|                                                                           
|---------------------------------------------------------------------------
|UNITED STATESSECURITIES AND EXCHANGE
      COMMISSIONWashington, D.C. 20549
|                                                                           
|Form
      10-Q                                                            
|                                                                           

|(Mark One)
|----------
|x         
|          
|o         

|                              
|------------------------------
|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) 255-7900                                      
|Registrant'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. Yes x  Noo.
|                                                                                                                                                                                                                                                                                                                                                                                             
|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 o | Non-accelerated filer o
|------------------------------- | ------------------------- | -----------------------
|                                |                           |                        

|Indicate by check mark whether the registrant is a shell company
      (as defined in Rule 12b-2 of the Act). Yes o No x.
      The
      number of outstanding shares of the issuer's $1.00 par value common stock
      as of November 1, 2006 was 75,234,504.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|



|PART
      I. FINANCIAL INFORMATION                                                                                                   
|--------------------------------------------------------------------------------------------------------------------------------------
|Item 1. Financial
      Statements                                                                                                    
|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE
      SHEETS(in thousands, except share data)
  (Unaudited)

|                                                                             | September
      30, |  |  
|---------------------------------------------------------------------------- | ------------------- |  | -
|
|
|Assets                                                                       |                     |  |  
|Cash and
      due from banks                                                |                     |  | $
|Interest-bearing bank balances                                               |                     |  |  
|Federal
      funds sold and securities purchased to resell                  |                     |  |  
|Securities                                                                   |                     | 
|Trading                                                                      |                     |  |  
|Available for sale                                                           |                     |  |  
|Held to maturity (market value $52,678, $63,929,
      and                   |                     | 
|$62,697,
respectively)                                                       |                     |  |  
|                                                                             |                     |  |  
|Total securities                                                             |                     |  |  
|                                                                             |                     |  |  
|Loans
      held for sale                                                    |                     |  |  
|Loans
      held for investment                                              |                     |  |  
|Allowance
      for loan losses                                              |                     |  |  
|                                                                             |                     |  |  
|Net loans held for
      investment                                          |                     |  |  
|                                                                             |                     |  |  
|Premises
      and equipment, net                                            |                     |  |  
|Accrued
      interest receivable                                            |                     |  |  
|Goodwill                                                                     |                     |  |  
|Other
      intangible assets                                                |                     |  |  
|Other
      assets                                                           |                     |  |  
|                                                                             |                     |  |  
|                                                                             |                     |  | $
|                                                                             |                     |  |  
|Liabilities and Shareholders' Equity                                         |                     | 
|Liabilities                                                                  |                     | 
|Deposits                                                                     |                     | 
|Noninterest-bearing                                                          |                     |  | $
|Interest-bearing                                                             |                     |  |  
|                                                                             |                     |  |  
|Total
      deposits                                                         |                     |  |  
|Federal funds purchased and repurchase
      agreements                      |                     |  |  
|Other short-term borrowings                                                  |                     |  |  
|Long-term debt                                                               |                     |  |  
|Accrued interest payable                                                     |                     |  |  
|Other liabilities                                                            |                     |  |  
|                                                                             |                     |  |  
|Total liabilities                                                            |                     |  |  
|                                                                             |                     |  |  
|Commitments and contingencies (Note 9)                                       |                     |  |  
|                                                                            
|Shareholders' equity                                                         |                     | 
|Preferred 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
      75,191,563, 74,574,907, and 74,721,461          |                     |  |  
|shares, respectively                                                         |                     |  |  
|Surplus                                                                      |                     |  |  
|Retained earnings                                                            |                     |  |  
|Guarantee of employee stock ownership plan debt
      and nonvested          |                     | 
|restricted stock                                                             |                     |  |  
|Common stock held in trust for deferred
      compensation                   |                     |  |  
|Deferred compensation payable in common
      stock                          |                     |  |  
|Accumulated other comprehensive loss, net of
      tax                       |                     |  |  
|                                                                             |                     |  |  
|Total shareholders'
      equity                                             |                     |  |  
|                                                                             |                     |  |  
|                                                                             |                     |  | $
|                                                                             |                     |  |  

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

|1
|-



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF
      INCOME(in thousands, except share data)
  (Unaudited)
|--------------------------------------------------------------------------------------------------------------------------------------------

