The South Financial Group said it would classify $21 million in loans as nonperforming as the result of a fraudulent land sale scheme in North Carolina.
The company, which operates as Mercantile Bank in Florida and as Carolina First Bank in North and South Carolina, disclosed the information in a filing with the Securities and Exchange Commission after learning that the developer of a residential real estate project near Spruce Pine, N.C., had abandoned the development. South Financial had financed some of the lot purchases in the development beginning in 2005.
On June 7, the North Carolina attorney general issued a release stating that lot purchasers and several lenders associated with the development have been victimized by fraudulent land sales schemes. The release said a receiver had been appointed for the project. It indicated that the investment scheme included more than $100 million in financing and multiple financial institutions.
South Financial said that although its loans are secured by real estate, it does not believe the collateral values determined at the time of the underwriting are now realistic.
Based on information currently available, the company said it now expects 0.25 percent of its loan averages to be charged off for the remaining three quarters of 2007. That compares with a net loan charge-off ratio of 29 basis points for first quarter 2007 and 28 basis points for full-year 2006, according to the SEC filing.
Greenville, S.C.-based South Financial (NASDAQ: TSFG) operates 19 Mercantile Bank offices in the Tampa Bay area with $820 million in deposits and a 1.21 percent market share as of June 30, according to the most recent information available from the Federal Deposit Insurance Corp.