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TrustCo Bank Corp. (NASDAQ:TRST) stock is a name we continue to cover after many years. The company recently reported earnings, and the results were strong, beating expectations. We last liked shares close to $30 based on valuation, the dividend, and the long-term prospects for financials as interest rates rise. Financials have been hit hard in 2022, though as our members will tell you, we have been pushing regional banks hard the last few months as they are set up for future success in coming years with much better rates. We like buying regionals here. At fresh 52-week highs, we still like the stock.
Discussion
This regional bank is a true community-oriented bank and is focused entirely on traditional, simple community banking. 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 many centuries and will continue to work in the future. Bread and butter banking as we say.
Increased loan activity and strong returns on assets lead to revenue strength. Revenues were up 18% from last year, to $52.2 million, well ahead of expectations. The return on average assets and return on average equity came in at 1.24% and 12.78%, respectively. This is an increase from last year of 16 basis points and 138 basis points, respectively. There are a lot of assets under management, and the higher returns led to the higher revenues. With this rise and well-controlled expenses and much higher earnings per share ($0.871 vs. $0.730), the results were $0.13 ahead of expectations.
In terms of valuation, it is still attractive, though with the share appreciation it is certainly not as great of a deal as earlier in the year. However, that book value expanded year-over-year to $30.89, up 1.1% year-over-year. Of course at $38 per share, we have some premium built in, but this is due to strong performance. Loan growth, deposit growth, and a stabilization in the cost of funds have helped, along with earnings growth thanks to higher rates.
Loans and deposits grow
Rates are up but there is no evidence of rate shock stopping borrowing as a whole. Keep in mind that loans and deposits are critical for small regional banks such as TrustCo. That is how a traditional community bank like TrustCo makes its money as we discussed above. Well, TrustCo continues to grow both loans and deposits over time. Growth in loans and deposits is key for any bank, small or large. Despite higher rates, the loan portfolio continues to expand.
The bank is lending more to homeowners and using caution in the riskier commercial loan side of the business, though it has grown both. Total loans were up 4.9%. Average residential loans, which is the primary focus of the company, were up $185 million, or 4.7% vs. last year. Average commercial loans continue to be less of a focus but still rose $12.5 million from last year. There also was a strong increase in home equity loan balances of $37 million, while installment loans were up marginally.
Total average deposits also grew. Deposits were up $105 million in the quarter versus a year ago, a rise of 2.0%.
What went into this deposit growth? Well, the increase in deposits was due to a $275.7 million increase in total average core deposit accounts. These types of deposits really consist of interest bearing and non-interest bearing checking, savings, and money market deposits. It was a strong and respectable 6.7% increase. This is solid when a lot of other banks are seeing declines in deposits. There is a lot of competition right now for deposit dollars with higher rates. That is a lot of new money to work with for the bank to issue loans. On Checking balances were up $120.5 million or 6.2%. Average time deposits decreased $170.6 million or 14.8%. All in all, solid action.
TrustCo also has strong asset quality. This is a very conservative lender and carefully considers each and every borrower and every potential property/project that its loan is going to finance. It is extremely stingy in its lending practices to be honest, often requiring the highest of credit scores. It also does not mess with escrow accounts, protecting itself from exposure of paying taxes or insurance and not getting the needed payments from customers. The same cannot be said for other banks, who may have less stringent credit score requirements or personal portfolio strength.
Non-performing assets decline
Now we love the loan growth which we view as a strength, but only if the loans are quality. TrustCo is killing it. Asset quality and loan loss reserve measures have remained consistently strong over the last year. Strong. Non-performing assets as a percentage of total assets keep improving. Non-performing loans improved $1.5 million compared to the year-ago quarter, while total non-performing assets were also down nearly $1.3 million. Further, quarterly net charge-offs were actually a recovery this quarter of $132,000.
The bank is shareholder-friendly
Another reason we like owning shares here is that the stock offers a high dividend yield of 3.7% at $38 a share. That is solid. TrustCo also previously purchased shares to boost shareholder value. What is more, that dividend was also raised 3% last week. We think this is a sign of ongoing strength.
Take-home on TrustCo Bank
The stock has made a big run. No doubt. It is at a 52-week high and was a bank we have recommended as a buy for our members. Winning. Overall, we like the financials in the medium-term here with rising rates. TrustCo is performing well on the critical metrics we believe are key to examine for banks. They are a conservative lender, stingy really. They are growing loans and deposits while seeing improvement on return metrics and quality metrics. Book value expanded from a year ago. We love it here with interest rate hikes. The dividend has been hiked and it is still a 3.7% yielding stock. Stick with it.
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