Executive Summary / Key Takeaways

• TrustCo Bank (NASDAQ:TRST) operates as a fundamentally conservative community bank focused on relationship banking, organic deposit growth, and residential real estate lending within its core Northeast and Central Florida markets.
• The company demonstrated strong financial performance in Q1 2025, with net income increasing 17.7% year-over-year to $14.3 million, driven by significant net interest income growth (up 10.4%) and improved net interest margin (up 20 basis points to 2.64%).
• Loan growth, particularly in home equity lines of credit (up 17.3% YoY Q1) and commercial loans (up 7.5% YoY Q1), coupled with effective management of deposit costs, fueled margin expansion despite a challenging rate environment.
• TRST maintains an exemplary capital position, with consolidated equity to assets at 10.85% and the Bank classified as "well capitalized," supporting a newly authorized 1 million share repurchase program aimed at enhancing shareholder value.
• Superior asset quality remains a core strength, with non-performing loans to total loans consistently low at 0.37% and a robust allowance for credit losses coverage ratio of 269.8% as of March 31, 2025.

The Conservative Core: Building Value Through Relationship Banking

TrustCo Bank Corp NY operates as a steadfast community bank deeply rooted in its core markets across the Capital Region of New York, Central Florida, and surrounding areas including New Jersey, Vermont, and Massachusetts. With a history built on traditional banking principles, TrustCo's strategy centers on cultivating strong customer relationships and fostering organic growth. Unlike many peers who rely on external funding sources, a fundamental tenet of TrustCo's approach is to fund its lending activities primarily through deposits gathered directly from its extensive branch network and customer base. This disciplined model, emphasizing a prudent mix of earning assets dominated by residential real estate loans, has historically provided stability and resilience, particularly during periods of market volatility.

In a competitive landscape populated by larger national players like Truist Financial (TFC), PNC Financial Services Group (PNC), KeyCorp (KEY), and U.S. Bancorp (USB), as well as smaller regional banks and increasingly agile fintech firms, TrustCo differentiates itself through its localized service model and conservative underwriting. While larger competitors often leverage vast scale and significant investments in cutting-edge digital platforms, TrustCo's strength lies in its efficiency and deep community ties. Its operational costs per branch are estimated to be lower than those of larger institutions, contributing to a lean operating structure. However, this focus on traditional methods means TrustCo may lag larger peers in the speed of digital innovation and processing times for certain transactions, a potential vulnerability as customer expectations evolve.

TRST's "technology" focus, as described in company materials, is less about proprietary, groundbreaking financial technology and more about enhancing operational efficiency and customer experience through digital channels. Recent efforts have centered on improving online and mobile banking platforms to meet customers "where they are" and streamline account openings. While specific quantitative metrics on the performance or cost advantages of these digital tools are not detailed, the strategic intent is clearly to support relationship banking and facilitate deposit gathering and loan origination in a more modern way. The company also continues to invest in its core operational systems, as evidenced by increases in equipment and outsourced services expenses, aimed at maintaining a competitive service level.

Beyond traditional banking, TrustCo has strategically ventured into providing services to the cannabis industry in states where it's legal within its footprint (primarily New York and Massachusetts so far). Leveraging its branch network, this initiative focuses on serving the deposit needs of cash-intensive retail cannabis businesses, contributing to low-cost core deposit growth, as highlighted by management in Q1 2025. This targeted expansion demonstrates an adaptability to new market opportunities while utilizing existing infrastructure, reinforcing the company's pragmatic growth approach.

Performance with Purpose: Margin Expansion and Robust Fundamentals

TrustCo's conservative strategy and operational focus translated into a robust financial performance in the first quarter of 2025. Net income surged to $14.3 million, a significant 17.7% increase compared to $12.1 million in the first quarter of 2024. This profitability improvement was reflected in key return metrics, with return on average assets climbing to 0.93% (from 0.80%) and return on average equity reaching 8.49% (from 7.54%).

The primary engine behind this performance was a substantial 10.4% increase in net interest income, rising from $36.6 million in Q1 2024 to $40.4 million in Q1 2025. This expansion was driven by a combination of factors: growth in the loan portfolio at higher interest rates and a decrease in the average rate paid on interest-bearing liabilities. The net interest margin improved by 20 basis points year-over-year, reaching 2.64% in Q1 2025, while the net interest spread widened by 21 basis points to 2.21%.

Average loans grew by $104.7 million, or 2.1%, to an all-time high of $5.1 billion in Q1 2025 compared to the prior year period. This growth was led by the home equity lines of credit portfolio, which expanded by $61 million or 17.3%, and commercial loans, which increased by $20.7 million or 7.5%. The average yield on the total loan portfolio increased by 21 basis points to 4.19%, reflecting the impact of higher rates on new originations and variable rate loan repricing. Management noted strong demand for home equity products, particularly from borrowers with low-rate first mortgages seeking to utilize home equity for projects or purchases.

On the funding side, TrustCo successfully managed its deposit costs. Total average interest-bearing deposits increased by $67.8 million, or 1.5%, to $4.65 billion in Q1 2025 compared to Q1 2024. Crucially, the average rate paid on these deposits decreased by 7 basis points to 1.92%. This was achieved by offering competitive core deposit products and short-term time accounts, with management noting success in lowering rates offered on time deposits while retaining and growing this product. The influx of low-cost core and business accounts, including contributions from the new cannabis banking initiative, also supported this favorable trend.

