10-Q 1 form10q-09302009.htm FOR QUARTER ENDED SEPTEMBER 30, 2009


 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-Q

 

 

(Mark One)

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2009

 

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from____ to____

 

 

Commission file number 0-15083

 

The South Financial Group, Inc.
(Exact Name of Registrant as Specified in Its Charter)


 

 

 

South Carolina

 

57-0824914

(State or Other Jurisdiction of

 

(IRS Employer Identification No.)

Incorporation or Organization)

 

 

 

 

 

102 South Main Street, Greenville, South Carolina

 

29601

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

 

(864) 255-7900
Registrant’s telephone number, including area code

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

 

Large Accelerated Filer o

              Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x.

The number of outstanding shares of the issuer’s $1.00 par value common stock as of November 3, 2009 was 215,449,549.




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,
2008

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

418,585

 

$

176,293

 

$

292,219

 

Interest-bearing bank balances

 

 

124

 

 

35

 

 

166

 

Securities

 

 

 

 

 

 

 

 

 

 

Available for sale, at fair value

 

 

2,079,394

 

 

1,995,681

 

 

2,107,194

 

Held to maturity (fair value $140,514, $24,566, and $23,048, respectively)

 

 

138,277

 

 

24,518

 

 

22,709

 

 

 

   

 

   

 

   

 

Total securities

 

 

2,217,671

 

 

2,020,199

 

 

2,129,903

 

 

 

   

 

   

 

   

 

Loans held for sale (includes $0, $14,334, and $14,681, respectively, measured at fair value)

 

 

8,071

 

 

37,575

 

 

30,963

 

Loans held for investment

 

 

8,874,234

 

 

10,299,640

 

 

10,192,072

 

Less: Allowance for loan losses

 

 

(339,536

)

 

(200,748

)

 

(247,086

)

 

 

   

 

   

 

   

 

Net loans held for investment

 

 

8,534,698

 

 

10,098,892

 

 

9,944,986

 

 

 

   

 

   

 

   

 

Premises and equipment, net

 

 

272,732

 

 

274,258

 

 

282,472

 

Accrued interest receivable

 

 

37,549

 

 

51,207

 

 

50,388

 

Goodwill

 

 

213,797

 

 

461,458

 

 

224,161

 

Other intangible assets, net

 

 

16,809

 

 

23,112

 

 

21,859

 

Other assets

 

 

580,756

 

 

552,149

 

 

625,209

 

 

 

   

 

   

 

   

 

Total assets

 

$

12,300,792

 

$

13,695,178

 

$

13,602,326

 

 

 

   

 

   

 

   

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing retail and commercial deposits

 

$

1,091,439

 

$

1,022,632

 

$

1,041,140

 

Interest-bearing retail and commercial deposits

 

 

6,298,309

 

 

6,412,343

 

 

6,455,810

 

 

 

   

 

   

 

   

 

Total retail and commercial deposits

 

 

7,389,748

 

 

7,434,975

 

 

7,496,950

 

Brokered deposits

 

 

2,099,040

 

 

2,573,833

 

 

1,908,767

 

 

 

   

 

   

 

   

 

Total deposits

 

 

9,488,788

 

 

10,008,808

 

 

9,405,717

 

Short-term borrowings

 

 

288,751

 

 

1,188,929

 

 

1,626,374

 

Long-term debt

 

 

1,126,393

 

 

773,109

 

 

707,769

 

Accrued interest payable

 

 

45,803

 

 

61,463

 

 

71,465

 

Other liabilities

 

 

152,356

 

 

129,255

 

 

170,470

 

 

 

   

 

   

 

   

 

Total liabilities

 

 

11,102,091

 

 

12,161,564

 

 

11,981,795

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

Preferred stock-no par value; authorized 10,000,000 shares; issued and outstanding 351,650, 249,000, and 585,700 shares, respectively

 

 

334,900

 

 

249,000

 

 

566,379

 

Common stock-par value $1 per share; authorized 325,000,000 shares; issued and outstanding 215,371,687, 73,005,766, and 74,643,649 shares, respectively

 

 

215,372

 

 

73,006

 

 

74,644

 

Surplus

 

 

1,343,987

 

 

1,104,697

 

 

1,135,920

 

Retained (deficit) earnings

 

 

(745,043

)

 

120,578

 

 

(199,540

)

Accumulated other comprehensive income (loss), net of tax

 

 

48,875

 

 

(13,667

)

 

42,558

 

Other, net

 

 

610

 

 

 

 

570

 

 

 

   

 

   

 

   

 

Total shareholders’ equity

 

 

1,198,701

 

 

1,533,614

 

 

1,620,531

 

 

 

   

 

   

 

   

 

Total liabilities and shareholders’ equity

 

$

12,300,792

 

$

13,695,178

 

$

13,602,326

 

 

 

   

 

   

 

   

 

See notes to consolidated financial statements (unaudited), which are an integral part of these statements.

1



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

112,673

 

$

155,433

 

$

358,615

 

$

484,677

 

Interest and dividends on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

16,742

 

 

20,186

 

 

55,430

 

 

61,169

 

Exempt from federal income taxes

 

 

2,006

 

 

2,422

 

 

6,312

 

 

7,594

 

 

 

   

 

   

 

   

 

   

 

Total interest and dividends on securities

 

 

18,748

 

 

22,608

 

 

61,742

 

 

68,763

 

Interest on short-term investments

 

 

 

 

197

 

 

1

 

 

375

 

 

 

   

 

   

 

   

 

   

 

Total interest income

 

 

131,421

 

 

178,238

 

 

420,358

 

 

553,815

 

 

 

   

 

   

 

   

 

   

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

45,156

 

 

69,071

 

 

149,540

 

 

209,357

 

Interest on short-term borrowings

 

 

230

 

 

6,171

 

 

2,020

 

 

31,017

 

Interest on long-term debt

 

 

5,997

 

 

7,377

 

 

17,812

 

 

24,911

 

 

 

   

 

   

 

   

 

   

 

Total interest expense

 

 

51,383

 

 

82,619

 

 

169,372

 

 

265,285

 

 

 

   

 

   

 

   

 

   

 

Net Interest Income

 

 

80,038

 

 

95,619

 

 

250,986

 

 

288,530

 

Provision for Credit Losses

 

 

224,179

 

 

84,608

 

 

498,143

 

 

221,663

 

 

 

   

 

   

 

   

 

   

 

Net interest income after provision for credit losses

 

 

(144,141

)

 

11,011

 

 

(247,157

)

 

66,867

 

Noninterest Income

 

