GREENVILLE, S.C., July 20 /PRNewswire-FirstCall/ -- The South Financial Group, Inc. today reported second quarter 2006 net income of $29.3 million, or $0.39 per diluted share, compared with net income of $27.8 million, or $0.37 per diluted share, for the first quarter of 2006, and $42.7 million, or $0.57 per diluted share, for the second quarter of 2005. Second quarter 2005 included a nonrecurring, non-cash benefit of $22.3 million (pre-tax) for an increase in fair value of interest rate swaps related to certain derivatives. The return on average assets for the three months ended June 30, 2006 was 0.82%, and the return on average equity was 7.95%.
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Operating earnings for second quarter 2006 also totaled $29.3 million, or $0.39 per diluted share, same as GAAP earnings. This compares with $27.8 million, or $0.37 per diluted share, for first quarter 2006 and $32.5 million, or $0.44 per diluted share, for second quarter 2005. The decline in second quarter 2006 operating earnings, compared with second quarter 2005, was primarily attributable to lower net interest income, after adjusting to include the net cash settlement of certain interest rate swaps, and higher noninterest expenses. The operating return on average assets for the three months ended June 30, 2006 was 0.82%, and the operating return on average equity was 7.93%. A reconciliation of net income to operating earnings is provided in the financial highlights.
"We are encouraged with this quarter's progress," said Mack I. Whittle, Jr., Chairman, President and Chief Executive Officer of The South Financial Group. "Led by 10% linked-quarter annualized growth in operating revenue and continued lower net loan charge-offs, our earnings per share and profitability ratios improved in what continues to be a very challenging environment. Importantly, recent fee income and customer deposit initiatives produced results. While we have not seen recent growth in our net interest income due to our deleveraging and net interest margin compression, our operating noninterest income grew at a double-digit annualized pace. Our customer deposit mix improved with linked-quarter annualized growth in average core deposits of 6.1%, which included an 8.9% increase in noninterest-bearing deposits and an 8.3% increase in money market deposits.
"Over the last year, we worked extremely hard to improve the mix of our balance sheet with the goal of reducing our risk profile and improving our profitability ratios. Our focus going forward includes solid loan growth with strong risk-adjusted returns, improved customer deposit funding, double-digit fee income growth, and expense management that will produce positive operating leverage. While below the fourth quarter level, our second quarter operating noninterest expenses increased over first quarter and are higher than the level where we would like to operate."
Net income for the first six months of 2006 totaled $57.2 million, or $0.76 per diluted share, compared with $65.1 million, or $0.88 per diluted share, for the same period of 2005. Operating earnings for the first six months of 2006 totaled $57.0 million, or $0.76 per diluted share, compared with $65.2 million, or $0.88 per diluted share, for the same period of 2005.
Revenue
Total revenue, defined as net interest income plus noninterest income, was $135.1 million in second quarter 2006, compared with $132.2 million in first quarter 2006. During the second quarter, TSFG sold approximately $360 million of indirect auto loans from loans held for investment in an effort to improve profitability and reduce wholesale funding levels. GAAP noninterest income for second quarter 2006 included a $3.5 million loss from the sale of indirect auto loans previously held for investment and a $3.6 million net gain on the sale of equity investments and available for sale securities.
Operating revenue, defined as tax-equivalent net interest income plus operating noninterest income, increased $3.4 million, or 10.2% linked-quarter annualized, to $136.7 million from $133.4 million for the first quarter 2006. This increase reflects slightly higher tax-equivalent net interest income and strong double-digit noninterest income growth.
Second quarter 2006 tax-equivalent net interest income was $104.9 million, compared to $104.7 million in first quarter 2006, partially as a result of one additional calendar day in second quarter 2006. For the second quarter of 2006, average earning assets remained essentially unchanged from the first quarter at $12.9 billion, due to proceeds from maturities and principal paydowns of investment securities being used to fund new loans and the impact of the indirect auto loan sale. Also, the net interest margin declined 4 basis points (or 2 basis points adjusting for the difference in the number of calendar days) to 3.27%. During second quarter 2006, TSFG continued to improve its earning asset mix and reported favorable results from its initial efforts to improve its overall funding through the growth of core deposits.
TSFG's operating noninterest income grew $3.3 million to $31.9 million for second quarter 2006 and had double-digit linked-quarter annualized growth in virtually every category. During 2005 and 2006, TSFG has made additional investments in the leadership, products, and sales of its fee-based lines of business - insurance, merchant, mortgage, treasury services, and wealth management. Efforts are now being made to integrate these fee-based products into the daily sales activities of its commercial and retail bankers. For second quarter 2006, operating noninterest income also included a $514,000 gain on sale of mortgage servicing rights (included in mortgage banking income).
Balance Sheet Trends
TSFG continues to focus on improving its relative level and mix of customer assets and liabilities in an effort to generate more predictable and higher quality, longer-term earnings.
In June 2006, TSFG sold approximately $360 million of indirect auto loans originated from August 2005 through the end of May 2006 and used the proceeds to reduce wholesale borrowings. TSFG took these actions to remove assets with a lower return on equity from the balance sheet and reduce its level of wholesale borrowings. Although modestly lowering net interest income, these actions had an immediate favorable impact on TSFG's balance sheet ratios (loan/customer deposits, wholesale borrowings/total assets, allowance for loan losses ratio, and tangible equity/tangible assets) and are projected to have longer-term benefits on TSFG's net interest margin and its returns on assets and equity. TSFG does not expect its decisions regarding indirect auto to meaningfully impact future loan growth.
