deposits plus customer sweep accounts. TSFG also discusses its funding generated from non-customer sources using the following definition: “wholesale borrowings,” which are defined by TSFG as short-term and long-term borrowings less customer sweep accounts plus brokered deposits. Management believes that these presentations of “core deposits,” “customer deposits,” “customer funding,” and “wholesale borrowings” aid in the identification of funding generated by its lines of business versus its treasury department. In addition, TSFG provides data eliminating intangibles in order to present data on a “tangible” basis. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. Management compensates for these limitations by providing detailed reconciliations between GAAP and operating measures. These disclosures should not be viewed as a substitute for GAAP measures, and furthermore, TSFG’s non-GAAP measures may not necessarily be comparable to non-GAAP performance measures of other companies.
The South Financial Group is a bank holding company, headquartered in Greenville, South Carolina, with $12.6 billion in total assets and 177 branch offices in South Carolina, Florida, and North Carolina at June 30, 2009. Founded in 1986, TSFG focuses on Southeastern banking markets, which have historically experienced long-term growth. TSFG operates Carolina First Bank, which conducts banking operations in North Carolina and South Carolina (as Carolina First), in Florida (as Mercantile), and on the Internet (as Bank Caroline). At June 30, 2009, approximately 46% of TSFG’s customer deposits (total deposits less brokered deposits) were in South Carolina, 42% were in Florida, and 12% 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 $202.3 million, or $(2.34) per diluted share, for the first six months of 2009, primarily attributable to higher credit and related costs. For the first six months of 2008, TSFG reported a net loss available to common shareholders of $218.2 million, or $(3.01) 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. The following is a summary of the consolidated statements of operations (in thousands, except per share data):
At June 30, 2009, nonperforming assets as a percentage of loans and foreclosed property increased to 5.94% from 4.04% at December 31, 2008 and 2.29% at June 30, 2008. The increase in nonperforming assets was primarily attributable to continued deterioration in residential construction and development-related loans (which are included in commercial real estate loans). For the six months ended June 30, 2009, annualized net loan charge-offs totaled 4.63% of average loans held for investment, compared to 1.40% for the six months ended June 30, 2008. TSFG’s provision for credit losses increased to $274.0 million for the first six months of 2009 from $137.1 million for the six months ended June 30, 2008.
In June 2009, TSFG announced a capital plan (the “Capital Plan”) to bolster its common equity to cover the losses associated with a “more adverse” credit scenario used by the U.S. government in its recently completed supervisory capital assessment program (“SCAP”) for the country’s 19 largest bank holding companies. In connection
with this plan, TSFG issued $75 million of common equity in a public offering in June, with net proceeds of $69.9 million. (An additional $10 million was issued in July in connection with the exercise of the underwriters’ over-allotment, with net proceeds of $9.5 million.) Also in June, TSFG exchanged $94.5 million of the Series 2008 Convertible Preferred Stock for a new series of preferred stock, Series 2009-A Convertible Preferred Stock, which automatically converts into 24.0 million common shares (including 9.4 million shares valued at $14.0 million as an inducement to convert) upon shareholder approval. (Shareholder approval is expected to be obtained in third quarter 2009.) In addition, TSFG reduced its assets during second quarter 2009, partly by sales of indirect auto loans and shared national credits. Other provisions of the Capital Plan include exchanging common stock for the remaining $95.5 million of Series 2008 Convertible Preferred Stock, converting $20 to $30 million of certain TRUP and REIT preferred securities into common, and selling ancillary businesses.
In January 2009, 48,674 shares of our Series 2008 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. In total, $20.5 million for the first six months of 2009 was treated as a deemed dividend to preferred shareholders resulting from induced conversions for purposes of computing net loss available to common shareholders, including $6.5 million in first quarter 2009 and $14.0 million in second quarter 2009.
TSFG’s tangible equity to tangible asset ratio remained relatively stable at 10.27% at June 30, 2009, compared to 10.29% at December 31, 2008 primarily due to net losses in the first six months of 2009 being offset by proceeds from the common stock offering mentioned above and lower total assets. Tangible common equity to tangible assets was 6.07% at June 30, 2009, compared to 6.05% at March 31, 2009 and December 31, 2008. The common stock offering, lower total assets, and the conversion of $48.7 million of the Series 2008 Preferred Stock helped to offset our net loss and dividends for the first half of 2009. Tangible common equity to tangible assets, assuming conversion of all Convertible Preferred Stock, was 7.60% at June 30, 2009, 7.84% at December 31, 2008, and 7.94% at June 30, 2008. In addition, all regulatory capital ratios exceeded well-capitalized minimums.
Tax-equivalent net interest income was $173.3 million for the first six months of 2009, compared to $195.7 million for the first six months of 2008. The net interest margin decreased to 2.89% for the first six months of 2009 from 3.16% for the first six months of 2008, primarily due to yields on earning assets declining more than funding costs, as deposit pricing has effectively approached a floor on the absolute level for most non-maturity products, and increased nonperforming asset levels. The net interest margin increased to 2.96% for second quarter 2009, up 13 basis points from 2.83% for first quarter 2009 as higher rate certificates of deposit repriced downward upon renewal.
Noninterest income totaled $56.0 million for the first six months of 2009, compared to $63.3 million for the first six months of 2008. The decrease was largely attributable to decreases in most categories of noninterest income, including a $2.6 million decline in the net gain on securities and declines in customer fee income and wealth management income due to the effects of the economic downturn. However, mortgage banking income improved for second quarter 2009 versus first quarter 2009.
Noninterest expenses totaled $226.4 million for the first six months of 2009, compared to $356.0 million for the six months ended June 30, 2008. Goodwill impairment charges totaling $188.4 million were recorded in the first half of 2008. In the first half of 2009, regulatory assessments and credit-related expenses continued to increase, and TSFG recorded $17.4 million in impairment charges on long-lived assets.
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
35
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.
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.
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 June 30, 2009, the net deferred tax asset totaled $131.7 million. Management’s analysis of the need for a valuation allowance recognizes that the Company has incurred a cumulative loss over the preceding three-year period, including substantial losses in 2008 and the first half of 2009. A majority of the cumulative loss has been caused by the deterioration in credit and the substantial increase to the allowance for loan losses in the past two years. Current forecasts have the Company producing sufficient taxable income over the 20 year carryforward period to realize the entire net deferred tax asset. Should the expectations of future profitability materially change or earnings in the short term differ materially from the Company’s forecast, a valuation allowance may be established if management believes any portion of the deferred tax asset will not be realized. The amount of future taxable income required to fully utilize the deferred tax asset is approximately $414 million in the carryforward period.
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 June 30, 2009, $159.0 million of the deferred tax assets were excluded from tier 1 and total capital. This amount exceeds the net deferred tax asset of $131.7 million due to the disallowance of the deferred tax liability associated with the unrealized gain/loss on available
36
for sale securities and the deferred tax liability that reduces net intangible assets for regulatory purposes. (See “Capital Resources and Dividends” under “Balance Sheet Review”.)
Balance Sheet Review
Loans
TSFG focuses its lending activities on small and middle market businesses and individuals in its geographic markets. At June 30, 2009, outstanding loans totaled $9.3 billion, which equaled 99.5% of total deposits (127.5% of customer deposits) and 74.2% of total assets. The major components of the loan portfolio were commercial loans, commercial real estate loans, and consumer loans (including both direct and indirect loans). Substantially all loans were to borrowers located in TSFG’s market areas in South Carolina, Florida, and North Carolina. At June 30, 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.
Loans held for investment decreased $886.1 million, or 8.7%, to $9.3 billion at June 30, 2009 from $10.2 billion at December 31, 2008. During the three and six months ended June 30, 2009, TSFG transferred $335.8 million and $346.5 million, respectively, from the held for investment portfolio to the held for sale portfolio. Included in the second quarter amounts were $230.3 million of indirect auto loans (all of which were sold prior to quarter-end) and $88.8 million of shared national credits (of which $24.7 million were still included in held for sale at June 30, 2009). After recording a $4.5 million allowance adjustment, TSFG recorded a $3.2 million net loss on the indirect auto loan and shared national credits transactions. Subsequent to quarter-end, in July 2009, the $24.7 million of shared national credits held for sale were sold.
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 $15.2 million at June 30, 2009 from $14.7 million at December 31, 2008, primarily due to higher mortgage loan volume and timing of mortgage sales. Prior to second quarter 2009, TSFG accounted for its mortgage loans held for sale at fair value pursuant to the fair value option. Effective second quarter 2009, TSFG elected to discontinue its use of the fair value option on new production of mortgage loans held for sale. This change corresponds to TSFG’s decision to no longer sell mortgage loans on a pooled basis.
Table 1 summarized outstanding loans held for investment by loan purpose.
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|
Table 1 |
| |
Loan Portfolio Composition Based on Loan Purpose |
| |
(dollars in thousands) |
| | | | | | | | | | |
| | June 30, | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Commercial Loans | | | | | | | | | | |
Commercial and industrial | | $ | 2,428,511 | | $ | 2,891,007 | | $ | 2,722,611 | |
Commercial owner - occupied real estate | | | 1,315,442 | | | 1,183,618 | | | 1,270,746 | |
Commercial real estate (1) | | | 3,873,199 | | | 4,162,248 | | | 4,074,331 | |
| | | | | | | | | | |
| | | 7,617,152 | | | 8,236,873 | | | 8,067,688 | |
| | | | | | | | | | |
Consumer Loans | | | | | | | | | | |
Indirect - sales finance | | | 285,658 | | | 728,433 | | | 635,637 | |
Consumer lot loans | | | 178,212 | | | 266,242 | | | 225,486 | |
Direct retail | | | 87,326 | | | 99,951 | | | 95,397 | |
Home equity | | | 811,057 | | | 781,120 | | | 813,201 | |
| | | | | | | | | | |
| | | 1,362,253 | | | 1,875,746 | | | 1,769,721 | |
| | | | | | | | | | |
|
Mortgage Loans | | | 326,604 | | | 363,112 | | | 354,663 | |
| | | | | | | | | | |
|
Total loans held for investment | | $ | 9,306,009 | | $ | 10,475,731 | | $ | 10,192,072 | |
| | | | | | | | | | |
| | | | | | | | | | |
Percentage of Loans Held for Investment | | | | | | | | | | |
Commercial and industrial | | | 26.1 | % | | 27.6 | % | | 26.7 | % |
Commercial owner - occupied real estate | | | 14.2 | | | 11.3 | | | 12.5 | |
Commercial real estate | | | 41.6 | | | 39.7 | | | 40.0 | |
Consumer | | | 14.6 | | | 17.9 | | | 17.3 | |
Mortgage | | | 3.5 | | | 3.5 | | | 3.5 | |
| | | | | | | | | | |
|
Total | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | |
| |
(1) | See “Commercial Real Estate Concentration,” “Credit Quality,” and “Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” for more detail on commercial real estate loans. |
Commercial and industrial loans are loans to finance short-term and intermediate-term cash needs of businesses. Typical needs include the need to finance seasonal or other temporary cash flow imbalances, growth in working assets created by sales growth, and purchases of equipment and vehicles. Credit is extended in the form of short-term single payment loans, lines of credit for periods up to a year, revolving credit facilities for periods up to five years, and amortizing term loans for periods up to ten years.
Commercial owner - occupied real estate loans are loans to finance the purchase or expansion of operating facilities used by businesses not engaged in the real estate business. Typical loans are loans to finance offices, manufacturing plants, warehouse facilities, and retail shops. Depending on the property type and the borrower’s cash flows, amortization terms vary from ten years up to 20 years. Although secured by mortgages on the properties financed, these loans are underwritten based on the cash flows generated by operations of the businesses they house.
Commercial real estate (“CRE”) loans are loans to finance real properties that are acquired, developed, or constructed for sale or lease to parties unrelated to the borrower. Our CRE products fall into four primary categories including land, acquisition and development, construction, and income property. See “Commercial Real Estate Concentration” below for further details.
Indirect - sales finance loans are loans to individuals to finance the purchase of motor vehicles. They are closed at the auto dealership but approved in advance by TSFG for immediate purchase. Loans are extended on new and used motor vehicles with terms varying from two years to six years. TSFG has effectively stopped originating indirect auto loans in its markets, with the exception of certain dealers that fit within our relationship strategy. During second quarter 2009, TSFG sold $230.3 million of indirect loans.