 

33,470

 

 

28,665

 

 

89,483

 

 

91,955

 

Noninterest Expenses

 

 

89,529

 

 

94,157

 

 

315,958

 

 

450,140

 

 

 

   

 

   

 

   

 

   

 

Loss before income taxes

 

 

(200,200

)

 

(54,481

)

 

(473,632

)

 

(291,318

)

Income tax expense (benefit)

 

 

123,304

 

 

(29,526

)

 

13,951

 

 

(54,139

)

 

 

   

 

   

 

   

 

   

 

Net Loss

 

 

(323,504

)

 

(24,955

)

 

(487,583

)

 

(237,179

)

Preferred stock dividends

 

 

(4,454

)

 

(6,250

)

 

(20,268

)

 

(12,083

)

Deemed dividend resulting from induced conversion

 

 

(11,927

)

 

 

 

(32,388

)

 

 

Deemed dividend resulting from accretion of discount

 

 

(870

)

 

 

 

(2,571

)

 

 

Amounts allocated to participating security holders

 

 

 

 

(7

)

 

(241

)

 

(151

)

 

 

   

 

   

 

   

 

   

 

Net Loss Available to Common Shareholders

 

$

(340,755

)

$

(31,212

)

$

(543,051

)

$

(249,413

)

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Common Shares Outstanding, Basic

 

 

174,426

 

 

72,755

 

 

116,217

 

 

72,606

 

Average Common Shares Outstanding, Diluted

 

 

174,426

 

 

72,755

 

 

116,217

 

 

72,606

 

Loss Per Common Share, Basic

 

$

(1.95

)

$

(0.43

)

$

(4.67

)

$

(3.44

)

Loss Per Common Share, Diluted

 

 

(1.95

)

 

(0.43

)

 

(4.67

)

 

(3.44

)

Dividends per common share

 

 

 

 

0.01

 

 

0.02

 

 

0.21

 

See notes to consolidated financial statements (unaudited), which are an integral part of these statements.

2



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share data) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares of
Common
Stock

 

Common
Stock

 

Preferred
Stock

 

Surplus

 

Retained
(Deficit)
Earnings
and
Other

 

Accumulated
Other
Comprehensive
Income
(Loss), Net

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2007

 

 

72,455,205

 

$

72,455

 

$

 

$

1,107,601

 

$

386,061

 

$

(15,809

)

$

1,550,308

 

Net loss

 

 

 

 

 

 

 

 

 

 

(237,179

)

 

 

 

(237,179

)

Other comprehensive income, net of income tax of $1,185

 

 

 

 

 

 

 

 

 

 

 

 

2,142

 

 

2,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(235,037

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Common dividends declared ($0.21 per share)

 

 

 

 

 

 

 

 

 

 

(15,331

)

 

 

 

(15,331

)

Preferred dividends declared

 

 

 

 

 

 

 

 

 

 

(12,083

)

 

 

 

(12,083

)

Issuance of preferred stock

 

 

 

 

 

 

250,000

 

 

(11,028

)

 

 

 

 

 

238,972

 

Common stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend reinvestment plan

 

 

206,206

 

 

206

 

 

 

 

1,626

 

 

 

 

 

 

1,832

 

Conversion of preferred stock

 

 

153,844

 

 

154

 

 

(1,000

)

 

846

 

 

 

 

 

 

 

 

Restricted stock plan

 

 

101,378

 

 

101

 

 

 

 

2,794

 

 

(163

)

 

 

 

2,732

 

Director compensation

 

 

49,571

 

 

50

 

 

 

 

358

 

 

 

 

 

 

408

 

Employee stock purchase plan

 

 

31,557

 

 

32

 

 

 

 

215

 

 

 

 

 

 

247

 

Acquisitions

 

 

4,403

 

 

4

 

 

 

 

20

 

 

 

 

 

 

24

 

Exercise of stock options, including income tax benefit of $6

 

 

3,602

 

 

4

 

 

 

 

37

 

 

 

 

 

 

41

 

Common and preferred stock purchased by trust for deferred compensation

 

 

 

 

 

 

 

 

 

 

(441

)

 

 

 

(441

)

Deferred compensation payable in stock

 

 

 

 

 

 

 

 

 

 

441

 

 

 

 

441

 

Cumulative effect of initial application of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SFAS 159, net of tax

 

 

 

 

 

 

 

 

 

 

60

 

 

 

 

60

 

EITF 06-4

 

 

 

 

 

 

 

 

 

 

(737

)

 

 

 

(737

)

Stock option expense

 

 

 

 

 

 

 

 

2,287

 

 

 

 

 

 

2,287

 

Other, net

 

 

 

 

 

 

 

 

(59

)

 

(50

)

 

 

 

(109

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Balance, September 30, 2008

 

 

73,005,766

 

$

73,006

 

$

249,000

 

$

1,104,697

 

$

120,578

 

$

(13,667

)

$

1,533,614

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2008

 

 

74,643,649

 

$

74,644

 

$

566,379

 

$

1,135,920

 

$

(198,970

)

$

42,558

 

$

1,620,531

 

Net loss

 

 

 

 

 

 

 

 

 

 

(487,583

)

 

 

 

(487,583

)

Other comprehensive income, net of income tax of $4,611

 

 

 

 

 

 

 

 

 

 

 

 

6,317

 

 

6,317

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(481,266

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Common dividends declared ($0.02 per share)

 

 

 

 

 

 

 

 

 

 

(2,693

)

 

 

 

(2,693

)

Preferred dividends declared

 

 

 

 

 

 

 

 

 

 

(20,268

)

 

 

 

(20,268

)

Accretion of discount on preferred stock

 

 

 

 

 

 

2,571

 

 

 

 

(2,571

)

 

 

 

 

Common stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

85,000,000

 

 

85,000

 

 

 

 

(5,275

)

 

 

 

 

 

79,725

 

Conversion of preferred stock

 

 

54,892,158

 

 

54,892

 

 

(234,050

)

 

210,123

 

 

(32,388

)

 

 

 

(1,423

)

Restricted stock plan

 

 

352,589

 

 

353

 

 

 

 

903

 

 

 

 

 

 

1,256

 

Director compensation

 

 

144,763

 

 

145

 

 

 

 

102

 

 

 

 

 

 

247

 

Dividend reinvestment plan

 

 

130,828

 

 

131

 

 

 

 

81

 

 

 

 

 

 

212

 

Employee stock purchase plan

 

 

117,317

 

 

117

 

 

 

 

80

 

 

 

 

 

 

197

 

Settlement of shareholder lawsuit

 

 

91,033

 

 

91

 

 

 

 

15

 

 

 

 

 

 

106

 

Common and preferred stock released by trust for deferred compensation

 

 

 

 

 

 

 

 

 

 

842

 

 

 

 

842

 

Deferred compensation payable in stock

 

 

 

 

 

 

 

 

 

 

(802

)

 

 

 

(802

)

Stock option expense

 

 

 

 

 

 

 

 

2,028

 

 

 

 

 

 

2,028

 

Other, net

 

 

(650

)

 

(1

)

 

 

 

10

 

 

 

 

 

 

9

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Balance, September 30, 2009

 

 

215,371,687

 

$

215,372

 

$

334,900

 

$

1,343,987

 

$

(744,433

)

$

48,875

 

$

1,198,701

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

See notes to consolidated financial statements (unaudited), which are an integral part of these statements.

