| | |
| • | fluctuations in consumer spending; |
| | |
| • | competition in the banking industry and demand for our products and services; |
| | |
| • | continued availability of senior management; |
| | |
| • | technological changes; |
| | |
| • | ability to increase market share; |
| | |
| • | income and expense projections, ability to control expenses, and expense reduction initiatives; |
| | |
| • | changes in the compensation, benefit, and incentive plans, including compensation accruals; |
| | |
| • | risks associated with income taxes, including the potential for adverse adjustments and the failure to realize deferred tax assets; |
| | |
| • | acquisitions, greater than expected deposit attrition or customer loss, inaccuracy of related cost savings estimates, inaccuracy of estimates of financial results, and unanticipated integration issues; |
| | |
| • | valuation of goodwill and intangibles and any potential future impairment; |
| | |
| • | significant delay or inability to execute strategic initiatives designed to grow revenues; |
| | |
| • | changes in management’s assessment of and strategies for lines of business, asset, and deposit categories; |
| | |
| • | changes in accounting policies and practices; |
| | |
| • | changes in the evaluation of the effectiveness of our hedging strategies; |
| | |
| • | changes in regulatory actions, including the potential for adverse adjustments; |
| | |
| • | changes, costs, and effects of litigation, and environmental remediation; |
| | |
| • | any potential participation in one or more governmental capital programs such as the U.S. Treasury’s Capital Assistance Program (“CAP”); and |
| | |
| • | recently-enacted or proposed legislation. |
Such forward-looking statements speak only as of the date on which such statements are made and shall be deemed to be updated by any future filings made by TSFG with the SEC. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. In addition, certain statements in future filings by TSFG with the SEC, in press releases, and in oral and written statements made by or with the approval of TSFG, which are not statements of historical fact, constitute forward-looking statements.
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 $13.3 billion in total assets and 180 branch offices in South Carolina, Florida, and North Carolina at March 31, 2009. Founded in 1986, TSFG focuses on attractive Southeastern banking markets which have historically experienced long-
term growth. TSFG operates Carolina First Bank, which conducts banking operations in North Carolina and South Carolina (as Carolina First), in Florida (as Mercantile), and on the Internet (as Bank Caroline). At March 31, 2009, approximately 45% of TSFG’s customer deposits (total deposits less brokered deposits) were in South Carolina, 42% were in Florida, and 13% were in North Carolina.
TSFG targets small business, middle market companies and retail consumers. TSFG strives to combine personalized customer service and local decision-making, typical of community banks, with a full range of financial services normally found at larger regional institutions.
TSFG reported a net loss available to common shareholders of $90.8 million, or $(1.10) per diluted share, for first quarter 2009, primarily attributable to a $142.6 million provision for credit losses resulting from continued credit deterioration, particularly in the Florida market. For first quarter 2008, TSFG reported a net loss available to common shareholders of $201.4 million, or $(2.78) per diluted share, which included a goodwill impairment charge of $188.4 million resulting from a decrease in expected cash flows of the Mercantile banking segment.
At March 31, 2009, nonperforming assets as a percentage of loans and foreclosed property increased to 5.08% from 4.04% at December 31, 2008 and 2.24% at March 31, 2008. The increase in nonperforming assets was primarily attributable to accelerating deterioration in residential construction and development-related loans (which are included in commercial real estate loans), principally in Florida markets. For the three months ended March 31, 2009, annualized net loan charge-offs totaled 4.36% of average loans held for investment, compared to 2.93% for the quarter ended December 31, 2008 and 0.98% for the quarter ended March 31, 2008. TSFG’s provision for credit losses increased to $142.6 million for the first three months of 2009 from $122.9 million and $73.3 million, respectively, for the quarters ended December 31, 2008 and March 31, 2008.
TSFG’s tangible equity to tangible asset ratio decreased to 10.03% at March 31, 2009 from 10.29% at December 31, 2008 primarily due to the net loss in first quarter 2009. Tangible common equity to tangible assets was 6.05% at March 31, 2009 and December 31, 2008. The conversion of $48.7 million of our Mandatory Convertible Non-Cumulative Preferred Stock, Series 2008 (the “Convertible Preferred Stock”), a net increase in other comprehensive income due primarily to changes in interest rates, and a decrease in intangible assets offset our net loss and dividends for the quarter. Tangible common equity to tangible assets, assuming conversion of the Convertible Preferred Stock, was 7.51% at March 31, 2009, 7.84% at December 31, 2008, and 6.72% at March 31, 2008. In addition, all regulatory capital ratios exceeded well-capitalized minimums.
In January 2009, 48,674 shares of our Convertible Preferred Stock were converted into approximately 10.0 million common shares, which included 2.5 million shares (valued at $6.5 million) issued as an inducement to convert. The $6.5 million was treated as a deemed dividend to preferred shareholders for purposes of net loss available to common shareholders.
Tax-equivalent net interest income was $86.2 million for first quarter 2009, compared to $92.9 million for fourth quarter 2008 and $94.2 million for first quarter 2008. The net interest margin decreased to 2.83% for first quarter 2009 from 2.97% for fourth quarter 2008 and 3.07% for first quarter 2008, primarily due to significant Federal Reserve rate cuts and increased nonperforming asset levels.
Noninterest income totaled $23.7 million for the first three months of 2009, compared to $30.0 million for fourth quarter 2008 and $31.1 million for first quarter 2008. The decrease in noninterest income was largely attributable to a loss on securities of $3.0 million, compared to a gain of $1.6 million in fourth quarter 2008 and $2.3 million in first quarter 2008 (including the gain on Visa IPO share redemption).
Noninterest expenses totaled $90.2 million for first quarter 2009, compared to $342.1 million and $268.4 million, respectively, for the quarters ended December 31, 2008 and March 31, 2008. Goodwill impairment charges totaling $237.6 million and $188.4 million, respectively, were recorded in fourth quarter 2008 and first quarter 2008. In first quarter 2009, regulatory assessments and credit-related expenses continued to increase, but most other noninterest expense categories decreased, reflecting continued emphasis on expense control.
Using period-end balances, TSFG’s loans held for investment at March 31, 2009 decreased 2.0% from December 31, 2008, and total deposit balances decreased 1.9%. Customer funding (deposits less brokered deposits plus customer sweep accounts) decreased 2.7% since December 31, 2008.
26
Critical Accounting Policies and Estimates
TSFG’s accounting policies are in accordance with accounting principles generally accepted in the United States and with general practice within the banking industry. TSFG makes a number of judgmental estimates and assumptions relating to reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during periods presented. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and reserve for unfunded lending commitments; the effectiveness of derivatives and other hedging activities; the fair value of certain financial instruments (loans held for sale, securities, derivatives, and privately held investments); income tax assets or liabilities; share-based compensation; and accounting for acquisitions, including the fair value determinations and the analysis of goodwill for impairment. To a lesser extent, significant estimates are also associated with the determination of contingent liabilities, discretionary compensation, and expense associated with other employee benefit agreements. Different assumptions in the application of these policies could result in material changes in TSFG’s Consolidated Financial Statements. Accordingly, as this information changes, the Consolidated Financial Statements could reflect the use of different estimates, assumptions, and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions, and judgments, and as such have a greater possibility of producing results that could be materially different than originally reported. TSFG has procedures and processes in place to facilitate making these judgments.
For additional information regarding critical accounting policies and estimates other than income taxes, refer to the Annual Report of TSFG on Form 10-K for the year ended December 31, 2008, specifically Item 8, Note 1 – Summary of Significant Accounting Policies in the notes to the Consolidated Financial Statements and the section captioned “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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.
No assurance can be given that either the tax returns submitted by management or the income tax reported on the Consolidated Financial Statements will not be adjusted 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.
Pursuant to FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” 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 based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of a deferred tax asset in accordance with GAAP ultimately depends on the existence of sufficient taxable income available under tax law, including future reversals of existing temporary differences, future taxable income exclusive of reversing differences, taxable income in prior carryback years, and tax planning strategies.
27
Although realization is not assured, management believes the recorded deferred tax assets, beyond the REIT capital loss and the South Carolina non-bank net operating loss (which currently have a valuation allowance recorded as reported in Note 14 to the Consolidated Financial Statements included in TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008) are fully recoverable based on the ability to carry back losses, forecasts of future taxable income, and current forecasts for the periods through which losses may be carried forward. At March 31, 2009, the net deferred tax asset totaled $65.3 million, which is supported by the expectation of future taxable income sufficient to realize the net deferred tax asset. The amount of future taxable income required is approximately $257 million in the carryforward period, which is currently 20 years. Going forward, if operating losses continue the deferred tax asset will continue to increase. Should the expectations of future profitability change, a valuation allowance may be established if management believes any portion of the deferred tax asset will not be realized.
Additionally, for regulatory capital purposes, deferred tax assets are limited to the assets which can be realized through (i) carryback to prior years or (ii) taxable income in the next twelve months. At March 31, 2009, $95.5 million of the deferred tax assets were excluded from tier 1 and total capital. (See “Capital Resources and Dividends” under “Balance Sheet Review”.)
Expanded Corporate Facilities
During 2007, TSFG started construction on a corporate campus project in Greenville, South Carolina. Through March 31, 2009, TSFG had invested approximately $75 million in the project (which is included in premises and equipment on the consolidated balance sheet as construction in progress) and had entered into additional contractual commitments of approximately $13 million. The initial phase of the facilities was originally expected to be placed in service during mid-2009.
However, in light of the economic downturn, TSFG has initiated a review of the corporate campus to determine the best short-term and long-term options relative to the facility. There are potential one-time charges that will be generated dependent on the option selected. TSFG may decide on one of the following: to move into the facility as originally planned (which would create lease termination expense when TSFG vacates existing space, currently estimated to be between $8 million and $12 million pre-tax); to modify the amount of space the Company occupies and lease the remainder; or to market the campus for sale to an end user (which would require reclassification of the investment in the campus as held for sale and measurement at lower of carrying value or estimated net realizable value, for which no estimate has been made). Each of these options will have different financial impacts. Management expects to present a final recommendation regarding the campus to the Board of Directors by the end of the second quarter 2009.
Balance Sheet Review
Loans
TSFG focuses its lending activities on small and middle market businesses and individuals in its geographic markets. At March 31, 2009, outstanding loans totaled $10.0 billion, which equaled 108.6% of total deposits (135.6% of customer deposits) and 75.4% of total assets. Loans held for investment decreased $205.4 million, or 2.0%, to $10.0 billion at March 31, 2009 from $10.2 billion at December 31, 2008. The major components of the loan portfolio were commercial loans, commercial real estate loans, and consumer loans (including both direct and indirect loans). Substantially all loans were to borrowers located in TSFG’s market areas in South Carolina, Florida, and North Carolina. At March 31, 2009, approximately 6% 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. At March 31, 2009, loans held for sale included $12.8 million of nonperforming loans originally held for investment.
TSFG generally sells a substantial majority of its residential mortgage loans in the secondary market. TSFG also retains certain of its mortgage loans in its held for investment portfolio as part of its overall balance sheet management strategy. Mortgage loans held for sale increased to $17.0 million at March 31, 2009 from $14.7 million at December 31, 2008, primarily due to higher mortgage loan volume and timing of mortgage sales. TSFG accounts for its mortgage loans held for sale at fair value pursuant to SFAS 159.