As mentioned previously, second quarter 2006 average earning assets were essentially unchanged from first quarter 2006, as the growth in average loans approximated the decline in average investment securities. Average loans grew $81.1 million during the second quarter 2006. Excluding indirect auto loans, average loans increased 7.7% linked-quarter annualized, or $168.0 million. By not reinvesting maturing investments and principal paydowns, average investment securities declined 12.0% linked-quarter annualized, or $95.0 million. Loan growth, combined with the continued reduction of investment securities, has increased average loans as a percentage of average earning assets to 75.5% for second quarter 2006 from 75.0% for first quarter 2006 and 64.7% for second quarter 2005. This shift to a higher level of loans has contributed to a higher overall earning asset yield and a higher percentage of customer-derived net interest income.
In January of 2006, TSFG took actions to improve its future level and mix of customer deposits, by establishing weekly new transaction account opening goals, differentiating pricing for promotions and specific markets, and changing incentive plans to place a greater emphasis on lower-cost customer deposit growth. During this period, TSFG has actively managed the pricing of many of its higher-cost deposits, opting in certain instances to fund with wholesale borrowings instead of paying a premium price for non-relationship deposits. In the short-term, while hampering overall total customer deposit growth, these initiatives have provided the initial groundwork to grow certain categories of lower-cost deposits and improve the underlying mix.
Second quarter 2006 results included solid average balance growth in total core deposits (up $76.1 million or 6.1% linked-quarter annualized). Core deposit growth included increases in noninterest-bearing deposits (up $33.2 million or 8.9% linked-quarter annualized) and money market deposits (up $46.1 million or 8.3% linked-quarter annualized). Through the growth of average core deposits and the decline in average time deposits (primarily in the jumbo time deposit category), average core deposits increased to 65.7% of total average customer deposits in second quarter 2006 from 64.2% in first quarter 2006. Equally important, the mix of core deposits improved in second quarter with noninterest-bearing deposits averaging 20.0% of total customer deposits, versus 19.4% in first quarter 2006 and interest checking averaging 14.0%, versus 13.7% in first quarter 2006.
Average wholesale borrowings (which include brokered deposits) as a percentage of average total funding totaled 39.3% for second quarter 2006, up from 38.9% for first quarter 2006 and down from 46.6% for second quarter 2005. At June 30, 2006, period-end wholesale borrowings as a percentage of total funding declined to 36.5%, primarily from using the proceeds from the June sale of approximately $360 million of indirect auto loans to pay down wholesale borrowings.
Net Interest Margin
The tax-equivalent net interest margin for second quarter 2006 declined 4 basis points to 3.27% from 3.31% for first quarter 2006. Approximately half of the decline resulted from one additional day in the second quarter. The net interest margin declined due to a 29 basis point increase in total funding costs compared with a 24 basis point increase in earning asset yields. Within total funding, the total cost of customer deposits increased only 20 basis points while wholesale borrowing costs (including brokered deposits) increased 43 basis points. Within earning assets, the loan yield increased 31 basis points while the investment security yield declined 5 basis points from the prior quarter.
Operating Efficiency and Noninterest Expenses
TSFG's GAAP efficiency ratio totaled 61.5% for second quarter 2006 versus 60.4% for the first quarter of 2006. Its cash operating efficiency ratio was 59.1%, up from 57.8% for first quarter 2006 and 53.6% for second quarter 2005. For the quarter, operating revenue increased 10.2% linked-quarter annualized while cash operating noninterest expense rose 19.9% linked-quarter annualized. Three primary factors have contributed to the increase in TSFG's efficiency ratio over the last year: declining spreads from investment securities, investments in fee-based businesses with higher efficiency ratios but which use less capital, and higher overall operating expenses.
Noninterest expenses for second quarter 2006 totaled $83.1 million, compared with $79.8 million for the first quarter 2006. Cash operating noninterest expenses (which exclude intangible amortization and non-operating items) totaled $80.9 million for second quarter 2006, up $3.8 million from $77.0 million for first quarter 2006.
Compared to first quarter 2006, personnel expense increased $1.8 million, primarily due to higher incentive compensation accruals, stock-based awards, and annual salary increases. Occupancy and furniture and equipment expenses grew by $887,000, largely due to increases in maintenance agreements, data processing, and office space. The $513,000 increase in merchant processing expense was more than offset by higher merchant income. The remaining increase netted to $599,000, as certain categories increased while others decreased.
Provision for Credit Losses
The provision for credit losses for second quarter 2006 totaled $7.5 million, down $2.4 million from the first quarter of 2006 and the second quarter of 2005. The decline in the provision for credit losses resulted from continued improvement in net loan charge-offs and slower loan growth. Second quarter 2006 provision for credit losses exceeded net loan charge-offs. For the last twelve months, the provision for credit losses has exceeded net loan charge-offs by $7.9 million.
Net loan charge-offs in second quarter 2006 were $6.5 million, an improvement from $6.8 million in first quarter 2006 and second quarter 2005. Annualized second quarter 2006 net loan charge-offs improved to 0.27% of average loans held for investment, its best level since 2000, from the previous quarter's 0.29% and 0.32% in second quarter 2005. Loans classified as nonperforming totaled $37.8 million, or 0.40% of loans held for investment, at June 30, 2006, compared with $35.7 million or 0.37% at March 31, 2006, and $42.5 million or 0.47% at June 30, 2005. Foreclosed property was $10.2 million at June 30, 2006, compared with $9.3 million at March 31, 2006 and $12.6 million at June 30, 2005.
