Attached files
file | filename |
---|---|
EX-31.2 - CFO CERTIFICATION - SOUTH FINANCIAL GROUP INC | exhibit31-2.htm |
EX-32.1 - CEO CERTIFICATION - SOUTH FINANCIAL GROUP INC | exhibit32-1.htm |
EX-32.2 - CFO CERTIFICATION - SOUTH FINANCIAL GROUP INC | exhibit32-2.htm |
EX-31.1 - CEO CERTIFICATION - SOUTH FINANCIAL GROUP INC | exhibit31-1.htm |
EX-10.1 - CONSENT ORDER - SOUTH FINANCIAL GROUP INC | consentorder.htm |
EX-10.2 - FED AGREEMENT - SOUTH FINANCIAL GROUP INC | fedagreement.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
T
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended March 31,
2010
|
£
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period
from____ to____
|
Commission
file number 0-15083
The
South Financial Group, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
South
Carolina
|
57-0824914
|
|
(State
or Other Jurisdiction of Incorporation or
Organization)
|
(IRS
Employer Identification No.)
|
|
102
South Main Street, Greenville, South Carolina
|
29601
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(864)
255-7900
Registrant's
telephone number, including area code
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes T No£.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes £ No£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large
Accelerated Filer £
|
Accelerated
filer T
|
Non-accelerated
filer£
|
Smaller
reporting company £
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £ NoT.
The
number of outstanding shares of the issuer's $1.00 par value common stock as of
May 3, 2010 was 215,670,558.
PART
I. FINANCIAL INFORMATION
|
||||||||||||
Item
1. Financial
Statements
|
||||||||||||
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
|
||||||||||||
CONSOLIDATED
BALANCE SHEETS
|
||||||||||||
(in
thousands, except share data) (Unaudited)
|
||||||||||||
March 31,
|
December 31,
|
|||||||||||
2010
|
2009
|
2009
|
||||||||||
Assets
|
||||||||||||
Cash
and due from banks
|
$ | 156,568 | $ | 147,297 | $ | 190,346 | ||||||
Interest-bearing
bank balances
|
1,059,598 | 5,429 | 192,962 | |||||||||
Securities
|
||||||||||||
Available
for sale, at fair value
|
2,220,551 | 2,060,448 | 2,095,401 | |||||||||
Held
to maturity (fair value $101,715, $18,460, and $129,496,
respectively)
|
99,452 | 18,039 | 127,516 | |||||||||
Total
securities
|
2,320,003 | 2,078,487 | 2,222,917 | |||||||||
Loans
held for sale (at March 31, 2009, includes $16,960 measured at fair
value)
|
13,296 | 29,726 | 15,758 | |||||||||
Loans
held for investment
|
8,002,694 | 9,986,681 | 8,386,127 | |||||||||
Less: Allowance
for loan losses
|
(373,146 | ) | (280,156 | ) | (365,642 | ) | ||||||
Net
loans held for investment
|
7,629,548 | 9,706,525 | 8,020,485 | |||||||||
Bank-owned
life insurance
|
301,498 | 295,855 | 302,830 | |||||||||
Premises
and equipment, net
|
257,499 | 285,580 | 261,523 | |||||||||
Accrued
interest receivable
|
37,538 | 42,927 | 37,304 | |||||||||
Goodwill
|
214,118 | 224,161 | 214,118 | |||||||||
Other
intangible assets, net
|
14,698 | 20,568 | 15,707 | |||||||||
Other
assets
|
423,788 | 448,692 | 421,032 | |||||||||
Total
assets
|
$ | 12,428,152 | $ | 13,285,247 | $ | 11,894,982 | ||||||
Liabilities
and Shareholders' Equity
|
||||||||||||
Liabilities
|
||||||||||||
Deposits
|
||||||||||||
Noninterest-bearing
retail and commercial deposits
|
$ | 1,109,153 | $ | 1,067,953 | $ | 1,124,404 | ||||||
Interest-bearing
retail and commercial deposits
|
6,696,069 | 6,316,548 | 6,225,707 | |||||||||
Total
retail and commercial deposits
|
7,805,222 | 7,384,501 | 7,350,111 | |||||||||
Brokered
deposits
|
1,958,948 | 1,842,577 | 1,946,101 | |||||||||
Total
deposits
|
9,764,170 | 9,227,078 | 9,296,212 | |||||||||
Short-term
borrowings
|
300,647 | 1,342,088 | 322,702 | |||||||||
Long-term
debt
|
1,115,984 | 931,977 | 1,116,869 | |||||||||
Accrued
interest payable
|
44,942 | 74,032 | 36,658 | |||||||||
Other
liabilities
|
282,759 | 157,889 | 129,367 | |||||||||
Total
liabilities
|
11,508,502 | 11,733,064 | 10,901,808 | |||||||||
Commitments
and contingencies (Note 9)
|
||||||||||||
Shareholders'
equity
|
||||||||||||
Preferred
stock-no par value; authorized 10,000,000 shares; issued and outstanding
351,650, 537,026, and 351,650 shares, respectively
|
336,681 | 518,549 | 335,783 | |||||||||
Common
stock-par value $1 per share; authorized 325,000,000 shares; issued and
outstanding 215,624,517, 84,781,160, and 215,455,541 shares,
respectively
|
215,625 | 84,781 | 215,456 | |||||||||
Surplus
|
1,345,397 | 1,182,423 | 1,344,984 | |||||||||
Retained
deficit
|
(1,016,090 | ) | (291,199 | ) | (934,598 | ) | ||||||
Accumulated
other comprehensive income, net of deferred taxes
|
37,426 | 57,018 | 30,938 | |||||||||
Other,
net
|
611 | 611 | 611 | |||||||||
Total
shareholders' equity
|
919,650 | 1,552,183 | 993,174 | |||||||||
Total
liabilities and shareholders' equity
|
$ | 12,428,152 | $ | 13,285,247 | $ | 11,894,982 |
See notes
to consolidated financial statements (unaudited), which are an integral part of
these statements.
1
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
(in
thousands, except per share data) (Unaudited)
|
||||||||
Three
Months Ended
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
Interest
Income
|
||||||||
Interest
and fees on loans
|
$ | 98,860 | $ | 124,119 | ||||
Interest
and dividends on securities:
|
||||||||
Taxable
|
17,486 | 20,548 | ||||||
Exempt
from federal income taxes
|
232 | 2,234 | ||||||
Total
interest and dividends on securities
|
17,718 | 22,782 | ||||||
Interest
on interest-bearing bank balances and short-term
investments
|
284 | 1 | ||||||
Total
interest income
|
116,862 | 146,902 | ||||||
Interest
Expense
|
||||||||
Interest
on deposits
|
37,684 | 54,843 | ||||||
Interest
on short-term borrowings
|
229 | 1,146 | ||||||
Interest
on long-term debt
|
5,424 | 5,895 | ||||||
Total
interest expense
|
43,337 | 61,884 | ||||||
Net
Interest Income
|
73,525 | 85,018 | ||||||
Provision
for Credit Losses
|
95,123 | 142,627 | ||||||
Net
interest income after provision for credit losses
|
(21,598 | ) | (57,609 | ) | ||||
Noninterest
Income
|
21,132 | 23,741 | ||||||
Noninterest
Expenses
|
83,653 | 90,241 | ||||||
Loss
before income taxes
|
(84,119 | ) | (124,109 | ) | ||||
Income
tax benefit
|
(3,525 | ) | (49,706 | ) | ||||
Net
Loss
|
(80,594 | ) | (74,403 | ) | ||||
Preferred
stock dividends
|
(4,337 | ) | (9,088 | ) | ||||
Deemed
dividend resulting from accretion of discount
|
(898 | ) | (844 | ) | ||||
Deemed
dividend resulting from induced conversion
|
- | (6,475 | ) | |||||
Amounts
allocated to participating security holders
|
- | (1 | ) | |||||
Net
Loss Available to Common Shareholders
|
$ | (85,829 | ) | $ | (90,811 | ) | ||
Average
Common Shares Outstanding, Basic
|
215,523 | 82,223 | ||||||
Average
Common Shares Outstanding, Diluted
|
215,523 | 82,223 | ||||||
Loss
Per Common Share, Basic
|
$ | (0.40 | ) | $ | (1.10 | ) | ||
Loss
Per Common Share, Diluted
|
(0.40 | ) | (1.10 | ) |
See notes
to consolidated financial statements (unaudited), which are an integral part of
these statements.
2
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||
CONSOLIDATED
STATEMENTS OF CHANGES
|
||||||||||||||||||||||||||||
IN
SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
|
||||||||||||||||||||||||||||
(in
thousands, except share and per share data) (Unaudited)
|
||||||||||||||||||||||||||||
Shares
of Common Stock
|
Common Stock
|
Preferred Stock
|
Surplus
|
Retained
Deficit and Other
|
Accumulated
Other Comprehensive Income,Net
|
Total
|
||||||||||||||||||||||
Balance,
December 31, 2008
|
74,643,649 | $ | 74,644 | $ | 566,379 | $ | 1,135,920 | $ | (198,970 | ) | $ | 42,558 | $ | 1,620,531 | ||||||||||||||
Net
loss
|
- | - | - | - | (74,403 | ) | - | (74,403 | ) | |||||||||||||||||||
Other
comprehensive income, net of income tax of $8,795
|
- | - | - | - | - | 14,460 | 14,460 | |||||||||||||||||||||
Comprehensive
loss
|
- | - | - | - | - | - | (59,943 | ) | ||||||||||||||||||||
Common
dividends declared ($0.01 per share)
|
- | - | - | - | (849 | ) | - | (849 | ) | |||||||||||||||||||
Preferred
dividends declared
|
- | - | - | - | (9,088 | ) | - | (9,088 | ) | |||||||||||||||||||
Accretion
of discount on preferred stock
|
- | - | 844 | - | (844 | ) | - | - | ||||||||||||||||||||
Common
stock activity:
|
||||||||||||||||||||||||||||
Conversion
of preferred stock
|
9,988,306 | 9,988 | (48,674 | ) | 45,161 | (6,475 | ) | - | - | |||||||||||||||||||
Director
compensation
|
74,706 | 75 | - | 55 | - | - | 130 | |||||||||||||||||||||
Dividend
reinvestment plan
|
30,193 | 30 | - | 35 | - | - | 65 | |||||||||||||||||||||
Employee
stock purchase plan
|
27,238 | 27 | - | 42 | - | - | 69 | |||||||||||||||||||||
Restricted
stock plan
|
17,718 | 18 | - | 516 | - | - | 534 | |||||||||||||||||||||
Stock
option expense
|
- | - | - | 685 | - | - | 685 | |||||||||||||||||||||
Other,
net
|
(650 | ) | (1 | ) | - | 9 | 41 | - | 49 | |||||||||||||||||||
Balance,
March 31, 2009
|
84,781,160 | $ | 84,781 | $ | 518,549 | $ | 1,182,423 | $ | (290,588 | ) | $ | 57,018 | $ | 1,552,183 | ||||||||||||||
Balance,
December 31, 2009
|
215,455,541 | $ | 215,456 | $ | 335,783 | $ | 1,344,984 | $ | (933,987 | ) | $ | 30,938 | $ | 993,174 | ||||||||||||||
Net
loss
|
- | - | - | - | (80,594 | ) | - | (80,594 | ) | |||||||||||||||||||
Other
comprehensive income, net of income tax of $3,494
|
- | - | - | - | - | 6,488 | 6,488 | |||||||||||||||||||||
Comprehensive
loss
|
- | - | - | - | - | - | (74,106 | ) | ||||||||||||||||||||
Accretion
of discount on preferred stock
|
- | - | 898 | - | (898 | ) | - | - | ||||||||||||||||||||
Common
stock activity:
|
||||||||||||||||||||||||||||
Dividend
reinvestment plan
|
41,414 | 41 | - | (18 | ) | - | - | 23 | ||||||||||||||||||||
Employee
stock purchase plan
|
83,640 | 84 | - | (33 | ) | - | - | 51 | ||||||||||||||||||||
Restricted
stock plan
|
43,922 | 44 | - | 166 | - | - | 210 | |||||||||||||||||||||
Stock
option expense
|
- | - | - | 321 | - | - | 321 | |||||||||||||||||||||
Other,
net
|
- | - | - | (23 | ) | - | - | (23 | ) | |||||||||||||||||||
Balance,
March 31, 2010
|
215,624,517 | $ | 215,625 | $ | 336,681 | $ | 1,345,397 | $ | (1,015,479 | ) | $ | 37,426 | $ | 919,650 |
See notes
to consolidated financial statements (unaudited), which are an integral part of
these statements.
3
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
(in
thousands) (Unaudited)
|
||||||||
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
loss
|
$ | (80,594 | ) | $ | (74,403 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities
|
||||||||
Provision
for credit losses
|
95,123 | 142,627 | ||||||
Depreciation,
amortization, and accretion, net
|
12,518 | 9,420 | ||||||
Write-downs/loss
on other real estate owned
|
5,492 | 124 | ||||||
Share-based
compensation expense
|
549 | 1,370 | ||||||
Loss
on securities
|
389 | 2,954 | ||||||
Gain
on sale of mortgage loans
|
(888 | ) | (439 | ) | ||||
Gain
on certain derivative activities
|
(59 | ) | (1,135 | ) | ||||
(Gain)
loss on disposition of premises and equipment
|
(5 | ) | 3 | |||||
Loss
on non-mortgage loans held for sale
|
- | 1,838 | ||||||
Gain
on early extinguishment of debt
|
- | (52 | ) | |||||
Origination
of loans held for sale
|
(51,054 | ) | (73,539 | ) | ||||
Sale
of loans held for sale and principal repayments
|
55,891 | 75,716 | ||||||
Decrease
(increase) in other assets
|
28,636 | (47,851 | ) | |||||
Decrease
in other liabilities
|
(4,004 | ) | (7,825 | ) | ||||
Net
cash provided by operating activities
|
61,994 | 28,808 | ||||||
Cash
Flows from Investing Activities
|
||||||||
Sale
of securities available for sale
|
- | 5,729 | ||||||
Maturity,
redemption, call, or principal repayments of securities available for
sale
|
126,144 | 92,948 | ||||||
Maturity,
redemption, call, or principal repayments of securities held to
maturity
|
26,937 | 4,665 | ||||||
Purchase
of securities available for sale
|
(93,520 | ) | (67,437 | ) | ||||
Repayments
of loans held for investment, net of originations
|
234,521 | 47,867 | ||||||
Sale
of loans originally held for investment
|
24,334 | 9,783 | ||||||
Sale
of other real estate owned
|
9,176 | 2,964 | ||||||
Sale
of premises and equipment
|
234 | 5 | ||||||
Purchase
of premises and equipment
|
(2,009 | ) | (15,780 | ) | ||||
Net
cash provided by investing activities
|
325,817 | 80,744 | ||||||
Cash
Flows from Financing Activities
|
||||||||
Increase
(decrease) in deposits, net
|
467,094 | (178,525 | ) | |||||
Decrease
in short-term borrowings
|
(22,054 | ) | (284,313 | ) | ||||
Issuance
of long-term debt
|
- | 250,000 | ||||||
Payment
of long-term debt
|
(44 | ) | (26,413 | ) | ||||
Cash
dividends paid on common stock
|
- | (747 | ) | |||||
Cash
dividends paid on preferred stock
|
- | (9,341 | ) | |||||
Other
common stock activity
|
51 | 128 | ||||||
Net
cash provided by (used for) financing activities
|
445,047 | (249,211 | ) | |||||
Net
change in cash and cash equivalents
|
832,858 | (139,659 | ) | |||||
Cash
and cash equivalents at beginning of year
|
383,308 | 292,385 | ||||||
Cash
and cash equivalents at end of period
|
$ | 1,216,166 | $ | 152,726 | ||||
Supplemental
Cash Flow Data
|
||||||||
Interest
paid, net of amounts capitalized
|
$ | 35,237 | $ | 59,376 | ||||
Income
tax (refunds) payments, net
|
(1,641 | ) | 487 | |||||
Significant
non-cash investing and financing transactions:
|
||||||||
Unrealized
gain on available for sale securities
|
13,332 | 32,306 | ||||||
Purchase
of available for sale securities settled subsequent to
period-end
|
163,171 | - | ||||||
Loans
transferred to other real estate owned
|
35,213 | 32,092 | ||||||
Loans
transferred from held for investment to held for sale
|
27,678 | 10,710 | ||||||
Conversion
of preferred stock into common stock
|
- | 48,674 |
See notes
to consolidated financial statements (unaudited), which are an integral part of
these statements.
4
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Note
1 – General
The
foregoing unaudited Consolidated Financial Statements and Notes are presented in
accordance with the instructions for the Securities and Exchange Commission
Quarterly Report on Form 10-Q. “TSFG” refers to The South Financial Group, Inc.
and subsidiaries, except where the context requires otherwise. The information
contained in the Consolidated Financial Statements included in TSFG's Annual
Report on Form 10-K for the year ended December 31, 2009 should be referred to
in connection with the reading of these unaudited interim Consolidated Financial
Statements. The Consolidated Balance Sheet at December 31, 2009 is derived from
TSFG’s Consolidated Audited Financial Statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. In the opinion of management, all adjustments necessary to
present a fair statement of the results for the interim periods have been made.
All such adjustments are of a normal, recurring nature. TSFG has evaluated
subsequent events for potential recognition and/or disclosure through the date
the Consolidated Financial Statements included in this Quarterly Report on Form
10-Q were issued.
Nature
of Operations
TSFG is a
bank holding company headquartered in Greenville, South Carolina that offers a
broad range of financial products and services, including banking, treasury
management, investments, wealth management, and private banking services. TSFG’s
banking subsidiary Carolina First Bank conducts banking operations in South
Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile).
TSFG also owns several non-bank subsidiaries. At March 31, 2010, TSFG operated
through 83 branch offices in South Carolina, 66 in Florida, and 27 in North
Carolina. In South Carolina, the branches are primarily located in the state’s
largest metropolitan areas. The Florida operations are principally concentrated
in the Jacksonville, Orlando, Tampa Bay, Southeast Florida, and Gainesville
areas. The North Carolina branches are primarily located in the Hendersonville
and Asheville areas of western North Carolina and in the Wilmington area of
eastern North Carolina.
Regulatory
Matters
Effective
April 30, 2010, Carolina First Bank’s Board of Directors entered into a Consent
Order with the Federal Deposit Insurance Corporation (“FDIC”) and the South
Carolina State Board of Financial Institutions (the “Consent Order”). This
Consent Order provides for various things, including (among other things) the
following: (1) within 120 days of entering into the Consent Order, Carolina
First Bank must increase its Tier 1 leverage ratio to 8% and its total
risk-based capital ratio to 12%, (2) Carolina First Bank must prepare strategic,
capital, liquidity and earnings plans and related projections within certain
timetables set forth in the Consent Order and on an ongoing basis, (3) Carolina
First Bank must provide plans and meet timeframes set forth in the Consent Order
for reducing criticized assets, (4) Carolina First Bank is precluded from
extending credit to classified borrowers absent express board approval and must
ensure compliance with updated concentration limits implemented with respect to
its loan portfolio, (5) Carolina First Bank is subject to certain limitations
with respect to brokered deposits and the rates it can pay on certain customer
deposits, (6) Carolina First Bank cannot make dividends or bonus payments
without the consent of the FDIC and (7) Carolina First Bank must limit its
growth to 10% per year unless the FDIC consents otherwise. The foregoing summary
is not complete and is qualified in all respects by reference to the actual
language of the Consent Order. As a result of the Consent Order, the Bank is no
longer deemed to be “well capitalized” although all ratios at March 31, 2010
exceeded well-capitalized thresholds.
Effective
May 4, 2010, The South Financial Group, Inc. entered into a written agreement
(the “Fed Agreement”) with the Board of Governors of the Federal Reserve System
(the “Federal Reserve”). The Fed Agreement provides, among other things, that
the holding company must serve as a source of strength to Carolina First Bank,
and that except upon consent of the Federal Reserve, the holding company may not
pay dividends to shareholders or receive dividends from Carolina First Bank, the
holding company and its nonbank subsidiaries may not make payments on trust
preferred securities or subordinated debt, and the holding company cannot incur,
increase or guarantee debt or repurchase any capital securities. The Fed
Agreement also requires that the holding company submit a capital plan which
reflects sufficient capital and a cash flow plan, both of which must be
acceptable to the Federal Reserve, and follow certain guidelines with respect to
the appointment or change in responsibilities of senior officers. The foregoing
summary is not complete and is qualified in all respects by reference to the
actual language of the Fed Agreement.
5
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Going
Concern Considerations
The
Consolidated Financial Statements have been prepared on a going concern basis,
which contemplates the realization of assets and the discharge of liabilities in
the normal course of business for the foreseeable future. These Consolidated
Financial Statements do not include any adjustments relating to the
recoverability or classification of assets or the amounts and classification of
liabilities that may be necessary should we be unable to continue as a going
concern. Management continues to assess a number of factors including liquidity,
capital, asset quality, and profitability that affect our ability to continue in
operation.
Management
is in the process of evaluating various alternatives to increase tangible common
equity and regulatory capital through (i) the conversion of certain debt and
non-common equity instruments into common stock and/or cash; (ii) the issuance
of additional equity through one or more public and/or private offerings; and/or
(iii) a strategic sale of all or a portion of the Company. Additionally, TSFG is
actively evaluating asset reductions and other balance sheet management
strategies to ensure that the projected level of regulatory capital can support
its balance sheet long-term.
Current
market conditions for banking institutions, the overall uncertainty in financial
markets, uncertainty around TSFG’s potential future credit losses, and the
Company’s depressed stock price present significant challenges to the Company’s
ability to issue additional equity in public or private offerings. An equity
financing transaction that would result in capital in the amount being
considered by TSFG would result in substantial dilution to the Company's current
shareholders and could adversely affect the market price of the Company's common
stock.
There can
be no assurance as to whether these efforts will be successful, either on a
short-term or long-term basis. Should these efforts be unsuccessful, due to
existing regulatory restrictions on cash payments between Carolina First Bank
and TSFG, TSFG may be unable to discharge its liabilities in the normal course
of business. There can be no assurance that TSFG will be successful in any
efforts to raise additional capital during 2010. The pursuit of strategic
transaction alternatives may also involve significant expenses and management
time and attention.
Both the
parent company and the banking subsidiary actively manage liquidity and cash
flow needs. The parent company does not have any debt maturing during 2010 or
2011. TSFG has suspended its common and preferred dividends to shareholders. At
March 31, 2010, the parent company had $26.2 million of cash and cash
equivalents. During first quarter 2010, the parent company contributed $30
million to its subsidiary bank as a capital contribution.
Cash and
cash equivalents at the banking subsidiary at March 31, 2010 were approximately
$1.2 billion. Carolina First Bank has $134,000 of long-term debt maturing in the
remaining nine months of 2010. Liquidity at the bank level is dependent upon the
deposit franchise which funds 78.6% of the Company’s assets (or 62.8% excluding
brokered CDs). During April 2010, the FDIC approved an interim final rule
extending the Transaction Account Guarantee Program (“TAGP”), which provides
full FDIC coverage for noninterest-bearing transaction deposit accounts and
certain interest-bearing checking accounts, from June 30, 2010 to December 31,
2010 (and subject to extension for an additional one year as determined by the
FDIC). Deposit balances which are not covered by FDIC insurance total
approximately $804 million currently, and would increase to approximately $1.6
billion without the benefit of the FDIC’s TAGP. A significant portion of
uninsured deposits are public fund deposits which are collateralized by
investment securities. Loss of collateralized deposits in a liquidity crisis
would be essentially liquidity-neutral to the extent released collateral could
be sold or used to secure replacement wholesale funding. Thus, the primary
deposit-related liquidity risk relates to balances which are neither insured nor
collateralized, which total approximately $327 million currently, and would
increase to approximately $810 million without the benefit of the TAGP. Public
deposits which are currently insured but which would be uninsured and would
therefore require collateralization without the benefit of the TAGP totaled
approximately $301 million at March 31, 2010. Free securities of $1.2 billion
would meet incremental collateral needs and, along with surplus cash, represent
reserves to address liquidity needs in a crisis scenario. If a liquidity issue
presents itself, deposit promotions would be expected to yield significant
in-flows of cash, but could be limited based on limitations on maximum interest
rates imposed on TSFG by the Consent Order.
As
discussed above, effective April 30, 2010, Carolina First Bank entered into the
Consent Order. If the Company is unable to raise the capital required or
otherwise comply with the terms of the Consent Order, further regulatory actions
could be taken, and its ability to operate as a going concern could be
negatively impacted. Furthermore, because such consent orders are public, there
could be an adverse customer or market reaction to the announcement of the
Consent Order.
6
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Based on
current and expected liquidity needs and sources, management expects TSFG to be
able to meet its obligations at least through March 31, 2011. If unanticipated
market factors emerge, or if the Company is unable to raise additional capital,
successfully execute its plans, or comply with the Consent Order, its banking
regulators could take further action, which could include actions (including the
implementation of a receivership) that may have a material adverse effect on the
Company’s business, results of operations and financial position.
Accounting
Estimates and Assumptions
The
preparation of the Consolidated Financial Statements and accompanying notes
requires management of TSFG to make a number of estimates and assumptions
relating to reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the Consolidated Financial
Statements and the reported amounts of revenues and expenses during the period.
Actual results could differ significantly from these estimates and assumptions.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and reserve for
unfunded lending commitments, the effectiveness of derivative and other hedging
activities, the fair value of certain financial instruments (securities,
derivatives, privately held investments, and, for purposes of goodwill
impairment evaluation, loans), income tax assets or liabilities (including
deferred tax assets and any related valuation allowance), share-based
compensation, and accounting for acquisitions, including the fair value
determinations, the analysis of goodwill impairment and the analysis of
valuation allowances in the initial accounting of loans acquired. To a lesser
extent, significant estimates are also associated with the determination of
contingent liabilities, discretionary compensation, and other employee benefit
agreements.
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of The South Financial
Group, Inc. and all other entities in which it has a controlling financial
interest. All significant intercompany balances and transactions have been
eliminated in consolidation.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the 2010 presentation
with no impact on shareholders’ equity or net loss as previously reported. In
particular, beginning first quarter 2010, TSFG reclassified interest-bearing
balances held at the Federal Reserve from cash and due from banks to
interest-bearing bank balances. Amounts for prior periods (including $192.8
million at December 31, 2009 and $5.4 million at March 31, 2009) have been
reclassified to conform to the current presentation.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash and due from banks, interest-bearing bank
balances, and federal funds sold. Generally, both cash and cash equivalents have
maturities of three months or less, and accordingly, the carrying amount of
these instruments is deemed to be a reasonable estimate of fair value. At March
31, 2010, interest-bearing cash balances held at the Federal Reserve totaled
$1.1 billion and are included in interest-bearing bank balances.
Loans
Held for Sale
Loans
held for sale include loans originated and intended for sale in the secondary
market, primarily residential mortgage loans and the guaranteed portion of Small
Business Administration (“SBA”) loans, as well as other loans that management
has an active plan to sell. Loans held for sale are carried at the lower of cost
or estimated fair value, generally on an individual asset basis for commercial
and mortgage loans, and on an aggregate basis for other consumer loans. Prior to
sale, decreases in fair value and subsequent recoveries in fair value up to the
cost basis are included in noninterest income or expense. Gains or losses on
sales of loans are recognized in noninterest income or expense at the time the
transfer qualifies as a sale and are determined by the difference between net
sales proceeds and the carrying value of the loans sold. Transactions that
constitute a legal sale of a portion of the loan but do not qualify to be
accounted for as a loan sale are recorded as secured borrowings.
Loans or
pools of loans are transferred from the held for investment portfolio to the
held for sale portfolio when the intent to hold the loans has changed due to
portfolio management or risk mitigation strategies and when there is a
plan
7
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
to sell
the loans within a reasonable period of time. At the time of transfer, if the
fair value is less than the cost, the difference related to the credit quality
of the loan is recorded as an adjustment to the allowance for loan losses.
Decreases in fair value subsequent to the transfer are recognized in noninterest
income or expense.
Loans or
pools of loans are transferred from the held for sale portfolio to the held for
investment portfolio when the intent to sell the loans has changed. Any
previously recorded lower of cost or market adjustments are amortized to
interest income over the remaining life of the loans.
