That loss was mostly attributable to &dquo;housing-related loans&dquo; gone bad in Florida, a state the New York Times described last Sunday as &dquo;the American dream in high reverse.&dquo;

After including a non-cash accounting charge for &dquo;goodwill impairment&dquo; of $426 million reflecting lower valuations of its Florida franchise, TSFG booked a total loss of $568 million for 2008.

That single-year loss is about $40 million more than all the net profits the bank reported from 2002 to 2007.

&dquo;It goes without saying that we find these numbers disappointing,&dquo; Harton told the analysts.

The U.S. Treasury Department&squo;s efforts to help banks begin to lend again are working, Harton said, but new problems have now arisen in the economy. He cited &dquo;the rapid pullback in consumer spending over the past 90 days&dquo; as now taking its toll in the bank&squo;s commercial, industrial and consumer loan portfolios.

Harton said 2009 &dquo;will also have its challenges.&dquo;

But despite the current economic conditions, Harton said he believes TSFG is poised to come back strong once the economy recovers.

Ross Sloan, Carolina First Bank Market President for Western North Carolina, said the bank remains committed to its investing in the Carolinas.

&dquo;While it is clearly a challenging time for banks right now, the fact that Carolina First is well capitalized allows us to keep our focus on our customers,&dquo; Sloan said. &dquo;Since 1986, we&squo;ve been helping customers grow their businesses and households, and will continue to do so. Likewise, we are committed to the communities we serve, and we continue to invest in them.&dquo;

Growth by acquisition

Carolina First, one of seven banks serving Polk County and Landrum, began as a small bank in Greenville, S.C. in 1986. The bank expanded over the past 23 years by acquiring 18 other banks, focusing mostly on the Palmetto State through 2002.

Under the leadership of founder Mack Whittle, they bought banks in Georgetown, Aiken, Prosperity, Mount Pleasant, Anderson, Easley, Travelers Rest, Camden, Myrtle Beach and Rock Hill.

In 2000, however, the bank changed its parent holding company name from Carolina First Corp. to The South Financial Group and began buying Florida banks.

Through 2005, TSFG went on to acquire banks in Crescent City, St. Petersburg, Tampa, Jacksonville and Boca Raton, all now operating under TSFG&squo;s Mercantile Bank franchise.

TSFG expanded its Carolina First franchise into Western North Carolina in 2003 when it purchased MountainBank Financial Corp., a Hendersonville-based startup founded in 1997 by J.W. Davis.

Today, TSFG has $13.6 billion in assets and operates 82 branches in South Carolina, 71 branches in Florida, and 27 branches in North Carolina. TSFG is the largest bank holding company in South Carolina and its operations place it among the top 50 U.S. commercial banks in total assets.

Like the other 49, TSFG has had a rough year. The bank&squo;s &dquo;non-performing&dquo; assets totalled $421 million at year end, 4.1% of the bank&squo;s $10.2 billion loan portfolio.

That&squo;s money still at risk. TSFG already wrote off bad loans of about $223 million in 2008, or 2.16% of its total loan portfolio.

20 cents on the dollar

Banks routinely clean up their balance sheets by selling off bad loans at a discount, but when TSFG went to the sale in the fourth quarter of last year, buyers who wanted to buy couldn&squo;t get the cash, Harton said. Others simply stayed away due to the uncertain market outlook.

There was some discussion on the conference call regarding the federal government&squo;s plan to create a &dquo;bad bank,&dquo; an aggregator bank to buy banks&squo; bad assets, but Harton said TSFG officers were unsure as yet if such a bank would be formed, or how it might function. To be helpful to regional banks like TSFG, the aggregator would have to buy bad loans and foreclosed properties and not just &dquo;toxic securities,&dquo; Harton said.

TSFG has taken defensive measures in light of current economic conditions, Harton explained, measures which he said he hopes &dquo;will enable us to emerge from the economic turmoil as a stronger bank.&dquo;

The bank has curtailed its lending in Florida, appointed new officers in key positions, set out to control expenses and explore new revenue opportunities.