28
Table 1 summarizes outstanding loans by loan purpose.
| | | | | | | | | | |
Table 1 | |
| | |
Loan Portfolio Composition Based on Loan Purpose | |
| | |
(dollars in thousands) | |
|
| | March 31, 2009 | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Commercial Loans | | | | | | | | | | |
Commercial and industrial (1) | | $ | 2,645,871 | | $ | 2,788,980 | | $ | 2,722,611 | |
Commercial owner - occupied real estate | | | 1,285,530 | | | 1,107,069 | | | 1,270,746 | |
Commercial real estate (2) | | | 4,042,871 | | | 4,156,522 | | | 4,074,331 | |
| | | | | | | | | | |
| | | 7,974,272 | | | 8,052,571 | | | 8,067,688 | |
| | | | | | | | | | |
| | | | | | | | | | |
Consumer Loans | | | | | | | | | | |
Indirect - sales finance | | | 573,653 | | | 710,806 | | | 635,637 | |
Consumer lot loans | | | 198,032 | | | 291,378 | | | 225,486 | |
Direct retail (1) | | | 90,999 | | | 101,278 | | | 95,397 | |
Home equity (1) | | | 813,015 | | | 754,344 | | | 813,201 | |
| | | | | | | | | | |
| | | 1,675,699 | | | 1,857,806 | | | 1,769,721 | |
| | | | | | | | | | |
| | | | | | | | | | |
Mortgage Loans (1) | | | 336,710 | | | 365,276 | | | 354,663 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total loans held for investment | | $ | 9,986,681 | | $ | 10,275,653 | | $ | 10,192,072 | |
| | | | | | | | | | |
| | | | | | | | | | |
Percentage of Loans Held for Investment | | | | | | | | | | |
Commercial and industrial | | | 26.4 | % | | 27.1 | % | | 26.7 | % |
Commercial owner - occupied real estate (1) | | | 12.9 | | | 10.8 | | | 12.5 | |
Commercial real estate | | | 40.5 | | | 40.5 | | | 40.0 | |
Consumer | | | 16.8 | | | 18.1 | | | 17.3 | |
Mortgage | | | 3.4 | | | 3.5 | | | 3.5 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | |
| |
(1) | During 2008, TSFG reclassified certain loan balances. Amounts presented for prior periods have been reclassified to conform to the current presentation. |
| |
(2) | 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
29
motor vehicles with terms varying from two to six years. During second quarter 2008, TSFG ceased originating indirect loans in Florida, and plans to allow this portion of the portfolio to run off over its remaining life. In January 2009, TSFG effectively stopped originating indirect auto loans in its remaining markets, with the exception of certain dealers that fit within our relationship strategy.
Consumer lot loans are loans to individuals to finance the purchase of residential lots.
Direct retail consumer loans are loans to individuals to finance personal, family, or household needs. Typical loans are loans to finance auto purchases or home repairs and additions.
Home equity loans are loans to homeowners, secured primarily by junior mortgages on their primary residences, to finance personal, family, or household needs. These loans may be in the form of amortizing loans or lines of credit with terms up to 15 years. TSFG’s home equity portfolio consists of loans to direct customers, with no brokered loans.
Mortgage loans are loans to individuals, secured by first mortgages on single-family residences, generally to finance the acquisition or construction of those residences. TSFG generally sells a majority of its residential mortgage loans at origination in the secondary market. TSFG also retains certain of its mortgage loans in its held for investment portfolio as part of its overall balance sheet management strategy. TSFG’s mortgage portfolio is bank-customer related, with minimal brokered loans or subprime exposure.
Portfolio risk is partially managed by maintaining a “house” lending limit at a level significantly lower than the legal lending limit of Carolina First Bank and by requiring approval by the Risk Committee of the Board of Director to exceed this house limit. At March 31, 2009, TSFG’s house lending limit was $35 million, and 13 credit relationships totaling $547.2 million were in excess of the house lending limit (but not the legal lending limit). The 20 largest credit relationships had an aggregate outstanding principal balance of $599.6 million, or 6% of total loans held for investment at March 31, 2009, compared to 5.3% of total loans held for investment at December 31, 2008. Approximately $37 million of these loans were considered nonperforming loans as of March 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 March 31, 2009, the loan portfolio included commitments totaling $1.2 billion in SNCs. Outstanding borrowings under these commitments totaled $696.1 million at March 31, 2009, decreasing from $711.6 million at December 31, 2008. The largest commitment was $40.0 million and the largest outstanding balance was $36.0 million at March 31, 2009. In addition to internal limits that control our credit exposure to individual borrowers, we have established limits on the size of the overall SNC portfolio, and have established a sub-limit for total credit exposure to borrowers located outside of our markets. 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 average. Our ongoing strategic plan is to maintain diversity in our portfolio and expand the profitability of our relationships through the sale of non-credit products. Going forward, we expect to reduce the percentage of our portfolio invested in SNCs.
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 |
30
Underwriting policies dictate the loan-to-value (“LTV”) limitations at origination for commercial real estate loans. Table 2 presents selected characteristics of commercial real estate loans by product type.
| | | | | | | | | | | | | |
Table 2 | |
| | |
Selected Characteristics of Commercial Real Estate Loans | |
| | |
(dollars in thousands) | |
|
| | March 31, 2009 | |
| | |
| | Policy LTV | | Weighted Average
Time to Maturity
(in months) | | Weighted
Average
Loan Size | | Largest
Ten
Total O/S | |
| | | | | | | | | |
Completed income property | | 85 | % | | 39.4 | | | $ | 515 | | $ | 164,450 | |
Residential A&D | | 75 | | | 9.4 | | | | 606 | | | 92,782 | |
Commercial A&D | | 75 | | | 7.9 | | | | 1,144 | | | 101,501 | |
Commercial construction | | 80 | | | 29.5 | | | | 2,417 | | | 135,903 | |
Residential construction | | 80 | | | 11.6 | | | | 333 | | | 69,058 | |
Residential condo | | 80 | | | 7.6 | | | | 1,366 | | | 125,482 | |
Undeveloped land | | 65 | | | 9.8 | | | | 751 | | | 103,021 | |
| | | | | | | | | | | | | |
Overall | | | | | 27.6 | | | $ | 613 | | $ | 792,197 | |
For additional information on other commercial real estate management processes, refer to the Annual Report of TSFG on Form 10-K for the year ended December 31, 2008, specifically the section captioned “Commercial Real Estate Concentration” in the “Balance Sheet Review — Loans” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Table 3 presents the commercial real estate portfolio by geography, while Table 4 presents the commercial real estate portfolio by geography and property type. Commercial real estate nonaccruals, past dues, and net charge-offs are presented in Tables 6, 7, and 11, respectively. TSFG monitors trends in these categories in order to evaluate the possibility of higher credit risk in its commercial real estate portfolio.
31
| | | | | | | | | | | | | | | |
Table 3 | |
| | |
Commercial Real Estate Loans by Geographic Diversification (1) | |
| | |
(dollars in thousands) | | | | | | | | | | | | | |
|
| | March 31, 2009 | | December 31, 2008 | |
| | | | | |
| | Balance | | % of
Total CRE | | Balance | | % of
Total CRE | |
| | | | | | | | | |
South Carolina, exluding Coastal: | | | | | | | | | | | | | |
Upstate South Carolina (Greenville) | | $ | 570,034 | | | 14.1 | % | | $ | 539,920 | | | 13.3 | % | |
Midlands South Carolina (Columbia) | | | 235,515 | | | 5.8 | | | | 238,285 | | | 5.9 | | |
Greater South Charlotte South Carolina (Rock Hill) | | | 167,990 | | | 4.2 | | | | 164,709 | | | 4.0 | | |
Coastal South Carolina: | | | | | | | | | | | | | | | |
North Coastal South Carolina (Myrtle Beach) | | | 405,664 | | | 10.0 | | | | 401,325 | | | 9.9 | | |
South Coastal South Carolina (Charleston) | | | 264,026 | | | 6.5 | | | | 268,951 | | | 6.6 | | |
Western North Carolina (Hendersonville/Asheville) | | | 728,901 | | | 18.0 | | | | 762,559 | | | 18.7 | | |
Central Florida: | | | | | | | | | | | | | | | |
Central Florida (Orlando) | | | 267,450 | | | 6.6 | | | | 274,560 | | | 6.7 | | |
Marion County, Florida (Ocala) | | | 152,987 | | | 3.8 | | | | 156,700 | | | 3.8 | | |
North Florida: | | | | | | | | | | | | | | | |
Northeast Florida (Jacksonville) | | | 276,311 | | | 6.9 | | | | 276,942 | | | 6.8 | | |
North Central Florida | | | 307,960 | | | 7.6 | | | | 311,426 | | | 7.6 | | |
South Florida (Ft. Lauderdale) | | | 251,050 | | | 6.2 | | | | 232,437 | | | 5.7 | | |
Tampa Bay Florida | | | 414,983 | | | 10.3 | | | | 446,517 | | | 11.0 | | |
| | | | | | | | | | | | | | | |
Total commercial real estate loans | | $ | 4,042,871 | | | 100.0 | % | | $ | 4,074,331 | | | 100.0 | % | |
| | | | | | | | | | | | | | | |
| |
(1) | Geography is primarily determined by the originating operating geographic market and not necessarily the ultimate location of the underlying collateral. |
| |
Table 4 | |
| | |
Commercial Real Estate Loans by Geography and Product Type | |
| | |
(dollars in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2009 Commercial Real Estate Loans by Geography | |
| | | |
| | SC, Excl
Coastal | | Coastal
SC | | Western
NC | | Central
FL | | North
FL | | South
FL | | Tampa
Bay | | Total
CRE | | % of
LHFI | |
| | | | | | | | | | | | | | | | | | | |
Commercial Real Estate Loans by Product Type | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Completed income property | | $ | 533,581 | | $ | 356,960 | | $ | 402,906 | | $ | 211,724 | | $ | 359,941 | | $ | 146,565 | | $ | 190,762 | | $ | 2,202,439 | | | 22.1 | % | |
Residential A&D | | | 98,266 | | | 63,837 | | | 157,792 | | | 34,809 | | | 71,845 | | | 17,489 | | | 27,063 | | | 471,101 | | | 4.7 | | |
Commercial A&D | | | 42,901 | | | 25,705 | | | 38,114 | | | 34,838 | | | 10,456 | | | 14,470 | | | 69,105 | | | 235,589 | | | 2.4 | | |
Commercial construction | | | 191,507 | | | 42,660 | | | 24,645 | | | 44,027 | | | 17,931 | | | 26,191 | | | 22,831 | | | 369,792 | | | 3.7 | | |
Residential construction | | | 31,644 | | | 44,492 | | | 34,950 | | | 20,928 | | | 28,666 | | | 11 | | | 6,193 | | | 166,884 | | | 1.7 | | |
Residential condo | | | 20,876 | | | 73,487 | | | 10,797 | | | 1,495 | | | 30,126 | | | 21,768 | | | 24,545 | | | 183,094 | | | 1.8 | | |
Undeveloped land | | | 54,764 | | | 62,549 | | | 59,697 | | | 72,616 | | | 65,306 | | | 24,556 | | | 74,484 | | | 413,972 | | | 4.1 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total CRE Loans | | $ | 973,539 | | $ | 669,690 | | $ | 728,901 | | $ | 420,437 | | $ | 584,271 | | $ | 251,050 | | $ | 414,983 | | $ | 4,042,871 | | | 40.5 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CRE Loans as % of Total Loans HFI | | | 9.7 | % | | 6.7 | % | | 7.3 | % | | 4.2 | % | | 5.9 | % | | 2.5 | % | | 4.2 | % | | 40.5 | % | | | | |
See “Credit Quality” for additional commercial real estate information.
Credit Quality
A willingness to take credit risk is inherent in the decision to grant credit. Prudent risk-taking requires a credit risk management system based on sound policies and control processes that ensure compliance with those policies. TSFG’s credit risk management system is defined by policies approved by the Board of Directors that govern the risk
32
underwriting, portfolio monitoring, and problem loan administration processes. Adherence to underwriting standards is managed through a multi-layered credit approval process and after-the-fact review by credit risk management of loans approved by lenders. Through daily review by credit risk managers, monthly reviews of exception reports, and ongoing analysis of asset quality trends, compliance with underwriting and loan monitoring policies is closely supervised. The administration of problem loans is driven by policies that require written plans for resolution and periodic meetings with credit risk management to review progress. Credit risk management activities are monitored by the Risk Committee of the Board, which meets periodically to review credit quality trends, new large credits, loans to insiders, large problem credits, credit policy changes, and reports on independent credit reviews.
For TSFG’s policy regarding impairment on loans, nonaccruals, charge-offs, and foreclosed property, refer to Item 8, Note 1 – Summary of Significant Accounting Policies in the notes to the Consolidated Financial Statements in the Annual Report on Form 10-K for year ended December 31, 2008.
