GARDNERVILLE, Nev. - David Harvey has created one of the nation's most successful bank hedge funds by investing in community banks that other buyers overlooked or rejected.
"He kicks the tires hard roaming the backwoods of California or Massachusetts researching community banks that Wall Street doesn't care about," said Tom Gillen, principal of the Kingston Fund in New York. "That's where the deep value is."
Mr. Harvey, 42, is founder and principal of Everest Managers LLC, a $22 million hedge fund that invests in micro-cap banks and thrifts. Since its inception in 1993, the Everest fund is up nearly 600%.
"I would suggest to people that if they have money, give it to David right away," said John Spence, who runs a Nashville-based thrift fund. "I don't think anyone comes close to him."
In 1999 Everest's roster of 30 banks has gained 24%, after fees and expenses. In comparison, the American Banker index of the top 225 banks is down nearly 12%, and the Russell 2000, a barometer for small-cap stocks, is up about 15%.
"If a bank stock is held by a lot of smart guys, I stay away from it," Mr. Harvey said. "I only want to play the game if I can cheat, and I know these little banks better than the doctors and lawyers who own them."
After working for banks big and small, Mr. Harvey says he decided to invest in community banks because they will always have a clear competitive advantage over their "bureaucratized, consolidated, demoralized, and commodity-producing larger brethren."
Never bashful, in an interview he said that only 10% of his portfolio is invested in thrifts because the "majority of the customer base is dying." He also called many bankers "nothing but order-takers," and he criticized those who have not adopted a sales culture.
"When a management team these days asks why their stock is so cheap," he said, "we say they should look in the mirror."
Mr. Harvey, who runs his fund from this small ranching town near Lake Tahoe, bases the bulk of his buying decisions on book value.
Typically he steers clear of bank stocks trading above 150% of book value; he won't touch a thrift if it's trading above 70% of book.
Mr. Harvey said he is high on North Valley Bancorp in Redding, Calif.; Cowlitz Bancorp in Longview, Wash.; and First National Bank of Cherokee in Woodstock, Ga. - all of which are trading below 120% of book.
He said he hopes at least one will emerge as the next Sacramento Commercial Bank.
He bought shares in Sacramento Commercial for 65% of book value in 1995 and held on as the bank slowly improved its earnings and fundamentals.
Then, as he put it, "lightning struck" last month when Sacramento Commercial announced it was selling to Belvedere Capital Partners, a San Francisco venture fund, for $42 million. Mr. Harvey quadrupled his money.
Such home runs have won him the admiration of many industry observers.
"David digs deeper than anyone else, and he's done phenomenally well," said Scott Burford, principal at Burford Capital, a brokerage firm in La Crescenta, Calif., who has sold bank shares to Mr. Harvey.
His tactics, however, ruffle some feathers.
Benjamin Namatinia, chairman and chief executive officer of Cowlitz, said it is not uncommon for Mr. Harvey to "antagonize" executives of small banks in which he has invested. Soon after buying a large block of Cowlitz's stock, for example, Mr. Harvey directly challenged the bank's growth strategy.
"Shareholders like him keep us straight," Mr. Namatinia conceded. "Small-bank executives typically don't have to answer questions from shareholders."
Born in Southern California, Mr. Harvey was a restless hiker and hitchhiker who attended four colleges before eventually earning graduate degrees in law and business. His first job was as a loan officer for Security Pacific National Bank in 1983. He later became one of the first technology lenders at Silicon Valley Bancshares in Santa Clara, Calif.
Steve Rippe, Mr. Harvey's boss at Security Pacific and now CEO of Highland Bancorp in Burbank, Calif., said he was quickly impressed by Mr. Harvey's analytical mind - though he turned down Mr. Harvey's request for a raise three months into the job.
"He is in the position to identify opportunities sooner than the next guy," Mr. Rippe said.
In 1990 Mr. Harvey left California for New York, joining the law firm of Sullivan & Cromwell. There, he worked on a merger and acquisition team that advised such clients as Cleveland-based KeyCorp and Charlotte, N.C.-based First Union Corp.
Yearning to be his own boss, Mr. Harvey toyed with idea of becoming a hedge fund manager when he began to buy small bank stocks in 1992. He did late-night research from his loft apartment in Manhattan and later persuaded his family and hiking buddies to kick in some money.
With $222,000, he founded Everest. Named after the world's highest mountain - which Mr. Harvey has not dared to climb - the fund was quickly loaded up with cheap California bank stocks that had been bruised by the early '90s recession.
Because some of his portfolio is invested in banks that do not publicly disclose their financials, he attributes part of his investing success to gut instinct and knowing whom to trust.
While working out of a small office on Park Avenue in Manhattan, Mr. Harvey said, he learned some hard lessons. For example, after a lengthy discussion with the chairman of Mercantile National Bancorp in Los Angeles, Mr. Harvey believed the company's prospects were promising, and he invested. Two weeks later, he said, the company was nearly wiped out by loan losses.
That experience also prompted Mr. Harvey to move closer to his investments.
Last year he pulled up stakes in New York and put them down again in the dusty valley town of Gardnerville, a site familiar from his college days when he hitched rides to bathe in the area's natural hot springs.
He bought a 69-year-old estate, known as Jobs Peak Ranch, and spent $1 million to restore it. The isolated spot is surrounded by towering pines, and the driveway winds two-and-a-half miles up a steep, snow-capped mountain. Built by German laborers, it once was the home of a wealthy New York family; a scene from the "The Godfather" was filmed there.
Mr. Harvey said many townspeople have no clue what he does. Because of his property's storied history, his presence on the mountain fuels rumors, he said. "These people have no idea what a hedge fund is."
This year he added two people to his team: Randall Kinoshita, formerly of Burford Capital and regarded by some as a top-rate stock picker of small banks, and James Sullivan, who handles investor relations.
With bank stocks so cheap, Mr. Harvey said, opportunities abound, and the extra help probably will boost his fund's returns. "I couldn't just be a one-man show in the closet buying stocks anymore," he said. "There is a lot of money to be made."