Tuesday, April 13, 2010

Investment group bucks trend, invests in small banks

Atlanta Business Chronicle - by J. Scott Trubey Staff Writer

Friday, April 9, 2010

Betting on the banking sector’s recovery, a Buckhead-based fund has seen big returns on small investments in community banks.

Sagus Partners LLC, an investment group led by former Burke Capital Group investment banker David Brown, and partners including State Bank & Trust Co. Chairman and CEO Joe Evans, has deployed $23 million in its main fund over the past two years in strategic investments in Southeastern banks.

The group has had remarkable success so far, posting a 26.3 percent net return in its Sagus Financial Fund L.P. since January 2008, compared with the S&P 500 bank index’s net loss of 45.9 percent during that same period.

“This cycle, like the last cycle of the 1980s and 1990s, is going to transform the industry, eliminate some parties and make others stronger,” said Brown, a 15-year veteran investment banker who specialized in small bank mergers and acquisitions.
The window of opportunity, Sagus principals say, is generational. The firm has been buying stock in select smaller lenders with $500 million to $5 billion in assets that are trading at an extreme discount.

The bets are made that these institutions will survive the current cycle of failure to be later bought for a premium as bigger rivals seek greater market share or be consolidators themselves even after the failed bank sweepstakes comes to a close.
“Separate and apart from organic performance, we believe there’s another round of consolidation that will resume as the industry recovers, and banks in that size range are the beneficiaries of the consolidation process,” Evans said.

He should know. Evans led the July 2009 acquisition of tiny Pinehurst, Ga.-based State Bank, which became a platform to buy the six bank subsidiaries of the failed Security Bank Corp., and later metro Atlanta lenders The Buckhead Community Bank and First Security National Bank.

That bank will likely be looked at as a potential consolidator in the traditional sense, and other banks appear to be posturing to make buys even after the wave of Federal Deposit Insurance Corp.-assisted sales ends.

Evans has made a career of growing banks and selling them at a premium, from his days at Century South Banks Inc. and Flag Financial Corp.

Sagus also operates a distinct fund for regulatory purposes, called SBT Investment, that invested $8.5 million in the formation of State Bank last July. That investment, less than 4 percent of the bank’s privately held stock, is now valued at $14 per share, up 40 percent in less than a year.

The Sagus team includes several of Evans’ lieutenants with State Bank as well as J. Thomas Wiley Jr., the head of Bankers’ Capital Group LLC, a private equity group and major State Bank investor.

All are experienced bank operators with deep connections in the industry. They know the players and they know the makeup of the right banks in which to invest, Brown said.

The team has avoided community banks in the hardest-hit markets, or that were overly gung-ho on residential development loans. The team also scoped out banks with solid branch networks and stable core customers in growth markets that weren’t likely to be forced to raise capital at gunpoint, diluting investors.

Sagus invests mostly in illiquid stocks — though it has placed money in some publicly traded banks. The plan is for longer-term holds, waiting for the cycle of natural merger and acquisition activity to begin after the failed bank bonanza has run its course.

Investments in smaller lenders, many of them not publicly traded, is where real money can be made, industry observers say. Adam Aspes, institutional equity trader for Sterne, Agee & Leach Inc. in Atlanta, said Sagus has a deep team and breadth of knowledge of the region’s smaller banks.

“There’s no doubt that there’s a huge opportunity to recapitalize small banks and [Sagus] is in the middle of it all,” Aspes said. “They’ve got all the relationships and know who to support and who not to.”

Smaller lenders are still trading at distressed prices, and FDIC-assisted transactions for smaller banks can prove to be “transformative,” Aspes said. The group invests typically up to 5 percent of a bank’s stock, and would prefer to remain under 10 percent in ownership to avoid onerous regulatory requirements.
The only Atlanta bank in which Sagus owns stock is Buckhead’s Fidelity Southern Corp. (Nasdaq: LION), parent of Fidelity Bank andLionMark Insurance Co.

The banking company posted net income of $1.9 million and earnings of 11 cents a share in the fourth quarter, and said at the time that signs of improvement were appearing in its conservative balance sheet. Only a third of Georgia’s 300 banks posted net gains in the fourth quarter.

Fidelity’s stock bottomed out at $1.09 in March 2009, but has since rebounded to $7 at the April 6 close.

Sagus invested its first dollars in early spring 2008 and had invested 50 percent of its capital by the end of that year. Most of its capital is currently deployed, though liquidity remains for other investment opportunities.

“We felt that strategy was conservatively aggressive,” Brown said. “We were buying when no one else was.”

Sagus had an 18-month deployment schedule, and has managed to invest its capital at or near the bottom of the market, missing much of the “carnage” on the way down, Brown said.

“We didn’t have to have it exactly right, but we needed to be close,” he said. After being down for 2008 on average, the fund has seen a strong rally in community banks during the last three quarters of 2009, and particularly the first quarter of 2010. Investors are mostly high-net-worth individuals, families and endowments based in Georgia.

“We have a lot of our own money in this fund and most of our investors are friends, family and close associates,” Evans said. “We strongly believe in the Will Rogers saying that the return of your money is more important than a return on your money.”