Table 5 presents our credit quality indicators.
| | | | | | | | | | |
Table 5 | |
| | |
Credit Quality Indicators | |
| | |
(dollars in thousands) | | | | | | | | | | |
|
| | March 31, | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Loans held for sale | | $ | 29,726 | | $ | 16,119 | | $ | 30,963 | |
Loans held for investment | | | 9,986,681 | | | 10,275,653 | | | 10,192,072 | |
Allowance for loan losses | | | 280,156 | | | 174,420 | | | 247,086 | |
Allowance for credit losses (1) | | | 283,425 | | | 177,016 | | | 249,874 | |
|
Nonaccrual loans - commercial and industrial(2) | | | 41,877 | | | 22,414 | | | 35,998 | |
Nonaccrual loans - commercial owner - occupied real estate | | | 19,310 | | | 6,325 | | | 14,876 | |
Nonaccrual loans - commercial real estate | | | 301,872 | | | 171,795 | | | 230,373 | |
Nonaccrual loans - consumer (2) | | | 28,743 | | | 13,241 | | | 39,009 | |
Nonaccrual loans - mortgage (2) | | | 31,148 | | | 8,582 | | | 29,126 | |
| | | | | | | | | | |
Total nonperforming loans held for investment (3) | | | 422,950 | | | 222,357 | | | 349,382 | |
Nonperforming loans held for sale - CRE | | | 12,766 | | | — | | | 16,282 | |
Foreclosed property (other real estate owned and personal property repossessions) | | | 77,210 | | | 8,227 | | | 48,993 | |
| | | | | | | | | | |
Total nonperforming assets | | $ | 512,926 | | $ | 230,584 | | $ | 414,657 | |
| | | | | | | | | | |
Restructured loans accruing interest (3) | | $ | 11,073 | | $ | 1,433 | | $ | 6,249 | |
| | | | | | | | | | |
Loans past due 90 days or more (interest accruing) | | $ | 6,444 | | $ | 9,588 | | $ | 47,481 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total nonperforming assets as a percentage of loans and foreclosed property | | | 5.08 | % | | 2.24 | % | | 4.04 | % |
Allowance for loan losses to nonperforming loans | | | 0.66 | x | | 0.78 | x | | 0.71 | x |
| |
(1) | The allowance for credit losses is the sum of the allowance for loan losses and the reserve for unfunded lending commitments. |
| |
(2) | In second quarter 2008, TSFG reclassified certain loan balances. Amounts presented for prior periods have been reclassified to conform to the current presentation. |
| |
(3) | During first quarter 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 5.08% at March 31, 2009 from 4.04% at December 31, 2008. The increase in nonperforming assets was primarily attributable to accelerating market deterioration in residential construction and development-related loans, principally in Florida markets.
33
Table 6 presents CRE nonaccrual loans by geography and product type. At March 31, 2009, CRE loans past due 90 days still accruing interest totaled $23,000.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 6 |
| |
Commercial Real Estate Nonaccrual Loans |
| |
(dollars in thousands) |
|
| | March 31, 2009 CRE Nonaccrual Loans (“NAL”) by Geography | |
| | | |
| | SC, Excl
Coastal | | Coastal
SC | | Western
NC | | Central
FL | | North
FL | | South
FL | | Tampa
Bay | | Total
CRE NAL | | % of
NAL | |
| | | | | | | | | | | | | | | | | | | |
CRE Nonaccrual Loans by Product Type | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Completed income property | | $ | 2,663 | | $ | 12,219 | | $ | 13,827 | | $ | 8,773 | | $ | 4,300 | | $ | 10,947 | | $ | 18,731 | | $ | 71,460 | | | 16.9 | % |
Residential A&D | | | 11,209 | | | 677 | | | 14,233 | | | 2,152 | | | 7,139 | | | 3,876 | | | 12,883 | | | 52,169 | | | 12.3 | |
Commercial A&D | | | 146 | | | 3,058 | | | 1,044 | | | 123 | | | 70 | | | — | | | 30,273 | | | 34,714 | | | 8.2 | |
Commercial construction | | | 817 | | | 391 | | | 624 | | | — | | | — | | | 1,567 | | | 11,327 | | | 14,726 | | | 3.5 | |
Residential construction | | | 1,807 | | | 2,340 | | | 6,802 | | | 17,814 | | | 2,635 | | | 11 | | | 1,180 | | | 32,589 | | | 7.7 | |
Residential condo | | | 8,024 | | | 1,884 | | | 234 | | | — | | | — | | | 8,203 | | | 5,111 | | | 23,456 | | | 5.5 | |
Undeveloped land | | | 1,587 | | | 351 | | | 322 | | | 18,676 | | | 4,642 | | | 16,406 | | | 30,774 | | | 72,758 | | | 17.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total CRE Nonaccrual Loans | | $ | 26,253 | | $ | 20,920 | | $ | 37,086 | | $ | 47,538 | | $ | 18,786 | | $ | 41,010 | | $ | 110,279 | | $ | 301,872 | | | 71.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CRE Nonaccrual Loans as % of Total Nonaccrual Loans HFI | | | 6.2 | % | | 5.0 | % | | 8.8 | % | | 11.2 | % | | 4.4 | % | | 9.7 | % | | 26.1 | % | | 71.4 | % | | | |
Table 7 provides detail regarding commercial real estate loans past due 30 days or more.
| | | | | | | | | | | | | |
Table 7 |
| |
Commercial Real Estate Loans Past Due 30 Days or More (excluding nonaccruals) |
| |
(dollars in thousands) |
|
| | | | | | | | | | | | | |
| | March 31, 2009 | | December 31, 2008 | |
| | | | | |
| | Balance | | % of CRE | | Balance | | % of CRE | |
| | | | | | | | | |
North Carolina | | $ | 22,711 | | | 0.56 | % | $ | 21,364 | | | 0.53 | % |
South Carolina | | | 27,254 | | | 0.68 | | | 34,268 | | | 0.84 | |
Florida | | | 49,813 | | | 1.23 | | | 44,471 | | | 1.09 | |
| | | | | | | | | | | | | |
Total CRE loans past due 30 days or more | | $ | 99,778 | | | 2.47 | % | $ | 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 8 provides additional detail regarding potential problem loans.
| | | | | | | | | | | | | | | | | | | |
Table 8 |
| |
Potential Problem Loans |
| |
(dollars in thousands) |
| | | | | | | | | | | | | | | | | | | |
| | March 31, 2009 | | December 31, 2008 | |
| | | | | |
| | # of
Loans | | Balance | | % of
LHFI | | # of
Loans | | Balance | | % of
LHFI | |
| | | | | | | | | | | | | |
Large potential problem loans ($5 million or more) | | | 16 | | $ | 186,817 | | | 1.87 | % | | 23 | | $ | 217,688 | | | 2.13 | % |
Small potential problem loans (less than $5 million) | | | 786 | | | 367,496 | | | 3.68 | | | 732 | | | 282,189 | | | 2.77 | |
| | | | | | | | | | | | | | | | | | | |
Total potential problem loans (1) | | | 802 | | $ | 554,313 | | | 5.55 | % | | 755 | | $ | 499,877 | | | 4.90 | % |
| | | | | | | | | | | | | | | | | | | |
| |
(1) | Includes commercial and industrial, commercial real estate, and commercial owner-occupied real estate. |
34
Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
The allowance for loan losses represents management’s estimate of probable incurred losses inherent in the lending portfolio. The adequacy of the allowance for loan losses (the “Allowance”) is analyzed quarterly. For purposes of this analysis, adequacy is defined as a level sufficient to absorb probable incurred losses in the portfolio as of the balance sheet date presented. The methodology employed for this analysis is as follows.
Management’s ongoing evaluation of the adequacy of the Allowance considers both impaired and unimpaired loans and takes into consideration TSFG’s past loan loss experience, known and inherent risks in the portfolio, existing adverse situations that may affect the borrowers’ ability to repay, estimated value of any underlying collateral, an analysis of guarantees and an analysis of current economic factors and existing conditions.
TSFG, through its lending and credit functions, continuously reviews its loan portfolio for credit risk. TSFG employs an independent credit review area that reviews the lending and credit functions and processes to validate that credit risks are appropriately identified and addressed and reflected in the risk ratings. Using input from the credit risk identification process, the Company’s credit risk management area analyzes and validates the Company’s Allowance calculations. The analysis includes four basic components: general allowances for loan pools segmented based on similar risk characteristics, specific allowances for individually impaired loans, subjective and judgmental qualitative adjustments based on identified economic factors and existing conditions and other risk factors, and the unallocated component of the Allowance (which is determined based on the overall Allowance level and the determination of a range given the inherent imprecision of calculating the Allowance).
Management reviews the methodology, calculations and results and ensures that the calculations are appropriate and that all material risk elements have been assessed in order to determine the appropriate level of Allowance for the inherent losses in the loan portfolio at each quarter end. The Allowance for Credit Losses Committee is in place to ensure that the process is systematic and consistently applied.
The following chart reflects the various levels of reserves included in the Allowance:
| | |
Level I | | General allowance calculated based upon historical losses |
| | | |
Level II | | Specific reserves for individually impaired loans |
| | | |
Level III | | Subjective/judgmental adjustments for economic and other risk factors |
| | | |
Unfunded | | Reserves for off-balance sheet (unadvanced) exposure |
| | | |
Unallocated | | Represents the imprecision inherent in the previous calculations |
| | | |
Total | | Represents summation of all reserves |
Level I Reserves. The first reserve component is the general allowance for loan pools segmented based on similar risk characteristics that are determined by applying adjusted historical loss factors to each loan pool. This part of the methodology is governed by SFAS No. 5, “Accounting for Contingencies.” 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 eight 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 four pools by product type—Direct, Indirect, Revolving, 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 $97.4 million at March 31, 2009, based on the portfolio historical loss rates, compared to $81.8 million at December 31, 2008.
35
Level II Reserves. The second component of the Allowance involves the calculation of specific allowances for each individually impaired loan in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” In situations where a loan is determined to be impaired (primarily because it is probable that all principal and interest amount 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 loans over $500,000 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 current fair value (less cost to sell) of the subject property. TSFG had Level II reserves of $67.0 million at March 31, 2009, compared to $44.4 million at year end 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 in accordance with SFAS 5 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 additional reserves for current economic conditions, the commercial real estate concentration in the portfolio, and an additional adjustment to represent declining land values. The Level III Reserves totaled $111.7 million at March 31, 2009 compared to $117.0 million at December 31, 2008.
Reserve for Unfunded Commitments. At March 31, 2009 and December 31, 2008, the reserve for unfunded commitments was $3.3 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 calculated Allowance and the lower boundary amounts for each category in our model. The sum of these differences at March 31, 2009 was $14.5 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 whether the impaired loans are secured, the collateral type, and the estimated loss severity on individual loans. Specifically, impaired loans increased to $375.0 million at March 31, 2009 from $287.5 million at December 31, 2008, primarily attributable to commercial real estate loans in Florida. Most of the loans contributing to the increase were over $500,000 and 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 increased 51% compared to the 30% 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
36
may not be valid. Thus, there can be no assurance that loan losses in future periods will not exceed the current Allowance amount or that future increases in the Allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the Allowance, thus adversely affecting the operating results of TSFG.
The Allowance is also subject to examination and adequacy testing by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the Allowance relative to that of peer institutions, and other adequacy tests. In addition, such regulatory agencies could require us to adjust our Allowance based on information available to them at the time of their examination.
