New Fund Banks on Community Banks

02/02/2015 10:00 am EST

Focus: STOCKS

Former board member of the Philadelphia Fed, Ted Peters is now CEO of the newly-launched Bluestone Financial Institutions Fund, focused on community bank stocks. Here, he shares his favorite growth idea, his top turnaround stock, and his best bet for a potential takeover.

Steven Halpern:  Joining us today is Ted Peters, former board member of the Philadelphia Fed and now CEO of Bluestone Financial Institutions Fund.  How are you doing today, Ted?

Ted Peters:  I'm doing fine, thank you very much.  I appreciate being on your show.

Steven Halpern:  First off, congratulations are in order; the Bluestone Financial Institutions Fund was just launched. Could you share a brief overview of the fund and its objectives?

Ted Peters:  Yes, absolutely. We have actually been running the fund strategy—with really, just my own money—for about 21 months and so we have a track record of 21 months. However, we officially opened to the public for investors—private investors—this past Tuesday, January 20.  

The fund is going to concentrate on micro- and small-cap bank stocks with an occasional mid-cap bank stock in there.  

We think this is a very attractive market to be in; it is fragmented. It is not covered overly well. We think there is a lot of opportunity in that market.  We think there are some real tailwinds in the banking industry.  

Credit quality is excellent. The banks are very well capitalized and the economy is improving all of the time. In addition, rising rates will really help all banks, but we think, especially, the community banks that we might be investing in.

Steven Halpern:  Now, you point out that many people don't realize that their local community bank might, in fact, be a publicly traded company. How common is it that community banks also trade as stocks?

Ted Peters:  Well, it really usually depends upon the size of the bank.  Most banks that are, say, $600 million, $700 million, or bigger, usually have some type of trading in them, whether they be in what we call the pink sheets, or whether they are on an exchange like NASDAQ, or even some community banks are actually on the New York Stock Exchange.  

The universe that we are looking at has approximately 540 banks that are publicly traded and they are banks that we consider, sort of, micro-, small-cap banks that are publicly traded.

Steven Halpern:  Now, as you alluded to earlier, there are several factors that you believe could drive the sector higher this year.  Let's walk through those three main factors beginning with your expectation for higher interest rates.

Ted Peters:  Well, as you know, I was on the Federal Reserve Board for six years, just got off at the end of the year and I certainly have a feeling—from the information of, just general information that is open to the public and so forth, but being on that board and having a good sense of it—that rates are going to be rising some time middle of the year.

Regardless of what happens to the economy or unemployment, I think Janet Yellen is going to push rates up in June or July. We will probably see a 25 to 50 basis point increase in 2015 and then we will see more of an increase in 2016.  

Rising rates are going to help banks quite a bit, especially community banks. It is going to take the pressure off, what we consider, margin compression.  

Right now, rates are so low on the loan side and security side and banks just can't drop their deposit rates any lower; we are getting squeezed a little bit.

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Most banks are well positioned to take advantage of rising interest rates. They are what we call asset sensitive. That is, most banks will re-price their assets, their loans and securities, faster than they re-price their liabilities, primarily deposits.

Steven Halpern:  Now you also suggest that M&A activity could be a benefit. Could you explain?

Ted Peters:  Well, definitely.  Last year, in 2014, there were 272 acquisitions of banks primarily by other banks.  That was up 19% from the previous year.

We are projecting that there will be 325 to 350 bank acquisitions this year. Multiples are going up, but banks have better currency.  

Their stock prices are up as well. We see a good, strong, robust M&A market continuing to grow at a rate probably 15% to 20% a year for a number of years.

Steven Halpern:  Now through your fund, an investor can get a broad section of community banks, but perhaps you could walk us through a few select stocks that you find particularly attractive for the coming year.

Ted Peters:  First of all, the stocks that we look at fall in to one of three categories. They are either takeover targets—we see them as takeover targets, we see them as turnaround situations, or we see them as growth stories.  

Let's start with the growth story. Our favorite growth story right now is Bank of the Ozarks (OZRK). We think that is a $3 billion plus bank.  It is growing nicely.  

They have done a number of acquisitions, done them very well.  They recently just reported good strong earnings and we like that story very well.  

On the turnaround story, we like Peapack-Gladstone (PGC) in New Jersey. Peapack-Gladstone is a bank with a good size trust and wealth business.

They have newer management. The management has come in the past year, or so. We think that management is a little more energetic. We think that they can turn that situation around and take it from being a fairly mediocre performer to a higher performer.  

The third space, the one we like is a bank that we believe to be a takeover target. That is Sun Bancorp (SNBC), which operates Sun National Bank over in New Jersey.  This is really a turnaround and a takeover situation.  

They brought in new management. The bank has struggled quite a bit for almost 25 years, gone through numerous CEOs. It brought in a new CEO who has been making lots of changes.  

They had way too many branches. He is closing a lot of branches, reducing the workforce, cleaning up the balance sheet a little bit. We think that is a turnaround story, but we think it will definitely be sold.  

Wilbur Ross is one of the investors in there. Once they right size, or rationalize their franchise, we think that will be an attractive target.

Steven Halpern:  Again, our guest is Ted Peters, CEO of Bluestone Financial Institutions Fund. Ted, thank you so much for joining us today.

Ted Peters:  Thank you very much, Steve, my pleasure.

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