Consumer lot loans are loans to individuals to finance the purchase of residential lots.
38
Direct retail consumer loans are loans to individuals to finance personal, family, or household needs. Typical loans are loans to finance auto purchases or home repairs and additions.
Home equity loans are loans to homeowners, secured primarily by junior mortgages on their primary residences, to finance personal, family, or household needs. These loans may be in the form of amortizing loans or lines of credit with terms up to 15 years. TSFG’s home equity portfolio consists of loans to direct customers, with no brokered loans.
Mortgage loans are loans to individuals, secured by first mortgages on single-family residences, generally to finance the acquisition or construction of those residences. TSFG generally sells a majority of its residential mortgage loans at origination in the secondary market. TSFG also retains certain of its mortgage loans in its held for investment portfolio as part of its overall balance sheet management strategy. TSFG’s mortgage portfolio is bank-customer related, with minimal brokered loans or subprime exposure.
Portfolio risk is partially managed by maintaining a “house” lending limit at a level significantly lower than the legal lending limit of Carolina First Bank and by requiring approval by the Risk Committee of the Board of Directors to exceed this house limit. At June 30, 2009, TSFG’s house lending limit was $35 million, and 14 credit relationships totaling $606.9 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 $590.5 million, or 6.4% of total loans held for investment at June 30, 2009, compared to 5.3% of total loans held for investment at December 31, 2008. Approximately $67 million of these loans were considered nonperforming loans as of June 30, 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 June 30, 2009, the loan portfolio included commitments totaling $1.1 billion in SNCs. Outstanding borrowings under these commitments totaled $598.9 million at June 30, 2009, decreasing from $711.6 million at December 31, 2008. The largest commitment was $40.0 million and the largest outstanding balance was $32.1 million at June 30, 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. Our strategy targets borrowers whose management teams are well known to us and whose risk profile is above average. Going forward, we expect to reduce the percentage of our portfolio invested in SNCs due to the lack of relationship opportunity on much of the portfolio. During second quarter 2009, we transferred $88.8 million of these loans to the held for sale portfolio, of which $24.7 million were still included in held for sale at June 30, 2009. The remaining $24.7 million were sold in July 2009.
Commercial Real Estate Concentration
The portfolio’s largest concentration is in commercial real estate loans. Real estate development and construction are major components of the economic activity that occurs in TSFG’s markets. TSFG’s commercial real estate products include the following:
| | |
Commercial Real Estate
Product | | Description |
| | | |
Completed income property | | Loans to finance a variety of income producing properties, including apartments, retail centers, hotels, office buildings and industrial facilities |
Residential A&D | | Loans to develop land into residential lots |
Commercial A&D | | Loans to finance the development of raw land into sellable commercial lots |
Commercial construction | | Loans to finance the construction of various types of income property |
Residential construction | | Loans to construct single family housing; primarily to residential builders |
Residential condo | | Loans to construct or convert residential condominiums |
Undeveloped land | | Loans to acquire land for resale or future development |
Underwriting policies dictate the loan-to-value (“LTV”) limitations at origination for commercial real estate loans. Table 2 presents selected characteristics of commercial real estate loans by product type.
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|
Table 2 |
| |
Selected Characteristics of Commercial Real Estate Loans |
| |
(dollars in thousands) |
| | | | | | | | | | | | | | | |
| | June 30, 2009 | |
| | | |
| | Policy LTV | | Weighted Average
Time to Maturity
(in months) | | Weighted
Average
Loan Size | | Largest
Ten
Total O/S | |
| | | | | | | | | |
Completed income property | | 85 | % | | 37.8 | | | | $ | 481 | | | $ | 164,509 | |
Residential A&D | | 75 | | | 8.3 | | | | | 583 | | | | 107,479 | |
Commercial A&D | | 75 | | | 7.8 | | | | | 832 | | | | 74,962 | |
Commercial construction | | 80 | | | 29.4 | | | | | 2,456 | | | | 139,549 | |
Residential construction | | 80 | | | 13.7 | | | | | 230 | | | | 72,917 | |
Residential condo | | 80 | | | 7.1 | | | | | 1,285 | | | | 118,618 | |
Undeveloped land | | 65 | | | 9.2 | | | | | 672 | | | | 91,454 | |
| | | | | | | | | | | | | | | |
Overall | | | | | 26.9 | | | | $ | 559 | | | $ | 769,488 | |
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.
|
Table 3 |
| |
Commercial Real Estate Loans by Geographic Diversification (1) |
| |
(dollars in thousands) |
| | | | | | | | | | | | | | | |
| | June 30, 2009 | | December 31, 2008 | |
| | | | | |
| | Balance | | % of
Total CRE | | Balance | | % of
Total CRE | |
| | | | | | | | | |
South Carolina, exluding Coastal: | | | | | | | | | | | | | | | |
Upstate South Carolina (Greenville) | | $ | 593,835 | | | 15.3 | % | | $ | 539,920 | | | 13.3 | % | |
Midlands South Carolina (Columbia) | | | 234,990 | | | 6.1 | | | | 238,285 | | | 5.9 | | |
Greater South Charlotte South Carolina (Rock Hill) | | | 162,290 | | | 4.2 | | | | 164,709 | | | 4.0 | | |
Coastal South Carolina: | | | | | | | | | | | | | | | |
North Coastal South Carolina (Myrtle Beach) | | | 377,805 | | | 9.8 | | | | 401,325 | | | 9.9 | | |
South Coastal South Carolina (Charleston) | | | 265,662 | | | 6.9 | | | | 268,951 | | | 6.6 | | |
Western North Carolina (Hendersonville/Asheville) | | | 697,617 | | | 18.0 | | | | 762,559 | | | 18.7 | | |
Central Florida: | | | | | | | | | | | | | | | |
Central Florida (Orlando) | | | 252,512 | | | 6.5 | | | | 274,560 | | | 6.7 | | |
Marion County, Florida (Ocala) | | | 147,616 | | | 3.8 | | | | 156,700 | | | 3.8 | | |
North Florida: | | | | | | | | | | | | | | | |
Northeast Florida (Jacksonville) | | | 265,291 | | | 6.8 | | | | 276,942 | | | 6.8 | | |
North Central Florida | | | 297,235 | | | 7.7 | | | | 311,426 | | | 7.6 | | |
South Florida (Ft. Lauderdale) | | | 248,077 | | | 6.4 | | | | 232,437 | | | 5.7 | | |
Tampa Bay Florida | | | 330,269 | | | 8.5 | | | | 446,517 | | | 11.0 | | |
| | | | | | | | | | | | | | | |
Total commercial real estate loans | | $ | 3,873,199 | | | 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. |
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|
Table 4 |
| |
Commercial Real Estate Loans by Geography and Product Type |
| |
(dollars in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 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 | | $ | 536,256 | | $ | 341,799 | | $ | 394,721 | | $ | 201,957 | | $ | 358,806 | | $ | 146,963 | | $ | 154,218 | | $ | 2,134,720 | | | 22.9 | % |
Residential A&D | | | 95,095 | | | 62,392 | | | 153,149 | | | 31,841 | | | 63,421 | | | 15,646 | | | 41,155 | | | 462,699 | | | 5.0 | |
Commercial A&D | | | 42,544 | | | 21,845 | | | 33,538 | | | 35,156 | | | 6,240 | | | 14,592 | | | 33,380 | | | 187,295 | | | 2.0 | |
Commercial construction | | | 208,212 | | | 45,987 | | | 24,822 | | | 47,210 | | | 15,768 | | | 30,844 | | | 25,016 | | | 397,859 | | | 4.3 | |
Residential construction | | | 35,276 | | | 40,070 | | | 22,849 | | | 12,983 | | | 24,399 | | | 2,235 | | | 5,047 | | | 142,859 | | | 1.5 | |
Residential condo | | | 20,159 | | | 67,387 | | | 11,459 | | | 7,827 | | | 30,720 | | | 23,098 | | | 15,437 | | | 176,087 | | | 1.9 | |
Undeveloped land | | | 53,573 | | | 63,987 | | | 57,079 | | | 63,154 | | | 63,172 | | | 14,699 | | | 56,016 | | | 371,680 | | | 4.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total CRE Loans | | $ | 991,115 | | $ | 643,467 | | $ | 697,617 | | $ | 400,128 | | $ | 562,526 | | $ | 248,077 | | $ | 330,269 | | $ | 3,873,199 | | | 41.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CRE Loans as % of Total Loans HFI | | | 10.7 | % | | 6.9 | % | | 7.5 | % | | 4.3 | % | | 6.0 | % | | 2.7 | % | | 3.5 | % | | 41.6 | % | | | |
See “Credit Quality” for additional commercial real estate information.
Credit Quality
A willingness to take credit risk is inherent in the decision to grant credit. Prudent risk-taking requires a credit risk management system based on sound policies and control processes that ensure compliance with those policies. TSFG’s credit risk management system is defined by policies approved by the Board of Directors that govern the risk underwriting, portfolio monitoring, and problem loan administration processes. Adherence to underwriting standards is managed through a multi-layered credit approval process and after-the-fact review by credit risk management of loans approved by lenders. Through daily review by credit risk managers, monthly reviews of exception reports, and ongoing analysis of asset quality trends, compliance with underwriting and loan monitoring policies is closely supervised. The administration of problem loans is driven by policies that require written plans for resolution and periodic meetings with credit risk management to review progress. Credit risk management activities are monitored by the Risk Committee of the Board, which meets periodically to review credit quality trends, new large credits, loans to insiders, large problem credits, credit policy changes, and reports on independent credit reviews.
41
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) |
| | | | | | | | | | |
| | June 30, | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Loans held for sale | | $ | 40,290 | | $ | 21,871 | | $ | 30,963 | |
Loans held for investment | | | 9,306,009 | | | 10,475,731 | | | 10,192,072 | |
Allowance for loan losses | | | 285,290 | | | 191,727 | | | 247,086 | |
Allowance for credit losses (1) | | | 289,680 | | | 193,825 | | | 249,874 | |
Nonaccrual loans - commercial and industrial | | | 76,506 | | | 28,234 | | | 35,998 | |
Nonaccrual loans - commercial owner - occupied real estate | | | 24,170 | | | 5,112 | | | 14,876 | |
Nonaccrual loans - commercial real estate | | | 309,339 | | | 151,579 | | | 230,373 | |
Nonaccrual loans - consumer | | | 26,504 | | | 16,246 | | | 39,009 | |
Nonaccrual loans - mortgage | | | 28,046 | | | 17,555 | | | 29,126 | |
| | | | | | | | | | |
Total nonperforming loans held for investment (2) | | | 464,565 | | | 218,726 | | | 349,382 | |
Nonperforming loans held for sale - CRE | | | 376 | | | — | | | 16,282 | |
Foreclosed property (other real estate owned and personal property repossessions) | | | 95,752 | | | 21,780 | | | 48,993 | |
| | | | | | | | | | |
Total nonperforming assets | | $ | 560,693 | | $ | 240,506 | | $ | 414,657 | |
| | | | | | | | | | |
Restructured loans accruing interest (2) | | $ | 17,291 | | $ | 1,425 | | $ | 6,249 | |
| | | | | | | | | | |
Loans past due 90 days or more (interest accruing) | | $ | 11,107 | | $ | 8,779 | | $ | 47,481 | |
| | | | | | | | | | |
Total nonperforming assets as a percentage of loans and foreclosed property | | | 5.94 | % | | 2.29 | % | | 4.04 | % |
Allowance for loan losses to nonperforming loans | | | 0.61 | x | | 0.88 | 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) | 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 5.94% at June 30, 2009 from 4.04% at December 31, 2008 and 2.29% at June 30, 2008. The increase in nonperforming assets was primarily attributable to market deterioration in residential construction and development-related loans.
Table 6 presents CRE nonaccrual loans by geography and product type. At June 30, 2009, CRE loans past due 90 days still accruing interest totaled $1.1 million.
