First National to seek heavy share dilution

Struggling financial services company First National Bancshares will hold its 2009 annual meeting July 14 at the Spartanburg Marriott at Renaissance Park.

Besides the usual business of electing board members, the company is proposing an amendment to its articles of incorporation to increase the number of authorized shares of common stock from 10 million to 100 million.

Since its organization in 1999, the company has issued approximately 9,150,000 shares of common stock. The ability to issue additional shares could play a crucial role in helping keep First National afloat. From a filing made with the US Securities and Exchange Commission on June 15:

During 2008, adversity within the financial services industry and the economy in general contributed to an increase in the bank’s nonperforming assets and eroded our earnings. Based on the recent deterioration in the housing and real estate markets, including falling real estate prices, increasing foreclosures, and rising unemployment, and the negative impact these events have had on the financial services industry and banks’ loan portfolios, we believe that it is prudent to take all necessary steps to strengthen our capital position. In response to the decline in the residential housing market, we have taken what we believe to be an aggressive approach with respect to determining the probability of losses in our loan portfolio. In order to concentrate our efforts on the timely resolution and disposition of nonperforming and foreclosed assets, we have formed a special assets management group. This group’s objective is the expedient workout/resolution of assigned loans and assets at the highest present value recovery. To that end, we have been carefully exploring a variety of capital-raising alternatives including issuance of additional shares of common stock.

The company will need to raise additional capital to absorb the potential losses associated with the disposition of its subsidiary bank’s nonperforming assets and to increase capital levels to meet the standards set forth by the Office of the Comptroller of the Currency (“OCC”). Due to the financial condition of the bank, the OCC has required that our board of directors sign a consent order with the OCC which conveys specific actions needed to address certain findings from the OCC’s recent regulatory examination and to address our current financial condition. We entered into a consent order with the OCC on April 27, 2009, which contains a list of strict requirements including a capital directive, which requires the bank to achieve and maintain minimum regulatory capital levels in excess of the statutory minimums to be well-capitalized, specifically to achieve and maintain Tier 1 capital at least equal to 11% of risk-weighted assets and at least equal to 9% of adjusted total assets by August 25, 2009.

Additional common shares may be issued by the company in connection with equity financing to raise capital, current or future equity compensation plans for the company’s directors, officers, and employees, and other corporate purposes. As of the date of this proxy statement, the board of directors does not have any understandings, agreements, or commitments to issue common stock of the company or to reserve additional common stock for issuance under the company’s current or future equity compensation plans.

First National has the discretion to offer the additional shares of common stock to whomever it chooses and is not obligated to first offer the shares to existing shareholders. That means current shareholders can expect to see common stock value and earnings per share diluted if the amendment is approved and additional shares issued.

First National, the parent of First National Bank of the South, lost $44.8 million in 2008 and another $1.4 million during the first three months of this year. Its stock trades for around $1 a share.

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