The South Financial Group in Greenville, S.C., reported Tuesday a large but narrowing first-quarter loss of $85.8 million.

The $12.4 billion-asset company had lost $193.8 million a year earlier.

The company said it expects to enter into formal agreements with regulators this quarter that would require it to boost capital — a challenge for a wobbly banking company.

Still, management said it sees reasons for optimism: Along with the significant decline in losses, the company's nonperforming assets and chargeoffs continue to decrease.

"These signs are encouraging and help reinforce our belief that losses for this cycle peaked in 2009," H. Lynn Harton, the company's chief executive, said in a conference call with analysts and investors Wednesday. "However, a fair amount of uncertainty remains in the economy. Our potential problem-loan levels remain elevated, and we expect credit costs to remain in this same range for the next several quarters."

Though credit costs were high in the quarter, Harton said, nonperforming loans declined for a third consecutive period, to $374.2 million. Meanwhile, net chargeoffs fell for the second consecutive quarter, to $87.8 million from $143 million.

The company's $95.1 million loan-loss provision exceeded chargeoffs by $7 million, increasing the allowance for loan losses to 4.75% of loans held for investment, an increase of 30 basis points from the previous quarter.

Yet capital ratios at Carolina First Bank, the company's subsidiary, remained thin.

The parent company injected $30 million into the bank to ensure that its total-risked based capital ratio would exceed 10% at the end of the quarter, the company's chief financial officer, James Gordon, said in the conference call. South Financial reported a 9.52% Tier 1 capital ratio, 10.4% total risk-based capital ratio and 7.4% leverage ratio at March 31.

The bank's tangible common equity ratio, however, fell 77 basis points, to 2.9%, at the end of the quarter. (Analysts consider 5% as acceptable.)

Jefferson Harralson, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said that this ratio "necessitates a capital raise in the fairly near term, which is going to be relatively difficult in the current market."

"That said, you are starting to see an improvement in credit and in the franchise value of South Financial Group," he added.

Albert Savastano, an analyst at Macquarie Research in New York, said the company appears to be moving beyond its worst problems. "Clearly, if they can get capital, I think they can right the ship," he said.

The company's shares, however, have not closed above $1 in nearly six months, a further obstacle to satisfying its need for more capital.

Gordon, the CFO, said a handful of banks with less-than-stellar balance sheets have been able to raise capital in recent weeks and that South Financial is optimistic.

Savastano said it could work out for the company. "Given where we see the capital raises that have occurred, it's probably not impossible," he said.

Gordon would not comment on a timetable for raising the money but said he expected any enforcement action to set a deadline. He said the company is exploring options such as a public offering, private-equity raise or debt restructuring, including of the $347 million it received in funds through the Troubled Asset Relief Program in December 2008.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.