Executives of Nevada Security Bank said last week they're making progress toward meeting requirements set by state and federal banking regulators in an enforcement action.
Essentially, bank executives said, the Reno-based institution needs to raise about $15 million in fresh capital or reduce the amount of loans on its books by about $150 million to get into compliance with a cease-and-desist order issued by the Federal Deposit Insurance Corp. and the state Financial Institutions Division.
The bank signed an agreement with the regulators on June 29 and disclosed the enforcement agreement to the shareholders of its publicly held parent company, The Bank Holdings, a couple of days later.
The state and federal regulators said Nevada Security Bank was operating without sufficient capital, had too many poor quality loans on its books and relied too much on brokered deposits.
Hal Giomi, chairman of The Bank Holdings, said the company didn't necessarily agree with the regulators' findings but decided to save the time and expense of battling them.
He said Nevada Security Bank had made headway on the issues spotlighted by regulators even before the enforcement action.
"We are working closely with our regulators to ensure the bank's financial strength and stability," he said.
He said the bank was particularly hard hit when the federal government's takeover of mortgage giants Fannie Mae and Freddie Mac cost The Bank Holdings about $15 million. The company had held preferred stock in the two mortgage companies as part of its core capital, which it uses as a cushion against loan losses. The value of that preferred stock was wiped out when the federal government took control of the mortgage companies last autumn.
The amount of that loss $15 million is what the company now needs to raise from investors at a time that banks face challenges attracting fresh capital.
The regulators required that Nevada Security Bank get its capital up to specified standards within 90 days.
The Bank Holdings said last week it raised $425,000 through the sale of Granite Exchange Inc., a real estate exchange company in the Sacramento area, to two former directors of Granite.
The bank also has been hit hard by the downturn in commercial real estate and development sectors, where it was an active lender.
"Nevada Security Bank faces unprecedented challenges with the increasing level of non-performing loans, the steep declines in the underlying value of real estate collateral and the greater loan loss provisions required," Giomi said.
The bank imposed a moratorium on construction and land-development lending in late 2007 and has cut its lending to that sector by $63 million in the past two years.
But the deteriorating economy means that the bank has set aside an allowance equal to nearly 4 percent of its total loan portfolio to cover possible losses. Giomi said the allowance, which is about double the average at other Nevada banks, reflects Nevada Security Bank's commitment to resolving problem loans.
The company had a total of $427 million in loans on its books as of March 31.
The bank also reduced its reliance on brokered deposits by $50 million during the first half of this year, replacing those deposits with retail certificates of deposit and money market accounts from customers in the bank's home turf of northern Nevada and northern California.
(Brokered deposits are generated when a bank pays a third party to find customers who will open a certificate of deposit. Regulators worry that brokered deposits may not stick around very long in comparison to deposits from local residents.)
Nevada Security Bank has cut its operating expenses by about $4 million a year, Giomi said, including the closure of five financial centers in 2008 and 2009. It's reduced its staff by 37 percent.
The enforcement order calls for the bank to develop a plan within 60 days to restore itself to profitability.
In the first quarter of this year, The Bank Holdings reported a loss of $166,000.
Shares in The Bank Holdings, which sold for close to $20 in early 2007, were at 60 cents last week.
