Beverly Hills Bancorp has put itself on the block, because its foray into wholesale banking never quite panned out.
That is how shareholders are interpreting the company’s announcement last week that it has hired the investment banking firm Hovde Financial Inc. to advise it of its strategic alternatives.
But just how attractive would the Calabasas, Calif., parent of First Bank of Beverly Hills be to a potential buyer?
Observers say the best things the $1.6 billion-asset Beverly Hills has going for it are its loan portfolio, its Southern California location, and its capital base.
On the downside, it has just one branch, limited core deposits, and high funding costs.
Though its stock currently trades below book value, Robert Gallivan, a shareholder, said he believes Beverly Hills could fetch as much as $13 a share — or 1.6 times book — simply because it is located in Southern California, “the seventh-largest economy in the world.”
A buyer who is not enamored with the wholesale banking strategy could use Beverly Hills’ charter to open more retail branches and build up its core deposit base, he said.
No analysts cover Beverly Hills, but Don Worthington, an analyst at Hoefer & Arnett Inc. in San Francisco who follows the Southern California market, said Friday that the company would be most attractive to another community bank in its market that might be struggling with loan growth. Beverly Hills said that in the first quarter its loan portfolio increased 10% from a year earlier.
“Organic growth is hard to come by” in the current environment, Mr. Worthington said. Its loans “are reasonably well-underwritten, so acquiring the company would be a good way” for another bank “to pick up loans in a tough market.
“That would be the value as opposed to a deposit acquisition strategy, just because there aren’t any core deposits to speak of,” he said.
Certificates of deposit account for the bulk of Beverly Hills’ deposit base. In the first quarter its cost of funds was 4.41%, or 100 basis points higher than the average of banks with $1 billion to $10 billion of assets, according to Federal Deposit Insurance Corp. data.
As of March 31 core deposits made up just 1% of Beverly Hills’ $767 million of deposits. By comparison, the average ratio of core deposits to total deposits at banks with $1 billion to $10 billion of assets was 56%, according to FDIC data.
The shares are up nearly 5% since Beverly Hills announced the Hovde hiring in a Securities and Exchange Commission filing late Wednesday. They closed at $7.73 Friday.
In the filing, Beverly Hills said that the hiring does not necessarily mean that the company will sell itself or pursue any other alternative strategy.
Christopher R. Raffo, an institutional salesman for FIG Partners LLC in Atlanta, who spoke on behalf of a number of Beverly Hills shareholders, said that, at this point, a sale is the best course of action.
Mr. Raffo said that last year’s shift to a wholesale banking strategy did not go over well with shareholders.
Beverly Hills “has a large base of capital and a charter that’s clearly underutilized, but they just don’t have the management talent to leverage it,” he said.
Larry B. Faigin, Beverly Hills’ chairman and chief executive, also became the bank’s CEO in July after the resignation of Joseph W. Kiley 3rd, who opposed the strategic shift.
Mr. Faigin did not return calls for this article.
Last year Beverly Hills began focusing on variable-rate construction and land development loans, particularly to condominium developers. To fund the loans, First Bank of Beverly Hills began depending more on wholesale borrowing, through brokered CDs, Federal Home Loan Bank borrowings, and repurchase agreements.
In July the bank sold one of its two branches to First Banks Inc. of St. Louis. Mr. Faigin said at the time that his company felt it could not compete for retail business in its market.
Since then Beverly Hills’ shares have hovered between $7 and $8. They reached a 52-week high of $9.62 on June 30.
“Following the sale of the branch, they became a pure wholesale operation, and historically wholesale operations trade at a very low multiple relative to traditional banks,” Mr. Raffo said.
Though Beverly Hills’ loan portfolio has grown over the last year, the rising cost of funds has hampered its net interest margin. Its first-quarter net income rose 6% from a year earlier, to $2.64 million, but its net interest margin fell 69 basis points, to 2.01%.
