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U.S. banks have been the main component of the President’s Portfolio at Contra the Heard since the financial meltdown. It has paid off handily with Bank of America (BAC-NYSE), which was closed out in March at US$38.74. The purchase price, in August, 2011, was US$6.76. Beautiful. Some of the other plays also turned out wonderfully.
Not so luscious was the 2015 investment in First US Bancshares Inc. (FUSB-Nasdaq) at US$8.32. Currently it skips along at around US$10.25, a huge distance from our initial sell target of US$23.44 and way below north of US$30, where it traded in 2005. What gives?
FUSB is a small bank that was established in 1952 and currently has 19 branches in Alabama and Virginia. It has been profitable in eight of the past 10 years with the exceptions of 2011 and 2017. We suspect that fiscal 2021 will also have a black bottom line.
The first-quarter results reported recently were tuned more to stability than exciting growth. Net income was US$950,000, up from US$847,000. Deposits climbed by 4.6 per cent and lending by 3.1 per cent. Again, numbers moving in the right direction but not exhilarating.
So why do we think that this one could do better than a double? Much of the rationale is because of the macro picture. There is a ton of money kicking around because of governmental stimulus in North America and our feeling is that inflation, which has been shunted to the sidelines, will increase. This will lead to an uptick in interest rates, offering banks the possibility of increasing margins, and thus, returns. In addition, the U.S. economy has been recovering nicely, with growth of 6.4 per cent in the first quarter. And President Biden is spending on gifts for his fellow citizens as if every day is Christmas. That should boost the economy further.
One aspect that we particularly like about this enterprise is that it is the same old management. President and chief executive officer James House has been the top dog for almost a decade. He seems like a dyed-in-the-wool conservative banker, but given that he is pushing 70, retirement might soon be in the cards. Fortunately, the bank can look within for talent, but just who will take over the reins is a bit of a wildcard.
In its heyday, the dividend for FUSB was 27 US cents a quarter, but when the financial crisis hit, it was cut to 11 US cents. It rested there for not quite two years before falling to 4 US cents and then being eliminated altogether. Re-established in 2014 at a penny, it quickly doubled before hitting 3 US cents in 2019, where it currently sits. That works out to a payout of just north of 1 per cent, not unreasonable in these low interest rate times. Nonetheless, because the share count is a lowly 6.2 million, the company could easily afford to increase the dividend, and we think it will, before too long.
We do expect further consolidation in the U.S. banking sector. Given that First US has a book value slightly north of US$14, about 40 per cent higher than the trading price, an acquirer could pay a reasonable premium and still be purchasing this enterprise below book. It would make a lovely procurement for another Alabama bank, such as the state’s largest, Regions Financial Corp. (RF-NYSE). Regions has been firing on all cylinders, with the stock price doing almost a triple this past year. The possibility of many other potential suitors is also very realistic.
Anyone interested in purchasing this stock should be aware it is not very liquid and only trades about 5,900 shares a day. From our angle, that means placing an at-the-market bid is not wise and limit orders are the modus operandi to ensure price certainty. Buyers would be joining the insiders who own about 6.4 per cent. The competition for shares could be heating up: In addition to the 54,961 shares remaining in the current buyback program, the company’s board recently authorized the repurchase of another one million shares under the same program. At about 16 per cent of the float, that could easily push the share price upward.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter
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