Risky Rewards

Risky Rewards

BANKING ISSUE by Francis X. Gilpin | Associate Editor

Intervest Bancshares Corp. would appear to be a stock for investors who like to live on the edge.

Although not widely known on the Gulf Coast, the New York City-based company's Intervest National Bank has put five of its six offices in Pinellas County. A sixth Florida branch is set to open in August on Clearwater Beach.

Intervest National is the Bay area's 13th biggest financial institution by deposits. Almost half of the bank's $1.4 billion in deposits at the end of last year were generated in Florida, although the bank's headquarters is in midtown Manhattan.

But it is the deposit profile, among other attributes, that makes some investors skittish.

More than 81% of Intervest National's deposits were in certificates of deposit, as of Dec. 31. Just 3% were demand deposits, such as cash in checking accounts, which are considered a cheaper source of loan funds.

Plus, Intervest National accepts brokered deposits. The bank paid fees on top of interest for $40.5 million in brokered CDs that Intervest National had on the books at the end of 2005.

The asset side is no less reassuring to cautious investors.

Nearly the entire loan portfolio is tied up in commercial real estate and multifamily housing. Those categories of loans are seen as risky. The properties don't always produce immediate income and the amortization schedule usually boils down to a balloon payment that borrowers can only make with the successful completion of a project.

Heavy reliance on CDs. Brokered deposits. Big exposure to multifamily development in Florida. Who in their right mind would buy Intervest stock? Over the past year or so, the answer is somebody who wants to make money.

Top 10 finish

Intervest shares shot up 127% during the 12 months that ended March 31. That catapulted Intervest into sixth place among the biggest-gaining U.S. bank and thrift stocks for the period, according to SNL Financial L.C. (Immokalee-based Florida Community Banks Inc. was fourth).

Intervest profit jumped 59% for 2005 and net income from the first quarter of 2006 doubled from the year-earlier period.

With interest rates continuing to rise, though, the future is uncertain for Intervest. But, if the bank is to keep delivering, Intervest National will need to execute even better in Florida.

Intervest was formed in 1993 to gain control of a state-chartered commercial bank in Pinellas, formerly known as Countryside Bank. New York real estate investors Jerome Dansker and Lawrence G. Bergman, who paid a reported $4 million for the Pinellas bank, took it public in 1997.

The holding company started a second bank in New York in 1999, then merged the two institutions in 2001. During the past five years, Intervest has formed mortgage and securities subsidiaries to go along with the bank.

Dansker, Intervest's chairman and chief executive, is credited with using his real estate savvy to avoid bad loans. In 13 years, Intervest claims to have sustained just one loss of $150,000, despite a preference for lending against commercial real estate.

But Dansker, who made $1.2 million in 2005 salary and bonus, is 87. His age has limited the upside potential of the stock, according to securities analysts.

Dansker's heir-apparent is his son, Lowell S. Dansker, 55. The younger Dansker is the company's vice chairman and president; he earned $777,317 in salary and bonus last year. Indeed, Intervest is dominated by the Dansker family, which exercises authority over the board of directors through a special class of stock. Bergman, 61, Jerome Dansker's son-in-law, is a company vice president and made $471,426 in salary and bonus in 2005.

Florida is critical

Intervest doesn't court publicity. The company hosts no earnings calls and executives didn't respond to several interview requests from the Gulf Coast Business Review.

Nevertheless, the younger Dansker displayed some of what he has absorbed from his father at an investment conference last fall.

Lowell Dansker told stock analysts that the bank pays close attention to loan collateral. Intervest National requires loans to be repaid within three years. Ryan Beck & Co.'s Collyn B. Gilbert reported Lowell Dansker told the conference that the bank finds the chances of a default increase when their kind of loans are written for longer terms.

Intervest National specializes in quickly turning around requests for short-term commercial loans from real estate investors who buy and fix up substandard properties. The bank likes properties where rents can be raised significantly after remodeling.

Gilbert calls Intervest National's commercial real estate business "somewhat of an annuity stream" because of multiple referrals from mortgage brokers. The Ryan Beck analyst doesn't own Intervest stock, but his firm gets investment banking fees from the company.