Table 9 summarizes the changes in the allowance for loan losses, reserve for unfunded lending commitments, and allowance for credit losses and provides certain related ratios.
| | | | | | | | | | |
Table 9 |
| |
Summary of Loan and Credit Loss Experience |
| |
(dollars in thousands) |
| | | | | | | | | | |
| | At and For the
Three Months
Ended March 31, | | At and For the
Year Ended
December 31, | |
| | | | |
| | 2009 | | 2008 | | 2008 | |
| | | | | | | |
Allowance for loan losses, beginning of year | | $ | 247,086 | | $ | 126,427 | | $ | 126,427 | |
Net charge-offs: | | | | | | | | | | |
Loans charged-off | | | (110,443 | ) | | (27,583 | ) | | (230,961 | ) |
Loans recovered | | | 1,367 | | | 2,612 | | | 7,551 | |
| | | | | | | | | | |
| | | (109,076 | ) | | (24,971 | ) | | (223,410 | ) |
Additions to allowance through provision expense | | | 142,146 | | | 72,964 | | | 344,069 | |
| | | | | | | | | | |
Allowance for loan losses, end of period | | $ | 280,156 | | $ | 174,420 | | $ | 247,086 | |
| | | | | | | | | | |
| | | | | | | | | | |
Reserve for unfunded lending commitments, beginning of year | | $ | 2,788 | | $ | 2,268 | | $ | 2,268 | |
Provision for unfunded lending commitments | | | 481 | | | 328 | | | 520 | |
| | | | | | | | | | |
Reserve for unfunded lending commitments, end of period | | $ | 3,269 | | $ | 2,596 | | $ | 2,788 | |
| | | | | | | | | | |
| | | | | | | | | | |
Allowance for credit losses, beginning of year | | $ | 249,874 | | $ | 128,695 | | $ | 128,695 | |
Net charge-offs: | | | | | | | | | | |
Loans charged-off | | | (110,443 | ) | | (27,583 | ) | | (230,961 | ) |
Loans recovered | | | 1,367 | | | 2,612 | | | 7,551 | |
| | | | | | | | | | |
| | | (109,076 | ) | | (24,971 | ) | | (223,410 | ) |
Additions to allowance through provision expense | | | 142,627 | | | 73,292 | | | 344,589 | |
| | | | | | | | | | |
Allowance for credit losses, end of period | | $ | 283,425 | | $ | 177,016 | | $ | 249,874 | |
| | | | | | | | | | |
| | | | | | | | | | |
Average loans held for investment | | $ | 10,154,853 | | $ | 10,221,424 | | $ | 10,351,897 | |
Loans held for investment, end of period | | | 9,986,681 | | | 10,275,653 | | | 10,192,072 | |
Net charge-offs as a percentage of average loans held for investment (annualized) | | | 4.36 | % | | 0.98 | % | | 2.16 | % |
Allowance for loan losses as a percentage of loans held for investment | | | 2.81 | | | 1.70 | | | 2.42 | |
Allowance for credit losses as a percentage of loans held for investment | | | 2.84 | | | 1.72 | | | 2.45 | |
Allowance for loan losses to nonperforming loans HFI | | | 0.66 | x | | 0.78 | x | | 0.71 | x |
The provision for credit losses for first quarter 2009 totaled $142.6 million, which exceeded net loan charge-offs by $33.6 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 land development portfolios, particularly in Florida. The overall allowance for credit losses as a percentage of loans held for investment increased to 2.84% at March 31, 2009 from 2.45% at December 31, 2008. Tables 10 and 11 provide additional detail for net charge-offs.
37
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 10 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Charge-Offs by Product Type | | | | | | | | | | |
| | | | | | | | | | | |
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
March 31, 2009 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Amount | | % of
NCO | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | | | | | | | | | | | | | | | | | | | | | $ | 22,078 | | | 20.2 | % |
Commercial owner-occupied real estate | | | | | | | | | | | | | | | | | | | | | | | | 3,430 | | | 3.2 | |
Commercial real estate | | | | | | | | | | | | | | | | | | | | | | | | 47,922 | | | 43.9 | |
Indirect - sales finance | | | | | | | | | | | | | | | | | | | | | | | | 4,823 | | | 4.4 | |
Consumer lot loans | | | | | | | | | | | | | | | | | | | | | | | | 17,164 | | | 15.7 | |
Direct retail | | | | | | | | | | | | | | | | | | | | | | | | 1,289 | | | 1.2 | |
Home equity | | | | | | | | | | | | | | | | | | | | | | | | 3,236 | | | 3.0 | |
Mortgage | | | | | | | | | | | | | | | | | | | | | | | | 9,134 | | | 8.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total net charge-offs | | | | | | | | | | | | | | | | | | | | | | | $ | 109,076 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | �� |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 11 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate Net Charge-Offs by Product Type | | | | |
| | | | | |
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | Three Months Ended March 31, 2009 CRE Net Charge-Offs (“NCO”) by Geography | |
| | | |
| | SC, Excl
Coastal | | Coastal
SC | | Western
NC | | Central
FL | | North
FL | | South
FL | | Tampa
Bay | | Total
CRE NCO | | % of
NCO | |
| | | | | | | | | | | | | | | | | | | |
CRE Net Charge-Offs by
Product Type | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Completed income property | | $ | 771 | | $ | 2,394 | | $ | 2,650 | | $ | 1,718 | | $ | 403 | | $ | 1,062 | | $ | 4,364 | | $ | 13,362 | | | 12.3 | % |
Residential A&D | | | 789 | | | 942 | | | 4,013 | | | 2,452 | | | 1,839 | | | — | | | 3,630 | | | 13,665 | | | 12.5 | |
Commercial A&D | | | 238 | | | 700 | | | 208 | | | — | | | — | | | 119 | | | 557 | | | 1,822 | | | 1.7 | |
Commercial construction | | | — | | | — | | | — | | | — | | | — | | | 127 | | | — | | | 127 | | | 0.1 | |
Residential construction | | | (21 | ) | | 153 | | | 2,644 | | | 1,473 | | | 1,068 | | | (6 | ) | | 730 | | | 6,041 | | | 5.5 | |
Residential condo | | | 482 | | | 1,062 | | | — | | | — | | | — | | | — | | | — | | | 1,544 | | | 1.4 | |
Undeveloped land | | | — | | | — | | | 36 | | | 1,816 | | | 779 | | | 1,424 | | | 7,306 | | | 11,361 | | | 10.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total CRE Net Charge-Offs | | $ | 2,259 | | $ | 5,251 | | $ | 9,551 | | $ | 7,459 | | $ | 4,089 | | $ | 2,726 | | $ | 16,587 | | $ | 47,922 | | | 43.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
CRE Net Charge-Offs as % of Total Net Charge-Offs | | | 2.1 | % | | 4.8 | % | | 8.8 | % | | 6.8 | % | | 3.7 | % | | 2.5 | % | | 15.2 | % | | 43.9 | % | | | |
Securities
TSFG uses the investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate risk, to generate interest and dividend income, to provide liquidity to meet funding requirements, and to provide collateral for pledges on public deposits, treasury tax and loan (“TT&L”) advances, FHLB advances, derivatives, and securities sold under repurchase agreements. 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 12 shows the carrying values of the investment securities portfolio.
38
| | | | | | | | | | |
Table 12 | | | | | | | | | | |
| |
Investment Securities Portfolio Composition |
| |
(dollars in thousands) | | | | | | | | | | |
| | | | | | | | | | |
| | March 31, | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Available for Sale (at fair value) | | | | | | | | | | |
U.S. Treasury | | $ | 2,042 | | $ | 28,798 | | $ | 2,069 | |
U.S. Government agencies | | | 313,159 | | | 337,775 | | | 313,729 | |
Agency mortgage-backed securities | | | 1,489,583 | | | 1,343,108 | | | 1,468,639 | |
Private label mortgage-backed securities | | | 12,462 | | | 16,209 | | | 12,771 | |
State and municipal | | | 241,478 | | | 279,788 | | | 262,248 | |
Other investments: | | | | | | | | | | |
Corporate bonds | | | — | | | 18,270 | | | 9,963 | |
Federal Home Loan Bank (“FHLB”) stock | | | 45,833 | | | 39,795 | | | 35,536 | |
Community bank stocks | | | 581 | | | 3,170 | | | 672 | |
Other equity investments | | | 1,143 | | | 2,985 | | | 1,567 | |
| | | | | | | | | | |
| | | 2,106,281 | | | 2,069,898 | | | 2,107,194 | |
| | | | | | | | | | |
Held to Maturity (at amortized cost) | | | | | | | | | | |
State and municipal | | | 17,939 | | | 31,228 | | | 22,609 | |
Other investments | | | 100 | | | 240 | | | 100 | |
| | | | | | | | | | |
| | | 18,039 | | | 31,468 | | | 22,709 | |
| | | | | | | | | | |
Total | | $ | 2,124,320 | | $ | 2,101,366 | | $ | 2,129,903 | |
| | | | | | | | | | |
Total securities as a percentage of total assets | | | 16.0 | % | | 15.3 | % | | 15.7 | % |
| | | | | | | | | | |
| | | | | | | | | | |
Percentage of Total Securities Portfolio | | | | | | | | | | |
U.S. Treasury | | | 0.1 | % | | 1.4 | % | | 0.1 | % |
U.S. Government agencies | | | 14.7 | | | 16.1 | | | 14.7 | |
Agency mortgage-backed securities | | | 70.1 | | | 63.9 | | | 69.0 | |
Private label mortgage-backed securities | | | 0.6 | | | 0.8 | | | 0.6 | |
State and municipal | | | 12.2 | | | 14.8 | | | 13.4 | |
Other investments | | | 2.3 | | | 3.0 | | | 2.2 | |
| | | | | | | | | | |
Total | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | |
Securities (i.e., securities available for sale and securities held to maturity) excluding the unrealized loss on securities available for sale averaged $2.1 billion for first quarter 2009, fourth quarter 2008, and first quarter 2008. The average tax-equivalent portfolio yield decreased for the three months ended March 31, 2009 to 4.52% from 4.57% in fourth quarter 2008 and 4.73% in first quarter 2008. The securities yield decreased primarily due to an overall decline in interest rates resulting in reinvestment of scheduled and unscheduled payments and calls at lower yields.
The expected duration of the debt securities portfolio was approximately 1.9 years at March 31, 2009, a decrease 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 some callable bonds and mortgage-backed securities, security paydowns are likely to accelerate if interest rates fall or decline if interest rates rise. Changes in interest rates and related prepayment activity impact yields and fair values of TSFG’s securities.
The available for sale portfolio constituted 99.2% of total securities at March 31, 2009. Management believes that maintaining most of its securities in the available for sale category provides greater flexibility in the management of the overall investment portfolio. The majority of these securities are government or agency securities and, therefore, pose minimal credit risk.
Approximately 56% of mortgage-backed securities (“MBS”) are collateralized mortgage obligations (“CMOs”) with an average duration of 0.9 years. At March 31, 2009, approximately 16% of the MBS portfolio was variable rate or
39
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 net unrealized gain on securities available for sale (pre-tax) totaled $43.3 million at March 31, 2009, compared with a $10.9 million gain at December 31, 2008, primarily due to a decrease in long term interest rates. If interest rates increase, credit spreads widen, and/or market illiquidity worsens, TSFG expects its net unrealized gain on securities available for sale to decrease and possibly become a net unrealized loss. See Item 1, Note 4 to the Consolidated Financial Statements for information about TSFG’s securities in unrealized loss positions.
Table 13 shows the credit risk profile of the securities portfolio.
| | | | | | | | | | | | | |
Table 13 | | | | | | | | | | | | | |
| |
Investment Securities Portfolio Credit Risk Profile |
| |
(dollars in thousands) | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | March 31, 2009 | | December 31, 2008 | |
| | | | |
| | Balance | | % of Total | | Balance | | % of Total | |
| | | | | | | | | |
Government and agency | | | | | | | | | | | | | |
U.S. Treasury | | $ | 2,042 | | | 0.1 | % | $ | 2,069 | | | 0.1 | % |
U.S. Government agencies (1) | | | 313,159 | | | 14.7 | | | 313,729 | | | 14.7 | |
Agency mortgage-backed securities (MBS) (1)(2) | | | 1,489,583 | | | 70.1 | | | 1,468,639 | | | 68.9 | |
Federal Home Loan Bank Stock | | | 45,833 | | | 2.2 | | | 35,536 | | | 1.7 | |
| | | | | | | | | | | | | |
Total government and agency | | | 1,850,617 | | | 87.1 | | | 1,819,973 | | | 85.4 | |
| | | | | | | | | | | | | |
State and municipal (3)(4)(5) | | | | | | | | | | | | | |
Pre-funded with collateral or AAA-rated backed by Texas Permanent School Fund | | | 177,545 | | | 8.3 | | | 188,598 | | | 8.9 | |
Underlying issuer or collateral rated A or better (including South Carolina State Aid) | | | 71,465 | | | 3.4 | | | 81,238 | | | 3.8 | |
Underlying issuer or collateral rated BBB | | | 8,322 | | | 0.4 | | | 7,344 | | | 0.3 | |
Non-rated | | | 2,085 | | | 0.1 | | | 7,677 | | | 0.4 | |
| | | | | | | | | | | | | |
Total state and municipal | | | 259,417 | | | 12.2 | | | 284,857 | | | 13.4 | |
| | | | | | | | | | | | | |
Corporate bonds AA or A-rated | | | — | | | — | | | 9,963 | | | 0.5 | |
Private label mortgage-backed securities AAA-rated (2) | | | 12,462 | | | 0.6 | | | 12,771 | | | 0.6 | |
Community bank stocks and other | | | 1,824 | | | 0.1 | | | 2,339 | | | 0.1 | |
| | | | | | | | | | | | | |
Total securities | | $ | 2,124,320 | | | 100.0 | % | $ | 2,129,903 | | | 100.0 | % |
| | | | | | | | | | | | | |
Percent of total securities: (4) | | | | | | | | | | | | | |
Rated A or higher | | | | | | 99.4 | % | | | | | 99.2 | % |
Investment grade | | | | | | 99.8 | | | | | | 99.5 | |
| |
(1) | At March 31, 2009, these numbers include, in the aggregate, $172.6 million and $1.5 billion related to senior debt and MBS, respectively, issued by FNMA and FHLMC. |
| |
(2) | Current policies restrict MBS/CMO purchases to agency-backed and a small percent of private-label securities and prohibit securities collateralized by sub-prime assets. |
| |
(3) | At March 31, 2009 and December 31, 2008, state and municipal securities include $17.9 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 or the State of South Carolina. At March 31, 2009, $38.3 million of municipal bonds are guaranteed by bond insurers. At December 31, 2008, $39.1 million of municipal bonds are guaranteed by bond insurers. |
| |
(5) | At March 31, 2009, the breakdown by current bond rating is as follows: $177.5 million pre-funded with collateral or AAA-rated backed by Texas Permanent School Fund, $7.5 million AAA-rated, $69.6 million AA or A-rated, $2.7 million BBB-rated, and $2.1 million non-rated. |
Note: Within each category, securities are ordered based on risk assessment from lowest to highest. TSFG holds no collateralized debt obligations.