The allowance for credit losses totaled $110.3 million, or 1.17% of loans held for investment, at June 30, 2006, compared with $112.5 million, or 1.16% at March 31, 2006 and $105.6 million, or 1.18% at June 30, 2005. The decrease in the overall allowance for credit losses is primarily related to the indirect auto loan sale. Second quarter 2006 allowance coverage of nonperforming loans totaled 2.88 times, compared with 3.11 times a quarter earlier and 2.47 times a year earlier.
Capital
Tangible shareholders' equity at June 30, 2006 totaled $795.3 million, or $10.60 per share, an increase from $792.8 million, or $10.58 per share at March 31, 2006. Tangible equity per share increased 0.8% linked-quarter annualized during this period, as higher earnings offset the quarterly dividend and an increase in the after-tax unrealized loss on available for sale securities.
TSFG's tangible equity to tangible assets ratio at June 30, 2006 was 5.94%, an improvement from 5.80% at March 31, 2006. Higher earnings and the second quarter 2006 sale of indirect auto loans, which lowered tangible assets, contributed to the increase in the tangible equity ratio. At June 30, 2006, TSFG's unrealized loss on available for sale securities (net of income tax) totaled $84.7 million, an increase from $66.1 million at March 31, 2006. Excluding the impact of the unrealized loss on available for sale securities, TSFG's tangible equity to tangible assets ratio improved to 6.51% at June 30, 2006 from 6.24% at March 31, 2006.
TSFG's capital ratios continued to exceed all "well-capitalized" regulatory requirements at June 30, 2006.
Conference Call / Webcast Information
The South Financial Group will host a conference call on Friday, July 21st at 10:00 a.m. (ET) to discuss second quarter 2006 results. Additional material information, including forward-looking statements such as trends and projections, may be discussed during the presentation. For supplemental financial information, please refer to the Form 8-K filed by TSFG with the Securities and Exchange Commission on July 20, 2006 or visit the Investor Relations section of its website under the financial information button. To participate in the conference call or webcast, please follow the instructions listed below.
Conference Call: Please call 1-888-405-5393 or 1-517-645-6236 using the access code "The South." A 7-day rebroadcast of the call will be available via 1-888-473-0136 or 1-203-369-3732.
Webcast: To gain access to the webcast, which will be "listen-only," please go to http://www.thesouthgroup.com/ under the Investor Relations tab and click on the link "Webcast/The South Financial Group 2nd Quarter Earnings Conference Call." For those unable to participate during the live webcast, it will be archived on The South Financial Group website until August 4, 2006.
General Information
The South Financial Group, the largest publicly-traded bank holding company headquartered in South Carolina, ranks among the top 50 U.S. commercial bank holding companies in total assets. At June 30, 2006, it had approximately $14.1 billion in total assets and 169 branch offices in Florida, North Carolina, and South Carolina. TSFG focuses on fast-growing banking markets in the Southeast and concentrates its growth in metropolitan statistical areas. TSFG operates through two subsidiary banks: Carolina First Bank, operating in North Carolina, South Carolina, and on the Internet under the brand name, Bank CaroLine; and Mercantile Bank, operating in Florida. At June 30, 2006, approximately 48% of TSFG's total customer deposits were in South Carolina, 39% were in Florida, and 13% were in North Carolina. The South Financial Group's common stock trades on the Nasdaq National Market under the symbol TSFG. Press releases along with additional information may also be found at The South Financial Group's website: http://www.thesouthgroup.com/.
Explanation of TSFG's Use of Certain Unaudited Non-GAAP Financial Measures and Forward-Looking Statements
This press release contains financial information determined by methods other than in accordance with Generally Accepted Accounting Principles ("GAAP"). The attached financial highlights provide reconciliations between GAAP net income, operating earnings (which exclude gains or losses on certain asset sales, changes in fair value of certain interest rate swaps, merger- related costs, early extinguishment of debt, impairment charges, employment contract buyouts, and other non-operating expenses), and certain measures excluding or including the net cash settlement of certain interest rate swaps. In addition, TSFG provides data eliminating intangibles and related amortization in order to present data on a "cash operating basis."
TSFG's management uses these non-GAAP measures in its analysis of TSFG's performance and believes presentations of financial measures on an operating basis provide useful supplemental information, a clearer understanding of TSFG's financial performance, and better reflect TSFG's core operating activities. Management utilizes operating earnings in the calculation of certain of TSFG's ratios, in particular, to analyze on a consistent basis and over a longer period of time the performance of which it considers to be its core operating activities. TSFG believes the non-GAAP measures enhance investors' understanding of TSFG's business and performance. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of others in the financial services industry.
The limitations associated with utilizing operating measures and cash basis information 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 information and operating measures. These disclosures should not be considered an alternative to GAAP.
This news release contains forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) that are provided to assist in the understanding of anticipated future financial performance. These statements (as well as other forward-looking statements that may be made by management in the related conference call) include but are not limited to, descriptions of management's plans, objectives or goals for future operations, and predictions, forecasts or other statements about future operations. They also include such items as return goals, loan growth, customer deposit growth, expected financial results for acquisitions, factors that will affect credit quality and the net interest margin, the effectiveness of its hedging strategies, the risks and effects of changes in interest rates, effects of future economic conditions, performance following TSFG's balance sheet repositioning, and market performance. However, such statements necessarily involve risks and uncertainties and there are a number of factors - many of which are beyond TSFG's control -- that could cause the actual conditions, events, or results to differ materially from those in such statements. For a discussion of certain factors that may cause such forward-looking statements to differ materially from TSFG's actual results, please refer to TSFG's filings with the Securities and Exchange Commission. The South Financial Group undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this release.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except share data) (unaudited)
% Change 6/30/06 vs.
