By Scott Miller
smiller@scbiznews.com
Published May 6, 2010

Carolina First entered into a consent order with the Federal Deposit Insurance Corp. last week that sets time frames during which the Greenville-based bank must improve its capital position or risk being taken over by federal regulators.

The bank’s parent company, The South Financial Group of Greenville, informed shareholders of the order this morning in a document filed with the Securities and Exchange Commission. South Financial expected the order and had previously notified investors that it likely would enter such an agreement this year.

“It wasn’t a surprise,” said CFO James Gordon. “Nothing in the order is surprising. It’s a formalization of the activities that we’re already doing, whether it’s pursuing capital or working on troubled assets.”

The FDIC consent order requires the bank to improve its leverage ratio and total risk-based capital ratios to 8% and 12%, respectively, within 120 days. Currently, those ratios stand at 6.88% and 10.45%, respectively.

The order also requires the bank to take several efforts to improve liquidity and rid its books of bad loans gradually over the next two years. South Financial entered into a similar agreement last week with the Federal Reserve Bank of Richmond. If requirements are not met, Carolina First could be placed in federal receivership.

“Everything we’re doing is absolutely in partnership with our regulators,” said Carolina First President Christopher Gompper, noting that the order does not affect bank operations. “If they didn’t believe in us and our management team and what we’re doing, we wouldn’t be here.”

Gordon wouldn’t disclose the amount of capital South Financial needs to raise. At its annual meeting May 18, South Financial will ask shareholders to authorize an additional 1 billion shares of common stock that could be sold this year.

The independent research firm Morningstar Inc. recently estimated that South Financial needs to raise $250 million by the end of the year and predicted the company is unlikely to do so.

“A poor operator in the boom times, The South Financial Group is burdened with too many problem loans to make it through this cycle without additional common equity capital,” Morningstar said. “We believe the company's capital shortfall will reach $250 million by the end of the year. In our opinion, the chances that South Financial can find a way to raise that much capital, plus some sort of cushion, is highly unlikely. Consequently, we believe the FDIC will be taking over the bank before the year is out.”

Gordon said Morningstar’s $250 million estimate is “the beginning of a low range.”

Gompper rebutted Morningstar’s assessment by noting that the bank has reduced nonperforming assets for three straight quarters and net charge-offs for two consecutive quarters. Core deposits have increased, as has mortgage activity, he said.

“We will be adding mortgage originators,” Gompper said.

Carolina First launched a Small Business Administration lending unit about six months ago that has become the No. 1 ranked SBA loan producer in the state, he noted. Additionally, South Financial was recognized as a national and regional winner of the 2009 Excellence in Small Business Banking awards from Greenwich Associates.

“We’re growing business. We’re winning awards. We’re growing customer deposits,” Gompper said. “There are some bumps in the road based on some of the real estate transactions that occurred in the past, but I feel very confident about where we’re headed.”

Since the beginning of 2008, South Financial has reported nine straight quarterly losses, totaling nearly $1.39 billion. The bank reported an $85.8 million loss for the first quarter, down from $90.8 million during the same quarter last year and from $193.9 million in the fourth quarter.

The bank is one of several S.C. institutions facing heightened oversight by federal regulators. Palmetto Bancshares Inc. of Greenville previously said it expects to enter an agreement with the FDIC sometime this year. Easley-based CommunitySouth Financial Corp. entered into a consent order with the FDIC in February. Late last year, Tidelands Bancshares Inc. based in Mount Pleasant entered into an informal memorandum of understanding with the FDIC.

Beach First National Bank of Myrtle Beach became the first S.C.-based bank in a decade to fail when it was taken over by the FDIC in April. The bank had entered into a consent order with the Office of the Comptroller of the Currency in November.

Spartanburg-based First National Bancshares Inc. has operated under a similar agreement with the federal comptroller’s office for more than a year.