To reduce costs, Harton said the bank reduced its work force by 3%, or 68 people, in the fourth quarter, and said that executives will not receive bonuses for 2008.

Harton said TSFG is attempting to face the reality of its situation and has adjusted its loss reserves to reflect the challenges still ahead in 2009. TSFG&squo;s allowance for further credit losses is currently $250 million, 2.45% of its total loan portfolio.

One stock analyst on the conference call, however, questioned whether that loss reserve is enough as residential values continue to fall across the country. He cited as an example Carolina First&squo;s $127 million portfolio of residential construction and condominium construction loans in the Myrtle Beach area.

TSFG currently carries these past due residential loans on its books at 69% of the total outstanding principal. The analyst noted that failing banks in the Myrtle Beach area are selling off their bad loans for 20 cents on the dollar.

&dquo;We have sold some residential land at 20 cents on the dollar this quarter,&dquo; Harton said, noting some other residential land was sold at 65%. &dquo;We just try to react to the market.&dquo;

Nearly $600 million raised

The primary measure TSFG took this year to weather the economic storm was to raise new capital, nearly $600 million.

Harton noted that TSFG raised $250 million through preferred stock sales last spring, and another $347 million in preferred stock through the U.S. Treasury Department&squo;s Troubled Asset Relief Program (TARP) in November.

TSFG ended the year with a tangible equity ratio, a key regulatory measure of a bank&squo;s health, of 10.29%, up from 7.9% at Sept. 30, 2008.

TSFG chief financial officer James Gordon said $87 million of the TARP money was retained by the parent company, TSFG, to meet the required dividend payments to the federal government. The rest, $260 million, went to TSFG&squo;s subsidiary, Carolina First Bank.

None went directly to bonuses for executives, although that issue arose.

When TSFG CEO and founder Whittle retired Oct. 24th last year with $18 million it raised the ire of S.C. Gov. Mark Sanford. Sanford accused Whittle of &dquo;gaming the system&dquo; by retiring just in time to get his contractual retirement payment before the bank&squo;s TARP loan was received and rules would have prevented such a payment.

&dquo;It is,&dquo; Gov. Sanford said last November, &dquo;a very strong example, when somebody takes a share price from $26 down to $4 (TSFG&squo;s share price is now under $2), and yet they get an $18 million payout. In the marketplace, that&squo;s not normally what happens.&dquo;

TSFG, however, issued a statement from its board chairman, John Smith, noting that Whittle&squo;s retirement payment was &dquo;consistent with the provisions of his employment agreement, disclosed to both the public and the banking regulators. The retirement reflected his 20-year career with TSFG as its founder and only chief executive officer.&dquo;

In keeping with the intent of TARP program, Harton said the TARP money helped TSFG&squo;s banks to originate 5,175 new loans and loan renewals totaling $1 billion ‐ $920 million in commercial loans and $130 million in consumer loans ‐ in the fourth quarter of last year.

Red ink in real estate

It is doubtful that many of those new loans were in commercial real estate.

While commercial real estate represents just 40% of the total loan portfolio for TSFG, commercial real estate loans represent 66% of the bank&squo;s failing loans and 50% of the total of all loans charged-off in the fourth quarter.

Commercial real estate loans include loans made for residential and commercial development, condominium development, income properties and undeveloped land.

TheStreet.com just this week placed TSFG on its list of the ten holding companies with more than $10 billion in total assets with the highest asset concentration in non-performing commercial real estate and commercial construction loans as of Dec. 31.

TSFG charged off $5 million in bad real estate loans in South Carolina in the last three months of the year.

The total of S.C. commercial real estate &dquo;non-accrual&dquo; loans ‐ those loans for which the bank no longer records interest, the loans considered most likely to go bad ‐ grew to $41 million.

Sixty percent of those non-accrual loans were in the formerly booming S.C. coastal areas.

Nonetheless, TSFG&squo;s South Carolina operations earned money in 2008.