40
Subsequent to quarter-end, 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, which will be recognized in second quarter 2009. In connection with this sale, TSFG also terminated $75.0 million (4.3% rate) in long-term repurchase agreements, and will recognize a loss on extinguishment of $5.4 million in second quarter 2009.
Investments included in Other Assets. TSFG also invests in limited partnerships, limited liability companies (LLC’s) and other privately held companies. These investments are included in other assets. In first quarter 2009, TSFG recorded $2.9 million in other-than-temporary impairment on these investments. At March 31, 2009, TSFG’s investment in these entities totaled $15.0 million, of which $5.2 million were accounted for under the cost method and $9.8 million were accounted for under the equity method.
Also included in other assets were $6.2 million of various auction rate preferred securities which TSFG repurchased from brokerage customers who purchased the securities during 2007. Currently, the market for these securities is illiquid and TSFG recorded a loss of $676,000 during first quarter 2009 to adjust these securities to estimated fair value.
Goodwill
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), 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 acceleration of credit deterioration in Florida and overall adverse changes in the banking industry prompted TSFG to perform an interim impairment evaluation of a significant portion of the recorded goodwill at each quarter-end during 2008. As a result of these evaluations, TSFG recorded goodwill impairment charges related to its Mercantile reporting unit of $188.4 million in first quarter 2008 and $237.6 million in fourth quarter 2008, which were included in noninterest expense in the consolidated statements of income. The fair value of the Mercantile reporting unit evaluated for impairment was determined primarily using discounted cash flow models based on internal forecasts and, to a lesser extent, market-based trading and transaction multiples.
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. Accordingly, due to volatile market conditions, the Company has concluded that it is possible that the other reporting units may become impaired in future periods.
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 under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and its related amendments, derivatives that do not qualify for hedge accounting under SFAS 133 but otherwise achieve economic hedging goals (“economic hedges”), as well as derivatives that are used in trading and customer hedging programs. See Note 7 to the Consolidated Financial Statements for additional information regarding derivatives.
Deposits
Deposits remain TSFG’s primary source of funds. Average customer deposits equaled 63.7% of average total funding in first quarter 2009. 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 14 shows the breakdown of total deposits by type of deposit and the respective percentage of total deposits, while Table 15 shows the breakdown of customer funding by type.
41
| | | | | | | | | | |
Table 14 | | | | | | | | | | |
| |
Type of Deposits | | | | | | | | | | |
| |
(dollars in thousands) | | | | | | | | | | |
| | | | | | | | | | |
| | March 31, | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Noninterest-bearing demand deposits | | $ | 1,067,953 | | $ | 1,108,623 | | $ | 1,041,140 | |
Interest-bearing checking | | | 1,098,585 | | | 1,162,374 | | | 1,078,921 | |
Money market accounts | | | 1,889,041 | | | 2,182,709 | | | 1,834,115 | |
Savings accounts | | | 203,106 | | | 155,337 | | | 190,519 | |
Time deposits under $100,000 | | | 1,742,177 | | | 1,408,593 | | | 1,863,520 | |
Time deposits of $100,000 or more | | | 1,383,639 | | | 1,557,927 | | | 1,488,735 | |
| | | | | | | | | | |
Customer deposits (1) | | | 7,384,501 | | | 7,575,563 | | | 7,496,950 | |
Brokered deposits | | | 1,842,577 | | | 1,875,969 | | | 1,908,767 | |
| | | | | | | | | | |
Total deposits | | $ | 9,227,078 | | $ | 9,451,532 | | $ | 9,405,717 | |
| | | | | | | | | | |
Percentage of Deposits | | | | | | | | | | |
Noninterest-bearing demand deposits | | | 11.6 | % | | 11.7 | % | | 11.1 | % |
Interest-bearing checking | | | 11.9 | | | 12.3 | | | 11.5 | |
Money market accounts | | | 20.4 | | | 23.1 | | | 19.5 | |
Savings accounts | | | 2.2 | | | 1.6 | | | 2.0 | |
Time deposits under $100,000 | | | 18.9 | | | 14.9 | | | 19.8 | |
Time deposits of $100,000 or more | | | 15.0 | | | 16.5 | | | 15.8 | |
| | | | | | | | | | |
Customer deposits (1) | | | 80.0 | | | 80.1 | | | 79.7 | |
Brokered deposits | | | 20.0 | | | 19.9 | | | 20.3 | |
| | | | | | | | | | |
Total deposits | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | |
| |
(1) | TSFG defines customer deposits as total deposits less brokered deposits. |
| | | | | | | | | | |
Table 15 | | | | | | | | | | |
| |
Type of Customer Funding | | | | | | | | | | |
| |
(dollars in thousands) | | | | | | | | | | |
| | | | | | | | | | |
| | March 31, | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Customer deposits (1) | | $ | 7,384,501 | | $ | 7,575,563 | | $ | 7,496,950 | |
Customer sweep accounts(2) | | | 387,106 | | | 631,214 | | | 493,012 | |
| | | | | | | | | | |
Customer funding | | $ | 7,771,607 | | $ | 8,206,777 | | $ | 7,989,962 | |
| | | | | | | | | | |
| |
(1) | TSFG defines customer deposits as total deposits less brokered deposits. |
| |
(2) | TSFG includes customer sweep accounts in short-term borrowings on its consolidated balance sheet. |
At March 31, 2009, period-end customer funding decreased $218.4 million, or 2.7%, from December 31, 2008, as increases in lower-cost core deposit categories generated by a deposit campaign during the quarter were more than offset by decreases in time deposits and customer sweep accounts. Public deposits totaled approximately $645 million at March 31, 2009, compared to approximately $697 million at December 31, 2008.
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 ($344.2 million at March 31, 2009) and 2) uninsured Eurodollar deposits ($42.9 million at March 31, 2009). These balances are tied directly to commercial customer checking accounts 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. Brokered deposits decreased as a percentage of total deposits since December 31, 2008 as TSFG increased its lower-cost core deposits.
42
Table 18 in “Earnings Review - Net Interest Income” details average balances for the deposit portfolio for the three months ended March 31, 2009 and 2008. Comparing the three months ending March 31, 2009 and 2008, average customer funding decreased $308.4 million, or 3.7%. Comparing first quarter 2009 to fourth quarter 2008, average customer funding decreased $13.4 million, as increases in lower cost core deposit categories were offset by decreases in time deposits and customer sweep accounts. During first quarter 2009, TSFG continued its core deposit promotion.
Average customer funding equaled 67.5% of average total funding in the first three months of 2009 and 68.1% in the first three months of 2008. 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. Deposit pricing is very competitive, and we expect this pricing environment to continue as banks compete for sources of liquidity and funding to replace funding which may not be available in the current market environment.
Borrowed Funds
Table 16 shows the breakdown of borrowed funds by type.
| | | | | | | | | | |
Table 16 | | | | | | | | | | |
| |
Type of Borrowed Funds | | | | | | | | | | |
| |
(dollars in thousands) | | | | | | | | | | |
| | | | | | | | | | |
| | March 31, | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Short-Term Borrowings | | | | | | | | | | |
Federal funds purchased and repurchase agreements | | $ | 197,309 | | $ | 541,022 | | $ | 67,309 | |
Customer sweep accounts | | | 387,106 | | | 631,214 | | | 493,012 | |
Federal Reserve borrowings | | | 750,000 | | | 200,000 | | | 1,050,000 | |
Commercial paper | | | — | | | 29,582 | | | 12,537 | |
Treasury, tax and loan note | | | 7,673 | | | 515,632 | | | 3,516 | |
| | | | | | | | | | |
Total short-term borrowings | | | 1,342,088 | | | 1,917,450 | | | 1,626,374 | |
| | | | | | | | | | |
|
Long-Term Borrowings | | | | | | | | | | |
Repurchase agreements | | | 200,000 | | | 200,000 | | | 200,000 | |
FHLB advances | | | 467,717 | | | 324,080 | | | 233,497 | |
Subordinated notes | | | 206,704 | | | 216,704 | | | 216,704 | |
Mandatorily redeemable preferred stock of subsidiary | | | 56,800 | | | 56,800 | | | 56,800 | |
Note payable | | | 756 | | | 775 | | | 768 | |
Purchase accounting premiums, net of amortization | | | — | | | 858 | | | — | |
| | | | | | | | | | |
Total long term borrowings | | | 931,977 | | | 799,217 | | | 707,769 | |
| | | | | | | | | | |
Total borrowings | | | 2,274,065 | | | 2,716,667 | | | 2,334,143 | |
Less: Customer sweep accounts | | | (387,106 | ) | | (631,214 | ) | | (493,012 | ) |
Add: Brokered deposits (1) | | | 1,842,577 | | | 1,875,969 | | | 1,908,767 | |
| | | | | | | | | | |
Total wholesale borrowings | | $ | 3,729,536 | | $ | 3,961,422 | | $ | 3,749,898 | |
| | | | | | | | | | |
| | | | | | | | | | |
Wholesale borrowings as a % of total assets | | | 28.1 | % | | 28.8 | % | | 27.6 | % |
| |
(1) | TSFG includes brokered deposits in total deposits on its consolidated balance sheet. |
TSFG uses both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. In first quarter 2009, average borrowings totaled $2.4 billion, compared with $2.3 billion in fourth quarter 2008 and $2.6 billion in first quarter 2008.
Period-end wholesale borrowings decreased $20.4 million since December 31, 2008, while TSFG strengthened liquidity by shifting into long-term borrowings which increased $224.2 million.
43
Daily funding needs are met through federal funds purchased and short-term brokered CDs, term TT&L, repurchase agreements, Federal Reserve borrowings and FHLB advances. Balances in these accounts can fluctuate on a day-to-day basis based on availability of collateral and overall funding needs.
During first quarter 2009, TSFG recognized a net gain on early extinguishment of debt of $52,000, primarily due to gains on brokered CDs for which the related swaps were called, partially offset by prepayment penalties for FHLB advances and the write-off of unamortized debt issuance costs associated with $10.0 million of subordinated notes which TSFG called for redemption.
Subsequent to quarter-end, 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 16 and will recognize an $8.1 million gain on the extinguishment in second quarter 2009. In addition, TSFG terminated $75.0 million (4.3% rate) in long-term repurchase agreements, and will recognize a loss on extinguishment of $5.4 million in second quarter 2009. 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, which will be recognized in second quarter 2009.
Capital Resources and Dividends
Shareholders’ equity totaled $1.6 billion, or 11.7% of total assets, at March 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 first quarter 2009.
In January 2009, 48,674 shares of Convertible Preferred Stock were converted into approximately 10.0 million common shares, which included 2.5 million shares issued as an inducement to convert. The value of the inducement ($6.5 million) was treated as a deemed dividend to preferred shareholders and deducted from net income in calculating net income available to common shareholders. The remaining outstanding shares (190,026 at March 31, 2009) will convert into approximately 29.2 million common shares by May 1, 2011.
TSFG’s unrealized gain on securities available for sale and cash flow hedges, net of tax, which is included in accumulated other comprehensive income, increased to $57.0 million at March 31, 2009, compared with $42.6 million at December 31, 2008 due primarily to a decrease in long-term interest rates.
