Prepared by Chris, CEO Quad 7 Capital and Lead Analyst of the team at BAD BEAT Investing

TrustCo Bank Corp. (TRST) is a stock we continue to cover after many years, and you will recall we named it a fantastic buy for our membership at $5. Shares have pulled back significantly from post-COVID highs. The company just reported earnings, and the results were strong, despite beating expectations. We like shares here under $5.50 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. Keep in mind that TrustCo 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. The economy is still in pain here in New York as reopening has been so very slow. Further interest rates remain low making it hard for banks to make money on deposits they take in and loan out. In addition a lot of 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 in the $5 range.


This regional bank is focused entirely on traditional bread-and-butter banking. Yes, simple community banking is what we mean.

What is such community banking? We alluded to it in the opening, but 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 and interest rates so low.

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 0.98% and 10.04%, respectively. 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 2.4%) and lower earnings per share ($0.146 vs. $0.152). While this is down year-over-year the results crushed expectations.

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What is more, the bank is trading below book value, and that book value expanded year over year to $5.81, up 7.2% year-over-year. We also like the name on the last few months 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

Remember, loans and deposits are critical for small regional banks such as TrustCo. 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 $6.5% 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 $237.6 million, or 6.9% 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 $442 million in the quarter versus a year ago, a rise of 9.9%. The increase in deposits was the result of a $544.6 million or 18.1% increase total average core deposit accounts, which consist of interest bearing and non-interest bearing checking, savings and money market deposits. Checking balances were up $333.8 million or 25.4% (including interest bearing and non-interest bearing checking balances). Average time deposits decreased $102.3 million or 7.0% for the third quarter 2020 compared to the third quarter 2019. We think it is worth mentioning that 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. Now, given the COVID-19 issues, we have been concerned with a the provision for loan losses.

Non-performing assets decline

A critical aspect to consider for all banks is the quality of the assets on the books. Loan growth is a strength, but only if the loans are quality.

There was an increase in the provision for loan losses in earlier quarters, driven by the growth in the loans and the uncertainty around the current economic environment resulting from COVID-19. We expected the level of provision for loan losses in 2020 to continue to reflect the overall growth of the bank’s loan portfolio, but as we saw with other banks in Q3, this was not exactly the case. They were pretty flat for TrustCo.

Non-performing assets as a percentage of total assets keep improving. Non-performing loans actually rose very slightly $0.8 million compared to the year-ago quarter, while total non-performing assets were also down nearly $1.1 million. Further, quarterly net charge-offs were 0.00% (just $21,000) of average loans on an annualized basis, compared to 0.01% a year ago. This is positive. The provision for loan losses decreased to $1.0 million for the third quarter 2020, a 50% decline from $2.0 million in Q2 2020. This reduced provision helped EPS tremendously.

TrustCo’s Q3 2020 core net income was $14.1 million, down from the $14.7 million in Q3 2019. Factoring in share repurchases, EPS came in at $0.146 per share, down from $0.152 a year ago. Considering where all the other banks came in following their Q3 reports, this was pretty strong.


We view this earnings contraction as positive given it was so much better than expected. The decline in loan loss provisions was bullish. We did see organic pressure a result of the decline in interest rates as well as COVID-19-related loan payment reductions/deferrals. However, loan and deposit growth continues and asset quality metrics are solid. Overall, performance was strong. With shares having pulled back 20% from post-COVID highs, we think you can do some buying here again.

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Disclosure: I am/we are long TRST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.