S.C. small banks on notice

The recent failure of the Beach First Bank of Myrtle Beach is seen by some as an ominous sign for the immediate future of the state’s economy and a number of the state’s small banks. Last Friday, Beach First become the first bank in South Carolina to fail in 11 years. USC Business Finance professor Dr. Jean Helwege  says the failure of the small bank was not a surprise because it was a fairly new business that did not have the time to build up a lot of capital and traditional sources of funding once in got into trouble, considering the tough condition of the real estate market.

“You’ve got a difficult real estate situation and this is a bank that made a lot of bets on that real estate so they’re going to do poorly and it’s not so surprising that it failed. It’s almost surprising to me that it took this long to fail. I don’t see this as the least bit ominous I think it’s just sort of a symptom of what has happened in the past and hopefully it won’t be too many more of them.”

Helwege says small banks that are trouble will get a warning from federal bank regulators including the Federal Deposit Insurance corporation (FDIC) to get their balance sheet in order. That usually means the banks are below the minimum equity requirement of four percent of the assets they hold. Helwege says even if a bank fails, its customers are not in imminent danger of losing their assets, as illustrated by the seamless takeover of the Beach First Bank by the Bank of North Carolina.

“Going forward its doesn’t much matter. The FDIC did a terrific job of giving people their money. It was seamless as usual. They came in over the weekend and on Monday morning it’s a different bank and most of the customers don’t even know it.”

Bank deposits are insured up to $250,000 per account by the FDIC.

Helwege says as recent as a little over 30 years ago, word of a bank’s possible failure would have customers rushing the building looking for their money, but now things are different.

“They would have long lines out to the parking lot because people were worried that they wouldn’t get their money back and they (the FDIC) have done everything they can to make sure that never happens now. They will literally show up with truckloads of cash to make sure no depositor would feel like they couldn’t get their money out and they’ve done so much of this lately. I guess that’s the bright side of this recession in that they’ve had many opportunities to perfect this process that they have become very good at it especially when it concerns very small banks”

Various news reports says that as many as 10 banks in the state have been ordered by federal regulators to get their houses in order.  However Helwege says the banks will be given time to make adjustments by finding more investors or downsizing by selling off assets or loans to other financial institutions.  But she says that would be a poor strategy during this recession because no business will get top dollar for those assets.

“For your basic small bank you have to have four percent of the assets. For example, if you have $100 million in assets you have to have at least $4 million in equity to support the assets.  If you don’t have it, you can go out and try to get some more. They give you the chance to do that, but if you can’t get some more they have the right to shut you down.”

Helwege says if more small banks fail, the worries would be minimal because it is easy for small banks to be absorbed by larger banks. She says real problems develop when large banks have to be sold which can be difficult as we have seen during this recession with Wachovia’s sale to Wells Fargo.