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Some banks still struggling to pick up the pieces

coverThe view from Roger Plemens office is hard to beat.

Bay windows serve up a bird’s eye view of the Nantahala mountain range, a vantage point that must have been a factor when Macon Bank chose this hilltop for its prestigious corporate headquarters that tower above Franklin.


A far cry from a corner suite on Wall Street, perhaps, but it once was prime real estate for a banking executive in the mountains.

The endless ridges out Plemens’ window were once an enviable empire, covered in dollar signs as far as the eye could see. A land rush was on, and Macon Bank was positioned, unwittingly, right at ground zero.

These days, however, the view isn’t quite so rosy. The dollar signs are gone. They’ve been replaced with big bags of bad debt now hanging like an albatross around Macon Bank’s neck.

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Macon Bank came under federal banking oversight this spring by the Federal Deposit Insurance Corporation, a banking regulatory arm. The bank took hit after hit in the unrelenting wave of foreclosures during the real estate crash, and the FDIC is now monitoring the bank’s progress under a turnaround plan.

Plemens says a turnaround is indeed doable, and the bank is making great strides.

“Things are certainly difficult in today’s economic times, but we are seeing improvement and have been seeing improvement over the past several months,” Plemens said.

For the record, Macon Bank is not at risk of closing. It is deemed “well-capitalized” by the FDIC, the highest classification a bank can have. But, its losses have taken a toll on the bank’s bottom line.

Those losses came in the form of hundreds of foreclosures amid steeply declining real estate values. Property repossessed by the bank was worth pennies on the dollar compared to what the bank had originally loaned.

Just down the road, Nantahala Bank is also operating under FDIC oversight and has been for almost two years now. Tim Hubbs, the president of Nantahala Bank, said it is no reason for alarm, however.

“It is just an agreement between the regulator and the bank that ‘Here are the things we are going to do to make our bank stronger,’” Hubbs said. “It is not that it is going to close or is in imminent threat. We have been well-capitalized the entire time.”

It’s not unheard of for banks to come out from under FDIC oversight. Several hundred small local banks nationwide have landed on the FDIC’s watch list since 2008. Dozens have shored up their finances and gotten off the list. Others were forced to close or merge with another banks.

The majority, however, remain parked on the FDIC watch list. Macon and Nantahala banks could remain on the list another year or two themselves.

“We will probably be there for another couple of years until we start making money on a consistent basis,” Hubbs said of Nantahala Bank.

The real estate melt down in the mountains has caused some carnage in the banking world. Three banks in Macon’s backyard — namely just over the state line in North Georgia — have folded per FDICorders. Blue Ridge Savings Bank and the Bank of Asheville have also been shut down by the FDIC. And the club of banks under FDIC oversight also includes Mountain First based in Hendersonville.

Most likely, banks that are still standing today will remain that way, however.

“We have gotten through the worst of this,” Plemens said.

Foreclosures have tapered off, real estate values seem to have bottomed out, and so any losses the banks were going to see have been realized already.

“The big hits have already occurred,” Hubbs said.

Profits during the high years are also helping them weather the storm.

“The profits we made over the years went right back into capital to make us stronger and help us through the bad times,” Plemens said.

Plemens was appointed president of Macon Bank in 2004 after working his way up through the ranks. The bank had just built a new corporate headquarters presiding on a hillside over town, a testament to the good times.

Plemens appointed his new office with golf memorabilia and décor, but these days it serves only to remind him of the game he once loved. Sadly, he doesn’t have time to play anymore. Steering the bank through rocky times has been a bit time consuming.

He’s never thought of stepping down, however. Plemens has a long history with Macon Bank. He got his first job there 35 years ago as a mortgage loan officer. The bank had eight employees and $27 million in assets. Now, it has 163 employees and $813 million in assets.

“I just kind of grew with it,” Plemens said.


Back to its roots

For 90 years, Macon Bank had been a diligent hometown hero, making neighborly loans for cars, tractors, homes and farms — the meat and potatoes that defined community banking in the mountains.

