2023-12-26 18:00:00 ET
Summary
- Trustco Bank's shares have outperformed the market, up 9.2% compared to the S&P 500's 6.9% increase.
- The bank has seen a decline in the value of deposits and an uptick in uninsured deposit exposure.
- Despite weaknesses, the stock is still cheap and has potential for additional upside, warranting a 'buy' rating, but not the 'strong buy' I assigned it previously.
With a market capitalization right now of $584.4 million, Trustco Bank ( TRST ) is one of the smaller banks that I have analyzed over the past year. But when I last wrote about the company in early September, it was even smaller. Back then, I found it an interesting prospect because of how cheap shares were. But in addition to that, it was showing attractive growth when it came to loans and deposits, as well as other important metrics. These two factors combined led me to rate the institution a ‘strong buy’ to reflect my belief that shares should generate upside that would significantly outperform what the broader market would achieve over the same window of time.
Although only three months have passed since then, the firm seems to be doing just that. Shares are up 9.2% at a time when the S&P 500 is up 6.9%. To be clear, not everything regarding the institution is going great. There have been some signs of weakness, some of which were apparent when I last wrote about it and others having just become apparent. But when you consider just how cheap the stock still is, I have no problem maintaining a bullish stance on the firm. But I do think a modest downgrade from a ‘strong buy’ to a ‘buy’ rating is appropriate at this time.
Mixed results
One of the things that I liked most about Trustco Bank was the fact that the company was experiencing attractive growth pretty much across the board. As an example, we need only look at the value of deposits. At the time that I wrote about the firm previously, we only had data covering through the second quarter of the 2023 fiscal year. Around that time, there were still concerns about the security and safety of the banking sector. And the most vulnerable part of the institutions involved deposits, particularly uninsured deposits. Even with all of this uncertainty and high interest rates working hard to pull capital away from the institution and toward other investment opportunities, management still reported an increase in deposits from $5.19 billion at the end of 2022 to $5.26 billion at the end of the second quarter. Unfortunately, we have actually just recently seen a decline on this front. By the end of the third quarter , the firm had seen the value of deposits drop by $24 million to $5.23 billion.
To make matters worse, the trend for uninsured deposits has been worsening. At the end of 2022, only 18.7% of the company's deposits were uninsured. This number dropped to 17.8% in the first quarter before ticking up to 18.1% in the second. But by the third quarter, it had risen again to 18.3%. This is not a material change and it's important to keep in mind that I consider anything 30% or lower to be fine. So Trustco Bank is far from being in trouble on this front. But the overall trend in uninsured deposit exposure is uninspiring.
This is not to say that there haven't been some areas where the company has excelled. Take, for instance, the value of loans on its books. These increased consistently over the past few quarters, rising from $4.73 billion in 2022 to $4.89 billion in the second quarter of this year. From the second quarter to the third quarter, Trustco Bank has seen the value of loans on its books grow another $73.5 million to $4.96 billion. Considering that this is occurring at a time when deposits are falling, I can say that I am impressed with the results.
For the most part, the other important balance sheet figures for the company have remained in a fairly narrow range. As an example, let's look at the value of securities on its books. At the end of the second quarter, the firm had $452.7 million in available for sale securities. By the end of the third quarter, this figure had dropped slightly to $450.1 million. The value of cash has actually dropped further, declining from $603.4 million to $507.3 million. This is part of a larger trend than investors should pay careful attention to if they are to invest in the business. At the end of last year, for instance, the company had $650.6 million in cash on its books. And at the end of 2021, cash stood at $1.22 billion. There's also the topic of debt. For the most part, debt has remained in a very narrow range from 2022 through the present day. It ended last year at $122.7 million. And by the end of the third quarter of this year, it had dipped nicely to $103.1 million.
The change in the institution’s balance sheet, combined with a contraction net interest margin caused by higher amounts of interest the institution has to pay on deposits and debt, has resulted in some weak financial results for the most recent quarter. In the third quarter of 2023, the bank reported net interest income of $42.1 million. This was down from $47.5 million reported one year earlier. Non-interest income inched up from $4.4 million to $4.6 million. But that didn't stop net profits from declining from $19.4 million to $14.7 million.
If we value the company from a price to book perspective, we see that shares are trading at about 93.1% of book value. This is not the lowest that I have seen in the space, but it is quite low. We could also value the company relative to last year's earnings. That would give us a price to earnings multiple of 7.8. Alternatively, we could annualize results experienced so far for the year. That would give us a net profits on a forward basis of $67.6 million. In that case, we would be looking at a price to earnings multiple of 8.6. All of these are quite low and indicate that some additional upside still exists.
Takeaway
So far, Trustco Bank has been doing quite well for itself and its investors. Shares are outperforming the market in a short window of time. Having said that, we are seeing some additional areas of weakness, the most notable being a small decline in deposits. I also don't like to see the uptick in uninsured deposit exposure. The good news is that the stock is still cheap and, because of that and the low amount of uninsured deposit exposure, I would argue that additional upside is still on the table. But when you add all the factors together, the company no longer warrants a ‘strong buy’ rating and, instead, deserves a ‘buy’ rating.
For further details see:
Trustco Bank's Upside Has Become Limited