TRUX - Truxton Trust

[My Own Personal Hedge Fun]

This is more of a retail investor idea with average volume of 470 shares x $41/share. Many days this security shows no volume, so definitely want to go with a limit order here.

 

Truxton is a single branch trust bank focused on the high net worth market in Nashville, TN. They have $0 non-performing loans, and management's letters communicate their focus on long-term success even when it costs more temporarily, along with being friendly to shareholders. While it's not a fast grower, it is very steady and predictable, and Nashville is growing for sure. I liked TRUX better in the $36-38 range a few months ago, but I figure at $40 or less it's still worthwhile. And you never know when these thinly traded stocks drop 5-10% for now reason (as case in point, OTCM regularly trades up or down 3-4% on no news).

 

Anyone else happen to follow this one or have any thoughts? I can see many taking a pass because it might not return enough over the long term, so I think a stronger case can be made comparing a decent upside vs. limited downside.

[Broeb22]

This looks interesting. Reminds me of TYBT, a small one-branch bank in Dallas.

 

What is their ROA on just their lending division?

[Guest Schwab711]

We can't tease it out without assumptions so here's an effort.

 

First, Truxton has ~$1b in AUM and $10m in fees (1% all-in fee). On a second read of their website, it looks like there's a flat rate + other types of one-time fees included. Hard to say here but 1% all-in probably isn't a terrible estimate of management fees + other business.

https://www.truxtontrust.com/wealth-management/faqs/

 

Related parties (executives, directors, and affiliates) account for $546k in fees in 2018 from $372k in 2017. Did management pay 1% all-in in 2018? Wouldn't be unreasonable to pay less since their ~$55m represents a sizeable percentage of total AUM.

 

Anyways, the trust department has 21 direct employees on the website. Most Wealth management firms should earn roughly 30% gross margins at this size. Let's assume ~$7m in wages and compensation. That works well considering it should cost ~$4.5m +/- $1m to staff a bank of $485m assets (< ~1% expense as a % of assets is reasonable in this case). It's a little less here because it's a single branch. Less growth potential (usually) offset by greater operating efficiency.

 

That leaves us with ~$14.6m branch revenue (NII - provisions + deposit fees + BOLI) - ~$7m expenses (total expenses - $7m wages - known WM expenses) = $7.6m pre-tax profits. Assume 25% tax rate and we are left with $5.7m NI.

 

5.7m / 485.1m = 1.2% ROA or ~11% ROE, given present leverage (some assets relate to the trust company but it's minimal)

 

It's tough to split the bank like this because the retail branch is likely only earning > Cost of Capital because of the wealth management practice (easier to acquire profitable customers). It also limits potential acquirers since not all banks like to be in the trust business anymore. On the other hand, ~20% of TRUX's loan book is closed-end mortgages, which is quite impressive given the above post-tax returns. There's a lot to like in this little branch.

 

The trust company is probably worth ~$20m-30m as a stand-alone. The branch is probably trading at an effective P/B of 1.4x - 1.6x. Seems fair given the present returns and location.

 

TRUX is probably fairly valued to slightly overvalued, given it's liquidity, but this is a hot asset. TRUX could reasonably be acquired for 2.5x TBV. TRUX would fit so well with so many potential acquirers. Community banks with similar quality have been acquired for a median multiple of 2.2x (or 20x normalized earnings) between 2016-2019. TRUX has slightly higher returns than the samples I've been tracking.

 

Thanks for the post MOPHF! Agree completely that at $35 or so it starts to look like a an interesting idea.

[My Own Personal Hedge Fun]

Thanks for the extensive reply! I've been lurking on this site for a while off and on, but haven't made it a routine to stop by here regularly.

 

Most of my research was on FDIC's website reviewing their past performance with lending, deposits, etc. I couldn't find anything to worry about, and since the price was off its high when I found it, I decided not to think too much and just start a position.

 

I've missed a couple great opportunities among Cincinnati area banks. Mt. Washington Bank was very thinly traded on the OTC and only had two or three branches (one of those is like a mini-branch). When I started watching it, they had changed their name to a more generic sounding MW Bank so I figured they would expand their geography a bit, open 5-10 branches over several years and then sell to a larger bank. I thought about buying at $15... watched it go to $20... and went to check it later to find out those two little branches were acquired at $30/share.

 

TYBT in Fort Worth looks really good too! They look more focused on the banking business where I sense banking is more of a supporting role at TRUX. They both seem to have very independent personalities. If they ever sell, seems like they would be very selective about an acquirer.

 

TRUX is probably fairly valued to slightly overvalued, given it's liquidity, but this is a hot asset. TRUX could reasonably be acquired for 2.5x TBV. TRUX would fit so well with so many potential acquirers. Community banks with similar quality have been acquired for a median multiple of 2.2x (or 20x normalized earnings) between 2016-2019. TRUX has slightly higher returns than the samples I've been tracking.

 

Who do think would be a good acquirer? TRUX feels like some wealth management folks who decided they would be happier as an  independent firm, and that's a core part of their message to clients. I can't imagine them selling to a large bank. Maybe a local bank or someone like Northern Trust?