Federal bank regulators have tightened their grip on financially struggling Sonoma Valley Bank, placing sanctions on the community bank that often are a prelude to a government takeover.
Whether the bank is seized by the government depends almost entirely on whether Sonoma Valley Bank executives can raise about $15 to $20 million from investors or find another bank to acquire it, a bank executive and other sources said Tuesday.
The 22-year-old bank lost $19.2 million last year after writing off millions of dollars in loans made to developers who stopped repaying money borrowed for local real estate projects.
On April 13, the Federal Deposit Insurance Corporation issued an enforcement order requiring that Sonoma Valley Bank raise additional funds within 30 days.
Sonoma Valley Bank, which is publicly traded, formally asked regulators this week for more time to raise money or find an acceptable buyer, said Sean Cutting, bank president. The government action does not mean the Sonoma-based bank will close on May 13, Cutting said.
"This doesn't give us a 30-day life expectancy," Cutting said. "It directs us to raise capital."
Sonoma Valley Bank is working with a national investment bank to attract potential investors or a buyer. It will likely have until at least the end of summer to find a solution, Cutting said.
"If we are unable to raise capital over the next 4 to 6 months, then (regulators) are going to be a lot more aggressive," he said.
The FDIC notification is an ominous step, said Philip Van Doorn, a senior analyst with TheStreet.com, which reports on the banking industry.
"During this crisis, most banks under this type of order over the last couple of years have been shut down," Van Doorn said. "It is possible for them to raise capital in the open market, but that is not a likely scenario."
Van Doorn agreed that nothing was likely to happen at the end of the 30-day period, and that banks frequently received extensions to raise additional capital.
Most bank customers do not need to worry about the bank's health, an FDIC spokeswoman said Tuesday.
"It doesn't generally affect the day-to-day business for the customer," said Lajuan Williams-Young, a spokeswoman for the FDIC.
If the bank is seized by the government, it will usually be reopened the next business day under the control of another bank that has taken it over, she said.
"Most people won't even know the change has taken place until they go into a branch," Williams-Young said. "It is business as usual."
Each customer account is insured by the government up to $250,000 for an individual, or $500,000 for a joint account. That means a customer's checking account is insured up to $250,000 and their savings account is also insured up to $250,000 — or twice that amount for accounts managed by two people such as a husband and wife.
Customers with questions on whether or not their account is adequately insured should speak with a banker.
The deck is stacked against Sonoma Valley Bank raising capital, Van Doorn said. When regulators take over a bank, they sell it to another bank at a steep discount and provide guarantees that protect the buyer's investment. So rather than buy a bank such as Sonoma Valley Bank now, another financial institution might wait until the government seizes it.
"(Sonoma Valley Bank) is competing with those sweet deals being offered by the FDIC," Van Doorn said.
But Van Doorn said Sonoma Valley Bank has some factors in its favor. The bank has put aside $13 million in loan reserves, cushioning it against future losses. Also, it was profitable in the fourth quarter of last year.
While the bank lost money last year due to large loan write-offs, Cutting stressed that its core business was profitable and that he believes the worst is behind the bank.
"The core operation of our business is very healthy," he said. "We are positioned to be profitable the rest of the year."
He said that while some investors might prefer to wait for the government to take the bank over, others might want to avoid the bureaucratic difficulties of buying a seized bank. In that case, they would want to buy Sonoma Valley Bank before it is seized, he said.
Another factor in the bank's favor is the large percentage of its deposits that come from everyday customers, both Van Doorn and Cutting said. Other banks have relied on deposits from large institutions that require the bank pay higher interest rates, which lower the bank's profitability and value.
Bank customers expressed strong loyalty to Sonoma Valley Bank on Tuesday.
"I love this bank," said Ruth Lucas, a Sonoma resident, standing outside its main branch in Sonoma on Tuesday.
Lucas said her experience with the bank since joining 6 years ago has been too positive to withdraw money from the bank now.
"I didn't know any of this was happening. But I trust them," she said.
Mike Brocco, who is both a customer and a shareholder of the bank, said he trusts Cutting and other bank executives to handle the current problems.
"I think the bank is stationary and will be here a long time," he said. "The valley will stand behind it."
Founded in 1988, Sonoma Valley Bank operates three branches in Sonoma, Glen Ellen and Boyes Hot Springs. It reported $357 million in assets at the end of 2009.
Early last year, Sonoma Valley Bank appeared to be traversing the global financial collapse relatively unscathed. It had received $8.7 million in government assistance, often referred to as TARP funds, in early 2009.
Then federal regulators audited the bank late last year, and required it to restate its third-quarter earnings. It had initially reported losing $495,000 in the third quarter. After the audit, it restated that it lost $19 million, which included setting aside $22 million for loan provisions for potentially bad debts.
Last year, 140 banks failed in the United States. This year, 57 banks have failed, including four in California. The most recent bank failure in California was Tamalpais Bank in San Rafael, which was seized on April 16.
Tamalpais Bank received the same warning as Sonoma Valley Bank two months before regulators seized it.
Cutting said he believed his bank would get more time.
"They recognize that the timeline given us is not terribly realistic," he said. "We are doing a lot. We are going full board on multiple paths. It is going to take more time to do this."
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