|                                                            | Three
      Months EndedSeptember 30, |  | Nine
      Months EndedSeptember 30, |        
|----------------------------------------------------------- | ------------------------------------- |  | ------------------------------------ | -------
|
|
|Interest Income                                             |                                       |  |                                      |        
|Interest
      and fees on loans                            |                                       |  | $                                    | 184,476
|Interest
      and dividends on securities:                 |                                       | 
|Taxable                                                     |                                       |  |                                      | 30,779 
|Exempt from federal income taxes                            |                                       |  |                                      | 3,140  
|                                                            |                                       |  |                                      |        
|Total interest and dividends on
      securities            |                                       |  |                                      | 33,919 
|Interest
      on short-term investments                    |                                       |  |                                      | 196    
|                                                            |                                       |  |                                      |        
|Total interest income                                       |                                       |  |                                      | 218,591
|                                                            |                                       |  |                                      |        
|Interest Expense                                            |                                       | 
|Interest
      on deposits                                  |                                       |  |                                      | 77,393 
|Interest
      on short-term borrowings                     |                                       |  |                                      | 22,304 
|Interest
      on long-term debt                            |                                       |  |                                      | 20,211 
|                                                            |                                       |  |                                      |        
|Total interest expense                                      |                                       |  |                                      | 119,908
|                                                            |                                       |  |                                      |        
|Net Interest Income                                         |                                       |  |                                      | 98,683 
|Provision for Credit Losses                                 |                                       |  |                                      | 6,553  
|                                                            |                                       |  |                                      |        
|Net interest income after provision for credit
      losses |                                       |  |                                      | 92,130 
|Noninterest Income                                          |                                       |  |                                      | 37,912 
|Noninterest Expenses                                        |                                       |  |                                      | 83,628 
|                                                            |                                       |  |                                      |        
|Income before income taxes and
    discontinued             |                                       | 
|operations                                                  |                                       |  |                                      | 46,414 
|Income
      taxes                                          |                                       |  |                                      | 14,249 
|                                                            |                                       |  |                                      |        
|Income from continuing operations                           |                                       |  |                                      | 32,165 
|Discontinued operations, net of income tax                  |                                       |  |                                      | --     
|                                                            |                                       |  |                                      |        
|Net Income                                                  |                                       |  | $                                    | 32,165 
|                                                            |                                       |  |                                      |        
|                                                            |                                       | 
|Average Common Shares Outstanding, Basic                    |                                       |  |                                      | 75,004 
|Average Common Shares Outstanding, Diluted                  |                                       |  |                                      | 75,591 
|Per
      Common Share, Basic                               |                                       | 
|Income
      from continuing operations                     |                                       |  | $                                    | 0.43   
|Discontinued operations                                     |                                       |  |                                      | --     
|                                                            |                                       |  |                                      |        
|Net
      income                                            |                                       |  | $                                    | 0.43   
|                                                            |                                       |  |                                      |        
|Per
      Common Share, Diluted                             |                                       | 
|Income
      from continuing operations                     |                                       |  | $                                    | 0.43   
|Discontinued operations                                     |                                       |  |                                      | --     
|                                                            |                                       |  |                                      |        
|Net
      income                                            |                                       |  | $                                    | 0.43   
|                                                            |                                       |  |                                      |        
|                                                            |                                       | 
|Dividends
      per common share                            |                                       |  | $                                    | 0.17   
|                                                            |                                       |  |                                      |        

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

|2
|-



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF
      CHANGESIN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME(in
      thousands, except share data)
(Unaudited)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                              | Shares
      ofCommonStock | CommonStock | Surplus | RetainedEarningsandOther* | AccumulatedOtherComprehensiveLoss | Total
|--------------------------------------------- | -------------------------- | ----------- | ------- | ------------------------- | --------------------------------- | -----
|Balance, December 31, 2004                    |                            |             |         | 71,252,346                |                                   | $    
|Net
      income                              |                            |             |         | --                        |                                   |      
|Other
      comprehensive loss, net of        |                            |             |         |                           |                                   |      
|income tax of $20,781                         |                            |             |         | --                        |                                   |      
|                                              |                            |             |         |                           |                                   |      
|Comprehensive income                          |                            |             |         | --                        |                                   |      
|                                              |                            |             |         |                           |                                   |      
|Cash
      dividends declared                 |                            |             |         |                           |                                   |      
|($0.48 per common share)                      |                            |             |         | --                        |                                   |      
|Common
      stock activity:                  |                            |            
|Exercise of stock options, including          |                            |            
|income tax benefit of
      $3,937            |                            |             |         | 785,222                   |                                   |      
|Dividend reinvestment plan                    |                            |             |         | 97,480                    |                                   |      
|Restricted stock plan                         |                            |             |         | 76,326                    |                                   |      
|Employee stock purchase plan                  |                            |             |         | 13,047                    |                                   |      
|Director compensation                         |                            |             |         | 10,608                    |                                   |      
|Acquisitions                                  |                            |             |         | 2,339,878                 |                                   |      
|Common
      stock purchased by trust for     |                            |            
|deferred compensation                         |                            |             |         | --                        |                                   |      
|Deferred
      compensation payable in common |                            |             |         |                           |                                   |      
|stock                                         |                            |             |         | --                        |                                   |      
|Miscellaneous                                 |                            |             |         | --                        |                                   |      
|                                              |                            |             |         |                           |                                   |      
|Balance,
      September 30, 2005             |                            |             |         | 74,574,907                |                                   | $    
|                                              |                            |             |         |                           |                                   |      
|                                              |                            |            
|                                              |                            |            
|Balance,
      December 31, 2005              |                            |             |         | 74,721,461                |                                   | $    
|Net
      income                              |                            |             |         | --                        |                                   |      
|Other
      comprehensive loss, net of        |                            |            
|income tax of $1,487                          |                            |             |         | --                        |                                   |      
|                                              |                            |             |         |                           |                                   |      
|Comprehensive income                          |                            |             |         | --                        |                                   |      
|                                              |                            |             |         |                           |                                   |      
|Cash
      dividends declared                 |                            |            
|($0.51 per common share)                      |                            |             |         | --                        |                                   |      
|Common
      stock activity:                  |                            |            
|Exercise of stock options, including          |                            |             |         |                           |                                   |      
|income tax benefit of
      $1,222            |                            |             |         | 351,947                   |                                   |      
|Dividend reinvestment plan                    |                            |             |         | 95,723                    |                                   |      
|Restricted stock plan                         |                            |             |         | (7,610                    | )                                 |      
|Employee stock purchase plan                  |                            |             |         | 14,045                    |                                   |      
|Director compensation                         |                            |             |         | 13,439                    |                                   |      
|Acquisitions                                  |                            |             |         | 2,558                     |                                   |      
|Common
      stock released by trust for      |                            |             |         |                           |                                   |      
|deferred compensation                         |                            |             |         | --                        |                                   |      
|Deferred
      compensation payable in common |                            |            
|stock                                         |                            |             |         | --                        |                                   |      
|Reversal
      of unearned compensation       |                            |             |         |                           |                                   |      
|upon adoption of SFAS 123R                    |                            |             |         | --                        |                                   |      
|Stock
      option expense                    |                            |             |         | --                        |                                   |      
|Miscellaneous                                 |                            |             |         | --                        |                                   |      
|                                              |                            |             |         |                           |                                   |      
|Balance,
      September 30, 2006             |                            |             |         | 75,191,563                |                                   | $    
|                                              |                            |             |         |                           |                                   |      

