How First National Bank of the South failed

By Dick Hughes  

JULY 21, 2010 6:58 a.m. (0)

Business was booming for First National Bank of the South in 2007, just eight years into its founding with ambition to grow from one Spartanburg office into a statewide force in banking.

That ambition crashed last Friday when the FDIC put the bank into receivership, closed its doors and sold it to a private equity firm created to scoop up failed banks.

First National reopened as business as usual Monday under the new owners.

The high hopes were dashed by moving too fast in illusionary boom years and an unforgiving recession that exposed consequences of aggressive lending to developers in a real estate market that inflated into a bubble over years and deflated in months.

For more than two years, First National worked to pull itself out of the hole, putting aggressive remedial steps in place and repeatedly assuring customers and investors it was near turning the corner. But the hole was too deep.

The bank was taken over by North American Financial Holdings of Charlotte, an investment company led by former Bank of America corporate officers who raised $900 million to buy failed banks in discount transactions with the FDIC. NAFH said it will operate First National under its existing name.

Under a loss-share agreement, the FDIC eats 80 percent and NAFH 20 percent of the expected additional losses of approximately $100 million in bad loans still on First National’s books. FDIC estimates the cost to its insurance fund at $74.9 million.

NAFH, only the second equity firm approved by the FDIC to takeover failed banks, is required to keep capital at higher rates than banks for the first three years of operation.

Between 2003 and 2008, First National grew from three offices in Spartanburg County to full-service branches in in Mt. Pleasant, Charleston (two), Greenville and Greer, plus a loan production office on Daniel Island and a wholesale mortgage office in downtown Greenville. It paid $1.4 million for land in Fort Mills outside Charlotte for a Tega Cay branch office.

In August 2007 First National made its boldest move, agreeing to buy Carolina National Corp., itself a start-up, and its three Columbia banking offices for $59 million or $21.65 per share in cash and stock.

By the time the deal closed at $54 million in December, the collapse of the real estate and credit market that fueled the worst downturn since the Great Depression was under way.

Within 18 months, First National was forced to write off $28.7 million of the purchase price it paid as goodwill over and above asset value.

To help come up with $16.8 million in cash to close the deal, First National’s holding company made a fateful deal with Nexity Bank of Birmingham, Ala., borrowing $9.6 million against assets of the bank.

That loan turned into an albatross as First National fell into default and missed repeated payment deadlines even at a negotiated discounted sum of $3.5 million. (Nexity last week said it would enter bankruptcy.)

More than 90 percent of all First National’s loans were collateralized by real estate, and the company acknowledged it made some loans that exceeded its own underwriting guidelines.

First National’s expansion into coastal South Carolina proved especially costly. Forty-two percent of its $120 million in toxic real estate loans at the end of 2009 were in that hard-hit market.

The history of the company’s capital ratios – key indicators of a bank’s solvency – paints a telling picture of the bank’s two-year decline.

At the end of 2007, it had a total risk ratio of 10.85 percent, basically having $10.85 to back up every $100 in loans outstanding. Federal regulators considered the bank to be “well-capitalized.”

Within three months, the bank came under a consent order by the Office of Comptroller of the Currency to raise its money as a buffer against rising loan losses.

The company launched plans to raise capital, purify its books of bad loans through collection, sale at discount or write-offs; to reduce expenses and sell, if necessary, assets.

In August, it replaced Jerry Calvert, chief executive officer since the beginning, with J. Barry Mason, who was hired away from Arthur State Bank. Directors collectively anted up $550,000 in stock purchases to give him a signing bonus.

When the end came, holding company stock worth as much as $19 per share in 2007 was down to 20 cents; book value per share dropped from $8.46 to minus $2.23; assets fell from $812 million to $682 million, and shareholder equity plunged from $47.5 million to a deficit of $4.1 million.