Washington, D.C. 20549
The South Financial Group, Inc.
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):
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on June 30, 2009, was approximately $187 million.
The number of shares of the Registrant's common stock, $1.00 par value, outstanding on March 5, 2010 was 215,625,225.
Portions of the Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission are specifically identified and incorporated by reference into Part II and III.
The Exhibit Index begins on page 141.
The South Financial Group, Inc., a South Carolina corporation headquartered in Greenville, South Carolina, is a bank holding company. “TSFG” refers to The South Financial Group, Inc. and its subsidiaries, except where the context requires otherwise. TSFG operates principally through Carolina First Bank, a South Carolina-chartered commercial bank headquartered in Greenville, South Carolina, which conducts banking operations in South Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile).
TSFG's subsidiaries provide a full range of financial services, including deposits, loans, treasury management, investments, wealth management, and private banking services. At December 31, 2009, TSFG conducted business through 83 branch offices in South Carolina, 67 in Florida, and 27 in North Carolina. At December 31, 2009, TSFG had $11.9 billion in assets, $8.4 billion in loans, $9.3 billion in deposits, and $993.2 million in shareholders' equity.
TSFG began its operations in 1986 under the name “Carolina First Corporation” with the de novo opening of its banking subsidiary, Carolina First Bank, in Greenville, South Carolina. Its opening was undertaken, in part, in response to opportunities resulting from the takeovers of several South Carolina-based banks by larger Southeastern regional bank holding companies in the mid-1980s. In the late 1990’s, TSFG perceived a similar opportunity in Florida where banking relationships were in a state of flux due to the acquisition of several larger Florida banks. In 1999, TSFG entered the Florida market with the same view of capitalizing on the environment through strategic acquisitions. Substantial expansion in Florida occurred as a result of three bank acquisitions in 2004 and 2005. TSFG entered North Carolina in 2000 th rough the acquisition of a bank which had three branch locations in eastern North Carolina, and then expanded its presence there in 2003 via a bank acquisition in western North Carolina.
TSFG focuses on Southeastern banking markets which have historically had long-term growth potential. TSFG has emphasized internal growth through the acquisition of market share from the large out-of-state bank holding companies and other competitors. It attempts to acquire market share by providing quality banking services and personal service to individuals and business customers.
TSFG manages its banking operations by dividing its franchise into Carolina First (North and South Carolina) and Mercantile (Florida) and then into eleven banking markets run by market presidents. This structure allows TSFG to operate like a community bank focusing on personal customer service. However, because of the size of the overall organization, TSFG’s subsidiary bank can also offer a full range of sophisticated products and services more typical of larger regional banks.
Carolina First currently focuses its operations in the following six principal market areas:
Because some of our markets are resort areas that are seasonal in nature, most of the businesses in those markets, including financial institutions, are subject to moderate swings in activity between the winter and summer months. Otherwise, Carolina First Bank’s business is not subject to significant seasonal factors.
Carolina First Bank targets small business and middle-market companies, retail consumers, and high-net worth clients in its markets and surrounding areas. Carolina First Bank provides a full range of banking services, including deposits and loans; treasury management; investments; and wealth management and private banking services. Carolina First Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC").
TSFG has a number of non-bank subsidiaries. The following describes certain of the more significant subsidiaries.
During 2009, TSFG sold two subsidiaries, American Pensions, Inc., a retirement plan administrator, and Koss Olinger, a financial planning group, to third parties.
Each of TSFG's markets is highly competitive with the largest banks in their respective states represented. The competition among the various financial institutions is based upon a variety of factors including interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. In addition to banks and savings associations, TSFG competes with other financial institutions, such as securities firms, insurance companies, credit unions, leasing companies, and finance companies.
The banking industry continues to consolidate, which presents opportunities for TSFG to gain new business. However, consolidation may further intensify competition if additional financial services companies enter TSFG’s market areas through the acquisition of local financial institutions. In the current market environment, new owners of failed banks with more capital and FDIC loss share arrangements (i.e., private equity firms) may also serve to intensify competition.
Size gives larger banks certain advantages in competing for business from large commercial customers. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina, North Carolina, Florida, and the Southeastern United States region. As a result, TSFG concentrates its efforts on small- to medium-sized businesses and individuals. TSFG believes it competes effectively in this market segment by offering quality, personalized service.
At December 31, 2009, TSFG and its subsidiaries employed 2,214 full-time equivalent employees. TSFG provides a variety of benefit programs including retirement plans and health, life, disability, and other insurance. TSFG also maintains training, educational, and affirmative action programs designed to prepare employees for positions of increasing responsibility. TSFG believes that its relations with employees are good.
TSFG’s executive officers (reporting persons under Section 16 of the Securities Exchange Act of 1934) are appointed by the Board of Directors and set forth below as of March 1, 2010.
Mr. Harton joined TSFG in February 2007. On February 9, 2009, he was appointed President and Chief Executive Officer, after serving since November 2008 as Interim President and CEO. From June 2004 to December 2006, he served as Chief Credit Officer for Regions Financial Corporation, a bank holding company headquartered in Birmingham, AL. From June 2003 to June 2004, he served as Chief Credit Officer for Union Planters Corporation, a bank holding company headquartered in Memphis, Tennessee. From January 1983 to June 2003, he served in various senior line and credit administration roles for BB&T Corporation, a bank holding company headquartered in Winston Salem, NC.
Ms. Butts joined TSFG as Chief Operations Officer in January 2006 and currently serves as Executive Vice President, Chief Operations and Technology Officer. From late 2004 to 2006, Ms. Butts served as a strategy consultant for FIS Management Services LLC in Jacksonville, Florida. From 2003 until late 2004, Ms. Butts served in various senior management roles at Colonial Bank including Chief Operations Officer.
Mr. Crawford has served as General Counsel of TSFG since April 2002. In addition, he has served as Chief Risk Officer since December 2008.
Mr. Diaz joined TSFG in September 2007 as Market President in South Florida. He assumed the role of President of Mercantile in December 2008. Prior to joining TSFG, Mr. Diaz worked with Regions Bank for seven years, most recently as a market executive for Southeast Florida.
Mr. Edwards joined TSFG in April 2007 as Executive Vice President, Senior Credit Administrator. In June 2008, he was appointed Chief Risk Officer and in December 2008 he ceased serving as Chief Risk Officer and became Chief Credit Officer. From 2003 until joining TSFG in 2007, Mr. Edwards served in various capacities responsible for lending and credit policy at Regions Bank.
Mr. Gompper joined TSFG in June 2005 and currently serves as Interim President of Carolina First. Prior to joining TSFG, Mr. Gompper served in various senior management roles with AmSouth from January 2003 to late 2004.
Mr. Gordon joined TSFG on March 15, 2007 and serves as Senior Executive Vice President and Chief Financial Officer. From December 2004 until his appointment with the Company, Mr. Gordon served as a partner in the Jackson, Mississippi office of Horne LLP, a regional accounting and consulting firm. From April 2004 until November 2004, he served as chief accounting officer of National Commerce Financial Corp. (until acquired by SunTrust Banks), a bank holding company headquartered in Memphis, Tennessee. From June 2002 to April 2004, he served as chief risk officer for Union Planters Corporation (until acquired by Regions Financial), a bank holding company headquartered in Memphis, Tennessee.
Mr. Speaks joined TSFG in 1998 and currently serves as Chief Accounting Officer.
The policies of regulatory authorities, including the Board of Governors of the Federal Reserve System (the "Federal Reserve") affect TSFG's earnings. An important function of the Federal Reserve is regulation of the money supply. Various methods employed by the Federal Reserve include open market operations in U.S. Government securities, changes in the target Federal funds rate on bank borrowings, and changes in reserve requirements against member bank deposits. The Federal Reserve uses these methods in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits. The use of these methods may also affect interest rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Due to the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, TSFG can make no prediction as to the future impact that changes in interest rates, securities, deposit levels, or loan demand may have on its business and earnings. TSFG strives to manage the effects of interest rates through its asset/liability management processes.
Unlike most industrial companies, the assets and liabilities of financial institutions such as TSFG's subsidiaries are primarily monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. TSFG strives to manage the effects of interest rate movements through its asset/liability management processes.
TSFG and its subsidiaries are extensively regulated under federal and state law. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws may have a material effect on TSFG's business and prospects. TSFG's operations may be affected by possible legislative and regulatory changes and by the monetary policies of the United States.
regulating the financial services industry also frequently adopt changes to their regulations. Substantial regulatory and legislative initiatives, including a comprehensive overhaul of the regulatory system in the U.S., are possible in the months or years ahead. Any such action could have a materially adverse effect on our business, financial condition and results of operations.
As of June 1, 1997, a bank headquartered in one state was authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.
The Federal Deposit Insurance Act, as amended ("FDIA"), authorizes the merger or consolidation of any Bank Insurance Fund ("BIF") member with any Savings Association Insurance Fund ("SAIF") member, the assumption of any liability by any BIF member to pay any deposits of any SAIF member or vice versa, or the transfer of any assets of any BIF member to any SAIF member in consideration for the assumption of liabilities of such BIF member or vice versa, provided that certain conditions are met. In the case of any acquiring, assuming or resulting depository institution which is a BIF member, such institution will continue to make payment of SAIF assessments on the portion of liabilities attributable to any acquired, assumed or merged SAIF-insured institution (or, in the case of any acquiring, assuming or resulting depository institution wh ich is a SAIF member, that such institution will continue to make payment of BIF assessments on the portion of liabilities attributable to any acquired, assumed or merged BIF-insured institution).
In addition, the "cross-guarantee" provisions of the FDIA require insured depository institutions under common control to reimburse the FDIC for any loss suffered by either the SAIF or the BIF as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF, or both. The FDIC's claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository insti tutions.
Law and regulatory policy impose a number of obligations and restrictions on bank holding companies and their depository institution subsidiaries that are designed to minimize potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds. Current federal law requires a bank holding company to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital sta ndards as of the time the institution fails to comply with such capital restoration plan. The Federal Reserve requires a bank holding company to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve also has the authority under the BHCA to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal law grants federal bank regulatory authorities additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condi tion.
The Gramm-Leach-Bliley Act of 1999 (“GLB”) covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. GLB also permits bank holding companies to elect to become financial holding companies. A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, investment and merchant banking, insurance underwriting and sales, and brokerage activities. In order to become a financial holding company, the bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed, and have at least a satisfactory Community Reinvestment Act rating.
GLB adopts a system of functional regulation under which the Federal Reserve Board is confirmed as the umbrella regulator for bank holding companies, but bank holding company affiliates are to be principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the Securities and Exchange Commission for securities affiliates and state insurance regulators for insurance affiliates. GLB repeals the broad exemption of banks from the definitions of "broker" and "dealer" for purposes of the Securities Exchange Act of 1934, but identifies a set of specific activities, including traditional bank trust and fiduciary activities, in which a bank may engage without being deemed a "broker", and a set of activities in which a bank may engage without being deemed a “dealer.”
GLB contains extensive customer privacy protection provisions, which require the institution to provide notice of the privacy policies and provide the opportunity to opt-out of many disclosures of personal information. Additionally, GLB limits the disclosure of customer account numbers or other similar account identifiers for marketing purposes.
TSFG, through its banking subsidiary, is also subject to regulation by the South Carolina state banking authorities. TSFG must receive the approval of the state authorities prior to engaging in the acquisitions of banking or nonbanking institutions or assets. It also must file periodic reports with these authorities showing its financial condition and operations, management, and intercompany relationships between TSFG and its subsidiaries.
Carolina First Bank is subject to the requirements of the Community Reinvestment Act ("CRA"). The CRA requires that financial institutions have an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution's efforts in meeting community credit needs are evaluated as part of the examination process pursuant to three assessment factors. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.
From a corporate law perspective, the holders of TSFG's common stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available. Because TSFG is a legal entity separate and distinct from its subsidiaries and because it does not conduct revenue-generating operations at the holding company level, TSFG depends on the payment of dividends from its subsidiaries for its revenues. Current federal law prohibits, except under certain circumstances and with prior regulatory approval, an insured depository institution from paying dividends or making any other capital distribution if, after making the payment or distribution, the institution would be considered "undercapitalized," as that term is defined in applicable regulations. In addition, South Carolina banking regulations restrict und er certain circumstances the amount of dividends that the subsidiary bank can pay to TSFG. The terms of TSFG’s preferred stock include a restriction on declaring or paying common dividends unless all preferred dividends are paid. Also, the Federal Reserve has the authority to prohibit TSFG from paying a dividend on its common and preferred stock and trust preferred securities. During 2009, TSFG suspended dividend payments on its common stock. Effective first quarter 2010, TSFG suspended dividend payments on its preferred stock and all remaining outstanding equity and capital instruments, including its trust preferred and REIT preferred securities. Based on informal communications from federal banking regulators, currently none of TSFG or Carolina First Bank, or any of their respective subsidiaries (including, but not limited to, the real estate investment trust subsidiary) are permitted to pay dividends on capital securities.
Substantially all of the deposits of Carolina First Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating. Carolina First Bank expensed FDIC insurance premiums of $28.0 million and $9.6 million, respectively, in 2009 and 2008 which included $606,000 and $36,000, respectively, in additional premiums associated with participation in the Transaction Account Guarantee Program (see below). The 2009 expense also included a $5.7 million special assessment by the FDIC. During 2009, the FDIC required all insured depository institutions, with l imited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. As a result, TSFG paid $89.4 million in prepaid assessments to the FDIC in fourth quarter 2009, of which $5.9 million was expensed in 2009, with the remaining $83.5 million to be recognized over the next three years based on the FDIC assessment. FDIC insurance premiums are expected to increase based in part on the adoption of a uniform three-basis point increase to assessment rates effective January 1,
2011. The FDIC assessment rate could also increase due to downgrades in Carolina First Bank’s risk category which is impacted by changes in the regulatory rating by the FDIC and the capital ratios of the bank.
In addition, TSFG expensed $1.1 million in each of 2009 and 2008 in Financing Corporation (“FICO”) assessments related to outstanding FICO bonds to the FDIC as collection agent. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation.
The Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law on October 3, 2008. Pursuant to the EESA, the U.S. Treasury was given the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The U.S. Treasury has since injected capital into many financial institutions, including TSFG, under the Troubled Asset Relief Program Capital Purchase Program (the “CPP”). On December 5, 2008, TSFG entered into a Securities Purchase Agreement–Standard Terms with the U.S. Treasury pursuant to which, among other things, TSFG sold preferred stock and warrants to the U.S. Treasury for an aggre gate purchase price of $347.0 million. Under the terms of the CPP, TSFG is prohibited from increasing dividends on its common stock, and from making certain repurchases of equity securities, including its common stock, without the U.S. Treasury’s consent. Furthermore, as long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including TSFG’s common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. If dividends payable on the shares of preferred stock have not been paid for six quarterly dividend periods or more, whether or not consecutive, the authorized number of directors of TSFG shall automatically be increased by two, and the U.S. Treasury would have the right to elect two directors to the board.
In November 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLGP”). The TLGP was announced by the FDIC in October 2008, preceded by the determination of systemic risk by the Secretary of the Department of Treasury (after consultation with the President), as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or December 31, 2012 (extended from June 30, 2012 by subsequent amendment), certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008 and before October 31, 2009 (extended from June 30, 2009 by subsequent amendment) and (ii) provide full FDIC deposit insurance coverage for noninterest-bear ing transaction deposit accounts and certain interest-bearing checking accounts (for which the rate paid will not exceed 50 basis points) held at participating FDIC insured institutions through June 30, 2010 (extended from December 31, 2009, subject to an opt-out provision, by subsequent amendment), otherwise known as the Transaction Account Guarantee Program (“TAGP”). The Company opted into the TAGP. The fee assessment for deposit insurance coverage was 10 basis points per quarter during 2009 on amounts in covered accounts exceeding $250,000. During the six-month extension period in 2010, the fee assessment increases based on an institution’s rating under the risk-based premium system.
Under certain circumstances, a well capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions, including paying dividends, or paying management fees to a holding company if the institution would thereafter be undercapitalized. Institutions that are adequately but not well capitalized cannot accept, renew or rollover brokered deposits except with a waiver from the FDIC and are subject to limitations on the maximum interest rates that can be paid on deposits. Undercapitalized institutions may not accept, renew or rollover brokered deposits.
The banking regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agencies’ corrective powers include, among other things:
A banking institution that is in any of the three undercapitalized categories is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.
TSFG's subsidiaries are subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Aggregate limitations on extensions of credit also may apply. TSFG's subsidiaries are also subject to certain lending limits and restrictions on overdrafts to such persons.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the bank holding company or its nonbank subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. Such restrictions may limit TSFG's ability to obtain funds from its bank subsidiary for its cash needs, including funds for acquisitions, interest, and operating expenses. Certain of these restrictions are not applicable to transactions between a bank and a savings association owned by the same bank holding company, provided that every bank and savings association controlled by such bank holding company complies with all applicable capital requirements without relying on goodwill.
In addition, under the BHCA and certain regulations of the Federal Reserve, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services.
TSFG’s banking subsidiary is subject to the Bank Secrecy Act and its implementing regulations and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001. Among other things, these laws and regulations require financial institutions such as TSFG to take steps to prevent the use of its banking subsidiary for facilitating the flow of illegal or illicit money, to report large currency transactions and to file suspicious activity reports. TSFG is also required to develop and implement a comprehensive anti-money laundering compliance program. TSFG must also have in place appropriate "know your customer" policies and procedures. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of t he USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, internal controls, executive compensation, and enhanced and timely disclosure of corporate information. In accordance with Section 302(a) of the Sarbanes-Oxley Act, written certifications by TSFG’s Chief Executive Officer and Chief Financial Officer are obtained. These certifications attest that TSFG’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact or omit material facts necessary to make such reports not misleading. TSFG has also implemented a program designed to comply with Section 404 of the Sarbanes-Oxley Act, which includes the identification of key controls over significant processes and accounts, evaluation of the control design effectiveness, and t esting of the operating effectiveness of key controls. See Item 9A “Controls and Procedures” for TSFG’s evaluation of its disclosure controls and procedures and internal control over financial reporting.
Changes to the laws and regulations (including changes in interpretation or enforcement) at the federal level and in the states where we do business can affect the operating environment of bank holding companies and their subsidiaries in substantial and unpredictable ways. From time to time, various legislative and regulatory proposals are introduced. These proposals, if codified, may change banking statutes and regulations and our operating environment in substantial and unpredictable ways. If codified, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. We cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon our financial condition or results of operations. It is likely, however, that the current high level of enforcement and compliance-related activities of federal and state authorities will continue and potentially increase.
See Item 7, “Critical Accounting Policies and Estimates” and “Recently Adopted/Issued Accounting Pronouncements,” for discussion of certain accounting matters, which is incorporated herein by reference.
Our business, operating results and/or the market price of our common stock may be significantly affected by a number of factors, including the following:
Our ability to raise additional capital could be limited and this could affect our liquidity and could be dilutive to existing shareholders.
Regulatory actions could have a material negative effect on our business, operations, financial condition, results of operations or the value of our common stock.
A consent order would, among other things, result in us being deemed “adequately capitalized” (irrespective of the fact that we may be “well capitalized”) and could require that we raise additional capital within a specified timeframe and limit our access to the brokered CD market and restrict the rates we can offer on customer deposits. If we are unable to raise the capital required or otherwise comply with the terms of any such consent order, further regulatory actions could be taken, and our 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 such announcement, which could put further pressure on our funding capability and liquidity needs.
We fund our business operations through a combination of customer deposits, other customer funding and wholesale borrowing (including short-term and long-term borrowings as well as brokered deposits). These funding sources have been less available and have become more expensive in recent periods as a result of our financial performance, including the performance of our loan portfolio, decreased confidence in the financial markets generally among borrowers, lenders and depositors, as well as disruption and extreme volatility in the capital and credit markets and the failure of some entities in the financial sector. Our customer deposit funding has been low relative to peers because of our traditional focus on commercial lending, which has caused us to utilize wholesale funding to a greater degree than some of our peers. Customer deposi ts typically provide cost and liquidity advantages relative to wholesale funding, particularly in a higher interest rate environment. We have been working to strengthen our liquidity by shifting into customer deposits, reducing our reliance on wholesale funding and, where we do rely on wholesale funding, shifting to longer-term and more diversified borrowings. However, we may not be successful in increasing customer deposits or otherwise improving our funding capability and liquidity. With increased concerns about bank failures, traditional deposit customers are increasingly concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits from our subsidiary bank in an effort to ensure that the amount that they have on deposit is fully insured. The termination of the FDIC's temporary transactional account guarantee program, scheduled to occur June 30, 2010 could put further pressure on our ability to retain certain deposits.
Any occurrence that limits participation in the capital markets or our access to the capital markets, such as the loss of access to the brokered CD market, the Federal Reserve Bank discount window or FHLB advances, a further downgrade of our debt ratings, or a loss of our well capitalized status, may adversely affect our capital costs, our ability to raise capital and our ability to raise capital on terms that meet our funding and liquidity needs. The failure to establish and maintain appropriate funding and capital markets access on acceptable terms when needed could have a material adverse effect on our businesses, financial condition and results of operations, the willingness of certain counterparties and customers to do business with us and on the potential for criticism or adverse action by our regulators or the rating agencies.
Among other things, if we fail to remain well capitalized for bank regulatory purposes, because we do not qualify under the minimum capital standards or the FDIC otherwise downgrades our capital category, it could affect customer confidence, the rates we are allowed to pay on customer deposits, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common stock, and our ability to make acquisitions, and we would not be able to accept brokered deposits without prior FDIC approval. To be well capitalized, a bank must generally maintain a leverage capital ratio of at least 5%, a tier 1 risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%. However, our regulators could require us to increase our capital levels. For example, regulators frequently require fi nancial institutions with high levels of classified assets to maintain a leverage ratio of at least 8% and could also impose other and even higher regulatory capital requirements. Our failure to remain well capitalized or to maintain any higher capital requirements imposed on us could negatively affect our business, results of operations and financial condition, generally.
If we are unable to raise funding using the methods described above, we would likely need to finance or liquidate unencumbered assets to meet maturing liabilities. We may be unable to sell some of our assets, or we may have to sell assets at a discount from market value, either of which could adversely affect our results of operations and financial condition.
The NASDAQ’s listing requires that companies have a minimum bid price of $1 per share.
NASDAQ rules classify a security as “deficient” if it has a closing bid price of less than $1 per share for thirty consecutive business days. Once deficient, issuers have an automatic 180-day period to regain compliance by having a closing bid price of at least $1 per share for ten consecutive business days, and can receive an additional 180 days if all other listing requirements are met. On December 4, 2009, we received a letter from the NASDAQ notifying us of our non-compliance with such minimum bid price requirement. As a result, we have until June 2, 2010 to comply with the minimum bid price requirement. If we do not regain compliance with the minimum bid price rule by that date, we may appeal the delisting determination or we could be eligible for an additional grace period of 180 days if we apply to transfer the list ing of our common shares to The NASDAQ Capital Market. If we do not meet this listing requirement, liquidity in our stock could be materially and adversely affected.
Issuances or sales of common stock or other equity securities could result in an “ownership change” as defined for U.S. federal income tax purposes. In the event an “ownership change” were to occur, our ability to utilize a significant portion of our U.S. federal and state tax net operating losses could be impaired, and we could lose certain built-in losses that have not been recognized for tax purposes as a result of the operation of Section 382 of the Internal Revenue Code of 1986, as amended.
Our ability to use certain realized net operating losses and unrealized built-in losses to offset future taxable income may be significantly limited if we experience an “ownership change” as defined by Section 382 of the Internal Revenue Code of 1986, as amended. An “ownership change” under Section 382 generally occurs if the aggregate percentage ownership of the stock of the corporation held by one or more “five-percent shareholders” increases by more than fifty percentage points over such shareholders’ lowest percentage ownership during the testing period, which is generally the three year-period ending on the transaction date. Upon an “ownership change,” a corporation generally is subject to an annual limitation on its utilization of pre-change losses and certain recognized buil t-in losses equal to the value of the stock of the corporation immediately before the “ownership change,” multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation is increased each year to the extent that there is an unused limitation in a prior year. Since U.S. federal net operating losses generally may be carried forward for up to 20 years, the annual limitation also effectively provides a cap on the cumulative amount of pre-change losses and certain recognized built-in losses that may be utilized. Pre-change losses and certain recognized built-in losses in excess of the cap are effectively lost.
The relevant calculations under Section 382 are technical and highly complex. In some circumstances, issuances or sales of our stock (including any debt-for-equity exchanges and certain transactions involving our stock that are outside of our control) could result in an “ownership change” under Section 382. An “ownership change” could occur if, due to the sale or issuance of additional common stock, the aggregate ownership of one or more persons treated as “five-percent shareholders” were to increase by more than fifty percentage points over such shareholders’ lowest percentage ownership during the relevant testing period. As of December 31, 2009, our federal net operating loss carryforward was approximately $468.5 million. If an “ownership change” were to occur, we believe we woul d permanently lose the ability to realize a portion of the net operating loss carryforwards and a portion of the net unrealized built-in losses, which could adversely impact our ability to recognize capital from the potential future release of our valuation allowance.
If an “ownership change” were to occur, it is possible that the limitations imposed on our ability to use pre-change losses and certain recognized built-in losses could cause a net increase in our U.S. federal income tax liability and U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect.
Based on available information, we have estimated that the aggregate percentage ownership change over the testing period through the current date is approximately 45%. In reviewing the calculation, we have concluded that if we choose or are required to raise additional capital (including conversion of other capital instruments), an “ownership change” under Section 382 is likely. Also, due to the infrequent reporting requirements for “five-percent shareholders,” an “ownership change” could occur and not be known to us until reported by the new or existing “five-percent shareholder.” We are not able to estimate the impact of an “ownership change” because the limitation on the utilization of the pre-change losses and certain recognized built-in losses is calculated as of the date of the “ownership change” and is affected, among other things, by the value of our stock on that date.
We have incurred significant losses and will incur additional losses.
We incurred a net loss available to common shareholders of $736.9 million, or $5.22 loss per share for the year ended December 31, 2009, and $568.8 million, or $7.78 loss per share, for the year ended December 31, 2008. These losses are primarily a result of losses in our loan portfolio and associated write-offs of goodwill, as well as the increase in our deferred tax asset valuation allowance, and we expect to continue to incur losses in 2010. Additional detail regarding various matters relating to our credit exposure, portfolio concentrations, nonperforming assets and related matters is included below.
Our geographic and product concentrations and the downturn in the real estate market have significantly affected our results of operations, and further credit deterioration could have further adverse effects on collateral values and borrowers’ ability to repay, and consequently our financial condition and results of operations.
Our commercial, real estate and consumer loans are concentrated predominantly in South Carolina, western North Carolina and larger markets in Florida. In addition, commercial real estate
loans in South Carolina, North Carolina and Florida represented approximately 42% of our total loan portfolio as of December 31, 2009. Included in these commercial real estate loans are loans related to residential construction, which represented approximately 10% of our total loan portfolio as of December 31, 2009. Because of the concentration of real estate and other loans in the same geographic regions, adverse economic conditions in these areas have contributed to higher rates of loss and delinquency on our loans than if the loans had been more diversified on a geographic or product basis.
The effects of recent mortgage market challenges, combined with the ongoing decrease in commercial and residential real estate market prices and demand, could result in further price reductions in commercial and residential real estate values, adversely affecting the value of collateral securing the loans that we hold, as well as loan originations and gains on sale of real estate and construction loans. Prices of properties in South Carolina, North Carolina and Florida – where a large portion of our loans have real estate as a primary or secondary component of collateral – remain under significant pressure, with rising unemployment levels and the impact of the real estate downturn on the general economy. If we are required to liquidate the collateral during this period of reduced real estate values, our profitability and f inancial condition could be further adversely affected. As the extent and duration of this downturn is not known, we must estimate, based on current portfolio knowledge and analysis, the amount of our probable losses when recording our allowance for loan losses. This estimate requires substantial judgment on the part of management which may or may not prove valid and could be too low.
As noted above, as part of our credit quality and risk management efforts, we have been seeking to reduce our levels of problem loans and nonperforming assets, address weaknesses in lending relationships and manage geographic and product lending concentrations. However, while we expect that these actions will help mitigate the overall effects of the credit down cycle, the weaknesses in our loan portfolio are expected to continue, and we will continue to have substantial geographic and product concentrations even with respect to new loans. Accordingly, it is anticipated that our nonperforming asset and charge-off levels will remain elevated and could accelerate as a result of efforts (including by further charge-offs and loan sales) to reduce our levels of problem loans. In addition, our regulators could require us to take more aggress ive measures in the future in connection with our nonperforming assets. If we are not successful in our efforts to successfully manage our existing loan portfolio or new lending activities, or if we experience higher than expected delinquencies and greater than expected charge-offs in future periods, we could experience additional credit losses that materially and adversely affect our financial condition, our results of operations and our capital position. We are currently operating under increased regulatory scrutiny, and we could be exposed to increased potential for criticism or adverse action by our regulators or the rating agencies due to our credit quality.
Credit losses, in particular credit losses in excess of what we anticipate, impact our earnings, capital, and operations.
As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their contractual terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans and have had a material adverse effect on our operating results. Our credit risk with respect to our real estate and construction loan portfolio relates principally to the creditworthiness of corporations and the value of the real estate serving as security for the repayment of loans. Our credit risk with respect to our commercial and consumer loan portfolio relates principally to the general creditworthiness of businesses and individuals within our local markets.
Our credit risk management system is defined by policies approved by our board of directors that govern the risk, underwriting, portfolio monitoring, and problem loan administration processes. We seek to ensure adherence to underwriting standards through a credit approval process and after-the-fact review by credit risk management, and supervise compliance with underwriting and loan monitoring policies through daily reviews by credit risk managers, monthly reviews of exception reports and ongoing analysis of asset quality trends. We administer problem loans through the use of policies that require written plans for resolution and periodic meetings with credit risk management to review progress. Ultimately, credit risk management activities are monitored by our board of directors’ risk committee. As part of our credit quality eff orts, we continually assess the effectiveness of our policies and processes, and we have been and will continue to seek to reduce our levels of problem loans, address weaknesses in lending relationships and manage lending concentrations. However, our credit and risk management efforts are subject to substantial risks, including the risk of failure to develop adequate policies and procedures, failure to reduce problem loans and address lending and concentration weaknesses, failure of personnel to comply with our policies and procedures, assumptions and judgments that are not realized and other failures of our policies and procedures. Such failures could result in credit losses that exceed our expectations and adversely impact our financial condition, our capital position and the potential for criticism or adverse action by our regulators or the rating agencies.
In connection with our credit risk management, business planning and forecasting, we make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for estimated credit losses based on a number of factors. We believe that our allowance for credit losses is adequate. However, if our assumptions or judgments are wrong, our
allowance for credit losses may not be sufficient to cover our actual credit losses. We may need to increase our allowance in the future in response to regulatory requests, changing conditions and assumptions, or deterioration in the quality of our loan portfolio. The actual amount of future provisions for credit losses cannot be determined at this time and may vary from the amounts of past provisions.
We may be required to pay significantly higher FDIC premiums in the future.
A significant increase in insured institution failures during 2009 has resulted in a decline in the designated reserve ratio of the Deposit Insurance Fund (“DIF”) to historical lows. On November 12, 2009, the FDIC adopted a final rule requiring substantially all institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. On September 29, 2009, the FDIC increased annual assessment rates uniformly by 3 basis points beginning in 2011. As a result, an institution’s total base assessment rate for purposes of estimating an institution’s prepaid assessment for 2011 and 2012 will be increased by an annualized 3 basis points beginning in 2011. Again for purposes of calculating the amount that an institution will prepay, an institution’ s third quarter 2009 assessment base will be increased quarterly at a 5 percent annual growth rate through the end of 2012. At least semi-annually hereafter, the FDIC will update its loss and income projections for the DIF. If necessary to return the reserve ratio to its mandated minimum, the FDIC could increase assessment rates during its restoration period, which could have an adverse impact on our results of operations. The FDIC assessment rate could also increase due to downgrades in Carolina First Bank’s risk category which is impacted by changes in the regulatory rating by the FDIC and the capital ratios of the bank.
While we currently do not pay dividends on our common stock, holders of our common stock may be unable to use the dividends-received deduction with respect to any distributions we may make on our common stock in the future.
While we currently pay no dividends on our common stock, if we were to pay a dividend or other distribution on our common stock, distributions paid to corporate U.S. holders on our common stock may be eligible for the dividends received deduction if we have current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. Although we believe we have accumulated earnings and profits at December 31, 2009, we may not have sufficient current or accumulated earnings and profits during future taxable years for the distributions on our common stock to qualify as dividends for federal income tax purposes. If any distributions on our common stock with respect to any taxable year are not eligible for the dividends-received deduction because of insufficient current or accumulated earnings and profits, the amount fo r which you may be able to sell our common stock may decline.
We may not pay dividends on our common stock unless all accrued and unpaid dividends for all past dividend periods are fully paid on our outstanding Series T Preferred Stock issued to the U.S. Treasury.
We are prohibited from paying dividends on our common stock until all accrued and unpaid dividends are paid on our Series T Preferred Stock issued to the U.S. Treasury. Additionally, if we do not pay dividends on the shares of Series T Preferred Stock for six quarterly dividend periods or more, the authorized number of directors on our board will automatically increase by two, and the U.S. Treasury will have the right to elect two directors to our board. In first quarter 2010, we suspended dividend payments on our Series T Preferred Stock and all remaining outstanding equity and capital instruments.
We may not be able to redeem the Series T Preferred Stock and the warrant sold to the U.S. Treasury.
Until such time as we redeem our Series T Preferred Stock, we will remain subject to the respective terms and conditions set forth in the agreements we entered into with the U.S. Treasury under the Capital Purchase Program. Among other things, prior to December 5, 2011, unless we have redeemed the Series T Preferred Stock issued to the U.S. Treasury or the U.S. Treasury has transferred the Series T Preferred Stock to a third party, the consent of the U.S. Treasury will be required for us to (1) declare or pay any dividend or make any distribution on our common stock (other than regular quarterly cash dividends of not more than $0.01 per share of common stock) or (2) redeem, purchase or acquire any shares of our common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the related purchase agreement. It is unlikely that we will be able to redeem the Series T Preferred Stock until, among other things, we increase our capital and return to profitability. See “Risk Factors— We have incurred significant losses and will incur additional losses,” above.
Further, the continued existence of the Capital Purchase Program investment subjects us to increased regulatory and legislative oversight. See “Risk Factors — Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may significantly affect our financial condition, results of operation, liquidity or stock price,” below.
Our business may be further adversely affected by conditions in the financial markets and economic conditions generally.
Since late 2007, the United States has been in a recession. Business activity across a wide range of industries and regions is greatly reduced and local governments and many businesses are in serious difficulty due to the lack of consumer spending and the lack of liquidity in the credit markets. Unemployment has increased significantly.
Since mid-2007, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. This was initially triggered by declines in home prices and the values of subprime mortgages, but spread to all mortgage and real estate asset classes, to leveraged bank loans and to nearly all asset classes, including equities. Over this period, the global markets were characterized by substantially increased volatility and short-selling and an overall loss of investor confidence, initially in financial institutions, but also subsequently in companies in a number of other industries and in the broader markets.
Market conditions also led to the failure or merger of a number of prominent financial institutions. Financial institution failures or near-failures resulted in further losses as a consequence of defaults on securities issued by them and defaults under contracts entered into with such entities as counterparties. Furthermore, declining asset values, defaults on mortgages and consumer loans, and the lack of market and investor confidence, as well as other factors, combined to increase credit default swap spreads, to cause rating agencies to lower credit ratings, and to otherwise increase the cost and decrease the availability of liquidity, despite very significant declines in Federal Reserve borrowing rates and other government actions. Some banks and other lenders suffered significant losses and became reluctant to lend, even on a secu red basis, due to the increased risk of default and the impact of declining asset values on the value of collateral. The foregoing significantly weakened the strength and liquidity of some financial institutions worldwide. In 2008 and 2009, the U.S. government, the Federal Reserve and other regulators took numerous steps to increase liquidity and to restore investor confidence, including investing in the equity of banking organizations, but certain asset values have continued to decline and access to liquidity continues to be constrained.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where we operate. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by: declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; natural disasters; or a combination of these or other factors. Overall, during 20 08 and 2009, the business environment has been adverse for many households and businesses in the United States and worldwide. It is expected that the business environment in the United States and worldwide will continue to be challenged for the foreseeable future. There can be no assurance that these conditions will improve in the near term. Such conditions could adversely affect the credit quality of our loans, results of operations and financial condition.
The performance of our investment portfolio is subject to fluctuations due to changes in interest rates and market conditions.
Changes in interest rates can negatively affect the performance of most of our investments. Interest rate volatility can reduce unrealized gains or create unrealized losses in our portfolios. Interest rates are highly sensitive to many factors, including central government monetary policies, domestic and international economic and political conditions, and other factors beyond our control. Fluctuations in interest rates affect our returns on, and the market value of, our investment securities.
The fair market value of the securities in our portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations.
Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may significantly affect our financial condition, results of operation, liquidity or stock price.
Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus on and scrutiny of the financial services industry. The U.S. government has intervened on an unprecedented scale. In addition to the Capital Purchase Program (in which we participated) under the Troubled Asset Relief Program (“TARP”) announced in 2008, the U.S. government has taken steps that include enhancing the liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money market funds and certain types of debt issuances, and increasing insurance on bank deposits. The U.S. Congress, through the Emergency Economic Stabilization Act of 2008 (“EESA”) and the American Recovery and R einvestment Act of 2009 (“ARRA”), also has imposed a number of restrictions and limitations on the operations of financial services firms participating in the federal programs. There can be no assurance as to the impact that these programs and measures will have on the financial markets, including the high levels of volatility and limited credit availability currently being experienced, or on the U.S. banking and financial industries and the broader U.S. and global economies. The failure of these programs and measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit, or the trading price of our common stock.
These programs and measures also subject participating financial institutions, like us, to additional restrictions, oversight and costs that may have an adverse impact on our business, financial condition, results of operations or the price of our common stock. In particular, ARRA made amendments to the executive compensation provisions of EESA, under which TARP was established. These amendments apply not only to future participants under TARP, but also apply retroactively to companies like us that are current TARP participants.
In addition, new legislative proposals continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including with respect to compensation, interest rates and the impact of bankruptcy proceedings on consumer real property mortgages and otherwise. These, and any future legal requirements and implementing standards under TARP may have unforeseen or unintended adverse effects on TARP participants and on the financial services industry as a whole. Further, federal and state regulatory agencies also frequently adopt changes to their regulations and/or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation, regulation or the application thereof. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner by requiring us to expend significant time, effort and resources to ensure compliance. Additionally, the evolving regulations concerning executive compensation may impose limitations on us that affect our ability to compete successfully for executive and management talent.
We are subject to extensive government regulation and supervision and could be subjected to additional restrictions on our business and operations.
TSFG and its subsidiaries are subject to extensive federal and state regulation and supervision affecting, among other things, our lending practices, capital structure, investment practices, dividend policy, and growth. Banking regulations are primarily intended to protect depositors’ funds, consumers, federal deposit insurance funds, and the banking system as a whole, not security holders. Under federal and state law, our regulators have broad powers with respect to our company and subsidiaries, which entail risks and uncertainties. These risks and uncertainties include the risk that additional capital will be required by our regulators. In addition, our regulators may impose other directives relating to various aspects of our business, such as risk management, credit and lending policies and procedures, asset/liability managem ent, loan and securities portfolio composition, funding and liquidity and dividend policies if they determine that any of these aspects of our business pose undue risk to the institution and we fail to take or are unable to take sufficient action to mitigate such risks. Any such laws, requirements or directives, or the failure or inability to comply with them, could result in negative regulatory consequences, including becoming subject to supervisory action or to the imposition of restrictions on our business and operations. Such restrictions could adversely impact our financial condition, our access to the equity and capital markets, the way in which we operate our businesses and the value of our common stock.
Laws and regulations also exist that require financial institutions like us to take steps to prevent the use of our banking subsidiary to facilitate the flow of illegal or illicit money, to report large currency transactions, and to file suspicious activity reports. We are also required to develop and implement a comprehensive anti-money laundering compliance program. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.
In addition, Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. It is likely that there will be significant changes to the banking and financial institutions regulatory regimes in the near future in light of the recent performance of and government intervention in the financial services sector. Changes to statutes, regulations, regulatory policies, or regulatory ratings (including changes in interpretation or implementation), could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit access to certain funding sources, limit the types of financial services, products, and rates we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things.
Our credit ratings are reviewed periodically, and could be subject to further downgrade.
Our credit ratings are currently below investment grade. A further downgrade to our, or our affiliates’, credit ratings could increase our cost of funds and negatively impact our profitability, or could lead to a loss of deposits due to decreased depositor confidence. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, and level and quality of earnings. In addition, ratings agencies have themselves been subject to scrutiny arising from the financial crisis and there is no assurance that ratings agencies will not make or be required to make substantial changes to their ratings policies and practices or that such changes would not affect ratings of our securities or of securities in which we have an economic interest. Failure to raise additional capital, further credit quality deterioration and other factors relating to our business could cause us to have lower capital ratios, which could result in the further downgrade of our credit ratings.
Our stock price can be volatile in response to a number of factors.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things: variations in our quarterly operating results; recommendations by securities analysts; significant acquisitions or business combinations; performance of other companies that investors deem comparable to us; news reports relating to trends, concerns and other issues in the financial services industry; and changes in government regulations. General market fluctuations, industry factors, and general economic and political conditions and events could also cause our stock price to decrease regardless of our operating results. Declining stock prices could create customer concern, which co uld weaken our competitive position and, in turn, adversely affect our financial condition and results of operations.
Industry competition may have an adverse effect on our success.
Our profitability depends on our ability to compete successfully. We operate in a highly competitive environment. Certain of our competitors are larger and have more resources than we do and as a result may be perceived as stronger institutions. In our market areas, we face competition from other commercial banks, savings and loan associations, credit unions, internet banks, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, and other financial intermediaries that offer similar services. Some of our non-bank competitors are not subject to the same extensive regulations that govern TSFG or Carolina First Bank and may have greater flexibility in competing for business. We expect competition to intensify among financial services companies due to the recent consolidation of certain competing fina ncial institutions and the conversion of certain investment banks to bank holding companies. Should competition in the financial services industry intensify, our ability to market our products and services may be adversely affected.
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain skilled people. Competition for the best people in most activities engaged in by us can be intense, and we may not be able to hire sufficiently skilled people or to retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our markets, years of industry experience, and the difficulty of promptly finding qualified replacement personnel. Moreover, our current trading price, reported losses and other matters have, and will likely continue to, hurt our ability to retain and hire employees.
Significant litigation could have a material adverse effect on us.
We face legal risks in our business, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability or significant regulatory action against us may have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects.
We rely on our systems and certain counterparties, and certain failures could materially adversely affect our operations.
Our businesses are dependent on our ability to process, record and monitor a large number of complex transactions. If any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. Third parties with which we do business could also be sources of operational risk to us, including relating to breakdowns or failures of such parties’ own systems. Any of these occurrences could diminish our ability to operate one or more of our businesses, or result in potential liability to clients, reputational damage and regulatory intervention, any of which could materially adversely affect us. If personal, confidential or proprietary information of customers or clients in our possession were to be mishandled or misused, we could suffer significant regulat ory consequences, reputational damage and financial loss. We may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses or electrical or telecommunications outages, natural disasters, disease pandemics or other damage to property or physical assets, or events arising from local or larger scale politics, including terrorist acts. Such disruptions may give rise to losses in service to customers and loss or liability.
Our framework for managing risks may not be effective in mitigating risk and loss.
Our risk management framework seeks to mitigate risk and loss to us. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and could be materially adversely affected.
We are a holding company and depend on our subsidiaries for dividends, distributions and other payments.
From a corporate law perspective, the holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors out of funds legally available. Because TSFG is a legal entity separate and distinct from its subsidiaries and because it does not conduct revenue-generating operations at the holding company level, TSFG depends on the payment of dividends from its subsidiaries for its revenues. Current federal law prohibits, except under certain circumstances and with prior regulatory approval, an insured depository institution from paying dividends or making any other capital distribution if, after making the payment or distribution, the institution would be considered “under-capitalized,” as that term is defined in applicable regulations. In addition, South Carolina banking regulations re strict under certain circumstances the amount of dividends that the subsidiary bank, Carolina First Bank, can pay to TSFG.
In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, such authority may require, after notice and hearing, that such bank cease and desist from such practice. Depending on the financial condition of Carolina First Bank, the applicable regulatory authority might deem us to be engaged in an unsafe or unsound practice if Carolina First Bank were to pay dividends. The Federal Reserve and other regulatory authorities have issued policy statements generally requiring insured banks and bank holding companies only to pay dividends out of current operating earnings. Payment of dividends could also be subject to regulatory limitations. For examp le, if Carolina First Bank became “under-capitalized,” current law provides the federal banking agencies with broad powers to take prompt corrective action to resolve problems of insured depository institutions.
Based on informal communications from federal banking regulators, currently none of TSFG or Carolina First Bank, or any of their respective subsidiaries (including, but not limited to, the real estate investment trust subsidiary) are permitted to pay dividends on capital securities.
In addition, if any of our subsidiaries becomes insolvent, the direct creditors of that subsidiary will have a prior claim on its assets. Our rights and the rights of our creditors will be subject to that prior claim, unless we are also a direct creditor of that subsidiary.
Our historical financial information may not permit you to predict our cost of operations.
In addition to the impact on our provision for credit losses and charge-offs, the current credit environment has adversely affected our noninterest expenses. We have recorded significant write-downs and losses on sales of foreclosed properties, write-downs and losses on sales of loans and impairment of long-lived assets and goodwill, all of which are reported in noninterest expense. In addition, increased regulatory assessments and loan collection expense have also impacted noninterest expense. The magnitude and volatility in these line items may make it hard for you to accurately predict our basic cost of operations, absent the impact of credit.
None.
TSFG's principal executive offices are located at 102 South Main Street, Greenville, South Carolina. TSFG leases approximately 111,000 square feet of this location, which also houses Carolina First Bank's Greenville main office branch. The majority of TSFG's administrative functions presently reside at this location. TSFG owns a 130,000 square foot building in Lexington, South Carolina which houses the technology and operations departments. TSFG leases the land for the technology building under a 30 year lease. In addition, TSFG leases non-banking office space in 18 locations in South Carolina, North Carolina, and Florida.
TSFG occupies approximately 60,000 square feet of its corporate campus. See Item 8, Note 11 to the Consolidated Financial Statements for a discussion of TSFG’s decision to market its campus facility for sale.
At December 31, 2009, TSFG operated 177 branch offices, including 83 in South Carolina, 67 in Florida, and 27 in North Carolina. Of these locations, TSFG or one of its subsidiaries owns 101 locations, which includes 21 locations with land leases, and leases 76 locations. In addition, TSFG or one of its subsidiaries owns 7 stand-alone ATM locations, including 5 locations with land leases, and leases 22 locations.
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.
None.
See Equity Compensation Plan Data to be included in the Registrants’ Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.
The following graph sets forth the performance of TSFG’s common stock for the five year period ended December 31, 2009 as compared to the S&P 500 Index and the NASDAQ Bank Index. The graph assumes $100 originally invested on December 31, 2004 and that all subsequent dividends were reinvested in additional shares. The performance graph represents past performance and should not be considered to be an indication of future performance.
See Item 8, Consolidated Financial Statements and the accompanying notes for factors including but not limited to business combinations and accounting changes that affect the comparability of the information presented.
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 audited Consolidated Financial Statements and accompanying Notes presented in Item 8 of this report and the supplemental financial data appearing throughout this report. Percentage calculations contained herein have been calculated based upon actual, not rounded, results.
TSFG primarily operates through its subsidiary bank, Carolina First Bank, which conducts operations in South Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile).
Index to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, some of which are discussed in more detail in Item 1A – Risk Factors, may affect the operations, performance, business strategy and results of TSFG including, but not limited to, the following:
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 Securities and Exchange Commission (“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.
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: “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 “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.
The South Financial Group is a bank holding company, headquartered in Greenville, South Carolina, with $11.9 billion in total assets and 177 branch offices in South Carolina, Florida, and North Carolina at December 31, 2009. 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 South Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile). At December 31, 2009, approximately 45% of TSFG’s customer deposits (total deposits less brokered deposits) were in South Carolina, 43% were in Florida, and 12% were in North Carolina.
