UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
 Form 10-Q (Mark One)
 x
Quarterly report pursuant
  to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
  quarterly period ended June 30, 2007o
Transition report pursuant
  to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
  transition period from____ to____ Commission file number 0-15083 The
South Financial Group, Inc.(Exact Name of Registrant as Specified
in Its Charter) South
  Carolina

57-0824914(State
  or Other Jurisdiction of

(IRS
  Employer Identification No.)Incorporation
  or Organization)102 South
  Main Street, Greenville, South Carolina

29601(Address
  of Principal Executive Offices)

(Zip
  Code)(864)
  255-7900Registrants
  telephone number, including area code Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. YesxNoo. Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
One):
 Large
  Accelerated Filer x
Accelerated
  filer  ̈
Non-accelerated
  filer  ̈ Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes  ̈ No x. The number of outstanding
shares of the issuers $1.00 par value common stock as of August 7, 2007 was
72,917,278.    PART I. FINANCIAL INFORMATION

Item 1.      Financial
Statements

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (Unaudited)

June 30,December 31,20062007

2006AssetsCash and due from
banks

$
267,005

$
286,954

$
326,567Interest-bearing bank
balances


263


16,275


31,264Federal funds sold and
securities purchased to resell





7,176


SecuritiesAvailable for sale, at fair
value


2,433,341


2,861,182


2,743,456Held to maturity (fair value
$41,501, $53,106, and $52,101,
  respectively)


41,892


53,617


52,308Total securities


2,475,233


2,914,799


2,795,764Loans held for sale


35,718


78,763


28,556Loans held for
investment


10,029,228


9,439,445


9,701,867Less: Allowance for loan
losses


(125,545
)

(108,995
)

(111,663
)Net loans held for
investment


9,903,683


9,330,450


9,590,204Premises and equipment,
net


224,951


207,393


219,163Accrued interest
receivable


75,851


71,905


77,523Goodwill


650,544


650,254


650,492Other intangible assets,
net


30,939


39,436


35,076Other assets


475,488


473,678


455,907Total assets

$
14,139,675

$
14,077,083

$
14,210,516Liabilities and
Shareholders EquityLiabilitiesDepositsNoninterest-bearing

$
1,244,834

$
1,465,811

$
1,280,908Interest-bearing


8,840,972


7,774,508


8,235,832Total deposits


10,085,806


9,240,319


9,516,740Federal funds purchased and
repurchase agreements


1,210,921


1,088,143


1,421,099Other short-term
borrowings


221,729


171,157


347,620Long-term debt


857,248


1,846,062


1,130,475Accrued interest
payable


77,751


60,928


68,940Other liabilities


168,033


188,897


163,610Total liabilities


12,621,488


12,595,506


12,648,484Commitments and contingencies
(Note 6)








Shareholders
equityPreferred stock-no par value;
authorized 10,000,000 shares; issued
  and outstanding none








Common stock-par value $1 per
share; authorized 200,000,000 shares;
  issued and outstanding 73,698,807, 75,033,866, and 75,341,276 shares,
  respectively


73,699


75,034


75,341Surplus


1,129,499


1,158,758


1,167,685Retained earnings


378,399


338,019


367,261Guarantee of employee stock
ownership plan debt


(39
)

(268
)

(151
)Accumulated other comprehensive
loss, net of tax


(63,371
)

(89,966
)

(48,104
)Total shareholders
equity


1,518,187


1,481,577


1,562,032Total liabilities and
shareholders equity

$
14,139,675

$
14,077,083

$
14,210,516See notes to consolidated financial statements (unaudited), which
are
an integral part of these statements.

1

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) (Unaudited)

Three Months EndedJune 30,

Six Months EndedJune 30,2007

2006

2007

2006Interest
IncomeInterest and fees on
loans

$
191,961

$
179,971

$
378,589

$
349,159Interest and dividends on
securities:Taxable


26,879


31,652


55,704


64,195Exempt from
federal income taxes


2,888


3,210


5,936


6,554Total interest
and dividends on securities


29,767


34,862


61,640


70,749Interest on short-term
investments


97


879


238


1,171Total interest
income


221,825


215,712


440,467


421,079Interest
ExpenseInterest on deposits


92,066


68,704


180,545


131,183Interest on short-term
borrowings


21,165


20,924


42,429


39,022Interest on long-term
debt


12,073


22,962


26,434


44,840Total interest
expense


125,304


112,590


249,408


215,045Net
Interest Income


96,521


103,122


191,059


206,034Provision for Credit
Losses


17,125


7,487


26,138


17,398Net interest
income after provision for credit losses


79,396


95,635


164,921


188,636Noninterest
Income


28,508


29,342


56,332


56,497Noninterest
Expenses


80,976


80,381


163,307


158,050Income before
income taxes


26,928


44,596


57,946


87,083Income taxes


8,998


15,253


19,498


29,933Net
Income

$
17,930

$
29,343

$
38,448

$
57,150Average Common Shares
Outstanding, Basic


74,050


74,865


74,390


74,775Average Common Shares
Outstanding, Diluted


74,397


75,505


74,815


75,422Net Income Per Common Share,
Basic

$
0.24

$
0.39

$
0.52

$
0.76Net Income Per Common Share,
Diluted


0.24


0.39


0.51


0.76Dividends per common
share

$
0.18

$
0.17

$
0.36

$
0.34See notes to consolidated financial
statements (unaudited), which are an integral part of these statements.

2

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY AND COMPREHENSIVE (LOSS) INCOME
(in thousands, except share and per share data) (Unaudited)

Shares ofCommonStock

CommonStock

Surplus

RetainedEarningsandOther*

AccumulatedOtherComprehensiveLoss, Net

TotalBalance, December 31,
2005

74,721,461

$
74,721

$
1,151,005

$
307,081


$
(45,900
)

$
1,486,907Net income










57,150







57,150Other comprehensive loss, net
of income tax
  of $25,623














(44,066
)


(44,066
)Comprehensive income


















13,084Cash dividends declared ($0.34
per common
  share)










(25,486
)






(25,486
)Common stock
activity:Exercise of
stock options, including income
  tax benefit of $825

245,158


245


4,255










4,500Dividend
reinvestment plan

64,749


65


1,567










1,632Restricted
stock plan

(18,110
)

(18
)

1,892










1,874Employee stock
purchase plan

9,237


9


222










231Director
compensation

8,813


9


227










236Acquisitions

2,558


3


68










71Common stock released by trust
for deferred
  compensation










138







138Deferred compensation payable
in common
  stock










(138
)






(138
)Cumulative effect of initial
application of
  SAB 108, net of income tax of $1,858










(3,412
)






(3,412
)Reversal of unearned
compensation upon
  adoption of SFAS 123R







(2,301
)

2,301







Stock option expense







1,759










1,759Miscellaneous







64


117







181Balance, June 30,
2006

75,033,866

$
75,034

$
1,158,758

$
337,751


$
(89,966
)

$
1,481,577Balance, December 31,
2006

75,341,276

$
75,341

$
1,167,685

$
367,110


$
(48,104
)

$
1,562,032Net income










38,448







38,448Other comprehensive loss, net
of income tax
  of $8,756














(15,267
)


(15,267
)Comprehensive income


















23,181Cash dividends declared ($0.36
per common
  share)










(26,750
)






(26,750
)Common stock
activity:Repurchase of
stock

(2,150,000
)

(2,150
)

(50,522
)









(52,672
)Exercise of
stock options, including income
  tax benefit of $849

382,357


383


7,224










7,607Dividend
reinvestment plan

71,002


71


1,575










1,646Restricted
stock plan

29,349


29


973


(72
)






930Employee stock
purchase plan

10,299


11


229










240Director
compensation

10,237


10


250










260Acquisitions

4,287


4


100










104Common stock released by trust
for deferred
  compensation










12







12Deferred compensation payable
in common
  stock










(12
)






(12
)Cumulative effect of initial
application of
  FIN 48










(488
)






(488
)Stock option expense







1,946










1,946Miscellaneous







39


112







151Balance, June 30,
2007

73,698,807

$
73,699

$
1,129,499

$
378,360


$
(63,371
)

$
1,518,187*           Other includes guarantee of
employee stock ownership plan debt and deferred compensation.

See notes to consolidated financial statements (unaudited), which
are
an integral part of these statements.

3

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Unaudited)

Six Months Ended June 30,2007

2006Cash Flows from Operating
ActivitiesNet income

$
38,448

$
57,150Adjustments to reconcile net
income to net
  cash provided by operating activitiesDepreciation,
amortization, and accretion,
  net


16,782


22,158Provision for
credit losses


26,138


17,398Share-based
compensation expense


3,775


3,140Loss (gain) on
securities


3,622


(4,276
)Loss on
derivative activities


1,400


1,370Gain on sale
of mortgage loans


(2,999
)

(3,876
)Loss on early
extinguishment of debt


231


Loss on
indirect auto loans





4,462Loss (gain) on
disposition of premises and
  equipment


46


(542
)Loss on
disposition of other real estate
  owned


163


642Excess tax
benefits from share-based
  compensation


(849
)

(825
)Origination of
loans held for sale


(243,785
)

(297,671
)Sale of loans
held for sale and principal
  repayments


254,634


258,436Increase in
other assets


(18,839
)

(407
)Increase in
other liabilities


8,600


39,329Net cash
provided by operating activities


87,367


96,488Cash Flows from Investing
ActivitiesSale of securities available
for sale


129,781


25,032Maturity, redemption, call, or
principal
  repayments of securities available for sale


161,177


190,326Maturity, redemption, call, or
principal repayments
  of securities held to maturity


10,499


8,961Purchase of securities
available for sale


(4,370
)

(34,469
)Purchase of securities held to
maturity


(140
)

Origination of loans held for
investment,
  net of principal repayments


(358,682
)

(390,653
)Sale of loans originally held
for
  investment





353,044Sale of other real estate
owned


3,154


3,637Sale of premises and
equipment


144


3,616Purchase of premises and
equipment


(16,201
)

(26,598
)Cash equivalents acquired, net
of payment
  for purchase acquisition





(53
)Net cash (used
for) provided by investing
  activities


(74,638
)

132,843Cash Flows from Financing
ActivitiesIncrease in deposits


577,344


28,312Decrease in federal funds
purchased and
  repurchase agreements


(210,178
)

(333,158
)(Decrease) increase in other
short-term
  borrowings


(126,775
)

117,290Issuance of long-term
debt


77,320


127,321Payment of long-term
debt


(350,307
)

(203,181
)Cash dividends paid on common
stock


(27,030
)

(25,446
)Repurchase of common
stock


(52,672
)

Excess tax benefits from
share-based
  compensation


849


825Other common stock
activity


8,157


6,406Net cash used
for financing activities


(103,292
)

(281,631
)Net change in cash and cash
equivalents


(90,563
)

(52,300
)Cash and cash equivalents at
beginning of
  year


357,831


362,705Cash and cash equivalents at
end of period

$
267,268

$
310,405Supplemental Cash Flow
DataInterest paid

$
240,163

$
207,397Income tax payments (refunds
received), net


20,583


(4,740
)Significant non-cash investing
and
  financing transactions:Increase in
unrealized loss on available
  for sale securities


(19,284
)

(60,845
)Loans
transferred to other real estate
  owned


3,502


3,732See notes to consolidated financial
statements (unaudited), which are an integral part of these statements.

4

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

Note 1  General

The
foregoing unaudited Consolidated Financial Statements and Notes are presented
in accordance with the instructions for the Securities and Exchange Commission
Quarterly Report on Form 10-Q. TSFG refers to The South Financial Group, Inc.
and subsidiaries, except where the context requires otherwise. The information
contained in the Notes to Consolidated Financial Statements included in TSFGs
Annual Report on Form 10-K for the year ended December 31, 2006 should be
referred to in connection with the reading of these unaudited interim
Consolidated Financial Statements. The Consolidated Balance Sheet at December
31, 2006 is derived from TSFGs Consolidated Audited Financial Statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States of America. In the opinion of management, all
adjustments necessary to present a fair statement of the results for the
interim periods have been made. All such adjustments are of a normal, recurring
nature.

Nature of Operations

TSFG is a
financial holding company headquartered in Greenville, South Carolina that
offers a broad range of financial products and services, including banking,
treasury services, merchant processing, mortgage, and wealth management (which
consists of benefits administration, insurance, private banking, retail
investment, and trust and investment management). TSFGs banking subsidiary
Carolina First Bank conducts banking operations in South Carolina and North
Carolina (as Carolina First Bank) and in Florida (as Mercantile Bank). TSFG
also owns several non-bank subsidiaries. At June 30, 2007, TSFG operated through
79 branch offices in South Carolina, 65 in Florida, and 27 in North Carolina.
In South Carolina, the branches are primarily located in the states largest
metropolitan areas. The Florida operations are principally concentrated in the
Jacksonville, Orlando, Tampa Bay, Southeast Florida, and Gainesville areas. The
North Carolina branches are primarily located in the Hendersonville and
Asheville areas of western North Carolina and in the Wilmington area of eastern
North Carolina. Prior to July 1, 2007, TSFGs Florida banking operations were
conducted through a separate banking subsidiary, Mercantile Bank. However,
effective July 1, 2007, Mercantile Bank was merged with and into Carolina First
Bank. Subsequent to the merger, the former Mercantile Bank operations have been
operated as a division of Carolina First Bank, under the name Mercantile
Bank.

Accounting Estimates and Assumptions

The
preparation of the Consolidated Financial Statements and accompanying notes
requires management of TSFG to make a number of estimates and assumptions
relating to reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the Consolidated Financial
Statements and the reported amounts of revenues and expenses during the period.
Actual results could differ significantly from these estimates and assumptions.

Principles of Consolidation

The
Consolidated Financial Statements include the accounts of The South Financial
Group, Inc. and all other entities in which it has a controlling financial
interest. All significant intercompany balances and transactions have been
eliminated in consolidation.

Reclassifications

Certain
prior year amounts have been reclassified to conform to the 2007 presentations.
In particular, in second quarter 2007, TSFG began presenting its merchant
income net of direct processing costs (see Note 2).


In addition,  in second quarter 2007, TSFG  reclassified  certain  deposit  balances from time deposits under $100,000 to time
deposits of $100,000 or more.  Amounts for prior periods (including  $408.8  million at December 31, 2006 and $222.0  million at June
30, 2006) have been reclassified to conform to the current presentation.  The following summarizes deposit categories affected by the
reclassification (in thousands):




















June 30,
          
     December 31,2007
     
     2006
     
     2006Time deposits under $100,000
     
     $1,363,462
        
     $1,204,609
        
     $1,272,056Time deposits of $100,000 or more
     1,583,653
        
     1,427,811
        
     1,514,615Recently Adopted Accounting Pronouncements

Accounting for
Uncertainty in Income Taxes

In July
2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting
and reporting for uncertainties in income tax law. This Interpretation
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. TSFG adopted FIN 48 effective
January 1, 2007. As a result, the Company recognized a $488,000 increase to
reserves for uncertain tax positions. This increase was accounted for as an
adjustment

5

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

to the beginning balance of retained earnings; therefore, prior period
results have not been restated. At the beginning of 2007, TSFG had
approximately $13.2 million of total gross unrecognized tax benefits. Of this
total, $3.6 million represents the amount of unrecognized tax benefits that, if
recognized, would favorably affect the effective income tax rate in any future
periods. During the first quarter 2007, unrecognized tax benefits were reduced
by approximately $4.7 million related to payments due on settlements with South
Carolina and the Internal Revenue Service during 2006. During the second
quarter of 2007, unrecognized tax benefits increased by approximately $917,000,
which includes approximately $90,000 of accrued interest, related to new
information in connection with a potential understatement of federal and state
income taxes in an open tax year. As of June 30, 2007, the Company does not
expect a significant increase or decrease in unrecognized tax benefits in the
next 12 months.

TSFG and
its subsidiaries are subject to U.S. federal income tax as well as income tax
of multiple state jurisdictions. The Company has substantially concluded all
U.S. federal income tax matters for years through 2003. The Company is subject
to state and local income tax examinations for the tax years 2001 through 2006.
A TSFG subsidiary is currently under examination by the state of North Carolina
for tax years 2003 through 2005.

TSFGs
continuing practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. The Company had approximately $1.1 million
accrued for interest and penalties at January 1, 2007.

