Description

UBAB represents an opportunity to invest in Schrodinger’s bank that simultaneously trades at 171% of TBV and at 72% of TBV but under 8 times last year’s earnings with a clear path to growing earnings.

For those wondering what Shrodinger’s bank is, it is a play on Schrodinger’s cat from physics. Here is what Wikipedia has on it:

“In quantum mechanics, Schrödinger's cat is a thought experiment that illustrates a paradox of quantum superposition. In the thought experiment, a hypothetical cat may be considered simultaneously both alive and dead, while it is unobserved in a closed box, as a result of its fate being linked to a random subatomic event that may or may not occur.”

Using the Schrodinger analogy may not be the best, as thinking about a bank as both dead and alive is not appealing as an investor but I imagine that investors screening for banks may consider a bank at 171% of TBV to be dead as an investing opportunity and move on. In the middle of every difficulty lies opportunity.

Punch Line: UBAB has $1.4 billion in assets and $213 million in equity as of 12/31/2022 and can easily increase assets to $2.1 billion. The bank received $123,750,000 from the government as part of the ECIP program. If you follow conventional balance sheet analysis to subtract the preferreds from total equity, then UBAB trades at 154% of TBV. Given the structure of the preferreds, they could be considered permanent, low-cost equity. There is no mandatory redemption of the preferreds and the maximum interest payable is 2%. While the preferred equity does not belong to the common stock shareholders like us, we derive all the benefits (earnings) as if they did. Including the preferreds brings the bank down to 64% of TBV. In a way, it reminds me of researching MHC thrifts, where you have to look at the current state and what it would look like fully converted. For UBAB, though, it is like the bank did the 2^nd step and all the new owners (preferred shares) are absentee owners who don’t care about being paid back.

Normally, a bank trading at 72% of TBV is not earning all that much. However, UBAB earned $5.11/sh in 2022 so it trades 8.3X TTM earnings. Throw in the ability to grow earnings by 50% and things get interesting.

History: The bank began in 1904 as The Bank of Atmore in Alabama, right on the border with Florida’s western panhandle. The bank changed its name to United Bank in 1983, and acquired United Bank of Frisco City in 1984. In 2004, it acquired Premier Community Bank of Southwest Florida. Finally, the bank acquired Town-Country National Bank in 2021.

It has 18 branches in Alabama and 3 in Florida and focuses on commercial lending to rural communities.

UBAB was registered with the SEC but went dark in 2012.

Performance: The bank earned $1.43/sh in 4^th Qtr 2022 and $5.11/sh for all of 2022. By comparison, the bank earned $0.87/sh in 4^th Qtr 2021 and $4.87/sh for 2021. The 2021 income benefitted from a $9.8 million CDFI award vs. $1.0 million in 2022, so the increase to the actual bank earnings was much more dramatic in 2022. EPS was $2.86 in 2019 and $3.27 in 2020. Assets increased from $1.1 billion in 2021 to $1.4 billion. Loans increased from $647 million to $710 million in the same period.

Growth: The bank has grown significantly over the past 5 years, as assets have gone from $637 million to $1,408 million. Equity has gone from $6.7 million to $212.6 million, as the result of the ECIP preferreds and an equity raise.

ECIP: This was covered in raf698’s CBOBA write-up, as well as message thread of Akritai’s ASB write-up.

It is worth noting that the timing of the ECIP funds was great. Last summer, the Fed was raising interest rates and promising more, which hit a lot of banks holding a chunk of low interest-rate AFS. As of 9/30/2022, UBAB had an AOCI hit of $36.9 million to its equity. That dropped TBV by $10 per share. ECIP gives UBAB liquidity and stability to the balance sheet that should allow the bank to hold the securities to maturity. Thus, the $10 should be added back to the bank’s equity over the next 7- 10 years.

New Market Tax Credits (NMTC): In November 2022, the bank received $45 million in New Market Tax Credit (NMTC) Allocations from the US Treasury as part of the CDFI Fund. The NMTC “…is designed to stimulate private investment and economic growth in low-income urban neighborhoods and rural communities that lack access to the capital to support and grow businesses, create jobs and sustain healthy local economies.”

Here is a brief item from the bank:

“On February 13, 2018, UB Community Development, LLC (UBCD), a wholly owned subsidiary of the

Corporation, was awarded a $55,000,000 allocation of the 2017 New Markets Tax Credits from the

Community Development Financial Institution (CDFI) Fund administered by the U.S. Department of the

Treasury. UBCD has fully deployed these tax credits to qualified projects as of December 31, 2021.

On July 15, 2020, UBCD was awarded a $65,000,000 allocation of the 2019 New Markets Tax credits

from the CDFI Fund. UBCD will deploy these tax credits to qualified projects. As of December 31, 2021,

$56,000,000 has been allocated and closed, $9,000,000 has been allocated to deals expected to close in the first two quarters of 2022.

On September 1, 2021, UBCD was awarded a $65,000,000 allocation of the 2020 New Markets Tax

Credits from the CDFI Fund. UBCD will deploy these tax credits to qualified projects. As of December

31, 2021, $65,000,000 has been allocated to deals expected to close across 2022 and 2023.

UB Community Development, LLC has applied for a 2021 allocation, to be awarded in the third quarter of 2022.”

Although the credits go to the private investors, the bank earns various fees on the NMTC business.

AFS: Over 80% of the securities are either government bonds or GSE MBS paper. A lot of the AFS has durations of 7 or more years. We will have a better glimpse of the AFS duration in the audited 2022 financials that should be available around April 1^st. Here is the duration detail from the financial data as of 12/31/2021:

Loans: The loan book is primarily commercial in nature although it does have some residential mortgages and consumer loans. As part of the ECIP program, the bank does make loans to riskier customers. It also makes a number of construction loans and government loans. Nonaccrual loans were $7.0 million as of 12/31/2022, right around 1.0% of total loans. Allowance for loan losses is $12.1 million or 1.67% of loans.

Deposits: The bank benefits from favorable core deposits. As of 12/31/2022, almost half of deposits were non-interest bearing and were up 19% from 12/31/2021. Of that gain in deposits, $158.3 million was non-interest bearing compared to an increase of $27.9 million in interest bearing.

Management: Michael Vincent became CEO in September 2021, taking over from the retiring Robert R. Jones. Vincent joined the bank in 2006 as an executive vice president and was promoted to chief credit officer in 2014. Jones had been CEO since 1992. At one time, Jones owned about 4.3% of the stock but owned 1.87% as of the last reported holdings dated 12/31/2020.

Board of Directors: Directors owns an aggregate of 2.91% of the bank. The largest shareholder among directors is David Swift, chairman of the board, who owns 1.03%. Swift is chairman of Swift Supply, a 6^th generation family-owned company that provides building materials to professionals. There are no 5%+ shareholders. This information comes from the Federal Reserve System:

https://www.atlantafed.org/-/media/documents/FRY6Docs/2021/UNITED_BC_OF_AL_1083895_2021.pdf

Risks: Illiquid nano-cap; recession; interest rates.

Catalyst

Grow the balance sheet and thus earnings.