Description

Oneida Financial is the holding company for a $422 million (assets) thrift located in central New York, whose stock, if shares outstanding are properly accounted for, trades for 60% of liquidation value (book value plus a 6% premium for deposits) and 10 times earnings.

Oneida Financial has a mutual holding company structure. This means that when Oneida converted from mutual form in 1998, it created a mutual holding company to hold a large block of shares in Oneida Financial. The intent is to protect management from a hostile takeover. Oneida reports 7,680,331 shares outstanding, of which 4.3 million shares, or 56%, are held by Oneida Financial MHC, the mutual holding company. Somewhere down the line, the company may announce that it will sell the mutual holding company’s shares in a “second-step” public offering at the prevailing market price (adjusted for an “exchange ratio”, read: stock split), in which case the mutual holding company will cease to exist. When second-step offerings are announced, they usually lead to a runup in the stock price.

I’ve posted a report on this type of thrift before. Please see my write-up on Peoples Bancorp of Connecticut (PBCT) for aspects of MHCs that I might have neglected here.

Oneida earned $4 million before securities gains in 2004, up from $3.1 million in 2003. Net worth at 3/31/05 was $51.7 million.

Based on the number of shares outstanding as reported, Oneida earned $0.53 per share last year and its book value is $6.73 per share. On this basis, the stock at $12.5 per share doesn’t appear cheap.

I would argue that the shares owned by the mutual holding company are not truly shares outstanding and that the stock therefore is cheap. This is because nobody owns the MHC shares. Although management indirectly controls the MHC shares, neither the management, the depositors, nor the shareholders own the shares. In a second-step transaction, the proceeds from the offering go to the company, which, of course, is owned by the public shareholders. The proceeds do not go to the management, the depositors, or the shareholders. Significantly, when Oneida pays a dividend, the MHC waives its right to receive the dividend. The “owners” of the MHC do not complain about not getting a dividend -- because the MHC has no owners.

I view MHC shares as shares that are authorized but unissued. When Brookline Bancorp (BRKL) did a second step three years ago, the ultimate effect on the shareholders was the same as doing a secondary stock offering of previously unissued shares. Accordingly, from my perspective, Oneida’s true shares outstanding are 3,379,000. The true EPS are $1.19 per share, giving the stock a P-E of 10. The true book value is $15.30 per share. If one values the $304 million of deposits at a premium of 6%, and adds this value to the $52 million of net worth, then one arrives at an overall valuation of $70 million, or $21 per share.

This is a plain vanilla thrift that shouldn’t contain many surprises. Oneida is in a rural market area south of Syracuse that hasn’t had overheated real estate activity. Unlike thrifts in California, my home state, you’re not going to find mortgages with 80% loan to “value” ratios where the loan “value” is 40% above the real value of the house and the true LTV is 110. Nonperforming assets are 0.14% of assets. The balance sheet is very liquid with about 40% of interest-earning assets in investment securities and other liquid assets. The $209 million loan book is split $99 million residential, $45 million commercial real estate, $37 million consumer loans, and $31 million commercial loans. Oneida sticks to adjustable rate product such that a 300 basis point move in rates would change their net interest income by -3.6% on the downside and -0.1% on the upside.

The main complaint I have with this company is that they have lousy expense discipline. Noninterest expenses run at a whopping 76% of revenue and 4.3% of assets. They could earn a lot more than 90 basis points on assets if they learned how to run a tighter ship.

I would also fault management for not buying back stock. This company has twice as much capital as it needs. The equity to assets ratio is 12%. They bought back stock in 1999 and 2000, and that was it.

I can live with these faults because Oneida is solid in asset quality and capital position, and because the values are there, though I admit that it can take a while to grasp the concept that shares “outstanding” might not be so.

Catalyst

Possible "Second-Step" Transaction
Room for Share Buybacks
Continued Earnings Growth