Three Months Ended (Annualized)
6/30/06 3/31/06 6/30/05 3/31/06 6/30/05
TOTAL REVENUE (1)
GAAP $135,142 $132,232 $152,756 8.8 % (11.5)%
Operating (2) 136,746 133,358 132,729 10.2 3.0
EARNINGS
GAAP earnings $29,343 $27,807 $42,712 22.2 % (31.3)%
Operating earnings 29,261 27,757 32,513 21.7 (10.0)
Cash operating
earnings 30,714 29,201 33,958 20.8 (9.6)
DILUTED SHARE DATA
Average common shares
outstanding 75,504,683 75,339,283 74,421,103 0.9 % 1.5 %
GAAP earnings $0.39 $0.37 $0.57 21.7 (31.6)
Operating earnings 0.39 0.37 0.44 21.7 (11.4)
Cash operating
earnings 0.41 0.39 0.46 20.6 (10.9)
PERFORMANCE RATIOS (Annualized)
RETURN ON AVERAGE ASSETS:
GAAP earnings 0.82 % 0.78 % 1.15
Operating earnings 0.82 0.78 0.88
Cash operating earnings
on average tangible
assets 0.90 0.87 0.96
RETURN ON AVERAGE EQUITY:
GAAP earnings 7.95 7.56 11.81
Operating earnings 7.93 7.55 8.99
Cash operating earnings
on average tangible
equity 15.61 14.80 17.14
NET INTEREST MARGIN:
Tax equivalent 3.27 3.31 3.09
Including net cash
settlement of certain
interest rate
swaps (3) 3.27 3.31 3.19
NONINTEREST INCOME AS A %
OF TOTAL REVENUE(4):
GAAP 23.69 22.17 33.04
Operating (2) 23.32 21.48 21.88
Operating, excluding
net cash settlement
of certain interest
rate swaps (5) 23.32 21.48 19.22
EFFICIENCY RATIOS (6):
GAAP 61.46 60.37 52.07
Operating (2) 60.74 59.42 55.17
Cash operating (2) 59.12 57.76 53.55
CREDIT
Net charge-offs as a
% of average loans
held for investment
(annualized) 0.27 0.29 0.32
(1) The sum of net interest income and noninterest income.
(2) Total revenue, noninterest income as a % of total revenue, and the
efficiency ratio, on an operating basis, are calculated using tax-
equivalent net interest income and exclude non-operating items. The
cash operating efficiency ratio also excludes amortization of
intangibles.
(3) Calculated as tax-equivalent net interest income plus net cash
settlement on certain interest rate swaps divided by average earning
assets, annualized.
(4) Calculated as noninterest income, divided by the sum of net interest
income and noninterest income.
(5) Calculated as operating noninterest income excluding the net cash
settlement of certain interest rate swaps divided by operating
revenues.
(6) Calculated as noninterest expenses, divided by the sum of net interest
income and noninterest income.
Supplemental financial information may be found in the Investor Relations
section of TSFG's web site: http://www.thesouthgroup.com/.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except share data) (unaudited)
Six Months Ended
6/30/06 6/30/05 % Change
TOTAL REVENUE (1)
GAAP $267,374 $264,276 1.2 %
Operating (2) 270,104 260,839 3.6
EARNINGS
GAAP earnings $57,150 $65,128 (12.2)%
Operating earnings 57,018 65,180 (12.5)
Cash operating earnings 59,915 67,835 (11.7)
DILUTED SHARE DATA
Average common shares outstanding 75,422,439 73,729,630 2.3 %
GAAP earnings $0.76 $0.88 (13.6)
Operating earnings 0.76 0.88 (13.6)
Cash operating earnings 0.79 0.92 (14.1)
PERFORMANCE RATIOS (Annualized)
RETURN ON AVERAGE ASSETS:
GAAP earnings 0.80 % 0.90 %
Operating earnings 0.80 0.90
Cash operating earnings on average
tangible assets 0.88 0.98
RETURN ON AVERAGE EQUITY:
GAAP earnings 7.76 9.23
Operating earnings 7.74 9.24
Cash operating earnings on average
tangible equity 15.20 17.33
NET INTEREST MARGIN:
Tax equivalent 3.29 3.11
Including net cash settlement of
certain interest rate swaps (3) 3.29 3.24
NONINTEREST INCOME AS A % OF TOTAL
REVENUE (4):
GAAP 22.94 24.12
Operating (2) 22.41 22.08
Operating, excluding net cash
settlement of certain interest rate
swaps (5) 22.41 18.90
EFFICIENCY RATIOS (6):
GAAP 60.92 55.26
Operating (2) 60.09 53.75
Cash operating (2) 58.45 52.24
CREDIT
Net charge-offs as a % of average
loans held for investment (annualized) 0.28 0.38
(1) The sum of net interest income and noninterest income.
(2) Total revenue, noninterest income as a % of total revenue, and the
efficiency ratio, on an operating basis, are calculated using tax-
equivalent net interest income and exclude non-operating items. The
cash operating efficiency ratio also excludes amortization of
intangibles.
(3) Calculated as tax-equivalent net interest income plus net cash
settlement on certain interest rate swaps divided by average earning
assets, annualized.
(4) Calculated as noninterest income, divided by the sum of net interest
income and noninterest income.
(5) Calculated as operating noninterest income excluding the net cash
settlement of certain interest rate swaps divided by operating
revenues.
(6) Calculated as noninterest expenses, divided by the sum of net interest
income and noninterest income.
Supplemental financial information may be found in the Investor Relations
section of TSFG's web site: http://www.thesouthgroup.com/.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except share data) (unaudited)
% Change 6/30/06 vs.
