San Luis Obispo County banks and thrifts navigated through tough financial times last year, the result of a severe economic recession that led to painful year-end losses for local institutions.
Of the nine institutions reviewed by The Tribune, all posted a net loss for the year ending Dec. 31, 2009. The losses, some bankers say, were due primarily to growth in nonperforming loans — fallout from a still fragile real estate market — as well as assessments imposed by the FDIC to bolster its dwindling insurance fund and increases in allowances to cushion against potential loan losses.
In addition to bank losses, federal regulators last year also issued enforcement actions or entered into agreements with several local banks, asking them to strengthen their capital position to weather financial troubles.
“We’re all treading water right now,” said Tom Sherman, president of San Luis Obispo’s Founders Community Bank. “We’re cautiously optimistic that things will improve ever so slightly over the course of this next year.”
John Hansen, president and chief executive officer of Atascadero’s Santa Lucia Bank, said it is working through its problem loans and trying to minimize losses.
“We had a rough go of it last year, and our customers had a rough go of it,” he said. “We’re going to hunker down and preserve our capital.”
Like many banks, the focus at San Luis Obispo’s Coast National Bank was on conserving capital and shrinking its asset size, said Gwen Pelfrey, the bank’s chief operating officer.
“Certainly, you’re hearing and seeing everyone focus on their capital, whether it was because of regulators or just because it was prudent,” she said.
Anita Robinson, president of Mission Community Bank in San Luis Obispo, said the challenges for banks will likely persist into 2011, when there could be some signs of stabilization.
“That’s what we’re all hoping is the case,’’ she said. “But between now and then, we don’t know what to expect, and we’re all just trying to get our arms around it.”
The county’s banks are not alone in feeling the recession’s sting.
Nearly 30 percent of banks nationwide reported negative income for the year, up from 24.8 percent in 2008, the highest proportion of unprofitable institutions in any year since at least 1984, according to the Federal Deposit Insurance Corp.
The FDIC said full-year earnings in 2009 were well below historical norms for the industry, with net income for the year at $12.5 billion, up from $4.5 billion in 2008 but below the $100 billion in net income reported for 2007.
A total of 140 institutions failed during the year — the largest number of bank failures in a year since 1992. The number of institutions on the FDIC’s problem list also rose to 702 at the end of last year, up from 252 at the end of 2008.
While local bankers tighten the reins to remain financially healthy, they must also deal with stepped-up regulatory measures. Several of the county’s banks remain under the watchful eye of federal regulators.
The Office of Thrift Supervision issued a cease-and-desist order against Solvang-based Los Padres Bank in October 2009, ordering the bank to strengthen its capital position by the end of the year.
Craig Cerny, president of Harrington West Financial Group, which owns Los Padres, told The Tribune last year that the bank had a plan to build up capital to meet regulators’ requirements, including the sale of Harrington West to Arkansas-based Arvest Bank for $4.1 million. To improve its capital ratios, bank officials also reduced Los Padres’ net loans.
Cerny did not return calls to The Tribune to comment on the status of the cease-and-desist order or the bank’s year-end financial performance.
Harrington West Financial Group notified Nasdaq in December of its decision to voluntarily withdraw shares of its common stock from listing on the exchange. The company received a letter from Nasdaq, saying that it was not in compliance with a listing rule because its market value of publicly-held securities had fallen below $5 million for 30 consecutive trading days.
In November, regulators also issued a cease-and-desist order for San Luis Obispo’s San Luis Trust Bank, requesting the thrift strengthen its capital ratios, maintain adequate short-term and long-term liquidity, revise its policies for modifying loans and reduce its level of classified assets — typically loans for which payments are not being received on time.
The bank has since submitted a written plan to the OTS, outlining how it would improve. Brad Lyon, president of San Luis Trust, said the bank has complied with the regulator’s request, increasing its capital ratios and reducing the size of its classified assets.
“We’ve shrunk from $403 million as of September and ended up at $320 million,” Lyon said.
