Temecula Valley Bancorp Inc. has gone from hanging on by a thread to getting a lifeline.
The $1.5 billion-asset California company, which in recent months has warned that its viability was in doubt, announced late Monday that it has a letter of intent from a group of investors that would take a majority stake in it for $210 million.
The infusion, to be led by Bancroft Capital and Orient Property Group LLC, would be enough for its undercapitalized bank unit to satisfy regulators.
Observers said this could be a sign of private equity gaining comfort with the banking industry. Though Temecula Valley still needs to finalize the deal, several people said that such willingness to buy into a struggling bank in one of the nation's most battered real estate markets — without government backing — could help shore up confidence in the sector.
"The fact that a California community bank that engaged in a lot of construction lending can succeed in reaching an unassisted deal to raise the needed equity says a lot. If they can get it done, it could be a huge positive for the market," said Tim O'Brien, an analyst with Sandler O'Neill & Partners LP who used to cover Temecula Valley. "If it closes, it would imply confidence in the market. We still have a long way to go, but the context of this is beyond Temecula Valley."
In addition to the Temecula Valley infusion, the $96 million-asset Plaza Bank in Irvine, Calif., announced Monday that it had received final regulatory approval to receive $18 million in capital from a private-equity investment group called Carpenter Community BancFund.
The deal, which has been in the works since the fall, is expected to replenish the four-year-old bank's depleted capital. Its chairman said growth, rather than loan trouble, had left it needing the boost.
While calling such signs encouraging, observers said that private equity remains largely elusive.
They also cautioned that Temecula Valley is far from a done deal.
Another struggling California company, Vineyard National Bancorp in Corona, offers an example of how such investment plans can go awry. The $1.9 billion-asset company announced late last month that a deal to sell its bank unit had been terminated.
Vineyard National's chairman had organized a separate entity called Vineyard Bancshares Inc. as part of a plan to purchase the ailing bank and recapitalize it. But according to a securities filing, the deal fell through because the buyer was unable to arrange the needed financing.
Calls to Vineyard were not immediately returned.
Richard Levenson, the president of the San Diego investment bank Western Financial Corp., said that the clock is ticking for both Vineyard and Temecula Valley to secure capital, and that the failure of Vineyard's deal is worrisome.
"Unless they come up with another transaction very quickly, I think it's going to be very difficult for them," Levenson said.
He said that the structure of Temecula Valley's proposed deal is particularly interesting, and that the price seems attractive.
"They're getting it for a song," he said.
Half of the Temecula Valley infusion would be an equity investment that would go toward recapitalizing the company. The investors would receive voting shares and own 95% of the company.
Temecula Valley said in a press release that any preferred shares issued would be convertible at 50 cents each, a 25% premium to the 40-cent closing price of the company's stock on May 29.
On news of the deal, its share price rose 55% Tuesday, to 62 cents.
The other half of the capital infusion would go toward resolving credit problems.
Temecula Valley would establish a workout entity to hold its nonperforming and poorly performing assets. The entity would be owned partly by Temecula Valley and partly by the private-equity investors.
At the end of the first quarter, Temecula Valley had nonperforming assets of $182.3 million, up 167% from a year earlier. The nonperformers made up 12.2% of total assets.
Temecula Valley's trouble is mostly in construction loans, which make up 36% of its portfolio, but 60% of its nonperformers.
"By creating this separate entity for the nonperforming assets, that will enable us to enhance our management of those distressed credits while easing the strains they place on our capital at the bank," Frank Basirico, Temecula Valley's chief executive officer, said in an interview.
Basirico said he is "tremendously optimistic" that the company would have a definitive agreement with the investors quickly.
He conceded that the company is on a tight deadline. State regulators have given its bank unit until July 6 to raise at least $71 million — which would give it an 8% ratio of tangible equity to tangible assets.
It also must file any related regulatory applications by June 12.
Basirico said the goal is to have the investment from the private-equity firms in place by July 1.
Along with the cash they would provide, the firms are bringing expertise to the disposition of problem assets.
Orient, of Los Angeles, was created by an unnamed "multibillion-dollar New York-based hedge fund" to invest in distressed real estate assets, Temecula Valley said in its press release.
Douglas McDonald, founder and president of Bancroft Capital, is a former asset manager who oversaw the disposition of more than $250 million in nonperforming loans and real estate for the Resolution Trust Corp., according to his biography on the Bancroft Web site.
"This transaction represents a unique opportunity to aid a very capable management team in the restoration of its community banking model," McDonald said in the press release. "Temecula Valley Bank has traditionally been one of the finest small banks in the country and our investment will enable the bank to expand while at the same time addressing the issues in its loan portfolio that have caused the bank distress."
O'Brien said the resumes of the buyers could be a great benefit to Temecula Valley's turnaround, given its exposure to California's Inland Empire, which underwent aggressive residential development in the last decade and has been deeply stressed by the housing crisis.
"Arguably, no real estate market in the country has been hit harder that the Inland Empire," O'Brien said. "I really don't know much about the deal, but the fact that their headline investor was involved with the RTC suggests that they've seen these kinds of circumstances before."
In Plaza's case, the search for capital had nothing to do with loan trouble, said Robert Feldhake, its chairman.
Plaza set out to find investors in January of last year as a part of its "future planning," Feldhake said. The commercial bank wanted to grow, particularly in small-business lending.
In October, it announced it had reached a deal with Carpenter Community BancFund to invest $15 million in the bank. In the ensuing months, the figure swelled to $18 million.
The bank proceeded to make loans under the impression that the infusion would be completed by yearend, but ran into regulatory delays.
The resulting 12% growth in loans quarter over quarter without the underlying boost to capital left the bank adequately capitalized at yearend, Feldhake said. And by the end of the first quarter it was undercapitalized.
Beyond the loan growth, Feldhake said that the start-up opened with "a little less capital than we should have had."
"We essentially built a Ferrari that was waiting for the gas to get to the engine," Feldhake said.
Credit quality has slipped, but with noncurrent loans making up 2.7% of total loans at March 31, Plaza's credit quality is decidedly middle of the road compared with other banks in California.
Now that it has "an abundance of capital," as well as a new management team, Feldhake expects that the company, which reached $70 million in loans last quarter, could nearly double that by August.
As part of its deal, Terry Robinson became Plaza's new CEO and Gene Galloway became its president. Both are veteran Southern California bankers.
Robinson was formerly the CEO of Vintage Bank, which grew from $26 million in assets to $675 million under his leadership before it sold to Umpqua Holdings Corp. in 2007. Galloway most recently worked as chief of the retail and community banking group at Sanwa Bank California.