Capital Bank disclosed that it expects to receive orders from state and federal banking regulators to clean up its finances.
If issued a so-called Memorandum of Understanding, or MOU, from the N.C. Banking Commission and FDIC, the Raleigh-based bank would be required to improve its liquidity, reduce its real-estate loans, strengthen its loan guidelines and take other steps to improve its financial health.
The disclosure raises questions about Capital's business. It also throws up another obstacle as the bank seeks to raise millions of dollars by selling more of its stock on Wall Street.
Ironically, the proposed stock sale is designed to raise additional capital and bolster the bank's finances. But winning fans on Wall Street becomes much harder when there is any pending enforcement action from regulators, said Tony Plath, a finance professor at UNC Charlotte.
"A few years ago, an MOU would have been the kiss of death for a stock sale," Plath said. "It's lost a lot of the deleterious effect it once had. There are so many banks operating under these restrictions. But it will be more difficult to raise capital."
Capital CEO Grant Yarber declined to comment, citing SEC restrictions during a pending stock sale.
As with other community banks across the country, Capital has been hit by loan losses, borrowers' bankruptcies and other issues. During the past year, Capital has written off, revalued or sold many of its troubled loans.
"Our Board of Directors and management have already initiated actions to comply with what we believe may be the provisions in a proposed MOU," Capital wrote in a filing with the Securities and Exchange Commission on Monday.
About 40 out of the 86 state-chartered banks in North Carolina were considered troubled by the N.C. Banking Commission in July. The commission isn't allowed to disclose individual bank names or ratings. Doing so could risk a "run" on deposits, which could prevent banks from working through problems.
In July, banking commissioner Joseph Smith said that he expects the number of failures to come will "be low, if we have any," but added that "I can't promise you they're all going to work out."
So far, North Carolina has had only two bank failures, both last year in Wilmington. Some states have lost many more banks. Customers' money is protected by the FDIC.
An MOU is an informal agreement and isn't the toughest step regulators can take. They also can issue a cease and desist order that requires more drastic action.
Not all banks disclose MOUs to investors, but clearly Capital officials decided it was an important risk factor as they market the stock sale, Plath said.
"The bad news it's an enforcement action, but it's fixable if the secondary offering succeeds," he added. "But if they can't raise capital, they will likely be forced to consolidate into another bank."
Capital wants to raise money to increase its capital and for potential expansion, including outside of North Carolina for the first time. The bank has 32 branches across the state.
Last quarter, Capital lost $14.2 million and increased its provision for loan losses to $20 million, up from $1.7 million a year earlier.
Its stock has suffered as investors worry about its prospects and the pending stock sale. The stock price decline also means that Capital won't be able to raise as much by selling new shares.
Capital's stock rose 3 cents today to $1.79 but is down 64 percent this year.