TSFG targets small business and 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 8, Note 1 to the Consolidated Financial Statements, due to TSFG’s 2009 financial results and capital levels, the substantial uncertainty throughout the U.S. banking industry, and other matters, 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 December 31, 2010. 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. Als o see “Capital and Liquidity.”
TSFG reported a net loss available to common shareholders of $736.9 million, or $(5.22) per diluted share, for 2009, primarily due to recording a full valuation allowance against its deferred tax asset and higher credit and related costs. For 2008, TSFG reported a net loss available to common shareholders of $568.8 million, or $(7.78) per diluted share for 2008, primarily due to a $426.0 million goodwill impairment charge resulting from a decrease in the value of the Mercantile banking segment and elevated credit costs. The following is a summary of the consolidated statements of operations (in thousands, except per share data):
At December 31, 2009, nonperforming assets as a percentage of loans and foreclosed property increased to 6.13% from 4.04% at December 31, 2008. The increase in nonperforming assets was primarily attributable to continued deterioration in residential construction and development-related loans (which are included in commercial real estate loans). For 2009, net loan charge-offs totaled 5.72% of average loans held for investment, compared to 2.16% for 2008. TSFG’s provision for credit losses increased to $668.9 million for 2009 compared to $344.6 million for 2008.
During 2009, TSFG evaluated the expected realization of its deferred tax assets, primarily comprised of future tax benefits associated with the allowance for loan losses and net operating loss carryforwards, and concluded that a $286.5 million increase to the valuation allowance was required. This non-cash charge was included in income tax expense during 2009.
In June 2009, TSFG announced a capital plan (the “Capital Plan”) to bolster its common equity. This plan is substantially complete. In connection with this plan, TSFG issued $85 million of common equity in a public offering (with net proceeds of $79.7 million) and converted $185.4 million of convertible preferred stock into 44.9 million common shares (including 16.3 million shares valued at $25.9 million as an inducement to convert). In addition, TSFG sold ancillary businesses (which added approximately $16 million to tangible common equity) and reduced its assets during 2009, partly by sales of indirect auto loans and shared national credits. During 2009, TSFG contributed $195 million to its subsidiary bank to increase its capital.
In 2009, preferred stock dividends included $32.4 million treated as deemed dividends to preferred shareholders resulting from induced conversion of $234.1 million of preferred stock into common shares.
At December 31, 2009, all regulatory capital ratios exceeded well-capitalized minimums. TSFG’s tangible equity to tangible asset ratio decreased to 6.54% at December 31, 2009, from 10.29% at December 31, 2008 primarily due to net losses in 2009, partially offset by proceeds from the common stock offering and lower total assets. Tangible common equity to tangible assets was 3.67% at December 31, 2009, compared to 6.05% at December 31, 2008. The common stock offering, lower total assets, and the conversion of $234.1 million of the Series 2008 and Series 2009-A Convertible Preferred Stock partially offset the impact of our net loss and dividends for 2009.
Tax-equivalent net interest income was $335.8 million for 2009, a $49.7 million decrease from $385.5 million in 2008. The net interest margin decreased to 2.92% in 2009 from 3.09% in 2008, primarily due to yields on earning assets declining more than funding costs and the impact of the credit environment, including increased nonperforming asset levels and higher interest reversals for nonperforming loans.
Noninterest income totaled $118.0 million for 2009, compared to $122.0 million for 2008, reflecting decreases in most categories. During 2009, TSFG sold certain ancillary businesses for a gain of $7.2 million which, combined with a $4.9 million increase in gain on securities and a $4.1 million increase in gain on certain derivative activities, partially offset the declines in other categories.
Noninterest expenses for 2009 totaled $419.1 million, compared to $792.2 million for 2008. In 2008, noninterest expenses included a $426.0 million goodwill impairment charge and higher employment contract and severance expense related to the retirement of TSFG’s CEO. In 2009, regulatory assessments and credit-related costs continued to increase, and TSFG recorded $21.6 million in impairment charges on long-lived assets. However, salaries and wages (excluding employment contract and severance expense) and employee benefits decreased $15.8 million when comparing 2009 to 2008.
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, income tax assets or liabilities, the effectiveness of derivatives and other hedging activities, the fair value of certain financial instruments (securities, derivatives, and privately held investm ents), share-based compensation, and accounting for acquisitions, including the fair value determinations and the analysis of goodwill impairment. To a lesser extent, significant estimates are also associated with the determination of contingent liabilities, discretionary compensation, and 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.
The allowance for loan losses (“Allowance”) represents management’s estimate of probable incurred losses in the lending portfolio. See “Balance Sheet Review – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” for additional discussion, including the methodology for analyzing the adequacy of the Allowance. This methodology relies upon management’s judgment in segregating the portfolio into risk-similar segments, computing specific allocations for impaired loans, and setting the amounts within the probable loss range (from 95% to 105% of the adjusted historical loss ratio). Management’s judgments evolve from an assessment of various issues, including but not limited to the pace of loan growth, collateral values, borrower’s ability and willingness to repay, emerg ing portfolio concentrations, risk management system changes, new product offerings, loan portfolio quality trends, and uncertainty in current economic and business conditions.
Assessing the adequacy of the Allowance is a process that requires considerable judgment. Management considers the year-end Allowance appropriate and adequate to cover probable incurred losses in the loan portfolio. However, management's judgment is based upon a number of assumptions about current events, which are believed to be reasonable, but which may or may not prove 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 TSFG to adjust its Allowance based on information available to them at the time of their examination.
The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to that used to determine the allowance for loan losses described above, adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio.
Income Taxes
Management uses certain assumptions and estimates in determining income taxes payable or refundable, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments and estimates are re-evaluated on a continual basis as regulatory and business factors change.
Tax returns submitted by management or the income tax reported on the Consolidated Financial Statements may be subject to adjustment by either adverse rulings by the U.S. Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service (“IRS”). TSFG is subject to potential adverse adjustments, including but not limited to: an increase in the statutory federal or state income tax rates, the permanent nondeductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets.
TSFG will only include the current and deferred tax impact of its tax positions in the financial statements when it is more likely than not (likelihood of greater than 50%) that such positions will be sustained by taxing authorities, with full knowledge of relevant information, based on the technical merits of the tax position. While TSFG supports its tax positions by unambiguous tax law, prior experience with the taxing authority, and analysis that considers all relevant facts, circumstances and regulations, management must still rely on assumptions and estimates to determine the overall likelihood of success and proper quantification of a given tax position.
TSFG recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Management regularly reviews the Company’s deferred tax assets for recoverability. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. During third quarter 2009, the estimated realization period for the deferred tax asset based on forecasts of future earnings extended further into the 20-year carryforward period compared to the realization period forecasted in second quarter 2009. This extended realization period, combined with the objective evidence of a three-year cumulative loss position and continued near-term losses represented significant negative evidence that caused the Company to conclude that a $286.5 million increase to the deferred tax valuation allowance was required in 2009. To the extent that TSFG generates taxable income in a given quarter, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense. Any remaining deferred tax asset valuation allowance will ultimately reverse (subject to ownership change limitations) through income tax expense when TSFG can demonstrate a sustainable return to profitability that would lead management to conclude that it is more likely than not that the deferred tax asset will be utilized during the 2 0-year carryforward period.
At December 31, 2009, TSFG had federal income tax net operating loss (NOL) carryforwards of approximately $468.5 million that originated in 2009 and will expire in 2029. TSFG was able to carry back a portion of its net operating losses to two prior years (2006 and 2007), to the extent it had taxable income in those years; however, as a participant in the TARP Capital Purchase Program, TSFG was ineligible for the five year carryback implemented in late 2009 through the Worker, Homeownership and Business Assistance Act of 2009. The ability of TSFG to utilize NOL carryforwards to reduce future federal taxable income and the federal income tax liability of the Company is subject to various limitations under Section 382 of the Internal Revenue Code of 1986, as amended. The utilization of such carryforwards may be limited upon the occurrence of certain ownership changes, 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%. Future equity transactions by TSFG or by 5% stockholders (including transactions beyond our control) could cause a Section 382 ownership change and therefore a limitation on the annual utilization of NOLs.
In the event of an ownership change (as defined for income tax purposes), Section 382 of the Code imposes an annual limitation on the amount of a corporation's taxable income that can be offset by these carryforwards. The limitation is generally equal to the product of (i) the fair market value of the equity of the company multiplied by (ii) a percentage approximately equivalent to the yield on long-term tax exempt bonds during the month in which an ownership change occurs. In addition, the limitation is increased if there are unrecognized built-in losses on the balance sheet prior to a change in ownership. Therefore, the amount of any potential Section 382 limitation cannot be reasonably estimated until an actual change occurs.
Derivatives and Hedging Activities
TSFG uses derivative financial instruments to reduce exposure to changes in interest rates and market prices for financial instruments. The application of hedge accounting requires judgment in the assessment of hedge effectiveness, identification of similarly hedged item groupings, and measurement of changes in the fair value of derivatives and related hedged items. TSFG believes that its methods for addressing these judgmental areas are reasonable and in accordance with generally accepted accounting principles in the United States. See “Balance Sheet Review--Derivative Financial Instruments” and “Fair Value of Certain Financial Instruments” for additional information regarding derivatives.
Fair Value of Certain Financial Instruments
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. When measuring fair value, an entity must maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value is based on quoted market prices for the same or similar instruments, adjusted for any differences in terms. If market values are not readily available, then the fair value is estimated. For example, when TSFG has an investment in a privately held company, TSFG’s management evaluates the fair value of these investments based on the entity’s ability to generate cash through its operations, obtain alternative financin g, and subjective factors. Modeling techniques, such as discounted cash
flow analyses, which use assumptions for interest rates, credit losses, prepayments, and discount rates, are also used to estimate fair value if market values are not readily available.
TSFG carries its available for sale securities and derivatives at fair value. (Effective second quarter 2009, TSFG elected to discontinue its use of the fair value option on new production of mortgage loans held for sale. This change corresponds to TSFG’s decision to no longer sell mortgage loans on a pooled basis.) The unrealized gains or losses, net of income tax effect, on available for sale securities and the effective component of derivatives qualifying as cash flow hedges are included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. The fair value adjustments for derivative financial instruments not qualifying as cash flow hedges are included in earnings. In addition, for hedged items in a fair value hedge, changes in the hedged item’s fair value attributable to th e hedged risk are also included in noninterest income. No fair value adjustment is allowed for the related hedged asset or liability in circumstances where the derivatives do not meet the requirements for hedge accounting.
TSFG periodically evaluates its investment securities portfolio for other-than-temporary impairment. If a security is considered to be other-than-temporarily impaired, the related unrealized loss is charged to operations (or, in some cases the related unrealized loss attributable to credit is charged to operations), and a new cost basis is established. Factors considered include the reasons for the impairment, recent events specific to the issuer or industry, the severity and duration of the impairment, volatility of fair value, changes in value subsequent to period-end, external credit ratings, and forecasted performance of the security issuer. In addition, TSFG considers whether it intends to sell the security, whether it is more likely than not that it will be required to sell the security before recovery of the amortized cost basi s, and whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. However, for equity securities, which typically do not have a contractual maturity with a specified cash flow on which to rely, the ability to hold an equity security indefinitely, by itself, does not allow for avoidance of other-than-temporary impairment.
The fair values of TSFG’s investments in privately held limited partnerships, corporations and LLCs are not readily available. These investments are accounted for using either the cost or the equity method of accounting. The accounting treatment depends upon TSFG’s percentage ownership and degree of management influence over the investee’s operations. TSFG’s management evaluates its investments in limited partnerships and LLCs quarterly for impairment based on the investee’s ability to generate cash through its operations, obtain alternative financing, and subjective factors. There are inherent risks associated with TSFG’s investments in privately held limited partnerships, corporations and LLCs, which may result in income statement volatility in future periods.
We 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 example, nonrecurring fair value adjustments to loans held for investment reflect full or partial write-downs that are based on the loan’s observable fair value or the fair value of the underlying collateral. Nonrecurring fair value adjustments to other real estate owned reflect the application of the principle of lower of cost or fair value less cost to sell.
Additionally, as part of the second step of goodwill impairment testing (see Critical Accounting Policies and Estimates -Accounting for Acquisitions), we may be required to estimate the fair value of assets and liabilities of a reporting unit. The estimated fair value of loans 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.
The process for valuing financial instruments, particularly those with little or no liquidity, is subjective and involves a high degree of judgment. Small changes in assumptions can result in significant changes in valuation. Valuations are subject to change as a result of external factors beyond our control that have a substantial degree of uncertainty. The inherent risks associated with determining the fair value of a financial instrument may result in income statement volatility in future periods.
See Note 31 to the Consolidated Financial Statements for more information on fair value measurements.
Share-Based Compensation
TSFG measures compensation cost for share-based awards at fair value and recognizes compensation expense over the service period for awards expected to vest. The fair value of restricted stock and restricted stock units is based on the number of shares granted and the quoted price of our common stock and the fair value of service-based stock options is determined using the Black-Scholes valuation model. The Black-Scholes model requires the input of subjective assumptions, changes to which can
materially affect the fair value estimate. In addition, the estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. TSFG considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.
Accounting for Acquisitions (including Goodwill)
TSFG has grown its operations, in part, through bank and non-bank acquisitions. TSFG has used the purchase method of accounting to account for acquisitions. Under this method, TSFG is required to record assets acquired and liabilities assumed at their fair value, which in many instances involves estimates based on third party, internal, or other valuation techniques. These estimates also include the establishment of various accruals for planned facilities dispositions and employee benefit related considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in goodwill or other intangible assets, which are subject to periodic impairment tests on an annual basis, or more often, if events or circumstances indicate that there may be impairment. These tests, which TSFG has performed annually as of June 30th since 2002 (and on an interim basis, as needed), use estimates such as projected cash flows, discount rates, time periods, and comparable market values in their calculations. Management believes these estimates and assumptions are reasonable; however, the fair value of each reporting unit could be different in the future if actual results and market conditions differ from the estimates and assumptions used. Furthermore, the determination of which intangible assets have finite lives is subjective, as well as the determination of the amortization period for such intangible assets.
TSFG evaluates goodwill for impairment by determining the fair value for each reporting unit and comparing it to the carrying amount. If the carrying amount exceeds its fair value, the potential for impairment exists, and a second step of impairment testing is required. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired in a business combination at the date of the impairment test. If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written down to its fair value.
TSFG has assigned goodwill to its Carolina First, Mercantile, and Insurance reporting units. Although it does not meet the definition of a reportable operating segment as discussed in Note 32 - Business Segments to the Consolidated Financial Statements, the Insurance reporting unit is tested separately for goodwill impairment because it has a dissimilar product set and separate discrete financial information. Goodwill is assigned to the reporting units at the date the goodwill is initially recorded and no longer retains its association with a particular acquisition. All of the activities within a reporting unit, whether acquired or organically generated, are available to support the value of the goodwill. Determining the fair value of the Company’s reporting units requires management to make judgments and assumptions related to various items, including estimates of future operating results, allocations of indirect expenses, and discount rates. See “Goodwill” for additional discussion of management’s process and the assumptions and the judgments applied.
For several previous acquisitions, TSFG has agreed to issue earn-out payments based on the achievement of certain performance targets. Upon paying the additional consideration, TSFG records additional goodwill.
TSFG’s other intangible assets have an estimated finite useful life and are amortized over that life in a manner that reflects the estimated decline in the economic value of the identified intangible asset. TSFG periodically reviews its other intangible assets to determine whether there have been any events or circumstances which indicate the recorded amount is not recoverable from projected undiscounted cash flows. If the projected undiscounted net operating cash flows are less than the carrying amount, a loss is recognized to reduce the carrying amount to fair value, and when appropriate, the amortization period is also reduced.
Balance Sheet Review
Loans
TSFG focuses its lending activities on small and middle market businesses and individuals in its geographic markets. At December 31, 2009, outstanding loans totaled $8.4 billion, which equaled 90.4% of total deposits (109.6% of customer funding) and 70.6% of total assets. Loans held for investment decreased $1.8 billion, or 17.7%, to $8.4 billion at December 31, 2009 from $10.2 billion at December 31, 2008, partly due to sales and liquidations of problem loans, net loan charge-offs, weaker loan demand, and management’s decision to exit or substantially reduce its exposure to certain loan products with limited relationship opportunity.
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, North Carolina, and Florida. At December 31, 2009, approximately 5% 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 2009 TSFG transferred $557.0 million from the held for investment portfolio to the held for sale portfolio, and subsequently sold the loans. The transfers and subsequent sales included $247.5 million of nonperforming loans (including shared national credits) for which TSFG charged-off $84.0 million against the allowance for loan losses prior to transferring them to loans held for sale. The transfers and subsequent sales also included $230.3 million of indirect auto loans and $79.2 million of performing shared national credits, which resulted in an allowance adjustment of $4.5 million. At December 31, 2009, none of these loans remained in held for sale.
At December 31, 2008, loans held for sale included $16.3 million of nonperforming loans originally held for investment. During 2008, TSFG transferred nonperforming loans with an unpaid principal balance totaling $117.3 million from the held for investment portfolio to the held for sale portfolio, and charged-off $53.4 million of these loans against the allowance for loan losses on or before the date of transfer. Of these loans, approximately $41 million (net of charge-offs) were sold and $3.1 million were transferred back to loans held for investment. The remaining balance was reduced by lower of cost or fair value adjustments and unscheduled paydowns.
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. Mortgage loans held for sale increased to $15.8 million at December 31, 2009 from $14.7 million at December 31, 2008, primarily due to timing of mortgage sales. Effective January 1, 2008, TSFG elected to account for its mortgage loans held for sale at fair value pursuant to the fair value option. However, effective second quarter 2009, TSFG elected to discontinue its use of the fair value option on new production of mortgage loans held for sale. This change corresponds to TSFG’s decision to no longer sell mortgage loans on a pooled basis.
Table 1 summarizes outstanding loans held for investment by loan purpose.
| Table 1 | |
| Loan Portfolio Composition Based on Loan Purpose | |
| (dollars in thousands) | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Commercial Loans | | | | | | | | | | | | | | | |
| Commercial and industrial | | $ | 2,080,329 | | | $ | 2,722,611 | | | $ | 2,742,863 | | | $ | 2,491,210 | | | $ | 2,258,789 | |
| Commercial owner - occupied real estate | | | 1,271,525 | | | | 1,270,746 | | | | 1,070,376 | | | | 830,179 | | | | 801,953 | |
Commercial real estate (1) | | | 3,501,809 | | | | 4,074,331 | | | | 4,158,384 | | | | 4,171,631 | | | | 3,933,927 | |
| | | | 6,853,663 | | | | 8,067,688 | | | | 7,971,623 | | | | 7,493,020 | | | | 6,994,669 | |
| Consumer Loans | | | | | | | | | | | | | | | | | | | | |
| Indirect - sales finance | | | 230,426 | | | | 635,637 | | | | 699,014 | | | | 660,401 | | | | 916,318 | |
| Consumer lot loans | | | 144,315 | | | | 225,486 | | | | 311,386 | | | | 357,325 | | | | 310,532 | |
| Direct retail | | | 83,460 | | | | 95,397 | | | | 107,827 | | | | 98,181 | | | | 107,295 | |
| Home equity | | | 787,645 | | | | 813,201 | | | | 754,158 | | | | 512,881 | | | | 553,194 | |
| | | | 1,245,846 | | | | 1,769,721 | | | | 1,872,385 | | | | 1,628,788 | | | | 1,887,339 | |
| | | | | | | | | | | | | | | | | | | | | |
| Mortgage Loans | | | 286,618 | | | | 354,663 | | | | 369,412 | | | | 580,059 | | | | 557,387 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total loans held for investment | | $ | 8,386,127 | | | $ | 10,192,072 | | | $ | 10,213,420 | | | $ | 9,701,867 | | | $ | 9,439,395 | |
| | | | | | | | | | | | | | | | | | | | | |
| Percentage of Loans Held for Investment | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | 24.8 | % | | | 26.7 | % | | | 26.9 | % | | | 25.7 | % | | | 23.9 | % |
| Commercial owner - occupied real estate | | | 15.2 | | | | 12.5 | | | | 10.5 | | | | 8.6 | | | | 8.5 | |
| Commercial real estate | | | 41.8 | | | | 40.0 | | | | 40.7 | | | | 43.0 | | | | 41.7 | |
| Consumer | | | 14.8 | | | | 17.3 | | | | 18.3 | | | | 16.7 | | | | 20.0 | |
| Mortgage | | | 3.4 | | | | 3.5 | | | | 3.6 | | | | 6.0 | | | | 5.9 | |
| Total | | | 100.0 | % | | | 100.0 | % | | | 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 to six years. TSFG has effectively stopped originating indirect auto loans in its markets, with the exception of a few dealers that fit within our relationship strategy. During 2009, TSFG sold $230.3 million of indirect auto loans.
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 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 December 31, 2009, TSFG’s house lending limit was $35 million, and 9 credit relationships totaling $396.4 million were in excess of the house lending limit (but not the legal lending limit). The 20 largest credit relationships have an aggregate outstanding principal balance of $578.6 million, or 6.9% of total loans held for investment, at December 31, 2009, compared to 5.3% of total loans held for investment at December 31, 2008. Approximately $9 million of these loans were considered nonperforming loans as of December 31, 2009.
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 December 31, 2009, the loan portfolio included commitments totaling $965.3 million in SNCs. Outstanding borrowings under these commitments totaled $495.6 million, decreasing from $711.6 million at December 31, 2008. The largest commitment was $30.9 million and the largest outstanding balance was $19.7 million at December 31, 2009. All of our SNC relationships are underwritten and managed in a centralized Corporate Banking Group staffed with experienced bankers. Our strategy targets borrowers whose management teams are well known to us and whose risk profile is above averag e. Going forward, we expect to reduce the percentage of our portfolio invested in SNCs due to the lack of relationship opportunity on much of the portfolio. During 2009, we transferred $173.2 million of these loans to the held for sale portfolio, including $94.0 million in problem loans, and subsequently sold or otherwise settled the loans.
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. Going forward, 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 20% of the principal).
Table 2 presents remaining maturities of certain loan classifications at December 31, 2009. The table also provides the breakdown between those loans with a predetermined interest rate and those loans with a floating interest rate.
| Table 2 | |
| Selected Loan Maturity and Interest Sensitivity | |
| (dollars in thousands) | | | | | | | | | | | | | |
| | | | | | Over One But | | | Over | | | | | |
| | | One Year | | | Less Than | | | Five | | | | | |
| | | or Less | | | Five Years | | | Years | | | Total | |
| Commercial and industrial | | $ | 892,601 | | | $ | 930,709 | | | $ | 257,019 | | | $ | 2,080,329 | |
| Commercial owner - occupied real estate | | | 128,988 | | | | 688,561 | | | | 453,976 | | | | 1,271,525 | |
| Commercial real estate | | | 1,221,652 | | | | 1,780,862 | | | | 499,295 | | | | 3,501,809 | |
| Total of loans with: | | | | | | | | | | | | | | | | |
Floating interest rates (1) | | | 1,702,461 | | | | 1,799,753 | | | | 598,516 | | | | 4,100,730 | |
| Predetermined interest rates | | | 540,780 | | | | 1,600,379 | | | | 611,774 | | | | 2,752,933 | |
| (1) | TSFG has entered into swaps to hedge the forecasted interest income from certain prime-based and LIBOR-based loans. The notional amount of the swaps totaled $780.0 million at December 31, 2009. Swaps totaling $265.0 million were terminated or dedesignated in first quarter 2010. Additionally, loans with floating rates, primarily limited to prime or LIBOR, included loans with floors totaling $1.3 billion with an average floor of 5.10%. |
Table 3 summarizes TSFG's loan relationships, including unused loan commitments, which are greater than $20 million.
| Table 3 | |
| Loan Relationships Greater than $20 Million | |
| | | | | | | | | | |
| | | | | | | Outstanding Principal Balance | |
| | | | | | | Amount | | | |
| December 31, 2009 | | | 40 | | $1.1 billion | | $0.8 billion | | | 9.9 | % |
| December 31, 2008 | | | 53 | | 1.6 billion | | 1.1 billion | | | 10.3 | |
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 for commercial real estate loans. Table 4 presents selected characteristics of commercial real estate loans by product type.
| Table 4 | |
| Selected Characteristics of Commercial Real Estate Loans | |
| (dollars in thousands) | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | | | | Weighted Average | | Weighted | | Largest | |
| | | | | | Time to Maturity | | Average | | Ten | |
| Commercial Real Estate Product Type | | Policy LTV | | (in months) | | Loan Size | | Total O/S | |
Completed income property (1) | | | 80 | % | | | 35.8 | | | $ | 533 | | | $ | 147,678 | |
| Residential A&D | | | 75 | | | | 8.3 | | | | 515 | | | | 85,937 | |
| Commercial A&D | | | 75 | | | | 7.1 | | | | 964 | | | | 58,745 | |
| Commercial construction | | | 80 | | | | 37.7 | | | | 2,642 | | | | 89,632 | |
| Residential construction | | | 80 | | | | 10.4 | | | | 239 | | | | 40,825 | |
| Residential condo | | | 80 | | | | 8.0 | | | | 1,031 | | | | 90,090 | |
| Undeveloped land | | | 65 | | | | 9.5 | | | | 645 | | | | 55,330 | |
| | | | | | | | | | | | | | | | | |
| Overall | | | | | | | 28.1 | | | $ | 585 | | | $ | 568,237 | |
| (1) | The policy LTV on completed income property was changed to 80% from 85% in December 2009. |
In addition to LTV limitations, other commercial real estate management processes are as follows:
Project Hold Limits. TSFG has implemented project hold limits (which represent the maximum amount that TSFG will hold in its portfolio by project) tiered by the underlying risk. These project limits act to encourage the appropriate amount of borrower and geographic granularity within the portfolio. Since the project limits vary by grade, TSFG attempts to reduce the exposure in correlation to the amount of assigned risk inherent in the project.
Construction Advances. TSFG monitors construction advances on all new construction projects and existing or renewed construction projects over set thresholds to ensure inspections are properly obtained and advances are consistent with the construction budget. The appropriateness of the construction budget is part of the underwriting package and considered during the approval process. The monitoring is administered by the centralized Construction Loan Administration department on an ongoing basis.
Quarterly Project Reviews. On a quarterly basis, each commercial real estate loan greater than $5 million is reviewed as part of a large project review process. Risk Management and the Relationship Manager discuss recent sales activity, local market absorption rates and the progress of each transaction in order to ensure proper internal risk rating and borrower strategy.
Appraisal Policies. It is TSFG’s policy to comply with Interagency Appraisal and Evaluation Guidelines as issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (the “Agencies”). These guidelines address supervisory matters relating to real estate appraisals and evaluations used to support real estate-related financial transactions and provide guidance to both examiners and regulated institutions about prudent appraisal and evaluation programs. Under the Agencies’ appraisal regulations, the appraiser is selected and engaged directly by TSFG or its agent. Additionally, because the appraisal and evaluati on process is an integral component of the credit underwriting process, these processes should be isolated from influence by our loan production process. TSFG orders and reviews all appraisals for loans over a set threshold through a centralized review function.
Although the Agencies’ appraisal regulations exempt certain categories of real estate-related financial transactions from the appraisal requirements, most real estate transactions over $250,000 are considered federally regulated transactions and thus require appraisals. The Agencies allow us to use an existing appraisal or evaluation to support a subsequent transaction, if we document that the existing estimate of value remains valid. Criteria for determining whether an existing appraisal or evaluation remains valid will vary depending upon the condition of the property and the marketplace, and the nature of any subsequent transaction. Factors that could cause changes to originally reported values include: the passage of time; the volatility of the local market; the availability of financing; the inventory of competin g properties; improvement to, or lack of maintenance of, the subject property or competing surrounding properties; changes in zoning; or environmental contamination.
While the Agencies’ appraisal regulations generally allow appropriate evaluations of real estate collateral in lieu of an appraisal for loan renewals and refinancing, in certain situations an appraisal is required. If new funds are advanced over reasonable closing costs, we would be expected to obtain a new appraisal for the renewal of an existing transaction when there is a material change in market conditions or the physical aspects of the property that threatens our real estate collateral protection.
A reappraisal would not be required when we advance funds to protect our interest in a property, such as to repair damaged property, because these funds should be used to restore the damaged property to its original condition. If a loan workout involves modification of the terms and conditions of an existing credit, including acceptance of new or additional real estate collateral, which facilitates the orderly collection of the credit or reduces our risk of loss, a reappraisal or reevaluation may be prudent, even if it is obtained after the modification occurs.
TSFG’s policy is to order new appraisals in the following circumstances:
| | · | Funds are being advanced to increase the loan above the originally committed loan amount and the appraisal is more than 18 months old; |
| | · | Loan is downgraded to substandard or worse, and the appraisal is more than three years old or significant adverse changes have occurred in the market where the property is located; |
| | · | Loan is downgraded to watch, and the appraisal is more than five years old or significant adverse changes have occurred in the market where the property is located; |
| | · | Loan is restructured to advance additional funds or extend the original amortization term, and the appraisal is over three years old or significant adverse changes have occurred in the market where the property is located; |
| | · | Property is being cross-pledged to another loan (other than an abundance of caution), and the appraisal is over three years old or significant adverse changes have occurred in the market where the property is located. |
Credit Officers and Special Assets Officers make the final determination of whether an updated appraisal is required and the timing of the updated appraisal as part of their approval and portfolio management responsibilities.
Table 5 presents the commercial real estate portfolio by geography, while Table 6 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 8, 9, and 13, respectively. TSFG monitors trends in these categories in order to evaluate the possibility of higher credit risk in its commercial real estate portfolio.
| Table 5 | |
Commercial Real Estate Loans by Geographic Diversification (1) | |
| (dollars in thousands) | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | | | | % of | | | | | | % of | |
| | | Balance | | | Total | | | Balance | | | Total | |
| South Carolina, excluding Coastal: | | | | | | | | | | | | |
| Upstate South Carolina (Greenville) | | $ | 569,018 | | | | 16.2 | % | | $ | 539,920 | | | | 13.3 | % |
| Midlands South Carolina (Columbia) | | | 232,088 | | | | 6.6 | | | | 238,285 | | | | 5.9 | |
| Greater South Charlotte South Carolina (Rock Hill) | | | 142,114 | | | | 4.1 | | | | 164,709 | | | | 4.0 | |
| Coastal South Carolina: | | | | | | | | | | | | | | | | |
| North Coastal South Carolina (Myrtle Beach) | | | 331,819 | | | | 9.5 | | | | 401,325 | | | | 9.9 | |
| South Coastal South Carolina (Charleston) | | | 292,207 | | | | 8.3 | | | | 268,951 | | | | 6.6 | |
| Western North Carolina (Hendersonville/Asheville) | | | 639,264 | | | | 18.3 | | | | 762,559 | | | | 18.7 | |
| Central Florida (Orlando/Ocala) | | | 356,239 | | | | 10.2 | | | | 431,260 | | | | 10.6 | |
| North Florida: | | | | | | | | | | | | | | | | |
| Northeast Florida (Jacksonville) | | | 219,202 | | | | 6.3 | | | | 276,942 | | | | 6.8 | |
| North Central Florida | | | 271,085 | | | | 7.7 | | | | 311,426 | | | | 7.6 | |
| South Florida (Ft. Lauderdale) | | | 198,874 | | | | 5.7 | | | | 232,437 | | | | 5.7 | |
| Tampa Bay Florida | | | 249,899 | | | | 7.1 | | | | 446,517 | | | | 11.0 | |
| Total commercial real estate loans | | $ | 3,501,809 | | | | 100.0 | % | | $ | 4,074,331 | | | | 100.1 | % |
| (1) | Geography is primarily determined by the originating operating geographic market and not necessarily the ultimate location of the underlying collateral. |
| Table 6 | |
| Commercial Real Estate Loans by Geography and Product Type | |
| (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 Commercial Real Estate Loans by Geography | |
| | | SC, Excl | | | Coastal | | | Western | | | Central | | | North | | | South | | | Tampa | | | Total | | | % of | |
| | | Coastal | | | SC | | | NC | | | FL | | | FL | | | FL | | | Bay | | | CRE | | | LHFI | |
| Commercial Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans by Product Type | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Completed income property | | $ | 566,178 | | | $ | 428,243 | | | $ | 380,430 | | | $ | 204,184 | | | $ | 346,489 | | | $ | 131,096 | | | $ | 113,709 | | | $ | 2,170,329 | | | | 25.9 | % |
| Residential A&D | | | 64,999 | | | | 51,002 | | | | 129,540 | | | | 19,292 | | | | 43,308 | | | | 11,798 | | | | 33,204 | | | | 353,143 | | | | 4.2 | |
| Commercial A&D | | | 31,742 | | | | 27,243 | | | | 33,199 | | | | 24,034 | | | | 5,480 | | | | 15,355 | | | | 21,070 | | | | 158,123 | | | | 1.9 | |
| Commercial construction | | | 188,376 | | | | 14,193 | | | | 23,231 | | | | 37,441 | | | | 15,284 | | | | 9,375 | | | | 29,081 | | | | 316,981 | | | | 3.8 | |
| Residential construction | | | 39,786 | | | | 6,541 | | | | 14,802 | | | | 8,815 | | | | 10,629 | | | | 5,037 | | | | 3,313 | | | | 88,923 | | | | 1.1 | |
| Residential condo | | | 12,430 | | | | 36,941 | | | | 7,597 | | | | 11,884 | | | | 29,927 | | | | 16,033 | | | | 13,021 | | | | 127,833 | | | | 1.5 | |
| Undeveloped land | | | 39,709 | | | | 59,863 | | | | 50,465 | | | | 50,589 | | | | 39,170 | | | | 10,180 | | | | 36,501 | | | | 286,477 | | | | 3.4 | |
| Total CRE Loans | | $ | 943,220 | | | $ | 624,026 | | | $ | 639,264 | | | $ | 356,239 | | | $ | 490,287 | | | $ | 198,874 | | | $ | 249,899 | | | $ | 3,501,809 | | | | 41.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CRE Loans as % of Total Loans HFI | | | 11.3 | % | | | 7.4 | % | | | 7.6 | % | | | 4.3 | % | | | 5.8 | % | | | 2.4 | % | | | 3.0 | % | | | 41.8 | % | | | | |
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 probl em 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 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.
Table 7 presents a summary of TSFG’s credit quality indicators.
| Table 7 |
| Credit Quality Indicators |
| (dollars in thousands) | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Loans held for sale | | $ | 15,758 | | | $ | 30,963 | | | $ | 17,867 | | | $ | 28,556 | | | $ | 37,171 | |
| Loans held for investment | | | 8,386,127 | | | | 10,192,072 | | | | 10,213,420 | | | | 9,701,867 | | | | 9,439,395 | |
| Allowance for loan losses | | | 365,642 | | | | 247,086 | | | | 126,427 | | | | 111,663 | | | | 107,767 | |
Allowance for credit losses (1) | | | 373,126 | | | | 249,874 | | | | 128,695 | | | | 112,688 | | | | 109,350 | |
| | | | | | | | | | | | | | | | | | | | | |
| Nonaccrual loans - commercial and industrial | | $ | 77,527 | | | $ | 35,998 | | | $ | 22,963 | | | $ | 7,052 | | | $ | 25,145 | |
| Nonaccrual loans - commercial owner - occupied real estate | | | 43,701 | | | | 14,876 | | | | 4,085 | | | | 4,512 | | | included above |
| Nonaccrual loans - commercial real estate | | | 240,377 | | | | 230,373 | | | | 36,634 | | | | 16,913 | | | included above |
| Nonaccrual loans - consumer | | | 16,314 | | | | 39,009 | | | | 11,606 | | | | 5,250 | | | | 3,417 | |
| Nonaccrual loans - mortgage | | | 21,127 | | | | 29,126 | | | | 4,903 | | | | 3,441 | | | | 4,693 | |
Total nonperforming loans held for investment (2) | | | 399,046 | | | | 349,382 | | | | 80,191 | | | | 37,168 | | | | 33,255 | |
| Nonperforming loans held for sale - CRE | | | - | | | | 16,282 | | | | - | | | | - | | | | - | |
| Foreclosed property (other real estate owned and personal property repossessions) | | | 123,314 | | | | 48,993 | | | | 8,276 | | | | 4,341 | | | | 10,722 | |
| Total nonperforming assets | | $ | 522,360 | | | $ | 414,657 | | | $ | 88,467 | | | $ | 41,509 | | | $ | 43,977 | |
| | | | | | | | | | | | | | | | | | | | | |
Restructured loans accruing interest (2) | | $ | 26,128 | | | $ | 6,249 | | | $ | 1,440 | | | $ | - | | | $ | - | |
| Loans past due 90 days or more (interest accruing) | | $ | 10,465 | | | $ | 47,481 | | | $ | 5,349 | | | $ | 3,129 | | | $ | 4,548 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total nonperforming assets as a percentage of loans and foreclosed property | | | 6.13 | % | | | 4.04 | % | | | 0.86 | % | | | 0.43 | % | | | 0.46 | % |
| Total nonperforming assets as a percentage of total assets | | | 4.39 | | | | 3.05 | | | | 0.64 | | | | 0.29 | | | | 0.31 | |
| Allowance for loan losses as a percentage of loans held for investment | | | 4.36 | | | | 2.42 | | | | 1.24 | | | | 1.15 | | | | 1.14 | |
| Allowance for credit losses as a percentage of loans held for investment | | | 4.45 | | | | 2.45 | | | | 1.26 | | | | 1.16 | | | | 1.16 | |
| Allowance for loan losses to nonperforming loans held for investment | | | 0.92 | x | | | 0.71 | x | | | 1.58 | x | | | 3.00 | x | | | 3.24 | x |
| (1) | The allowance for credit losses is the sum of the allowance for loan losses and the reserve for unfunded lending commitments. |
| (2) | During 2009, TSFG began excluding restructured loans accruing interest from its nonperforming loans. Amounts for prior periods have been reclassified to conform to the current presentation. |
TSFG’s nonperforming asset ratio (nonperforming assets as a percentage of loans and foreclosed property) increased to 6.13% at December 31, 2009 from 4.04% at December 31, 2008. The increase in nonperforming assets was primarily attributable to market deterioration in residential construction and development-related loans and general economic conditions which have impacted other commercial loan categories.
Troubled debt restructurings generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term. In certain cases, TSFG will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. To facilitate this process, a concessionary modification that would not otherwise
be considered may be granted resulting in classification as a troubled debt restructuring. Troubled debt restructurings can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower. Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains classifie d as a nonaccrual loan.
In certain cases, and in compliance with the Agencies’ guidance on prudent commercial real estate loan workouts, a restructuring may involve a multiple note structure in which, for example, a troubled loan is restructured into two notes. TSFG may separate a portion of the current outstanding debt into a new legally enforceable note (i.e., the first note) that is reasonably assured of repayment and performance according to prudently modified terms. This note may be placed back on accrual status in certain situations. In returning the loan to accrual status, sustained historical payment performance for a reasonable time prior to the restructuring may be taken into account. The portion of the debt that is not reasonably assured of repayment (i.e., the second note) is adversely classified and charged-off as appropriate. To date, TSF G’s use of multiple note structures has not been material, but use of this structure could increase in future periods.
Table 8 presents CRE nonaccrual loans by geography and product type, while Table 9 provides detail regarding commercial real estate loans past due 30 days or more. At December 31, 2009, there were no commercial real estate loans that were 90 days past due and still accruing interest.
| Table 8 | |
| Commercial Real Estate Nonaccrual Loans | |
| (dollars in thousands) | |
| | | December 31, 2009 CRE Nonaccrual Loans HFI ("NAL") by Geography | |
| | | SC, Excl | | | Coastal | | | Western | | | Central | | | North | | | South | | | Tampa | | | Total | | | % of | |
| | | Coastal | | | SC | | | NC | | | FL | | | FL | | | FL | | | Bay | | | CRE NAL | | | NAL | |
| CRE Nonaccrual Loans by | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Product Type | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Completed income property | | $ | 10,757 | | | $ | 9,307 | | | $ | 21,270 | | | $ | 4,333 | | | $ | 5,562 | | | $ | 3,613 | | | $ | 12,986 | | | $ | 67,828 | | | | 17.0 | % |
| Residential A&D | | | 9,947 | | | | 6,235 | | | | 22,821 | | | | 4,576 | | | | 5,790 | | | | 1,092 | | | | 5,302 | | | | 55,763 | | | | 14.0 | |
| Commercial A&D | | | 1,788 | | | | 670 | | | | 2,074 | | | | 960 | | | | - | | | | 608 | | | | 17,677 | | | | 23,777 | | | | 5.9 | |
| Commercial construction | | | 15,029 | | | | - | | | | 4,161 | | | | - | | | | - | | | | - | | | | 5,184 | | | | 24,374 | | | | 6.1 | |
| Residential construction | | | 730 | | | | 464 | | | | 2,409 | | | | 6,637 | | | | 2,689 | | | | - | | | | 892 | | | | 13,821 | | | | 3.5 | |
| Residential condo | | | 2,496 | | | | 13,850 | | | | 654 | | | | 720 | | | | 8 | | | | 75 | | | | 2,850 | | | | 20,653 | | | | 5.2 | |
| Undeveloped land | | | 4,582 | | | | 2,295 | | | | 1,418 | | | | 2,276 | | | | 10,768 | | | | 5,050 | | | | 7,772 | | | | 34,161 | | | | 8.5 | |
| Total CRE Nonaccrual Loans | | $ | 45,329 | | | $ | 32,821 | | | $ | 54,807 | | | $ | 19,502 | | | $ | 24,817 | | | $ | 10,438 | | | $ | 52,663 | | | $ | 240,377 | | | | 60.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CRE Nonaccrual Loans as %of Total Nonaccrual Loans HFI | | | 11.4 | % | | | 8.2 | % | | | 13.7 | % | | | 4.9 | % | | | 6.2 | % | | | 2.6 | % | | | 13.2 | % | | | 60.2 | % | | | | |
| Table 9 | |
| Commercial Real Estate Loans Past Due 30 Days or More (excluding nonaccruals) | |
| (dollars in thousands) | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Balance | | | % of CRE | | | Balance | | | % of CRE | |
| North Carolina | | $ | 17,747 | | | | 0.51 | % | | $ | 21,364 | | | | 0.53 | % |
| South Carolina | | | 23,714 | | | | 0.68 | | | | 34,268 | | | | 0.84 | |
| Florida | | | 71,877 | | | | 2.05 | | | | 44,471 | | | | 1.09 | |
| Total CRE loans past due 30 days or more | | $ | 113,338 | | | | 3.24 | % | | $ | 100,103 | | | | 2.46 | % |
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 10 provides additional detail regarding potential problem loans.
| Table 10 |
| Potential Problem Loans |
| (dollars in thousands) |
| | | December 31, 2009 | | December 31, 2008 |
| | | Outstanding Principal Balance | | Outstanding Principal Balance |
| | | | | | | | | % of Loans | | | | | | | | | % of Loans | |
| | | Number | | | | | | Held for | | | Number | | | | | | Held for | |
| | | of Loans | | | Amount | | | Investment | | | of Loans | | | Amount | | | Investment | |
| Large potential problem loans ($5 million or more) | | | 40 | | | $ | 377,230 | | | | 4.50 | % | | | 23 | | | $ | 217,688 | | | | 2.13 | % |
| Small potential problem loans (less than $5 million) | | | 1,112 | | | | 558,700 | | | | 6.66 | | | | 732 | | | | 282,189 | | | | 2.77 | |
Total potential problem loans (1) | | | 1,152 | | | $ | 935,930 | | | | 11.16 | % | | | 755 | | | $ | 499,877 | | | | 4.90 | % |
| (1) | Includes commercial and industrial, commercial real estate, and 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 A llowance (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, 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 $193.0 million at December 31, 2009, based on the portfolio historical loss rates, compared to $81.8 million at December 31, 2008.
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 commercial loans over $1 million that have been placed in nonaccrual status). 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 cu rrent fair value less cost to sell of the subject property. TSFG had Level II reserves of $37.7 million at December 31, 2009, compared to $44.4 million at December 31, 2008.
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 is calculated and 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 a dditional reserves for current economic conditions, the commercial real estate concentration in the portfolio, and an additional adjustment to represent declining land values. Although the adjustment related to declining land values has been a factor since first quarter 2008, the appraisal discount and default rate assumptions on land were increased during third quarter 2009 to reflect value declines indicated by recent appraisals. The Level III Reserves totaled $135.0 million at December 31, 2009, compared to $117.0 million at December 31, 2008.