Recently
Adopted Accounting Pronouncements
Accounting
for Transfers of Financial Assets
Accounting
Standards Update 2009-16 (“ASU 2009-16”), “Accounting for Transfers of Financial
Assets,” amends Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 860, “Transfers and Servicing,” primarily to (1)
eliminate the concept of a qualifying special-purpose entity, (2) limit the
circumstances under which a financial asset (or portion thereof) should be
derecognized when the entire financial asset has not been transferred to a
non-consolidated entity, and (3) require additional information to be disclosed
concerning a transferor's continuing involvement with transferred financial
assets. TSFG adopted this standard effective January 1, 2010 with no significant
impact on its Consolidated Financial Statements. However, this guidance could
have a significant impact on the accounting for future transfers, if
any.
Accounting
for Variable Interest Entities
Accounting
Standards Update 2009-17 (“ASU 2009-17”), “Accounting for Variable Interest
Entities,” amends FASB ASC 810, “Consolidation,” to require a comprehensive
qualitative analysis to be performed to determine whether a holder of variable
interests in a variable interest entity also has a controlling financial
interest in that entity. In addition, FASB ASC 810 has been amended to require
that the same such analysis be applied to entities previously designated as
qualified special-purpose entities under FASB ASC 860. TSFG adopted this
standard effective January 1, 2010 with no significant impact on its
Consolidated Financial Statements.
Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent)
Accounting
Standards Update No. 2009-12 (“ASU 2009-12”), “Fair Value Measurements and
Disclosures: Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent),” offers guidance on how to use a NAV per share to
estimate the fair value of investments in hedge funds, private equity funds,
real estate funds, venture capital funds, offshore fund vehicles, and funds of
funds. TSFG adopted this standard effective January 1, 2010 with no significant
impact on its Consolidated Financial Statements.
Improving
Disclosures about Fair Value Measurements
Accounting
Standards Update No. 2010-06 (“ASU 2010-06”), “Improving Disclosures about Fair
Value Measurements,” amends FASB ASC 820-10, “Fair Value Measurements and
Disclosures,” to require disclosure of transfers in and out of Levels 1 and 2
and gross presentation of items in the Level 3 rollforward. The guidance also
clarifies the level of disaggregation required for fair value measurement
disclosures and requires disclosure of inputs and valuation techniques used in
Levels 2 and 3. With the exception of the gross presentation of items in the
Level 3 rollforward (which is effective for fiscal years beginning after
December 15, 2010), TSFG adopted this guidance effective January 1, 2010 with no
significant impact on its Consolidated Financial Statements.
8
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Note
2 – Noninterest Income and Noninterest Expense
The
following presents the details for noninterest income and noninterest expense
(in thousands):
Three
Months Ended
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
Noninterest
Income
|
||||||||
Service
charges on deposit accounts
|
$ | 9,223 | $ | 9,268 | ||||
Debit
card income, net
|
2,216 | 1,925 | ||||||
Customer
service fee income
|
1,126 | 1,209 | ||||||
Total
customer fee income
|
12,565 | 12,402 | ||||||
Insurance
income
|
1,876 | 2,457 | ||||||
Retail
investment services, net
|
1,587 | 2,010 | ||||||
Trust
and investment management income
|
1,102 | 1,465 | ||||||
Benefits
administration fees
|
- | 642 | ||||||
Total
wealth management income
|
4,565 | 6,574 | ||||||
Bank-owned
life insurance income
|
2,444 | 2,502 | ||||||
Mortgage
banking income
|
1,289 | 1,205 | ||||||
Gain
on certain derivative activities
|
59 | 1,135 | ||||||
Loss
on securities
|
(389 | ) | (2,954 | ) | ||||
Merchant
processing income, net
|
- | 610 | ||||||
Other
|
599 | 2,267 | ||||||
Total
noninterest income
|
$ | 21,132 | $ | 23,741 | ||||
Noninterest
Expenses
|
||||||||
Salaries
and wages
|
$ | 29,836 | $ | 35,191 | ||||
Employee
benefits
|
4,512 | 8,923 | ||||||
Severance
related benefits
|
878 | - | ||||||
Total
salaries and wages and employee benefits
|
35,226 | 44,114 | ||||||
Occupancy
|
9,700 | 9,436 | ||||||
Regulatory
assessments
|
7,150 | 4,655 | ||||||
Furniture
and equipment
|
6,606 | 6,945 | ||||||
Write-downs/loss
on other real estate owned
|
5,492 | 124 | ||||||
Professional
services
|
5,329 | 4,507 | ||||||
Project
NOW expense
|
- | 1,298 | ||||||
Loan
collection and foreclosed asset expense
|
4,692 | 4,891 | ||||||
Telecommunications
|
1,536 | 1,526 | ||||||
Advertising
and business development
|
1,169 | 1,281 | ||||||
Amortization
of intangibles
|
1,009 | 1,291 | ||||||
Loss
on non-mortgage loans held for sale
|
- | 1,838 | ||||||
Loss
on repurchase of auction rate securities
|
- | 676 | ||||||
Other
|
5,744 | 7,659 | ||||||
Total
noninterest expenses
|
$ | 83,653 | $ | 90,241 |
9
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Note
3 – Accumulated Other Comprehensive Income
The
following summarizes accumulated other comprehensive income, net of tax (in
thousands):
Three
Months Ended
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
Net
Unrealized Gains on Securities Available for Sale
|
||||||||
Balance
at beginning of period
|
$ | 18,487 | $ | 6,890 | ||||
Other
comprehensive income:
|
||||||||
Unrealized
holding gains arising during the period
|
13,332 | 32,301 | ||||||
Income
tax expense
|
(4,666 | ) | (11,961 | ) | ||||
Less:
Reclassification adjustment for losses included in net
income
|
- | 5 | ||||||
Income tax benefit
|
- | (2 | ) | |||||
8,666 | 20,343 | |||||||
Balance
at end of period
|
27,153 | 27,233 | ||||||
Net
Unrealized Gains on Cash Flow Hedges
|
||||||||
Balance
at beginning of period
|
12,451 | 35,668 | ||||||
Other
comprehensive loss:
|
||||||||
Unrealized
gain on change in fair values
|
1,658 | 3,888 | ||||||
Income
tax expense
|
(581 | ) | (1,361 | ) | ||||
Less: Reclassification
adjustment for gains included in net income
|
(5,008 | ) | (12,939 | ) | ||||
Income tax expense
|
1,753 | 4,529 | ||||||
(2,178 | ) | (5,883 | ) | |||||
Balance
at end of period
|
10,273 | 29,785 | ||||||
$ | 37,426 | $ | 57,018 | |||||
Total
other comprehensive income
|
$ | 6,488 | $ | 14,460 | ||||
Net
loss
|
(80,594 | ) | (74,403 | ) | ||||
Comprehensive
loss
|
$ | (74,106 | ) | $ | (59,943 | ) |
10
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Note
4 – Securities
The
aggregate amortized cost and estimated fair value of securities available for
sale and securities held to maturity (in thousands) were as
follows:
March 31,
2010
|
||||||||||||||||
Amortized Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated Fair Value
|
|||||||||||||
Securities
Available for Sale
|
||||||||||||||||
U.S.
Treasury
|
$ | 2,064 | $ | - | $ | 9 | $ | 2,055 | ||||||||
U.S.
Government agencies
|
284,233 | 2,127 | 8 | 286,352 | ||||||||||||
Agency
residential mortgage-backed securities
|
1,879,062 | 42,315 | 2,463 | 1,918,914 | ||||||||||||
Private
label residential mortgage-backed securities
|
7,802 | 68 | 242 | 7,628 | ||||||||||||
State
and municipals
|
3,653 | 4 | - | 3,657 | ||||||||||||
Other
investments
|
1,963 | 150 | 168 | 1,945 | ||||||||||||
$ | 2,178,777 | $ | 44,664 | $ | 2,890 | $ | 2,220,551 | |||||||||
Securities
Held to Maturity
|
||||||||||||||||
State
and municipals
|
$ | 13,654 | $ | 332 | $ | 8 | $ | 13,978 | ||||||||
Agency
residential mortgage-backed securities
|
85,698 | 1,939 | - | 87,637 | ||||||||||||
Other
investments
|
100 | - | - | 100 | ||||||||||||
$ | 99,452 | $ | 2,271 | $ | 8 | $ | 101,715 |
December 31,
2009
|
||||||||||||||||
Amortized Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated Fair Value
|
|||||||||||||
Securities
Available for Sale
|
||||||||||||||||
U.S.
Treasury
|
$ | 2,069 | $ | - | $ | 24 | $ | 2,045 | ||||||||
U.S.
Government agencies
|
78,696 | 1,011 | - | 79,707 | ||||||||||||
Agency
residential mortgage-backed securities
|
1,952,386 | 34,984 | 7,065 | 1,980,305 | ||||||||||||
Private
label residential mortgage-backed securities
|
8,757 | 12 | 265 | 8,504 | ||||||||||||
State
and municipals
|
23,086 | 76 | 4 | 23,158 | ||||||||||||
Other
investments
|
1,964 | 24 | 306 | 1,682 | ||||||||||||
$ | 2,066,958 | $ | 36,107 | $ | 7,664 | $ | 2,095,401 | |||||||||
Securities
Held to Maturity
|
||||||||||||||||
State
and municipals
|
$ | 16,217 | $ | 411 | $ | 9 | $ | 16,619 | ||||||||
Agency
residential mortgage-backed securities
|
111,199 | 1,578 | - | 112,777 | ||||||||||||
Other
investments
|
100 | - | - | 100 | ||||||||||||
$ | 127,516 | $ | 1,989 | $ | 9 | $ | 129,496 |
11
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
The
amortized cost and estimated fair value of securities available for sale and
securities held to maturity (in thousands) at March 31, 2010, by contractual
maturity, are shown in the following table. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. The estimated fair
value of securities was determined using quoted market prices.
March 31,
2010
|
||||||||
Amortized Cost
|
Estimated Fair Value
|
|||||||
Securities
Available for Sale
|
||||||||
Due
in one year or less
|
$ | 24,610 | $ | 25,075 | ||||
Due
after one year through five years
|
1,442,024 | 1,459,859 | ||||||
Due
after five years through ten years
|
244,490 | 251,663 | ||||||
Due
after ten years
|
465,691 | 482,011 | ||||||
No
contractual maturity
|
1,962 | 1,943 | ||||||
$ | 2,178,777 | $ | 2,220,551 | |||||
Securities
Held to Maturity
|
||||||||
Due
in one year or less
|
$ | 3,889 | $ | 3,920 | ||||
Due
after one year through five years
|
94,829 | 97,066 | ||||||
Due
after five years through ten years
|
734 | 729 | ||||||
$ | 99,452 | $ | 101,715 |
Proceeds
from sales of securities available for sale, gross realized gains and losses on
sales, and maturities and other securities transactions (in thousands) are
summarized as follows. The net gains or losses are shown in noninterest income
as gain/loss on securities.
Three
Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Proceeds
from sales of securities available for sale
|
$ | - | $ | 5,729 | ||||
Sales
transactions of securities available for sale:
|
||||||||
Gross
realized losses
|
$ | - | $ | (5 | ) | |||
Other
securities transactions (investments included in other
assets):
|
||||||||
Gross
realized gains
|
71 | - | ||||||
Other-than-temporary
impairment
|
(460 | ) | (2,949 | ) | ||||
Net
loss on securities
|
$ | (389 | ) | $ | (2,954 | ) |
Securities
with estimated fair values of $1.3 billion and $1.1 billion at March 31, 2010
and December 31, 2009, respectively, were pledged to secure public deposits and
for other purposes. The amortized cost totaled approximately $1.2 billion and
$1.1 billion for these same periods.
12
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Gross
unrealized losses on investment securities and the fair value of the related
securities, aggregated by investment category and length of time that individual
securities have been in an unrealized loss position, were as follows (in
thousands):
March 31,
2010
|
||||||||||||||||||||||||
Less
than 12 Months
|
12
Months or Longer
|
Total
|
||||||||||||||||||||||
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
|||||||||||||||||||
Securities
Available for Sale
|
||||||||||||||||||||||||
U.S.
Treasury
|
$ | 2,055 | $ | 9 | $ | - | $ | - | $ | 2,055 | $ | 9 | ||||||||||||
U.S.
Government agencies
|
42,413 | 8 | - | - | 42,413 | 8 | ||||||||||||||||||
Agency
residential mortgage-backed securities
|
203,184 | 2,463 | - | - | 203,184 | 2,463 | ||||||||||||||||||
Private
label residential mortgage-backed securities
|
- | - | 2,394 | 242 | 2,394 | 242 | ||||||||||||||||||
Other
investments
|
364 | 89 | 975 | 79 | 1,339 | 168 | ||||||||||||||||||
$ | 248,016 | $ | 2,569 | $ | 3,369 | $ | 321 | $ | 251,385 | $ | 2,890 | |||||||||||||
Securities
Held to Maturity
|
||||||||||||||||||||||||
State
and municipals
|
$ | 1,059 | $ | 5 | $ | 506 | $ | 3 | $ | 1,565 | $ | 8 |
December 31,
2009
|
||||||||||||||||||||||||
Less
than 12 Months
|
12
Months or Longer
|
Total
|
||||||||||||||||||||||
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
|||||||||||||||||||
Securities
Available for Sale
|
||||||||||||||||||||||||
U.S.
Treasury
|
$ | 2,045 | $ | 24 | $ | - | $ | - | $ | 2,045 | $ | 24 | ||||||||||||
Agency
residential mortgage-backed securities
|
758,427 | 7,053 | 2,572 | 12 | 760,999 | 7,065 | ||||||||||||||||||
Private
label residential mortgage-backed securities
|
- | - | 2,392 | 265 | 2,392 | 265 | ||||||||||||||||||
State
and municipals
|
- | - | 648 | 4 | 648 | 4 | ||||||||||||||||||
Other
investments
|
399 | 116 | 830 | 190 | 1,229 | 306 | ||||||||||||||||||
$ | 760,871 | $ | 7,193 | $ | 6,442 | $ | 471 | $ | 767,313 | $ | 7,664 | |||||||||||||
Securities
Held to Maturity
|
||||||||||||||||||||||||
State
and municipals
|
$ | 1,237 | $ | 9 | $ | - | $ | - | $ | 1,237 | $ | 9 |
At March
31, 2010, TSFG had 24 individual investments that were in an unrealized loss
position. The unrealized losses summarized above, except for other investments,
were primarily attributable to changes in interest rates, rather than
deterioration in credit quality. The majority of these securities are government
or agency securities and, therefore, pose minimal credit risk and TSFG’s private
label mortgage-backed securities are AAA-rated. TSFG does not intend to sell
these securities and it is not more likely than not that it will be required to
sell the securities before recovery of the amortized cost basis. Therefore, at
March 31, 2010, these investments are not considered impaired on an
other-than-temporary basis.
At March
31, 2010, the securities included in other investments were not considered
impaired on an other-than-temporary basis based on either the short duration of
the unrealized loss, or, to the extent that an investment has been in an
unrealized loss position for more than a year, improving trends in fair
value.
TSFG also
invests in limited partnerships, limited liability companies (LLC's) and other
privately held companies. These investments are included in other assets. In
first quarter 2010 and 2009, TSFG recorded $460,000 and $2.9 million,
respectively, in other-than-temporary impairment on these investments. At March
31, 2010, TSFG's investment in these entities totaled $14.1 million, of which
$7.1 million were accounted for under the cost method and $7.0 million were
accounted for under the equity method.
13
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Note 5 –
Loans
The
following is a summary of loans by category (in thousands):
March 31,
2010
|
December 31,
2009
|
|||||||
Commercial
Loans
|
||||||||
Commercial
and industrial
|
$ | 1,924,014 | $ | 2,080,329 | ||||
Commercial
owner - occupied real estate
|
1,280,010 | 1,271,525 | ||||||
Commercial
real estate
|
3,321,544 | 3,501,809 | ||||||
6,525,568 | 6,853,663 | |||||||
Consumer
Loans
|
||||||||
Indirect
- sales finance
|
202,504 | 230,426 | ||||||
Consumer
lot loans
|
132,307 | 144,315 | ||||||
Direct
retail
|
79,617 | 83,460 | ||||||
Home
equity
|
783,868 | 787,645 | ||||||
1,198,296 | 1,245,846 | |||||||
Mortgage
Loans
|
278,830 | 286,618 | ||||||
Total
loans held for investment
|
8,002,694 | 8,386,127 | ||||||
Loans
held for sale
|
13,296 | 15,758 | ||||||
Total
loans
|
$ | 8,015,990 | $ | 8,401,885 | ||||
Included
in the above:
|
||||||||
Nonaccrual
loans held for investment
|
$ | 374,156 | $ | 399,046 | ||||
Loans
past due 90 days still accruing interest
|
3,442 | 10,465 |
During
the three months ended March 31, 2010, TSFG transferred (and sold) $27.7 million
of loans from the held for investment portfolio to the held for sale portfolio.
In connection with the sales, TSFG charged-off $3.3 million against the
allowance for loan losses prior to transferring them to loans held for
sale.
Loans are
considered to be impaired when, in management’s judgment and based on current
information, the full collection of principal and interest becomes doubtful. A
loan is also considered impaired if its terms are modified in a troubled debt
restructure. At March 31, 2010, TSFG did not have any material commitments to
lend additional money to borrowers whose loans had been restructured in a
troubled debt restructure. The following table summarizes information on
impaired loans (in thousands):
At
and For the Three Months Ended
|
At
and For the Year Ended
|
|||||||
March 31,
2010
|
December 31,
2009
|
|||||||
Impaired
loans with specific allowance
|
$ | 193,420 | $ | 197,576 | ||||
Impaired
loans with no specific allowance
|
193,296 | 194,763 | ||||||
Total
impaired loans
|
$ | 386,716 | $ | 392,339 | ||||
Related
allowance
|
$ | 37,675 | $ | 37,656 | ||||
Interest
income recognized
|
449 | 1,484 | ||||||
Foregone
interest
|
5,676 | 15,527 |
14
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Note
6 – Allowance for Credit Losses
The
allowance for loan losses, reserve for unfunded lending commitments, and
allowance for credit losses are presented below (in thousands):
At
and For the Three Months Ended March 31,
|
At
and For the Year Ended December 31,
|
|||||||||||
2010
|
2009
|
2009
|
||||||||||
Allowance
for loan losses
|
||||||||||||
Balance
at beginning of period
|
$ | 365,642 | $ | 247,086 | $ | 247,086 | ||||||
Allowance
adjustment for loans sold
|
- | - | (4,471 | ) | ||||||||
Provision
for loan losses
|
95,260 | 142,146 | 664,208 | |||||||||
Loans
charged-off
|
(93,619 | ) | (110,443 | ) | (556,585 | ) | ||||||
Recoveries
of loans previously charged off
|
5,863 | 1,367 | 15,404 | |||||||||
Balance
at end of period
|
$ | 373,146 | $ | 280,156 | $ | 365,642 | ||||||
Reserve
for unfunded lending commitments
|
||||||||||||
Balance
at beginning of year
|
$ | 7,484 | $ | 2,788 | $ | 2,788 | ||||||
Provision
for unfunded lending commitments
|
(137 | ) | 481 | 4,696 | ||||||||
Balance
at end of period
|
$ | 7,347 | $ | 3,269 | $ | 7,484 | ||||||
Allowance
for credit losses
|
||||||||||||
Balance
at beginning of year
|
$ | 373,126 | $ | 249,874 | $ | 249,874 | ||||||
Allowance
adjustment for loans sold
|
- | - | (4,471 | ) | ||||||||
Provision
for credit losses
|
95,123 | 142,627 | 668,904 | |||||||||
Loans
charged-off
|
(93,619 | ) | (110,443 | ) | (556,585 | ) | ||||||
Recoveries
of loans previously charged off
|
5,863 | 1,367 | 15,404 | |||||||||
Balance
at end of period
|
$ | 380,493 | $ | 283,425 | $ | 373,126 |
Note
7 – Other Real Estate Owned
Other
real estate owned (“OREO”), consisting of properties obtained through
foreclosure or in satisfaction of loans, is reported at the lower of cost or
fair value, determined on the basis of current appraisals, comparable sales, and
other estimates of fair value obtained principally from independent sources,
adjusted for estimated selling costs. At the time of foreclosure, any excess of
the loan balance over the fair value of the real estate held as collateral is
recorded as a charge against the allowance for loan losses. Gains or losses on
sale and any subsequent adjustments to the value are recorded as a component of
noninterest expense. The following presents the details for OREO (in
thousands):
Three
Months Ended
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
Balance
at beginning of period
|
$ | 122,086 | $ | 44,668 | ||||
Loans
transferred in
|
35,213 | 32,092 | ||||||
Proceeds
from sales
|
(9,176 | ) | (2,964 | ) | ||||
Loss
on sales
|
(944 | ) | (124 | ) | ||||
Write-downs
|
(4,548 | ) | - | |||||
Balance
at end of period
|
$ | 142,631 | $ | 73,672 |
Note
8 – Derivative Financial Instruments and Hedging Activities
TSFG is
exposed to certain risks arising from both its ongoing business operations and
economic conditions. The Company principally manages its exposure to a wide
variety of business and operational risks through management of its core
business activities. TSFG manages economic risks, including interest rate,
liquidity, and credit risk, primarily by
15
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
managing
the amount, sources, and duration of its assets and liabilities and the use of
derivative financial instruments. Specifically, TSFG enters into derivative
financial instruments to manage exposure that arises from business activities
that result in the receipt or payment of future known and uncertain cash
amounts, the value of which are determined by interest rates. The Company’s
derivative financial instruments are used to manage the differences in the
amount, timing, and duration of known or expected cash receipts and known or
expected cash payments, principally related to certain variable-rate loans and
fixed-rate borrowings.
The fair
value of TSFG’s derivative assets and liabilities (included in other assets and
other liabilities on the consolidated balance sheet) and their related notional
amounts (in thousands) are presented below.
March 31,
2010
|
December 31,
2009
|
|||||||||||||||||||||||
Fair
Value
|
Notional
|
Fair
Value
|
Notional
|
|||||||||||||||||||||
Asset
|
Liability
|
Amount
|
Asset
|
Liability
|
Amount
|
|||||||||||||||||||
Derivatives
designated as hedging instruments under GAAP:
|
||||||||||||||||||||||||
Cash
flow hedges
|
||||||||||||||||||||||||
Interest
rate swaps associated with lending activities
|
$ | 1,504 | $ | - | $ | 350,000 | $ | 14,339 | $ | - | $ | 780,000 | ||||||||||||
Fair
value hedges
|
||||||||||||||||||||||||
Interest
rate swaps associated with brokered CDs
|
439 | 16 | 24,539 | 1,895 | 48 | 54,185 | ||||||||||||||||||
Total
derivatives designated as hedging instruments under GAAP
|
$ | 1,943 | $ | 16 | $ | 374,539 | $ | 16,234 | $ | 48 | $ | 834,185 | ||||||||||||
Derivatives
not designated as hedging instruments under GAAP:
|
||||||||||||||||||||||||
Interest
rate swaps
|
$ | 4,181 | $ | 1,437 | $ | 313,471 | $ | 279 | $ | 480 | $ | 119,755 | ||||||||||||
Forward
foreign currency contracts
|
295 | 295 | 11,493 | 12 | 12 | 13,331 | ||||||||||||||||||
Customer
swap contracts
|
26,939 | 23,382 | 827,138 | 25,658 | 22,067 | 850,680 | ||||||||||||||||||
Options,
mortgage contracts and other
|
250 | 266 | 107,768 | 416 | 433 | 111,328 | ||||||||||||||||||
Total
derivatives not designated as hedging instruments under
GAAP
|
$ | 31,665 | $ | 25,380 | $ | 1,259,870 | $ | 26,365 | $ | 22,992 | $ | 1,095,094 | ||||||||||||
Total
derivatives
|
$ | 33,608 | $ | 25,396 | $ | 1,634,409 | $ | 42,599 | $ | 23,040 | $ | 1,929,279 |
Cash
Flow Hedges of Interest Rate Risk
TSFG’s
objectives in using interest rate derivatives are to add stability to interest
income and to manage its exposure to interest rate movements. To accomplish this
objective, the Company primarily uses interest rate swaps as part of its
interest rate risk management strategy. Interest rate swaps designated as cash
flow hedges involve the receipt of fixed-rate amounts from a counterparty in
exchange for the Company making variable-rate payments over the life of the
agreements without exchange of the underlying notional amount.
The
effective portion of changes in the fair value of derivatives designated and
that qualify as cash flow hedges is recorded in accumulated other comprehensive
income and is subsequently reclassified into earnings in the period that the
hedged forecasted transaction affects earnings. During 2010 and 2009, such
derivatives were used to hedge the variable cash inflows associated with
existing pools of prime and LIBOR-based loan assets. The ineffective portion of
the change in fair value of the derivatives is recognized directly in earnings.
For first quarter 2010, no hedge ineffectiveness was recognized. For first
quarter 2009, the Company recognized a loss of $174,000 for hedge
ineffectiveness attributable to a mismatch between the swap notional and the
aggregate principal amount of the designated loan pools. In addition, certain
swaps failed to qualify for hedge accounting due to this mismatch; accordingly,
the change in fair value of these swaps during the three months ended March 31,
2009 of $221,000, was recognized directly in earnings as a loss and was included
in the sections entitled “Derivatives Not Designated as Hedging Instruments”
throughout this footnote.
Certain
of these swaps with a notional amount of $265.0 million were terminated or
de-designated in first quarter 2010, which locked in a gain of approximately $12
million that will be amortized to the statement of operations
16
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
as the
hedged cash flows impact earnings. During the three months ended March 31, 2010
and 2009, the Company accelerated the reclassification of an unrealized gain in
accumulated other comprehensive income of $127,000 and $832,000, respectively,
to earnings as a result of the hedged forecasted transactions becoming probable
not to occur. During the next twelve months, the Company estimates that $10.7
million will be reclassified as an increase to interest income. With respect to
cash flow hedges, forecasted transactions are being hedged through
2012.
Fair
Value Hedges of Interest Rate Risk
TSFG is
exposed to changes in the fair value of certain of its fixed-rate obligations
due to changes in the benchmark interest rate, LIBOR, as well as to overall
changes in fair value for certain other fixed-rate obligations. The Company uses
interest rate swaps to convert the payment profile on certain brokered CDs from
a fixed rate to a floating rate based on LIBOR and to similarly convert exposure
taken on through the issuance of equity-linked and inflation-indexed
certificates of deposit. Interest rate swaps designated as fair value hedges
involve the receipt of fixed-rate amounts from a counterparty in exchange for
the Company making variable-rate payments over the life of the agreements
without the exchange of the underlying notional amount.
For
derivatives that are designated and that qualify as fair value hedges, the gain
or loss on the derivative as well as the offsetting loss or gain on the hedged
item attributable to the hedged risk are recognized in earnings. The Company
includes the gain or loss on the hedged items in the same line item as the
offsetting loss or gain on the related derivatives. For the three months ended
March 31, 2010 and 2009, the Company recognized a loss of $5,000 and a gain of
$594,000, respectively, related to hedge ineffectiveness and amounts excluded
from effectiveness testing. The net impact of the Company’s fair value hedges to
interest expense for the three months ended March 31, 2010 and 2009, which
includes net settlements on the derivatives and any amortization of the basis
adjustment on the hedged items, was a reduction to interest expense of $509,000
and $1.2 million, respectively.
Non-designated
Hedges
Derivatives
not designated as hedges are used to manage the Company’s exposure to interest
rate movements and other identified risks but do not meet the strict hedge
accounting requirements under GAAP. Changes in the fair value of derivatives not
designated in hedging relationships are recorded directly in noninterest
income.