Three Months Ended (Annualized)
6/30/06 3/31/06 6/30/05 3/31/06 6/30/05
INCOME STATEMENT
Interest income
(tax-equivalent) $217,440 $207,168 $186,298 19.9 % 16.7 %
Interest expense 112,590 102,455 82,616 39.7 36.3
Net interest income
(tax-equivalent) 104,850 104,713 103,682 0.5 1.1
Less: tax-equivalent
adjustment 1,728 1,801 1,397 (16.3) 23.7
Net interest
income 103,122 102,912 102,285 0.8 0.8
Provision for credit
losses 7,487 9,911 9,944 (98.1) (24.7)
Net interest income
after provision for
credit losses 95,635 93,001 92,341 11.4 3.6
NONINTEREST INCOME:
Customer fee income 14,761 14,218 12,751 15.3 15.8
Wealth management
income 7,482 7,124 4,827 20.2 55.0
Mortgage banking
income 2,078 1,884 2,140 41.3 (2.9)
Bank-owned life
insurance 2,969 2,819 2,759 21.3 7.6
Merchant processing
income 3,318 2,686 2,713 94.4 22.3
Loss on trading and
certain derivative
activities (1) (245) (1,125) (1,032) 313.7 76.3
Net cash settlement of
certain interest rate
swaps (2) - - 3,534 - (100.0)
Loss on indirect auto
loans (3) (985) - - n/m n/m
Other 2,518 1,039 1,355 571.0 85.8
Operating noninterest
income (noninterest
income, excluding
non-operating
items) 31,896 28,645 29,047 45.5 9.8
Change in fair value of
interest rate swaps (2) - - 22,277 n/m n/m
Loss on sale of available
for sale securities (150) (183) (1,503) n/m n/m
Gain on equity
investments 3,751 858 650 n/m n/m
Loss on sale of indirect
auto loans previously
HFI (3) (3,477) - - n/m n/m
Non-operating
noninterest income 124 675 21,424 n/m n/m
Total noninterest
income 32,020 29,320 50,471 36.9 (36.6)
NONINTEREST EXPENSES:
Personnel expense 42,308 40,485 35,681 18.1 18.6
Occupancy 7,684 7,313 6,823 20.3 12.6
Furniture and
equipment 6,468 5,952 6,023 34.8 7.4
Professional services 5,497 5,779 5,135 (19.6) 7.0
Advertising and business
development 2,187 2,506 2,310 (51.1) (5.3)
Merchant processing
expense 2,678 2,165 2,211 95.0 21.1
Telecommunications 1,421 1,418 1,384 0.8 2.7
Amortization of
intangibles 2,208 2,207 2,140 0.2 3.2
Other 12,608 11,411 11,514 42.1 9.5
Operating noninterest
expenses (noninterest
expenses, excluding
non-operating
items) 83,059 79,236 73,221 19.4 13.4
Employment contract
buyouts - 598 222 n/m n/m
Merger-related costs - - 2,194 n/m n/m
Impairment from
write-down of assets - - 917 n/m n/m
Loss on early
extinguishment of debt - - 2,981 n/m n/m
Non-operating
noninterest expenses - 598 6,314 n/m n/m
Total noninterest
expenses 83,059 79,834 79,535 16.2 4.4
Income before income
taxes and
discontinued
operations 44,596 42,487 63,277 19.9 (29.5)
Income tax expense 15,253 14,680 20,565 15.7 (25.8)
Net income $29,343 $27,807 $42,712 22.2 % (31.3)%
SHARE DATA:
Net income per common
share, basic $0.39 $0.37 $0.58 21.7 % (32.8)%
Net income per common
share, diluted 0.39 0.37 0.57 21.7 (31.6)
Cash dividends declared
per common share 0.17 0.17 0.16 - 6.3
Average common shares
outstanding,
basic 74,864,648 74,685,192 73,083,009 1.0 2.4
Average common shares
outstanding,
diluted 75,504,683 75,339,283 74,421,103 0.9 1.5
(1) Includes any ineffectiveness on derivatives qualifying for hedge
accounting and the fair value adjustments and net cash settlements on
all derivatives not qualifying for hedge accounting.
(2) Relates to derivatives originally documented under the short-cut
method. All of these derivatives were either terminated or
redesignated as hedges under the long-haul method during fourth
quarter 2005.
(3) In June 2006, TSFG sold approximately $360 million of indirect loans
originated from August 2005 through the end of May 2006 and classified
the loss on sale of these loans previously held for investment as a
non-operating item. TSFG classified its June production of indirect
auto loans as held for sale and reported the loss from the lower of
cost or market adjustment as an operating item.
