Tri City Bankshares (TRCY)

Alright, another bank idea to close out the week. If I do many more banks like ENB Financial and the following franchise, I may have to launch a “Ron Popeil Strategy” on this site.

I’ll put the disclaimer upfront: this name is illiquid, boring, and unlikely to fit anything but a retail position size. And I like it.

Back in 1955, small businessman David Ulrich’s loan application was turned down by a local lender. To remedy the issue, Mr. Ulrich decided to start his own bank and spent the next eight years raising capital in in order to establish Tri City National Bank in 1963. As it stands today, Tri City Bankshares (TRCY) of Oak Creek, WI still operates as Tri City National Bank and services Southeast Wisconsin with a 33 branch network.

Now, I’m going to highlight something that will turn some folks off: of the 33 branch locations, almost half (16, to be exact) are in-store/retail branches. Look, I avoid supermarket banks as much as the next guy; even with the operational cost-savings, supermarket branches typically don’t end up being very profitable (broadly speaking, most are just check-cashing stations). Do I wish Tri City made an effort to close down the in-store operations? Yes. But I’m not the Chairman or CEO, so I need to assess the merits of the bank in its current form.

Had TRCY’s operating metrics been below peers, I would likely have stopped my work right then and there. But I saw the 11%+ ROE, 1%+, ROA, chunky equity and capital positions, and decided to dig further. I looked at the in-store branch deposit concentration – those 16 “branch” locations only bank ~29% of the deposit base and, unlike many supermarket banks, they have virtually no questionable loan exposures. The asset quality (NPLs are > 1.50%, but trending down) had me a tad concerned, but I dug further, and discovered that Tri City did a FDIC-assisted transaction in 2009 (Bank of Elmwood) and this was a driver in the deterioration during the crises and Tri City has been managing these problem assets over the past several years.

I believe the current market valuation on this franchise and its solid track record of operating performance makes it an attractive purchase today. At its current P/TBV (119%) and P/E (11.0x) valuations, an investment in TRCY at current levels positions shareholders alongside an excellent management team executing at a level that should compound returns, with very little fanfare, at high-single-digits levels over a complete cycle. The TRCY deposit franchise is an absolute monster – approximately 75% of the deposit book is interest-bearing, but the rate paid on the interest-bearing deposits is only 0.19% (just 3bps higher from 2017’s rate). A full-year 3% deposit beta on $1.2 Billion of deposits in 2018 is spectacular. I briefly mentioned the asset quality concerns earlier – they have methodically worked down the NPL totals from > 5% (FY 2011) to today’s 1.9% total. While TRCY’s originated loans were surely responsible for some of the spike to 5%, the FDIC deal in 2009 took over a failed bank that was nearly 50% of it’s balance sheet size at that time. I’m comfortable with TRCY’s underwriting standards.

Primary drivers setting up TRCY shareholders for a nice investment over the near- and longer-term:

  1. Compounding Earnings:
    • TRCY management operates a profitable community bank, simple as that. The past year is a great example of the potential of this franchise during the good part of a credit cycle. In 2018, TRCY printed a 1.21% ROA and 11.7% ROE – this is a run rate that will double equity in under 6 years.
    • The earnings stream and already bloated equity/capital position provides TRCY with several options to drive shareholder returns: loan growth strategies, share repurchases with low TBV-earnback periods, and/or dividends.
  2. Dividend Income: TRCY pays a current dividend yield of ~1.9% and the current payout ratio is very manageable 28%. The bank has sufficient capital cushion to pay an outsized dividend should they not be able to find more efficient uses for its net income.
  3. Asset Quality, Loan Mix, & Deposit Funding: I’ve already touched on all three of these and I am fine with the asset quality, I like the loan mix, and I love the deposit franchise.
  4. Uplisting Potential: TRCY shares currently trade on the OTC Pink marketplace, but carry a market cap sufficient to warrant a strategic process to uplist to OTCQX or, even better, Nasdaq. Doing so will increase its exposure and universe of potential buyers, especially if the migrated to the Nasdaq and qualified as a Russell 2000 Index member.

Some concerns that could pressure earnings/profitability/growth to keep an eye on:

  • Limited-to-zero M&A upside
    • As I mentioned at the top of the post, I would not assign much of a probability to an upside M&A scenario given TRCY’s ownership structure and family involvement (even with some of involved parties being older). There is a Ulrich Voting Trust, which owns ~33.8% of the common stock, and is controlled by Mr. Ulrich’s three children.
  • Families can be complicated
    • President & CEO Brian McGarry (age 67) is the son-in-law of founder David Ulrich. Mr. Ulrich’s wife Agatha (age 89), brother-in-law Frank Bauer (age 91), son David Jr. (age 58) all serve on the Board of Directors. And so does Brian McGarry’s daughter Rebecca and her husband Jay Ferguson (both in 40s). If you lost count (I did…), that makes 6 of the 14 Board Members with family connections.
    • Do I prefer a Board that is not 40% family: yes
  • Economic Cycle
    • Hard to forecast where we are here, but all banks and shareholders, no matter the quality of management, bear the risk of a downturn in the local and national economy.

Bank Description & Geography

Based in Oak Creek, Wisconsin, Tri City National Bankshares Corporation is the holding company for Tri City National Bank, which operates 33 banking locations around Milwaukee and Racine.

trcy geo

Financial Overview


Notable Ownership

  • Ulrich Voting Trust & Family Ownership – ~37%
  • William Gravitter (Director) – 6.3% (Age 89)
  • Sanford Fedderly (Director) – 2.3% (Age 83)
  • Banc Funds – 1.5%

Author: Golden Belt Investments

Investor, primarily community banks, small/mid cap, specialty finance

2 thoughts on “Tri City Bankshares (TRCY)”

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