Reserve for Unfunded Commitments. At December 31, 2009 and 2008, the reserve for unfunded commitments was $7.5 million and $2.8 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 Allowance and the lower boundary amounts for each category in our model. The sum of these differences at December 31, 2009 was $21.3 million, compared to $13.9 million at December 31, 2008. 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. Specifically, impaired loans increased to $392.3 million at December 31, 2009 from $287.5 million at December 31, 2008, primarily attributable to commercial real estate loans. Most of the loans contributing to the increase were over $1 million and were evaluated for whether a specific reserve was warranted based on the analysis of the most probable source of repayment including liquidation of the collateral. Based on this analysis, the Level II Reserves decreased 15% compared to the 36% increase in impaired 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 11, which summarizes the changes in the Allowance, and Table 12, which reflects the component percentage allocation of the Allowance at the end of each year, provide additional information with respect to the activity in the Allowance.
| Table 11 | |
| Summary of Loan Loss Experience | |
| (dollars in thousands) | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Allowance for loan losses, beginning of year | | $ | 247,086 | | | $ | 126,427 | | | $ | 111,663 | | | $ | 107,767 | | | $ | 96,434 | |
| Purchase accounting adjustments | | | - | | | | - | | | | - | | | | - | | | | 3,741 | |
| Allowance adjustment for loans sold | | | (4,471 | ) | | | - | | | | - | | | | (3,089 | ) | | | - | |
| Charge-offs: | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | 137,909 | | | | 44,647 | | | | 18,651 | | | | 16,440 | | | | 22,989 | |
| Commercial owner-occupied real estate | | | 18,197 | | | | 3,671 | | | | 2,576 | | | | 1,693 | | | | 652 | |
| Commercial real estate | | | 301,607 | | | | 135,414 | | | | 12,714 | | | | 10,638 | | | | 7,436 | |
| Indirect - sales finance | | | 14,272 | | | | 14,927 | | | | 6,582 | | | | 4,205 | | | | 4,658 | |
| Consumer lot loans | | | 37,544 | | | | 14,349 | | | | 15,225 | | | | 83 | | | | 7 | |
| Direct retail | | | 4,346 | | | | 731 | | | | 1,117 | | | | 1,468 | | | | 1,221 | |
| Home equity | | | 18,818 | | | | 6,239 | | | | 1,284 | | | | 1,452 | | | | 1,428 | |
| Mortgage loans | | | 23,892 | | | | 10,983 | | | | 1,259 | | | | 644 | | | | 823 | |
| Total loans charged-off | | | 556,585 | | | | 230,961 | | | | 59,408 | | | | 36,623 | | | | 39,214 | |
| Recoveries: | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | 4,736 | | | | 2,577 | | | | 3,898 | | | | 6,522 | | | | 4,652 | |
| Commercial owner-occupied real estate | | | 342 | | | | 179 | | | | 270 | | | | 739 | | | | 73 | |
| Commercial real estate | | | 4,927 | | | | 2,544 | | | | 1,440 | | | | 1,699 | | | | 1,269 | |
| Indirect - sales finance | | | 1,220 | | | | 794 | | | | 538 | | | | 746 | | | | 522 | |
| Consumer lot loans | | | 3,181 | | | | 680 | | | | 9 | | | | 3 | | | | 4 | |
| Direct retail | | | 272 | | | | - | | | | 339 | | | | 311 | | | | 325 | |
| Home equity | | | 430 | | | | 180 | | | | 285 | | | | 241 | | | | 379 | |
| Mortgage loans | | | 296 | | | | 597 | | | | 68 | | | | - | | | | 89 | |
| Total loans recovered | | | 15,404 | | | | 7,551 | | | | 6,847 | | | | 10,261 | | | | 7,313 | |
| Net charge-offs | | | 541,181 | | | | 223,410 | | | | 52,561 | | | | 26,362 | | | | 31,901 | |
| Additions through provision expense | | | 664,208 | | | | 344,069 | | | | 67,325 | | | | 33,347 | | | | 39,493 | |
| Allowance for loan losses, end of year | | $ | 365,642 | | | $ | 247,086 | | | $ | 126,427 | | | $ | 111,663 | | | $ | 107,767 | |
| | | | | | | | | | | | | | | | | | | | | |
| Average loans held for investment | | $ | 9,456,636 | | | $ | 10,351,897 | | | $ | 9,985,751 | | | $ | 9,581,602 | | | $ | 8,848,279 | |
| Loans held for investment (period end) | | | 8,386,127 | | | | 10,192,072 | | | | 10,213,420 | | | | 9,701,867 | | | | 9,439,395 | |
| Net charge-offs as a percentage of average loans held for investment | | | 5.72 | % | | | 2.16 | % | | | 0.53 | % | | | 0.28 | % | | | 0.36 | % |
| Table 12 | |
| Composition of Allowance for Loan Losses | |
| (dollars in thousands) | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Commercial and industrial | | $ | 88,577 | | | $ | 58,712 | | | $ | 35,834 | | | $ | 32,004 | | | $ | 27,130 | |
| Commercial owner-occupied real estate | | | 53,282 | | | | 27,533 | | | | 14,875 | | | | 10,321 | | | | 10,599 | |
| Commercial real estate | | | 156,897 | | | | 108,125 | | | | 56,519 | | | | 52,080 | | | | 45,957 | |
| Indirect - sales finance | | | 7,093 | | | | 9,750 | | | | 6,499 | | | | 4,623 | | | | 8,825 | |
| Consumer lot loans | | | 11,776 | | | | 7,470 | | | | 879 | | | | 1,201 | | | | 1,777 | |
| Direct retail | | | 2,927 | | | | 3,160 | | | | 304 | | | | 330 | | | | 614 | |
| Home equity | | | 12,681 | | | | 12,154 | | | | 2,369 | | | | 2,256 | | | | 3,309 | |
| Mortgage loans | | | 11,069 | | | | 6,245 | | | | 3,132 | | | | 2,487 | | | | 3,965 | |
| Unallocated | | | 21,340 | | | | 13,937 | | | | 6,016 | | | | 6,361 | | | | 5,591 | |
| Total | | $ | 365,642 | | | $ | 247,086 | | | $ | 126,427 | | | $ | 111,663 | | | $ | 107,767 | |
Table 13 provides additional detail for 2009 commercial real estate net charge-offs.
| Table 13 | |
| CRE Net Charge-Offs by Product Type | |
| (dollars in thousands) | |
| | | Year Ended December 31, 2009 CRE Net Charge-Offs ("NCO") by Geography | |
| | | SC, Excl | | | Coastal | | | Western | | | Central | | | North | | | South | | | Tampa | | | Total | | | % of | |
| | | Coastal | | | SC | | | NC | | | FL | | | FL | | | FL | | | Bay | | | CRE NCO | | | NCO | |
| CRE Net Charge-Offs by | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Product Type | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Completed income property | | $ | 6,368 | | | $ | 14,536 | | | $ | 11,995 | | | $ | 5,687 | | | $ | 679 | | | $ | 11,286 | | | $ | 17,630 | | | $ | 68,181 | | | | 12.6 | % |
| Residential A&D | | | 24,006 | | | | 5,638 | | | | 9,507 | | | | 3,893 | | | | 15,964 | | | | 1,837 | | | | 13,194 | | | | 74,039 | | | | 13.7 | |
| Commercial A&D | | | 1,364 | | | | 1,899 | | | | 1,058 | | | | 4,474 | | | | 398 | | | | - | | | | 20,131 | | | | 29,324 | | | | 5.4 | |
| Commercial construction | | | - | | | | 150 | | | | 53 | | | | - | | | | - | | | | 123 | | | | 8,337 | | | | 8,663 | | | | 1.6 | |
| Residential construction | | | 5,089 | | | | 10,321 | | | | 2,627 | | | | 7,453 | | | | 1,667 | | | | 11 | | | | 2,834 | | | | 30,002 | | | | 5.5 | |
| Residential condo | | | 5,461 | | | | 5,070 | | | | 52 | | | | 210 | | | | - | | | | 2,750 | | | | 4,102 | | | | 17,645 | | | | 3.3 | |
| Undeveloped land | | | 6,882 | | | | 83 | | | | 1,030 | | | | 14,330 | | | | 11,274 | | | | 9,235 | | | | 25,992 | | | | 68,826 | | | | 12.7 | |
| Total CRE Net Charge-Offs | | $ | 49,170 | | | $ | 37,697 | | | $ | 26,322 | | | $ | 36,047 | | | $ | 29,982 | | | $ | 25,242 | | | $ | 92,220 | | | $ | 296,680 | | | | 54.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CRE Net Charge-Offs as % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| of Total Net Charge-Offs | | | 9.1 | % | | | 7.0 | % | | | 4.9 | % | | | 6.6 | % | | | 5.5 | % | | | 4.7 | % | | | 17.0 | % | | | 54.8 | % | | | | |
In addition to the allowance for loan losses, TSFG also estimates probable losses related to binding unfunded lending commitments. The methodology to determine such losses is inherently similar to the methodology utilized in calculating the allowance for commercial loans, adjusted for factors specific to binding commitments, including the probability of funding. The reserve for unfunded lending commitments is included in other liabilities on the balance sheet. Changes to the reserve for unfunded lending commitments are made by changes to the provision for credit losses. (See Item 8, Note 9 to the Consolidated Financial Statements for information regarding the reserve for unfunded lending commitments, which information is incorporated herein by reference.)
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, TT&L advances, FHLB advances, derivatives, and securities sold under repurchase agreements. TSFG strives to provide adequate flexibility to proactively manage cash flow as market conditions change. Cash flow may be used to pay-off borrowings, to fund loan growth, or to reinvest in securities at then current market rates. Table 14 shows the carrying values of the investment securities portfolio at the end of each of the last five years.
| Table 14 | |
| Investment Securities Portfolio Composition | |
| (dollars in thousands) | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Trading Account (at fair value) | | | | | | | | | | | | | | | |
| U.S. Treasury | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 22 | |
| U.S. Government agencies | | | - | | | | - | | | | - | | | | - | | | | 137 | |
| State and municipal | | | - | | | | - | | | | - | | | | - | | | | 1,243 | |
| | | | - | | | | - | | | | - | | | | - | | | | 1,402 | |
Securities Available for Sale (at fair value) | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury | | | 2,045 | | | | 2,069 | | | | 27,592 | | | | 166,719 | | | | 182,468 | |
| U.S. Government agencies | | | 79,707 | | | | 313,729 | | | | 503,571 | | | | 653,034 | | | | 656,442 | |
| Agency residential mortgage-backed securities | | | 1,980,305 | | | | 1,468,639 | | | | 1,088,427 | | | | 1,400,288 | | | | 1,688,862 | |
| Private label residential mortgage-backed securities | | | 8,504 | | | | 12,771 | | | | - | | | | - | | | | - | |
| State and municipal | | | 23,158 | | | | 262,248 | | | | 302,586 | | | | 341,488 | | | | 373,892 | |
Other investments: (1) | | | | | | | | | | | | | | | | | | | | |
| Corporate bonds | | | - | | | | 9,963 | | | | 20,380 | | | | 113,365 | | | | 112,246 | |
| Community bank stocks | | | 399 | | | | 672 | | | | 4,988 | | | | 12,406 | | | | 10,067 | |
| Other equity investments | | | 1,283 | | | | 1,567 | | | | 3,335 | | | | 3,910 | | | | 4,037 | |
| | | | 2,095,401 | | | | 2,071,658 | | | | 1,950,879 | | | | 2,691,210 | | | | 3,028,014 | |
Securities Held to Maturity (at amortized cost) | | | | | | | | | | | | | | | | | | | | |
| State and municipal | | | 16,217 | | | | 22,609 | | | | 39,451 | | | | 52,208 | | | | 62,548 | |
| Agency residential mortgage-backed securities | | | 111,199 | | | | - | | | | - | | | | - | | | | - | |
| Other investments | | | 100 | | | | 100 | | | | 240 | | | | 100 | | | | 100 | |
| | | | 127,516 | | | | 22,709 | | | | 39,691 | | | | 52,308 | | | | 62,648 | |
| Total | | $ | 2,222,917 | | | $ | 2,094,367 | | | $ | 1,990,570 | | | $ | 2,743,518 | | | $ | 3,092,064 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total securities as a percentage of total assets | | | 18.7 | % | | | 15.4 | % | | | 14.3 | % | | | 19.3 | % | | | 21.6 | % |
| (1) | During 2009, TSFG reclassified FHLB stock from securities available for sale to other assets. Amounts for prior periods have been reclassified to conform to the current presentation. |
Securities (i.e., trading securities, securities available for sale, and securities held to maturity), excluding the unrealized gain on available for sale securities, averaged $2.0 billion in 2009 and $2.1 billion in 2008. The average tax-equivalent portfolio yield decreased in 2009 to 4.24% from 4.65% in 2008. The securities yield decreased primarily due to an overall decline in interest rates resulting in reinvestment of maturities and calls at lower yields, and to a lesser extent, the fourth quarter 2009 sales of higher-yielding mortgage-backed securities and municipal securities.
The expected duration of the debt securities portfolio was approximately 3.2 years at December 31, 2009, an increase from approximately 2.9 years at December 31, 2008. 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 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 December 31, 2009 securities had unamortized premiums of $31.3 million and unamortized discounts of $3.2 million. Faster than expected paydowns would adversely impact yields and market values of securiti es with unamortized premiums while slower than expected paydowns would adversely impact yields and market values of securities with unamortized discounts.
Approximately 62% of mortgage-backed securities (“MBS”) are collateralized mortgage obligations (“CMOs”) with an average expected duration of 3.1 years. At December 31, 2009, 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 $28.4 million at December 31, 2009, compared with $10.9 million at December 31, 2008, primarily due to a decrease in long-term interest rates and a contraction in spreads. 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 8, Note 7 to the Consolidated Financial Statements for information about TSFG’s securities in unrealized loss positions.
During fourth quarter 2009, in an effort to strengthen liquidity, reduce sources of tax-exempt income, and reduce interest rate risk, TSFG sold approximately $325 million of higher-yielding mortgage-backed securities and municipal securities available for sale with maturities longer than six months for a net gain of $6.2 million. The proceeds were reinvested into lower-yielding mortgage-backed securities, primarily conservative CMO structures such as planned amortization class (“PAC”) and sequential-pay CMOs intended to limit the extension of expected durations if interest rates rise.
In April 2009, TSFG sold U.S. government agency securities with a book value of approximately $120 million (3.6% yield) for a gain of $5.4 million. In connection with this sale, TSFG also terminated $75.0 million (4.3% rate) in long-term repurchase agreements, and recognized a loss on extinguishment of $5.4 million. Also in second quarter 2009, TSFG recorded $435,000 in other-than-temporary impairment on certain community bank-related equity investments included in the other investments category.
In second quarter 2008, TSFG recorded $927,000 in other-than-temporary impairment on its corporate bond portfolio due to a change in intent to hold the securities until a recovery in value based on a change in investment strategy. In third quarter 2008, TSFG sold approximately $8.4 million of corporate bonds and recognized a gain on sale of approximately $129,000. Additionally in 2008, TSFG recorded $2.1 million in other-than-temporary impairment on certain community bank-related investments included in the other investments portfolio due to the severity and/or duration of the impairment. In 2007, TSFG recorded $2.9 million in other-than-temporary impairment on its corporate bond portfolio, and sold approximately $70 million of those bonds.
Table 15 shows the credit risk profile of the securities portfolio for the years ended December 31, 2009 and 2008.
| Table 15 | |
| Investment Securities Portfolio Credit Risk Profile | |
| (dollars in thousands) | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Balance | | | % of Total | | | Balance | | | % of Total | |
| Government and agency | | | | | | | | | | | | |
| U.S. Treasury | | $ | 2,045 | | | | 0.1 | % | | $ | 2,069 | | | | 0.1 | % |
U.S. Government agencies (1) | | | 79,707 | | | | 3.6 | | | | 313,729 | | | | 15.0 | |
Agency residential mortgage-backed securities (MBS) (1)(2) | | | 2,091,504 | | | | 94.0 | | | | 1,468,639 | | | | 70.1 | |
| Total government and agency | | | 2,173,256 | | | | 97.7 | | | | 1,784,437 | | | | 85.2 | |
State and municipal (3)(4)(5) | | | | | | | | | | | | | | | | |
Pre-funded with collateral or AAA-rated backed by Texas Permanent School Fund | | | 19,392 | | | | 0.9 | | | | 188,598 | | | | 9.0 | |
Underlying issuer or collateral rated A or better (including South Carolina State Aid) | | | 15,127 | | | | 0.7 | | | | 81,238 | | | | 3.9 | |
| Underlying issuer or collateral rated BBB | | | 2,337 | | | | 0.1 | | | | 7,344 | | | | 0.3 | |
| Non-rated | | | 2,519 | | | | 0.1 | | | | 7,677 | | | | 0.4 | |
| Total state and municipal | | | 39,375 | | | | 1.8 | | | | 284,857 | | | | 13.6 | |
| Corporate bonds AA or A-rated | | | - | | | | - | | | | 9,963 | | | | 0.5 | |
Private label residential mortgage-backed securities AAA-rated (2) | | | 8,504 | | | | 0.4 | | | | 12,771 | | | | 0.6 | |
| Community bank stocks and other | | | 1,782 | | | | 0.1 | | | | 2,339 | | | | 0.1 | |
| Total securities | | $ | 2,222,917 | | | | 100.0 | % | | $ | 2,094,367 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
Percent of total securities: (4) | | | | | | | | | | | | | | | | |
| Rated A or higher | | | | | | | 99.7 | % | | | | | | | 99.2 | % |
| Investment grade | | | | | | | 99.8 | | | | | | | | 99.5 | |
| (1) | At December 31, 2009, these amounts include, in the aggregate, $29.4 million and $1.8 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 December 31, 2009, agency mortgage-backed securities include $111.2 million of securities held to maturity at amortized cost. At December 31, 2009 and 2008, state and municipal securities include $16.2 million and $22.6 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 December 31, 2009 and 2008, $4.9 million and $39.1 million, respectively, of municipal bonds are guaranteed by bond insurers. |
| (5) | At December 31, 2009, the breakdown by current bond rating is as follows: $19.4 million pre-funded with collateral or AAA-rated backed by Texas Permanent School Fund, $17.5 million AA or A-rated, and $2.5 million non-rated. |
| Note: | Within each category, securities are ordered based on risk assessment from lowest to highest. TSFG holds no collateralized debt obligations, or subordinated debt or equity investments in FNMA or FHLMC. |
Table 16 shows the contractual maturity schedule for securities held to maturity and securities available for sale at December 31, 2009. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. The table also reflects the weighted average tax-equivalent yield of the investment securities.
| Table 16 | |
| Investment Securities Maturity Schedule | |
| (dollars in thousands) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Available for Sale -- Fair Value | | | | | | | | | | | | | | | | | | |
| | | | | | After One | | | After Five | | | | | | No | | | | |
| | | Within | | | But Within | | | But Within | | | After | | | Contractual | | | | |
| | | One Year | | | Five Years | | | Ten Years | | | Ten Years | | | Maturity (1) | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| U.S. Treasury | | $ | - | | | $ | 2,045 | | | $ | - | | | $ | - | | | $ | - | | | $ | 2,045 | |
| U.S. Government agencies | | | - | | | | 79,707 | | | | - | | | | - | | | | - | | | | 79,707 | |
| Agency residential MBS | | | 42,025 | | | | 1,179,446 | | | | 175,203 | | | | 583,631 | | | | - | | | | 1,980,305 | |
| Private label residential MBS | | | - | | | | - | | | | - | | | | 8,504 | | | | - | | | | 8,504 | |
| State and municipal | | | 22,908 | | | | 200 | | | | 50 | | | | - | | | | - | | | | 23,158 | |
| Other investments | | | - | | | | 2 | | | | - | | | | - | | | | 1,680 | | | | 1,682 | |
| | | $ | 64,933 | | | $ | 1,261,400 | | | $ | 175,253 | | | $ | 592,135 | | | $ | 1,680 | | | $ | 2,095,401 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted Average Tax-Equivalent Yield | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury | | | - | % | | | 1.40 | % | | | - | % | | | - | % | | | - | % | | | 1.40 | % |
| U.S. Government agencies | | | - | | | | 2.33 | | | | - | | | | - | | | | - | | | | 2.33 | |
| Agency residential MBS | | | 3.35 | | | | 3.33 | | | | 4.31 | | | | 4.58 | | | | - | | | | 3.78 | |
| Private label residential MBS | | | - | | | | - | | | | - | | | | 4.73 | | | | - | | | | 4.73 | |
| State and municipal | | | 4.58 | | | | 5.34 | | | | 5.34 | | | | - | | | | - | | | | 4.58 | |
| Other investments | | | - | | | | 4.00 | | | | - | | | | - | | | | n/a | | | | 4.00 | |
| | | | 3.79 | % | | | 3.26 | % | | | 4.31 | % | | | 4.58 | % | | | - | % | | | 3.74 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Held to Maturity -- Amortized Cost | | | | | | | | | | | | | | | | | | | | | | | | |
| State and municipal | | $ | 4,786 | | | $ | 10,697 | | | $ | 734 | | | $ | - | | | $ | - | | | $ | 16,217 | |
| Agency residential MBS | | | - | | | | 111,199 | | | | - | | | | - | | | | - | | | | 111,199 | |
| Other investments | | | 50 | | | | 50 | | | | - | | | | - | | | | - | | | | 100 | |
| | | $ | 4,836 | | | $ | 121,946 | | | $ | 734 | | | $ | - | | | $ | - | | | $ | 127,516 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted Average Tax-Equivalent Yield | | | | | | | | | | | | | | | | | | | | | | | | |
| State and municipal | | | 5.44 | % | | | 5.32 | % | | | 5.20 | % | | | - | % | | | - | % | | | 5.35 | % |
| Agency residential MBS | | | - | | | | 4.02 | | | | - | | | | - | | | | - | | | | 4.02 | |
| Other investments | | | 4.50 | | | | 6.45 | | | | - | | | | - | | | | - | | | | 5.48 | |
| | | | 5.43 | % | | | 4.14 | % | | | 5.20 | % | | | - | % | | | - | % | | | 4.19 | % |
| (1) | These securities have no contractual maturity or yield and accordingly are excluded from the "Other Investments" yield calculation, as well as the overall "Available for Sale" yield calculation. |
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. Fair values are estimated based on information available as no quoted market prices are available. In 2009, 2008, and 2007, TSFG recorded $3.9 million, $589,000, and $2.0 million, respectively, in other-than-temporary impairment on these investments. Since certain of these investments are real estate-related or banking industry-related, additional impairment in future periods is possible. Additionally, in 2009 and 2008, TSFG sold certain of these investments and recorded $641,000 and $4.3 million, respectively, of realized gains. At December 31, 2009, TSFG's investment in these ent ities totaled $14.5 million, of which $7.1 million were accounted for under the cost method and $7.4 million were accounted for under the equity method. At December 31, 2009, TSFG’s remaining commitment to advance funds on these investments was $5.5 million. At December 31, 2008, TSFG's investment in these entities totaled $18.1 million, of which $5.3 million were accounted for under the cost method and $12.8 million were accounted for under the equity method.
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, as cost approximates fair value and there is
no ready market for such investments. At December 31, 2009 and 2008, FHLB stock totaled $58.8 million and $35.5 million, respectively.
Also included in other assets were $5.2 million of various auction rate preferred securities which TSFG repurchased from brokerage customers who purchased the securities during 2007. TSFG recorded a loss of $676,000 upon purchase of $6.9 million of these securities during first quarter 2009 to adjust these securities to estimated fair value based on illiquidity in the market.
Bank-Owned Life Insurance
TSFG had approximately $303 million invested in bank-owned life insurance (“BOLI”) at December 31, 2009. These investments are expected to provide a long-term source of earnings to support existing employee benefit programs and for other purposes. Approximately $153 million was held in separate accounts. The separate account holdings are invested in diversified portfolios of fixed income securities (substantially all of which are investment-grade) and cash equivalents, including U.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio's investment guidelines. The separate account policies have stable value agreements throu gh either a large well-rated bank or insurance carrier that provides limited cash surrender value protection from declines in the value of each policy’s underlying investments. Losses are recognized when the decline in the cash surrender value exceeds the protection provided by the stable value agreements. At December 31, 2009, the cash surrender value protection had not been exceeded for any BOLI policies; however, two of the separate accounts with a $52.4 million cash surrender value exceeded the underlying fair value of the investments by approximately $4.8 million. No adjustment to the cash surrender value was recorded due to the fair value exceeding the protection of the stable value agreements. Among other things, the stable value agreements may also include terms which, upon surrender, may extend the payout period or limit the protection of the stable value agreements when the Company has net operating losses or a credit event as defined (including default on its ob ligations) or may prohibit future acquisition of BOLI for a specified period of time. For one of the policies with a net operating loss trigger, the payout of the cash surrender value of approximately $17 million would be expected to occur over 20 quarters. Accordingly, TSFG reduced the carrying value of this policy by approximately $1 million as of December 31, 2009 to reflect the present value of the expected cash flows. The remaining cash surrender value of $150 million primarily represented the cash surrender value of policies held in the general accounts and amounts due from various insurance companies with ratings of A or higher at December 31, 2009.
The majority of TSFG’s life insurance policies have modified endowment contract (“MEC”) classification which receives less advantageous tax treatment than non-MEC policies. Upon surrender of a MEC policy, the Company would reduce its net operating losses by the cumulative gain on the policy with no impact on income tax expense as the Company has recorded a valuation allowance on its deferred tax assets; however, the Company would also pay a 10% MEC tax penalty on the cumulative gain which would increase income tax expense. As of December 31, 2009, TSFG’s MEC policies had cumulative gains of approximately $92 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 purposes of the goodwill impairment evaluation performed at June 30, 2009, the fair value of the Carolina First reporting unit was determined primarily using discounted cash flow models based on internal forecasts (90% weighting) and, to a lesser extent, market-based trading and transaction multiples (10% weighting). More weight was given to the discounted cash flow models since market-based multiples are not considered directly comparable given the lack of a complete operational entity for each reporting unit, and based on the internal forecasts taking a longer term view of the Company’s performance. The
internal forecasts included certain assumptions made by management, including expected growth rates in loans and customer funding, changes in net interest margin, credit quality trends, and the forecasted levels of other income and expense items. Forecasts were prepared for each of the next five years, with a terminal cash flow assigned to the remainder of the forecast horizon. A range of terminal growth rates ranging from 3% to 7% were applied to the terminal cash flow. Each period’s cash flow was then discounted using a range of discount rates based on the risk-free rate plus a premium based on overall stock market level of risk compared to the level of risk of our own stock. The portion of the estimated value derived from market-based trading and transaction multiples was based on a weighting of market multiples for selected p eer institutions based on such metrics as book value of equity, tangible equity, and assets. (Earnings multiples were not used because most peers did not have earnings.) The value assigned to the reporting unit for purposes of the goodwill impairment evaluation was based on the midpoint of the range of values determined using the method outlined above. This valuation indicated that the fair value of the Carolina First reporting unit was less than its carrying value. However, Step 2 of the evaluation indicated that the implied fair value of the goodwill was greater than its carrying value, and thus no impairment charge was required as of the June 30, 2009 test date for the Carolina First banking segment.
As TSFG, including its Carolina First reporting unit, continued to report additional losses and other conditions had changed during third quarter 2009, TSFG performed an updated evaluation of the goodwill related to the Carolina First reporting unit as of September 30, 2009. In connection with its evaluation, TSFG engaged an independent third party to review the methodology and assumptions in Step 1 and to perform the valuation of the loan portfolio and the core deposit intangible for the Carolina First banking segment for purposes of performing Step 2. (The remaining $12.5 million of goodwill for other segments was related to TSFG’s insurance operations and was not evaluated for impairment on an interim basis based on operating results.) Based on changes in management’s views on its current outlook and the review by the t hird party, the Company lowered the terminal growth rates to a range of 2% to 4% and increased the targeted capital level allocated to the Carolina First reporting unit to reflect current industry conditions and company-specific expectations as part of its Step 1 analysis. Although the valuation with the updated assumptions continued to indicate that the fair value of the Carolina First reporting unit was less than its carrying value, Step 2 of the evaluation indicated that the implied fair value of the goodwill was greater than its carrying value at September 30, 2009, primarily due to the excess of the book value of the Carolina First loan portfolio over its fair value based on exit price, and no impairment was recorded. No formal impairment evaluation was performed at December 31, 2009 since there were no material changes to the assumptions and expectations used as of September 30, 2009.
In the current environment, forecasting cash flows, credit losses and growth in addition to valuing the Company’s assets with any degree of assurance is very difficult and subject to significant changes over very short periods of time. Management will continue to update its analysis as circumstances change, and as market conditions continue to be volatile and unpredictable. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test at September 30, 2009, we estimated that, holding the other valuation assumptions constant, a 100 basis point reduction in the range of terminal growth rates applied to the terminal cash flows of the Carolina First reporting unit, which has been allocated the majority of the remaining goodwill, would result in an estimated 5% decrease in its fair value. A 100 b asis point increase in the range of discount rates would result in an estimated 8% reduction in the fair value of Carolina First. The Company also determined that a 10% reduction in the fair value of the Carolina First reporting unit would have resulted in the carrying value of its goodwill exceeding the implied fair value in Step 2, resulting in impairment. Accordingly, based on these sensitivity analyses and the possibility of changes in the fair value of the Carolina First reporting unit’s assets and liabilities, particularly loans, the Company has concluded that it is reasonably possible that the Carolina First reporting unit may become impaired in future periods.
During second quarter 2009, TSFG recorded a $2.1 million goodwill impairment charge on one of its nonbank subsidiaries based on discounted cash flows and estimated market valuations. Also in second quarter 2009, TSFG recorded a $411,000 goodwill impairment charge in its Retirement Plan Administration reporting unit due to its decision to sell its subsidiary, American Pensions, Inc. Both of these reporting units were sold during third quarter 2009.
During first quarter 2008, TSFG recognized $188.4 million in goodwill impairment in the Mercantile banking segment primarily due to increased projected credit costs and a related decrease in projected loan growth, as well as changes in the measurement of segment profitability. During fourth quarter 2008, TSFG recognized an additional $237.6 million of goodwill impairment primarily due to an increase in the discount rate used for valuing future cash flows of our Mercantile reporting unit and a reduction in the projected cash flows primarily over the next two years. The range of discount rates used increased to 14% to 18% at December 31, 2008 (from 10% to 14% in prior evaluations) due to increases in overall stock market volatility as well as volatility of our stock.
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 2009, we sold $65.7 million of OREO and incurred losses of $10.5 million. Due to continuing weak market conditions, we revalued our OREO during second quarter 2009 and also changed our policies to record such assets at 70% of the most recent appraised value versus our previous practice of 80%. The result of the revaluation and change in policy was a downward adjustment in values by $21.9 million during 2009. At December 31, 2009, the carrying value of OREO totaled $122.1 million, compared to $44.7 million at December 31, 2008, and was included in other assets. Table 17 presents a rollforward of OREO, while Table 18 presents an OREO aging as of December 31, 2009.
| Table 17 | |
| OREO Rollforward | |
| (dollars in thousands) | | | | | | |
| | | Years Ended December 31, | |
| | | 2009 | | | 2008 | |
| Balance at beginning of year | | $ | 44,668 | | | $ | 6,467 | |
| Loans transferred in | | | 165,061 | | | | 51,158 | |
| Sales | | | (65,696 | ) | | | (11,907 | ) |
| Write-downs | | | (21,947 | ) | | | (1,050 | ) |
| Balance at end of year | | $ | 122,086 | | | $ | 44,668 | |
| Table 18 | |
| Number of Months in OREO at December 31, 2009 | |
| (dollars in thousands) | | | |
| | | | |
| Less than three months | | $ | 36,390 | |
| Three months or more, but less than six months | | | 27,137 | |
| Six months or more, but less than nine months | | | 24,684 | |
| Nine months or more, but less than twelve months | | | 16,062 | |
| Twelve months or more | | | 17,813 | |
| Total OREO | | $ | 122,086 | |
Impairment of Long-Lived Assets
During 2005, TSFG initiated plans for a “corporate campus” to meet current and future facility needs and serve as the primary headquarters for its banking operations. During 2009, TSFG announced its intention to market its campus facility for sale. The campus site contains approximately 60 acres. Two office buildings have been completed, the conference center is substantially complete, and ten additional building sites are available. At December 31, 2009, TSFG occupied approximately 20% of the available space in the office buildings at the campus in order to house certain of its operations that were previously located in facilities with leases expiring in 2009 or early 2010.
Based on the fair value of the property as determined by third-party appraisal, TSFG recorded impairment charges of $19.4 million in 2009, which are included in noninterest expense. In determining the impairment charge, the cost basis was reduced by the estimated net realizable value of state tax credits available to TSFG, which can be transferable in certain conditions. At December 31, 2009, the carrying amount of the campus was $56.1 million and the carrying amount of the state tax credits was $7.6 million. Management will continue to monitor market conditions and offered prices, and further write-downs could be required in future periods.
TSFG also recorded a $612,000 impairment loss (included in noninterest expense) from the write-down of the corporate jet which was classified as an asset held for sale in 2009. The corporate jet was subsequently sold during 2009 with no significant gain or loss on the sale.
In addition, during 2009, TSFG recorded $1.6 million in impairment losses (also included in noninterest expense) associated with vacated branches and office locations, primarily attributable to subletting office space at less than the contractual lease rate.
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, 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 2009 and 2008, TSFG recorded credit losses of $1.9 million and $815,000, respectively, 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 December 31, 2009, the total fair value of TSFG’s customer swap derivative assets was $25.7 mi llion.
In 2008, TSFG had counterparty credit exposure to Lehman Brothers Special Financing, Inc. (“LBSF”) in connection with derivatives. LBSF’s parent company filed for bankruptcy in 2008, triggering an event of default under the derivative agreement, resulting in termination. During fourth quarter 2008, TSFG recognized a loss related to the termination in the amount of $1.1 million, representing the excess of the value of the securities collateral held by LBSF above the amounts owed by TSFG under the agreement.
Please see Item 8, Notes 1 and 15 to the Consolidated Financial Statements for a description of TSFG’s significant accounting policies and additional information on derivatives.
Deposits
Deposits remain TSFG's primary source of funds. Average customer deposits equaled 66.1% of average total funding in 2009 and 61.9% in 2008. 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 19 shows the breakdown of total deposits by type of deposit and the respective percentage of total deposits, while Table 20 shows the breakdown of customer funding by type.
| Table 19 | |
| Types of Deposits | |
| (dollars in thousands) | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Noninterest-bearing demand deposits | | $ | 1,124,404 | | | $ | 1,041,140 | | | $ | 1,127,657 | | | $ | 1,280,908 | | | $ | 1,458,914 | |
| Interest-bearing checking | | | 1,060,470 | | | | 1,078,921 | | | | 1,117,850 | | | | 1,208,125 | | | | 1,162,891 | |
| Money market accounts | | | 2,072,664 | | | | 1,834,115 | | | | 2,188,261 | | | | 2,435,413 | | | | 2,290,134 | |
| Savings accounts | | | 322,924 | | | | 190,519 | | | | 158,092 | | | | 181,192 | | | | 187,101 | |
| Core deposits | | | 4,580,462 | | | | 4,144,695 | | | | 4,591,860 | | | | 5,105,638 | | | | 5,099,040 | |
| Time deposits under $100,000 | | | 1,632,582 | | | | 1,863,520 | | | | 1,442,030 | | | | 1,272,056 | | | | 1,246,791 | |
| Time deposits of $100,000 or more | | | 1,137,067 | | | | 1,488,735 | | | | 1,496,270 | | | | 1,514,615 | | | | 1,549,925 | |
Customer deposits (1) | | | 7,350,111 | | | | 7,496,950 | | | | 7,530,160 | | | | 7,892,309 | | | | 7,895,756 | |
| Brokered deposits | | | 1,946,101 | | | | 1,908,767 | | | | 2,258,408 | | | | 1,624,431 | | | | 1,338,681 | |
| Total deposits | | $ | 9,296,212 | | | $ | 9,405,717 | | | $ | 9,788,568 | | | $ | 9,516,740 | | | $ | 9,234,437 | |
| | | | | | | | | | | | | | | | | | | | | |
| Percentage of Deposits | | | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing demand deposits | | | 12.1 | % | | | 11.1 | % | | | 11.5 | % | | | 13.4 | % | | | 15.8 | % |
| Interest-bearing checking | | | 11.4 | | | | 11.5 | | | | 11.4 | | | | 12.7 | | | | 12.6 | |
| Money market accounts | | | 22.3 | | | | 19.5 | | | | 22.4 | | | | 25.6 | | | | 24.8 | |
| Savings accounts | | | 3.5 | | | | 2.0 | | | | 1.6 | | | | 1.9 | | | | 2.0 | |
| Core deposits | | | 49.3 | | | | 44.1 | | | | 46.9 | | | | 53.6 | | | | 55.2 | |
| Time deposits under $100,000 | | | 17.6 | | | | 19.8 | | | | 14.7 | | | | 13.4 | | | | 13.5 | |
| Time deposits of $100,000 or more | | | 12.2 | | | | 15.8 | | | | 15.3 | | | | 15.9 | | | | 16.8 | |
Customer deposits (1) | | | 79.1 | | | | 79.7 | | | | 76.9 | | | | 82.9 | | | | 85.5 | |
| Brokered deposits | | | 20.9 | | | | 20.3 | | | | 23.1 | | | | 17.1 | | | | 14.5 | |
| Total deposits | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| (1) | TSFG defines customer deposits as total deposits less brokered deposits. |
| Table 20 | |
| Types of Customer Funding | |
| (dollars in thousands) | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Customer deposits (1) | | $ | 7,350,111 | | | $ | 7,496,950 | | | $ | 7,530,160 | | | $ | 7,892,309 | | | $ | 7,895,756 | |
Customer sweep accounts (2) | | | 316,690 | | | | 493,012 | | | | 648,311 | | | | 500,288 | | | | 305,815 | |
| Customer funding | | $ | 7,666,801 | | | $ | 7,989,962 | | | $ | 8,178,471 | | | $ | 8,392,597 | | | $ | 8,201,571 | |
| (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 December 31, 2009, period-end customer funding decreased $323.2 million, or 4.0%, from December 31, 2008, as increases in lower-cost core deposit categories generated by a deposit campaign in 2009 were more than offset by decreases in time deposits and customer sweep accounts. Public deposits totaled $749.1 million at December 31, 2009, compared to $697.2 million at December 31, 2008 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 ($293.9 million at December 31, 2009) and 2) Eurodollar deposits ($22.8 million at December 31, 2009). These balances are tied directly to commercial customer checking accounts, including public funds depositors, and generate treasury services noninterest income.
TSFG uses brokered deposits and other borrowed funds as an alternative funding source while continuing its efforts to maintain and grow its local customer funding base.
Average customer funding equaled 69.2% of average total funding for 2009 and 66.7% for 2008. Period-end customer funding increased to 71.4% of total funding at December 31, 2009, compared to 68.1% at December 31, 2008, due primarily to the decline in wholesale borrowings attributable to the sales of loans and securities during 2009. As part of its overall funding strategy, 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. Deposi t 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 market environment.
TSFG elected to continue its participation in the FDIC’s Transaction Account Guarantee Program (the “TAGP”). Under the program, through June 30, 2010, all noninterest-bearing transaction accounts and certain interest-bearing checking accounts (for which the rate paid will not exceed 50 basis points) are fully guaranteed by the FDIC for the entire amount in the account. TSFG estimates that deposits that are neither insured nor collateralized would increase from approximately $265 million at December 31, 2009 to approximately $750 million without the benefit of the TAGP.
| Table 21 | |
| Maturity Distribution of and Rates on Time Deposits | |
| (dollars in thousands) | |
| | | | | | | | | | | | | | | | |
| | | Customer Time Deposits | | | Brokered Deposits | | | Total | |
| | | | | | Average | | | | | | Average | | | | |
| | | Balance | | | Rate | | | Balance | | | Rate | | | Balance | |
| | | | | | | | | | | | | | | | |
| Three months or less | | $ | 338,224 | | | | 1.87 | % | | $ | 176,094 | | | | 3.70 | % | | $ | 514,318 | |
| Over three through six months | | | 305,272 | | | | 1.97 | | | | 209,695 | | | | 2.15 | | | | 514,967 | |
| Over six through twelve months | | | 1,322,629 | | | | 2.86 | | | | 419,989 | | | | 2.81 | | | | 1,742,618 | |
| Over twelve months | | | 803,524 | | | | 2.66 | | | | 1,140,323 | | | | 2.83 | | | | 1,943,847 | |
| Total outstanding | | $ | 2,769,649 | | | | 2.58 | % | | $ | 1,946,101 | | | | 2.83 | % | | $ | 4,715,750 | |
| Table 22 | |
| Maturity Distribution of Time Deposits of $100,000 or More | |
| (dollars in thousands) | | | |
| | | | |
| Three months or less | | $ | 151,492 | |
| Over three through six months | | | 117,986 | |
| Over six through twelve months | | | 573,518 | |
| Over twelve months | | | 294,071 | |
| Total outstanding | | $ | 1,137,067 | |
Borrowed Funds
Table 23 shows the breakdown of total borrowed funds by type.
| Table 23 | |
| Types of Borrowed Funds | |
| (dollars in thousands) | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Short-Term Borrowings | | | | | | | | | | | | | | | |
| Customer sweep accounts | | $ | 316,690 | | | $ | 493,012 | | | $ | 648,311 | | | $ | 500,288 | | | $ | 305,815 | |
| Treasury, tax and loan note | | | 5,987 | | | | 3,516 | | | | 752,195 | | | | 139,989 | | | | 20,131 | |
| Federal funds purchased and repurchase agreements | | | 25 | | | | 67,309 | | | | 206,216 | | | | 920,811 | | | | 1,115,486 | |
| Federal Reserve borrowings | | | - | | | | 1,050,000 | | | | - | | | | - | | | | - | |
| Commercial paper | | | - | | | | 12,537 | | | | 30,828 | | | | 32,631 | | | | 32,933 | |
| FHLB advances | | | - | | | | - | | | | - | | | | 175,000 | | | | - | |
| | | | 322,702 | | | | 1,626,374 | | | | 1,637,550 | | | | 1,768,719 | | | | 1,474,365 | |
| Long-Term Borrowings | | | | | | | | | | | | | | | | | | | | |
| FHLB advances, net of discount | | | 752,646 | | | | 233,497 | | | | 223,087 | | | | 328,113 | | | | 852,140 | |
| Repurchase agreements | | | 125,000 | | | | 200,000 | | | | 200,000 | | | | 521,000 | | | | 821,000 | |
| Subordinated notes | | | 206,704 | | | | 216,704 | | | | 216,704 | | | | 188,871 | | | | 155,695 | |
| Mandatorily redeemable preferred stock of REIT subsidiary | | | 31,800 | | | | 56,800 | | | | 56,800 | | | | 89,800 | | | | 89,800 | |
| Note payable | | | 719 | | | | 768 | | | | 786 | | | | 828 | | | | 865 | |
| Employee stock ownership plan note payable | | | - | | | | - | | | | - | | | | 200 | | | | 500 | |
| Purchase accounting premiums, net of amortization | | | - | | | | - | | | | 963 | | | | 1,663 | | | | 2,151 | |
| Total long-term borrowings | | | 1,116,869 | | | | 707,769 | | | | 698,340 | | | | 1,130,475 | | | | 1,922,151 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total borrowings | | | 1,439,571 | | | | 2,334,143 | | | | 2,335,890 | | | | 2,899,194 | | | | 3,396,516 | |
| Less: customer sweep accounts | | | (316,690 | ) | | | (493,012 | ) | | | (648,311 | ) | | | (500,288 | ) | | | (305,815 | ) |
Add: brokered deposits(1) | | | 1,946,101 | | | | 1,908,767 | | | | 2,258,408 | | | | 1,624,431 | | | | 1,338,681 | |
| Total wholesale borrowings | | $ | 3,068,982 | | | $ | 3,749,898 | | | $ | 3,945,987 | | | $ | 4,023,337 | | | $ | 4,429,382 | |
| Total wholesale borrowings as a percentage of total assets | | | 25.8 | % | | | 27.6 | % | | | 28.4 | % | | | 28.3 | % | | | 30.9 | % |
| (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 2009, average borrowings totaled $1.8 billion, compared with $2.4 billion in 2008.
Period-end wholesale borrowings decreased to $3.1 billion at December 31, 2009, compared to $3.7 billion at December 31, 2008 primarily due to sales of loans and securities during 2009. TSFG also shifted into borrowings with remaining maturities of more than one year in order to strengthen liquidity.
Table 24 shows balance and interest rate information on selected short-term borrowings. Balances in these accounts can fluctuate on a day-to-day basis based on availability of collateral and overall funding needs.
| Table 24 | |
| Selected Short-Term Borrowings Data | |
| (dollars in thousands) | |
| | | Maximum | | | | | | | | | | | | Interest | |
| | | Outstanding | | | | | | | | | | | | Rate at | |
| | | at any | | | Average | | | Average | | | Ending | | | Year | |
| Year Ended December 31, | | Month End | | | Balance | | | Interest Rate | | | Balance | | | End | |
| | | | | | | | | | | | | | | | |
| 2009 | | | | | | | | | | | | | | | |
| Customer sweep accounts | | $ | 466,967 | | | $ | 353,830 | | | | 0.29 | % | | $ | 316,690 | | | | 0.33 | % |
| Federal funds purchased and repurchase agreements | | | 197,309 | | | | 47,000 | | | | 0.25 | | | | 25 | | | | 0.63 | |
| Federal Reserve borrowings | | | 1,200,000 | | | | 387,619 | | | | 0.26 | | | | - | | | | - | |
| Commercial paper | | | 2,476 | | | | 1,044 | | | | 2.63 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| 2008 | | | | | | | | | | | | | | | | | | | | |
| Customer sweep accounts | | $ | 741,206 | | | $ | 580,882 | | | | 1.98 | % | | $ | 493,012 | | | | 0.58 | % |
| Federal funds purchased and repurchase agreements | | | 589,229 | | | | 329,503 | | | | 2.52 | | | | 67,309 | | | | 0.05 | |
| Federal Reserve borrowings | | | 1,150,000 | | | | 478,954 | | | | 1.82 | | | | 1,050,000 | | | | 0.28 | |
| Commercial paper | | | 31,053 | | | | 22,507 | | | | 4.24 | | | | 12,537 | | | | 3.30 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2007 | | | | | | | | | | | | | | | | | | | | |
| Customer sweep accounts | | $ | 648,311 | | | $ | 525,606 | | | | 4.32 | % | | $ | 648,311 | | | | 3.79 | % |
| Federal funds purchased and repurchase agreements | | | 1,048,334 | | | | 767,413 | | | | 5.17 | | | | 206,216 | | | | 3.70 | |
| Commercial paper | | | 35,704 | | | | 33,454 | | | | 5.35 | | | | 30,828 | | | | 5.04 | |
In 2009, TSFG repurchased $25.0 million of mandatorily redeemable preferred stock of a REIT subsidiary (priced at LIBOR plus 350 basis points) included in long-term borrowings in Table 23 and recognized an $8.3 million gain on the extinguishment. In addition, TSFG terminated $75.0 million (4.3% rate) in long-term repurchase agreements, and recognized a loss on extinguishment of $5.4 million. In connection with the termination of the repurchase agreement, TSFG also sold U.S. government agency securities with a book value of approximately $120 million (3.6% yield) for a gain of $5.4 million.
During 2008, TSFG recognized a loss on early extinguishment of debt of $2.1 million, primarily due to prepayment penalties for FHLB advances partially offset by gains on brokered CDs for which the related swaps were called. During 2007, TSFG recognized a loss on early extinguishment of debt of $2.0 million, primarily from the write-off of unamortized debt issuance costs associated with the redemption of $131.5 million of subordinated notes and mandatorily redeemable preferred stock, with an average spread of 347 basis points over LIBOR.
Capital and Liquidity
Capital
Shareholders' equity totaled $993.2 million, or 8.3% of total assets, at December 31, 2009 compared with $1.6 billion, or 11.9% of total assets, at December 31, 2008. Shareholders' equity decreased primarily due to the net loss for 2009, partially offset by the net proceeds from the issuance of $85 million of common stock.
In connection with its capital plan announced in June 2009, TSFG issued $85 million of common equity in a public offering (with net proceeds of $79.7 million) and converted $90.9 million of Series 2008 Convertible Preferred Stock into 20.9 million common shares (including 6.9 million shares valued at $11.9 million as an inducement to convert). TSFG also exchanged $94.5 million of the Series 2008 Convertible Preferred Stock for a new series of preferred stock, Series 2009-A Convertible Preferred Stock, which automatically converted into 24.0 million common shares (including 9.4 million shares valued at $14.0 million as an inducement to convert) upon shareholder approval on September 11, 2009. In addition, TSFG sold ancillary businesses and reduced its assets during 2009, partly by sales of indirect auto loans and shared national credit s. During 2009, TSFG contributed $195 million to its subsidiary bank to increase its capital.
However, the significant loss in the second half of 2009, primarily related to credit losses and the valuation allowance on deferred tax assets, reduced tangible common equity to tangible assets to 3.67% at December 31, 2009, compared to 6.05% at
December 31, 2008. While TSFG’s regulatory ratios were not impacted by the valuation allowance, the tangible common equity ratio, which is an important measure to investors, debt rating agencies, and others, was significantly impacted by the valuation allowance. Accordingly, management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the conversion of certain debt and non-common equity instruments into common stock and/or cash and/or the issuance of additional equity in public or private offerings. No decision has been made and the company plans to conclude on such evaluations over the coming months and take such actions, if any, shortly thereafter. No assurance can be provided that the Company can or will undertake such actions.
In 2009, preferred stock dividends included $32.4 million treated as deemed dividends (non cash) to preferred shareholders resulting from induced conversions of $234.1 million of preferred stock into common shares. The deemed dividends had no effect on total equity or regulatory capital.
TSFG’s tangible equity to tangible asset ratio decreased to 6.54% at December 31, 2009, compared to 10.29% at December 31, 2008 primarily due to the 2009 net loss being partially offset by proceeds from the common stock offering and lower total assets. As interest rates increase, TSFG expects its unrealized gain on securities available for sale would decrease, leading to a lower tangible equity to tangible asset ratio, including accumulated other comprehensive income.
TSFG’s unrealized gain on securities available for sale and cash flow hedges, net of tax, which is included in accumulated other comprehensive income, decreased to $30.9 million at December 31, 2009, compared with $42.6 million at December 31, 2008 due primarily to an increase in long-term interest rates and realization of gains through sales of securities during 2009.
Common book value per common share at December 31, 2009 and 2008 was $3.05 and $14.12, respectively. The decrease in common book value per common share was primarily due to the issuance of 85 million common shares, the conversion of Series 2008 and Series 2009-A Convertible Preferred Stock into 54.9 million common shares, and the net loss during the period. Common tangible book value per common share at December 31, 2009 and 2008 was $1.98 and $10.83, 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 December 31, 2009, goodwill totaled $214.1 million, or $0.99 per share, and is not being amortized, while other intangibles totaled $15.7 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. TSFG and Carolina First Bank exceeded the well-capitalized regulatory requirements at December 31, 2009. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators, that, if undertaken, could have a direct material effect on our Consolidated Financial Statements. Based on the regulatory agencies’ view of projected future losses related to credit risk, the regulatory agencies could impose capital requirements exceeding the well-capitalized standards.
Table 25 sets forth various capital ratios for TSFG and Carolina First Bank. For further information regarding the regulatory capital of TSFG and Carolina First Bank, see Item 8, Note 24 to the Consolidated Financial Statements.
| Table 25 | |
| Capital Ratios | |
| | | | | | | |
| | | December 31, | | | Well Capitalized | |
| | | 2009 | | | Requirement | |
| TSFG | | | | | | |
| Total risk-based capital | | | 11.24 | % | | | n/a | |
| Tier 1 risk-based capital | | | 9.93 | | | | n/a | |
| Leverage ratio | | | 7.91 | | | | n/a | |
| | | | | | | | | |
| Carolina First Bank | | | | | | | | |
| Total risk-based capital | | | 10.55 | % | | | 10.00 | % |
| Tier 1 risk-based capital | | | 8.96 | | | | 6.00 | |
| Leverage ratio | | | 7.13 | | | | 5.00 | |
At December 31, 2009, 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 December 31, 2009, trust and REIT preferred securities accounted for 23.9% of TSFG’s tier 1 capital.
