News - Local

Thursday, Jun. 04, 2009

Feds act on Los Padres Bank’s ‘unsound’ practices

Los Padres Bank agrees to strengthen capital and comply with regulatory requirements

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Los Padres Bank, a savings bank with four San Luis Obispo County locations, and its holding company, Harrington West Financial Group, have entered into a supervisory agreement with regulators.

The Office of Thrift Supervision, a government agency that regulates all federal and many state-chartered savings associations, found that the two “engaged in acts and practices that are unsafe and unsound.”

The agreement is designed to correct problems, augment the savings bank’s capital — the amount of assets and cash owned by a company — and return it to profitability.

William Phillips, president of Los Padres, said it is working with the OTS to strengthen its capital and has taken the necessary steps to comply with other regulatory requirements.

“It’s the current environment we (all banks) are in,’’ Phillips said. “It’s because of all the housing woes, and for us, it’s some of our portfolio backed by single-family housing (residential mortgage-backed securities) that’s taken some hits.”

The Solvang-based savings association and its holding company have been under financial strain because of the weak residential housing market, credit crunch and recession. Both posted net losses in the quarter ended March 31.

Los Padres Bank reported a net loss of $1.8 million in the first quarter, compared to a nearly $2.9 million net loss in the same quarter a year ago. Harrington West Financial Group, with total assets of $1.2 billion in the first quarter, reported a net loss of $2.1 million, compared to a net loss of $3.2 million in March 2008.

The bank’s total risk-based capital ratio fell to 9.36 percent in the first quarter of this year from 10.16 percent in the same period a year ago. Regulators examine a financial institution’s capital ratios — its capital relative to its risk profile — to measure its overall financial health. A bank is considered well-capitalized when its total risk-based capital ratio is 10 percent or more, depending on the risk characteristics on its balance sheet. Phillips said the savings institution is considered “adequately capitalized’’ according to regulatory standards. The OTS does not comment on enforcement actions.

But an agency spokes-man said the supervisory agreement — which took effect April 24 following a regulatory examination of the bank and its holding company — is considered more serious than an informal letter to a bank’s board or a memorandum of understanding.

The agency has mandated Los Padres take action on several fronts: • Submit a written plan to preserve and maintain the association’s capital at certain levels, requiring senior management to assess the sufficiency of its capital levels relative to its risk profile, and establishing an alternative strategy.

That might include seeking a merger or acquisition partner if the board’s strategy for raising additional capital is unsuccessful. • Provide a written business plan for 2009-2011 designed to return the savings bank to long-term profitability. • Adopt a policy that sets limits for its concentrations of loans, investments and funding sources.

• Submit a policy ensuring the savings bank maintains adequate short-term and long-term liquidity.

• Adopt an internal review policy requiring management to do quarterly reviews of classified assets, typically loans for which payments aren’t being made on time.

In addition, the agency has placed certain limits and restrictions on the savings institution. Among them are limitations on asset growth, restrictions on making golden parachute payments, and declaring, making or paying dividends. Phillips said the bank has implemented a two-pronged approach to improve its financial health that includes reducing its assets and raising capital.

However, he acknowledged that economic conditions make it difficult to do the latter at this time.

“We raised capital (about $12.3 million in private equity) during last year, and were one of the few institutions that were able to do that,’’ Phillips said. As well, the bank is trying to control operating expenses, including compensation and benefits, and has downsized, trimming about 10 positions from its staff of nearly 200. The savings bank is one of many thrift institutions across the country to face troubles in the first quarter of this year. While the OTS is encouraged by fewer losses in the industry in the first quarter, the number of problem thrifts — those with troubled assets — increased to 31, up from 26 in the previous quarter, the OTS said. As of March 31, the OTS supervised 801 thrifts with assets of $1.23 trillion.