TrustCo Bank Corp. NY (TRST) operates as the holding company for TrustCo Bank. The bank provides personal and business banking services for individuals, partnerships, corporations and other entities. The company was founded in 1902 and is headquartered in Glenville, New York.
TrustCo's business execution is benchmarking well above its peers in the financial services industry. Most of the regional banks we follow in this sector appear to have not demonstrated improvements since the financial crisis. TrustCo's first half of 2010 provided a net income of $14.1 million and diluted earnings per share of $0.183. The return on average assets and return on average equity were 0.76% and 11.31%, respectively, for the first six months of 2010 and 0.68% and 9.98% for the comparable period in 2009. In these challenging times for banks, TrustCo has demonstrated significant progress.
On June 17, 2010 SNL released its annual ranking of the top performers from the largest 100 institutions in the thrift industry. TrustCo ranked 11th based on objective analysis of profitability, capital strength and asset quality. It was one of a few select banks to have achieved the highest grade in both good times, pre 2008, and since the financial crisis.
With TrustCo performance above its peers, it is surprising that investors can achieve both a high yielding dividend, and an profitable enterprise basically having no enterprise value.
TrustCo achieved the following ratios as of June 30, 2010 and 2009:
|Bank Risk||TrustCo June 2010||TrustCo June 2009||Min. Reg. Guidelines|
|Tier 1 risk adjusted capital||12.68%||12.45%||4.00%|
|Total risk adjusted capital||13.94%||13.71%||8.00%|
Great Balance Sheet:
TrustCo has $5.52 of cash per share after subtracting its debt. Meaning the remaining enterprise is worth only $.02 value per share. The bank earned $.09 cents a share in its second quarter ending June 2010 and for the first half of 2010 net income was $14.1 million. The cash flow from operations for the last three month was over $17 million dollars or $.22. per share. The trailing annualized cash flow from operations was over $34 million. The annualized cash flow works out to be $.44 per share. It appears that the high levels of cash and strong cash flow from operations are camouflaging the true earning power and dividend yield of TrustCo.
Applying this metric would value (Zack's based values):
|Equity to Cash Flow||Zero Equity||12.83||16.44||13.26|
The current peer groups trade about 12.83 times cash flow. If you use the $.44 cents that represents TrustCo’s annual trailing cash from operation that would create an equity value of $5.64. Adding the cash value per share of $5.52, would give TrustCo an $11.16 market value.
The $.183 per share earned during the last 6 months annualized gives the bank a PE of 15. If one applies the earnings to enterprise value, TrustCo would have a run rate of $.36. Using the 15.27 average PE sector for banks, the company would receives a value of $5.49. Once again TrustCo seems to get zero value for its cash holdings and strong cash flow. When you value the ongoing equity plus cash using cash equity value modeling its value would be about $11.00 a share.
Due to banks profits, mark-ups, mark-downs and accounting, the price to sales ratio would not be a fair indicator of value.
Great Cash flow:
TrustCo generated over $34 million in free cash flow from operations in its trailing fiscal year. That works out $.44 per share. Realizing the value of the entire enterprise is only 2 cents per share, again subtracting out the cash and debt, the return on enterprise (ROE) works out to be an undefined number, because the enterprise basically has a zero value. With the annual dividend rate of $.264 per share, TrustCo is paying out about 60% of its operational cash flow to shareholders. That is higher than many companies we follow.
TrustCo Dividend Graph
TrustCo has emerged from the financial chaos that has ravaged the entire banking industry. As seen below, TrustCo's earnings (green line below) took a major hit when the financial system started to collapse. No one in the industry avoided the downturn; as was evident with nightly news reports of large multinational institutions like JP Morgan (JPM), Citi (C), Bank of America (BAC), Wells Fargo (WFC) and even General Electric's (GE) financial arm, all teetering on the brink of collapse.
TrustCo’s dividend payment (red line below) followed earnings lead as operating cash flow simply could not prop up the dividend any more. Emerging from the storm in the middle of 2009, earnings steadied and were above the dividend again. Recently TrustCo announced an increase to the dividend, signaling strength.
TrustCo's level of cash is hiding the outstanding free cash flow generation from operations, coupled with the poor performance of the banking and thrift industries. The high level of cash allows TrustCo more freedom and flexibility to pay the higher return to shareholders funding.
TrustCo started issuing a dividend in June of 1990 and has paid one every quarter since then. The dividend was reduced on March 5, 2008 and again on June 3, 2009. This was due to the economic tidal wave that hit the entire banking industry. Just two years since the chaos, TrustCo announced it will be raising its dividend and is open to lending. (Please see graph below.)
Real Estate Holding
This is where most people are most concerned about the health of the bank industry. TrustCo cited in its most recent SEC filling dated June 30, 2010
the widespread disruptions in the mortgage market as a result of the financial crisis have not had a significant impact on TrustCo.
Further along the bank says it did not offer the types of loans that were responsible for many of the problems causing the disruptions and that the market it serves also has not experienced the declines realized in other areas of the country. With SEC statements like this, coupled with the dividend growth, and increased profits, it appears TrustCo is again demonstrating that the financial crisis that caused many bank to fail, is in their wake.
Lack of management ownership
The amount of stock being held by by insiders is only 4.28%, a market value of $18 million. Compared to the last company reported on, Adams Energy where insiders owned around 50% of the float and did very little trading with no stock incentive plan, TrustCo has an stock incentive plan and it seems to be used more for a short term or opportunistic gains by management instead of a long term commitment that shareholders are asked to make.
Interest Rate spread
Currently the cost to borrow money at the “Federal Funds” rate is .00 to .25. There is an arbitrage opportunity created allowing banks to borrow money and invest in government debt. This spread has created profits for banks. These rates are currently quite attractive and the Federal Reserve is indicating that this policy could be maintained for an extended period of time. One must understand that this is not sustainable and it could and most probably will turn negative down the economic recovery road. Currently banks are riding a very financially rewarding wave using a low risk, Federal Reserves Infusion, for the banking industry to slowly replenish their balance sheets.
TrustCo's business appears to be gaining strength even while the economic, banking, and financial derivative markets are providing tremendous adversity. The market has valued stocks in this sector, particularly such as small banks like TrustCo, as if they are in critical condition and on “Federal” life support. Based on TrustCo’s positive cash flow, low enterprise value, and strong balance sheet, the bank appears to be gaining momentum and plotting a successful course. TrustCo is rewarding investors with a very high and growing dividend rate in addition to being able to acquire the underlying assets (minus the cash and debts) for free!
TrustCo is now a core position in our Investment Growth & Income Portfolio.
TrustCo Bank Corp (TRST) Per share values on 9-24-2010:
Market value $5.50
Cash $ 5.52
Equity value $ 0.02
Dividend rate 4.72 %
Disclosure: Durig Capital and its clients currently do have positions in TrustCo.