Additionally, TSFG offers programs that
permit its customers to hedge various risks, including fluctuations in interest
rates and foreign exchange rates. Customer contracts are frequently interest
rate swaps in conjunction with floating rate loans to achieve fixed rate
financing and foreign exchange forward contracts to manage currency risk
associated with non-dollar denominated transactions. Through these programs,
derivative contracts are executed between the customers and TSFG. In most cases,
offsetting contracts are executed between TSFG and selected third parties to
hedge market risk created through the customer contracts. The interest rates on
the third party contracts are identical to the interest rates on the customer
contracts, and thus, the change in fair value of the customer contracts will
generally be offset by the change in fair value of the related third-party
contracts, with the exception of any credit valuation adjustments that may be
recorded. However, during 2009 certain counterparties terminated their
third-party contracts as a result of TSFG’s rating downgrades, and TSFG did not
replace a portion of the terminated contracts. As a result, certain customer
contracts are no longer offset by third-party hedges. At March 31, 2010, the
total fair value of TSFG’s interest rate swaps with customers was an asset of
$26.9 million, net of a $3.0 million established reserve for credit losses, and
a liability of $152,000. During first quarter 2010, TSFG recorded credit losses
of $2.1 million on its customer swaps.
From time
to time, TSFG enters into derivative financial contracts that are not designed
to hedge specific transactions or identified assets or liabilities and therefore
do not qualify for hedge accounting, but are rather part of the Company’s
overall risk management strategy. These contracts are marked to market through
noninterest income each period and are generally short-term in
nature.
As part
of its mortgage lending activities, TSFG originates certain residential loans
and commits these loans for sale. The commitments to originate residential loans
(“rate locks’) and the sales commitments are freestanding derivative instruments
and are generally funded within 90 days. The value of the rate locks is
estimated based on indicative market prices being bid on similarly structured
mortgage backed securities.
17
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Effect
of Derivative Instruments on the Consolidated Statements of
Operations
The
effect of derivative instruments on the consolidated statements of operations is
presented in the tables below (in thousands):
Three
Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Derivatives
in Cash Flow Hedging Relationships
|
||||||||
Interest
rate swaps associated with lending activities:
|
||||||||
Amount
of gain recognized in OCI
|
$ | 1,658 | $ | 3,666 | ||||
Amount
of gain reclassified from accumulated OCI to interest income (effective
portion)
|
4,881 | 9,919 | ||||||
Amount
of gain reclassified from accumulated OCI to gain/loss on
certain derivative activities (effective portion)
|
127 | 944 | ||||||
Amount
of loss recognized in gain/loss on certain derivative activities
(ineffective portion and amount excluded from effectiveness
testing)
|
- | (174 | ) | |||||
Interest
rate floor associated with lending activities:
|
||||||||
Amount
of gain recognized in OCI
|
- | 222 | ||||||
Amount
of gain reclassified from accumulated OCI to interest income (effective
portion)
|
- | 2,250 |
Three
Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Derivatives
in Fair Value Hedging Relationships
|
||||||||
Interest
rate swaps associated with brokered CDs:
|
||||||||
Amount
of gain (loss) recognized in gain on certain derivative activities on
derivative
|
$ | 64 | $ | 1,210 | ||||
Amount
of gain (loss) recognized in gain on certain derivative activities on
hedged item
|
(69 | ) | (616 | ) |
Amount
of Gain (Loss)Recognized in Income on Derivative
|
||||||||||
Derivatives
Not Designated as Hedging
|
Location
of Gain (Loss)Recognized in Income on
|
Three
Months Ended
March 31,
|
||||||||
Instruments
|
Derivative
|
2010
|
2009
|
|||||||
Interest
rate swaps
|
Gain
(loss) on certain derivative activities
|
$ | (61 | ) | $ | (221 | ) | |||
Interest
rate swaps
|
Other
noninterest income
|
(633 | ) | - | ||||||
Customer
swaps
|
Other
noninterest income
|
(683 | ) | 574 | ||||||
Mortgage
contracts
|
Mortgage
banking income
|
4 | 49 | |||||||
Other
contracts
|
Gain
(loss) on certain derivative activities
|
(2 | ) | (8 | ) | |||||
$ | (1,375 | ) | $ | 394 |
Credit-risk-related
Contingent Features
TSFG has
agreements with its derivative counterparties that contain a provision in which
if the Company defaults on any of its indebtedness, including default where
repayment of the indebtedness has not been accelerated by the lender, then the
Company could also be declared in default on its derivative
obligations.
18
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Furthermore,
certain of TSFG’s derivative instruments contain provisions that require the
Company to maintain its status as a well / adequately capitalized institution
and/or the Company’s debt to maintain a certain credit rating from one or more
of the major credit rating agencies. These provisions enable the counterparties
to the derivative instruments to request immediate payment or require TSFG to
post additional collateral.
As of
March 31, 2010, the fair value of derivatives in a net liability position, which
includes accrued interest but excludes any adjustment for nonperformance risk,
related to these agreements was $20.3 million. As of March 31, 2010, the Company
had minimum collateral posting thresholds with certain of its derivative
counterparties and had posted collateral of $37.4 million. Since the Company was
in violation of certain debt rating provisions at March 31, 2010, it could have
been required to settle its obligations under the agreements at the termination
value ($20.3 million) and could have been required to post additional collateral
with the respective counterparty (up to $2.0 million).
Note
9 – Commitments and Contingent Liabilities
Legal
Proceedings
TSFG is
currently subject to various legal proceedings, including the litigation
discussed below, and claims arising in the ordinary course of business. In the
opinion of management based on consultation with external legal counsel, any
reasonably foreseeable outcome of such current litigation would not be expected
to materially affect TSFG's consolidated financial position or results of
operations, except to the extent indicated in the discussion below.
In
February 2009, Carolina First Bank was named as a defendant in a complaint filed
in the In re Louis J.
Pearlman bankruptcy pending in the United States Bankruptcy Court, Middle
District of Florida, Orlando Division. The complaint seeks, among other things,
to avoid certain fraudulent transfers Carolina First Bank allegedly received in
connection with repayment of a loan and alleges approximately $24 million in
compensatory damages, plus punitive damages. TSFG is vigorously defending the
allegations and has filed an answer denying liability and asserting affirmative
defenses. The case is currently in the pre-trial discovery stage. In April 2009,
Bank of America, Fifth Third Bank, Carolina First Bank, Sun Trust Bank, and Dun
& Bradstreet, Inc. were named as defendants in a complaint captioned Elizabeth Groom, et. al v.
Bank of America, et.
al, which is pending in the United States District Court for the Middle
District of Florida. The Groom complaint seeks
unspecified damages relating to individual investor losses resulting from a
“Ponzi scheme” allegedly orchestrated by Louis J. Pearlman over a period
spanning several decades. TSFG intends to vigorously defend the allegations and
has moved to dismiss the complaint, or in the alternative, for a more definite
statement. The case is currently stayed pending the outcome of related
litigation pending in the United States District Court in New York, in which
TSFG is not a party. In August 2009, Carolina First Bank was named as a
defendant in a complaint filed in federal court in Minnesota by American Bank of
St. Paul. The complaint, as amended, seeks compensatory damages of $36 million,
plus punitive damages. American Bank of St. Paul alleges that it is the
servicing bank for itself and twenty-six participant banks regarding a loan made
to Pearlman/related entities which paid off a Carolina First Bank loan. TSFG is
vigorously defending the allegations and has filed an answer denying liability
and asserting affirmative defenses. The case is currently in the pre-trial
discovery stage.
While the
Company believes it has meritorious defenses against these three suits, the
ultimate resolution of these matters could result in a loss in excess of the
amount accrued. An adverse resolution of these matters could be material to
TSFG’s financial position and/or results of operations.
Recourse
Reserve
As part
of its 2004 acquisition of Florida Banks, Inc. (“Florida Banks”), TSFG acquired
a recourse reserve associated with loans previously sold from Florida Banks’
wholesale mortgage operation. This recourse requires the repurchase of loans at
par plus accrued interest from the buyer, upon the occurrence of certain events.
At March 31, 2010, the estimated recourse reserve liability, included in other
liabilities, totaled $6.0 million. TSFG will continue to evaluate the reserve
level and may make adjustments through earnings as more information becomes
known. There can be no guarantee that any liability or cost arising out of this
matter will not exceed any established reserves.
Dividend
Arrearage on Preferred Securities
During
first quarter 2010, TSFG suspended dividend payments on its preferred stock and
all remaining outstanding equity and capital instruments. (This suspension of
dividends does not constitute a default under the
19
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
applicable
documents governing such instruments.) As a result, the Company is in arrears in
the payment of dividends with respect to the Series 2008-T Preferred Stock,
trust preferred securities, and REIT preferred securities, all of which are
cumulative preferred securities. The Company has also suspended the quarterly
dividends (which total $116,000) on its Series 2008D-V and Series 2008D-NV
Preferred Stock, although such dividends are non-cumulative.
The trust
preferred securities are issued by statutory business trusts which are not
consolidated by TSFG. However, the sole assets of the Trusts are subordinated
notes (the “Notes”) of TSFG, which are included in long-term debt on the
Consolidated Balance Sheet. TSFG’s deferral of interest payments on these Notes
effectively defers payment of dividends on the trust preferred securities. The
REIT preferred securities are also included in long-term debt on the
Consolidated Balance Sheet.
As of
March 31, 2010, the arrearage with respect to the Series 2008-T Preferred Stock,
trust preferred securities, and REIT preferred securities held by third parties
was $4.3 million, $661,000, and $785,000, respectively, or $5.8 million in the
aggregate.
Loan
Commitments
TSFG is a
party to financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, commercial letters of credit,
and standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets.
TSFG’s
exposure to credit loss is represented by the contractual amount of these
instruments. TSFG uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet
instruments.
Commitments
to extend credit are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since certain of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. TSFG evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of the collateral obtained, if deemed necessary
by TSFG upon extension of credit, is based on TSFG’s credit evaluation of the
borrower.
Commercial
letters of credit and standby letters of credit are conditional commitments
issued by TSFG to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in making loans to customers. TSFG generally holds collateral
supporting those commitments if deemed necessary. A summary of the contractual
amounts of TSFG’s financial instruments relating to extension of credit with
off-balance-sheet risk follows (in thousands):
Outstanding
Commitments
|
||||||||
March 31, 2010
|
December 31, 2009
|
|||||||
Loan
commitments:
|
||||||||
Commercial,
industrial, and other
|
$ | 1,020,033 | $ | 1,085,129 | ||||
Commercial
owner-occupied and commercial real estate
|
100,535 | 119,928 | ||||||
Home
equity loans
|
414,629 | 423,151 | ||||||
Total
loan commitments
|
1,535,197 | 1,628,208 | ||||||
Standby
letters of credit
|
205,136 | 199,237 | ||||||
Documentary
letters of credit
|
2,454 | 2,066 | ||||||
Unused
business credit card lines
|
30,874 | 31,746 | ||||||
Total
|
$ | 1,773,661 | $ | 1,861,257 |
20
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Note
10 – Preferred Stock
The
following is a summary of TSFG’s preferred stock by series:
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
Number
of Shares
|
Carrying
Value ($000s)
|
Number
of Shares
|
Carrying
Value ($000s)
|
|||||||||||||
Series
2008D-V
|
1,048 | $ | 1,048 | 1,048 | $ | 1,048 | ||||||||||
Series
2008D-NV
|
3,602 | 3,602 | 3,602 | 3,602 | ||||||||||||
Mandatorily
convertible preferred stock
|
4,650 | 4,650 | 4,650 | 4,650 | ||||||||||||
Series
2008-T
|
347,000 | 347,000 | 347,000 | 347,000 | ||||||||||||
Less
discount originally attributable to the Warrant issued to the Treasury
Department, net of accretion
|
- | (14,969 | ) | - | (15,867 | ) | ||||||||||
Series
2008-T, net
|
347,000 | 332,031 | 347,000 | 331,133 | ||||||||||||
Total
preferred stock
|
351,650 | $ | 336,681 | 351,650 | $ | 335,783 |
Note
11 – Regulatory Capital Requirements
TSFG and
Carolina First Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, TSFG and Carolina
First Bank must meet specific capital guidelines that involve quantitative
measures of the assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. TSFG's and Carolina First
Bank’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require TSFG and
Carolina First Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and tier 1 capital (as defined in the regulation) to
risk-weighted assets (as defined) and to average assets (as defined). Management
believes, as of March 31, 2010, that TSFG and Carolina First Bank met all
capital adequacy requirements. However, as long as Carolina First Bank is
subject to the Consent Order, it will not be deemed to be well capitalized even
if it maintains the minimum capital ratios to be well
capitalized.
21
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
The
following table presents TSFG's and Carolina First Bank's actual capital amounts
and ratios, as well as the minimum calculated amounts for each
regulatory-defined category (dollars in thousands):
Minimum
Requirements
|
||||||||||||||||||||||||
Actual
|
For
Capital Adequacy Purposes
|
To
Be Well Capitalized Under Prompt Corrective Action Provisions (1)
|
||||||||||||||||||||||
March 31,
2010
|
December 31,
2009
|
March 31,
2010
|
December 31,
2009
|
March 31,
2010
|
December 31,
2009
|
|||||||||||||||||||
TSFG
|
||||||||||||||||||||||||
Tier
1 capital
|
$ | 865,438 | $ | 948,762 | $ | 363,614 | $ | 382,008 | n/a | n/a | ||||||||||||||
Total
risk-based capital
|
984,564 | 1,073,472 | 727,228 | 764,015 | n/a | n/a | ||||||||||||||||||
Tier
1 capital ratio
|
9.52 | % | 9.93 | % | 4.00 | % | 4.00 | % | n/a | n/a | ||||||||||||||
Total
risk-based capital ratio
|
10.83 | 11.24 | 8.00 | 8.00 | n/a | n/a | ||||||||||||||||||
Leverage
ratio
|
7.41 | 7.91 | 4.00 | 4.00 | n/a | n/a | ||||||||||||||||||
Carolina
First Bank
|
||||||||||||||||||||||||
Tier
1 capital
|
$ | 802,204 | $ | 854,808 | $ | 362,785 | $ | 381,423 | $ | 544,177 | $ | 572,134 | ||||||||||||
Total
risk-based capital
|
947,373 | 1,005,638 | 725,570 | 762,846 | 906,962 | 953,557 | ||||||||||||||||||
Tier
1 capital ratio
|
8.85 | % | 8.96 | % | 4.00 | % | 4.00 | % | 6.00 | % | 6.00 | |||||||||||||
Total
risk-based capital ratio
|
10.45 | 10.55 | 8.00 | 8.00 | 10.00 | 10.00 | ||||||||||||||||||
Leverage
ratio
|
6.87 | 7.13 | 4.00 | 4.00 | 5.00 | 5.00 |
(1)
|
Minimum
capital amounts and ratios are the amounts to be well capitalized under
the various regulatory capital requirements administered by the federal
banking agencies. On April 30, 2010, Carolina First Bank became subject to
a regulatory Consent Order with the FDIC which requires that, within 120
days of the agreement, Carolina First Bank must increase its Tier 1
leverage ratio to 8% and its total risk-based capital ratio to 12%.
Regardless of the Bank’s capital ratios, it cannot be classified as “well
capitalized” while it is operating under the Consent
Order.
|
Note
12 – Average Share Information
The
following is a summary of the basic and diluted average common shares
outstanding and loss per share calculations (in thousands, except share and per
share data):
Three
Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
loss available to common shareholders (numerator)
|
$ | (85,829 | ) | $ | (90,811 | ) | ||
Basic
|
||||||||
Average
common shares outstanding (denominator)
|
215,522,634 | 82,223,190 | ||||||
Loss
per share
|
$ | (0.40 | ) | $ | (1.10 | ) | ||
Diluted
|
||||||||
Average
common shares outstanding
|
215,522,634 | 82,223,190 | ||||||
Average
dilutive potential common shares
|
- | - | ||||||
Average
diluted shares outstanding (denominator)
|
215,522,634 | 82,223,190 | ||||||
Loss
per share
|
$ | (0.40 | ) | $ | (1.10 | ) |
For the
three months ended March 31, 2010 and 2009, options to purchase an additional
3.3 million and 4.6 million shares, respectively, of common stock were
outstanding but were not included in the computation of diluted earnings per
share because either their inclusion would have had an antidilutive effect or
the exercise price of the option was greater than the average market price of
the common shares. Also excluded from the computation of diluted earnings per
share for the three months ended March 31, 2010 and 2009 because of their
antidilutive effect were 715,000
22
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
and 29.2
million shares, respectively, of common stock related to mandatorily convertible
preferred stock, 10.1 million shares of common stock related to warrants, and
112,000 and 288,000 shares, respectively, of common stock related to restricted
stock and restricted stock units granted under equity incentive
programs.
Note
13 – Fair Value Disclosures
TSFG
carries certain financial instruments at fair value on a recurring basis,
specifically securities available for sale and derivative assets and
liabilities. Fair value is defined as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. TSFG determines the fair
values of its financial instruments based on the fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
|
·
|
Level
1 – Valuations are based on quoted prices in active markets for identical
assets and liabilities. Level 1 assets include debt and equity securities
that are traded in an active exchange market, as well as certain U.S.
Treasury securities that are highly liquid and are actively traded in
over-the-counter markets.
|
|
·
|
Level
2 – Valuations are based on observable inputs other than Level 1 prices,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; inputs that are observable (such as interest
rates, volatilities, prepayment speeds, credit risks, etc.); or inputs
that can be corroborated by observable market data. Level 2 assets and
liabilities include debt securities with quoted prices that are traded
less frequently than exchange-traded instruments and derivative contracts
whose value is determined using a pricing model with inputs that are
observable in the market or can be derived principally from or
corroborated by observable market data. This category generally includes
U.S. government agencies, agency mortgage-backed debt securities,
private-label mortgage-backed debt securities, state and municipal bonds,
and certain derivative contracts.
|
|
·
|
Level
3 – Valuations include unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the
assets. For example, this category includes certain derivative contracts
for which independent pricing information is not available for a
significant portion of the underlying
assets.
|
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
Following
is a description of the valuation methodologies used for the major categories of
financial assets and liabilities measured at fair value on a recurring
basis.
Securities Available for
Sale. Where quoted market prices are available in an active market,
securities are valued at the last traded price by obtaining feeds from a number
of live data sources including active market makers and inter-dealer brokers.
These securities are classified as Level 1 within the valuation hierarchy and
include debt and equity securities that are traded in an active exchange market,
as well as certain U.S. Treasury securities that are highly liquid and are
actively traded in over-the-counter markets. If quoted market prices are not
available, fair values are estimated by using bid prices and quoted prices of
pools or tranches of securities with similar characteristics. These types of
securities are classified as Level 2 within the valuation hierarchy and
generally include U.S. government agencies, agency mortgage-backed debt
securities, private-label mortgage-backed debt securities, and state and
municipal bonds. In certain cases where there is limited activity or less
transparency around inputs to valuation, securities are classified as Level 3
within the valuation hierarchy.
Derivative Assets and Liabilities.
TSFG measures the fair value of many of its derivatives using internal
valuation models that use primarily market observable inputs, such as yield
curves and option volatilities, and accordingly, those derivatives are
classified as Level 2. When available, TSFG also obtains dealer quotations for
these derivatives for comparative purposes to assess the reasonableness of the
model valuations. Examples of Level 2 derivatives are basic interest rate swaps.
Level 3 derivative instruments have primary risk characteristics that relate to
unobservable pricing parameters. For purposes of potential valuation adjustments
to its derivative positions, TSFG evaluates the credit risk of its
counterparties as well as that of TSFG. Accordingly, TSFG has considered factors
such as the likelihood of default by
23
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
TSFG and
its counterparties, its net exposures, and remaining contractual life, among
other things, in determining fair value adjustments related to credit
risk.
The
tables below present the balances of assets and liabilities measured at fair
value on a recurring basis (in thousands):
March 31, 2010
|
||||||||||||||||
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
Securities
available for sale:
|
||||||||||||||||
U.S.
Treasury
|
$ | 2,055 | $ | 2,055 | $ | - | $ | - | ||||||||
U.S.
Government agencies
|
286,352 | 283,349 | 3,003 | - | ||||||||||||
Agency
residential mortgage-backed securities
|
1,918,914 | - | 1,918,914 | - | ||||||||||||
Private
label residential mortgage-backed securities
|
7,628 | - | 7,628 | - | ||||||||||||
State
and municipals
|
3,657 | - | 3,407 | 250 | ||||||||||||
Other
investments
|
1,945 | 1,367 | 577 | 1 | ||||||||||||
Total
securities available for sale
|
2,220,551 | 286,771 | 1,933,529 | 251 | ||||||||||||
Derivative
assets:
|
||||||||||||||||
Interest
rate swaps
|
6,124 | - | 5,029 | 1,095 | ||||||||||||
Forward
foreign currency contracts
|
295 | - | 295 | - | ||||||||||||
Customer
swap contracts
|
26,939 | - | 24,986 | 1,953 | ||||||||||||
Options,
mortgage contracts and other
|
250 | - | - | 250 | ||||||||||||
Total
derivative assets
|
33,608 | - | 30,310 | 3,298 | ||||||||||||
Total
|
$ | 2,254,159 | $ | 286,771 | $ | 1,963,839 | $ | 3,549 | ||||||||
Derivative
liabilities:
|
||||||||||||||||
Interest
rate swaps
|
$ | 1,453 | $ | - | $ | 1,453 | $ | - | ||||||||
Forward
foreign currency contracts
|
295 | - | 295 | - | ||||||||||||
Customer
swap contracts
|
23,382 | - | 23,382 | - | ||||||||||||
Options,
mortgage contracts and other
|
266 | - | 71 | 195 | ||||||||||||
Total
derivative liabilities
|
$ | 25,396 | $ | - | $ | 25,201 | $ | 195 |
March 31, 2009
|
||||||||||||||||
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
Securities
available for sale
|
$ | 2,060,448 | $ | 155,091 | $ | 1,904,841 | $ | 516 | ||||||||
Loans
held for sale
|
16,960 | - | 16,960 | - | ||||||||||||
Derivative
assets
|
98,829 | - | 94,294 | 4,535 | ||||||||||||
Total
|
$ | 2,176,237 | $ | 155,091 | $ | 2,016,095 | $ | 5,051 | ||||||||
Derivative
liabilities
|
$ | 51,155 | $ | - | $ | 47,793 | $ | 3,362 |
24
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
December 31, 2009
|
||||||||||||||||
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
Securities
available for sale:
|
||||||||||||||||
U.S.
Treasury
|
$ | 2,045 | $ | 2,045 | $ | - | $ | - | ||||||||
U.S.
Government agencies
|
79,707 | 76,696 | 3,011 | - | ||||||||||||
Agency
residential mortgage-backed securities
|
1,980,305 | - | 1,980,305 | - | ||||||||||||
Private
label residential mortgage-backed securities
|
8,504 | - | 8,504 | - | ||||||||||||
State
and municipals
|
23,158 | - | 22,858 | 300 | ||||||||||||
Other
investments
|
1,682 | 1,229 | 452 | 1 | ||||||||||||
Total
securities available for sale
|
2,095,401 | 79,970 | 2,015,130 | 301 | ||||||||||||
Derivative
assets
|
42,599 | - | 38,906 | 3,693 | ||||||||||||
Total
|
$ | 2,138,000 | $ | 79,970 | $ | 2,054,036 | $ | 3,994 | ||||||||
Derivative
liabilities
|
$ | 23,040 | $ | - | $ | 22,675 | $ | 365 |
The
changes in Level 3 assets and liabilities measured at fair value on a recurring
basis are summarized as follows (in thousands):
Three
months ended March 31, 2010
|
||||||||||||||||||||
Securities
available for sale
|
Net
derivative assets (liabilities)
|
|||||||||||||||||||
State
and municipals
|
Other
investments
|
Interest
rate swaps
|
Customer
swap contracts
|
Other
|
||||||||||||||||
Balance,
beginning of period
|
$ | 300 | $ | 1 | $ | 1,118 | $ | 2,159 | $ | 51 | ||||||||||
Total
net gains (losses) included in net income
|
- | - | (23 | ) | (1,095 | ) | 4 | |||||||||||||
Purchases,
sales, issuances and settlements, net
|
(50 | ) | - | - | - | |||||||||||||||
Transfers
into Level 3
|
- | - | - | 889 | - | |||||||||||||||
Balance,
end of period
|
$ | 250 | $ | 1 | $ | 1,095 | $ | 1,953 | $ | 55 | ||||||||||
Net
gains (losses) included in net loss relating to assets/liabilities held at
period-end
|
$ | - | $ | - | $ | (23 | ) | $ | (1,095 | ) | $ | 4 |
Three
months ended
|
||||||||
March 31,
2009
|
||||||||
Securities
available for sale
|
Net
derivative assets (liabilities)
|
|||||||
Balance,
beginning of period
|
$ | 566 | $ | (410 | ) | |||
Total
net gains (losses) included in net income
|
- | 1,583 | ||||||
Purchases,
sales, issuances and settlements, net
|
(50 | ) | - | |||||
Transfers
into Level 3
|
- | - | ||||||
Balance,
end of period
|
$ | 516 | $ | 1,173 | ||||
Net
gains (losses) included in net loss relating to assets/liabilities held at
period-end
|
$ | - | $ | 1,583 |
For the
three months ended March 31, 2010 and 2009, the gains/losses in the tables above
were included in noninterest income. During the three months ended March 31,
2010, certain derivative assets were transferred to Level 3 from Level 2 based
on increases in credit valuation adjustments due to deterioration in the credit
quality of certain bank customers with whom TSFG has entered into customer
swaps. Transfers between levels of the fair value hierarchy are
25
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
recognized
on the actual date of the event or circumstances that caused the transfer, which
generally coincides with the quarterly valuation process. There were no
significant transfers between Level 1 and Level 2 for the three months ended
March 31, 2010.
Assets
Measured at Fair Value on a Nonrecurring Basis
TSFG may
be required, from time to time, to measure certain other assets at fair value on
a nonrecurring basis in accordance with generally accepted accounting
principles. These adjustments to fair value usually result from write-downs of
individual assets.
For
financial assets measured at fair value on a nonrecurring basis that were still
reflected in the balance sheet at period end, the following table provides the
level of valuation assumptions used to determine each adjustment and the
carrying value of the related individual assets at period end (in
thousands).
Carrying value at period
end
|
Total
losses for period
|
|||||||||||||||||||
Total
|
Level
1
|
Level
2
|
Level
3
|
ended
|
||||||||||||||||
March
31, 2010
|
||||||||||||||||||||
Loans
held for investment
|
$ | 213,272 | $ | - | $ | - | $ | 213,272 | $ | (34,551 | ) | |||||||||
Other
real estate owned
|
28,406 | - | - | 28,406 | (9,887 | ) | ||||||||||||||
Private
equity investments
|
1,700 | - | - | 1,700 | (460 | ) | ||||||||||||||
$ | (44,898 | ) | ||||||||||||||||||
March
31, 2009
|
||||||||||||||||||||
Loans
held for investment
|
$ | 296,071 | $ | - | $ | - | $ | 296,071 | $ | (76,152 | ) | |||||||||
Loans
held for sale
|
12,766 | - | - | 12,766 | (1,356 | ) | ||||||||||||||
Private
equity investments
|
3,210 | - | - | 3,210 | (2,949 | ) | ||||||||||||||
Other
real estate owned
|
20,392 | - | - | 20,392 | (7,552 | ) | ||||||||||||||
Auction
rate preferred securities
|
6,174 | - | - | 6,174 | (676 | ) | ||||||||||||||
$ | (88,685 | ) |
The
valuation techniques for the items in the table above are as
follows:
Loans held for investment.
Impaired loans are evaluated for impairment using the present value of expected
future cash flows discounted at the loan’s effective interest rate, or as a
practical expedient, a loan’s observable market value or the fair value of the
collateral if the loan is collateral dependent. The measurement of impaired
loans using future cash flows discounted at the loan’s effective interest rate
rather than the market rate of interest is not a fair value measurement and is
therefore excluded from the requirements of FASB ASC 820-10. Impaired loans
measured by applying the practical expedient are included in the requirements of
FASB ASC 820-10. Under the practical expedient, TSFG measures the fair value of
collateral dependent impaired loans based on the fair value of the collateral
securing these loans. These measurements are classified as Level 3 within the
valuation hierarchy. Substantially all impaired loans are secured by real
estate. The fair value of this real estate is generally determined based upon
appraisals performed by a certified or licensed appraiser using inputs such as
absorption rates, capitalization rates, and comparables. Management also
considers other factors or recent developments which could result in adjustments
to the collateral value estimates indicated in the appraisals such as changes in
absorption rates or market conditions from the time of valuation. Impaired loans
are reviewed and evaluated on at least a quarterly basis for additional
impairment and adjusted accordingly, based on the same factors identified
above.
