Darkness before dawn: economic forces that mauled major banks still stalk those that aren't too big to fail.

• Author: Maley, Frank
• Position: COVER STORY

As the U.S. financial system staggered to the brink of collapse last September, Buddy Greenwood watched events unfold with growing concern. As CEO of Weststar Financial Services Inc., he runs its sole subsidiary, Bank of Asheville. This BofA little resembles the behemoth a two-hour drive away in Charlotte. It occupies the bottom floor of a three-story building on the outskirts of an eccentric mountain metropolis, not a preening 60-story tower in the heart of what was then the nation's second-largest financial hub. Bank of Asheville would have to see its $203 million in assets grow 8,993 times to match Bank of America Corp.'s. When his iconic New York brokerage stared death in the face, Merrill Lynch's leader didn't pick up the phone and call Greenwood; he called the other BofA--much to its shareholders' eventual chagrin.

Though far from the epicenter of the temblor, Greenwood could feel the landscape shifting. "You're concerned about the ripple effect, because you know it's going to impact your customers and it will have some residual effect on the bank." Bank of Asheville has had to restructure loan-payment schedules to accommodate slowing customer cash flows during the recession, but its deposits, like those at many other community banks around the state, have increased as customers of shakier, sometimes larger, banks sought refuge from the upheaval.

The vast majority of North Carolina banks, including Bank of Asheville, appear poised to survive the downturn, but many Tar Heel bankers still live in fear of what tomorrow will bring. While Bank of America grabs attention with big deals gone awry, worrisome capital levels and leadership shifts, smaller institutions struggle in its shadow with woes of their own. Most have been pinched by bad loans and difficulty finding the money to cover them. And the longer the economy stays in the tank, the worse their position is likely to get.

Many of the big banks are laying off workers, but capital infusions from the federal Troubled Asset Relief Program make them unlikely to fail. "Smaller banks have a much tougher row to hoe," N.C. Commissioner of Banks Joseph Smith says. "If you're not too big to fail, if you're not systemically significant, you'd better keep your nose clean because you don't get that kind of support in a downturn."

Smith likes to crack jokes--some of them funny--but about that he's dead serious. He shut down Wilmington-based Cape Fear Bank Corp. in April, and three others formally have been warned to change the way they do business--just as Cape Fear had been. The admonitions aren't necessarily preludes to failure, but they're signs of banks heading in that direction. When the downward spiral will stop is anybody's guess. The savings-and-loan crisis of the late '80s and early '90s took down 10 North Carolina thrifts in five years. Smith says this crisis won't produce that many casualties, but he doesn't guarantee that Cape Fear will be the last Tar Heel bank to fail. Some still standing have even scarier numbers.

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