Reflecting these items, TSFG reported a first quarter 2008 net loss of $201.3 million, or $(2.77) per diluted share, compared with first quarter 2007 net income of $20.5 million, or $0.27 per diluted share. Excluding the aforementioned goodwill impairment charge and other non-operating items discussed above, TSFG reported a first quarter 2008 operating loss of $14.5 million, or $(0.20) per diluted share, compared with operating earnings of $22.6 million, or $0.30 per diluted share, for first quarter 2007. Reconciliations of GAAP-reported results to operating results are provided in the attached financial highlights. At March 31, 2008, TSFG reported a tangible equity ratio of 6.72%, above its 6% to 6.5% target, and both TSFG and Carolina First Bank (including its Mercantile Bank division) exceeded the “well-capitalized” levels for all regulatory capital ratios. “While we made progress in several operating fundamentals, industry-wide credit pressure and difficult market conditions overshadowed our results in the first quarter,” said Mack I. Whittle, Jr., Chairman, President and Chief Executive Officer of The South Financial Group. “At the end of the first quarter, residential construction market weakness, particularly in Florida, became more pronounced, and net charge-offs and nonperforming assets increased reflecting the stressed environment. We continue to proactively identify and seek resolutions of problem loans and aggressively address credit risks. As of the end of March, we increased our allowance for credit losses by 46 basis points to 1.72% of loans held for investment.” “We continue to execute our strategic plan,” Whittle continued. “As a result of our strategic focus, in the first quarter, our customer funding balances increased at a faster pace than loans and contributed to stable margin performance while managing 200 basis points of reductions in the federal funds target rate. In addition, we controlled operating noninterest expenses for the fifth consecutive quarter and held them essentially flat versus first quarter a year ago while absorbing certain industry-related cost increases. We ended the quarter with a higher tangible capital ratio and remain ‘well-capitalized’ for all regulatory ratios. We are committed to maintaining a strong balance sheet throughout this credit environment. As we navigate through these difficult times, we’ll continue to focus on the execution of our strategic objectives.” Non-Cash Goodwill Impairment TSFG recorded goodwill in connection with the acquisitions of several banks in Florida between 1999 and 2005. As previously disclosed, TSFG has continued to perform evaluations of the goodwill associated with its Florida Banking Segment. TSFG’s evaluation as of March 31, 2008 reflected decreases in projected cash flows for the Florida Banking Segment, and accordingly the estimated fair value of the segment declined. This decline resulted in the recognition of a $188.4 million pre-tax goodwill impairment charge in the first quarter 2008 and a corresponding reduction in the goodwill balance for the Florida Banking Segment to $239.5 million at March 31, 2008. The goodwill impairment charge is non-cash and has no impact on cash flows. Additionally, it has no impact on TSFG’s tangible equity or regulatory capital ratios, since goodwill is excluded from tangible equity and regulatory capital. TSFG remains committed to its Florida franchise and believes Florida is a key part of TSFG’s long-term success. 2 Net Interest Income and Average Balance Sheet First quarter 2008 tax-equivalent net interest income totaled $94.2 million, a decrease of $2.3 million from $96.5 million in fourth quarter 2007, principally from slight compression in the net interest margin, lower earning assets, and one fewer day in the first quarter. For first quarter 2008, average customer funding growth of 7.8% linked-quarter annualized exceeded average loan growth of 1.9%. The tax-equivalent net interest margin for first quarter 2008 declined 2 basis points to 3.07% from 3.09% for fourth quarter 2007, primarily from higher nonperforming loans and the associated reversal of previously accrued interest income. Given the Federal Reserve actions during the quarter, average earning asset yields decreased due to loan repricings as well as the impact of nonaccrual loans, which were offset by a similar decline in average funding costs (a 57 basis points decline for average earning assets versus 58 basis points for average funding costs). The shift into loans, which had a first quarter 2008 average tax-equivalent yield of 6.73%, and away from investment securities, which had an average tax-equivalent yield of 4.73%, partially offset the earning asset yield decline. Within total funding, the higher level of customer funding, which had a first quarter 2008 average cost of 2.97%, and lower level of wholesale borrowings, which had a first quarter average cost of 4.26%, contributed to the decline in funding costs. During the last six quarters, the net interest margin has remained relatively stable, ranging from 3.07% to 3.12%. First quarter 2008 average earning assets declined 3.3% linked-quarter annualized to $12.3 billion, as loan growth partially offset planned reductions of investment securities. First quarter 2008 average loans increased $49.2 million, or 1.9% linked-quarter annualized, from fourth quarter 2007. Commercial and industrial (C&I) loans led the growth, as TSFG continues to alter the mix of its commercial loan portfolio to concentrate on C&I and income-producing CRE loans. Average loans as a percentage of average earning assets totaled 83.1% for first quarter 2008, up from 