Loans held for sale. Loans
held for sale are measured at the lower of cost or fair value. If available,
fair value is measured by the price that secondary market investors are offering
for loans with similar characteristics. If quoted market prices are not
available, TSFG may consider outstanding investor commitments, discounted cash
flow analyses with market assumptions, or the fair value of the collateral if
the loan is collateral dependent. Where assumptions are made using significant
unobservable inputs, such loans held for sale are classified as Level 3 within
the valuation hierarchy.
26
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Other real estate owned. OREO
is adjusted to fair value less costs to sell upon transfer of a loan to OREO.
Subsequently, OREO is carried at the lower of carrying value or fair value less
costs to sell. Fair value is generally based upon current appraisals, comparable
sales, and other estimates of value obtained principally from independent
sources, adjusted for estimated selling costs. However, management also
considers other factors or recent developments which could result in adjustments
to the collateral value estimates indicated in the appraisals such as changes in
absorption rates or market conditions from the time of valuation. In situations
where management adjustments are significant to the fair value measurement in
its entirety, such measurements are classified as Level 3 within the valuation
hierarchy.
Private equity investments.
The fair values of TSFG’s investments in privately held limited partnerships,
corporations and LLCs are not readily available. TSFG evaluates these
investments quarterly for impairment based on information available, which may
include the investee’s ability to generate cash through its operations or obtain
alternative financing, and subjective factors. The valuation of these
investments requires significant management judgment due to the absence of
quoted market prices, inherent lack of liquidity, and the long-term nature of
the investments; as a result, private equity investments subjected to
nonrecurring fair value adjustments are classified as Level 3.
Auction rate preferred securities.
Nonrecurring fair value adjustments on auction rate preferred securities
reflect impairment write-downs. The valuation of these securities requires
significant management judgment due to illiquidity in the market; as a result,
auction rate preferred securities subjected to nonrecurring fair value
adjustments are classified as Level 3.
FASB
ASC 825-10, Disclosures about Fair Value of Financial Instruments
FASB ASC
825-10, "Financial Instruments," requires disclosure of fair value information,
whether or not recognized in the statement of financial position, when it is
practical to estimate the fair value. The standard defines a financial
instrument as cash, evidence of an ownership interest in an entity or
contractual obligations, which require the exchange of cash, or other financial
instruments. Certain items are specifically excluded from the disclosure
requirements, including TSFG's common stock, premises and equipment, accrued
interest receivable and payable, and other assets and liabilities.
The
methodologies used to determine fair value for securities, derivative assets and
liabilities, impaired loans held for investment, and loans held for sale are
disclosed elsewhere in this footnote. Fair value approximates book value for
cash and due from banks and interest-bearing bank balances due to the short-term
nature of the instrument. Fair value for loans held for investment which are not
impaired is based on the discounted present value of the estimated future cash
flows. Discount rates used in these computations reflect approximate current
market rates offered for similar types of loans, adjustments that take into
account the credit quality of the loan portfolio and the underlying collateral,
and illiquidity in the market. Loan commitments and letters of credit, which are
off-balance-sheet financial instruments, are short-term and typically based on
current market rates; therefore, the fair values of these items are not included
in the following table.
Fair
value for demand deposit accounts and interest-bearing accounts with no fixed
maturity date is equal to the carrying value. Certificate of deposit accounts
are estimated by discounting cash flows from expected maturities using current
interest rates on similar instruments. Callable brokered deposits are valued in
a similar manner except the cash flow stream may be shorter than the term to
maturity if the call option is exercised. Fair value approximates book value for
federal funds purchased due to the short-term nature of the borrowing. Fair
value for other short-term borrowings and long-term debt is based on discounted
cash flows using current market rates for similar instruments.
27
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
TSFG has
used management's best estimate of fair value based on the above assumptions.
Thus, the fair values presented may not be the amounts, which could be realized,
in an immediate sale or settlement of the instrument. In addition, any income
taxes or other expenses, which would be incurred in an actual sale or
settlement, are not taken into consideration in the fair values presented. The
estimated fair values of TSFG's financial instruments (in thousands) were as
follows:
March 31,
2010
|
December 31,
2009
|
|||||||||||||||
Carrying Amount
|
Fair Value
|
Carrying Amount
|
Fair Value
|
|||||||||||||
Financial
Assets
|
||||||||||||||||
Cash
and due from banks
|
$ | 156,568 | $ | 156,568 | $ | 190,346 | $ | 190,346 | ||||||||
Interest-bearing
bank balances
|
1,059,598 | 1,059,598 | 192,962 | 192,962 | ||||||||||||
Securities
available for sale
|
2,220,551 | 2,220,551 | 2,095,401 | 2,095,401 | ||||||||||||
Securities
held to maturity
|
99,452 | 101,715 | 127,516 | 129,496 | ||||||||||||
Net
loans
|
7,642,844 | 6,898,534 | 8,036,243 | 7,213,252 | ||||||||||||
Derivative
assets
|
33,608 | 33,608 | 42,599 | 42,599 | ||||||||||||
Financial
Liabilities
|
||||||||||||||||
Retail
and commercial deposits
|
$ | 7,805,222 | $ | 7,829,302 | $ | 7,350,111 | $ | 7,387,521 | ||||||||
Brokered
deposits
|
1,958,948 | 1,974,003 | 1,946,101 | 1,956,562 | ||||||||||||
Total
deposits
|
9,764,170 | 9,803,305 | 9,296,212 | 9,344,083 | ||||||||||||
Short-term
borrowings
|
300,647 | 300,564 | 322,702 | 322,545 | ||||||||||||
Subordinated
notes related to trust preferred securities
|
206,704 | 49,646 | 206,704 | 95,977 | ||||||||||||
Other
long-term debt
|
909,280 | 915,813 | 910,165 | 911,924 | ||||||||||||
Total
long-term debt
|
1,115,984 | 965,459 | 1,116,869 | 1,007,901 | ||||||||||||
Derivative
liabilities
|
25,396 | 25,396 | 23,040 | 23,040 |
Note
14 – Business Segments
TSFG’s
banking subsidiary Carolina First Bank conducts banking operations in South
Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile).
Carolina First and Mercantile are TSFG’s primary reportable segments for
management financial reporting. This business segment structure along geographic
lines is consistent with the way management internally reviews financial
information and allocates resources. Each geographic bank segment consists of
commercial and consumer lending and full service branches in its geographic
region with its own management team. The branches provide a full range of
traditional banking products as well as treasury services, wealth management and
mortgage banking services. The “Other” column includes the investment securities
portfolio, indirect lending, treasury, parent company activities, bank-owned
life insurance, net intercompany eliminations, various nonbank subsidiaries
(including insurance), equity investments, and certain other activities not
currently allocated to the aforementioned segments.
The
results for these segments are based on TSFG’s management reporting process,
which assigns balance sheet and income statement items to each segment. Unlike
financial reporting, there is no authoritative guidance for management reporting
equivalent to generally accepted accounting principles. The Company uses an
internal funding methodology to assign funding costs to assets and earning
credits to liabilities with an offset in “Other.” The management reporting
process measures the performance of the defined segments based on TSFG’s
management structure and is not necessarily comparable with similar information
for other financial services companies or representative of results that would
be achieved if the segments operated as stand-alone entities. If the management
structure and/or allocation process changes, allocations, transfers and
assignments may change. Segment information (in thousands) is shown in the table
below.
28
THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (unaudited)
Carolina First
|
Mercantile
|
Other
|
Total
|
|||||||||||||
Three
Months Ended March 31, 2010
|
||||||||||||||||
Net
interest income before inter-segment income (expense)
|
$ | 44,030 | $ | 19,676 | $ | 9,819 | $ | 73,525 | ||||||||
Inter-segment
interest income (expense)
|
2,214 | 7,522 | (9,736 | ) | - | |||||||||||
Net
interest income
|
46,244 | 27,198 | 83 | 73,525 | ||||||||||||
Provision
for credit losses
|
29,023 | 40,437 | 25,663 | 95,123 | ||||||||||||
Noninterest
income
|
12,060 | 3,815 | 5,257 | 21,132 | ||||||||||||
Other
noninterest expenses - direct (1)
|
30,007 | 20,875 | 32,771 | 83,653 | ||||||||||||
Contribution
before allocation
|
(726 | ) | (30,299 | ) | (53,094 | ) | (84,119 | ) | ||||||||
Noninterest
expenses - allocated (2)
|
14,293 | 8,559 | (22,852 | ) | - | |||||||||||
Contribution
before income taxes
|
$ | (15,019 | ) | $ | (38,858 | ) | $ | (30,242 | ) | (84,119 | ) | |||||
Income
tax expense
|
(3,525 | ) | ||||||||||||||
Net
loss
|
$ | (80,594 | ) | |||||||||||||
March 31,
2010
|
||||||||||||||||
Total
assets
|
$ | 5,135,304 | $ | 2,823,506 | $ | 4,469,342 | $ | 12,428,152 | ||||||||
Total
loans held for investment
|
4,841,083 | 2,778,419 | 383,192 | 8,002,694 | ||||||||||||
Total
deposits
|
4,288,792 | 3,478,672 | 1,996,706 | 9,764,170 | ||||||||||||
Total
goodwill
|
201,628 | - | 12,490 | 214,118 |
Three
Months Ended March 31, 2009
|
||||||||||||||||
Net
interest income before inter-segment income (expense)
|
$ | 41,529 | $ | 20,467 | $ | 23,022 | $ | 85,018 | ||||||||
Inter-segment
interest income (expense)
|
7,130 | 11,859 | (18,989 | ) | - | |||||||||||
Net
interest income
|
48,659 | 32,326 | 4,033 | 85,018 | ||||||||||||
Provision
for credit losses
|
47,536 | 90,675 | 4,416 | 142,627 | ||||||||||||
Noninterest
income
|
13,431 | 5,355 | 4,955 | 23,741 | ||||||||||||
Other
noninterest expenses - direct (1)
|
26,133 | 19,988 | 44,120 | 90,241 | ||||||||||||
Contribution
before allocation
|
(11,579 | ) | (72,982 | ) | (39,548 | ) | (124,109 | ) | ||||||||
Noninterest
expenses - allocated (2)
|
22,414 | 12,903 | (35,317 | ) | - | |||||||||||
Contribution
before income taxes
|
$ | (33,993 | ) | $ | (85,885 | ) | $ | (4,231 | ) | (124,109 | ) | |||||
Income
tax benefit
|
(49,706 | ) | ||||||||||||||
Net
loss
|
$ | (74,403 | ) | |||||||||||||
March 31,
2009
|
||||||||||||||||
Total
assets
|
$ | 6,041,949 | $ | 3,486,848 | $ | 3,756,450 | $ | 13,285,247 | ||||||||
Total
loans held for investment
|
5,770,195 | 3,464,208 | 752,278 | 9,986,681 | ||||||||||||
Total
deposits
|
4,250,713 | 3,066,580 | 1,909,785 | 9,227,078 | ||||||||||||
Total
goodwill
|
203,800 | - | 20,361 | 224,161 |
(1)
|
Noninterest
expenses – direct include the direct costs of the segment’s operations
such as facilities, personnel, and other operating
expenses.
|
(2)
|
Noninterest
expenses – allocated includes expenses not directly attributable to the
segments, such as information services, operations, human resources,
accounting, finance, treasury, and corporate incentive
plans.
|
29
Item
2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The
following discussion and analysis are presented to assist in understanding the
financial condition, changes in financial condition, results of operations, and
cash flows of The South Financial Group, Inc. and its subsidiaries
(collectively, "TSFG"), except where the context requires otherwise. TSFG may
also be referred to herein as "we", "us", or "our.” This discussion should be
read in conjunction with the consolidated financial statements appearing in this
report as well as TSFG’s Annual Report on Form 10-K for the year ended December
31, 2009. Results of operations for the three months ended March 31, 2010 are
not necessarily indicative of results that may be attained for any other
period.
Index to Item 2, Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Page
|
|
30
|
|
30
|
|
31
|
|
32
|
|
34
|
|
34
|
|
35
|
|
52
|
|
56
|
|
61
|
|
63
|
|
63
|
Website Availability of Reports Filed with the Securities and
Exchange Commission
All of
TSFG’s electronic filings with the United States Securities and Exchange
Commission (“SEC”), including its Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and other documents filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are
made available at no cost on TSFG’s web site, www.thesouthgroup.com,
through the Investor Relations link. TSFG’s SEC filings are also available
through the SEC’s web site at www.sec.gov.
Forward-Looking Statements
This report contains certain
forward-looking statements (as defined in the Private Securities Litigation
Reform Act of 1995) to assist in the understanding of anticipated future
operating and financial performance, growth opportunities, growth rates, and
other similar forecasts and statements of expectations. These forward-looking
statements may be identified by the use of such words as: “estimate”,
“anticipate”, “expect”, “believe”, “intend”, “plan”, or words of similar
meaning, or future or conditional verbs such as “may”, “intend”, “could”,
“will”, or “should”. These forward-looking statements reflect current views, but
are based on assumptions and are subject to risks, uncertainties, and other
factors, which may cause actual results to differ materially from those in such
statements. A variety of factors may affect the operations, performance,
business strategy and results of TSFG including, but not limited to, the
following:
|
·
|
significant
changes in, or additions to, banking laws or regulations, including,
without limitation, as a result of the Emergency Economic Stabilization
Act of 2008 (“EESA”), the Troubled Asset Relief Program (“TARP”),
including the Capital Purchase Program (the “Capital Purchase Program”) of
the U.S. Department of Treasury (the “U.S. Treasury”), and related
executive compensation
requirements;
|
|
·
|
additional
losses in our loan portfolio and ability to mitigate credit issues in our
loan portfolio;
|
|
·
|
continuation
or worsening of current recessionary conditions, as well as continued
turmoil in the financial markets;
|
|
·
|
continued
volatility and deterioration of the capital and credit
markets;
|
|
·
|
ability
to maintain adequate sources of funding and
liquidity;
|
|
·
|
impact
of the Consent Order and Fed Agreement and actions to comply with their
respective provisions;
|
|
·
|
ability
to raise capital or otherwise comply with Federal and State capital
requirements imposed on TSFG and Carolina First under law and the Consent
Order;
|
|
·
|
adverse
customer reaction associated with any public regulatory
actions;
|
·
|
deposit
growth, change in the mix or type of deposit products, and cost of
deposits;
|
|
·
|
loss
of deposits due to perceived financial weakness or otherwise, including as
a result of the decision of the Federal Deposit Insurance Corporation
(“FDIC”) whether or not the Transaction Account Guarantee Program is
extended after its proposed termination on December 31,
2010;
|
|
·
|
ability
to maintain key personnel and attract new
employees;
|
|
·
|
rating
agency action such as a ratings
downgrade;
|
|
·
|
continued
weakness in the real estate market, including the markets for commercial
and residential real estate, which may affect, among other things, the
level of nonperforming assets, charge-offs, and provision
expense;
|
|
·
|
continued
weakness or further deterioration in the residential real estate markets
in South Carolina, western North Carolina, and larger markets in Florida,
in which our loans are
concentrated;
|
|
·
|
risks
inherent in making loans including repayment risks and changes in the
value of collateral, and our ability to manage such
risks;
|
|
·
|
loan
growth, loan sales, the adequacy of the allowance for credit losses,
provision for credit losses, and the assessment of problem loans
(including loans acquired via
acquisition);
|
|
·
|
risks
incurred as a result of trading, clearing, counterparty, or other
relationships;
|
|
·
|
changes
in interest rates, shape of the yield curve, deposit rates, the net
interest margin, and funding
sources;
|
|
·
|
market
risk (including net interest income at risk analysis and economic value of
equity risk analysis) and
inflation;
|
|
·
|
changes
in accounting policies and
practices;
|
|
·
|
the
ability of our internal controls and procedures to prevent acts intended
to defraud, misappropriate assets, or circumvent applicable law or our
system of controls;
|
|
·
|
risks
associated with potential interruptions or breaches with respect to our
information systems;
|
|
·
|
the
exposure of our business to hurricanes and other natural
disasters;
|
|
·
|
ability
to redeem the Series 2008-T Preferred Stock and the warrant sold to the
U.S. Treasury;
|
|
·
|
competition
in the banking industry and demand for our products and
services;
|
|
·
|
changes
in the financial performance and/or condition of the borrowers of the
subsidiary bank, Carolina First
Bank;
|
|
·
|
increases
in FDIC insurance premiums due to market developments, regulatory changes,
or other reasons;
|
|
·
|
level,
composition, and repricing characteristics of the securities
portfolio;
|
|
·
|
fluctuations
in consumer spending;
|
|
·
|
increased
competition in our markets;
|
|
·
|
income
and expense projections, ability to control expenses, and expense
reduction initiatives;
|
|
·
|
changes
in the compensation, benefit, and incentive plans, including compensation
accruals;
|
|
·
|
risks
associated with income taxes, including the potential for adverse
adjustments and the inability to reverse valuation allowances on deferred
tax assets;
|
|
·
|
acquisitions,
greater than expected deposit attrition or customer loss, inaccuracy of
related cost savings estimates, inaccuracy of estimates of financial
results, and unanticipated integration
issues;
|
|
·
|
valuation
of goodwill and intangibles and any potential future
impairment;
|
|
·
|
significant
delay or inability to execute strategic initiatives designed to grow
revenues;
|
|
·
|
changes
in management’s assessment of and strategies for lines of business, asset,
and deposit categories;
|
|
·
|
changes
in the evaluation of the effectiveness of our hedging strategies or access
to derivative instruments; and
|
|
·
|
changes,
costs, and effects of litigation and environmental
remediation.
|
Such
forward-looking statements speak only as of the date on which such statements
are made and shall be deemed to be updated by any future filings made by TSFG
with the SEC. We undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made to reflect the occurrence of unanticipated events. In addition, certain
statements in future filings by TSFG with the SEC, in press releases, and in
oral and written statements made by or with the approval of TSFG, which are not
statements of historical fact, constitute forward-looking
statements.
Non-GAAP Financial Information
This
report also contains financial information determined by methods other than in
accordance with Generally Accepted Accounting Principles (“GAAP”). TSFG’s
management uses these non-GAAP measures to analyze TSFG’s performance. In
particular, TSFG presents certain designated net interest income amounts on a
tax-equivalent basis (in accordance with common industry practice). Management
believes that these presentations of tax-equivalent net interest income aid in
the comparability of net interest income arising from both taxable and
tax-exempt sources over
the
periods presented. In discussing its deposits, TSFG presents information
summarizing its funding generated by customers using the following definitions:
“core deposits,” which are defined by TSFG as noninterest-bearing,
interest-bearing checking, money market accounts, and savings accounts;
“customer deposits,” which are defined by TSFG as total deposits less brokered
deposits; and “customer funding,” which is defined by TSFG as total deposits
less brokered deposits plus customer sweep accounts. TSFG also discusses its
funding generated from non-customer sources using the following
definition: “wholesale borrowings,” which are defined by TSFG as
short-term and long-term borrowings less customer sweep accounts plus brokered
deposits. Management believes that these presentations of “core deposits,”
“customer deposits,” “customer funding,” and “wholesale borrowings” aid in the
identification of funding generated by its lines of business versus its treasury
department. In addition, TSFG provides data eliminating intangibles in order to
present data on a “tangible” basis. The limitations associated with operating
measures are the risk that persons might disagree as to the appropriateness of
items comprising these measures and that different companies might calculate
these measures differently. Management compensates for these limitations by
providing detailed reconciliations between GAAP and operating measures. These
disclosures should not be viewed as a substitute for GAAP measures, and
furthermore, TSFG’s non-GAAP measures may not necessarily be comparable to
non-GAAP performance measures of other companies.
Overview
The South
Financial Group is a bank holding company, headquartered in Greenville, South
Carolina, with $12.4 billion in total assets and 176 branch offices in South
Carolina, Florida, and North Carolina at March 31, 2010. Founded in 1986, TSFG
focuses on Southeastern banking markets, which have historically experienced
long-term growth. TSFG operates Carolina First Bank, which conducts banking
operations in North Carolina and South Carolina (as Carolina First) and in
Florida (as Mercantile). At March 31, 2010, approximately 44% of TSFG’s customer
deposits were in South Carolina, 45% were in Florida, and 11% were in North
Carolina.
TSFG
targets small business, middle market companies, retail consumers, and high-net
worth clients in its markets and surrounding areas. TSFG strives to combine
personalized customer service and local decision-making with a full range of
financial services normally found at larger regional institutions.
As
discussed in Item 1, Note 1 to the Consolidated Financial Statements, the
Company has assessed its ability to continue as a going concern and has
concluded that, based on current and expected liquidity needs and sources,
management expects TSFG to be able to meet its obligations at least through
March 31, 2011. If unanticipated market factors emerge, or if the Company is
unable to raise additional capital, successfully execute its plans, or comply
with regulatory requirements, then its banking regulators could take further
action, which could include actions that may have a material adverse effect on
the Company’s business, results of operations and financial position. Also see
“Capital and Liquidity.”
Effective
April 30, 2010, Carolina First Bank’s Board of Directors entered into a Consent
Order with the FDIC and the South Carolina State Board of Financial Institutions
(the “Consent Order”), a copy of which is attached to this filing as Exhibit
10.1. This Consent Order provides for various things, including (among other
things) the following: (1) within 120 days of entering into the Consent Order,
Carolina First Bank must increase its Tier 1 leverage ratio to 8% and its total
risk-based capital ratio to 12%, (2) Carolina First Bank must prepare strategic,
capital, liquidity and earnings plans and related projections within certain
timetables set forth in the Consent Order and on an ongoing basis, (3) Carolina
First Bank must provide plans and meet timeframes set forth in the Consent Order
for reducing criticized assets, (4) Carolina First Bank is precluded from
extending credit to classified borrowers absent express board approval and must
ensure compliance with updated concentration limits implemented with respect to
its loan portfolio, (5) Carolina First Bank is subject to certain limitations
with respect to brokered deposits and the rates it can pay on certain customer
deposits, (6) Carolina First Bank cannot make dividends or bonus payments
without the consent of the FDIC and (7) Carolina First Bank must limit its
growth to 10% per year unless the FDIC consents otherwise. The foregoing summary
is not complete and is qualified in all respects by reference to the actual
language of the Consent Order. As a result of the Consent Order, the Bank is no
longer considered to be “well capitalized” although all ratios at March 31, 2010
exceeded well-capitalized thresholds.
Effective
May 4, 2010, The South Financial Group, Inc. entered into a written agreement
(the “Fed Agreement”) with the Board of Governors of the Federal Reserve System
(the “Federal Reserve”), a copy of which is attached to this filing as Exhibit
10.2. The Fed Agreement provides, among other things, that the holding company
must serve as a source of strength to Carolina First Bank, and that except upon
consent of the Federal Reserve, the holding company may not pay dividends to
shareholders or receive dividends from Carolina First Bank, the holding company
and its nonbank subsidiaries may not make payments on trust preferred securities
or subordinated debt, and the holding company cannot incur, increase or
guarantee debt or repurchase any capital securities. The Fed Agreement also
requires
that the
holding company submit a capital plan which reflects sufficient capital and a
cash flow plan, both of which must be acceptable to the Federal Reserve, and
follow certain guidelines with respect to the appointment or change in
responsibilities of senior officers. The foregoing summary is not complete and
is qualified in all respects by reference to the actual language of the Fed
Agreement.
If the
Company is unable to raise the capital required or otherwise comply with the
terms of the Consent Order, further regulatory actions (including actions up to
the implementation of a receivership) could be taken, and its ability to operate
as a going concern could be negatively impacted. Furthermore, because such
consent orders are public, there could be an adverse customer or market reaction
to the announcement of the Consent Order.
TSFG
reported a net loss available to common shareholders of $85.8 million, or
$(0.40) per diluted share, for first quarter 2010, compared to $193.9 million,
or $(0.90) per diluted share for fourth quarter 2009 and $90.8 million, or
$(1.10) per diluted share, for first quarter 2009. The following is a summary of
the consolidated statements of operations (in thousands, except per share
data):
Three Months Ended
|
||||||||||||
March 31,
2010
|
December 31,
2009
|
March 31,
2009
|
||||||||||
Net
interest income
|
$ | 73,525 | $ | 80,546 | $ | 85,018 | ||||||
Provision
for credit losses
|
95,123 | 170,761 | 142,627 | |||||||||
Noninterest
income
|
21,132 | 28,550 | 23,741 | |||||||||
Noninterest
expenses
|
83,653 | 103,163 | 90,241 | |||||||||
Income
tax (benefit) expense
|
(3,525 | ) | 23,843 | (49,706 | ) | |||||||
Net
loss
|
(80,594 | ) | (188,671 | ) | (74,403 | ) | ||||||
Preferred
stock dividends and other
|
(5,235 | ) | (5,221 | ) | (16,408 | ) | ||||||
Net
loss available to common shareholders
|
$ | (85,829 | ) | $ | (193,892 | ) | $ | (90,811 | ) | |||
Loss
per common share, diluted
|
$ | (0.40 | ) | $ | (0.90 | ) | $ | (1.10 | ) |
At March
31, 2010, nonperforming assets as a percentage of loans and foreclosed property
increased to 6.35% from 6.13% at December 31, 2009 and 5.08% at March 31, 2009.
Although nonperforming assets decreased to $518.3 million at March 31, 2010 from
$522.4 million at December 31, 2009, continued reductions in loans caused the
ratio to increase. For first quarter 2010, annualized net loan charge-offs
totaled 4.32% of average loans held for investment, compared to 6.52% and 4.36%,
respectively, for fourth quarter 2009 and first quarter 2009. TSFG’s provision
for credit losses decreased to $95.1 million for first quarter 2010 from $170.8
million for fourth quarter 2009 and $142.6 million for first quarter
2009.
At March
31, 2010, all regulatory capital ratios exceeded well-capitalized minimums but,
effective April 30, 2010, as a result of the Consent Order the Bank is
considered to be only adequately capitalized. TSFG’s tangible equity to tangible
asset ratio decreased to 5.66% at March 31, 2010, from 6.54% at December 31,
2009 primarily due to the net loss in first quarter 2010, partially offset by an
increase in unrealized gains on available for sale securities included in
accumulated other comprehensive income. Tangible common equity to tangible
assets was 2.90% at March 31, 2010, compared to 3.67% at December 31, 2009 and
6.05% at March 31, 2009.
Tax-equivalent
net interest income was $73.7 million for first quarter 2010, compared to $81.4
million for fourth quarter 2009 and $86.2 million for first quarter 2009. The
net interest margin decreased to 2.75% for first quarter 2010 from 2.87% for
fourth quarter 2009 and 2.80% for first quarter 2009. The decrease relative to
fourth quarter 2009 was primarily due to the effect of maturing interest rate
hedges, while the decrease relative to first quarter 2009 was primarily due to
excess cash maintained as a liquidity management measure.
Noninterest
income totaled $21.1 million for the first three months of 2010, compared to
$28.6 million for fourth quarter 2009 and $23.7 million for first quarter 2009.
The decrease relative to fourth quarter 2009 was largely attributable to a
$389,000 loss on securities (primarily write-downs on equity investments) in
first quarter 2010 compared to a $6.7 million gain on securities (primarily due
to sales of municipal securities) in fourth quarter 2009. The decrease relative
to first quarter 2009 was largely due to the sale of ancillary businesses in
third quarter 2009.
Noninterest
expenses totaled $83.7 million for first quarter 2010, compared to $103.2
million for fourth quarter 2009 and $90.2 million for first quarter 2009. The
decrease relative to fourth quarter 2009 was primarily due to lower
credit-related expenses and personnel expense. The decrease relative to first
quarter 2009 was partly due to expense
control
initiatives, particularly with regard to personnel expense, as well as the
elimination of operating expenses associated with ancillary businesses sold in
third quarter 2009.
Critical Accounting Policies and Estimates
TSFG's
accounting policies are in accordance with accounting principles generally
accepted in the United States and with general practice within the banking
industry. TSFG makes a number of judgmental estimates and assumptions relating
to reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the Consolidated Financial Statements and
the reported amounts of revenues and expenses during periods presented. Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses and reserve for unfunded lending
commitments; the effectiveness of derivatives and other hedging activities; the
fair value of certain financial instruments (securities, derivatives, privately
held investments, and, for purposes of goodwill impairment evaluation, loans);
income tax assets or liabilities; share-based compensation; and accounting for
acquisitions, including the fair value determinations and the analysis of
goodwill for impairment. To a lesser extent, significant estimates are also
associated with the determination of contingent liabilities, discretionary
compensation, and expense associated with other employee benefit agreements.