San Luis Trust, he said, is working through the troubled loans in its portfolio and is making few loans, if any.
“We’re still trying to keep our assets on a downward path,’’ he said. “We’re not through yet.”Pacific Capital Bancorp, which owns First Bank of San Luis Obispo, entered into an agreement last year with the Office of the Comptroller of the Currency to bolster its capital base. In response, the bank has sold its income tax refund anticipation loan and refund transfer business, reduced its assets through loan sales and discussed the possible sale of some bank branches.
Last year, Coast National Bank in San Luis Obispo entered into a written agreement with the Office of the Comptroller of the Currency, which required the bank to correct and improve some of its business practices and reduce its concentration of commercial real estate loans. Pelfrey said management has made some changes and that it’s something the “bank continues to work on.”
Officials with Heritage Oaks Bancorp, parent company of Paso Robles-based Heritage Oaks Bank, said this month that it was addressing regulator concerns by raising $60 million in capital through the sale of securities to private investors.
Earlier this month, federal and state regulators had ordered the company to strengthen its capital and reduce its classified assets. Also, the company was to submit a capital plan in the next 60 days to the Federal Reserve Bank of San Francisco, which regulates bank-holding companies.
Robinson, whose bank was not subject to regulators’ enforcement action, said community banks’ survival boils down to capital. Mission Community is in the process of closing a deal with an investment banking firm in which Mission will receive a $15.2 million capital infusion.
“We all need the capital because we don’t know how much we’re going to have to reach into the capital bucket to sustain future losses,” she said.
Several local banks, including Mission Community, participated in the so-called federal bailout — the U.S. Treasury’s voluntary Troubled Asset Relief Program — designed to inject capital into institutions and expand their capacity to lend.
But Robinson said the program fell short.
“The system isn’t such that money can free flow right down (from the Treasury) to the street and get to the people that need it,” she said. “The mechanisms were not in place.”
Recession takes a toll
The erosion of small businesses and downturn in the commercial real estate market, which hit property owners and real estate developers hard, took their toll on the banking industry in 2009 and continue to have an effect, bankers say.
Some of the banks that had been lagging in their recognition of the stresses in their portfolio took a more aggressive approach to writing down problem assets in 2009, Robinson said.
“Community banks by nature have a lot of commercial real estate in their portfolios; it’s meat and potatoes for the banks,’’ Robinson said. “In the past, we really had no stress in commercial real estate. But now, we have properties that are losing tenants or making rental concessions to keep tenants.”
Robinson added: “Owners have lost their liquidity for a lot of reasons, and now, because many of these properties are on mini-perm loans (short-term loans that are coming due), they’re finding out that their bank is not in the position to renew or extend their loan. It’s very frustrating for borrowers.”
Robinson anticipates more pain this year as some of the financially stronger commercial developers run into problems.
“Those in the first tier were the ones going into this with no liquidity and were already stressed,” she said. “Those guys have already taken hits. This next group, they had cash and liquidity and net worth. This is a significant issue for us. They employ more people, they are more prominent in our community and they have bigger loans.”
Sherman of Founders said community bankers are working with clients who are having trouble making payments “as best they can.”
But the uncertainty about the overall economy, coupled with the specter of high unemployment, adds to their concerns.
Sherman said Founders will review a borrower’s financial situation and offer suggestions to help manage its obligations.
“If you go back a month or two ago, there were generally positive feelings,” he said. “Now, as we progress into the year, people are going through tough times. They have to make their property tax payments and file income taxes. People are in a little bit of a holding pattern.”
Economists predict job gains in the next few months, but San Luis Obispo County’s unemployment rate in January reached its highest level — 10.6 percent (nonseasonally adjusted) — since the state government began tracking employment data. February’s unemployment rate for the county was 10.2 percent.
“It’s the biggest stumbling block to people feeling better about the economy,” Sherman said. “That number has to be pushed down, banks have to lend, and employers have to hire more employees. It’s a circle.”