77.8% for the year earlier period. Average securities declined $154.9 million during first quarter 2008. First quarter 2008 average customer funding, defined as total deposits less brokered deposits plus customer sweep accounts, increased $157.2 million, or 7.8% linked-quarter annualized. Average interest checking balances increased $77.2 million reflecting progress in recent deposit initiatives. First quarter 2008 average customer sweeps for Treasury Services customers, a source of funding tied directly to core commercial accounts, totaled $684.8 million, representing a $94.1 million increase from fourth quarter 2007. First quarter 2008 average wholesale borrowings, including brokered deposits and excluding customer sweep accounts, declined $213.7 million, or 21.1% linked-quarter annualized, in connection with the decline in investment securities and customer funding growth. Noninterest Income Noninterest income for first quarter 2008 included a $1.9 million gain from the Visa IPO shares redeemed and a $396,000 net gain on other security transactions. This compares with losses on securities of $1.3 million and $1.4 million for fourth quarter 2007 and first quarter 2007, respectively. 3 Operating noninterest income (which excludes the non-operating items mentioned above) totaled $28.6 million, down from $30.0 million for fourth quarter 2007 and up 0.9% from $28.4 million for first quarter 2007. In first quarter 2008, noninterest income declined largely from lower deposit-related fees, down $1.0 million linked-quarter, which tend to be seasonally lower in the first quarter of the year. Year-over-year, noninterest income increased from higher customer fee income, including double-digit increases for Treasury Services, debit card income, and merchant processing income. These increases were partially offset by declines in mortgage banking, insurance, and brokerage income. Noninterest Expenses As discussed above, first quarter 2008 noninterest expenses included a $188.4 million goodwill impairment charge, an $863,000 expense reduction for the reversal of an accrual for the settlement of Visa-related litigation, and a $547,000 non-operating pre-tax loss on early extinguishment of debt. This compares with an $881,000 accrual for the settlement of Visa-related litigation and a $499,000 loss on early extinguishment of debt for fourth quarter 2007 and $1.8 million employment contract buyouts and severance in first quarter 2007. Operating noninterest expenses (which exclude the non-operating items mentioned above) totaled $80.1 million for first quarter 2008, a $963,000 increase from $79.1 million for fourth quarter 2007 and up 0.4% from $79.7 million for first quarter 2007. The linked-quarter increase included $613,000 related to the full-quarter impact of higher FDIC insurance premiums, $417,000 in higher advertising and business development costs related to the customer funding initiatives, and higher personnel expense from incentive adjustments in fourth quarter 2007. Year-over-year, noninterest expenses declined in most categories, except for advertising and the expected increase in the FDIC insurance premiums, reflecting continued focus on expense control. In first quarter 2008, TSFG opened 2 new branch offices in the Hilton Head area of South Carolina and announced plans to purchase 5 retail branch offices in the Orlando area from BankAtlantic. This transaction is expected to close in the later part of the second quarter 2008, pending customary regulatory approval. Credit Quality The provision for credit losses for first quarter 2008 totaled $73.3 million, compared with $31.9 million for fourth quarter 2007. For first quarter 2008, the provision for credit losses exceeded net loan charge-offs by $48.3 million. The higher provision largely reflected credit deterioration due to continued weakness in housing markets, particularly in Florida, and additional specific reserves for nonperforming loans and the overall land development portfolios in Florida. The overall allowance for credit losses as a percentage of loans held for investment increased to 1.72% at March 31, 2008 from 1.26% at December 31, 2007. Net loan charge-offs in first quarter 2008 totaled $25.0 million, or 0.98% of average loans held for investment, compared to 0.92% for fourth quarter 2007 (0.57% excluding the Penland Development loans). Approximately 70% of the first quarter 2008 net loan charge-offs related to loans in Florida. 4 At March 31, 2008, nonperforming assets increased to $232.0 million, or 2.26% of loans held for investment and foreclosed property, from $89.9 million, or 0.88%, at December 31, 2007. The significant increase in nonperforming assets in first quarter 2008 was primarily attributable to accelerating market deterioration in residential construction and development-related loans, principally in Florida markets. Approximately 80% of the increase in nonperforming loans related to loans in Florida. The allowance for credit losses totaled $177.0 million, or 1.72% of loans held for investment, at March 31, 2008, compared with $128.7 million, or 1.26%, at December 31, 2007. The allowance coverage of nonperforming loans totaled 0.78 times at March 31, 2008, compared with 1.55 times at December 31, 2007. Capital Tangible shareholders’ equity at March 31, 2008 totaled $890.2 million, or $12.26 per share, compared with $872.1 million, or $12.04 per share, at December 31, 2007 and $878.0 million, or $11.76 per share, at March 31, 2007. TSFG’s tangible equity to tangible assets ratio at March 31, 2008 was 6.72%, up from 6.61% at December 31, 2007 and 6.52% at March 31, 2007. The increase in tangible equity