Description

Although well known amongst small bank investors, surprisingly Bank of Utica has never been written up on VIC.  This is a get rich slow stock.  This is a stock that won’t make your portfolio double, but it might provide ballast in the stormy seas as a small part of your portfolio.  Don’t feel compelled to put in a market order for a Monday morning trade at the opening bell.  There is no catalyst here, you have plenty of time to build a position in this one if you choose to do so.  Trust me on that one, I speak from experience.  If you are a hedge fund manager with a small amount of liquid high beta positions, skip this idea.  If you are an activist, skip this one as it is effectively controlled.  But, if you have 10-30 different small banks or a portion of your portfolio dedicated to community banks, this might be a suitable idea for you. 

There are a total of 250,000 shares outstanding in Bank of Utica.  200,000 non-voting shares with the symbol of BKUTK.  50,000 shares of voting stock that trade under the symbol BKUT.  If given a choice between the two stocks at the same price, buy the voting as it normally trades at a slight premium.  If you can get the non-voting a little cheaper, buy the non-voting.  The voting stock is effectively controlled by the Sinnott Family, currently in the capable hands of Tom Sinnott the third BofU president to have the last name Sinnott.  His son Barry is the heir apparent to be the fourth generation BofU president when Tom retires.

Utica New York is not really a growthy area.  Apparently there used to be a bumper sticker that said something like “last one out of Utica turn out the lights.”  As a result of the negative growth, BofU has tended to invest their assets primarily in securities.  Bonds.  Nationwide there has been slack loan demand and many banks have increased the size of their securities portfolio.  Most community banks park anywhere between 20% and 30% of their assets in bonds.  BofU has 905 million in assets, with 833 million of those assets in securities.  

Let me beat you to the punch here, yes this is a liability sensitive bank and I know rates are poised to go up.  But BofU has a competitive advantage when it comes to securities investing.  They are the largest community bank in the nation without a branch network.  Just the headquarters, located in an area rich with deposits from depression era mindset depositors that want a safe place to store their money.  As a result BofU has assets of 900 million with only 35 full time employees.  This allows them to only take limited amounts of duration exposure in their securities portfolio.  A bank with a bunch of employees and an expensive branch network would have to reach farther in the securities market to get yields sufficient to generate a satisfactory ROE.  Frankly most borrowers on commercial real estate are looking for fixed rates going out 10 years at this point, and due to the fierce competition amongst community banks, borrowers are getting what they want.  They get their deposits locally, but rely to a large degree on competitive pricing.  Most loan commitments at other community banks require some sort of a deposit commitment from the borrower as well, can't say that is the case at BofU as they don't really bother making loans.  In other words it isn't all sticky money.  That said demand deposits nationwide will evnetually seek yield if or when rates increase, to what degree it is hard to say. 

Like most value investments the appeal here is the price relative to the value.  There is a liquidity discount, and a minority share discount.  I also think this gets discounted because Tom Sinnott has a very strict policy of never talking to shareholders.  His only communication is a yearly letter that is always exactly 4 pages long.  Of course bank investors can access tons of information on the bank using the call reports filed with the FDIC.  Book value per share is 579.00 per share.  Note that there are unrealized gains in the HTM portfolio which if sold would add 88$ to the 579.00 for an adjusted book value of 667. (That 88 is pre tax, so the number would be a little lower than 667.)

Tom Sinnott has done remarkably well over the last five years:  Growing book value (assuming reinvestment of dividends) at an IRR of 15.24%.

Net income 2012 was 15,216,000 (62.10 per share) and they paid dividends of 10.20 per share.

Net income 2011 was 13,620,000 (54.48 per share) and they paid dividends of 9.30 per share.

Net income 2010 was 13,749,000 (54.99 per share) and they paid dividends of 8.40 per share.

Net income 2009 was 7,064,000 (28.25 per share) and they paid dividends of 11.45 per share.

Net income 2008 was -5,750,000  (-23.00 per share) and they paid dividends of 7.30 per share.

