No profits yet for TSFG

By Dick Hughes  

APRIL 21, 2010 10:01 a.m. (0)

Carolina First’s losses eased in the first three months of the year, but with no expectation of profit until 2011. The bank needs a major cash infusion and expects bank regulators to insist on it.

The South Financial Group, parent of Carolina First and Mercantile Bank in Florida, Tuesday reported a first quarter loss of $85.8 million, or 40 cents per share, which was 9 cents less than expected in a consensus of Wall Street analysts. The bank lost $194 million, or 90 cents a share, in the prior quarter.

H. Lynn Harden, president and chief executive officer, was “encouraged that our loss this quarter was an improvement over previous quarters” but said with additional losses expected through 2010 the bank will “need to raise additional capital.”

Within 30 days, TSFG will enter into agreements with the FDIC and the Federal Reserve to do just that, according to James Gordon, chief financial officer.

“It is going to require capital in excess of the wall-capitalized thresholds,” he said in an interview. “We would be required in some period of time to get to the thresholds they would require.

“Largely, that will be the only financial piece of it. The rest will be the things we already are doing: reducing our problem loans, maintaining adequate liquidity, making sure we are grading our loans properly” and seeking capital investments.

“While they know those are the things we are doing today, this is the stake that holds you to all of that,” Gordon said.

The higher government regulations will come in a consent order from the FDIC and a memorandum of understanding from the Federal Reserve.

Gordon said the higher capital requirements will have the benefit of giving potential private investors a clearer picture of what kind of money the company needs to not just get through the down times but put the bank on surer footing when profit returns.

“The last thing they want to do is put in hundreds of millions of capital and six months later you need more capital. They would always prefer it to be X plus Y to make sure they are the last dollar in.”

In seeking private investors, Gordon said, the company has “spent a fair amount of time in the last 120 days or longer talking to those parties and discussing operations of the company and what the outlook is.”

He could not be specific in describing the parties but said “generically, the likely investors would be private equity firms, ‘blind pools,’ hedge funds and/or strategic buyers.”

The privately placed investments most likely would be in the form of common stock.  The company has asked shareholders to approve quadrupling allowable common shares to 1.35 billion and give the board authority to enact a reverse stock split.  Shareholders meet May 18 in Greenville.

The agreements with regulators on capital and potential of private investment also is linked to re-jiggering the $347 million in TSFG preferred shares held by U.S. Treasury under the TARP bailout.

A conversion of some or all of the preferred shares to common would boost TSFG’s capital ratios because common shares are equity while preferred are considered more like debt and require a 5 percent dividend, which, in TSFG’s case, has been suspended, though it accumulates.

Gordon said “most investors would like something done” with TARP and, at the same time, Treasury insists that banks raise capital on their own as a condition of any recapitalization of its investment.

“We’ve had discussions with Treasury in the context of all of those things, but in more general terms” because negotiations with the private investors are unsettled, he said.  It’s a chicken and egg conundrum.

“So which one do you do first or do you do them simultaneously.  If you could jointly announce all of that, that would be the ideal situation ... but you don’t always deal with the optimal.”

At the end of March, TSFG’s total risk-based ratio was 10.83 percent, which is above the 10 percent ratio normally required in stable economies but below the $11 for every $100 in a risk-based loan that regulators want banks to have in this troubled-loan environment.

In light of TSFG’s exposure to additional loan losses, Gordon expects the FDIC to demand the bank raise enough capital to get the ratio back to 11 or as high as 12.

In positive trends in the first quarter, the bank said nonperforming loans declined for the third consecutive quarter to $374 million, net charge-offs declined from $143 million to $88 million, noninterest expenses declined by $17 million and customer deposits rose $455 million to $7.8 billion.

As an indication of its underlying, the bank points to excess cash reserves and unpledged securities totaling $2.2 billion, a “significant increase of $743 million, or 53 percent,” above Dec. 31.

“You want that reserve to be strong because that is your first line of defense,” said Gordon.

TSFG has suffered nine consecutive quarters of losses since the credit and housing meltdown hit in late 2007.  It remains South Carolina’s largest financial company with $12.4 billion in assets and 176 branches in North and South Carolina and Florida.