The failure of Carolina Federal Savings Bank last weekend was a grim reminder of the double-edged reality of the lending business: Capital is king, and it's increasingly out-of-reach for the small fry that need it to survive.

The U.S. Office of the Comptroller of the Currency was brief and blunt in its postmortem report on the demise of Carolina Federal. The tiny Charleston-based bank was bleeding assets and earnings because of unsafe or unsound practices.

But that wasn't all. “The OCC also found that the institution incurred losses that depleted its capital, the institution is undercapitalized and there is no reasonable prospect that it will become adequately capitalized,” the agency said in a written statement.

Regulators seized the two-branch Carolina Federal after the close of business June 8. It was the second locally based lender to go under within the past year, with the other being Atlantic Bank & Trust. Neither failure came as much of a surprise.

Long history Carolina Federal was miniscule — it held just $54 million in assets as of March 31 — but it wasn't a newcomer to the business. It started out as a credit union more than a half-century ago to serve members of a local church and at one point was run out of a department store on King Street.

In 1999, the West Ashley-based lender decided to jump on the fast-moving real estate bandwagon. It switched its charter and became a mutually owned savings bank with the intent “to expand and grow with mortgage loans,” according to its now-disabled website. It changed its name to Carolina Federal Savings Bank. It opened a second branch in Mount Pleasant.

The strategy unraveled as the recession that began in late 2007 crippled the coastal housing market. Like many lenders, Carolina Federal struggled as soured mortgage debt piled up. “We're caught up in the economic times where customers don't have the resources to make their loan payments,” then-CEO Jim Wojewodka told The Post and Courier in 2010.

All the while, the bank was forced to beef up its reserves to cover anticipated losses. Making matters worse, legal fees, insurance payments, tax bills and other expenses swelled as Carolina Federal seized properties from delinquent borrowers.

The hammer began to fall in July 2010, when regulators ordered the bank publicly to either raise more money or prepare to be dissolved. Examiners had determined months earlier that Carolina Federal had “an inadequate capital protection for the volume, type and quality of assets” on its books.

The bank had a plan to strengthen up its financial cushion. It proposed to convert itself to a stockholder-owned company by selling shares. It even hired a financial adviser to help line up investors.

Size matters Needless to say, demand fell short of expectations. The bank's financial condition continued to deteriorate.

“Obviously, loan losses outran the capital,” said industry veteran Rick Callicutt.

Callicutt is president of the acquisitive Bank of North Carolina, which reopened Carolina Federal's branches as BNC Bank on Monday under a deal with the Federal Deposit Insurance Corp.

“From all my reports, all that's been going extremely well,” he said Wednesday of the ownership transition.

Callicutt said the 10-year-old BNC had been looking to fill the gap between its existing operations in the Hilton Head and Myrtle Beach markets. Carolina Federal fit the bill nicely.

“Certainly to us Charleston looks like one of the few coastal markets where commerce is actually taking place,” he said.

Callicutt can sympathize with Carolina Federal's financial predicament, noting that the prospect of raising money is a daunting challenge for many banks. He can speak with some authority on the issue because BNC successfully sold $72.5 million of its stock in a private placement this month.

That was the exception rather than the rule, which is hardly a comforting thought to the scores of other cash-starved tiny banks that are seeking a financial injection.

In short, size matters.“I can tell you, for smaller institutions there is no capital out there,” said Callicutt, whose well-capitalized bank has $2.5 billion in assets and is profitable. “You have to really be north of a billion dollars in assets for the investment community to consider investing in your company. It's very difficult for these small institutions to have any access to capital at all.”

Reach John P. McDermott at 937-5572