San Diego Business Journal

Responding to complaints of a lack of liquidity in its stock, the majority shareholders of Borrego Springs Bank , the Viejas Band of the Kumeyaay Indians , is proposing to buy out all the remaining minority shareholders in a reverse stock split.

Frank Riolo, the chief executive of Viejas Enterprises in Alpine, said the board of directors of the $150 million bank said longtime investors in the bank's stock had a difficult time getting a fair price for their shares because it has been so thinly traded.

After hiring a consultant to study the issue, board members decided setting a fair price and buying out all the minority shareholders was the best solution.

"When you have a small bank like ours with a limited float (daily number of shares traded), there's not much liquidity for shareholders," Riolo said. "If investors put up a block of their shares for sale, the price is usually discounted."
Under the proposal, the Viejas tribe, which owns 68 percent of the bank's shares, would pay $22 per share, or nearly $7 million for the remaining 32 percent of the stock.

The minority shareholders are officers, directors and some members of the public. After the Viejas tribe, the next largest shareholder holds no more than 2 percent, Riolo said.

Borrego Springs is the first commercial bank owned by an American Indian tribe in California.

Borrego Springs' directors hired investment bankers Hoefer & Arnett of San Francisco to advise them on possible alternate solutions to the liquidity problem and determined the stock purchase plan was the best way to resolve the issue, Riolo said.

The advisers provided the bank board with a range for the bank's market value, and the board selected the upper range, resulting in the pre-split price of $22 per share, or about $22 million for all the bank's nearly 1 million outstanding shares.

The bank set a shareholders meeting for Dec. 28, when they will vote on the proposal. The transaction also needs approval of the bank's regulator, the Comptroller of the Currency.

Borrego Springs Bank stock is traded on the over-the-counter bulletin board, with recent sales going for about $21.

Riolo said an unknown investor has been buying up the bank stock, anticipating a profit once the sale is approved.

In late October, days after the bank's buyout announcement, some 90,000 shares traded hands , an unusually high number for the thinly traded stock, said Matt Allen, managing director for Hoefer & Arnett's Los Angeles office.

The total to be paid to the minority shareholders in the deal is $6.89 million, not including any options, Allen said.

Despite the offer price that amounts to 2.36 times the bank's book value of $9.33 per share, not everyone is thrilled. Investor Bob Block said the bank's shares should command a higher price than that paid for Cuyamaca Bank (nearly $27 per share) by Community National Bank, and that the bank hasn't been run as profitably as it could.

He said while other banks expanded their loan portfolios, BSB actually shrunk the number of loans it had on its books.

Riolo, Borrego Springs' former chief executive officer, said the Viejas tribe has no intention of selling the bank. He said the bank has become an integral part of the tribe's business operations and is providing much more value than what was originally envisioned.

Viejas began buying shares in the bank in 1996, gradually increasing its stake, while it boosted the bank's depleted capital reserves.

Founded in 1982, Borrego Springs Bank's former majority owner was BSD Bancorp, a now defunct holding firm for the Bank of San Diego and several other community banks. Residents of Borrego Springs made up 49 percent ownership of the bank stock.

Since the tribe's ownership, the bank has increased in size and profits.

For the recently completed third quarter, Borrego Springs reported net income of $322,000, or 32 cents per share, compared with $273,000, or 28 cents per share for the same period of 2003.

For the nine months, the bank reported net income of $815,000, or 82 cents per share, compared with $784,000, or 80 cents per share for the like period of 2003.

As of Sept. 30, the bank's assets stood at $155.7 million, up 28 percent from the same date last year. The net loan balance decreased 9 percent to $42 million, while the total deposits increased 30 percent to $144.7 million.

Borrego Springs Bank is one part of the empire controlled by Viejas Enterprises.

The biggest number of its 2,600 employees work at its casino on the reservation near the East County community of Alpine.