Capital Bank made loans to developers in scheme

A real estate scheme in the mountains of North Carolina that allegedly bilked consumers of $100 million has ensnared a few banks as well.

Raleigh-based Capital Bank is among four banks that have reported concerns related to the suspect development. However, CEO Grant Yarber said the bank's financial risk is minimal.

Capital made three loans totaling more than $1.5 million related to the Mitchell County development. But Yarber said that, unlike other banks that have reported concerns, Capital is confident that the largest loan by far -- $1.2 million -- is backed by sufficient collateral.

"The potential loss to Capital Bank would be in the hundreds of thousands, not millions," Yarber said.

Capital disclosed its exposure Thursday -- even though it won't have a material impact on its finances -- because analysts who follow the bank for investors wanted to know if it was at risk. Capital has more than $1 billion in outstanding loans.

The bank issued a news release after the markets closed Thursday.

Last week, state Attorney General Roy Cooper accused developers in Mitchell County of defrauding consumers by promising that they could make a profit on real estate without investing their own money. The attorney general's office persuaded Wake County Superior Court Judge Michael Morgan to halt the venture and appoint a receiver to take control of the developers' operations.

Charlotte-based First Charter Corp. reported that it made 67 loans totaling $13.6 million to consumers who purchased lots in Mitchell County based on inflated appraisals. As a result, the bank said its portfolio of bad loans could increase.

Two out-of-state banks with operations in the western part of the state -- United Community Banks of Georgia and South Financial Group, the South Carolina-based parent of Carolina First Bank -- reported making loans of $23.8 million and $21 million, respectively. The latter estimates that it could end up writing off half the loans, or $10.5 million, as a loss.

Yarber said he expects additional banks to report concerns.

The attorney general's office doesn't yet know which other banks might be affected, spokeswoman Jennifer Canada said.

Two banks that are major players in the Triangle market, RBC Centura and SunTrust, said they haven't discovered any loans related to the scheme.

According to the attorney general's lawsuit, the developers convinced consumers to apply for mortgages to purchase multiple lots at $125,000 each -- far above their tax value. Under one scenario, the developers promised to make the mortgage payments and buy the lots back from the consumers at the same price within three years. The lots would then be developed, and the consumer would be paid $100,000 when each home was sold.

"As defendant developers explained it [to investors], by selling the lots in this manner and having the consumers apply for credit in their own names, defendant developers would be able to obtain more capital than the banks would be willing to extend directly to the developers themselves," the lawsuit states.

However, the lots were never developed, and one developer recently told investors that their monthly mortgage payments would no longer be covered.

One of Capital Bank's loans, for $1.2 million, was made to principals of the development firms to buy undeveloped land "before any of the frauds took place," Yarber said. The tax value of the lots is close to the value of the loans, he said.

About 18 months ago, Yarber said, the developers approached Capital Bank about providing financing for individuals interested in buying lots.

"We declined to participate in that," Yarber said. "It was speculative."