Supplemental financial information may be found in the Investor Relations
section of TSFG's web site: http://www.thesouthgroup.com/.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except share data) (unaudited)
Six Months Ended
6/30/06 6/30/05 % Change
INCOME STATEMENT
Interest income (tax-equivalent) $424,608 $357,873 18.6 %
Interest expense 215,045 154,616 39.1
Net interest income (tax-
equivalent) 209,563 203,257 3.1
Less: tax-equivalent adjustment 3,529 2,723 29.6
Net interest income 206,034 200,534 2.7
Provision for credit losses 17,398 20,906 (16.8)
Net interest income after provision
for credit losses 188,636 179,628 5.0
NONINTEREST INCOME:
Customer fee income 28,979 23,674 22.4
Wealth management income 14,606 8,968 62.9
Mortgage banking income 3,962 3,627 9.2
Bank-owned life insurance 5,788 5,520 4.9
Merchant processing income 6,004 4,751 26.4
Loss on trading and certain
derivative activities (1) (1,370) (128) (970.3)
Net cash settlement of certain
interest rate swaps (2) - 8,271 (100.0)
Loss on indirect auto loans (3) (985) - n/m
Other 3,557 2,899 22.7
Operating noninterest income
(noninterest income, excluding
non-operating items) 60,541 57,582 5.1
Change in fair value of interest
rate swaps (2) - 5,068 n/m
Loss on sale of available for sale
securities (333) (1,269) n/m
Gain on equity investments 4,609 2,361 n/m
Loss on sale of indirect auto loans
previously HFI (3) (3,477) - n/m
Non-operating noninterest income 799 6,160 n/m
Total noninterest income 61,340 63,742 (3.8)
NONINTEREST EXPENSES:
Personnel expense 82,793 69,319 19.4
Occupancy 14,997 12,922 16.1
Furniture and equipment 12,420 11,556 7.5
Professional services 11,276 9,571 17.8
Advertising and business development 4,693 4,219 11.2
Merchant processing expense 4,843 3,843 26.0
Telecommunications 2,839 2,710 4.8
Amortization of intangibles 4,415 3,946 11.9
Other 24,019 22,122 8.6
Operating noninterest expenses
(noninterest expenses, excluding
non-operating items) 162,295 140,208 15.8
Employment contract buyouts 598 185 n/m
Merger-related costs - 2,499 n/m
Impairment from write-down of assets - 917 n/m
Charitable contribution to
foundation - 683 n/m
Loss on early extinguishment of debt - 1,553 n/m
Non-operating noninterest expenses 598 5,837 n/m
Total noninterest expenses 162,893 146,045 11.5
Income before income taxes and
discontinued operations 87,083 97,325 (10.5)
Income tax expense 29,933 31,801 (5.9)
Discontinued operations, net of
income tax - (396) n/m
Net income $57,150 $65,128 (12.2)%
SHARE DATA:
Net income per common share, basic $0.76 $0.90 (15.6)%
Net income per common share, diluted 0.76 0.88 (13.6)
Cash dividends declared per common
share 0.34 0.32 6.3
Average common shares outstanding,
basic 74,775,416 72,234,263 3.5
Average common shares outstanding,
diluted 75,422,439 73,729,630 2.3
(1) Includes any ineffectiveness on derivatives qualifying for hedge
accounting and the fair value adjustments and net cash settlements on
all derivatives not qualifying for hedge accounting.
(2) Relates to derivatives originally documented under the short-cut
method. All of these derivatives were either terminated or
redesignated as hedges under the long-haul method during fourth
quarter 2005.
(3) In June 2006, TSFG sold approximately $360 million of indirect auto
loans originated from August 2005 through the end of May 2006 and
classified the loss on sale of these loans previously held for
investment as a non-operating item. TSFG classified its June
production of indirect auto loans as held for sale and reported the
loss from the lower of cost or market adjustment as an operating item.
Supplemental financial information may be found in the Investor Relations
section of TSFG's web site: http://www.thesouthgroup.com/.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except share data) (unaudited)
% Change 6/30/06 vs.
(Annualized)
6/30/06 3/31/06 6/30/05 3/31/06 6/30/05
BALANCE SHEET DATA
(Period End)
Total assets $14,077,083 $14,361,925 $14,887,905 (8.0)% (5.4)%
Intangible
assets (689,690) (691,328) (693,541) (1.0) (0.6)
Tangible
assets 13,387,393 13,670,597 14,194,364 (8.3) (5.7)
Loans held
for sale 78,763 23,536 41,427 941.2 90.1
Loans held for
investment 9,439,445 9,720,891 8,966,337 (11.6) 5.3
Allowance for
loan losses (108,995) (111,219) (104,853) (8.0) 4.0
Net loans
held for
investment 9,330,450 9,609,672 8,861,484 (11.7) 5.3
Securities 2,914,799 3,040,082 4,325,967 (16.5) (32.6)
Total earning
assets 12,590,938 12,899,975 13,398,288 (9.6) (6.0)
Noninterest-
bearing
deposits 1,579,852 1,536,796 1,466,803 11.2 7.7
Core
deposits (1) 5,202,623 5,110,395 5,393,874 7.2 (3.5)
Customer
deposits (2) 7,835,043 7,776,911 7,518,621 3.0 4.2
Wholesale
borrowings (3) 4,510,638 4,884,736 5,699,442 (30.7) (20.9)
Total funding 12,345,681 12,661,647 13,218,063 (10.0) (6.6)
Shareholders'
equity 1,484,989 1,484,105 1,517,072 0.2 (2.1)
Intangible
assets (689,690) (691,328) (693,541) (1.0) (0.6)
Tangible
equity 795,299 792,777 823,531 1.3 (3.4)
Securities/total
