Temecula Valley Bancorp Inc. joined the list of California companies warning that mounting losses and evaporating capital are casting doubt on their survival.
The embattled $1.5 billion-asset Temecula Valley said Tuesday in its annual securities filing that increasing credit problems have left it undercapitalized. It is trying to shrink its balance sheet to bolster capital ratios, and it has hired an investment bank to secure outside infusions or identify potential acquirers, but the company said it is unsure if those efforts will pay off.
"Our ability to accomplish these goals is significantly constricted by the current economic environment," the filing said. "We believe substantial doubt exists as to our ability to continue as a going concern."
In an interview Tuesday, Frank Basirico, Temecula Valley's chief executive, sounded a more upbeat note in discussing its prospects for selling loans, finding outside money and improving liquidity.
"I guess I have to be as optimistic as possible," he said. "We've made significant progress to shrink the balance sheet … and in the next couple of weeks we expect to know exactly how soon others would like to proceed for equity infusions."
The company engaged Stifel, Nicolaus & Co. Inc. in January to find strategic partners, from banks looking to make acquisitions in Southern California to private-equity firms that may like Temecula Valley's focus on Small Business Administration lending. Basirico would not disclose the number of prospective deal partners, but said there has a "tremendous response" to the inquiries.
Aaron J. Deer, an analyst with Sandler O'Neill & Partners LP, who does not cover Temecula Valley's stock but follows many other banking companies in Southern California, said private investors are looking to invest in Southern California; the problem is agreeing to a price.
"Obviously, this is a very challenging environment, but there is actually a lot of interest out there," Deer said. "Unfortunately, the real challenge is finding the price. Given some of the stock prices, the dilution could be pretty extreme."
By contrast, traditional mergers and acquisitions are drawing less interest as companies seek to limit their risks, he said. Potential buyers "don't know how big the hole might be, and I think that just has people waiting on the sidelines."
In recent months a handful of other publicly traded Southern California companies saddled by residential real estate losses have raised questions about their viability. The list includes Vineyard National Bancorp, which warned in August that it was in danger, and 1st Centennial Bancorp in Redlands, which issued its warning in January.
For some companies, the warnings came to fruition. Regulators seized Capital Corp of the West's bank last month and Downey Financial Corp.'s in November.
To stave off that fate, Temecula Valley has applied for $45 million of funding from the Treasury Department's Troubled Asset Relief Program, but it has not received notice of acceptance, Basirico said.
The company also is seeking $50 million to $70 million from a buyout firm. A Feb. 12 order from the Federal Deposit Insurance Corp. and the California Department of Financial Institutions gave its Temecula Valley Bank 90 days to develop a plan to raise its Tier 1 leverage ratio to 10%. At yearend the ratio was at 6%.
Last year the parent company's nonperforming assets climbed nearly fivefold, to $148 million as of Dec. 31. Nonperformers made up 10.36% of total assets, and loans related to residential real estate construction and other real estate made up 58% of total loans.
Though Temecula Valley's problems intensified last year, Basirico said it has sought to prepare for future losses, increasing the allowance for loans losses to 4.7% of total loans at yearend, versus 1.6% a year earlier.
Under an agreement with the Federal Reserve Bank of San Francisco, Temecula Valley is also required to reduce debt and submit a capital plan, among other things.
Basirico said outside investors are waiting for the company to file its annual report before making any moves.
In the report, its final results were revised from those released early last month. The company lost $59 million for the year after earning $15.1 million in 2007. It had originally pegged last year's loss at $16 million, but declining real estate values and fresh appraisals prompted it to increase the provision for loan losses to $78.4 million, up seventeenfold from 2007. The company had previously reported a $38.8 million provision.
While Temecula Valley awaits possible outside investment, it is shrinking itself by selling loans, primarily the guaranteed portion of its SBA 7(a) loans, which once made up about half its portfolio. It has sold roughly $45 million of loans at par, though Basirico said that figure could reach $100 million by the end of the quarter. He expects to sell $200 million by yearend and another $200 million next year.
Additionally, Basirico said Temecula Valley has increased core, retail and window deposits at a rate of $2 million a day for the last 45 days. One of the requirements of the federal and state cease-and-desist order was to decrease its dependence on brokered deposits. Basirico, who took the helm in December, said that is a testament to the company's loyal customer base.
"We've made a complete 180-degree turn in the last 45 days," he said. "And we've got to stay positive."
