Federal regulators have slapped California's Regency Bank with a cease- and-desist order for not having enough capital.
The bank, however, claimed that its capital reached a dangerously low level because it had to compliance with another regulatory order.
The Oct. 28 cease-and-desist order, made public last month by the Federal Deposit Insurance Corp., ordered the Fresno bank to increase its capital to 7% of assets. It had dipped to 5.5% in June.
Steven F. Hertel, president and chief executive officer of $189 million- asset Regency, said its cash reserves were wiped out by losses it took selling its real estate portfolio.
Regency had to sell the holdings to comply with the Federal Deposit Insurance Corporation Improvement Act of 1991. One provision of the law was that state-chartered banks like Regency could not be involved in any business prohibited to national banks, including real estate.
Unfortunately for the bank, it began selling its real estate holdings in 1995 and has had to deal with a sluggish economy in the Central Valley of California. All the area's banks have struggled somewhat.
Banks in the Central Valley averaged a return on assets of only 0.67% for the first three quarters of 1997 and 0.92% for all of 1996. The statewide average ROA through the third quarter of 1997 was 1.24%.
"Even without FDICIA, we would have taken losses," Mr. Hertel said. "But because of the mandate to sell, we had to keep selling-and our earnings took a large hit."
The bank had partners in many of its nearly 2,000 properties, Mr. Hartel said, and it had to buy the partners out, further draining its cash reserves.
At the bank's nadir in 1996, classified assets totaled more than 140% of capital. The FDIC counted the real estate holdings as classified assets.
But Mr. Hertel said Regency is raising its capital reserves. On Jan. 7, Regency announced the completion of a private placement of its common stock that netted $5.9 million.
Regency, which two years ago had about $20 million tied up in land development, now holds less than $4 million. The bank has sold all but 32 of the nearly 2,000 properties it once had a stake in.
The bank would not say whether it expected to increase its capital fast enough to get out of the FDIC's spotlight by the time it is inspected in 1998. But Mr. Hertel said it is off to a good start.
He said that the stock sale helped the bank fulfill its obligation to raise its capital level to 7% of assets, or about $14 million, by the end of 1997. The bank's yearend results have not been released.
