Looking busy may be the best hope for Temecula Valley Bancorp Inc.

Wednesday is the California company's deadline under a prompt corrective action notice to return its $1.5 billion-asset Temecula Valley Bank to adequately capitalized status. If the company fails to do so, regulators have said they could seize the bank. Since Temecula was jilted two weeks ago by a private equity group — whose proposed $210 million investment had raised hopes for the entire banking sector — the company has been scrambling for alternatives.

"The message I want to send out is that we are continuing to do everything we can do to right the ship," Frank Basirico, Temecula's chief executive officer, said last week.

Experts said regulators' swiftness in closing a bank depends somewhat on its ability to show it has potential investors.

"From what I've seen, it depends on if they really have anything in the works that may yet come to fruition," said Karen Dorway, the president of the bank rating agency BauerFinancial Inc. in Coral Gables, Fla.

"We have seen a number of institutions continue to work for quite a little while after the PCA has run out. Remember, the FDIC is supposed to seek the least costly solution so if they see some potential for private money, they give room for the bank to pursue that."

Brett Rabatin, an analyst at Sterne, Agee & Leach Inc. in Nashville, said a failure by Temecula to meet the Federal Deposit Insurance Corp.'s July 15 deadline would not automatically cause the regulator to seize the bank.

"They don't want to close these institutions unless they absolutely have to," Rabatin said. "If they don't see the cost increasing from an insurance fund point of view or see a liquidity crisis coming, there is a willingness to see if something works out."

Additionally, Rabatin said the FDIC's lack of manpower might also buy wobbly institutions like Temecula more time to find another deal.

"The FDIC has about a third of the employees as it had during the last banking crisis. We know more closures are coming, but there is only so much they can do in one day," Rabatin said.

Late last month, Temecula's would-be savior — a group of investors led by Bancroft Capital LLC — cancelled a nonbinding letter of intent to pump $210 million into the company.

When the proposed investment was announced in early June, it was interpreted as a sign that private equity was warming to investments in the banking sector — without government assistance.

Tim O'Brien, an analyst in San Francisco with the investment bank Sandler O'Neill & Partners LP who until recently covered Temecula, said that the deal, had it been completed, would have stoked confidence in the market and could have led to similar transactions.

"It would have been a sign that the market was moving on," O'Brien said. "But things remain challenging nationally and certainly in California. Nothing new there."

Richard Levenson, the president of the San Diego investment bank Western Financial Corp., agreed that an infusion from the Bancroft group "could have been the beginning of a lot of capital coming off the sidelines," particularly for banks in Southern California.

The deal's collapse shows that "private equity money is still not convinced we are at the bottom, and that the timing is not good yet," Levenson said.

Rabatin said that private equity firms have largely shunned community banks out of fear that they will run afoul of regulatory restrictions on ownership — and that their investments would be wiped out as loan problems increase.

"There is a lack of private equity in general willing to step up and help these smaller institutions. … I think it is because with smaller banks every loan is so critical. They cannot absorb the impact of a problem as well as the bigger banks," Rabatin said. "And no one wants to be in the first-loss place. … I think the equity in the market now is seeking larger and more stable deals."

Levenson said Temecula likely doesn't have other investors in the pipeline.

"The fuse is really short here. If they had something they would have announced it already," Levenson said. "I don't know that it will be this Friday or next Friday or a month from now, but I don't think it is going to be long for them if they don't come up with the money soon."

Basirico said he is continuing to work with Temecula's investment banker, Stifel, Nicolaus & Co., on finding outside capital, but he would not discuss any deals that might be in the works.

He said the company has been shrinking assets and cutting expenses, but acknowledged that such internal measures alone will not be enough to satisfy the June 15 prompt corrective action in time.

"We do have to have a certain degree of capital in the bank, and I don't think it is possible to shrink [Temecula's assets] to that level," Basirico said.

He also said he is in constant communication with regulators.

"We are trying to be as transparent and informative as we can be," Basirico said.

Dorway, whose firm has given Temecula zero stars — its lowest rating — said it would take at least $37 million to move the bank's risk-based capital ratio from 5.44% at the end of the first quarter to an adequately capitalized ratio of 8%.

Under the terms of scotched deal, Bancroft, along with Orient Property Group LLC, would have invested $110 million into the company through the purchase of convertible preferred stock. The other $110 million would have gone toward creating a work-out unit for the company's $182.3 million of nonperforming assets, which made up 12.2% of total assets at the end of the first quarter.

However, given five straight quarters of rising credit problems, the nonperformers have probably increased and the capital hole has likely gotten deeper, Dorway said.

"I don't see anything on the first-quarter statement that shows that things have leveled off," Dorway said.

Temecula's troubles are primarily driven by residential construction loans in California's Inland Empire area. At the end of the first quarter, construction loans made up 60% of its nonperformers and 36% of its portfolio. Dorway said that construction loans can be more time-consuming to work out, compared with a residential mortgage.

"There are a lot more variables in working out a construction loan," Dorway said, including finishing construction, dealing with the homeowners' association and getting the proper permitting.

Levenson said that an "11th hour, 59 minutes" deal is still possible, but that Temecula has likely met with dozens of interested parties in the past several months.

With the regulators waiting in the wings, he said, there likely isn't enough time to complete the due diligence needed to get a deal done.

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