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United Security: Sweet Home Alabama

07/25/2016 8:00 am EST


Benj Gallander

President, Contra the Heard

Ultimately, interest rates will go up, and when they do, the banks should benefit, asserts value investor Benj Gallander, editor of Contra the Heard.

We continue to recommend United Security Bancshares (USBI), a holding company that operates 20 bank branches and 24 finance company offices.

The bank is located in sweet home Alabama, where the skies are blue and the cash is very green.

First quarter results were a reflection of management's focus over the past few years on dealing with asset problems.

Net profit came in at a paltry $0.3 million, as loan volume and yield were sacrificed in favor of a sprightlier balance sheet.

Net loans grew by $8.5 million to $264 million, or 13.3%, from last year's period. Loans by its banks actually grew by $9.8 million, but this was offset by a $1.2 million decrease at the finance company.

Management feels it is now better positioned for growth in both categories. Non-performing assets decreased by $0.5 million to $8.6 million and now represent 1.5% of total assets, compared with 2.3% a year ago. Meanwhile, the bank remains well-capitalized.

A plot of land in metropolitan Birmingham was purchased for $3 million and construction on an office complex will being in the next quarter to house a branch and the commercial lending team.

The idea is to take advantage of the improving business environment in the state's largest city and grow the firm's commercial loan portfolio.

USBI is a small trader, with just over six million shares outstanding. This illiquidity means that volumes and the share price sometimes do things that aren't related to material changes in the bank's business.

It is as young holding in our long-term portfolio, where we generally hold stocks for years, and with an initial sell target of $23.44 a share, a few moons — and perhaps Fed chairs — could come and go before it is jettisoned.

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By Benj Gallander, Editor of Contra the Heard

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