|*    Other includes guarantee of employee stock
      ownership plan debt, nonvested restricted stock, 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 SUBSIDIARIESCONSOLIDATED STATEMENTS OF
      CASH FLOWS(in thousands)
(Unaudited)
|---------------------------------------------------------------------------------------------------------------------------

|                                                                                       | Nine
      Months Ended September 30, | 
|-------------------------------------------------------------------------------------- | ------------------------------------- | 
|
|
|Cash Flows from Operating Activities                                                   |                                       | 
|Net
      income                                                                       |                                       | 
|Adjustments to reconcile net income to net cash provided by
      operating activities |                                       | 
|Depreciation, amortization, and accretion,
      net                                   |                                       | 
|Provision for credit losses                                                            |                                       | 
|Share-based compensation expense                                                       |                                       | 
|Loss on sale of securities available for
      sale                                    |                                       | 
|Gain on equity investments                                                             |                                       | 
|(Gain ) loss on trading and derivative
      activities                                |                                       | 
|Gain on sale of mortgage loans                                                         |                                       | 
|Gain on disposition of assets and
      liabilities                                    |                                       | 
|Loss on indirect auto loans                                                            |                                       | 
|Gain on disposition of premises and
      equipment                                    |                                       | 
|Loss (gain) on disposition of other real estate
      owned                            |                                       | 
|Impairment loss from write-down of
    assets                                          |                                       | 
|Contribution to foundation                                                             |                                       | 
|Loss on early extinguishment of debt                                                   |                                       | 
|Increase in trading account assets                                                     |                                       | 
|Origination of loans held for sale                                                     |                                       | 
|Sale of loans held for sale and principal
      repayments                             |                                       | 
|Decrease (increase) in other assets                                                    |                                       | 
|Increase in other liabilities                                                          |                                       | 
|                                                                                       |                                       | 
|Net cash provided by operating
      activities                                        |                                       | 
|                                                                                       |                                       | 
|                                                                                       |                                       | 
|Cash
      Flows from Investing Activities                                             |                                       | 
|Sale of
      securities available for sale                                            |                                       | 
|Maturity,
      redemption, call, or principal repayments of securities
available      |                                       | 
|for sale                                                                               |                                       | 
|Maturity,
      redemption, call, or principal repayments of securities held to        |                                       | 
|maturity                                                                               |                                       | 
|Purchase
      of securities available for sale                                        |                                       | 
|Origination of loans held for investment, net of principal
      repayments            |                                       | 
|Sale of
      loans originally held for investment                                     |                                       | 
|Sale of
      other real estate owned                                                  |                                       | 
|Sale of
      premises and equipment                                                   |                                       | 
|Purchase
      of premises and equipment                                               |                                       | 
|Disposition of assets and liabilities, net                                             |                                       | 
|Cash
      equivalents acquired, net of payment for purchase acquisition               |                                       | 
|                                                                                       |                                       | 
|Net cash provided by (used for) investing
      activities                             |                                       | 
|                                                                                       |                                       | 

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

|4
|-



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF
      CASH FLOWS - CONTINUED(in thousands)
  (Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------------------

|                                                                               | Nine
      Months Ended September 30, | 
|------------------------------------------------------------------------------ | ------------------------------------- | 
|
|
|Cash Flows from Financing Activities                                           |                                       | 
|(Decrease) increase in deposits                                                |                                       | 
|Increase
      (decrease) in federal funds purchased and repurchase agreements |                                       | 
|Increase
      in other short-term borrowings                                  |                                       | 
|Issuance
      of long-term debt                                               |                                       | 
|Payment
      of long-term debt                                                |                                       | 
|Prepayment penalty on early extinguishment of debt                             |                                       | 
|Cash
      dividends paid on common stock                                      |                                       | 
|Other
      common stock activity                                              |                                       | 
|                                                                               |                                       | 
|Net cash (used for) provided by financing
      activities                     |                                       | 
|                                                                               |                                       | 
|Net
      change in cash and cash equivalents                                  |                                       | 
|Cash and
      cash equivalents at beginning of year                           |                                       | 
|                                                                               |                                       | 
|Cash and
      cash equivalents at end of period                               |                                       | 
|                                                                               |                                       | 
|                                                                               |                                       | 
|Supplemental Cash Flow Data                                                    |                                       | 
|Interest
      paid                                                            |                                       | 
|Income
      tax payments, net                                                 |                                       | 
|Significant non-cash investing and financing
transactions:                     |                                       | 
|Change in unrealized loss on available for sale
      securities               |                                       | 
|Loans transferred from held for sale to held for
      investment              |                                       | 
|Loans transferred to other real estate
      owned                             |                                       | 
|Security sales, redemptions and calls settled
      subsequent to period-end   |                                       | 
|Business combinations:                                                         |                                       | 
|Fair value of assets acquired
      (includes cash and cash equivalents)       |                                       | 
|Fair value of common stock
      issued and stock options recognized           |                                       | 
|Cash paid                                                                      |                                       | 
|                                                                               |                                       | 
|Liabilities assumed                                                            |                                       | 
|                                                                               |                                       | 

