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BENJ GALLANDER and BEN STADELMANN

Wednesday, April 27, 2011

One of the hallmarks of our value-based system is that we love to buy into sectors that have been badly beaten up. After 9/11, for example, it was an airline. For those old enough to remember when gold became a relic and that sector was considered verboten for investors, well, naturally it became alluring in this corner. And over the past few years the U.S. financial sector was trashed, and that attracted us like bees to honey.

In the Vice-President' portfolio, there is one bank, Sun Bancorp, purchased for $3.86 (U.S.) last November and currently trading at around $3.60. In the President's Portfolio, there are three: Fidelity Southern, bought in 2010 at $3.32, now trading above $7.00; VIST, which was acquired the same year at $5.24 and currently resides at about $7.50; and the purchase in March of Bank of Commerce Holdings, which joined the portfolio at $4.01 and trades 25 cents higher.

This most recent addition appears to have tremendous potential. Though based in California, which could discourage some investors given this state's sad-sack financial position, BOCH managed to remain profitable every year during the recession. Not a lot of banks can crow like that, especially in the United States. Though net income was just north of $2 million in 2008, it has cruised over $5 million in each of the past couple of years. That is pretty good for this small bank whose revenues sit around $60 million.

The first quarter of 2011 was fairly typical. Revenues were $10.6 million, with net income of $1.4 million, translating into eight cents per share. Another quarterly dividend came down the pipeline at the expected rate of three cents per share, a much better return than one will find on many American investments these days. The bank also remained well capitalized. In addition, numerous insiders continued to buy, bringing their ownership up to almost 30 percent. It should be noted, though, that Linda Miles, the chief operating officer, has been an exception recently, as she has been selling.

The company was not completely unscathed during the crisis; to remain well capitalized, the share count was about doubled to almost 17 million. That dilution could impact how far this stock will climb. As late as January 2007, it traded above $12. In 2004, it touched beyond $34.

One of the questions that we're often asked is when the company will hit our target price, in this case $11.49. Or what we expect in the next year. While many in the financial community have quick responses to inquiries like this, our crystal ball is never that clear. However, we do know that receiving a dividend gives us a steady return while waiting for capital appreciation. If fortune shines brightly, the quarterly dividend could return to the old form of six cents per share. Given the increased share count, the high water mark of eight cents seems unlikely, at least for a number of years.

It seems like every decade or so there is a financial implosion of one sort or another in the United States. Once again, we have been nimble in choosing a number of positions. If things work according to plan, before the next crisis hits, our sales will be completed. Then, as fears sweep this sector, we'll look to cherry-pick once more. Though there is no certainty that this will happen, given historical precedent, one can almost bank on it.


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