TSFG records second year of losses

By Dick Hughes  

JANUARY 29, 2010 10:07 a.m. (0)

Stumbling under the weight of soured loans in the Carolinas and Florida, The South Financial Group finished 2009 with a second year of losses and expressed doubt that profitability will return this year.

The Greenville-based parent of Carolina First and Mercantile Bank of Florida reported a loss of $194 million for the 4^th quarter and $737 million for the year.  In 2008, the bank lost $319 million in the comparable quarter and $569 million for the year.

“I would say that in 2010 the losses will be less, but it is still going to be very difficult,” said James Gordon, chief financial officer, in an interview Tuesday after 4^th quarter results were released.

“The ability to be profitable really hinges on how fast the economy really does recover.  I think it has extended out further than I would have thought a year ago.  As we see that play out, I think it will be 2011 before you can be poised for profitability.”

Gordon said one of the points that need to be stressed is that Carolina First and Mercantile are “still making loans.  We’re still supporting our local communities through lending activities.”

He cited recent creation of a division to make loans under the Small Business Administration and designation of the banks as preferred SBA lenders.

The first two loans granted under this program were to close this week, Gordon said, adding that they are the kind of loans in the $1-2 million range the Obama administration asked banks to increase to help small businesses.

Even as the bottom-line continued to suffer, TSFG reported positive trends in two consecutive quarters of declines in nonperforming loans; lower charge-offs of bad loans; five quarters of increases in core deposits; ongoing cuts in expenses not related to loans; and a slight improvement in net interest margin.

“It’s not what we want,” said Lynn H. Harton, president and chief executive officer, of the financial state of the bank.

“But the best news is moderation of credit costs and the fact that it not just us. So, knock on wood, if that truly is a trend and we don’t have a double dip (recession) that’s really good for everybody, good for us.”

To conserve cash and shore up capital against future losses, TSFG suspended dividends on the $347 million in preferred shares it sold to the U.S. Treasury under the Troubled Asset Relief Program, on $200 million in trust preferred securities and on $30 million in noncumulative preferred.

By suspending the dividends, each quarter the holding company preserves $4.5 million in capital and $6.1 million in cash to “put capital into the bank as needed.”

Under TARP rules, Gordon said, the bank is allowed to defer payment of the annual 5 percent dividend to Treasury, though it eventually will have to “catch that back up so it is not gone forever.”

He said TSFG also will have to catch up with dividends on the cumulative preferred trust accounts but the dividend on the noncumulative preferred “is forever gone.”

Harton and Gordon stressed that TSFG’s capital ratios – measures of the company’s cushion against loan losses – exceed what the government requires to be “well capitalized.”  Still, TSFG’s Tier 1 total risk-based capital ratio fell to 11.24 percent in the fourth quarter from 12.49 at the end of the third. Regulators want an 11 percent ratio in these hard times.

Gordon said TSFG continues to spend “a significant amount of time” on developing a comprehensive plan to raise more capital, an effort TSFG announced in November

“It’s taken longer than we thought,” he said.  “It’s gotten more complex with more moving parts, and the continued uncertainty with the economy makes capital less flowing, if you will.”

Among options being considered were converting some portion of the $347 million in TARP shares into common stock, which would give the government an ownership position; converting trust preferred shares to common, which requires private exchanges; issuing a public offering of more common shares; or some combination.

Converting preferred shares to common builds tangible capital because common shares are hard equity and preferred shares are more like debt.

Wall Street was disappointed by TSFG’s fourth quarter results. Wall Street was disappointed by TSFG’s fourth quarter results.  In the first three hours of trading on NASDAQ Wednesday, the first trading day after the report was issued, TSFG stock was selling more than 30 percent lower at below 50 cents a share. Trading volume in the sell-off was heavy.  Nearly 26 million shares traded hands by noon; the average volume for a full day has been 4.5 million shares.

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