Q3 2024 Quarterly Letter

Dear Gator Financial Partners:

We are pleased to provide you with Gator Financial Partners, LLC’s (the “Fund” or “GFP”) 2024 3^rd quarter investor letter. This letter reviews the Fund’s 2024 Q3 investment performance and shares our investment thesis on Chain Bridge Bancorp.

Review of 2024 Q3 Performance

During the 3^rd quarter of 2024, the Fund performed well, outperforming the broader market, while performing in line with the Financials sector benchmark. Our long positions Anywhere Real Estate, Western Alliance Bancorp, Jackson National, UMB Financial, and PayPal were the top contributors to the Fund’s performance. The largest detractors were short positions in Vornado, Higham Institute for Savings, Columbia Banking System, Cousins Properties, and Boston Properties.    

Source: Gator Capital Management & Bloomberg

Chain Bridge Bancorp (Nasdaq: CBNA)

We purchased shares in a recent initial public offering (“IPO”) of Chain Bridge Bancorp (“Chain Bridge” or “CBNA”). Chain Bridge has a specialty deposit business providing banking services to Republican political campaigns and political action committees. These political campaigns deposit their funds in the bank in non-interest bearing checking accounts. Because of the zero-cost deposits, the bank invests its balance sheet conservatively and still earns high returns.

We think the shares of Chain Bridge provide an attractive risk/reward at the current share price. Here’s our investment thesis:

1. Unique Customer Focus – Chain Bridge’s specialty deposit business brings zero-cost deposits to the bank. Chain Bridge’s customers are the Treasurers of Republican political campaigns and Political Action Committees (“PACs”). These customers value the ability to open accounts quickly with a bank that understands their accounts. These customers have a lot of money moving in and out of their accounts, so they are not interested in earning interest. Instead, they are concerned about their transactions getting completed in a timely manner. Chain Bridge’s bankers are focused on serving these customers.
2. Deposit Franchises in Demand – After the Regional Bank Crisis in March 2023, banks with strong deposit franchises have been in demand. We believe investors will recognize the value of Chain Bridge’s deposit franchise.
3. High Returns – Chain Bridge has posted high returns on equity. We expect returns to be diluted in the near-term while the bank digests the fresh capital raised in the IPO. However, we also expect the bank to leverage its fixed expense base and potentially generate higher returns going forward as it continues to grow.
4. Virtually Zero Credit Risk – Chain Bridge has a very small loan portfolio. 80% of its loan portfolio is single-family mortgages. Since the bank started in 2007, total loans charged-off are less than $300k.
5. Very Liquid Balance Sheet – Chain Bridge has a very liquid balance sheet. Having a liquid balance sheet provides stability especially when the stock market gets concerned about a potential recession and sells down the regional banking sector. We expect CBNA to trade with a significantly lower beta than the average regional bank.
6. Management – Peter Fitzgerald is the Founder and Chairman of Chain Bridge. He is a former U.S. Senator from Illinois. His father started and grew Suburban Bancorp in Chicago before selling it to Bank of Montreal in 1994. Fitzgerald was the general counsel at Suburban. His brothers currently own several private banks in Illinois. Fitzgerald brings Republican credibility to the bank. We believe Fitzgerald is a prudent banker who excels at risk mitigation. We also think he will sell the bank when the bank achieves a premium valuation.
7. Valuation – Chain Bridge IPO’d at $22. We estimate Q3 tangible book value will be a pro forma $21.50 after adjusting for the IPO. We note that book value is lower if we adjust for losses in the bank’s Held-to-Maturity bond portfolio, but this issue will resolve itself in the coming years.
8. Attractive Acquisition for a Mid-size Bank – We believe Chain Bridge Bank would be an attractive acquisition for banks that would appreciate its deposit franchise. Ideal acquirers are Axos Bank, Enterprise Financial Services, and Western Alliance Bancorp. All three of these banks have niche deposit gathering franchises, and could easily absorb another deposit gathering franchise by acquiring CBNA. We understand that the Too Big to Fail banks don’t want the headline risk of providing banking services to political campaigns. We believe mid-sized banks can make the business decision to endure the headline risk.

