DBRS Confirms The South Financial Group, Inc. at BBB (low), Changes Trend to Negative

DBRS has today confirmed the ratings of The South Financial Group, Inc. (The South or the Company), including its Issuer & Senior Debt rating of BBB (low), and changed the trend on all ratings to Negative from Stable.

The rating action followed the Company’s announcement of accelerating asset quality deterioration and a significant non-cash pre-tax $188 million write-down of goodwill related to its Florida banking segment, resulting in a $201 million loss for Q1 2008. The Negative trend reflects DBRS’s concerns with The South’s weakened Florida commercial real estate portfolio, which has been negatively impacted by the severe downturn in the housing and mortgage markets. DBRS further notes concern with the higher risk nature of the Company’s commercial real estate concentration. DBRS comments that The Company’s Q1 2008 provision at $73 million exceeded net charge-offs by $48 million, representing about two quarters of income before provisions and taxes. DBRS believes that a significant increase in credit costs above this level could invade capital, which may trigger a rating action. Should credit costs continue to rise, DBRS would expect The South to enhance its capital position to adequately absorb the increased credit costs.

Since Q3 2007, The South’s level of nonperforming assets (NPAs) has rapidly accelerated, and currently represents 2.26% of loans and other real estate owned, up from 0.88% for the prior quarter. Moreover, DBRS comments that the Company’s Q1 2008 net charge-offs are relatively high and represent 0.98% of average loans, up slightly from 0.92% for the prior quarter. DBRS currently views The South’s levels of loan loss reserves to be sufficient to cover current losses. However, DBRS would expect the Company to continue to build loan loss reserves in unison with potential future charge-offs and increases in nonaccruals.

DBRS notes that The South’s liquidity and capital positions are acceptable for its rating range. DBRS also notes that The South’s net interest margin (NIM) for the first quarter remained relatively stable at 3.07% versus 3.09% for the prior quarter. Moreover, recurrent expenses and core non-interest income appear to be relatively stable.

The South’s profile is characterized by its three-state community banking franchise and demographically appealing operating footprint in the Carolinas and Florida. The South Financial Group, Inc., a super community financial services company headquartered in Greenville, South Carolina, reported total assets of $14 billion at March 31, 2008.

Note:
All figures are in U.S. dollars unless otherwise noted.