42
|
Table 6 |
| |
Commercial Real Estate Nonaccrual Loans |
| |
(dollars in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 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 | | $ | 7,792 | | $ | 12,827 | | $ | 16,996 | | $ | 9,482 | | $ | 3,608 | | $ | 9,986 | | $ | 17,053 | | $ | 77,744 | | | 16.7 | % |
Residential A&D | | | 20,166 | | | 9,369 | | | 13,520 | | | 4,338 | | | 3,010 | | | 2,027 | | | 5,706 | | | 58,136 | | | 12.5 | |
Commercial A&D | | | 142 | | | 729 | | | 1,016 | | | — | | | — | | | — | | | 19,865 | | | 21,752 | | | 4.7 | |
Commercial construction | | | 817 | | | — | | | 4,492 | | | — | | | — | | | — | | | 13,622 | | | 18,931 | | | 4.1 | |
Residential construction | | | 2,566 | | | 5,917 | | | 3,693 | | | 9,488 | | | 673 | | | — | | | 3,555 | | | 25,892 | | | 5.6 | |
Residential condo | | | 8,479 | | | 33,780 | | | 214 | | | 4,250 | | | 10 | | | 8,612 | | | 4,753 | | | 60,098 | | | 12.9 | |
Undeveloped land | | | 1,440 | | | 442 | | | 1,074 | | | 13,335 | | | 770 | | | 8,417 | | | 21,308 | | | 46,786 | | | 10.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total CRE Nonaccrual Loans | | $ | 41,402 | | $ | 63,064 | | $ | 41,005 | | $ | 40,893 | | $ | 8,071 | | $ | 29,042 | | $ | 85,862 | | $ | 309,339 | | | 66.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CRE Nonaccrual Loans as % of Total Nonaccrual Loans HFI | | | 8.9 | % | | 13.6 | % | | 8.8 | % | | 8.8 | % | | 1.7 | % | | 6.3 | % | | 18.5 | % | | 66.6 | % | | | |
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) |
| | | | | | | | | | | | | |
| | June 30, 2009 | | December 31, 2008 | |
| | | | | |
| | Balance | | % of CRE | | Balance | | % of CRE | |
| | | | | | | | | |
North Carolina | | $ | 15,429 | | | 0.40 | % | $ | 21,364 | | | 0.53 | % |
South Carolina | | | 24,497 | | | 0.63 | | | 34,268 | | | 0.84 | |
Florida | | | 37,439 | | | 0.97 | | | 44,471 | | | 1.09 | |
| | | | | | | | | | | | | |
Total CRE loans past due 30 days or more | | $ | 77,365 | | | 2.00 | % | $ | 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) |
| | | | | | | | | | | | | | | | | | | |
| | June 30, 2009 | | December 31, 2008 | |
| | | | | |
| | # of
Loans | | Balance | | % of
LHFI | | # of
Loans | | Balance | | % of
LHFI | |
| | | | | | | | | | | | | |
Large potential problem loans ($5 million or more) | | | 20 | | $ | 206,675 | | | 2.22 | % | | 23 | | $ | 217,688 | | | 2.13 | % |
Small potential problem loans (less than $5 million) | | | 760 | | | 375,037 | | | 4.03 | | | 732 | | | 282,189 | | | 2.77 | |
| | | | | | | | | | | | | | | | | | | |
Total potential problem loans (1) | | | 780 | | $ | 581,712 | | | 6.25 | % | | 755 | | $ | 499,877 | | | 4.90 | % |
| | | | | | | | | | | | | | | | | | | |
| |
(1) | Includes commercial and industrial, commercial real estate, and commercial owner-occupied real estate. |
| |
| Allowance for Loan Losses and Reserve for Unfunded Lending Commitments |
The allowance for loan losses represents management’s estimate of probable incurred losses inherent in the lending portfolio. The adequacy of the allowance for loan losses (the “Allowance”) is analyzed quarterly. For purposes of
43
this analysis, adequacy is defined as a level sufficient to absorb probable incurred losses in the portfolio as of the balance sheet date presented. The methodology employed for this analysis is as follows.
Management’s ongoing evaluation of the adequacy of the Allowance considers both impaired and unimpaired loans and takes into consideration TSFG’s past loan loss experience, known and inherent risks in the portfolio, existing adverse situations that may affect the borrowers’ ability to repay, estimated value of any underlying collateral, an analysis of guarantees and an analysis of current economic factors and existing conditions.
TSFG, through its lending and credit functions, continuously reviews its loan portfolio for credit risk. TSFG employs an independent credit review area that reviews the lending and credit functions and processes to validate that credit risks are appropriately identified and addressed and reflected in the risk ratings. Using input from the credit risk identification process, the Company’s credit risk management area analyzes and validates the Company’s Allowance calculations. The analysis includes four basic components: general allowances for loan pools segmented based on similar risk characteristics, specific allowances for individually impaired loans, subjective and judgmental qualitative adjustments based on identified economic factors and existing conditions and other risk factors, and the unallocated component of the Allowance (which is determined based on the overall Allowance level and the determination of a range given the inherent imprecision of calculating the Allowance).
Management reviews the methodology, calculations and results and ensures that the calculations are appropriate and that all material risk elements have been assessed in order to determine the appropriate level of Allowance for the inherent losses in the loan portfolio at each quarter end. The Allowance for Credit Losses Committee is in place to ensure that the process is systematic and consistently applied.
The following chart reflects the various levels of reserves included in the Allowance:
| |
| | |
Level I | General allowance calculated based upon historical losses |
| | |
Level II | Specific reserves for individually impaired loans |
| | |
Level III | Subjective/judgmental adjustments for economic and other risk factors |
| | |
Unfunded | Reserves for off-balance sheet (unadvanced) exposure |
| | |
Unallocated | Represents the imprecision inherent in the previous calculations |
| | |
Total | Represents summation of all reserves |
| | |
Level I Reserves. The first reserve component is the general allowance for loan pools segmented based on similar risk characteristics that are determined by applying adjusted historical loss factors to each loan pool. The general allowance factors are based upon recent and historical charge-off experience and are applied to the outstanding portfolio by loan type and internal risk rating. Historical loss analyses of the previous 12 quarters provide the basis for factors used for homogenous pools of smaller loans, such as indirect auto and other consumer loan categories which generally are not evaluated based on individual risk ratings but almost entirely based on historical losses. The loss factors used in the Level I analyses are adjusted quarterly based on loss trends and risk rating migrations.
TSFG generates historical loss ratios from actual loss history for nine subsets of the loan portfolio over a 12 quarter period (3 years). Commercial loans are sorted by risk rating into four pools—Pass, Special Mention, Substandard, and Doubtful. Consumer loans are sorted into five pools by product type—Direct, Indirect, Home Equity, Consumer Lots, and Mortgage.
The adjusted loss ratio for each pool is multiplied by the dollar amount of loans in the pool in order to create a range. We then add and subtract five percent (5.0%) to and from this amount to create the upper and lower boundaries of the range. The upper and lower boundary amounts for each pool are summed to establish the total range. Although TSFG generally uses the actual historical loss rate, on occasion management may decide to select a higher or lower boundary based on known market trends or internal behaviors that would impact the performance of a specific portfolio grouping. The Level I reserves totaled $126.7 million at June 30, 2009, based on the portfolio historical loss rates, compared to $81.8 million at December 31, 2008.
Level II Reserves. The second component of the Allowance involves the calculation of specific allowances for each individually impaired loan. In situations where a loan is determined to be impaired (primarily because it is probable that all principal and interest 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
44
loan determined to be impaired (whether a specific reserve is assigned or not) is excluded from the Level I calculations described above.
TSFG tests a broad group of loans for impairment each quarter (this includes all commercial loans over $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 $70.0 million at June 30, 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 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 $88.6 million at June 30, 2009 compared to $117.0 million at December 31, 2008.
Reserve for Unfunded Commitments. At June 30, 2009 and December 31, 2008, the reserve for unfunded commitments was $4.4 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 June 30, 2009 was $14.4 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 $432.4 million at June 30, 2009 from $287.5 million at December 31, 2008, primarily attributable to commercial real estate loans. Most of the loans contributing to the increase were over $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 58% compared to the 50% increase in impaired loans.
Changes in the other components of the Allowance (reserves for Level I, Level III, unallocated, and unfunded commitments) are not related to specific loans but reflect changes in loss experience and subjective and judgmental adjustments made by management.
Assessing the adequacy of the Allowance is a process that requires considerable judgment. Management’s judgments are based on numerous assumptions about current events, which we believe to be reasonable, but which may or may not be valid. Thus, there can be no assurance that loan losses in future periods will not exceed the current Allowance amount or that future increases in the Allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the Allowance, thus adversely affecting the operating results of TSFG.
45
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
Six Months
Ended June 30, | | At and For the
Year Ended
December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Allowance for loan losses, beginning of year | | $ | 247,086 | | $ | 126,427 | | $ | 126,427 | |
Allowance adjustment for loans sold | | | (4,471 | ) | | — | | | — | |
Net charge-offs: | | | | | | | | | | |
Loans charged-off | | | (234,565 | ) | | (76,106 | ) | | (230,961 | ) |
Loans recovered | | | 4,878 | | | 4,181 | | | 7,551 | |
| | | | | | | | | | |
| | | (229,687 | ) | | (71,925 | ) | | (223,410 | ) |
Additions to allowance through provision expense | | | 272,362 | | | 137,225 | | | 344,069 | |
| | | | | | | | | | |
Allowance for loan losses, end of period | | $ | 285,290 | | $ | 191,727 | | $ | 247,086 | |
| | | | | | | | | | |
| | | | | | | | | | |
Reserve for unfunded lending commitments, beginning of year | | $ | 2,788 | | $ | 2,268 | | $ | 2,268 | |
Provision for unfunded lending commitments | | | 1,602 | | | (170 | ) | | 520 | |
| | | | | | | | | | |
Reserve for unfunded lending commitments, end of period | | $ | 4,390 | | $ | 2,098 | | $ | 2,788 | |
| | | | | | | | | | |
| | | | | | | | | | |
Allowance for credit losses, beginning of year | | $ | 249,874 | | $ | 128,695 | | $ | 128,695 | |
Allowance adjustment for loans sold | | | (4,471 | ) | | — | | | — | |
Net charge-offs: | | | | | | | | | | |
Loans charged-off | | | (234,565 | ) | | (76,106 | ) | | (230,961 | ) |
Loans recovered | | | 4,878 | | | 4,181 | | | 7,551 | |
| | | | | | | | | | |
| | | (229,687 | ) | | (71,925 | ) | | (223,410 | ) |
Additions to allowance through provision expense | | | 273,964 | | | 137,055 | | | 344,589 | |
| | | | | | | | | | |
Allowance for credit losses, end of period | | $ | 289,680 | | $ | 193,825 | | $ | 249,874 | |
| | | | | | | | | | |
| | | | | | | | | | |
Average loans held for investment | | $ | 10,000,260 | | $ | 10,328,336 | | $ | 10,351,897 | |
Loans held for investment, end of period | | | 9,306,009 | | | 10,475,731 | | | 10,192,072 | |
Net charge-offs as a percentage of average loans held for investment (annualized) | | | 4.63 | % | | 1.40 | % | | 2.16 | % |
Allowance for loan losses as a percentage of loans held for investment | | | 3.07 | | | 1.83 | | | 2.42 | |
Allowance for credit losses as a percentage of loans held for investment | | | 3.11 | | | 1.85 | | | 2.45 | |
Allowance for loan losses to nonperforming loans HFI | | | 0.61 | x | | 0.88 | x | | 0.71 | x |
The provision for credit losses for the first half of 2009 totaled $274.0 million, which exceeded net loan charge-offs by $44.3 million. The higher provision largely reflected credit deterioration due to continued weakness in housing markets and additional specific reserves for nonperforming loans and land development portfolios. The overall allowance for credit losses as a percentage of loans held for investment increased to 3.11% at June 30, 2009 from 2.45% at December 31, 2008. Tables 10 and 11 provide additional detail for net charge-offs.