Some downsides to the Chain Bridge story are worth noting, highlighted by the following points: 

1. Legacy Bond Portfolio – Chain Bridge invests in short-term bonds, but even short-term bonds sustained losses during the rate increases of 2022-23. Chain Bridge does have some longer-term municipal bonds in its investment portfolio which will take longer to mature. We are confident that Chain Bridge has learned from this and will keep its bond portfolio invested in short-term maturities going forward.
2. Cyclicality of the Business – Chain Bridge’s deposit base is cyclical with peaks during both Presidential and Mid-Term election years. This will cause earnings to decline in non-election years. Some investors will avoid investing in the bank due to the volatility in earnings. We are less concerned due to the high-quality nature of Chain Bridge’s business.
3. Dual-class Structure – Chain Bridge Bancorp has a dual-class stock structure. The stated reason is to prevent an activist investor from making a political claim that would damage the bank’s business. We disagree with this reasoning and believe that the dual share class should be collapsed. Some equity index providers will not add companies with super-voting shares to their indices. With passive ownership of stocks so high in the current environment, we believe Chain Bridge’s dual-class structure will result in lower passive ownership of the stock and a lower valuation.
4. Small Company, Low Liquidity – Chain Bridge Bancorp has a small market cap and a limited float. We expect trading in the shares to average less than 30k shares a day going forward. Some larger institutions will avoid the stock due to the lower trading volumes.
5. Unseasoned Stock – As a recent IPO, CBNA is an unseasoned stock. At most, we expect three sell-side brokerage firms to publish research reports on the company. Very few investors know the story of CBNA.

At the current stock price, Chain Bridge Bancorp presents an attractive asymmetrical investment opportunity. At tangible book value, investors are paying nothing for a very attractive deposit gathering franchise. We believe Chain Bridge will grow tangible book value while we wait for others to recognize the value of their franchise.

Portfolio Analysis

Largest Positions

Below are the Fund’s five largest common equity long positions. All data is as of September 30, 2024.

Long                                                                

First Citizens Bancshares                                              

Robinhood Markets Inc.

UMB Financial Corp.

Jackson Financial Inc.

Axos Financial

Sub-sector Weightings

Below is a table showing the Fund’s positioning within the Financials sector^5[1] as of September 30, 2024.

The Fund’s gross exposure is 182.49%, and its net exposure is 76.21%. From this table, we exclude fixed-income instruments such as preferred stock. Preferred stock positions account for an additional 14.83% of the portfolio.

Conclusion

Thank you for entrusting us with a portion of your wealth. We are grateful for you, our investors, who believe and trust in our strategy. On a personal level, Derek Pilecki, the Fund's Portfolio Manager, continues to have more than 80% of his liquid net worth invested in the Fund.

As always, we welcome the opportunity to speak with you and discuss the Fund.

Sincerely,

Gator Capital Management, LLC

Gator Capital Management, LLC prepared this letter. Ultimus LeverPoint Fund Solutions, LLC, our administrator, is responsible for the distribution of this information and not its content.

General Disclaimer

By accepting this investment letter, you agree that you will not divulge any information contained herein to any other party. This letter and its contents are confidential and proprietary information of the Fund, and any reproduction of this information, in whole or in part, without the prior written consent of the Fund is prohibited.

The information contained in this letter reflects the opinions and projections of Gator Capital Management, LLC (the "General Partner") and its affiliates as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security.

All performance results are based on the net asset value of the Fund. Net performance results are presented net of management fees, brokerage commissions, administrative expenses, and accrued performance allocation, as indicated, and include the reinvestment of all dividends, interest, and capital gains. The performance results represent Fund-level returns and are not an estimate of any specific investor's actual performance, which may be materially different from such performance depending on numerous factors.

The market indices appearing in this letter have been selected for purposes of comparing the performance of an investment in the Fund with certain well-known equity benchmarks. The statistical data regarding the indices has been obtained from Bloomberg and the returns are calculated assuming all dividends are reinvested. The indices are not subject to any of the fees or expenses to which the funds are subject and may involve significantly less risk than the Fund. The Fund is not restricted to investing in those securities which comprise these indices, its performance may or may not correlate to these indices, and it should not be considered a proxy for these indices. The S&P 500 Total Return Index is a market cap weighted index of 500 widely held stocks often used as a proxy for the overall U.S. equity market. The S&P 1500 Financials Index is a market cap weighted index of financial stocks within the S&P 1500 Super Composite Index we used as a proxy for the Financials sector of the U.S. equity market.   An investment cannot be made directly in either index. The Fund consists of securities which vary significantly from those in the benchmark indices listed above. Accordingly, comparing results shown to those of such indices may be of limited use.

