Carolina Federal ordered to raise money or face fallout

Federal bank regulators have ordered a financially struggling Charleston-based lender that dates back 50 years to raise capital or face potentially dire consequences.

Carolina Federal Savings Bank said Wednesday it will be seeking money from investors to comply with the terms of the cease and desist order issued by the Office of Thrift Supervision last week. The enforcement action is one of the most serious the federal agency can take when a bank's finances deteriorate.

The three-branch Carolina Federal said it plans to continue operating as it works through its loan troubles, though some of its business practices are restricted.

"The big thrust is that we do have a plan in place," said Jim Wojewodka, president and chief executive officer. "We're actively working with our regulatory groups to implement that plan."

The OTS issued the cease and desist order based on the results of a March 22 examination of the bank's books. Carolina Federal previously had been operating under a less-severe supervisory agreement with the agency, which is part of the U.S. Treasury Department.

Examiners this year found that the bank had "an inadequate capital protection for the volume, type and quality of assets" carried on its books. Among other shortfalls, regulatory officials determined Carolina Federal had too many bad loans for a bank of its size and that its earnings were insufficient.

In its 15-page order, the OTS gave the tiny lender until the end of the year to increase two key categories of capital to specific levels. Carolina Federal must provide a written plan by Sept. 30 explaining how it plans to do that.

If the bank cannot raise enough money by the Dec. 31 deadline, it will have to submit a contingency plan within 15 days detailing either a merger or a voluntary dissolution, according to the order.

Wojewodka said the bank, like many coastal lenders, has struggled as bad real estate debts have piled up and as the recession has dragged on. He said the majority of Carolina's Federal's loan portfolio is made of mortgages tied to primary residences, vacation homes or rental housing in the Charleston area.

"We're caught up in the economic times where customers don't have the resources to make their loan payments," he said Wednesday.

At the same time, he said, the bank has had to set aside more capital to cover potential losses. Also, legal costs have swelled as Carolina Federal has had to recoup some of its losses through foreclosures and other means.

"It's a double or triple whammy to the income side of the bank," Wojewodka said.

Carolina Federal posted a $500,000 loss for the first six months of this year compared to a $197,000 deficit for the same period in 2009, according to quarterly reports filed with the Federal Financial Institutions Examination Council.

Wojewodka said the crux of the bank's plan to raise capital is to convert itself to a stockholder- owned institution by selling shares to one or more deep-pocketed institutions. Carolina Federal has hired a financial adviser to help line up prospective investors, he said.

The bank was formed as a credit union 50 years ago this month to serve members of a local church. It was run out of a department store on King Street until 1983.

In 1999, the West Ashley-based credit union changed its charter to a mutual savings bank in an effort "to expand and grow with mortgage loans," according to its website. It also changed its name to Carolina Federal Savings Bank and went on to open branches in Mount Pleasant and downtown Charleston.

Wojewodka, who joined the bank in 2006, said he spent the past few days explaining to employees the impact of the OTS order "and what we're doing about it."

"Our next step is to talk to the customers," he said.

One other South Carolina-based lender is operating under a cease and desists order from the OTS. Pawleys Island-based Plantation Federal Bank received its notice on June 30.

The owner of Woodlands Bank in Bluffton had been under the same type of order until it was seized by the Federal Deposit Insurance Corp. last month.

Contact John McDermott at 937-5572 or jmcdermott@postandcourier.com.