Common book value per common share at March 31, 2009 and December 31, 2008 (assuming conversion of the Convertible Preferred Stock) was $10.73 and $11.61, respectively. Common tangible book value per common share at March 31, 2009 and December 31, 2008 (assuming conversion of the Convertible Preferred Stock) was $8.59 and $9.40, respectively. Tangible book value was below book value as a result of goodwill and intangibles associated with acquisitions of entities and assets accounted for as purchases. At March 31, 2009, goodwill totaled $224.2 million, or $2.64 per share ($1.97 per share assuming conversion of the Convertible Preferred Stock), and is not being amortized, while other intangibles totaled $20.6 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 March 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.
Table 17 sets forth various capital ratios for TSFG and Carolina First Bank. Under current regulatory guidelines, debt associated with trust preferred securities qualifies for tier 1 capital treatment. At March 31, 2009, trust preferred securities included in tier 1 capital totaled $200.5 million.
44
| | | | | | | |
| | March 31, 2009 | | Well
Capitalized
Requirement | |
| | | | | |
TSFG | | | | | | | |
Total risk-based capital | | 13.53 | % | | n/a | | |
Tier 1 risk-based capital | | 12.10 | | | n/a | | |
Leverage ratio | | 10.55 | | | n/a | | |
| | | | | | | |
Carolina First Bank | | | | | | | |
Total risk-based capital | | 11.75 | % | | 10.00 | % | |
Tier 1 risk-based capital | | 10.10 | | | 6.00 | | |
Leverage ratio | | 8.79 | | | 5.00 | | |
TSFG believes its recorded deferred tax assets are fully recoverable based on forecasts of future taxable income and current forecasts for the periods through which losses may be carried back and/or forward. However, for regulatory purposes, approximately $96 million of deferred tax assets have been deducted from tier 1 and total capital ratios for both TSFG and Carolina First Bank as capital regulations only allow a twelve-month horizon for taxable income projections. Accordingly, future tax benefits recorded may be excluded from regulatory capital computations.
At March 31, 2009, TSFG’s tangible equity to tangible asset ratio totaled 10.03%, a decrease from 10.29% at December 31, 2008, due primarily to the first quarter 2009 net loss. Tangible common equity to tangible assets totaled 6.05% at both March 31, 2009 and December 31, 2008. If interest rates increase, TSFG expects its unrealized gain on securities available for sale to decrease, leading to a lower tangible equity to tangible asset ratio.
Carolina First Bank is subject to certain regulatory restrictions on the amount of dividends it is permitted to pay. Currently, Carolina First Bank may not pay a dividend to TSFG without regulatory approval. 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.
TSFG, through a real estate investment trust subsidiary, had 568 mandatorily redeemable preferred shares outstanding at March 31, 2009 with a stated value of $100,000 per share. At March 31, 2009, these preferred shares, which are reported as long-term debt on the consolidated balance sheet, totaled $56.8 million. Under Federal Reserve Board guidelines, $26.3 million qualified as tier 1 capital, and $18.3 million qualified as tier 2 capital. The terms for the preferred shares include certain asset coverage and cash flow tests, which if not satisfied, may prohibit TSFG’s real estate trust subsidiary from paying dividends to Carolina First Bank, which in turn may limit its ability to pay dividends to TSFG. Subsequent to quarter-end, in April 2009, TSFG repurchased $25.0 million of these preferred shares, of which 60% was included in tier 2 capital at March 31, 2009 (although the percent includable in tier 2 capital would have decreased to 40% at June 30, 2009, 20% at June 30, 2010 and 0% at June 30, 2011).
Earnings Review
Net Interest Income
Net interest income is TSFG’s primary source of revenue. Net interest income is the difference between the interest earned on assets, including loan fees and dividends on investment securities, and the interest incurred for the liabilities to support such assets. The net interest margin measures how effectively a company manages the difference between the yield on earning assets and the rate incurred on funds used to support those assets. Fully tax-equivalent net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis based on a 35% marginal federal income tax rate. Table 18 presents average balance sheets and a net interest income analysis on a tax-equivalent basis for the three months ended March 31, 2009 and 2008.
45
|
Table 18 |
| |
Comparative Average Balances - Yields and Costs |
| |
(dollars in thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | |
| | | |
| | 2009 | | 2008 | |
| | | | | |
| | Average
Balance | | Income/
Expense | | Yield/
Rate | | Average
Balance | | Income/
Expense | | Yield/
Rate | |
| | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | |
Earning assets | | | | | | | | | | | | | | | | | | | |
Loans (1) | | $ | 10,188,368 | | $ | 124,119 | | | 4.94 | % | $ | 10,235,518 | | $ | 171,228 | | | 6.73 | % |
Investment securities, taxable (2) | | | 1,854,149 | | | 20,548 | | | 4.43 | | | 1,749,423 | | | 20,392 | | | 4.66 | |
Investment securities, nontaxable (2) (3) | | | 266,600 | | | 3,437 | | | 5.16 | | | 326,318 | | | 4,143 | | | 5.08 | |
| | | | | | | | | | | | | | | | | | | |
Total investment securities | | | 2,120,749 | | | 23,985 | | | 4.52 | | | 2,075,741 | | | 24,535 | | | 4.73 | |
Federal funds sold and interest-bearing bank balances | | | 198 | | | 1 | | | 2.05 | | | 8,716 | | | 72 | | | 3.32 | |
| | | | | | | | | | | | | | | | | | | |
Total earning assets | | | 12,309,315 | | $ | 148,105 | | | 4.87 | | | 12,319,975 | | $ | 195,835 | | | 6.39 | |
| | | | | | | | | | | | | | | | | | | |
Non-earning assets | | | 1,246,813 | | | | | | | | | 1,524,930 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 13,556,128 | | | | | | | | $ | 13,844,905 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | | | | | | | | | | | | | | | | | | |
Interest-bearing checking | | $ | 1,131,456 | | $ | 865 | | | 0.31 | | $ | 1,155,418 | | $ | 4,653 | | | 1.62 | |
Savings | | | 196,974 | | | 529 | | | 1.09 | | | 156,848 | | | 427 | | | 1.09 | |
Money market | | | 1,913,927 | | | 7,779 | | | 1.65 | | | 2,193,504 | | | 16,633 | | | 3.05 | |
Time deposits, excluding brokered deposits | | | 3,199,427 | | | 28,867 | | | 3.66 | | | 2,953,364 | | | 33,651 | | | 4.58 | |
Brokered deposits | | | 1,905,805 | | | 16,803 | | | 3.58 | | | 1,934,922 | | | 21,742 | | | 4.52 | |
| | | | | | | | | | | | | | | | | | | |
Total interest-bearing deposits | | | 8,347,589 | | | 54,843 | | | 2.66 | | | 8,394,056 | | | 77,106 | | | 3.69 | |
Customer sweep accounts | | | 455,781 | | | 298 | | | 0.27 | | | 684,752 | | | 5,472 | | | 3.21 | |
Other borrowings (4) | | | 1,899,771 | | | 6,743 | | | 1.44 | | | 1,922,959 | | | 19,101 | | | 4.00 | |
| | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 10,703,141 | | $ | 61,884 | | | 2.34 | | | 11,001,767 | | $ | 101,679 | | | 3.72 | |
| | | | | | | | | | | | | | | | | | | |
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | | | 1,021,400 | | | | | | | | | 1,083,505 | | | | | | | |
Other noninterest-bearing liabilities | | | 230,741 | | | | | | | | | 194,655 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 11,955,282 | | | | | | | | | 12,279,927 | | | | | | | |
Shareholders’ equity | | | 1,600,846 | | | | | | | | | 1,564,978 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 13,556,128 | | | | | | | | $ | 13,844,905 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Net interest income (tax-equivalent) | | | | | $ | 86,221 | | | 2.83 | % | | | | $ | 94,156 | | | 3.07 | % |
Less: tax-equivalent adjustment (3) | | | | | | 1,203 | | | | | | | | | 1,450 | | | | |
| | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | $ | 85,018 | | | | | | | | $ | 92,706 | | | | |
| | | | | | | | | | | | | | | | | | | |
Supplemental data: | | | | | | | | | | | | | | | | | | | |
Customer funding (5) | | $ | 7,918,965 | | $ | 38,338 | | | 1.96 | % | $ | 8,227,391 | | $ | 60,836 | | | 2.97 | % |
Wholesale borrowings (6) | | | 3,805,576 | | | 23,546 | | | 2.51 | | | 3,857,881 | | | 40,843 | | | 4.26 | |
| | | | | | | | | | | | | | | | | | | |
Total funding (7) | | $ | 11,724,541 | | $ | 61,884 | | | 2.14 | % | $ | 12,085,272 | | $ | 101,679 | | | 3.38 | % |
| | | | | | | | | | | | | | | | | | | |
| |
(1) | Nonaccrual loans are included in average balances for yield computations. |
| |
(2) | The average balances for investment securities exclude the unrealized gain/loss recorded for available for sale securities. |
| |
(3) | The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis. |
| |
(4) | During the three months ended March 31, 2009 and 2008, TSFG capitalized $450,000 and $329,000, respectively, of interest in conjunction with the construction of its expanded corporate facilities. |
| |
(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. |
46
Fully tax-equivalent net interest income decreased to $86.2 million for first quarter 2009 from $92.9 million for fourth quarter 2008 due primarily to significant Federal Reserve rate cuts in fourth quarter 2008, a fourth quarter benefit related to a temporary widening of the spread between LIBOR and the federal funds rate, and two fewer days in first quarter 2009 as compared to fourth quarter 2008.
Comparing first quarter 2009 to first quarter 2008, tax-equivalent net interest income decreased to $86.2 million from $94.2 million, also primarily due to rate cuts during 2008. TSFG’s average earning assets remained constant at $12.3 billion for both first quarter 2009 and 2008. Average loans as a percentage of average earning assets decreased to 82.8% for first quarter 2009 from 83.1% for first quarter 2008, as average securities increased. At March 31, 2009, approximately 61% 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 certain prime-based and LIBOR-based loans as part of its overall interest rate risk management. TSFG also has an interest rate floor that is designated as a hedge of variable rate commercial loans and is intended to mitigate earnings exposure to falling interest rates.
The net interest margin for first quarter 2009 was 2.83%, compared with 2.97% for fourth quarter 2008 and 3.07% for first quarter 2008. Comparing first quarter 2009 to fourth quarter 2008, the yield on average earning assets decreased 54 basis points, primarily due to decreased loan yields, which were down 65 basis points. The decrease in earning asset yields was partially offset by a decrease in the average cost of funding of 41 basis points. Although rates on wholesale borrowings decreased 61 basis points, rates on customer funding decreased only 29 basis points as deposit pricing has effectively approached a floor on the absolute level for most non-maturity products.
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 $142.6 million in first quarter 2009, compared to $122.9 million and $73.3 million, respectively, in the three months ended December 31, 2008 and March 31, 2008. 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 land loans, particularly in Florida.
Net loan charge-offs were $109.1 million, or 4.36% of average loans held for investment, for first quarter 2009, compared with $76.1 million, or 2.93% for fourth quarter 2008 and $25.0 million, or 0.98%, for first quarter 2008. The allowance for credit losses equaled 2.84% of loans held for investment as of March 31, 2009, compared to 2.45%, and 1.72%, respectively, as of December 31, 2008, and March 31, 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.”
47
Noninterest Income
Table 19 shows the components of noninterest income.
|
Table 19 |
| |
Components of Noninterest Income |
| |
(dollars in thousands) |
| | | | | | | |
| | Three Months Ended
March 31, | |
| | | |
| | 2009 | | 2008 | |
| | | | | |
Service charges on deposit accounts | | $ | 9,268 | | $ | 10,429 | |
Debit card income, net | | | 1,925 | | | 1,876 | |
Customer service fee income | | | 1,209 | | | 1,331 | |
| | | | | | | |
Total customer fee income | | | 12,402 | | | 13,636 | |
| | | | | | | |
Insurance income | | | 2,457 | | | 3,060 | |
Retail investment services, net | | | 2,010 | | | 1,546 | |
Trust and investment management income | | | 1,465 | | | 1,666 | |
Benefits administration fees | | | 642 | | | 756 | |
| | | | | | | |
Total wealth management income | | | 6,574 | | | 7,028 | |
| | | | | | | |
Bank-owned life insurance income | | | 2,502 | | | 3,147 | |
Mortgage banking income | | | 1,205 | | | 1,485 | |
Gain on certain derivative activities | | | 1,135 | | | 12 | |
Merchant processing income, net | | | 610 | | | 857 | |
(Loss) gain on securities | | | (2,954 | ) | | 396 | |
Gain on Visa IPO share redemption | | | — | | | 1,904 | |
Other | | | 2,267 | | | 2,638 | |
| | | | | | | |
Total noninterest income | | $ | 23,741 | | $ | 31,103 | |
| | | | | | | |
Noninterest income decreased to $23.7 million in first quarter 2009 from $30.0 million fourth quarter 2008 and $31.1 million first quarter 2008.