46
|
Table 10 |
| |
Net Charge-Offs by Product Type |
| |
(dollars in thousands) |
| | | | | | |
| | Six Months Ended
June 30, 2009 |
| | |
| | Amount | | % of
NCO | |
| | | | | |
Commercial and industrial | | $ | 39,045 | | 17.0 | % |
Commercial owner-occupied real estate | | | 5,194 | | 2.3 | |
Commercial real estate | | | 130,059 | | 56.6 | |
Indirect - sales finance | | | 7,971 | | 3.5 | |
Consumer lot loans | | | 23,620 | | 10.3 | |
Direct retail | | | 2,171 | | 0.9 | |
Home equity | | | 7,739 | | 3.4 | |
Mortgage | | | 13,888 | | 6.0 | |
| | | | | | |
Total net charge-offs | | $ | 229,687 | | 100.0 | % |
| | | | | | |
| | | | | | |
|
Table 11 |
| |
Commercial Real Estate Net Charge-Offs by Product Type |
| |
(dollars in thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 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 | | $ | 2,355 | | $ | 6,738 | | $ | 4,855 | | $ | 4,732 | | $ | 812 | | $ | 2,022 | | $ | 7,039 | | $ | 28,553 | | | 12.4 | % |
Residential A&D | | | 3,238 | | | 2,728 | | | 6,018 | | | 3,229 | | | 2,690 | | | 1,587 | | | 9,773 | | | 29,263 | | | 12.7 | |
Commercial A&D | | | 237 | | | 1,242 | | | 352 | | | 123 | | | — | | | 119 | | | 13,963 | | | 16,036 | | | 7.0 | |
Commercial construction | | | — | | | 150 | | | 53 | | | — | | | — | | | 123 | | | — | | | 326 | | | 0.1 | |
Residential construction | | | 463 | | | 669 | | | 3,741 | | | 5,379 | | | 1,212 | | | 6 | | | 1,063 | | | 12,533 | | | 5.5 | |
Residential condo | | | (21 | ) | | 5,928 | | | 20 | | | — | | | — | | | — | | | 4,103 | | | 10,030 | | | 4.4 | |
Undeveloped land | | | — | | | — | | | 609 | | | 5,971 | | | 1,998 | | | 6,018 | | | 18,722 | | | 33,318 | | | 14.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total CRE Net Charge-Offs | | $ | 6,272 | | $ | 17,455 | | $ | 15,648 | | $ | 19,434 | | $ | 6,712 | | $ | 9,875 | | $ | 54,663 | | $ | 130,059 | | | 56.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CRE Net Charge-Offs as % of Total Net Charge-Offs | | | 2.7 | % | | 7.6 | % | | 6.8 | % | | 8.5 | % | | 2.9 | % | | 4.3 | % | | 23.8 | % | | 56.6 | % | | | |
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.
47
|
Table 12 |
| |
Investment Securities Portfolio Composition |
| |
(dollars in thousands) |
| | | | | | | | | | |
| | June 30, | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Available for Sale (at fair value) | | | | | | | | | | |
U.S. Treasury | | $ | 4,051 | | $ | 27,703 | | $ | 2,069 | |
U.S. Government agencies | | | 44,220 | | | 335,593 | | | 313,729 | |
Agency mortgage-backed securities | | | 1,449,961 | | | 1,276,145 | | | 1,468,639 | |
Private label mortgage-backed securities | | | 11,600 | | | 15,544 | | | 12,771 | |
State and municipal | | | 232,916 | | | 270,521 | | | 262,248 | |
Other investments: | | | | | | | | | | |
Corporate bonds | | | — | | | 18,211 | | | 9,963 | |
Federal Home Loan Bank (“FHLB”) stock | | | 58,825 | | | 38,614 | | | 35,536 | |
Community bank stocks | | | 496 | | | 2,078 | | | 672 | |
Other equity investments | | | 1,389 | | | 2,823 | | | 1,567 | |
| | | | | | | | | | |
| | | 1,803,458 | | | 1,987,232 | | | 2,107,194 | |
| | | | | | | | | | |
| | | | | | | | | | |
Held to Maturity (at amortized cost) | | | | | | | | | | |
State and municipal | | | 16,835 | | | 26,577 | | | 22,609 | |
Agency mortgage-backed securities | | | 129,534 | | | — | | | — | |
Other investments | | | 100 | | | 100 | | | 100 | |
| | | | | | | | | | |
| | | 146,469 | | | 26,677 | | | 22,709 | |
| | | | | | | | | | |
Total | | $ | 1,949,927 | | $ | 2,013,909 | | $ | 2,129,903 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total securities as a percentage of total assets | | | 15.5 | % | | 14.4 | % | | 15.7 | % |
| | | | | | | | | | |
| | | | | | | | | | |
Percentage of Total Securities Portfolio | | | | | | | | | | |
U.S. Treasury | | | 0.2 | % | | 1.4 | % | | 0.1 | % |
U.S. Government agencies | | | 2.3 | | | 16.6 | | | 14.7 | |
Agency mortgage-backed securities | | | 81.0 | | | 63.4 | | | 69.0 | |
Private label mortgage-backed securities | | | 0.6 | | | 0.8 | | | 0.6 | |
State and municipal | | | 12.8 | | | 14.7 | | | 13.4 | |
Other investments | | | 3.1 | | | 3.1 | | | 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 $2.0 billion for the first half of 2009, and $2.1 billion for the first half of 2008. The average tax-equivalent portfolio yield decreased for the six months ended June 30, 2009 to 4.48% from 4.69% for the six months ended June 30, 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 3.4 years at June 30, 2009, an increase from approximately 2.9 years at December 31, 2008. If interest rates rise, the duration of the debt securities portfolio may extend. Conversely, if interest rates fall, the duration of the debt securities portfolio may decline. Since total securities include 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.
Approximately 51% of mortgage-backed securities (“MBS”) are collateralized mortgage obligations (“CMOs”) with an average duration of 3.5 years. At June 30, 2009, approximately 15% of the MBS portfolio was variable rate or hybrid variable rate, where the rate adjusts on an annual basis after a specified fixed rate period, generally ranging from one to ten years.
The majority of these securities are government or agency securities and, therefore, pose minimal credit risk. The net unrealized gain on securities available for sale (pre-tax) totaled $30.2 million at June 30, 2009, compared with $10.9
48
million 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) |
| | | | | | | | | | | | | |
| | June 30, 2009 | | December 31, 2008 | |
| | | | | |
| | Balance | | % of Total | | Balance | | % of Total | |
| | | | | | | | | |
Government and agency | | | | | | | | | | | | | |
U.S. Treasury | | $ | 4,051 | | | 0.2 | % | $ | 2,069 | | | 0.1 | % |
U.S. Government agencies (1) | | | 44,220 | | | 2.3 | | | 313,729 | | | 14.7 | |
Agency mortgage-backed securities
(MBS) (1)(2)(3) | | | 1,579,495 | | | 81.0 | | | 1,468,639 | | | 68.9 | |
Federal Home Loan Bank Stock | | | 58,825 | | | 3.0 | | | 35,536 | | | 1.7 | |
| | | | | | | | | | | | | |
Total government and agency | | | 1,686,591 | | | 86.5 | | | 1,819,973 | | | 85.4 | |
| | | | | | | | | | | | | |
State and municipal (3)(4)(5) | | | | | | | | | | | | | |
Pre-funded with collateral or AAA-rated backed by Texas Permanent School Fund | | | 172,767 | | | 8.9 | | | 188,598 | | | 8.9 | |
Underlying issuer or collateral rated A or better (including South Carolina State Aid) | | | 66,511 | | | 3.4 | | | 81,238 | | | 3.8 | |
Underlying issuer or collateral rated BBB | | | 3,881 | | | 0.2 | | | 7,344 | | | 0.3 | |
Non-rated | | | 6,592 | | | 0.3 | | | 7,677 | | | 0.4 | |
| | | | | | | | | | | | | |
Total state and municipal | | | 249,751 | | | 12.8 | | | 284,857 | | | 13.4 | |
| | | | | | | | | | | | | |
Corporate bonds AA or A-rated | | | — | | | — | | | 9,963 | | | 0.5 | |
Private label mortgage-backed securities AAA-rated (2) | | | 11,600 | | | 0.6 | | | 12,771 | | | 0.6 | |
Community bank stocks and other | | | 1,985 | | | 0.1 | | | 2,339 | | | 0.1 | |
| | | | | | | | | | | | | |
Total securities | | $ | 1,949,927 | | | 100.0 | % | $ | 2,129,903 | | | 100.0 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Percent of total securities: (4) | | | | | | | | | | | | | |
Rated A or higher | | | | | | 99.4 | % | | | | | 99.2 | % |
Investment grade | | | | | | 99.6 | | | | | | 99.5 | |
| |
(1) | At June 30, 2009, these numbers include, in the aggregate, $29.1 million and $1.6 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 June 30, 2009, agency mortgage-backed securities include $129.5 million of securities held to maturity at amortized cost. At June 30, 2009 and December 31, 2008, state and municipal securities include $16.8 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 June 30, 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 June 30, 2009, the breakdown by current bond rating is as follows: $172.8 million pre-funded with collateral or AAA-rated backed by Texas Permanent School Fund, $3.6 million AAA-rated, $68.1 million AA or A-rated, $2.4 million BBB-rated, and $2.9 million non-rated. |
Note: Within each category, securities are ordered based on risk assessment from lowest to highest. TSFG holds no collateralized debt obligations.
In April 2009, TSFG sold U.S. government agency securities with a book value of approximately $120 million (3.6% yield) for a gain of $5.4 million. In connection with this sale, TSFG also terminated $75.0 million (4.3% rate) in long-term repurchase agreements, and recognized a loss on extinguishment of $5.4 million. Also in second quarter 2009,
49
TSFG recorded $435,000 in other-than-temporary impairment on certain community bank-related equity securities included in the other investments category.
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 the three and six months ended June 30, 2009, TSFG recorded $370,000 and $3.3 million in other-than-temporary impairment on these investments. At June 30, 2009, TSFG’s investment in these entities totaled $14.9 million, of which $5.0 million were accounted for under the cost method and $9.9 million were accounted for under the equity method.
Also included in other assets were $5.8 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
TSFG evaluates its goodwill annually for each reporting unit as of June 30th or more frequently if events or circumstances indicate that there may be impairment. The goodwill impairment test is a two-step process, which requires management to make judgments in determining the assumptions used in the calculations. The first step (“Step 1”) involves estimating the fair value of each reporting unit and comparing it to the reporting unit’s carrying value, which includes the allocated goodwill. If the estimated fair value is less than the carrying value, then a second step (“Step 2”) is performed to measure the actual amount of goodwill impairment, if any. Step 2 involves determining the implied fair value of goodwill. This requires the Company to allocate the estimated fair value of the reporting unit to all the assets and liabilities of such unit. The fair values of the assets and liabilities, primarily loans and deposits, are determined using current market interest rates, projections of future cash flows, and where available, quoted market prices of similar instruments. Any unallocated fair value represents the implied fair value of goodwill, which is then compared to its corresponding carrying value. If the implied fair value is less than the carrying value, an impairment loss is recognized in an amount equal to that deficit.
The fair value of the Carolina First reporting unit evaluated for impairment was determined primarily using discounted cash flow models based on internal forecasts (90% weighting) and, to a lesser extent, market-based trading and transaction multiples (10% weighting). More weight was given to the discounted cash flow models since market-based multiples are not considered directly comparable given the lack of a complete operational entity for each reporting unit, and based on the internal forecasts taking a longer term view of the Company’s performance. The internal forecasts include certain assumptions made by management, including expected growth rates in loans and customer funding, changes in net interest margin, credit quality trends, and the forecasted levels of other income and expense items. Forecasts are prepared for each of the next five years, with a terminal cash flow assigned to the remainder of the forecast horizon. A range of terminal growth rates ranging from 3% to 7% are applied to the terminal cash flow. Each period’s cash flow is then discounted using a range of discount rates based on the risk-free rate plus a premium based on overall stock market volatility and the volatility of our own stock. The portion of the estimated value derived from market-based trading and transaction multiples is based on a weighting of market multiples for selected peer institutions based on such metrics as book value of equity, tangible equity, assets, trailing earnings, and projected earnings. The value assigned to the reporting unit for purposes of the goodwill impairment evaluation is based on the midpoint of the range of values determined using the method outlined above. This valuation indicated that the fair value of the Carolina First reporting unit was less than its carrying value. However, Step 2 of the evaluation indicated that the implied fair value of the goodwill was greater than its carrying value, and thus no impairment charge was required as of the June 30, 2009 test date for the Carolina First banking segment.
