November 14, 2016 - 12:15am EST by
2016 2017
Price: 424.00 EPS 40 40
Shares Out. (in M): 0 P/E 10 10
Market Cap (in $M): 106 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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I will spare everyone another media discussion and instead submit a simpler idea.

This isn't exactly a Trump-themed idea, but it isn't not Trump-themed idea either. Now that the Republicans control Congress and the White House, it seems likely we will get some tax reform. Everyone will likely win to some extent, but assuming a big part of the tax reform is a lower base corporate tax rate (as is likely), smaller American companies with no overseas operations (like small and mid-sized banks) would be among the big winners. Depending on how the tax cut is implemented, a lot of companies could see their combined state and federal rate go from 40% to 30% or lower. How much a given bank benefits depends on the size of their muni portfolio (which will decline a bit in value, most likely), but they should mostly come out ahead. It would be a small bump to earnings for most companies, but every bit counts.

The Bank of Utica was written up by broncos 3 years ago and has performed admirably since then. BKUTK is a cult stock, a $1bn (asset) one-branch community bank in upstate NY. It is has been controlled by the local Sinnott family for four generations, and has 250,000 shares outstanding (only 50,000 of which are voting shares trading under the symbol BKUT), which makes the math easy.

It would be misleading to frame BKUTK as a normal community bank; although it mostly takes local deposits ($823mm in total, largely in time deposits and MMDAs), it deploys them almost entirely into short/intermediate term high quality corporate bonds. The bond portfolio is worth $862 million, while the loan portfolio usually fluctuates around $60 million, there not being a ton of economic activity in the greater Utica area. Also, the bank maintains a stock portfolio, mostly accumulated between 2009-2011, worth $88mm at market (although carried at $69mm on the books after netting out the deferred tax liability). The bank has a TCE/TA of 13% even if you exclude the equity portfolio (20% if you include it), so you can think of the stock portfolio as being added value. The dividends are (mostly) tax free, the capital gains are deferrable indefinitely (and the tax rate should come down), so it should continue to be a source of value for the whole enterprise.

The financials are available in the call report. As of the most recent quarter, the company had a tangible book value of $195mm, or $780 a share. If you were to mark the bond portfolio to market, you would get $808 a share (net of taxes). So, depending on your measure, it trades at 52% or 54% of tangible book. The bank is decently profitable, earning a mid-to high single digit ROE. While the assets aren't that high yielding, the costs involved in running this kind of operation are very low, with the expense ratio running in the 20s and 30s. Earnings will probably be around $10mm a year ($40 a share), and the bank is on track for that again this year. Keep in mind the stock portfolio, which is about a third of total tangible book value, only flows through dividends to the income statement, so that throws things off a little.

I won't go into a deep analysis of the earning power of the bank, except to say that it benefits most directly from higher corporate spreads (after all, it's just taking in deposits and buying corporate bonds). In the short term, it benefits a bit from falling rates, since there is a slight duration mismatch. In the last 15 years, we've had falling rates, and more recently we had a period with very wide spreads, and both have really benefited the stock. In 2000, tangible book was only $200 a share, so in 15 years, shareholders have quadrupled value and received about 2% a year in dividends on top of that. Now that the bank is much bigger, they won't match that record, but it should still be a safe, steady source of growing value (and at half price!).

Management is solid and conservative and has an excellent record of creating value despite a tough local economy. They communicate with shareholders through an annual letter, wherein they reiterate their commitment to conservatism and refer shareholders to the call reports, which are quite detailed. They have a clear strategy, and they execute well. The financial crisis has made them perhaps more conservative than they were before, and they are happy to continue to accumulate capital and keep the bank as a pillar of the community. Shareholders will have to content themselves with their steadily growing dividend, which runs at about 1.5% of tangible book (3% based on the stock price).

I will keep this short since this is as simple as they come, and it has been written up before (thanks, broncos!). I can always address specific questions in the comments.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


No catalyst here, sorry.

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