The South Financial Group Reports First Quarter Results

The South Financial Group, Inc. (NASDAQ: TSFG) today reported a first quarter 2010 net loss available to common shareholders of $85.8 million, or $(0.40) per diluted share, compared to a net loss available to common shareholders of $193.9 million, or $(0.90) per diluted share, for fourth quarter 2009 and $90.8 million, or $(1.10) per diluted share, for first quarter 2009. Reconciliations of GAAP-reported results to operating results are provided in the attached financial highlights.

“This quarter exhibited improvements in credit costs, as nonperforming assets, nonperforming loans and net charge-offs all improved from the fourth quarter due to our continued efforts to assertively address problem and potential problem loans. Additionally, our team executed on improvements in loan pricing, customer funding costs, and expense levels,” said H. Lynn Harton, President and CEO of The South Financial Group. “Customer deposit growth was solid during the quarter, and we continue to hold substantial excess liquidity.”

“That being said, the credit environment continues to be difficult. We are encouraged that our loss this quarter was an improvement over previous quarters; however, given our expectation of additional losses during 2010, we will need to raise additional capital during the year. We are expending our best efforts to do so, but market conditions, along with our performance, continue to make access to capital a challenge.”

Key points for first quarter included:

Capital ratios exceeded “well-capitalized” regulatory thresholds at March 31, 2010, but will remain under pressure as the year progresses

• At March 31, 2010, TSFG’s preliminary Tier 1 capital ratio, Total risk-based capital ratio and Leverage ratio were 9.52%, 10.83% and 7.41%, respectively, compared to 9.93%, 11.24%, and 7.91% at December 31, 2009
• Tangible common equity ratio declined to 2.90% from 3.67% due to the first quarter 2010 net loss and asset growth, partially offset by a $6.5 million increase in Other Comprehensive Income
• Tangible common book value per common share was $1.64 at March 31, 2010, down from $1.98 at December 31, 2009
• Consistent with prior disclosures, we expect to enter into formal agreements with our regulators during the second quarter, which, among other things, will require capital levels in excess of the regulatory “well-capitalized” thresholds

Credit costs improved relative to prior quarters, although such costs remain elevated

• Nonperforming loans declined to $374.2 million, representing the third consecutive quarterly decline
• Net charge-offs declined to $87.8 million from $142.9 million in the prior quarter, representing the second consecutive quarterly decline
• The provision for credit losses of $95.1 million exceeded net charge-offs by $7 million, increasing the allowance for credit losses to 4.75% of loans held for investment compared to 4.45% in fourth quarter 2009
• Potential problem loans increased to $944 million from $936 million at December 31, 2009 and $554 million at March 31, 2009

Increases in cash reserves, securities and customer deposits strengthened our liquidity position

• Excess cash reserves and unpledged securities totaled $2.2 billion at March 31, 2010, compared to $1.4 billion at December 31, 2009, a significant increase of $743 million, or 53%
• Customer deposits totaled $7.8 billion at March 31, 2010, an increase of $455 million from December 31, 2009 and an increase of $421 million from March 31, 2009

Operating results reflect expense control and pricing discipline, but were negatively impacted by credit-related and liquidity costs and lower earning asset levels

• Net interest income declined by $7 million during the quarter, as improvements in commercial loan pricing and deposit pricing were more than offset by lower income from interest rate hedges and lower levels of earning assets. The reduction in income from interest rate hedges caused the net interest margin to decline 12 basis points to 2.75%
• Earning asset levels decreased as a result of lower loan demand and strategic reductions in non-core loans
• Operating noninterest income had a slight decline of $0.3 million linked-quarter, from $21.8 million to $21.5 million
• Operating noninterest expenses declined by $16.9 million for the quarter ($82.8 million for first quarter 2010 compared to $99.7 million for fourth quarter 2009) driven by lower personnel expenses, reductions in loan collection and foreclosure costs, and lower levels of write downs on OREO
• Operating pre-tax, pre-provision net revenue totaled $12.3 million in first quarter 2010, compared to $2.7 million in fourth quarter 2009 and $22.1 million in first quarter 2009

Net Interest Income and Average Balance Sheet

First quarter 2010 net interest income decreased $7.0 million to $73.5 million from $80.5 million in fourth quarter 2009 as a result of two less days, continued contraction in loan balances and maturing balance sheet management hedges, partially offset by lower funding costs and a decline in interest reversals on nonaccrual loans.