United Security Upside

Benj Gallander and Ben Stadelmann
Monday, Thursday April 16, 2015

Last October, we wrote about the US banking sector, a number of our picks and how our holdings in this arena continued to expand. We are convinced still that much more potential for capital returns exists stateside as compared to the Canadian banks, although dividends are more certain in our country.

In February, Benj was at it again. This time the prey was Thomasville, Ala.-based United Security Bancshares (USBI-Q), a small bank with 19 branches and 2014 revenues of a mere $36 million (US), a hefty drop from the $55 million level of 2010. The purchase price was $8.32, a far cry from the $30 level it touched over the past decade.

USBI is another bank that struggled during the recession. In 2011, this resulted in a loss of $9.1 million. The dividend, which had reached 27 cents per share per quarter in 2008, was eliminated. The stock price swooned, touching below $4.

The metrics of USBI have improved dramatically since the low water mark. In 2014, net income was $3.6 million, equivalent to 57 cents per share. Non-performing assets were the lowest in three years. The bank’s capitalization ratios are excellent with the debt level strikingly low. USBI trades at about two-thirds the book value of $12.45.

The improvements allowed the company to recommence a dividend, now at two pennies a quarter. Investors did not appear overly impressed, but there is a reasonable expectation that the amount will be increased over the next couple of years. While a return to the level of 27 cents per share per quarter is not in the short-term outlook, 5 cents per share is certainly not out of the question. If that comes to pass, the stock price will likely move up.

One of the beauties of this enterprise is that the share count was not diluted during the bank’s difficulties. It remains just north of six million, meaning that when the marketplace recognizes the improving nature of this organization, the stock price could rise quickly. The flip side, though, is that the lowly share count means the stock trades almost by appointment, so accumulating a position takes time. This has not deterred insiders, a number who have been buying in the open market. One has been selling. Currently their holdings comprise 7.6 percent of the float.

Given the numerous consolidations in the bank sector and the smallish nature of USBI, it would not surprise us at all to see a predator swoop in and scoop up the bank. Regions Financial (RF-N) is one nearby that might want to expand its footprint and already owns 4.4 percent of the company. Renasant Corp. (RNST-Q), which is based in Mississippi but also operates in Alabama, is another potential suitor.

United Security has decided to rebrand as First US Bank. The feeling is that this will help visibility as the bank intends to grow into more markets. We don’t get how the name change will help, quite frankly. If it works, so much the better. Regardless of the moniker, a triple of the share price is a realistic goal.