South Financial Group Inc., owner of Carolina First Bank and Mercantile Bank in Florida, said it is the victim of a fraudulent land sale scheme related to a North Carolina real estate development project.
The company financed purchases of certain residential lots in the project near Spruce Pine, N.C. In a filing with the Securities and Exchange Commission, South Financial said it learned the developer recently abandoned the project.
The North Carolina Attorney General said the investment scheme included more than $100 million in financing and multiple financial institutions. South Financial said it has about $18 million in secured lot loans to about 80 buyers and approximately $3 million in loans secured by land owned by the developer, now classified as nonperforming.
South Financial said in the filing the developers apparently contradicted their company policy and advanced down payments to lot buyers. Unknown to South Financial, the lot purchasers also simultaneously bought additional lots in the same developments financed by other companies.
South Financial said it does not believe the collateral values set at the time of the underwriting are now realistic due to the developers’ default and incomplete status of the projects. The filing also said the attorney general’s complaint indicates appraisers may have intentionally overstated property values.
South Financial anticipates overall net loan charge-offs around the 25 basis point range for the remaining three quarters of the year due to the matter. The company had a net loan charge-off ratio of 29 basis points for the first quarter and 28 basis points for full-year 2006.
The company said it believes the fraud is an isolated occurrence and does not reflect on the underlying credit quality of the rest of its loan portfolio.
NEW YORK – Associated Press