During 2009, TSFG recorded a valuation allowance against its deferred tax assets (see “Critical Accounting Policies and Estimates – Income Taxes”). For regulatory purposes, the deferred tax assets were already deducted from tier 1 and total capital ratios for both TSFG and Carolina First Bank as capital regulations limit the amount of deferred tax assets that are dependent upon future taxable income to the lesser of the amount of deferred tax assets that are expected to be realized within one year of the quarter-end date, based on the projected future taxable income for that year, or 10% of tier 1 capital. Accordingly, the valuation allowance did not impact TSFG’s well-capitalized status at December 31, 2009.
Carolina First Bank is subject to certain regulatory restrictions on the amount of dividends it is permitted to pay. During third quarter 2009, TSFG suspended its common dividend. Future TSFG common dividends will depend upon a number of factors, including payment of the preferred stock dividends, financial performance, capital requirements and assessment of capital needs. In addition, the Federal Reserve has the authority to prohibit TSFG from paying a dividend on its common and preferred stock and trust preferred securities. Subsequent to year-end, TSFG suspended dividends on all remaining outstanding equity and capital instruments. Based on informal communications from federal banking regulators, currently none of TSFG or Carolina First Bank, or any of their respective subsidiaries (including, but not limited to, the real estate in vestment trust subsidiary) are permitted to pay dividends on capital securities.
As mentioned above, failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators, that, if undertaken, could have a direct material effect on our Consolidated Financial Statements. For example, a depository institution is generally prohibited from making capital distributions, including paying dividends, or paying management fees to a holding company if the institution would thereafter be undercapitalized. Institutions that are adequately but not well capitalized cannot accept, renew or rollover brokered deposits except with a waiver from the FDIC and are subject to limitations on the maximum interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or rollover brokered deposits. For additional details regarding pote ntial consequences of a failure to meet the well-capitalized standards, see Item 1, “Supervision and Regulation -- Prompt Corrective Action.”
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 dividends (if any) and 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 December 31, 2009, Carolina First Bank could not pay any dividend to the parent company without prior regulatory approval. Through the Asset Liability Committee (“ALCO”), Corporate Treasury is responsible for planning and executing the funding activiti es 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. 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 aimed at acquiring new deposits from its customer base through its established branch network to enhance liquidity and reduce reliance on wholesale borrowing. Liquidity needs are a factor in developing the deposit pricing structure, which may be altered to retain or grow deposits as deemed necessary. However, TSFG may face regulatory limitations on the maximum rates it can pay on interest-bearing deposits if it falls below well capitalized.
As noted in Table 26 which follows, we have $2.8 billion of time deposits maturing in 2010, with maturities of customer and brokered CDs accounting for $2.0 billion and $805.8 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. We anticipate replacing brokered CD maturities through a combination of growth in core customer funding and balance sheet reductions. Our capacity to issue new brokered CDs could be significantly diminished or eliminated based on regulatory restrictions, our financial condition, our capital levels, and/or our performance.
Longer term funding needs are typically 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 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. Potential loss of deposits would be a primary funding need in a liquidity crisis. Deposit balances which are not covered by FDIC insurance total approximately $625 million currently, and would increase to approximately $1.5 billion without the benefit of the FDIC’s TAGP, currently scheduled to expire at June 30, 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 $265 million currently, and would increase to approximately $750 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 $350 million at December 31, 2009. Free secur ities of $1.2 billion would meet incremental collateral needs and, along with surplus cash of approximately $200 million at year-end, represent reserves to address liquidity needs in a crisis scenario.
During 2009 and early 2010, several rating agencies lowered the credit ratings for TSFG and/or Carolina First Bank. These ratings changes did not have a material impact on TSFG’s liquidity given that we have no debt for which a downgrade of our credit ratings would trigger early termination and a credit rating downgrade has not historically impacted access to our
primary funding sources. However, certain downgrade levels could require the Company to post additional collateral to secure certain transactions (derivatives and certain borrowings) or could enable certain counterparties to rescind the transaction at their option. Such requirements are not expected to materially impact the Company’s overall liquidity. In addition, certain borrowings, such as brokered CDs and FHLB advances, are dependent on various credit eligibility criteria which may be impacted by changes in the Company’s financial position and/or results of operations.
Given the weakened economy, current market conditions, and our recent credit ratings downgrades, 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. Due to these factors, 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 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 its needs. Table 26 summarizes future contractual obligations as of December 31, 2009. Table 26 does not include payments which may be required under employment and deferred compensation agreements (see Item 8, Note 28 of the Consolidated Financial Statements) or loan commitments (see Item 8, Note 21 of the Consolidated Financial Statements). In addition, Table 26 does not include payments required for interest and income taxes (see Item 8, Consolidated Statements of Cash Flows for details on interest and income taxes paid for 2009).
| Table 26 | |
| Contractual Obligations | |
| (dollars in thousands) | |
| | | Payments Due by Period | |
| | | | | | Less | | | | | | | | | | |
| | | | | | than 1 | | | 1-3 | | | 4-5 | | | After 5 | |
| | | Total | | | Year | | | Years | | | Years | | | Years | |
| Customer time deposits | | $ | 2,769,649 | | | $ | 1,966,125 | | | $ | 780,762 | | | $ | 18,726 | | | $ | 4,036 | |
| Brokered deposits | | | 1,946,101 | | | | 805,778 | | | | 1,039,542 | | | | 66,994 | | | | 33,787 | |
| Total time deposits | | | 4,715,750 | | | | 2,771,903 | | | | 1,820,304 | | | | 85,720 | | | | 37,823 | |
| Short-term borrowings | | | 322,702 | | | | 322,702 | | | | - | | | | - | | | | - | |
| Long-term debt - parent company | | | 206,704 | | | | - | | | | - | | | | - | | | | 206,704 | |
| Long-term debt - Carolina First Bank | | | 910,896 | | | | 179 | | | | 681,416 | | | | 200,267 | | | | 29,034 | |
| Total long-term debt | | | 1,117,600 | | | | 179 | | | | 681,416 | | | | 200,267 | | | | 235,738 | |
| Operating leases | | | 176,044 | | | | 17,490 | | | | 34,141 | | | | 29,879 | | | | 94,534 | |
| Total contractual cash obligations | | $ | 6,332,096 | | | $ | 3,112,274 | | | $ | 2,535,861 | | | $ | 315,866 | | | $ | 368,095 | |
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 December 31, 2009, 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 paid 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 27 presents average balance sheets and a net interest income analysis on a tax equivalent basis for each of the years in the three-year period ended December 31, 2009. Table 28 provides additional an alysis of the effects of volume and rate on net interest income.
| Table 27 | |
| Comparative Average Balances - Yields and Costs | |
| (dollars in thousands) | |
| | | Years Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | Average | | | Income/ | | | Yield/ | | | Average | | | Income/ | | | Yield/ | | | Average | | | Income/ | | | Yield/ | |
| | | Balance | | | Expense | | | Rate | | | Balance | | | Expense | | | Rate | | | Balance | | | Expense | | | Rate | |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans (1) | | $ | 9,478,536 | | | $ | 466,493 | | | | 4.92 | % | | $ | 10,374,423 | | | $ | 629,966 | | | | 6.07 | % | | $ | 10,013,387 | | | $ | 764,828 | | | | 7.64 | % |
Investment securities, taxable (2) | | | 1,786,429 | | | | 73,527 | | | | 4.12 | | | | 1,788,333 | | | | 81,744 | | | | 4.57 | | | | 2,165,589 | | | | 103,525 | | | | 4.78 | |
Investment securities, nontaxable (2) (3) | | | 232,416 | | | | 12,131 | | | | 5.22 | | | | 299,412 | | | | 15,299 | | | | 5.11 | | | | 359,728 | | | | 17,847 | | | | 4.96 | |
| Total investment securities | | | 2,018,845 | | | | 85,658 | | | | 4.24 | | | | 2,087,745 | | | | 97,043 | | | | 4.65 | | | | 2,525,317 | | | | 121,372 | | | | 4.81 | |
| Federal funds sold and interest-bearing bank balances | | | 227 | | | | 1 | | | | 0.44 | | | | 16,825 | | | | 385 | | | | 2.29 | | | | 6,519 | | | | 402 | | | | 6.17 | |
| Total earning assets | | | 11,497,608 | | | $ | 552,152 | | | | 4.80 | | | | 12,478,993 | | | $ | 727,394 | | | | 5.83 | | | | 12,545,223 | | | $ | 886,602 | | | | 7.07 | |
| Non-earning assets | | | 1,322,089 | | | | | | | | | | | | 1,354,362 | | | | | | | | | | | | 1,499,342 | | | | | | | | | |
| Total assets | | $ | 12,819,697 | | | | | | | | | | | $ | 13,833,355 | | | | | | | | | | | $ | 14,044,565 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing checking | | $ | 1,054,372 | | | $ | 3,012 | | | | 0.29 | | | $ | 1,104,088 | | | $ | 11,127 | | | | 1.01 | | | $ | 1,140,753 | | | $ | 22,141 | | | | 1.94 | |
| Savings | | | 236,369 | | | | 2,363 | | | | 1.00 | | | | 156,464 | | | | 1,504 | | | | 0.96 | | | | 174,100 | | | | 2,756 | | | | 1.58 | |
| Money market | | | 2,013,132 | | | | 28,033 | | | | 1.39 | | | | 2,014,702 | | | | 49,557 | | | | 2.46 | | | | 2,275,380 | | | | 89,338 | | | | 3.93 | |
| Time deposits, excluding brokered deposits | | | 2,985,683 | | | | 96,160 | | | | 3.22 | | | | 3,153,991 | | | | 125,475 | | | | 3.98 | | | | 2,900,260 | | | | 144,299 | | | | 4.98 | |
| Brokered deposits | | | 1,972,847 | | | | 61,018 | | | | 3.09 | | | | 2,205,481 | | | | 87,340 | | | | 3.96 | | | | 2,114,211 | | | | 109,761 | | | | 5.19 | |
| Total interest-bearing deposits | | | 8,262,403 | | | | 190,586 | | | | 2.31 | | | | 8,634,726 | | | | 275,003 | | | | 3.18 | | | | 8,604,704 | | | | 368,295 | | | | 4.28 | |
| Customer sweep accounts | | | 353,830 | | | | 1,011 | | | | 0.29 | | | | 580,882 | | | | 11,519 | | | | 1.98 | | | | 525,606 | | | | 22,723 | | | | 4.32 | |
Other borrowings (4) | | | 1,459,355 | | | | 24,777 | | | | 1.70 | | | | 1,814,120 | | | | 55,355 | | | | 3.05 | | | | 1,938,851 | | | | 106,557 | | | | 5.50 | |
| Total interest-bearing liabilities | | | 10,075,588 | | | $ | 216,374 | | | | 2.15 | | | | 11,029,728 | | | $ | 341,877 | | | | 3.10 | | | | 11,069,161 | | | $ | 497,575 | | | | 4.50 | |
| Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing deposits | | | 1,080,503 | | | | | | | | | | | | 1,055,855 | | | | | | | | | | | | 1,200,663 | | | | | | | | | |
| Other noninterest-bearing liabilities | | | 213,333 | | | | | | | | | | | | 189,691 | | | | | | | | | | | | 231,189 | | | | | | | | | |
| Total liabilities | | | 11,369,424 | | | | | | | | | | | | 12,275,274 | | | | | | | | | | | | 12,501,013 | | | | | | | | | |
| Shareholders' equity | | | 1,450,273 | | | | | | | | | | | | 1,558,081 | | | | | | | | | | | | 1,543,552 | | | | | | | | | |
| Total liabilities and shareholders' equity | | $ | 12,819,697 | | | | | | | | | | | $ | 13,833,355 | | | | | | | | | | | $ | 14,044,565 | | | | | | | | | |
| Net interest income (tax-equivalent) | | | | | | $ | 335,778 | | | | 2.92 | % | | | | | | $ | 385,517 | | | | 3.09 | % | | | | | | $ | 389,027 | | | | 3.10 | % |
Less: tax-equivalent adjustment (3) | | | | | | | 4,246 | | | | | | | | | | | | 5,354 | | | | | | | | | | | | 6,246 | | | | | |
| Net interest income | | | | | | $ | 331,532 | | | | | | | | | | | $ | 380,163 | | | | | | | | | | | $ | 382,781 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Supplemental data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customer funding(5) | | $ | 7,723,889 | | | $ | 130,579 | | | | 1.69 | % | | $ | 8,065,982 | | | $ | 199,182 | | | | 2.47 | % | | $ | 8,216,762 | | | $ | 281,257 | | | | 3.42 | % |
Wholesale borrowings (6) | | | 3,432,202 | | | | 85,795 | | | | 2.50 | | | | 4,019,601 | | | | 142,695 | | | | 3.55 | | | | 4,053,062 | | | | 216,318 | | | | 5.34 | |
Total funding (7) | | $ | 11,156,091 | | | $ | 216,374 | | | | 1.94 | % | | $ | 12,085,583 | | | $ | 341,877 | | | | 2.83 | % | | $ | 12,269,824 | | | $ | 497,575 | | | | 4.06 | % |
| (1) | Nonaccrual loans are included in average balances for yield computations. |
| (2) | The average balances for investment securities exclude the unrealized 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) | During the years ended December 31, 2009, 2008, and 2007 TSFG capitalized $738,000, $1.6 million, and $505,000, respectively, of interest in conjunction with its planned corporate campus. |
| (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.
| Table 28 | |
| Rate/Volume Variance Analysis | |
| (dollars in thousands) | | | | | | | | | | | | | | | | | | | |
| | | 2009 Compared to 2008 | | | 2008 Compared to 2007 | |
| | | Total | | | Change in | | | Change in | | | Total | | | Change in | | | Change in | |
| | | Change | | | Volume | | | Rate | | | Change | | | Volume | | | Rate | |
| Earning assets | | | | | | | | | | | | | | | | | | | |
| Loans | | $ | (163,473 | ) | | $ | (51,174 | ) | | $ | (112,299 | ) | | $ | (134,862 | ) | | $ | 26,731 | | | $ | (161,593 | ) |
| Investment securites, taxable | | | (8,217 | ) | | | (87 | ) | | | (8,130 | ) | | | (21,781 | ) | | | (17,403 | ) | | | (4,378 | ) |
| Investment securites, nontaxable | | | (3,168 | ) | | | (3,490 | ) | | | 322 | | | | (2,548 | ) | | | (3,068 | ) | | | 520 | |
| Federal funds sold and interest-bearing bank balances | | | (384 | ) | | | (211 | ) | | | (173 | ) | | | (17 | ) | | | 350 | | | | (367 | ) |
| Total interest income | | | (175,242 | ) | | | (54,962 | ) | | | (120,280 | ) | | | (159,208 | ) | | | 6,610 | | | | (165,818 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing checking | | | (8,115 | ) | | | (480 | ) | | | (7,635 | ) | | | (11,014 | ) | | | (690 | ) | | | (10,324 | ) |
| Savings | | | 859 | | | | 797 | | | | 62 | | | | (1,252 | ) | | | (257 | ) | | | (995 | ) |
| Money market | | | (21,524 | ) | | | (39 | ) | | | (21,485 | ) | | | (39,781 | ) | | | (9,338 | ) | | | (30,443 | ) |
| Time deposits | | | (29,315 | ) | | | (6,417 | ) | | | (22,898 | ) | | | (18,824 | ) | | | 11,855 | | | | (30,679 | ) |
| Brokered deposits | | | (26,322 | ) | | | (8,557 | ) | | | (17,765 | ) | | | (22,421 | ) | | | 4,565 | | | | (26,986 | ) |
| Total interest-bearing deposits | | | (84,417 | ) | | | (14,696 | ) | | | (69,721 | ) | | | (93,292 | ) | | | 6,135 | | | | (99,427 | ) |
| Customer sweep accounts | | | (10,508 | ) | | | (3,817 | ) | | | (6,691 | ) | | | (11,204 | ) | | | 2,315 | | | | (13,519 | ) |
| Other borrowings | | | (30,578 | ) | | | (9,356 | ) | | | (21,222 | ) | | | (51,202 | ) | | | (6,470 | ) | | | (44,732 | ) |
| Total interest expense | | | (125,503 | ) | | | (27,869 | ) | | | (97,634 | ) | | | (155,698 | ) | | | 1,980 | | | | (157,678 | ) |
| Net interest income | | $ | (49,739 | ) | | $ | (27,093 | ) | | $ | (22,646 | ) | | $ | (3,510 | ) | | $ | 4,630 | | | $ | (8,140 | ) |
Note: Changes that are not solely attributable to volume or rate have been allocated to volume and rate on a pro-rata basis.
Fully tax-equivalent net interest income decreased to $335.8 million in 2009 from $385.5 million in 2008 and $389.0 million in 2007 primarily due to the decline in average earning assets and the impact of higher levels of nonperforming assets. TSFG’s average earning assets decreased to $11.5 billion in 2009 compared to $12.5 billion in 2008, primarily due to sales and liquidations of problem loans, net loan charge-offs, and reductions of loans with limited relationship opportunity. Average loans as a percentage of average earning assets was 82.4% for 2009, compared to 83.1% for 2008. At December 31, 2009, approximately 56% of TSFG’s accruing loans were variable rate loans, the majority of which are tied to the prime rate. TSFG has entered into receive-fixed interest rate swaps to hedge the forecasted interest income from c ertain 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 dedesignated in early 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. At December 31, 2009, loans with floating rates, primarily limited to prime or LIBOR, included loans with floors totaling $1.3 billion with an average floor of 5.10%.
The net interest margin for 2009 was 2.92%, compared with 3.09% for 2008 and 3.10% for 2007. Net interest income and the net interest margin have been negatively impacted in 2009 and 2008 by elevated levels of nonperforming assets and the reversal of accrued interest income as loans have been moved to nonaccrual status. In 2009 and 2008, credit had an approximate adverse impact of 34 basis points and 29 basis points, respectively, on the net interest margin from interest reversals on nonaccrual loans, which totaled $15.5 million and $12.6 million, respectively, as well as the carrying amount associated with nonperforming assets. During 2009, in order to manage liquidity, TSFG increased the level of excess cash it maintains, as well as shifted into funding with longer maturities (see Table 23 Types of Borrowed Funds), which is generall y more expensive than overnight borrowings. These actions had an adverse impact on TSFG’s net interest margin during 2009.
Comparing 2008 to 2007, the adverse effects attributable to credit were partially offset by the issuance of preferred stock.
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 $668.9 million, $344.6 million, and $68.6 million in 2009, 2008, and 2007, respectively. In 2009 and 2008, the higher provision largely reflected credit deterioration due to continued weakness in housing markets, migration of loans to higher risk categories, and additional reserves for nonperforming loans and land loans. The allowance for credit losses equaled 4.45% and 2.45% of loans held for investment at December 31, 2009 and 2008, respectively.
Net loan charge-offs were $541.2 million, or 5.72% of average loans held for investment in 2009, compared with $223.4 million, or 2.16% of average loans held for investment in 2008. 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 29 shows the components of noninterest income during the three years ended December 31, 2009.
| Table 29 | |
| Components of Noninterest Income | |
| (dollars in thousands) | |
| | | Years Ended December 31, | |
| | | 2009 | | | | 2008 | | | | 2007 | |
| Service charges on deposit accounts | | $ | 39,659 | | | $ | 42,940 | | | $ | 44,519 | |
| Debit card income, net | | | 8,305 | | | | 7,805 | | | | 7,182 | |
| Customer service fee income | | | 4,839 | | | | 5,335 | | | | 5,648 | |
| Total customer fee income | | | 52,803 | | | | 56,080 | | | | 57,349 | |
| | | | | | | | | | | | | |
| Insurance income | | | 7,800 | | | | 10,082 | | | | 12,029 | |
| Retail investment services, net | | | 7,703 | | | | 7,711 | | | | 7,902 | |
| Trust and investment management income | | | 5,135 | | | | 6,688 | | | | 6,595 | |
| Benefits administration fees | | | 1,213 | | | | 3,136 | | | | 3,261 | |
| Total wealth management income | | | 21,851 | | | | 27,617 | | | | 29,787 | |
| | | | | | | | | | | | | |
| Bank-owned life insurance income | | | 9,515 | | | | 12,877 | | | | 13,344 | |
| Gain (loss) on securities | | | 8,034 | | | | 3,108 | | | | (4,623 | ) |
| Gain on sale of ancillary businesses | | | 7,234 | | | | - | | | | - | |
| Mortgage banking income | | | 5,694 | | | | 5,260 | | | | 6,053 | |
| Gain (loss) on trading and certain derivative activities | | | 3,849 | | | | (207 | ) | | | (1,197 | ) |
| Merchant processing income, net | | | 2,018 | | | | 3,279 | | | | 3,263 | |
| Gain on Visa IPO share redemption | | | - | | | | 1,904 | | | | - | |
| Other | | | 7,035 | | | | 12,049 | | | | 9,736 | |
| Total noninterest income | | $ | 118,033 | | | $ | 121,967 | | | $ | 113,712 | |
Noninterest income decreased to $118.0 million in 2009 from $122.0 million in 2008, reflecting decreases in most categories. Total customer fee income and wealth management income continued to decrease partially due to the effects of the economic downturn, such as fewer customer transactions and lower asset valuations. Net debit card income was an exception, as increased transactions led to an overall increase in this line item. During third quarter 2009, TSFG sold three ancillary businesses: its merchant processing portfolio, a financial planning group, and a retirement plan administrator. Although these sales resulted in a $7.2 million gain, they reduced the respective line items in which the businesses were previously included. For the period in 2009 prior to the sales, these businesses reported $5.1 million in noninterest income ( $2.0 million merchant processing income, $1.2 million benefits administration fees, and $1.9 million included in insurance, retail investment services, and trust and investment management income). An additional deferred gain of approximately $6 million related to the sale of the merchant processing portfolio may be recognized over the next two years.
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.
Bank-owned life insurance income decreased to $9.5 million in 2009, partly due to a $1.0 million adjustment to the cash surrender value due to various provisions of stable value contracts and fluctuations in the amounts of life insurance proceeds received during the year. Mortgage banking income increased 8.3% for the year ended 2009 compared to 2008. Mortgage loans originated by TSFG originators totaled $320.7 million and $278.3 million for the years ended 2009 and 2008, respectively. Gain on certain derivative activities increased $4.1 million, primarily due to recording changes in the value of interest rate swaps no longer qualifying for hedge accounting and the ineffectiveness of other hedging relationships. For the year ended 2009, gain on securities included gains on the sale of municipal securities and U.S. government agency se curities (see “Securities”), partially offset by $4.3 million in other-than-temporary impairment on certain community bank-related equity securities and privately held investments included in other assets.
Comparing 2008 to 2007, noninterest income increased $8.3 million to $122.0 million due primarily to a gain on mandatory partial redemption of shares received in the Visa IPO of $1.9 million and a net gain on securities of $3.1 million in 2008 compared to a $4.6 million net loss on securities in 2007. The 2008 gain included other-than-temporary impairment recorded on corporate bonds, community bank-related equity investments, and other investments, which was more than offset by realized gains. The 2007 loss included other-than-temporary impairment of $2.9 million on corporate bonds and $2.0 million on non-marketable equity investments. Noninterest income also included a loss on certain derivative activities of $207,000 in 2008, compared with a loss of $1.2 million in 2007. These increases more than offset decreases in customer fee inc ome and wealth management income, which were partially due to the effects of the economic downturn. NSF fees, which are included in service charges on deposit accounts, continued their downward trend based on fewer opportunities to collect. Net debit card income was an exception, as increased transactions led to an 8.7% increase in this line item in 2008 relative to 2007. In addition, bank-owned life insurance income fluctuated based on the amount of life insurance proceeds received during the year, and mortgage banking income decreased principally as a result of lower origination volumes in response to industry conditions.
Other noninterest income also includes income related to international banking services, wire transfer fees, overdraft protection fee income, internet banking fees, swap fee income, and gains/losses on disposition of fixed assets.
Noninterest Expenses
Table 30 shows the components of noninterest expenses for the three years ended December 31, 2009.
| Table 30 | |
| Components of Noninterest Expense | |
| (dollars in thousands) | |
| | | Years Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Salaries and wages, excluding employment contracts and severance | | $ | 133,548 | | | $ | 144,037 | | | $ | 137,085 | |
| Employment contracts and severance | | | 829 | | | | 16,519 | | | | 2,306 | |
| Total salaries and wages | | | 134,377 | | | | 160,556 | | | | 139,391 | |
| | | | | | | | | | | | | |
| Occupancy | | | 38,200 | | | | 37,311 | | | | 34,659 | |
| Employee benefits | | | 32,893 | | | | 38,200 | | | | 37,098 | |
| Loss on other real estate owned | | | 32,435 | | | | 633 | | | | - | |
| Regulatory assessments | | | 29,293 | | | | 10,923 | | | | 2,628 | |
| Furniture and equipment | | | 27,758 | | | | 27,561 | | | | 26,081 | |
| Loan collection and foreclosed asset expense | | | 27,090 | | | | 12,431 | | | | 3,665 | |
| Impairment of long-lived assets | | | 21,600 | | | | - | | | | - | |
| Professional services | | | 16,768 | | | | 16,212 | | | | 17,062 | |
| Project NOW expense | | | 1,693 | | | | 271 | | | | - | |
| Loss on non-mortgage loans held for sale | | | 11,776 | | | | 283 | | | | - | |
| Telecommunications | | | 6,197 | | | | 6,140 | | | | 5,668 | |
| Advertising and business development | | | 5,947 | | | | 9,927 | | | | 7,401 | |
| Amortization of intangibles | | | 4,917 | | | | 6,138 | | | | 7,897 | |
| (Gain) loss on early extinguishment of debt | | | (3,043 | ) | | | 2,086 | | | | 2,029 | |
| Goodwill impairment | | | 2,511 | | | | 426,049 | | | | - | |
| Loss on repurchase of auction rate securities | | | 676 | | | | - | | | | - | |
| Loss on derivative collateral | | | - | | | | 1,061 | | | | - | |
| Branch acquisition and conversion costs | | | - | | | | 731 | | | | - | |
| Visa-related litigation | | | - | | | | (863 | ) | | | 881 | |
| Other | | | 28,033 | | | | 36,583 | | | | 36,789 | |
| Total noninterest expenses | | $ | 419,121 | | | $ | 792,233 | | | $ | 321,249 | |
Noninterest expenses decreased to $419.1 million in 2009 from $792.2 million in 2008. The acceleration of credit deterioration in Florida and overall adverse changes in the banking industry prompted TSFG to perform an interim impairment evaluation of the goodwill associated with its Mercantile banking segment at each quarter-end during 2008. The evaluations reflected decreases in projected cash flows for the Mercantile banking segment and increases in the discount rate used to value the cash flows, and accordingly the estimated fair value of the segment declined. This decline resulted in the recognition of goodwill impairment charges of $426.0 million in 2008.
Late in 2008, TSFG launched an internal efficiency and expense control project (“Project NOW”), the goal of which was to improve revenue and reduce annual operating expenses. As a result, salaries and wages (excluding employment contracts and severance) and employee benefits decreased $15.8 million in 2009 compared to 2008, as full-time equivalent employees declined to 2,214 at December 31, 2009, compared to 2,505 and 2,474 at December 31, 2008 and 2007, respectively.
Credit-related expenses (including loan collection and foreclosed asset expense, loss on non-mortgage loans held for sale, and loss on other real estate owned) increased $58.0 million in 2009 compared to 2008 due to the current credit environment, and may continue to be volatile in future periods.
Regulatory assessments increased $18.4 million in 2009 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. TSFG also recorded an FDIC special assessment charge of $5.7 million in second quarter 2009. 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, which resulted in TSFG paying $89.4 million in prepaid assessments to the FDIC in fourth quarter 2009, the cost of which will be recognized through 2012. FDIC insurance premiums are expected to increase based in part on the adoption of a uniform three-basis point increase to assessment rates effective January 1, 2011,
partially offset by the decrease in premiums associated with the expiration of the TAGP. Actions by regulatory agencies could also cause our assessments to increase.
During 2009, TSFG recognized impairment charges of $21.6 million on its campus facility ($19.4 million), corporate jet ($612,000), and vacated branches and office locations ($1.6 million) (see “Impairment of Long-Lived Assets”), as well as a $2.5 million goodwill impairment charge related to non-banking subsidiaries (see “Goodwill”). During 2009, TSFG recognized a net gain on early extinguishment of debt of $3.0 million, primarily due to gain on the repurchase of $25.0 million of mandatorily redeemable preferred stock of a REIT subsidiary, partially offset by a loss on termination of $75.0 million of long-term repurchase agreements (see “Borrowed Funds”). Also during 2009, TSFG repurchased various auction rate preferred securities from brokerage customers who purchased the securities during 2007. TS FG recorded a loss of $676,000 during 2009 to adjust these securities to estimated fair value based on illiquidity in the market (see “Securities”).
Professional services increased in 2009, partially due to legal expenses associated with a shareholder lawsuit. Project NOW expenses increased due to costs associated with TSFG’s revenue and expense initiative.
Comparing 2008 to 2007, noninterest expenses increased $471.0 million, primarily due to the goodwill impairment charge mentioned above. Salaries, wages, and employee benefits (excluding contracts and severance) increased $8.1 million in 2008, partially due to normal salary increases and lower loan origination salary deferrals. The 2008 increase in FTEs relative to 2007 was partly due to the acquisition of five branch offices in Orlando and three de novo branch openings. Employment contracts and severance increased primarily as a result of expenses related to the retirement of former CEO Mack Whittle. The incremental expense related to Whittle’s retirement benefits was approximately $12 million, all of which was recorded in 2008. Professional services decreased 3.4% for 2008, primarily due to a decrease in legal fees.
Advertising and business development increased 34.1% in 2008 relative to 2007, primarily due to costs related to customer funding initiatives. In addition, regulatory assessments increased, primarily due to the fact that the credit which had been offsetting FDIC premiums for all of 2006 and the first three quarters of 2007 was fully utilized in fourth quarter 2007. Loan collection and foreclosed asset expense increased $8.8 million in 2008 due to the credit environment.
During 2008, TSFG recognized a loss on early extinguishment of debt of $2.1 million, which reflects prepayment penalties for FHLB advances partially offset by gains on brokered CDs for which the related interest rate swaps were called. During 2007, TSFG recognized a loss on early extinguishment of debt of $2.0 million, primarily from the write-off of unamortized debt issuance costs associated with the redemption of subordinated notes and mandatorily redeemable preferred stock.
In 2008, TSFG recognized a loss related to derivative collateral of $1.1 million, representing the excess of the value of securities collateral held by a counterparty who declared bankruptcy during the year above the amounts owed by TSFG under the swap agreement. TSFG incurred branch acquisition and conversion costs during the first half of 2008 related to the June 6, 2008 purchase of five retail branch offices in the Orlando area. This transaction also contributed to higher occupancy expense. During 2008, TSFG reversed $863,000 of an $881,000 reserve for losses for Visa-related litigation (shared among Visa and Visa member banks) recorded in 2007.
Income Taxes
Income tax expense as a percentage of pretax loss was (5.9)% for 2009. 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 2009 primarily due to the deferred tax asset valuation allowance recorded during third quarter 2009 (see “Critical Accounting Policies and Estimates – Income Taxes”). Income tax benefit as a percentage of pretax loss was 13.8% for 2008, which differed from the U.S federal statutory rate primarily due to the impact of the nondeductible goodwill impairment that was recorded in 2008.
The accounting complexities of evaluating and recording a valuation allowance on deferred tax assets make the projection of the effective tax rate on future pretax net income or loss difficult. Based on current projections and assuming no change in pretax other comprehensive income (gains on investment securities available for sale and cash flow hedges), the tax expense or benefit for 2010 should be at or near zero except for any change in reserves for uncertain tax positions. Volatility in other comprehensive income could materially impact the tax expense or benefit charged to operations with little or no impact to equity.
For further information concerning income tax expense, refer to Item 8, Note 17 to the Consolidated Financial Statements.
Fourth Quarter Summary
TSFG reported a net loss available to common shareholders of $193.9 million or $(0.90) per diluted share for fourth quarter 2009, compared to a net loss available to common shareholders of $340.8 million, or $(1.95) per diluted share for third quarter 2009 and $319.4 million, or $(4.29) per diluted share for fourth quarter 2008. The third quarter 2009 net loss was partly due to a $200.1 million increase to the deferred tax asset valuation allowance, while the fourth quarter 2008 net loss was partly due to a $237.6 million goodwill impairment charge resulting from a decrease in value of the Mercantile banking segment. The following is a summary of the consolidated statements of operations (in thousands, except per share data):
| | | Three Months Ended | |
| | | December 31, | | | September 30, | | | December 31, | |
| | | 2009 | | | 2009 | | | 2008 | |
| Net interest income | | $ | 80,546 | | | $ | 80,038 | | | $ | 91,633 | |
| Provision for credit losses | | | 170,761 | | | | 224,179 | | | | 122,926 | |
| Noninterest income | | | 28,550 | | | | 33,470 | | | | 30,012 | |
| Noninterest expenses | | | 103,163 | | | | 89,529 | | | | 342,093 | |
| Income tax expense (benefit) | | | 23,843 | | | | 123,304 | | | | (33,435 | ) |
| Net loss | | | (188,671 | ) | | | (323,504 | ) | | | (309,939 | ) |
| Preferred stock dividends and other | | | (5,221 | ) | | | (17,251 | ) | | | (9,424 | ) |
| Net loss available to common shareholders | | $ | (193,892 | ) | | $ | (340,755 | ) | | $ | (319,363 | ) |
| | | | | | | | | | | | | |
| Loss per common share, diluted | | $ | (0.90 | ) | | $ | (1.95 | ) | | $ | (4.29 | ) |
Nonperforming assets declined to $522.4 million at December 31, 2009, from $544.6 million at September 30, 2009. However, at December 31, 2009, nonperforming assets as a percentage of loans and foreclosed property increased to 6.13% from 6.05% at September 30, 2009 due to a decrease in loans held for investment. TSFG’s provision for credit losses totaled $170.8 million for fourth quarter 2009, compared to $224.2 million for third quarter 2009 and $122.9 million for fourth quarter 2008.
Fully tax-equivalent net interest income totaled $81.4 million for fourth quarter 2009, compared with $81.1 million for third quarter 2009 and $92.9 million for fourth quarter 2008. The net interest margin for fourth quarter 2009 was 2.97%, compared to 2.93% for third quarter 2009 and 2.97% for fourth quarter 2008. Comparing fourth quarter 2009 to third quarter 2009, the yield on average earning assets declined 10 basis points, primarily due to the sale of higher-yielding mortgage-backed securities and municipal securities (the yield on which is calculated on a tax-equivalent basis) during fourth quarter 2009 (the proceeds from which were reinvested into lower-yielding mortgage-backed securities), while average funding costs decreased 19 basis points, driven by an enhanced deposit mix, disciplined pricing, and downward pricing of cert ificates of deposit upon renewal.
Noninterest income totaled $28.6 million for fourth quarter 2009, compared to $33.5 million for third quarter 2009 and $30.0 million for fourth quarter 2008. Fourth quarter 2009 noninterest income included a gain on securities of $6.7 million (primarily due to the sale of municipal securities mentioned in the previous paragraph) compared with a loss of $286,000 and a gain of $1.6 million, respectively, in third quarter 2009 and fourth quarter 2008. However, third quarter 2009 included a $7.2 million gain on sale of ancillary businesses. Excluding these items, the decrease in fourth quarter 2009 relative to third quarter 2009 was largely due to a $1.6 million decline in the gain on certain derivative activities, a $1.0 million adjustment to bank-owned life insurance cash surrender value due to various provisions of stable value contrac ts, and an $854,000 decline in customer fee income. In addition, merchant processing income and wealth management income declined from the third quarter sales of ancillary businesses (which also reduced noninterest expenses).
Noninterest expenses totaled $103.2 million in fourth quarter 2009, compared to $89.5 million in third quarter 2009 and $342.1 million in fourth quarter 2008. Comparing fourth quarter 2009 to third quarter 2009, this increase was primarily due to a $12.5 million increase in credit-related expenses and a $3.5 million impairment charge related to the corporate campus, partially offset by expense reductions in many other categories. Fourth quarter 2008 included a $237.6 million goodwill impairment charge, as well as higher employment contract and severance expense related to the retirement of TSFG’s CEO. In addition, TSFG recorded a $1.7 million loss on early extinguishment of debt and a $1.1 million loss on derivative collateral during fourth quarter 2008.
In fourth quarter 2009, income tax expense/benefit as a percentage of pretax loss was (14.5)%, compared with (61.6)% in third quarter 2009 and 9.7% in fourth quarter 2008. Income tax expense differed from the amount computed by applying TSFG’s statutory U.S. federal income tax rate of 35% to pretax loss in fourth and third quarters 2009 due to the deferred tax asset valuation allowance recorded during those quarters. For fourth quarter 2008, income tax expense was affected by the nondeductible goodwill impairment.
Enterprise Risk Management
Risk, to varying degrees and in different forms, is present in virtually all business activities of a financial services organization. In certain activities, the bank proactively assumes risk as a means of generating revenue, while in other activities risk arises by virtue of engaging in that activity. The primary goals of risk management are to ensure that (1) the outcomes of risk-taking activities are within TSFG’s risk tolerance and (2) that there is an appropriate balance between risk and reward to maximize shareholder returns.
Several key principles guide our enterprise-wide risk management activities. The active participation of the Board and executive and business line management in the risk management process is designed to ensure consistency with risk-taking activities and integrity with these principles which, in varying forms, apply to all business and risk types:
| | · | Board oversight—The Board approves risk strategies, policies and associated limits; and the Board directly, or through its Risk Committee, receives regular updates on the key risks to TSFG. |
| | · | Accountability—Business units are responsible for identifying and managing risks within their areas, as outlined in their policies and procedures. |
| | · | Monitoring—The risk management functions within the Company seek to provide objective oversight of business unit activities and work with business units to ensure key risks are properly identified and controlled. |
| | · | Independent review—The internal audit group reports directly to the Audit Committee of the Board of Directors and provides an independent assessment of our system of internal controls. |
Market Risk and Asset/Liability Management
Market Risk Management. We refer to “market risk” as the risk of loss from adverse changes in market prices of fixed income securities, equity securities, other earning assets, interest-bearing liabilities, and derivative financial instruments as a result of changes in interest rates or other factors. TSFG's market risk arises principally from interest rate risk inherent in its core banking activities. Interest rate risk is the risk of a change in earnings or equity represented by the impact of potential changes in market interest rates, both short-term and long-term, and includes, but is not limited to, the following:
| | · | assets and liabilities (including derivative positions) may mature or reprice at different times; |
| | · | assets and liabilities may reprice at the same time but by different amounts; |
| | · | short-term and long-term interest rates may change by different amounts; |
| | · | remaining maturities of assets or liabilities may shorten or lengthen as interest rates change; |
| | · | the fair value of assets and liabilities may adjust by varying amounts; and |
| | · | changes in interest rates may have an indirect impact on loan and deposit demand, credit quality, and other sources of earnings. |
TSFG has risk management policies and systems which attempt to monitor and limit exposure to interest rate risk. Specifically, TSFG manages its exposure to fluctuations in interest rates through policies established by our Asset/Liability Committee ("ALCO"), reviewed by the Risk Committee of the Board, and approved by the Board of Directors. A primary goal of ALCO is to monitor and limit exposure to interest rate risk through implementation of various strategies. These strategies include positioning the balance sheet to minimize fluctuations in income associated with interest rate risk, while maintaining adequate liquidity and capital.
In evaluating interest rate risk, TSFG uses a simulation model to analyze various interest rate scenarios, which take into account potential changes in the shape of the yield curve, forward interest rates implied by current yield curves, and immediate and gradual interest rate shifts. ALCO assesses interest rate risk by comparing the base case scenario results to the various interest rate scenarios. The variations of net interest income and economic value of equity (“EVE”), as compared with our base case, provide insight into our interest rate risk exposures.
The assumptions used in this process possess an inherent uncertainty. As a result, we cannot precisely predict the impact of changes in interest rates on net interest income or the fair value of net assets. Actual results may differ significantly from our projections, due to, but not limited to the following:
| | · | the timing, magnitude and frequency of interest rate changes; |
| | · | changes in market conditions; |
| | · | differences in the yields on earning assets and costs of interest-bearing liabilities; and |
| | · | actions taken by TSFG to counter such changing market conditions. |
Interest Sensitivity Analysis. The information presented in Tables 31 and 32 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 31 and 32. Primary assumptions 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 31 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 December 31, 2009 and 2008 levels, respectively. As of December 31, 2009, net interest income over the next year is asset sensitive, meaning that interest rate increases would have a positive impact on net interest income. The increase in interest rate sensitivity from December 31, 2008 is primarily due to lengthening of wholesale funding maturities coupled with continued generation of variable rate loans.
| Table 31 |
| Net Interest Income at Risk Analysis |
| | | | Annualized Hypothetical Percentage Change in |
| | | | Net Interest Income |
Interest Rate Scenario (1) | | | December 31, |
| | | | 2009 | | | 2008 | |
| | 2.00 | % | | | 1.8 | % | | | (0.2 | ) % |
| | 1.00 | | | | 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 rate environment, downward rate shifts were not run. |
Table 32 reflects the sensitivity of the EVE to changes in interest rates. EVE is a measurement of the inherent, long-term 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 32 shows the effect that the indicated changes in interest rates would have on the fair value of net assets at December 31, 2009 and 2008, respectively, compared with the base case or flat interest rate scenario. The base case scenario assumes interest rates stay at December 31, 2009 and 2008 levels, respectively. The increase in the change in EVE to increases in interest rates in the +100 basis point change scenario is primarily driven by an increase in loans with embedded floors which effectively increased the amount of fixed rate assets. The lower decline in EVE in the +200 basis point change scenario is due
to changes in the composition of the mortgage-backed and municipal securities portfolio, partially offset by the increase in loans with embedded floors.
| Table 32 | |
| Economic Value of Equity Risk Analysis | |
| (dollars in thousands) | Annualized Hypothetical Dollar Change in | |
| | | | Economic Value of Equity | |
Interest Rate Scenario (1) | | | December 31, | |
| | | | 2009 | | | 2008 | |
| | 2.00 | % | | $ | (63,227 | ) | | $ | (82,307 | ) |
| | 1.00 | | | | (35,430 | ) | | | (12,270 | ) |
| Flat | | | | - | | | | - | |
| | (1.00 | )(2) | | | n/a | | | | n/a | |
| | (2.00 | )(2) | | | n/a | | | | n/a | |
| (1) | The rising 100 and 200 basis points and falling 100 and 200 basis point interest rate scenarios assume an immediate and parallel change in interest rates along the entire yield curve. |
| (2) | Due to the current rate environment, downward rate shifts were not run. |
There are material limitations with TSFG’s models presented in Tables 31 and 32, 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 (i.e., 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. |
The expected duration of the debt securities portfolio was approximately 3.2 years at December 31, 2009, an increase from approximately 2.9 years at December 31, 2008. 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 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. For additional information related to interest rate risk, see Table 2 in “Loans” for selected loan maturity and interest sensitivity, Table 16 in “Securities” for investment securiti es maturity and related yields, Table 21 in “Deposits” for maturity distribution of time deposits and related yields, and Table 26 in “Liquidity” for maturities of long-term debt.
Derivatives and Hedging Activities. TSFG uses derivative instruments as part of its interest rate risk management activities to reduce risks associated with its lending, investment, deposit taking, and borrowing activities. Derivatives used for interest rate risk management may include interest rate swaps, interest rate floors, options, and futures contracts.
By using derivative instruments, TSFG is exposed to credit and market risk. Derivative credit risk, which is the risk that a counterparty to a derivative instrument will fail to perform, is equal to the extent of the fair value gain in a derivative, or the excess of the fair value of collateral posted against the fair value loss in a derivative. Derivative credit risk is created when the fair value of a derivative contract is positive, since this generally indicates that the counterparty owes us. When the fair value of a derivative is negative, credit risk exists to the extent that TSFG has posted collateral in excess of the fair value of the derivative. Derivative credit risk related to existing bank customers (in the case of “customer loan swaps” and foreign exchange contracts) is monitored through existing credit polici es and procedures. Due to the current credit environment, TSFG has seen an increase in credit losses related to customer loan swaps. The effects of changes in interest rates or foreign exchange rates are evaluated across a range of possible options to limit the maximum exposures to individual customers. Customer loan swaps are generally cross-collateralized with the related loan.
Counterparty credit risk with other derivative counterparties (generally money-center and super-regional financial institutions) is evaluated through existing policies and procedures. This evaluation considers the total relationship between TSFG and each of the counterparties. Individual limits are established by management and approved by the credit department. Institutional counterparties must have an investment grade credit rating and be approved by TSFG’s Asset/Liability Management Committee and Executive Credit Committee. A deterioration of the credit standing of one or more of the counterparties to these contracts may result in the related hedging relationships being deemed ineffective or in TSFG not achieving its desired economic hedging outcome.
Market risk is the adverse effect on the value of a financial instrument from a change in interest rates, or implied volatility of rates. TSFG manages the market risk associated with derivative contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The market risk associated with derivatives used for interest rate risk management activity is fully incorporated into our market risk sensitivity analysis.
TSFG records derivatives at fair value, as either assets or liabilities, on the consolidated balance sheet, included in other assets or other liabilities. See Item 8, Note 15 to the Consolidated Financial Statements for the fair value of TSFG’s derivative assets and liabilities and their related notional amounts. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet 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.
Economic Risk
TSFG’s performance is impacted by U.S. and particularly Southeastern economic conditions, and as non-U.S. companies continue to move into TSFG’s footprint, by international economic circumstances. This includes the level of interest rates, price compression, competition, bankruptcy filings and unemployment rates, as well as political and international policies, regulatory guidelines and general developments. TSFG continues to monitor the economic situations in all areas of operations to achieve growth and limit risk.
Credit Risk
Credit risk is the potential for financial loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligation. Credit risk arises in many of TSFG’s business activities, most prominently in its lending activities, derivative activities, ownership of debt securities, and when TSFG acts as an intermediary on behalf of its customers and other third parties. TSFG has a risk management system designed to help ensure compliance with its policies and control processes. See “Critical Accounting Policies and Estimates – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” and “Credit Quality.”
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. 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. At December 31, 2009, the total fair value of TSFG’s customer swap derivative assets was $25.7 million.
Liquidity Risks
TSFG’s business is also subject to liquidity risk, which arises in the normal course of business. TSFG’s liquidity risk is that we will be unable to meet a financial commitment to a customer, creditor, or investor when due. See “Capital and Liquidity.”
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or external events. It includes reputation and franchise risks associated with business practices or market conduct that TSFG may undertake. TSFG has an operational risk management system with policies and procedures designed to help limit our operational risks.
Compliance and Litigation Risks
TSFG is a public company in a heavily regulated industry. Failure to comply with applicable laws and regulations can result in monetary penalties and/or prohibition from conducting certain types of activities. Furthermore, TSFG’s conduct of business may result in litigation associated with contractual disputes or other alleged liability to third parties.
TSFG’s regulatory compliance risk is managed by our compliance group. This group works with our business lines regularly monitoring activities and evaluating policies and procedures. See Item 1, “Supervision and Regulation” for some of the laws and regulations which impact TSFG and its subsidiaries. TSFG has policies and control processes that are designed to help ensure compliance with applicable laws and regulations and limit litigation. These policies and control processes comply with the Gramm-Leach-Bliley Act, the Sarbanes-Oxley Act, and other regulatory guidance.
TSFG’s Audit Committee helps to ensure compliance with financial reporting matters. TSFG’s Audit Committee is involved in the following: selecting the independent auditor, communicating with the independent auditor, reviewing the financial statements and the results of the financial statement audit, monitoring the performance of the independent auditor, and monitoring the work of the internal audit function. The Audit Committee has chartered a Disclosure Committee to help ensure that TSFG's internal controls and reporting systems are sufficient to satisfy compliance with disclosure requirements related to TSFG’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.