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

|5
|-



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      Note1  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, 2005
      should be referred to in connection with the reading of these unaudited
      interim Consolidated Financial Statements. The Consolidated Balance Sheet
      at December 31, 2005 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 insurance, retail investment, benefits
      administration, and trust and investment management). It has two bank
      subsidiaries, Carolina First Bank, a South Carolina banking corporation
      headquartered in Greenville, South Carolina, and Mercantile Bank, a
      Florida banking corporation headquartered in Jacksonville, Florida. It
      also owns several non-bank subsidiaries. At September 30, 2006, TSFG
      operated through 76 branch offices in South Carolina, 65 in Florida, and
      24 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.
      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.
      TSFG determines whether it has
      a controlling financial interest in an entity by first evaluating whether
      the entity is a voting interest entity or a variable interest entity under
      U.S. generally accepted accounting principles (GAAP). Voting interest
      entities are entities in which the total equity investment at risk is
      sufficient to enable each entity to finance itself independently and
      provides the equity holders with the obligation to absorb losses, the
      right to receive residual returns, and the right to make decisions about
      the entity's activities. TSFG consolidates voting interest entities in
      which it has at least a majority of the voting interest. As defined in
      GAAP, variable interest entities (VIEs) are entities that lack one or
      more of the characteristics of a voting interest entity described above. A
      controlling financial interest in an entity is present when an enterprise
      has a variable interest, or combination of variable interests, that will
      absorb a majority of the entity's expected losses, receive a majority of
      the entity's expected residual returns, or both. The enterprise with a
      controlling financial interest, known as the primary beneficiary,
      consolidates the VIE. TSFG does not have VIEs that it consolidates as of
      September 30, 2006. The following entities are VIEs for which TSFG is not
      the primary beneficiary: South Financial Capital Trust I, TSFG Capital
      Trust 2002-A, South Financial Capital Trust II, South Financial Capital
      Trust III, MountainBank Capital Trust I, Florida Banks Capital Trust I,
      Florida Banks Capital Trust II, Florida Banks Statutory Trust I, Florida
      Banks Statutory Trust II, Florida Banks Statutory Trust III, South
      Financial Capital Trust 2006-I, and South Financial Capital Trust 2006-II.
      Accordingly, the accounts of these entities are not included in TSFG's
      Consolidated Financial Statements. At September 30, 2006 and 2005, the
      statutory business trusts (Trusts) created by TSFG had outstanding trust
      preferred securities with an aggregate par value of $210.5 million and
      $135.5 million, respectively. The trust preferred securities have floating
      interest rates ranging from 6.98% to 9.17% at
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6
|-



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      September 30, 2006, maturities ranging from 2031 to 2036, and call
      dates ranging from 2006 to 2011. At September 30, 2006 and 2005, the
      principal assets of the Trusts are $217.0 million and $139.7 million,
      respectively, of the Company's subordinated notes with identical rates of
      interest and maturities as the trust preferred securities. At September
      30, 2006 and 2005, the Trusts have issued $6.5 million and $4.2 million,
      respectively, of common securities to the Company. The Company records
      interest expense on the subordinated notes and recognizes the dividend
      income on the common stock of the trust entities.
      Reclassifications
      Certain
      prior year amounts have been reclassified to conform to the 2006
      presentations.
      Recently Adopted Accounting Pronouncements
      Accounting Changes and
      Error Corrections
      In May 2005, the
      Financial Accounting Standards Board (FASB) issued Statement of
      Financial Accounting Standards (SFAS) No. 154 (SFAS 154), Accounting
      Changes and Error Corrections - a replacement of Accounting Principles
      Board (APB) Opinion No. 20 and FASB Statement No. 3, which eliminates
      the requirement to reflect changes in accounting principles as cumulative
      adjustments to net income in the period of the change and requires
      retrospective application to prior periods' financial statements for
      voluntary changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of
      the change. If it is impracticable to determine the cumulative effect of
      the change to all prior periods, SFAS 154 requires that the new accounting
      principle be adopted prospectively. For new accounting pronouncements, the
      transition guidance in the pronouncement should be followed. Retrospective
      application refers to the application of a different accounting principle
      to previously issued financial statements as if that principle had always
      been used.
      SFAS 154 did not
      change the guidance for reporting corrections of errors, changes in
      estimates or for justification of a change in accounting principle on the
      basis of preferability. SFAS 154 is effective for accounting changes made
      in fiscal years beginning after December 15, 2005. TSFG adopted the
      provisions of SFAS 154 on January 1, 2006. The adoption of this Statement
      did not impact TSFG's financial position or results of
      operations.
      Share-Based
      Compensation
      In
      December 2004, the FASB issued SFAS No. 123R (SFAS 123R), Share-Based
      Payment, which requires companies to recognize in the income statement
      the grant-date fair value of stock options and other equity-based
      compensation issued to employees. SFAS 123R is an amendment of SFAS No.
      123 (SFAS 123), Accounting for Stock-Based Compensation, and its
      related implementation guidance. SFAS 123R does not change the accounting
      guidance for share-based payment transactions with parties other than
      employees provided in SFAS 123. Under SFAS 123R, the way an award is
      classified will affect the measurement of compensation cost.
      Liability-classified awards are remeasured to fair value at each
      balance-sheet date until the award is settled. Equity-classified awards
      are measured at grant-date fair value, amortized over the subsequent
      vesting period, and are not subsequently remeasured.
      At
      September 30, 2006, TSFG had several stock-based employee compensation
      plans, which are described more fully in Note 11. Prior to January 1,
      2006, TSFG accounted for its option plans under the recognition and
      measurement principles of APB Opinion 25, Accounting for Stock Issued to
      Employees, and related Interpretations (APB Opinion 25), as permitted
      by SFAS 123. No stock-based employee compensation cost was recognized in
      net income related to these plans for the year ended December 31, 2005, as
      all options granted under those plans had an exercise price equal to the
      market value of the underlying common stock on the date of grant.
      Effective January 1, 2006, TSFG adopted SFAS 123R using the modified
      prospective transition method. Under that method of transition,
      compensation cost recognized in 2006 includes: (a) compensation cost for
      all share-based payments granted prior to, but not yet vested as of
      January 1, 2006, based on the grant date fair value estimated in
      accordance with the original provisions of SFAS 123, and (b) compensation
      cost for all share-based payments granted subsequent to January 1, 2006,
      based on the grant-date fair value estimated in accordance with the
      provisions of Statement 123R. Since this compensation cost is based on
      awards ultimately expected to vest, it has been reduced for estimated
      forfeitures. SFAS 123R requires forfeitures to be estimated at the time of
      grant and revised, if necessary, in subsequent periods if actual
      forfeitures differ from those estimates. TSFG has elected to expense
      future grants of awards with graded vesting on a straight-line basis over
      the requisite service period of the entire award. Results for prior
      periods have not been restated.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7
|-



