Local banks rebound, but at a cost [News & Record, Greensboro, N.C.]

Aug. 19--GREENSBORO -- Chances are, your local community bank is stronger than it was in the dark days of 2009.

But it may come at a cost to hometown customers.

Banks are now struggling to keep their community touch as they face the cold realities of the new economy.

Federal insurance always has protected local depositors, but a community bank's troubles send ripples through a hometown's financial world.

The 10 community banks based in such Piedmont Triad towns and cities such as Greensboro, High Point, Asheboro, Oak Ridge and Winston-Salem have spent the past three years working to unload bad loans and repossessed real estate.

Tony Plath, an associate professor of finance at UNC-Charlotte and an authority on North Carolina banks, said the financial health of Triad banks is a mixed bag. But they're trying to improve.

And most of them are succeeding.

The most troubled bank -- Asheboro's CommunityOne Bank -- dodged a near-death experience when in 2011 two New York equity investment companies injected $77 million into the bank and allowed it to merge with Bank of Granite in Granite Falls.

CommunityOne, a $1.6 billion bank, still faces troubles, but it also has new management, more capital to work with and a clear-cut plan to achieve its goals.

Plath said CommunityOne's recovery is "a work in progress as yet, but to say the trouble continues is not fair."

Full recovery, he said, is "a 12- to 18-month process. They are continuing to struggle, but the struggle is eased dramatically with that infusion of capital."

As local banks grow stronger, accepting infusions of cash from far-flung venture capital funds, they're also taking a harder look at local lending policies.

That may cause them to pull away from their defining characteristic -- "community."

If banks like Wells Fargo or Bank of America are considered impersonal, community banks have long been known for a strong connection with depositors and borrowers.

Now they're more disciplined, better financed, and able to expand.

That also reduces the options for small-town borrowers.

"In the old days, when you got turned down by one bank, you went to another of the smaller banks and you got accepted," Plath said.

Community banks had differing personalities, and their policies were based on boards with differing standards, customers with differing expectations.

"The bank ... made loans based on personal relationships and close proximity to the community," Plath said. "That's what made those unique and that's what's going away."

Serving two masters, the community and big money equity investors, can be tough.

Winston-Salem's Southern Community Financial Corp. will soon be sold to Capital Bank Financial Corp. for $52 million after struggling to lower its troubled assets.

The new owners recently replaced the local management, severing a decade-long personal connection to the community.

With new owners come higher performance standards.

CommunityOne got major investors and strong task masters, as the bank's CEO described it, when Carlyle Group and Oak Hill Capital Partners invested $77.5 million in common stock.

CommunityOne is the bank that teetered on the brink of failure during the financial crisis years, nearly drowning in bad real estate loans and investments seven times its capital reserves.

Its bad assets are still too high, $193 million compared with backup capital of $152 million.

But with the $77 million and a clear plan to eradicate the bad assets, Plath and CommunityOne Chief Executive Officer Brian Simpson said the bank is at least surviving and on the road to thriving.

"The viability of the institution is no longer in question," said Simpson, who was hired after previous management departed. "All would agree that was not the case a few years ago."

Plath said the bank may have to work hard for up to 18 months to fully right its ship.

But with the urgent supervision of the equity investors, Simpson has a plan for doing that.

The first task is to clean up and clean out the bad assets that are hanging over the bank and keeping it in dangerous territory.

That involves working out payment plans with business borrowers that still are making some money, revising mortgages with homeowners and making sure all borrowers who are able to pay even a little bit contribute to CommunityOne's bottom line.

It also involves selling the real estate it repossessed from borrowers who used land and buildings for collateral. That's the hardest job for a bank because the market dictates demand.

The second task is to continue to focus on the community. Simpson believes that's still possible, as the banks sort out their financial problems.

Both Bank of Granite and CommunityOne are roughly 100 years old with 63 branches , and Simpson said that's an intangible asset they can't afford to abandon.

"We want to continue to service those communities and those relationships for another hundred years or more," he said.

The final job, he said, is to make sure the merged banks operate with uniform standards and well-organized support at headquarters.

Simpson said, "The worst of the storm is over and clouds are beginning to clear.

"There's still a fair amount of rain in the forecast. But it seems to be tapering."

Another obstacle fell in May when a federal court lifted a deferred prosecution agreement against the bank, allowing it to pay $400,000 in restitution for a $40 million ponzi scheme created by one of its depositors.

Prosecutors delayed the payment so the bank could shore up its finances.

Court documents alleged that CommunityOne failed to detect the fact that Keith Franklin Simmons of West Jefferson deposited and withdrew $35 million from the bank from 2007 through late 2008. On May 23, Simmons was sentenced to 50 years in prison.

As CommunityOne emerges from its difficulties, other banks in the region have worked hard to shore up trouble spots.

Plath also compliments Greensboro's NewBridge Bank for solving potentially dire problems with no outside capital and turning a profit.

In 2008, the bank lost $60 million while its troubled assets began to mount quickly.

The bank began aggressively cutting expenses, laying off some employees and writing off bad loans, according to its financial statements.

Now the bank regularly turns a profit, recently reporting a $921,000 profit for the second quarter.

The region still has work to do, as does the rest of North Carolina.

With high unemployment, smaller banks in the state are lagging the nation.

Jim Strader of the Federal Reserve Bank of Richmond said Fed economists report that half the banks in the state are operating in a "below satisfactory" rating, which lags behind the nation.

Those banks will prosper only when the entire state sees an economic recovery.

Contact Richard M. Barron at 373-7371 or richard.barron@news-record.com

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