Macon Bank is settling back into those roots. It’s sworn off loans on speculative building and development. Nor will it make loans on raw land or subdivision lots.

“We are not doing any lot loans now,” Plemens said.

Macon Bank faces a conundrum, however. Making loans is how it makes money, the interest on loans is a bank’s profit. So it wants to make loans — indeed it must make loans — in order to come back, Plemens said.

It’s easier said than done, however. Plemens gestured out his office window. All that land, all those lots — yet the bank can’t make loans on them. If that’s off the table, what’s left?

To realign its portfolio — a portfolio heavily concentrated in lots and land that ultimately proved so volatile — Macon Bank is looking for safe and stable loans: car loans, residential home loans, loans to reputable businesses.

Of course, banks everywhere are in the same boat.

“You’ve got a lot of banks, and we are all chasing the same few customers,” Plemens said.

John Tench, vice president with HomeTrust Bank at its Waynesville office, agreed.

“We are all chasing the same customers and trying to land those valuable relationships,” Tench said.

Low-interest rates helped drive refinances on existing loans, and that has done wonders in filling the void from the evaporating construction and development arena, Tench said.

“Low rates created a whole new avenue of refinance which has kept us pretty busy,” Tench said.

Still, the number of loans banks were making dried up seemingly overnight.

“There was a huge drop off in 2007,” Plemens said. “Typically you see a gradual decline in lendings. But, it was more like a cliff.”

Borrowers who once walked in the doors in droves now have to be courted and won.

“While the demand for loans has gone down some, it is still out there. The type of loan has just changed over time,” Hubbs said.


Growing their way back

There’s another way recovering banks can raise money, and that’s drumming up new investors to inject capital directly into the bank’s balance sheet.

“The way out for a bank that has had tremendous real estate losses is to raise capital — and be more cautious in the foreseeable future,” said Ken Flynt, associate dean of advancement in Western Carolina University’s College of Business and a longtime banking executive.

To that end, Macon Bank contemplated a stock sale last year. Selling stockholder shares could have raised much-needed capital. After testing the waters, however, Macon Bank postponed those plans indefinitely.

“With the economy the way it was, we decided to pull back and do it at a later date,” Plemens said.

At Nantahala Bank, shareholders in the privately held stock company have come back to the table to put in more cash three times during the past two years. The most recent was in May, with $2.1 million being raised among shareholders and the bank’s board.

“We think we were strong enough without their capital, but it gives us that buffer,” Hubbs said. A buffer would be paramount in the worst-case scenario that the real estate market hasn’t hit bottom yet.

The willingness of shareholders to put up more money is a testament to their belief that the bank will pull through.

“I do think we are unique in that. I don’t think it makes us better, but we are blessed to have shareholders that have supported us,” Hubbs said.

In another effort to raise capital by a local bank, HomeTrust Bank became a publicly traded company last year. It was an amazing success story. It raised $211 million through its initial stock offering last July. Shares sold for $10 and are now trading for more than $12.

There was so much demand for HomeTrust stock shares when it went public that it couldn’t accommodate everyone who wanted to buy and had to turn prospective shareholders away.

“We were over-subscribed,” Tench said. Existing customers and buyers in HomeTrust’s geographic market had first dibs in the IPO.

Whether HomeTrust would have gone public had it not been for the real estate downturn is hard to say.


Other banks

Macon Bank wasn’t the only one riding high in the saddle during the height of WNC’s building boom. Local banks across the mountains were caught up in the real estate boom and the lending frenzy it fueled.

New banks were coming on the scene everywhere. Nantahala Bank was one of these, opening its doors in 2004. Mountain Heritage Bank opened that same year just over the Macon County line in north Georgia but has since folded. Mountain Heritage’s stock had plummeted dramatically, from more than $20 per share in 2007 to less than $1 a share in late 2008.