Accounting for
Purchases of Life Insurance

In
September 2006, the FASB ratified the consensus reached by the EITF on Issue
No. 06-5, Accounting for Purchases of Life Insurance  Determining the Amount
That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance.FASB Technical Bulletin No. 85-4 requires that the amount that could
be realized under the insurance contract as of the date of the statement of
financial position should be reported as an asset. Since the issuance of FASB
Technical Bulletin No. 85-4, there has been diversity in practice in the
calculation of the amount that could be realized under insurance contracts.
Issue No. 06-5, which was effective January 1, 2007, concludes that the Company
should consider any additional amounts (e.g., cash stabilization reserves and
deferred acquisition cost taxes) included in the contractual terms of the
insurance policy other than the cash surrender value in determining the amount
that could be realized in accordance with FASB Technical Bulletin No. 85-4. The
adoption of this standard did not have a significant impact on TSFGs
shareholders equity or results of operations.

Accounting for
Certain Hybrid Financial Instruments

In February
2006, the FASB issued SFAS No. 155 (SFAS 155), Accounting for Certain Hybrid
Financial Instruments  an amendment of FASB Statements No. 133 and 140. SFAS
155 permits an entity to measure at fair value any financial instrument that
contains an embedded derivative that otherwise would require bifurcation. In
December 2006, the FASB issued a narrow exception to SFAS 155 in the form of a
Derivative Implementation Guide that would exempt most securitized financial
instruments that are subject to prepayment from the bifurcation requirements of
SFAS 155 and SFAS 133. The Company adopted this standard in the first quarter
of 2007 with no significant impact on its shareholders equity or results of
operations.

Recently Issued Accounting Pronouncements

Fair Value
Measurements

In
September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value
Measurements, which defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurements. SFAS 157
does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the effect of adopting this standard on its
Consolidated Financial Statements.

Endorsement
Split-Dollar Life Insurance Arrangements

In
September 2006, the Emerging Issues Task Force (EITF) reached a final
consensus on Issue 06-4 (EITF 06-4), Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. EITF 06-4 stipulates that an agreement by the employer to share
a portion of the proceeds of a life insurance policy with the employee during
the postretirement period is a postretirement benefit arrangement for

6

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

which a liability must be recorded. The consensus is effective for
fiscal years beginning after December 15, 2007. Entities will have the option
of applying the provisions of EITF 06-4 as a cumulative effect adjustment to
the opening balance of retained earnings or retrospectively to all prior
periods. TSFG is currently evaluating the effect of adopting this guidance on
its Consolidated Financial Statements.

Fair Value
Option for Financial Assets and Financial Liabilities

On February
15, 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities, which allows an entity the
irrevocable option to elect fair value for the initial and subsequent
measurement for certain financial assets and liabilities on a
contract-by-contract basis. Subsequent changes in fair value of these financial
assets and liabilities would be recognized in earnings when they occur. SFAS
159 further establishes certain additional disclosure requirements. SFAS 159 is
effective for TSFGs financial statements for the year beginning on January 1,
2008. The Company is currently evaluating the effect of adopting this standard
on its Consolidated Financial Statements.

Collateral
Assignment Split-Dollar Life Insurance Arrangements

In March
2007, the EITF reached a final consensus on Issue 06-10 (EITF 06-10), Accounting
for Collateral Assignment Split-Dollar Life Insurance Arrangements. EITF 06-10
stipulates that a liability should be recognized for a postretirement benefit
obligation associated with a collateral assignment arrangement if, on the basis
of the substantive agreement with the employee, the employer has agreed to
maintain a life insurance policy during the postretirement period or provide a
death benefit. The employer also must recognize and measure the associated
asset on the basis of the terms of the collateral assignment arrangement. The
consensus is effective for fiscal years beginning after December 15, 2007.
Entities will have the option of applying the provisions of EITF 06-10 as a
cumulative effect adjustment to the opening balance of retained earnings or
retrospectively to all prior periods. TSFG is currently evaluating the effect
of adopting this guidance on its Consolidated Financial Statements.

7

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

Note 2  Supplemental Financial Information
to Consolidated Statements of Income

The
following presents the details for noninterest income and noninterest expense
(in thousands):

Three Months Ended
  June 30,

Six Months Ended
  June 30,2007

2006

2007

2006Noninterest IncomeService charges on deposit
accounts

$
11,223

$
11,592

$
21,836

$
22,880Debit card income


2,403


2,095


4,580


4,016Customer service fee
income


1,402


1,074


2,693


2,083Total customer
fee income


15,028


14,761


29,109


28,979Insurance income


2,987


2,806


6,284


5,783Retail investment
services


2,282


2,249


4,240


4,272Trust and investment management
income


1,734


1,678


3,328


3,135Benefits administration
fees


749


749


1,491


1,416Total wealth
management income


7,752


7,482


15,343


14,606Bank-owned life insurance
income


4,454


2,969


7,305


5,788Mortgage banking
income


1,877


2,078


3,946


3,962Merchant processing income, net
(1)


771


640


1,506


1,161Loss on derivative
activities


(1,497
)

(245
)

(1,400
)

(1,370
)(Loss) gain on
securities


(2,237
)

3,601


(3,622
)

4,276Loss on indirect auto
loans





(4,462
)




(4,462
)Other


2,360


2,518


4,145


3,557Total
noninterest income

$
28,508

$
29,342

$
56,332

$
56,497Noninterest ExpensesSalaries and wages

$
34,804

$
33,605

$
71,636

$
65,659Employee benefits


9,245


8,703


19,004


17,732Occupancy


8,545


7,684


17,153


14,997Furniture and
equipment


6,486


6,468


12,948


12,420Professional services


4,914


5,497


9,017


11,276Advertising and business
development


1,973


2,187


3,904


4,693Amortization of
intangibles


2,136


2,208


4,137


4,415Telecommunications


1,418


1,421


2,811


2,839Loss on early extinguishment of
debt


231





231


Other


11,224


12,608


22,466


24,019Total
noninterest expenses

$
80,976

$
80,381

$
163,307

$
158,050(1)
In second quarter 2007, TSFG began presenting its merchant income net
  of direct processing costs. Direct merchant processing costs totaled (in
  thousands) $3,930 and $6,950, respectively, for the three and six months
  ended June 30, 2007, and $2,678 and $4,843, respectively, for the three and
  six months ended June 30, 2006. Amounts presented for prior periods have been
  reclassified to conform to the current presentation.8

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIES 
Notes to Consolidated Financial Statements (unaudited)

Note3 Accumulated Other
Comprehensive Income (Loss)

The
following summarizes accumulated other comprehensive loss, net of tax (in
thousands):

Three Months Ended
  June 30,

Six Months Ended
  June 30,2007

2006

2007

2006Net Unrealized Losses on
Securities Available for SaleBalance at beginning of
period

$
(37,601
)
$
(66,137
)
$
(47,378
)
$
(46,350
)Other comprehensive
loss:Unrealized
holding losses arising during the period


(36,732
)

(25,819
)

(22,579
)

(56,569
)Income tax
benefit


13,526


9,633


8,250


21,038Less:
Reclassification adjustment for losses (gains) included in
net income


1,910


(3,601
)

3,295


(4,276
)Income tax
expense (benefit)


(668
)

1,257


(1,153
)

1,490(21,964
)

(18,530
)

(12,187
)

(38,317
)Balance at end of
period


(59,565
)

(84,667
)

(59,565
)

(84,667
)Net Unrealized Gains (Losses)
on Cash Flow HedgesBalance at beginning of
period


557


(2,233
)

(726
)

450Other comprehensive
loss:Unrealized
loss on change in fair values


(6,603
)

(4,206
)

(4,198
)

(8,165
)Income tax
benefit


2,312


1,472


1,470


2,858Less:
Amortization of terminated swaps


(110
)

(510
)

(541
)

(679
)Income tax
expense


38


178


189


237(4,363
)

(3,066
)

(3,080
)

(5,749
)Balance at end of
period


(3,806
)

(5,299
)

(3,806
)

(5,299
)$
(63,371
)
$
(89,966
)
$
(63,371
)
$
(89,966
)Total other comprehensive
loss

$
(26,327
)
$
(21,596
)
$
(15,267
)
$
(44,066
)Net income


17,930


29,343


38,448


57,150Comprehensive (loss)
income

$
(8,397
)
$
7,747

$
23,181

$
13,0849

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIES 
Notes to Consolidated Financial Statements (unaudited)

Note 4 Gross Unrealized
Losses on Investment Securities

Gross
unrealized losses on investment securities and the fair value of the related
securities, aggregated by investment category and length of time that
individual securities have been in an unrealized loss position, were as follows
(in thousands):

June 30, 2007Less than 12 Months

12 Months or Longer

TotalFair
  Value

Unrealized
  Losses

Fair
  Value

Unrealized
  Losses

Fair
  Value

Unrealized
  LossesSecurities Available for
SaleU.S. Treasury

$



$



$
165,152


$
1,930


$
165,152


$
1,930U.S. Government
agencies


49,555



841



598,524



14,935



648,079



15,776Mortgage-backed
securities


45,523



1,209



1,088,417



70,153



1,133,940



71,362State and municipals


59,241



977



232,963



6,039



292,204



7,016Equity investments


3,723



227











3,723



227$
158,042


$
3,254


$
2,085,056


$
93,057


$
2,243,098


$
96,311Securities Held to
MaturityState and municipals

$
3,449


$
27


$
17,366


$
492


$
20,815


$
519June 30, 2006Less than 12 Months

12 Months or Longer

TotalFair
  Value

Unrealized
  Losses

Fair
  Value

Unrealized
  Losses

Fair
  Value

Unrealized
  LossesSecurities
  Available for SaleU.S. Treasury

$
118,419


$
1,381


$
52,554


$
2,756


$
170,973


$
4,137U.S. Government agencies


241,498



6,285



402,013



18,920



643,511



25,205Mortgage-backed securities


271,089



12,034



1,220,291



81,110



1,491,380



93,144State and municipals


104,050



2,587



231,624



7,336



335,674



9,923Corporate bonds


58,941



2,345



52,326



2,743



111,267



5,088Equity investments










1,019



41



1,019



41$
793,997


$
24,632


$
1,959,827


$
112,906


$
2,753,824


$
137,538Securities
  Held to MaturityState and municipals

$
4,432


$
65


$
20,544


$
712


$
24,976


$
777At
June 30, 2007, TSFG had 1,137 individual investments that were in an unrealized
loss position. The unrealized losses on investments summarized above, except
for equity investments, were attributable to increases in interest rates,
rather than deterioration in credit quality. The majority of these securities
are government or agency securities and, therefore, pose minimal credit risk.
TSFG believes it has the ability and intent to hold these debt securities until
a market price recovery or maturity. Therefore, at June 30, 2007, these
investments are not considered impaired on an other-than-temporary basis.

In
second quarter 2007, TSFG recorded $2.9 million in other-than-temporary
impairment on its $93.2 million corporate bond portfolio due to a change in
intent to hold the securities until a recovery in value based on a change in
investment strategy and related credit risk considerations. Subsequent to
quarter-end, TSFG sold approximately $70 million of corporate bonds and
recognized an additional loss on sale of approximately $300,000.

At
June 30, 2007, TSFGs equity investments with unrealized losses are not
considered impaired on an other-than-temporary basis due to the lack of
severity of the impairment.

10

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIESNotes to Consolidated Financial Statements
(unaudited)

Note 5  Derivative Financial Instruments and Hedging
Activities

The fair
value of TSFGs derivative assets and liabilities and their related notional
amounts (in thousands) are presented below.

June 30,
  2007

December
  31, 2006Fair Value

Notional
  Amount

Fair Value

Notional
  AmountAsset

Liability


Asset

LiabilityCash Flow
HedgesInterest rate swaps associated
with
  borrowing activities

$


$


$


$
143

$


$
183,000Interest rate swaps associated
with lending
  activities





4,728


770,000


1,979


3,408


870,000Interest rate floor associated
with lending
  activities


653





200,000


1,564





200,000Fair Value
HedgesInterest rate swaps associated
with
  brokered CDs





41,640


1,085,977





33,541


1,167,585Other
DerivativesForward foreign currency
contracts


173


173


18,430


36


36


18,119Options, interest rate swaps
and other


6,678


6,178


258,266


6,236


5,922


278,846$
7,504

$
52,719

$
2,332,673

$
9,958

$
42,907

$
2,717,550In
the three and six months ended June 30, 2007, noninterest income included a
loss of $1.5 million and $1.4 million, respectively, for derivative activities.
In the three and six months ended June 30, 2006, noninterest income included a
loss of $245,000 and $1.4 million, respectively, for derivative activities.
These amounts include the following: the change in fair value of derivatives
that do not qualify for hedge accounting under SFAS 133, as well as the net
cash settlement from these interest rate swaps; hedge ineffectiveness for fair
value hedges, which totaled $601,000 and $742,000, respectively, for the three
and six months ended June 30, 2007, and $444,000 and $895,000, respectively,
for the three and six months ended June 30, 2006; and other miscellaneous
items.

Note 6  Commitments and Contingent
Liabilities

Legal
Proceedings

TSFG
is currently subject to various legal proceedings and claims that have arisen
in the ordinary course of its business. In the opinion of management based on
consultation with external legal counsel, any reasonably foreseeable outcome of
such current litigation would not be expected to materially affect TSFGs
consolidated financial position or results of operations.

Recourse
Reserve

As part of
its acquisition of Florida Banks, Inc. (Florida Banks), TSFG acquired a
recourse reserve associated with loans previously sold from Florida Banks
wholesale mortgage operation. This recourse requires the repurchase of loans at
par plus accrued interest from the buyer, upon the occurrence of certain
events. At June 30, 2007, the estimated recourse reserve liability, included in
other liabilities, totaled $6.1 million. TSFG will continue to evaluate the
reserve level and may make adjustments through earnings as more information
becomes known. There can be no guarantee that any liability or cost arising out
of this matter will not exceed any established reserves.

Loan Commitments

TSFG is a
party to financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, commercial letters of credit,
and standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets.

11

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIESNotes to Consolidated Financial Statements
(unaudited)



TSFGs
exposure to credit loss is represented by the contractual amount of these
instruments. TSFG uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.

Commitments
to extend credit are agreements to lend to a customer provided there is no violation
of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since certain of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. TSFG evaluates each customers creditworthiness on a case-by-case
basis. The amount of the collateral obtained, if deemed necessary by TSFG upon
extension of credit, is based on TSFGs credit evaluation of the borrower.

Commercial
letters of credit and standby letters of credit are conditional commitments
issued by TSFG to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in making loans to customers. TSFG generally holds collateral
supporting those commitments if deemed necessary. A summary of the contractual
amounts of TSFGs financial instruments relating to extension of credit with
off-balance-sheet risk follows (in thousands):

Outstanding
  CommitmentsJune 30, 2007

December 31, 2006Commitment
  on loans


$
2,163,267



$
2,204,476Standby
  letters of credit



178,910




177,905Unused
  credit card lines



31,795




28,442Documentary
  letters of credit



517




944Total


$
2,374,489



$
2,411,767Note 7  Share Information

The
following is a summary of the basic and diluted average common shares
outstanding and earnings per share calculations (in thousands, except share and
per share data):

Three
  Months EndedJune 30,

Six Months
  EndedJune 30,2007


2006


2007


2006Net income
(numerator)

$
17,930

$
29,343

$
38,448

$
57,150BasicAverage common shares
outstanding (denominator)


74,050,115


74,864,648


74,390,456


74,775,416Earnings per share

$
0.24

$
0.39

$
0.52

$
0.76DilutedAverage common shares
outstanding


74,050,115


74,864,648


74,390,456


74,775,416Average dilutive potential
common shares


346,976


640,035


424,465


647,023Average diluted shares
outstanding (denominator)


74,397,091


75,504,683


74,814,921


75,422,439Earnings per share

$
0.24

$
0.39

$
0.51

$
0.7612

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

The
following options were outstanding at the period end presented but were
excluded from the calculation of diluted earnings per share because the
exercise price was greater than the average market price of the common shares
during the period:

Number
  of Shares

Range of
  Exercise PricesFor the Three Months
EndedJune 30, 2007


2,152,567


$24.10 to $31.96June 30, 2006


1,287,406


$27.08 to $31.96For the Six Months
EndedJune 30, 2007


2,057,117


$24.79 to $31.96June 30, 2006


1,343,436


$26.94 to $31.96On December
14, 2006, TSFGs Board of Directors authorized a stock repurchase program of up
to 4 million shares. This authorization replaced TSFGs existing stock
repurchase authorization. In the first half of 2007, TSFG repurchased 2.15
million shares in connection with the aforementioned authorization. During July
2007, TSFG repurchased an additional 850,000 shares.

