DBRS Confirms The South Financial Group, Inc. at BBB (low); Trend is Stable

DBRS has today confirmed the ratings of The South Financial Group, Inc. (TSFG or the Company) and its subsidiary Carolina First Bank as indicated below. The rating action followed a review of the Company’s operating results, financial fundamentals and future prospects. The trends on all ratings are Stable.

TSFG’s ratings are underpinned by a growing three-state community banking franchise with an improved risk profile, a demographically attractive operating footprint and well-managed credit quality. The Company’s challenges, which are incorporated into the assigned ratings level, include generating meaningful earnings and revenue growth, its concentration in commercial real estate (CRE) and its reliance on wholesale funding.

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 as well as retail consumers whose banking relationships have been disrupted by the significant amount of regional bank consolidation over the past 20 years. TSFG’s modest earnings power has been constrained over the past few years due to a sharply narrowing wholesale spread, elevated operating expenses and an internal improvement focus.

Having doubled in size in five years, the Company has elected to defer its normally brisk acquisition pace in order to strengthen its risk organization, treasury management, retail products and delivery, deposit mix and fee-based revenue stream while reducing expenses. DBRS believes that TSFG’s risk profile has been reduced by the hiring of experienced professionals who have executed on many of the actions outlined above including the ongoing de-leveraging of the balance sheet and the rebalancing of capital levels. The internal focus and organizational changes however, have negatively impacted revenue and earnings growth. DBRS expects gradual earnings improvement from these initiatives over the near to medium term. The Company’s success in converting its many improvement efforts into meaningful performance gains could lead to positive rating actions. 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.

The Company has a noteworthy concentration in CRE whose composition of acquired bank-loan portfolios has exacerbated. In a significant regional CRE downturn, the Company’s earnings would likely be pressured. TSFG has improved its credit processes and administration, as evidenced by lower levels of non-performing loans that are approaching peer levels.

DBRS notes that TSFG has an adequate core deposit franchise that is ranked fourth by deposit market share in South Carolina, but has a weaker position in its Florida 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 reliance with a renewed focus on deposit gathering.

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 operating a sole banking subsidiary, Carolina First Bank with 171 branches as of July 1, 2007.

Note:
All figures are in U.S. dollars unless otherwise noted.
Effective July 1, 2007 the ratings of Mercantile Bank were withdrawn as a result of its charter merger with Carolina First Bank.