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.
For commercial customers, loan commitments generally take the form of revolving credit arrangements to finance customers' working capital requirements. For retail customers, loan commitments are generally lines of credit secured by residential property. At December 31, 2009, commercial and retail loan commitments totaled $1.6 billion. Documentary letters of credit are typically issued in connection with customers’ trade financing requirements and totaled $2.1 million at December 31, 2009. Unused business credit card lines, which totaled $31.7 million at December 31, 2009, are generally for short-term borrowings.
Standby letters of credit represent an obligation of TSFG to a third party contingent upon the failure of TSFG’s customer to perform under the terms of an underlying contract with the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the customer’s delivery of merchandise, completion of a construction contract, release of a lien, or repayment of an obligation. Under the terms of a standby letter, drafts will be generally drawn only when the underlying event fails to occur as intended. TSFG has legal recourse to its customers for amounts paid, and these obligations are secured or unsecured, depending on the customers’ creditworthiness. Commitments under standby letters of credit are usually for one year or less. TSFG evaluates its obligation to perform as a guarantor and records reserves as deemed necessary. The maximum potential amount of undiscounted future payments related to standby letters of credit at December 31, 2009 was $199.2 million.
TSFG applies essentially the same credit policies and standards as it does in the lending process when making these commitments. See Item 8, Note 21 to the Consolidated Financial Statements for additional information regarding lending commitments.
Derivatives. TSFG records derivatives at fair value, as either assets or liabilities, on the consolidated balance sheet. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet 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 Item 8, Note 15 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.
| Quantitative and Qualitative Disclosures about Market Risk |
See “Enterprise Risk Management” in Item 7, and Item 8, Notes 7, 15, and 31, for quantitative and qualitative disclosures about market risk, which information is incorporated herein by reference.
| Financial Statements and Supplementary Data |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of The South Financial Group, Inc. (“TSFG”) and subsidiaries is committed to enhanced shareholder value, financial stability, and integrity in all dealings. Management has prepared the accompanying Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America. The statements include amounts that are based on management's best estimates and judgments. Other financial information in this report is consistent with the Consolidated Financial Statements.
TSFG’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. TSFG’s internal control system is designed to provide reasonable assurance to TSFG’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. In meeting its responsibility, management relies on its internal control structure that is supplemented by a program of internal audits.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
TSFG’s management assessed the effectiveness of TSFG’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, we believe that, as of December 31, 2009, TSFG’s internal control over financial reporting was effective.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited TSFG’s Consolidated Financial Statements and the effectiveness of TSFG’s internal control over financial reporting in accordance with standards of the Public Company Accounting Oversight Board (United States). PricewaterhouseCoopers LLP reviews the results of its audit with both management and the Audit Committee of the Board of Directors of TSFG. In connection with its audit, PricewaterhouseCoopers LLP has issued an attestation report on our internal control over financial reporting as of December 31, 2009. This attestation report “Report of Independent Registered Public Accounting Firm” appears on page 75.
The Audit Committee, composed entirely of independent directors, meets periodically with management, TSFG’s internal auditors and PricewaterhouseCoopers LLP (separately and jointly) to discuss audit, financial reporting and related matters. PricewaterhouseCoopers LLP and the internal auditors have direct access to the Audit Committee.
| /s/ H. Lynn Harton | /s/ James R. Gordon |
| H. Lynn Harton | James R. Gordon |
| President and | Senior Executive Vice President |
| Chief Executive Officer | and Chief Financial Officer |
| March 16, 2010 | March 16, 2010 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
The South Financial Group, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and comprehensive (loss) income and of cash flows present fairly, in all material respects, the financial position of The South Financial Group, Inc. and its subsidiaries at December 31, 2009 and 2008 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with auth orizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 16, 2010
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | December 31, | |
| | | 2009 | | | 2008 | |
| Assets | | | | | | |
| Cash and due from banks | | $ | 383,184 | | | $ | 292,219 | |
| Interest-bearing bank balances | | | 124 | | | | 166 | |
| Securities | | | | | | | | |
| Available for sale, at fair value | | | 2,095,401 | | | | 2,071,658 | |
| Held to maturity (fair value $129,496 in 2009 and $23,048 in 2008) | | | 127,516 | | | | 22,709 | |
| Total securities | | | 2,222,917 | | | | 2,094,367 | |
| Loans held for sale (includes $0 in 2009 and $14,681 in 2008 measured at fair value) | | | 15,758 | | | | 30,963 | |
| Loans held for investment | | | 8,386,127 | | | | 10,192,072 | |
| Less: Allowance for loan losses | | | (365,642 | ) | | | (247,086 | ) |
| Net loans held for investment | | | 8,020,485 | | | | 9,944,986 | |
| Bank-owned life insurance | | | 302,830 | | | | 294,843 | |
| Premises and equipment, net | | | 261,523 | | | | 282,472 | |
| Accrued interest receivable | | | 37,304 | | | | 50,388 | |
| Goodwill | | | 214,118 | | | | 224,161 | |
| Other intangible assets, net | | | 15,707 | | | | 21,859 | |
| Other assets | | | 421,032 | | | | 365,902 | |
| Total assets | | $ | 11,894,982 | | | $ | 13,602,326 | |
| | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | |
| Liabilities | | | | | | | | |
| Deposits | | | | | | | | |
| Noninterest-bearing retail and commercial deposits | | $ | 1,124,404 | | | $ | 1,041,140 | |
| Interest-bearing retail and commercial deposits | | | 6,225,707 | | | | 6,455,810 | |
| Total retail and commercial deposits | | | 7,350,111 | | | | 7,496,950 | |
| Brokered deposits | | | 1,946,101 | | | | 1,908,767 | |
| Total deposits | | | 9,296,212 | | | | 9,405,717 | |
| Short-term borrowings | | | 322,702 | | | | 1,626,374 | |
| Long-term debt | | | 1,116,869 | | | | 707,769 | |
| Accrued interest payable | | | 36,658 | | | | 71,465 | |
| Other liabilities | | | 129,367 | | | | 170,470 | |
| Total liabilities | | | 10,901,808 | | | | 11,981,795 | |
| | | | | | | | | |
| Commitments and contingencies (Note 21) | | | | | | | | |
| | | | | | | | | |
| Shareholders' equity | | | | | | | | |
| Preferred stock-no par value; authorized 10,000,000 shares; issued and outstanding 351,650 shares in 2009 and 585,700 shares in 2008 | | | 335,783 | | | | 566,379 | |
| Common stock-par value $1 per share; authorized 325,000,000 shares; issued and outstanding 215,455,541 shares in 2009 and 74,643,649 shares in 2008 | | | 215,456 | | | | 74,644 | |
| Surplus | | | 1,344,984 | | | | 1,135,920 | |
| Retained deficit | | | (934,598 | ) | | | (199,540 | ) |
| Accumulated other comprehensive income, net of tax | | | 30,938 | | | | 42,558 | |
| Other, net | | | 611 | | | | 570 | |
| Total shareholders' equity | | | 993,174 | | | | 1,620,531 | |
| Total liabilities and shareholders' equity | | $ | 11,894,982 | | | $ | 13,602,326 | |
See Notes to Consolidated Financial Statements, which are an integral part of these statements.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Interest Income | | | | | | | | | |
| Interest and fees on loans | | $ | 466,493 | | | $ | 629,966 | | | $ | 764,828 | |
| Interest and dividends on securities: | | | | | | | | | | | | |
| Taxable | | | 73,527 | | | | 81,744 | | | | 103,525 | |
| Exempt from federal income taxes | | | 7,885 | | | | 9,945 | | | | 11,601 | |
| Total interest and dividends on securities | | | 81,412 | | | | 91,689 | | | | 115,126 | |
| Interest on short-term investments | | | 1 | | | | 385 | | | | 402 | |
| Total interest income | | | 547,906 | | | | 722,040 | | | | 880,356 | |
| Interest Expense | | | | | | | | | | | | |
| Interest on deposits | | | 190,586 | | | | 275,003 | | | | 368,295 | |
| Interest on short-term borrowings | | | 2,259 | | | | 34,775 | | | | 79,853 | |
| Interest on long-term debt | | | 23,529 | | | | 32,099 | | | | 49,427 | |
| Total interest expense | | | 216,374 | | | | 341,877 | | | | 497,575 | |
| Net Interest Income | | | 331,532 | | | | 380,163 | | | | 382,781 | |
| Provision for Credit Losses | | | 668,904 | | | | 344,589 | | | | 68,568 | |
| Net interest income after provision for credit losses | | | (337,372 | ) | | | 35,574 | | | | 314,213 | |
| Noninterest Income | | | 118,033 | | | | 121,967 | | | | 113,712 | |
| Noninterest Expenses | | | 419,121 | | | | 792,233 | | | | 321,249 | |
| (Loss) income before income taxes | | | (638,460 | ) | | | (634,692 | ) | | | 106,676 | |
| Income tax expense (benefit) | | | 37,794 | | | | (87,574 | ) | | | 33,400 | |
| Net (Loss) Income | | | (676,254 | ) | | | (547,118 | ) | | | 73,276 | |
| Preferred stock dividends | | | (24,606 | ) | | | (21,261 | ) | | | - | |
| Deemed dividend resulting from induced conversion | | | (32,388 | ) | | | - | | | | - | |
| Deemed dividend resulting from accretion of discount | | | (3,454 | ) | | | (243 | ) | | | - | |
| Amounts allocated to participating security holders | | | (241 | ) | | | (154 | ) | | | (665 | ) |
| Net (Loss) Income Available to Common Shareholders | | $ | (736,943 | ) | | $ | (568,776 | ) | | $ | 72,611 | |
| | | | | | | | | | | | | |
| Average Common Shares Outstanding, Basic | | | 141,208 | | | | 73,137 | | | | 73,618 | |
| Average Common Shares Outstanding, Diluted | | | 141,208 | | | | 73,137 | | | | 74,085 | |
| (Loss) Earnings Per Common Share, Basic | | $ | (5.22 | ) | | $ | (7.78 | ) | | $ | 0.99 | |
| (Loss) Earnings Per Common Share, Diluted | | | (5.22 | ) | | | (7.78 | ) | | | 0.98 | |
See Notes to Consolidated Financial Statements, which are an integral part of these statements.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME
(dollars in thousands, except per share data)
| | | | | | | | | | | | | | | Retained | | | | | | | |
| | | | | | | | | | | | | | | Earnings | | | Accumulated | | | | |
| | | Shares of | | | | | | | | | | | | (Deficit) | | | Other | | | | |
| | | Common | | | Common | | | Preferred | | | | | | and | | | Comprehensive | | | | |
| | | Stock | | | Stock | | | Stock | | | Surplus | | | Other | | | Income (Loss) | | | Total | |
| Balance, December 31, 2006 | | | 75,341,276 | | | $ | 75,341 | | | $ | - | | | $ | 1,167,685 | | | $ | 367,110 | | | $ | (48,104 | ) | | $ | 1,562,032 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | 73,276 | | | | - | | | | 73,276 | |
| Other comprehensive income, net of tax of $18,292 | | | - | | | | - | | | | - | | | | - | | | | - | | | | 32,295 | | | | 32,295 | |
| Comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 105,571 | |
| Common dividends declared ($0.73 per share) | | | - | | | | - | | | | - | | | | - | | | | (53,695 | ) | | | - | | | | (53,695 | ) |
| Common stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock repurchase | | | (3,600,000 | ) | | | (3,600 | ) | | | - | | | | (79,691 | ) | | | - | | | | - | | | | (83,291 | ) |
| Acquisitions | | | 7,918 | | | | 8 | | | | - | | | | 183 | | | | - | | | | - | | | | 191 | |
| Exercise of options, including tax benefit of $1,067 | | | 476,386 | | | | 476 | | | | - | | | | 8,675 | | | | - | | | | - | | | | 9,151 | |
| Dividend reinvestment plan | | | 149,021 | | | | 149 | | | | - | | | | 3,057 | | | | - | | | | - | | | | 3,206 | |
| Restricted stock plan | | | 39,617 | | | | 40 | | | | - | | | | 3,078 | | | | (293 | ) | | | - | | | | 2,825 | |
| Employee stock purchase plan | | | 19,378 | | | | 19 | | | | - | | | | 402 | | | | - | | | | - | | | | 421 | |
| Director compensation | | | 22,098 | | | | 22 | | | | - | | | | 512 | | | | - | | | | - | | | | 534 | |
| Cumulative effect of initial application of guidance related to uncertain tax positions | | | - | | | | - | | | | - | | | | - | | | | (488 | ) | | | - | | | | (488 | ) |
| Stock option expense | | | - | | | | - | | | | - | | | | 3,657 | | | | - | | | | - | | | | 3,657 | |
| Other, net | | | (489 | ) | | | - | | | | - | | | | 43 | | | | 151 | | | | - | | | | 194 | |
| Balance, December 31, 2007 | | | 72,455,205 | | | | 72,455 | | | | - | | | | 1,107,601 | | | | 386,061 | | | | (15,809 | ) | | | 1,550,308 | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | (547,118 | ) | | | - | | | | (547,118 | ) |
| Other comprehensive income, net of tax of $33,288 | | | - | | | | - | | | | - | | | | - | | | | - | | | | 58,367 | | | | 58,367 | |
| Comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (488,751 | ) |
| Issuance of preferred stock | | | - | | | | - | | | | 577,436 | | | | (12,030 | ) | | | - | | | | - | | | | 565,406 | |
| Issuance of warrant to U. S. Treasury Department | | | - | | | | - | | | | - | | | | 19,564 | | | | - | | | | - | | | | 19,564 | |
| Common dividends declared ($0.22 per share) | | | - | | | | - | | | | - | | | | - | | | | (16,089 | ) | | | - | | | | (16,089 | ) |
| Preferred dividends declared | | | - | | | | - | | | | - | | | | - | | | | (21,261 | ) | | | - | | | | (21,261 | ) |
| Accretion of discount on preferred stock | | | - | | | | - | | | | 243 | | | | - | | | | (243 | ) | | | - | | | | - | |
| Common stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion of preferred stock | | | 1,738,454 | | | | 1,739 | | | | (11,300 | ) | | | 9,561 | | | | - | | | | - | | | | - | |
| Dividend reinvestment plan | | | 225,805 | | | | 226 | | | | - | | | | 1,707 | | | | - | | | | - | | | | 1,933 | |
| Restricted stock plan | | | 96,635 | | | | 97 | | | | - | | | | 5,604 | | | | (163 | ) | | | - | | | | 5,538 | |
| Director compensation | | | 70,422 | | | | 70 | | | | - | | | | 460 | | | | - | | | | - | | | | 530 | |
| Employee stock purchase plan | | | 49,123 | | | | 49 | | | | - | | | | 276 | | | | - | | | | - | | | | 325 | |
| Acquisitions | | | 4,403 | | | | 4 | | | | - | | | | 20 | | | | - | | | | - | | | | 24 | |
| Exercise of options, including tax benefit of $6 | | | 3,602 | | | | 4 | | | | - | | | | 37 | | | | - | | | | - | | | | 41 | |
| Cumulative effect of initial application of guidance related to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair value option, net of tax of $32 | | | - | | | | - | | | | - | | | | - | | | | 60 | | | | - | | | | 60 | |
| Endorsement split-dollar life insurance | | | - | | | | - | | | | - | | | | - | | | | (737 | ) | | | - | | | | (737 | ) |
| Stock option expense | | | - | | | | - | | | | - | | | | 3,179 | | | | - | | | | - | | | | 3,179 | |
| Other, net | | | - | | | | - | | | | - | | | | (59 | ) | | | 520 | | | | - | | | | 461 | |
| Balance, December 31, 2008 | | | 74,643,649 | | | | 74,644 | | | | 566,379 | | | | 1,135,920 | | | | (198,970 | ) | | | 42,558 | | | | 1,620,531 | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | (676,254 | ) | | | - | | | | (676,254 | ) |
| Other comprehensive loss, net of tax of $6,606 | | | - | | | | - | | | | - | | | | - | | | | - | | | | (11,620 | ) | | | (11,620 | ) |
| Comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (687,874 | ) |
| Common dividends declared ($0.02 per share) | | | - | | | | - | | | | - | | | | - | | | | (2,694 | ) | | | - | | | | (2,694 | ) |
| Preferred dividends | | | - | | | | - | | | | - | | | | - | | | | (20,268 | ) | | | - | | | | (20,268 | ) |
| Accretion of discount on preferred stock | | | - | | | | - | | | | 3,454 | | | | - | | | | (3,454 | ) | | | - | | | | - | |
| Common stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock | | | 85,000,000 | | | | 85,000 | | | | - | | | | (5,275 | ) | | | - | | | | - | | | | 79,725 | |
| Conversion of preferred stock | | | 54,892,158 | | | | 54,892 | | | | (234,050 | ) | | | 210,180 | | | | (32,388 | ) | | | - | | | | (1,366 | ) |
| Restricted stock plan | | | 348,561 | | | | 349 | | | | - | | | | 1,233 | | | | - | | | | - | | | | 1,582 | |
| Director compensation | | | 144,763 | | | | 145 | | | | - | | | | 102 | | | | - | | | | - | | | | 247 | |
| Dividend reinvestment plan | | | 150,627 | | | | 151 | | | | - | | | | 78 | | | | - | | | | - | | | | 229 | |
| Employee stock purchase plan | | | 185,400 | | | | 185 | | | | - | | | | 68 | | | | - | | | | - | | | | 253 | |
| Settlement of shareholder lawsuit | | | 91,033 | | | | 91 | | | | - | | | | 15 | | | | - | | | | - | | | | 106 | |
| Stock option expense | | | - | | | | - | | | | - | | | | 2,653 | | | | - | | | | - | | | | 2,653 | |
| Other, net | | | (650 | ) | | | (1 | ) | | | - | | | | 10 | | | | 41 | | | | - | | | | 50 | |
| Balance, December 31, 2009 | | | 215,455,541 | | | $ | 215,456 | | | $ | 335,783 | | | $ | 1,344,984 | | | $ | (933,987 | ) | | $ | 30,938 | | | $ | 993,174 | |
See Notes to Consolidated Financial Statements, which are an integral part of these statements.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Cash Flows from Operating Activities | | | | | | | | | |
| Net (loss) income | | $ | (676,254 | ) | | $ | (547,118 | ) | | $ | 73,276 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities | | | | | | | | | | | | |
| Provision for credit losses | | | 668,904 | | | | 344,589 | | | | 68,568 | |
| Deferred income tax expense (benefit) | | | 57,699 | | | | (47,206 | ) | | | 7,426 | |
| Depreciation, amortization, and accretion, net | | | 39,258 | | | | 38,691 | | | | 33,963 | |
| Loss on other real estate owned | | | 32,435 | | | | 633 | | | | 401 | |
| Impairment of long-lived assets | | | 21,600 | | | | - | | | | - | |
| Loss on non-mortgage loans held for sale | | | 11,776 | | | | 283 | | | | - | |
| (Gain) loss on securities | | | (8,034 | ) | | | (3,108 | ) | | | 4,623 | |
| Gain on sale of ancillary businesses | | | (7,234 | ) | | | - | | | | - | |
| Share-based compensation expense | | | 4,890 | | | | 9,936 | | | | 7,469 | |
| (Gain) loss on certain derivative activities | | | (3,849 | ) | | | 207 | | | | 1,197 | |
| (Gain) loss on early extinguishment of debt | | | (3,043 | ) | | | 2,086 | | | | 2,029 | |
| Gain on sale of mortgage loans | | | (2,737 | ) | | | (3,314 | ) | | | (5,179 | ) |
| Goodwill impairment | | | 2,511 | | | | 426,049 | | | | - | |
| Loss on disposition of premises and equipment | | | 279 | | | | 342 | | | | 70 | |
| Gain on Visa IPO share redemption | | | - | | | | (1,904 | ) | | | - | |
| Excess tax benefits from share-based compensation | | | - | | | | (6 | ) | | | (1,067 | ) |
| Loss on derivative collateral | | | - | | | | 1,061 | | | | - | |
| Origination of loans held for sale | | | (320,535 | ) | | | (251,144 | ) | | | (411,539 | ) |
| Sale of loans held for sale and principal repayments | | | 346,035 | | | | 278,840 | | | | 454,948 | |
| Increase in other assets | | | (88,599 | ) | | | (17,732 | ) | | | (6,364 | ) |
| (Decrease) increase in other liabilities | | | (39,052 | ) | | | 12,861 | | | | (12,894 | ) |
| Net cash provided by operating activities | | | 36,050 | | | | 244,046 | | | | 216,927 | |
| | | | | | | | | | | | | |
| Cash Flows from Investing Activities | | | | | | | | | | | | |
| Sale of securities available for sale | | | 464,368 | | | | 257,483 | | | | 309,110 | |
| Maturity, redemption, call, or principal repayments of securities available for sale | | | 635,835 | | | | 490,181 | | | | 483,630 | |
| Maturity, redemption, call, or principal repayments of securities held to maturity | | | 25,190 | | | | 16,983 | | | | 12,655 | |
| Purchase of securities available for sale | | | (1,101,469 | ) | | | (813,272 | ) | | | (12,616 | ) |
| Purchase of securities held to maturity | | | (131,435 | ) | | | - | | | | (140 | ) |
| Net repayments (originations) of loans held for investment | | | 618,048 | | | | (328,088 | ) | | | (601,055 | ) |
| Sale of loans held for investment | | | 461,422 | | | | 41,163 | | | | - | |
| Sale of other real estate owned | | | 55,208 | | | | 12,324 | | | | 4,746 | |
| Sale of premises and equipment | | | 123 | | | | 9 | | | | 445 | |
| Purchase of premises and equipment | | | (37,332 | ) | | | (57,917 | ) | | | (35,658 | ) |
| Sale of long lived assets held for sale | | | 6,745 | | | | - | | | | - | |
| Proceeds from sale of ancillary businesses | | | 16,584 | | | | - | | | | - | |
| Cash equivalents acquired, net of payment for purchase acquisitions | | | (321 | ) | | | 3,332 | | | | (363 | ) |
| Net cash provided by (used for) investing activities | | | 1,012,966 | | | | (377,802 | ) | | | 160,754 | |
See Notes to Consolidated Financial Statements, which are an integral part of these statements.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Cash Flows from Financing Activities | | | | | | | | | |
| (Decrease) increase in deposits | | $ | (112,370 | ) | | $ | (407,440 | ) | | $ | 249,876 | |
| Decrease in short-term borrowings | | | (1,303,699 | ) | | | (12,140 | ) | | | (132,959 | ) |
| Issuance of long-term debt | | | 550,000 | | | | 203,320 | | | | 126,290 | |
| Payment of long-term debt | | | (137,866 | ) | | | (200,169 | ) | | | (557,726 | ) |
| Cash dividends paid on common stock | | | (3,440 | ) | | | (29,106 | ) | | | (53,493 | ) |
| Cash dividends paid on preferred stock | | | (29,609 | ) | | | (11,920 | ) | | | - | |
| Issuance of common stock, net | | | 79,725 | | | | - | | | | - | |
| Repurchase of common stock | | | - | | | | - | | | | (83,291 | ) |
| Conversion of preferred stock | | | (1,366 | ) | | | - | | | | - | |
| Issuance of preferred stock and warrant, net | | | - | | | | 584,970 | | | | - | |
| Excess tax benefits from share-based compensation | | | - | | | | 6 | | | | 1,067 | |
| Other common stock activity | | | 532 | | | | 2,095 | | | | 11,249 | |
| Net cash (used for) provided by financing activities | | | (958,093 | ) | | | 129,616 | | | | (438,987 | ) |
| Net change in cash and cash equivalents | | | 90,923 | | | | (4,140 | ) | | | (61,306 | ) |
| Cash and cash equivalents at beginning of year | | | 292,385 | | | | 296,525 | | | | 357,831 | |
| Cash and cash equivalents at end of year | | $ | 383,308 | | | $ | 292,385 | | | $ | 296,525 | |
| | | | | | | | | | | | | |
| Supplemental Cash Flow Data | | | | | | | | | | | | |
| Interest paid, net of amounts capitalized | | $ | 244,169 | | | $ | 355,460 | | | $ | 492,913 | |
| Income tax (refunds) payments, net | | | (47,023 | ) | | | (5,927 | ) | | | 30,313 | |
| Significant non-cash investing and financing transactions: | | | | | | | | | | | | |
| Unrealized gain on available for sale securities | | | 17,493 | | | | 59,790 | | | | 26,461 | |
| Conversion of preferred stock into common stock | | | 234,050 | | | | 11,300 | | | | - | |
| Loans transferred from held for investment to held for sale | | | 557,019 | | | | 63,929 | | | | - | |
| Loans transferred from held for sale to held for investment | | | - | | | | 3,060 | | | | 59 | |
| Loans transferred to other real estate owned | | | 165,061 | | | | 51,158 | | | | 8,173 | |
| | | | | | | | | | | | | |
| | | | | | |
See Notes to Consolidated Financial Statements, which are an integral part of these statements.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Note 1. | Summary of Significant Accounting Policies |
The accounting and reporting policies followed by The South Financial Group, Inc. and all its subsidiaries and the methods of applying these policies conform with U.S. generally accepted accounting principles and with general practices within the banking industry. Certain policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized below. “TSFG” refers to The South Financial Group, Inc. and its subsidiaries, except where the context requires otherwise.
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 December 31, 2009, TSFG operated through 83 branch offices in South Carolina, 67 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 p rimarily located in the Hendersonville and Asheville areas of western North Carolina and in the Wilmington area of eastern North Carolina.
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.
The substantial uncertainties throughout the economy and U.S. banking industry coupled with current market conditions have adversely affected TSFG’s 2009 results and capital levels. The significant loss in 2009, primarily related to credit losses and the valuation allowance on deferred tax assets, reduced TSFG’s and Carolina First Bank’s capital levels. In order to remain well capitalized under federal banking agencies’ guidelines, management believes that the Company will need to raise additional capital to absorb the potential future credit losses associated with the disposition of its nonperforming assets. While regulatory ratios were not impacted by the valuation allowance, the tangible common equity ratio, which is an important measure to investors, debt rating agencies, and others, was significa ntly impacted by the valuation allowance. Accordingly, management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the conversion of certain debt and non-common equity instruments into common stock and/or cash and/or the issuance of additional equity in public or private offerings. TSFG is actively evaluating a number of capital sources, asset reductions, and other balance sheet management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term. TSFG is currently reducing its balance sheet to improve capital ratios.
Current market conditions for banking institutions, the overall uncertainty in financial markets, and TSFG’s credit rating downgrades and depressed stock price are significant barriers to the success of any plan to issue additional equity in public or private offerings. An equity financing transaction 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.
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 until such time as the Company returns to profitability. At December 31, 2009, the parent company had $56.2
million of cash and cash equivalents. (See Note 33, Parent Company Financial Information.) TSFG expects to use a portion of this cash to capitalize the banking subsidiary.
Cash and cash equivalents at the banking subsidiary at December 31, 2009 were approximately $383 million. Carolina First Bank has $179,000 of long-term debt maturing in 2010. Liquidity at the bank level is dependent upon the deposit franchise which funds 78.2% of the Company’s assets (or 61.8% excluding brokered CDs). The FDIC’s temporary changes to increase the amount of deposit insurance to $250,000 per deposit relationship and to provide unlimited deposit insurance for certain transaction accounts have contributed to the stable deposit base. All banks that have elected to participate in the Transaction Account Guarantee Program (“TAGP”) have the same FDIC insurance coverage. Potential loss of deposits would be a primary funding need in a liquidity crisis. Deposit balances which are not covered by FDIC i nsurance total approximately $625 million currently, and would increase to approximately $1.5 billion without the benefit of the FDIC’s TAGP, currently scheduled to expire at June 30, 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 $265 million currently, and would increase to approximately $750 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 $350 million at December 31, 2009. Free securities of $1.2 billion would meet incremental collateral needs and, along with surplus cash of approximately $200 million at year-end, 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 recently approved limitations on maximum interest rates offered by institutions that are not well capitalized.
During 2009 and early 2010, several rating agencies lowered their credit ratings for TSFG and/or Carolina First Bank. These ratings changes did not have a material impact on TSFG’s liquidity given that we have no debt for which a downgrade of our credit ratings would trigger early termination and a credit rating downgrade has not historically impacted access to our primary funding sources. However, certain downgrade levels could require the Company to post additional collateral to secure certain transactions (such as derivatives and certain borrowings) or could enable certain counterparties to rescind transactions at their option. Such requirements are not expected to materially impact the Company’s overall liquidity. In addition, certain borrowings, such as brokered CDs and FHLB advances, are dependent on various cre dit eligibility criteria which may be impacted by changes in the Company’s financial position and/or results of operations. Given the weakened economy, current market conditions, and our recent credit ratings downgrades, 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.
Given our asset quality and earnings performance, if we are not able to substantially increase our regulatory capital in the near term, we believe that it is likely that our regulators would request that we stipulate to a consent order, to be entered into between the bank and each of its banking regulators. A consent order would, among other things, result in Carolina First Bank being deemed “adequately capitalized” (irrespective of the fact that it may be “well capitalized”) and could require that the Company raise additional capital within a specified timeframe and limit TSFG's access to the brokered CD market and restrict the rates it can offer on customer deposits. In addition, a consent o rder would likely impose higher capital ratios on Carolina First Bank than would otherwise be required. If the Company is unable to raise the capital required or otherwise comply with the terms of any such 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 such announcement.
Based on current and expected liquidity needs and sources, management expects TSFG to be able to meet its obligations at least through December 31, 2010. 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.
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 imp airment 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.
TSFG determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under U.S. generally accepted accounting principles. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable each entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns, and the right to make decisions about the entity's activities. TSFG consolidates voting interest entities in which it has all, or at least majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity descr ibed above. A controlling financial interest in an entity is present when an enterprise has a variable interest, or combination of variable interests, that will absorb a majority of the entity's expected losses, receive a majority of the entity's expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. At December 31, 2009, TSFG had six subsidiaries that were VIEs for which TSFG was not the primary beneficiary. Accordingly, the accounts of these statutory business trusts (“Trusts”) were not included in TSFG’s Consolidated Financial Statements. At December 31, 2009 and 2008, the Trusts had outstanding trust preferred securities with an aggregate par value of $200.5 million. At December 31, 2009 and 2008, the principal assets of the Trusts are $206.7 million of the Company’s subordinated notes with identical rates of interest and maturities as the trust preferred securities (see Note 20). At Decembe r 31, 2009 and 2008, the Trusts have issued $6.2 million of common securities to the Company. The Company records interest expense on the subordinated debt and recognizes the dividend income on the common stock of the trust entities.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2009 presentation.
Accounting Standards Codification
The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (“GAAP”) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in fin ancial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
Business Combinations
For all business combination transactions initiated after June 30, 2001, the purchase method of accounting has been used, and accordingly, the assets and liabilities of the acquired company have been recorded at their estimated fair values as of the merger date. The fair values are subject to adjustment as information relative to the fair values as of the acquisition date becomes available. The Consolidated Financial Statements include the results of operations of any acquired company since the acquisition date.
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.
Securities
TSFG classifies its investment securities in one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Securities held to maturity are debt securities in which TSFG has the ability and intent to hold until maturity. All securities not included in trading or held to maturity are classified as available for sale. TSFG classifies its investment securities at the date of commitment or purchase.
Trading securities are carried at fair value. Adjustments for realized and unrealized gains or losses from trading securities are included in noninterest income.
Securities available for sale are carried at fair value. Such securities are used to execute asset/liability management strategy, manage liquidity, collateralize public deposits, borrowings, and derivatives, and leverage capital. Adjustments for unrealized gains or losses, net of the income tax effect, are made to accumulated other comprehensive income (loss), a separate component of shareholders' equity.
Securities held to maturity are stated at cost, net of unamortized balances of premiums and discounts.
TSFG generally determines the fair value of its securities based on quoted market prices and/or observable market data. On a quarterly basis, TSFG evaluates declines in the market value below cost of any available for sale or held to maturity security for other-than-temporary impairment and, if necessary, charges the unrealized loss to operations (or, in certain cases, charges the unrealized loss attributable to credit to operations) and establishes a new cost basis. To determine whether impairment is other-than-temporary, TSFG considers the reasons for the impairment, recent events specific to the issuer or industry, the severity and duration of the impairment, volatility of fair value, changes in value subsequent to period-end, external credit ratings, and forecasted performance of the investee. In addition, TSFG considers whether i t intends to sell the security, whether it more likely than not will be required to sell the security, and whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. As the forecasted market price recovery period lengthens, the uncertainties inherent in the estimate increase, impacting the reliability of that estimate. To be included in assessment of recoverability, market price recoveries must reasonably be expected to occur within an acceptable forecast period. Ultimately, a lack of objective evidence to support recovery of a security’s cost over a reasonable period of time will result in an other-than-temporary impairment charge.
Dividend and interest income are recognized when earned. Premiums and discounts are amortized or accreted over the expected life of the related held to maturity or available for sale security as an adjustment to yield. Gains or losses on the sale of securities are recognized on a specific identification, trade date basis.
Loans Held for Sale
Loans held for sale include residential mortgage loans intended to be sold in the secondary market and other loans that management has an active plan to sell. Effective January 1, 2008, TSFG elected to carry its portfolio of mortgage loans held for sale at fair value. However, effective second quarter 2009, TSFG elected to discontinue its use of the fair value option on new production of mortgage loans held for sale. This change corresponds to TSFG’s decision to no longer sell mortgage loans on a pooled basis. 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 noni nterest income or expense. Gains or losses on sales of loans are recognized in noninterest income or expense at the time of sale and are determined by the difference between net sales proceeds and the carrying value of the loans sold.
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 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.
Loans Held for Investment
Loans held for investment are reported at their outstanding principal balances, adjusted for any deferred fees (net of associated direct costs) and unamortized premiums or unearned discounts. TSFG recognizes interest on the unpaid balance of the loans when earned. The net amount of the nonrefundable loan origination fees, commitment fees, and certain direct costs associated with the lending process are deferred and amortized to interest income over the term of the loan. The premium or discount on purchased loans is amortized over the expected life of the loans and is included in interest and fees on loans.
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. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Loans are charged-off (if unsecured) or written-down (if secured) when losses are reasonably quantifiable. Commercial loans are generally placed in nonaccrual status (if secured) or charged-off (if unsecured) when full collection of principal and interest becomes doubtful or when they become 90-days delinquent. Consumer loans are generally placed in nonaccrual status (if secured) or charged-off (if unsecured) when they become greater than 120 days past due or upon determination that full collection of principal and interest is doubtful. Mortgage loans are generally placed in no naccrual status when they become greater than 150 days past due or upon determination that full collection of principal and interest is doubtful. Once placed in nonaccrual, in the event the net realizable liquidation value of the collateral is less than the principal balance of the mortgage loan, the anticipated deficiency balance is charged off.
When loans are placed in nonaccrual status, accrued but unpaid interest is charged against accrued interest income. Interest payments received on nonaccrual loans are applied as a reduction of principal. Generally, loans are returned to accrual status when the loan is brought current and ultimate collectibility of principal and interest is no longer in doubt. TSFG defines past due loans based upon contractual maturity.
A loan is also considered impaired if its terms are modified in a troubled debt restructuring. TSFG designates loan modifications as troubled debt restructurings (TDRs) when, for economic or legal reasons related to the borrower’s financial difficulties, it grants a concession to the borrower that it would not otherwise consider. Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of modification are initially classified as accruing TDRs at the date of modification, if the note is reasonably assured of repayment and performance in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the modification date if reasonable doubt exists as to the collection of interest or principal under the restructure ag reement. TDRs are returned to accruing status when there is economic substance to the restructuring, any portion of the debt not expected to be repaid has been charged off, the remaining note is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally six months). At December 31, 2009, total TDRs were $33.8 million of which $26.1 million were accruing restructured loans. TSFG does not have significant commitments to lend additional funds to borrowers whose loans have been modified as a TDR.
Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
The allowance for loan losses and reserve for unfunded lending commitments are based on management's ongoing evaluation of the loan portfolio and unfunded lending commitments and reflect an amount that, in management's opinion, is adequate to absorb probable incurred losses in these items. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior loan loss experience, the composition of the loan portfolio, and management's estimate of credit losses. Loans are charged against the allowance at such time as they are determined to be losses. Subsequent recoveries are credited to the allowance.
Management considers the year-end allowance appropriate and adequate to cover probable incurred losses in the loan portfolio; however, management's judgment is based upon a number of assumptions about current events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. In addition, various regulatory agencies periodically review TSFG's allowance for loan losses as part of their examination process and could require TSFG to adjust its allowance for loan losses based on information available to them at the time of their examination.
The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to that used to determine the allowance for loan losses described above, adjusted for factors specific to binding commitments, including the probability of funding and exposure at default.
Concentrations of Credit Risk
TSFG’s loans are concentrated predominantly in South Carolina, western North Carolina and larger markets in Florida. In addition, commercial real estate loans in South Carolina, North Carolina and Florida represented 41.8% of the total loan portfolio as of December 31, 2009. Because of the concentration of real estate and other loans in the same geographic regions, adverse economic conditions in these areas have contributed to higher rates of loss and delinquency on TSFG’s loans than if the loans had been more diversified on a geographic or product basis.
Premises and Equipment
Premises and equipment are carried at cost including capitalized interest, when appropriate, less accumulated depreciation. Depreciation is charged to expense over the estimated useful lives of the assets. Leasehold improvements and capital leases are amortized over the terms of the respective lease or the estimated useful lives of the improvements, whichever is shorter. Depreciation and amortization are computed primarily using the straight-line method. Estimated useful lives generally range from 30 to 40 years for buildings, 3 to 12 years for furniture, fixtures, and equipment, 5 to 7 years for capitalized software, and 3 to 30 years for leasehold improvements.
Additions to premises and equipment and major replacements or improvements are capitalized at cost. Maintenance, repairs, and minor replacements are expensed when incurred.
Impairment of Long-Lived Assets
TSFG periodically reviews the carrying value of its long-lived assets including premises and equipment for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Long-lived assets to be disposed of by abandonment or in an exchange for a similar productive long-lived asset are classified as held and used until disposed of.
Long-lived assets to be sold are classified as held for sale and are no longer depreciated. Certain criteria have to be met in order for the long-lived asset to be classified as held for sale, including that a sale is probable and expected to occur within one year. Long-lived assets classified as held for sale are recorded at the lower of their carrying amount or fair value less the cost to sell.
Goodwill and Intangible Assets
Intangible assets include goodwill and other identifiable assets, such as core deposit intangibles, customer list intangibles, and non-compete agreement intangibles, resulting from TSFG acquisitions. Core deposit intangibles are amortized over 5 to 15 years using the straight-line or the sum-of-the-years' digits method based upon historical studies of core deposits. The non-compete agreement intangibles are amortized on a straight-line basis over the non-compete period, which is generally seven years or less. Customer list intangibles are amortized on a straight-line or accelerated basis over their estimated useful life of 10 to 17 years. Goodwill is not amortized but tested annually for impairment or at any time an event occurs or circumstances change that may trigger a decline in the value of the reporting unit. Examples of suc h events or circumstances include adverse changes in results of operations, legal factors, business climate, unanticipated competition, change in regulatory environment, or loss of key personnel.
TSFG’s other intangible assets have an estimated finite useful life and are amortized over that life in a manner that reflects the estimated decline in the economic value of the identified intangible asset. TSFG periodically reviews its other intangible assets for impairment.
Derivative Financial Instruments and Hedging Activities
TSFG’s derivative activities, along with its other exposures to market risk, are monitored by its Asset/Liability Committee (“ALCO”) based upon the interest rate risk guidelines TSFG has established. Market risk is the adverse effect on the value of a financial instrument from a change in interest rates, implied volatility of rates, counterparty credit risk and other market-driven factors. TSFG manages the market risk associated with derivative contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The market risk associated with trading and derivative activities used for risk management activities is fully incorporated into its market risk sensitivity analysis.
TSFG uses derivatives to manage exposure to interest rate risk and offers derivatives to its customers which they use to meet their risk management objectives. TSFG manages risks associated with its lending, investment, deposit taking, and borrowing activities. Derivatives for interest rate risk management include interest rate swaps, floors, options, and futures contracts. Interest rate swaps used by TSFG effectively convert specific fixed rate borrowings to a floating rate index, or vice versa, or serve to convert prime-based or LIBOR-based variable loan cash flows to fixed rate income streams. TSFG has also entered into swap contracts that effectively convert exposure taken on through the issuance of equity-linked and inflation-indexed certificates of deposit to LIBOR-based funding.
TSFG enters into forward sales commitments to hedge the interest rate risk arising from its mortgage banking activities. The Company may also, from time to time, enter into certain option and futures contracts that are not designated as hedging a specific asset, liability or forecasted transaction and are therefore considered trading positions. Such options and futures contracts typically have indices that relate to the pricing of specific on-balance sheet instruments and forecasted transactions and may be more speculative in nature. TSFG has policies that limit the amount of outstanding trading positions.
TSFG also offers various derivatives, including interest rate, commodity, equity, credit, and foreign exchange contracts, to its customers; however TSFG attempts to neutralize its market risk exposure with offsetting financial contracts from third party dealers. All derivative contracts associated with these programs are carried at fair value and are not considered hedges.
TSFG uses derivatives to effectively modify the repricing characteristics of certain assets and liabilities so that any significant adverse effect on net interest income and cash flows from changes in interest rates is mitigated, and to better match the repricing profile of our interest bearing assets and liabilities. As a result of interest rate fluctuations, certain interest-sensitive assets and liabilities will gain or lose market value. In an effective fair value hedging strategy, the effect of this change in value will generally be offset by a corresponding change in value on the derivatives linked to the hedged assets and liabilities. In an effective cash flow hedging strategy, the variability of cash flows due to interest rate fluctuations on floating rate instruments is managed by derivatives that effectively lock-in the amoun t of cash payments or receipts.
By using derivative instruments, TSFG is also exposed to credit risk. Credit risk, which is the risk that a counterparty to a derivative instrument will fail to perform, equals the fair value gain in a derivative or the excess of the fair value of collateral posted against the fair value loss in a derivative. Credit risk is created when the fair value of a derivative contract is positive, since this generally indicates that the counterparty owes TSFG. When the fair value of a derivative is negative, credit risk exists to the extent that TSFG has posted collateral in excess of the fair value of the derivative. Derivative credit risk related to existing bank customers (in the case of “customer loan swaps” and foreign exchange contracts) is monitored through existing credit policies and procedures. The effects of changes in i nterest rates or foreign exchange rates are evaluated across a range of possible options to limit the maximum exposures to individual customers. Customer loan swaps are generally cross-collateralized with the related loan. TSFG evaluates the credit risk of its bank customer counterparties for purposes of potential adjustments to the value of its customer swaps.
Counterparty credit risk with other derivative counterparties (generally money-center and super-regional financial institutions) is evaluated through existing policies and procedures. This evaluation considers the total relationship between TSFG and each of the counterparties. Individual limits are established by management and approved by the credit department. Institutional counterparties must have an investment grade credit rating and be approved by TSFG’s ALCO and Executive Credit Committee.
A deterioration of the credit standing of one or more of the counterparties to these contracts may result in the related hedging relationships being deemed ineffective or in TSFG not achieving its desired economic hedging outcome.
At the inception of a hedge transaction, TSFG formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge. This process includes identification of the hedging instrument, hedged item, risk being hedged and the method for assessing effectiveness and measuring ineffectiveness. In addition, on a quarterly basis, TSFG assesses whether the derivative used in the hedging transaction is highly effective in offsetting changes in fair value or cash flows of the hedged item, and measures and records any ineffectiveness.
All derivatives are recognized on the consolidated balance sheet in either other assets or other liabilities at their fair value. On the trade date, TSFG designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge"), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), or (3) an instrument with no hedging designation. Changes in fair value for derivatives that qualify as fair value hedges are recorded along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk as noninterest income in the consolidated statements of operations. Changes in fair value for derivatives that qualify as ca sh flow hedges are recorded through other comprehensive income (net of tax) in shareholders' equity to the extent that the hedge is effective. The net cash settlement on derivatives qualifying for hedge accounting is recorded in interest income or interest expense, as appropriate, based on the item being hedged. The net cash settlement on derivatives not qualifying for hedge accounting is included in noninterest income. Changes in the fair value of derivative instruments that fail to meet the criteria for hedge designation are recorded as noninterest income in the consolidated statements of income. TSFG has elected not to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral.
TSFG discontinues hedge accounting when the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; the derivative expires or is sold, terminated or exercised; the derivative is dedesignated as a hedge instrument because it is unlikely that the forecasted transaction will occur; or management determines that designation of the derivative as a hedge instrument is no longer appropriate.
When hedge accounting is discontinued, the future gains and losses on derivatives are recognized as noninterest income in the consolidated statements of operations. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transaction are still expected to occur, gains and losses that were accumulated in other comprehensive income are amortized or accreted into earnings as the hedged cash flows impact earnings. They are recognized in earnings immediately if the cash flow hedge was discontinued because a forecasted transaction is no longer probable of occurring.
TSFG may occasionally enter into a contract (the host contract) that contains an embedded derivative. If applicable, an embedded derivative is separated from the host contract, recorded at fair value and can be designated as a hedge that qualifies for hedge accounting; otherwise, the derivative is recorded at fair value with gains and losses recognized in the consolidated statements of operations. TSFG’s equity-linked certificates of deposit contain embedded derivatives that require separation from the host contract.
Other Investments
TSFG accounts for its investments in limited partnerships, limited liability companies (“LLCs”), and other privately held companies using either the cost or the equity method of accounting. The accounting treatment depends upon TSFG’s percentage ownership and degree of management influence.
Under the cost method of accounting, TSFG records an investment in stock at cost and generally recognizes cash dividends received as income. If cash dividends received exceed the investee’s earnings since the investment date, these payments are considered a return of investment and reduce the cost of the investment.
Under the equity method of accounting, TSFG records its initial investment at cost. Subsequently, the carrying amount of the investment is increased or decreased to reflect TSFG’s share of income or loss of the investee. TSFG’s recognition of earnings or losses from an equity method investment is based on TSFG’s ownership percentage in the limited partnership or LLC and the investee’s earnings. The limited partnerships and LLCs generally provide their financial information during the quarter following the end of a given period. TSFG’s policy is to record its share of earnings or losses on equity method investments in the quarter the financial information is received.
All of the limited partnerships and LLCs in which TSFG invests are privately held, and their market values are not readily available. TSFG’s management evaluates its investments in limited partnerships and LLCs for impairment based on the investee’s ability to generate cash through its operations or obtain alternative financing, and other subjective factors. There are inherent risks associated with TSFG’s investments in limited partnerships and LLCs, which may result in income statement volatility in future periods.
Federal Home Loan Bank Stock
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, as cost approximates fair value and there is no ready market for such investments. At December 31, 2009 and 2008, FHLB stock totaled $58.8 million and $35.5 million, respectively.
Bank-Owned Life Insurance
TSFG has purchased life insurance policies on certain key employees. These policies, both general and separate accounts, are recorded at their cash surrender value, or the amount that can be realized, inclusive of certain stable value contracts associated with the separate account policies. At December 31, 2009, bank-owned life insurance included approximately $153 million held in separate accounts and approximately $150 million held in general accounts. Income from these policies and changes in the net cash surrender value are recorded in noninterest income.
Foreclosed Property
Other real estate owned (“OREO”), included in other assets, is comprised of real estate properties acquired in partial or total satisfaction of problem loans. The property is classified as held for sale when the sale is probable and is expected to occur within one year. The property is initially carried 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. Principal losses existing at the time of acquisition of such properties are charged against the allowance for loan losses. Subsequent write-downs that may be required to the carrying value of these properties and gains and losses realized from the sale of other real estate owned are included in noninterest e xpense. Costs related to the development and improvements of such property are capitalized, whereas the costs related to holding the property are charged to expense.
Personal property repossessions are acquired in partial or total satisfaction of problem loans and are included in other assets. These repossessions are initially carried at the lower of cost or estimated fair value. Principal losses existing at the time of acquisition of such personal properties are charged against the allowance for loan losses. Personal property repossessions totaled $1.2 million and $4.3 million at December 31, 2009 and 2008, respectively.
Debt Issuance Costs
TSFG amortizes debt issuance costs over the life of the related debt using a method that approximates the effective interest method.