Note 8  Share-Based Compensation

In the
second quarter 2007, TSFGs board of directors approved new Long-Term Incentive
Plan (LTIP) awards for the period 2007-2009. A total of 483,252 restricted
stock units (RSUs) with a per share fair value of $23.40 have been reserved
for potential issuance for the 2007-2009 period, which includes both service
and performance-based awards. Of these units, the service award component
(100,248 RSUs) will be expensed ratably over the three-year vesting period,
assuming continued employment of the LTIP participant. The remaining RSUs are
performance-based awards and will vest based on achieving, during 2009, certain
performance targets. Achieving target performance (100%) on the performance
goals will result in the issuance of 191,502 shares, although a maximum of
191,502 additional shares may be issued if more stringent performance hurdles
are met. The compensation expense related to the performance-based RSUs will be
recognized ratably over the period from the date of award through December 31,
2009, based on managements assessment of the probability that the performance
targets will be met. If the performance targets are not reached, the
corresponding RSUs will be forfeited.

Note 9  Business Segments

South
Carolina Bank, North Carolina Bank, and Florida Bank are TSFGs primary
reportable segments for management financial reporting. Effective January 1,
2007, TSFG changed its segment methodology from a legal entity structure (i.e., Carolina
First Bank and Mercantile Bank) to a business segment structure along
geographic lines to maintain consistency with the way management internally
reviews financial information and allocates resources. Results for prior periods
have been restated for comparability. Each geographic bank segment consists of
commercial and consumer lending and full service branches in its geographic
region with its own management team. The branches provide a full range of
traditional banking products as well as treasury services, merchant services,
wealth management and mortgage banking services. The Other column includes
the investment securities portfolio, indirect lending, treasury, parent company
activities, bank-owned life insurance, net intercompany eliminations, various
nonbank subsidiaries, equity investments, and certain other activities not
currently allocated to the aforementioned segments.

The
results for these segments are based on TSFGs management reporting process,
which assigns balance sheet and income statement items to each segment. Unlike
financial reporting, there is no authoritative guidance for management
reporting equivalent to generally accepted accounting principles. The Company
uses an internal funding methodology to assign funding costs to assets and
earning credits to liabilities with an offset in Other. The management
reporting process measures the performance of the defined segments based on
TSFGs management structure and is not necessarily comparable with similar
information for other financial services companies or representative of results
that would be achieved if the segments operated as stand-alone entities. If the
management structure and/or allocation process change, allocations, transfers
and assignments may change. Segment information (in thousands) is shown in the
table below.

13

THE SOUTH FINANCIAL GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

  South
  Carolina
  Bank

North
  Carolina
  Bank

Florida
  Bank

Other

TotalThree Months Ended June 30,
2007Net
          interest income before inter-segment income (expense)


$
43,404



$
21,238



$
41,606



$
(9,727
)


$
96,521Inter-segment interest income
(expense)



(143
)



(6,904
)



(3,229
)



10,276




Net interest income



43,261




14,334




38,377




549




96,521Provision for credit losses -
net charge-offs and allocated (1)



1,044




11,134




1,025




1,023




14,226Noninterest income



13,129




2,586




9,946




2,847




28,508Noninterest expenses - direct
(2)



16,123




5,143




16,187




710




38,163Segment contribution


$
39,223



$
643



$
31,111



$
1,663




72,640Provision for credit losses not
allocated to segments (1)























2,899Noninterest expenses -
unallocated (3)























42,813Income before income
taxes























26,928Income tax expense























8,998Net income






















$
17,930Six Months Ended June 30,
2007Net interest income before
inter-segment income (expense)


$
84,901



$
41,396



$
81,515



$
(16,753
)


$
191,059Inter-segment interest income
(expense)



869




(13,412
)



(4,714
)



17,257




Net interest income



85,770




27,984




76,801




504




191,059Provision for credit losses -
net charge-offs and allocated (1)



3,238




11,026




4,434




2,407




21,105Noninterest income



24,939




4,939




19,899




6,555




56,332Noninterest expenses - direct
(2)



32,194




10,334




33,579




1,505




77,612Segment contribution


$
75,277



$
11,563



$
58,687



$
3,147




148,674Provision for credit losses not
allocated to segments (1)























5,033Noninterest expenses -
unallocated (3)























85,695Income before income
taxes























57,946Income tax expense























19,498Net income






















$
38,448June 30, 2007Total assets


$
4,042,442



$
1,822,178



$
4,087,535



$
4,187,520



$
14,139,675Total loans held for
investment



3,803,084




1,713,223




3,544,032




968,889




10,029,228Total deposits



3,564,506




1,159,407




2,997,327




2,364,566




10,085,806Total goodwill



119,222




87,961




440,124




3,237




650,544

(1)
In 2007, the provision for
  credit losses included in each segment represents the actual net charge-offs
  for the period and any provision specifically allocated to that segment for
  reporting purposes. Provision in excess of actual net charge-offs and
  specific allocation is not allocated to any of the segments, and is thus
  presented as a reconciling item. TSFG is refining its methodology for
  allocating provision to its segments and thus the presentation of the
  provision allocation may change in future periods.(2)
Noninterest expenses 
  direct include the direct costs of the segments operations such as
  facilities, personnel, and other operating expenses.(3)
Noninterest expenses 
  unallocated are managed on a centralized basis and thus are not included in
  any segment column. This line item includes expenses not directly
  attributable to the segments, such as information services, operations, human
  resources, accounting, finance, treasury, and corporate incentive plans. TSFG
  is refining its methodology for allocating these expenses to its segments and
  thus the presentation of noninterest expenses may change in future periods.14

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

  South
  Carolina
  Bank

North
  Carolina
  Bank

Florida
  Bank

Other

TotalThree Months Ended June 30,
2006Net
          interest income before inter-segment income (expense)


$
49,078



$
21,362



$
43,507



$
(10,825
)


$
103,122Inter-segment interest income
(expense)



(2,796
)



(6,617
)



(2,424
)



11,837




Net interest income



46,282




14,745




41,083




1,012




103,122Provision for credit losses -
net charge-offs (1)



3,357




503




507




2,165




6,532Noninterest income



13,129




2,664




8,837




4,712




29,342Noninterest expenses - direct
(2)



15,523




4,959




16,890




758




38,130Segment contribution


$
40,531



$
11,947



$
32,523



$
2,801




87,802Provision for credit losses in
excess of net charge-offs (1)























955Noninterest expenses -
unallocated (3)























42,251Income before income
taxes























44,596Income tax expense























15,253Net income






















$
29,343Six Months Ended June 30,
2006Net interest income before
inter-segment income (expense)


$
96,855



$
40,309



$
84,625



$
(15,755
)


$
206,034Inter-segment interest income
(expense)



(2,771
)



(10,244
)



(2,632
)



15,647




Net interest income



94,084




30,065




81,993




(108
)



206,034Provision for credit losses -
net charge-offs (1)



7,834




1,965




778




2,762




13,339Noninterest income



25,450




5,070




17,770




8,207




56,497Noninterest expenses - direct
(2)



30,221




10,016




33,435




1,515




75,187Segment contribution


$
81,479



$
23,154



$
65,550



$
3,822




174,005Provision for credit losses in
excess of net charge-offs (1)























4,059Noninterest expenses -
unallocated (3)























82,863Income before income
taxes























87,083Income tax expense























29,933Net income






















$
57,150June 30, 2006Total assets


$
4,116,571



$
1,649,500



$
3,834,479



$
4,476,533



$
14,077,083Total loans held for
investment



3,771,972




1,521,135




3,265,018




881,320




9,439,445Total deposits



3,738,122




1,008,663




3,010,311




1,483,223




9,240,319Total goodwill



119,233




87,900




439,884




3,237




650,254(1)
In 2006, the provision for credit losses included in each segment represents
  the actual net charge-offs for the period. Provision in excess of actual net
  charge-offs is not allocated to any of the segments, and is thus presented as
  a reconciling item. TSFG is refining its methodology for allocating provision
  to its segments and thus the presentation of the provision allocation may
  change in future periods.(2)
Noninterest expenses 
  direct include the direct costs of the segments operations such as
  facilities, personnel, and other operating expenses.(3)
Noninterest expenses 
  unallocated are managed on a centralized basis and thus are not included in
  any segment column. This line item includes expenses not directly
  attributable to the segments, such as information services, operations, human
  resources, accounting, finance, treasury, and corporate incentive plans. TSFG
  is refining its methodology for allocating these expenses to its segments and
  thus the presentation of noninterest expenses may change in future periods.15

Item 2.      Managements Discussion and Analysis
of Financial Condition and Results of Operations

The
following discussion and analysis are presented to assist in understanding the
financial condition, changes in financial condition, results of operations, and
cash flows of The South Financial Group, Inc. and its subsidiaries
(collectively, TSFG), except where the context requires otherwise. TSFG may
also be referred to herein as we, us, or our. This discussion should be
read in conjunction with the consolidated financial statements appearing in
this report as well as the Annual Report of TSFG on Form 10-K for the year
ended December 31, 2006. Results of operations for the six months ended June
30, 2007 are not necessarily indicative of results that may be attained for any
other period.

Effective
July 1, 2007, TSFG primarily operates through its subsidiary bank, Carolina
First Bank, which conducts operations in South Carolina and North
Carolina (as Carolina First Bank) and in Florida (as Mercantile Bank).

Index
to Item 2, Managements Discussion and Analysis of Financial Condition and
Results of Operations

PageWebsite Availability of Reports Filed with the Securities and
  Exchange Commission
16Forward-Looking Statements
16Non-GAAP Financial Information
17Overview
17Critical Accounting Policies and Estimates
19Expanded Corporate Facilities
19Balance Sheet Review
19Earnings Review
33Enterprise Risk Management
39Off-Balance Sheet Arrangements
41Liquidity
42Recently Adopted/Issued Accounting Pronouncements
43Website Availability of Reports Filed with
the Securities and Exchange Commission

All
of TSFGs electronic filings with the Securities and Exchange Commission
(SEC), including its Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and other documents filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are
made available at no cost on TSFGs web site, www.thesouthgroup.com, through
the Investor Relations link. TSFGs SEC filings are also available through the
SECs web site at www.sec.gov.

Forward-Looking
Statements

This
report contains certain forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995) to assist in the understanding of
anticipated future operating and financial performance, growth opportunities,
growth rates, and other similar forecasts and statements of expectations. These
forward-looking statements may be identified by the use of such
words as: estimate, anticipate, expect, believe, intend,
plan, or
words of similar meaning, or future or conditional verbs such as may,
intend, could, will, or should. These forward-looking statements reflect current
views, but are based on
assumptions and are subject to risks, uncertainties, and other factors, which
may cause actual results to differ materially from those in such statements. A
variety of factors may affect the operations, performance, business strategy
and results of TSFG including, but not limited to, the following:


risks from changes in economic, monetary
  policy, and industry conditions;
changes in interest rates, shape of the
  yield curve, deposit rates, the net interest margin, and funding sources;
market risk (including net income at risk
  analysis and economic value of equity risk analysis) and inflation;
risks inherent in making loans including
  repayment risks and changes in the value of collateral;
loan growth, the adequacy of the allowance
  for credit losses, provision for credit losses, and the assessment of problem
  loans (including loans acquired via acquisition and loans in a North Carolina
  development under investigation);
level, composition, and repricing
  characteristics of the securities portfolio;
deposit growth, change in the mix or type
  of deposit products and cost of deposits;
availability of wholesale funding;16


fluctuations in consumer spending;
competition in the banking industry and
  demand for our products and services;
continued availability of senior
  management;
technological changes;
ability to increase market share;
income and expense projections, ability to
  control expenses, and expense reduction initiatives;
changes in the compensation, benefit, and
  incentive plans, including compensation accruals;
risks associated with income taxes,
  including the potential for adverse adjustments;
acquisitions, greater than expected deposit
  attrition or customer loss, inaccuracy of related cost savings estimates,
  inaccuracy of estimates of financial results, and unanticipated integration
  issues;
significant delay or inability to execute
  strategic initiatives designed to grow revenues;
changes in managements assessment of and
  strategies for lines of business, asset, and deposit categories;
changes in accounting policies and
  practices;
changes in the evaluation of the
  effectiveness of our hedging strategies;
changes in regulatory actions, including
  the potential for adverse adjustments;
changes, costs, and effects of litigation,
  and environmental remediation; and
recently-enacted or proposed legislation.Such
forward-looking statements speak only as of the date on which such statements
are made and shall be deemed to be updated by any future filings made by TSFG
with the SEC. We undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made to reflect the occurrence of unanticipated events. In
addition, certain statements in future filings by TSFG with the SEC, in press
releases, and in oral and written statements made by or with the approval of
TSFG, which are not statements of historical fact, constitute forward-looking
statements.

Non-GAAP Financial Information

This report
also contains financial information determined by methods other than in
accordance with Generally Accepted Accounting Principles (GAAP). TSFGs
management uses these non-GAAP measures to analyze TSFGs performance. In
particular, TSFG presents certain designated net interest income amounts on a
tax-equivalent basis (in accordance with common industry practice). Management
believes that these presentations of tax-equivalent net interest income aid in
the comparability of net interest income arising from both taxable and
tax-exempt sources over the periods presented. TSFG also presents loan and
deposit growth, excluding loans/deposits acquired net of dispositions (referred
to herein as organic growth). In discussing its deposits, TSFG presents core
deposits, which are defined by TSFG as noninterest-bearing, interest-bearing
checking, money market accounts, and savings accounts, customer deposits,
which are defined by TSFG as total deposits less brokered deposits, and
customer funding, which is defined by TSFG as total deposits less brokered
deposits plus customer sweeps. Wholesale borrowings include short-term and
long-term borrowings less customer sweeps plus brokered deposits. In addition,
TSFG provides data eliminating intangibles in order to present data on a
tangible basis. The limitations associated with operating measures are the
risk that persons might disagree as to the appropriateness of items comprising
these measures and that different companies might calculate these measures
differently. Management compensates for these limitations by providing detailed
reconciliations between GAAP and operating measures. These disclosures should
not be viewed as a substitute for GAAP measures, and furthermore, TSFGs
non-GAAP measures may not necessarily be comparable to non-GAAP performance
measures of other companies.

Overview

The
South Financial Group is a financial holding company, headquartered in
Greenville, South Carolina, with $14.1 billion in total assets and 171 branch
offices in South Carolina, Florida, and North Carolina at June 30, 2007. Founded
in 1986, TSFG focuses on fast-growing banking markets in the
Southeast and concentrates its growth in metropolitan statistical areas. TSFG operates Carolina First Bank, which
conducts banking operations in North Carolina and South Carolina (as Carolina
First Bank), in Florida (as Mercantile Bank), and on the Internet (as Bank
Caroline). At June 30, 2007, approximately 46% of TSFGs customer deposits
(total deposits less brokered deposits) were in South Carolina, 39% were in
Florida, and 15% were in North Carolina. (See Noninterest Expenses for a
discussion of the merger of TSFGs two bank subsidiaries effective July 1,
2007.)

17

TSFG uses a
super-community bank strategy and targets small and middle market businesses
and retail customers. As a super-community bank, TSFG combines personalized
customer service and local decision-making, typical of community banks, with a
full range of financial services normally found at larger regional
institutions.

TSFG
reported net income of $38.4 million, or $0.51 per diluted share, for the first
six months of 2007, compared with $57.2 million, or $0.76 per diluted share,
for the first six months of 2006. The decline in net income is principally from
lower net interest income and a second quarter 2007 additional provision for
loan losses of $10.5 million pre-tax (or $7.0 million after-tax) related to a
well-publicized western North Carolina real estate development which was
alleged by the North Carolina attorney general to involve fraud (NC Development
Loans). Average diluted shares outstanding decreased 0.8% to 74.8 million
shares, principally as a result of TSFGs repurchase of 2.15 million shares
during the first six months of 2007, partially offset by shares issued pursuant
to the exercise of stock options.

TSFG
continues to focus on improving its balance sheet mix by increasing the
relative level and mix of customer assets and liabilities. On the asset side,
average loans as a percentage of average earning assets increased to 78.5% for
the first half of 2007 from 75.2% for the first half of 2006. On the funding
side, average customer funding (which includes deposits less brokered deposits
plus customer sweeps) as a percentage of average total funding increased to
67.3% for the first half of 2007, up from 63.3% for the first half of 2006.

Using
period-end balances, TSFGs loans held for investment at June 30, 2007
increased 6.2% from a year ago, and total deposit balances grew 9.1%. Customer
funding (deposits less brokered deposits plus customer sweeps) increased 2.0%
since June 30, 2006.