resulted primarily from an overall positive change in other comprehensive income, including an improvement of $28.9 million in the after-tax unrealized loss on available for sale securities to $1.9 million. TSFG and its banking subsidiary remain well-capitalized for all regulatory capital ratios, and TSFG ended the quarter with a tier 1 capital ratio of 9.33%, compared with 9.49% at December 31, 2007. Effective January 1, 2008, TSFG adopted the provisions of SFAS 157 and 159 which did not have a material impact on TSFG’s equity or operating results for the quarter. Conference Call / Webcast Information The South Financial Group will host a conference call on Wednesday, April 23rd at 10:00 a.m. (ET) to discuss first quarter 2008 financial results. Additional material information, including forward-looking statements such as trends and projections, may be discussed during the presentation. For supplemental financial information, please refer to the Form 8-K filed by TSFG with the Securities and Exchange Commission on April 22nd or visit the Investor Relations section of its website under the Quarterly Earnings button. To participate in the conference call or webcast, please follow the instructions listed below. Conference Call: Please call 1-888-405-5393 or 1-517-645-6236 using the access code “The South.” A 7-day rebroadcast of the call will be available via 1-866-434-5274 or 1-203-369-1013. Webcast:To gain access to the webcast, which will be “listen-only,” please go towww.thesouthgroup.com under the Investor Relations tab and click on the link “Webcast/The South Financial Group 1st Quarter Earnings Conference Call.” For those unable to participate during the live webcast, it will be archived on The South Financial Group website until May 7, 2008. 5 General Information The South Financial Group is the largest publicly-traded bank holding company headquartered in South Carolina and ranks among the top 50 U.S. commercial bank holding companies in total assets. At March 31, 2008, it had approximately $13.7 billion in total assets and 174 branch offices in Florida, North Carolina, and South Carolina. TSFG focuses on fast-growing banking markets in the Southeast, concentrating its growth in metropolitan statistical areas. TSFG operates Carolina First Bank, which conducts banking operations in North Carolina and South Carolina (as Carolina First Bank), in Florida (as Mercantile Bank), and on the Internet (as Bank CaroLine). At March 31, 2008, approximately 46% of TSFG’s total customer deposits were in South Carolina, 39% were in Florida, and 15% were in North Carolina. Investor information is available at www.thesouthgroup.com . Explanation of TSFG’s Use of Certain Unaudited Non-GAAP Financial Measures and Forward-Looking Statements This press release contains financial information determined by methods other than Generally Accepted Accounting Principles (“GAAP”). The attached financial highlights provide reconciliations between GAAP net income and operating earnings (which exclude gains or losses on certain items deemed not to reflect core operations). In addition, TSFG provides data eliminating intangibles and related amortization in order to present data on a “tangible” or “cash operating” basis. TSFG uses these non-GAAP measures in its analysis of TSFG’s performance and believes presentations of “operating” financial measures provide useful supplemental information, a clearer understanding of TSFG’s performance, and better reflect TSFG’s core operating activities. Management utilizes non-GAAP measures in the calculation of certain of TSFG’s ratios, in particular, to analyze on a consistent basis over time the performance of what it considers to be its core operations. TSFG believes the non-GAAP measures enhance investors’ understanding of TSFG’s business and performance. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of other financial institutions. The limitations associated with operating measures and cash basis information 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 considered an alternative to GAAP. This news release contains forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) that are provided to assist in the understanding of anticipated future financial performance. These statements (as well as other forward-looking statements that may be made by management in the related conference call) include, but are not limited to, descriptions of management's plans, objectives or goals for future operations, and predictions, forecasts or other statements about future operations. They also include such items as return goals, loan growth, customer funding growth, expense control, income tax rate, expected financial results for acquisitions, factors that will affect credit quality and the net interest margin, the effectiveness of its hedging strategies, the risks and effects of changes in interest rates, effects of future economic conditions, and market performance. However, such statements necessarily involve risks and uncertainties and there are a number of factors – many of which are beyond TSFG’s control -- that could cause the actual conditions, events, or results to differ materially from those in such statements. For a discussion of certain factors that may cause such forward-looking statements to differ materially from TSFG’s actual results, please refer to TSFG’s filings with the Securities and Exchange Commission. The South Financial Group undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this release. CONTACT: Mary M. Gentry, EVP – Investor Relations (864) 421-1068 Christopher T. Holmes, EVP – Retail Banking and IR (864) 255-8970 ***END*** 6 |
