DBRS Comments on Q4 2008 Results of The South Financial Group, Inc., Senior at BBB (low), Negative

DBRS has commented today on the Q4 2008 results of The South Financial Group, Inc. (The South or the Company), given the rapidly deteriorating economy. DBRS rates The South’s Issuer & Senior Debt at BBB (low) with a Negative trend. The Company reported a $319 million net loss available to common shareholders for the quarter, down from a $31 million deficit for the prior quarter and net income of $9 million for Q4 2007. On a sequential quarter basis, Q4 2008 was negatively impacted by a $238 million non-cash goodwill impairment charge, a 45% increase in provisions for loan loss reserves (of which 38% was for reserve build), and an 11 basis point (bp) narrowing of net interest margin (NIM) to 2.97%. On an annual quarter basis, results were negatively affected by a 2.9 times increase in provisions, a 12 bp narrowing of NIM, and a 7% decrease in operating fee revenues.

With the swiftly declining economy and a housing market that has yet to stabilize, The South continued to exhibit sustained asset quality erosion. At December 31, 2008, non-performing assets (NPAs) increased to a high 4.1% of loans and foreclosed property, up from 2.83% at September 30, 2008, and 0.88% at December 31, 2007. Approximately half of the increase in non-performing loans (NPLs) was related to completed income property and commercial development, most of which was Florida-based. Roughly 40% of NPLs are residential construction exposures. The Company’s Q4 2008 net charge-offs (NCOs) increased to 2.93% of average loans, from 2.87% for Q3 2008 and 0.92% from the year-ago quarter. A little over one-half of NCOs were residential construction and C&I-related exposures. For 2008, The South’s loan loss provisions of $344 million exceeded NCOs by 1.5 times. DBRS notes that the Company’s allowance for loan loss reserves-to-non-performing loans was moderate at 69%. Given the deepening recession, DBRS anticipates continued asset quality erosion.

The South’s NIM narrowed to 2.97% from 3.08% for Q3 2008, due to higher levels of non-accruals and a balance sheet mix that was pressured by the 175 bp decline in the Fed funds target rate. On a sequential quarter basis, the Company’s non-interest income was negatively impacted by lower customer fee and wealth management income.
The Company’s liquidity position remains acceptable. The South has a moderately sized core deposit base, which represents 59% of net loans. Additional sources of liquidity include a good-quality securities portfolio, which represents 16% of total assets, and access to the Federal Home Loan Bank and the Federal Reserve Bank of Richmond.

Positively, in December 2008, the Company issued $347 million of preferred stock to the U.S. Department of the Treasury (the Treasury), as part of the Treasury’s Capital Purchase Program and, in May 2008, issued $250 million of convertible preferred stock. Both capital raises helped augment regulatory capital ratios and provide more of a cushion to absorb credit losses. DBRS notes that higher levels of capital reflect the new reality of thresholds for banks with strained asset quality. At December 31, 2008, The South’s estimated Tier 1 and Total risk-based capital ratios were 12.9% and 14.3%, respectively.

On April 23, 2008, DBRS confirmed the ratings of The South at BBB (low) and changed the trend on all ratings to Negative from Stable. The change in trend reflects DBRS’s concerns with The South’s weakened Florida commercial real estate portfolio, which has been negatively affected 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, primarily due to continued asset quality deterioration. DBRS sees sustained levels of heightened asset quality erosion and credit costs as putting negative pressure on The South’s ratings. Conversely, success by The South in re-establishing meaningful and sustained earnings and the absence of significant future credit costs could result in the restoration of the trend to Stable.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.