face with possible loan losses in the next few quarters.
- Keep an eye on loan loss provisions.
- Most recent earnings pretty solid.
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- Prepared by Chris, CEO Quad 7 Capital and Lead Analyst of the team at BAD BEAT Investing
TrustCo Bank Corp. (TRST) is a name we have covered many times over the years, and named it a fantastic buy for our membership at $5. The company just reported earnings, and the results have sparked some selling, despite beating expectations. While we loved shares at $5, the market has rebounded so strongly. As such, in this climate, we believe that if shares dip below $6 again, and you are not in the name, you can start buying. This based on valuation, the dividend, and the long-term prospects for financials. Sure, right now there is pain in banking. In the near term it will be volatile, and this should be expected given the profound economic impact COVID-19 has had. Now, this bank has a lot of exposure to New York markets, and so, the market has hammered this name because of lockdown orders and the unemployment rates in New York. While things have reopened some, the economy is still in pain here in New York. Rates remain low, and borrowers are facing increased pressure. That said, we want to continue our coverage of this regional bank by honing on the critical metrics that investors should be focused on, and reiterate that it is a good opportunity to buy the stock below $6.
Discussion
Unlike some major banks, there really is not a focus on investment banking and equities trading here. This regional bank is focused entirely on traditional bread-and-butter banking. Yes, simple community banking is what we mean. TrustCo takes in deposits from customers at a low interest rate and makes loans to other customers at a higher rate. It is a model that has worked for centuries, though in recent months has been painful with the sharp shift in the economy.
Increased loan activity, as well as overall higher returns on assets, helped lead to revenue strength relative to expectations, though revenues did dip. The return on average assets and return on average equity came in at 0.82% and 8.21%, respectively. Investors saw this as a bit of a red flag and might be selling because this is a decrease from last year. There are a lot of assets under management, but the lower returns led to slightly lower revenues (down 6%) and lower earnings per share ($0.117 vs. $0.15). Why are we bullish? Well, the bank is trading just over book value, and that book value expanded year over year to $5.73, up 7.7% year over year. We also like the name on this decline because it is not about where the company has been, it's about where it is going. Loan growth, deposit growth and a stabilization in the cost of funds have helped, despite interest rates being so low.
Growing loans and deposits
Loans and deposits are especially critical for small regional banks such as TrustCo. We are pleased that the bank continues to grow both loans and deposits over time. Growth in loans and deposits is absolutely necessary for any bank, small or large. Even when we cover large banks, which have complicated balance sheets and are in all areas of banking such as trading, investments, etc., we always point out that traditional banking is what grows the business. For TrustCo, the loan portfolio reached an all-time high. Average loans were up $7% year over year. Total loans have once again reached an all-time high of over $4 billion.
The types of loans show us that the bank is lending more to homeowners and using caution in the riskier commercial loan side of the business. Average residential loans, which is a key focus of the company, were up $257 million, or 7.6% vs. last year. Average commercial loans continue to be less of a focus and were up $40 million from last year. Management has stated several times that these are less attractive on a risk-adjusted basis, but they grew. There also was a decline in home equity loan balances, while installment loans were about flat.
Total average deposits were up nearly $276 million in the quarter versus a year ago, a rise of 6.2%. The increase in deposits came in the form of on-demand deposits, while interest-bearing checking was flat, money market deposits were up and time deposits were down. All told, deposits continue to increase every year.
What is more, TrustCo isn't giving out risky loans. It is a conservative lender and carefully considers each and every borrower and every potential property/project that its loan is going to finance.
The bank knows a good deal when it sees one and a risky deal when it is presented, in our opinion. Now, given the COVID-19 issues, we have a higher provision for loan losses.
