Ohio Legacy Corp., which is scrambling to raise capital or find a buyer, has joined the list of companies warning of possible failure.
The $184 million-asset Wooster company, which has been plagued by bad construction loans and securities losses over the past few quarters, said last week that its auditors have questioned its viability, because its Ohio Legacy Bank is undercapitalized.
Crowe Horwath LLP included a "going concern" notice in an annual report the company filed with the Securities and Exchange Commission.
In a February cease-and-desist order, the Office of the Comptroller of the Currency gave the bank until Aug. 31 to boost its Tier 1 leverage ratio to 8.75% and its total risk-based capital ratio to 13.25% — well above their current levels.
Because of the capital shortage, Ohio Legacy Corp. said in its annual filing that it has hired Stifel, Nicolaus & Co. Inc. to look for a buyer or investors. The company also reduced its total risk-weighted assets by replacing $28.4 million of mortgage-backed securities with more highly rated investments.
Mike Heller, the president of the bank rating firm Veribanc Inc. in Woonsocket, R.I., said Ohio Legacy Corp. would need an infusion of $7 million to $10 million to achieve the prescribed capital ratios at its bank unit.
Over the past three years the company has been adding construction and development loans to its portfolio and de-emphasizing mortgages. "They are certainly feeling the effects of that switch now," Heller said.
Ohio Legacy Corp. lost $6 million last year after losing $3.6 million in 2007. Last year's results included $2.8 million of other-than-temporary impairment charges on Fannie Mae and Freddie Mac investments; most of the charges were recorded in the third quarter.
Kevin Jacques, a professor and the chairman of the finance department at Baldwin-Wallace College in Berea, Ohio, and a former OCC regulator, said the order indicates that regulators see Ohio Legacy Corp.'s situation getting worse.
"The OCC sees some significant credit risk problems here," Jacques said. "They are saying, 'We are not comfortable with the way you are measuring and managing your risk, and we are clearly worried that you do not have enough capital to absorb losses.' "
At yearend 4.75% of the bank's loans were not current, according to data from the Federal Deposit Insurance Corp. It had a Tier 1 leverage ratio of 5.27% and a total risk-based capital ratio of 8.26%. Typically regulators require a Tier 1 leverage ratio of at least 5% and a total risk-based ratio of at least 10% for a bank to be considered well capitalized.