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Rockland Trust, one of the Boston-based manager's larger holdings, isn't a household name. But the bank is doing just fine on Boston's south shore. Assets have increased 41 percent to $5.1 billion since the end of 2008.
And shares of the bank's holding company, Independent Bank Corp (INDB.O), are up 46 percent in the past year, fueling some of the gains in Horn's Polaris Global Value Fund (PGVFX.O). The fund has posted a 1-year return of 29 percent, beating 98 percent of the funds in the global multi-cap value category, according to Lipper Inc, a Thomson Reuters company.
"I like to meet the management teams and get a feel for their credit culture," said Horn, who once did a stint on the loan committee of a small bank in suburban Boston. As president of Polaris Capital Management, he oversees about $4.4 billion. During the height of the credit crisis, small bank stocks got hammered just like the big banks, even though their credit problems were relatively tame. In July 2010, Horn made the case for Independent Bank in a letter to investors, saying its shares were being penalized for what he said would only be temporary hits to earnings.
Horn made the right call. Shares of Independent Bank and other small-cap bank stocks soared as they increased their assets and set aside less money for problem loans. They've also capitalized on the woes of their big bank brethren, picking up some of their dissatisfied customers and key lending teams. "Small losses (of business) for big banks can be big gains for smaller banks," Horn said. "Smaller banks also tell me they get loan officers leaving bigger banks, bringing with them healthy customer relationships. That's real earnings growth at very little cost."
Chris Beck, who runs the $837 million Delaware Small Cap Value Fund (DEVLX.O), owns Independent Bank shares and several other small-cap stocks that have taken off. Over the past 12 months, for example, Boston Private Financial Holdings Inc (BPFH.O), East West Bancorp Inc (EWBC.O) and Bank of Hawaii Corp (BOH.N) have risen 70 percent, 45 percent and 29 percent, respectively. The 1-year return of Beck's fund is 30.6 percent, beating 72 percent of the funds in the small-cap core category, according to Lipper. Small banks still have some opportunity to take business from the larger banks. But most of that has played out, he said. He sees cost-cutting, consolidation and commercial and industrial lending as catalysts for increasing future profits.
"Consolidation should be happening," Beck said. "I'm surprised there hasn't been much more."
Horn said he added Brookline Bancorp Inc (BRKL.O) to his portfolio in the second quarter, partly because of the bank's recent acquisition of Bancorp Rhode Island. Brookline's assets are now at $5 billion, up from $3.1 billion before the deal was announced last year. Horn sees more earnings power at a bank that previously was criticized for having too much capital. "Once they did the merger, they leveraged up some of that capital," Horn explained. "That allows the cash earnings power to go up a lot faster." ... Continue to read.
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