Bank of Utica has paid 169 consecutive semi annual dividends. 

This of course is rear view mirror stuff.  How will earnings be going forward in a rising rate environment?  The answer is probably not as good.  Keep in mind though that there is 88$ per share in unrealized gains in the HTM portfolio which should provide a nice tail wind.  Earnings will be lower in a rising interest rate environment.  But as long as rates move up slowly, it will actually be a long term positive to what I think is a unique business model.  The duration of the portfolio, as I’ve mentioned, is still fairly short.  Below is a cut and paste from the year end call report detailing the maturities of the portfolio.   Hopefully it works on the website.

Schedule RC-B - Securities

Dollar amounts in thousands

1. Pledged securities.............................................................................................................. RCON0416 138,431 M.1.

2. Maturity and repricing data for debt securities (excluding those in nonaccrual status): M.2.

M.2.a.

a. Securities issued by the U.S. Treasury, U.S. Government agencies, and states and

political subdivisions in the U.S.; other non-mortgage debt securities; and mortgage

pass-through securities other than those backed by closed-end first lien 1-4 family

residential mortgages with a remaining maturity or next repricing date of:

1. Three months or less............................................................................................... RCONA549 47,034 M.2.a.1.

2. Over three months through 12 months................................................................... RCONA550 124,869 M.2.a.2.

3. Over one year through three years......................................................................... RCONA551 340,420 M.2.a.3.

4. Over three years through five years........................................................................ RCONA552 186,059 M.2.a.4.

5. Over five years through 15 years............................................................................ RCONA553 53,250 M.2.a.5.

6. Over 15 years.......................................................................................................... RCONA554 30 M.2.a.6.

M.2.b.

b. Mortgage pass-through securities backed by closed-end first lien 1-4 family residential

mortgages with a remaining maturity or next repricing date of:

1. Three months or less............................................................................................... RCONA555 49 M.2.b.1.

2. Over three months through 12 months................................................................... RCONA556 304 M.2.b.2.

3. Over one year through three years......................................................................... RCONA557 0 M.2.b.3.

4. Over three years through five years........................................................................ RCONA558 2,340 M.2.b.4.

5. Over five years through 15 years............................................................................ RCONA559 5,121 M.2.b.5.

6. Over 15 years.......................................................................................................... RCONA560 470 M.2.b.6.

M.2.c.

c. Other mortgage-backed securities (include CMOs, REMICs, and stripped MBS; exclude

mortgage pass-through securities) with an expected average life of:

1. Three years or less.................................................................................................. RCONA561 2,700 M.2.c.1.

2. Over three years...................................................................................................... RCONA562 1,706 M.2.c.2.

M.2.d.

As you can see this is fairly short term stuff. 

I think one way the bank has generated nice returns is in foreign securities.  I assume these securities are the major European bank bonds and dabbling opportunistically in the sovereign debt of the PIIGS, but that is just a guess on my part.  Looking back over the last few years, Sinnott has really become pretty comfortable in that space:

He now has 248 million in the Foreign Debt Securities bucket as of 12-31-12.  He had 135 million in foreign debt 12-31-11.  They had 84 million in foreign debt as of 12-31-2101.  So obviously Tom Sinnott sees some opportunity to get yield in foreign debt.

In his most recent letter to shareholders, Sinnott basically conveyed to shareholders that this bank is not for sale and that his son is taking an active role.  This is the real buzz kill for this investment.  But frankly the Sinnott family has a lot at stake here and like everyone else wants to see their fortunes grow.  I think at the current price you are getting to tag along for the ride at a good valuation of 65% of book value.  If the general market goes higher we could see a price to book value multiple expansion.  But if book value is growing above 10% and the multiple stays the same we should still see some price appreciation.  There is a dividend while you wait.  Who knows..maybe (just maybe) one day the Sinnott family will sell this bank, but don’t hold your breath on that. 

For those not familiar with searching FDIC call and UBPR reports, I will provide the link:

https://cdr.ffiec.gov/public/ManageFacsimiles.aspx

RISKS:

Catalyst