In its Securities and Exchange Commission (SEC) filing in November, TSFG reported that its South Carolina banking operations earned $28 million in profits for the first three quarters of 2008.

Western North Carolina operations did not fare as well. Through the first nine months of 2008, Carolina First&squo;s North Carolina operations reported losses of $11 million.

&squo;Stresses in Western N.C.&squo;

The bank charged off $5.4 million in bad commercial real estate loans in Western North Carolina in the fourth quarter and reported $40 million of commercial real estate non-accrual loans.

One Western North Carolina project, for which Carolina First provided $15 million of financing, went sour very publicly in early 2008 when investors brought a lawsuit against the Village of Penland, a 1,300-acre mountain development near Asheville.

The developer&squo;s partner banks, including Carolina First, were also named in the suit, which claimed that the banks and the developer fraudulently led consumers to borrow a total of $100 million to buy properties that are now worth far less.

The N.C. attorney general shut down the Village of Penland development and the developer has pled guilty to securities, mail, wire and bank fraud.

Analysts on the year-end conference call asked several questions about Carolina First&squo;s Western North Carolina operations.

&dquo;Similar stresses are moving into Western North Carolina as we have seen in Florida,&dquo; TSFG Chief Credit Officer Robert Edwards told them. Edwards said loans for spec houses and residential lots are the main problem in Western North Carolina.

Unlike Florida, Harton said, Western North Carolina developers are typically smaller firms. &dquo;The good news is that they take smaller bites. The bad news is there are more of them.&dquo;

Overall, though, TSFG&squo;s Florida operations took by far the hardest hit. Through September, TSFG showed losses of $313 million in Florida, including a $188 million non-cash accounting charge for goodwill impairment.

Sixty percent of all TSFG loans which went bad in the first three quarters of 2008 were loans made in Florida.

In its SEC filing, TSFG reported that $1.7 billion, about 44% of the bank&squo;s $4.1 billion commercial real estate portfolio, was based in Florida.

&squo;Excellent markets&squo;

It is an understatement to say 2008 was not a good year to be in commercial real estate in Florida. The housing bust brought failure to many residential developers. Caught in the economic downturn also were shopping centers, office parks and big box stores.

&dquo;Now Leasing&dquo; signs are ubiquitous as Florida experiences a 15.7 percent statewide vacancy rate for office, retail and industrial buildings.

TSFG&squo;s markets in the state ‐ Tampa Bay, Boca Raton, Jacksonville ‐ are among the worst.

The Tampa Bay area (Pinellas County), saw a 19.1% vacancy rate, Boca Raton (Palm Beach County) 18.6% and Jacksonville, 17.5%. The average rental rate per square foot has dropped to $7.12 from $7.79 two years ago, and analysts are predicting more stores will close this winter after a sluggish holiday season, the most since the recession of 1981-82.

At year end, TSFG reported total Florida commercial real estate non-accrual loans of $149 million.

Nonetheless, Harton said South Carolina, Florida and Western North Carolina remain &dquo;excellent long term markets.&dquo;

In fact, once the economy recovers, Harton said the bank&squo;s officers expect returns in Florida actually to be better than before due to a reduction in the number of competing banks there.

&dquo;We should hit the ground running at the end of the recession,&dquo; Harton said.

Finally, TSFG&squo;s financial problems in Florida real estate may alter slightly the real estate market in Greenville, S.C.

In recent years, TSFG has invested $92 million in building a new bank headquarters building in Greenville near Clemson University&squo;s International Center for Automotive Research.

That facility is expected to be partially ready for occupancy later this year.

However, in light of the current financial state of the company, Harton told analysts that a study group of bank officers has been formed to consider whether to move in as planned, whether to lease part of the new building to others, or whether to just sell it off entirely.

This is the second in a series of profiles on local banks. The first in the series (Oct. 10, 2008 Bulletin) profiled Mountain First Bank. Other banks will be featured in upcoming issues of the Bulletin.