BANKING: Temecula Valley Bank chief executive departs amid losses

Red ink flowed from bad loans on commercial construction loans

By CHRIS BAGLEY - Staff Writer | Monday, December 8, 2008 7:12 PM PST ∞

TEMECULA ---- Temecula Valley Bank appears to have fired its founder and chief executive, Stephen H. Wacknitz, a career banker who grew the company in a dozen years from a single branch into a $1.5 billion regional giant that made small-business loans across the western United States.

Wacknitz, 68, founded the bank in Temecula in 1996 and remains its largest shareholder. The bank said in a regulatory filing late Friday that its "employment understanding was terminated" with the chief executive earlier in the week. It wasn't immediately clear whether he remained as chairman of its board.

Wacknitz declined to comment Monday.

In an interview, Chief Administrative Officer Frank Basirico declined to specify the reasons for Wacknitz's departure, but acknowledged that it was a sudden move. Bank officials hope to name a replacement by the end of the week, Basirico said.

The bank had expanded to Murrieta, Escondido and Fallbrook by 2001. It has a dozen branches from Solana Beach to Corona to El Cajon and reported having 325 employees at the end of 2007. One of the bank's specialties has been commercial construction loans, helping it to churn out consistent profits for 11 years amid burgeoning development in Riverside and San Diego counties.

But the specialty also exposed it to defaults when the region's economy turned sour. The bank reported its first-ever quarterly loss, $2 million, in the second quarter of this year, and a $3.6 million loss in the third quarter. Bank officials said the losses stemmed from riskier loans and sharply fluctuating interest rates.

Temecula Valley's shares have collapsed in the last 12 months; down 86 percent to close at $1.50 on Friday. Shares rose 10 cents on Monday to close at $1.60 on the Nasdaq exchange.

Banking industry analysts said the particularly sharp downturn in Riverside County's economy had wrought havoc on many banks in the region.

Mission Oaks National Bank, a Temecula-based lender with branches in Fallbrook and Ontario, has reported smaller profits in recent quarters. Shares have fallen in value by more than 40 percent in the last year at Mission Oaks; Escondido-based California Community Bank; and Pacific Western, a bank holding company with branches in Escondido, Temecula and 50 other Southern California locations.

But Temecula Valley's heavy focus on construction had left it particularly vulnerable, said Michael Natzic, a senior vice president for community banking with investment house Stone & Youngberg LLC.

As of Sept. 30, the bank had $62 million in bad loans on its books, and foreclosures saddled it with real estate valued at $27 million, according to public filings.

"We don't like to see a bank with any owned real estate," Natzic said.

Natzic said it's conceivable that Wacknitz could regain control of the company by persuading a majority of shareholders to vote out some of its directors in what's known as a "proxy" fight. Wacknitz is by far the bank's largest single shareholder, with 8.4 percent of its shares.

The board hasn't decided whether to replace Wacknitz from inside or outside the bank, or on what timetable, according to the filing Friday.

"I think things progressed very rapidly," Natzic said. "I can speculate all day about what transpired."

Regulatory filings indicate that board members had bought or sold shares just two weeks ago. They wouldn't have been allowed to do so if major changes in leadership were on the table at the time, Natzic said.

Even so, public filings indicate that the bank had been scrambling to shore up its finances. It suspended its quarterly cash dividend in September. Board members slashed their own salaries last month to $18,000 from $24,000 and Wacknitz's salary to $420,000 from $560,000.

Also last month, the bank began the process of issuing preferred shares, a move that analysts read as an intention to participate in the federal government's Troubled Assets Relief Program. One aspect of the program allows the government to buy preferred shares directly from banks as a way to encourage them to make more loans.

Weakness in the construction industry and in the economy as a whole had prompted Temecula Valley Bank to expand its portfolio of loans backed by the U.S. Small Business Administration. The agency guarantees 75 percent to 80 percent of the value of a loan that meets certain guidelines.

The guarantee encourages banks to make loans to small businesses that might not otherwise qualify, especially those starting up or trying to expand, and at lower interest rates than banks might normally demand.

In late 2007 and early 2008, the bank hired four vice presidents and as many as eight sales representatives to issue such loans across California and in Arizona. Bank analyst Tim O'Brien said the new team has made the bank's SBA division one of the largest in the United States.

Both O'Brien and Basirico, the bank's chief administrative officer, said SBA lending is still a relatively safe business, but one whose profitability has been squeezed.

Banks had been able to bundle the government-backed portions of the loans and sell them off as securities that could be traded like bonds in a secondary market. But the California state treasury and other large players in that market stopped buying the securities late last year, thus limiting funds available for further SBA loans, O'Brien said Friday before the bank made Wacknitz's firing public.

On Monday, Basirico noted that several banks have recently scaled back or even eliminated their SBA divisions and said that Temecula Valley Bank is "constantly evaluating" options for its own SBA division.

Temecula Valley Bank reported $1.51 billion in loans and other assets as of Sept. 30. The $1.41 billion in liabilities it reported at the time consisted mainly of short-term debt and customer deposits.

Contact staff writer Chris Bagley at (760) 740-5444 or cbagley@nctimes.com. Bagley blogs about local economic trends at http://bizblogs.nctimes.com.