Banking On The Financial Sector

Regular followers know that since the recession I have been a heavy investor in U.S. banks. That has paid off beautifully with both Fidelity Southern (LION – Nasdaq) and VIST Financial, which was taken over by Tompkins Financial (TMP – NYSE), being sold for huge gains. Plus there were dividends to boot!

Though it is harder to find bargains in the financial sector now, United Security Bancshares (USBI – Nasdaq) was added to the President’s Portfolio in December at $8.32 USD. Once again the initial sell target is miles away, set at a lofty $23.44. Worth noting is that the stock has traded north of $33, and unlike many banks that diluted shareholders during the downturn, the share count remains a diminutive six million.

Located in Alabama, USBI is the holding company for First US Bank, which has 19 bank branches and 24 acceptance loan company offices. During the recession, the bank floundered as evidenced by the stock price, which dipped to just under $4.00 during the heart of tax loss selling season. To help ensure survival, the $1.08 annual dividend was eliminated, but reinstated at a penny per quarter in 2014. That tally has since doubled and it is likely that further increases are in store. That should help to push up the stock price.

Though net income was down from $3.5 million to $2.6 million for the year ending December 31, 2015, by many other metrics the corporation was doing much better. Net loans increased 30 percent from a year ago, while non-performing loans dropped. The book value increased to $12.65, well above the current stock price of $8.18. Capitalization ratios, a key metric for banks, were excellent on all counts.

United Security Bancshares is a thin trader. That did not stop insiders from padding their holdings in the last six months of 2015, as they upped their position to around 8 percent of the shares outstanding.

I also continue to own a number of other American banks. Investors wanting a bigger, more mainstream financial might want to look at Bank of America (BAC – NYSE). Now that it appears the vast majority of the litigation is behind this behemoth, the bottom line has improved dramatically. In addition, the enterprise has a huge share buyback going on and is likely to continue to increase its dividends that were $0.64 a share quarterly when the recession hit. At that point, the company cut them to a penny a quarter, and then notched them up to a nickel a share in 2014. Further increases are likely in store. Meanwhile, the corporation is trading at about 60 percent of book value.

Along with the aforementioned, there are four other banking stocks in my portfolio. These are Bank of Commerce Holdings (BOCH – Nasdaq) out of Redding, California; Cascade Bancorp (CACB – Nasdaq) headquartered in Bend, Oregon; First United Bank (FUNC – Nasdaq) from Oakland, Maryland; and Macatawa Bank (MCBC – Nasdaq), which is based in Holland, Michigan These four have nine, 37, 25 and 26 branches respectively, so all are on the small side but geographically dispersed. While BOCH and MCBC pay dividends, which are growing, FUNC and CACB do not. Worth noting is that prior to the recession, FUNC paid $0.80 a year, and the dividend is likely to be reestablished before the end of 2017. Typically, that pushes up a stock price. CACB will also likely resume payments, although it would not be surprising if it takes longer to reestablish the payout and the bumps will likely be more muted.

One of the keys to Contra the Heard’s success (21.6 percent annualized return over the past 15 years) has been investing in out-of-favour sectors. The U.S. banking field was a perfect example. Though not full of the bargains of a few years ago, deals are still to be found, and as interest rates rise, the bottom lines of all of these enterprises should be enhanced. They will also be helped if the U.S. economy continues to perk up.

Every stock here has the potential for a minimum 100 percent return based on historical trading prices, and a number of them could exceed that handily. With such huge potential and dividends while waiting, I am very comfortable holding for the long term on these positions, while hoping that a short game or two might surprise me.

Benj Gallander, MBA, Co-editor of "Contra the Heard", Toronto, ON (416) 354-2458, gall@pathcom.com, www.contratheheard.com