During second quarter 2009, TSFG recorded a $2.1 million goodwill impairment charge on one of its nonbank subsidiaries based on discounted cash flows and estimated market valuations. Also in second quarter 2009, TSFG recorded a $411,000 goodwill impairment charge in its Retirement Plan Administration reporting unit due to its decision to sell its subsidiary, American Pensions, Inc. On July 1, 2009, TSFG sold American Pensions, Inc.
During first quarter 2008, TSFG recognized $188.4 million in goodwill impairment in the Mercantile banking segment primarily due to increased projected credit costs and a related decrease in projected loan growth, as well as changes in the measurement of segment profitability. During fourth quarter 2008, TSFG recognized an additional $237.6 million of goodwill impairment primarily due to an increase in the discount rate used for valuing future cash flows of our Mercantile reporting unit and a reduction in the projected cash flows primarily over the next two years. As a result, there is no goodwill currently assigned to the Mercantile banking segment.
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In the current environment, forecasting cash flows, credit losses and growth in addition to valuing the Company’s assets with any degree of assurance is very difficult and subject to significant changes over very short periods of time. Management will continue to update its analysis as circumstances change, and as market conditions continue to be volatile and unpredictable. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we estimated that, holding the other valuation assumptions constant, a 100 basis point reduction in the range of terminal growth rates applied to the terminal cash flows of the Carolina First reporting unit, which has been allocated the majority of the remaining goodwill, would result in an estimated 7% decrease in its fair value. A 100 basis point increase in the range of discount rates would result in an estimated 9% reduction in the fair value of Carolina First. Accordingly, based on these sensitivity analyses, the Company has concluded that it is possible that the Carolina First reporting unit may become impaired in future periods.
Other Real Estate Owned
Other real estate owned (“OREO”), consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of fair value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is recorded as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the value are recorded as a component of noninterest expense.
During second quarter 2009, we sold $13.7 million in OREO and incurred losses of $2.6 million. Due to continuing weak market conditions, we revalued our OREO during the quarter and also changed our policies to record assets at 70% of the most recent appraised value versus our previous practice of 80%. The result of the revaluation and change in policy was a downward adjustment in values by $10.2 million during the quarter. At June 30, 2009, the carrying value of OREO totaled $93.9 million, compared to $44.7 million at December 31, 2008, and was included in other assets.
Impairment of Long-Lived Assets
During 2005, TSFG initiated plans for a “corporate campus” to meet current and future facility needs and serve as the primary headquarters for its banking operations. Through June 30, 2009, TSFG had invested approximately $80 million in the project and had entered into additional contractual commitments of approximately $8 million.
During second quarter 2009, TSFG announced its intention to market its planned campus facility for sale. The campus site contains approximately 60 acres. Site infrastructure and landscaping is nearing completion and is expected to be finished in fall 2009. Three buildings – two office buildings and a conference center – are under construction, and ten additional building sites are available. Prior to the sale, TSFG expects to take advantage of the campus facility to house some operations that are currently located in facilities with leases expiring in 2009. Approximately 50,000 square feet, or approximately 20% of the available space in the two office buildings at the campus, are expected to be occupied by these operations.
Based on the current environment, initial estimates of value, and an 18 to 36 month marketing period, TSFG recorded an impairment charge of $15.9 million in second quarter 2009, which is included in noninterest expense. The fair value for the property was determined by estimating a range of values using limited market data on similar properties, adjusted for factors specific to TSFG’s corporate campus. In determining the impairment charge, the cost basis was reduced by the estimated net realizable value of state tax credits available to TSFG. At June 30, 2009, the carrying amount of the campus was $62.7 million. Management will continue to monitor market conditions and offered prices, and further write-downs could be required in future periods.
TSFG also recorded a $612,000 impairment loss (included in noninterest expense) from the write-down of the corporate jet which was classified as an asset held for sale in 2009. At June 30, 2009, the carrying amount of the corporate jet was $6.7 million, which was included in other assets. Subsequent to quarter-end, TSFG sold the corporate jet and recorded no significant gain or loss on the sale.
In addition, during second quarter 2009, TSFG recorded an $864,000 impairment loss (also included in noninterest expense) associated with vacated branches and office locations, primarily attributable to subletting office space at less than the contractual lease rate.
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Derivative Financial Instruments
Derivative financial instruments used by TSFG may include interest rate swaps, caps, collars, floors, options, futures and forward contracts. Derivative contracts are primarily used to hedge identified risks and also to provide risk-management products to customers. TSFG has derivatives that qualify for hedge accounting, derivatives that do not qualify for hedge accounting but otherwise achieve economic hedging goals (“economic hedges”), as well as derivatives that are used in trading and customer hedging programs. See Note 10 to the Consolidated Financial Statements for additional information regarding derivatives.
Deposits
Deposits remain TSFG’s primary source of funds. Average customer deposits equaled 64.1% of average total funding in the first half of 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.
| | | | | | | | | | |
Table 14 | | | | | | | | | | |
| | | | | | | | | | | |
Type of Deposits | | | | | | | | | | |
| | | | | | | | | | | |
(dollars in thousands) | | | | | | | | | | |
| | | | | | | | | | |
| | June 30, | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Noninterest-bearing demand deposits | | $ | 1,099,743 | | $ | 1,107,115 | | $ | 1,041,140 | |
Interest-bearing checking | | | 1,061,400 | | | 1,127,497 | | | 1,078,921 | |
Money market accounts | | | 1,978,114 | | | 2,162,599 | | | 1,834,115 | |
Savings accounts | | | 222,044 | | | 150,696 | | | 190,519 | |
| | | | | | | | | | |
Core deposits | | | 4,361,301 | | | 4,547,907 | | | 4,144,695 | |
Time deposits under $100,000 | | | 1,710,870 | | | 1,468,372 | | | 1,863,520 | |
Time deposits of $100,000 or more | | | 1,260,709 | | | 1,479,740 | | | 1,488,735 | |
| | | | | | | | | | |
Customer deposits (1) | | | 7,332,880 | | | 7,496,019 | | | 7,496,950 | |
Brokered deposits | | | 2,055,772 | | | 2,390,350 | | | 1,908,767 | |
| | | | | | | | | | |
Total deposits | | $ | 9,388,652 | | $ | 9,886,369 | | $ | 9,405,717 | |
| | | | | | | | | | |
| | | | | | | | | | |
Percentage of Deposits | | | | | | | | | | |
Noninterest-bearing demand deposits | | | 11.7 | % | | 11.2 | % | | 11.1 | % |
Interest-bearing checking | | | 11.3 | | | 11.4 | | | 11.5 | |
Money market accounts | | | 21.1 | | | 21.9 | | | 19.5 | |
Savings accounts | | | 2.4 | | | 1.5 | | | 2.0 | |
| | | | | | | | | | |
Core deposits | | | 46.5 | | | 46.0 | | | 44.1 | |
Time deposits under $100,000 | | | 18.2 | | | 14.8 | | | 19.8 | |
Time deposits of $100,000 or more | | | 13.4 | | | 15.0 | | | 15.8 | |
| | | | | | | | | | |
Customer deposits (1) | | | 78.1 | | | 75.8 | | | 79.7 | |
Brokered deposits | | | 21.9 | | | 24.2 | | | 20.3 | |
| | | | | | | | | | |
Total deposits | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | |
| |
(1) | TSFG defines customer deposits as total deposits less brokered deposits. |
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| | | | | | | | | | |
Table 15 | | | | | | | | | | |
| | | | | | | | | | | |
Type of Customer Funding | | | | | | | | | | |
| | | | | | | | | | | |
(dollars in thousands) | | | | | | | | | | |
| | | | | | | | | | |
| | June 30, | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Customer deposits (1) | | $ | 7,332,880 | | $ | 7,496,019 | | $ | 7,496,950 | |
Customer sweep accounts(2) | | | 330,765 | | | 536,642 | | | 493,012 | |
| | | | | | | | | | |
Customer funding | | $ | 7,663,645 | | $ | 8,032,661 | | $ | 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 June 30, 2009, period-end customer funding decreased $326.3 million from December 31, 2008, as increases in lower-cost core deposit categories generated by a deposit campaign during the first half of the year were more than offset by decreases in time deposits and customer sweep accounts. Public deposits totaled approximately $664 million at June 30, 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 ($293.0 million at June 30, 2009) and 2) uninsured Eurodollar deposits ($37.8 million at June 30, 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 increased as a percentage of total deposits since December 31, 2008 as TSFG replaced customer deposits and other sources of funding with brokered deposits.
Average customer funding equaled 67.7% of average total funding in the first six months of 2009 and 67.0% in the first six months of 2008. Period-end customer funding increased to 70.6% of total funding at June 30, 2009, compared to 68.1% at December 31, 2008, due primarily to the decline in wholesale borrowings attributable to the sales of loans and securities in second quarter 2009. As part of its overall funding strategy, TSFG expects to continue its focus on lowering its funding costs by trying to improve the customer funding level, mix, and rate paid. TSFG attempts to enhance its deposit mix by working to attract lower-cost transaction accounts through actions such as new transaction account opening goals, new checking products, and creating incentive plans to place a greater emphasis on lower-cost customer deposit growth. 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.
53
| | | | | | | | | | |
Table 16 | | | | | | | | | | |
| | | | | | | | | | | |
Type of Borrowed Funds | | | | | | | | | | |
| | | | | | | | | | | |
(dollars in thousands) | | | | | | | | | | |
| | | | | | | | | | |
| | June 30, | | December 31,
2008 | |
| | | | |
| | 2009 | | 2008 | | |
| | | | | | | |
Short-Term Borrowings | | | | | | | | | | |
Federal funds purchased and repurchase agreements | | $ | 25 | | $ | 169,074 | | $ | 67,309 | |
Customer sweep accounts | | | 330,765 | | | 536,642 | | | 493,012 | |
Federal Reserve borrowings | | | — | | | 500,000 | | | 1,050,000 | |
Commercial paper | | | — | | | 25,155 | | | 12,537 | |
Treasury, tax and loan note | | | 12,364 | | | 350,730 | | | 3,516 | |
| | | | | | | | | | |
Total short-term borrowings | | | 343,154 | | | 1,581,601 | | | 1,626,374 | |
| | | | | | | | | | |
| | | | | | | | | | |
Long-Term Borrowings | | | | | | | | | | |
Repurchase agreements | | | 125,000 | | | 200,000 | | | 200,000 | |
FHLB advances | | | 762,188 | | | 297,873 | | | 233,497 | |
Subordinated notes | | | 206,704 | | | 216,704 | | | 216,704 | |
Mandatorily redeemable preferred stock of subsidiary | | | 31,800 | | | 56,800 | | | 56,800 | |
Note payable | | | 743 | | | 791 | | | 768 | |
Purchase accounting premiums, net of amortization | | | — | | | 789 | | | — | |
| | | | | | | | | | |
Total long term borrowings | | | 1,126,435 | | | 772,957 | | | 707,769 | |
| | | | | | | | | | |
Total borrowings | | | 1,469,589 | | | 2,354,558 | | | 2,334,143 | |
Less: Customer sweep accounts | | | (330,765 | ) | | (536,642 | ) | | (493,012 | ) |
Add: Brokered deposits (1) | | | 2,055,772 | | | 2,390,350 | | | 1,908,767 | |
| | | | | | | | | | |
Total wholesale borrowings | | $ | 3,194,596 | | $ | 4,208,266 | | $ | 3,749,898 | |
| | | | | | | | | | |
| | | | | | | | | | |
Wholesale borrowings as a % of total assets | | | 25.4 | % | | 30.1 | % | | 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 the first six months of 2009, average borrowings totaled $2.2 billion, compared with $2.6 billion in the first six months of 2008.
Period-end wholesale borrowings decreased $555.3 million since December 31, 2008, primarily due to sales of loans and securities during second quarter 2009. During the six months ended June 30, 2009, TSFG also shifted into borrowings with remaining maturities of more than one year in order to strengthen liquidity.
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.