3



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net loss

 

$

(487,583

)

$

(237,179

)

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

 

 

 

 

 

Provision for credit losses

 

 

498,143

 

 

221,663

 

Depreciation, amortization, and accretion, net

 

 

28,187

 

 

28,233

 

Impairment of long lived assets

 

 

18,122

 

 

 

Loss on other real estate owned

 

 

17,403

 

 

949

 

Loss on nonmortgage loans held for sale

 

 

11,258

 

 

 

Share-based compensation expense

 

 

3,953

 

 

6,061

 

Goodwill impairment

 

 

2,511

 

 

188,431

 

Gain on sale of ancillary businesses

 

 

(7,234

)

 

 

(Gain) loss on early extinguishment of debt

 

 

(3,043

)

 

339

 

Gain on certain derivative activities

 

 

(3,817

)

 

(49

)

Gain on securities

 

 

(1,340

)

 

(1,547

)

Gain on sale of mortgage loans

 

 

(1,894

)

 

(2,634

)

Loss on disposition of premises and equipment

 

 

246

 

 

333

 

Gain on Visa IPO share redemption

 

 

 

 

(1,904

)

Excess tax benefits from share-based compensation

 

 

 

 

(6

)

   Deferred income tax valuation allowance

200,121

Deferred income tax benefit, excluding change in valuation allowance

 

 

(155,388)

 

 

(35,141

)

Origination of loans held for sale

 

 

(257,918

)

 

(201,350

)

Sale of loans held for sale and principal repayments

 

 

288,725

 

 

224,410

 

Decrease (increase) in other assets

 

 

22,324

 

 

(3,009

)

Decrease in other liabilities

 

 

(21,885

)

 

(9,503

)

 

 

   

 

   

 

Net cash provided by operating activities

 

 

150,891

 

 

178,097

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Sale of securities available for sale

 

 

137,490

 

 

193,029

 

Maturity, redemption, call, or principal repayments of securities available for sale

 

 

519,126

 

 

375,013

 

Maturity, redemption, call, or principal repayments of securities held to maturity

 

 

15,078

 

 

15,166

 

Purchase of securities available for sale

 

 

(587,683

)

 

(580,138

)

Purchase of securities held to maturity

 

 

(131,435

)

 

 

Origination of loans held for investment, net of principal repayments

 

 

371,734

 

 

(331,593

)

Sale of loans originally held for investment

 

 

409,286

 

 

38,663

 

Sale of other real estate owned

 

 

35,668

 

 

3,230

 

Sale of long lived assets held for sale

 

 

6,745

 

 

 

Sale of premises and equipment

 

 

27

 

 

7

 

Purchase of premises and equipment

 

 

(31,330

)

 

(43,358

)

Proceeds from sale of ancillary businesses

 

 

16,584

 

 

 

Cash equivalents acquired, net of payment for purchase acquisition

 

 

 

 

3,817

 

 

 

   

 

   

 

Net cash provided by (used for) investing activities

 

 

761,290

 

 

(326,164

)

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Increase in deposits, net

 

 

81,586

 

 

200,094

 

Decrease in short-term borrowings

 

 

(1,337,650

)

 

(449,487

)

Issuance of long-term debt

 

 

700,000

 

 

203,320

 

Payment of long-term debt

 

 

(279,960

)

 

(132,235

)

Issuance of common stock, net

 

 

79,725

 

 

 

Issuance of preferred stock, net

 

 

 

 

238,972

 

Cash dividends paid on common stock

 

 

(3,439

)

 

(28,367

)

Cash dividends paid on preferred stock

 

 

(25,155

)

 

(5,833

)

Conversion of preferred stock

 

 

(1,423

)

 

 

Excess tax benefits from share-based compensation

 

 

 

 

6

 

Other common stock activity

 

 

459

 

 

1,400

 

 

 

   

 

   

 

Net cash (used for) provided by financing activities

 

 

(785,857

)

 

27,870

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

126,324

 

 

(120,197

)

Cash and cash equivalents at beginning of year

 

 

292,385

 

 

296,525

 

 

 

   

 

   

 

Cash and cash equivalents at end of period

 

$

418,709

 

$

176,328

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Data

 

 

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

189,849

 

$

269,204

 

Income tax (refunds received) payments, net

 

 

(47,037

)

 

3,599

 

Significant non-cash investing and financing transactions:

 

 

 

 

 

 

 

Unrealized gain on available for sale securities

 

 

39,575

 

 

431

 

Conversion of preferred stock

 

 

234,050

 

 

1,000

 

Loans transferred from held for investment to held for sale

 

 

489,255

 

 

61,904

 

Loans transferred to other real estate owned

 

 

120,106

 

 

23,882

 

See notes to consolidated financial statements (unaudited), which are an integral part of these statements.

4



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

Note 1 – General

          The foregoing unaudited Consolidated Financial Statements and Notes are presented in accordance with the instructions for the Securities and Exchange Commission Quarterly Report on Form 10-Q. “TSFG” refers to The South Financial Group, Inc. and subsidiaries, except where the context requires otherwise. The information contained in the Consolidated Financial Statements included in TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008 should be referred to in connection with the reading of these unaudited interim Consolidated Financial Statements. The Consolidated Balance Sheet at December 31, 2008 is derived from TSFG’s Consolidated Audited Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments necessary to present a fair statement of the results for the interim periods have been made. All such adjustments are of a normal, recurring nature. TSFG has evaluated subsequent events for potential recognition and/or disclosure through November 9, 2009, the date the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued.

