Brake the banks.

• Author: Brown, Kathryn
• Position: Assessment of North Carolina banks' assets and liabilities

The Fed frets that good times lead to loosey-goosey loans that go bad when times get tough.

When Darius Davis took over as president and CEO of United National Bank in January, he faced an immediate problem. The Fayetteville bank's nonperforming assets - foreclosed real estate and loans renegotiated or written off as uncollectible - were a hefty 5.46% at the end of last year. That was worst among Tar Heel commercial banks and trailed only savings and loan Blue Ridge Savings Bank in Asheville.

Davis, formerly an assistant vice president of private banking at Wachovia Corp., has made raising United National's lending standards a top priority. "We need to go back to making deals tighter," he says.

LOSING THEIR ASSETS Worst nonperforming-asset rates(*) Blue Ridge Savings 9.39% United National 6.36 Mutual Community Savings 3.04 First Carolina Federal Savings 2.30 Mitchell Savings 1.72 First Federal Savings 1.35 First Federal S&L 1.25 Peoples 0.97 East Carolina 0.95 Home Federal S&L 0.93 Randolph Bank & Trust 0.89 Surrey Bank & Trust 0.88 Cherryville Federal S&L 0.88 Four Oaks Fincorp 0.87 Macon Bancorp 0.84 * as of 3/31/98 Source: SNL Securities LC For one thing, the bank is requiring personal guarantees, such as a lien on a primary residence, for some customers, which it had stopped doing. And it is being choosier. Its credit officers are doing more analysis of business borrowers' industries, considering, for example, how economic cycles could affect repayment. "We're being sure we evaluate everything thoroughly."

Federal Reserve Chairman Alan Greenspan would give Davis a pat on the back. The Fed is imploring banks to tighten lending standards and in late June wrote a letter cautioning them to stay prudent. Why the concern? With the economy in overdrive, the Fed fears banks may be in such competition for customers that they are lending money too freely. Practices such as lower pricing and liberal repayment schedules could leave banks stuck with a bundle of bad loans if the economy bottoms out.

The warning comes at a time when problem loans nationally are at a decade low. But that's exactly what makes Greenspan nervous. "Things are so good we may forget we're fallible," says Tony Plath, a finance professor at UNC Charlotte.

North Carolina banking has fared better than most. Of the state's 108 financial institutions, all but 16 are below the national average for nonperforming assets, as of the end of the first quarter. As a whole, their 0.40%...