Community Banker of the Year: Heritage Oaks' Simone Lagomarsino

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 Bancorp (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 … 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.

"She has a way of motivating the staff through her genuine caring about the people working for her and that translates into a very productive business," says Iler, now the chief operating officer at South Bay CRE Commercial Brokers.

At Kinecta, Lagomarsino pushed the credit union to originate more home loans and helped strengthen its capital ratio, which had fallen below 7 percent (the trigger level for prompt corrective action).

Jason Obradovich, who also worked with Lagomarsino at Kinecta, says her push into mortgage lending helped turn around the credit union, even while it was dealing with bad loans and hefty loan loss reserves. "We sat in meetings and credit union officers said, 'Mortgages got us into this mess, why are we building out a large mortgage division and a portfolio jumbo program?'" says Obradovich, now a vice president of capital markets at New American Funding, a Tustin, Calif., mortgage lender. "The credit union had difficulty embracing it because it wasn't part of their bones, their makeup, but she pushed for it. She sold them on it, got their support and it was a huge success. Then we rode the refinance wave straight up."

Before Kinecta, Lagomarsino spent a year as chief administrative officer at Countrywide Bank and was previously CEO for five years at Hawthorne Savings, in El Segundo, Calif., before it got sold. She also had a stint at FirstFed Financial, and was CFO at Warner Center Bank, First Plus Bank and Ventura County National Bank.

"Having worked as a CFO, she knows her way around the financials," says O'Brien at Sandler O'Neill.

Because of her familiarity with the region, Lagomarsino was able to quickly identify lending niches at Heritage Oaks that had previously been overlooked. Lagomarsino, who is 52, owns a home and small winery with her husband in Ventura County. (She leases a condo in Paso Robles.)

"As someone with a small vineyard, I can relate to some of the customers here," she says. "Like any business it's important to learn and do your homework."

She likes to point out that Ventura County's population and deposit base are equal to those of Santa Barbara and San Luis Obispo counties combined.

Before the Mission acquisition, Heritage Oaks had opened loan production offices in both counties, where banks have been takeover targets. Notably, Santa Barbara Bank & Trust was bought in December by the parent of Union Bank, while First California Financial, with branches in San Luis Obispo and Ventura counties, was bought in May by PacWest Bancorp of Los Angeles.

"Whenever there is a sale of a bank, there is an opportunity," she says. "As a community bank, I think it's important that our loan portfolio and business reflects the community around us."

Morris, the Heritage Oaks chairman, says that meetings with regulators "are much happier now" than they were a few years ago.

"It's clear to me that these folks really respect Simone and her ability to properly run a bank and her integrity," says Morris. "They know that her word is her word."