N.C. Bank Wins Partial Appeal of Fed Edict

The Federal Reserve Board has shown a partial change of heart toward a banking company, though in the case of Waccamaw Bankshares Inc. it took persistence and a sense of urgency to make it happen.

The issue of appealing regulatory edicts is a hot topic in Washington, as lawmakers consider a House bill that would set up an independent appeals process for banks that receive a low exam rating and provide new guidelines for agencies regarding the treatment of commercial loans.

Waccamaw, however, is an example of a banking company that successfully navigated the appeals process, convincing the Fed's Board of Governors to loosen up a little. The Whiteville, N.C., company last month managed to successfully get half of a $16.4 million capital infusion to count as Tier 1 capital. Still, it took a long time — and three appeals — for the company to get a partial reversal.

"The frustrating part is it took us a year to get to where we are," says Geoffrey Hopkins, Waccamaw's president. "It took a lot of money, it took a lot of time and it took a lot of frustration."

The partial reversal came roughly a month after Waccamaw received a prompt corrective action from the Fed. Hopkins says he expects the amended ruling on the capital to improve the bank's status from its current "critically undercapitalized" designation, giving management a change to craft an exit strategy.

The Fed's decision "just gives us some time to hopefully, raise additional capital or seek strategic alternatives," Hopkins says. "Everything is on the table. [The ruling] doesn't get us out of the woods. We're a troubled institution and we realize that . . . but it does give us time."

Still, the entire process has made it hard for Hopkins to call it a win. "I wish we didn't have to go through this. I felt like it did a lot of damage to the bank publicly," he says. "Over time, it will fade into the background but we'll never be able to get out from under the effect it had on our reputation."

The Fed called into question a series of transactions Waccamaw made in 2010. In September of that year, the $562 million-asset company sold some nonperforming assets. Three months later, it bought a portfolio of home equity lines of credit from that same entity that bought the bad assets.

Finally, Waccamaw sold $16.4 million in preferred stock to an investor group affiliated with the company involved in the other asset transactions. Last year, the Fed refused to allow the stock sale count towards Waccamaw's Tier 1 capital, saying the transactions were too closely related and that Waccamaw "likely" overpaid for the HELOC portfolio. The Fed determined that, in a sense, the banking company had self-funding its own capital.

Banks and investor groups "are being very creative and they're trying to figure out how to sweeten a deal so the bank doesn't take a hit" from valuations in the portfolio it buys, says Jerry Blanchard, a lawyer at Bryan Cave. "There is a lot of concern from the regulators in banks accounting for all the transaction and how they work economically and whether it is true capital."

Lawyers say Waccamaw's outcome is a rarity because few banks formerly appeal and far fewer win. Even the timing of the overturn was odd; a week later, federal regulators spoke out against a bill, sponsored by Republican Rep. Shelly Moore Capito and Democratic Rep. Carolyn Maloney, that would change the appeals process.

Regulators spoke out against the bill before the House's Subcommittee on Financial Institutions and Consumer Credit earlier this month, stating it would raise safety and soundness concerns specifically when it comes to deterioration of capital levels and asset quality.

"These provisions also fail to recognize that the regulatory definitions for the various capital thresholds were designed to apply generically to banking firms," said Kevin Bertsch, the Fed's associate director at the division of banking and supervision, during testimony on Feb. 1. It does "not take into account the idiosyncratic risks at individual firms or the potential effects on a bank's capital position of risk-management deficiencies or concentrations in problem assets."

Bertsch said the Fed already has "a robust appeals process," with an independent ombudsman "designed to provide institutions with a fair and fulsome review of complaints." Ten appeals were filed with the Fed last year, he said.

On Friday, Senate Banking Committee Chairman Tim Johnson issued a letter to inspectors general, probing the federal banking agencies' exam and appeals processes, both formal and informal.

Waccamaw, which now has to restate results for 2010 and 2011, seems respectful of how the Fed handled its case. Hopkins says the Fed was "very understanding and invited us to appeal."

Waccamaw began the appeals process in June, going first to a review panel of Fed staff outside its district and then to Jeffrey Lacker, president of the Richmond Fed. Waccamaw was denied in both attempts until it reached the Fed's Board of Governors, which on Jan. 26 granted $8.4 million of the investment as Tier 1 capital. The remaining amount must be discounted from the company's HELOC portfolio.

Hopkins says the Fed's decision was changed after the company proved it did not overpay for the HELOC book by providing documented valuations it received when the deal closed. The contract also had a clause that if the values of the HELOC portfolio fell below a specific threshold, the seller would substitute the difference.

"In the end, I think we all learned a lot, both for us and for them," he says. Hopkins says his company still has a ways to go before it can fully meet the terms of the prompt corrective action and return to good health. The delisted company has not filed a quarterly financial report with the Securities and Exchange Commission since late 2010. The company also has several agreements to sell certain assets, including 11 branches in North Carolina and South Carolina.