Tax-equivalent
net interest income was $194.3 million for the first six months of 2007, a
$15.3 million decrease from $209.6 million for the first six months of 2006.
The net interest margin decreased to 3.10% for the first half of 2007 from
3.28% for the first half of 2006. This margin compression reflects customer preference for higher-cost
deposit categories, higher wholesale borrowing costs, and actions by management
to reduce interest rate risk and optionality on the balance sheet. Most
recently, the net interest margin improved four basis points to 3.12% for
second quarter 2007 from 3.08% for first quarter 2007 due to an increase in
earning asset yields and stable customer funding costs.

Noninterest
income decreased 0.3% to $56.3 million for the first six months of 2007
compared to $56.5 million for the first six months of 2006. Noninterest income
for the first half of 2007 included a net loss on securities of $3.6 million
including other-than-temporary impairment on TSFGs corporate bond portfolio as
well as net losses sustained on the sale of approximately $120 million of
securities available for sale, including $116 million in first quarter 2007 to
manage interest rate risk. This compares with a $4.3 million net gain for the
first half of 2006. In addition, noninterest income for the first half of 2007
included $1.5 million in life insurance proceeds. Noninterest income for the
first half of 2006 included a $4.5 million loss on indirect auto loans. TSFGs
wealth management income, merchant processing income, and customer fee income
for the first six months of 2007 increased over the prior year amounts.

Noninterest
expenses totaled $163.3 million for the first six months of 2007, compared to
$158.1 million for the first six months of 2006, an increase of 3.3%. Salaries,
wages and employee benefits (excluding contract buyouts and severance), which
account for 54.1% of total noninterest expenses for the first six months of
2007, increased 6.7% to $88.3 million. The
increase in noninterest expenses included higher incentive expense, higher
salaries attributable to annual salary increases and TSFGs expansion of its
management team, and higher occupancy expenses, partially offset by declines in
professional fees and most other categories of expense. TSFG continued
to make progress in its expense reduction initiative, as noninterest expenses
for second quarter 2007 decreased to $81.0 million from $82.3 million for first
quarter 2007 and $91.0 million for fourth quarter 2006.

At June 30,
2007, nonperforming assets as a percentage of loans held for investment and
foreclosed property decreased to 0.45% from 0.51% at June 30, 2006. For the six
months ended June 30, 2007, annualized net loan charge-offs totaled 0.25% of
average loans held for investment, an improvement from 0.28% for the six months
ended June 30, 2006. Net loan charge-offs declined to 0.21% for second quarter
2007, down from 0.29% for first quarter 2007. TSFGs provision for credit
losses increased to $26.1 million for the first six months of 2007 from $17.4
million for the first six months of 2006, primarily as a result of an
additional $10.5 million provision expense
related to the NC Development Loans. The allowance for loan loss
coverage of nonperforming loans at June 30, 2007 increased to 3.02 times,
compared with 2.88 times at June 30, 2006.

TSFGs
tangible equity to tangible asset ratio totaled 6.22% at June 30, 2007, up from
5.92% at June 30, 2006, primarily as a result of retention of earnings and a
decrease in net unrealized losses on available for sale securities. At

18

June 30, 2007, the after-tax net unrealized loss on available for sale
securities totaled $59.6 million, down from $84.7 million at June 30, 2006.

Critical Accounting
Policies and Estimates

TSFGs
accounting policies are in accordance with accounting principles generally
accepted in the United States and with general practice within the banking industry.
TSFG makes a number of judgmental estimates and assumptions relating to
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the Consolidated Financial Statements and
the reported amounts of revenues and expenses during periods presented.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and reserve for
unfunded lending commitments; the effectiveness of derivatives and other
hedging activities; the fair value of certain financial instruments (loans held
for sale, securities, derivatives, and privately held investments); income tax
assets or liabilities; share-based compensation; and accounting for acquisitions,
including the fair value determinations, the analysis of goodwill for
impairment and the analysis of valuation allowances in the initial accounting
of loans acquired. To a lesser extent, significant estimates are also
associated with the determination of contingent liabilities, discretionary
compensation, and other employee benefit agreements. Different assumptions in
the application of these policies could result in material changes in TSFGs
Consolidated Financial Statements. Accordingly, as this information
changes, the Consolidated Financial Statements could reflect the use of
different estimates, assumptions, and judgments. Certain determinations
inherently have a greater reliance on the use of estimates, assumptions, and
judgments, and as such have a greater possibility of producing results that
could be materially different than originally reported. TSFG has procedures and
processes in place to facilitate making these judgments.

For
additional information regarding critical accounting policies, refer to the Annual Report of TSFG on Form 10-K for
the year ended December 31, 2006, specifically Item 8, Note 1  Summary of
Significant Accounting Policies in the notes to the Consolidated Financial
Statements and the section captioned Critical
Accounting Policies and Estimates in Managements Discussion and Analysis of
Financial Condition and Results of Operations.

Expanded Corporate Facilities

There have
been no material changes to the plans for TSFGs Expanded Corporate Facilities
previously disclosed on page 16 of TSFGs March 31, 2007 Quarterly Report on
Form 10-Q.

Balance Sheet Review

Loans

TSFG
focuses its lending activities on small and middle market businesses and
individuals in its geographic markets. At June 30, 2007, outstanding loans
totaled $10.1 billion, which equaled 99.8% of total deposits (129.2% of
customer deposits) and 71.2% of total assets. Loans held for investment
increased $589.8 million, or 6.2%, to $10.0 billion at June 30, 2007 from $9.4
billion at June 30, 2006. The major components of the loan portfolio were
commercial loans, commercial real estate loans, and consumer loans (including
both direct and indirect loans). Substantially all loans were to borrowers
located in TSFGs market areas in South Carolina, Florida, and North Carolina.
At June 30, 2007, approximately 8% of the portfolio was unsecured.

As part of
its portfolio and balance sheet management strategies, TSFG reviews its loans
held for investment and determines whether its intent for specific loans or
classes of loans has changed. If management changes its intent from held for
investment to held for sale, the loans are transferred to the held for sale
portfolio and recorded at the lower of cost basis or fair value.

TSFG
generally sells a majority of its residential mortgage loans in the secondary
market. TSFG also retains certain of its mortgage loans, based on predetermined
criteria, in its held for investment portfolio as part of its overall balance
sheet management strategy. Loans held for
sale decreased to $35.7 million at June 30, 2007 from $78.8 million at June 30,
2006. At June 30, 2006, loans held for sale included $51.0 million of indirect
auto loans as management changed its intent with regard to these loans during
June and July 2006. Excluding the indirect auto loans, loans held for sale
increased from $27.7 million at June 30, 2006, partly due to TSFGs decision to
hold fewer mortgage loans in its held for investment portfolio.

Table 1
summarizes outstanding loans by collateral type for real estate secured loans
and by borrower type for

19

all other loans. Collateral type represents the underlying assets
securing the loan, rather than the purpose of the loan.

Table 1Loan Portfolio Composition(dollars in thousands)June 30,December 31,
  20062007

2006Commercial,
  financial and agricultural

$
2,285,920

$
2,046,169

$
2,152,375Real estate
  - construction (1)


1,738,387


1,515,148


1,630,366Real estate
  - residential mortgages (1-4 family)


1,388,485


1,496,948


1,416,005Commercial
  secured by real estate (1)


3,819,818


3,703,930


3,727,316Consumer


796,618


677,250


775,805Loans held
  for investment

$
10,029,228

$
9,439,445

$
9,701,867Percentage
of Loans Held for InvestmentCommercial,
  financial and agricultural


22.8
%

21.7
%

22.2
%Real estate
  - construction (1)


17.3


16.0


16.8Real estate
  - residential mortgages (1-4 family)


13.9


15.9


14.6Commercial
  secured by real estate (1)


38.1


39.2


38.4Consumer


7.9


7.2


8.0Total


100.0
%

100.0
%

100.0
%(1)
These categories include loans to businesses other than real estate
  companies where owner-occupied real estate is pledged on loans to finance
  operations, equipment, and facilities.20

Table
2 provides a stratification of the loan portfolio by loan purpose. This
presentation differs from that in Table 1, which stratifies the portfolio by
collateral type and borrower type. Certain prior period amounts have been
reclassified to conform to current period presentation.

Table 2Loan
  Portfolio Composition Based on Loan Purpose(dollars
  in thousands)June 30,December 31,2007



2006



2006Commercial
LoansCommercial and
industrial


$
2,569,628



$
2,393,706



$
2,491,210Owner - occupied real estate
(1)



961,806




880,545




830,179Commercial real
estate



4,258,837




4,043,550




4,171,6317,790,271




7,317,801




7,493,020Consumer LoansIndirect - sales
finance



684,053




555,678




660,401Direct retail
(2)



430,760




428,702




439,478Home equity



547,167




554,266




528,9091,661,980




1,538,646




1,628,788Mortgage Loans
(2)



576,977




582,998




580,059Total loans held for
investment


$
10,029,228



$
9,439,445



$
9,701,867Percentage of Loans Held for
InvestmentCommercial and
industrial



25.6
%



25.4
%



25.7
%Owner - occupied real estate
(1)



9.6




9.3




8.6Commercial real
estate



42.5




42.8




43.0Consumer



16.6




16.3




16.7Mortgage



5.7




6.2




6.0Total



100.0
%



100.0
%



100.0
%(1)
In Table 1,
  these loans are included in the Real estate  construction and Commercial
  secured by real estate categories, which also include loans to non-real
  estate industry borrowers.(2)
In second
  quarter 2007, TSFG reclassified certain loan balances from mortgage loans to
  consumer direct retail. Amounts for prior periods (including $151.1 million
  at March 31, 2007, $146.5 million at December 31, 2006, $123.8 million at
  June 30, 2006) have been reclassified to conform to the current presentation.Commercial
and industrial loans are loans to finance short-term
and intermediate-term cash needs of businesses. Typical needs include the need
to finance seasonal or other temporary cash flow imbalances, growth in working
assets created by sales growth, and purchases of equipment and vehicles. Credit
is extended in the form of short-term single payment loans, lines of credit for
periods up to a year, revolving credit facilities for periods up to five years,
and amortizing term loans for periods up to ten years.

Owner
- occupied real estate loans are loans to finance the
purchase or expansion of operating facilities used by businesses not engaged in
the real estate business. Typical loans are loans to finance offices,
manufacturing plants, warehouse facilities, and retail shops. Depending on the
property type and the borrowers cash flows, amortization terms vary from ten
years up to 20 years. Although secured by mortgages on the properties financed,
these loans are underwritten based on the cash flows generated by operations of
the businesses they house.

Commercial
real estate loans are loans to finance real properties
that are acquired, developed, or constructed for sale or lease to parties
unrelated to the borrower. Included are loans to acquire land for development,
land development loans, construction loans, mini-perms for cash flow
stabilization periods, and permanent loans in situations where access to the
secondary market is limited due to loan size.

21

Indirect
- sales finance loans are loans to individuals to
finance the purchase of motor vehicles. They are closed at the auto dealership
but approved in advance by TSFG for immediate purchase. Loans are extended on
new and used motor vehicles with terms varying from two years to six years.
During the second quarter of 2006, TSFG sold $359.6 million of indirect auto
loans.

Direct
retail consumer loans are loans to individuals to
finance personal, family, or household needs. Typical loans are loans to
finance auto purchases, home repairs and additions, and purchases of
residential lots.

Home
equity loans are loans to homeowners, secured
primarily by junior mortgages on their primary residences, to finance personal,
family, or household needs. These loans may be in the form of amortizing loans
or lines of credit with terms up to 15 years.

Mortgage
loans are conforming loans to individuals, secured by
first or second mortgages on single-family residences, generally to finance the
acquisition or construction of those residences. TSFG generally sells a
majority of its residential mortgage loans at origination in the secondary
market. TSFG also retains certain of its mortgage loans, based on predetermined
criteria, in its held for investment portfolio as part of its overall balance
sheet management strategy.

Table
3 sorts the commercial real estate portfolio by geography and property type.
The portfolios most significant concentration is in commercial real estate
loans. Real estate development and construction are major components of the
economic activity that occurs in TSFGs markets. By product type, commercial
construction and development loans, the largest component of commercial real
estate loans, represent 41.2% of the total commercial real estate loans at June
30, 2007, up from 39.4% at December 31, 2006. The risk attributable to the
concentration in commercial real estate loans is managed by focusing our
lending on markets with which we are familiar and on borrowers with proven
track records whom we believe possess the financial means to weather adverse
market conditions. Consequently, although the analysis of reserve adequacy
includes an adjustment to account for the risk inherent in this concentration,
management believes the loss potential in its commercial real estate loans is
not materially greater than that of any other segment of the portfolio. In
addition, management believes that diversification by geography, property type,
and borrower partially mitigates the risk of loss in its commercial real estate
loan portfolio.

22

Table 3Commercial
  Real Estate Loans(dollars
  in thousands)June 30, 2007

December 31, 2006% of




% ofBalance

Total

Balance

TotalCommercial Real Estate Loans by Geographic DiversificationWestern
North Carolina (Hendersonville/Asheville)

$
895,347


21.0
%
$
913,742


21.9
%Tampa Bay
Florida


584,823


13.7


562,905


13.5North
Coastal South Carolina (Myrtle Beach)


379,581


8.9


274,548


6.6Northeast
Florida (Jacksonville)


341,000


8.0


354,372


8.5Upstate
South Carolina (Greenville)


332,355


7.8


338,576


8.1Midlands
South Carolina (Columbia)


326,042


7.7


381,810


9.2North
Central Florida


319,888


7.5


313,009


7.5Central
Florida (Orlando)


292,777


6.9


279,922


6.7South
Florida (Ft. Lauderdale)


250,802


5.9


263,807


6.3South
Coastal South Carolina (Charleston)


246,008


5.8


233,834


5.6Marion
County, Florida (Ocala)


149,922


3.5


147,098


3.5Greater
South Charlotte South Carolina (Rock Hill)


140,292


3.3


108,008


2.6Total
commercial real estate loans

$
4,258,837


100.0
%
$
4,171,631


100.0
%Commercial Real Estate Loans by Product TypeCommercial
construction/development

$
1,756,819


41.2
%
$
1,642,221


39.4
%Mixed
use


426,645


10.0


441,853


10.6Residential
construction


314,449


7.4


266,779


6.4Other real
estate structures


312,040


7.3


315,785


7.6Undeveloped
land


297,539


7.0


253,706


6.11-4 family
residential investment property


275,239


6.5


302,883


7.2Retail


263,456


6.2


280,817


6.7Multi-family residential


207,739


4.9


233,094


5.6Hotel/motel


164,430


3.9


178,845


4.3Other
(1)


240,481


5.6


255,648


6.1Total
commercial real estate loans

$
4,258,837


100.0
%
$
4,171,631


100.0
%(1)
Other includes all loans
  in categories smaller than the lowest percentages shown above.Note: At June
  30, 2007 and December 31, 2006, average loan size for commercial real estate
  loans totaled $522,000 and $478,000, respectively.Portfolio
risk is also managed by maintaining a house lending limit at a level
significantly lower than the legal lending limit of Carolina First Bank and by
requiring Board of Director approval to exceed this house limit. At June 30,
2007, TSFGs house lending limit was $35 million, and seven credit
relationships totaling $288.9 million were in excess of the house lending limit
(but not the legal lending limit). The 20 largest credit relationships had an
aggregate outstanding principal balance of $422.0 million, or 4.21% of total
loans held for investment at June 30, 2007, up from 3.41% of total loans held
for investment at June 30, 2006.

TSFG
participates in shared national credits (multi-bank credit facilities of $20
million or more), primarily to borrowers who are headquartered or conduct
business in or near our markets. At June 30, 2007, the loan portfolio included
commitments totaling $1.2 billion in shared national credits. Outstanding
borrowings under these commitments totaled $502.2 million at June 30, 2007,
increasing from $413.2 million at December 31, 2006, and $296.3 million at June
30, 2006.

Credit Quality

A
willingness to take credit risk is inherent in the decision to grant credit.
Prudent risk-taking requires a credit risk management system based on sound
policies and control processes that ensure compliance with those policies.
TSFGs credit risk management system is defined by policies approved by the
Board of Directors that govern the risk

23

underwriting, portfolio
monitoring, and problem loan administration processes. Adherence to
underwriting standards is managed through a multi-layered credit approval
process and after-the-fact review by credit risk management of loans approved
by lenders. Through daily review by credit risk managers, monthly reviews of
exception reports, and ongoing analysis of asset quality trends, compliance
with underwriting and loan monitoring policies is closely supervised. The
administration of problem loans is driven by policies that require written
plans for resolution and quarterly meetings with credit risk management to
review progress. Credit risk management activities are monitored by Directors
Loan Committee of the Board, which meet monthly to review credit quality
trends, new large credits, loans to insiders, large problem credits, credit policy
changes, and reports on independent credit reviews of branch offices.