Nature of Operations

          TSFG is a bank holding company headquartered in Greenville, South Carolina that offers a broad range of financial products and services, including banking, mortgage, treasury services, and wealth management (which consists of insurance, retail investment, and trust and investment management). TSFG’s banking subsidiary Carolina First Bank conducts banking operations in South Carolina and North Carolina (as Carolina First), in Florida (as Mercantile), and on the Internet (as Bank CaroLine). TSFG also owns several non-bank subsidiaries. At September 30, 2009, TSFG operated through 83 branch offices in South Carolina, 67 in Florida, and 27 in North Carolina. In South Carolina, the branches are primarily located in the state’s largest metropolitan areas. The Florida operations are principally concentrated in the Jacksonville, Orlando, Tampa Bay, Southeast Florida, and Gainesville areas. The North Carolina branches are primarily located in the Hendersonville and Asheville areas of western North Carolina and in the Wilmington area of eastern North Carolina.

Accounting Estimates and Assumptions

          The preparation of the Consolidated Financial Statements and accompanying notes requires management of TSFG to make a number of 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 the period. Actual results could differ significantly from these estimates and assumptions. 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 derivative and other hedging activities, the fair value of certain financial instruments (securities, derivatives, and privately held investments), income tax assets or liabilities (including deferred tax assets and any related valuation allowance), share-based compensation, and accounting for acquisitions, including the fair value determinations, the analysis of goodwill impairment and the analysis of valuation allowances in the initial accounting of loans acquired. 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.

Principles of Consolidation

          The Consolidated Financial Statements include the accounts of The South Financial Group, Inc. and all other entities in which it has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.

Accounting Standards Codification

          The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (“GAAP”) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and

5



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

Reclassifications

          Certain prior year amounts have been reclassified to conform to the 2009 presentations.

Recently Adopted Accounting Pronouncements

     Fair Value Measurements

          TSFG adopted new guidance affecting FASB ASC 820, “Fair Value Measurements and Disclosures,” on January 1, 2008 for financial assets and liabilities with no significant impact on its Consolidated Financial Statements. This guidance defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. This guidance does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. This guidance was effective for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis in fiscal years beginning after November 15, 2008. As a result, TSFG adopted this guidance for nonfinancial assets and liabilities effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.

     Business Combinations

          FASB ASC 805, “Business Combinations,” reflects new guidance which requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under previous standards whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. The new guidance requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case. Under the new guidance, the requirements of FASB ASC 420, “Exit or Disposal Cost Obligations,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of FASB ASC 450, “Contingencies.” TSFG adopted this guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements. However, TSFG expects the new guidance to have a significant effect on the accounting for future acquisitions, if any.

     Noncontrolling Interests in Consolidated Financial Statements

          FASB ASC 810-10, “Consolidation,” reflects new guidance which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The new guidance clarifies that a non-controlling interest in a subsidiary, which was previously referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. TSFG adopted this guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.

     Disclosures about Derivative Instruments and Hedging Activities

          FASB ASC 815-10, “Derivatives and Hedging,” reflects new guidance which amends and expands the disclosure requirements related to derivatives and hedging activities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under FASB ASC 815-10, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, the new guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of

6



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. TSFG adopted this guidance effective January 1, 2009 and has included the required disclosures in Note 11.

     Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

          FASB ASC 260-10, “Earnings Per Share,” reflects new guidance that states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. TSFG adopted this guidance effective January 1, 2009 and has determined that certain of its outstanding nonvested restricted stock and restricted stock units are participating securities. Accordingly, earnings per common share has been computed using the two-class method. All previously reported earnings per common share data has been retrospectively adjusted to conform to the new computation method.

     Determination of the Useful Life of Intangible Assets and Accounting for Defensive Intangible Assets

          FASB ASC 350-30, “General Intangibles Other Than Goodwill,” reflects new guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This Subtopic also reflects new guidance that clarifies how to account for defensive intangible assets subsequent to initial measurement. TSFG adopted this new guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.

     Equity Method Investment Accounting Considerations

          FASB ASC 323, “Investments - Equity Method and Joint Ventures,” reflects new guidance which clarifies the accounting for certain transactions and impairment considerations involving equity method investments. TSFG adopted this new guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.

     Determining Fair Value When the Volume and Level of  Activity for the Asset or Liability Have  Significantly
     Decreased and Identifying Transactions that Are Not Orderly

          FASB ASC 820, “Fair Value Measurements and Disclosures,” reflects new guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and for determining when a transaction is an orderly one. TSFG adopted this new guidance effective second quarter 2009 with no significant impact on its Consolidated Financial Statements.

     Interim Disclosures about Fair Value of Financial Instruments

          FASB ASC 825, “Financial Instruments,” reflects new guidance which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. TSFG adopted this new guidance effective second quarter 2009 and has included the required disclosures in Note 16.

     Recognition and Presentation of Other-Than-Temporary Impairments

          FASB ASC 320-10, “Investments – Debt and Equity Securities,” reflects new guidance on other-than-temporary impairment for debt securities to make the standard more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. TSFG adopted the new guidance effective second quarter 2009 with no significant impact on its Consolidated Financial Statements.

     Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies

          FASB ASC 805, “Business Combinations,” reflects new guidance which requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with FASB ASC 450, “Contingencies.” The new guidance removes subsequent accounting guidance for assets and liabilities arising from contingencies from FASB ASC 805 and requires entities to develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. The new guidance eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, entities are required to include only

7



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

the disclosure required by FASB ASC 450. The new guidance also requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value. TSFG adopted the new guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.

     Subsequent Events

          FASB ASC 855, “Subsequent Events,” establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The standard requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. TSFG adopted the new guidance effective second quarter 2009.

     Measuring Liabilities at Fair Value

          Accounting Standards Update 2009-05 (“ASU 2009-05”), “Measuring Liabilities at Fair Value,” modifies existing fair value guidance to permit companies determining the fair value of a liability to use the perspective of an investor that holds the related obligation as an asset. ASU 2009-05 addresses practice difficulties caused by the tension between fair-value measurements based on the price that would be paid to transfer a liability to a new obligor and contractual or legal requirements that prevent such transfers from taking place. TSFG adopted this standard effective third quarter 2009 with no significant impact on its Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

     Accounting for Transfers of Financial Assets

          Statement of Financial Accounting Stamdards (“SFAS”) No. 166 (“SFAS 166”), “Accounting for Transfers of Financial Assets,” amends FASB ASC 860, “Transfers and Servicing,” primarily to (1) eliminate the concept of a qualifying special-purpose entity, (2) limit the circumstances under which a financial asset (or portion thereof) should be derecognized when the entire financial asset has not been transferred to a non-consolidated entity, and (3) require additional information to be disclosed concerning a transferor’s continuing involvement with transferred financial assets. The new guidance is effective for fiscal years beginning after November 15, 2009, and TSFG does not expect adoption of this standard to have a significant impact on its Consolidated Financial Statements, although the Company continues to evaluate the effects of adoption. However, this guidance could have a significant impact on the accounting for future transfers, if any.

