Capital Gold Group Report: Regulators list 40 North Carolina banks as 'troubled'

The number of N.C. state-chartered banks in trouble increased 74 percent since October, as delinquent loans and declining real estate values took a toll.

Nearly half of North Carolina's 86 state-chartered banks are on N.C. regulators' list of troubled institutions, up 74 percent in less than a year and a grim record that underscores the strain of the multiyear downturn.

The tally of 40 troubled banks compares with 23 in October 2009. Typically, there are only two or three on the list.

Regulators are legally barred from disclosing individual bank names or ratings. Doing so could risk a "run" on deposits, which could prevent banks from working through problems.

However, banks where conditions have deteriorated significantly are made public. In North Carolina, there are seven of those, according to state and federal regulators' records.

"We work hard every day to try to resolve those situations without failure," said N.C. banking commissioner Joseph Smith. "I can't promise you they're all going to work out."

However, he expects the number of failures to come will "be low, if we have any."

Mergers are one way to avert failure. On Friday, a Virginia bank announced plans to buy one of the seven most distressed N.C. banks, The Bank of Currituck. The bank has six branches in the state's northeastern area, including three on the Outer Banks. The deal is expected to close this fall.

Banks, struggling through the national economic crisis, are plagued by plunging real estate values, delinquent loans and weak loan demand. Locally and nationwide, job losses, weak consumer spending and struggling businesses have made it harder for people to repay mortgages, credit cards and other debt.

Harry Davis, an economist for the N.C. Bankers Association, was surprised by the growth in the number of troubled banks. However, like Smith, he doesn't anticipate a large number of failures.

"The reason there are so many problem banks right now isn't because they were poorly managed," said Davis, who is also an Appalachian State University banking professor. "It's because the absolute bottom has fallen out of the economy."

So far, North Carolina has had only two bank failures, both last year in Wilmington. Some states have lost many more banks. Georgia has accounted for 41 of the 288 failures nationwide since Jan. 1, 2008, according to the Federal Deposit Insurance Corp.

On Friday, two S.C. lenders failed, bringing the state's loss tally to three. All have been federally chartered firms, including the Myrtle Beach bank that failed in April. Friday's casualties were First National Bank of The South in Spartanburg and a coastal S.C. thrift, Woodlands Bank, near Hilton Head.

South Carolina, with 49 state-chartered banks, doesn't maintain "a bank watchlist or a list of banks we're concerned about," said Scott Malyerck, the deputy state treasurer. An Observer review of federal regulatory websites found five state-chartered banks identified as operating under greater regulatory scrutiny.

State-chartered banks are typically community, midsize and regional banks. North Carolina's largest is BB&T, based in Winston-Salem, which passed the federal government's worst-case scenario stress test last year and repaid federal bailout dollars.

National firms, such as Bank of America, are not regulated by the state and so could not be on its troubled list.

The most troubled Carolinas banks - those publicly disclosed - are all smaller banks, which are most likely to lend in their immediate area. That means local woes can quickly yield losses. They also are less likely than large banks to have other revenue, such as investment banking fees, to make up for consumer and small business slumps.

Bank of Granite, for example, is heavily concentrated in Caldwell and Catawba counties, which have been hurt by job losses in the furniture and textile industries. The bank, once lauded by Warren Buffett as one of the nation's best-run community banks, has been operating under a so-called "cease-and-desist" order since August 2009. Those regulatory orders typically direct banks to take specific steps to improve their financial health.

Adding to the pressure, new overdraft fee regulations are expected to reduce what can be an important income stream for small banks.

The last time North Carolina had a lot of troubled banks was about 1990, when 18 of 44 were on the state regulators' watch list. That was 41 percent of the state-chartered tally, compared with 47 percent now. Back then, only one bank failed.

What's next for the industry?

UNC Chapel Hill banking professor Lissa Broome has heard bankers and bank directors talking about declining scores this year.

"We've been relatively blessed," Broome said, noting there have been only two failures. "We're going to have to figure out how to fix the troubled banks."

That's a tough assignment because real estate lending, a key income source for smaller banks, isn't likely to bounce back for a year, maybe several. Commissioner Smith's agenda for getting banks back to health includes helping them generate loan demand, raise capital and pursue mergers.

He faces a delicate balance of not overstepping his role as regulator and becoming a consultant.

"We're not in the business of telling people exactly what to do," he said. However, "we want to encourage banks to keep them healthy."

Smith is working with bankers and the state's small business task force to encourage greater use of government-guaranteed loans, such as U.S. Small Business Administration offerings. Those loans, largely backed by the government, can enable banks to spread around scarce dollars.

Smith, like other experts, also says there are deep-pocketed investors seeking bargains.

"Without apology, I've been working with our banks to attract capital into North Carolina," he said.

Those efforts could lead to consolidation, which Smith views with mixed feelings. He wants to maintain a diversity of banking statewide, including community banks, but smaller banks may be more likely investor targets. Smith says the current investment discussions could be "laying the foundations for some regional banks" that would serve the Carolinas and Virginia.

Smith, a lawyer who has been the state's banking commissioner since 2002, empathizes with the plight of bankers today but calls the problems "resolvable." He sees banks strengthening over the next three to four years.

"I persist in the belief that our system has integrity, and people should trust the banks," he said. "We're trying like heck to help them restructure their business plans."

He also cautions bank customers not to panic. N.C. regulators have said no customers lost money in the state's two failures of this downturn, although investor stakes were wiped out.

Depositors are insured up to $250,000, with higher limits for certain business accounts. There's no similar protection for investors.

"If you're over the insurance deposit limits, get under them," Smith said. "If you're under, you're safe."

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