The Intervest National strategy can be a problem in Manhattan, Brooklyn and the Bronx, where the bank's metropolitan New York loans are concentrated. Rent control prevents Intervest borrowers from maximizing cash flow from residential tenants.

That makes Florida a key to the bank's growth prospects. Keith A. Olsen, 52, a veteran Pinellas banker, heads Intervest National's Florida division. Besides rounding up more bankable redevelopers in places like Fort Lauderdale, Miami, Orlando and Tampa, Olsen is under pressure to help attract cheaper deposits. That gets more difficult as interest rates go up. Yet Olsen, who was paid $205,712 in salary and bonus last year, may be realizing some success.

During the first quarter of this year, the bank picked up another $33.4 million in CDs. But $22 million also flowed into checking, savings and money market accounts, according to regulatory fillings.

Time to jump?

In spite of the costly dependency on CDs, Intervest National continues to operate with exceptional efficiency. The bank spent just 26 cents for every dollar of revenue it took in last year.

With numbers like that, Gilbert has had to lift Ryan Beck's price target for Intervest shares several times over the past year.

Gilbert started coverage of the stock last summer with an "outperform" rating and a $28 target, when it was trading around $20. By May, with the stock just below $40, Gilbert had increased the target to $45.

Not everybody is hanging in there, with a cloudy forecast for interest rates and Florida real estate.

At Sandler O'Neill + Partners LP, bank analyst Avi Barak recommends selling Intervest. Barak argues the stock has become overpriced, partly due to speculation that it may be added to the Russell 3000 index. His price target was $37 in late May. FTN Midwest Securities Corp. downgraded the stock from "buy" to "neutral" in June.

But even those jumping ship are leaving with a smile.

"We are out of this one now fully," Douglas Hughes, senior editor of the Small Bank Newsletter, wrote in April.

"Thank you very much," added Hughes, who manages about $50 million in assets. "Great earnings again, but this is when you sell – when things just can't get any better."

At a Glance

Intervest

Bancshares Corp.

Headquarters: New York City

CEO: Jerome Dansker

Stock symbol: IBCA

Recent stock price: $40.50

52-week stock-price range: $17.80 to $42.87

Price-earnings ration (trailing 12 months): 14.69

Dividend: Nil

Market capitalization: $317.60 million

Sources: Securities and Exchange Commission, Yahoo Finance

By the Numbers

Intervest National Bank

(Dollars in thousands)

Assets and liabilities 3/31/05 3/31/05 %Change

Total assets $ 1,294,903 $1,671,436 29%

Net loans and leases $981,048 1,282,459 30%

Total liabilities $1,181,468 $1,509,527 27%

Total deposits $1,160,468 $1,476,055 27%

Equity capital $113,435 $161,909 42%

Noncurrent loans and leases $4,428 $1,546 -65%

Average Assets, year-to-date $1,239,206 $1,634,915 31%

Insider loans $0 $0 N/A%

Tier 1 (core) capital $108,319 $161,909 49%

Income and expenses YTD 3/31/05 YTD 3/31/06 %Change

Total interest income $18,653 $20,083 0.07%

Total interest expense $9,236 $14,860 60%

Net interest income $9,417 $14,223 51%

Provision for loan and lease losses $1,033 $329 -68%

Total noninterest income $165 $306 85%

Total noninterest expense $2,920 $3,281 12%

Salaries and employee benefits $800 $966 20%

Pre-tax net operating income $5,629 $10,919 93%

Net income $3,181 $6,156 93%

Performance Ratios YTD 3/31/05 YTD 3/31/06

Net interest margin 3.13% 3.58%

Return on assets 1.82% 2.67%

Return on equity 11.32% 15.45%

Efficiency ratio 30.47% 22.58%

Noncurrent assets plus other real estate owned to assets 0.34% 0.09%

Core capital (leverage) ratio 8.66% 9.85%

Tier 1 risk-based capital ratio 10.13% 11.59%

Total risk-based capital ratio 11.23% 12.67%

Source: FDIC