Table
4 presents our credit quality indicators.

Table 4Credit
  Quality Indicators(dollars
  in thousands)June 30,December 31,2007

2006

2006Loans held
for investment

$
10,029,228

$
9,439,445

$
9,701,867Allowance
for loan losses


125,545


108,995


111,663Allowance
for credit losses (1)


126,721


110,320


112,688Nonaccrual
loans - commercial (2)


33,596


30,860


28,733Nonaccrual
loans - consumer


4,405


3,388


5,250Nonaccrual
loans - mortgage


3,526


3,534


3,185Restructured loans (2)








Total
nonperforming loans


41,527


37,782


37,168Foreclosed
property (other real estate owned and personal property
  repossessions)


4,028


10,187


4,341Total
nonperforming assets

$
45,555

$
47,969

$
41,509Loans past
due 90 days or more (mortgage and consumer with interest
  accruing)

$
2,503

$
2,849

$
3,129Total
nonperforming assets as a percentage of loans held for
  investment and foreclosed property


0.45
%

0.51
%

0.43
%Allowance
for loan losses to nonperforming loans


3.02
x

2.88
x

3.00
x(1)
The allowance for credit
  losses is the sum of the allowance for loan losses and the reserve for
  unfunded lending commitments.(2)
At June 30, 2007, December
  31, 2006, and June 30, 2006, nonaccrual loans  commercial included $1.9
  million, $500,000, and $743,000, respectively, in restructured loans.TSFGs
nonperforming asset ratio (nonperforming assets as a percentage of loans held
for investment and foreclosed property) increased to 0.45% at June 30, 2007
from 0.43% at December 31, 2006 but decreased from 0.51% at June 30, 2006.

As
disclosed on a Form 8-K filed June 13, 2007, TSFG has financed purchases of
certain residential lots in a real estate development project near Spruce Pine,
North Carolina (Mitchell County) since 2005 (the NC Development Loans). During
second quarter 2007, TSFG learned that the developer of this project had
abandoned the development. Moreover, on June 7, 2007, the North Carolina
Attorney General issued a press release stating that the lot purchasers and the
several lenders associated with this development have been victimized by
fraudulent land sales schemes and announcing that a receiver has been appointed
with respect to the project. The press release indicated that the investment
scheme included more than $100 million in financing and multiple financial
institutions. Table 5 summarizes information on TSFGs involvement in and
exposure to the NC Development Loans.

24

Table 5NC Development Loans(dollars in thousands)At and for
  the Six Months Ended June 30, 2007# of Loans

Balance

Classified
  as Nonaccrual

Allocated
  Allowance

Accrued
  Interest

Charge-offsLot loans


93

$
17,422

$
1,592

$
9,000

$
161

$
Development
  loans


2


1,507


1,507








1,500Total


95

$
18,929

$
3,099

$
9,000

$
161

$
1,500Payment status as of June 30, 2007Balance

Percent

# of Loans

Accrued
  InterestCurrent

$
3,561


18.8
%

20

$
121-29 days


5,744


30.4


32


5330-59 days


6,425


33.9


36


9460-89 days


100


0.5


1


2Nonaccrual


3,099


16.4


6


$
18,929


100.0
%

95

$
161As
indicated in the table above, at June 30, 2007, loans held for investment
included $18.9 million related to the NC Development Loans, of which $3.1
million was classified as nonperforming.
In the coming quarters, it is likely that many of these loans will reach
nonaccrual status as the payment status becomes more delinquent or as additional
information regarding collection likelihood becomes available.

Table
6 summarizes information on impaired loans, all of which are in nonaccrual
status. All impaired loans are commercial loans. There was no recognized
interest income on impaired loans.

Table 6Impaired Loans(dollars in thousands)At
        and For the
        Six Months
        Ended June 30,
    
    At
        and For the
        Year EndedDecember
        31,2007
    
    2006
    
    2006Impaired
        loans
    
    $
    33,596
    
    $
    30,860
    
    $
    28,733Average
        investment in impaired loans
    
    
    34,602
    
    
    24,171
    
    
    26,331Related
        allowance
    
    
    9,414
    
    
    8,027
    
    
    6,686Foregone
        interest
    
    
    1,386
    
    
    1,044
    
    
    1,665Allowance for Loan Losses and
Reserve for Unfunded Lending Commitments

The
allowance for loan losses represents managements estimate of probable incurred
losses inherent in the lending portfolio. The adequacy of the allowance for
loan losses (the Allowance) is analyzed quarterly. For purposes of this
analysis, adequacy is defined as a level sufficient to absorb probable incurred
losses in the portfolio as of the balance sheet date presented. The methodology
employed for this analysis is as follows.

The
portfolio is segregated into risk-similar segments for which historical loss
ratios are calculated and adjusted for identified changes in current portfolio
characteristics. Historical loss ratios are calculated by product type for
consumer loans (direct installment, indirect installment, revolving, and
mortgage) and by credit risk grade for performing commercial loans.
Nonperforming commercial loans are reviewed for impairment and impairment is
measured in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, an amendment of FASB Statements No. 5 and 15 (SFAS
114), and assigned specific reserves. To allow for modeling margin for
imprecision, a range of probable loss ratios (from 95% to 105% of the adjusted
historical loss ratio) is then derived for each segment. The resulting
percentages are then applied to the dollar amounts of loans in each segment to
arrive at each segments range of probable loss levels.

25

The
Allowance for each portfolio segment is set at an amount within its range that
reflects managements best judgment of the extent to which historical loss
levels are more or less accurate indicators of current losses in the portfolio.
Managements judgments evolve from an assessment of various issues, including
but not limited to the pace of loan growth, emerging portfolio concentrations,
risk management system changes, entry into new markets, new product offerings,
acquired loans, loan portfolio quality trends, and uncertainty in current
economic and business conditions.

The
Allowance is then segregated into allocated and unallocated components. The
allocated component is the sum of the loss estimates at the lower end of the
probable loss range for each category. The unallocated component is the sum of
the amounts by which final loss estimates exceed the lower end estimates for
each category. The unallocated component of the Allowance represents probable
incurred losses inherent in the portfolio based on our analysis that are not
fully captured in the allocated component. Allocation of the Allowance to
respective loan portfolio components is not necessarily indicative of future
losses or future allocations. The entire Allowance is available to absorb
probable incurred losses in the loan portfolio.

Assessing
the adequacy of the Allowance is a process that requires considerable judgment.
Managements judgments are based on numerous assumptions about current events,
which we believe to be reasonable, but which may or may not be valid. Thus,
there can be no assurance that loan losses in future periods will not exceed
the current Allowance amount or that future increases in the Allowance will not
be required. No assurance can be given that managements ongoing evaluation of
the loan portfolio in light of changing economic conditions and other relevant
circumstances will not require significant future additions to the Allowance,
thus adversely affecting the operating results of TSFG.

The
Allowance is also subject to examination and adequacy testing by regulatory
agencies, which may consider such factors as the methodology used to determine
adequacy and the size of the Allowance relative to that of peer institutions,
and other adequacy tests. In addition, such regulatory agencies could require
us to adjust our Allowance based on information available to them at the time
of their examination.

The
methodology used to determine the reserve for unfunded lending commitments,
which is included in other liabilities, is inherently similar to that used to
determine the allowance for loan losses described above, adjusted for factors
specific to binding commitments, including the probability of funding and
historical loss ratio.

Table 7 summarizes the changes in the allowance for loan losses, reserve for unfunded
lending commitments, and allowance for credit losses and provides certain related
ratios.

26

Table 7Summary of Loan and Credit Loss Experience(dollars in thousands)At and For the
  Six Months
  Ended June 30,

At and For the
  Year Ended
  December 31,
  20062007

2006Allowance
  for loan losses, beginning of year

$
111,663

$
107,767

$
107,767Allowance
  adjustment for loans sold





(3,089
)

(3,089
)Net
  charge-offs:Loans charged-off


(16,233
)

(17,658
)

(36,623
)Loans recovered


4,128


4,319


10,261(12,105
)

(13,339
)

(26,362
)Additions to
  allowance through provision expense


25,987


17,656


33,347Allowance
  for loan losses, end of period

$
125,545

$
108,995

$
111,663Reserve for
  unfunded lending commitments, beginning of year

$
1,025

$
1,583

$
1,583Provision
  for unfunded lending commitments


151


(258
)

(558
)Reserve for
  unfunded lending commitments, end of period

$
1,176

$
1,325

$
1,025Allowance for
  credit losses, beginning of year

$
112,688

$
109,350

$
109,350Allowance
  adjustment for loans sold





(3,089
)

(3,089
)Net
  charge-offs:Loans charged-off


(16,233
)

(17,658
)

(36,623
)Loans recovered


4,128


4,319


10,261(12,105
)

(13,339
)

(26,362
)Additions to
  allowance through provision expense


26,138


17,398


32,789Allowance
  for credit losses, end of period

$
126,721

$
110,320

$
112,688Average loans held for
investment

$
9,865,936

$
9,635,658

$
9,581,602Loans held for investment, end
of period


10,029,228


9,439,445


9,701,867Net charge-offs as a percentage
of average
  loans held for investment (annualized)


0.25
%

0.28
%

0.28
%Allowance for loan losses as a
percentage
  of loans held for investment


1.25


1.15


1.15Allowance for credit losses as
a percentage
  of loans held for investment


1.26


1.17


1.16Allowance for loan losses to
nonperforming
  loans


3.02
x

2.88
x

3.00
xTSFGs
allowance for loan losses and allowance for credit losses at June 30, 2007
included $9.0 million related to the NC
Development Loans. In addition, provision expense for the six months ended June
30, 2007 included $10.5 million related to the same development.

Securities

TSFG uses
the investment securities portfolio for several purposes. It serves as a
vehicle to manage interest rate risk, to generate interest and dividend income,
to provide liquidity to meet funding requirements, and to provide collateral
for pledges on public deposits, FHLB advances, and securities sold under
repurchase agreements. TSFG strives to provide adequate
flexibility to proactively manage cash flow as market conditions change. Cash
flow may be used to pay-off borrowings, to fund loan growth, or to reinvest in
securities at then current market rates. Table
8 shows the carrying values of the investment securities portfolio.

27

Table 8Investment Securities Portfolio Composition(dollars in thousands)June 30,

December 31,20062007

2006Available
for Sale(at fair value)U.S.
  Treasury

$
167,195

$
173,049

$
166,719U.S.
  Government agencies


650,581


641,315


653,034Mortgage-backed
  securities


1,158,498


1,504,818


1,400,288State and
  municipal


308,070


351,462


341,488Other
  investments:Corporate
bonds


93,187


111,267


113,365Federal Home
Loan Bank (FHLB) stock


44,119


63,317


52,246Community bank
stocks


7,921


12,245


12,406Other equity
investments


3,770


3,709


3,9102,433,341


2,861,182


2,743,456Held to Maturity (at amortized cost)State and
  municipal


41,792


53,517


52,208Other
  investments


100


100


10041,892


53,617


52,308Total

$
2,475,233

$
2,914,799

$
2,795,764Total
  securities as a percentage of total assets


17.5
%

20.7
%

19.7
%Percentage of Total Securities PortfolioU.S.
  Treasury


6.8
%

5.9
%

6.0
%U.S.
  Government agencies


26.3


22.0


23.3Mortgage-backed
  securities


46.8


51.6


50.1State and
  municipal


14.1


13.9


14.1Other investments


6.0


6.6


6.5Total


100.0
%

100.0
%

100.0
%Securities
(i.e., securities available for sale and securities held to maturity) excluding
the unrealized loss on securities available for sale averaged $2.7 billion in
the first six months of 2007, 13.9% below the average for the corresponding
period in 2006 of $3.1 billion. TSFG has continued to decrease securities by
not reinvesting maturing investments and principal paydowns in an effort to reduce
its reliance on wholesale borrowings. In addition, in the first half of 2007,
TSFG sold approximately $120 million of securities available for sale,
including $116 million in first quarter 2007 to manage interest rate risk as
determined by its new asset/liability management model. In second quarter 2007, TSFG recorded $2.9 million in
other-than-temporary impairment charges on its corporate bond portfolio due to
a change in intent to hold the securities until a recovery in value based on a
change in investment strategy and related credit risk considerations.
Subsequent to quarter-end, TSFG sold approximately $70 million of corporate
bonds and recognized an additional loss on sale of approximately $300,000. TSFG
continues to evaluate the approximately $23 million of corporate bonds
remaining and its decision to hold such bonds until maturity to determine
additional impairment, if any.

The
average tax-equivalent portfolio yield increased for the six months ended June
30, 2007 to 4.80% from 4.73% in the first six months of 2006.

The
expected duration of the debt securities portfolio was approximately 4.3 years
at June 30, 2007, an increase from approximately 3.8 years at December 31, 2006
and a decrease from approximately 4.5 years at June 30, 2006. If interest rates
rise, the duration of the debt securities portfolio may extend. Since total
securities include some callable bonds and mortgage-backed securities, security
paydowns are likely to accelerate if interest rates fall.

The
available for sale portfolio constituted 98.3% of total securities at June 30,
2007. Management believes that maintaining most of its securities in the
available for sale category provides greater flexibility in the management of
the overall investment portfolio. The majority of these securities are
government or agency securities and, therefore, pose

28

minimal credit
risk. Approximately 72% of MBS are collateralized mortgage obligations (CMOs)
with an average duration of 6.2 years. At June 30, 2007, approximately 19% of
the MBS portfolio was variable rate or hybrid variable rate, where the rate
adjusts on an annual basis after a specified fixed rate period, generally
ranging from three to ten years. All of TSFGs MBS are agency-backed.

Changes in
interest rates and related prepayment activity impact yields and fair values of
TSFGs securities. Based on the current investment portfolio composition, in a
rising interest rate environment, related prepayment activity should decrease.

The net
unrealized loss on securities available for sale (pre-tax) totaled $94.6
million at June 30, 2007, compared with a $75.3 million loss at December 31,
2006 and a $134.5 million loss at June 30, 2006, as long term interest rates
decreased since June 30, 2006 and the reduction of the securities portfolio
continued. If interest rates increase, TSFG expects its net unrealized loss on
securities available for sale to increase. See Item 1, Note 4 to the
Consolidated Financial Statements for information about TSFGs securities in
unrealized loss positions.

Community Bank Stocks.
At June 30, 2007, TSFG had equity investments in seven community banks located
in the Southeast with a cost basis of $6.6 million and a market value of $7.9
million. In each case, TSFG owns less than 5% of the community banks
outstanding common stock. These investments in community banks are included in
securities available for sale. During the second quarter 2007, TSFG sold
approximately $3 million of such securities for a net gain of $760,000.

Derivative
Financial Instruments

Derivative financial instruments used by TSFG
may include interest rate swaps, caps, collars, floors, options, futures and
forward contracts. Derivative contracts are primarily used to hedge identified
risks and also to provide risk-management products to customers. TSFG has
derivatives that qualify for hedge accounting under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133), derivatives
that do not qualify for hedge accounting under SFAS 133 but otherwise achieve
economic hedging goals (economic hedges), as well as derivatives that are
used in customer hedging programs. See Note 5 to the Consolidated Financial
Statements for disclosure of the fair value of TSFGs derivative assets and
liabilities (which are included in other assets and other liabilities,
respectively, in the Consolidated Financial Statements) and their related
notional amounts. TSFGs economic hedges and customer hedging programs are
included in Other Derivatives in the table in Note 5.

In
the three and six months ended June 30, 2007, noninterest income included
losses of $1.5 million and $1.4 million, respectively, for derivative
activities. In the three and six months ended June 30, 2006, noninterest income
included losses of $245,000 and $1.4 million, respectively, for derivative
activities. These amounts include the following: the change in fair value of
derivatives that do not qualify for hedge accounting under SFAS 133, as well as
the net cash settlement from these interest rate swaps; hedge ineffectiveness;
and other miscellaneous items.

Deposits

Deposits
remain TSFGs primary source of funds. TSFG faces strong competition from other
banking and financial services companies in gathering deposits. TSFG also
maintains short and long-term wholesale sources including federal funds,
repurchase agreements, brokered CDs, and FHLB advances to fund a portion of
loan demand and, if appropriate, any increases in investment securities.