Comparing first quarter 2009 to first quarter 2008, the decrease was primarily due to a net loss on securities of $3.0 million in first quarter 2009 (primarily due to other-than-temporary impairment charges on investments included in other assets) compared to a $2.3 million net gain on securities and Visa IPO share redemption in first quarter 2008. In addition, gain on certain derivative activities increased $1.1 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. Total customer fee income and wealth management income decreased 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 increase in this line item. Mortgage banking income decreased 18.9% in the first three months of 2009 when compared to the same period in 2008. Mortgage loans originated by TSFG originators totaled $75.3 million and $83.5 million in the first three months of 2009 and 2008, respectively. The decrease in mortgage banking income was principally the result of lower origination volumes in response to industry conditions.
Comparing first quarter 2009 to fourth quarter 2008, the decrease was primarily due to a $4.5 million swing in the net loss on securities and continued decreased customer fee income.
48
Noninterest Expenses
Table 20 shows the components of noninterest expenses.
|
Table 20 |
| |
Components of Noninterest Expenses |
| |
(dollars in thousands) |
| | | | | | | |
| | Three Months Ended
March 31, | |
| | | |
| | 2009 | | 2008 | |
| | | | | |
Salaries and wages | | $ | 35,191 | | $ | 34,853 | |
Employee benefits | | | 8,923 | | | 9,298 | |
Occupancy | | | 9,436 | | | 8,623 | |
Furniture and equipment | | | 6,945 | | | 6,383 | |
Loan collection and foreclosed asset expense | | | 4,891 | | | 1,079 | |
Regulatory assessments | | | 4,655 | | | 2,077 | |
Professional services | | | 4,507 | | | 3,527 | |
Project NOW expense | | | 1,298 | | | — | |
Loss on nonperforming loans held for sale | | | 1,838 | | | — | |
Telecommunications | | | 1,526 | | | 1,423 | |
Amortization of intangibles | | | 1,291 | | | 1,658 | |
Advertising and business development | | | 1,281 | | | 2,471 | |
Loss on repurchase of auction rate securities | | | 676 | | | — | |
Loss on other real estate owned | | | 124 | | | 187 | |
(Gain) loss on early extinguishment of debt | | | (52 | ) | | 547 | |
Goodwill impairment | | | — | | | 188,431 | |
Visa-related litigation | | | — | | | (863 | ) |
Other | | | 7,711 | | | 8,672 | |
| | | | | | | |
Total noninterest expenses | | $ | 90,241 | | $ | 268,366 | |
| | | | | | | |
During first quarter 2008, the acceleration of credit deterioration in Florida prompted TSFG to perform an interim evaluation of the goodwill associated with its Mercantile banking segment. The evaluation reflected decreases in projected cash flows for the Mercantile banking segment, and accordingly the estimated fair value of the segment declined. This decline resulted in the recognition of a goodwill impairment charge of $188.4 million. During fourth quarter 2008, TSFG recognized an additional $237.6 million of goodwill impairment on its Mercantile banking segment.
Late in 2008, TSFG launched an internal efficiency and expense control project (“Project NOW”), the goal of which is to improve revenue and reduce annual operating expenses.
Comparing first quarter 2009 to first quarter 2008, salaries and wages and employee benefits remained basically flat, although the number of full-time equivalent employees declined to 2,430 at March 31, 2009 from 2,485 at March 31, 2008. Professional services increased, 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. Regulatory assessments increased $2.6 million based in part on TSFG’s participation in the Temporary Liquidity Guarantee Program related to noninterest-bearing deposit accounts and across-the-board rate increases designed to replenish the FDIC’s Deposit Insurance Fund. The FDIC has proposed a special assessment effective second quarter 2009, which at the current proposed level of 20 basis points would be approximately $20 million, although the amount has not been finalized and is subject to change. In addition to the proposed special assessment, the FDIC could also continue to raise assessment rates. Credit-related expenses (including loan collection and foreclosed asset expense, loss on nonperforming loans held for sale, and loss on other real estate owned) increased $5.6 million due to the current credit environment, and may continue to increase.
During first quarter 2009, TSFG recognized a net gain on early extinguishment of debt of $52,000, primarily due to gains on brokered CDs for which the related swaps were called, partially offset by prepayment penalties for FHLB advances and the write-off of unamortized debt issuance costs associated with $10.0 million of subordinated
49
notes which TSFG called for redemption. See “Borrowed Funds.” Also during first quarter 2009, TSFG repurchased $6.9 million of various auction rate preferred securities from brokerage customers who purchased the securities during 2007. Currently, the market for these securities is illiquid and TSFG recorded a loss of $676,000 during first quarter 2009 to adjust these securities to estimated fair value. See “Securities.”
Comparing first quarter 2009 to fourth quarter 2008 (and excluding goodwill impairment, employment contracts and severance, loss on early extinguishment of debt, and loss on derivative collateral), most categories of noninterest expense decreased, reflecting continued focus on expense control through Project NOW initiative.
Income Taxes
The effective income tax benefit as a percentage of pretax loss was 40.1% for first quarter 2009 and 7.6% for first quarter 2008. The increase in the first quarter 2009 tax benefit relative to the statutory U.S. federal tax rate was primarily due to the impact of permanent tax preference items and credits. The first quarter 2008 tax benefit decreased due to the impact of the non-deductible goodwill impairment. The statutory U.S. federal income tax rate was 35% for both first quarter 2009 and 2008.
On an ongoing basis, TSFG evaluates its deferred tax assets for realizability (see “Critical Accounting Policies and Estimates – Income Taxes”). As of March 31, 2009, management determined that no additional valuation allowance against deferred tax assets was required.
Enterprise Risk Management
Pages 62 through 65 of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008 provide a discussion of overall Enterprise Risk Management, Derivatives and Hedging Activities, Economic Risk, Credit Risk, Liquidity Risks, Operational Risk, and Compliance and Litigation Risks.
Market Risk and Asset/Liability Management
There has been no significant change to the market risk and asset/liability management methodology as disclosed in TSFG’s 2008 Form 10-K. The interest sensitivity analysis which follows has been updated for March 31, 2009 numbers.
Interest Sensitivity Analysis. As discussed on pages 62 and 63 of TSFG’s 2008 Form 10-K, TSFG uses a simulation model to analyze various interest rate scenarios in order to monitor interest rate risk. The information presented in Tables 21 and 22 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 21 and 22. These include, but are not limited to, the following:
| |
• | a static balance sheet for net interest income analysis; |
| |
• | as assets and liabilities mature or reprice they are reinvested at current rates and keep the same characteristics (i.e., remain as either variable or fixed rate) for net interest income analysis; |
| |
• | mortgage backed securities prepayments are based on historical industry data (given the current economic and regulatory environment, uncertainty regarding future prepayments is heightened); |
| |
• | loan prepayments are based upon historical bank-specific analysis and historical industry data; |
| |
• | deposit retention and average lives are based on historical bank-specific analysis; |
| |
• | whether callable/puttable assets and liabilities are called/put is based on the implied forward yield curve for each interest rate scenario; and |
| |
• | management takes no action to counter any change. |
Table 21 reflects the sensitivity of net interest income to changes in interest rates. It shows the effect that the indicated changes in interest rates would have on net interest income over the next 12 months compared with the base case or flat interest rate scenario. The base case or flat scenario assumes interest rates stay at March 31, 2009, and 2008 levels, respectively.
50
| | | | | | | | |
Table 21 | |
| | |
Net Interest Income at Risk Analysis | |
| | |
|
Interest Rate Scenario (1) | | Annualized Hypothetical Percentage Change in
Net Interest Income
March 31, | |
| | | |
| | | 2009 | | 2008 | |
| | | | | | |
2.00 | % | | | 1.8 | % | | (0.4 | )% |
1.00 | | | | 1.0 | | | (0.1 | ) |
Flat | | | | — | | | — | |
(1.00 | ) (2) | | | n/a | | | 0.1 | |
(2.00 | ) (2) | | | n/a | | | (0.1 | ) |
| |
(1) | Net interest income sensitivity is shown for gradual rate shifts over a 12 month period. |
| |
(2) | Due to the current low rate environment, downward rate shifts were not run for March 31, 2009. |
Table 22 reflects the sensitivity of the economic value of equity (“EVE”) to changes in interest rates. EVE is a measurement of the inherent, long-term balance sheet-related economic value of TSFG (defined as the fair value of all assets minus the fair value of all liabilities and their associated off balance sheet amounts) at a given point in time. Table 22 shows the effect that the indicated changes in interest rates would have on the fair value of net assets at March 31, 2009 and 2008, respectively, compared with the base case or flat interest rate scenario. The base case or flat scenario assumes interest rates stay at March 31, 2009 and 2008 levels, respectively.
| | | | | | | | |
Table 22 | |
| | |
Economic Value of Equity Risk Analysis | |
| | |
|
Interest Rate Scenario (1) | | Annualized Hypothetical Percentage Change in
Economic Value of Equity
March 31, | |
| | | |
| | | 2009 | | 2008 | |
| | | | | | |
2.00 | % | | | (9.2 | )% | | (5.9 | )% |
1.00 | | | | (1.6 | ) | | (2.5 | ) |
Flat | | | | — | | | — | |
(1.00 | ) (2) | | | n/a | | | (1.5 | ) |
(2.00 | ) (2) | | | n/a | | | (9.0 | ) |
| |
(1) | The rising 100 and 200 basis point and falling 100 and 200 basis point interest rate scenarios assume an instantaneous and parallel change in interest rates along the entire yield curve. |
| |
(2) | Due to the current low rate environment, downward rate shifts were not run for March 31, 2009. |
There are material limitations with TSFG’s models presented in Tables 21 and 22, which include, but are not limited to, the following:
| | |
| • | the flat scenarios are base case and are not indicative of historical results; |
| | |
| • | they do not project an increase or decrease in net interest income or the fair value of net assets, but rather the risk to net interest income and the fair value of net assets because of changes in interest rates; |
| | |
| • | they present the balance sheet in a static position; however, when assets and liabilities mature or reprice, they do not necessarily keep the same characteristics (e.g., variable or fixed interest rate); |
| | |
| • | the computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results; and |
| | |
| • | the computations do not contemplate any additional actions TSFG could undertake in response to changes in interest rates. |
51
Off-Balance Sheet Arrangements
In the normal course of operations, TSFG engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by TSFG for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding.
Lending Commitments. Lending commitments include loan commitments, standby letters of credit, unused business credit card lines, and documentary letters of credit. These instruments are not recorded in the consolidated balance sheet until funds are advanced under the commitments. TSFG provides these lending commitments to customers in the normal course of business. TSFG estimates probable losses related to binding unfunded lending commitments and records a reserve for unfunded lending commitments in other liabilities on the consolidated balance sheet. See Note 8 to the Consolidated Financial Statements for disclosure of the amounts of lending commitments.
Derivatives. In accordance with SFAS 133, TSFG records derivatives at fair value, as either assets or liabilities, on the consolidated balance sheets. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheets and is not, when viewed in isolation, a meaningful measure of the risk profile of the instrument. The notional amount is not exchanged, but is used only as the basis upon which interest and other payments are calculated.
See “Derivative Financial Instruments” under “Balance Sheet Review” and Note 7 to the Consolidated Financial Statements for additional information regarding derivatives.
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 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. Through the Asset Liability Committee (“ALCO”), Corporate Treasury is responsible for planning and executing the funding activities and strategy.
TSFG’s liquidity policy strives to ensure a diverse funding base, with limits established by wholesale funding source as well as aggregate wholesale funding. Daily and short-term liquidity needs are principally met with deposits from customers, payments on loans, maturities and paydowns of investment securities, and wholesale borrowings, including brokered CDs, federal funds purchased (as available), repurchase agreements, and, depending on the availability of collateral, TT&L notes, and borrowings from the Federal Reserve and FHLB. In light of current market conditions, TSFG has reduced its usage of short-term unsecured wholesale borrowings. 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 if deemed necessary.
As noted in Table 23, we have $3.5 billion of time deposits maturing over the remainder of 2009, with maturities of customer and brokered CDs accounting for $2.4 billion and $1.1 billion, 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 issuance of new brokered CDs.