     Accounting for Variable Interest Entities

          SFAS No. 167 (“SFAS 167”), “Accounting for Variable Interest Entities,” amends FASB ASC 810, “Consolidation,” to require a comprehensive qualitative analysis to be performed to determine whether a holder of variable interests in a variable interest entity also has a controlling financial interest in that entity. In addition, FASB ASC 810 has been amended to require that the same such analysis be applied to entities previously designated as qualified special-purpose entities under FASB ASC 860. The new guidance is effective for fiscal years beginning after November 15, 2009, and TSFG does not expect adoption of this standard to have a significant impact on its Consolidated Financial Statements.

     Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

          Accounting Standards Update No. 2009-12 (“ASU 2009-12”), “Fair Value Measurements and Disclosures: Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” offers guidance on how to use a NAV per share to estimate the fair value of investments in hedge funds, private equity funds, real estate funds, venture capital funds, offshore fund vehicles, and funds of funds. ASU 2009-12 is effective for periods ending after December 15, 2009, and TSFG does not expect adoption of this standard to have a significant impact on its Consolidated Financial Statements.

8



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

Note 2 – Noninterest Income and Noninterest Expense

          The following presents the details for noninterest income and noninterest expense (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

10,754

 

$

11,376

 

$

29,557

 

$

32,791

 

Debit card income, net

 

 

2,139

 

 

2,006

 

 

6,232

 

 

5,938

 

Customer service fee income

 

 

1,251

 

 

1,425

 

 

3,724

 

 

4,114

 

 

 

   

 

   

 

   

 

   

 

Total customer fee income

 

 

14,144

 

 

14,807

 

 

39,513

 

 

42,843

 

 

 

   

 

   

 

   

 

   

 

Insurance income

 

 

1,911

 

 

2,368

 

 

6,133

 

 

7,816

 

Retail investment services, net

 

 

2,157

 

 

2,294

 

 

5,813

 

 

5,960

 

Trust and investment management income

 

 

1,251

 

 

1,728

 

 

4,211

 

 

5,251

 

Benefits administration fees

 

 

 

 

813

 

 

1,213

 

 

2,303

 

 

 

   

 

   

 

   

 

   

 

Total wealth management income

 

 

5,319

 

 

7,203

 

 

17,370

 

 

21,330

 

 

 

   

 

   

 

   

 

   

 

Bank-owned life insurance income

 

 

2,797

 

 

2,881

 

 

7,859

 

 

8,938

 

Gain on sale of ancillary businesses (1)

 

 

7,234

 

 

 

 

7,234

 

 

 

Mortgage banking income

 

 

1,137

 

 

879

 

 

4,392

 

 

4,222

 

Gain (loss) on certain derivative activities

 

 

1,597

 

 

(199

)

 

3,817

 

 

49

 

Merchant processing income, net

 

 

591

 

 

916

 

 

2,018

 

 

2,582

 

(Loss) gain on securities

 

 

(286

)

 

(725

)

 

1,340

 

 

1,547

 

Gain on Visa IPO share redemption

 

 

 

 

 

 

 

 

1,904

 

Other (2)

 

 

937

 

 

2,903

 

 

5,940

 

 

8,540

 

 

 

   

 

   

 

   

 

   

 

Total noninterest income

 

$

33,470

 

$

28,665

 

$

89,483

 

$

91,955

 

 

 

   

 

   

 

   

 

   

 

Noninterest Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and wages, excluding employment contracts and severance

 

$

32,559

 

$

37,700

 

$

102,489

 

$

108,689

 

Employment contracts and severance

 

 

 

 

4,621

 

 

829

 

 

6,920

 

 

 

   

 

   

 

   

 

   

 

Total salaries and wages

 

 

32,559

 

 

42,321

 

 

103,318

 

 

115,609

 

 

 

   

 

   

 

   

 

   

 

Employee benefits

 

 

7,724

 

 

9,252

 

 

25,572

 

 

27,663

 

Occupancy

 

 

9,658

 

 

9,770

 

 

28,600

 

 

27,365

 

Furniture and equipment

 

 

6,950

 

 

6,991

 

 

20,696

 

 

20,107

 

Loan collection and foreclosed asset expense

 

 

6,835

 

 

4,491

 

 

18,973

 

 

7,873

 

Impairment of long lived assets

 

 

746

 

 

 

 

18,122

 

 

 

Regulatory assessments

 

 

6,181

 

 

3,020

 

 

17,315

 

 

7,471

 

FDIC special assessment

 

 

 

 

 

 

5,700

 

 

 

Loss on other real estate owned (2)

 

 

4,406

 

 

765

 

 

17,403

 

 

949

 

Professional services

 

 

4,034

 

 

4,573

 

 

12,892

 

 

11,679

 

Project NOW expense

 

 

114

 

 

 

 

1,693

 

 

 

(Gain) loss on nonmortgage loans held for sale

 

 

(41

)

 

 

 

11,258

 

 

 

Advertising and business development

 

 

1,264

 

 

2,114

 

 

4,654

 

 

7,316

 

Telecommunications

 

 

1,572

 

 

1,628

 

 

4,649

 

 

4,527

 

Amortization of intangibles

 

 

1,238

 

 

1,474

 

 

3,815

 

 

4,721

 

Goodwill impairment

 

 

 

 

 

 

2,511

 

 

188,431

 

Loss on repurchase of auction rate securities

 

 

 

 

 

 

676

 

 

 

(Gain) loss on early extinguishment of debt

 

 

 

 

(125

)

 

(3,043

)

 

339

 

Branch acquisition and conversion costs

 

 

 

 

 

 

 

 

731

 

Visa-related litigation

 

 

 

 

 

 

 

 

(863

)

Other

 

 

6,289

 

 

7,883

 

 

21,154

 

 

26,222

 

 

 

   

 

   

 

   

 

   

 

Total noninterest expenses

 

$

89,529

 

$

94,157

 

$

315,958

 

$

450,140

 

 

 

   

 

   

 

   

 

   

 


 

 

(1)

See Note 8 for the sale of certain ancillary businesses during third quarter 2009.


 

 

(2)

In fourth quarter 2008, TSFG reclassified loss (gain) on other real estate owned from noninterest income to noninterest expense. Prior periods have been reclassified to conform to the current presentation.