Statements herein that reflect projections or expectations of future financial or economic performance of the Fund are forward-looking statements. Such "forward-looking" statements are based on various assumptions, which assumptions may not prove to be correct. Accordingly, there can be no assurance that such assumptions and statements will accurately predict future events or the Fund's actual performance. No representation or warranty can be given that the estimates, opinions, or assumptions made herein will prove to be accurate. Any projections and forward-looking statements included herein should be considered speculative and are qualified in their entirety by the information and risks disclosed in the Fund's Private Placement Memorandum. Actual results for any period may or may not approximate such forward-looking statements. You are advised to consult with your own independent tax and business advisors concerning the validity and reasonableness of any factual, accounting and tax assumptions. No representations or warranties whatsoever are made by the Fund, the General Partner, or any other person or entity as to the future profitability of the Fund or the results of making an investment in the Fund. Past performance is not a guarantee of future results.

The funds described herein are unregistered private investment funds commonly called "hedge funds" (each, a "Private Fund"). Private Funds, depending upon their investment objectives and strategies, may invest and trade in a variety of different markets, strategies and instruments (including securities, non-securities and derivatives) and are NOT subject to the same regulatory requirements as mutual funds, including requirements to provide certain periodic and standardized pricing and valuation information to investors. There are substantial risks in investing in a Private Fund (which also are applicable to the underlying Private Funds, if any, in which a Private Fund may invest). Prospective investors should note that:

• A Private Fund represents a speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience, and willingness to bear the risks of an investment in a Private Fund. An investor could lose all or a substantial portion of his/her/its investment.
• An investment in a Private Fund is not suitable for all investors and should be discretionary capital set aside strictly for speculative purposes. Only qualified eligible investors may invest in a Private Fund.
• A Private Fund's prospectus or offering documents are not reviewed or approved by federal or state regulators and its privately placed interests are not federally, or state registered.
• An investment in a Private Fund may be illiquid and there are significant restrictions on transferring or redeeming interests in a Private Fund. There is no recognized secondary market for an investor's interest in a Private Fund and none is expected to develop. Substantial redemptions within a limited period of time could adversely affect the Private Fund.
• Certain portfolio assets of a Private Fund may be illiquid and without a readily ascertainable market value. The manager's/advisor's involvement in the valuation process creates a potential conflict of interest. Instances of mispriced portfolios, due to fraud or negligence, have occurred in the industry.
• A Private Fund may have little or no operating history or performance and may use performance information which may not reflect actual trading of the Private Fund and should be reviewed carefully. Investors should not place undue reliance on hypothetical, pro forma or predecessor performance.
• A Private Fund may trade in commodity interests, derivatives, and futures, both for hedging and speculative purposes, and may execute a substantial portion of trades on foreign exchanges, all of which could result in a substantial risk of loss. Commodities, derivatives, and futures prices may be highly volatile, may be difficult to accurately predict, carry specialized risks and can increase the risk of loss.
• A Private Fund's manager/advisor has total trading authority over a Private Fund. The death or disability of a key person, or their departure, may have a material adverse effect on a Private Fund.
• A Private Fund may use a single manager/advisor or employ a single strategy, which could mean a lack of diversification and higher risk. Alternatively, a Private Fund and its managers/advisors may rely on the trading expertise and experience of third-party managers or advisors, the identity of which may not be disclosed to investors, which may trade in a variety of different instruments and markets.
• A Private Fund may involve a complex tax structure, which should be reviewed carefully, and may involve structures or strategies that may cause delays in important financial and tax information being sent to investors.
• A Private Fund's fees and expenses, which may be substantial regardless of any positive return, will offset such Private Fund's trading profits. If a Private Fund's investments are not successful or are not sufficiently successful, these payments and expenses may, over a period of time, significantly reduce or deplete the net asset value of the Private Fund.
• A Private Fund and its managers/advisors and their affiliates may be subject to various potential and actual conflicts of interest.
• A Private Fund may employ investment techniques or measures aimed to reduce the risk of loss which may not be successful or fully successful.
• A Private Fund may employ leverage, including involving derivatives. Leverage presents specialized risks. The more leverage used, the more likely a substantial change in value may occur, either up or down.

The above summary is not a complete list of the risks, tax considerations and other important disclosures involved in investing in a Private Fund and is subject to the more complete disclosures in such Private Fund's offering documents, which must be reviewed carefully prior to making an investment.

^[1] The Fund’s inception date was July 1, 2008.

^[2] Performance presented assumes reinvestment of dividends, is net of fees, brokerage and other commissions, and other expenses an investor in the Fund would have paid. Past performance is not indicative of future results. Please see General Disclaimer.

^[3] Performance presented assumes reinvestment of dividends. No fees or other expenses have been deducted.

^[5] ‘Financials sector’ is defined as companies included in the Global Industry Classification System (“GICS”) sectors 40 and 60, which contains financial and real estate companies.