assets 20.7 % 21.2 % 29.1 %
Wholesale borrowings/
total assets (3) 32.0 34.0 38.3
BALANCE SHEET DATA
(Averages - Three
Months Ended)
Total assets $14,344,435 $14,367,256 $14,902,070 (0.6)% (3.7)%
Intangible
assets (690,375) (691,262) (656,066) (0.5) 5.2
Tangible
assets 13,654,060 13,675,994 14,246,004 (0.6) (4.2)
Loans 9,711,641 9,630,573 8,706,276 3.4 11.5
Loans, excluding
indirect auto
loans 8,878,531 8,710,531 7,862,397 7.7 12.9
Securities (4) 3,092,328 3,187,325 4,731,121 (12.0) (34.6)
Total earning
assets 12,868,288 12,839,407 13,460,095 0.9 (4.4)
Noninterest-
bearing
deposits 1,536,140 1,502,958 1,349,746 8.9 13.8
Core
deposits (1) 5,054,809 4,978,698 5,178,447 6.1 (2.4)
Customer
deposits (2) 7,696,626 7,757,285 7,095,571 (3.1) 8.5
Wholesale
borrowings (3) 4,975,576 4,945,488 6,197,520 2.4 (19.7)
Total funding 12,672,202 12,702,773 13,293,091 (1.0) (4.7)
Shareholders'
equity 1,479,646 1,491,408 1,450,674 (3.2) 2.0
Intangible
assets (690,375) (691,262) (656,066) (0.5) (147.6)
Tangible
equity 789,271 800,146 794,608 (5.5) (220.3)
BALANCE SHEET DATA
(Averages - Year
to Date)
Total assets $14,355,783 $14,367,256 $14,603,708 (0.3)% (1.7)%
Intangible
assets (690,816) (691,262) (633,615) (0.3) 9.0
Tangible
assets 13,664,967 13,675,994 13,970,093 (0.3) (2.2)
Loans 9,671,331 9,630,573 8,496,056 1.7 13.8
Loans, excluding
indirect auto
loans 8,794,995 8,710,531 7,666,224 3.9 14.7
Securities (4) 3,139,564 3,187,325 4,662,386 (6.0) (32.7)
Total earning
assets 12,853,927 12,839,407 13,184,784 0.5 (2.5)
Noninterest-
bearing
deposits 1,519,641 1,502,958 1,289,140 4.5 17.9
Core
deposits (1) 5,016,963 4,978,698 5,072,429 3.1 (1.1)
Customer
deposits (2) 7,726,788 7,757,285 6,871,086 (1.6) 12.5
Wholesale
borrowings (3) 4,960,615 4,945,488 6,163,617 1.2 (19.5)
Total funding 12,687,403 12,702,773 13,034,703 (0.5) (2.7)
Shareholders'
equity 1,485,495 1,491,408 1,422,911 (1.6) 4.4
Intangible
assets (690,816) (691,262) (633,615) (0.3) 9.0
Tangible
equity 794,679 800,146 789,296 (2.7) 0.7
(1) Core deposits include noninterest-bearing, interest-bearing checking,
money market accounts, and savings accounts.
(2) Customer deposits include total deposits less brokered deposits.
(3) Wholesale borrowings include borrowings and brokered deposits.
(4) The average balances for investment securities exclude the unrealized
loss recorded for available for sale securities.
Supplemental financial information may be found in the Investor Relations
section of TSFG's web site: http://www.thesouthgroup.com/.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except share data) (unaudited)
% Change 6/30/06 vs.
(Annualized)
6/30/06 3/31/06 6/30/05 3/31/06 6/30/05
CREDIT QUALITY
Nonperforming
loans (1) $37,782 $35,722 $42,457 (11.0)%
Foreclosed
property
(other real
estate owned
and personal
property
repossessions) 10,187 9,323 12,618 (19.3)
Nonperforming
assets $47,969 $45,045 $55,075 (12.9)
Loans held for
investment
(period-end) $9,439,445 $9,720,891 $8,966,337
Nonperforming
loans as a %
of loans held
for investment 0.40 % 0.37 % 0.47 %
Nonperforming
assets as a %
of loans held
for investment
and foreclosed
property 0.51 0.46 0.61
Allowance for
loan losses $108,995 $111,219 $104,853
Allowance for
credit losses
(2) $110,320 $112,454 $105,552
Allowance for
loan losses as
a % of loans
HFI 1.15 1.14 1.17
Allowance for
credit losses
as a % of
loans HFI (2) 1.17 1.16 1.18
Allowance for
loan losses to
nonperforming
loans 2.88 x 3.11 x 2.47 x
Loans past due
90 days or
more (mortgage
and consumer
with interest
accruing) 2,849 2,369 2,035 40.0
Net loan
charge-offs:
Three months
ended 6,532 6,807 6,823 (4.3)
Year to date 13,339 6,807 16,013 (16.7)
Average loans
held for
investment:
Three months
ended 9,664,441 9,606,556 8,679,316
Year to date 9,635,658 9,606,556 8,472,434
Net loan
charge-offs as
a % of average
loans held for
investment
(annualized):
Three months
ended 0.27 % 0.29 % 0.32 %
Year to date 0.28 0.29 0.38
CAPITAL RATIOS
Total risk-
based capital 11.53 10.36 10.67
Tier 1 risk-
based capital 9.96 8.82 9.07
Leverage ratio 8.21 7.47 7.12
Tangible equity
to tangible
assets 5.94 5.80 5.80
SHARE DATA
Book value per
common share $19.79 $19.81 $20.40 (0.4)% (3.0)%
Tangible book
value per
common share 10.60 10.58 11.08 0.8 (4.3)
Shares
outstanding 75,033,866 74,907,489 74,348,330 0.7 0.9
STOCK PERFORMANCE
Market price
per share of
common stock $26.41 $26.15 $28.42 4.0 % (7.1)%
Indicated
annual
dividend 0.68 0.68 0.64 - 6.3
Dividend yield 2.57 % 2.60 % 2.25 %
Price/book
ratio 1.33 x 1.32 x 1.39 x
Market capital-
ization $1,981,644 $1,958,831 $2,112,980 4.7 (6.2)
OPERATIONS DATA
Branch offices 169 172 167 (7.0)% 1.2 %
ATMs 169 167 159 4.8 6.3
Employees
(full-time
equivalent) 2,581 2,526 2,554 8.7 1.1
Active internet
banking
customers 116,499 93,973 72,173 96.1 61.4
(1) At June 30, 2006, December 31, 2005 and June 30, 2005, these credit
quality indicators (nonperforming loans and impaired loans) included
$743,000, $1.9 million, and $5.5 million, respectively, in
restructured loans.