9



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

Note 3 Accumulated Other Comprehensive Income (Loss)

          The following summarizes accumulated other comprehensive income (loss), net of tax (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains (Losses) on Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

19,013

 

$

(34,287

)

$

6,890

 

$

(30,765

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

20,425

 

 

4,580

 

 

44,610

 

 

(1,271

)

Income tax (expense) benefit

 

 

(7,552

)

 

(1,708

)

 

(16,400

)

 

425

 

Less: Reclassification adjustment for (gains)
      losses included in net loss

 

 

(90

)

 

1,664

 

 

(5,035

)

 

1,965

 

      Income tax expense (benefit)

 

 

31

 

 

(583

)

 

1,762

 

 

(688

)

 

 

   

 

   

 

   

 

   

 

 

 

 

12,814

 

 

3,953

 

 

24,937

 

 

431

 

 

 

   

 

   

 

   

 

   

 

Balance at end of period

 

 

31,827

 

 

(30,334

)

 

31,827

 

 

(30,334

)

 

 

   

 

   

 

   

 

   

 

Net Unrealized Gains on Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

22,102

 

 

16,602

 

 

35,668

 

 

14,956

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on change in fair values

 

 

3,044

 

 

7,273

 

 

8,146

 

 

20,721

 

Income tax benefit (expense)

 

 

(1,065

)

 

(2,546

)

 

(2,851

)

 

(7,253

)

Less: Reclassification adjustment for gains
      included in net loss

 

 

(10,820

)

 

(7,172

)

 

(36,793

)

 

(18,088

)

      Income tax expense

 

 

3,787

 

 

2,510

 

 

12,878

 

 

6,331

 

 

 

   

 

   

 

   

 

   

 

 

 

 

(5,054

)

 

65

 

 

(18,620

)

 

1,711

 

 

 

   

 

   

 

   

 

   

 

Balance at end of period

 

 

17,048

 

 

16,667

 

 

17,048

 

 

16,667

 

 

 

   

 

   

 

   

 

   

 

 

 

$

48,875

 

$

(13,667

)

$

48,875

 

$

(13,667

)

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

$

7,760

 

$

4,018

 

$

6,317

 

$

2,142

 

Net loss

 

 

(323,504

)

 

(24,955

)

 

(487,583

)

 

(237,179

)

 

 

   

 

   

 

   

 

   

 

Comprehensive loss

 

$

(315,744

)

$

(20,937

)

$

(481,266

)

$

(235,037

)

 

 

   

 

   

 

   

 

   

 

10



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

Note 4 Securities

          The aggregate amortized cost and estimated fair value of securities available for sale and securities held to maturity (in thousands) were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

 

 

 

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

2,074

 

$

1

 

$

17

 

$

2,058

 

U.S. Government agencies

 

 

93,750

 

 

1,474

 

 

 

 

95,224

 

Agency mortgage-backed securities

 

 

1,648,004

 

 

40,443

 

 

246

 

 

1,688,201

 

Private label mortgage-backed securities

 

 

9,287

 

 

5

 

 

180

 

 

9,112

 

State and municipals

 

 

214,756

 

 

9,198

 

 

6

 

 

223,948

 

Other investments

 

 

60,999

 

 

57

 

 

205

 

 

60,851

 

 

 

   

 

   

 

   

 

   

 

 

 

$

2,028,870

 

$

51,178

 

$

654

 

$

2,079,394

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipals

 

$

16,221

 

$

458

 

$

2

 

$

16,677

 

Agency mortgage-backed securities

 

 

121,956

 

 

1,781

 

 

 

 

123,737

 

Other investments

 

 

100

 

 

 

 

 

 

100

 

 

 

   

 

   

 

   

 

   

 

 

 

$

138,277

 

$

2,239

 

$

2

 

$

140,514

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

2,001

 

$

68

 

$

 

$

2,069

 

U.S. Government agencies

 

 

307,025

 

 

6,704

 

 

 

 

313,729

 

Agency mortgage-backed securities

 

 

1,467,516

 

 

14,632

 

 

13,509

 

 

1,468,639

 

Private label mortgage-backed securities

 

 

14,850

 

 

 

 

2,079

 

 

12,771

 

State and municipals

 

 

256,755

 

 

5,673

 

 

180

 

 

262,248

 

Other investments

 

 

48,098

 

 

87

 

 

447

 

 

47,738

 

 

 

   

 

   

 

   

 

   

 

 

 

$

2,096,245

 

$

27,164

 

$

16,215

 

$

2,107,194

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipals

 

$

22,609

 

$

343

 

$

4

 

$

22,948

 

Other investments

 

 

100

 

 

 

 

 

 

100

 

 

 

   

 

   

 

   

 

   

 

 

 

$

22,709

 

$

343

 

$

4

 

$

23,048

 

 

 

   

 

   

 

   

 

   

 

          At September 30, 2009, other investments in securities available for sale included the following (recorded at the estimated fair value): FHLB stock of $58.8 million and equity investments of $2.0 million. At December 31, 2008, other investments in securities available for sale included the following (recorded at the estimated fair value): FHLB stock of $35.5 million, corporate bonds of $10.0 million, and equity investments of $2.2 million.

11



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

          The amortized cost and estimated fair value of securities available for sale and securities held to maturity (in thousands) at September 30, 2009, by contractual maturity, are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The estimated fair value of securities was determined using quoted market prices.

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

 

 

         

 

 

 

Amortized
Cost

 

Estimated
Fair Value

 

 

 

   

 

   

 

Securities Available for Sale

 

 

 

 

 

 

 

Due in one year or less

 

$

75,401

 

$

76,873

 

Due after one year through five years

 

 

944,250

 

 

964,002

 

Due after five years through ten years

 

 

206,426

 

 

213,487

 

Due after ten years

 

 

741,796

 

 

764,183

 

No contractual maturity

 

 

60,997

 

 

60,849

 

 

 

   

 

   

 

 

 

$

2,028,870

 

$

2,079,394

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

Due in one year or less

 

$

4,507

 

$

4,554

 

Due after one year through five years

 

 

133,035

 

 

135,217

 

Due after five years through ten years

 

 

735

 

 

743

 

 

 

   

 

   

 

 

 

$

138,277

 

$

140,514

 

 

 

   

 

   

 

          Proceeds from sales of securities available for sale, gross realized gains and losses on sales, and maturities and other securities transactions (in thousands) are summarized as follows. The net gains or losses are shown in noninterest income as gain/loss on securities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sales of securities available for sale

 

$

6,024

 

$

37,687

 

$

137,490

 

$

193,029

 

 

 

   

 

   

 

   

 

   

 

Sales transactions of securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

$

90

 

$

 

$

5,475

 

$

630

 

Gross realized losses (1)

 

 

 

 

(759

)

 

(5

)

 

(763

)

Maturities and other securities transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

 

 

 

945

 

 

 

 

4,107

 

Other-than-temporary impairment

 

 

(376

)

 

(911

)

 

(4,130

)

 

(2,427

)

 

 

   

 

   

 

   

 

   

 

Net (loss) gain on securities

 

$

(286

)

$

(725

)

$

1,340

 

$

1,547

 

 

 

   

 

   

 

   

 

   

 


 

 

(1)

Includes impairment losses on securities subsequently sold.

