Two of L.A.’s largest financial institutions, each operating under an enforcement order from regulators, could face severe consequences as early as this week if they cannot find a way to raise capital.

California National Bank, the fourth largest bank in Los Angeles by assets, and First Federal Bank of California, the county’s No. 2 savings and loan, have been ordered to shore up their capital levels by Sept. 30.

Executives at both banks strongly assert they will be able to meet their deadlines, but the ailing institutions are contending with an unfriendly capital market that has made it difficult for other troubled banks and thrifts to raise money.

“The more problems a bank has, the more difficult it becomes to raise capital,” said Joseph Gladue, a bank analyst for B. Riley & Co., who noted regulatory deadlines especially “make investors nervous” because they highlight the potential for the loss of the investment.

FirstFed Financial Corp., the holding company of First Federal Bank of California, was one of the largest lenders of option adjustable-rate mortgages during the housing boom. Since the real estate collapse, the thrift, with 38 branches and assets of $6.3 billion, has watched loan losses mount.

FirstFed recently saw its risk-based capital level dip below 10 percent, the minimum level at which a lender is considered well-capitalized. Capital, the money that actually belongs to the bank, is a leading indicator of a bank’s financial strength.

FirstFed received a cease and desist order in January forcing the thrift to stop lending and requiring it to develop a plan to remain well-capitalized.

Cease and desist orders are among the most severe enforcement actions taken by regulators and are issued to stop unsafe banking practices, including operating without adequate board oversight or sufficient capital.

Cal National, which has 68 branches and more than $7 billion in assets, sustained massive losses in 2008 on investments in mortgage giants Fannie Mae and Freddie Mac. It has watched its capital levels drop to among the lowest of all California banks. At the end of the second quarter, the bank’s total risk-based capital ratio was a meager 2 percent.

In late May it got a consent order from regulators, which directed the bank to raise capital – essentially to get an infusion of cash –and develop a plan to maintain the necessary ratios by Sept. 30. If Cal National is unable to do so, then the order requires “a disposition plan, which shall detail the board’s proposal to sell or merge the bank, or liquidate” the bank’s assets.

For reprint and licensing requests for this article, CLICK HERE.