Raise more capital, feds tell local bank

Federal regulators have ordered Los Padres Bank to raise more capital to put it on sounder financial footing, according to a cease-and-desist order filed by the Office of Thrift Supervision.

Los Padres, based in Solvang, is a federally chartered savings bank with 11 branches on the Central Coast, including four in San Luis Obispo County. It is owned by Harrington West Financial Group, which also owns three banks in Kansas City and three in Arizona.

The move by the Office of Thrift Supervision follows an April supervisory agreement between the regulators and Los Padres Bank to augment the institution’s capital and return it to profitability.

The new cease-and-desist order lists several actions Los Padres must take, including raising its capital ratios to higher levels by the end of the year.

A financial institution’s capital ratios — assets and cash relative to its risk profile — measure its overall financial health.

Craig Cerny, who is chairman of the board and chief executive officer for both Los Padres and Harrington West, said his bank’s problems are not all that unusual. He blames them on what he calls the toughest real estate market since the Great Depression, 10 percent unemployment, borrowers not meeting their obligations and real estate values falling below their loan amounts.

Harrington West reported a net loss of $17.7 million in the first six months of the year because of higher loan loss reserves, write-downs on loans and having to foreclose on properties because of defaulting borrowers. That compares to a $3.4 million net loss for the first half of 2008.

Results for Harrington West’s third quarter ending Sept. 30 are expected to be released Nov. 2.

Regulators want Los Padres to raise its core capital ratio — which gauges a bank’s equity to its assets — to at least 8 percent. Cerny said it is currently 6.46 percent.

Regulators want the bank’s total risk-based capital ratio to increase to 12 percent or more. Cerny said that ratio is currently 7.67 percent.

Los Padres also must show it has access to enough cash to withstand “any anticipated or extraordinary demand against its funding base,” according to the OTS order.

A spokeswoman for the OTS, Janet Frank, said it is too speculative to gauge what moves the regulatory agency will take if Los Padres is unable to comply with regulators’ requirements.

However, if the bank is unable to meet the OTS capital requirements, regulators could impose additional restrictions on the company, she said.

Los Padres has been executing a plan to restore its capital for more than a year. In June it said it had raised $12.3 million last year and taken various steps to control operating expenses. It has continued efforts to raise capital, Cerny told The Tribune this week.

Harrington West is in the process of selling its Kansas bank division for $4.1 million to Arvest, a bank corporation controlled by the Waltons of the Wal-Mart fortune.

That deal, which should close in early November, will go on Los Padres’ balance sheet as new tangible capital and raise its total capital ratios by 1.4 percent, “if all other things remain equal,” Cerny said.

He also believes the deal will bring the bank’s core capital ratio up to the imposed OTS requirements, although still falling short of the required 12 percent for total risk-based capital ratio.

To further build capital, the bank is working on “additional plans with several partners,” Cerny said. He would not disclose exactly what those plans were, saying only that “we hope to get well beyond our capital needs and have a structure that will make us more of a player — and even bring similar banks into the fold.”

“It is our intent to get back into the growth mode, and we are working hard to achieve this,” he added. “But first things first: we want to reach the requirements of the OTS.”

The company’s stock on NASDAQ (HWFG) closed at $1.01 a share on Tuesday, a 52-week low.