Simone Lagomarsino has helped turn around a lot of banks, but she'd never seen one in such bad shape. When she took over as CEO of $1.1 billion-asset Heritage Oaks Bank (HEOP) in Paso Robles, Calif., two years ago, she was handed a lengthy to-do list in the form of a regulatory consent order.
"There were 21 or 22 items we had to address," including cutting back on commercial lending and boosting loan loss provisions, Lagomarsino says.
Many banks in California's Central Valley region had remained profitable after the financial crisis because they had a much lower concentration of problem real estate loans — but not Heritage Oaks.
Construction and land loans had swelled to 20 percent of its credit portfolio, whereas many rivals had limited their concentration to less than 6 percent.
Yet in a phenomenally short amount of time, Lagomarsino has righted the ship. Heritage Oaks, which lost a combined $30 million in 2009 and 2010, returned to profitability in 2011.
The bank had raised $60 million in capital before Lagomarsino's arrival, and that helped provide the underpinnings to execute on a recovery plan. Under Lagomarsino, Heritage Oaks also had the advantage of generating solid pre-tax, pre-provision earnings and a strong deposit base to offset chargeoffs and provisions, which helped speed up the turnaround, says James Lynch, a managing partner at Patriot Financial Partners, the bank's second-largest shareholder.
"A lot of bank CEOs are one-dimensional — they focus only on problem assets or the expense base," says Lynch, a former vice chairman of Sovereign Bancorp. "But Simone was multitasking and was able to keep the core business momentum going and to replace the problem loans with good earning assets."
Through workouts and loan sales, she whittled down nonperforming assets to $8.4 million as of Sept. 30, a 40 percent drop in one year and 83 percent off the peak of nearly $50 million in early 2010, dramatically improving the bank's risk profile.
In the third quarter, loans grew 15 percent to $777.2 million while deposits rose 12 percent to $957 million.
The Federal Deposit Insurance Corp. and the California Department of Financial Institutions terminated their consent orders with Heritage Oaks in early 2012, and ended subsequent memorandums of understanding in early 2013. Heritage Oaks hit another milestone early this year when it repaid the Treasury Department $25 million of Troubled Asset Relief Program funds.
Even more surprising, just a month after the Federal Reserve Bank of San Francisco ended its own MOU, the bank's last regulatory order, Heritage Oaks announced a big acquisition. In October, it announced it had agreed to pay $56.4 million to buy the $447 million-asset Mission Community Bancorp in San Luis Obispo, Calif., making it the second-largest bank in the area.
The purchase would have been unthinkable without Lagomarsino's efforts at cutting costs, improving credit quality and identifying new areas for loan growth. The sale is expected to close in the first quarter of 2014.
"She's a seasoned pro," says Tim O'Brien, a managing director at Sandler O'Neill & Partners, which advised on the deal. "Her skill set, personality and people strengths, make her a pretty solid CEO. She takes care of business."
Heritage Oaks Chairman Michael Morris, who led the executive search that brought Lagomarsino on board in 2011, says she immediately stood out.
"I was blown away at how well-informed she was," Morris recalls. "She had a vision of where she thought we could go, and how we could get out of the (consent) order."
One of Lagomarsino's first steps was to analyze Heritage Oak's cost structure and compare its financial results to other banks in the region. When expenses were found to be out of whack, she closed three branches and laid off 47 employees. But she then turned around and hired 20 new loan officers as part of a growth strategy.
These new frontline lenders, poached from Rabobank, Wells Fargo and others, included a team focused solely on agribusiness lending. That area has proved to be fertile ground for loan growth in the bank's own backyard of Paso Robles, a burgeoning wine-making region.
Laying off longtime employees and replacing them with new hires can be a tricky proposition. Lagomarsino likes to quote from Jim Collin's best-seller "Good to Great: Why Some Companies Make the Leap â€¦ and Others Don't," to explain her approach to staffing.
"You get the right people on the bus, you get them in the right seats and you get the wrong people off the bus," she says. "It takes time and in some cases that's why the middle part is important. You may have the right people that are not in the right seat. You can have the most talented players, but if they don't work well as a team, you'll still lose. We're only as strong as the people around us."
Dave Iler, who worked for Lagomarsino when she was previously CEO at Kinecta Federal Credit Union, was so impressed with her skills that he followed her to Heritage Oaks, even though he had to brave a five-hour commute every week from his home in Long Beach, Calif.