Different assumptions in the application of these policies could result in
material changes in TSFG’s Consolidated Financial Statements. Accordingly, as
this information changes, the Consolidated Financial Statements could reflect
the use of different estimates, assumptions, and judgments. Certain
determinations inherently have a greater reliance on the use of estimates,
assumptions, and judgments, and as such have a greater possibility of producing
results that could be materially different than originally reported. TSFG has
procedures and processes in place to facilitate making these
judgments.
For
additional information regarding critical accounting policies and estimates,
refer to the Annual Report of TSFG on Form 10-K for the year ended December 31,
2009, specifically Item 8, Note 1 – Summary of Significant Accounting Policies
in the notes to the Consolidated Financial Statements and the section captioned
“Critical Accounting Policies and Estimates” in Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Deposit Insurance
During
2009, the FDIC required all insured depository institutions, with limited
exceptions, to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for all of 2010, 2011 and 2012. As of March 31, 2010,
$76.7 million in prepaid deposit insurance is included in other assets in the
consolidated balance sheet. The FDIC also adopted a uniform three-basis point
increase in assessment rates effective on January 1, 2011.
In April
2010, the FDIC approved an interim rule that extends the Transaction Account
Guarantee Program (“TAGP”) which provides full FDIC coverage for
noninterest-bearing transaction deposit accounts and certain interest-bearing
checking accounts. Under the interim rule, the TAGP will be extended from June
30, 2010 to December 31, 2010 and may be extended an additional year to December
31, 2011 without additional rulemaking, provided the FDIC announces the
extension before October 29, 2010. The existing fee structure under the TAGP
will not change; however, the maximum interest rate that can be paid on
qualifying NOW accounts will be reduced from 50 basis points to 25 basis points,
and assessment reporting will be based on average daily account balances rather
than account balances at the end of the quarter as currently required.
Participants in the TAGP have a one-time, irrevocable opportunity to opt out of
the TAGP extension effective July 1, 2010. TSFG has elected not to opt out of
the TAGP extension.
In April
2010, the FDIC also issued a notice of proposed rulemaking to revise the deposit
insurance assessment system for large institutions. The FDIC proposal would
create two scorecards, one for most institutions, including Carolina First Bank,
that have more than $10 billion in assets and another for “highly complex”
institutions as defined. Each scorecard would have a performance score and a
loss-severity score that would be combined to produce a total score, which would
be translated into an initial assessment rate. In calculating these scores, the
FDIC would continue to utilize CAMELS ratings, would introduce certain new
financial measures, and would eliminate the use of risk categories and long-term
debt issuer ratings. In determining the initial base assessment rate, the FDIC
would have the ability to adjust each component of the scorecard where
necessary, based upon quantitative or qualitative measures not adequately
captured in the scorecard, to produce accurate relative risk rankings. The
proposed rule would allow for adjustments to an institution’s initial base
assessment rate as a result of certain long-term unsecured debt, certain secured
liabilities and brokered deposits. After the effect of potential base-rate
adjustments, the total base assessment rate could range from 5 to 85 basis
points on an annualized basis. The final rule related to this proposal is
expected to be effective January 1, 2011. The Company can not provide any
assurance as to the effect of any proposed change in its deposit insurance
premium rate, should such a change occur, as such changes are dependent upon a
variety of factors, some of which are beyond the Company’s
control.
Balance Sheet Review
Loans
TSFG
focuses its lending activities on small and middle market businesses and
individuals in its geographic markets. At March 31, 2010, outstanding loans
totaled $8.0 billion, which equaled 82.1% of total deposits (102.7% of customer
deposits) and 64.5% of total assets. The major components of the loan portfolio
were commercial loans, commercial real estate loans, and consumer loans
(including both direct and indirect loans). Substantially all loans were to
borrowers located in TSFG’s market areas in South Carolina, Florida, and North
Carolina. At March 31, 2010, approximately 4% of the portfolio was
unsecured.
As part
of its portfolio and balance sheet management strategies, TSFG reviews its loans
held for investment and determines whether its intent for specific loans or
classes of loans has changed. If management changes its intent from held for
investment to held for sale, the loans are transferred to the held for sale
portfolio and recorded at the lower of cost basis or fair value.
In an
effort to accelerate the sale or resolution of problem loans and to otherwise
divest itself of loans with limited relationship opportunity, during the three
months ended March 31, 2010, TSFG transferred $27.7 million from the held for
investment portfolio to the held for sale portfolio (and subsequently sold or
otherwise settled the loan).
TSFG
generally sells a substantial majority of its residential mortgage loans in the
secondary market. TSFG also retains certain of its mortgage loans in its held
for investment portfolio as part of its overall balance sheet management
strategy. Mortgage loans held for sale decreased to $10.8 million at March 31,
2010 from $15.8 million at December 31, 2009, primarily due to timing of
mortgage sales.
Table 1
summarizes outstanding loans held for investment by loan
purpose.
Table
1
|
||||||||||||
Loan
Portfolio Composition Based on Loan Purpose
|
||||||||||||
(dollars
in thousands)
|
||||||||||||
March 31,
|
December 31,
|
|||||||||||
2010
|
2009
|
2009
|
||||||||||
Commercial
Loans
|
||||||||||||
Commercial
and industrial
|
$ | 1,924,014 | $ | 2,645,871 | $ | 2,080,329 | ||||||
Commercial
owner - occupied real estate
|
1,280,010 | 1,285,530 | 1,271,525 | |||||||||
Commercial
real estate (1)
|
3,321,544 | 4,042,871 | 3,501,809 | |||||||||
6,525,568 | 7,974,272 | 6,853,663 | ||||||||||
Consumer
Loans
|
||||||||||||
Indirect
- sales finance
|
202,504 | 573,653 | 230,426 | |||||||||
Consumer
lot loans
|
132,307 | 198,032 | 144,315 | |||||||||
Direct
retail
|
79,617 | 90,999 | 83,460 | |||||||||
Home
equity
|
783,868 | 813,015 | 787,645 | |||||||||
1,198,296 | 1,675,699 | 1,245,846 | ||||||||||
Mortgage
Loans
|
278,830 | 336,710 | 286,618 | |||||||||
Total
loans held for investment
|
$ | 8,002,694 | $ | 9,986,681 | $ | 8,386,127 | ||||||
Percentage
of Loans Held for Investment
|
||||||||||||
Commercial
and industrial
|
24.0 | % | 26.4 | % | 24.8 | % | ||||||
Commercial
owner - occupied real estate
|
16.0 | 12.9 | 15.2 | |||||||||
Commercial
real estate
|
41.5 | 40.5 | 41.8 | |||||||||
Consumer
|
15.0 | 16.8 | 14.8 | |||||||||
Mortgage
|
3.5 | 3.4 | 3.4 | |||||||||
Total
|
100.0 | % | 100.0 | % | 100.0 | % |
(1)
|
See
“Commercial Real Estate Concentration,” “Credit Quality,” and “Allowance
for Loan Losses and Reserve for Unfunded Lending Commitments” for more
detail on commercial real estate
loans.
|
Commercial and industrial loans
are loans to finance short-term and intermediate-term cash needs of
businesses. Typical needs include the need to finance seasonal or other
temporary cash flow imbalances, growth in working assets created by sales
growth, and purchases of equipment and vehicles. Credit is extended in the form
of short-term single payment loans, lines of credit for periods up to a year,
revolving credit facilities for periods up to five years, and amortizing term
loans for periods up to ten years.
Commercial owner - occupied real
estate loans are loans to finance the purchase or expansion of operating
facilities used by businesses not engaged in the real estate business. Typical
loans are loans to finance offices, manufacturing plants, warehouse facilities,
and retail shops. Depending on the property type and the borrower’s cash flows,
amortization terms vary from ten years up to 20 years. Although secured by
mortgages on the properties financed, these loans are underwritten based on the
cash flows generated by operations of the businesses they house.
Commercial real estate (“CRE”) loans
are loans to finance real properties that are acquired, developed, or
constructed for sale or lease to parties unrelated to the borrower. Our CRE
products fall into four primary categories including land, acquisition and
development, construction, and income property. See “Commercial Real Estate
Concentration” below for further details.
Indirect - sales finance
loans are loans to individuals to finance the purchase of motor vehicles.
They are closed at the auto dealership but approved in advance by TSFG for
immediate purchase. Loans are extended on new and used motor vehicles with terms
varying from two years to six years. TSFG has effectively stopped originating
indirect auto loans, with the exception of certain dealers that fit within our
relationship strategy.
Consumer lot loans are loans
to individuals to finance the purchase of residential lots.
Direct retail consumer loans
are loans to individuals to finance personal, family, or household needs.
Typical loans are loans to finance auto purchases or home repairs and
additions.
Home equity loans are loans
to homeowners, secured primarily by junior mortgages on their primary
residences, to finance personal, family, or household needs. These loans may be
in the form of amortizing loans or lines of credit with terms up to 15 years.
TSFG’s home equity portfolio consists of loans to direct customers, with no
brokered loans.
Mortgage loans are loans to
individuals, secured by first mortgages on single-family residences, generally
to finance the acquisition or construction of those residences. TSFG generally
sells a majority of its residential mortgage loans at origination in the
secondary market. TSFG also retains certain of its mortgage loans in its held
for investment portfolio as part of its overall balance sheet management
strategy. TSFG’s mortgage portfolio is bank-customer related, with minimal
brokered loans or subprime exposure.
Portfolio
risk is partially managed by maintaining a “house” lending limit at a level
significantly lower than the legal lending limit of Carolina First Bank and by
requiring approval by the Risk Committee of the Board of Directors to exceed
this house limit. At March 31, 2010, TSFG’s house lending limit was $35 million,
and nine credit relationships totaling $391.0 million were in excess of the
house lending limit (but not the legal lending limit). The 20 largest credit
relationships had an aggregate outstanding principal balance of $510.3 million,
or 6.4% of total loans held for investment at March 31, 2010, compared to 6.9%
of total loans held for investment at December 31, 2009. Approximately $5
million of these loans were considered nonperforming loans as of March 31,
2010.
TSFG,
through its Corporate Banking group, participates in “shared national credits”
(multi-bank credit facilities of $20 million or more, or “SNCs”), primarily to
borrowers who are headquartered or conduct business in or near our markets. At
March 31, 2010, the loan portfolio included outstanding SNC borrowings of $368.9
million, decreasing from $495.6 million at December 31, 2009. The largest
commitment was $28.6 million and the largest outstanding balance was $17.6
million at March 31, 2010. Our strategy targets borrowers whose management teams
are well known to us and whose risk profile is above average. We expect to
continue to reduce the percentage of our portfolio invested in SNCs due to the
lack of relationship opportunity on much of the portfolio.
Late in
2009, TSFG established a U.S. Small Business
Administration ("SBA") lending unit to generate new customers by focusing
on small business lending opportunities. In early 2010, TSFG was
approved as a preferred lender under the SBA Preferred Lender Program ("PLP").
This PLP designation grants TSFG the authority to process, underwrite, close,
and service SBA guaranteed loans without prior SBA review. TSFG plans to
sell substantially all of the SBA-guaranteed portion of the loans into the SBA
loan secondary market, generating gains from the sales, and retain the
un-guaranteed portion (generally 10% to 25% of the principal). At March 31,
2010, loans held for sale included $2.5 million of SBA loans.
Commercial
Real Estate Concentration
The
portfolio’s largest concentration is in commercial real estate loans. Real
estate development and construction are major components of the economic
activity that occurs in TSFG’s markets. TSFG’s commercial real estate products
include the following:
Commercial
Real Estate Product
|
Description
|
Completed
income property
|
Loans
to finance a variety of income producing properties, including apartments,
retail centers, hotels, office buildings and industrial
facilities
|
Residential
A&D
|
Loans
to develop land into residential lots
|
Commercial
A&D
|
Loans
to finance the development of raw land into sellable commercial
lots
|
Commercial
construction
|
Loans
to finance the construction of various types of income
property
|
Residential
construction
|
Loans
to construct single family housing; primarily to residential
builders
|
Residential
condo
|
Loans
to construct or convert residential condominiums
|
Undeveloped
land
|
Loans
to acquire land for resale or future
development
|
Underwriting
policies dictate the loan-to-value (“LTV”) limitations at origination for
commercial real estate loans. Table 2 presents selected characteristics of
commercial real estate loans by product type.
Table
2
|
||||||||||||||||
Selected
Characteristics of Commercial Real Estate Loans
|
||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||
March 31,
2010
|
||||||||||||||||
Policy LTV
|
Weighted
Average Time to Maturity (in
months)
|
Weighted
Average Loan Size
|
Largest
Ten Total O/S
|
|||||||||||||
Completed
income property
|
80 | % | 33.6 | $ | 529 | $ | 147,488 | |||||||||
Residential
A&D
|
75 | 8.3 | 487 | 66,115 | ||||||||||||
Commercial
A&D
|
75 | 6.0 | 965 | 42,396 | ||||||||||||
Commercial
construction
|
80 | 42.2 | 3,025 | 64,790 | ||||||||||||
Residential
construction
|
80 | 6.5 | 298 | 41,595 | ||||||||||||
Residential
condo
|
80 | 10.7 | 748 | 62,936 | ||||||||||||
Undeveloped
land
|
65 | 9.4 | 632 | 50,519 | ||||||||||||
Overall
|
27.4 | $ | 575 | $ | 475,839 |
For
additional information on other commercial real estate management processes,
refer to the Annual Report of TSFG on Form 10-K for the year ended December 31,
2009, specifically the section captioned “Commercial Real Estate Concentration”
in the “Balance Sheet Review -- Loans” section of Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Table 3
presents the commercial real estate portfolio by geography, while Table 4
presents the commercial real estate portfolio by geography and property type.
Commercial real estate nonaccruals, past dues, and net charge-offs are presented
in Tables 6, 7, and 11, respectively. TSFG monitors trends in these categories
in order to evaluate the possibility of higher credit risk in its commercial
real estate portfolio.
Table
3
|
||||||||||||||||
Commercial
Real Estate Loans by Geographic Diversification (1)
|
||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||
March 31,
2010
|
December 31,
2009
|
|||||||||||||||
%
of
|
%
of
|
|||||||||||||||
Balance
|
Total CRE
|
Balance
|
Total CRE
|
|||||||||||||
South
Carolina, exluding Coastal:
|
||||||||||||||||
Upstate
South Carolina (Greenville)
|
$ | 544,767 | 16.4 | % | $ | 569,018 | 16.2 | % | ||||||||
Midlands
South Carolina (Columbia)
|
208,965 | 6.3 | 232,088 | 6.6 | ||||||||||||
Greater
South Charlotte South Carolina (Rock Hill)
|
130,386 | 3.9 | 142,114 | 4.1 | ||||||||||||
Coastal
South Carolina:
|
||||||||||||||||
North
Coastal South Carolina (Myrtle Beach)
|
316,666 | 9.5 | 331,819 | 9.5 | ||||||||||||
South
Coastal South Carolina (Charleston)
|
280,352 | 8.4 | 292,207 | 8.3 | ||||||||||||
Western
North Carolina (Hendersonville/Asheville)
|
603,906 | 18.2 | 639,264 | 18.3 | ||||||||||||
Central
Florida (Orlando/Ocala)
|
349,744 | 10.5 | 356,239 | 10.2 | ||||||||||||
North
Florida:
|
||||||||||||||||
Northeast
Florida (Jacksonville)
|
205,083 | 6.2 | 219,202 | 6.3 | ||||||||||||
North
Central Florida
|
266,535 | 8.0 | 271,085 | 7.7 | ||||||||||||
South
Florida (Ft. Lauderdale)
|
194,095 | 5.9 | 198,874 | 5.7 | ||||||||||||
Tampa
Bay Florida
|
221,045 | 6.7 | 249,899 | 7.1 | ||||||||||||
Total
commercial real estate loans
|
$ | 3,321,544 | 100.0 | % | $ | 3,501,809 | 100.0 | % |
(1)
|
Geography
is primarily determined by the originating operating geographic market and
not necessarily the ultimate location of the underlying
collateral.
|
Table
4
|
||||||||||||||||||||||||||||||||||||
Commercial
Real Estate Loans by Geography and Product Type
|
||||||||||||||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
March 31,
2010 Commercial Real Estate Loans by Geography
|
||||||||||||||||||||||||||||||||||||
SC,
Excl Coastal
|
Coastal SC
|
Western NC
|
Central FL
|
North FL
|
South FL
|
Tampa
Bay
|
Total CRE
|
%
of LHFI
|
||||||||||||||||||||||||||||
Commercial
Real Estate
|
||||||||||||||||||||||||||||||||||||
Loans
by Product Type
|
||||||||||||||||||||||||||||||||||||
Completed
income property
|
$ | 563,739 | $ | 414,203 | $ | 373,243 | $ | 204,508 | $ | 344,930 | $ | 129,673 | $ | 107,379 | $ | 2,137,675 | 26.7 | % | ||||||||||||||||||
Residential
A&D
|
45,510 | 47,839 | 119,580 | 15,632 | 37,338 | 11,819 | 29,817 | 307,535 | 3.9 | |||||||||||||||||||||||||||
Commercial
A&D
|
30,984 | 32,000 | 25,282 | 22,277 | 7,147 | 15,274 | 12,742 | 145,706 | 1.8 | |||||||||||||||||||||||||||
Commercial
construction
|
157,888 | 9,663 | 21,420 | 33,275 | 16,129 | 9,189 | 27,688 | 275,252 | 3.4 | |||||||||||||||||||||||||||
Residential
construction
|
35,595 | 5,036 | 6,937 | 8,845 | 16,235 | 20,262 | 1,411 | 94,321 | 1.2 | |||||||||||||||||||||||||||
Residential
condo
|
10,682 | 31,786 | 7,284 | 14,206 | 14,377 | 1,826 | 10,357 | 90,518 | 1.1 | |||||||||||||||||||||||||||
Undeveloped
land
|
39,720 | 56,491 | 50,160 | 51,001 | 35,462 | 6,052 | 31,651 | 270,537 | 3.4 | |||||||||||||||||||||||||||
Total
CRE Loans
|
$ | 884,118 | $ | 597,018 | $ | 603,906 | $ | 349,744 | $ | 471,618 | $ | 194,095 | $ | 221,045 | $ | 3,321,544 | 41.5 | % | ||||||||||||||||||
CRE
Loans as %of Total Loans HFI
|
11.0 | % | 7.5 | % | 7.5 | % | 4.4 | % | 5.9 | % | 2.4 | % | 2.8 | % | 41.5 | % |
See
“Credit Quality” for additional commercial real estate information.
Credit
Quality
A
willingness to take credit risk is inherent in the decision to grant credit.
Prudent risk-taking requires a credit risk management system based on sound
policies and control processes that ensure compliance with those policies.
TSFG’s credit risk management system is defined by policies approved by the
Board of Directors that govern the risk underwriting, portfolio monitoring, and
problem loan administration processes. Adherence to underwriting standards is
managed through a multi-layered credit approval process and after-the-fact
review by credit risk management of loans approved by lenders. Through daily
review by credit risk managers, monthly reviews of exception reports, and
ongoing analysis of asset quality trends, compliance with underwriting and loan
monitoring policies is closely supervised. The administration of problem loans
is driven by policies that require written plans for resolution and periodic
meetings with credit risk management to review progress. Credit risk management
activities are monitored by the Risk Committee of the Board, which meets
periodically to review credit quality trends, new large credits, loans to
insiders, large problem credits, credit policy changes, and reports on
independent credit reviews.
For
TSFG’s policy regarding impairment on loans, nonaccruals, charge-offs, and
foreclosed property, refer to Item 8, Note 1 – Summary of Significant Accounting
Policies in the notes to the Consolidated Financial Statements in the Annual
Report on Form 10-K for the year ended December 31, 2009.
Table 5
presents our credit quality indicators.
Table
5
|
||||||||||||
Credit
Quality Indicators
|
||||||||||||
(dollars
in thousands)
|
||||||||||||
March 31,
2010
|
December 31,
|
|||||||||||
2010
|
2009
|
2009
|
||||||||||
Loans
held for sale
|
$ | 13,296 | $ | 29,726 | $ | 15,758 | ||||||
Loans
held for investment
|
8,002,694 | 9,986,681 | 8,386,127 | |||||||||
Allowance
for loan losses
|
373,146 | 280,156 | 365,642 | |||||||||
Allowance
for credit losses (1)
|
380,493 | 283,425 | 373,126 | |||||||||
Nonaccrual
loans - commercial and industrial
|
71,242 | 41,877 | 77,527 | |||||||||
Nonaccrual
loans - commercial owner - occupied real estate
|
48,040 | 19,310 | 43,701 | |||||||||
Nonaccrual
loans - commercial real estate
|
217,542 | 301,872 | 240,377 | |||||||||
Nonaccrual
loans - consumer
|
15,353 | 28,743 | 16,314 | |||||||||
Nonaccrual
loans - mortgage
|
21,979 | 31,148 | 21,127 | |||||||||
Total
nonperforming loans held for investment (2)
|
374,156 | 422,950 | 399,046 | |||||||||
Nonperforming
loans held for sale - CRE
|
- | 12,766 | - | |||||||||
Foreclosed
property (other real estate owned and personal property
repossessions)
|
144,128 | 77,210 | 123,314 | |||||||||
Total
nonperforming assets
|
$ | 518,284 | $ | 512,926 | $ | 522,360 | ||||||
Restructured
loans accruing interest
|
$ | 45,051 | $ | 11,073 | $ | 26,128 | ||||||
Loans
past due 90 days or more (interest accruing)
|
$ | 3,442 | $ | 6,444 | $ | 10,465 | ||||||
Total
nonperforming assets as a percentage of loans and foreclosed
property
|
6.35 | % | 5.08 | % | 6.13 | % | ||||||
Total
nonperforming assets as a percentage of total assets
|
4.17 | 3.86 | 4.39 | |||||||||
Allowance
for loan losses to nonperforming loans held for investment
|
1.00 | x | 0.66 | x | 0.92 | x |
(1)
|
The
allowance for credit losses is the sum of the allowance for loan losses
and the reserve for unfunded lending
commitments.
|
(2)
|
At
March 31, 2010, includes $18.5 million of restructured loans in nonaccrual
status.
|
TSFG’s
nonperforming asset ratio (nonperforming assets as a percentage of loans and
foreclosed property) increased to 6.35% at March 31, 2010 from 6.13% at December
31, 2009, due primarily to lower loans outstanding. Comparing March 31, 2010 to
December 31, 2009, nonperforming assets decreased to $518.3 million from $522.4
million as TSFG continued to address its problem loans and inflows of
nonaccruals declined for three consecutive quarters.
Table 6
presents CRE nonaccrual loans by geography and product type, while Table 7
provides detail regarding commercial real estate loans past due 30 days or
more.
Table
6
|
||||||||||||||||||||||||||||||||||||
Commercial
Real Estate Nonaccrual Loans
|
||||||||||||||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
March
31, 2010 CRE Nonaccrual Loans ("NAL") by Geography
|
||||||||||||||||||||||||||||||||||||
SC,
Excl Coastal
|
Coastal SC
|
Western NC
|
Central FL
|
North FL
|
South FL
|
Tampa
Bay
|
Total CRE NAL
|
%
of NAL
|
||||||||||||||||||||||||||||
CRE
Nonaccrual Loans by Product Type
|
||||||||||||||||||||||||||||||||||||
Completed
income property
|
$ | 13,935 | $ | 10,120 | $ | 20,352 | $ | 2,805 | $ | 6,401 | $ | 3,157 | $ | 12,720 | $ | 69,490 | 18.6 | % | ||||||||||||||||||
Residential
A&D
|
5,461 | 5,694 | 18,747 | 6,566 | 5,449 | 1,092 | 3,339 | 46,348 | 12.4 | |||||||||||||||||||||||||||
Commercial
A&D
|
1,785 | 5,933 | 3,733 | 960 | - | - | 6,420 | 18,831 | 5.0 | |||||||||||||||||||||||||||
Commercial
construction
|
14,810 | - | 2,901 | - | 1,523 | - | 5,193 | 24,427 | 6.5 | |||||||||||||||||||||||||||
Residential
construction
|
495 | - | 919 | 6,412 | 2,151 | - | - | 9,977 | 2.7 | |||||||||||||||||||||||||||
Residential
condo
|
1,131 | 13,183 | 77 | - | 8 | 1,106 | 189 | 15,694 | 4.2 | |||||||||||||||||||||||||||
Undeveloped
land
|
3,209 | 3,076 | 1,320 | 5,129 | 11,307 | 1,391 | 7,343 | 32,775 | 8.7 | |||||||||||||||||||||||||||
Total
CRE Nonaccrual Loans
|
$ | 40,826 | $ | 38,006 | $ | 48,049 | $ | 21,872 | $ | 26,839 | $ | 6,746 | $ | 35,204 | $ | 217,542 | 58.1 | % | ||||||||||||||||||
CRE
Nonaccrual Loans as %of Total Nonaccrual Loans HFI
|
10.9 | % | 10.2 | % | 12.8 | % | 5.8 | % | 7.2 | % | 1.8 | % | 9.4 | % | 58.1 | % |
Table
7
|
||||||||||||||||
Commercial
Real Estate Loans Past Due 30 Days or More (excluding
nonaccruals)
|
||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||
March 31,
2010
|
December 31,
2009
|
|||||||||||||||
Balance
|
% of CRE
|
Balance
|
% of CRE
|
|||||||||||||
North
Carolina
|
$ | 15,250 | 0.46 | % | $ | 17,747 | 0.51 | % | ||||||||
South
Carolina
|
16,511 | 0.50 | 23,714 | 0.68 | ||||||||||||
Florida
|
34,398 | 1.03 | 71,877 | 2.05 | ||||||||||||
Total
CRE loans past due 30 days or more
|
$ | 66,159 | 1.99 | % | $ | 113,338 | 3.24 | % |
Potential
problem loans consist of commercial loans that are performing in accordance with
contractual terms but for which management has concerns about the ability of an
obligor to continue to comply with repayment terms because of the obligor’s
potential operating or financial difficulties. These loans are identified
through our internal risk grading processes. Management monitors these loans
closely and reviews their performance on a regular basis. Table 8 provides
additional detail regarding potential problem loans.
Table
8
|
||||||||||||||||||||||||
Potential
Problem Loans
|
||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
March 31, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
#
of Loans
|
Balance
|
%
of LHFI
|
#
of Loans
|
Balance
|
%
of LHFI
|
|||||||||||||||||||
Large
potential problem loans ($5 million or more)
|
42 | $ | 389,064 | 4.86 | % | 40 | $ | 377,230 | 4.50 | % | ||||||||||||||
Small
potential problem loans (less than $5 million)
|
1,177 | 555,248 | 6.94 | 1,112 | 558,700 | 6.66 | ||||||||||||||||||
Total
potential problem loans (1)
|
1,219 | $ | 944,312 | 11.80 | % | 1,152 | $ | 935,930 | 11.16 | % |
(1)
|
Includes
commercial and industrial, commercial real estate, and commercial
owner-occupied real estate.
|
Allowance
for Loan Losses and Reserve for Unfunded Lending Commitments
The
allowance for loan losses represents management’s estimate of probable incurred
losses inherent in the lending portfolio. The adequacy of the allowance for loan
losses (the “Allowance”) is analyzed quarterly. For purposes of this analysis,
adequacy is defined as a level sufficient to absorb probable incurred losses in
the portfolio as of the balance sheet date presented. The methodology employed
for this analysis is as follows.
Management’s
ongoing evaluation of the adequacy of the Allowance considers both impaired and
unimpaired loans and takes into consideration TSFG’s past loan loss experience,
known and inherent risks in the portfolio, existing
adverse
situations that may affect the borrowers’ ability to repay, estimated value of
any underlying collateral, an analysis of guarantees and an analysis of current
economic factors and existing conditions.