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
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regulatory capital, including trust preferred securities and subordinated debt. In addition, the Company may also issue equity capital to address liquidity or capital needs.
Under normal business conditions, the sources above are adequate to meet both the short-term and longer-term funding needs of the Company; however, TSFG’s contingency funding plan establishes early warning triggers to alert management to potentially 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 rapid adverse changes in the economy. As of March 31, 2009, we had $3.9 billion of secured liquidity reserves in the form of borrowing capacity from the Federal Reserve and TT&L, FHLB, and unpledged investment securities which could be used to manage through a severe liquidity scenario. Following a severe liquidity scenario, we would consider various actions to replenish liquidity, including potential asset sales. We have no debt for which a downgrade of our credit ratings would trigger early termination. In addition, a credit rating downgrade would not impact access to our primary funding sources.
In addition to the primary funding sources discussed above, secondary sources of liquidity include sales of investment securities which are not held for pledging purposes and other classes of assets. Securities classified as available for sale which are not pledged may be sold in response to changes in interest rates or liquidity needs. A significant portion of TSFG’s securities are pledged as collateral for repurchase agreements and public funds deposits, although approximately $1.0 billion was unpledged as of March 31, 2009.
Management believes that TSFG’s available borrowing capacity and efforts to grow deposits are sufficient to provide the necessary funding for the remainder of 2009. However, management is prepared to take other actions if needed to manage through adverse liquidity conditions.
In managing its liquidity needs, TSFG focuses on its existing assets and liabilities, as well as its ability to enter into additional borrowings, and on the manner in which they combine to provide adequate liquidity to meet our needs. Table 23 summarizes future contractual obligations based on maturity dates as of March 31, 2009. Table 23 does not include payments which may be required under employment and deferred compensation agreements. In addition, Table 23 does not include payments required for interest and income taxes (see Item 1, Consolidated Statements of Cash Flows for details on interest and income taxes paid for the three months ended March 31, 2009).
| | | | | | | | | | | | | | | | |
Table 23 | |
| | |
Contractual Obligations | |
| | |
(dollars in thousands) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Payments Due by Period | |
| | | |
| | Total | | Remainder
of
2009 | | 2010
and
2011 | | 2012
and
2013 | | After
2014 | |
| | | | | | | | | | | |
Time deposits | | $ | 4,968,393 | | $ | 3,479,902 | | $ | 1,262,130 | | $ | 147,438 | | $ | 78,923 | |
Short-term borrowings | | | 1,342,088 | | | 1,342,088 | | | — | | | — | | | — | |
Long-term debt | | | 931,977 | | | 14,377 | | | 225,368 | | | 456,359 | | | 235,873 | |
Operating leases | | | 179,992 | | | 12,931 | | | 34,055 | | | 30,428 | | | 102,578 | |
Expanded corporate facilities contracts | | | 12,615 | | | 12,615 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | |
Total contractual obligations | | $ | 7,435,065 | | $ | 4,861,913 | | $ | 1,521,553 | | $ | 634,225 | | $ | 417,374 | |
| | | | | | | | | | | | | | | | |
As mentioned above, TSFG has the ability to borrow from the FHLB and maintain short-term lines of credit from unrelated banks. FHLB advances outstanding as of March 31, 2009 totaled $467.7 million. At March 31, 2009, TSFG had $881.0 million of unused borrowing capacity from the FHLB, compared to $863.7 million at December 31, 2008. TSFG funds its short-term needs principally with deposits, including brokered deposits, federal funds purchased, repurchase agreements, FHLB advances, Federal Reserve borrowings, TT&L notes, and the principal run-off of investment securities. At March 31, 2009, TSFG had unused short-term lines of credit totaling $256.7 million (which may be canceled at the lender’s option and are subject to funds availability at the lender), compared to $328.7 million at December 31, 2008. 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.
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A collateralized borrowing relationship with the Federal Reserve Bank of Richmond is in place for Carolina First Bank. At March 31, 2009, TSFG had qualifying collateral to secure advances up to $3.2 billion, of which $750.0 million was outstanding. At December 31, 2008, TSFG had qualifying collateral to secure advances up to $3.4 billion, of which $1.1 billion was outstanding.
The parent company has maintained cash from the preferred stock issuances in 2008 to meet preferred stock dividend requirements through 2013, although this cash could be used to provide further capital support to Carolina First Bank if needed.
During April 2009, Fitch Ratings lowered the long-term and short-term Issuer Default Ratings for TSFG and Carolina First Bank, to ‘BB+/B’ from ‘BBB-/F3’ with a Rating Outlook of Negative. Additionally, Moody’s and Standard and Poor’s have placed the TSFG and/or Carolina First Bank credit rating on Negative Watch, indicating the potential for downgrades. These ratings changes are not expected to have a material impact on TSFG’s liquidity given that, as noted above, we have no debt for which a downgrade of our credit ratings would trigger early termination and a credit rating downgrade would not impact 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.
TSFG enters into agreements in the normal course of business to extend credit to meet the financial needs of its customers. For amounts and types of such agreements at March 31, 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.
Recently Adopted/Issued Accounting Pronouncements
See Note 1 – Recently Adopted Accounting Pronouncements and Recently Issued Accounting Pronouncements in the accompanying Notes to the Consolidated Financial Statements for details of recently adopted and recently issued accounting pronouncements and their expected impact on the Company’s Consolidated Financial Statements.
| |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
See “Enterprise Risk Management” in Item 2, Management Discussion and Analysis of Financial Condition and Results of Operations for quantitative and qualitative disclosures about market risk, which information is incorporated herein by reference.
| |
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
At March 31, 2009, TSFG’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated its disclosure controls and procedures as currently in effect. Based on this evaluation, TSFG’s management concluded that as of March 31, 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 decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
TSFG continually assesses the adequacy of its internal control over financial reporting and strives to enhance its controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in TSFG’s internal control over financial reporting identified in connection with its assessment during the quarter ended March 31, 2009 or through the date of this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, TSFG’s internal control over financial reporting.
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PART II. OTHER INFORMATION
As previously reported, TSFG and certain of its current and former directors and executive officers have been named as parties in two shareholder lawsuits, one filed on November 7, 2008 in South Carolina State Court in Greenville County (the “Court”) having Vernon A. Mercier as the named plaintiff, and one filed on November 26, 2008 in the Court having John S. McMullen on behalf of Andros Associates, Inc. as named plaintiff. These two lawsuits are collectively referred to hereinafter as the “Litigation.”
On March 24, 2009, all parties to the Litigation executed an Agreement in Principle providing for the settlement of the Litigation. For additional details, refer to TSFG’s Current Report on Form 8-K dated April 1, 2009.
In addition, see Note 8 to the Consolidated Financial Statements for a discussion of ongoing legal proceedings.
There have been no material changes to the risk factors previously disclosed under Item 1A (pages 11-13) of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008.
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
TSFG has repurchased shares of our common stock in private transactions and open-market purchases, as authorized by our Board. The amount and timing of stock repurchases will be based on factors, including but not limited to, management’s assessment of TSFG’s capital structure and liquidity, the market price of TSFG’s common stock compared to management’s assessment of the stock’s underlying value, and applicable regulatory, legal, and accounting matters. The following table presents information about our stock repurchases for the three months ended March 31, 2009.
Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | |
Period | | | Total
Number
of Shares
Purchased | | Average
Price
Paid per
Share | | Total
Number of
Shares Purchased
as Part
of Publicly
Announced Plans
or Programs | | Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under Plans or
Programs
(in thousands) | |
| | | | | | | | | | |
January 1, 2009 to January 31, 2009 | | | 12,315 | (1) | $ | 1.76 | | | — | | $ | — | |
February 1, 2009 to February 28, 2009 | | | 1,734 | (1) | | 0.95 | | | — | | | — | |
March 1, 2009 to March 31, 2009 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
Total | | | 14,049 | | $ | 1.66 | | | — | | $ | — | |
| | | | | | | | | | | | | |
| |
(1) | These shares were canceled in connection with exercise of options, vesting of restricted stock, or distribution from the deferred compensation plan. Pursuant to TSFG’s stock option plans, participants may exercise stock options by surrendering shares of TSFG common stock the participants already own or, in some cases, by surrendering fully vested stock options as payment of the option exercise price. Pursuant to TSFG’s restricted stock plans, participants may tender shares of vested restricted stock as payment for taxes due at the time of vesting. Pursuant to TSFG’s Executive Deferred Compensation Plan, participants may tender shares of stock as payment for taxes due at the time of distribution. Shares surrendered by participants of these plans are repurchased at current market value pursuant to the terms of the applicable stock option, restricted stock, or deferred compensation plan and not pursuant to publicly announced share repurchase programs. |
During first quarter 2009, 48,674 shares of preferred stock were converted into 9,988,306 common shares, which included 2,500,000 shares issued as an inducement to convert. This issuance of common shares was not registered under the Securities Act of 1933 in reliance upon the exemption set forth in Section 3a(9) thereof.
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| |
Item 3. | Defaults upon Senior Securities |
None.
| |
Item 4. | Submission of Matters to a Vote of Securities Holders |
On May 5, 2009, TSFG held its 2009 Annual Meeting of Shareholders. The results of the 2009 Annual Meeting of Shareholders follow. All directors nominated by TSFG received the affirmative vote of over a majority of the votes cast, and all other matters presented before the meeting were approved by the requisite vote reflecting over a majority of votes cast.
Proposal #1 – Election of Directors
| | | | | | | | | | |
| | Voting shares in favor | | | | |
| | | | | | |
| | # | | | % | | | Withheld
Authority | |
| | | | | | | | | |
H. Lynn Harton | | 74,920,534 | | | 94.5 | % | | 4,379,233 | |
M. Dexter Hagy | | 73,616,145 | | | 92.8 | % | | 5,683,622 | |
H. Earle Russell, Jr. | | 72,516,634 | | | 91.4 | % | | 6,783,133 | |
William R. Timmons III | | 74,075,569 | | | 93.4 | % | | 5,224,198 | |
David C. Wakefield III | | 72,635,229 | | | 91.6 | % | | 6,664,538 | |
William P. Brant, J.W. Davis, William S. Hummers III, Challis M. Lowe, Darla D. Moore, Jon W. Pritchett., Edward J. Sebastian, John C.B. Smith, Jr., and Mack I. Whittle, Jr. continued in their present terms as directors.
Proposal #2 – Approve Amendments to TSFG’s Long Term Incentive Plan. These proposed amendments were approved with 55,518,573 shares, or 91.3%, voting in favor, 3,773,934 shares voting against, and 1,511,695 shares abstaining.
Proposal #3 – Approve Amendments to TSFG’s Employee Stock Purchase Plan. This proposed amendment was approved with 56,816,170 shares, or 93.4%, voting in favor, 2,482,878 shares voting against, and 1,505,154 shares abstaining.
Proposal #4 – Vote on Nonbinding Resolution to Ratify the Compensation of the Named Executive Officers. This Resolution was approved with 72,692,778 shares, or 91.7%, voting in favor, 4,872,170 shares voting against, and 1,734,819 shares abstaining.
Proposal #5 – Ratification of Auditors. The shareholders approved the appointment of PricewaterhouseCoopers LLP as independent auditors of TSFG for fiscal year 2009 with 76,908,843 shares, or 97.0%, voting in favor, 1,041,817 shares voting against, and 1,349,106 shares abstaining.
None.
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| | |
10.1 | | The South Financial Group 2005 Executive and Director Deferred Compensation Plan |
| | |
31.1 | | Certificate of the Principal Executive Officer pursuant to Rule 13a-14a/15(d)-14(a) of Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
31.2 | | Certificate of the Principal Financial Officer pursuant to Rule 13a-14a/15(d)-14(a) of Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
32.1+ | | Certificate of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
32.2+ | | Certificate of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Note for non-filed versions of this Form 10-Q
The above exhibits may be found on TSFG’s electronic filing of its March 31, 2009 Quarterly Report on Form 10-Q with the Securities and Exchange Commission (“SEC”) and is accessible at no cost on TSFG’s web site, www.thesouthgroup.com, through the Investor Relations link. TSFG’s SEC filings are also available through the SEC’s web site at www.sec.gov.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, TSFG has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| The South Financial Group, Inc. |
| | |
Date: May 8, 2009 | /s/ James R. Gordon | |
| | |
| James R. Gordon |
| Senior Executive Vice President and |
| Chief Financial Officer |
| (Principal Financial Officer) |
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