Three Differentiated Small Banks: UBAB, Northeast Bank, FFB Bancorp

Keith Smith of Bonhoeffer Fund presented his in-depth investment theses on three small banks — United Bancorporation of Alabama (OTC: UBAB), Northeast Bank (Nasdaq: NBN), and FFB Bancorp (OTC: FFBB) — at Best Ideas 2025.

Thesis summaries:

United Bancorporation of Alabama (“UBAB”) is a community bank located in Alabama that provides banking service to small and mid-sized businesses (“SMEs”) in Alabama and Northwestern Floria and low-income housing and municipal loans across the Southeast. UBAB services one of the fastest growing regions of Alabama and Florida (the Panhandle Beach Cities). UBAB also originates and services low-income loans which results in a large amount of non-interest income via fees, grant and tax credits (which can be sold to third parties). UBAB operates out of its headquarters in Atmore, Alabama, and nineteen locations in Alabama and Florida. UBAB services Baldwin, Escambia, Monroe, Mobile, Jefferson and Wilco counties in Alabama, and Santa Rosa county in Florida. UBAB is a designated community development finance institution (“CDFI”) thus is eligible for US Treasury incentive payments. UBAB has grown EPS by almost 17% per year over the past five and 22% over the past ten years. This growth is driven by providing low-income loans, selling tax credit and providing commercial and commercial real estate loans. UBAB’s lending franchise and loan purchase generates an average loan yield of 6.7% and has organically grown loans by 15% per year over the past five years. The strong loan growth is comprised of criticized plus watch list loans of 5.0%, non-performing loans (“NPAs”) of 2.2% and a loan loss reserve to NPAs of 80%. UBAB finances its loans through non-interest bearing and interest bearing deposits generating a low cost of funds of 1.3%. The resulting net interest margin (NIM) is 5.4% and is sustainable as funding costs will decline with declining loan yields. UBAB’s largest shareholder is its management, which holds 4.5% of its common stock. UBAB generates about 20% of its revenue from non-interest bearing or spread activities. UBAB’s current valuation is about 7x earnings with high-teens expected EPS growth.

Northeast Bank (“NBN”) is a community bank located in Maine that provide banking service to small and mid-sized businesses (“SMEs”) in Maine as well as SBA loans nationwide as well purchasing and servicing orphan loans. Orphan loans are loans which are sold by either the FTC, as a result of forced sales associated with mergers, or the FDIC, as a result of forced sales from insolvency. NBN operates out of its headquarters in Portland, Maine, an office in Lewiston, Maine, an office in Boston, Massachusetts and seven branch locations across Maine. NBN’s strategy includes purchasing orphan loans as well as originating specialty loans such as PPP loans during COVID or SBA loans currently. FFBB also has specialized loan purchase group (National Lending Group) that purchases and services orphan loans. The orphan loans team has over 30 years experience in originating and servicing FTC and FDIC sold loans. Much of the NLG’s current management team worked for Capital Crossing Bank that was founded by NBN’s CEO Richard Wayne in the late 1980s to purchase orphan loans. Capital Crossing was sold to Lehman Brothers in 2007. As a public company, Capital Crossing generated 20% annualized returns from the IPO to sale. After the financial crisis, Richard Wayne was able to reassemble the Capital Crossing team as NBN after Mr. Wayne gained control of NBN in 2010. Other banks that have grown via buying orphan loans include Beal Bank and First Citizens whose current or peak size is multiples of NBN’s current size illustrating decent growth potential for NBN. NBN has grown EPS by almost 40% per year over the past five and ten years. This growth is driven by opportunistically buying orphan loans and originating PPP loans during COVID and SBA loans currently. NBN’s lending franchise and loan purchase generates an average loan yield of 8.9% and has organically grown loans by 26% per year over the past five years. The incremental loan yield is estimated by management to be 8.8%. This loan growth is good growth characterized by criticized plus watch list loans of 1.4% of loans, non-performing loans (“NPAs”) of 0.9% and a loan loss reserve to NPAs of 118%. NBN’s finances its loans via CDs and generates a high cost of funds of 4.0%. The resulting NIM is 4.9% and is sustainable as funding costs will decline with declining loan yields. NBN’s largest shareholder is its management, which holds 15% of its common stock. NBN’s current valuation is about 9.1x earnings with 20%s expected EPS growth.

FFB Bancorp (“FFBB”) is a regional bank located in California that provides high touch banking services to small and mid-sized businesses (“SME”). Two large functional areas of growth include transaction processing and SBA loans. FFBB operates out of one branch in Fresno providing financial services to California’s Central Valley as well as Southern and Northern California. FFBB also has a loan production office in Torrance, California servicing Southern California. FFBB’s strategy includes hiring an experienced regional banking head to hire relationship managers and business development officers in Northern and Southern California. FFBB also has technologies groups that are used to automate banking service functions and develop new applications for targeted customer bases such as small businesses and restaurants. Management has aspirations to grow its assets in three regions it operates in (Central Valley, Northern California and Southern California) by six times over the next seven to ten years. FFBB is one of only five firms whose EPS has grown by 20% or more in each of the last five consecutive years. This growth is driven by transaction processing and increased loan revenue from SMEs and Southern California multi-family real estate. FFBB’s lending franchise generates an average loan yield of 6.7% and has organically grown loans by 23% per year over the past five years. The incremental loan yield is estimated by management to be 8%. This loan growth is good growth characterized by criticized plus watch list loans of 1.6% of loans, non-performing loans (“NPAs”) of 0.5% and a loan loss reserve to NPAs of 145%. FFBB’s deposit franchise generates low cost of funds of 1.1% from transaction processing float and non-interest bearing deposits from SME and real estate loan clients. The resulting NIM is 5.2% and is sustainable as incremental loan yield is higher than the current yield and the cost of funds is steady as processing revenue is increasing. FFBB’s largest shareholder is its ESOP, which holds 6% of its common stock. FFBB’s current valuation is about 8.8x earnings with 20%s expected EPS growth.

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About the instructor:

Keith Smith, the fund manager, brings over 20 years of valuation experience to the Bonhoeffer Fund. He is a CFA charterholder and received his MBA from UCLA. Keith currently serves as a Portfolio Manager at Bonhoeffer Capital and was previously a Managing Director of a valuation firm and his expertise includes corporate transactions, distressed loans, derivatives, and intangible assets. Warren Buffett and Benjamin Graham’s value-oriented approach of pursuing the “fifty-cents on the dollar” opportunities, underpins Keith’s investment strategy. The combination of his experience and track record led Keith to commit most of his investable net worth to the Bonhoeffer Fund model.