In April 2009, TSFG repurchased $25.0 million of mandatorily redeemable preferred stock of a REIT subsidiary (priced at LIBOR plus 350 basis points) included in long-term borrowings in Table 16 and recognized an $8.3 million gain on the extinguishment. In addition, TSFG terminated $75.0 million (4.3% rate) in long-term repurchase agreements, and recognized a loss on extinguishment of $5.4 million. In connection with the termination of the repurchase agreement, TSFG also sold U.S. government agency securities with a book value of approximately $120 million (3.6% yield) for a gain of $5.4 million.
Capital Resources and Dividends
Shareholders’ equity totaled $1.5 billion, or 12.0% of total assets, at June 30, 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 the first half of 2009, partially offset by the second quarter issuance of $75 million of common stock.
In June 2009, TSFG announced a capital plan (the “Capital Plan”) to bolster its common equity to cover the losses associated with a “more adverse” credit scenario used by the U.S. government in its recently completed
54
supervisory capital assessment program (“SCAP”) for the country’s 19 largest bank holding companies. In connection with this plan, TSFG issued $75 million of common equity in a public offering in June, with net proceeds of $69.9 million. (An additional $10 million was issued in July in connection with the exercise of the underwriters’ over-allotment, with net proceeds of $9.5 million.) Also in June, TSFG exchanged $94.5 million of the Series 2008 Convertible Preferred Stock for a new series of preferred stock, Series 2009-A Convertible Preferred Stock, which automatically converts into 24.0 million common shares (including 9.4 million shares valued at $14.0 million as an inducement to convert) upon shareholder approval. (Shareholder approval is expected to be obtained in third quarter 2009.) In addition, TSFG reduced its assets during second quarter 2009, partly by sales of indirect auto loans and shared national credits. Other provisions of the Capital Plan include exchanging common stock for the remaining $95.5 million of Series 2008 Convertible Preferred Stock, converting $20 to $30 million of certain TRUP and REIT preferred securities into common, and selling ancillary businesses. During second quarter 2009, TSFG contributed $150 million to its subsidiary bank to increase its capital.
In January 2009, 48,674 shares of our Series 2008 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. In total, during the six months ended June 30, 2009, deemed dividends to preferred shareholders resulting from induced conversions totaled $20.5 million for purposes of computing net loss available to common shareholders.
TSFG’s tangible equity to tangible asset ratio remained relatively stable at 10.27% at June 30, 2009, compared to 10.29% at December 31, 2008 primarily due to net losses in the first six months of 2009 being offset by proceeds from the common stock offering mentioned above and lower total assets. Tangible common equity to tangible assets was 6.07% at June 30, 2009, compared to 6.05% at March 31, 2009 and December 31, 2008. The common stock offering, lower total assets and the conversion of $48.7 million of the Series 2008 Convertible Preferred Stock helped to offset our net loss and dividends for the first half of 2009. Tangible common equity to tangible assets, assuming conversion of all Convertible Preferred Stock, was 7.60% at June 30, 2009, 7.84% at December 31, 2008, and 7.94% at June 30, 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.
Any remaining outstanding shares of Series 2008 Convertible Preferred Stock (95,526 shares at June 30, 2009) will convert into common shares by May 1, 2011 based on a 153.846 conversion ratio (14.7 million common shares at June 30, 2009).
TSFG’s unrealized gain on securities available for sale and cash flow hedges, net of tax, which is included in accumulated other comprehensive income, decreased to $41.1 million at June 30, 2009, compared with $42.6 million at December 31, 2008 due primarily to an increase in long-term interest rates.
Common book value per common share at June 30, 2009 and December 31, 2008 was $6.18 and $14.12, respectively. The decrease in common book value per common share was primarily due to the issuance of 75 million common shares and the net loss during the period. Common tangible book value per common share at June 30, 2009 and December 31, 2008 was $4.67 and $10.83, respectively. Tangible book value was below book value as a result of goodwill and intangibles associated with acquisitions of entities and assets accounted for as purchases. At June 30, 2009, goodwill totaled $221.7 million, or $1.38 per share, and is not being amortized, while other intangibles totaled $19.3 million and will continue to be amortized. TSFG expects common book value per common share and common tangible book value per common share to decline from the additional issuance of common shares associated with the Capital Plan mentioned above.
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 June 30, 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 June 30, 2009, trust preferred securities included in tier 1 capital totaled $200.5 million.
55
| | | | | | | | |
Table 17 | | | | | | | |
| | | | | | | | |
Capital Ratios | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | June 30, 2009 | | Well
Capitalized
Requirement | |
| | | | | | |
| TSFG | | | | | | | |
| Total risk-based capital | | 13.65 | % | | n/a | | |
| Tier 1 risk-based capital | | 12.36 | | | n/a | | |
| Leverage ratio | | 10.30 | | | n/a | | |
| | | | | | | | |
| Carolina First Bank | | | | | | | |
| Total risk-based capital | | 12.55 | % | | 10.00 | % | |
| Tier 1 risk-based capital | | 11.01 | | | 6.00 | | |
| Leverage ratio | | 9.17 | | | 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 $159 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.
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 federal and state 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 318 mandatorily redeemable preferred shares outstanding at June 30, 2009 with a stated value of $100,000 per share. At June 30, 2009, these preferred shares, which are reported as long-term debt on the consolidated balance sheet, totaled $31.8 million. Under Federal Reserve Board guidelines, $26.3 million qualified as tier 1 capital, and $2.2 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. In April 2009, TSFG repurchased $25.0 million of these preferred shares, of which 40% would have been included in tier 2 capital at June 30, 2009 (although the percent includable in tier 2 capital would have decreased to 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 and six months ended June 30, 2009 and 2008.
56
|
Table 18 |
| |
Comparative Average Balances - Yields and Costs |
| |
(dollars in thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | |
| | | |
| | 2009 | | 2008 | |
| | | | | |
| | Average
Balance | | Income/
Expense | | Yield/
Rate | | Average
Balance | | Income/
Expense | | Yield/
Rate | |
| | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | |
Earning assets | | | | | | | | | | | | | | | | | | | |
Loans (1) | | $ | 9,875,268 | | $ | 121,823 | | | 4.95 | % | $ | 10,458,571 | | $ | 158,016 | | | 6.08 | % |
Investment securities, taxable (2) | | | 1,680,893 | | | 18,140 | | | 4.32 | | | 1,799,907 | | | 20,591 | | | 4.58 | |
Investment securities, nontaxable (2) (3) | | | 246,001 | | | 3,188 | | | 5.18 | | | 299,350 | | | 3,814 | | | 5.10 | |
| | | | | | | | | | | | | | | | | | | |
Total investment securities | | | 1,926,894 | | | 21,328 | | | 4.43 | | | 2,099,257 | | | 24,405 | | | 4.65 | |
Federal funds sold and interest-bearing bank balances | | | 255 | | | — | | | — | | | 20,256 | | | 106 | | | 2.10 | |
| | | | | | | | | | | | | | | | | | | |
Total earning assets | | | 11,802,417 | | $ | 143,151 | | | 4.86 | | | 12,578,084 | | $ | 182,527 | | | 5.83 | |
| | | | | | | | | | | | | | | | | | | |
Non-earning assets | | | 1,283,139 | | | | | | | | | 1,290,065 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 13,085,556 | | | | | | | | $ | 13,868,149 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | | | | | | | | | | | | | | | | | | |
Interest-bearing checking | | $ | 1,036,339 | | $ | 724 | | | 0.28 | | $ | 1,120,716 | | $ | 2,683 | | | 0.96 | |
Savings | | | 208,856 | | | 472 | | | 0.91 | | | 152,023 | | | 304 | | | 0.80 | |
Money market | | | 1,924,037 | | | 6,726 | | | 1.40 | | | 2,104,322 | | | 11,822 | | | 2.26 | |
Time deposits, excluding brokered deposits | | | 3,067,471 | | | 26,581 | | | 3.48 | | | 2,997,131 | | | 29,172 | | | 3.91 | |
Brokered deposits | | | 1,954,201 | | | 15,038 | | | 3.09 | | | 2,081,224 | | | 19,199 | | | 3.71 | |
| | | | | | | | | | | | | | | | | | | �� |
Total interest-bearing deposits | | | 8,190,904 | | | 49,541 | | | 2.43 | | | 8,455,416 | | | 63,180 | | | 3.01 | |
Customer sweep accounts | | | 362,342 | | | 245 | | | 0.27 | | | 573,957 | | | 2,621 | | | 1.84 | |
Other borrowings (4) | | | 1,682,118 | | | 6,319 | | | 1.51 | | | 2,078,730 | | | 15,186 | | | 2.94 | |
| | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 10,235,364 | | | 56,105 | | | 2.20 | | | 11,108,103 | | | 80,987 | | | 2.93 | |
| | | | | | | | | | | | | | | | | | | |
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | | | 1,074,739 | | | | | | | | | 1,079,390 | | | | | | | |
Other noninterest-bearing liabilities | | | 235,432 | | | | | | | | | 185,275 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 11,545,535 | | | | | | | | | 12,372,768 | | | | | | | |
Shareholders’ equity | | | 1,540,021 | | | | | | | | | 1,495,381 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 13,085,556 | | | | | | | | $ | 13,868,149 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Net interest income (tax-equivalent) | | | | | $ | 87,046 | | | 2.96 | % | | | | $ | 101,540 | | | 3.24 | % |
Less: tax-equivalent adjustment (3) | | | | | | 1,116 | | | | | | | | | 1,335 | | | | |
| | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | $ | 85,930 | | | | | | | | $ | 100,205 | | | | |
| | | | | | | | | | | | | | | | | | | |
Supplemental data: | | | | | | | | | | | | | | | | | | | |
Customer funding (5) | | $ | 7,673,784 | | $ | 34,748 | | | 1.82 | % | $ | 8,027,539 | | $ | 46,602 | | | 2.33 | % |
Wholesale borrowings (6) | | | 3,636,319 | | | 21,357 | | | 2.36 | | | 4,159,954 | | | 34,385 | | | 3.32 | |
| | | | | | | | | | | | | | | | | | | |
Total funding (7) | | $ | 11,310,103 | | $ | 56,105 | | | 1.99 | % | $ | 12,187,493 | | $ | 80,987 | | | 2.67 | % |
| | | | | | | | | | | | | | | | | | | |
| |
(1) | Nonaccrual loans are included in average balances for yield computations. |
| |
(2) | The average balances for investment securities exclude the unrealized loss recorded for available for sale securities. |
| |
(3) | The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis. |
| |
(4) | During the three months ended June 30, 2009 and June 30, 2008, TSFG capitalized $288,000 and $332,000, respectively, of interest in conjunction with the construction of its planned corporate campus. See “Impairment of Long-Lived Assets” under “Balance Sheet Review.” |
| |
(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.
