First National loan keeps bank afloat

by Dick Hughes

First National Bancshares has an agreement in principle to be free of default conditions on its debt with an Alabama bank that impeded the Spartanburg bank’s ability to raise enough capital to stay in business.

The deal on the loan was one of several developments last week designed to shore up confidence in First National’s ability to survive tough times.

First National said it reached agreement with Nexity Bank of Birmingham on a $9.7-million loan “to cure existing covenant violations and eliminate the uncertainty surrounding” Nexity’s temporary waivers on foreclosing on the stock of its operating bank, First National Bank of the South.

“This uncertainty is one of the factors that has cast doubt about the company’s ability to continue in operation,” First National said in a filing with the Securities and Exchange Commission.

When its capital fell below specified performance ratios last Sept. 30, First National fell into default on the covenants of a $15-million line of credit – $9.7 million is outstanding – to help fund the $54-million stock and cash purchase of Carolina National’s four Columbia bank offices last year.

Nexity, a correspondent bank that lends to other banks, had agreed only to quarterly deferrals of its right to seize First National’s stock.

Under that threat, First National’s ability to raise capital through a public stock sale was problematic.

C. Don Adams, chairman of First National’s board of directors, said getting out from under default clears the way for First National to take actions to improve its capital ratios, as required by the Office of Comptroller of the Currency to prevent, in the worst outcome, liquidation by the FDIC.

The OCC approved the loan modification on behalf of First National, but execution of the agreement was pending approval of Nexity’s regulator, the Alabama Banking Department, which, along with the FDIC, has Nexity under orders to improve its own capital reserves and earnings.

First National’s directors last week put down their own money to buy common shares.

Collectively, they bought 550,500 shares at $1 apiece and warrants or rights to buy 137,625 more at a dollar a share within three years.

The shares were purchased on Aug. 24 when the price on Nasdaq was at 96 cents in minimal trading of 5,400 shares. With the announcement Aug. 26 that a deal had been reached with Nexity, the price shot up to $1.87, and daily volume skyrocketed to an historical high of 179,700 shares, nearly 14 times the three-month average.

The private purchase was completed under an exemption of the Securities Act of 1933 that allows for a non public offering.

The exemption limits the ability of the directors, as insiders, to resell the stock and thus profit from the stock surge.

First National also received a vote of confidence from the OCC, which extended indefinitely an Aug. 25 deadline for increasing capital and reserves sufficient to put the bank’s capital ratio above minimum levels for a well-capitalized bank.

First National’s key capital ratio, a measure of the bank’s ability to survive losses, has since fallen below the “adequately capitalized” level, but Adams said the OCC is satisfied that the bank is making progress and doing the right things to restore its financial viability.

First National lost $44.8 million in 2008 and $1.4 million and $20 million in the first and second quarters of this year. It has been badly hurt by losses on loans for real estate construction in the Charleston-Myrtle Beach area. As of June 30, it still had $116.6 million in non-performing loans on its books.

First National Bank of the South has 13 branches in Spartanburg, Greenville, Columbia, Charleston and York County. It has assets of around $800 million.

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