The securities portfolio saw a decrease in average balance ($369.9 million in Q1 2025 vs $477.4 million in Q1 2024) due to routine paydowns and maturities, partially offset by new purchases. The yield on this portfolio increased slightly to 2.62% (from 2.50%), reflecting higher yields on recent purchases. The Federal Funds sold and other short-term investments portfolio saw a significant increase in average balance ($613.6 million in Q1 2025 vs $497.7 million in Q1 2024), providing liquidity, but the yield decreased to 4.45% (from 5.45%) due to changes in the Federal Funds target rate, resulting in slightly lower interest income from this segment.

Noninterest income saw a modest increase to $5.0 million in Q1 2025 (from $4.8 million in Q1 2024). This was primarily driven by a 16.7% increase in Trustco financial services income, which reached $2.12 million, reflecting higher market values of assets under management ($1.3 billion at March 31, 2025, up from $1.0 billion a year prior) and strong client demand. Fees for services to customers saw a slight decrease, primarily in interchange income.

Total noninterest expenses increased by $1.4 million, or 5.7%, to $26.3 million in Q1 2025 compared to Q1 2024. Key drivers included higher costs in salaries and employee benefits, equipment expense, professional services, and outsourced services. Despite these increases, management expects total recurring non-interest expense for 2025, net of ORE expense, to be consistent with the prior year's guidance range ($27.5 million to $28 million per quarter for 2024), suggesting some of the Q1 increases may normalize or be offset. ORE expense net remained low at $28 thousand for the quarter, well within management's anticipated level not to exceed $250,000 per quarter.

Fortress Balance Sheet and Shareholder Returns

A hallmark of TrustCo's strategy is its unwavering commitment to maintaining a strong balance sheet, characterized by superior asset quality, robust liquidity, and ample capital. As of March 31, 2025, asset quality remained exceptional. Non-performing loans totaled $18.76 million, representing a negligible 0.37% of total loans, consistent with prior periods. Non-performing assets stood at $20.9 million. The allowance for credit losses on loans (ACL) was a solid $50.6 million, providing a strong coverage ratio of 269.8% of non-performing loans. The provision for credit losses for the quarter was $300,000, primarily driven by loan growth rather than credit deterioration, reflecting management's confidence in the portfolio's health. Net recoveries for the quarter totaled $258,000, further underscoring the strength of the loan book. Management explicitly stated they are not concerned about credit quality, attributing it to their conservative underwriting and diligent loan processing.

Liquidity remains a significant strength. TrustCo funds its lending organically through deposits and maintains a substantial position in Federal Funds sold and other short-term investments ($756.1 million in cash and cash equivalents at March 31, 2025).

The company does not rely on borrowed funds or brokered deposits. It also has significant contingent funding capacity available through the FHLBNY ($928.0 million as of March 31, 2025) and the FRBNY, secured by pledged assets. Management believes the company has adequate liquidity to cover its obligations.

Capital levels are exemplary, exceeding all minimum regulatory requirements, including the capital conservation buffer. As of March 31, 2025, the consolidated equity to total assets ratio was 10.85%, and the Bank was classified as "well capitalized" under OCC regulations. Book value per share increased to $36.16, up 6% from $34.12 a year earlier. This strong capital position provides significant flexibility. The Board of Directors recently authorized a new share repurchase program of up to 1 million shares, or approximately 5% of outstanding common stock. Management expressed an intention to fully execute this program, viewing it as a key component of their capital management strategy to enhance shareholder value while retaining ample capital to support future growth and strategic initiatives like potential new branch expansion.

Outlook and Risks

Looking ahead, TrustCo management is cautiously optimistic. They anticipate continued loan growth, particularly as they see early signs of a potential return to more normalized housing market activity, including increased purchase money mortgage volume. They believe their competitive residential loan products, featuring low closing costs and fast approvals, position them well to capture market share. While remaining selective, they also see potential opportunities for selective growth in the commercial loan portfolio in the coming years.

The outlook for net interest margin is positive, with management anticipating that potential future interest rate reductions by the Federal Reserve in 2025 could provide further opportunities to manage deposit costs effectively, thereby supporting margin expansion. They remain committed to offering competitive deposit products to retain and grow their funding base organically.

Management expects recurring non-interest expenses, net of ORE expense, to remain consistent with prior year levels, reflecting ongoing cost management efforts. The anticipated low level of ORE expense is expected to continue.

Despite the positive outlook, TrustCo faces several risks inherent to the banking industry and the current macroeconomic environment. Interest rate risk remains pertinent, as changes in rates can impact net interest income and the value of the securities portfolio. Credit risk, while currently low, could increase if economic conditions deteriorate, particularly in their core markets. Competition from larger banks and fintechs continues to pressure pricing and necessitate ongoing investment in technology to meet customer expectations. Regulatory changes, including evolving capital requirements and compliance costs (such as those related to the new cannabis banking venture), pose ongoing challenges. Cybersecurity threats and the risk of fraud also require continuous vigilance and investment. Management's ability to execute on strategic initiatives, such as the cannabis banking expansion and digital enhancements, will be key to realizing future growth opportunities.

Conclusion

TrustCo Bank Corp NY presents a compelling investment thesis centered on its enduring conservative strategy, strong financial fundamentals, and disciplined approach to growth. The company's recent performance in Q1 2025, marked by significant net income and net interest margin expansion driven by organic loan and deposit growth and effective cost management, underscores the effectiveness of its model in the current environment. TrustCo's fortress balance sheet, characterized by superior asset quality and exemplary capital levels, provides a solid foundation and significant flexibility, supporting initiatives like the authorized share repurchase program aimed at enhancing shareholder value. While facing competitive pressures and inherent industry risks, TrustCo's focus on relationship banking, selective growth opportunities (including the promising cannabis banking venture), and ongoing operational enhancements position it to continue delivering value for investors. The ability to sustain margin improvement and execute on its capital allocation priorities will be key factors to watch in the coming quarters.