- Key insight: After private meetings with executives allegedly yielded few results, two activist investors have published a letter outlining their concerns, beginning what they say will be a persistent pressure campaign.
- Supporting data: In this year's first quarter, expenses at United Bancorporation of Alabama rose by 15% year over year, while total loans grew by 2%.
- Expert quote: "We felt that there was a lot of talk and not enough action. It was time to … put a little bit more pressure on management to do what they say they're going to do." — Aaron Sallen, UBA investor
An Alabama community bank is the latest lender under public pressure from activist investors to make big changes, including in the composition of its board of directors.
In an
"Management has repeatedly stated that they believe the stock is undervalued. It is time to prove it," wrote Jason Blumberg, managing member of Blue Hill, and Aaron Sallen, manager of Merion Road.
The activist investors say UBA, the $1.4 billion-asset parent company of Alabama's United Bank, has allowed deposit and loan growth to stagnate as expenses have "ballooned." Meanwhile, they contend, excess capital has been dragging down the bank's performance.
"We've been talking about their excess capital positions for as long as I can remember, and the capital continues to build instead of being utilized," Blumberg told American Banker.
In this year's first quarter, total non-interest expenses at the company were $11.5 million, up 15.5% from the same period last year. Total loans held for investment, meanwhile, grew by 2.2%, and total deposits grew by 5.5%.
UBA did not respond to American Banker's requests for comment. But in its latest earnings report, CEO Mike Vincent attributed the bank's rising expenses to important investments in technology.
"We recognize that IT and people expenses are higher and do not expect this trend to continue," Vincent said in a
Blumberg and Sallen are not convinced, and recommend a number of steps to change course. These include a $40 million stock buyback, new measures to either cut expenses or "grow into" higher ones, and the appointment of one or two new directors "with deep M&A and capital markets expertise."
According to Blumberg and Sallen, UBA is aware of their concerns. Both investors have met with the company's executives, who they say have listened to their suggestions and even agreed with some of them. The problem, they say, is that not much happened afterward.
"We felt that there was a lot of talk and not enough action," Sallen said. "It was time to bring the thesis to light and put a little bit more pressure on management to do what they say they're going to do."
In facing down a revolt from its own investors, UBA is far from alone. Last summer, an activist investor accused Comerica of "disastrous decisions" and urged the bank to
In UBA's case, one major reason for the two investors' concerns about capital, as well as their demand for new board members, is a COVID-era cash infusion.
In 2022, the bank received $123 million in equity from the U.S. Treasury's Emergency Capital Investment Program, which invested billions in community development financial institutions. UBA, which says it's committed to "fostering economic growth in underserved communities" in Alabama and Florida, is a designated CDFI.
The equity boost resulted in a glut of capital that, in Blumberg and Sallen's view, has still not been put to good use.
"They found themselves with a load of new capital overnight and don't necessarily possess the expertise in the boardroom — or the experience — to efficiently deploy that capital through M&A and buybacks," Blumberg said. "So we think they probably could benefit from one to two independent directors with that skill set."
The investors acknowledged that UBA has repurchased some of its stock — by the company's own
"Forty million is what we think is appropriate, but we're willing to discuss and debate the right amount," Blumberg said. "A tender offer would … send a very positive signal to the market that UBA understands this is an attractive time to buy its shares at a discount."
And above all, the two investors want UBA to get its expenses under control — or explain what strategic purpose they're serving.
"When you see a bank's expenses explode, and every quarter or so you hear an explanation for management … you want either a justification where they're going to grow into that expense base, or you want a path to reducing them," Blumberg said.
With their open letter, Blumberg and Sallen hope to exert more pressure on UBA's management — not just by going public with their concerns, but by emboldening other investors to speak up as well. Since the letter was published, they say they've already received several supportive messages from other shareholders.
And until they see more of their demands put into action, Blumberg said, he and Sallen plan to remain "heavily engaged."
"We're not going anywhere," he said. "We'll persist in this effort, because we think that there's a lot of trapped value in this stock that's yet to be realized."
