Notes and Updates

I’ve noticed a lot of new subscribers lately, so this is me writing to say 1. Thanks! and 2. Where are you coming from? Not that it matters. I’m just curious. I have been working on a write-up on a REIT I think is exceptionally cheap, but I’m not quite ready to publish. So until then, here are a few notes and observations on markets and the broader financial world.

First, I really enjoyed this presentation from Tim Eriksen at the MicroCap Leadership Summit. I have a lot of respect for Tim as an investor. Tim focuses on the same wild and wooly world of micro-caps and special situations that Alluvial does, and he does it well. Tim also has the rare distinction of being a successful operator, leading Solitron Devices through a difficult period of accounting restatements and now trying his hand over at PharmChem. I have watched many investment managers try to follow in Buffett’s footsteps and run a public company, and so far only Tim has proven equal to the challenge.

Could ECIP recipient banks soon(ish) repurchase the preferred shares issued to the treasury? For those not familiar, in 2022 the Treasury Department injected $8.6 billion in a collection of community banks on wildly favorable terms for those banks. About a dozen public banks participated, issuing preferred stock that paid a maximum of 2% annual dividends, with the potential to pay less based on their lending activity. These investments were intended as an economic support for low-income communities as the nation recovered from COVID, but of course they were also a tremendous windfall for investors in these banks.

I’ve heard through more than one grapevine that this program, while enacted by Congress, was never popular with the Treasury. The Department found it onerous to administer and of questionable benefit. Rumors have circulated that the Treasury would wind down the program as soon as practicable by selling preferred shares back to the issuers or even cancelling them outright. Well, the Treasury is now seeking comment on procedures around the disposal ECIP preferred shares and their valuation. Interestingly, the Treasury comments that as of March, the fair value of these securities is likely to be somewhere between 7% and 28% of face value.

A repurchase by the issuing banks at say, 20% of face value, would be extraordinarily accretive to book value and earnings. Take United Bancorporation of Alabama, one of the strongest and most successful ECIP recipient. “UBAB” has a GAAP tangible book value of $128.4 million, or $36.25 per share. If UBAB were to repurchase its $123.75 million in ECIP preferred shares at 20% of par, the after-tax gain would be around $74 million and tangible book value per share would rocket to $57.20. The math is similarly tantalizing for other ECIP recipients. In order to repurchase the preferreds, ECIP banks do have to meet thresholds for “deep impact” and/or “qualified” lending over a certain period of time. But I expect more than one of the better-capitalized ECIP banks will be eager to extinguish its preferreds at a steep discount in coming years.

Surprisingly, the “Wolf of West Virginia” wasn’t on the up and up. Maybe it’s me, but I would hesitate to invest with a guy whose Instagram handle is @thelivinglegend.tm and whose TikTok pitch promises “…ROI in excess of twenty f***ing percent” for those committing at the “f*** it, let’s go” level. I guess I’m old-fashioned. But at least one person did. Mr. Miller is alleged to have misappropriated those funds and now he is facing federal charges.

I am astounded that Mr. Miller has over 100,000 TikTok followers for what seems to be an obvious charade. Then again, he’s certainly not the biggest social media star to overstate his material wealth and business prowess for fame and attention. More broadly, I am both fascinated and alarmed by just how heavily Mr. Miller’s pitch, as gleaned from his company website and other social media accounts, associates masculinity with the willingness to invest in high-risk real estate ventures. “Are you ready to invest with me like a MAN, or are you a WIMP?!” is not even subtext but rather than openly stated message here. I suppose “You’re not a REAL MAN unless you…"-type messages are everywhere, but social media allows fraudsters to go after the insecure and impressionable more directly than ever. At least it seems the Wolf of West Virginia is out of the game.

Anybody else watching Hawaiian Electric? Hawaiian Electric appears close to arriving at a dollar figure for its liabilities related to the disastrous 2023 Lahaina fire, agreeing to pay $1.77 billion in multiple installments. Despite the good news of a resolution approaching, Hawaiian Electric Industries shares traded off this week on a “going concern” warning in its 10-Q. I don’t think there is any serious risk that Hawaiian Electric will wind up in bankruptcy. The company has to disclose that it is in need of financing and has not yet secured it, but this is far from a suggestion that this financing will not be achieved. I’ve watched turnarounds unfold at other utilities like FirstEnergy, and I think they often present opportunities. Utilities are like banks in that the distribution of returns has a long left tail. Meaning, these businesses can and sometimes do go to zero, but their potential returns and earnings are limited by industry structure and regulators. So investors rightly focus on the existential risks, knowing there are no offsetting right tail events that could result in sudden windfalls. As these potential risks are eliminated or at least become quantifiable, equity value increases.

So here’s where I am asking for some help from my readers. Hawaiian has common shares, multiple series of preferreds, corporate debt, and even utility muni bonds. Is there a part of the capital structure that sticks out to you as offering the best risk/reward here? I can’t wait to dig in.

Thanks for reading! I’ll be back soon with the promised REIT pitch.

Alluvial Capital Management, LLC holds shares of United Bancorporation of Alabama, Inc. for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com