TSFG,
through its lending and credit functions, continuously reviews its loan
portfolio for credit risk. TSFG employs an independent credit review area that
reviews the lending and credit functions and processes to validate that credit
risks are appropriately identified and addressed and reflected in the risk
ratings. Using input from the credit risk identification process, the Company’s
credit risk management area analyzes and validates the Company’s Allowance
calculations. The analysis includes four basic components: general allowances
for loan pools segmented based on similar risk characteristics, specific
allowances for individually impaired loans, subjective and judgmental
qualitative adjustments based on identified economic factors and existing
conditions and other risk factors, and the unallocated component of the
Allowance (which is determined based on the overall Allowance level and the
determination of a range given the inherent imprecision of calculating the
Allowance).
Management
reviews the methodology, calculations and results and ensures that the
calculations are appropriate and that all material risk elements have been
assessed in order to determine the appropriate level of Allowance for the
inherent losses in the loan portfolio at each quarter end. The Allowance for
Credit Losses Committee is in place to ensure that the process is systematic and
consistently applied.
The
following chart reflects the various levels of reserves included in the
Allowance:
Level
I
|
General
allowance calculated based upon historical losses
|
|
Level
II
|
Specific
reserves for individually impaired loans
|
|
Level
III
|
Subjective/judgmental
adjustments for economic and other risk factors
|
|
Unfunded
|
Reserves
for off-balance sheet (unadvanced) exposure
|
|
Unallocated
|
Represents
the imprecision inherent in the previous calculations
|
|
Total
|
Represents
summation of all reserves
|
Level I Reserves. The first
reserve component is the general allowance for loan pools segmented based on
similar risk characteristics that are determined by applying adjusted historical
loss factors to each loan pool. The general allowance factors are based upon
recent and historical charge-off experience and are applied to the outstanding
portfolio by loan type and internal risk rating. Historical loss analyses of the
previous 12 quarters provide the basis for factors used for homogenous pools of
smaller loans, such as indirect auto and other consumer loan categories which
generally are not evaluated based on individual risk ratings but almost entirely
based on historical losses. The loss factors used in the Level I analyses are
adjusted quarterly based on loss trends and risk rating migrations.
TSFG
generates historical loss ratios from actual loss history for nine subsets of
the loan portfolio over a 12 quarter period (3 years). Commercial loans are
sorted by risk rating into four pools—Pass, Special Mention, Substandard, and
Doubtful. Consumer loans are sorted into five pools by product type—Direct,
Indirect, Home Equity, Consumer Lots, and Mortgage.
The
adjusted loss ratio for each pool is multiplied by the dollar amount of loans in
the pool in order to create a range. We then add and subtract five percent
(5.0%) to and from this amount to create the upper and lower boundaries of the
range. The upper and lower boundary amounts for each pool are summed to
establish the total range. Although TSFG generally uses the actual historical
loss rate, on occasion management may decide to select a higher or lower
boundary based on known market trends or internal behaviors that would impact
the performance of a specific portfolio grouping. The Level I reserves totaled
$210.3 million at March 31, 2010, based on the portfolio historical loss rates,
compared to $193.0 million at December 31, 2009.
Level II Reserves. The second
component of the Allowance involves the calculation of specific allowances for
each individually impaired loan. In situations where a loan is determined to be
impaired (primarily because it is probable that all principal and interest
amounts due according to the terms of the note will not be collected as
scheduled), a specific reserve may or may not be warranted. Upon examination of
the collateral and other factors, it may be determined that TSFG reasonably
expects to collect all amounts due; therefore, no specific reserve is warranted.
Any loan determined to be impaired (whether a specific reserve is assigned or
not) is excluded from the Level I calculations described above.
TSFG
tests a broad group of loans for impairment each quarter (this includes all
large commercial relationships, generally over $1 million, that have been placed
in nonaccrual status or modified as a troubled debt restructure). Once a loan is
identified as impaired, reserves are based on a thorough analysis of the most
probable source of repayment which is normally the liquidation of collateral,
but may also include discounted future cash flows or the
market
value of the loan itself. Generally, for collateral dependent loans, current
market appraisals are utilized for larger credits; however, in situations where
a current market appraisal is not available, management uses the best available
information (including appraisals for similar properties, communications with
qualified real estate professionals, information contained in reputable
publications and other observable market data) to estimate the current fair
value (less cost to sell) of the subject property. TSFG had Level II reserves of
$37.7 million at March 31, 2010 and December 31, 2009.
Level III Reserves. The third
component of the Allowance represents subjective and judgmental adjustments
determined by management to account for the effect of risks or losses that are
not fully captured elsewhere. This part of the methodology reflects adjustments
to historical loss experience to incorporate current economic conditions and
other factors which impact the inherent losses in the portfolio. This component
includes amounts for new loan products or portfolio categories which are deemed
to have risks not included in the other reserve elements as well as
macroeconomic and other factors. The qualitative risk factors of this third
allowance level are more subjective and require a high degree of management
judgment. Currently, Level III Reserves include additional reserves for current
economic conditions, the commercial real estate concentration in the portfolio,
and an additional adjustment to represent declining land values. The Level III
Reserves totaled $125.2 million at March 31, 2010 compared to $135.0 million at
December 31, 2009.
Reserve for Unfunded Commitments.
At March 31, 2010 and December 31, 2009, the reserve for unfunded
commitments was $7.3 million and $7.5 million, respectively. This reserve is
determined by formula; historical loss ratios are multiplied by potential usage
levels (i.e., the difference between actual usage levels and the second highest
historical usage level).
Unallocated Reserves. The
calculated Level
I, II and III reserves are then segregated into allocated and unallocated
components. The allocated component is the sum of the loss estimates at the
lower end of the probable loss ranges, and is distributed to the loan categories
based on the mix of loans in each category. The unallocated portion is
calculated as the sum of the differences between the actual calculated Allowance
and the lower boundary amounts for each category in our model. The sum of these
differences at March 31, 2010 was $21.7 million, compared to $21.3 million at
December 31, 2009. The unallocated Allowance is the result of management’s best
estimate of risks inherent in the portfolio, economic uncertainties and other
subjective factors, including industry trends, as well as the imprecision
inherent in estimates used for the allocated portions of the Allowance.
Management reviews the overall level of the Allowance as well as the unallocated
component and considers the level of both amounts in determining the appropriate
level of reserves for the overall inherent risk in TSFG’s total loan
portfolio.
Changes
in the Level II reserves (and the overall Allowance) may not correlate to the
relative change in impaired loans depending on a number of factors including the
collateral type, amounts previously charged off, and the estimated loss severity
on individual loans.
Changes
in the other components of the Allowance (reserves for Level I, Level III,
unallocated, and unfunded commitments) are not related to specific loans but
reflect changes in loss experience and subjective and judgmental adjustments
made by management.
Assessing
the adequacy of the Allowance is a process that requires considerable judgment.
Management's judgments are based on numerous assumptions about current events,
which we believe to be reasonable, but which may or may not be valid. Thus,
there can be no assurance that loan losses in future periods will not exceed the
current Allowance amount or that future increases in the Allowance will not be
required. No assurance can be given that management's ongoing evaluation of the
loan portfolio in light of changing economic conditions and other relevant
circumstances will not require significant future additions to the Allowance,
thus adversely affecting the operating results of TSFG.
The
Allowance is also subject to examination and adequacy testing by regulatory
agencies, which may consider such factors as the methodology used to determine
adequacy and the size of the Allowance relative to that of peer institutions,
and other adequacy tests. In addition, such regulatory agencies could require us
to adjust our Allowance based on information available to them at the time of
their examination.
Table 9
summarizes the changes in the allowance for loan losses, reserve for unfunded
lending commitments, and allowance for credit losses and provides certain
related ratios.
Table
9
|
||||||||||||
Summary
of Loan and Credit Loss Experience
|
||||||||||||
(dollars
in thousands)
|
||||||||||||
At
and For the
|
At
and For the
|
|||||||||||
Three
Months
|
Year
Ended
|
|||||||||||
Ended
March 31,
|
December 31,
|
|||||||||||
2010
|
2009
|
2009
|
||||||||||
Allowance
for loan losses, beginning of year
|
$ | 365,642 | $ | 247,086 | $ | 247,086 | ||||||
Allowance
adjustment for loans sold
|
- | - | (4,471 | ) | ||||||||
Net
charge-offs:
|
||||||||||||
Loans
charged-off
|
(93,619 | ) | (110,443 | ) | (556,585 | ) | ||||||
Loans
recovered
|
5,863 | 1,367 | 15,404 | |||||||||
(87,756 | ) | (109,076 | ) | (541,181 | ) | |||||||
Additions
to allowance through provision expense
|
95,260 | 142,146 | 664,208 | |||||||||
Allowance
for loan losses, end of period
|
$ | 373,146 | $ | 280,156 | $ | 365,642 | ||||||
Reserve
for unfunded lending commitments, beginning of year
|
$ | 7,484 | $ | 2,788 | $ | 2,788 | ||||||
Provision
for unfunded lending commitments
|
(137 | ) | 481 | 4,696 | ||||||||
Reserve
for unfunded lending commitments, end of period
|
$ | 7,347 | $ | 3,269 | $ | 7,484 | ||||||
Allowance
for credit losses, beginning of year
|
$ | 373,126 | $ | 249,874 | $ | 249,874 | ||||||
Allowance
adjustment for loans sold
|
- | - | (4,471 | ) | ||||||||
Net
charge-offs:
|
||||||||||||
Loans
charged-off
|
(93,619 | ) | (110,443 | ) | (556,585 | ) | ||||||
Loans
recovered
|
5,863 | 1,367 | 15,404 | |||||||||
(87,756 | ) | (109,076 | ) | (541,181 | ) | |||||||
Additions
to allowance through provision expense
|
95,123 | 142,627 | 668,904 | |||||||||
Allowance
for credit losses, end of period
|
$ | 380,493 | $ | 283,425 | $ | 373,126 | ||||||
Average
loans held for investment
|
$ | 8,240,922 | $ | 10,154,853 | $ | 9,456,636 | ||||||
Loans
held for investment, end of period
|
8,002,694 | 9,986,681 | 8,386,127 | |||||||||
Net
charge-offs as a percentage of average loans held for investment
(annualized)
|
4.32 | % | 4.36 | % | 5.72 | % | ||||||
Allowance
for loan losses as a percentage of loans held for
investment
|
4.66 | 2.81 | 4.36 | |||||||||
Allowance
for credit losses as a percentage of loans held for
investment
|
4.75 | 2.84 | 4.45 |
The
provision for credit losses for first quarter 2010 totaled $95.1 million,
compared to $170.7 million for fourth quarter 2009 and $142.6 million for first
quarter 2009, and exceeded net loan charge-offs by $7.4 million. The overall
allowance for credit losses as a percentage of loans held for investment
increased to 4.75% at March 31, 2010 from 4.45% at December 31, 2009. Net
charge-offs in first quarter 2010 decreased to $87.8 million compared to $142.9
million in fourth quarter 2009, partly as a result of fourth quarter 2009 sales
of problem loans. Tables 10 and 11 provide additional detail for net
charge-offs.
Table
10
|
||||||||
Net
Charge-Offs by Product Type
|
||||||||
(dollars
in thousands)
|
||||||||
Three
Months Ended
|
||||||||
March 31, 2010
|
||||||||
Amount
|
%
of NCO
|
|||||||
Commercial
and industrial
|
$ | 25,715 | 29.3 | % | ||||
Commercial
owner-occupied real estate
|
8,073 | 9.2 | ||||||
Commercial
real estate
|
43,111 | 49.1 | ||||||
Indirect
- sales finance
|
1,836 | 2.1 | ||||||
Consumer
lot loans
|
2,852 | 3.2 | ||||||
Direct
retail
|
790 | 0.9 | ||||||
Home
equity
|
3,736 | 4.3 | ||||||
Mortgage
|
1,643 | 1.9 | ||||||
Total
net charge-offs
|
$ | 87,756 | 100.0 | % |
Table
11
|
||||||||||||||||||||||||||||||||||||
Commercial
Real Estate Net Charge-Offs by Product Type
|
||||||||||||||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
Three
Months Ended March 31, 2010 CRE Net Charge-Offs ("NCO") by
Geography
|
||||||||||||||||||||||||||||||||||||
SC,
Excl Coastal
|
Coastal SC
|
Western NC
|
Central FL
|
North FL
|
South FL
|
Tampa
Bay
|
Total CRE NCO
|
%
of NCO
|
||||||||||||||||||||||||||||
CRE
Net Charge-Offs by
|
||||||||||||||||||||||||||||||||||||
Product
Type
|
||||||||||||||||||||||||||||||||||||
Completed
income property
|
$ | 2,194 | $ | 1,059 | $ | 4,685 | $ | 2,095 | $ | 1,023 | $ | 829 | $ | 5,299 | $ | 17,184 | 19.6 | % | ||||||||||||||||||
Residential
A&D
|
3,323 | 3,299 | 1,314 | 1,231 | 1,496 | 8 | 153 | 10,824 | 12.3 | |||||||||||||||||||||||||||
Commercial
A&D
|
67 | - | 45 | - | 80 | 435 | 3,894 | 4,521 | 5.2 | |||||||||||||||||||||||||||
Commercial
construction
|
- | 135 | 1,265 | - | - | - | - | 1,400 | 1.6 | |||||||||||||||||||||||||||
Residential
construction
|
(16 | ) | 874 | 1,178 | 49 | 8,646 | (1,031 | ) | (1,586 | ) | 8,114 | 9.2 | ||||||||||||||||||||||||
Undeveloped
land
|
(162 | ) | 218 | 235 | - | 1,108 | (91 | ) | (240 | ) | 1,068 | 1.2 | ||||||||||||||||||||||||
Total
CRE Net Charge-Offs
|
$ | 5,406 | $ | 5,585 | $ | 8,722 | $ | 3,375 | $ | 12,353 | $ | 150 | $ | 7,520 | $ | 43,111 | 49.1 | % | ||||||||||||||||||
CRE
Net Charge-Offs as %of Total Net Charge-Offs
|
6.1 | % | 6.4 | % | 9.9 | % | 3.8 | % | 14.1 | % | 0.2 | % | 8.6 | % | 49.1 | % |
Securities
TSFG uses
the investment securities portfolio for several purposes. It serves as a vehicle
to manage interest rate risk, to generate interest and dividend income, to
provide liquidity to meet funding requirements, and to provide collateral for
pledges on public deposits, treasury tax and loan (“TT&L”) advances, FHLB
advances, derivatives, and securities sold under repurchase agreements. Table 12
shows the carrying values of the investment securities
portfolio.
Table
12
|
||||||||||||
Investment
Securities Portfolio Composition
|
||||||||||||
(dollars
in thousands)
|
||||||||||||
March 31,
|
December 31,
|
|||||||||||
2010
|
2009
|
2009
|
||||||||||
Available for Sale (at
fair value)
|
||||||||||||
U.S.
Treasury
|
$ | 2,055 | $ | 2,042 | $ | 2,045 | ||||||
U.S.
Government agencies
|
286,352 | 313,159 | 79,707 | |||||||||
Agency
residential mortgage-backed securities
|
1,918,914 | 1,489,583 | 1,980,305 | |||||||||
Private
label residential mortgage-backed securities
|
7,628 | 12,462 | 8,504 | |||||||||
State
and municipal
|
3,657 | 241,478 | 23,158 | |||||||||
Other
investments:
|
||||||||||||
Community
bank stocks
|
403 | 581 | 399 | |||||||||
Other
equity investments
|
1,542 | 1,143 | 1,283 | |||||||||
2,220,551 | 2,060,448 | 2,095,401 | ||||||||||
Held to Maturity (at
amortized cost)
|
||||||||||||
State
and municipal
|
13,654 | 17,939 | 16,217 | |||||||||
Agency
residential mortgage-backed securities
|
85,698 | - | 111,199 | |||||||||
Other
investments
|
100 | 100 | 100 | |||||||||
99,452 | 18,039 | 127,516 | ||||||||||
Total
|
$ | 2,320,003 | $ | 2,078,487 | $ | 2,222,917 | ||||||
Total
securities as a percentage of total assets
|
18.7 | % | 15.6 | % | 18.7 | % | ||||||
Percentage
of Total Securities Portfolio
|
||||||||||||
U.S.
Treasury
|
0.1 | % | 0.1 | % | 0.1 | % | ||||||
U.S.
Government agencies
|
12.3 | 15.1 | 3.6 | |||||||||
Agency
residential mortgage-backed securities
|
86.4 | 71.6 | 94.1 | |||||||||
Private
label residential mortgage-backed securities
|
0.3 | 0.6 | 0.4 | |||||||||
State
and municipal
|
0.8 | 12.5 | 1.7 | |||||||||
Other
investments
|
0.1 | 0.1 | 0.1 | |||||||||
Total
|
100.0 | % | 100.0 | % | 100.0 | % |
Securities
(i.e., securities available for sale and securities held to maturity) excluding
the unrealized gain on securities available for sale averaged $2.1 billion for
both first quarter 2010 and 2009. The average tax-equivalent portfolio yield
decreased for the quarter ended March 31, 2010 to 3.36% from 3.76% in fourth
quarter 2009 and 4.52% in first quarter 2009. The securities yield decreased
primarily due to an overall decline in interest rates resulting in reinvestment
of scheduled and unscheduled payments and calls at lower yields and the fourth
quarter 2009 sales of higher-yielding mortgage-backed securities and municipal
securities.
The
expected duration of the debt securities portfolio was approximately 2.9 years
at March 31, 2010, a decrease from approximately 3.2 years at December 31, 2009.
If interest rates rise, the duration of the debt securities portfolio may
extend. Conversely, if interest rates fall, the duration of the debt securities
portfolio may decline. Since total securities include some callable bonds and
mortgage-backed securities, security paydowns are likely to accelerate if
interest rates fall or decline if interest rates rise. Changes in interest rates
and related prepayment activity impact yields and fair values of TSFG’s
securities. At March 31, 2010, securities had unamortized premiums of $33.4
million and unamortized discounts of $2.9 million, of which $27.0 million and
$2.8 million, respectively, related to securities which are callable or subject
to prepayment (i.e., mortgage-backed securities). Faster than expected paydowns
would adversely impact yields and market values of securities with unamortized
premiums while slower than expected paydowns would adversely impact yields and
market values of securities with unamortized discounts.
Approximately
61% of mortgage-backed securities (“MBS”) are collateralized mortgage
obligations (“CMOs”) with an average duration of 2.8 years. At March 31, 2010,
approximately 12% of the MBS portfolio was variable rate or hybrid variable
rate, where the rate adjusts on an annual basis after a specified fixed rate
period, generally ranging from one to ten years.
The
majority of these securities are government or agency securities and, therefore,
pose minimal credit risk. The net unrealized gain on securities available for
sale (pre-tax) totaled $41.8 million at March 31, 2010, compared with $28.4
million at December 31, 2009, primarily due to a decrease in interest rates. If
interest rates increase, credit spreads widen, and/or market illiquidity
worsens, TSFG expects its net unrealized gain on securities available for sale
to decrease and possibly become a net unrealized loss. See Item 1, Note 4 to the
Consolidated Financial Statements for information about TSFG’s securities in
unrealized loss positions.
Table 13
shows the credit risk profile of the securities portfolio.
Table
13
|
||||||||||||||||
Investment
Securities Portfolio Credit Risk Profile
|
||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||
March 31,
2010
|
December 31,
2009
|
|||||||||||||||
Balance
|
% of Total
|
Balance
|
% of Total
|
|||||||||||||
Government
and agency
|
||||||||||||||||
U.S.
Treasury
|
$ | 2,055 | 0.1 | % | $ | 2,045 | 0.1 | % | ||||||||
U.S.
Government agencies (1)
|
286,352 | 12.3 | 79,707 | 3.6 | ||||||||||||
Agency
mortgage-backed securities (MBS) (1)(2)(3)
|
2,004,612 | 86.4 | 2,091,504 | 94.0 | ||||||||||||
Total
government and agency
|
2,293,019 | 98.8 | 2,173,256 | 97.7 | ||||||||||||
State
and municipal (3)(4)(5)
|
||||||||||||||||
Pre-funded
with collateral or AAA-rated backed by Texas Permanent School Fund or
AAA-rated
|
4,076 | 0.2 | 19,392 | 0.9 | ||||||||||||
Underlying
issuer or collateral rated A or better (including South Carolina State
Aid)
|
8,909 | 0.4 | 15,127 | 0.7 | ||||||||||||
Underlying
issuer or collateral rated BBB
|
1,987 | 0.1 | 2,337 | 0.1 | ||||||||||||
Non-rated
|
2,339 | 0.1 | 2,519 | 0.1 | ||||||||||||
Total
state and municipal
|
17,311 | 0.8 | 39,375 | 1.8 | ||||||||||||
Private
label mortgage-backed securities AAA-rated (2)
|
7,628 | 0.3 | 8,504 | 0.4 | ||||||||||||
Community
bank stocks and other
|
2,045 | 0.1 | 1,782 | 0.1 | ||||||||||||
Total
securities
|
$ | 2,320,003 | 100.0 | % | $ | 2,222,917 | 100.0 | % | ||||||||
Percent
of total securities:
|
||||||||||||||||
Rated
A or higher
|
99.7 | % | 99.7 | % | ||||||||||||
Investment
grade
|
99.8 | 99.8 |
(1)
|
At
March 31, 2010, these amounts include, in the aggregate, $206 million and
$1.7 billion related to senior debt and MBS, respectively, issued by FNMA
and FHLMC.
|
(2)
|
Current
policies restrict MBS/CMO purchases to agency-backed and a small percent
of private-label securities and prohibit securities collateralized by
sub-prime assets.
|
(3)
|
At
March 31, 2010 and December 31, 2009, agency mortgage-backed securities
include $85.7 million and $111.2 million, respectively, of securities held
to maturity at amortized cost. At March 31, 2010 and December 31, 2009,
state and municipal securities include $13.7 million and $16.2 million,
respectively, of securities held to maturity at amortized
cost.
|
(4)
|
Ratings
shown above do not reflect the benefit of guarantees by bond insurers. At
March 31, 2010, $4.1 million of municipal bonds are guaranteed by bond
insurers. At December 31, 2009, $4.9 million of municipal bonds are
guaranteed by bond insurers.
|
(5)
|
At
March 31, 2010, the breakdown by current bond rating is as
follows: $0.2 million pre-funded with collateral or AAA-rated
backed by Texas Permanent School Fund, $3.9 million AAA-rated, $10.9
million AA or A-rated, and $2.3 million
non-rated.
|
Note: Within
each category, securities are ordered based on risk assessment from lowest to
highest. TSFG holds no collateralized debt obligations.
Investments included in Other
Assets. TSFG also invests in limited partnerships, limited liability
companies (LLC's) and other privately held companies. These investments are
included in other assets. In first quarter 2010, TSFG recorded $460,000 in
other-than-temporary impairment on these investments. At March 31, 2010, TSFG's
investment in these entities totaled $14.1 million, of which $7.1 million were
accounted for under the cost method and $7.0 million were
accounted
for under the equity method. Since certain of these investments are real
estate-related or banking industry-related, additional impairment in future
periods is possible.
Carolina
First Bank, as a member of the Federal Home Loan Bank ("FHLB") of Atlanta, is
required to own capital stock in the FHLB of Atlanta based generally upon its
balances of residential mortgage loans, select commercial loans secured by real
estate, and FHLB advances. FHLB stock is included in other assets at its
original cost basis. At March 31, 2010 and December 31, 2009, FHLB stock totaled
$58.8 million.
Goodwill
TSFG
evaluates its goodwill annually for each reporting unit as of June 30th or
more frequently if events or circumstances indicate that there may be
impairment. The goodwill impairment test is a two-step process, which requires
management to make judgments in determining the assumptions used in the
calculations. The first step (“Step 1”) involves estimating the fair value of
each reporting unit and comparing it to the reporting unit’s carrying value,
which includes the allocated goodwill. If the estimated fair value is less than
the carrying value, then a second step (“Step 2”) is performed to measure the
actual amount of goodwill impairment, if any. Step 2 involves determining the
implied fair value of goodwill. This requires the Company to allocate the
estimated fair value of the reporting unit to all the recognized and
unrecognized assets and liabilities of such unit. The fair values of the assets
and liabilities, primarily loans and deposits, are determined using current
market interest rates, projections of future cash flows, and where available,
quoted market prices of similar instruments. Any unallocated fair value
represents the implied fair value of goodwill, which is then compared to its
corresponding carrying value. If the implied fair value is less than the
carrying value, an impairment loss is recognized in an amount equal to that
deficit.
For
information regarding interim goodwill impairment tests, refer to the Annual
Report of TSFG on Form 10-K for the year ended December 31, 2009, specifically
the section captioned “Goodwill” in “Balance Sheet Review” in Management’s
Discussion and Analysis of Financial Condition and Results of Operations. No
formal interim impairment evaluation was performed at March 31, 2010 since there
were no material changes to the assumptions and expectations used for the
interim evaluation at September 30, 2009.
Other
Real Estate Owned
Other
real estate owned (“OREO”), consisting of properties obtained through
foreclosure or in satisfaction of loans, is reported at the lower of cost or
fair value, determined on the basis of current appraisals, comparable sales, and
other estimates of fair value obtained principally from independent sources,
adjusted for estimated selling costs. At the time of foreclosure, any excess of
the loan balance over the fair value of the real estate held as collateral is
recorded as a charge against the allowance for loan losses. Gains or losses on
sale and any subsequent adjustments to the value are recorded as a component of
noninterest expense.
During
the three months ended March 31, 2010, TSFG sold $10.1 million in OREO and
incurred losses of $944,000. Due to continuing weak market conditions, TSFG
records assets at 70% of the most recent appraised value. At March 31, 2010, the
carrying value of OREO totaled $142.6 million, compared to $122.1 million at
December 31, 2009, and was included in other assets. Table 14 presents a
rollforward of OREO, while Table 15 presents an aging as of March 31, 2010 and
Table 16 presents OREO by property type.
Table
14
|
||||||||
OREO
Rollforward
|
||||||||
(dollars
in thousands)
|
||||||||
Three
Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Balance
at beginning of period
|
$ | 122,086 | $ | 44,668 | ||||
Loans
transferred in
|
35,213 | 32,092 | ||||||
Proceeds
from sales
|
(9,176 | ) | (2,964 | ) | ||||
Loss
on sales
|
(944 | ) | (124 | ) | ||||
Write-downs
|
(4,548 | ) | - | |||||
Balance
at end of period
|
$ | 142,631 | $ | 73,672 |
Table
15
|
||||
Number
of Months in OREO at March 31, 2010
|
||||
(dollars
in thousands)
|
||||
Less
than three months
|
$ | 34,102 | ||
Three
months or more, but less than six months
|
33,939 | |||
Six
months or more, but less than nine months
|
24,508 | |||
Nine
months or more, but less than twelve months
|
19,769 | |||
Twelve
months or more
|
30,313 | |||
Total
OREO
|
$ | 142,631 |
Table
16
|
||||
OREO
by property type at March 31, 2010
|
||||
(dollars
in thousands)
|
||||
Land
|
$ | 91,393 | ||
Commercial
|
27,200 | |||
Residential
|
17,836 | |||
Other
|
6,202 | |||
Total
OREO
|
$ | 142,631 |
Derivative
Financial Instruments
Derivative
financial instruments used by TSFG may include interest rate swaps, caps,
collars, floors, options, futures and forward contracts. Derivative contracts
are primarily used to hedge identified risks and also to provide risk-management
products to customers. TSFG has derivatives that qualify for hedge accounting,
derivatives that do not qualify for hedge accounting but otherwise achieve
economic hedging goals (“economic hedges”), as well as derivatives that are used
in trading and customer hedging programs. For purposes of potential valuation
adjustments to its derivative assets, TSFG evaluates the credit risk of its
counterparties, including bank customers with whom TSFG has entered into
customer swaps. During first quarter 2010, TSFG recorded credit losses of $2.1
million on its customer swaps. Deterioration in customers’ credit and in TSFG’s
ability to collect on the derivative assets associated with customer swaps could
negatively impact TSFG’s consolidated financial statements. If we are in a
receivable position with respect to our interest rate swaps with customers, the
fair value of the derivative asset represents additional credit exposure to the
customer (without additional collateral). At March 31, 2010, the total fair
value of TSFG’s customer swap derivative assets was $26.9 million. See Note
8 to the Consolidated Financial Statements for additional information regarding
derivatives.
