USA, May 17, 2009 (Info-Prod Research) -- Moody's Investors Service downgraded the ratings of Carolina First Bank (bank financial strength to D from C-, long term deposits to Ba2 from Baa1, and short term deposits to Not-Prime fromPrime-2). Carolina First is the lead bank of The South Financial Group, Inc. (NASDAQ:TSFG) , an unrated bank holding company. Following the downgrade, the outlook on Carolina First is negative. This rating action concludes the review for possible downgrade that began on March 12, 2009. The multiple notch downgrade and negative outlook reflect Moody's view that South Financial's capital position could come under pressure in the near to medium term because of its large commercial real estate (CRE) concentration, residential development in particular. Although Moody's had previously incorporated this concentration into its ratings, the sharp decline in real estate prices and anticipated deterioration in CRE loan performance, especially residential construction and development loans, has led Moody's to considerably increase its loss expectations on these assets. The concern that 2009 credit costs could impact South Financial's capital ratios holds increased rating pertinence as Moody's recently stated that it is making some recalibration of the weights and relative importance attached to certain rating factors within its current rating methodologies. Capital adequacy, in particular, is taking on increased importance in determining financial strength ratings. Since the initiation of the ratings review on March 12th, Moody's has sharply increased its expected loss assumptions for residential development, which is a large concentration risk for South Financial, accounting for 1.6 times tangible common equity (TCE). This increase in loss expectations contributed to a more severe downgrade than Moody's had initially anticipated. Moody's also noted that South Financial's core profitability weakened considerably in the first quarter of 2009 as a result of credit related expenses. Moody's view that South Financial is not expected to be profitable at least through 2009 also contributed to the magnitude of the downgrade. South Financial's CRE accounts for approximately 4.7 times TCE, with construction lending comprising almost one-half of total CRE. South Financial has seen more than a doubling of nonperforming assets (including 90+) over the last five quarters, to 5.15% of loans plus OREO at March 31, 2009, driven by deterioration in the Florida residential construction book, as well as increasing weakness in its North and South Carolina markets. Moody's expects further deterioration in these portfolios as the credit cycle continues to unfold. Regarding liquidity, Moody's also highlighted that South Financial's core deposit funding isweaker than peers, which is reflected in its current ratings. Moody's last rating action was on March 12, 2009 when Carolina First's ratings were placed on review for possible downgrade.