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      Prior to the adoption of SFAS
      123R, TSFG presented all tax benefits resulting from share-based
      compensation as cash flows from operating activities in the consolidated
      statements of cash flows. SFAS 123R requires cash flows resulting from tax
      deductions in excess of the grant-date fair value of share-based awards to
      be included in cash flows from financing activities. There was no excess
      tax benefit related to share-based compensation in the first nine months
      of 2006.
      The following table provides
      pro forma net income and earnings per share information, as if TSFG had
      applied the fair value recognition provisions of SFAS 123 to stock-based
      employee compensation option plans for the periods presented (dollars in
      thousands, except per share data).
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                                                                                                                                                                  | Three
      MonthsEndedSeptember 30, 2005 |        | Nine
      MonthsEndedSeptember 30, 2005 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------ | ---------------------------------------- | -
|
|Net
      Income                                                                                                                                                                  |                                           |        |                                          |  
|Net
      income, as reported                                                                                                                                                     | $                                         | 21,090 |                                          | $
|Deduct:                                                                                                                                                                           |                                           |        |                                          |  
|Total stock-based employee
      compensation
      expense          determined
      under fair value based method
      for          all
      option awards, net of income tax |                                           | 646    |                                          |  
|                                                                                                                                                                                  |                                           |        |                                          |  
|Pro forma
      net income                                                                                                                                                        | $                                         | 20,444 |                                          | $
|                                                                                                                                                                                  |                                           |        |                                          |  
|                                                                                                                                                                                  |                                           |        |                                          |  
|Basic
      Earnings Per Share                                                                                                                                                    |                                           |        |                                          |  
|As
      reported                                                                                                                                                                 | $                                         | 0.28   |                                          | $
|Pro
      forma                                                                                                                                                                   |                                           | 0.28   |                                          |  
|                                                                                                                                                                                  |                                           |        |                                          |  
|Diluted Earnings Per Share                                                                                                                                                        |                                           |        |                                          |  
|As
      reported                                                                                                                                                                 | $                                         | 0.28   |                                          | $
|Pro
      forma                                                                                                                                                                   |                                           | 0.27   |                                          |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|See Note 11 for a summary of TSFG's assumptions used to estimate the
      grant-date per share fair value of options in the above table.
      Consolidation of Limited
      Partnerships
      In June 2005, the
      FASB ratified Emerging Issues Task Force (EITF) Issue No. 04-5,
      Determining Whether a General Partner, or the General Partners of a
      Group, Controls a Limited Partnership or Similar Entity When the Limited
      Partners Have Certain Rights. Issue No. 04-5 is effective for all limited
      partnerships created or modified after June 29, 2005, and is
      effective for all other limited partnerships at the beginning of the first
      interim period in fiscal years beginning after December 15, 2005
      (effective January 1, 2006, for TSFG). The adoption of this guidance
      had no material effect on TSFG's financial condition or results of
      operations.
      Recently Issued Accounting Pronouncements
      Accounting for Defined
      Benefit Pension and Other Postretirement Plans
      In September 2006, the FASB
      issued SFAS No. 158 (SFAS 158), Employers' Accounting for Defined
      Benefit Pension and Other Postretirement Plans, an amendment of FASB
      Statements No. 87, 88, 106 and 132-R. SFAS 158 requires an entity to
      recognize in its statement of financial condition the funded status of its
      defined benefit postretirement plans, measured as the difference between
      the fair value of the plan assets and the benefit obligation.
      SFAS 158 also requires an entity to recognize changes in the funded
      status of a defined benefit postretirement plan within accumulated other
      comprehensive income, net of tax, to the extent such changes are not
      recognized in earnings as components of periodic net benefit cost.
      SFAS 158 is effective as of the end of the fiscal year ending after
      December 15, 2006. Adoption of this standard is not expected to have
      a significant impact on TSFG's shareholders' equity or results of
      operations.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|8
|-