Table
9 shows the breakdown of total deposits by type of deposit and the respective
percentage of total deposits, while Table 10 shows the breakdown of customer
funding by type.

29

Table 9Type of
  Deposits(dollars
  in thousands)June 30,

December 31,20062007

2006Noninterest-bearing demand
deposits

$
1,244,834

$
1,465,811

$
1,280,908Interest-bearing
checking


1,177,609


1,220,949


1,208,125Money market accounts


2,245,466


2,333,992


2,435,413Savings accounts


177,289


181,871


181,192Total core
deposits


4,845,198


5,202,623


5,105,638Time deposits under $100,000
(1)


1,363,462


1,204,609


1,272,056Time deposits of $100,000 or
more (1)


1,583,653


1,427,811


1,514,615Customer
deposits (2)


7,792,313


7,835,043


7,892,309Brokered deposits


2,293,493


1,405,276


1,624,431Total
deposits

$
10,085,806

$
9,240,319

$
9,516,740Percentage of
DepositsNoninterest-bearing demand
deposits


12.3
%

15.9
%

13.4
%Interest-bearing
checking


11.7


13.2


12.7Money market accounts


22.3


25.3


25.6Savings accounts


1.8


2.0


1.9Core
deposits


48.1


56.4


53.6Time deposits under
$100,000


13.5


13.0


13.4Time deposits of $100,000 or
more


15.7


15.4


15.9Customer
deposits (2)


77.3


84.8


82.9Brokered deposits


22.7


15.2


17.1Total
deposits


100.0
%

100.0
%

100.0
%(1)
In second
  quarter 2007, TSFG reclassified certain deposit balances from time deposits
  under $100,000 to time deposits of $100,000 or more. Amounts for prior
  periods (including $477.1 million at March 31, 2007, $408.8 million at
  December 31, 2006, and $222.0 million at June 30, 2006) have been
  reclassified to conform to the current presentation.(2)
TSFG defines
  customer deposits as total deposits less brokered deposits.Table 10Type of
  Customer Funding(dollars
  in thousands)June 30,December 31,
  20062007

2006Customer deposits
(1)

$
7,792,313

$
7,835,043

$
7,892,309Customer sweeps
(2)


556,622


349,471


500,288Customer funding

$
8,348,935

$
8,184,514

$
8,392,597(1)
TSFG defines
  customer deposits as total deposits less brokered deposits.(2)
TSFG
  includes customer sweeps in short-term borrowings on its consolidated balance
  sheet.At
June 30, 2007, period-end customer funding increased $164.4 million, or 2.0%,
from June 30, 2006, primarily due to increases in time deposits and customer
sweeps partially offset by a decrease in core deposits, as TSFGs deposit mix
continued to shift into higher-cost deposit categories.

TSFG
uses brokered deposits as an alternative funding source while continuing its
efforts to maintain and grow its local customer funding base. Brokered deposits
increased as a percentage of total deposits since June 30, 2006 as TSFG
replaced certain puttable funding with brokered deposits.

30

Table
13 in Earnings Review - Net Interest Income details average balances for the
deposit portfolio for the six months ended June 30, 2007 and 2006. Comparing
the six months ending June 30, 2007 and 2006, average customer funding
increased $268.5 million, or 3.3%. As stated above, within customer funding,
the mix continues to shift toward higher cost products, with increases in
average interest-bearing checking, money market accounts, and time deposits
partially offset by a decrease in noninterest-bearing deposits.

Average
customer funding equaled 67.3% of average total funding in the first six months
of 2007 and 63.3% in the first six months of 2006. As part of its overall
funding strategy, TSFG expects to continue its focus on lowering its funding
costs by trying to improve the level and mix of customer funding. TSFG attempts
to enhance its deposit mix by working to attract lower-cost transaction
accounts through actions such as new transaction account opening goals,
differentiating pricing for promotions and specific markets, and changing
incentive plans to place a greater emphasis on lower-cost customer deposit
growth. Deposit pricing is very competitive, and we expect this pricing
environment to continue.

Borrowed Funds

Table
11 shows the breakdown of total wholesale borrowings by type.

Table 11Type of
  Borrowings(dollars
  in thousands)June 30,

December 31,2007


2006


2006Short-Term
  BorrowingsFederal funds purchased and
  repurchase agreements

$
654,299

$
738,672

$
920,811Customer sweeps


556,622


349,471


500,288FHLB advances


75,000





175,000Commercial paper


32,687


30,336


32,631Treasury, tax and loan note


114,042


140,821


139,989Total
short-term borrowings


1,432,650


1,259,300


1,768,719Long-Term
  BorrowingsRepurchase agreements


200,000


771,000


521,000FHLB advances


328,100


749,127


328,113Subordinated notes


262,067


233,016


188,871Mandatorily redeemable
  preferred stock of subsidiary


64,800


89,800


89,800Note payable


808


847


828Employee stock ownership
  plan note payable


50


350


200Purchase accounting
  premiums, net of amortization


1,423


1,922


1,663Total long
term borrowings


857,248


1,846,062


1,130,475Total
borrowings


2,289,898


3,105,362


2,899,194Less: Customer sweeps


(556,622
)

(349,471
)

(500,288
)Add: Brokered deposits (1)


2,293,493


1,405,276


1,624,431Total
wholesale borrowings

$
4,026,769

$
4,161,167

$
4,023,337Wholesale borrowings as a %
  of total assets


28.5
%

29.6
%

28.3
%(1)     TSFG includes brokered deposits in total
deposits on its consolidated balance sheet.

TSFG
uses both short-term and long-term borrowings to fund growth of earning assets
in excess of deposit growth. In the first six months of 2007, average
borrowings totaled $2.6 billion, compared with $3.6 billion for the same period
in 2006. Since mid-2006, the FHLB and certain structured repurchase agreement
counterparties continue to exercise options to put certain borrowings back to
TSFG. The termination of these borrowings was funded by issuance of 3 to 5-year
brokered certificates of deposit combined with growth in customer funding.
While the decision to issue

31

brokered CDs
rather than reissue similar puttable funding increased TSFGs current funding
cost, removing the related funding optionality reduced future interest rate
risk exposure.

Average
wholesale borrowings totaled $4.0 billion in the first six months of 2007,
compared with $4.7 billion in the first six months of 2006. TSFG continues to
reduce its reliance on wholesale borrowings by growth in customer funding and
reductions in securities.

Daily
funding needs are met through federal funds purchased and short-term brokered
CDs, repurchase agreements and FHLB advances. Balances in these accounts can
fluctuate on a day-to-day basis.

FHLB
advances are a source of funding that TSFG uses depending on the current level
of deposits and the availability of collateral to secure FHLB borrowings.

During
second quarter 2007, TSFG recognized a loss on early extinguishment of debt of
$231,000, which reflects the write-off of unamortized debt issuance costs
associated with $29.1 million of subordinated notes and mandatorily redeemable
preferred stock with an average spread of 310 basis points over LIBOR. TSFG
replaced the debt (as well as shares repurchased during 2007) with newly issued
subordinated debt associated with trust preferred securities totaling $77.3 million
priced at 142 basis points over LIBOR.

In
addition, TSFG plans to replace approximately $94 million of subordinated debt
associated with trust preferred securities, which is callable during the last
six months of 2007. The debt and related trust preferred securities are priced
at an average spread of approximately 360 basis points above LIBOR, which is
approximately 225 basis points above current pricing levels for similar
securities. The write-off of the associated debt issuance costs, which total
approximately $1.8 million, would offset the majority of the benefit for 2007.
Subsequent to quarter-end, TSFG redeemed $43.8 million of the aforementioned
subordinated debt.

Capital
Resources and Dividends

Total
shareholders equity totaled $1.5 billion, or 10.7% of total assets, at June
30, 2007 compared with $1.5 billion, or 10.5% of total assets, at June 30,
2006. Shareholders equity increased from the retention of earnings and the
decrease in the net unrealized loss on securities available for sale, partially
offset by cash dividends paid and TSFGs repurchase of 2.15 million shares in
the first half 2007. At June 30, 2007, TSFG had 1.85 million shares remaining
under its stock repurchase authorization. During July 2007, TSFG repurchased an
additional 850,000 shares in the open market.

TSFGs
unrealized loss on securities available for sale, net of income tax, which is
included in accumulated other comprehensive loss, was $59.6 million at June 30,
2007, compared with an $84.7 million loss at June 30, 2006 due primarily to a
decrease in long-term interest rates as well as an approximately $400 million
reduction in securities balances.

Book
value per share at June 30, 2007 and 2006 was $20.60 and $19.75, respectively.
Tangible book value per share at June 30, 2007 and 2006 was $11.35 and $10.55,
respectively. Tangible book value was below book value as a result of the
purchase premiums associated with acquisitions of entities and assets accounted
for as purchases.

TSFG
is subject to the risk-based capital guidelines administered by bank regulatory
agencies. The guidelines are designed to make regulatory capital requirements
more sensitive to differences in risk profiles among banks and bank holding companies,
to account for off-balance sheet exposure and to minimize disincentives for
holding liquid assets. Under these guidelines, assets and certain off-balance
sheet items are assigned to broad risk categories, each with appropriate
weights. The resulting capital ratios represent capital as a percentage of
total risk-weighted assets and certain off-balance sheet items. TSFG, Carolina
First Bank, and Mercantile Bank exceeded the well-capitalized regulatory
requirements at June 30, 2007. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators, that, if undertaken, could have a direct material effect on our
Consolidated Financial Statements.

Table
12 sets forth various capital ratios for TSFG, Carolina First Bank, and
Mercantile Bank. Under current regulatory guidelines, debt associated with
trust preferred securities qualifies for tier 1 capital treatment. At June 30,
2007, trust preferred securities included in tier 1 capital totaled $244.5
million, including $75.0 million of trust preferred securities issued in the
second quarter 2007. Specifically, TSFG, through a newly-formed, unconsolidated
subsidiary (South Financial Capital Trust 2007-I), issued $75.0 million of
trust preferred securities to institutional investors during the second quarter

32

2007. In connection with this transaction, TSFG contributed $2.3
million of capital and issued $77.3 million in unsecured subordinated notes to
the subsidiary. Subsequent to quarter-end, TSFG called for redemption $42.5
million of trust preferred securities associated with 2002 issuances.

Table 12Capital RatiosJune 30, 2007

Well
  Capitalized
  RequirementTSFGTotal risk-based capital

11.56
%

n/aTier 1 risk-based capital

10.12


n/aLeverage ratio

8.73


n/aCarolina
  First BankTotal risk-based capital

11.04
%

10.00
%Tier 1 risk-based capital

8.97


6.00Leverage ratio

7.67


5.00Mercantile
  BankTotal risk-based capital

11.35
%

10.00
%Tier 1 risk-based capital

8.42


6.00Leverage ratio

7.37


5.00Effective
July 1, 2007, TSFG merged Mercantile Bank into Carolina First Bank (see
Noninterest Expenses for further discussion). The combined bank capital
ratios exceeded the well-capitalized regulatory requirements at June 30, 2007
on a pro-forma basis. The merger had no impact on consolidated capital ratios.

At June 30,
2007, TSFGs tangible equity to tangible asset ratio totaled 6.22%, an increase
from 5.92% at June 30, 2006, due primarily to retention of earnings and a
decrease in the unrealized loss on securities available for sale. If interest
rates increase, TSFG expects its unrealized loss on securities available for
sale to increase, leading to a lower tangible equity to tangible asset ratio.

Carolina
First Bank is subject to certain regulatory restrictions on the amount of
dividends it is permitted to pay. TSFG has paid a cash dividend each quarter
since the initiation of cash dividends on February 1, 1994. TSFG presently
intends to pay a quarterly cash dividend on its common stock; however, future
dividends will depend upon TSFGs financial performance and capital
requirements.

TSFG,
through a real estate investment trust subsidiary, had 648 mandatorily
redeemable preferred shares outstanding at June 30, 2007 with a stated value of
$100,000 per share. At June 30, 2007, these preferred shares, which are
reported as long-term debt on the consolidated balance sheet, totaled $64.8
million. Under Federal Reserve Board guidelines, $26.4 million qualified as
tier 1 capital, and $30.8 million qualified as tier 2 capital. The terms for
the preferred shares include certain asset coverage and cash flow tests, which
if not satisfied, may prohibit TSFGs real estate trust subsidiary from paying
dividends to Carolina First Bank, which in turn may limit its ability to pay
dividends to TSFG.

Earnings Review

Net
Interest Income

Net
interest income is TSFGs primary source of revenue. Net interest income is the
difference between the interest earned on assets, including loan fees and
dividends on investment securities, and the interest incurred for the
liabilities to support such assets. The net interest margin measures how
effectively a company manages the difference between the yield on earning
assets and the rate incurred on funds used to support those assets. Fully
tax-equivalent net interest income adjusts the yield for assets earning
tax-exempt income to a comparable yield on a taxable basis based on a 35%
marginal federal income tax rate. Table 13 presents average balance sheets and
a net interest income analysis on a tax-equivalent basis for the three and six
months ended June 30, 2007 and 2006.

33

Table 13Comparative Average Balances - Yields and Costs(dollars in thousands)Three Months Ended June 30,2007

2006Average
  Balance

Income/
  Expense

Yield/
  Rate

Average
  Balance

Income/
  Expense

Yield/
  RateAssetsEarning assetsLoans (1)

$
9,984,137

$
191,961


7.71
%
$
9,711,641

$
179,971


7.43
%Investment securities, taxable
(2)


2,247,092


26,879


4.79


2,676,211


31,652


4.73Investment securities,
nontaxable (2) (3)


359,043


4,443


4.95


416,117


4,938


4.75Total investment
securities


2,606,135


31,322


4.81


3,092,328


36,590


4.73Federal funds sold and
interest-bearing
  bank balances


6,376


97


6.10


64,319


879


5.48Total earning assets


12,596,648

$
223,380


7.11


12,868,288

$
217,440


6.77Non-earning assets


1,496,431








1,476,147Total assets

$
14,093,079







$
14,344,435Liabilities and
Shareholders EquityLiabilitiesInterest-bearing
liabilitiesInterest-bearing
depositsInterest-bearing
checking

$
1,176,182

$
6,029


2.06

$
1,168,434

$
5,054


1.73Savings


181,166


736


1.63


179,220


287


0.64Money market


2,294,181


22,528


3.94


2,261,040


18,651


3.31Time deposits, excluding
brokered deposits


2,910,284


36,407


5.02


2,641,817


26,984


4.10Brokered deposits


2,042,664


26,366


5.18


1,408,889


17,728


5.05Total interest-bearing
deposits


8,604,477


92,066


4.29


7,659,400


68,704


3.60Customer sweeps


496,030


5,528


4.47


314,040


3,383


4.32Other borrowings


1,989,109


27,710


5.59


3,252,647


40,503


4.99Total interest-bearing
liabilities


11,089,616

$
125,304


4.53


11,226,087

$
112,590


4.02Noninterest-bearing
liabilitiesNoninterest-bearing
deposits


1,225,075








1,446,115Other noninterest-bearing
liabilities


231,996








195,999Total liabilities


12,546,687








12,868,201Shareholders
equity


1,546,392








1,476,234Total liabilities and
shareholders equity

$
14,093,079







$
14,344,435Net interest income
(tax-equivalent)




$
98,076


3.12
%



$
104,850


3.27
%Less: tax-equivalent adjustment
(3)





1,555








1,728Net interest income




$
96,521







$
103,122Supplemental data:Customer funding(4)

$
8,282,918

$
71,228


3.45
%
$
8,010,666

$
54,359


2.72
%Wholesale borrowings(5)


4,031,773


54,076


5.38


4,661,536


58,231


5.01Total funding (6)

$
12,314,691

$
125,304


4.08

$
12,672,202

$
112,590


3.56(1)
Nonaccrual loans are
  included in average balances for yield computations.(2)
The average balances for
  investment securities exclude the unrealized loss recorded for available for
  sale securities.(3)
The tax-equivalent
  adjustment to net interest income adjusts the yield for assets earning
  tax-exempt income to a comparable yield on a taxable basis.(4)
Customer funding includes
  total deposits (total interest-bearing plus noninterest-bearing deposits)
  less brokered deposits plus customer sweeps.(5)
Wholesale borrowings include
  borrowings less customer sweeps plus brokered deposits. For purposes of this
  table, wholesale borrowings equal the sum of other borrowings and brokered
  deposits, as customer sweeps are presented separately.(6)
Total funding includes
  customer funding and wholesale borrowings.Note: Average
balances are derived from daily balances.