57
|
Table 18 (continued) |
| |
Comparative Average Balances - Yields and Costs |
| |
(dollars in thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | |
| | | |
| | 2009 | | 2008 | |
| | | | | |
| | Average
Balance | | Income/
Expense | | Yield/
Rate | | Average
Balance | | Income/
Expense | | Yield/
Rate | |
| | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | |
Earning assets | | | | | | | | | | | | | | | | | | | |
Loans (1) | | $ | 10,030,953 | | $ | 245,942 | | | 4.94 | % | $ | 10,347,045 | | $ | 329,244 | | | 6.40 | % |
Investment securities, taxable (2) | | | 1,767,043 | | | 38,688 | | | 4.38 | | | 1,774,664 | | | 40,983 | | | 4.62 | |
Investment securities, nontaxable (2) (3) | | | 256,243 | | | 6,625 | | | 5.17 | | | 312,834 | | | 7,957 | | | 5.09 | |
| | | | | | | | | | | | | | | | | | | |
Total investment securities | | | 2,023,286 | | | 45,313 | | | 4.48 | | | 2,087,498 | | | 48,940 | | | 4.69 | |
Federal funds sold and interest-bearing bank balances | | | 227 | | | 1 | | | 0.89 | | | 14,486 | | | 178 | | | 2.47 | |
| | | | | | | | | | | | | | | | | | | |
Total earning assets | | | 12,054,466 | | $ | 291,256 | | | 4.87 | | | 12,449,029 | | $ | 378,362 | | | 6.11 | |
| | | | | | | | | | | | | | | | | | | |
Non-earning assets | | | 1,265,076 | | | | | | | | | 1,407,498 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 13,319,542 | | | | | | | | $ | 13,856,527 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | | | | | | | | | | | | | | | | | | |
Interest-bearing checking | | $ | 1,083,635 | | $ | 1,589 | | | 0.30 | | $ | 1,138,067 | | $ | 7,336 | | | 1.30 | |
Savings | | | 202,948 | | | 1,001 | | | 0.99 | | | 154,435 | | | 731 | | | 0.95 | |
Money market | | | 1,919,010 | | | 14,505 | | | 1.52 | | | 2,148,913 | | | 28,455 | | | 2.66 | |
Time deposits, excluding brokered deposits | | | 3,133,084 | | | 55,448 | | | 3.57 | | | 2,975,248 | | | 62,823 | | | 4.25 | |
Brokered deposits | | | 1,930,136 | | | 31,841 | | | 3.33 | | | 2,008,073 | | | 40,941 | | | 4.10 | |
| | | | | | | | | | | | | | | | | | | |
Total interest-bearing deposits | | | 8,268,813 | | | 104,384 | | | 2.55 | | | 8,424,736 | | | 140,286 | | | 3.35 | |
Customer sweep accounts | | | 408,803 | | | 543 | | | 0.27 | | | 629,355 | | | 8,093 | | | 2.59 | |
Other borrowings (4) | | | 1,790,344 | | | 13,062 | | | 1.47 | | | 2,000,845 | | | 34,287 | | | 3.45 | |
| | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 10,467,960 | | | 117,989 | | | 2.27 | | | 11,054,936 | | | 182,666 | | | 3.32 | |
| | | | | | | | | | | | | | | | | | | |
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | | | 1,048,217 | | | | | | | | | 1,081,447 | | | | | | | |
Other noninterest-bearing liabilities | | | 233,099 | | | | | | | | | 189,964 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 11,749,276 | | | | | | | | | 12,326,347 | | | | | | | |
Shareholders’ equity | | | 1,570,266 | | | | | | | | | 1,530,180 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 13,319,542 | | | | | | | | $ | 13,856,527 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Net interest income (tax-equivalent) | | | | | $ | 173,267 | | | 2.89 | % | | | | $ | 195,696 | | | 3.16 | % |
Less: tax-equivalent adjustment (3) | | | | | | 2,319 | | | | | | | | | 2,785 | | | | |
| | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | $ | 170,948 | | | | | | | | $ | 192,911 | | | | |
| | | | | | | | | | | | | | | | | | | |
Supplemental data: | | | | | | | | | | | | | | | | | | | |
Customer funding (5) | | $ | 7,795,697 | | $ | 73,086 | | | 1.89 | % | $ | 8,127,465 | | $ | 107,438 | | | 2.66 | % |
Wholesale
borrowings (6) | | | 3,720,480 | | | 44,903 | | | 2.43 | | | 4,008,918 | | | 75,228 | | | 3.77 | |
| | | | | | | | | | | | | | | | | | | |
Total funding (7) | | $ | 11,516,177 | | $ | 117,989 | | | 2.07 | % | $ | 12,136,383 | | $ | 182,666 | | | 3.03 | % |
| | | | | | | | | | | | | | | | | | | |
| |
(1) | Nonaccrual loans are included in average balances for yield computations. |
| |
(2) | The average balances for investment securities exclude the unrealized loss recorded for available for sale securities. |
| |
(3) | The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis. |
| |
(4) | During the six months ended June 30, 2009, and June 30, 2008 TSFG capitalized $738,000 and $661,000, respectively, of interest in conjunction with the construction of its planned corporate campus. See “Impairment of Long-Lived Assets” under “Balance Sheet Review.” |
| |
(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. |
58
Fully tax-equivalent net interest income decreased to $173.3 million for the first six months of 2009 from $195.7 million for the first six months of 2008 primarily due to rate cuts during 2008. TSFG’s average earning assets were $12.1 billion for the first six months of 2009 compared to $12.4 billion for the first six months of 2008. Average loans as a percentage of average earning assets remained consistent at 83.2% for the first six months of 2009 compared to 83.1% for the first six months of 2008. At June 30, 2009, approximately 62% 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. Certain of these swaps with a notional amount of $805 million as well as the interest rate floor mature in the second half of 2009.
The net interest margin for the first half of 2009 was 2.89%, compared with 3.16% for the first half of 2008. Comparing the first half of 2009 to the first half of 2008, the yield on average earning assets decreased 124 basis points, primarily due to decreased loan yields, which were down 146 basis points. The decrease in earning asset yields was partially offset by a decrease in the average cost of funding of 96 basis points. Although rates on wholesale borrowings decreased 134 basis points, rates on customer funding decreased only 77 basis points as deposit pricing has effectively approached a floor on the absolute level for most non-maturity products.
Net interest income and the net interest margin have also been negatively impacted in 2008 and the first six months of 2009 by elevated levels of nonperforming assets and the reversal of accrued interest income as loans have been moved to nonaccrual status. For the first half of 2009, $7.5 million of interest income was reversed as the related loan was placed in nonaccrual status, which had an impact of approximately 13 basis points on the net interest margin. For the first half of 2008, the $5.0 million reversal of interest income on nonaccrual loans impacted the net interest margin by approximately 8 basis points.
Fully tax-equivalent net interest income for second quarter 2009 totaled $87.0 million, an increase of $825,000 from $86.2 million for first quarter 2009 and a decrease of $14.5 million from $101.5 million for second quarter 2008. The net interest margin for second quarter 2009 was 2.96%, compared to 2.83% for first quarter 2009 and 3.24% for second quarter 2008. This increase relative to first quarter 2009 was primarily due to higher rate certificates of deposit repricing downward upon renewal reflecting lower market rates. The decrease relative to second quarter 2008 was primarily due to rates on customer funding decreasing only 51 basis points compared to a decrease in earning asset yields of 97 basis points and a decrease in wholesale funding rates of 96 basis points. As mentioned above, deposit pricing has effectively approached a floor on the absolute level for most non-maturity products. For second quarter 2009, $3.4 million of interest income was reversed on loans moved to nonaccrual status, compared to $4.1 million for first quarter 2009 and $2.0 million for second quarter 2008.
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 $274.0 million in the first six months of 2009, compared to $137.1 million in the first six months of 2008. The higher provision largely reflected credit deterioration due to continued weakness in housing markets and additional specific reserves for nonperforming loans and land loans.
For second quarter 2009, the provision for credit losses totaled $131.3 million, compared to $142.6 million for first quarter 2009 and $63.8 million in second quarter 2008. Second quarter 2009 provision exceeded net loan charge-offs by $10.7 million.
Net loan charge-offs were $229.7 million, or 4.63% (annualized) of average loans held for investment, for the first six months of 2009, compared with $71.9 million, or 1.40% (annualized), for the first six months of 2008. The allowance for credit losses equaled 3.11% of loans held for investment as of June 30, 2009, compared to 2.45% and 1.85%, respectively, as of December 31, 2008 and June 30, 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.”
59
Noninterest Income
Table 19 shows the components of noninterest income.
|
Table 19 |
| |
Components of Noninterest Income |
| |
(dollars in thousands) |
| | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, | |
| | | | | |
| | 2009 | | 2008 | | 2009 | | 2008 | |
| | | | | | | | | |
Service charges on deposit accounts | | $ | 9,535 | | $ | 10,986 | | $ | 18,803 | | $ | 21,415 | |
Debit card income, net | | | 2,168 | | | 2,056 | | | 4,093 | | | 3,932 | |
Customer service fee income | | | 1,264 | | | 1,358 | | | 2,473 | | | 2,689 | |
| | | | | | | | | | | | | |
Total customer fee income | | | 12,967 | | | 14,400 | | | 25,369 | | | 28,036 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Insurance income | | | 1,765 | | | 2,388 | | | 4,222 | | | 5,448 | |
Retail investment services, net | | | 1,646 | | | 2,120 | | | 3,656 | | | 3,666 | |
Trust and investment management income | | | 1,495 | | | 1,857 | | | 2,960 | | | 3,523 | |
Benefits administration fees | | | 571 | | | 734 | | | 1,213 | | | 1,490 | |
| | | | | | | | | | | | | |
Total wealth management income | | | 5,477 | | | 7,099 | | | 12,051 | | | 14,127 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Bank-owned life insurance income | | | 2,560 | | | 2,910 | | | 5,062 | | | 6,057 | |
Mortgage banking income | | | 2,050 | | | 1,858 | | | 3,255 | | | 3,343 | |
Gain on certain derivative activities | | | 1,085 | | | 236 | | | 2,220 | | | 248 | |
Merchant processing income, net | | | 817 | | | 809 | | | 1,427 | | | 1,666 | |
Gain on securities | | | 4,580 | | | 1,876 | | | 1,626 | | | 2,272 | |
Gain on Visa IPO share redemption | | | — | | | — | | | — | | | 1,904 | |
Other | | | 2,736 | | | 2,999 | | | 5,003 | | | 5,637 | |
| | | | | | | | | | | | | |
Total noninterest income | | $ | 32,272 | | $ | 32,187 | | $ | 56,013 | | $ | 63,290 | |
| | | | | | | | | | | | | |
Noninterest income decreased to $56.0 million in the first six months of 2009 from $63.3 million in the first six months of 2008, reflecting decreases in most categories. 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 2.6% in the first six months of 2009. Mortgage loans originated by TSFG originators totaled $201.9 million and $174.1 million in the first six months of 2009 and 2008, respectively. Gain on certain derivative activities increased $2.0 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. During the first half of 2009, gain on securities included a $5.4 million gain on the sale of U.S. government agency securities, partially offset by $3.8 million in other-than-temporary impairment on certain community bank-related equity securities and other privately held investments included in other assets.
For second quarter 2009, noninterest income totaled $32.3 million, compared to $23.7 million for first quarter 2009 and $32.2 million for second quarter 2008. Comparing second quarter 2009 to first quarter 2009, the increase was primarily due to a $7.5 million favorable swing in the gain/loss on securities line item, reflecting the gain on the sale of U.S. government agency securities in second quarter combined with other-than-temporary impairment charges in first quarter 2009. In addition, mortgage banking income increased by 70.1% as mortgage loans originated by TSFG originators totaled $126.6 million and $75.3 million in second quarter 2009 and first quarter 2009, respectively. Comparing second quarter 2009 to second quarter 2008, decreases in most line items were offset by increases in gain on certain derivative activities and gain on securities, reflecting the derivative and securities transactions mentioned above.
In July 2009, TSFG sold its subsidiary American Pensions, Inc., which will effectively eliminate benefits administration fee income in future periods.