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      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 is 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. Adoption of this standard is not expected to have a significant
      impact on TSFG's shareholders' equity or results of operations.
      Prior Year
      Misstatements
      In September 2006, the
      Securities and Exchange Commission (SEC) Office of the Chief Accountant
      and Divisions of Corporation Finance and Investment Management released
      Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of
      Prior Year Misstatements when Quantifying Misstatements in Current Year
      Financial Statements, that provides interpretive guidance on how the
      effects of the carryover or reversal of prior year misstatements should be
      considered in quantifying a current year misstatement. The SEC staff
      believes that registrants should quantify errors using both a balance
      sheet and an income statement approach and evaluate whether either
      approach results in quantifying a misstatement that, when all relevant
      quantitative and qualitative factors are considered, is material. SAB 108
      is effective for fiscal years ending after November 15, 2006. Adoption of
      this standard is not expected to have a significant impact on TSFG's
      shareholders' equity or results of operations.
      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 not in a position to determine the effect of adopting this
      standard on its Consolidated Financial Statements.
      Accounting for Uncertainty
      in Income Taxes
      In July 2006, the 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 will adopt this Interpretation in the first quarter of 2007.
      The cumulative effects, if any, of applying this Interpretation will be
      recorded as an adjustment to retained earnings as of the beginning of the
      period of adoption. The Company has commenced the process of evaluating
      the expected effect of FIN 48 on its Consolidated Financial Statements and
      is currently not in a position to determine such effects.
      Accounting for Servicing of
      Financial Assets
      In March 2006, the FASB issued
      SFAS No. 156 (SFAS 156), Accounting for Servicing of Financial Assets -
      an amendment of FASB Statement No. 140, which simplifies the accounting
      for servicing rights and reduces the volatility that results from the use
      of different measurement attributes for servicing rights and the related
      financial instruments used to economically hedge risks associated with
      those servicing rights. SFAS 156 clarifies when to separately account for
      servicing rights, requires separately recognized servicing rights to be
      initially measured at fair value, and provides the option to subsequently
      account for those servicing rights (by class) at either fair value or
      under the amortization method previously required under FASB Statement No.
      140, Accounting for Transfers and
Servicing
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9
|-



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      of
      Financial Assets and Extinguishments of Liabilities. SFAS 156 is
      effective for fiscal years beginning after September 15, 2006, although
      early adoption is permitted. Adoption of this standard is not expected to
      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 October 2006, the FASB proposed a narrow exception to SFAS 155 that
      would exempt most securitized financial instruments that are subject to
      prepayment from the bifurcation requirements of SFAS 155 and SFAS 133.
      FASB will expose this exemption for comment for a 30-day period. After the
      comment period and if ultimately approved by the FASB, the FASB will issue
      the exemption in the form of a Derivative Implementation Guide. The
      Company is currently evaluating the impact that the provisions of SFAS 155
      and the potential exemption may have, if any, on its Consolidated
      Financial Statements.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10
|--



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes 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 EndedSeptember 30, |        | Nine
      Months EndedSeptember 30, |  
|------------------------------------------------------ | ------------------------------------- | ------ | ------------------------------------ | -
|
|
|
|Noninterest Income                                     |                                       |        |                                      |  
|Service
      charges on deposit accounts              | $                                     | 11,457 |                                      | $
|Debit
      card income                                |                                       | 2,055  |                                      |  
|Customer
      service fee income                      |                                       | 1,117  |                                      |  
|                                                       |                                       |        |                                      |  
|Total customer fee income                              |                                       | 14,629 |                                      |  
|                                                       |                                       |        |                                      |  
|                                                       |                                       |        |                                      |  
|Insurance
      income                                 |                                       | 2,831  |                                      |  
|Retail
      investment services                       |                                       | 1,689  |                                      |  
|Trust and
      investment management income           |                                       | 1,483  |                                      |  
|Benefits
      administration fees                     |                                       | 795    |                                      |  
|                                                       |                                       |        |                                      |  
|Total wealth management
    income                     |                                       | 6,798  |                                      |  
|                                                       |                                       |        |                                      |  
|                                                       |                                       |        |                                      |  
|Merchant
      processing income                       |                                       | 3,449  |                                      |  
|Bank-owned life insurance income                       |                                       | 2,916  |                                      |  
|Mortgage
      banking income                          |                                       | 1,969  |                                      |  
|                                                       |                                       |        |                                      |  
|Gain on
      equity investments                       |                                       |       |                                      |  
|Gain
      (loss) on trading and derivative activities |                                       | 3,924  |                                      |  
|                                                       |                                       |        |                                      |  
|Gain on
      disposition of assets and liabilities    |                                       | 2,498  |                                      |  
|                                                       |                                       |        |                                      |  
|Loss on
      indirect auto loans                      |                                       | (667   | )                                    |  
|                                                       |                                       |        |                                      |  
|Loss on
      sale of securities available for sale    |                                       |       |                                      |  
|Other                                                  |                                       | 2,396  |                                      |  
|                                                       |                                       |        |                                      |  
|Total noninterest income                               | $                                     | 37,912 |                                      | $
|                                                       |                                       |        |                                      |  
|                                                       |                                       |        |                                      |  
|Noninterest Expenses                                   |                                       |        |                                      |  
|Salaries
      and wages                               | $                                     | 34,494 |                                      | $
|Employee
      benefits                                |                                       | 9,080  |                                      |  
|Occupancy                                              |                                       | 7,949  |                                      |  
|Furniture
      and equipment                          |                                       | 6,217  |                                      |  
|Professional services                                  |                                       | 4,549  |                                      |  
|Merchant
      processing expense                      |                                       | 2,830  |                                      |  
|Advertising and business development                   |                                       | 2,264  |                                      |  
|Amortization of intangibles                            |                                       | 2,204  |                                      |  
|Telecommunications                                     |                                       | 1,407  |                                      |  
|                                                       |                                       |        |                                      |  
|Merger-related costs                                   |                                       |       |                                      |  
|                                                       |                                       |        |                                      |  
|Loss on
      early extinguishment of debt             |                                       |       |                                      |  
|                                                       |                                       |        |                                      |  
|Impairment loss from write-down of assets              |                                       |       |                                      |  
|                                                       |                                       |        |                                      |  
|Contribution to foundation                             |                                       |       |                                      |  
|Other                                                  |                                       | 12,634 |                                      |  
|                                                       |                                       |        |                                      |  
|Total noninterest expenses                             | $                                     | 83,628 |                                      | $
|                                                       |                                       |        |                                      |  

