More pain likely for San Luis Obispo County banks

San Luis Obispo County banks and thrifts continued to take hits from the recession in the third quarter of this year, sustaining losses, working through problem loans and beefing up reserves for future losses.

“It was a difficult third quarter, not just in our market but on a national scale,’’ said Tom Sherman, president of San Luis Obispo’s Founders Community Bank.

Banking officials say there’s likely more pain to come as the commercial real estate industry suffers.

“There are things we already know about that banks have been reserving for, and there are things that we are beginning to hear and see from bank regulators and others that may be coming in the future,’’ Sherman added.

“In particular, commercial real estate is projected to be the next shoe to drop, and so a lot of banks across the country, as well as locally, have taken the opportunity now to reserve for losses that may result from that segment.”

Economists for the UCSB Economic Forecast Project recently noted that the commercial real estate market is in the early stages of a downturn. A separate report prepared for the group by Stafford-McCarty Commercial Real Estate noted that vacancy rates have increased, and the county should expect to see more sales transactions next year “as leveraged property owners” seek to dispose of troubled assets.

Regulators’ requests

For several local banks, the current economic environment is especially tough as they deal with losses and work to raise more capital in response to requests from federal regulators.

Pacific Capital Bancorp, parent company of First Bank of San Luis Obispo, entered into an agreement earlier this year with the Office of the Comptroller of the Currency — the federal regulator of nationally chartered banks — to devise a plan to maintain adequate capital and sustain earnings. It also agreed to maintain certain capital ratios, essentially assets and cash relative to a bank’s risk profile. It is one way regulators measure a bank’s capital adequacy and its overall financial well-being.

As of Sept. 30, Pacific Capital exceeded the capital ratios to be considered “well-capitalized” according to regulatory guidelines.

However, its Tier 1 leverage ratio and total risk-based capital ratio — 5.6 percent and 10.8 percent respectively — failed to meet the higher levels set forth in its agreement with federal regulators.

George Leis, president of the bank, said in a third-quarter earnings release that the bank’s capital ratios “remained relatively stable during the third quarter,” and that it was “actively exploring possibilities for further strengthening” its capital position.

The bank, which recorded a third-quarter loss of $40.7 million, declined to elaborate on how it planned to raise additional capital. Officials also declined to say whether the company was looking for a buyer or seeking a capital infusion.

“We will not be making any comments regarding the strategic review unless and until we have something definitive to announce,’’ said Debbie Whiteley, spokeswoman for Pacific Capital Bancorp.

Last month, Solvang-based Los Padres Bank received a cease-and-desist order by the Office of Thrift Supervision, the federal regulator of savings associations. The agency had requested that Los Padres have a core tangible ratio of 4 percent and an 8 percent total risk-based capital ratio as of Nov. 6.

By Dec. 31, the OTS has stipulated the thrift maintain a Tier 1 core capital ratio of at least 8 percent and a total risk-based capital ratio of at least 12 percent.

Harrington West Financial Group, the parent company of Los Padres Bank, announced this month that it had reduced its total assets, improved its capital ratios and had reached the goal of being adequately capitalized as of Nov. 6. Its risk-based capital ratio is now above 8 percent and core tangible is at 7.5 percent, said Craig Cerny, chairman and chief executive officer.

The company, which posted a net loss of $4.1 million in the third quarter, was able to strengthen its capital position through a combination of moves, including the sale of its Kansas banking operations to Arkansas-based Arvest Bank for $4.1 million. As well, the bank, as a result of a change in federal law, will be allowed to recapture taxes it had paid as long as five years ago when it was profitable (instead of two years) thereby helping to mitigate current losses and increase capital.

Cerny said the company is making progress and is in “pretty intense discussions’’ to raise capital so that it will reach its goal Dec. 31.

San Luis Trust Bank also was hit with a cease-and-desist order from the agency, which has ordered the San Luis Obispo institution to strengthen its capital ratios. 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.

Brad Lyon, president and CEO of the thrift, recently told The Tribune that it will be able to accomplish those capital ratio goals by reducing its overall assets.

As well, the bank is trying to do a private placement preferred stock offering, and if it is successful next month, “that will make it that much easier (to achieve capital ratios),” he said.

Deposits increase

Despite some looming uncertainties, there are a few bright spots for community banks. Among them is an increase in deposits as people “see the safe haven of a bank,’’ Sherman said.

“Deposits growing are a good sign for the local economy,” he said.

Even so, with the real estate industry still showing signs of weakness and many businesses struggling to survive, local financial institutions are likely to experience more bumps as the economy heads toward recovery.

“If I look into my crystal ball, it’s looking like May or June before we (banking industry) feel like we’re coming back up off the deck,’’ Sherman said. “It could get a little uglier between now and then, but not too much so after that. That’s when the rebound will start to feel perceptible.”