34

Table 13
(Continued)Comparative
Average Balances - Yields and Costs(dollars in
thousands)Six Months Ended June 30,2007

2006Average
  Balance

Income/
  Expense

Yield/
  Rate

Average
  Balance

Income/
  Expense

Yield/
  RateAssetsEarning assetsLoans
(1)

$
9,899,046

$
378,589


7.71
%
$
9,671,331

$
349,159


7.28
%Investment
securities, taxable (2)


2,330,531


55,704


4.78


2,714,068


64,195


4.73Investment
securities, nontaxable (2)
  (3)


371,355


9,132


4.92


425,496


10,083


4.74Total
investment securities


2,701,886


64,836


4.80


3,139,564


74,278


4.73Federal funds
sold and interest-bearing
  bank balances


7,348


238


6.53


43,032


1,171


5.49Total earning
assets


12,608,280

$
443,663


7.09


12,853,927

$
424,608


6.65Non-earning assets


1,512,135








1,501,856Total assets

$
14,120,415







$
14,355,783Liabilities and
Shareholders EquityLiabilitiesInterest-bearing liabilitiesInterest-bearing depositsInterest-bearing checking

$
1,181,680

$
11,964


2.04

$
1,156,231

$
9,460


1.65Savings


180,060


1,442


1.61


185,382


595


0.65Money
market


2,335,745


46,065


3.98


2,238,172


34,996


3.15Time deposits,
excluding brokered deposits


2,902,007


71,988


5.00


2,709,825


53,015


3.95Brokered
deposits


1,907,623


49,086


5.19


1,391,143


33,117


4.80Total
interest-bearing deposits


8,507,115


180,545


4.28


7,680,753


131,183


3.44Customer
sweeps


475,095


10,509


4.46


307,006


6,272


4.12Other
borrowings


2,128,838


58,354


5.53


3,262,466


77,590


4.80Total
interest-bearing liabilities


11,111,048

$
249,408


4.53


11,250,225

$
215,045


3.85Noninterest-bearing
liabilitiesNoninterest-bearing deposits


1,227,683








1,437,178Other
noninterest-bearing liabilities


232,618








186,297Total liabilities


12,571,349








12,873,700Shareholders
equity


1,549,066








1,482,083Total liabilities and
shareholders equity

$
14,120,415







$
14,355,783Net interest income
(tax-equivalent)




$
194,255


3.10
%



$
209,563


3.28
%Less: tax-equivalent adjustment
(3)





3,196








3,529Net interest income




$
191,059







$
206,034Supplemental
data:Customer funding
(4)

$
8,302,270

$
141,968


3.45
%
$
8,033,794

$
104,338


2.62
%Wholesale
borrowings (5)


4,036,461


107,440


5.37


4,653,609


110,707


4.80Total funding
(6)

$
12,338,731

$
249,408


4.08

$
12,687,403

$
215,045


3.42(1)
Nonaccrual loans are
  included in average balances for yield computations.(2)
The average balances for
  investment securities exclude the unrealized loss recorded for available for
  sale securities.(3)
The tax-equivalent
  adjustment to net interest income adjusts the yield for assets earning
  tax-exempt income to a comparable yield on a taxable basis.(4)
Customer funding includes
  total deposits (total interest-bearing plus noninterest-bearing deposits)
  less brokered deposits plus customer sweeps.(5)
Wholesale borrowings
  include borrowings less customer sweeps plus brokered deposits. For purposes
  of this table, wholesale borrowings equal the sum of other borrowings and
  brokered deposits, as customer sweeps are presented separately.(6)
Total funding includes
  customer funding and wholesale borrowings.Note: Average balances are
derived from daily balances.

35

Fully
tax-equivalent net interest income decreased 7.3% to $194.3 million for the
first half of 2007 from $209.6 million for the first half of 2006. TSFGs
average earning assets declined 1.9% to $12.6 billion for the first half of
2007 from $12.9 billion for the first half of 2006 due primarily to the
continued reduction of securities and the second quarter 2006 sale of indirect
loans, partially offset by organic loan growth. As a result, average loans as a
percentage of average earning assets increased to 78.5% for the first half of
2007, up from 75.2% for the first half of 2006, improving the earning asset mix
and yield. At June 30, 2007, approximately 60% of TSFGs accruing loans were
variable rate loans, the majority of which are tied to the prime rate. TSFG has
entered into receive-fixed interest rate swaps to hedge the forecasted interest
income from certain prime-based commercial loans as part of its overall
interest rate risk management. TSFG also has an interest rate floor that is
designated as a hedge of commercial loans and is intended to mitigate earnings
exposure to falling interest rates.

The
net interest margin for the first half of 2007 was 3.10%, compared with 3.28%
for the first half of 2006. The yield on average earning assets increased 44
basis points, aided by improved loan yields, which were up 43 basis points.
However, the improved yield on earning assets was more than offset by a 66
basis point increase in the average cost of funding. This margin compression
reflects customer preferences for higher-cost deposit categories, higher
wholesale borrowing costs, and a continued challenging interest rate
environment, as well as TSFGs decision to replace puttable funding since
mid-2006 primarily with higher-cost brokered deposits.

Provision
for Credit Losses

The
provision for credit losses is recorded in amounts sufficient to bring the
allowance for loan losses and the reserve for unfunded lending commitments to a
level deemed appropriate by management. Management determines this amount based
upon many factors, including its assessment of loan portfolio quality, loan
growth, changes in loan portfolio composition, net loan charge-off levels, and
expected economic conditions. The provision for credit losses was $26.1 million
and $17.4 million in the first six months of 2007 and 2006, respectively. The
provision for credit losses in the first six months of 2007 included $10.5
million related to the NC Development Loans (see discussion in Credit
Quality).

Net loan
charge-offs were $12.1 million, or 0.25% of average loans held for investment,
for the first six months of 2007, compared with $13.3 million, or 0.28% of
average loans held for investment, for the first six months of 2006. Net loan
charge-offs for the first six months of 2007 included $1.5 million related to
the aforementioned North Carolina development. The allowance for credit losses
equaled 1.26%, 1.16%, and 1.17% of loans held for investment as of June 30,
2007, December 31, 2006, and June 30, 2006. The June 30, 2007 allowance for
credit losses included $9.0 million designated for the NC Development Loans.
See Loans, Credit Quality, and Allowance for Loan Losses and Reserve for
Unfunded Lending Commitments.

36

Noninterest
Income

Table
14 shows the components of noninterest income.

Table 14Components of Noninterest Income(dollars in thousands)Three Months Ended 
  June 30,

Six Months Ended
  June 30,2007

2006

2007

2006Service charges on deposit accounts

$
11,223

$
11,592

$
21,836

$
22,880Debit card
  income


2,403


2,095


4,580


4,016Customer
  service fee income


1,402


1,074


2,693


2,083Total customer fee
income


15,028


14,761


29,109


28,979Insurance
  income


2,987


2,806


6,284


5,783Retail
  investment services


2,282


2,249


4,240


4,272Trust and
  investment management income


1,734


1,678


3,328


3,135Benefits
  administration fees


749


749


1,491


1,416Total wealth management
income


7,752


7,482


15,343


14,606Bank-owned
  life insurance income


4,454


2,969


7,305


5,788Mortgage
  banking income


1,877


2,078


3,946


3,962Merchant
  processing income, net (1)


771


640


1,506


1,161Loss on
  derivative activities


(1,497
)

(245
)

(1,400
)

(1,370
)(Loss) gain
  on securities


(2,237
)

3,601


(3,622
)

4,276Loss on
  indirect auto loans





(4,462
)




(4,462
)Other


2,360


2,518


4,145


3,557Total noninterest
income

$
28,508

$
29,342

$
56,332

$
56,497(1)
In second
  quarter 2007, TSFG began presenting its merchant income net of direct processing
  costs. Direct merchant processing costs totaled (in thousands) $3,930 and
  $6,950, respectively, for the three and six months ended June 30, 2007, and
  $2,678 and $4,843, respectively, for the three and six months ended June 30,
  2006. Amounts presented for prior periods have been reclassified to conform
  to the current presentation.Total
customer fee income increased 0.4% in the first six months of 2007 compared to
the same period in 2006, as increases in debit card income and customer service
fee income were partially offset by a decrease in service charges on deposit
accounts, which decreased primarily due to lower nonsufficient funds charges
and returned check fees. This decrease was driven by lower service chargeable
balances and customer convenience initiatives, including longer branch hours
and all day deposit credit.

In
the first six months of 2007 compared with the corresponding period in 2006,
wealth management income increased $737,000, or 5.0%, primarily due to an
increase in insurance income driven by higher contingency fee income, which is
generally earned during the first quarter of the year.

For
the first six months of 2007, bank owned life insurance increased $1.5 million
compared with the same period in 2006 due to the receipt of life insurance
proceeds in second quarter 2007.

Mortgage
banking income decreased slightly in the first half of 2007 when compared to
the same period in 2006 due partially to a $514,000 gain on the sale of TSFGs
mortgage servicing rights portfolio in the second quarter of 2006. Mortgage
loans originated by TSFG originators totaled $301.7 million and $360.1 million
in the first half of 2007 and 2006, respectively.

Merchant
processing income (net of direct processing costs) increased 29.7% in the first
half of 2007 compared to the same period in 2006 as a result of increased
transactions.

37

Net
losses on securities totaled $3.6 million for the first half of 2007 compared
to a net gain of $4.3 million for first half of 2006. In the first half of
2007, TSFG recorded $2.9 million in other-than-temporary impairment on its
corporate bond portfolio and sold approximately $120 million of securities
available for sale, including $116 million in first quarter 2007 to manage
interest rate risk as determined by our new asset/liability management model.

Noninterest
Expenses

Table
15 shows the components of noninterest expenses.

Table 15Components of Noninterest Expenses(dollars in thousands)Three Months Ended
  June 30,

Six Months Ended
  June 30,2007

2006

2007

2006Salaries and
  wages, excluding contract buyouts and
  severance

$
34,258

$
33,605

$
69,330

$
65,061Employee
  benefits


9,245


8,703


19,004


17,732Occupancy


8,545


7,684


17,153


14,997Furniture
  and equipment


6,486


6,468


12,948


12,420Professional
  services


4,914


5,497


9,017


11,276Advertising
  and business development


1,973


2,187


3,904


4,693Amortization
  of intangibles


2,136


2,208


4,137


4,415Telecommunications


1,418


1,421


2,811


2,839Employment
  contract buyouts and severance


546





2,306


598Loss on
  early extinguishment of debt


231





231


Other


11,224


12,608


22,466


24,019Total noninterest
expenses

$
80,976

$
80,381

$
163,307

$
158,050In
first quarter 2007, TSFG implemented an expense reduction initiative, the goal
of which is to reduce annual operating expenses by approximately $20 million
from the fourth quarter 2006 run rate (excluding employment contract buyouts
and severance and loss on early extinguishment of debt). TSFG realized these
targeted savings in second quarter 2007 with a decline of $5.0 million from
fourth quarter 2006 (excluding changes in employment contract buyouts and
severance and loss on early extinguishment of debt), or $20 million on an
annualized basis.

Effective
July 1, 2007, TSFG merged Mercantile Bank into Carolina First Bank.
Post-merger, TSFG continues to conduct its Florida operations under the
Mercantile Bank name. Readily identifiable annual savings are expected in the
$750,000 range.

Salaries
and wages (excluding contract buyouts and severance) and employee benefits
increased $5.5 million, or 6.7%, in the first half of 2007 compared with the
same period in 2006, despite the fact that full-time equivalent employees as of
June 30, 2007 decreased slightly to 2,467 from 2,581 at June 30, 2006. In
addition to normal annual salary increases and increased insurance costs, TSFG
has invested in several key hires in an effort to strengthen its management
team and has incurred additional salary expense in order to attract and retain
this talent. The increase in personnel expense was also affected by higher
incentive expense under TSFGs LTIP as a result of service awards approved by
the board of directors. The nature of certain incentive plans and accruals may
result in increased volatility in personnel expense in future periods, based on
managements assessment of the probability that certain performance targets
will be met.

Occupancy
and furniture and equipment expense increased 9.8% for the first half of 2007
compared with the corresponding period in 2006 due primarily to increased rent
expense. Professional services decreased by 20.0% for the first half of 2007
compared with the first half of 2006. In the first half of 2006, professional
services included outsourcing costs for internal audit projects which are now
performed by TSFGs staff; this decrease was partially offset in 2007 with
additional professional services related to the development of TSFGs strategic
initiatives. In addition, most other categories decreased for the first six
months of 2007 compared to the first six months of 2006 due to the
aforementioned expense reduction initiatives implemented in first quarter of
2007.

38

During
second quarter 2007, TSFG recognized a loss on early extinguishment of debt of
$231,000, which reflects the write-off of unamortized debt issuance costs
associated with $29.1 million of subordinated notes and mandatorily redeemable
preferred stock.

Income Taxes

The
effective income tax rate as a percentage of pretax income was 33.6% for the
first half of 2007 and 34.4% for the first half of 2006. The blended statutory
federal and state income tax rate was approximately 37% for both of these
periods.

Second Quarter
Results

Net income
for the three months ended June 30, 2007 totaled $17.9 million, or $0.24 per
diluted share, compared with $29.3 million, or $0.39 per diluted share, for the
three months ended June 30, 2006. Net income for the second quarter of 2007
included an additional provision for credit losses of $10.5 million pre-tax (or
$7.0 million after-tax) related to the NC Development Loans.

Fully
tax-equivalent net interest income totaled $96.5 million, a decrease of $6.6
million, or 6.4%, compared with the second quarter of 2006. Average earning
assets decreased 2.1% principally as a result of the continued reduction of
investment securities, partially offset by loan growth.

The net
interest margin for second quarter 2007 was 3.12%, compared with 3.27% for
second quarter 2006. The yield on average earning assets increased 34 basis
points, aided by improved loan yields, which were up 28 basis points. However,
the improved yield on earning assets was more than offset by a 52 basis point
increase in the average cost of funding. The net interest margin for second
quarter 2007 improved four basis points to 3.12% from 3.08% for first quarter
2007, the first linked-quarter improvement since March 31, 2006, due primarily
to a five basis point increase in the yield on earning assets only partially
offset by a one basis point increase in total funding.

The
provision for credit losses totaled $17.1 million in the second quarter of
2007, compared with $7.5 million in the second quarter of 2006. The provision
for credit losses in second quarter 2007 included $10.5 million related to the
NC Development Loans. Net loan charge-offs as a percentage of average loans
held for investment declined to 0.21% for the second quarter of 2007 versus
0.27% for the second quarter of 2006. The allowance for credit losses as a
percentage of loans held for investment increased to 1.26% at June 30, 2007,
which included $9.0 million designated for the NC Development Loans, from 1.17%
at June 30, 2006.

Noninterest
income included a net loss on securities of $2.2 million (including the $2.9
million other-than-temporary impairment charge mentioned above) for the second
quarter of 2007, compared with a net gain on securities of $3.6 million for the
second quarter of 2006. A $1.5 million increase in bank-owned life insurance
income from insurance proceeds largely offset a $1.3 million increase in the
loss on derivative activities. Noninterest income in the second quarter of 2006
included a loss on indirect auto loans of $4.5 million. Customer fee income,
wealth management income, and merchant processing income increased, while
mortgage banking income (which included a $514,000 gain on the sale of mortgage
servicing rights in second quarter 2006) declined.

For the
second quarter of 2007, noninterest expenses increased slightly to $81.0
million from $80.4 million in second quarter 2006 as TSFG controlled expenses
in keeping with its expense control initiative.

Enterprise Risk Management

There have
been no significant changes to the discussion of Enterprise Risk Management,
including Market Risk and Asset/Liability Management, Derivatives and Hedging
Activities, Economic Risk, Credit Risk, Liquidity Risks, Operational Risk, and
Compliance and Litigation Risks, as presented in pages 55 through 60 of TSFGs
Annual Report on Form 10-K for the year ended December 31, 2006.