In first
quarter 2010, certain cash flow hedges with a notional amount of $265.0 million
were terminated or de-designated, which locked in a gain of approximately $12
million that will be amortized to the statement of operations as the hedged cash
flows impact earnings.
Deposits
Deposits
remain TSFG's primary source of funds. Average customer deposits equaled 69.6%
of average total funding in first quarter 2010. TSFG faces strong competition
from other banking and financial services companies in gathering deposits. TSFG
also maintains short and long-term wholesale sources including federal funds,
repurchase agreements, Federal Reserve borrowings, brokered CDs, and FHLB
advances to fund a portion of loan demand and, if appropriate, any increases in
investment securities.
Table 17
shows the breakdown of total deposits by type of deposit and the respective
percentage of total deposits, while Table 18 shows the breakdown of customer
funding by type.
Table
17
|
||||||||||||
Type
of Deposits
|
||||||||||||
(dollars
in thousands)
|
||||||||||||
March 31,
|
December 31,
|
|||||||||||
2010
|
2009
|
2009
|
||||||||||
Noninterest-bearing
demand deposits
|
$ | 1,109,153 | $ | 1,067,953 | $ | 1,124,404 | ||||||
Interest-bearing
checking
|
1,030,056 | 1,098,585 | 1,060,470 | |||||||||
Money
market accounts
|
2,053,388 | 1,889,041 | 2,072,664 | |||||||||
Savings
accounts
|
367,573 | 203,106 | 322,924 | |||||||||
Core
deposits
|
4,560,170 | 4,258,685 | 4,580,462 | |||||||||
Time
deposits under $100,000
|
1,843,184 | 1,742,177 | 1,632,582 | |||||||||
Time
deposits of $100,000 or more
|
1,401,868 | 1,383,639 | 1,137,067 | |||||||||
Customer
deposits (1)
|
7,805,222 | 7,384,501 | 7,350,111 | |||||||||
Brokered
deposits
|
1,958,948 | 1,842,577 | 1,946,101 | |||||||||
Total
deposits
|
$ | 9,764,170 | $ | 9,227,078 | $ | 9,296,212 | ||||||
Percentage
of Deposits
|
||||||||||||
Noninterest-bearing
demand deposits
|
11.4 | % | 11.6 | % | 12.1 | % | ||||||
Interest-bearing
checking
|
10.5 | 11.9 | 11.4 | |||||||||
Money
market accounts
|
21.0 | 20.4 | 22.3 | |||||||||
Savings
accounts
|
3.8 | 2.2 | 3.5 | |||||||||
Core
deposits
|
46.7 | 46.1 | 49.3 | |||||||||
Time
deposits under $100,000
|
18.9 | 18.9 | 17.6 | |||||||||
Time
deposits of $100,000 or more
|
14.3 | 15.0 | 12.2 | |||||||||
Customer
deposits (1)
|
79.9 | 80.0 | 79.1 | |||||||||
Brokered
deposits
|
20.1 | 20.0 | 20.9 | |||||||||
Total
deposits
|
100.0 | % | 100.0 | % | 100.0 | % |
|
(1)
|
TSFG
defines customer deposits as total deposits less brokered
deposits.
|
Table
18
|
||||||||||||
Type
of Customer Funding
|
||||||||||||
(dollars
in thousands)
|
||||||||||||
March 31,
|
December 31,
|
|||||||||||
2010
|
2009
|
2009
|
||||||||||
Customer
deposits (1)
|
$ | 7,805,222 | $ | 7,384,501 | $ | 7,350,111 | ||||||
Customer
sweep accounts(2)
|
289,888 | 387,106 | 316,690 | |||||||||
Customer
funding
|
$ | 8,095,110 | $ | 7,771,607 | $ | 7,666,801 |
(1) TSFG
defines customer deposits as total deposits less brokered deposits.
(2) TSFG
includes customer sweep accounts in short-term borrowings on its consolidated
balance sheet.
At March
31, 2010, period-end customer funding increased $428.3 million from December 31,
2009, due to two time deposit promotions and the incorporation of a new floating
rate time deposit product. Public deposits totaled approximately $821.7 million
at March 31, 2010, compared to $749.1 million at December 31, 2009 and are
generally subject to seasonal fluctuations.
While
reported in short-term borrowings on the consolidated balance sheet, customer
sweep accounts represent excess overnight cash to/from commercial customer
operating accounts and are a source of funding for TSFG. Currently, sweep
balances are generated through two products: 1) collateralized customer
repurchase agreements ($274.8 million at March 31, 2010) and 2) Eurodollar
deposits ($15.1 million at March 31, 2010). These balances are tied directly to
commercial customer checking accounts and generate treasury services noninterest
income.
TSFG has
historically used brokered deposits and other borrowed funds as an alternative
funding source while continuing its efforts to maintain and grow its local
customer funding base. Effective April 30, 2010, Carolina First Bank
is
subject
to certain limitations with respect to brokered deposits and the rates it can
pay on certain customer deposits as stipulated in its Consent
Order.
Average
customer funding equaled 72.2% of average total funding for the first three
months of 2010 and 67.5% for the first three months of 2009. Period-end customer
funding remained relatively flat at 72.4% of total funding at March 31, 2010,
compared to 71.4% at December 31, 2009. Although the Company more aggressively
priced time deposits in first quarter 2010 to build excess liquidity to address
whether the TAGP would be extended and to extend maturities of funding, TSFG
expects to continue its focus on lowering its funding costs by trying to improve
the customer funding level, mix, and rate paid. TSFG attempts to enhance its
deposit mix by working to attract lower-cost transaction accounts through
actions such as new transaction account opening goals, new checking products,
and creating incentive plans to place a greater emphasis on lower-cost customer
deposit growth. Deposit pricing is very competitive, and we expect this pricing
environment to continue as banks compete for sources of liquidity and funding to
replace funding which may not be available in the current
environment.
In April
2010, the FDIC approved an interim final rule extending the TAGP from June 30,
2010 to December 31, 2010. TSFG elected to continue its participation in the
program, through which all noninterest-bearing transaction accounts and certain
interest-bearing checking accounts are fully guaranteed by the FDIC for the
entire amount in the account (see “Deposit Insurance”). TSFG estimates that
deposits that are neither insured nor collateralized would increase from
approximately $327 million at March 31, 2010 to approximately $810 million
without the benefit of the TAGP.
Table
19
|
||||||||||||||||||||
Maturity
Distribution of and Rates on Time Deposits
|
||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||
Customer
Time Deposits
|
Brokered
Deposits
|
Total
|
||||||||||||||||||
Balance
|
Average Rate
|
Balance
|
Average Rate
|
Balance
|
||||||||||||||||
April
1, 2010 through June 30, 2010
|
$ | 297,745 | 1.96 | % | $ | 209,554 | 2.15 | % | $ | 507,299 | ||||||||||
July
1, 2010 through September 30, 2010
|
1,001,899 | 2.94 | 184,563 | 1.77 | 1,186,462 | |||||||||||||||
October
1, 2010 through December 31, 2010
|
332,907 | 2.32 | 235,025 | 3.63 | 567,932 | |||||||||||||||
After
December 31, 2010
|
1,612,501 | 2.37 | 1,329,806 | 2.64 | 2,942,307 | |||||||||||||||
Total
outstanding
|
$ | 3,245,052 | 2.51 | % | $ | 1,958,948 | 2.62 | % | $ | 5,204,000 |
Borrowed
Funds
Table 20
shows the breakdown of borrowed funds by type.
Table
20
|
||||||||||||
Type
of Borrowed Funds
|
||||||||||||
(dollars
in thousands)
|
||||||||||||
March 31,
|
December 31,
|
|||||||||||
2010
|
2009
|
2009
|
||||||||||
Short-Term
Borrowings
|
||||||||||||
Federal
funds purchased and repurchase agreements
|
$ | 25 | $ | 197,309 | $ | 25 | ||||||
Customer
sweep accounts
|
289,888 | 387,106 | 316,690 | |||||||||
Federal
Reserve borrowings
|
- | 750,000 | - | |||||||||
Secured
borrowings
|
1,769 | - | - | |||||||||
Treasury,
tax and loan note
|
8,965 | 7,673 | 5,987 | |||||||||
Total
short-term borrowings
|
300,647 | 1,342,088 | 322,702 | |||||||||
Long-Term
Borrowings
|
||||||||||||
Repurchase
agreements
|
125,000 | 200,000 | 125,000 | |||||||||
FHLB
advances, net of discount
|
751,776 | 467,717 | 752,646 | |||||||||
Subordinated
notes
|
206,704 | 206,704 | 206,704 | |||||||||
Mandatorily
redeemable preferred stock of REIT subsidiary
|
31,800 | 56,800 | 31,800 | |||||||||
Note
payable
|
704 | 756 | 719 | |||||||||
Total
long term borrowings
|
1,115,984 | 931,977 | 1,116,869 | |||||||||
Total
borrowings
|
1,416,631 | 2,274,065 | 1,439,571 | |||||||||
Less: Customer
sweep accounts
|
(289,888 | ) | (387,106 | ) | (316,690 | ) | ||||||
Add: Brokered
deposits (1)
|
1,958,948 | 1,842,577 | 1,946,101 | |||||||||
Total
wholesale borrowings
|
$ | 3,085,691 | $ | 3,729,536 | $ | 3,068,982 | ||||||
Wholesale
borrowings as a % of total assets
|
24.8 | % | 28.1 | % | 25.8 | % |
(1) TSFG
includes brokered deposits in total deposits on its consolidated balance
sheet.
TSFG uses
both short-term and long-term borrowings to fund net growth of assets in excess
of deposit growth. In first quarter 2010, average borrowings totaled $1.4
billion, compared with $2.4 billion in first quarter 2009. Period-end wholesale
borrowings increased $16.7 million since December 31, 2009, primarily due to a
slight increase in brokered CDs. During 2009, TSFG began shifting into
borrowings with remaining maturities of more than one year in order to
strengthen liquidity.
Capital and Liquidity
Capital
Effective
April 30, 2010, Carolina First Bank’s Board of Directors entered into the
Consent Order (see “Overview”). As a result of the Consent Order, the Bank is
considered to be only adequately capitalized although all ratios at March 31,
2010 exceeded well-capitalized thresholds.
Shareholders'
equity totaled $920.0 million, or 7.4% of total assets, at March 31, 2010
compared with $993.2 million, or 8.3% of total assets, at December 31, 2009.
Shareholders’ equity decreased primarily due to the net loss in first quarter
2010, partially offset by an increase in the unrealized gain on securities
available for sale (net of tax) included in accumulated other comprehensive
income. Tangible common equity to tangible assets decreased to 2.90% at March
31, 2010, compared to 3.67% at December 31, 2009. During first quarter 2010,
TSFG contributed $30 million to its subsidiary bank as a capital
contribution.
Management
is in the process of evaluating various alternatives to increase tangible common
equity and regulatory capital through (i) the conversion of certain debt and
non-common equity instruments into common stock and/or cash; (ii) the issuance
of additional equity through one or more public and/or private offerings; and/or
(iii) a strategic sale of all or a portion of the Company. Additionally, TSFG is
actively evaluating asset reductions and other balance sheet management
strategies to ensure that the projected level of regulatory capital can support
its balance sheet long-term.
Current
market conditions for banking institutions, the overall uncertainty in financial
markets, uncertainty around TSFG’s potential future credit losses, and the
Company’s depressed stock price present significant challenges to the Company’s
ability to issue additional equity in public or private offerings. An equity
financing transaction that would result in capital
in the
amount being considered by TSFG would result in substantial dilution to the
Company's current shareholders and could adversely affect the market price of
the Company's common stock. There can be no assurance as to whether these
efforts will be successful, either on a short-term or long-term basis. Should
these efforts be unsuccessful, due to existing regulatory restrictions on cash
payments between Carolina First Bank and TSFG, TSFG may be unable to discharge
its liabilities in the normal course of business. There can be no assurance that
TSFG will be successful in any efforts to raise additional capital during 2010.
The pursuit of strategic transaction alternatives may also involve significant
expenses and management time and attention.
TSFG’s
unrealized gain on securities available for sale and cash flow hedges, net of
tax, which is included in accumulated other comprehensive income, increased to
$37.4 million at March 31, 2010, compared with $30.9 million at December 31,
2009 due primarily to a decrease in long-term interest rates. If interest rates
increase, TSFG expects its unrealized gain on securities available for sale to
decrease, leading to a lower tangible common equity to tangible asset
ratio.
Common
book value per common share at March 31, 2010 and December 31, 2009 was $2.70
and $3.05, respectively. The decrease in common book value per common share was
primarily due to the net loss during the period. Common tangible book value per
common share at March 31, 2010 and December 31, 2009 was $1.64 and $1.98,
respectively. Tangible book value was below book value as a result of goodwill
and intangibles associated with acquisitions of entities and assets accounted
for as purchases. At March 31, 2010, goodwill totaled $214.1 million, or $0.99
per share, and is not being amortized, while other intangibles totaled $14.7
million and will continue to be amortized.
TSFG is
subject to the risk-based capital guidelines administered by bank regulatory
agencies. The guidelines are designed to make regulatory capital requirements
more sensitive to differences in risk profiles among banks and bank holding
companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Under these guidelines, assets and
certain off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and certain off-balance sheet items.
Table 21 sets forth various capital ratios for TSFG and Carolina First
Bank.
Table
21
|
||||||||
Capital
Ratios
|
||||||||
March 31, 2010
|
To
Be Well Capitalized Under Prompt Corrective Action Provisions (1)
|
|||||||
TSFG
|
||||||||
Total
risk-based capital
|
10.83 | % | n/a | |||||
Tier
1 risk-based capital
|
9.52 | n/a | ||||||
Leverage
ratio
|
7.41 | n/a | ||||||
Carolina
First Bank
|
||||||||
Total
risk-based capital
|
10.45 | % | 10.00 | % | ||||
Tier
1 risk-based capital
|
8.85 | 6.00 | ||||||
Leverage
ratio
|
6.87 | 5.00 |
(1)
|
The
ratios presented are the amounts to be well capitalized under the various
regulatory capital requirements administered by the federal banking
agencies. On April 30, 2010, Carolina First Bank became subject to a
regulatory Consent Order with the FDIC which requires that, within 120
days of the agreement, Carolina First Bank must increase its Tier 1
leverage ratio to 8% and its total risk-based capital ratio to 12%.
Regardless of the Bank’s capital ratios, it is unable to be classified as
“well capitalized” while it is operating under the Consent
Order.
|
At March
31, 2010, trust preferred securities and shares of mandatorily redeemable
preferred stock of a REIT subsidiary (“REIT preferred securities”) included in
tier 1 capital totaled $200.5 million and $26.3 million, respectively. Under
current regulatory guidelines and subject to certain limitations, debt
associated with trust and REIT preferred securities qualifies for tier 1 capital
treatment, although the allowable amounts can change as equity declines below
certain levels. While a complete review of all the rules is beyond the scope of
this document, it is important to be aware of certain limits that may begin to
impact the Company’s ratios. The limitation regarding the inclusion of trust and
REIT
preferred
securities in capital calculations impacts only the ratios calculated at the
consolidated level and, accordingly, is not applicable to the Carolina First
Bank ratios. (The trust preferred securities are not included in Carolina First
Bank’s tier 1 capital since the related subordinated notes were issued by the
parent company.) Regulatory rules allow trust and REIT preferred securities to
be included in tier 1 capital up to 25.0% of the sum of selected tier 1 capital
elements, including the trust and REIT preferred securities. Effective March 31,
2011, the 25.0% limitation will become more restrictive and could cause the
Company’s tier 1 capital ratios to be negatively impacted. At March 31,
2010, trust and REIT preferred securities accounted for 26.2% of TSFG’s tier 1
capital.
Carolina
First Bank is subject to certain regulatory restrictions on the amount of
dividends it is permitted to pay. During 2009, TSFG suspended its common
dividend. Future TSFG common dividends will depend upon a number of factors,
including payment of the preferred stock dividends (including trust preferred
and REIT preferred dividends), financial performance, capital requirements and
assessment of capital needs. In first quarter 2010, TSFG suspended dividends on
all remaining outstanding equity and capital instruments. Based on the Consent
Order and the Fed Agreement, currently neither TSFG nor Carolina First Bank, nor
any of their respective subsidiaries (including, but not limited to, the real
estate investment trust subsidiary) are permitted to pay dividends on capital
securities.
Liquidity
Liquidity
management ensures that adequate funds are available to meet deposit
withdrawals, fund loan and capital expenditure commitments, maintain reserve
requirements, pay operating expenses, provide funds for debt service, manage
operations on an ongoing basis, and capitalize on new business
opportunities.
Liquidity
is managed at two levels. The first is the liquidity of the parent company,
which is the holding company that owns Carolina First Bank, the banking
subsidiary. The second is the liquidity of the banking subsidiary. The
management of liquidity at both levels is essential because the parent company
and banking subsidiary each have different funding needs and sources, and each
are subject to certain regulatory guidelines and requirements. In addition,
Carolina First Bank is subject to limitations on the amount of funds that may be
transferred to the parent company. At March 31, 2010, Carolina First Bank could
not pay any dividend to the parent company. Through the Asset Liability
Committee (“ALCO”), Corporate Treasury is responsible for planning and executing
the funding activities and strategy.
TSFG’s
liquidity policy strives to ensure a diverse funding base, with limits
established by wholesale funding source as well as aggregate wholesale funding
levels. Daily and short-term liquidity needs are principally met with deposits
from customers, payments on loans, maturities and paydowns of investment
securities, and excess cash balances. TSFG is focusing additional efforts at
acquiring new deposits from its customer base through its established branch
network to enhance liquidity and reduce reliance on wholesale
borrowing.
As noted
in Table 22 which follows, we have $2.3 billion of time deposits maturing over
the remainder of 2010, with maturities of customer and brokered CDs accounting
for $1.6 billion and $629.1 million, respectively. We expect to replace maturing
customer CDs through ongoing efforts to grow customer deposits and various
deposit campaigns, replacing any shortfall through wholesale borrowings. Our
ability to replace maturing customer CDs and grow customer funding could be
limited due to the deposit rate restrictions imposed by the Consent Order.
Additionally, the Company cannot replace maturing brokered CDs without the prior
approval of the FDIC.
Longer
term funding needs have typically been met through a variety of wholesale
sources, which have a broader range of maturities than customer deposits and add
flexibility in liquidity planning and management. These wholesale sources
include advances from the FHLB with longer maturities, brokered CDs, and
instruments that qualify as regulatory capital, including trust preferred
securities and subordinated debt. During 2009, TSFG shifted into borrowings with
remaining maturities of more than one year in order to strengthen liquidity.
Continued access to FHLB advances could be significantly diminished or
eliminated based on regulatory restrictions, our financial condition, and/or our
performance.
Under
normal business conditions, the sources above are adequate to meet both the
short-term and long-term funding needs of the Company; however, TSFG’s
contingency funding plan establishes early warning triggers to alert management
to potential negative liquidity trends. The plan provides a framework to manage
through various scenarios – including identification of alternative actions and
an executive management team to navigate through a crisis. Limits ensure that
liquidity is sufficient to manage through crises of various degrees of severity,
triggered by TSFG-specific events, such as regulatory actions, significant
adverse changes to earnings, credit quality or credit ratings, or general
industry or market events, such as market instability or adverse changes in the
economy. Deposit balances which are not covered by FDIC insurance total
approximately $804 million currently, and would increase to approximately $1.6
billion without the benefit of the FDIC’s TAGP, currently scheduled to expire at
December 31, 2010. A significant portion of
uninsured
deposits are public fund deposits which are collateralized by investment
securities. Loss of collateralized deposits in a liquidity crisis would be
essentially liquidity-neutral to the extent released collateral could be sold or
used to secure replacement wholesale funding. Thus, the primary
deposit-related liquidity risk relates to balances which are neither insured nor
collateralized, which total approximately $327 million currently, and would
increase to approximately $810 million without the benefit of the TAGP. Public
deposits which are currently insured but which would be uninsured and would
therefore require collateralization without the benefit of the TAGP totaled
approximately $301 million at March 31, 2010. Free securities of $1.2 billion
would meet incremental collateral needs and, along with surplus cash (including
$1.1 billion of excess cash held at the Federal Reserve), represent reserves to
address liquidity needs in a crisis scenario. If a liquidity issue presents
itself, deposit promotions would be expected to yield significant in-flows of
cash, but could be limited based on limitations on maximum interest rates
imposed by the Consent Order.
There is
no assurance that TSFG will, if it chooses to do so, be able to obtain new
borrowings or issue additional equity on terms that are satisfactory. As a
result, TSFG is currently maintaining a cash position in excess of normal
levels. TSFG is also evaluating additional capital and cash management
strategies including the potential sale of selected assets. While liquidity is
an ongoing challenge for all financial institutions, management believes that
TSFG’s available borrowing capacity and efforts to grow deposits are sufficient
to provide the necessary funding for the remainder of 2010. However, management
is prepared to take other actions if needed to manage through adverse liquidity
conditions.
In
managing its liquidity needs, TSFG focuses on its existing assets and
liabilities, as well as its ability to enter into additional borrowings, and on
the manner in which they combine to provide adequate liquidity to meet our
needs. Table 22 summarizes future contractual obligations based on maturity
dates as of March 31, 2010. Table 22 does not include payments which may be
required under employment and deferred compensation agreements. In addition,
Table 22 does not include payments required for interest and income taxes (see
Item 1, Consolidated Statements of Cash Flows for details on interest and income
taxes paid for the three months ended March 31, 2010).
Table
22
|
||||||||||||||||||||
Contractual
Obligations
|
||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||
Payments
Due by Period
|
||||||||||||||||||||
Total
|
Remainder
of 2010
|
2011
and 2012
|
2013
and 2014
|
After 2014
|
||||||||||||||||
Customer
time deposits
|
$ | 3,245,052 | $ | 1,632,551 | $ | 1,555,370 | $ | 39,385 | $ | 17,746 | ||||||||||
Brokered
deposits
|
1,958,948 | 629,142 | 1,229,044 | 66,979 | 33,783 | |||||||||||||||
Total
time deposits
|
5,204,000 | 2,261,693 | 2,784,414 | 106,364 | 51,529 | |||||||||||||||
Short-term
borrowings
|
300,647 | 300,647 | - | - | - | |||||||||||||||
Long-term
debt - parent company
|
206,704 | - | - | - | 206,704 | |||||||||||||||
Long-term
debt - Carolina First Bank
|
910,851 | 134 | 681,416 | 200,267 | 29,034 | |||||||||||||||
Total
long-term debt
|
1,117,555 | 134 | 681,416 | 200,267 | 235,738 | |||||||||||||||
Operating
leases
|
170,561 | 12,773 | 33,673 | 29,529 | 94,586 | |||||||||||||||
Total
contractual obligations
|
$ | 6,792,763 | $ | 2,575,247 | $ | 3,499,503 | $ | 336,160 | $ | 381,853 |
TSFG
enters into agreements in the normal course of business to extend credit to meet
the financial needs of its customers. For amounts and types of such agreements
at March 31, 2010, see “Off-Balance Sheet Arrangements.” Increased demand for
funds under these agreements would reduce TSFG’s available liquidity and could
require additional sources of liquidity.
Results of Operations
Net
Interest Income
Net
interest income is TSFG’s primary source of revenue. Net interest income is the
difference between the interest earned on assets, including loan fees and
dividends on investment securities, and the interest incurred for the
liabilities to support such assets. The net interest margin measures how
effectively a company manages the difference between the yield on earning assets
and the rate incurred on funds used to support those assets. Fully
tax-equivalent net interest income adjusts the yield for assets earning
tax-exempt income to a comparable yield on a taxable basis based on a 35%
marginal federal income tax rate. Table 23 presents average balance sheets and a
net interest income analysis on a tax-equivalent basis for the three months
ended March 31, 2010 and 2009.
Table
23
|
||||||||||||||||||||||||
Comparative
Average Balances - Yields and Costs
|
||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
Three
Months Ended March 31,
|
||||||||||||||||||||||||
2010
|
2009 | |||||||||||||||||||||||
Assets
|
Average
Balance
|
Income/Expense
|
Yield/Rate
|
Average
Balance
|
Income/Expense
|
Yield/Rate
|
||||||||||||||||||
Earning
assets
|
||||||||||||||||||||||||
Commercial
loans
|
$ | 6,733,445 | $ | 75,019 | 4.52 | % | $ | 8,086,559 | $ | 83,794 | 4.20 | % | ||||||||||||
Consumer
loans
|
1,300,110 | 14,886 | 4.64 | 1,494,261 | 17,566 | 4.77 | ||||||||||||||||||
Indirect
loans
|
216,604 | 4,074 | 7.63 | 607,548 | 10,845 | 7.24 | ||||||||||||||||||
Risk
management derivatives tied to loans
|
- | 4,881 | - | 11,914 | ||||||||||||||||||||
Total
loans (1)
|
8,250,159 | 98,860 | 4.86 | 10,188,368 | 124,119 | 4.94 | ||||||||||||||||||
Investment
securities, taxable (2)
|
2,098,373 | 17,486 | 3.33 | 1,854,149 | 20,548 | 4.43 | ||||||||||||||||||
Investment
securities, nontaxable (2)
(3)
|
28,496 | 357 | 5.01 | 266,600 | 3,437 | 5.16 | ||||||||||||||||||
Total
investment securities
|
2,126,869 | 17,843 | 3.36 | 2,120,749 | 23,985 | 4.52 | ||||||||||||||||||
Federal
funds sold and interest-bearing bank balances (4)
|
450,754 | 284 | 0.26 | 124,394 | 1 | - | ||||||||||||||||||
Total
earning assets
|
10,827,782 | $ | 116,987 | 4.37 | 12,433,511 | $ | 148,105 | 4.82 | ||||||||||||||||
Non-earning
assets
|
1,097,164 | 1,122,617 | ||||||||||||||||||||||
Total
assets
|
$ | 11,924,946 | $ | 13,556,128 | ||||||||||||||||||||
Liabilities
and Shareholders' Equity
|
||||||||||||||||||||||||
Liabilities
|
||||||||||||||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||||||||||
Interest-bearing
deposits
|
||||||||||||||||||||||||
Interest-bearing
checking
|
$ | 1,061,576 | $ | 698 | 0.27 | $ | 1,131,456 | $ | 865 | 0.31 | ||||||||||||||
Savings
|
345,349 | 845 | 0.99 | 196,974 | 529 | 1.09 | ||||||||||||||||||
Money
market
|
2,056,328 | 5,465 | 1.08 | 1,913,927 | 7,779 | 1.65 | ||||||||||||||||||
Time
deposits, excluding brokered deposits
|
2,946,198 | 18,557 | 2.55 | 3,199,427 | 28,867 | 3.66 | ||||||||||||||||||
Brokered
deposits
|
1,862,855 | 12,119 | 2.64 | 1,905,805 | 16,803 | 3.58 | ||||||||||||||||||
Total
interest-bearing deposits
|
8,272,306 | 37,684 | 1.85 | 8,347,589 | 54,843 | 2.66 | ||||||||||||||||||
Customer
sweep accounts
|
284,498 | 225 | 0.32 | 455,781 | 298 | 0.27 | ||||||||||||||||||
Other
borrowings
|
1,126,509 | 5,428 | 1.95 | 1,899,771 | 6,743 | 1.44 | ||||||||||||||||||
Total
interest-bearing liabilities
|
9,683,313 | 43,337 | 1.82 | 10,703,141 | 61,884 | 2.34 | ||||||||||||||||||
Noninterest-bearing
liabilities
|
||||||||||||||||||||||||
Noninterest-bearing
deposits
|
1,088,131 | 1,021,400 | ||||||||||||||||||||||
Other
noninterest-bearing liabilities
|
174,009 | 230,741 | ||||||||||||||||||||||
Total
liabilities
|
10,945,453 | 11,955,282 | ||||||||||||||||||||||
Shareholders'
equity
|
979,493 | 1,600,846 | ||||||||||||||||||||||
Total
liabilities and shareholders' equity
|
$ | 11,924,946 | $ | 13,556,128 | ||||||||||||||||||||
Net
interest income (tax-equivalent)
|
$ | 73,650 | 2.75 | % | $ | 86,221 | 2.80 | % | ||||||||||||||||
Less:
tax-equivalent adjustment (3)
|
125 | 1,203 | ||||||||||||||||||||||
Net
interest income
|
$ | 73,525 | $ | 85,018 | ||||||||||||||||||||
Supplemental
data:
|
||||||||||||||||||||||||
Customer
funding
(5)
|
$ | 7,782,080 | $ | 25,790 | 1.34 | % | $ | 7,918,965 | $ | 38,338 | 1.96 | % | ||||||||||||
Wholesale
borrowings
(6)
|
2,989,364 | 17,547 | 2.38 | 3,805,576 | 23,546 | 2.51 | ||||||||||||||||||
Total
funding
(7)
|
$ | 10,771,444 | $ | 43,337 | 1.63 | % | $ | 11,724,541 | $ | 61,884 | 2.14 | % |
(1)
|
Nonaccrual
loans are included in average balances for yield
computations.
|
(2)
|
The
average balances for investment securities exclude the unrealized
gain/loss recorded for available for sale
securities.
|
(3)
|
The
tax-equivalent adjustment to net interest income adjusts the yield for
assets earning tax-exempt income to a comparable yield on a taxable
basis.
|
(4)
|
Prior
to first quarter 2010, interest-bearing balances held at the Federal
Reserve were included in non-earning assets, and the related interest
income was utilized to offset certain Federal Reserve account
charges. Beginning first quarter 2010, these cash balances were included
in interest-bearing bank balances, with amounts from prior periods
reclassified to conform to the current presentation. The related amounts
of interest income are prospectively included in net interest income
beginning in first quarter
2010.
|
(5)
|
Customer
funding includes total deposits (total interest-bearing plus
noninterest-bearing deposits) less brokered deposits plus customer sweep
accounts.
|
(6)
|
Wholesale
borrowings include borrowings less customer sweep accounts plus brokered
deposits. For purposes of this table, wholesale borrowings equal the
sum of other borrowings and brokered deposits, as customer sweep accounts
are presented separately.
|
(7)
|
Total
funding includes customer funding and wholesale
borrowings.
|
Note: Average
balances are derived from daily balances.