Borrowed Funds
TSFG’s short-term borrowings are defined as borrowings with maturities of one year or less when made. Long-term borrowings have maturities greater than one year when made. Any premium or discount on borrowed funds is amortized over the term of the borrowing.
Commitments and Contingencies
Contingencies arising from environmental remediation costs, claims, assessments, guarantees, litigation, recourse reserves, fines, penalties and other sources are recorded when deemed probable and estimable.
Deposit Accounts
TSFG recognizes service charges on deposit accounts when collected. Any premium or discount on fixed maturity deposits is amortized over the term of the deposits.
TSFG is charged a fee in connection with its acquisition of brokered certificates of deposit. The fee is included in other assets as a prepaid charge and is amortized into interest expense over the life of the brokered CD on a straight-line basis.
Fair Value
TSFG determines the fair market values of its financial instruments based on the fair value hierarchy established in FASB ASC 820, “Fair Value Measurements and Disclosures,” 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; or other inputs that are observable or 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. |
TSFG carries securities available for sale and derivative assets and liabilities at fair value on a recurring basis.
Income Taxes
TSFG accounts for income taxes under the asset and liability method. The federal taxable operating results of TSFG and its eligible subsidiaries are included in its consolidated federal income tax return. Each subsidiary included in the consolidated federal income tax return receives an allocation of federal income taxes due to the Parent Company or is allocated a receivable from the Parent Company to the extent tax benefits are realized. Where federal and state tax laws do not permit consolidated or combined income tax returns, applicable separate subsidiary federal or state income tax returns are filed and payment, if any, is remitted directly to the federal or state governments from such subsidiary. In addition, TSFG periodically reviews the sustainability of its federal and state income tax positions and, if necessary, records con tingent tax liabilities.
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis and operating loss and income tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management regularly reviews deferred tax assets for recoverability, and in situations where it is “more likely than not” that a deferred tax asset is not realizable, a valuation allowance is recorded. At December 31, 2009, the Company had recorded a full valuation allowance against its net deferred tax asset.
Preferred Stock
Preferred stock ranks senior to common shares with respect to dividends and has preference in the event of liquidation. Preferred stock is reported in shareholders’ equity unless it is mandatorily redeemable or it embodies an unconditional obligation
that the Company must or may settle in shares whose monetary value at inception is based solely or predominantly on any of the following: (1) a fixed amount known at inception, (2) variations in something other than the fair value of the Company’s equity shares, or (3) variations inversely related to changes in the fair value of the Company’s equity shares. Dividends declared on preferred stock are accounted for as a reduction in retained earnings. Issuance costs are charged against surplus. Any premium or discount on preferred stock is amortized over the expected term of the borrowing using the effective interest method.
Comprehensive Income (Loss)
Comprehensive income (loss) is the change in TSFG's equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). TSFG's other comprehensive income (loss) and accumulated other comprehensive income (loss) are comprised of unrealized gains and losses on certain investments in debt securities, equity securities, and derivatives that qualify as cash flow hedges to the extent that the hedge is effective.
Share-Based Compensation
TSFG recognizes the grant-date fair value of stock options and other equity-based compensation issued to employees in the statement of operations. The way an award is classified will affect the measurement of compensation cost. Liability-classified awards are remeasured to fair value at each balance-sheet date until the award is settled. Equity-classified awards are measured at grant-date fair value, amortized over the subsequent vesting period, and are not subsequently remeasured. The fair value of non-vested stock awards for the purposes of recognizing stock-based compensation expense is the market price of the stock on the grant date. The fair value of options is estimated on the grant date using a Monte Carlo simulation method for market-based stock options and the Black-Scholes option pricing model for all other options.
Compensation cost is based on awards ultimately expected to vest; consequently, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. TSFG has elected to expense future grants of awards with graded vesting on a straight-line basis over the requisite service period of the entire award.
Cash flows resulting from tax deductions in excess of the grant-date fair value of share-based awards are included in cash flows from financing activities. Cash flows from financing activities for 2009, 2008, and 2007 included $0, $6,000, and $1.1 million, respectively, in cash inflows from excess tax benefits related to stock compensation. TSFG has elected the “short-cut method” to determine the pool of windfall tax benefits.
Per Share Data
Effective January 1, 2009, TSFG adopted new guidance which states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. TSFG has determined that certain of its outstanding nonvested restricted stock and restricted stock units are participating securities. Accordingly, effective January 1, 2009, earnings per common share is computed using the two-class method. All previously reported earnings per common share data has been retrospectively adjusted to conform to the new computation method.
Under the two-class method, basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding during the year, excluding outstanding participating securities. For diluted earnings per share, the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. In addition, if the denominator has been adjusted as per the prior sentence, then the numerator is adjusted to add back any convertible preferred dividends. If dilutive, common stock equivalents are calculated for options, warrants, restricted stock, and restricted stock units using the treasury stock method and for convertible securities using the if-converted method.
Business Segments
TSFG identifies operating segments as components of its business for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. Public enterprises are required to report a measure of segment profit or loss, certain specific revenue and expense items, segment assets,
information about the way that the operating segments were determined and other items. TSFG has two reportable operating segments: Carolina First and Mercantile.
Risk and Uncertainties
In the normal course of its business, TSFG encounters significant economic, liquidity, and regulatory risks. There are two main components of economic risk: credit risk and market risk. Credit risk is primarily the risk of default on TSFG's loan portfolio and other credit exposures that results from borrowers' failure to make contractually required payments. Market risk arises principally from interest rate risk inherent in TSFG's lending, investing, deposit, and borrowing activities.
Liquidity risk is the risk that TSFG will be unable to meet a financial commitment to a customer, creditor, or investor when due.
TSFG is subject to the regulations of various government agencies. These regulations may change significantly from period to period. TSFG also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examination.
The global and U.S. economies are experiencing volatility, and a challenging business climate is forecast for the foreseeable future. A continued economic downturn and volatility in the financial markets could significantly affect the estimates, judgments and assumptions used in the preparation of the Consolidated Financial Statements, and could lead to increased levels of credit losses, impairment of goodwill and other intangible assets, investments, or other assets.
Subsequent Events
TSFG has evaluated subsequent events for potential recognition and/or disclosure through March 16, 2010, the date the Consolidated Financial Statements included in this Annual Report on Form 10-K were issued.
Recently Adopted Accounting Pronouncements
Fair Value Measurements
TSFG adopted new guidance affecting FASB ASC 820, “Fair Value Measurements and Disclosures,” on January 1, 2008 for financial assets and liabilities with no significant impact on its Consolidated Financial Statements. This guidance defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. This guidance does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. This guidance was effective for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis in fiscal years beginning after November 15, 2008. As a result, TSFG adopted this guidance for nonfinancial assets and liabilities effective January 1, 2009 with no significant impact on its Consol idated Financial Statements.
Business Combinations
FASB ASC 805, “Business Combinations,” reflects new guidance which requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under previous standards whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. The new guidance requires acquirers to expense acquisition-related costs as incurred rather than allocat ing such costs to the assets acquired and liabilities assumed, as was previously the case. Under the new guidance, the requirements of FASB ASC 420, “Exit or Disposal Cost Obligations,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of FASB ASC 450, “Contingencies.” TSFG adopted this guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements. However, TSFG expects the new guidance to have a significant effect on the accounting for future acquisitions, if any.
Noncontrolling Interests in Consolidated Financial Statements
FASB ASC 810-10, “Consolidation,” reflects new guidance which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The new guidance clarifies that a non-controlling interest in a subsidiary, which was previously referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the parent and to the nonc ontrolling interest. TSFG adopted this guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.
Disclosures about Derivative Instruments and Hedging Activities
FASB ASC 815-10, "Derivatives and Hedging," reflects new guidance which amends and expands the disclosure requirements related to derivatives and hedging activities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under FASB ASC 815-10, and (iii) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. To meet those objectives, the new guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. TSFG adopted this gui dance effective January 1, 2009 and has included the required disclosures in Note 15.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
FASB ASC 260-10, “Earnings Per Share,” reflects new guidance that states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. TSFG adopted this guidance effective January 1, 2009 and has determined that certain of its outstanding nonvested restricted stock and restricted stock units are participating securities. Accordingly, earnings per common share has been computed using the two-class method. All previously reported earnings per common share data has been retrospectively adjusted to conform to the new computation method.
Determination of the Useful Life of Intangible Assets and Accounting for Defensive Intangible Assets
FASB ASC 350-30, “General Intangibles Other Than Goodwill,” reflects new guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This Subtopic also reflects new guidance that clarifies how to account for defensive intangible assets subsequent to initial measurement. TSFG adopted this new guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.
Equity Method Investment Accounting Considerations
FASB ASC 323, “Investments - Equity Method and Joint Ventures,” reflects new guidance which clarifies the accounting for certain transactions and impairment considerations involving equity method investments. TSFG adopted this new guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly
FASB ASC 820, “Fair Value Measurements and Disclosures,” reflects new guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and for determining when a transaction is an orderly one. TSFG adopted this new guidance effective second quarter 2009 with no significant impact on its Consolidated Financial Statements.
Interim Disclosures about Fair Value of Financial Instruments
FASB ASC 825, “Financial Instruments,” reflects new guidance which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. TSFG adopted this new guidance effective second quarter 2009 and has included the required disclosures in Note 31.
Recognition and Presentation of Other-Than-Temporary Impairments
FASB ASC 320-10, “Investments – Debt and Equity Securities,” reflects new guidance on other-than-temporary impairment for debt securities to make the standard more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. TSFG adopted the new guidance effective second quarter 2009 with no significant impact on its Consolidated Financial Statements.
Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies
FASB ASC 805, “Business Combinations,” reflects new guidance which requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with FASB ASC 450, “Contingencies.” The new guidance removes subsequent accounting guidance for assets and liabilities arising from contingencies from FASB ASC 805 and requires entities to develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. The new guidance eliminates the requirement to disclose an estimate of the range of outcomes of recognize d contingencies at the acquisition date. For unrecognized contingencies, entities are required to include only the disclosure required by FASB ASC 450. The new guidance also requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value. TSFG adopted the new guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.
Subsequent Events
FASB ASC 855, “Subsequent Events,” establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The standard requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. TSFG adopted the new guidance effective second quarter 2009. However, Accounting Standards Update 2010-09 (“ASU 2010-09”) amends this guidance to remove the disclosure requirement regarding the date through which an SEC filer has evaluated subsequent events. TSFG adopted ASU 2010-09 in first quarter 2010.
Measuring Liabilities at Fair Value
Accounting Standards Update 2009-05 (“ASU 2009-05”), “Measuring Liabilities at Fair Value,” modifies existing fair value guidance to permit companies determining the fair value of a liability to use the perspective of an investor that holds the related obligation as an asset. ASU 2009-05 addresses practice difficulties caused by the tension between fair-value measurements based on the price that would be paid to transfer a liability to a new obligor and contractual or legal requirements that prevent such transfers from taking place. TSFG adopted this standard effective third quarter 2009 with no significant impact on its Consolidated Financial Statements.
Accounting for Transfers of Financial Assets
Accounting Standards Update 2009-16 (“ASU 2009-16”), “Accounting for Transfers of Financial Assets,” amends FASB 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.
Accounting for Distributions to Shareholders with Components of Stock and Cash
Accounting Standards Update No. 2010-01 (“ASU 2010-01”), “Accounting for Distributions to Shareholders with Components of Stock and Cash, a Consensus of the FASB Emerging Issues Task Force,” requires that the stock portion of a dividend payment that is part cash and part stock be considered a share issuance in calculating per-share earnings. TSFG adopted this standard effective fourth quarter 2009 with no significant impact on its Consolidated Financial Statements.
Accounting and Reporting for Decreases in Ownership of a Subsidiary
Accounting Standards Update No. 2010-02 (“ASU 2010-02”), “Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification,” clarifies that the scope of the decrease in ownership provisions of FASB ASC 810-10, “Consolidation,” apply to a subsidiary or group of assets that is a business or nonprofit activity, a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture, and an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. TSFG adopted this guidance effective January 1, 2009 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.
Note 2. Accumulated Other Comprehensive Income (Loss)
The following summarizes accumulated other comprehensive income (loss), net of tax (in thousands) for the years ended December 31:
| | | 2009 | | | 2008 | | | 2007 | |
| Net Unrealized Gains (Losses) on Securities Available for Sale | | | | | | | | | |
| Balance at beginning of year | | $ | 6,890 | | | $ | (30,765 | ) | | $ | (47,378 | ) |
| Other comprehensive income: | | | | | | | | | | | | |
| Unrealized holding gains arising during the period | | | 28,765 | | | | 59,236 | | | | 23,129 | |
| Income tax expense | | | (9,841 | ) | | | (21,941 | ) | | | (8,682 | ) |
| Less: Reclassification adjustment for (gains) losses included in net (loss) income | | | (11,272 | ) | | | 554 | | | | 3,332 | |
| Income tax expense (benefit) | | | 3,945 | | | | (194 | ) | | | (1,166 | ) |
| | | | 11,597 | | | | 37,655 | | | | 16,613 | |
| Balance at end of year | | | 18,487 | | | | 6,890 | | | | (30,765 | ) |
| | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on Cash Flow Hedges | | | | | | | | | | | | |
| Balance at beginning of year | | | 35,668 | | | | 14,956 | | | | (726 | ) |
| Other comprehensive income (loss): | | | | | | | | | | | | |
| Unrealized gain on change in fair values | | | 8,529 | | | | 57,412 | | | | 22,337 | |
| Income tax expense | | | (2,985 | ) | | | (20,094 | ) | | | (7,818 | ) |
| Less: Reclassification adjustment for (gains) losses included in net (loss) income | | | (44,248 | ) | | | (25,547 | ) | | | 1,789 | |
| Income tax expense (benefit) | | | 15,487 | | | | 8,941 | | | | (626 | ) |
| | | | (23,217 | ) | | | 20,712 | | | | 15,682 | |
| Balance at end of year | | | 12,451 | | | | 35,668 | | | | 14,956 | |
| | | $ | 30,938 | | | $ | 42,558 | | | $ | (15,809 | ) |
| | | | | | | | | | | | | |
| Total other comprehensive (loss) income | | $ | (11,620 | ) | | $ | 58,367 | | | $ | 32,295 | |
| Net (loss) income | | | (676,254 | ) | | | (547,118 | ) | | | 73,276 | |
| Comprehensive (loss) income | | $ | (687,874 | ) | | $ | (488,751 | ) | | $ | 105,571 | |
Note 3. Noninterest Income and Noninterest Expenses
The following presents the details for noninterest income and noninterest expenses (in thousands) for the years ended December 31:
| | | 2009 | | | 2008 | | | 2007 | |
| Noninterest Income | | | | | | | | | |
| Service charges on deposit accounts | | $ | 39,659 | | | $ | 42,940 | | | $ | 44,519 | |
| Debit card income, net | | | 8,305 | | | | 7,805 | | | | 7,182 | |
| Customer service fee income | | | 4,839 | | | | 5,335 | | | | 5,648 | |
| Total customer fee income | | | 52,803 | | | | 56,080 | | | | 57,349 | |
| | | | | | | | | | | | | |
| Insurance income | | | 7,800 | | | | 10,082 | | | | 12,029 | |
| Retail investment services, net | | | 7,703 | | | | 7,711 | | | | 7,902 | |
| Trust and investment management income | | | 5,135 | | | | 6,688 | | | | 6,595 | |
| Benefits administration fees | | | 1,213 | | | | 3,136 | | | | 3,261 | |
| Total wealth management income | | | 21,851 | | | | 27,617 | | | | 29,787 | |
| | | | | | | | | | | | | |
| Bank-owned life insurance income | | | 9,515 | | | | 12,877 | | | | 13,344 | |
| Gain (loss) on securities | | | 8,034 | | | | 3,108 | | | | (4,623 | ) |
| Gain on sale of ancillary businesses | | | 7,234 | | | | - | | | | - | |
| Mortgage banking income | | | 5,694 | | | | 5,260 | | | | 6,053 | |
| Gain (loss) on trading and certain derivative activities | | | 3,849 | | | | (207 | ) | | | (1,197 | ) |
| Merchant processing income, net | | | 2,018 | | | | 3,279 | | | | 3,263 | |
| Gain on Visa IPO share redemption | | | - | | | | 1,904 | | | | - | |
| Other | | | 7,035 | | | | 12,049 | | | | 9,736 | |
| Total noninterest income | | $ | 118,033 | | | $ | 121,967 | | | $ | 113,712 | |
| | | | | | | | | | | | | |
| Noninterest Expenses | | | | | | | | | | | | |
| Salaries and wages, excluding employment contracts and severance | | $ | 133,548 | | | $ | 144,037 | | | $ | 137,085 | |
| Employment contracts and severance | | | 829 | | | | 16,519 | | | | 2,306 | |
| Total salaries and wages | | | 134,377 | | | | 160,556 | | | | 139,391 | |
| | | | | | | | | | | | | |
| Occupancy | | | 38,200 | | | | 37,311 | | | | 34,659 | |
| Employee benefits | | | 32,893 | | | | 38,200 | | | | 37,098 | |
| Loss on other real estate owned | | | 32,435 | | | | 633 | | | | - | |
| Regulatory assessments | | | 29,293 | | | | 10,923 | | | | 2,628 | |
| Furniture and equipment | | | 27,758 | | | | 27,561 | | | | 26,081 | |
| Loan collection and foreclosed asset expense | | | 27,090 | | | | 12,431 | | | | 3,665 | |
| Impairment of long-lived assets | | | 21,600 | | | | - | | | | - | |
| Professional services | | | 16,768 | | | | 16,212 | | | | 17,062 | |
| Project NOW expense | | | 1,693 | | | | 271 | | | | - | |
Loss on non-mortgage loans held for sale(1) | | | 11,776 | | | | 283 | | | | - | |
| Telecommunications | | | 6,197 | | | | 6,140 | | | | 5,668 | |
| Advertising and business development | | | 5,947 | | | | 9,927 | | | | 7,401 | |
| Amortization of intangibles | | | 4,917 | | | | 6,138 | | | | 7,897 | |
| (Gain) loss on early extinguishment of debt | | | (3,043 | ) | | | 2,086 | | | | 2,029 | |
| Goodwill impairment | | | 2,511 | | | | 426,049 | | | | - | |
| Loss of repurchase of auction rate securities | | | 676 | | | | - | | | | - | |
| Loss on derivative collateral | | | - | | | | 1,061 | | | | - | |
| Branch acquisition and conversion costs | | | - | | | | 731 | | | | - | |
| Visa-related litigation | | | - | | | | (863 | ) | | | 881 | |
| Other | | | 28,033 | | | | 36,583 | | | | 36,789 | |
| Total noninterest expenses | | $ | 419,121 | | | $ | 792,233 | | | $ | 321,249 | |
| | (1) | In 2009, TSFG reclassified loss on non-mortgage loans held for sale from noninterest income to noninterest expense. Amounts for prior periods have been reclassified to conform to the current presentation. |
Note 4. Sale of Ancillary Businesses
During 2009, TSFG completed the sale of three ancillary businesses for a net gain of $7.2 million, which was included in noninterest income. The businesses sold were: Carolina First Bank’s merchant processing portfolio; Koss Olinger, a financial planning group; and American Pensions, Inc., a retirement plan administrator.
The majority of the gain recognized in 2009 was related to the sale of the merchant processing portfolio; an additional deferred gain of approximately $6 million related to the sale may be recognized over the next two years. In connection with the sale of its merchant processing portfolio, TSFG entered into a marketing alliance with the acquirer for new merchant services referrals. Under this agreement, TSFG has agreed to refer its current and prospective merchant customers exclusively to the acquirer for all payment processing services. The agreement has an initial ten year term with recurring one year renewals thereafter, unless terminated by either party or notice of non-renewal is provided by either party.
Note 5. Branch Acquisition
In June 2008, Carolina First Bank acquired five branch offices (including related loans and deposits) in Florida from an unrelated financial institution. In connection with this branch acquisition, the Company acquired loans of $6.4 million, premises and equipment of $13.4 million, and deposits totaling $24.5 million, and recorded a core deposit intangible asset of $655,000. The core deposit intangible asset is being amortized over 5 years using an accelerated method.
Note 6. Restrictions on Cash and Due from Banks
TSFG is required to maintain average reserve balances with the Federal Reserve Bank based upon a percentage of deposits. The average amounts of these reserve balances for the years ended December 31, 2009 and 2008 were $26.2 million and $27.8 million, respectively.
At December 31, 2009, TSFG had $3.5 million restricted cash pledged as collateral for various purposes. At December 31, 2008, TSFG had no restricted cash pledged as collateral.
Note 7. Securities
The aggregate amortized cost and estimated fair value of securities available for sale and securities held to maturity (in thousands) at December 31 were as follows:
| | | 2009 | |
| | | | | | Gross | | | Gross | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Estimated | |
| | | Cost | | | Gains | | | Losses | | | 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 | |
| | | 2008 | |
| | | | | | Gross | | | Gross | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Estimated | |
| | | Cost | | | Gains | | | Losses | | | Fair Value | |
| Securities Available for Sale | | | | | | | | | | | | |
| U.S. Treasury | | $ | 2,001 | | | $ | 68 | | | $ | - | | | $ | 2,069 | |
| U.S. Government agencies | | | 307,025 | | | | 6,704 | | | | - | | | | 313,729 | |
| Agency residential mortgage-backed securities | | | 1,467,516 | | | | 14,632 | | | | 13,509 | | | | 1,468,639 | |
| Private label residential mortgage-backed securities | | | 14,850 | | | | - | | | | 2,079 | | | | 12,771 | |
| State and municipals | | | 256,755 | | | | 5,673 | | | | 180 | | | | 262,248 | |
Other investments (1) | | | 12,562 | | | | 87 | | | | 447 | | | | 12,202 | |
| | | $ | 2,060,709 | | | $ | 27,164 | | | $ | 16,215 | | | $ | 2,071,658 | |
| | | | | | | | | | | | | | | | | |
| Securities Held to Maturity | | | | | | | | | | | | | | | | |
| State and municipals | | $ | 22,609 | | | $ | 343 | | | $ | 4 | | | $ | 22,948 | |
| Other investments | | | 100 | | | | - | | | | - | | | | 100 | |
| | | $ | 22,709 | | | $ | 343 | | | $ | 4 | | | $ | 23,048 | |
| | (1) | During 2009, TSFG reclassified FHLB stock from securities available for sale to other assets. Amounts for prior periods have been reclassified to conform to the current presentation. |
The amortized cost and estimated fair value of securities available for sale and securities held to maturity (in thousands) at December 31, 2009, 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.
| | | December 31, 2009 | |
| | | Amortized | | | Estimated | |
| | | Cost | | | Fair Value | |
| Securities Available for Sale | | | | | | |
| Due in one year or less | | $ | 63,721 | | | $ | 64,933 | |
| Due after one year through five years | | | 1,255,518 | | | | 1,261,400 | |
| Due after five years through ten years | | | 169,980 | | | | 175,253 | |
| Due after ten years | | | 575,777 | | | | 592,135 | |
| No contractual maturity | | | 1,962 | | | | 1,680 | |
| | | $ | 2,066,958 | | | $ | 2,095,401 | |
| | | | | | | | | |
| Securities Held to Maturity | | | | | | | | |
| Due in one year or less | | $ | 4,836 | | | $ | 4,859 | |
| Due after one year through five years | | | 121,946 | | | | 123,908 | |
| Due after five years through ten years | | | 734 | | | | 729 | |
| Due after ten years | | | - | | | | - | |
| No contractual maturity | | | - | | | | - | |
| | | $ | 127,516 | | | $ | 129,496 | |
Proceeds from sales of securities available for sale, gross realized gains and losses on sales, and maturities and other securities transactions (in thousands) for the years ended December 31 are summarized as follows. The net gains or losses are shown in noninterest income as gain (loss) on securities.
| | | 2009 | | | 2008 | | | 2007 | |
| Proceeds from sales of securities available for sale | | $ | 464,368 | | | $ | 257,483 | | | $ | 309,110 | |
| | | | | | | | | | | | | |
| Sales transactions of securities available for sale: | | | | | | | | | | | | |
| Gross realized gains | | $ | 13,520 | | | $ | 2,544 | | | $ | 2,795 | |
Gross realized losses (1) | | | (1,813 | ) | | | (986 | ) | | | (5,427 | ) |
| Other securities transactions: | | | | | | | | | | | | |
| Gross realized gains | | | 641 | | | | 4,262 | | | | - | |
| Gross realized losses | | | - | | | | (6 | ) | | | - | |
| Other-than-temporary impairment | | | (4,314 | ) | | | (2,706 | ) | | | (1,991 | ) |
| Net gain (loss) on securities | | $ | 8,034 | | | $ | 3,108 | | | $ | (4,623 | ) |
| | (1) | Includes impairment losses on securities subsequently sold. |
Securities with market values of approximately $1.1 billion and $1.4 billion at December 31, 2009 and 2008, respectively, were pledged to secure public deposits and for other purposes. The amortized cost totaled approximately $1.1 billion and $1.4 billion for these same periods.
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 a continuous unrealized loss position, at December 31 were as follows (in thousands):
| | | 2009 | |
| | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
| | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
| Securities Available for Sale | | | | | | | | | | | | | | | | | | |
| US 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 | |
| | | 2008 | |
| | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
| | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
| Securities Available for Sale | | | | | | | | | | | | | | | | | | |
| Agency residential mortgage-backed securities | | $ | 342,792 | | | $ | 3,062 | | | $ | 399,557 | | | $ | 10,447 | | | $ | 742,349 | | | $ | 13,509 | |
| Private label residential mortgage-backed securities | | | 12,771 | | | | 2,079 | | | | - | | | | - | | | | 12,771 | | | | 2,079 | |
| State and municipals | | | 4,230 | | | | 148 | | | | 1,854 | | | | 32 | | | | 6,084 | | | | 180 | |
| Other investments | | | 369 | | | | 128 | | | | 700 | | | | 319 | | | | 1,069 | | | | 447 | |
| | | $ | 360,162 | | | $ | 5,417 | | | $ | 402,111 | | | $ | 10,798 | | | $ | 762,273 | | | $ | 16,215 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities Held to Maturity | | | | | | | | | | | | | | | | | | | | | | | | |
| State and municipals | | $ | - | | | $ | - | | | $ | 1,036 | | | $ | 4 | | | $ | 1,036 | | | $ | 4 | |
At December 31, 2009, TSFG had 52 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 December 31, 2009, these investments are not considered impaired on an other-than-temporary basis.
In 2009, TSFG recorded $435,000 in other-than-temporary impairment on certain community bank-related equity securities included in the other investments category. At December 31, 2009, the remaining securities in the other investments category with unrealized losses 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 had been in an unrealized loss position for more than a year, improving trends in fair value.
In second quarter 2008, TSFG recorded $927,000 in other-than-temporary impairment on its corporate bond portfolio due to a change in intent to hold the securities until a recovery in value based on a change in investment strategy. In third quarter 2008, TSFG sold approximately $8.4 million of corporate bonds and recognized a gain on sale of approximately $129,000. Additionally in 2008, TSFG recorded $2.1 million in other-than-temporary impairment on certain community bank-related investments included in the other investments portfolio. In 2007, TSFG recorded $2.9 million in other-than-temporary impairment on its corporate bond portfolio, and sold approximately $70 million of those bonds.
TSFG also invests in limited partnerships, limited liability companies (LLC's) and other privately held companies. These investments are included in other assets. In 2009, 2008, and 2007, TSFG recorded $3.9 million, $589,000, and $2.0 million, respectively, in other-than-temporary impairment on these investments. At December 31, 2009, TSFG's investment in these entities totaled $14.5 million, of which $7.1 million were accounted for under the cost method and $7.4 million were accounted for under the equity method. At December 31, 2008, TSFG's investment in these entities totaled $18.1 million, of which $5.3 million were accounted for under the cost method and $12.8 million were accounted for under the equity method.
Also included in other assets were $5.2 million of various auction rate preferred securities which TSFG repurchased during first quarter 2009 from brokerage customers who purchased the securities during 2007. TSFG recorded a loss of $676,000 upon purchase of $6.9 million of these securities during first quarter 2009 to adjust these securities to estimated fair value based on illiquidity in the market.
Note 8. Loans
The following is a summary of loans by category (in thousands) at December 31:
| | | 2009 | | | 2008 | |
| Commercial Loans | | | | | | |
| Commercial and industrial | | $ | 2,080,329 | | | $ | 2,722,611 | |
| Commercial owner - occupied real estate | | | 1,271,525 | | | | 1,270,746 | |
| Commercial real estate | | | 3,501,809 | | | | 4,074,331 | |
| | | | 6,853,663 | | | | 8,067,688 | |
| Consumer Loans | | | | | | | | |
| Indirect - sales finance | | | 230,426 | | | | 635,637 | |
| Consumer lot loans | | | 144,315 | | | | 225,486 | |
| Direct retail | | | 83,460 | | | | 95,397 | |
| Home equity | | | 787,645 | | | | 813,201 | |
| | | | 1,245,846 | | | | 1,769,721 | |
| | | | | | | | | |
| Mortgage Loans | | | 286,618 | | | | 354,663 | |
| Loans held for investment | | | 8,386,127 | | | | 10,192,072 | |
| Loans held for sale | | | 15,758 | | | | 30,963 | |
| Total loans | | $ | 8,401,885 | | | $ | 10,223,035 | |
| | | | | | | | | |
| Included in the above: | | | | | | | | |
| Nonaccrual loans held for investment | | $ | 399,046 | | | $ | 349,382 | |
| Nonaccrual loans held for sale | | | - | | | | 16,282 | |
| Loans past due 90 days still accruing interest | | | 10,465 | | | | 47,481 | |
The following tables summarize information on impaired loans (in thousands) at and for the years ended December 31:
| | | 2009 | | | 2008 | | | 2007 | |
| Impaired loans with specific allowance | | $ | 197,576 | | | $ | 193,280 | | | $ | 35,856 | |
| Impaired loans with no specific allowance | | | 194,763 | | | | 94,217 | | | | 32,246 | |
| Total impaired loans (year end) | | $ | 392,339 | | | $ | 287,497 | | | $ | 68,102 | |
| | | | | | | | | | | | | |
| Related allowance (year end) | | $ | 37,656 | | | $ | 44,418 | | | $ | 11,340 | |
| Interest income recognized | | | 1,484 | | | | 112 | | | | 59 | |
| Foregone interest | | | 15,527 | | | | 14,439 | | | | 3,437 | |
The average recorded investment in impaired loans for the years ended December 31, 2009, 2008, and 2007 was $400.5 million, $222.0 million, and $40.4 million, respectively. At December 31, 2009, 2008 and 2007, impaired loans included $33.8 million, $6.4 million, and $1.7 million, respectively, in restructured loans.
TSFG directors, directors of subsidiaries of TSFG, executive officers, and associates of such persons were customers of and had transactions with TSFG in the ordinary course of business. Included in such transactions are outstanding loans and commitments, all of which were made under normal credit terms and did not involve more than normal risk of collection at origination. At December 31, 2009, the aggregate dollar amount of these outstanding loans was $16.8 million, which included $9.5 million of nonaccrual loans. At December 31, 2008 and 2007, the aggregate dollar amount of these outstanding loans was $19.5 million and $35.5 million, respectively. During 2009, new loans of $12.8 million were made, and payments totaled $15.5 million. During 2008, new loans of $5.7 million were made, and payments totaled $21.7 million.
Credit risk represents the maximum accounting loss that would be recognized at the reporting date if borrowers failed to perform as contracted and any collateral or security proved to be of no value. Concentrations of credit risk (whether on- or off-balance sheet) arising from financial instruments can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, certain loan products, or certain regions of the country. Credit risk associated with these concentrations could arise when a significant amount of loans, related by similar characteristics, are simultaneously
impacted by changes in economic or other conditions that cause their probability of repayment to be adversely affected. The Company does not have a significant concentration to any individual client. The major concentrations of credit risk for the Company arise by collateral type in relation to loans and credit commitments. The most significant concentration that exists is in loans secured by commercial real estate. At December 31, 2009, the Company had $3.5 billion in commercial real estate loans, representing 41.8% of total loans held for investment. A geographic concentration arises because the Company operates primarily in the Southeastern region of the United States.
At December 31, 2009, loans with a carrying amount of $4.5 billion were pledged as collateral for various borrowings and lines of credit.
During 2009, TSFG transferred $557.0 million from the held for investment portfolio to the held for sale portfolio, and subsequently sold the loans. The transfers and subsequent sales included $247.5 million of nonperforming loans (including shared national credits) for which TSFG charged-off $84.0 million against the allowance for loan losses prior to transferring them to loans held for sale. The transfers and subsequent sales also included $230.3 million of indirect auto loans and $79.2 million of performing shared national credits, which resulted in an allowance adjustment of $4.5 million.
During 2008, TSFG transferred nonperforming loans with an unpaid principal balance totaling $117.3 million from the held for investment portfolio to the held for sale portfolio, and charged-off $53.4 million of these loans against the allowance for loan losses. Of these loans, $41.2 million (net of charge-offs) were sold and $3.1 million were transferred back to loans held for investment, based on the withdrawal of the potential buyer’s offer and management’s decision to work out the loans internally. The remaining balance was reduced by lower of cost or fair value adjustments and unscheduled paydowns.
Note 9. Allowance for Credit Losses
The allowance for loan losses, reserve for unfunded lending commitments, and allowance for credit losses for each of the years in the three-year period ended December 31, 2009 are presented below (in thousands).
| | | 2009 | | | 2008 | | | 2007 | |
| Allowance for loan losses | | | | | | | | | |
| Balance at beginning of year | | $ | 247,086 | | | $ | 126,427 | | | $ | 111,663 | |
| Allowance adjustment for loans sold | | | (4,471 | ) | | | - | | | | - | |
| Provision for loan losses | | | 664,208 | | | | 344,069 | | | | 67,325 | |
| Loans charged-off | | | (556,585 | ) | | | (230,961 | ) | | | (59,408 | ) |
| Recoveries of loans previously charged-off | | | 15,404 | | | | 7,551 | | | | 6,847 | |
| Balance at end of year | | $ | 365,642 | | | $ | 247,086 | | | $ | 126,427 | |
| | | | | | | | | | | | | |
| Reserve for unfunded lending commitments | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 2,788 | | | $ | 2,268 | | | $ | 1,025 | |
| Provision for unfunded lending commitments | | | 4,696 | | | | 520 | | | | 1,243 | |
| Balance at end of year | | $ | 7,484 | | | $ | 2,788 | | | $ | 2,268 | |
| | | | | | | | | | | | | |
| Allowance for credit losses | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 249,874 | | | $ | 128,695 | | | $ | 112,688 | |
| Allowance adjustment for loans sold | | | (4,471 | ) | | | - | | | | - | |
| Provision for credit losses | | | 668,904 | | | | 344,589 | | | | 68,568 | |
| Loans charged-off | | | (556,585 | ) | | | (230,961 | ) | | | (59,408 | ) |
| Recoveries of loans previously charged-off | | | 15,404 | | | | 7,551 | | | | 6,847 | |
| Balance at end of year | | $ | 373,126 | | | $ | 249,874 | | | $ | 128,695 | |
Note 10. Premises and Equipment
Premises and equipment at December 31 are summarized (in thousands) as follows:
| | | 2009 | | | 2008 | |
| Land and land improvements | | $ | 78,121 | | | $ | 56,989 | |
| Buildings | | | 115,629 | | | | 89,715 | |
| Furniture, fixtures and equipment | | | 126,547 | | | | 133,743 | |
| Capitalized software | | | 39,874 | | | | 35,518 | |
| Leasehold improvements | | | 63,212 | | | | 62,017 | |
| Construction in progress | | | 4,438 | | | | 54,024 | |
| | | | 427,821 | | | | 432,006 | |
| Less accumulated depreciation and amortization | | | 166,298 | | | | 149,534 | |
| | | $ | 261,523 | | | $ | 282,472 | |
During 2009, 2008, and 2007 TSFG capitalized $738,000, $1.6 million and $505,000, respectively, of interest related to construction in progress. Depreciation and amortization of premises and equipment totaled $22.6 million, $22.5 million, and $20.5 million in 2009, 2008, and 2007, respectively. At December 31, 2009, there were no land or buildings pledged as collateral for long-term debt.
Note 11. Impairment of Long-Lived Assets
During 2005, TSFG initiated plans for a “corporate campus” to meet expected current and future facility needs and serve as the primary headquarters for its banking operations. During 2009, TSFG announced its intention to market its campus facility for sale. The campus site contains approximately 60 acres. Two office buildings have been completed, the conference center is substantially complete, and ten additional building sites are available. At December 31, 2009, TSFG occupied approximately 20% of the available space in the office buildings at the campus in order to house certain of its operations that were previously located in facilities with leases expiring in 2009 and early 2010.
Based on the fair value of the property as determined by third-party appraisal, TSFG recorded impairment charges of $19.4 million in 2009, which are included in noninterest expense. In determining the impairment charge, the cost basis was reduced by the estimated net realizable value of state tax credits available to TSFG. At December 31, 2009, the carrying amount of the campus was $56.1 million and the carrying amount of the state tax credits was $7.6 million. For purposes of segment reporting, the asset is included in the “Other” column in Note 32. Management will continue to monitor market conditions and offered prices, and further write-downs could be required in future periods.
Also in 2009, TSFG recorded a $612,000 impairment loss (included in noninterest expense) from the write-down of its corporate jet. The corporate jet was subsequently sold during 2009 with no significant gain or loss on the sale.
In addition, during the year ended December 31, 2009, TSFG recorded $1.6 million in impairment losses (also included in noninterest expense) associated with vacated branches and office locations, primarily attributable to subletting office space at less than the contractual lease rate.
Note 12. Goodwill
The following summarizes the changes in the carrying amount of goodwill related to each of TSFG’s business segments (in thousands) for the years ended December 31, 2009 and 2008:
| | | Carolina First | | | Mercantile | | | Other | | | Total | |
| Balance, December 31, 2007 | | | | | | | | | | | | |
| Goodwill | | $ | 203,800 | | | $ | 427,887 | | | $ | 19,316 | | | $ | 651,003 | |
| Accumulated impairment losses | | | - | | | | - | | | | - | | | | - | |
| | | | 203,800 | | | | 427,887 | | | | 19,316 | | | | 651,003 | |
| Goodwill impairment charge | | | - | | | | (426,049 | ) | | | - | | | | (426,049 | ) |
| Purchase accounting adjustments | | | - | | | | (1,838 | ) | | | 1,045 | | | | (793 | ) |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2008 | | | | | | | | | | | | | | | | |
| Goodwill | | | 203,800 | | | | 426,049 | | | | 20,361 | | | | 650,210 | |
| Accumulated impairment losses | | | - | | | | (426,049 | ) | | | - | | | | (426,049 | ) |
| | | | 203,800 | | | | - | | | | 20,361 | | | | 224,161 | |
Goodwill impairment charge (1) | | | - | | | | - | | | | (2,511 | ) | | | (2,511 | ) |
| Purchase accounting adjustments | | | - | | | | - | | | | 321 | | | | 321 | |
| Goodwill allocated to sales of ancillary businesses | | | (2,172 | ) | | | - | | | | (5,681 | ) | | | (7,853 | ) |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2009 | | | | | | | | | | | | | | | | |
| Goodwill | | | 201,628 | | | | 426,049 | | | | 12,490 | | | | 640,167 | |
| Accumulated impairment losses | | | - | | | | (426,049 | ) | | | - | | | | (426,049 | ) |
| | | $ | 201,628 | | | $ | - | | | $ | 12,490 | | | $ | 214,118 | |
| | (1) | Goodwill impairment charge in 2009 was related to ancillary businesses that were subsequently sold. |
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 purposes of the goodwill impairment evaluation performed at June 30, 2009, the fair value of the Carolina First reporting unit was determined primarily using discounted cash flow models based on internal forecasts (90% weighting) and, to a lesser extent, market-based trading and transaction multiples (10% weighting). More weight was given to the discounted cash flow models since market-based multiples are not considered directly comparable given the lack of a complete operational entity for each reporting unit, and based on the internal forecasts taking a longer term view of the Company’s performance. The internal forecasts included certain assumptions made by management, including expected growth rates in loans and customer funding, changes in net interest margin, credit quality trends, and the forecasted levels of other in come and expense items. Forecasts were prepared for each of the next five years, with a terminal cash flow assigned to the remainder of the forecast horizon. A range of terminal growth rates ranging from 3% to 7% were applied to the terminal cash flow. Each period’s cash flow was then discounted using a range of discount rates based on the risk-free rate plus a premium based on overall stock market level of risk compared to the level of risk of our own stock. The portion of the estimated value derived from market-based trading and transaction multiples was based on a weighting of market multiples for selected peer institutions based on such metrics as book value of equity, tangible equity, and assets. (Earnings multiples were not used because most peers did not have
earnings.) The value assigned to the reporting unit for purposes of the goodwill impairment evaluation was based on the midpoint of the range of values determined using the method outlined above. This valuation indicated that the fair value of the Carolina First reporting unit was less than its carrying value. However, Step 2 of the evaluation indicated that the implied fair value of the goodwill was greater than its carrying value, and thus no impairment charge was required as of the June 30, 2009 test date for the Carolina First banking segment.
As TSFG, including its Carolina First reporting unit, continued to report additional losses and other conditions had changed during third quarter 2009, TSFG performed an updated evaluation of the goodwill related to the Carolina First reporting unit as of September 30, 2009. In connection with its evaluation, TSFG engaged an independent third party to review the methodology and assumptions in Step 1 and to perform the valuation of the loan portfolio and the core deposit intangible for the Carolina First banking segment for purposes of performing Step 2. (The remaining $12.5 million of goodwill for other segments was related to TSFG’s insurance operations and was not evaluated for impairment on an interim basis based on operating results.) Based on changes in management’s views on its current outlook and the review by the t hird party, the Company lowered the terminal growth rates to a range of 2% to 4% and increased the targeted capital level allocated to the Carolina First reporting unit to reflect current industry conditions and company-specific expectations as part of its Step 1 analysis. Although the valuation with the updated assumptions continued to indicate that the fair value of the Carolina First reporting unit was less than its carrying value, Step 2 of the evaluation indicated that the implied fair value of the goodwill was greater than its carrying value at September 30, 2009, primarily due to the excess of the book value of the Carolina First loan portfolio over its fair value based on exit price, and no impairment was recorded. No formal impairment evaluation was performed at December 31, 2009 since there were no material changes to the assumptions and expectations used as of September 30, 2009.
In the current environment, forecasting cash flows, credit losses and growth in addition to valuing the Company’s assets with any degree of assurance is very difficult and subject to significant changes over very short periods of time. Management will continue to update its analysis as circumstances change, and as market conditions continue to be volatile and unpredictable, and impairment write-downs on goodwill related to TSFG’s reporting units may be necessary in future periods.
During second quarter 2009, TSFG recorded a $2.1 million goodwill impairment charge on one of its nonbank subsidiaries (included in the Other segment) based on discounted cash flows and estimated market valuations. Also in second quarter 2009, TSFG recorded a $411,000 goodwill impairment charge in its Retirement Plan Administration reporting unit due to its decision to sell its subsidiary, American Pensions, Inc. (included in the Other segment). Both of these reporting units were sold during third quarter 2009.
During first quarter 2008, TSFG recognized $188.4 million in goodwill impairment in the Mercantile banking segment primarily due to increased projected credit costs and a related decrease in projected loan growth, as well as changes in the measurement of segment profitability. During fourth quarter 2008, TSFG recognized an additional $237.6 million of goodwill impairment primarily due to an increase in the discount rate used for valuing future cash flows of our Mercantile reporting unit and a reduction in the projected cash flows primarily over the next two years. The range of discount rates used increased to 14% to 18% at December 31, 2008 (from 10% to 14% in prior evaluations) due to increases in overall stock market volatility as well as volatility of our stock.
Note 13. Other Intangible Assets
Other intangible assets, net of accumulated amortization, at December 31 are summarized as follows (in thousands):
| | | 2009 | | | 2008 | |
Core deposit intangible (1) | | $ | 45,009 | | | $ | 59,550 | |
Less accumulated amortization (1) | | | (31,461 | ) | | | (41,979 | ) |
| | | | 13,548 | | | | 17,571 | |
| Non-compete agreement intangible | | | 5,672 | | | | 5,672 | |
| Less accumulated amortization | | | (5,669 | ) | | | (5,460 | ) |
| | | | 3 | | | | 212 | |
| Customer list intangible | | | 6,725 | | | | 7,960 | |
| Less accumulated amortization | | | (4,569 | ) | | | (3,884 | ) |
| | | | 2,156 | | | | 4,076 | |
| | | $ | 15,707 | | | $ | 21,859 | |
| | (1) | During 2009, TSFG removed $14.5 million of fully amortized core deposit intangible from both the gross carrying amount and accumulated amortization. |
The following presents the details for amortization expense of intangible assets (in thousands) for the years ended December 31:
| | | 2009 | | | 2008 | | | 2007 | |
| Core deposit intangible | | $ | 4,023 | | | $ | 4,811 | | | $ | 5,663 | |
| Non-compete agreement intangible | | | 209 | | | | 471 | | | | 1,254 | |
| Customer list intangible | | | 685 | | | | 856 | | | | 980 | |
| Total amortization expense of intangible assets | | $ | 4,917 | | | $ | 6,138 | | | $ | 7,897 | |
The estimated amortization expense for amortizable intangible assets (in thousands) for the years ended December 31 is as follows:
| | | | | | Non- | | | | | | | |
| | | Core | | | Compete | | | Customer | | | | |
| | | Deposit | | | Agreement | | | List | | | | |
| | | Intangible | | | Intangible | | | Intangible | | | Total | |
| 2010 | | $ | 3,543 | | | $ | 3 | | | $ | 442 | | | $ | 3,988 | |
| 2011 | | | 3,113 | | | | - | | | | 384 | | | | 3,497 | |
| 2012 | | | 2,317 | | | | - | | | | 313 | | | | 2,630 | |
| 2013 | | | 977 | | | | - | | | | 209 | | | | 1,186 | |
| 2014 | | | 519 | | | | - | | | | 172 | | | | 691 | |
| Aggregate total for all years thereafter | | | 3,079 | | | | - | | | | 636 | | | | 3,715 | |
| | | $ | 13,548 | | | $ | 3 | | | $ | 2,156 | | | $ | 15,707 | |
Note 14. Other Real Estate Owned
The following presents the details (in thousands) for other real estate owned (which is included in other assets on the consolidated balance sheet) at and for the years ended December 31:
| | | 2009 | | | 2008 | |
| Balance at beginning of year | | $ | 44,668 | | | $ | 6,467 | |
| Loans transferred in | | | 165,061 | | | | 51,158 | |
| Sales | | | (65,696 | ) | | | (11,907 | ) |
| Write-downs | | | (21,947 | ) | | | (1,050 | ) |
| Balance at end of year | | $ | 122,086 | | | $ | 44,668 | |
Note 15. 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 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 du ration 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) at December 31 are presented below.
| | | 2009 | | | 2008 | |
| | | 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 | | $ | 14,339 | | | $ | - | | | $ | 780,000 | | | $ | 48,766 | | | $ | - | | | $ | 1,670,000 | |
| Interest rate floor associated with lending activities | | | - | | | | - | | | | - | | | | 6,873 | | | | - | | | | 200,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair value hedges | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps associated with brokered CDs | | | 1,895 | | | | 48 | | | | 54,185 | | | | 2,491 | | | | 1,376 | | | | 220,352 | |
| Total derivatives designated as hedging instruments under GAAP | | $ | 16,234 | | | $ | 48 | | | $ | 834,185 | | | $ | 58,130 | | | $ | 1,376 | | | $ | 2,090,352 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments under GAAP: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | $ | 279 | | | $ | 480 | | | $ | 119,755 | | | $ | - | | | $ | 1,232 | | | $ | 10,000 | |
| Forward foreign currency contracts | | | 12 | | | | 12 | | | | 13,331 | | | | 1,660 | | | | 1,660 | | | | 11,063 | |
| Customer swap contracts | | | 25,658 | | | | 22,067 | | | | 850,680 | | | | 44,067 | | | | 44,882 | | | | 984,897 | |
| Options, mortgage contracts, and other | | | 416 | | | | 433 | | | | 111,328 | | | | 3,481 | | | | 3,420 | | | | 152,243 | |
| Total derivatives not designated as hedging instruments under GAAP | | $ | 26,365 | | | $ | 22,992 | | | $ | 1,095,094 | | | $ | 49,208 | | | $ | 51,194 | | | $ | 1,158,203 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total derivatives | | $ | 42,599 | | | $ | 23,040 | | | $ | 1,929,279 | | | $ | 107,338 | | | $ | 52,570 | | | $ | 3,248,555 | |
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 2009 and 2008, such derivatives were used to hedge the variable cash inflows associated with existing pools of prime and LIBOR-based loans. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During 2009, the Company recognized a loss of $156,000 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 ch ange in fair value of these swaps during 2009 of $2.2 million was recognized directly in earnings as a loss and was included in the section entitled
“Derivatives Not Designated as Hedging Instruments” throughout this footnote. No hedge ineffectiveness was recognized during 2008.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets. During 2009, the Company accelerated the reclassification of an unrealized gain in accumulated other comprehensive income of $3.2 million to earnings as a result of the hedged forecasted transactions becoming probable not to occur. During the next twelve months, the Company estimates that $15.2 million will be reclassified from accumulated other comprehensive income to the statement of operations. 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. During 2009 and 2008, the Company recognized a gain of $194,000 and $856,000, 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 2009 and 2008, which includes net settlements on the derivatives and any amortization of the basis adjustment in the hedged items, was a reduction to interest expense of $3.5 million and $8.3 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 ratings downgrades. As a result, certain customer contracts are no longer offset by third-party hedges. At December 31, 2009, the total fair value of TSFG’s interest rate swaps with customers was an asset of $25.7 million.
