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Small Bank Newsletter

April 2003

HIBERNIA CORP (HIB $17) is the bank holding company for Hibernia National Bank with over 5,400 employees and 278 locations. Total assets just over $17.4 billion, loans at $11.5 billion and deposits at $13.5 billion at 12/31/2002. Lots of good news here to start. The Bank is buying back their stock, over 2.5 million shares. That’s a lot for this Bank since it is sometimes thinly traded, reflecting their strong capital position. Asset quality is improving and loan reserves are increasing. Reserves at year-end were 1.85% and non-performing loans at 0.54%. The Bank plans to open 50 new sales offices in high-growth suburbs of certain Texas cities by 2006, beginning with the Dallas/Fort Worth metroplex. The management now in place is shareholder friendly and would sell the Bank for the right price, which would be over $27.50 a share, we feel. They have a book value of $10.79 a share and their efficiency ratio can still come down from the current 57%. They should earn $ 1.70 in 2003, depending on rates and expansion. Anyway you look at it, with a P/E around 10 and growth across the board, this is a buy under $17.50. They have 157 million shares outstanding and are in the some of the best markets in the country. Remember, oil has been high for awhile, which helps their markets greatly. They pay a nice 3.5% cash dividend and it will continue to go up. The recent 20% sell off in this Bank and many others over the past few weeks, have let us back in on this one. Buy all you can under $16.75 and accumulate under $17.5. Downside should be limited to 5-7% from these levels. If no deal happens, look for a 12%+ annualized return for many years to come. Located New Orleans, LA.

FOLLOW UPS:
    FIRST MERIT CORP (FMER) this is almost the same as HIB. The stock has come off 20%, and this has let us back in. It is a prime takeover target in ove r-banked Ohio. However, asset quality is going the other way (south) on this one and management is a little fat. So the bottom line, if they are sold you will make a lot of money (at least $27 a share). If they are not, you might only make 8% per year even though their cash dividend yield is 5% now. Downside risk is also much higher at 10-14%, if asset quality fell apart. But again, a takeover sooner rather than later is likely on this one. Buy under $18.50 only. Now our 6 th largest holding.
  1. FIRST BELL BANCORP (FFBC) being taken for $26.25 in cash (wow) for a 66% return in less than 6 months. If you have any left, sell. We were out already.
  2. NORTH CENTRAL BANCSHARES (FFFD) raised the cash dividend by 16.7% wow!
  3. FIRST COLONIAL GROUP (FTCG) being taken for most likely around $44 a share + depending on the stock offering of the acquiring Bank Keystone Nazareth Bank & Trust Company. If you have any left, sell now. Markets can change and deals can fall apart. We were out of this one a long –time ago. It was one of our largest holdings way back, so hopefully some of you didn’t sell out and held on. If you did, nice job.
  4. SCOTIABANK (BNS) sell for a 25%+ return in a few months. Fairly priced and no takeover potential.
  5. TOWN & COUNTRY BANCORP (TCBS) earnings at a record $2.20 a share and asset growth at 9% in 2002. They also paid a 20% stock dividend to stockholders of record on 3/2/2003. Hold.
  6. HOME FEDERAL BANCORP (HOMF) announced a new 5% stock repurchase program on 2/25/2003. Hold. Buy more under $23 only.
  7. PLUMAS BANK (PLBC) was written up in the Sacramento Bee, saying, “We want what’s in the best interest of shareholders and our communities”. We don’t think they would sell but hold on anyway, the stock never goes down. The board owns 15% now.
  8. ASTORIA FINANCIAL (AF) this is one of the last premier franchises left in the NY area that has huge takeover potential and pays us to wait. The Bank is still buying back their stock like crazy as well. Trading at 1 .3 times book is cheap. Buy all you can under $24 and accumulate under $25. Worth $37+ in a deal. Also, great asset quality. They command the third largest deposit share in the NY and Long Island market, which is equal to the population of 38 states. This Bank is worth a lot more than it’s currently trading for. Now our 4 th largest holding.
  9. < strong> MERCANTILE BANKSHARES (MRBK) buying F&M Bancorp (FMBN) for $500 million. This caused a 10% + sell-off in the stock the day the deal was announced. What a buying opportunity for us. Now our largest holding. We also traded some for a nice profit. This is a trading market.

Deals are on fire for the start of this year. While we missed the last two, hopefully some of you had them. This recent sell off was one of the sharpest declines in the mid-sized banks since October 1998, but this is how you make money in some of these large regionals. Buy the number one companies when they get hit. Short accounts had a home run again, this month, with everything now covered except one. (Corus Bancshares (CORS) short over $42 only, as a hedge only, cover in the $32-$36 area if and when bad news comes out. Shorting involves unlimited risk and should only be done by a professional.

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