          Securities with estimated fair values of $1.0 billion and $1.4 billion at September 30, 2009 and December 31, 2008, respectively, were pledged to secure public deposits and for other purposes. The amortized cost totaled approximately $974.5 million and $1.4 billion for these same periods.

          Carolina First Bank, as a member of the Federal Home Loan Bank (“FHLB”) of Atlanta, is required to own capital stock in the FHLB of Atlanta based generally upon its balances of residential mortgage loans, select commercial loans secured by real estate, and FHLB advances. FHLB capital stock, which is included in other investments, is pledged to secure FHLB advances. No ready market exists for this stock, and it has no quoted market value. However, redemption of this stock has historically been at par value.

12



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

          Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in an unrealized loss position, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or Longer

 

Total

 

 

 

 

 

 

 

 

 

 

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury

 

$

2,058

 

$

17

 

$

 

$

 

$

2,058

 

$

17

 

Agency mortgage-backed securities

 

 

93,862

 

 

175

 

 

6,797

 

 

71

 

 

100,659

 

 

246

 

Private label mortgage-backed securities

 

 

 

 

 

 

2,497

 

 

180

 

 

2,497

 

 

180

 

State and municipals

 

 

 

 

 

 

1,650

 

 

6

 

 

1,650

 

 

6

 

Other investments

 

 

197

 

 

33

 

 

847

 

 

172

 

 

1,044

 

 

205

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

$

96,117

 

$

225

 

$

11,791

 

$

429

 

$

107,908

 

$

654

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipals

 

$

512

 

$

2

 

$

 

$

 

$

512

 

$

2

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or Longer

 

Total

 

 

 

 

 

 

 

 

 

 

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities

 

$

342,792

 

$

3,062

 

$

399,557

 

$

10,447

 

$

742,349

 

$

13,509

 

Private label mortgage-backed securities

 

 

12,771

 

 

2,079

 

 

 

 

 

 

12,771

 

 

2,079

 

State and municipals

 

 

4,230

 

 

148

 

 

1,854

 

 

32

 

 

6,084

 

 

180

 

Other investments

 

 

369

 

 

128

 

 

700

 

 

319

 

 

1,069

 

 

447

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

$

360,162

 

$

5,417

 

$

402,111

 

$

10,798

 

$

762,273

 

$

16,215

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipals

 

$

 

$

 

$

1,036

 

$

4

 

$

1,036

 

$

4

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

          At September 30, 2009, TSFG had 25 individual investments that were in an unrealized loss position. The unrealized losses summarized above, except for other investments, were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The majority of these securities are government or agency securities and, therefore, pose minimal credit risk. Based on management’s assessment at September 30, 2009, these investments are not considered impaired on an other-than-temporary basis.

          During the nine months ended September 30, 2009, TSFG recorded $435,000 in other-than-temporary impairment on certain community bank-related equity securities included in the other investments category. The remaining securities in the other investment category with unrealized losses are not considered impaired on an other-than-temporary basis.

          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 nine months ended September 30, 2009, TSFG recorded $376,000 and $3.7 million, respectively, in other-than-temporary impairment on these investments. At September 30, 2009, TSFG’s investment in these entities totaled $14.8 million, of which $5.2 million were accounted for under the cost method and $9.6 million were accounted for under the equity method.

          Also included in other assets are $5.7 million of various auction rate preferred securities which TSFG repurchased during first quarter 2009 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.

13



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

Note 5 – Loans

          The following is a summary of loans by category (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Commercial Loans

 

 

 

 

 

 

 

Commercial and industrial

 

$

2,249,929

 

$

2,722,611

 

Commercial owner - occupied real estate

 

 

1,270,015

 

 

1,270,746

 

Commercial real estate

 

 

3,741,662

 

 

4,074,331

 

 

 

   

 

   

 

 

 

 

7,261,606

 

 

8,067,688

 

 

 

   

 

   

 

Consumer Loans

 

 

 

 

 

 

 

Indirect - sales finance

 

 

259,296

 

 

635,637

 

Consumer lot loans

 

 

161,206

 

 

225,486

 

Direct retail

 

 

86,474

 

 

95,397

 

Home equity

 

 

803,295

 

 

813,201

 

 

 

   

 

   

 

 

 

 

1,310,271

 

 

1,769,721

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Mortgage Loans

 

 

302,357

 

 

354,663

 

 

 

   

 

   

 

Total loans held for investment

 

 

8,874,234

 

 

10,192,072

 

Loans held for sale

 

 

8,071

 

 

30,963

 

 

 

   

 

   

 

Total loans

 

$

8,882,305

 

$

10,223,035

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Included in the above:

 

 

 

 

 

 

 

Nonaccrual loans held for investment

 

$

431,791

 

$

349,382

 

Nonaccrual loans held for sale

 

 

 

 

16,282

 

Loans past due 90 days still accruing interest

 

 

7,467

 

 

47,481

 

          During the three and nine months ended September 30, 2009, TSFG transferred $136.6 million and $489.3 million, respectively, from the held for investment portfolio to the held for sale portfolio. The third quarter transfers included $133.6 million of nonperforming loans for which TSFG charged-off $57.8 million against the allowance for loan losses prior to transferring them to loans held for sale.

          During second quarter 2009, TSFG transferred $230.3 million of indirect auto loans and $88.8 million of shared national credits to the held for sale portfolio. After recording an allowance adjustment of $4.5 million, TSFG recorded a $3.2 million net loss on the indirect auto loan and shared national credits transactions. Additional losses for the three and nine months ended September 30, 2009 (a gain of $41,000 and a loss of $8.1 million, respectively) were attributable to gains/losses on other sales, write-downs on loans transferred to other real estate owned, or write-downs on loans still included in held for sale.

