Beverly Hills Bancorp Inc.'s foray into construction and development lending is not going as smoothly as planned.
In July the chief executive of its $1.5 billion-asset First Bank of Beverly Hills in Calabasas, Calif., resigned after a disagreement with the board over the direction the bank was taking.
Now some shareholders opposed to the strategy are up in arms over the news that two directors sold 1.77 million shares back to the company. As the shareholders see it, the directors are selling because they also disagree with the new focus on lending to condominium developers at a time when condo demand is weakening.
Beverly Hills' stock price has dropped by nearly 10% in the two weeks since the directors, Howard Amster and Robert Kanner, revealed their stock sale in a Securities and Exchange Commission filing.
Larry B. Faigin, Beverly Hills' chairman and chief executive, said that Mr. Amster and Mr. Kanner - who both still own more than 1 million shares each - fully support the company's business plan.
The directors sold the shares to reap some reward from their investment and to diversify their assets, Mr. Faigin said in an interview last week.
Some investors, though, are not buying that explanation.
"There's the feeling that, if insiders are selling, what's next?" said Christopher R. Raffo, an institutional salesman for FIG Partners in Atlanta, speaking on behalf of Beverly Hills shareholders.
Formerly a thrift, First Bank of Beverly Hills switched to a commercial bank charter late last year and began to focus on making variable-rate construction and land development loans, particularly to condo developers.
Mr. Raffo said that shareholders are concerned about the new strategy because of the dearth of experience at the company in making such loans. Mr. Faigin had never been a banker before becoming the holding company's CEO last year, though he has been its chairman since 1999.
Shareholders also worry about the size of loans First Bank is making, Mr. Raffo said. Before the charter change it generally made loans of $2 million to $3 million; now many are in the range of $7 million to $10 million.
Mr. Faigin said that those fears are unfounded, pointing out that he has a background in construction and land development loans, as "both a lender's lawyer and a borrower." Before joining Beverly Hills he was the president of several real estate development companies, as well as the CEO of Home Capital Corp., the investment and development subsidiary of HomeFed Bank in San Diego, which failed in 1992.
Also, First Bank has hired underwriters specializing in construction and land development loans, though it is using the same officers who make other commercial loans, he said.
According to Mr. Raffo, shareholders were also sorry to learn that Joseph W. Kiley 3rd resigned in July as First Bank's president and CEO, because of his opposition to the new strategy. (Mr. Faigin has assumed his duties).
Mr. Kiley joined First Bank in March 2001 as its chief financial officer and was promoted to CEO five months later. Under his leadership, First Bank returned to profitability, and its assets more than doubled, from $659 million on March 31, 2001, to $1.4 billion five years later.
In an interview last week, Mr. Kiley said that he resigned because he did not have much experience in construction lending, particularly to condo developers. "You need a lot of expertise with these riskier loans, because when the real estate market goes soft, the first segment that gets hit is the condo market."
According to the California Association of Realtors, the state's condo market is already slowing, with July sales dropping 32.4% from a year earlier.
Mr. Faigin said First Bank also is making loans outside California, in markets such as Chicago, New York, and Texas. Condo sales dropped in each of those areas during the same period, except in Houston, where they rose 20.9%, according to realty groups in those markets.
Mr. Kiley, who said he is organizing a bank to open in Los Angeles, said he also disagreed with the board's decision to sell First Bank's Beverly Hills branch and rely more on wholesale funding.
"Core deposits are just cheaper and more stable," he said.
To fund its loans, First Bank now is depending more on wholesale borrowing, through brokered certificates of deposit, Federal Home Loan borrowings, and repurchase agreements.
Mr. Faigin said it sold the branch to First Banks Inc. in St. Louis "because we couldn't compete in a retail environment with only a few branches." (His bank now has just one branch, in Calabasas.)
As of June 30, First Bank of Beverly Hills had $20 million of construction loans, compared with just $14,000 at the same point last year. The company also is making more variable-rate commercial real estate loans, including those to tenants-in-common condo owners.
"We moved from largely a fixed-rate business into an area of lending where the rates are floating," Mr. Faigin said. "Therefore, you don't have people constantly looking for cheaper loans."
Total loans fell 3% from a year earlier, to $942 million, because of refinancings. Net income was flat at $3.2 million, because of a decline in net interest income.
Not all shareholders oppose the new strategy or object to the directors' decision to sell their stock. Robert Gallivan, a Beverly Hills shareholder, said he is confident it has enough expertise on board to be successful in construction lending.
"I'm waiting for the stock to reach $20" before considering selling, he said.
It has a long way to go. Late Monday the stock was trading at $8.03 a share. It has not traded higher than $10.88 since the company went public six years ago.
On Aug. 16, Beverly Hills announced that it would buy back 2.75 million shares at $9 each, for a total of $24.75 million. A week later Mr. Amster said in an SEC filing that he had sold 982,819 shares, and Mr. Kanner said in a filing the next day that he had sold 784,998 shares.
Though Beverly Hills' stock price began to fall slightly after the company announced the buyback plan, the drop accelerated after the directors made their filings.
Mr. Faigin said that the directors had a right to reduce their large positions, though he acknowledged that the recent decline in the stock price could be attributed in part to their sales.
"I suspect there may have been some confusion - even amongst some sophisticated investors - that may have impacted the stock price," he said.
Mr. Raffo said that several shareholders were disturbed over the magnitude of the sales.
"I think the two directors really sold their stock because they don't see the returns they want coming out of it," he said.
One institutional investor, who asked not to be named, pointed out that the directors also disclosed in the initial buyback documents July 14 that they were willing to sell up to 4.24 million shares - virtually their entire holdings. American Banker reviewed the SEC documents and confirmed his claim.
But a source close to Mr. Kanner, who also asked not to be named, said that the director never intended to sell all his stock. Mr. Kanner merely disclosed that he might sell most of his shares, the source said, because in the company's modified Dutch auction, the director knew the company would buy only a prorated portion of the amount he was willing to sell.
"Mr. Kanner had held such a huge position [an 8.9% stake] since 2000, when the stock was selling at just 50 cents a share, and this was an opportunity to take just a little" profit "off the table," the source said.
The director received nearly $7 million from the sale, "but he fully supports the business plan, and is considering buying additional shares in the future," the source added. "At the end of the day he's still a material shareholder," with 5.98% of the shares.
When approached after the annual shareholder meeting Aug. 30, Mr. Amster said that he did not want to say why he sold his stock. Through the tender offer, he reduced his stake from 11.9% to 8.5%.
