Local banks seek cover
Buyouts not seen as likely
Article Launched: 05/17/2008 10:21:46 PM PDT
In the last two quarters, local banks collectively shoveled a whopping $230 million into their loan loss reserves to cover tens of millions of dollars in loan write-offs, and they may have to set aside even more cash for future losses.
Is the environment ripe for bank buyouts?
The answer is no, according to one financial guru on Wall Street steeped in years of industry knowledge.
“Bankers become very cautious in markets like this,” said John Eggemeyer, chairman of San Diego-based PacWest Bancorp and CEO of Castle Creek Capital private equity firm. “It’s a mistake to jump into a troubled market too early. Banks are reluctant to expose their own balance sheets to other banks.”
The next choices in line: private equity or institutional capital.
“There’s plenty of private equity flying around, looking for banks like these,” said Eggemeyer, who has cobbled together PacWest through several acquisitions in recent years.
The most glaring examples of possible buyouts or capital infusions are Rancho Cucamonga-based PFF Bancorp and Corona-based Vineyard National Bancorp, but smaller banks’ financial statements are also raising eyebrows.
In light of Vineyard’s financial worries, the bank has hired a financial adviser to help it explore strategic options for raising capital.
The bank also announced Friday the termination of its executive vice president and chief lending officer, Michael Cain, while also eliminating the position of chief lending officer.
A bitter proxy battle has recently catapulted Vineyard into the spotlight as former CEO Norman Morales tries to gain control.
Morales, who resigned in January, was given the green light in April by an independent inspector to nominate his very own hand-picked board-of-director candidates at the company’s upcoming annual meeting.
Tension is building as stakeholders wait for the annual meeting date to be announced after Vineyard’s 10K – sometimes referred to as an annual report – is filed with securities regulators.
To make things worse, Vineyard reported so much in loan losses the last two quarters that it’s suspending its stock dividends “for the foreseeable future,” according to a May 1 financial statement.
“Nasdaq has begun preliminary proceedings about possibly delisting the stock,” said Joe Morford, analyst with RBC Capital Markets in San Francisco. “It’s worth citing as a risk.”
He wouldn’t be surprised if Vineyard records even more loan losses this year. And contrary to Eggemeyer’s opinion, Morford said the bank’s leaders are probably exploring buyout options.
“They’re trying to deal with exposure to the (construction and real-estate) markets, which on a percentage base is larger than most banks,” Morford added.
PFF is another likely candidate possibly for sale, some experts say.
Its stock – which closed at $1.69 on Friday – was worth almost $40 a share in mid-2006. PFF made loans to housing developers who got stung by the subprime mortgage crisis.
Private equity has already come to PFF’s rescue. The bank recently sold $60 million worth of loans – once valued at $100 million – to the first local private equity fund of its kind created by businessman Jeffrey Burum, a principal of Rancho Cucamonga-based housing developer Diversified Pacific.
Other regional banks just a fraction of PFF and Vineyard’s size are seeing red on their balance sheets:
1st Centennial Bancorp in Redlands reported a loan loss provision of $5.1 million for first-quarter 2008 because of “economic conditions” and “increased weakness in the real-estate sector,” according to the bank’s first-quarter financial statement. The bank saw a $1.4 million loss for the quarter.
Chino Commercial Bancorp, which never touched the subprime mortgage market, reported less-than-stellar news. The bank’s earnings dropped 68 percent in the first quarter of 2008 compared with the fourth quarter of 2007, and it threw more than $230,000 in its loan loss reserve – more than triple the amount in the first quarter of 2007.
Rialto-based ICB Financial increased its loan loss reserve by $216,000 for the first quarter of this year after infusing $480,000 last year.
First Mountain Bancorp in Big Bear Lake added $92,000 to its loan loss reserves for first-quarter 2008 – significantly less than the $832,000 loan loss reserve provision it recorded for the fourth quarter of 2007.
Newport Beach-based Downey Financial Corp. – which sports a home loan center in Victorville and has branches in Rancho Cucamonga, Ontario, Chino and Corona – said in April that 13percent of its $13 billion in loans were in default. The company took a first-quarter loss of $248 million.
Some private equity firms possibly in the market for debt-ridden banks include San Francisco-based Belvedere Capital, Cincinnati-based Financial Stocks LLC, and New York-based CapGen Capital Advisors.