When Bank of North Carolina took over Beach First National Bank in Myrtle Beach on April 9, the seller was the first bank failure in South Carolina in 11 years.
Though the state fared better than its neighbors in the Southeast, analysts say pressure is rising at a handful of banks there, and that Beach First's failure is a sure sign of more to come. As potential bidders start circling, Bank of North Carolina — which acquired Beach First with assistance from the Federal Deposit Insurance Corp. — has positioned itself as a contender for future deals.
"When folks realize that there is a very short list of banks that the FDIC allows to bid on failed institutions, and they have to pass a litmus test, I think it puts us in a more elite category — now that we've been approved and done a deal — than we were a week ago," W. Swope Montgomery Jr., the bank's chief executive, said in an interview last week.
Shares of the bank's parent company, BNC Bancorp in Thomasville, have soared 22% since the acquisition, which boosted its assets by more than a third, to $2.2 billion, and brought it into South Carolina. BNC is also planning to raise capital, possibly from private equity, after cancelling a $40 million public offering in November, Montgomery said.
Bank of North Carolina, also of Thomasville, has remained profitable throughout the downturn, and it has better credit quality than most other banks in the state. Its market, an area known as the Triad region, "never participated too much in the boom, and ended up not getting hurt as much in the bust, compared to areas like the coast," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP. He agreed with Montgomery that Bank of North Carolina is well set up to buy more banks in South Carolina.
Montgomery said the bank is "absolutely" seeking to bid on failed-bank deals in the Carolinas, Virginia, Tennessee and possibly Georgia. The company has made only two other acquisitions, both in its home state: Independence Bank in 2001 and SterlingSouth Bank and Trust Co. in 2006.
Montgomery said that, about 18 months ago, the bank started to do more hiring and building an infrastructure to support a $3 billion-to-$5 billion-asset company.
Yet the bank's tangible common equity ratio, which was 4.31% before it bought Beach First, is well below its peers', so it may need to bolster capital soon. Analysts said the Beach First acquisition may make it more attractive to investors.
"They have a story to tell that says, 'Here's what we're going to use the capital for, and here's why it's going to earn a good return,' " said Chip MacDonald, a partner at the Jones Day law firm in Atlanta.
Using the capital to pursue failed-bank deals in South Carolina makes sense, MacDonald said. The state's coast is a big retirement destination, and its demographics are attractive, he said.
"You're going to be insulated from a lot of credit issues, because of the FDIC's loss-sharing, and you're going to be able to take advantage of the economic growth because of the demographics in the area," MacDonald said.
Although the Palmetto State has just 96 banks, a growing number of them are struggling, said Jeffrey Adams, a managing director at Carson Medlin in Raleigh.
Their problems have mirrored those of Georgia and Florida, though nonperforming assets have increased at a much slower rate, holding off bank failures until this month. As of Dec. 31, five banks in South Carolina had a Texas ratio exceeding 100%, a sign that they are on the verge of failure, according to data from Foresight Analytics, a unit of Trepp LLC.
Foresight has 14 other South Carolina banks on its "watch list" — double the number it had at the end of the third quarter.
"As a percentage of the total banks, I don't think you could see the same type of failed-bank environment as you've seen in Atlanta, but South Carolina is certainly going to have a few banks fail," Adams said.