A Good High Yielding Small Cap Banking Stock

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At the end of April, Joseph Lucarelli, the Independent Director of TrustCo Bank (NASDAQ: TRST) accumulated 100,000 shares of this savings and loan holding company in a total transaction worth $535,000. Interestingly, Chuck Royce, the small-cap investing guru, also accumulated more than 6.1 million shares of this company. Since the market bottom of 2009, TrustCo Bank has fluctuated in the range of $3.95 to more than $7 per share. Should investors follow Chuck Royce and the bank's insider into the stock?

Decent net interest margin with good profitability

TrustCo Bank is considered a federal savings and loan holding company, operating 146 automatic teller machines and 138 banking offices in five states and 29 counties in the U.S. The majority of its deposits, $1.15 billion, or 33.9% of the total core deposits, were savings. Time deposits under $100,000 ranked second with $833.4 million in deposits, while money market deposits were $649 million and interest bearing checking account were $515 million. TrustCo Bank put most of its loans in real estate mortgage, accounting for 78.6% of its total loan portfolio in 2012. In the past three years, TrustCo Bank has managed to maintain its net interest margin at more than 3%. In 2012, the net interest margin was 3.20%.

What I like about TrustCo Bank is its consistent double-digit return on equity for the past ten years, ranging from 10.70% to 25.96%. In 2012, its return on equity stayed at 10.77%. However, the percentage of loan loss reserves over total loans has been decreasing, from 4.21% in 2008 to 1.79% in 2012. TrustCo Bank is trading at around $5.50 per share, with a total market cap of $521 million. The market values TrustCo bank at 12.6 times its forward earnings and 1.45 times its book value.

Two of its peers have lower reserves and dividend yield

Compared to its peers First Niagara Financial Group (NASDAQ: FNFG) and KeyCorp (NYSE: KEY), TrustCo Bank has the highest price-to-book value among the three. First Niagara is trading at $10 per share, with a total market cap of $3.4 billion. The market values First Niagara at 12.1 times its forward earnings and only 73% of its book value. Most of its loans, $6.47 billion, or 32.8% of total loans, were commercial real estate loans. Business loans ranked second at $4.95 billion, while residential real estate and home equity were $3.76 billion and $2.65 billion, respectively.

First Niagara does not interest me much with single digit return on equity in the past ten years and low loan loss reserves. The loan loss reserve ratio has fluctuated between 0.72% and 1.26% in the past ten years. In 2012, its return on equity was only 3.11% while its loan loss reserve ratio was only 0.82%.

KeyCorp is considered one of the largest bank-based financial services companies, operating around 1,088 full-service retail banking branches and a network of 1,611 ATMs in 15 states in the U.S. Most of its deposits, $29.67 billion, were NOW and money market deposits, while non interest-bearing deposits were more than $20.2 billion in 2012. KeyCorp focuses its lending in commercial, financial, and agricultural fields, with $23.24 billion in loan in 2012, accounting for 44% of total loans.

Home equity loans ranked second at $10.24 billion. What I like about KeyCorp is its highest loan loss reserve ratio among the three. In the past ten years, its loan loss reserve as a percentage of total loans has stayed in the range of 1.32% to 4.28%. In 2012, the loan loss reserve ratio was 1.66%. KeyCorp is trading at around $10.30 per share with a total market cap of around $9.5 billion. The market values KeyCorp at 10.72 times its forward earnings and 95% of its book value.

Among the three companies, TrustCo Bank offers investors the highest dividend yield at 4.90%, whereas First Niagara pays a dividend yielding 3.40%. KeyCorp has the lowest dividend yield at 2%.

My Foolish take

Personally, I like TrustCo Bank the most with its highest loan loss reserve ratio, highest dividend yield, and its loan concentration in residential mortgage. I think investors should also consider TrustCo Bank as a play on the improving U.S. residential housing market.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool owns shares of KeyCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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