          During the three and nine months ended September 30, 2008, TSFG transferred loans with an unpaid principal balance totaling $71.7 million and $111.7 million, respectively, from the held for investment portfolio to the held for sale portfolio, and charged off $28.1 million and $49.8 million, respectively, of these loans against the allowance for loan losses. Of these loans, $38.7 million (net of charge-offs) were sold, leaving $23.2 million (net of charge-offs) on the balance sheet in loans held for sale at September 30, 2008, of which $22.6 million were considered nonperforming loans.

14



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

          Loans are considered to be impaired when, in management’s judgment and based on current information, the full collection of principal and interest becomes doubtful. A loan is also considered impaired if its terms are modified in a troubled debt restructuring. The following table summarizes information on impaired loans (in thousands):

 

 

 

 

 

 

 

 

 

 

At and For the
Nine Months Ended
September 30, 2009

 

At and For the
Year Ended
December 31, 2008

 

 

 

 

 

 

 

Impaired loans with specific allowance

 

$

251,830

 

$

193,280

 

Impaired loans with no specific allowance

 

 

151,648

 

 

94,217

 

 

 

   

 

   

 

Total impaired loans

 

$

403,478

 

$

287,497

 

 

 

   

 

   

 

Related allowance

 

$

48,929

 

$

44,418

 

Interest income recognized

 

 

969

 

 

112

 

Foregone interest

 

 

9,880

 

 

14,439

 

Note 6 – Allowance for Credit Losses

          The allowance for loan losses, reserve for unfunded lending commitments, and allowance for credit losses are presented below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At and For the
Nine Months
Ended September 30,

 

At and For the
Year Ended
December 31,
2008

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

247,086

 

$

126,427

 

 

$

126,427

 

 

Allowance adjustment for loans sold

 

 

(4,471

)

 

 

 

 

 

 

Provision for loan losses

 

 

495,211

 

 

221,679

 

 

 

344,069

 

 

Loans charged-off

 

 

(406,675

)

 

(152,664

)

 

 

(230,961

)

 

Recoveries of loans previously charged off

 

 

8,385

 

 

5,306

 

 

 

7,551

 

 

 

 

   

 

   

 

 

   

 

 

Balance at end of period

 

$

339,536

 

$

200,748

 

 

$

247,086

 

 

 

 

   

 

   

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for unfunded lending commitments

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

2,788

 

$

2,268

 

 

$

2,268

 

 

Provision for unfunded lending commitments

 

 

2,932

 

 

(16

)

 

 

520

 

 

 

 

   

 

   

 

 

   

 

 

Balance at end of period

 

$

5,720

 

$

2,252

 

 

$

2,788

 

 

 

 

   

 

   

 

 

   

 

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

249,874

 

$

128,695

 

 

$

128,695

 

 

Allowance adjustment for loans sold

 

 

(4,471

)

 

 

 

 

 

 

Provision for credit losses

 

 

498,143

 

 

221,663

 

 

 

344,589

 

 

Loans charged-off

 

 

(406,675

)

 

(152,664

)

 

 

(230,961

)

 

Recoveries of loans previously charged off

 

 

8,385

 

 

5,306

 

 

 

7,551

 

 

 

 

   

 

   

 

 

   

 

 

Balance at end of period

 

$

345,256

 

$

203,000

 

 

$

249,874

 

 

 

 

   

 

   

 

 

   

 

 

15



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

Note 7 – Impairment of Long-Lived Assets

          During 2005, TSFG initiated plans for a “corporate campus” to meet expected current and future facility needs and serve as the primary headquarters for its banking operations. During second quarter 2009, TSFG announced its intention to market its planned campus facility for sale. The campus site contains approximately 60 acres. Two office buildings have been completed, the conference center is under construction, and ten additional building sites are available. During third quarter 2009, TSFG occupied approximately 20% of the available space in the office buildings at the campus in order to house certain of its operations that were previously located in facilities with leases expiring in 2009.

          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 September 30, 2009, the carrying amount of the campus was $66.4 million. For purposes of segment reporting, the asset is included in the “Other” column in Note 18. Management will continue to monitor market conditions and offered prices, and further write-downs could be required in future periods.

          Also in second quarter 2009, TSFG recorded a $612,000 impairment loss (included in noninterest expense) from the write-down of the corporate jet. The corporate jet was sold during third quarter 2009 with no significant gain or loss on the sale.

          In addition, during the three and nine months ended September 30, 2009, TSFG recorded $746,000 and $1.6 million, respectively, in impairment losses (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.

Note 8 – Sale of Ancillary Businesses

          During third quarter 2009, TSFG completed the sale of three ancillary businesses for a net gain of $7.2 million, which is included in noninterest income. The businesses sold were: Carolina First Bank’s merchant processing portfolio; Koss Olinger, a financial planning group; and American Pensions, Inc., a retirement plan administrator.

          The majority of the gain recognized in third quarter 2009 was related to the sale of the merchant processing portfolio; an additional deferred gain of approximately $6 million related to the sale will be recognized over the next two years. In connection with the sale of its merchant processing portfolio, TSFG entered into a marketing alliance with the acquirer for new merchant services referrals. Under this agreement, TSFG has agreed to refer its current and prospective merchant customers exclusively to the acquirer for all payment processing services. The agreement has an initial ten year term with recurring one year renewals thereafter, unless terminated by either party or notice of non-renewal is provided by either party.

16



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

Note 9 – Goodwill

          The following summarizes the changes in the carrying amount of goodwill related to each of TSFG’s business segments (in thousands) for the period ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carolina First

 

Mercantile

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

203,800

 

$

426,049

 

$

20,361

 

$

650,210

 

Accumulated impairment losses

 

 

 

 

(426,049

)

 

 

 

(426,049

)

 

 

   

 

   

 

   

 

   

 

 

 

 

203,800

 

 

 

 

20,361

 

 

224,161

 

Goodwill impairment charge

 

 

 

 

 

 

(2,511

)

 

(2,511

)

Goodwill allocated to sales of ancillary businesses

 

 

(2,172

)

 

 

 

(5,681

)

 

(7,853

)

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

201,628

 

 

426,049

 

 

14,680

 

 

642,357

 

Accumulated impairment losses

 

 

 

 

(426,049

)

 

(2,511

)

 

(428,560

)

 

 

   

 

   

 

   

 

   

 

 

 

$

201,628

 

$

 

$

12,169

 

$

213,797

 

 

 

   

 

   

 

   

 

   

 

          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.

          At June 30, 2009, 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 included 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 were 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% were applied to the