How to break the bank.

• Author: Wittebort, Suzanne
• Position: First Hanover Bank - Includes related article on portfolio - Cover Story

With loose lending, which put First Hanover in a tight squeeze. To ease pressure, regulators pulled the plug.

State Commissioner of Banks Bill Graham vividly remembers the moments just before First Hanover Bank officially failed. At 10 minutes to 6 on Friday, Oct. 25 of last year, he was standing near a window in the bank's headquarters on 17th Street in Wilmington with Jim Ross, the bank's president of two months. Through the vertical blinds, Graham could see a phalanx of Federal Deposit Insurance Corp. personnel, 30 or 40 strong, computers tucked under their arms, descending on the bank and its branch just across the parking lot. A truck had pulled up, and a giant copying machine was being unloaded to meet the FDIC's prodigious needs. Armed deputy sheriffs were taking up positions near the bank entrances.

And, apparently unaware of these flaming signals that something was very wrong with their bank, customers were still racing to deposit their money. "Honest to goodness, I saw some guy pull up in a pickup truck at 3 minutes to 6 and run into the bank because he wanted to get his deposit in before 6 o'clock," Graham recalls. "And I'm waiting there with Ross at my side getting ready to give me the keys."

Bank failure, North Carolina style. But First Hanover's customers can't be blamed if they didn't recognize the signs of imminent bank seizure. After all, the last bank to fail in the state was the Bank of Black Mountain, in 1943. And, as it turned out, none of First Hanover's depositors lost money. All four of the bank's offices reopened the following Monday as branches of Durham-based Central Carolina Bank & Trust. Over the weekend, automated teller service purred on uninterrupted.

Smooth as the transition was for most customers, First Hanover's was not a victimless collapse. Among the biggest losers were the roughly 700 shareholders, who saw an aggregate investment of some $4.5 million simply vanish. "We're all disappointed, I'm sure. I'm pretty disgusted with it," says Miller Cash, owner of a Fayetteville refrigeration company who, with nearly $250,000 in stock, is believed to have been First Hanover's biggest investor.

There were customers who did suffer: Spooked by bad publicity, some depositors withdrew savings prematurely and paid penalties, while some borrowers who once enjoyed a cozy relationship with a hometown bank now had to deal with the FDIC. And, of course, there is the FDIC itself, which ended up with roughly $30 million in loans and won't recoup it all. FDIC losses in recent bank failures have averaged 17% of total assets, which in First Hanover's case would equal an $8.1 million hit.

Also suffering were the board members, shareholders all, burdened with disappointment and embarrassment. Many had persuaded friends and family to invest during more hopeful days. These ex-directors are now hanging fire, vulnerable to lawsuits by the FDIC and disgruntled shareholders. One or more may be charged with crimes as the result of an ongoing investigation by the FBI. "A lot of people who were well-thought-of in this community are now smeared," a local banker says. "People who purchased stock don't view them in the same light. A lot of friendships and reputations have been damaged."

Trying to save the sinking bank was a bitter experience for many officers and employees as well. "It was a nightmare. I still think about it every day," says one, five months after the closure. Says another: "Everyone associated with it has been hurt."

For bankers, any illusion that North Carolina banks are somehow immune from the difficulties of the rest of the industry has been dispelled. "It can happen here," says Tom Schlesinger, director of the Southern Finance Project, a Charlotte-based policy group.

The state's stable, diversified economy and branching laws that have allowed banks to spread their risks have fostered a strong banking industry but plainly are not proof against failure after all. Says Rick Willetts, president of Cooperative Bank for Savings, Wilmington's largest locally headquartered bank: "If it could happen in this area in this economy, it could happen in any area, in any economy." Adds Glenn Orr, chairman and CEO of Lumberton-based Southern National Bank: "Any time a bank goes under it's a black eye for the whole banking industry in the state. It's a matter of pride as much as anything else."

First Hanover's is a story of good intentions and bad banking. The bank ended up a "last hangover" of the '80s, as one banker has dubbed it. One of 124 U.S. banks to fail last year, it helped punctuate the end of an era when many lenders across the country financed a boom with more optimism than sense. Straying from its mission as a community bank, First Hanover tried to ride a swelling real-estate market the way surfers ride the waves off Wrightsville Beach. But when it hit the '90s, with their leaner times for developers and tougher regulatory environment, it wiped out -- a victim of its own bad judgment.

The germ of the idea that was to become First Hanover was coaxed into existence in the mid-'80s by two young bankers, Dale Caines and Bob Segal. They had met in 1982, when Caines was regional executive for First Colony Savings & Loan in Southern Pines. Segal, a CPA, had been sent from High Point accounting firm Dixon, Odom & Co. to serve as acting CFO for the struggling thrift. A few years later they met again in Greenville, where Caines had been transferred after North State Savings & Loan, another troubled S&L, acquired First Colony. Again, Segal had been brought in as acting CFO. The two men shared several dinners and soon a dream: to start their own bank.

Both were attracted by the challenge of running their own show. Segal says, "We'd seen the mistakes others had made, and we thought we had learned from their experience." Caines was longing to return to his native Wilmington, and Segal, originally from Ohio, was powerfully attracted by the thought of living near the ocean. "We saw an opportunity to start a bank in a town where we wanted to live and provide a local service to the community," Segal says.

They made a good team. Caines, tall and burly with a shock of dark hair sweeping his forehead, was charming...