The board of First National Bancshares of Spartanburg is asking shareholders to increase authorized common shares 10 fold as a potential means to raise capital to meet a looming federal regulatory deadline to improve its balance sheet.
“To that end, we have been carefully exploring a variety of capital-raising alternatives including issuance of additional shares of common stock,” the board of directors said in a proxy filing with the Securities and Exchange Commission.
First National is the holding company of First National Bank of the South, which has three branches in Spartanburg, two in Greenville, five in Columbia, two in Charleston and one, recently opened, in Tega Cay in York County.
In the proxy filing, the board said it is seeking shareholder approval at its annual meeting July 14 to increase the company’s authorized shares of common stock from 10 million to 100 million.
Currently, 9.1 million shares are outstanding or reserved.
In recommending approval, which requires two-thirds affirmation, the board noted that the bank is under “strict requirements” from the Office of the Comptroller of the Currency, its regulatory body, to “address our current financial condition.”
In a consent order April 27, the OCC said First National’s capital position fell below the “well-capitalized” levels the OCC thinks are minimally necessary to survive the recession’s heavy hit on its real estate portfolio.
The OCC gave the company until Aug. 25 to raise additional capital and/or dispose of the bad loans dragging down its capital ratios.
As of March 31, First National reported having $74 million in nonperforming loans, most of it in real estate loans that went bad in the Charleston market. They represent debits on the balance sheet.
The company said it is working aggressively to convert them to paying assets and, failing that, to sell the loans at discounts to investors.
That deadline could be relaxed if the OCC determines First National is making progress toward achieving regulatory demands.
Failure to improve its ratios above the well-capitalized level, as OCC is demanding, as well as rectify other shortcomings identified by federal examiners, could put the bank into receivership under the FDIC.
Successful sale of additional common shares on the open market would improve the bank’s cash position while diluting the value of existing shareholders. It’s an approach taken recently by several banks, including The South Financial Group (Carolina First), BB&T and South Carolina Bank & Trust.
But the board said it had not yet made the decision to go that route, although said it wanted the flexibility to determine “whether, when, and on what terms” to issue additional shares without having to come back for further shareholder approval.
The board said in addition to raising capital, additional shares could be issued to finance “current or future equity compensation plans for the company’s directors, officers, and employees, and other corporate purposes.”
First National reported a loss of $44.8 million in 2008 and $1.36 million in the first quarter of this year.
It also is struggling to pay off a loan from Nexity Bank of Birmingham, Ala., to help finance the purchase of the banks of Carolina National Corp. of Columbia.
As a result of deterioration of its performance ratios, First National fell into default last September on the financial covenants of the $15-million line of credit from Nexity. First National drew $9.5 million for the purchase of Carolina National and pledged “all of the stock” of First National Bank of the South as collateral.
The annual shareholders meeting will be held at 10 a.m. July 14, at the Spartanburg Marriott at Renaissance Park.