In this article, we will analyze the financial holding company TrustCo Bank Corp NY.

TrustCo Bank Corp NY (TRST) is a small financial holdings company, with a market capitalization below $1 billion. Today, the company has a high dividend yield of 4.3%, and the payout ratio has come down over the last decade as earnings have grown.

However, TrustCo slashed its dividend fiercely during the great recession. The company is clearly not recession-resistant, and investors must perform their due diligence before purchasing high-yield stocks.

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Business Overview

TrustCo Bank Corp. NY is a financial holding company that provides personal and business banking services for individuals, partnerships, and corporations. The company’s products include savings accounts, retirement accounts, money market accounts, mortgages, building loans, auto loans, and more.

The bank was founded in 1902 and is headquartered in Glenville, New York. TrustCo operates 147 banking offices across the USA. The bank has $6.2 billion in savings and loans assets.

TrustCo released Q4 and FY 2021 results on January 24th. Net income of$16.2 million for the fourth quarter was 17% higher compared to the fourth quarter 2020 net income of $13.8 million. Diluted earnings per share of $0.845 was also up by 18% compared to $0.716 earned in the same prior year period.

For the full fiscal 2021 year, TrustCo generated $3.20 in diluted EPS, up 17.6% year-over-year compared to $2.72. The company’s average loans grew 4.4% YoY or by $185.3 million. Also, Average residential loans grew 5.9%, or by $223.3 million.

Average residential loans is TrustCo’s primary lending focus. Return on average assets and return on average equity for fiscal 2021 were 1.01% and 10.61%, compared to 0.94% and 9.47% in 2020.

Leadership reports that there are no loans in deferral. Also, TrustCo funded 663 Paycheck Protection Program (PPP) loans totaling $46 million in 2020 and another $23 million in 2021. At the end of the year, the bank had 190 PPP loans of $10 million outstanding.

Growth Prospects

TrustCo will achieve growth primarily through boosting their loan portfolio, specifically the residential mortgage loan portfolio, which make up the majority of their assets. The company’s growth will also rely on an increase in economic activities, as this will create a demand for the bank’s products.

Additionally, continued geographic expansion of the bank’s operations can add to organic growth. The Florida region reached over $1 billion in deposits and $1 billion in loans in the beginning of 2021.

We also anticipate a minor tailwind to earnings as the company attempts to repurchase shares after receiving approval to buy back up to 200,000 common shares. This represents about 1% of outstanding shares in March.

We estimate, going forward, that TrustCo can continue compounding earnings at around 4.0% per year on average.

Competitive Advantages & Recession Performance

The great financial crisis of 2008 pummeled TrustCo, which primarily specializes in residential mortgages. The dividend payout at the time became unsustainable and the dividend was slashed to less than half of what its dividend was prior to the Great Recession and has barely increased since.

TrustCo Bank Corp NY is not recession-resistant. We do not see TrustCo as having a strong competitive advantage in its field, as they are a small bank and also do not possess significant geographical diversification.

Dividend Analysis

TrustCo’s quarterly $0.35 per share dividend equates to a $1.40 annualized dividend payment in 2022. The company significantly slashed its dividend as a result of the Great Recession, and today has a 1-year dividend increase streak. At the current share price, TrustCo has a high dividend yield of 4.3%. This yield is roughly 40 basis points higher than the trailing decade average of 3.9%. A higher-than-average dividend yield may indicate that shares are undervalued.

Based on our 2022 earnings-per-share estimate of $3.00, the company will have a 47% payout ratio. That’s a healthy payout ratio for the bank, and we see no immediate threat to the dividend.

The company has remained prudent in bringing down the payout ratio by growing earnings and infrequently raising the dividend only slightly. We estimate that the company will continue to grow earnings faster than the dividend, and so the payout ratio should come down further from here.

Final Thoughts

TrustCo Bank Corp NY has significantly slashed its dividend in the not-so-distant past, and so some dividend growth investors may be wary of the name. Also, TrustCo is a very small bank, with a market capitalization below $1 billion.

Today the company has a high dividend yield of 4.3%, which is above its trailing decade average. What’s more, the company has been slow to raise the dividend, but earnings have grown, resulting in a strong payout ratio of 47% for the company in 2022.

We see no immediate threat to the dividend and believe the company can continue on its 1-year dividend increase streak, but we expect they will remain prudent and grow it slowly. This slow growth in the dividend will prevent another significant cut to it, at least in the medium term.