Comparing
first quarter 2010 to fourth quarter 2009, fully tax-equivalent net interest
income decreased to $73.7 million from $81.4 million as a result of two fewer
days, continued contraction in loan balances, and maturing balance sheet hedges,
partially offset by lower funding costs and a decline in interest reversals on
nonaccrual loans. The tax-equivalent net interest margin for first quarter
decreased to 2.75%, down 12 basis points from 2.87% for fourth quarter 2009. The
margin decline was primarily driven by the impact of $855 million of balance
sheet management hedges that matured in fourth quarter 2009, which reduced net
interest income by $3.2 million and the net interest margin by approximately 12
basis points.
Comparing
first quarter 2010 to first quarter 2009, fully tax-equivalent net interest
income decreased to $73.7 million for first quarter 2010 from $86.2 million for
first quarter 2009. The tax-equivalent net interest margin for first quarter
2010 decreased to 2.75%, down 5 basis points from 2.80% for first quarter 2009,
primarily due to an increased level of excess cash maintained as a liquidity
management measure and maturing balance sheet hedges partially offset by
downward pricing of deposits, particularly time deposits.
TSFG’s
average earning assets were $10.8 billion for first quarter 2010 compared to
$11.3 billion for fourth quarter 2009 and $12.4 billion for first quarter 2009.
Average loans as a percentage of average earning assets were 76.2% for first
quarter 2010 compared to 77.2% for fourth quarter 2009 and 81.9% for first
quarter 2009. At March 31, 2010, approximately 56% of TSFG’s accruing loans were
variable rate loans, the majority of which are tied to the prime rate. At March
31, 2010, loans with floating rates, primarily limited to prime or LIBOR,
included loans with floors totaling $1.3 billion with an average floor of 5.15%.
In addition, TSFG has entered into receive-fixed interest rate swaps to hedge
the forecasted interest income from certain prime-based and LIBOR-based loans as
part of its overall interest rate risk management. Certain of these swaps with a
notional amount of $265.0 million were terminated or de-designated in first
quarter 2010, which locked in a gain of approximately $12 million that will be
amortized to the statement of operations as the hedged cash flows impact
earnings.
Liquidity
initiatives have had and are expected to continue to have a negative impact on
the net interest margin due to the effect of low-yielding interest-bearing bank
balances being included in average earning assets and the higher costs of
longer-term funding exceeding the return on short-term assets. In addition, net
interest income and the net interest margin have been negatively impacted by
elevated levels of nonperforming assets and the reversal of accrued interest
income as loans have been moved to nonaccrual status. In first quarter 2010,
liquidity initiatives had an approximate adverse impact of 19 basis points on
the net interest margin, while credit had an approximate adverse impact of 29
basis points.
Provision
for Credit Losses
The
provision for credit losses is recorded in amounts sufficient to bring the
allowance for loan losses and the reserve for unfunded lending commitments to a
level deemed appropriate by management. Management determines this amount based
upon many factors, including its assessment of loan portfolio quality, loan
growth, changes in loan portfolio composition, net loan charge-off levels, and
expected economic conditions. The provision for credit losses was $95.1 million
in first quarter 2010, compared to $170.8 million and $142.6 million,
respectively, in the three months ended December 31, 2009 and March 31, 2009.
The lower provision largely reflected a decrease in the rate of migration of
loans into higher risk categories combined with lower inflows into nonaccrual
status.
Net loan
charge-offs were $87.8 million, or 4.32% (annualized) of average loans held for
investment, for first quarter 2010, compared with $142.9 million, or 6.52%
(annualized), for fourth quarter 2009 and $109.1 million, or 4.36% (annualized),
for first quarter 2009. The allowance for credit losses equaled 4.75% of loans
held for investment as of March 31, 2010, compared to 4.45% and 2.84%,
respectively, as of December 31, 2009 and March 31, 2009. Despite some
improvement in first quarter 2010, management expects the level of charge-offs
and provision expense to remain elevated relative to historical trends due to
the current credit environment. See “Loans,” “Credit Quality,” and “Allowance
for Loan Losses and Reserve for Unfunded Lending Commitments.”
Noninterest
Income
Table 24
shows the components of noninterest income.
Table
24
|
||||||||
Components
of Noninterest Income
|
||||||||
(dollars
in thousands)
|
||||||||
Three
Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Service
charges on deposit accounts
|
$ | 9,223 | $ | 9,268 | ||||
Debit
card income, net
|
2,216 | 1,925 | ||||||
Customer
service fee income
|
1,126 | 1,209 | ||||||
Total
customer fee income
|
12,565 | 12,402 | ||||||
Insurance
income
|
1,876 | 2,457 | ||||||
Retail
investment services, net
|
1,587 | 2,010 | ||||||
Trust
and investment management income
|
1,102 | 1,465 | ||||||
Benefits
administration fees
|
- | 642 | ||||||
Total
wealth management income
|
4,565 | 6,574 | ||||||
Bank-owned
life insurance income
|
2,444 | 2,502 | ||||||
Mortgage
banking income
|
1,289 | 1,205 | ||||||
Gain
on certain derivative activities
|
59 | 1,135 | ||||||
Loss
on securities
|
(389 | ) | (2,954 | ) | ||||
Merchant
processing income, net
|
- | 610 | ||||||
Other
|
599 | 2,267 | ||||||
Total
noninterest income
|
$ | 21,132 | $ | 23,741 |
Noninterest
income decreased to $21.1 million in first quarter 2010 from $23.7 million in
first quarter 2009, partly due to the third quarter 2009 sale of three ancillary
businesses: the merchant processing portfolio, a financial planning group, and a
retirement plan administrator. Although these sales resulted in a gain in third
quarter 2009, they reduced the respective line items in which the businesses
were previously included. For first quarter 2009, these businesses reported $2.1
million in noninterest income ($610,000 merchant processing income, $642,000
benefits administration fees, and $845,000 included in wealth management
income).
Debit
card income increased due to increased transactions. Mortgage banking income
increased 7.0% in first quarter 2010 compared to first quarter 2009. Mortgage
loans originated by TSFG originators totaled $52.3 million and $75.3 million in
the first three months of 2010 and 2009, respectively. Gain on certain
derivative activities decreased in first quarter 2010 partly due to a reduction
in both ineffectiveness and acceleration of gains of cash flow hedges (many of
which matured or were terminated in fourth quarter 2009 and first quarter 2010),
while loss on securities decreased primarily as a result of lower other than
temporary impairment charges.
Reductions
in the values of our customer swap portfolio attributable to increased credit
adjustments resulted in a net loss on customer swaps of $1.3 million for first
quarter 2010 (included in other noninterest income), compared to $574,000 of
income in first quarter 2009. At March 31, 2010, the fair value of swaps in this
portfolio which were in an asset position was $26.9 million, net of a $3.0
million established reserve for credit losses.
Comparing
first quarter 2010 to fourth quarter 2009, noninterest income decreased to $21.1
million from $28.6 million, primarily due to a $389,000 loss on securities
(largely attributable to a write-down on certain equity investments) in first
quarter 2010 compared to a $6.7 million gain on securities (largely attributable
to the sale of municipal securities) in fourth quarter 2009. Excluding the
gain/loss on securities, noninterest income decreased slightly, primarily due to
a decline in customer fee and other income, partially offset by an improvement
in bank-owned life insurance income.
NSF fees
are included in service charges on deposit accounts. In November 2009, the
Federal Reserve Board issued a final rule that, effective July 1, 2010,
prohibits financial institutions from charging consumers fees for paying
overdrafts on automated teller machine and one-time debit card transactions,
unless a consumer consents, or opts in, to the overdraft service for those types
of transactions. As a result, this line item may decrease in future
periods.
Noninterest
Expenses
Table 25
shows the components of noninterest expenses.
Table
25
|
||||||||
Components
of Noninterest Expenses
|
||||||||
(dollars
in thousands)
|
||||||||
Three
Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Salaries
and wages
|
$ | 29,836 | $ | 35,191 | ||||
Employee
benefits
|
4,512 | 8,923 | ||||||
Severance
related benefits
|
878 | - | ||||||
Total
salaries and wages and employee benefits
|
35,226 | 44,114 | ||||||
Occupancy
|
9,700 | 9,436 | ||||||
Regulatory
assessments
|
7,150 | 4,655 | ||||||
Furniture
and equipment
|
6,606 | 6,945 | ||||||
Write-downs/loss
on other real estate owned
|
5,492 | 124 | ||||||
Professional
services
|
5,329 | 4,507 | ||||||
Project
NOW expense
|
- | 1,298 | ||||||
Loan
collection and foreclosed asset expense
|
4,692 | 4,891 | ||||||
Telecommunications
|
1,536 | 1,526 | ||||||
Advertising
and business development
|
1,169 | 1,281 | ||||||
Amortization
of intangibles
|
1,009 | 1,291 | ||||||
Loss
on non-mortgage loans held for sale
|
- | 1,838 | ||||||
Loss
on repurchase of auction rate securities
|
- | 676 | ||||||
Other
|
5,744 | 7,659 | ||||||
Total
noninterest expenses
|
$ | 83,653 | $ | 90,241 |
Noninterest
expenses decreased to $83.7 million in first quarter 2010 from $90.2 million in
first quarter 2009, largely due to the continuation of expense control
initiatives throughout the Company. As a result of these initiatives, salaries
and wages (excluding severance related benefits) and employee benefits decreased
$9.8 million for first quarter 2010 compared to first quarter 2009, as full-time
equivalent employees declined to 2,144 at March 31, 2010 from 2,430 at March 31,
2009. In first quarter 2010, TSFG recorded severance related benefits of
$878,000 associated with staff reduction initiatives implemented during the
quarter. First quarter 2010 also reflects a decrease in the 401k match (from 6%
of employee contributions to 3% effective second quarter 2009) and the
restructuring of certain executive retirement plans. Regulatory assessments
increased $2.5 million based in part on TSFG’s participation in the TAGP related
to noninterest-bearing deposit accounts and across-the-board rate increases
designed to replenish the FDIC’s Deposit Insurance Fund. FDIC insurance premiums
are expected to increase based in part on the adoption of a uniform three-basis
point increase to assessment rates effective on January 1, 2011 (see “Deposit
Insurance”). Actions by regulatory agencies could also cause our assessments to
increase. Loss on other real estate owned increased $5.4 million due primarily
to write-downs on OREO. First quarter 2009 included operating expenses
associated with ancillary businesses sold in third quarter 2009.
Comparing
first quarter 2010 to fourth quarter 2009, noninterest expenses decreased to
$83.7 million from $103.2 million, primarily due to lower credit-related
expenses and personnel costs, partially offset by higher professional fees and
FDIC insurance premiums. Credit-related expenses decreased $13.5 million.
Personnel costs (excluding severance related benefits) declined $4.0 million,
partly due to the restructure of certain executive retirement plans during the
quarter. In addition, fourth quarter 2009 included a $3.5 million impairment
charge for long lived assets related to the corporate campus, which is being
marketed for sale.
Noninterest
expenses can be volatile due to the level of collection efforts on nonperforming
loans, holding costs of foreclosed property, and the timing of write-downs on
foreclosed properties due to declines in value of properties or as updated
information is obtained.
Income
Taxes
Income
tax benefit as a percentage of pretax loss was 4.2% for the three months ended
March 31, 2010. Income tax expense differed from the amount computed by applying
TSFG’s statutory U.S. federal income tax rate of 35% to pretax loss for the
three months ended March 31, 2010 primarily due to the valuation allowance
recorded against the net deferred tax asset. The recorded benefit reflects the
impact on the deferred tax valuation allowance of the increase to accumulated
other comprehensive income (“OCI”). Income tax benefit as a percentage of pretax
loss was 40.1% for the three months ended March 31, 2009. Income tax benefit
differed from the amount computed by applying TSFG’s statutory U.S. federal
income tax rate of 35% to pretax income for the three months ended March 31,
2009 primarily as a result of permanent tax preference items and credits. Until
the valuation allowance is released, income taxes from operations will reflect
tax benefits recognized year-to-date from changes in OCI and adjustments to tax
reserves, if any.
At March
31, 2010, TSFG’s net deferred tax asset before the valuation allowance was
$318.5 million, and the Company had federal income tax net operating loss
(“NOL”) carryforwards of approximately $544 million. If an ownership change were
to occur as a result of TSFG’s capital activities, it is possible that
limitations will be placed on our ability to utilize certain pre-change or
recognized built-in losses for which we currently have a net deferred tax asset.
The utilization of such carryforwards may be limited upon the occurrence of
certain ownership changes (including transactions beyond our control), including
the issuance or exercise of rights to acquire stock, the purchase or sale of
stock by 5% stockholders, as defined in the Treasury regulations, and the
offering of stock by TSFG during any three-year period resulting in an aggregate
change of more than 50% in the beneficial ownership of TSFG. Based on available
information, the Company has estimated that the aggregate percentage ownership
change over the testing period through the current date is approximately 45%.
For additional information regarding these potential limitations, refer to
TSFG’s Annual Report on Form 10-K for the year ended December 31, 2009,
specifically the section captioned “Critical Accounting Policies and Estimates –
Income Taxes” in Item 7.
Enterprise Risk Management
Pages 68
through 72 of TSFG’s Annual Report on Form 10-K for the year ended December 31,
2009 provide a discussion of overall Enterprise Risk Management, Derivatives and
Hedging Activities, Economic Risk, Credit Risk, Liquidity Risk, Operational
Risk, and Compliance and Litigation Risk.
Market
Risk and Asset/Liability Management
There has
been no significant change to the market risk and asset/liability management
methodology as disclosed in TSFG’s 2009 Form 10-K. The interest sensitivity
analysis which follows has been updated for March 31, 2010 numbers.
Interest Sensitivity
Analysis. As discussed on pages 68 and 69 of TSFG’s 2009 Form 10-K, TSFG
uses a simulation model to analyze various interest rate scenarios in order to
monitor interest rate risk. The information presented in Tables 26 and 27 are
not projections, and are presented with static balance sheet positions. This
methodology allows for an analysis of our inherent risk associated with changes
in interest rates. There are some similar assumptions used in both Table 26 and
27. These include, but are not limited to, the following:
|
·
|
a
static balance sheet for net interest income
analysis;
|
|
·
|
as
assets and liabilities mature or reprice they are reinvested at current
rates and keep the same characteristics (i.e., remain as either variable
or fixed rate) for net interest income
analysis;
|
|
·
|
mortgage
backed securities prepayments are based on historical industry data (given
the current economic and regulatory environment, uncertainty regarding
future prepayments is heightened);
|
|
·
|
loan
prepayments are based upon historical bank-specific analysis and
historical industry data;
|
|
·
|
deposit
retention and average lives are based on historical bank-specific
analysis;
|
|
·
|
whether
callable/puttable assets and liabilities are called/put is based on the
implied forward yield curve for each interest rate scenario;
and
|
|
·
|
management
takes no action to counter any
change.
|
Table 26
reflects the sensitivity of net interest income to changes in interest rates. It
shows the effect that the indicated changes in interest rates would have on net
interest income over the next 12 months compared with the base case or flat
interest rate scenario. The base case or flat scenario assumes interest rates
stay at March 31, 2010, and 2009 levels, respectively. The increase in interest
rate sensitivity from March 31, 2009 is primarily due to the increased liquidity
position, which is invested in overnight funding. The increased asset
sensitivity position is partially offset by growth in variable rate customer
time deposits tied to the prime rate.
Table
26
|
||||||||
Net
Interest Income at Risk Analysis
|
||||||||
Annualized
Hypothetical Percentage Change in Net Interest Income
|
||||||||
Interest
Rate Scenario (1)
|
March
31,
|
|||||||
2010
|
2009
|
|||||||
2.00% | 4.5 | % | 1.8 | % | ||||
1.00 | 2.2 | 1.0 | ||||||
Flat
|
- | - | ||||||
(1.00)(2) | n/a | n/a | ||||||
(2.00)(2) | n/a | n/a |
(1)
|
Net
interest income sensitivity is shown for gradual rate shifts over a 12
month period.
|
(2)
|
Due
to the current low rate environment, downward rate shifts were not
run.
|
Table 27
reflects the sensitivity of the economic value of equity (“EVE”) to changes in
interest rates. EVE is a measurement of the inherent, long-term balance
sheet-related economic value of TSFG (defined as the fair value of all assets
minus the fair value of all liabilities and their associated off balance sheet
amounts) at a given point in time. Table 27 shows the effect that the indicated
changes in interest rates would have on the fair value of net assets at March
31, 2010 and 2009, respectively, compared with the base case or flat interest
rate scenario. The base case or flat scenario assumes interest rates stay at
March 31, 2010 and 2009 levels, respectively. The increase in the dollar change
in EVE at March 31, 2010 compared to March 31, 2009 is due to increased
sensitivity of customer and brokered time deposits.
Table
27
|
||||||||
Economic
Value of Equity Risk Analysis
|
||||||||
Annualized
Hypothetical Dollar Change in Economic Value of Equity
|
||||||||
Interest
Rate Scenario (1)
|
March 31,
|
|||||||
2010
|
2009 | |||||||
2.00% | $ | 9,245 | $ | (72,675 | ) | |||
1.00 | 16,449 | (12,460 | ) | |||||
Flat
|
- | - | ||||||
(1.00)(2) | n/a | n/a | ||||||
(2.00)(2) | n/a | n/a |
(1)
|
The
rising 100 and 200 basis point and falling 100 and 200 basis point
interest rate scenarios assume an instantaneous and parallel change in
interest rates along the entire yield
curve.
|
(2)
|
Due
to the current low rate environment, downward rate shifts were not
run.
|
There are
material limitations with TSFG’s models presented in Tables 26 and 27, which
include, but are not limited to, the following:
|
·
|
the
flat scenarios are base case and are not indicative of historical
results;
|
|
·
|
they
do not project an increase or decrease in net interest income or the fair
value of net assets, but rather the risk to net interest income and the
fair value of net assets because of changes in interest
rates;
|
|
·
|
they
present the balance sheet in a static position; however, when assets and
liabilities mature or reprice, they do not necessarily keep the same
characteristics (e.g., variable or fixed interest
rate);
|
|
·
|
the
computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions and should not be relied upon as
indicative of actual results; and
|
|
·
|
the
computations do not contemplate any additional actions TSFG could
undertake in response to changes in interest
rates.
|
Off-Balance Sheet Arrangements
In the
normal course of operations, TSFG engages in a variety of financial transactions
that, in accordance with generally accepted accounting principles, are not
recorded in the financial statements, or are recorded in amounts that differ
from the notional amounts. These transactions involve, to varying degrees,
elements of credit, interest rate, and liquidity risk. Such transactions are
used by TSFG for general corporate purposes or for customer needs. Corporate
purpose transactions are used to help manage credit, interest rate, and
liquidity risk or to optimize capital. Customer transactions are used to manage
customers' requests for funding.
Lending Commitments. Lending
commitments include loan commitments, standby letters of credit, unused business
credit card lines, and documentary letters of credit. These instruments are not
recorded in the consolidated balance sheet until funds are advanced under the
commitments. TSFG provides these lending commitments to customers in the normal
course of business. TSFG estimates probable losses related to binding unfunded
lending commitments and records a reserve for unfunded lending commitments in
other liabilities on the consolidated balance sheet. See Note 9 to the
Consolidated Financial Statements for disclosure of the amounts of lending
commitments.
Derivatives. TSFG records
derivatives at fair value, as either assets or liabilities, on the consolidated
balance sheets. Derivative transactions are measured in terms of the notional
amount, but this amount is not recorded on the balance sheets and is not, when
viewed in isolation, a meaningful measure of the risk profile of the instrument.
The notional amount is not exchanged, but is used only as the basis upon which
interest and other payments are calculated.
See
“Derivative Financial Instruments” under “Balance Sheet Review” and Note 8 to
the Consolidated Financial Statements for additional information regarding
derivatives.
Recently Adopted/Issued Accounting Pronouncements
See Note
1 – Recently Adopted Accounting Pronouncements and Recently Issued Accounting
Pronouncements in the accompanying Notes to the Consolidated Financial
Statements for details of recently adopted and recently issued accounting
pronouncements and their expected impact on the Company’s Consolidated Financial
Statements.
Item
3. Quantitative and Qualitative
Disclosures about Market Risk
See
“Enterprise Risk Management” in Item 2, Management Discussion and Analysis of
Financial Condition and Results of Operations for quantitative and qualitative
disclosures about market risk, which information is incorporated herein by
reference.
Item
4. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
At March
31, 2010, TSFG’s management, under the supervision and with the participation of
its Chief Executive Officer and Chief Financial Officer, evaluated its
disclosure controls and procedures as currently in effect. Based on this
evaluation, TSFG’s management concluded that as of March 31, 2010, TSFG’s
disclosure controls and procedures were effective (1) to provide reasonable
assurance that information required to be disclosed by TSFG in the reports filed
or submitted by it under the Exchange Act was recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and
(2) to provide reasonable assurance that information required to be disclosed by
TSFG in such reports was accumulated and communicated to TSFG’s management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Controls over Financial Reporting
TSFG
continually assesses the adequacy of its internal control over financial
reporting and strives to enhance its controls in response to internal control
assessments and internal and external audit and regulatory recommendations.
There were no changes in TSFG’s internal control over financial reporting
identified in connection with its assessment during the quarter ended March 31,
2010 or through the date of this Quarterly Report on Form 10-Q that have
materially affected, or are reasonably likely to materially affect, TSFG’s
internal control over financial reporting.
PART II.
OTHER INFORMATION
Item
1. Legal
Proceedings
See Note
9 to the Consolidated Financial Statements for a discussion of legal
proceedings.
Item
1A. Risk
Factors
Except as
referenced below, there have been no
material changes to the risk factors previously disclosed under Item 1A (pages
10-19) of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2009
(the “Risk Factors”).
The Risk
Factors should be read in light of the fact that the Consent Order and the Fed
Agreement have been entered into, as discussed above. While the Company cannot
predict the impact of the Consent Order and the Fed Agreement, failure to meet
the obligations set forth in these agreements could have a material adverse
effect on the Company and its operations (including resulting in a
potential receivership with respect to the Bank). If the Company is unable
to raise the capital required or otherwise comply with the terms of the Consent
Order, further regulatory actions (including actions up to the implementation of
a receivership) could be taken, and its ability to operate as a going concern
could be negatively impacted. Furthermore, because such consent orders are
public, there could be an adverse customer or market reaction to the
announcement of the Consent Order.
The Risk
Factors should be read in light of the fact that the FDIC’s temporary
transactional account guarantee program was extended through December 31,
2010.
The Risk
Factor related to credit ratings should be read in light of the fact that
Standard and Poor’s, Moody’s and DBRS have suspended their ratings of the
Company.
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
TSFG has
repurchased shares of our common stock in private transactions and open-market
purchases, as authorized by our Board. The amount and timing of stock
repurchases will be based on factors, including but not limited to, management’s
assessment of TSFG’s capital structure and liquidity, the market price of TSFG’s
common stock compared to management’s assessment of the stock’s
underlying value, and applicable regulatory, legal, and accounting matters. The
following table presents information about our stock repurchases for the three
months ended March 31, 2010.
Issuer
Purchases of Equity Securities
|
||||||||||||||||
Period
|
Total
Number of Shares
Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under Plans or
Programs (in
thousands)
|
||||||||||||
January
1, 2010 to January 31, 2010
|
5,775 | (1) | $ | 0.45 | - | $ | - | |||||||||
February
1, 2010 to February 28, 2010
|
708 | (1) | 0.52 | - | - | |||||||||||
March
1, 2010 to March 31, 2010
|
- | - | - | - | ||||||||||||
Total
|
6,483 | $ | 0.46 | - | $ | - |
(1)
|
These
shares were canceled in connection with vesting of restricted stock.
Pursuant to TSFG’s restricted stock plans, participants may tender shares
of vested restricted stock as payment for taxes due at the time of
vesting. Shares surrendered by participants of these plans are repurchased
at current market value pursuant to the terms of the applicable stock
option, restricted stock, or deferred compensation plan and not pursuant
to publicly announced share repurchase
programs.
|
Item
3. Defaults upon Senior
Securities
During
first quarter 2010, TSFG suspended dividend payments on its preferred stock and
all remaining outstanding equity and capital instruments. (This suspension of
dividends does not constitute a default under the applicable documents governing
such instruments.) As a result, the Company is in arrears in the payment of
dividends with respect to the Series 2008-T Preferred Stock, trust preferred
securities, and REIT preferred securities, all of which are cumulative preferred
securities. The
Company has also suspended the quarterly dividends (which total $116,000) on its
Series 2008D-V and Series 2008D-NV Preferred Stock, although such dividends are
non-cumulative. As of the date of the filing of this report, the
arrearage with respect to the Series
2008-T Preferred Stock, trust preferred securities, and REIT preferred
securities held by third parties was $4.3 million, $896,000, and $1.6 million,
respectively, or $6.8 million in the aggregate.
Item
4. Reserved
Item
5. Other
Information
None.
Item
6. Exhibits
10.1
|
Consent
Order effective April 30, 2010
|
10.2
|
Federal
Reserve Agreement effective May 4,
2010
|
31.1
|
Certificate
of the Principal Executive Officer pursuant to Rule 13a-14a/15(d)-14(a) of
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certificate
of the Principal Financial Officer pursuant to Rule 13a-14a/15(d)-14(a) of
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002
|
32.1+
|
Certificate
of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2+
|
Certificate
of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
|
+ This
exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, or otherwise subject to the liability of that section, and
shall not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934.
Note for non-filed versions
of this Form 10-Q
The above
exhibits may be found on TSFG’s electronic filing of its March 31, 2010
Quarterly Report on Form 10-Q with the Securities and Exchange Commission
(“SEC”) and is accessible at no cost on TSFG’s web site, www.thesouthgroup.com,
through the Investor Relations link. TSFG’s SEC filings are also available
through the SEC’s web site at www.sec.gov.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, TSFG has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
The
South Financial Group, Inc.
|
||
Date:
May 5, 2010
|
/s/ James R. Gordon
|
|
James
R. Gordon
|
||
Senior
Executive Vice President and
|
||
Chief
Financial Officer
|
||
(Principal
Financial Officer)
|
66