A newly formed private investment company is looking to pick up shares of Southeastern and Middle Atlantic community banks on the cheap.
Sagus Partners LLC plans to begin investing in banks, primarily publicly held ones, in the next two to four weeks.
"We're making a call that the bottom of the bank cycle is getting close, and so we want to establish long positions in banks near the bottom of the cycle," said David C. Brown, the Atlanta company's managing principal.
Sagus would hold on to the stocks for three to five years.
"When you're taking a contrarian approach, looking to buy when other people are selling, you have to have some patience and you have to have a little longer time horizon," Mr. Brown said. "You can't expect to make a good return in a very short period of time."
The American Banker index of 225 bank stocks is down 29.4% since July 2. The Southern banks in the index lost 24.8% of their value in that period, and the Middle Atlantic banks lost 21.6%.
And it is possible shares could continue to fall if weakness in banks' construction loan portfolios persists. Craig Colasono, an analyst with Sandler O'Neill & Partners LP, said banks are "reserved up, and they've really scrubbed their portfolios." But if "the real estate market hasn't rebounded" in another three months, he said, "now you get another group of developers and builders who are financially under pressure as well, so you might see another wave of chargeoffs and reserve builds. Perhaps another shoe drops."
Mr. Brown has focused chiefly on the banking sector in his 15 years as an investment banker. He formed Sagus with another Atlanta company, Bankers Capital Group LLC, which buys distressed debt and makes private-equity investments in community banks.
Sagus plans to take minority positions in community banks, generally those with assets between $500 million and $3 billion, though it would consider investing in banks smaller and larger, Mr. Brown said. It will weigh each bank's soundness and credit issues, he said.
"We look at somebody that has a lot of good relationships in their own back yard both on the loan and deposit side," Mr. Brown said. "At some point, that's something that will either translate into improved earnings, or if that doesn't work, then it would translate into an attractive franchise that another bank would want to buy."
He would not specify how much his firm aims to raise. He said it is targeting Southeast and Middle Atlantic banks in part because he and Joseph W. Evans, Bankers Capital's managing principal, are familiar with many bankers there. "And we have a pretty good feel for the economic drivers and real estate trends in those markets."
Mr. Brown, who previously worked for Burke Capital Group LLC of Atlanta, has known Mr. Evans for years. Mr. Brown was a primary investment adviser to Mr. Evans when the latter, as the chief executive of Flag Financial Corp. in Atlanta, sold the $1.8 billion-asset Flag to Royal Bank of Canada's RBC Centura Banks Inc. in December 2006.
About the same time, Mr. Evans started Bankers Capital.
Mr. Evans said the fact that his company buys distressed debt and makes equity investments in banks "certainly does give us insight into the way specific banks manage their credit. But much more important is the insight we have into the marketplace in which the banks are playing."
However, if Bankers Capital comes into possession of material nonpublic information on a specific company, Sagus would be out of the market for that company until that information became public, Mr. Evans said.
Sagus also would abstain from investments in Mr. Evans' bank dealings through Bankers Capital's strategic alliance, started in March, with the Seattle private-equity firm Vulcan Capital, which was established by Microsoft Corp. co-founder Paul Allen.
That alliance also is on the lookout for undervalued banks in the Southeast.