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.
Effect of Derivative Instruments on the Consolidated Statements of Operations
The effects of derivative instruments on the consolidated statements of operations for the years ended December 31 are presented in the tables below (in thousands):
| | | 2009 | | | 2008 | |
| Derivatives in Cash Flow Hedging Relationships | | | | | | |
| Interest rate swaps associated with lending activities: | | | | | | |
| Amount of gain recognized in OCI | | $ | 7,813 | | | $ | 48,794 | |
| Amount of gain reclassified from accumulated OCI to interest income (effective portion) | | | 34,961 | | | | 20,143 | |
| Amount of gain reclassified from accumulated OCI to gain/loss on certain derivative activities (effective portion) | | | 2,618 | | | | - | |
| Amount of loss recognized in gain/loss on certain derivative activities (ineffective portion and amount excluded from effectiveness testing) | | | (156 | ) | | | - | |
| Interest rate floor associated with lending activities: | | | | | | | | |
| Amount of gain recognized in OCI | | | 716 | | | | 8,618 | |
| Amount of gain reclassified from accumulated OCI to interest income (effective portion) | | | 6,532 | | | | 5,404 | |
| Amount of gain recognized in gain/loss on certain derivative activities (ineffective portion and amount excluded from effectiveness testing) | | | 293 | | | | - | |
| | | 2009 | | | 2008 | |
| Derivatives in Fair Value Hedging Relationships | | | | | | |
| Interest rate swaps associated with brokered CDs: | | | | | | |
| Amount of gain recognized in gain/loss on certain derivative activities on derivative | | $ | 2,177 | | | $ | 8,801 | |
| Amount of loss recognized in gain/loss on certain derivative activities on hedged item | | | (1,983 | ) | | | (7,945 | ) |
| | | | | Amount of Gain (Loss) | |
| Derivatives Not | | Location of Gain (Loss) | | Recognized in Income on | |
| Designated as | | Recognized in Income on | | Derivative | |
| Hedging Instruments | | Derivative | | 2009 | | | 2008 | |
| Interest rate swaps | | Gain (loss) on certain derivative activities | | $ | 954 | | | $ | (1,069 | ) |
| Interest rate swaps | | Other noninterest income | | | (498 | ) | | | - | |
| Customer swaps | | Other noninterest income | | | (509 | ) | | | 4,372 | |
| Mortgage contracts | | Mortgage banking income | | | (24 | ) | | | 204 | |
| Other contracts | | Gain (loss) on certain derivative activities | | | (54 | ) | | | 6 | |
| | | | | $ | (131 | ) | | $ | 3,513 | |
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.
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 December 31, 2009, 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 $16.4 million. As of December 31, 2009 the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted collateral of $26.7 million. Since the Company was in violation of certain debt rating provisions at December 31, 2009, it could have been required to settle its obligations under the agreements at the termination value ($16.4 million) and could have been required to post additional collateral with the respective counterparty (up to $4.8 million).
Note 16. Deposits
Deposits (in thousands) at December 31 are summarized in the table below.
| | | 2009 | | | 2008 | |
| Noninterest-bearing demand deposits | | $ | 1,124,404 | | | $ | 1,041,140 | |
| Interest-bearing checking | | | 1,060,470 | | | | 1,078,921 | |
| Money market accounts | | | 2,072,664 | | | | 1,834,115 | |
| Savings accounts | | | 322,924 | | | | 190,519 | |
| Time deposits under $100,000 | | | 1,632,582 | | | | 1,863,520 | |
| Time deposits of $100,000 or more | | | 1,137,067 | | | | 1,488,735 | |
| Customer deposits | | | 7,350,111 | | | | 7,496,950 | |
| Brokered deposits | | | 1,946,101 | | | | 1,908,767 | |
| Total deposits | | $ | 9,296,212 | | | $ | 9,405,717 | |
Maturities of time deposits (including brokered deposits) at December 31, 2009 are as follows (in thousands):
| 2010 | | $ | 2,771,903 | |
| 2011 | | | 1,458,405 | |
| 2012 | | | 361,899 | |
| 2013 | | | 57,515 | |
| 2014 | | | 28,205 | |
| Thereafter | | | 37,823 | |
| | | $ | 4,715,750 | |
Prepaid broker fees, net of accumulated amortization, totaled $6.4 million and $6.0 million at December 31, 2009 and 2008, respectively, and were included in other assets on the consolidated balance sheet. Amortization of prepaid broker fees totaled $5.2 million, $5.5 million, and $4.6 million in 2009, 2008, and 2007, respectively, and was reported in interest expense on deposits in the consolidated statements of operations.
Note 17. Income Taxes
The aggregate amount of income tax expense (benefit) (in thousands) included in the consolidated statements of operations and in the consolidated statements of changes in shareholders’ equity and comprehensive income (in thousands) for the years ended December 31, 2009, 2008, and 2007 were as follows:
| | | 2009 | | | 2008 | | | 2007 | |
| Income/loss before income taxes | | $ | 37,794 | | | $ | (87,574 | ) | | $ | 33,400 | |
| Changes recorded in shareholders' equity | | | | | | | | | | | | |
| Cumulative effect of initial application of guidance related to uncertain tax positions | | | - | | | | - | | | | (488 | ) |
| Cumulative effect of initial application of fair value option | | | - | | | | (32 | ) | | | - | |
| Change in unrealized gains/losses on fair value of cash flow hedges | | | 12,502 | | | | (11,153 | ) | | | (8,444 | ) |
| Change in unrealized gains/losses on available for sale securities | | | (5,896 | ) | | | (22,135 | ) | | | (9,848 | ) |
| | | $ | 44,400 | | | $ | (120,894 | ) | | $ | 14,620 | |
Income tax expense (benefit) attributable to income (loss) before income taxes ("income tax expense (benefit)") (in thousands) for the years ended December 31, 2009, 2008, and 2007 consisted of the following:
| | | 2009 | | | 2008 | | | 2007 | |
| Current | | | | | | | | | |
| U.S. Federal | | $ | (20,093 | ) | | $ | (41,284 | ) | | $ | 22,937 | |
| State and local | | | 188 | | | | 916 | | | | 3,037 | |
| | | | (19,905 | ) | | | (40,368 | ) | | | 25,974 | |
| Deferred | | | | | | | | | | | | |
| U.S. Federal | | | 48,249 | | | | (39,232 | ) | | | 6,879 | |
| State and local | | | 9,450 | | | | (7,974 | ) | | | 547 | |
| | | | 57,699 | | | | (47,206 | ) | | | 7,426 | |
| Total income tax expense (benefit) | | $ | 37,794 | | | $ | (87,574 | ) | | $ | 33,400 | |
Income tax expense (benefit) differed from the amounts computed by applying TSFG's statutory U.S. federal income tax rate of 35% for the years ended December 31, 2009, 2008, and 2007 to pretax income/loss from continuing operations as a result of the following (in thousands):
| | | 2009 | | | 2008 | | | 2007 | |
| Income tax (benefit) expense at federal statutory rate | | $ | (223,461 | ) | | $ | (222,142 | ) | | $ | 37,337 | |
| State income tax, net of federal benefit | | | (13,543 | ) | | | (4,588 | ) | | | 2,329 | |
| Increase (decrease) resulting from: | | | | | | | | | | | | |
| Subsidiary stock, recognition of basis difference | | | (481 | ) | | | 2 | | | | 50 | |
| Bank-owned life insurance | | | (3,183 | ) | | | (4,507 | ) | | | (4,670 | ) |
| Book compensation cost for ISO stock options | | | 613 | | | | 946 | | | | 1,179 | |
| Nontaxable municipal interest | | | (2,856 | ) | | | (3,275 | ) | | | (3,817 | ) |
| Income tax credits | | | (4,753 | ) | | | (3,364 | ) | | | (841 | ) |
| Dividends received deduction | | | (36 | ) | | | (24 | ) | | | (24 | ) |
| Goodwill impairment | | | 1,495 | | | | 149,117 | | | | - | |
| Purchase of REIT preferred shares at a discount | | | (2,912 | ) | | | - | | | | - | |
| Change in federal and state valuation allowance for deferred income tax assets | | | 286,498 | | | | 83 | | | | (573 | ) |
| Other, net | | | 413 | | | | 178 | | | | 2,430 | |
| | | $ | 37,794 | | | $ | (87,574 | ) | | $ | 33,400 | |
The tax effected sources of temporary differences that give rise to significant portions of deferred income tax assets and deferred income tax liabilities at December 31 are presented below (in thousands):
| | | 2009 | | | 2008 | |
| Deferred Income Tax Assets | | | | | | |
| Loan loss allowance deferred for income tax purposes | | $ | 134,309 | | | $ | 90,906 | |
| Compensation expense deferred for income tax reporting purposes | | | 18,322 | | | | 21,293 | |
| Federal capital loss carryforward | | | 2,738 | | | | 1,484 | |
| State net operating loss carryforwards | | | 17,656 | | | | 6,802 | |
| Excess basis of securities for income tax purposes over financial reporting purposes | | | 615 | | | | 335 | |
| Federal net operating loss carryforward | | | 171,865 | | | | 958 | |
| Miscellaneous accruals and reserves | | | 5,855 | | | | 5,855 | |
| Other | | | 13,439 | | | | 4,550 | |
| | | | 364,799 | | | | 132,183 | |
| Less valuation allowance | | | 290,263 | | | | 3,765 | |
| | | | 74,536 | | | | 128,418 | |
| Deferred Income Tax Liabilities | | | | | | | | |
| Excess basis of intangible assets for financial reporting purposes over income tax basis | | | 13,851 | | | | 15,822 | |
| Unrealized gains on securities available for sale | | | 9,955 | | | | 4,059 | |
| Income tax depreciation in excess of book depreciation | | | 19,634 | | | | 18,523 | |
| Excess basis of prepaid and deferred expenses for financial reporting purposes over income tax basis | | | 20,439 | | | | 18,227 | |
| Unrealized gains on cash flow hedges deferred for income tax reporting purposes | | | 6,704 | | | | 19,206 | |
| Excess carrying value of assets acquired for financial reporting purposes over income tax basis | | | 499 | | | | 369 | |
| Unrealized gains and other adjustments on fair value hedges and derivatives not qualifying for hedge accounting | | | 3,450 | | | | 1,115 | |
| Income tax bad debt reserve recapture adjustment | | | 4 | | | | 4 | |
| | | | 74,536 | | | | 77,325 | |
| Net deferred income tax assets | | $ | - | | | $ | 51,093 | |
Changes in net deferred income tax assets were (in thousands):
| | | 2009 | | | 2008 | |
| Balance at beginning of year | | $ | 51,093 | | | $ | 37,175 | |
| Income tax effect from change in unrealized gains/losses on available for sale securities | | | (5,896 | ) | | | (22,135 | ) |
| Income tax effect from change in fair values on cash flow hedges | | | 12,502 | | | | (11,153 | ) |
| Deferred income tax (expense) benefit on continuing operations | | | (57,699 | ) | | | 47,206 | |
| Balance at end of year | | $ | - | | | $ | 51,093 | |
TSFG had a current tax receivable of $18.2 million and $45.2 million at December 31, 2009 and 2008, respectively.
The valuation allowance for deferred income tax assets as of December 31, 2009 and 2008 was $290.3 million and $3.8 million, respectively. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. During third quarter 2009, the estimated realization period for the deferred tax asset based on forecasts of future earnings extended further into the 20-year carryforwa rd period compared to the realization period forecasted in second quarter 2009. This extended realization period, combined with the objective evidence of a three-year cumulative loss position and continued near-term losses represented significant negative evidence that caused the Company to conclude that a $286.5 million increase to the deferred tax valuation allowance was required in 2009. To the extent that TSFG generates taxable income in a given quarter, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense. Any remaining deferred tax asset valuation allowance will ultimately reverse (subject to ownership change
limitations) through income tax expense when TSFG can demonstrate a sustainable return to profitability that would lead management to conclude that it is more likely than not that the deferred tax asset will be utilized during the 20-year carryforward period.
At December 31, 2009, TSFG had federal income tax net operating loss (“NOL”) carryforwards of approximately $468.5 million that originated in 2009 and will expire in 2029. The ability of TSFG to utilize NOL carryforwards to reduce future federal taxable income and the federal income tax liability of the Company may be subject to various limitations under Section 382 of the Internal Revenue Code of 1986, as amended. The utilization of such carryforwards may be limited upon the occurrence of certain ownership changes, 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. As of Dec ember 31, 2009, we do not believe that an ownership change has occurred. Future equity transactions by TSFG or by 5% stockholders (including transactions beyond our control) could cause a Section 382 ownership change and therefore a limitation on the annual utilization of NOLs.
In the event of an ownership change (as defined for income tax purposes), Section 382 of the Code imposes an annual limitation on the amount of a corporation's taxable income that can be offset by these carryforwards. The limitation is generally equal to the product of (i) the fair market value of the equity of the company multiplied by (ii) a percentage approximately equivalent to the yield on long-term tax exempt bonds during the month in which an ownership change occurs. In addition, the limitation is increased if there are unrecognized built-in losses on the balance sheet prior to a change in ownership.
At December 31, 2009, TSFG had NOL carryforwards for state income tax purposes of $444.8 million available to offset future taxable state income, if any, which expire in 2010 through 2029. These state NOL carryforwards may also be subject to limitation upon change of control. TSFG also has capital loss carryforwards of $7.8 million, which are available to offset future taxable federal capital gains, if any, through 2013.
The following table summarizes the activity related to unrecognized tax benefits (in thousands) for the years ended December 31:
| | | 2009 | | | 2008 | | | 2007 | |
| Balance at beginning of year | | $ | 4,382 | | | $ | 10,818 | | | $ | 13,218 | |
| Increases related to current year tax positions | | | - | | | | 154 | | | | 2,836 | |
| Decreases related to prior year tax positions | | | (14 | ) | | | (70 | ) | | | (32 | ) |
| Decreases related to expiration of statute of limitations | | | (1,630 | ) | | | (2,985 | ) | | | (21 | ) |
| Decreases related to audits/settlements with taxing authorities | | | - | | | | (3,535 | ) | | | (5,183 | ) |
| Balance at end of year | | $ | 2,738 | | | $ | 4,382 | | | $ | 10,818 | |
If recognized, the gross unrecognized tax benefits of $2.7 million at December 31, 2009 would favorably affect the effective income tax rate in future periods. At December 31, 2009, approximately $428,000 of unrecognized tax benefits is expected to be resolved during the next 12 months through the expiration of the statute of limitations and resolution of outstanding audits with taxing authorities.
TSFG and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2005. Tax returns for 2006 forward are open to examination by the Internal Revenue Service. The Company is open to state and local income tax examinations for the tax years 2006 forward.
TSFG’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company recognized $0, $79,000, and $363,000 of expense from interest and penalties in the statement of operations in 2009, 2008, and 2007, respectively. The Company had approximately $461,000 and $622,000 accrued for interest and penalties at December 31, 2009 and 2008, respectively.
Note 18. Short-Term Borrowed Funds
Short-term borrowed funds at December 31 were (in thousands):
| | | 2009 | | | 2008 | |
| Customer sweep accounts | | $ | 316,690 | | | $ | 493,012 | |
| Treasury, tax and loan note | | | 5,987 | | | | 3,516 | |
| Federal funds purchased and repurchase agreements | | | 25 | | | | 67,309 | |
| Federal reserve borrowings | | | - | | | | 1,050,000 | |
| Commercial paper | | | - | | | | 12,537 | |
| | | $ | 322,702 | | | $ | 1,626,374 | |
Repurchase agreements and certain customer sweep accounts represent overnight and short-term borrowings collateralized by securities of the U.S. government or its agencies, which are held by third-party safekeepers. The approximate cost and fair value of these securities at December 31, 2009 were $358.8 million and $364.2 million, respectively. The approximate cost and fair value of these securities at December 31, 2008 were $532.9 million and $530.8 million, respectively.
The following summarizes selected data related to short-term borrowed funds (in thousands) at and for the years ended December 31:
| | | 2009 | | | 2008 | |
| Maximum outstanding at any month-end during the year | | $ | 1,750,400 | | | $ | 2,324,472 | |
| Balance outstanding at end of year | | | 322,702 | | | | 1,626,374 | |
| Average outstanding during the year | | | 810,919 | | | | 1,626,453 | |
| Average interest rate during the year | | | 0.28 | % | | | 2.14 | % |
| Average interest rate at end of year | | | 0.33 | | | | 0.38 | |
Interest expense on short-term borrowings for the years ended December 31 related to the following (in thousands):
| | | 2009 | | | 2008 | | | 2007 | |
| Customer sweep accounts | | $ | 1,011 | | | $ | 11,519 | | | $ | 22,724 | |
| Treasury, tax and loan note | | | 3 | | | | 4,382 | | | | 11,208 | |
| Federal funds purchased and repurchase agreements | | | 120 | | | | 8,311 | | | | 39,650 | |
| Federal reserve borrowings | | | 1,012 | | | | 8,734 | | | | - | |
| Commercial paper | | | 27 | | | | 954 | | | | 1,790 | |
| FHLB advances | | | 86 | | | | 870 | | | | 4,476 | |
| Line of credit to unaffiliated bank and other | | | - | | | | 5 | | | | 5 | |
| | | $ | 2,259 | | | $ | 34,775 | | | $ | 79,853 | |
Note 19. Unused Lines of Credit
At December 31, 2009, TSFG had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $113.7 million. These lines of credit are generally available on a one-to-ten day basis for funding short-term liquidity needs. In addition, at December 31, 2009, TSFG had $124.5 million of excess collateral to support FHLB advances, subject to adjustments regarding acceptability by the FHLB, and $202.3 million of excess collateral to support Treasury, tax and loan borrowings. A collateralized borrowing relationship with the Federal Reserve Bank of Richmond is in place for TSFG. At December 31, 2009, TSFG had $1.4 billion of excess qualifying collateral to secure advances from the Federal Reserve Bank. These lines of credit are subject to withdrawal at any time at the lenders’ option.
Note 20. Long-Term Debt
Long-term debt at December 31 consisted of the following (in thousands, except for descriptions of terms):
| | | 2009 | | | 2008 | |
| FHLB advances, net of discount of $731,000 at December 31, 2009; fixed or variable rates ranging from 0.41% to 4.27% due from 2011 to 2018, notwithstanding certain earlier call dates; collateralized by a blanket lien on qualifying loans, including first mortgages on one-to-four family residences valued at $323.9 million, home equity lines of credit and second mortgage loans valued at $607.2 million, and commercial loans valued at $987.6 million; initial maturity of one year or greater; interest payable quarterly | | $ | 752,646 | | | $ | 233,497 | |
| Repurchase agreements; fixed or variable rates ranging from 0.05% to 4.30% due in 2012; collateralized by securities of the U.S. government or its agencies, which are held by third-party safekeepers, valued at $132.7 million; interest payable quarterly | | | 125,000 | | | | 200,000 | |
Subordinated Notes; due September 1, 2037; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 1.42%; balance can be prepaid in whole or in part after September 1, 2012 at accrued and unpaid interest plus outstanding principal (1) | | | 77,320 | | | | 77,320 | |
Subordinated Notes; due June 15, 2036; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 1.59%; balance can be prepaid in whole or in part after June 15, 2011 at accrued and unpaid interest plus outstanding principal (1) | | | 41,238 | | | | 41,238 | |
Subordinated Notes; due July 7, 2036; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 1.56%; balance can be prepaid in whole or in part after July 7, 2011 at accrued and unpaid interest plus outstanding principal (1) | | | 36,083 | | | | 36,083 | |
Subordinated Notes; due September 15, 2037; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 1.32%; balance can be prepaid in whole or in part after December 15, 2012 at accrued and unpaid interest plus outstanding principal (1) | | | 30,928 | | | | 30,928 | |
Mandatorily redeemable preferred stock of subsidiary; redeemable January 31, 2031; unsecured; dividends payable quarterly and at maturity at a rate per annum equal to 11.125% (2) | | | 26,300 | | | | 26,300 | |
Subordinated Notes; due October 30, 2037; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 1.33%; balance can be prepaid in whole or in part after October 30, 2012 at accrued and unpaid interest plus outstanding principal (1) | | | 18,042 | | | | 18,042 | |
Mandatorily redeemable preferred stock of subsidiary; redeemable May 31, 2012; unsecured; dividends payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 3.50% (2) | | | 5,500 | | | | 30,500 | |
Subordinated Notes; due June 26, 2033; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 3.10% (not to exceed 11.75% through June 26, 2008); balance can be prepaid in whole or in part after June 26, 2008 at accrued and unpaid interest plus outstanding principal (1) | | | 3,093 | | | | 3,093 | |
| Subordinated Notes; due December 17, 2013; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 2.83%; balance can be prepaid after December 17, 2008 at par plus accrued and unpaid interest | | | -- | | | | 10,000 | |
| Other | | | 719 | | | | 768 | |
| | | $ | 1,116,869 | | | $ | 707,769 | |
| | (1) | The balance can also be prepaid in whole (but not in part) at any time within a specified number of days (as defined in the indenture) following the occurrence of a tax event, an investment company event, or a capital treatment event at a special redemption price (as defined in the indenture). |
| | (2) | The balance can be redeemed in whole or in part following the occurrence of a tax or capital event (as defined in the terms of the preferred stock). |
Required annual principal payments for the five years subsequent to December 31, 2009 are as follows (in thousands):
| | | FHLB | | | Repurchase | | | | | | | |
| | | Advances | | | Agreements | | | Other | | | Total | |
| 2010 | | $ | 123 | | | $ | - | | | $ | 56 | | | $ | 179 | |
| 2011 | | | 450,125 | | | | - | | | | 64 | | | | 450,189 | |
| 2012 | | | 100,128 | | | | 125,000 | | | | 6,099 | | | | 231,227 | |
| 2013 | | | 200,132 | | | | - | | | | - | | | | 200,132 | |
| 2014 | | | 135 | | | | - | | | | - | | | | 135 | |
| Thereafter | | | 2,734 | | | | - | | | | 233,004 | | | | 235,738 | |
| | | $ | 753,377 | | | $ | 125,000 | | | $ | 239,223 | | | $ | 1,117,600 | |
Debt issuance costs, net of accumulated amortization, totaled $1.0 million and $1.7 million at December 31, 2009 and 2008, respectively, and are included in other assets on the consolidated balance sheet. Amortization of debt issuance costs totaled $106,000, $233,000, and $466,000 in 2009, 2008, and 2007, respectively, and is reported in other noninterest expenses on the consolidated statements of operations.
During the years ended December 31, 2009, 2008, and 2007, TSFG recognized gains or losses on the early extinguishment of debt of $3.0 million gain, $2.1 million loss, and $2.0 million loss, respectively. Such gains and losses are included in noninterest expenses. The gain for 2009 was primarily due to the gain on the repurchase of $25.0 million of mandatorily redeemable preferred stock of a REIT subsidiary, partially offset by a loss on termination of $75.0 million of long-term repurchase agreements. The loss for 2008 was primarily due to prepayment penalties for FHLB advances partially offset by gains on brokered CDs for which the related interest rate swaps were called. The majority of the loss for 2007 reflects the write-off of unamortized debt issuance costs a ssociated with $131.5 million of subordinated notes and mandatorily redeemable preferred stock, with an average spread of 347 basis points over LIBOR, which TSFG called for redemption.
Trust preferred securities (“Trust Securities”) are issued by statutory business trusts (the “Trusts”) which are not consolidated (see Note 1). These Trust Securities are mandatorily redeemable preferred security obligations of the Trusts. The sole assets of the Trusts are subordinated notes (the “Notes”) of TSFG, which are included in the Long-Term Debt table above. Each issue of the Notes has an interest rate equal to the corresponding Trust Securities distribution rate. TSFG has the right, subject to events of default, to defer payment of interest on the Notes for a period not to exceed five years, provided that no extension period may extend beyond the stated maturity of the relevant Notes. During any such extension period, distributions on the Trust Securities will also be deferred and the Comp any’s ability to pay dividends on its common and preferred stock will be restricted.
Effective first quarter 2010, TSFG opted to defer payment of interest on the Notes (which will in turn defer payment of the distributions on the Trust Securities), as well as to suspend dividends on all mandatorily redeemable preferred stock of its REIT subsidiary (“REIT Preferred Securities”). Since both the Notes and the REIT Preferred Securities are considered debt on the consolidated balance sheet, interest and dividends will continue to be accrued in the statement of operations despite the fact that the payments have been suspended. The terms of the REIT Preferred Securities include a provision that if six quarters of dividends are not declared and paid, the preferred holders get to elect two new trustees. In addition, the suspension of dividends on the REIT Preferred Securities prohibits any payment of common dividen ds out of the REIT subsidiary, which may cause it to lose its status as a REIT and thus become subject to taxation as a regular corporation.
Note 21. 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 March 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 intends to vigorously defend the allegations and has moved to dismiss the complaint or, in the alternative, for a more definite statement. 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. 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. In the complaint, which seeks damages of $36 million, 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 the Carolina First Bank loan. TSFG intends to vigorously defend the allegations and has moved to dismiss the complaint.
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 December 31, 2009 and 2008, 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.
Lease Commitments
Minimum rental payments under noncancelable operating leases at December 31, 2009 are as follows (in thousands):
| 2010 | | $ | 17,490 | |
| 2011 | | | 17,361 | |
| 2012 | | | 16,780 | |
| 2013 | | | 15,751 | |
| 2014 | | | 14,128 | |
| Thereafter | | | 94,534 | |
| | | $ | 176,044 | |
Leases on premises and equipment have options for extensions under substantially the same terms as in the original lease period with certain rate escalations. Lease payments charged to expense totaled $20.0 million, $21.0 million, and $19.2 million in 2009, 2008, and 2007, respectively. The leases typically provide that the lessee pay property taxes, insurance, and maintenance cost.
Lending Commitments and Guarantees
In the normal course of business, to meet the financing needs of its customers, TSFG is a party to financial instruments with off-balance-sheet risk. These financial instruments include commitments to extend credit, standby letters of credit, repurchase agreements, and documentary letters of credit. Those 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 in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those 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 as long as 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 many 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 collateral obtained, if deemed necessary by TSFG upon extension of credit, is based on management's credit evaluation of the borrower.
Standby letters of credit represent an obligation of TSFG to a third party contingent upon the failure of TSFG’s customer to perform under the terms of an underlying contract with the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the customer’s delivery of merchandise, completion of a construction contract, release of a lien, or repayment of an obligation. Under the terms of a standby letter, drafts will be generally drawn only when the underlying event fails to occur as intended. TSFG has legal recourse to its customers for amounts paid, and these obligations are secured or unsecured, depending on the customers’ creditworthiness. Commitments under standby letters of credit are usually for one year or less. TSFG evaluates its obligation to perform as a guarantor and records reserves as deemed necessary.
The following presents a summary of the contractual amounts of TSFG’s financial instruments relating to extension of credit with off-balance sheet risk at December 31 (in thousands):
| Loan commitments: | | 2009 | | | 2008 | |
| Commercial, industrial, and other | | $ | 1,085,129 | | | $ | 1,296,635 | |
| Commercial owner-occupied and commercial real estate | | | 119,928 | | | | 324,360 | |
| Home equity loans | | | 423,151 | | | | 477,777 | |
| Total loan commitments | | | 1,628,208 | | | | 2,098,772 | |
| Standby letters of credit | | | 199,237 | | | | 213,960 | |
| Documentary letters of credit | | | 2,066 | | | | 941 | |
| Unused business credit card lines | | | 31,746 | | | | 33,836 | |
| Total | | $ | 1,861,257 | | | $ | 2,347,509 | |
The total portfolios of loans serviced or subserviced for non-affiliated parties at December 31, 2009 and 2008 were $52.5 million and $103.1 million, respectively.
TSFG directors, directors of subsidiaries of TSFG, executive officers, and associates of such persons were customers of and had transactions with TSFG in the ordinary course of business. Included in such transactions are loan commitments, all of which were made under normal credit terms and did not involve more than normal risk of collection at origination. At December 31, 2009, the aggregate dollar amount of these unfunded loan commitments to the aforementioned directors, officers and their associates totaled $7.0 million and are included in the unfunded loan commitments presented above.
Note 22. Preferred Stock and Warrants
The following is a summary of TSFG’s preferred stock at and for the years ended December 31:
| | | 2009 | |
| | | Shares | | | Carrying | |
| | | | | | | | | Converted | | | | | | Value | |
| | | Balance, | | | | | | to Common | | | Balance, | | | December 31, | |
| | | January 1, | | | Exchanged | | | Shares | | | December 31, | | | ($000s) | |
| Series 2008ND-V | | | 51,341 | | | | (21,852 | ) | | | (29,489 | ) | | | - | | | $ | - | |
| Series 2008ND-NV | | | 177,639 | | | | (72,648 | ) | | | (104,991 | ) | | | - | | | | - | |
| Series 2008D-V | | | 2,248 | | | | - | | | | (1,200 | ) | | | 1,048 | | | | 1,048 | |
| Series 2008D-NV | | | 7,472 | | | | - | | | | (3,870 | ) | | | 3,602 | | | | 3,602 | |
| Series 2009-A | | | - | | | | 94,500 | | | | (94,500 | ) | | | - | | | | - | |
| Mandatorily convertible preferred stock | | | 238,700 | | | | - | | | | (234,050 | ) | | | 4,650 | | | | 4,650 | |
| Series 2008-T | | | 347,000 | | | | - | | | | - | | | | 347,000 | | | | 347,000 | |
| Less discount originally attributable to the Warrant issued to the Treasury Department, net of accretion | | | - | | | | - | | | | - | | | | - | | | | (15,867 | ) |
| Series 2008-T, net | | | 347,000 | | | | - | | | | - | | | | 347,000 | | | | 331,133 | |
| Total preferred stock | | | 585,700 | | | | - | | | | (234,050 | ) | | | 351,650 | | | $ | 335,783 | |
| | | 2008 | |
| | | Shares | | | Carrying | |
| | | | | | | | | Converted | | | | | | Value | |
| | | Balance, | | | | | | to Common | | | Balance, | | | December 31, | |
| | | January 1, | | | Issued | | | Shares | | | December 31, | | | ($000s) | |
| Series 2008ND-V | | | - | | | | 55,562 | | | | (4,221 | ) | | | 51,341 | | | $ | 51,341 | |
| Series 2008ND-NV | | | - | | | | 184,718 | | | | (7,079 | ) | | | 177,639 | | | | 177,639 | |
| Series 2008D-V | | | - | | | | 2,248 | | | | - | | | | 2,248 | | | | 2,248 | |
| Series 2008D-NV | | | - | | | | 7,472 | | | | - | | | | 7,472 | | | | 7,472 | |
| Mandatorily convertible preferred stock | | | - | | | | 250,000 | | | | (11,300 | ) | | | 238,700 | | | | 238,700 | |
| Series 2008-T | | | - | | | | 347,000 | | | | - | | | | 347,000 | | | | 347,000 | |
| Less discount originally attributable to the Warrant issued to the Treasury Department, net of accretion | | | - | | | | - | | | | - | | | | - | | | | (19,321 | ) |
| Series 2008-T, net | | | - | | | | 347,000 | | | | - | | | | 347,000 | | | | 327,679 | |
| Total preferred stock | | | - | | | | 597,000 | | | | (11,300 | ) | | | 585,700 | | | $ | 566,379 | |
On May 8, 2008, TSFG issued, in the aggregate, 250,000 shares of no par value, mandatory convertible non-cumulative preferred stock (“Series 2008ND/D Preferred Stock”), at a purchase price and liquidation preference of $1,000 per share. Dividends are payable quarterly, if declared by the Board of Directors, at an annual rate of 10%. Each share of Series 2008ND/D Preferred Stock is mandatorily convertible into 153.846 shares of TSFG’s common stock, based on a conversion price of $6.50 per share of common stock, on May 1, 2011. On or after July 18, 2010, the Series 2008ND/D Preferred Stock is also automatically convertible if, for a period of 20 consecutive trading days, the closing price of TSFG’s common stock has been at least $21.00 per share. In addition, the Series 2008ND/D Preferred Stock is convertible at the option of the holder before the mandatory conversion events described above.
The voting and conversion rights of the Series 2008ND/D Preferred Stock were voted upon and approved at a special shareholders’ meeting on July 18, 2008. As a result, all four Series 2008ND/D Preferred Stock series were considered common stock equivalents at December 31, 2009 and 2008 and would have added approximately 715,000 shares and 36.7 million shares, respectively, to the computation of diluted earnings per share, had the effect not been antidilutive.
Since July 18, 2008, except when they are entitled to vote as a separate class, the holders of the Series 2008ND/D Preferred Stock are entitled to vote their shares on an as-converted basis with our common stock as a single class. The affirmative vote of two-thirds of the holders of outstanding Series 2008ND/D Preferred Stock (voting as a separate class) is required for approval of any proposed changes in the preferences and special rights of such stock, or for certain acquisitions announced during the first 18 months following the issuance of the Series 2008ND/D
Preferred Stock. The Series 2008 ND/D Preferred Stock has no participation rights, unless the quarterly cash dividend on TSFG’s common stock is increased above certain thresholds after May 1, 2010. In that event, the Series 2008ND/D Preferred Stock would be entitled to receive additional dividends in proportion to the increase in the common stock dividend. The Series 2008ND/D Preferred Stock is not redeemable and is not subject to any sinking fund.
In June 2009, as an inducement to convert preferred shares to common shares, TSFG exchanged 94,500 shares of Series 2008ND-V and Series 2008 ND-NV mandatorily convertible preferred stock for 94,500 shares of a new series of mandatorily convertible preferred stock (“Series 2009-A”) with a liquidation preference of $1,000 per share. The conversion rights of the Series 2009-A were voted upon and approved at a special shareholders’ meeting on September 11, 2009.
During 2009, 234,050 shares of mandatorily convertible preferred stock Series 2008 ND/D and Series 2009-A were converted into approximately 54.9 million common shares, which included 18.9 million shares (valued at $32.4 million) issued as an inducement to convert.
Dividends declared on the Series 2008ND/D during 2009 and 2008 were $7.3 million and $17.9 million, respectively. During 2009, TSFG recorded $32.4 million as deemed dividends resulting from induced conversions in the computation of net income available to common shareholders.
On December 5, 2008, TSFG issued 347,000 shares of no par value, cumulative perpetual preferred stock, Series 2008-T (“Series 2008-T Preferred Stock”), to the United States Department of the Treasury (“Treasury Department”) with a liquidation preference of $1,000 per share, as part of the Troubled Asset Relief Program Capital Purchase Program. The Series 2008-T Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. TSFG may not redeem the Series 2008-T Preferred Stock prior to February 15, 2012 except with the proceeds from a qualified equity offering. After February 15, 2012, TSFG may, at its option, redeem the Series 2008-T Preferred Stock at par value plus accrued and unpaid dividends. The Series 2008-T Preferred Stock is generally non-voting. Prior to December 5, 2011, unless the Company has redeemed the Series 2008-T Preferred Stock or the Treasury Department has transferred the Series 2008-T Preferred Stock to a third party, the consent of the Treasury Department will be required for the Company to increase its common stock dividend or repurchase its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practices and certain other circumstances. A consequence of the Series 2008-T Preferred Stock purchase includes certain restrictions on executive compensation that could limit the tax deductibility of compensation the Company pays to executive management. Dividends declared on the Series 2008-T during 2009 and 2008 were $13.0 million and $3.4 million, respectively. In addition, TSFG recorded $4.3 million as accumulated but undeclared cumulative dividends in the computation of net income available to common shareholders.
As part of its purchase of the Series 2008-T Preferred Stock, the Treasury Department received a warrant (“the Warrant”) to purchase 10,106,796 shares of the Company’s common stock at an initial per share price of $5.15. The Warrant provides for the adjustment of the exercise price and the number of shares of the Company’s common stock issuable upon exercise pursuant to customary anti-dilution provisions and upon certain issuances of the Company’s common stock at or below a specified price relative to the initial exercise price. The Warrant is immediately exercisable and expires ten years from the issuance date. The shares issuable pursuant to the Warrant were considered common stock equivalents and would have added 10.1 million shares to the computation of diluted earnings per share for the years ended D ecember 31, 2009 and 2008, had the effect not been antidilutive.
The proceeds from the issuance of the Series 2008-T Preferred Stock and the Warrant were allocated based on the relative fair value of the Warrant as compared to the fair value of the preferred shares. The fair value of the Warrant was determined using a Black-Scholes model. The model includes assumptions regarding TSFG’s common stock price, dividend yield, stock price volatility, as well as assumptions regarding the risk-free interest rate. The fair value of the preferred shares was determined based on a discounted cash flow model using an estimated life of five years and a discount rate of 13%. As a result of the valuations, $327.4 million was allocated to the preferred shares and $19.6 million was allocated to the Warrant. The resulting discount on the preferred shares will be accreted through retained earnings over the five- year estimated life using the effective interest method. During 2009 and 2008, accretion of the preferred discount totaled $3.5 million and $243,000, respectively, and was treated as a deemed dividend to preferred shareholders in the computation of earnings per share.
All preferred shares outstanding are in parity to each other and rank senior to common shares both as to dividend and liquidation preferences. Subsequent to year-end, in early 2010, TSFG suspended dividend payments on all series of preferred stock.
Note 23. Capital Stock
On March 5, 2009, TSFG filed a “universal shelf” registration statement registering up to $750.0 million of securities to provide additional flexibility in managing capital levels, both in terms of debt and equity. On June 24, 2009, TSFG completed a common stock offering, selling 75 million shares at a gross offering price of $1.00 per share. In July 2009, TSFG sold an additional 10 million shares at $1.00 per share pursuant to the exercise in full of the underwriters’ over-allotment option. The common stock offerings generated proceeds to TSFG of $79.7 million for the year ended December 31, 2009, net of issuance costs for underwriting and expenses. TSFG used the net proceeds to increase the capital at TSFG’s subsidiary bank.
On September 11, 2009, TSFG held a special meeting of shareholders at which an amendment to the Articles of Incorporation was approved to increase the number of authorized shares of common stock from 200 million to 325 million.
In December of 2006, TSFG’s Board of Directors authorized a stock repurchase program of up to 4 million shares. This authorization replaced TSFG’s existing stock repurchase authorizations. Through August 2007, TSFG had repurchased 3 million shares pursuant to this authorization. In August 2007, the Board of Directors amended and restated the existing stock repurchase authorization to be an additional $100 million, which expires if unused on or before June 30, 2008. In fourth quarter 2007, TSFG repurchased 600,000 shares for $12.0 million, leaving $88.0 million under this authorization, which expired unused on June 30, 2008.
TSFG has a Dividend Reinvestment Plan, which allows shareholders to invest dividends and optional cash payments in additional shares of common stock. Shareholders of record are automatically eligible to participate in the plan.
Note 24. Regulatory Capital Requirements
TSFG and Carolina First Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on TSFG's financial statements. 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 December 31, 2009, that TSFG and Carolina First Bank met all capital adequacy requirements.
As of December 31, 2009, the most recent notification from federal banking agencies categorized TSFG and Carolina First Bank as "well capitalized" under the regulatory framework. To be categorized as "well capitalized," Carolina First Bank must maintain minimum total risk-based capital, tier 1 capital, and tier 1 leverage ratios as set forth in the table. Since December 31, 2009, there have been no events or conditions that management believes have changed Carolina First Bank’s categories.
TSFG's and Carolina First Bank's capital levels at December 31 exceeded the "well capitalized levels," as shown below (dollars in thousands):
| | | | | | | | | Minimum Requirements | |
| | | | | | | | | | | | | | | To Be Well Capitalized | |
| | | | | | | | | | | | | | | Under Prompt | |
| | | | | | | | | For Capital Adequacy | | | Corrective Action | |
| | | Actual | | | Purposes | | | Provisions | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| TSFG | | | | | | | | | | | | | | | | | | |
| Tier 1 capital | | $ | 948,762 | | | $ | 1,513,452 | | | $ | 382,008 | | | $ | 470,581 | | | | n/a | | | | n/a | |
| Total risk-based capital | | | 1,073,472 | | | | 1,688,077 | | | | 764,015 | | | | 941,161 | | | | n/a | | | | n/a | |
| Tier 1 capital ratio | | | 9.93 | % | | | 12.86 | % | | | 4.00 | % | | | 4.00 | % | | | n/a | | | | n/a | |
| Total risk-based capital ratio | | | 11.24 | | | | 14.35 | | | | 8.00 | | | | 8.00 | | | | n/a | | | | n/a | |
| Leverage ratio | | | 7.91 | | | | 11.22 | | | | 4.00 | | | | 4.00 | | | | n/a | | | | n/a | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Carolina First Bank | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier 1 capital | | $ | 854,808 | | | $ | 1,277,340 | | | $ | 381,423 | | | $ | 469,428 | | | $ | 572,134 | | | $ | 704,142 | |
| Total risk-based capital | | | 1,005,638 | | | | 1,477,910 | | | | 762,846 | | | | 938,856 | | | | 953,557 | | | | 1,173,570 | |
| Tier 1 capital ratio | | | 8.96 | % | | | 10.88 | % | | | 4.00 | % | | | 4.00 | % | | | 6.00 | % | | | 6.00 | % |
| Total risk-based capital ratio | | | 10.55 | | | | 12.59 | | | | 8.00 | | | | 8.00 | | | | 10.00 | | | | 10.00 | |
| Leverage ratio | | | 7.13 | | | | 9.49 | | | | 4.00 | | | | 4.00 | | | | 5.00 | | | | 5.00 | |
Given our asset quality and earnings performance, if we are not able to substantially increase our regulatory capital in the near term, we believe that it is likely that our regulators would request that we stipulate to a consent order, to be entered into between the bank and each of its banking regulators. A consent order would, among other things, result in Carolina First Bank being deemed “adequately capitalized” (irrespective of the fact that it may be “well capitalized”) and could require that the Company raise additional capital within a specified timeframe and limit TSFG's access to the brokered CD market and restrict th e rates it can offer on customer deposits. In addition, a consent order would likely impose higher capital ratios on Carolina First Bank than would otherwise be required. If the Company is unable to raise the capital required or otherwise comply with the terms of any such 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 such announcement.
Note 25. Restrictions on Dividends
The ability of TSFG to pay cash dividends over the long term is dependent upon receiving cash in the form of dividends from its subsidiaries. Current federal law prohibits, except under certain circumstances and with prior regulatory approval, an insured depository institution from paying dividends or making any other capital distribution if, after making the payment or distribution, the institution would be considered "undercapitalized," as that term is defined in applicable regulations. In addition, South Carolina banking regulations restrict under certain circumstances the amount of dividends that the subsidiary bank can pay to TSFG.
The terms of TSFG’s preferred stock include a restriction on declaring or paying common dividends unless all preferred dividends are paid. In addition, the Federal Reserve has the authority to prohibit TSFG from paying a dividend on its common and preferred stock and trust preferred securities. During third quarter 2009, TSFG suspended its common dividend. Future TSFG common dividends will depend upon a number of factors, including payment of the preferred stock dividends, financial performance, capital requirements and assessment of capital needs. Subsequent to year-end, TSFG suspended dividends on all remaining outstanding equity and capital instruments, including its trust preferred and REIT preferred securities. Based on informal commun ications from federal banking regulators, currently none of TSFG or Carolina First Bank, or any of their respective subsidiaries (including, but not limited to, the real estate investment trust subsidiary) are permitted to pay dividends on capital securities.
Note 26. Average Share Information
The following is a summary of the basic and diluted average common shares outstanding and (loss) earnings per share calculations (in thousands, except share and per share data) for the years ended December 31:
| | | 2009 | | | 2008 | | | 2007 | |
| Net (loss) income available to common shareholders | | $ | (736,943 | ) | | $ | (568,776 | ) | | $ | 72,611 | |
| | | | | | | | | | | | | |
| Basic | | | | | | | | | | | | |
| Average common shares outstanding (denominator) | | | 141,207,510 | | | | 73,136,936 | | | | 73,618,338 | |
| (Loss) earnings per share | | $ | (5.22 | ) | | $ | (7.78 | ) | | $ | 0.99 | |
| | | | | | | | | | | | | |
| Diluted | | | | | | | | | | | | |
| Average common shares outstanding | | | 141,207,510 | | | | 73,136,936 | | | | 73,618,338 | |
| Dilutive potential common shares | | | - | | | | - | | | | 467,102 | |
| Average diluted shares outstanding (denominator) | | | 141,207,510 | | | | 73,136,936 | | | | 74,085,440 | |
| (Loss) earnings per share | | $ | (5.22 | ) | | $ | (7.78 | ) | | $ | 0.98 | |
For the years ended December 31, 2009, 2008, and 2007, options to purchase an additional 3.7 million, 4.7 million, and 2.0 million shares, respectively, of common stock were outstanding but were not included in the computation of 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 year ended December 31, 2009 because of their antidilutive effect were 715,000 shares of common stock related to mandatorily convertible preferred stock, 10.1 million shares of common stock related to warrants, and 262,000 shares of common stock related to restricted stock and restricted stock units granted under equity incentive programs. Also exclude d from the computation of diluted earnings per share for the year ended December 31, 2008 because of their antidilutive effect were 36.7 million shares of common stock related to mandatorily convertible preferred stock, 10.1 million shares of common stock related to warrants, and 385,000 shares of common stock related to restricted stock and restricted stock units granted under equity incentive programs.
Note 27. Share-Based Compensation
TSFG has a Long-Term Incentive Plan (the “LTIP”), a restricted stock plan, and various stock option plans. These plans provide for grants of restricted stock units (“RSUs”), restricted stock, options to purchase TSFG’s $1 par value common stock, or other share-based awards. Service awards are expensed over the vesting period (typically three or five years following the grant date). For performance-based RSUs and restricted stock, TSFG estimates the degree to which performance conditions will be met to determine the number of shares which will vest and the related compensation expense prior to the vesting date. Compensation expense is adjusted in the period such estimates change. Income tax benefits related to stock compensation in excess of grant date fair value are recognized as an increase to surplus up on vesting and delivery of the stock. The compensation cost that was charged against income for these plans and the total income tax benefit recognized in the income statement for share-based compensation arrangements were as follows (in thousands):
| | | 2009 | | | 2008 | | | 2007 | |
| Compensation cost charged against income | | $ | 4,890 | | | $ | 9,936 | | | $ | 7,469 | |
Total income tax benefit recognized in income statement (1) | | | - | | | | 2,534 | | | | 1,432 | |
| | (1) | At December 31, 2009, TSFG had a full valuation allowance against its deferred tax asset. As a result, no income tax benefit was recognized during 2009 for compensation cost charged against income. |
Restricted Stock and Other Share-Based Awards
TSFG’s LTIP provides for incentive compensation in the form of stock options, restricted stock, RSUs, performance units (which may be stock based), stock appreciation rights and other stock-based forms of compensation. These grants may be made to directors, officers, employees, prospective employees, and consultants of TSFG. At December 31, 2009, authorized shares under the LTIP totaled 3.0 million shares (subject to further limitation of 1.7 million shares for restricted stock), of which approximately 1.1 million shares were available to be granted. TSFG also has a Restricted Stock Plan for awards to certain key employees. At December
31, 2009, authorized shares under the Restricted Stock Plan totaled 875,000 shares, of which approximately 60,000 shares were available to be granted.
