DBRS Confirms South Financial Group, Inc. at BBB (low)

Dominion Bond Rating Service (“DBRS”) has today confirmed its ratings of The South Financial Group, Inc. (“TSFG” or the “Company”) at BBB (low) and R-2 (middle), and its bank subsidiaries, Carolina First Bank and Mercantile Bank, as indicated above, subsequent to a detailed review of the Company. Additionally, DBRS assigned a rating of BB (high) to TSFG’s Subordinated Debt. The trends on all ratings are Stable.

TSFG’s ratings are underpinned by a growing three-state super-community banking franchise with strong deposit and loan growth, a demographically attractive operating footprint, and improving credit quality. The Company’s concentration in commercial real estate (CRE), reliance on wholesale funding, and below peer capitalization are also incorporated into the assigned ratings level.

Traditionally an acquisition-driven bank, TSFG has assembled a metropolitan-based franchise that targets high-growth markets within its southeastern footprint. With a 60/40 asset distribution between the Carolinas and Florida, the Company’s opportunistic strategy focuses on providing quality service to small- and middle-market business customers whose banking relationships have been disrupted by the significant amount of regional bank consolidation over the past 20 years. TSFG’s modest earnings power was further constrained over the past year due to a sharply narrowing wholesale spread and elevated operating expenses.

Having doubled in size in the past three years, the Company has elected to defer its normally brisk acquisition pace in order to strengthen its initiatives to improve internal asset-liability management, deposit mix, and fee-based revenue stream while reducing expenses. DBRS expects gradual earnings improvement from these initiatives over the near to medium term. Modest fee income levels are not expected to grow significantly as a function of revenues, if TSFG remains an active acquirer of community banks whose low non-interest revenues are dilutive to TSFG’s.

Loan growth has been brisk with a noteworthy concentration in CRE, as it is a preferred asset class. The composition of acquired bank loan portfolios has exacerbated this concentration. TSFG subsidiary banks have demonstrated an improving ability to manage their loan portfolios, as evidenced by lower levels of non-performing loans that are approaching peer levels, although net charge-offs remain elevated.

DBRS notes that TSFG has an adequate core deposit franchise that is ranked fourth by deposit market share in South Carolina, but is in a weaker 16th position in Florida, both of which are highly competitive markets. The Company’s deposit growth has traditionally lagged its loan growth, requiring more expensive and less stable wholesale funding to finance the gap. Recently, however, TSFG began to make progress in reducing its wholesale funding levels with a renewed focus on deposit gathering. While capital levels consistently exceed regulatory requirements, they lag its peers and are not expected to change significantly due to the Company’s acquisition appetite.

The South Financial Group, Inc., the largest bank holding company based in South Carolina, is a regional financial services company with US$14 billion in assets and 172 branches operating two bank subsidiaries, Carolina First Bank and Mercantile Bank, as of December 31, 2005.