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Ben Stadelmann and Benj Gallander, known as The Contra Guys and co-publishers of the Contra the Heard investment letter, focus on finding turnaround situations and stocks that are currently unpopular but are likely to regain their lustre. They are now regular contributors to Globe Unlimited's Inside the Market in addition to Globe Investor Gold.

Two columns ago, the focus was First United Corporation, a smallish regional bank based in Oakland Maryland, which Benj bought for the Contra the Heard portfolio he manages. There is another local, Cascade Bancorp (CACB) that he added for 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.

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CACB has huge insider ownership, registering almost 39 per cent. 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 increase. 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 $0.1125 on a quarterly basis before quickly being pedaled back to $0.09 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 as 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 taking on 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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