Interest
Sensitivity Analysis. As
discussed on page 56 of TSFGs 2006 Form 10-K, TSFG uses a simulation model to
analyze various interest rate scenarios in order to monitor interest rate risk.
The information presented in Tables 16 and 17 are not projections, and are
presented with static balance sheet positions. This methodology allows for an
analysis of our inherent risk associated with changes in interest rates. There
are some similar assumptions used in both Table 16 and 17. These include, but
are not limited to, the following:

39


interest rate scenarios that assume gradual as well as instantaneous
  parallel changes in interest rates along the entire yield curve;
a static balance sheet for net income analysis;
as assets and liabilities mature or reprice they are reinvested at
  current rates and keep the same characteristics (i.e., remain as either
  variable or fixed rate) for net income analysis;
mortgage backed securities prepayments are based on historical
  industry data;
loan prepayments are based upon historical bank-specific analysis and
  historical industry data;
deposit retention and average lives are based on
  historical bank-specific analysis;
whether callable/puttable assets and liabilities are called/put are
  based on the implied forward yield curve for each interest rate scenario; and
management takes no action to counter any change.Table
16 reflects the sensitivity of net income to changes in interest rates. It
shows the effect that the indicated changes in interest rates would have on net
income over the next 12 months compared with the base case or flat interest
rate scenario. The base case or flat scenario assumes interest rates stay at
June 30, 2007 and 2006 levels, respectively.

Table 16Net Income at Risk AnalysisAnnualized Hypothetical Percentage Change in
  Net IncomeInterest
  Rate Scenario (1)



Gradual Rate ChangeJune 30,

Immediate Rate ChangeJune 30,2007

2007

20062.00
%





(1.8
)%


(8.3
)%


4.0
%1.00






(0.7
)


(3.4
)


2.3Flat














(1.00
)





(0.2
)






(3.3
)(2.00
)





(0.1
)


(2.1
)


(17.8
)(1)
For June 30, 2006, the rising 100 and 200 basis points and falling 100
  and 200 basis points interest rate scenarios assume an immediate and parallel
  change in interest rates along the entire yield curve. For June 30, 2007, net
  income sensitivity is shown for both immediate and gradual rate shifts over a
  12 month period. For future periods, managements primary focus regarding net
  income sensitivity will be on gradual rate shifts, which TSFG views as
  providing a more realistic assessment of potential risk exposures.Table 17
reflects the sensitivity of the economic value of equity (EVE) to changes in
interest rates. EVE is a measurement of the inherent, long-term balance
sheet-related economic value of TSFG (defined as the fair value of all assets
minus the fair value of all liabilities and their associated off balance sheet
amounts) at a given point in time. Table 17 shows the effect that the indicated
changes in interest rates would have on the fair value of net assets at June
30, 2007 and 2006, respectively, compared with the base case or flat interest
rate scenario. The base case or flat scenario assumes interest rates stay at
June 30, 2007 and 2006 levels, respectively.

40

Table 17Economic
  Value of Equity Risk AnalysisInterest
  Rate Scenario (1)

Annualized Hypothetical Percentage Change in
  Economic Value of EquityJune 30,2007

20062.00
%



(11.4
)%



(6.0
)%1.00




(5.4
)



(2.0
)Flat









(1.00
)



2.8




(0.7
)(2.00
)



0.5




(7.6
)(1)
The rising 100 and 200 basis point and
  falling 100 and 200 basis point interest rate scenarios assume an
  instantaneous and parallel change in interest rates along the entire yield
  curve.There are
material limitations with TSFGs models presented in Tables 16 and 17, which
include, but are not limited to, the following:


the flat
  scenarios are base case and are not indicative of historical results;
they do not
  project an increase or decrease in net income or the fair value of net
  assets, but rather the risk to net income and the fair value of net assets
  because of changes in interest rates;
they present
  the balance sheet in a static position; however, when assets and liabilities
  mature or reprice, they do not necessarily keep the same characteristics
  (e.g., variable or fixed interest rate);
the
  computation of prospective effects of hypothetical interest rate changes are
  based on numerous assumptions and should not be relied upon as indicative of
  actual results; and
the
  computations do not contemplate any additional actions TSFG could undertake
  in response to changes in interest rates.Off-Balance Sheet Arrangements

In the
normal course of operations, TSFG engages in a variety of financial
transactions that, in accordance with generally accepted accounting principles,
are not recorded in the financial statements, or are recorded in amounts that
differ from the notional amounts. These transactions involve, to varying
degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used by TSFG for general corporate purposes or for customer
needs. Corporate purpose transactions are used to help manage credit, interest
rate, and liquidity risk or to optimize capital. Customer transactions are used
to manage customers requests for funding.

Lending
Commitments. Lending commitments include loan
commitments, standby letters of credit, unused business credit card lines, and
documentary letters of credit. These instruments are not recorded in the
consolidated balance sheet until funds are advanced under the commitments. TSFG
provides these lending commitments to customers in the normal course of
business. TSFG estimates probable losses related to binding unfunded lending
commitments and records a reserve for unfunded lending commitments in other
liabilities on the consolidated balance sheet. See Note 6 to the Consolidated
Financial Statements for disclosure of the amounts of lending commitments.

Derivatives.
In accordance with SFAS 133, TSFG records derivatives at fair value, as either
assets or liabilities, on the consolidated balance sheets. Derivative
transactions are measured in terms of the notional amount, but this amount is
not recorded on the balance sheets and is not, when viewed in isolation, a
meaningful measure of the risk profile of the instrument. The notional amount
is not exchanged, but is used only as the basis upon which interest and other
payments are calculated.

See
Derivative Financial Instruments under Balance Sheet Review and Note 5 to
the Consolidated Financial Statements for additional information regarding
derivatives.

41

Liquidity

Liquidity
management ensures that adequate funds are available to meet deposit
withdrawals, fund loan and capital expenditure commitments, maintain reserve
requirements, pay operating expenses, provide funds for dividends and debt service,
manage operations on an ongoing basis, and capitalize on new business
opportunities. Funds are primarily provided by customer funding, wholesale
borrowings, principal and interest payments on loans, loan sales, sales of
securities available for sale, maturities and paydowns of securities, and
earnings. Securities classified as available for sale, which are not pledged,
may be sold in response to changes in interest rates or liquidity needs. A
significant portion of TSFGs securities are pledged as collateral for FHLB
borrowings, repurchase agreements and public funds deposits. Management
believes that cash flows from investments, in addition to its available
borrowing capacity and efforts to grow deposits, are sufficient to provide the
necessary funding for the remainder of 2007.

In
managing its liquidity needs, TSFG focuses on its existing assets and
liabilities, as well as its ability to enter into additional borrowings, and on
the manner in which they combine to provide adequate liquidity to meet our
needs. Table 18 summarizes future contractual obligations based on maturity
dates as of June 30, 2007. Table 18 does not include payments which may be
required under employment and deferred compensation agreements. In addition,
Table 18 does not include payments required for interest and income taxes (see
Item 1, Consolidated Statements of Cash Flows for details on interest and
income taxes paid for the six months ended June 30, 2007).

Table 18Contractual Obligations(dollars in thousands)Payments Due by PeriodTotal

Remainder
  of
  2007

2008
  and
  2009

2010
  and
  2011

After
  2011Time
  deposits

$
5,240,608

$
2,718,617

$
1,092,584

$
604,708

$
824,699Short-term
  borrowings


1,432,650


1,432,650








Long-term
  debt


855,825


85


182,954


40,180


632,606Operating
  leases


185,920


9,330


36,371


27,477


112,742Total contractual
obligations

$
7,715,003

$
4,160,682

$
1,311,909

$
672,365

$
1,570,047Net
cash provided by operations and deposits from customers have been the primary
sources of liquidity for TSFG. TSFG is focusing additional efforts aimed at
acquiring new deposits through TSFGs established branch network to enhance
liquidity and reduce reliance on wholesale borrowing. Liquidity needs are a
factor in developing the deposit pricing structure, which may be altered to
retain or grow deposits if deemed necessary.

TSFG
has the ability to borrow from the FHLB and maintain short-term lines of credit
from unrelated banks. FHLB advances outstanding as of June 30, 2007 totaled
$403.1 million. At June 30, 2007, TSFG had $35.4 million of unused borrowing
capacity from the FHLB. TSFG funds its short-term needs principally with
deposits, including brokered deposits, federal funds purchased, repurchase
agreements, FHLB advances, treasury tax and loan notes, and the principal
runoff of investment securities. At June 30, 2007, TSFG had unused short-term
lines of credit totaling $1.7 billion (which may be canceled at the lenders
option).

The
Federal Reserve Bank provides back-up funding for commercial banks.
Collateralized borrowing relationships with the Federal Reserve Banks of
Richmond and Atlanta are in place for Carolina First Bank to meet emergency
funding needs. At June 30, 2007, TSFG had qualifying collateral to secure
advances up to $1.7 billion, of which none was outstanding.

At
June 30, 2007, the parent company had two unused short-term lines of credit
totaling $25.0 million. These lines of credit mature August 10, 2007 for $15.0
million and November 14, 2007 for $10.0 million.

TSFG
enters into agreements in the normal course of business to extend credit to
meet the financial needs of its customers. For amounts and types of such
agreements at June 30, 2007, see Off-Balance Sheet Arrangements. Increased
demand for funds under these agreements would reduce TSFGs available liquidity
and could require additional sources of liquidity.

42

Recently Adopted/Issued Accounting
Pronouncements

See
Note 1  Recently Adopted Accounting Pronouncements and Recently Issued
Accounting Pronouncements in the accompanying Notes to the Consolidated Financial
Statements for details of recently adopted and recently issued accounting
pronouncements and their expected impact on the Companys Consolidated
Financial Statements.

43

Item 3.      Quantitative
and Qualitative Disclosures about Market Risk

See
Enterprise Risk Management in Item 2, Management Discussion and Analysis of
Financial Condition and Results of Operations for quantitative and qualitative
disclosures about market risk, which information is incorporated herein by
reference.

Item 4.      Controls
and Procedures

Evaluation of
Disclosure Controls and Procedures

At
June 30, 2007, TSFGs management, under the supervision and with the participation
of its Chief Executive Officer and Chief Financial Officer, evaluated its
disclosure controls and procedures as currently in effect. Based on this
evaluation, TSFGs management concluded that as of June 30, 2007, TSFGs
disclosure controls and procedures were effective (1) to provide reasonable
assurance that information required to be disclosed by TSFG in the reports
filed or submitted by it under the Exchange Act was recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and forms, and (2) to provide reasonable assurance that information required to
be disclosed by TSFG in such reports is accumulated and communicated to TSFGs
management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

Changes in
Internal Controls over Financial Reporting

TSFG
continually assesses the adequacy of its internal control over financial
reporting quarterly and strives to enhance its controls in response to internal
control assessments and internal and external audit and regulatory
recommendations. There were no changes in TSFGs internal control over
financial reporting identified in connection with the evaluation described in
the immediately preceding paragraph during the quarter ended June 30, 2007 or
through the date of this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, TSFGs internal
control over financial reporting.

44

PART II. OTHER INFORMATION

Item 1.      Legal
Proceedings

See Note 6 to
the Consolidated Financial Statements for a discussion of legal proceedings.

Item 1A.     Risk
Factors

There
have been no material changes to the risk factors previously disclosed under
Item 1A (pages 10-12) of TSFGs Annual Report on Form 10-K for the year ended
December 31, 2006.

Item 2.      Unregistered
Sales of Equity Securities and Use of Proceeds

TSFG
has repurchased shares of our common stock in private transactions and
open-market purchases, as authorized by our Board. The amount and timing of
stock repurchases will be based on factors, including but not limited to,
managements assessment of TSFGs capital structure and liquidity, the market price
of TSFGs common stock compared to managements assessment of the stocks
underlying value, and applicable regulatory, legal, and accounting matters. The following table presents information
about our stock repurchases for the three months ended June 30, 2007.

Issuer Purchases of
Equity Securities

Period

TotalNumberof SharesPurchased

AveragePricePaid perShare

TotalNumber ofShares
 Purchasedas Partof
 PubliclyAnnounced
 Plansor Programs

MaximumNumber ofShares
 thatMay Yet BePurchasedUnder
 Plans orPrograms (2)April 1,
 2007 to April 30, 2007


528,330
(1)

$ 23.06


519,000


2,481,000May 1, 2007
 to May 31, 2007


506,000


23.14


506,000


1,975,000June 1, 2007
 to June 30, 2007


125,312
(1)

23.94


125,000


1,850,000Total


1,159,642


$ 23.19


1,150,000


1,850,000

(1)
Includes
 9,330 shares in April and 312 shares in June canceled in connection with
 exercise of options or vesting of restricted stock. Pursuant to TSFGs stock
 option plans, participants may exercise stock options by surrendering shares
 of TSFG common stock the participants already own as payment of the option
 exercise price. Pursuant to TSFGs restricted stock plans, participants may
 tender shares of vested restricted stock as payment for taxes due at the time
 of vesting. Shares surrendered by participants of these plans are repurchased
 pursuant to the terms of the applicable stock option or restricted stock plan
 and not pursuant to publicly announced share repurchase programs.(2)
In December
 of 2006, TSFG announced a stock repurchase program authorizing TSFG to
 repurchase up to 4 million shares of its common stock. This authorization
 replaced TSFGs existing stock repurchase authorizations. This stock
 repurchase program has no expiration date and will expire upon completion of
 repurchases totaling the amount authorized to repurchase. In July 2007, TSFG
 repurchased an additional 850,000 shares of its common stock in the open
 market at an average price per share of $21.93. As of the filing of this Form
 10-Q, there were 1 million shares remaining under the authorization.On
April 26, 2007, we issued 2,671 shares to the former shareholder of Summit
Title, LLC, a title insurance agency acquired by TSFG in 2004. These shares
were issued in connection with earnout provisions in the acquisition documents.
This issuance of shares was not registered under the Securities Act of 1933 in
reliance upon the exemption set forth in Section 4(2) thereof.

45

Item 3.      Defaults
upon Senior Securities

None.

Item 4.      Submission
of Matters to a Vote of Securities Holders

On May 8,
2007, TSFG held its 2007 Annual Meeting of Shareholders. The results of the
2007 Annual Meeting of Shareholders follow.

Proposal
# 1  Election of Directors

Voting shares in favorWithheld#

%

AuthorityWilliam P. Brant

63,017,281

94.4

3,705,903J.W. Davis

62,334,167

93.4

4,389,017C. Claymon
  Grimes, Jr.

62,258,328

93.3

4,464,856William S.
  Hummers III

62,310,786

93.4

4,412,398Challis M.
  Lowe

62,563,481

93.8

4,159,703Darla D.
  Moore

63,089,977

94.6

3,633,207Jon W. Pritchett, Charles B. Schooler, Edward J. Sebastian, John C.
  B. Smith, Jr., Mack I. Whittle, Jr., M. Dexter Hagy, H. Earle Russell, Jr.,
  William R. Timmons III, Samuel H. Vickers, and David C. Wakefield III
  continued in their present terms as directors.Proposal # 2  Approval of Amendment to Long-Term Incentive
PlanThe shareholders approved an amendment to increase the total
  authorized shares available for issuance under TSFGs Long-Term Incentive
  Plan by 500,000 with 31,883,737 shares, or 58.7%, voting in favor, 22,434,751
  shares voting against, and 889,482 shares abstaining.Proposal # 3  Ratification of AuditorsThe shareholders approved the appointment of PricewaterhouseCoopers
  LLP as independent auditors of TSFG for fiscal year 2007 with 65,752,750
  shares, or 99.6%, voting in favor, 279,233 shares voting against, and 691,201
  shares abstaining.Item 5.      Other
Information

None.

46

Item 6.      Exhibits

10.1
Amended and Restated TSFG Long
  Term Incentive Plan31.1
Certificate of the Principal Executive Officer pursuant to Rule
  13a-14a/15(d)-14(a) of Securities Exchange Act of 1934, as amended, as
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
Certificate of the Principal Financial Officer pursuant to Rule
  13a-14a/15(d)-14(a) of Securities Exchange Act of 1934, as amended, as adopted
  pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1+
Certificate of Chief Executive Officer pursuant to 18 U.S.C. 1350, as
  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2+
Certificate of Chief Financial Officer pursuant to 18 U.S.C. 1350, as
  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002+ This exhibit shall not be deemed filed for purposes of Section 18
of the Securities Exchange Act of 1934, or otherwise subject to the liability
of that section, and shall not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933 or the Securities Exchange Act of
1934.

Note for non-filed versions of this Form 10-Q

The above exhibits may be found on TSFGs electronic filing of its June
30, 2007 Quarterly Report on Form 10-Q with the Securities and Exchange
Commission (SEC) and is accessible at no cost on TSFGs web site,
www.thesouthgroup.com, through the Investor Relations link. TSFGs SEC filings
are also available through the SECs web site at www.sec.gov.

47

SIGNATURES

Pursuant to
the requirements of the Securities Exchange Act of 1934, TSFG has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.

The South
  Financial Group, Inc.Date:   August 8, 2007
/s/ James R. GordonJames R.
  GordonExecutive
  Vice President and Chief Financial Officer(Principal
  Accounting and Financial Officer)48