United Bancorporation of Alabama Makes For A Compelling Opportunity (OTCMKTS:UBAB)

Just like with pretty much any other type of company, banks come in all shapes and sizes. One of the smallest that I have looked at is a firm called United Bancorporation of Alabama (OTCQX:UBAB). With a market capitalization of less than $150 million, this is about as small as publicly traded banks get. Smaller enterprises like this do bring with them certain risks. For instance, it can be difficult for them to remain competitive compared to larger players that have more financial resources. Expansion can also be much more costly. But even after keeping these factors into consideration, the institution looks to be a truly compelling opportunity. Given how cheap the stock is and the quality of its assets, and even in spite of a bit of weakness experienced in 2023, the firm warrants a ‘strong buy’ rating at this time.

A bank worth banking on

As its name suggests, United Bancorporation of Alabama is focused on operating in Alabama. In total, the institution has about $1.4 billion of assets. And between southwest Alabama and northwest Florida, it operates 22 separate locations. Just like any other regional bank, United Bancorporation of Alabama engages in traditional banking services for its customers. It’s objective, according to management, is to aid in the economic development of underserved communities. It does this through its three primary subsidiaries, United Bank, Town-Country United Bank, and UB Community Development.

Over the past few years, the management team at United Bancorporation of Alabama has done a fine job of growing the institution. Net interest income, for instance, managed to grow from $31.1 million in 2021 to $57.6 million in 2023. This growth was driven by a rather quick expansion in the institution, combined with rising interest rates that have proven to be beneficial for it and its shareholders. In the final quarter of 2023, for instance, the institution had a net interest margin of 4.68%. That was up from the 4.23% that the company enjoyed one year earlier. While this may not seem like a huge disparity, if you apply this to $1 billion, it would translate to an extra $4.5 million in net interest income.

There are other parts of the income statement that experienced expansion during this window of time. Unfortunately, one of them was not non-interest income. It actually dipped slightly from $22.7 million in 2021 to $21.1 million in 2023. The largest chunk of this amount was about $15.1 million associated with various funds that the company received for free. But the company also generated $6.6 million from service charges and fees. Despite the trouble when it came to non-interest income, net profits still managed to shoot up from $18.5 million in 2021 to $31.5 million last year.

This general growth over time has only been made possible by a growth associated with the assets that the institution has. The value of loans on its portfolio, for instance, grew from $657.2 million in 2021 to $811.9 million in 2023. Despite this increase, not everything has seen growth. The value of securities, for instance, dipped slightly from $290.7 million to $270.8 million. On the other hand, the value of cash almost doubled from $120.2 million to $236.4 million. There was a bit of downside with this. And that is the fact that debt also increased. Over the three-year window we are looking at, it expanded from $23.5 million to $40.8 million. But considering the overall size of the institution and how profitable it is, I would not say that this makes it anywhere close to being over leveraged.

There has also been a general increase in the value of deposits that the institution has. These went from $982.7 million in 2021 to $1.17 billion in 2022. Unfortunately, high interest rates and concerns over the health of the banking sector caused deposits to take a step back in 2023. By the end of the year, they had dipped to $1.09 billion. That’s a decrease of $79.1 million over the course of a year. That drop in deposits, the overall increase in the value of assets that the company has was responsible for pushing its book value per share up materially over the span of three years. At the end of 2021, book value was $29.13 per share. And by the end of last year, it had grown to $70.34.

Speaking of book value, one way we can value the company is by that means. In the chart below, you can see both the price to book multiple and the price to tangible book multiple of United Bancorporation of Alabama at this time. That chart also shows how these numbers match up against five similar firms. On a price to book basis, United Bancorporation of Alabama ended up being the cheapest of the group. But when it came to the price to tangible book value, it ended up being the most expensive.

This gives us something of a mixed picture. We should also then look at another way to value the firm. And this would be by using the price to earnings multiple. Based on my own calculations using the 2023 results, we are looking at a multiple of 4.7. However, as I mentioned before, the company did receive a massive award. A more appropriate measure would probably be off of the $18.7 million in profit generated back in 2022. This would give us a more reasonable price to earnings multiple of 7.9. That’s still quite low in this space. And as the chart below illustrates, only two of the five companies I compared it to ended up being cheaper than it.

Naturally, we should also be paying attention to the quality of the assets. There are two primary ways that we can do this. The first, shown in the first chart below, is to look at the return on equity of the institution. Because of the same aforementioned issue, I ended up using the 2022 results for the bank instead. This gives us a reading of 7.52%. Two of the five banks that I compared it to ended up being lower than it. I then, using the same approach, looked at the return on assets. With a rating of 1.35%, United Bancorporation of Alabama is still at the high end of the group.

Takeaway

All things considered, United Bancorporation of Alabama is doing really well for itself. The institution is growing nicely on both the top and bottom lines. Admittedly, it has had some help along the way. But the company is profitable and healthy at this time. Some of the quality and pricing metrics are mixed. But when you consider how cheap the stock is relative to earnings and book value, and you factor in how high its return on assets are compared to similar firms, I don’t think a ‘strong buy’ is inappropriate at this time.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.