South Financial may convert shares to common

By Dick Hughes  

DECEMBER 17, 2009 4:23 p.m. (0)

The South Financial Group is considering asking the U.S. Treasury to convert some its $347 million in TARP preferred shares into common, which, if it happens, would give the government a direct ownership stake in the bank.

Converting preferred shares to common would allow TSFG to record the shares as capital since common shares are a marketable asset whereas preferred shares, which carry a 5 percent dividend annually, are more like a loan and recorded as debt. No additional cash is exchanged.

Such a transaction would have to win the approval of bank regulators and Treasury.

Treasury did this with Citibank, which Monday announced it was buying back $20 billion in preferred TARP shares and working with the government to sell in bunches the $25 billion Treasury holds in Citibank common shares. This would liquidate in stages the government’s 34 percent ownership of Citibank.

Also this week, TSFG announced that Darla D. Moore has resigned as director effective Dec. 31. Moore, 55, who was elected to the board in 2005, is the company’s highest profile director.

In her resignation letter, Moore said the press of other commitments drove her decision.

“Please understand that this has nothing to do with my level of support for TSFG or Carolina first Bank, and I certainly wish the company nothing but the best, particularly as it traverses these difficult economic times.”

While at Chemical Bank in New York, the Lake City native became the finance industry’s most successful expert in bankruptcy financing and eventually became the highest paid woman in banking. She was the first woman to command a Fortune magazine cover.

A multimillionaire in her own right, Moore is married to Texas financier Richard Rainwater, whose wealth is reported by Forbes to be $3 billion.

She has donated $70 million to The University of South Carolina business school, which carries her name and is the only business school in the nation named for a woman.

Her resignation leaves only one woman, Challis M. Lowe, on the 14-member board. Lowe, who was named to the board in 2006, was executive vice president for human resources of Dollar General Corp. until resigning last year.

Lowe, 63, is now senior vice president of HR for Ascension Health of St. Louis, Mo., the nation’s largest Catholic and nonprofit health care system.

The conversion of Treasury’s preferred shares is one of the approaches the financial holding company is evaluating to increase tangible capital on its books and convince investors and regulators it has the wherewithal to withstand more losses from loans gone bad.

Despite 18 months of aggressively foreclosing, writing off and selling at a discount nonperforming loans at Carolina First and, most especially, at Mercantile Bank in Florida, TSFG still had $432 million in bad loans sitting on its books as of Sept. 30. TSFG has reported $1.1 billion in losses since January 2008.

On Dec. 4, Nasdaq notified TSFG that it was not in compliance with its Global Select Market rule to maintain a minimum bid price of $1. The notification of potential delisting came after TSFG’s per share price was below $1 for 30 consecutive trading days.

Being in noncompliance does not immediately affect TSFG’s listing on the market, and trading continues as before.

But if the share price does not meet the minimum after a grace period of 180 days -- and potentially another 180-day reprieve after that – TSFG could be delisted from the global market. A smaller Nasdaq market would be available for application.

“This is a technical requirement of the Nasdaq stock market, and we’ll likely have close to a year to resolve it,” said Chief Financial Officer James Gordon in a statement.

TSFG’s stock price fell below $1 on Oct. 22 and has bounced around 60 cents since. The price began to decline after TSFG revealed a third-quarter loss of $341 million, which included writing off $200 million that had been booked as a tax deduction against profit, which will not materialize this year. The bank can use those deferred tax credits against profits in future years.

TSFG anticipated the tax accounting devaluation and continuing losses would create market problems for its stock, even though its underlying Tier I capital position was not affected and remains well above regulatory minimums.

But the tax issue and loan losses reduced TSFG’s tangible equity to tangible assets to 5.25 percent as of Sept. 30 from 6.05 percent at the beginning of the year. This ratio is stripped of all but the most liquid assets.

In a Securities and Exchange 10-Q financial summary, TSFG recognized the threat to stock value saying: “While management believes its regulatory ratios, which were not impacted by the valuation allowance, are satisfactory, the tangible common equity ratio is important to investors, debt rating agencies, and others.”

To address it, TSFG said, it was “in the process of evaluating various alternatives to increase tangible common equity through the conversion of certain debt and non-common equity instruments into stock or the issuance of additional equity in public or private offerings.”

The only non-common equity instruments TSFG still holds are the $347 million in the preferred shares held by Treasury and $200 million in trust preferred shares. The shares in trust, like the TARP shares, are recorded on the books as debt. They would have to be converted in private transactions.

In June, it completed conversion to common the $250 million in preferred shares it sold to private investors on the open market in spring of 2008. The company also netted $79 million in a public offering of common shares.

In all, including sale of some ancillary businesses, TSFG said it contributed $190 million to increase the capital of Carolina First and Mercantile Bank during the first nine months of 2009.

These steps strengthened capital but came at the price of further dilution of the per-share value of existing shareholders. Since the recession began two years ago, TSFG’s outstanding shares have nearly tripled to 215 million. On Jan. 2, 2008, TSFG closed at $15.08; last Friday it closed at 60 cents.

In her resignation letter, Moore said the press of “other commitments” drove her decision to step down from the TSFG board.

“Please understand that this has nothing to do with my level of support for TSFG or Carolina first Bank, and I certainly wish the company nothing but the best, particularly as it traverses these difficult economic times.”

Her resignation leaves only one woman, Challis M. Lowe, on the 14-member board. Lowe, who was named to the board in 2006, was executive vice president for human resources of Dollar General Corp. until resigning last year.

Lowe, 63, is now senior vice president of HR for Ascension Health of St. Louis, Mo., the nation’s largest Catholic and nonprofit health care system.