San Luis Trust Bank needs to raise more capital

Federal regulators have ordered San Luis Trust Bank to strengthen its capital and develop a plan to put the thrift on a track to better financial health, according to a cease-and-desist order filed by the Office of Thrift Supervision.

The government agency, charged with regulating savings associations, issued the order against the San Luis Obispo institution Nov. 2, setting in motion a series of steps San Luis Trust officials must take to bring it into compliance.

The cease-and-desist order — considered a formal enforcement action — stipulates, among other things, that the thrift raise additional capital, devise strategies for maintaining adequate short-term and long-term liquidity, revise its policies for modifying loans, and identify and report its allowance for loan and lease losses.

It also must reduce its level of classified assets — typically loans for which payments are not being received on time — and improve its banking and management practices.

The thrift is required to increase its capital ratios — a bank’s assets and cash relative to its risk profile and a core measure of a bank’s financial strength. Regulators want San Luis Trust to have a Tier 1 core capital ratio of at least 8 percent or a total risk-based capital ratio of at least 12 percent by Dec. 31. As of the third quarter ending Sept. 30, it had a Tier 1 core capital ratio of 6.8 percent and a total risk-based capital ratio of 11.8 percent.

San Luis Trust has until Friday to submit a written long-term business plan, which details its current and projected capital levels, future operations and lines of business and market conditions. The plan must cover at least the rest of this year and through the end of 2012.

A spokesman for the federal agency said it does not comment on enforcement actions.

Brad Lyon, president of San Luis Trust, said Monday that the thrift will be able to comply with what regulators have asked.

“None of it is fun, but for us, it is certainly doable,’’ Lyon said.

San Luis Trust has proposed a two-step approach to raising additional capital, he said. While he declined to discuss the details, he said the hope is to raise $1 million to $1.2 million by year’s end and an additional $2.5 million to $3 million by July. Doing so would help to improve both capital ratios, he said.

Lyon attributed the bank’s current troubles to a tough regulatory environment and the collapse of the real estate market, which saddled San Luis Trust with nonperforming loans.

By the end of the year, Lyon expects that it will have charged off almost $9 million in problem loans and report a year-end loss of about $3.5 million.

About 80 percent of the bank’s charge-offs this year and last year was from land development and construction loans made in 2004, 2005 or 2006, Lyon said. The thrift is currently not making construction or land development loans.

“It’s the lingering negative effect of the market going down,” Lyon said.

With total assets of $403 million as of Sept. 30, San Luis Trust had a net loss of $3.3 million for the nine months ending Sept. 30, compared to net income of nearly $1.8 million in the same period a year ago. The thrift has placed $6.9 million in its provision for credit losses in the nine-month period.

This will be the first year in the 10-year history of the thrift, which was not a beneficiary of the government’s Troubled Asset Relief Program, that it will sustain a net loss. The bank has earned $21 million in net income in the past seven years, Lyon said.

San Luis Trust is the second local bank in as many weeks to be hit with a cease-and-desist order by federal regulators.

Last month, the OTS filed such an order against Los Padres Bank, a Solvang-based savings association, whose parent company is Harrington West Financial Group. It outlined several actions it must take to regain its financial footing, including raising its capital ratios to higher levels by the end of the year.