|11
|--



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      Note 3
       Accumulated Other Comprehensive Income (Loss)
      The
      following summarizes accumulated other comprehensive loss, net of tax (in
      thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                 

|                                                                                     | Three
      Months EndedSeptember 30, |         | Nine
      Months EndedSeptember 30, |  
|------------------------------------------------------------------------------------ | ------------------------------------- | ------- | ------------------------------------ | -
|
|
|
|Net
      Unrealized Losses on Securities Available for Sale                         |                                       |         |                                      |  
|Balance
      at beginning of period                                                 | $                                     | (84,667 | )                                    | $
|Other
      comprehensive income (loss):                                             |                                       |         |                                      |  
|Unrealized holding gains (losses) gains
      arising during
      the        period |                                       | 57,256  |                                      |  
|Income tax (expense) benefit                                                         |                                       | (21,188 | )                                    |  
|Less:     Reclassification
      adjustment for gains and losses                     |                                       |         |                                      |  
|included in net income                                                               |                                       |        |                                      |  
|Income tax (benefit) expense                                                         |                                       |        |                                      |  
|                                                                                     |                                       |         |                                      |  
|                                                                                     |                                       | 36,068  |                                      |  
|                                                                                     |                                       |         |                                      |  
|Balance
      at end of period                                                       |                                       | (48,599 | )                                    |  
|                                                                                     |                                       |         |                                      |  
|                                                                                     |                                       |         |                                      |  
|Net
      Unrealized Gains (Losses) on Cash Flow Hedges                              |                                       |         |                                      |  
|Balance
      at beginning of period                                                 |                                       | (5,299  | )                                    |  
|Other
      comprehensive income (loss):                                             |                                       |         |                                      |  
|Unrealized gain on change in fair
values                                             |                                       | 8,932   |                                      |  
|Income tax expense                                                                   |                                       | (3,126  | )                                    |  
|Less:     Amortization of
      terminated swaps                                     |                                       | (508    | )                                    |  
|Income tax expense                                                                   |                                       | 178     |                                      |  
|                                                                                     |                                       |         |                                      |  
|                                                                                     |                                       | 5,476   |                                      |  
|                                                                                     |                                       |         |                                      |  
|Balance
      at end of period                                                       |                                       | 177     |                                      |  
|                                                                                     |                                       |         |                                      |  
|                                                                                     | $                                     | (48,422 | )                                    | $
|                                                                                     |                                       |         |                                      |  
|                                                                                     |                                       |         |                                      |  
|Total
      other comprehensive income (loss)                                        | $                                     | 41,544  |                                      | $
|Net
      income                                                                     |                                       | 32,165  |                                      |  
|                                                                                     |                                       |         |                                      |  
|Comprehensive income (loss)                                                          | $                                     | 73,709  |                                      | $
|                                                                                     |                                       |         |                                      |  

|                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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):
|                                                                                                                                                                                                                                                                                                                                                

|                               | September
      30, 2006 |        
|------------------------------ | ------------------------ | -------
|
|
|
|
|
|Securities Available for Sale  |                          |        
|U.S.
      Treasury            | $                        | 127,148
|U.S.
      Government agencies |                          | 190,836
|Mortgage-backed securities     |                          | 132,449
|State and
      municipals     |                          | 11,078 
|Corporate
      bonds          |                          | 19,551 
|Equity
      investments       |                          |       
|                               |                          |        
|                               | $                        | 481,062
|                               |                          |        
|                               |                          |        
|Securities Held to Maturity    |                          |        
|State and
      municipals     | $                        | 255    
|                               |                          |        

|12
|--



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

|                                 | September
      30, 2005 |          
|-------------------------------- | ------------------------ | ---------
|
|
|
|
|
|Securities Available for Sale    |                          |          
|U.S.
      Treasury              | $                        | 40,477   
|U.S.
      Government agencies   |                          | 507,185  
|Mortgage-backed securities       |                          | 1,441,470
|State and
      municipals       |                          | 201,132  
|Corporate
      bonds            |                          | 68,208   
|Federal
      Home Loan Mortgage |                          |          
|                                 |                          |          
|Corporation preferred stock      |                          | 11,215   
|                                 |                          |          
|Equity
      investments         |                          | 1,040    
|                                 |                          |          
|                                 | $                        | 2,270,727
|                                 |                          |          
|                                 |                          |          
|Securities Held to Maturity      |                          |          
|State and
      municipals       | $                        | 11,404   
|                                 |                          |          