Shares of restricted stock granted to employees under both the LTIP and the Restricted Stock Plan are subject to restrictions as to continuous employment for a specified time period following the date of grant. During this period, the holder is entitled to full voting rights.
Certain of TSFG’s RSUs were performance-based awards with vesting dependent on achieving, during 2009, certain earnings per share targets relative to a broad regional bank peer group, and return on equity targets. These performance targets were not reached, and the corresponding RSUs were forfeited during 2009. TSFG had recognized no expense related to the performance targets in 2009, 2008, or 2007 based on its assessment that meeting the performance targets was not probable.
The following is a summary of the status of TSFG’s nonvested shares of restricted stock and RSUs as of December 31, 2009 and changes during the year ended December 31, 2009.
| | | | | | Weighted | | | | | | Weighted | |
| | | | | | Average | | | | | | Average | |
| | | | | | Grant-Date | | | Restricted | | | Grant-Date | |
| | | RSUs | | | Fair Value | | | Shares | | | Fair Value | |
| Nonvested at January 1, 2009 | | | 563,310 | (1) | | $ | 18.35 | | | | 92,570 | | | $ | 18.15 | |
| Granted | | | 5,103 | | | | 1.70 | | | | 20,000 | | | | 1.78 | |
| Vested | | | (73,492 | ) | | | 18.93 | | | | (51,022 | ) | | | 19.58 | |
| Cancelled | | | (289,177 | ) | | | 21.93 | | | | (5,119 | ) | | | 23.35 | |
| Nonvested at December 31, 2009 | | | 205,744 | | | $ | 11.94 | | | | 56,429 | | | $ | 10.59 | |
| | (1) | Assumes maximum performance targets are met for performance-based awards. |
As of December 31, 2009, there was $1.4 million of total unrecognized compensation cost related to nonvested shares of restricted stock and RSUs. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 1.2 years. The total fair value of shares and RSUs vested during 2009, 2008, and 2007 was $2.4 million, $13.8 million and $2.6 million, respectively. The weighted average grant date fair value of RSUs in 2008 and 2007 was $10.07 per share and $23.26 per share, respectively. The weighted average grant date fair value of restricted stock in 2008 and 2007 was $15.42 per share and $21.41 per share, respectively.
In third quarter 2008, TSFG’s Board of Directors modified and accelerated the vesting of several previous share-based awards to CEO/Chairman Mack Whittle in connection with his retirement (which was effective October 27, 2008). As a result, expense related to unvested tranches of the original awards was reversed, and the incremental expense related to the modified awards ($2.0 million) was recognized during the third and fourth quarters of 2008.
In 2005, under the LTIP, TSFG issued cash-settled stand alone stock appreciation rights, which are accounted for as liability-classified awards. The strike price of each stock appreciation right equals the fair market value of TSFG's common stock on the date of grant. Stock appreciation rights issued to employees under this plan are exercisable on a cumulative basis for 20% of the shares on each of the first five anniversaries of the grant, and have a maximum contractual term of ten years. The following is a summary of the stock appreciation rights activity under the LTIP for the year ended December 31, 2009.
| | | Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (Years) | | | Aggregate Intrinsic Value ($000) | |
| Outstanding, January 1, 2009 | | | 153,325 | | | $ | 29.40 | | | | | | | |
| Cancelled | | | (23,975 | ) | | | 29.40 | | | | | | | |
| Outstanding, December 31, 2009 | | | 129,350 | | | $ | 29.40 | | | | 5.9 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Exercisable, December 31, 2009 | | | 103,780 | | | $ | 29.40 | | | | 5.9 | | | $ | - | |
There was no material unrecognized stock-based compensation expense related to stock appreciation rights at December 31, 2009.
Stock Option Plans
TSFG has a Stock Option Plan, a Directors' Stock Option Plan, a Fortune 50 Stock Option Plan, and various option plans assumed in connection with acquisitions (collectively referred to as “stock-based option plans”). At December 31, 2009, authorized shares under the Stock Option Plan totaled 5.2 million shares, of which approximately 1.1 million were available to be granted. The exercise price of each option either equals or exceeds the fair market value of TSFG's common stock on the date of grant. Options issued to employees under the Stock Option Plan are typically exercisable on a cumulative basis for 20% of the shares on each of the first five anniversaries of the grant, and have a maximum contractual term of ten years. Under the Directors' Stock Option Plan, TSFG may grant options to its non-employee directors and adv isory board members. At December 31, 2009, authorized shares under the Directors’ Stock Option Plan totaled 650,000 shares, of which approximately 206,000 were available to be granted. The exercise price of each director’s option equals the fair market value of TSFG's common stock on the date of grant. Options issued to directors under the Directors’ Stock Option Plan vest immediately on the grant date, and have a maximum contractual term of ten years.
The fair value of TSFG’s market-based stock options is estimated at the date of grant using a Monte Carlo simulation. The fair value of TSFG’s other stock options is estimated at the date of grant using the Black-Scholes option-pricing model. Both models require the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that these option-pricing models provide a reasonable estimate of fair value, the models do not necessarily provide the best single measure of fair value for TSFG’s employee stock options. Assumptions include, but are not limited to, TSFG’s expected price volatility over the term of the awards, which is based on historical volatility of TSFG’s common stock. The following is a summary of TSFG’s weighted-average assumptions used to estimate the weighted-average per share fair value of options granted on the date of grant using the Black-Scholes option-pricing model:
| | | 2009 | | | 2008 | | | 2007 | |
| Expected life (in years) | | | 6.01 | | | | 6.01 | | | | 6.01 | |
| Expected volatility | | | 77.73 | % | | | 40.96 | % | | | 23.45 | |
| Risk-free interest rate | | | 3.21 | | | | 3.08 | | | | 3.93 | |
| Expected dividend yield | | | 3.00 | | | | 2.88 | | | | 4.32 | |
| Weighted-average fair value of options granted during the period | | $ | 0.90 | | | $ | 3.20 | | | $ | 2.95 | |
No market-based stock options were granted in 2009 or 2007. Assumptions used to estimate the per-share fair value of options granted during 2008 using the Monte Carlo simulation method were similar to those summarized in the table above, and yielded a fair value per option of $2.13.
The following is a summary of the activity under the stock-based option plans for the year ended December 31, 2009.
| | | | | | | | | Weighted | | | | |
| | | | | | Weighted | | | Average | | | Aggregate | |
| | | | | | Average | | | Remaining | | | Intrinsic | |
| | | | | | Exercise | | | Contractual | | | Value | |
| | | Shares | | | Price | | | Term (Years) | | | ($000) | |
| Outstanding, January 1, 2009 | | | 4,688,093 | | | $ | 18.63 | | | | | | | | |
| Granted | | | 36,250 | | | | 1.63 | | | | | | | | |
| Cancelled | | | (1,014,042 | ) | | | 17.99 | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outstanding, December 31, 2009 | | | 3,710,301 | | | $ | 18.63 | | | | 5.9 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Exercisable, December 31, 2009 | | | 2,145,442 | | | $ | 22.44 | | | | 4.2 | | | $ | - | |
Unrecognized stock-based compensation expense related to stock options totaled $3.0 million at December 31, 2009. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 1.8 years.
No options were exercised during 2009. The total intrinsic value of options exercised during 2008 and 2007 was $19,000 and $3.6 million, respectively. Cash received from options exercised under all share-based payment arrangements for 2008 and 2007 was $35,000 and $8.1 million, respectively. The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $6,000 and $1.1 million, respectively, for 2008 and 2007. TSFG has a policy of issuing new shares to satisfy stock option exercises.
Note 28. Employee Benefits
TSFG maintains the Carolina First Salary Reduction Plan and Trust ("401(k) Plan") for all eligible employees. Upon ongoing approval of the Board of Directors, TSFG matches a percentage of employee contributions subject to certain adjustments and limitations. Contributions of $3.3 million, $5.4 million, and $5.5 million were charged to operations in 2009, 2008, and 2007, respectively.
TSFG maintains Supplementary Executive Retirement Plans (“SERPs”) for certain officers. These plans provide salary continuation benefits after the participant reaches normal retirement age (usually age 65) or early retirement (age 55 and 7 years of service) and continue for 15 years unless an alternate payout election is made by the executive. The SERPs also provide limited benefits in the event of early termination or disability while employed by TSFG and full benefits to the officer’s beneficiaries in the event of the officer’s death. In the event of a change of control of TSFG as defined in the SERPs, the officers become 100% vested in the total benefit. For the years ended December 31, 2009, 2008, and 2007, costs of $2.0 million, $3.5 million, and $4.3 million, respectively, were charged to expense related to these SERPs.
The SERP liability is accrued over the period until normal retirement date. The accrual is determined based on the present value of the estimated annual benefit payments at normal retirement, and by calculating a level principal amount required for the accrual to reach the present value of the estimated annual benefit payments at normal retirement. A discount rate is used to determine the present value of future benefit obligations. The discount rate for each plan is determined using the Moodys Aaa corporate bond rate published in the Federal Register as of the prior year end. In determining the estimated future annual benefit obligations, an estimated rate of compensation growth per year is generally used and may be adjusted as expectations about future compensation levels change. Compensation, for purposes of determining the annual benefit levels as defined in the plans, is the average of the highest three years annual base salary plus bonus. The benefit level, as a percentage of compensation, generally ranges between 15% and 60%, as specified in each SERP agreement.
If the Executive retires prior to normal retirement, or there is a change in the anticipated retirement date, and the Executive is eligible for the early retirement benefit under the SERP plan, the accrual is adjusted to reflect the calculated amount pursuant to provisions of the early retirement benefit.
TSFG maintains an Executive Deferred Compensation Plan for certain officers and directors. This plan allows eligible officers to defer up to 80% of base annual salary and 100% of annual bonus compensation on a pre-tax basis. TSFG provides a match of 10% of the contribution. The deferral elections are irrevocable and cannot be changed during the plan year. TSFG’s match becomes fully vested after five years. Payments from the plan will automatically begin upon the employee’s retirement, termination of employment, or death during employment. However, employees may choose to receive payments prior to these events, such as an in-service distribution, an elective early withdrawal, or upon a change in control. TSFG’s matching contributions, included in deferred compensation expense, totaled $25,000, $154,000, and $103,000 i n 2009, 2008, and 2007, respectively.
TSFG common and/or preferred stock is an investment option for deferred compensation under TSFG’s Executive Deferred Compensation Plan for certain officers. The common and/or preferred stock purchased by TSFG for this deferred compensation plan is maintained in a rabbi trust (the “Trust”), on behalf of the participants. The assets of the Trust are subject to the claims of general creditors of TSFG. The deferred compensation obligation in the Trust is classified as a component of shareholders’ equity, and the common and/or preferred stock held by the Trust is classified as a reduction of shareholders’ equity. The obligations of TSFG under this investment option of the deferred compensation plan, and the shares held by the Trust, have no net effect on outstanding shares. Subsequent changes in the fair value of the common and preferred stock are not reflected in earnings or shareholders’ equity.
Note 29. CEO Retirement
On September 2, 2008, the Board of Directors and Mack I. Whittle, the Company’s Chairman, President, and Chief Executive Officer, entered into a severance agreement pursuant to which Whittle would receive certain retirement benefits and retire on or before December 30, 2008 (at the Board’s election). Subsequently, the Executive Committee, on behalf of the Board, specified that Whittle’s retirement would be effective October 27, 2008. Those benefits included, among others, a lump sum cash payment of $4.1 million (subject to a six month delay pursuant to Section 409A of the Internal Revenue Code), vesting of all equity awards (see Note 27 – Share-Based Compensation), service credit under the SERP through age 65 which provides an annual retirement payment commencing at retirement date, vested benefits under other Company plans, continued welfare and fringe benefits for three years, and three years of continued life insurance coverage. The incremental expense related to these benefits was approximately $12 million, which was recognized in the second half of 2008.
Note 30. Related Party Transactions
At December 31, 2009 and 2008, TSFG had loans to TSFG directors, directors of its subsidiaries, executive officers, and associates of such persons totaling $16.8 million (which included $9.5 million of nonaccrual loans) and $19.5 million, respectively. All of these loans were made under normal credit terms and did not involve more than normal risk of collection at origination. At December 31, 2009, the aggregate dollar amount of unfunded loan commitments to the aforementioned directors, officers and their associates totaled $7.0 million. See Notes 8 and 21 for further details.
Note 31. 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; or other inputs that are observable or 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 information 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 conside red factors such as the likelihood of default by 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) at 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 | |
| | | 2008 | |
| | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | | |
| Securities available for sale | | $ | 2,071,658 | | | $ | 155,938 | | | $ | 1,915,154 | | | $ | 566 | |
| Mortgage loans held for sale | | | 14,681 | | | | - | | | | 14,681 | | | | - | |
| Derivative assets | | | 107,338 | | | | - | | | | 103,998 | | | | 3,340 | |
| Total | | $ | 2,193,677 | | | $ | 155,938 | | | $ | 2,033,833 | | | $ | 3,906 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Derivative liabilities | | $ | 52,570 | | | $ | - | | | $ | 48,820 | | | $ | 3,750 | |
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows (in thousands) for the years ended December 31:
| | | 2009 | | | 2008 | |
| | | | | | Net | | | | | | Net | |
| | | Securities | | | Derivative | | | Securities | | | Derivative | |
| | | Available | | | Asset | | | Available | | | Asset | |
| | | For Sale | | | (Liability) | | | For Sale | | | (Liability) | |
| | | | | | | | | | | | | |
| Balance at beginning of period | | $ | 566 | | | $ | (410 | ) | | $ | 2,402 | | | $ | 370 | |
| Total net gains (losses) included in net loss | | | - | | | | 865 | | | | - | | | | (829 | ) |
| Purchases, sales, issuances and settlements, net | | | (265 | ) | | | - | | | | (1,836 | ) | | | 10 | |
| Transfers into Level 3, net | | | - | | | | 2,873 | | | | - | | | | 39 | |
| Balance at end of period | | $ | 301 | | | $ | 3,328 | | | $ | 566 | | | $ | (410 | ) |
| | | | | | | | | | | | | | | | | |
| Net gains (losses) included in net loss relating to assets held at December 31 | | $ | - | | | $ | 1,308 | | | $ | - | | | $ | (829 | ) |
For 2009 and 2008, the net gains and losses in the table above were included in noninterest income.
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 in the years ended December 31, 2009 and 2008 that were still held in the balance sheet at year 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 year end (in thousands).
| | | Carrying value at year end | | | Total gains (losses) | |
| | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | for the year ended | |
| December 31, 2009 | | | | | | | | | | | | | | | |
| Loans held for investment | | $ | 242,405 | | | $ | - | | | $ | - | | | $ | 242,405 | | | $ | (118,094 | ) |
| Long-lived assets | | | 56,125 | | | | - | | | | 56,125 | | | | - | | | | (19,378 | ) |
| Other real estate owned | | | 91,059 | | | | - | | | | - | | | | 91,059 | | | | (78,563 | ) |
| Private equity investments | | | 4,605 | | | | - | | | | - | | | | 4,605 | | | | (3,710 | ) |
| Auction rate preferred securities | | | 5,174 | | | | - | | | | - | | | | 5,174 | | | | (676 | ) |
| | | | | | | | | | | | | | | | | | | $ | (220,421 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2008 | | | | | | | | | | | | | | | | | | | | |
| Loans held for investment | | $ | 243,079 | | | $ | - | | | $ | - | | | $ | 243,079 | | | $ | (106,183 | ) |
| Loans held for sale | | | 16,282 | | | | - | | | | - | | | | 16,282 | | | | (20,056 | ) |
| | | | | | | | | | | | | | | | | | | $ | (126,239 | ) |
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 ba sed 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 for which the fair value option has not been elected 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.
Long-lived assets. Nonrecurring fair value adjustments on long-lived assets (such as the campus facility discussed in Note 11) reflect impairment write-downs. Long-lived assets subjected to nonrecurring fair value adjustments may be classified as Level 2 or Level 3 depending on the inputs to the valuation. When appraisals are used to determine impairment and these appraisals require significant adjustments to market-based valuation inputs, or when the valuation applies an income approach based on unobservable cash flows to measure fair value, the related assets subjected to nonrecurring fair value adjustments are typically classified as Level 3 due to the fact that Level 3 inputs are significant to the fair value measureme nt.
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 Leve l 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.
Fair Value Option
Effective second quarter 2009, TSFG elected to discontinue its use of the fair value option on new production of mortgage loans held for sale. This change corresponds to TSFG’s decision to no longer sell mortgage loans on a pooled basis. For the year ended December 31, 2009, changes in fair value of these loans resulted in a net loss of $91,000, which was recorded in mortgage banking income. These changes in fair value were mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.
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 for which the fair value option has not been elected 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.
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) at December 31 were as follows:
| | | 2009 | | | 2008 | |
| | | Carrying | | | Fair | | | Carrying | | | Fair | |
| | | Amount | | | Value | | | Amount | | | Value | |
| Financial Assets | | | | | | | | | | | | |
| Cash and due from banks | | $ | 383,184 | | | $ | 383,184 | | | $ | 292,219 | | | $ | 292,219 | |
| Interest-bearing bank balances | | | 124 | | | | 124 | | | | 166 | | | | 166 | |
| Securities available for sale | | | 2,095,401 | | | | 2,095,401 | | | | 2,071,658 | | | | 2,071,658 | |
| Securities held to maturity | | | 127,516 | | | | 129,496 | | | | 22,709 | | | | 23,048 | |
| Net loans | | | 8,036,243 | | | | 7,213,252 | | | | 9,975,949 | | | | 9,494,197 | |
| Derivative assets | | | 42,599 | | | | 42,599 | | | | 107,338 | | | | 107,338 | |
| | | | | | | | | | | | | | | | | |
| Financial Liabilities | | | | | | | | | | | | | | | | |
| Deposits | | | 9,296,212 | | | | 9,344,083 | | | | 9,405,717 | | | | 9,487,817 | |
| Short-term borrowings | | | 322,702 | | | | 322,545 | | | | 1,626,374 | | | | 1,626,025 | |
| Long-term debt | | | 1,116,869 | | | | 1,007,901 | | | | 707,769 | | | | 705,504 | |
| Derivative liabilities | | | 23,040 | | | | 23,040 | | | | 52,570 | | | | 52,570 | |
Note 32. 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, par ent 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 earnings 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 change , allocations, transfers and assignments may change. Segment information (in thousands) is shown in the table below.
| | | Carolina | | | | | | | | | | |
| | | First | | | Mercantile | | | Other | | | Total | |
| Year Ended December 31, 2009 | | | | | | | | | | | | |
| Net interest income before inter-segment income (expense) | | $ | 175,448 | | | $ | 86,184 | | | $ | 69,900 | | | $ | 331,532 | |
| Inter-segment interest income (expense) | | | 13,194 | | | | 35,107 | | | | (48,301 | ) | | | - | |
| Net interest income | | | 188,642 | | | | 121,291 | | | | 21,599 | | | | 331,532 | |
Provision for credit losses (1) | | | 259,619 | | | | 313,131 | | | | 96,154 | | | | 668,904 | |
| Noninterest income | | | 53,214 | | | | 22,432 | | | | 42,387 | | | | 118,033 | |
| Goodwill impairment | | | - | | | | - | | | | 2,511 | | | | 2,511 | |
Other noninterest expenses - direct (2) | | | 127,850 | | | | 105,955 | | | | 182,805 | | | | 416,610 | |
| Contribution before allocation | | | (145,613 | ) | | | (275,363 | ) | | | (217,484 | ) | | | (638,460 | ) |
Noninterest expenses - allocated (3) | | | 89,333 | | | | 50,245 | | | | (139,578 | ) | | | - | |
| Contribution before income taxes | | $ | (234,946 | ) | | $ | (325,608 | ) | | $ | (77,906 | ) | | | (638,460 | ) |
| Income tax expense | | | | | | | | | | | | | | | 37,794 | |
| Net loss | | | | | | | | | | | | | | $ | (676,254 | ) |
| | | | | | | | | | | | | | | | | |
| December 31, 2009 | | | | | | | | | | | | | | | | |
| Total assets | | $ | 5,360,888 | | | $ | 2,939,438 | | | $ | 3,594,656 | | | $ | 11,894,982 | |
| Total loans held for investment | | | 5,078,731 | | | | 2,910,947 | | | | 396,449 | | | | 8,386,127 | |
| Total deposits | | | 4,164,396 | | | | 3,133,156 | | | | 1,998,660 | | | | 9,296,212 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2008 | | | | | | | | | | | | | | | | |
| Net interest income before inter-segment income (expense) | | $ | 218,893 | | | $ | 133,080 | | | $ | 28,190 | | | $ | 380,163 | |
| Inter-segment interest income (expense) | | | (3,630 | ) | | | (2,293 | ) | | | 5,923 | | | | - | |
| Net interest income | | | 215,263 | | | | 130,787 | | | | 34,113 | | | | 380,163 | |
| Provision for credit losses | | | 129,710 | | | | 192,371 | | | | 22,508 | | | | 344,589 | |
| Noninterest income | | | 58,666 | | | | 28,447 | | | | 34,854 | | | | 121,967 | |
| Goodwill impairment | | | - | | | | 426,049 | | | | - | | | | 426,049 | |
Other noninterest expenses - direct (2) | | | 96,443 | | | | 72,686 | | | | 197,055 | | | | 366,184 | |
| Contribution before allocation | | | 47,776 | | | | (531,872 | ) | | | (150,596 | ) | | | (634,692 | ) |
Noninterest expenses - allocated (3) | | | 90,212 | | | | 60,437 | | | | (150,649 | ) | | | - | |
| Contribution before income taxes | | $ | (42,436 | ) | | $ | (592,309 | ) | | $ | 53 | | | | (634,692 | ) |
| Income tax benefit | | | | | | | | | | | | | | | (87,574 | ) |
| Net loss | | | | | | | | | | | | | | $ | (547,118 | ) |
| | | | | | | | | | | | | | | | | |
| December 31, 2008 | | | | | | | | | | | | | | | | |
| Total assets | | $ | 6,117,729 | | | $ | 3,629,680 | | | $ | 3,854,917 | | | $ | 13,602,326 | |
| Total loans held for investment | | | 5,856,742 | | | | 3,548,031 | | | | 787,299 | | | | 10,192,072 | |
| Total deposits | | | 4,383,851 | | | | 3,060,230 | | | | 1,961,636 | | | | 9,405,717 | |
| Year Ended December 31, 2007 | | | | | | | | | | | | |
| Net interest income before inter-segment income (expense) | | $ | 262,667 | | | $ | 174,309 | | | $ | (54,195 | ) | | $ | 382,781 | |
| Inter-segment interest income (expense) | | | (29,904 | ) | | | (18,921 | ) | | | 48,825 | | | | - | |
| Net interest income | | | 232,763 | | | | 155,388 | | | | (5,370 | ) | | | 382,781 | |
Provision for credit losses (1) | | | 37,457 | | | | 25,262 | | | | 5,849 | | | | 68,568 | |
| Noninterest income | | | 54,462 | | | | 27,855 | | | | 31,395 | | | | 113,712 | |
Noninterest expenses - direct (2) | | | 84,958 | | | | 60,742 | | | | 175,549 | | | | 321,249 | |
| Contribution before allocation | | | 164,810 | | | | 97,239 | | | | (155,373 | ) | | | 106,676 | |
Noninterest expenses - allocated (3) | | | 71,694 | | | | 45,309 | | | | (117,003 | ) | | | - | |
| Contribution before income taxes | | $ | 93,116 | | | $ | 51,930 | | | $ | (38,370 | ) | | | 106,676 | |
| Income tax expense | | | | | | | | | | | | | | | 33,400 | |
| Net income | | | | | | | | | | | | | | $ | 73,276 | |
| | (1) | In 2009, TSFG began allocating provision expense to the segments using an expected loss methodology. Prior periods reflect a more general allocation. Provision expense included in “Other” includes the provision related to indirect auto, certain New Market Tax Credit loans, and the amount needed to account for differences in the consolidated allowance model and segment results that use an expected loss methodology. |
| | (2) | Noninterest expenses – direct include the direct costs of the segment’s operations such as facilities, personnel, and other operating expenses. |
| | (3) | Noninterest expenses – allocated include expenses not directly attributable to the segments, such as information services, operations, human resources, accounting, finance, treasury, and corporate incentive plans. |
Note 33. Parent Company Financial Information
The following is condensed financial information (dollars in thousands) of The South Financial Group (Parent Company only):
| Condensed Balance Sheets | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| Assets | | | | | | |
| Cash and due from banks | | $ | 3,488 | | | $ | 27,787 | |
| Interest-bearing bank balances | | | 52,682 | | | | 182,000 | |
| Investment in subsidiaries: | | | | | | | | |
| Bank subsidiaries | | | 1,125,649 | | | | 1,607,229 | |
| Nonbank subsidiaries | | | - | | | | 3,798 | |
| Total investment in subsidiaries | | | 1,125,649 | | | | 1,611,027 | |
| Receivable from subsidiaries | | | 154 | | | | 2,630 | |
| Other investments | | | 1,680 | | | | 2,023 | |
| Other assets | | | 17,499 | | | | 31,630 | |
| | | $ | 1,201,152 | | | $ | 1,857,097 | |
| | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | |
| Accrued expenses and other liabilities | | $ | 872 | | | $ | 11,311 | |
| Payables to subsidiaries | | | 402 | | | | 6,014 | |
| Borrowed funds | | | - | | | | 12,537 | |
| Subordinated debt | | | 206,704 | | | | 206,704 | |
| Shareholders' equity | | | 993,174 | | | | 1,620,531 | |
| | | $ | 1,201,152 | | | $ | 1,857,097 | |
| Condensed Statements of Income | |
| | | Years Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Income | | | | | | | | | |
| Equity in undistributed net (loss) income of subsidiaries | | $ | (655,123 | ) | | $ | (568,826 | ) | | $ | 203 | |
| Dividend income from subsidiaries | | | - | | | | 27,405 | | | | 75,886 | |
| (Loss) gain on equity investments | | | (3,655 | ) | | | 1,450 | | | | (68 | ) |
| Interest income from subsidiaries | | | 1,574 | | | | 193 | | | | 356 | |
| Other | | | 3,008 | | | | 4,338 | | | | 6,261 | |
| | | | (654,196 | ) | | | (535,440 | ) | | | 82,638 | |
| Expenses | | | | | | | | | | | | |
| Interest on borrowed funds | | | 4,920 | | | | 10,700 | | | | 17,074 | |
| Loss on early extinguishment of debt | | | - | | | | - | | | | 1,772 | |
| Other | | | 3,656 | | | | 4,596 | | | | (8,205 | ) |
| | | | 8,576 | | | | 15,296 | | | | 10,641 | |
| (Loss) income before taxes | | | (662,772 | ) | | | (550,736 | ) | | | 71,997 | |
| Income tax expense (benefit) | | | 13,482 | | | | (3,618 | ) | | | (1,279 | ) |
| Net (loss) income | | $ | (676,254 | ) | | $ | (547,118 | ) | | $ | 73,276 | |
| Condensed Statements of Cash Flows | |
| | | Years Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| Operating Activities | | | | | | | | | |
| Net (loss) income | | $ | (676,254 | ) | | $ | (547,118 | ) | | $ | 73,276 | |
| Adjustments to reconcile net (loss) income to net cash (used for) provided by operations | | | | | | | | | | | | |
| Equity in undistributed net loss (income) of subsidiaries | | | 655,123 | | | | 568,826 | | | | (203 | ) |
| Loss (gain) on equity investments | | | 3,655 | | | | (1,450 | ) | | | 68 | |
| Loss on early extinguishment of debt | | | - | | | | - | | | | 1,772 | |
| Decrease in other assets | | | 12,126 | | | | 15,284 | | | | 17,917 | |
| Decrease in other liabilities | | | (246 | ) | | | (357 | ) | | | (16,279 | ) |
| Net cash (used for) provided by operating activities | | | (5,596 | ) | | | 35,185 | | | | 76,551 | |
| | | | | | | | | | | | | |
| Investing Activities | | | | | | | | | | | | |
| (Investment in) distribution from subsidiaries | | | (181,326 | ) | | | (385,113 | ) | | | 12 | |
| Proceeds from disposition of equity investments | | | - | | | | 1,993 | | | | 8,235 | |
| Purchase of equity investments | | | - | | | | - | | | | (1,178 | ) |
| Net cash (used for) provided by investing activities | | | (181,326 | ) | | | (383,120 | ) | | | 7,069 | |
| | | | | | | | | | | | | |
| Financing Activities | | | | | | | | | | | | |
| Decrease in borrowings | | | (12,537 | ) | | | (18,291 | ) | | | (2,003 | ) |
| Issuance of subordinated debt | | | - | | | | - | | | | 126,290 | |
| Payment of subordinated debt | | | - | | | | - | | | | (98,457 | ) |
| Issuance of preferred stock and warrant, net | | | - | | | | 584,970 | | | | - | |
| Cash dividends paid on common stock | | | (3,440 | ) | | | (29,106 | ) | | | (53,493 | ) |
| Cash dividends paid on preferred stock | | | (29,609 | ) | | | (11,920 | ) | | | - | |
| Issuance of common stock, net | | | 79,725 | | | | - | | | | - | |
| Repurchase of common stock | | | - | | | | - | | | | (83,291 | ) |
| Other, net | | | (834 | ) | | | 2,101 | | | | 12,316 | |
| Net cash provided by (used for) financing activities | | | 33,305 | | | | 527,754 | | | | (98,638 | ) |
| Net change in cash and cash equivalents | | | (153,617 | ) | | | 179,819 | | | | (15,018 | ) |
| Cash and cash equivalents at beginning of year | | | 209,787 | | | | 29,968 | | | | 44,986 | |
| Cash and cash equivalents at end of year | | $ | 56,170 | | | $ | 209,787 | | | $ | 29,968 | |
Note 34. Quarterly Financial Data (Unaudited)
The following provides quarterly financial data for 2009 and 2008 (dollars in thousands, except per share data).
| 2009 Quarterly Financial Data | |
| | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | December 31 | | | September 30 | | | June 30 | | | March 31 | |
| | | | | | | | | | | | | |
| Interest income | | $ | 127,548 | | | $ | 131,421 | | | $ | 142,035 | | | $ | 146,902 | |
| Interest expense | | | 47,002 | | | | 51,383 | | | | 56,105 | | | | 61,884 | |
| Net interest income | | | 80,546 | | | | 80,038 | | | | 85,930 | | | | 85,018 | |
| Provision for credit losses | | | 170,761 | | | | 224,179 | | | | 131,337 | | | | 142,627 | |
| Noninterest income | | | 28,550 | | | | 33,470 | | | | 32,272 | | | | 23,741 | |
| Noninterest expenses | | | 103,163 | | | | 89,529 | | | | 136,188 | | | | 90,241 | |
| Loss before income taxes | | | (164,828 | ) | | | (200,200 | ) | | | (149,323 | ) | | | (124,109 | ) |
Income tax expense (benefit) (1) | | | 23,843 | | | | 123,304 | | | | (59,647 | ) | | | (49,706 | ) |
| Net loss | | | (188,671 | ) | | | (323,504 | ) | | | (89,676 | ) | | | (74,403 | ) |
| Preferred stock dividends and other | | | (5,221 | ) | | | (17,251 | ) | | | (21,809 | ) | | | (16,408 | ) |
| Net loss available to common shareholders | | $ | (193,892 | ) | | $ | (340,755 | ) | | $ | (111,485 | ) | | $ | (90,811 | ) |
| | | | | | | | | | | | | | | | | |
| Loss per common share, basic | | $ | (0.90 | ) | | $ | (1.95 | ) | | $ | (1.23 | ) | | $ | (1.10 | ) |
| Loss per common share, diluted | | $ | (0.90 | ) | | $ | (1.95 | ) | | $ | (1.23 | ) | | $ | (1.10 | ) |
| 2008 Quarterly Financial Data | |
| | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | December 31 | | | September 30 | | | June 30 | | | March 31 | |
| | | | | | | | | | | | | |
| Interest income | | $ | 168,225 | | | $ | 178,238 | | | $ | 181,192 | | | $ | 194,385 | |
| Interest expense | | | 76,592 | | | | 82,619 | | | | 80,987 | | | | 101,679 | |
| Net interest income | | | 91,633 | | | | 95,619 | | | | 100,205 | | | | 92,706 | |
| Provision for credit losses | | | 122,926 | | | | 84,608 | | | | 63,763 | | | | 73,292 | |
| Noninterest income | | | 30,012 | | | | 28,665 | | | | 32,187 | | | | 31,103 | |
Noninterest expenses (2) | | | 342,093 | | | | 94,157 | | | | 87,617 | | | | 268,366 | |
| Loss before income taxes | | | (343,374 | ) | | | (54,481 | ) | | | (18,988 | ) | | | (217,849 | ) |
| Income tax benefit | | | (33,435 | ) | | | (29,526 | ) | | | (8,056 | ) | | | (16,557 | ) |
| Net loss | | | (309,939 | ) | | | (24,955 | ) | | | (10,932 | ) | | | (201,292 | ) |
| Preferred stock dividends and other | | | (9,424 | ) | | | (6,257 | ) | | | (5,840 | ) | | | (137 | ) |
| Net loss available to common shareholders | | $ | (319,363 | ) | | $ | (31,212 | ) | | $ | (16,772 | ) | | $ | (201,429 | ) |
| | | | | | | | | | | | | | | | | |
| Loss per common share, basic | | $ | (4.29 | ) | | $ | (0.43 | ) | | $ | (0.23 | ) | | $ | (2.78 | ) |
| Loss per common share, diluted | | $ | (4.29 | ) | | $ | (0.43 | ) | | $ | (0.23 | ) | | $ | (2.78 | ) |
| | (1) | Includes an increase to the deferred tax asset valuation allowance of $86.4 million and $200.1 million, respectively, during the quarters ended December 31, 2009 and September 30, 2009. |
| | (2) | Includes goodwill impairment of $237.6 million and $188.4 million, respectively, during the quarters ended December 31, 2008 and March 31, 2008. |
| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
There have been no changes in or disagreements with accountants on accounting and financial disclosure.
TSFG maintains disclosure controls and procedures and internal control over financial reporting as required under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to TSFG’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Disclosure Controls and Procedures
| | (a) | At December 31, 2009, TSFG’s management, under the supervision and with the participation of TSFG’s 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 December 31, 2009, 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 d ecisions regarding required disclosure. |
Internal Control over Financial Reporting
(b) (1) Statement of management’s responsibility for maintaining adequate internal control over financial reporting:
See Management’s Report on Internal Control Over Financial Reporting included in Item 8 of this Annual Report on Form 10-K.
(2) Statement identifying the framework utilized by management to assess internal control over financial reporting:
See Management’s Report on Internal Control Over Financial Reporting included in Item 8 of this Annual Report on Form 10-K.
(3) Management’s assessment of the effectiveness of internal control over financial reporting:
See Management’s Report on Internal Control Over Financial Reporting included in Item 8 of this Annual Report on Form 10-K.
(4) Statement that the independent registered public accounting firm has issued an attestation report on internal control over financial reporting:
See Management’s Report on Internal Control Over Financial Reporting included in Item 8 of this Annual Report on Form 10-K.
| | (c) | Attestation report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, on the effectiveness of TSFG’s internal control over financial reporting: |
See “Report of Independent Registered Public Accounting Firm” included in Item 8 of this Annual Report on Form 10-K.
| | (d) | Changes in internal control 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 is assessment during the quarter ended December 31, 2009 or through the date of this Annual
Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, TSFG’s internal control over financial reporting.
None.
| Item 10. | Directors, Executive Officers and Corporate Governance |
See Executive Compensation Plan Data in the Registrants’ Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.
See Election of Directors, Business Experience of Directors and Executive Officers, and Section 16(a) Beneficial Ownership Reporting Compliance in the Registrant's Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.
See Executive Officers of the Registrant included in Item 1 of this Annual Report on Form 10-K for a listing of executive officers.
TSFG has adopted a Code of Ethics that is specifically applicable to senior management and financial officers, including its principal executive officer, its principal financial officer, its principal accounting officer and controllers. This Code of Ethics can be viewed on TSFG’s website, www.thesouthgroup.com, under the Investor Relations / Corporate Governance tab. TSFG’s Code of Conduct, applicable to all employees, may also be viewed on TSFG’s website under the Investor Relations / Corporate Governance tab.
See Director Compensation and Executive Compensation in TSFG's Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference. However, the information provided in the Proxy Statement under the heading “Compensation Committee Report” shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, subject to Regulation 14A or 14C, other than as provided in Item 402 of Regulation S-K, or subject to liabilities of Section 18 of the Securities Exchange Act of 1934.
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
See Security Ownership of Certain Beneficial Owners and Management in TSFG's Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.
| Certain Relationships and Related Transactions, and Director Independence |
See Certain Relationships and Related Transactions in TSFG's Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.
| Principal Accountant Fees and Services |
See Audit Fees, Other Audit Committee Matters, and Ratification of Independent Registered Public Accounting Firm for 2010 in TSFG's Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) Financial Statements filed as part of this report:
The following items are included in Item 8 hereof:
| | Management’s Report on Internal Control over Financial Reporting |
| | Report of PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm |
| | Consolidated Balance Sheets—December 31, 2009 and 2008 |
| | Consolidated Statements of Operations—Years ended December 31, 2009, 2008 and 2007 |
| | Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive (Loss) Income—Years ended December 31, 2009, 2008 and 2007 |
| | Consolidated Statements of Cash Flows—Years ended December 31, 2009, 2008 and 2007 |
| | Notes to Consolidated Financial Statements |
(a)(2) Financial Statement Schedules
All schedules to the Consolidated Financial Statements required by Article 9 of Regulation S-X and all other schedules to the financial statements of TSFG required by Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and, therefore, have been omitted, or the required information is contained in the Consolidated Financial Statements or the notes thereto, which are included in Item 8 hereof.
(a)(3) Listing of Exhibits
| Exhibit No. | | Description of Exhibit | | Location |
| 3.1 | | Articles of Incorporation | | Incorporated by reference to Exhibit 3.1 of TSFG’s Quarterly Report on Form 10-Q for the three months ended September 30, 2009 |
| 3.2 | | Bylaws of TSFG | | Incorporated by reference to Exhibit 3.2 of TSFG's Quarterly Report on Form 10-Q for the three months ended June 30, 2009 |
| 4.1 | | Specimen TSFG Common Stock certificate | | Incorporated by Reference to Exhibit 4.1 of TSFG's Registration Statement on Form S-1 |
| 4.2 | | Specimen certificate for shares of Preferred Stock, Series 2008D-V | | Incorporated by Reference to Exhibit 4.3 of TSFG's Registration Statement on Form S-3 dated June 6, 2008 |
| 4.3 | | Specimen certificate for shares of Preferred Stock, Series 2008D-NV | | Incorporated by Reference to Exhibit 4.4 of TSFG's Registration Statement on Form S-3 dated June 6, 2008 |
| 4.4 | | Specimen Certificate for the Series 2008-T Preferred Stock | | Incorporated by reference to Exhibit 4.1 of TSFG's Current Report on Form 8-K dated December 5, 2008 |
| 4.5 | | Warrant for Purchase of Shares of Common Stock | | Incorporated by reference to Exhibit 4.2 of TSFG’s Current Report on Form 8-K dated December 5, 2008 |
| 4.6 | | Amended and Restated Common Stock Dividend Reinvestment Plan | | Incorporated by reference to the Prospectus in TSFG’s Registration Statement on Form S-3, Commission File No. 333-149820 |
| 10.1 * | | TSFG Amended and Restated Restricted Stock Agreement Plan | | Incorporated by reference to Exhibit 10.1 of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2006 and Exhibit 10.4 to TSFG’s Current Report on Form 8-K dated August 14, 2007 |
| 10.2 * | | TSFG Amended and Restated Stock Option Plan | | Incorporated by reference to Exhibit 99.1 of TSFG’s Registration Statement on Form S-8, Commission File No. 333-158835 |
| Exhibit No. | | Description of Exhibit | | Location |
| 10.3 * | | TSFG Salary Reduction Plan | | Incorporated by reference to Exhibit 28.1 of TSFG’s Registration Statement on Form S-8, Commission File No. 33-25424 |
| 10.4-a * | | Noncompetition, Severance and Employment Agreement dated February 25, 2008 between TSFG and H. Lynn Harton | | Incorporated by reference to Exhibit 10.20 of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2007 |
| 10.4-b * | | Retention Bonus Award Agreement dated September 18, 2008 between TSFG and H. Lynn Harton | | Incorporated by reference to Exhibit 10.1 of TSFG’s Current Report on Form 8-K dated September 18, 2008 |
| 10.4-c * | | Supplemental Executive Retirement Agreement between TSFG and H. Lynn Harton | | Incorporated by reference to Exhibit 10.24 of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2007 |
| 10.5-a * | | Noncompetition, Severance and Employment Agreement dated February 25, 2008 between TSFG and James R. Gordon | | Incorporated by reference to Exhibit 10.6 of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2007 |
| 10.5-b * | | Retention Bonus Award Agreement dated September 18, 2008 between TSFG and James R. Gordon | | Incorporated by reference to Exhibit 10.1 of TSFG’s Current Report on Form 8-K dated September 18, 2008 |
| 10.5-c * | | Supplemental Executive Retirement Agreement between TSFG and James R. Gordon | | Incorporated by reference to Exhibit 99.2 of TSFG’s Current Report on Form 8-K dated March 20, 2007 |
| | Noncompetition, Severance and Employment Agreement dated September 3, 2007 between TSFG and J. Ernesto Diaz | | Filed herewith |
| | Supplemental Executive Retirement Agreement between TSFG and J. Ernesto Diaz | | Filed herewith |
| 10.7-a * | | Noncompetition, Severance and Employment Agreement dated February 25, 2008 between TSFG and Christopher T. Holmes | | Incorporated by reference to Exhibit 10.8-a of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008 |
| 10.7-b * | | Retention Bonus Award Agreement dated September 18, 2008 between TSFG and Christopher T. Holmes | | Incorporated by reference to Exhibit 10.1 of TSFG’s Current Report on Form 8-K dated September 18, 2008 |
| 10.7-c * | | Supplemental Executive Retirement Agreement between TSFG and Christopher T. Holmes | | Incorporated by reference to Exhibit 10.8-c of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008 |
| 10.8-a * | | Noncompetition, Severance and Employment Agreement dated February 25, 2008 between TSFG and William P. Crawford, Jr. | | Incorporated by reference to Exhibit 10.10-a of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008 |
| 10.8-b * | | Supplemental Executive Retirement Agreement between TSFG and William P. Crawford, Jr. | | Incorporated by reference to Exhibit 10.10-b of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008 |
| | Noncompetition, Severance and Employment Agreement dated May 14, 2003 between TSFG and J.W. Davis | | Filed herewith |
| | Consulting Agreement dated March 1, 2010 between Carolina First Bank and J.W. Davis | | Filed herewith |
| 10.10 * | | TSFG Management Performance Incentive Plan (MPIP) (the short term bonus plan) | | Incorporated by reference to Exhibit 10.2 of TSFG’s Current Report on Form 8-K dated August 14, 2007 |
| 10.11 * | | Amended TSFG Long Term Incentive Plan | | Incorporated by reference to Exhibit 99.1 of TSFG’s Registration Statement on Form S-8, Commission File No. 161130 |
| 10.12 * | | Amended and Restated TSFG Employee Stock Purchase Plan | | Incorporated by reference to Exhibit 99.1 of TSFG’s Registration Statement on Form S-8, Commission File No. 333-160959 |
| Exhibit No. | | Description of Exhibit | | Location |
| 10.13 * | | TSFG Directors Stock Option Plan | | Incorporated by reference to Exhibit 99.1 from TSFG’s Registration Statement on Form S-8, Commission File No. 33-82668/82670 |
| 10.14 * | | TSFG Amended and Restated Fortune 50 Plan | | Incorporated by reference to the Prospectus in TSFG’s Registration Statement on Form S-8, Commission File No. 333-31948 |
| 10.15 * | | TSFG Executive Deferred Compensation Plan | | Incorporated by reference to Exhibit 10.3 of TSFG’s Current Report on Form 8-K dated December 10, 2008 |
| 10.16 * | | Form of Grant for TSFG 2007-2009 Long-Term Incentive Plan – Restricted Stock Unit Award Agreement | | Incorporated by reference to Exhibit 10.1 of TSFG’s Current Report on Form 8-K dated August 14, 2007 |
| 10.17 * | | Form of Grant for TSFG 2008-2010 Long-Term Incentive Plan – Restricted Stock Unit Award Agreement | | Incorporated by reference to Exhibit 10.21 of TSFG’s Annual Report on Form 10-K for the year ending December 31, 2008 |
| 10.18 | | Letter Agreement dated December 5, 2008 between TSFG and U.S. Department of Treasury | | Incorporated by reference to Exhibit 10.1 of TSFG’s Current Report on Form 8-K dated December 5, 2008 |
| | Form of Waiver, executed by each of Messrs. Harton, Gordon, Crawford, Davis, Diaz and Holmes | | Filed herewith |
| 10.20 | | Stipulation of Compromise and Settlement dated March 31, 2009 | | Incorporated by reference to Exhibit 99.1 of TSFG's Current Report on Form 8-K dated April 2, 2009 |
| 11.1 | | Statement of Computation of Earnings Per Share | | Filed herewith as Note 26 of the Notes to Consolidated Financial Statements |
| | Subsidiaries of TSFG | | Filed herewith |
| 22.1 | | Proxy Statement for the 2010 Annual Meeting of Shareholders | | Future filing incorporated by reference pursuant to General Instruction G(3) |
| | Consent of PricewaterhouseCoopers LLP | | Filed herewith |
| 23.2 | | Opinion of PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm | | Included herewith |
| | Certification of 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 | | Filed herewith |
| | Certification of 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 | | Filed herewith |
| | Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes Oxley Act of 2002 | | Filed herewith |
| | Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes Oxley Act of 2002 | | Filed herewith |
| | Certification of Principal Executive Officer pursuant to the Emergency Economic Stability Act of 2008 | | Filed herewith |
| | Certification of Principal Financial Officer pursuant to the Emergency Economic Stability Act of 2008 | | Filed herewith |
| | * | This is a management contract or compensatory plan. |
Copies of exhibits are available upon written request to the Corporate Secretary of The South Financial Group, Inc.
| Type | Date Filed | Reporting Purpose |
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The South Financial Group, Inc.
| Name | | Title | | Date |
| | | | | |
/s/H. Lynn Harton. H. Lynn Harton | | President and Chief Executive Officer (Principal Executive Officer) | | March 16, 2010 |
/s/ James R. Gordon James R. Gordon | | Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | March 16, 2010 |
/s/ Christopher G. Speaks Christopher G. Speaks | | Executive Vice President and Chief Accounting Officer (Principal Accounting Officer) | | March 16, 2010 |
| | | | | |
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the date indicated: |
| Name | | Title | | Date |
/s/John C. B. Smith, Jr. John C. B. Smith, Jr. | | Chairman and Director | | March 16, 2010 |
/s/ William R. Timmons III William R. Timmons III | | Vice-Chairman and Director | | March 16, 2010 |
/s/ J. W. Davis J. W. Davis | | Director | | March 16, 2010 |
/s/ M. Dexter Hagy M. Dexter Hagy | | Director | | March 16, 2010 |
/s/H. Lynn Harton. H. Lynn Harton | | Director | | March 16, 2010 |
/s/ William S. Hummers III William S. Hummers III | | Director | | March 16, 2010 |
/s/ Challis M. Lowe Challis M. Lowe | | Director | | March 16, 2010 |
/s/ Jon W. Pritchett Jon W. Pritchett | | Director | | March 16, 2010 |
/s/ H. Earle Russell, Jr. H. Earle Russell, Jr. | | Director | | March 16, 2010 |
/s/ Edward J. Sebastian Edward J. Sebastian | | Director | | March 16, 2010 |
/s/ David C. Wakefield III David C. Wakefield III | | Director | | March 16, 2010 |
