Trustco Bank: The Bank The Recovery Forgot (NASDAQ:TRST)

Since bottoming out earlier this year, many of the banks that survived the banking crisis have posted at least significant partial recoveries. But not every bank has been treated the same way. One, for instance, that has barely budged since then is Trustco Bank (NASDAQ:TRST). From the end of February of this year until the stock bottomed, units dropped 27.4%. But they are still down 22.6% compared to that time. To some investors, this might be a warning that trouble is brewing. And to be clear, not everything regarding the bank is fantastic. But between its low exposure to uninsured deposits, low amounts of debt, continued deposit growth, and low trading multiple, the bank seems to me to make for a ‘strong buy’ prospect at this time.

Shares have yet to recover

The management team at Trustco Bank describes the institution as a savings and loan holding company. Originally incorporated in 1981, the company is fairly young compared to many other banks that are out there. However, that has not stopped it from growing at a rather impressive rate. As of the end of 2022, for instance, the firm operated 143 banking offices spread across several counties in New York, as well as in counties throughout Florida and New Jersey. Through these locations, as well as the 158 ATMs that it operates, it provides clients with a wide array of traditional banking services. These include both personal and banking activities that it engages in, such as the acceptance of deposits, the granting of loans for commercial purposes, the origination of mortgages and mortgage-backed securities, and more. The company also has another subsidiary called ORE Subsidiary Corp. which holds and manages certain foreclosed properties that have been acquired by the bank.

In recent years, management has done a good job of growing the company’s top and bottom lines. Net interest income, for instance, rose from $148 million in 2020 to $180.5 million in 2022. Non-interest income grew from $17.2 million to $19.3 million. These, combined, helped net profits to grow from $52.5 million to $75.2 million. Growth for the company has unfortunately been somewhat mixed this year. For the first half of the year, for instance, net interest income came in at $91.2 million. That represents an increase of 8.8% over the $83.8 million reported one year earlier. On the other hand, non-interest income fell from $10.1 million to $9.3 million. That, combined with higher costs, pushed net profits down from $35 million to $34.1 million. Most of the cost increase came from higher salary expenses, so it is experiencing downward pressure from a tight labor market.

This overall growth for the bank has been made possible by continued growth in the company’s asset base. From 2020 through 2022, its portfolio of loans expanded from $4.24 billion to $4.73 billion. And the value of its securities that are available for sale jumped from $439.1 million to $481.5 million. By the end of the first half of this year, loans grew further to $4.89 billion, while the securities that are available for sale inched down to $452.7 million. One area that investors have definitely been worried about when it comes to loan portfolios is exposure to office properties. The great news for shareholders is that this is not a material concern when it comes to Trustco Bank. As of the end of the most recent quarter, for instance, only 4.7% of the company’s loan portfolio involved commercial real estate. But beyond that, they have not broken it up into office properties versus other assets. A shocking amount of the company’s loan portfolio, approximately 94.5%, involves real estate mortgages. And those are centered around one to four family properties. First mortgages account for the vast majority of this, about 87% of loans in total.

Deposits have also managed to grow over time, making possible the growth in loans. From 2020 through 2022, deposits expanded from $5.04 billion to $5.19 billion. By the end of the second quarter, they had risen further to $5.26 billion. This is surprising since a large number of banks saw deposits drop, with some of that decline driven by concerns over a possible spread of the contagion that infected the banking sector earlier this year and by depositors looking for higher yields outside of banks. But clearly, Trustco Bank bucked the trend. What’s even better is the fact that, as of the end of the most recent quarter, only 18.1% of the company’s deposits are uninsured. This is some of the lowest I have seen in the banking sector and is well below the 30% maximum that I typically prefer.

In addition to seeing continued growth when it comes to both deposits and loans, the bank also has done well to keep debt low. By the end of 2022, the company had only $122.7 million worth of debt on its books. And as of the end of the most recent quarter, it had $113.8 million. That pales in comparison to the $603.4 million in cash and cash equivalents that it has. Add on top of this the fact that the firm’s book value per share has continuously grown, rising from $29.45 per share in 2020 to $32.66 per share today, and I definitely like what I see. This brings me to the topic of pricing. With shares currently at $28.99, we have a bank that is trading at an 11.2% discount on its book value per share. And using results from 2022, the institution is trading at a price to earnings multiple of only 7.3. The institution is actually so robust that it continues to pay out a rather hefty distribution, with a yield of 4.97% as of this writing.

Takeaway

From all the data that I can see, I have no reason to be anything other than optimistic about Trustco Bank. The only downside that I have seen is that recent financial performance has been a bit weak on the bottom line. The decline in non-interest income has been partially responsible for this, and higher costs, such as salaries, are also responsible. But compared to the rest of the picture, these are fairly minor issues. Uninsured deposit exposure is low. Loans and deposits continue to grow, even during uncertain times. The bank is trading at a discount to its book value per share and is trading at a low price to earnings multiple. Given all of these factors, combined with the low debt and high yield that I mentioned already, I have no reason to rate the business anything other than a ‘strong buy’.