(2) Effective December 31, 2005, the reserve for unfunded lending
commitments was reclassified from the allowance for loan losses to
other liabilities. The allowance for credit losses is the sum of
the allowance for loan losses and the reserve for unfunded lending
commitments. The provision for credit losses is the sum of the
provision for loan losses and the provision for unfunded lending
commitments. Amounts presented for prior periods have been
reclassified to conform to the current presentation.
Supplemental financial information may be found in the Investor Relations
section of TSFG's web site: http://www.thesouthgroup.com/.
THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except share data) (unaudited)
Three Months Ended % Change 6/30/06 vs.
(Annualized)
6/30/06 3/31/06 6/30/05 3/31/06 6/30/05
RECONCILIATION OF GAAP TO
NON-GAAP MEASURES
NET INCOME (LOSS), AS
REPORTED (GAAP) $29,343 $27,807 $42,712 22.2 % (31.3)%
Add: Income tax expense
(benefit) 15,253 14,680 20,565
Income (loss) before income
taxes and discontinued
operations 44,596 42,487 63,277 19.9 (29.5)
Non-operating items:
Change in fair value of
interest rate swaps - - (22,277)
Loss on sale of available
for sale securities 150 183 1,503
Gain on equity
investments (3,751) (858) (650)
Loss on sale of indirect
auto loans previously
HFI 3,477 - -
Employment contract
buyouts - 598 222
Merger-related costs - - 2,194
Impairment from write-
down of assets - - 917
Loss on early
extinguishment of debt - - 2,981
PRE-TAX OPERATING EARNINGS
(income before taxes and
discontinued operations,
excluding non-operating
items) 44,472 42,410 48,167 19.5 (7.7)
Related income taxes 15,211 14,653 15,654
OPERATING EARNINGS (net
income, excluding
non-operating items) 29,261 27,757 32,513 21.7 (10.0)
Add: Amortization of
intangibles, net of income
tax 1,453 1,444 1,445
CASH OPERATING EARNINGS
(net income, excluding
non-operating items and
amortization of
intangibles) $30,714 $29,201 $33,958 20.8 (9.6)
NET INTEREST INCOME, AS
REPORTED (GAAP) $103,122 $102,912 $102,285
Add: Tax-equivalent
adjustment 1,728 1,801 1,397
Add: Net cash
settlement of certain
interest rate swaps (1) - - 3,534
Net interest income (tax
equivalent), including
net cash settlement of
certain interest rate
swaps (1) $104,850 $104,713 $107,216 0.5 (2.2)
OPERATING NONINTEREST
INCOME (see page 3) $31,896 $28,645 $29,047
Less: Net cash
settlement of certain
interest rate swaps (1) - - (3,534)
Operating noninterest
income, excluding net cash
settlement of certain
interest rate swaps (1) $31,896 $28,645 $25,513 45.5 25.0
Six Months Ended
6/30/06 6/30/05 % Change
RECONCILIATION OF GAAP TO NON-GAAP
MEASURES
NET INCOME, AS REPORTED (GAAP) $57,150 $65,128 (12.2)%
Discontinued operations, net of
income tax - 396
Add: Income tax expense 29,933 31,801
Income before income taxes and
discontinued operations 87,083 97,325 (10.5)
Non-operating items:
Change in fair value of interest
rate swaps - (5,068)
Loss on sale of available for sale
securities 333 1,269
Gain on equity investments (4,609) (2,361)
Loss on sale of indirect auto loans
previously HFI 3,477 -
Employment contract buyouts 598 185
Merger-related costs - 2,499
Impairment from write-down of assets - 917
Charitable contribution to
foundation - 683
Loss on early extinguishment of debt - 1,553
PRE-TAX OPERATING EARNINGS (income
before taxes and discontinued
operations, excluding non-operating
items) 86,882 97,002 (10.4)
Related income taxes 29,864 31,822
OPERATING EARNINGS (net income,
excluding non-operating items) 57,018 65,180 (12.5)
Add: Amortization of intangibles, net
of income tax 2,897 2,655
CASH OPERATING EARNINGS (net income,
excluding non-operating items and
amortization of intangibles) $59,915 $67,835 (11.7)
NET INTEREST INCOME, AS REPORTED
(GAAP) $206,034 $200,534
Add: Tax-equivalent adjustment 3,529 2,723
Add: Net cash settlement of
certain interest rate swaps (1) - 8,271
Net interest income (tax
equivalent), including net
cash settlement of certain interest
rate swaps (1) $209,563 $211,528 (0.9)
OPERATING NONINTEREST INCOME (see
page 4) $60,541 $57,582
Less: Net cash settlement of
certain interest rate swaps (1) - (8,271)
Operating noninterest income,
excluding net cash settlement of
certain interest rate swaps (1) $60,541 $49,311 22.8
(1) Relates to derivatives originally documented under the short-cut
method. All of these derivatives were either terminated or
redesignated as hedges under the long-haul method during fourth
quarter 2005. TSFG is presenting prior periods to be comparable to
these current classifications under hedge accounting. Accordingly,
TSFG has presented these non-GAAP measures classifying the net cash
settlement for these certain derivatives in net interest income
instead of noninterest income.
Supplemental financial information may be found in the Investor
Relations section of TSFG's web site: http://www.thesouthgroup.com/.
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