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  Joining Cascade Bancorp's insiders

BENJ GALLANDER and BEN STADELMANN

Friday, July 18, 2014

Two columns ago, we focused on First United Corporation, a smallish regional bank based in Oakland, Maryland, which Benj bought for the Contra the Heard portfolio he manages.

He added another local, Cascade Bancorp, to his personal account. The sole reason that this was not bought as a Contra stock is because the President's Portfolio is already bulging with financials. While he is willing to overweight, there is a fine line between tipping in a direction and going overboard.

Cascade is growing. The 28 branches jumped to 40 with the recent takeover of Home Federal Bancorp. In Benj's mind, this is additional affirmation that the capitalization ratios of CACB are in good shape; otherwise, regulators would not have allowed this deal to occur. The bank remains focused on Oregon and Idaho.

CACB has huge insider ownership, registering almost 39 percent. Insiders continue to fatten their positions, with three major purchasers since the beginning of June. There is a handsome cash balance of almost $290 million. The book value kicks in at around $4.00. Revenue is just north of $60 million, about half the level of 2009 when the enterprise lost $93 million.

After further red ink, including $47 million in 2012, the bottom line has returned to black. Long-term debt has been eliminated, from $305 million in 2009. There is no short-term debt. The combo of these two makes it far more difficult for the bank to find financial trouble.

One major way that Cascade and First United acted in a wildly disparate manner is in share count. FUNC stuck around the 6.2 million level through all the difficult times. CACB had 2.8 million shares in 2008; today, there are more than 47 million outstanding. The danger exists that the company might decide at some point that a share consolidation is in order. That rarely bodes well for the stock price, and if it happens, Benj would likely sell his shares quickly.

This growth in shares makes it very difficult to calculate an initial sell target. Cascade was acquired at $4.71. If one looks at the chart, it appears that the stock traded above $300 back in 2006, but that is relative hocus pocus given the share dilution.

After much deliberation, the initial sell target has been set at $15.24, but to get there will likely require the reimplementation of a dividend. Currently, there is none. In 2008, it reached 11.25 cents quarterly before quickly being backpedalled to 9 cents in 2007. That dived to a penny, later in the year, before being eliminated in 2008.

Given the recovery of the company, it would not surprise at all to see a dividend before the end of 2016. However, the increased share count will inhibit the size.

While many prognosticators remain worried about deflation, the possibility of inflation rearing its head is very real. As a general rule, that can be good for banks; it increases margins, enhancing their bottom line. That could bode well for CACB and other enterprises in this field.

Investing in banks from 2008 through 2012 was largely a contrarian exercise. The sector was filled with potential opportunities, but one had to be wary to avoid blowouts. Currently, the economic recovery in the United States and the changing attitude of investors has made this arena far more palatable.

Risk — in terms of regulators closing banks or bankruptcy — has definitely been reduced, but the potential rewards have become more muted. From this angle, unless there is an economic disaster brewing in the background, this field still has quite a bit of upside.

Nevertheless, people should be wary that bankers often love expansion and the taking on of risk to enhance the bottom line. This tends to cause major financial problems in this sector every decade or so. Ideally, investors should remain somewhat cautious, knowing that the party does not last forever and that those who buy and hold often are left holding the bag.


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