Money Men: Take the Off-Ramp




DID YOU MISS the merger wave in big banks, the one that sent Citicorp shares up to 31/2 times book value and Mellon shares to 25 times 1997 earnings? Perhaps you should aim a little lower. Try Town & Country Bancorp, a $190 million (assets) bank in Springfield, Ill. Its shares are hard to find, but when they last changed hands, in April, they went for $30, or 93% of book value and just eight times projected 1998 earnings.

“If you know your local bank is a good company, why go off and buy Chase or BankAmerica?” asks money manager David Harvey. A 41-year-old former lawyer and banker, Harvey makes a career of finding obscure bank stocks. He has corralled 45 of them for Everest Partners, L.P., a $16 million hedge fund he runs out of Gardnerville, Nev. The four-year-old fund claims a 42.5% average annual compounded rate of return to limited partners since its inception, after all fees.

It takes a lot of patience to do what Harvey does. He has been chasing after Town & Country ever since 1996, and still has managed to land only 8,860 shares of it. As often as not, he gets shares not by placing an order with a broker but by dropping in on the president of the bank, who may know of a shareholder who wants out.

Harvey casts a wide net. He starts with the American Bankers Association’s Financial Institutions Directory, which lists financial institutions by location. Next he goes to the Federal Deposit Insurance Corp. Web site (, which gives more detailed financial data about the 7,000 commercial banks in the U.S. He then eliminates the ones with more than $1 billion in assets — on the assumption that bigger banks are pretty well followed on Wall Street and less likely to be bargains.

Harvey narrows his search further, to about 1,000 small banks that fall into roughly two categories: old, sleepy banks and young, back slapper ones.

The old, sleepy category covers banks that are at least half a century old but still small. You tend to find them in New York, Illinois and Texas, where, years ago, branching was severely restricted. So if a little town needed a bank, the townspeople often had to start one of their own. Examples: the State Bank of Jerseyville in Jerseyville, Ill., and Hollidaysburg Trust Co. in Hollidaysburg, Pa. Shares tend to turn up in estate liquidations.

The backslapper category consists of newer banks in states like California, Florida, Nevada and Georgia, where there is a tradition among small-business owners of getting together to start a community bank and rounding up deposits on the golf course or at Rotary Club dinners. What brings customers to these banks is a disaffection with big-city banks and their impersonal ways.

Silver State Bank in Henderson, Nev., a suburb of Las Vegas, was founded in 1996 with $4 million in capital and already has deposits of $83 million. Harvey bought stock at $13 and could get $21 for it now.

It’s relatively risky, he admits: “We don’t yet know how good the loans are.”

The 13-year-old First Colony Bancshares in Alpharetta, Ga., with $131 million in assets, is another backslapper bank. Depositor loyalty earned it 23% on shareholders’ equity last year. At its last bid price of $30, as quotd by the local stockbroker, it trades at 1.25 times book value.

There is no offer. Bid $40 and maybe you can land a few shares.

Harvey puts 3,000 miles a year on rental cars, visiting small-town banks. “When I see an off-ramp, I open the book [Financial Institutions Directory] to that town and see if I like anything,” he says. “Then I meet the bank president and talk to a few people in town.” That’s how he got into Crescent Banking Co. in Jasper, Ga., with all of $90 million in assets, and Solvay Bank Corp. in Solvay, N.Y., with $258 million in assets.

If you want to play this game, look at the banks within an hour’s drive of your home. Avoid paying more than 15 times earnings or 2 times book value. Also, stay away if deposits are declining or the ratio of nonperforming loans to total loans exceeds 2%. We asked SNL Securities, a financial research and publishing firm in Charlottesville, Va., to tell us what sort of banks are likely to turn up on such a search; its table appears above.

Juliette Rossant

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