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Noninterest Expenses
Table 20 shows the components of noninterest expenses.
|
Table 20 |
| |
Components of Noninterest Expenses |
| |
(dollars in thousands) |
| | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, | |
| | | | | | | |
| | 2009 | | 2008 | | 2009 | | 2008 | |
| | | | | | | | | |
Salaries and wages, excluding employment contracts and severance | | $ | 34,739 | | $ | 36,136 | | $ | 69,930 | | $ | 70,989 | |
Employment contracts and severance | | | 829 | | | 2,299 | | | 829 | | | 2,299 | |
| | | | | | | | | | | | | |
Total salaries and wages | | | 35,568 | | | 38,435 | | | 70,759 | | | 73,288 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Employee benefits | | | 8,925 | | | 9,113 | | | 17,848 | | | 18,411 | |
Impairment of long lived assets | | | 17,376 | | | — | | | 17,376 | | | — | |
Occupancy | | | 9,506 | | | 8,972 | | | 18,942 | | | 17,595 | |
Furniture and equipment | | | 6,801 | | | 6,733 | | | 13,746 | | | 13,116 | |
Loss (gain) on other real estate owned | | | 12,873 | | | (3 | ) | | 12,997 | | | 184 | |
Loan collection and foreclosed asset expense | | | 7,247 | | | 2,303 | | | 12,138 | | | 3,382 | |
Loss on nonmortgage loans held for sale | | | 9,461 | | | — | | | 11,299 | | | — | |
Regulatory assessments | | | 6,479 | | | 2,374 | | | 11,134 | | | 4,451 | |
FDIC special assessment | | | 5,700 | | | — | | | 5,700 | | | — | |
Professional services | | | 4,351 | | | 3,579 | | | 8,858 | | | 7,106 | |
Project NOW expense | | | 281 | | | — | | | 1,579 | | | — | |
Advertising and business development | | | 2,109 | | | 2,731 | | | 3,390 | | | 5,202 | |
Telecommunications | | | 1,551 | | | 1,476 | | | 3,077 | | | 2,899 | |
Amortization of intangibles | | | 1,286 | | | 1,589 | | | 2,577 | | | 3,247 | |
Goodwill impairment | | | 2,511 | | | — | | | 2,511 | | | 188,431 | |
Loss on repurchase of auction rate securities | | | — | | | — | | | 676 | | | — | |
(Gain) loss on early extinguishment of debt | | | (2,991 | ) | | (83 | ) | | (3,043 | ) | | 464 | |
Branch acquisition and conversion costs | | | — | | | 731 | | | — | | | 731 | |
Visa-related litigation | | | — | | | — | | | — | | | (863 | ) |
Other | | | 7,154 | | | 9,667 | | | 14,865 | | | 18,339 | |
| | | | | | | | | | | | | |
Total noninterest expenses | | $ | 136,188 | | $ | 87,617 | | $ | 226,429 | | $ | 355,983 | |
| | | | | | | | | | | | | |
Noninterest expenses decreased to $226.4 million in the first six months of 2009 from $356.0 million in the first six months of 2008. 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 the first six months of 2009 to the first six months of 2008, salaries and wages and employee benefits decreased $3.1 million, as full-time equivalent employees declined to 2,345 at June 30, 2009 from 2,572 at June 30, 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 $6.7 million based in part on TSFG’s participation in the Temporary Liquidity Guarantee Program related to noninterest-bearing
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deposit accounts and across-the-board rate increases designed to replenish the FDIC’s Deposit Insurance Fund. TSFG also recorded an FDIC special assessment charge of $5.7 million in the second quarter 2009. In addition to the special assessment during second quarter 2009, the FDIC could continue to raise assessment rates. Credit-related expenses (including loan collection and foreclosed asset expense, loss on nonmortgage loans held for sale, and loss on other real estate owned) increased $32.9 million due to the current credit environment, and may continue to increase.
During the first half of 2009, TSFG recognized impairment charges of $17.4 million on its planned campus facility ($15.9 million), corporate jet ($612,000), and vacated branches and office locations ($864,000) (see “Impairment of Long-Lived Assets”), as well as a $2.5 million goodwill impairment charge related to non-banking subsidiaries (see “Goodwill”). During the first six months of 2009, TSFG recognized a net gain on early extinguishment of debt of $3.0 million, primarily due to gain on the repurchase of $25.0 million of mandatorily redeemable preferred stock of a REIT subsidiary, partially offset by a loss on termination of $75.0 million of long-term repurchase agreements (see “Borrowed Funds”). Also during the first six months of 2009, TSFG repurchased $5.8 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 the first six months of 2009 to adjust these securities to estimated fair value (see “Securities”).
For second quarter 2009, noninterest expenses totaled $136.2 million, compared to $90.2 million for first quarter 2009 and $87.6 million for second quarter 2008. Comparing second quarter 2009 to first quarter 2009, credit-related expenses (including loan collection and foreclosed asset expense, loss on nonmortgage loans held for sale, and loss on other real estate owned) increased $22.7 million. This increase principally stemmed from higher losses on other real estate owned from reappraisals and a policy change to write properties down to 70% of appraised value (see “Other Real Estate Owned”) and higher losses on nonmortgage loans held for sale largely due to the write-down and transfer of one loan to OREO. In addition, FDIC insurance premiums, including the special assessment, increased $7.5 million. Also in second quarter 2009, TSFG recognized the impairment charges on long-lived assets ($17.4 million) and goodwill ($2.5 million) mentioned in the previous paragraph. Comparing second quarter 2009 to second quarter 2008, the increase was primarily due to credit-related expenses, regulatory assessments, and impairment charges mentioned above.
Income Taxes
The effective income tax benefit as a percentage of pretax income was 39.9% and 40.0%, respectively, for the three and six months ended June 30, 2009. Income tax benefit differed from the amount computed by applying TSFG’s statutory U.S. federal income tax rate of 35% to pretax loss for the three and six months ended June 30, 2009 primarily due to the impact of permanent tax preference items and credits. The effective income tax benefit as a percentage of pretax loss was 42.4% and 10.4%, respectively, for the three and six months ended June 30, 2008. Income tax benefit differed from the amount computed by applying TSFG’s statutory U.S. federal income tax rate of 35% to pretax income for the three and six months ended June 30, 2008 primarily as a result of the impact of the nondeductible goodwill impairment, other nontaxable and nondeductible items, and management’s projections.
On an ongoing basis, TSFG evaluates its deferred tax assets for realizability (see “Critical Accounting Policies and Estimates – Income Taxes”). As of June 30, 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 June 30, 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:
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| |
• | 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 June 30, 2009, and 2008 levels, respectively.
| | | | | | | | |
Table 21 | | | | | | |
| |
Net Interest Income at Risk Analysis |
| |
Interest Rate Scenario (1) | | | Annualized Hypothetical Percentage Change in
Net Interest Income
June 30, |
| | | |
| | | | 2009 | | 2008 | |
| | | | | | | |
2.00 | % | | | | 3.2 | % | 1.7 | % |
1.00 | | | | | 1.6 | | 1.0 | |
Flat | | | | | — | | — | |
(1.00 | ) (2) | | | | n/a | | (1.1 | ) |
(2.00 | ) (2) | | | | n/a | | (2.5 | ) |
| |
(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 June 30, 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 June 30, 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 June 30, 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
June 30, |
| | | | |
| | | | | 2009 | | 2008 | |
| | | | | | | | |
2.00 | % | | | | (10.1 | )% | (7.7 | )% |
1.00 | | | | | (4.1 | ) | (2.8 | ) |
Flat | | | | | — | | — | |
(1.00 | ) (2) | | | | n/a | | 1.7 | |
(2.00 | ) (2) | | | | n/a | | (1.2 | ) |
| |
(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 June 30, 2009. |
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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. |
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 11 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 10 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
64
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 $2.6 billion of time deposits maturing over the remainder of 2009, with maturities of customer and brokered CDs accounting for $1.8 billion and $731.9 million, respectively. We expect to replace maturing customer CDs through ongoing efforts to grow customer deposits and various deposit campaigns, replacing any shortfall through wholesale borrowings. We anticipate replacing brokered CD maturities through 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 regulatory capital, including trust preferred securities and subordinated debt. During the six months ended June 30, 2009, TSFG shifted into borrowings with remaining maturities of more than one year in order to strengthen liquidity. 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 June 30, 2009, we had $4.0 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.
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 June 30, 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 June 30, 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 | | $ | 5,027,351 | | $ | 2,558,622 | | $ | 2,239,736 | | $ | 165,857 | | $ | 63,136 | |
Short-term borrowings | | | 343,154 | | | 343,154 | | | — | | | — | | | — | |
Long-term debt | | | 1,126,435 | | | 8,835 | | | 450,368 | | | 431,359 | | | 235,873 | |
Operating leases | | | 174,251 | | | 8,564 | | | 33,735 | | | 30,308 | | | 101,644 | |
Expanded corporate facilities contracts | | | 8,044 | | | 8,044 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
Total contractual obligations | | $ | 6,679,235 | | $ | 2,927,219 | | $ | 2,723,839 | | $ | 627,524 | | $ | 400,653 | |
| | | | | | | | | | | | | | | |
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 June 30, 2009 totaled $762.2 million. At June 30, 2009, TSFG had $293.2 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,
65
repurchase agreements, FHLB advances, Federal Reserve borrowings, TT&L notes, and the principal run-off of investment securities. At June 30, 2009, TSFG had unused short-term lines of credit totaling $138.7 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.
A collateralized borrowing relationship with the Federal Reserve Bank of Richmond is in place for Carolina First Bank. At June 30, 2009, TSFG had qualifying collateral to secure advances up to $2.3 billion, of which none 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.
At June 30, 2009, the parent company had $104.5 million in cash and cash equivalents, which was available for payment of dividends and interest on capital instruments, unless required as capital support for Carolina First Bank. During second quarter 2009, the parent company’s obligations for dividends and interest on capital instruments totaled approximately $10 million. In addition, during second quarter 2009, the parent company contributed $150.0 million to Carolina First Bank.
During second quarter 2009 and in July 2009, several rating agencies lowered the credit ratings for TSFG and/or Carolina First Bank. These ratings changes did not have a material impact on TSFG’s liquidity given that, 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 June 30, 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.
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| |
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 June 30, 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 June 30, 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 June 30, 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. Subsequent to the Agreement in Principle, the parties to the Litigation agreed to the following documents, which were filed by TSFG as exhibits to a Current Report on Form 8-K dated April 2, 2009: the Stipulation of Compromise and Settlement dated March 31, 2009 (the “Stipulation”), the Joint Motion for Preliminary Approval of Proposed Settlement, the Preliminary Order Approving Settlement and Notice dated April 1, 2009 and the Notice of Pendency of Actions and Pendency of Settlement Hearing. These four documents are collectively referred to herein as the “Settlement Agreements”. The provisions in the Settlement Agreements were not to become effective until there was a final non-appealable order affirming their provisions.
On May 21, 2009, a confirmatory hearing with respect to the Settlement Agreements occurred before The Honorable Edward W. Miller of the South Carolina State Court of Common Pleas, which resulted in a Final Order and Judgment of Judge Miller, which among other things, affirmed the Stipulation (the “Final Order”). The time for appealing of the Final Order expired on July 1, 2009, and the fact that there were no appeals regarding the Final Order was confirmed by counsel for plaintiffs and defendants on July 7, 2009. Accordingly, the parties to the Litigation have proceeded to implement the provisions in the Settlement Agreements. For additional details, refer to TSFG’s Current Report on Form 8-K dated July 13, 2009. Subsequent to quarter-end, and in accordance with the provisions of the Settlement Agreements, Mack I. Whittle, Jr. resigned from the TSFG Board of Directors, and Donald T. Heroman was appointed as a TSFG director.
In addition, see Note 11 to the Consolidated Financial Statements for a discussion of ongoing legal proceedings.
With the exception of the following risk factor, 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.
The NASDAQ’s temporary suspension of its listing requirement that companies have a minimum bid price of $1 per share expired on July 31, 2009. In October 2008, the NASDAQ Stock Market temporarily suspended its listing requirement that requires companies to have a minimum bid price of $1 per share through July 31, 2009. NASDAQ rules classify a security as “deficient” if it has a closing bid price of less than $1 per share for thirty consecutive business days. Once deficient, issuers have an automatic 180-day period to regain compliance by having a closing bid price of at least $1 per share for ten consecutive business days, and can receive an additional 180 days if all other listing requirements are met. If we do not meet this standard, liquidity in our stock could be materially and adversely affected.
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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 June 30, 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) | |
| | | | | | | | | | | |
April 1, 2009 to April 30, 2009 | | | 105 | (1) | $ | 1.97 | | | — | | $ | — | |
May 1, 2009 to May 31, 2009 | | | 1,035 | (1) | | 1.80 | | | — | | | — | |
June 1, 2009 to June 30, 2009 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
Total | | | 1,140 | | $ | 1.82 | | | — | | $ | — | |
| | | | | | | | | | | | | |
| |
(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. |
On June 24, 2009, 21,852 shares of Preferred Stock Series 2008ND-V were exchanged for 21,852 shares of Preferred Stock Series 2009-A and 72,648 shares of Preferred Stock Series 2008ND-NV were exchanged for 72,648 shares of Preferred Stock Series 2009-A. This exchange of preferred 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.
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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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3.1 | Amended and Restated Articles of Incorporation, as amended |
| |
3.2 | Amended and Restated Bylaws, as amended |
| |
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 June 30, 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: August 7, 2009 | /s/ James R. Gordon | |
| | |
| James R. Gordon |
| Senior Executive Vice President and |
| Chief Financial Officer |
| (Principal Financial Officer) |
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