In Haywood County, a new bank seemed like a relative latecomer. It began putting the pieces in place in 2005, but starting a bank, simply put, is a lot of work. There’s shareholders and investors to line up, a board of directors to put in place, regulatory hoops at the state and federal level, charters to be approved.

Meanwhile, the bank’s founders have to drum up community interest before it even opens.

“Before you open your doors you are out there telling people ‘We are opening a bank,’” said Charles Umberger, president of Old Town Bank in Waynesville.

It’s in these first months that a bank’s board of directors and shareholders must work their civic magic, relying on their personal and professional relationships to simultaneously court depositors and future borrowers.

“People say, ‘Oh I know so and so. I trust them. I’ll go put money in the bank,’” Umberger said.

But by the time Old Town Bank officially opened its doors in 2007, the recession was on the horizon. The heyday of the real estate boom was coming to a close — and it was a blessing in disguise.

“If a bank opened in 2004, you open at a time when the momentum was phenomenal with real estate in Western North Carolina. You had an opportunity to grow far more than anybody had expected to grow,” Umberger said.

But riding the boom also meant you signed on for the bust. Old Town was spared from some of the bad debt and foreclosure volumes other banks have seen.

“Some of this is the luck of when we opened. We didn’t have the opportunity to make the decisions on how we would lend money in that type of environment. It was a very aggressive environment,” Umberger said.


Role of local banks

Local and regional banks play a critical role in the local economy. A local board of directors makes lending decisions locally. They donate to local causes in the community. And they know their clients.

“Traditionally, I have found it is always easier to work with a bank that knows the community and knows the people in a community and is vested in the community rather than with somebody in Charlotte or Atlanta,” said Tommy Jenkins, the economic development director in Macon County.

Jenkins said he considers both of Macon County’s locally based banks — Macon Bank and Nantahala Bank — as strategic partners in economic development.

For Tim Hubbs, who became the president of Nantahala Bank three months ago, it’s the community part of community banking that appealed to him. It’s not about making money off loans to out-of-state developers but helping average folks buy houses or business owners expand — providing people needed capital to generally improve their lot in life.

“If you can do that, it is a good thing. That is what banking is about,” said Hubbs, who has served in previous leadership roles at Drake Enterprises and Angel Medical Center.

Having a local board of directors and local loan committee can steer a more prudent path when times get tough, Umberger said.

“They know the local economy more than anybody sitting anywhere else. They know the players. They have done business with the people they are evaluating and lending money to and they know the market,” Umberger said. “That stewardship can make all the difference in the world during challenging local times.”

Ultimately, a bank is only as strong as its customers, Tench said.

“Most community banks really focus on trying to help local businesses and local customers. That is our bread and butter,” Tench said. “Our way of doing business is through ongoing long-term relationships. We’d like to believe we know our customers and our customers’ businesses.”

That role, however, also meant local banks were well positioned to ride the real estate wave as far as it would go.

Macon Bank, for example, was already entrenched as the trusted go-to bank in Macon County, one that had been there for the community long before there were fortunes to be made.

“We had a distinct advantage over the bigger banks. Western North Carolina was not necessarily where they wanted to be,” Plemens said. “They wouldn’t make a loan if it was on a gravel road. They wouldn’t make a loan if it was on a shared well. So we had a niche there.”

It’s a niche local banks are returning to.


Coming next week

Western North Carolina was riding high in the saddle eight years ago. There was a seemingly insatiable demand for mountain lots and homes, and the speculative building boom that ensued created a ripple of wealth through virtually every segment of the economy.

The spigot was flowing — thanks in large part to the millions being loaned by local banks to developers, second-home buyers and speculative land investors.

Were banks complicit in the real estate bubble, aggressively fueling the fire of inflated real estate values and then crying foul when they got burned? Or were banks just another victim of a real estate bust that no one could have seen coming?

See The Smoky Mountain News next week for in-depth coverage on where the real estate market has been, where it is going, the toll it took on local banks and how lending has changed.

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