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|At
      September 30, 2006, TSFG had 1,109 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 its debt securities until a market price recovery or maturity.
      Therefore, at September 30, 2006, these investments are not considered
      impaired on an other-than-temporary basis.
      At
      September 30, 2006, TSFG's unrealized losses in its equity investments are
      not considered impaired on an other-than-temporary basis due to the lack
      of severity of the impairment.
      Note
      5 Loan Sales
      During the second quarter of 2006, TSFG identified and sold $359.6 million
      of indirect auto loans originally classified as loans held for
      investment and recorded a $3.5 million loss on the sale. In connection
      with the sale, TSFG transferred $3.1 million out of the allowance for loan
      losses. There were no indirect auto loan sales in 2005. Indirect auto loan
      production for the months of June and July 2006 was originally classified
      as held for sale at loan origination based on management's intent to sell
      these loans. For the three and nine months ended September 30, 2006, TSFG
      recorded a loss on indirect auto loans of $667,000 and $5.1 million,
      respectively, which included lower of cost or market adjustments on the
      loans held for sale, losses on swaps economically hedging the anticipated
      monthly sale of the loans, and the $3.5 million loss on sale mentioned
      above.
      On
      July 31, 2006, TSFG changed its original intent to sell these loans and
      decided to retain these loans and transferred them to the held for
      investment portfolio. This change in intent was based on the expectation
      of improved profitability margins associated with this portfolio as a
      result of specific actions taken by management, as well as the challenges
      associated with selling indirect auto loans for a gain. The previously
      recorded lower of cost or market adjustments, which totaled $1.2 million,
      on these loans will be amortized over the remaining life of the loans. For
      the three and nine months ended September 30, 2006, interest income
      included $67,000 of income representing amortization of the lower of cost
      or market adjustment. In addition, all subsequent originations have been
      recorded as loans held for investment.
      Note
      6 Disposition of Assets and Liabilities
      In
      September 2006, Carolina First Bank completed the sale of its branch
      office in Mullins, South Carolina. In connection with the sale of this
      branch, TSFG recorded a gain of $2.5 million and transferred deposits of
      $27.9 million and loans of $2.6 million to the
  purchaser.

|13
|--



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated
      Financial Statements (unaudited)                                                                                                            
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                               
|Note
      7 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.
|                                                                                                                                                                                                                               

|                                                                | September
      30, 2006 |       | December
      31, 2005 |  
|--------------------------------------------------------------- | ------------------------ | ----- | ----------------------- | -
|
|
|
|
|
|Cash
      Flow Hedges                                          |                          |       |                         |  
|Interest
      rate swaps associated with  borrowing activities | $                        | 289   |                         | $
|                                                                |                          |       |                         |  
|Interest
      rate swaps associated with  lending activities   |                          | 1,851 |                         |  
|Interest
      rate floors associated with  lending activities  |                          | 2,139 |                         |  
|                                                                |                          |       |                         |  
|Fair
      Value Hedges                                         |                          |       |                         |  
|Interest
      rate swaps associated with  brokered CDs         |                          |      |                         |  
|                                                                |                          |       |                         |  
|Other
      Derivatives                                         |                          |       |                         |  
|Forward
      foreign currency contracts                        |                          | 111   |                         |  
|Options,
      interest rate swaps and other                    |                          | 5,064 |                         |  
|                                                                |                          |       |                         |  
|                                                                | $                        | 9,454 |                         | $
|                                                                |                          |       |                         |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|As
      part of its mortgage activities, TSFG originates certain residential loans
      and commits these loans for sale. The commitments to originate residential
      loans (rate locks) and the forward sales commitments are freestanding
      derivative instruments and are generally funded within 90 days. The values
      of the rate locks and forward sale commitments are estimated based on
      indicative market prices being bid on similarly structured mortgage backed
      securities. At September 30, 2006, the gross fair value of the rate locks
      was an asset of $246,000. The gross fair value of forward sales
      commitments was a liability of $325,000 at September 30, 2006. TSFG does
      not apply hedge accounting to these derivative activities.
      In June and July of 2006, TSFG
      hedged the anticipated monthly sale of indirect auto loans with
      pay-fixed interest rate swaps. These swaps did not qualify for hedge
      accounting and were marked to market through earnings with no offsetting
      adjustment for the hedged item. TSFG terminated these hedges as of July
      31, 2006 when it transferred its indirect auto loan production for June
      and July, originally classified as held for sale, to held for investment.
      For the three and nine months ended September 30, 2006, the loss on
      indirect auto loans included losses of $412,000 and $150,000,
      respectively, on these swaps.
      In
      the three and nine months ended September 30, 2006, noninterest income
      included gains of $3.9 million and $2.6 million, respectively, for trading
      and derivative activities. These gains 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 $1.0 million and $125,000 for the three and nine months ended
      September 30, 2006, respectively, and for cash flow hedges, which had no
      ineffectiveness; and other miscellaneous items.
      In the three and nine months
      ended September 30, 2005, noninterest income included losses of $13.5
      million and $249,000, respectively, for trading and derivative activities.
      For these periods in 2005, TSFG recorded no hedge
      ineffectiveness.

|14
|--



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      Note 8 Long-Term Debt
      Long-term
      debt consisted of the following (in thousands, except for descriptions of
      terms):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                             

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | September
      30,2006 |           | December
      31,2005 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | --------- | ---------------------- | -
|
|
|Repurchase agreements; fixed and variable rates ranging from 3.93%
      to 5.31%   due from 2010 to 2014, notwithstanding
      certain earlier call dates;    collateralized by
      securities of the United States government or its
         agencies, which are held by
      third-party safekeepers, and corporate    bonds
      valued at $557.7 million; interest payable quarterly                                                                                                                                            |  | $                       | 596,000   |                        | $
|FHLB
      advances; fixed and variable interest rates ranging from 3.36%
         to 6.27% due from 2008 to 2018, notwithstanding
      certain earlier call    dates; collateralized by a
      blanket lien on qualifying loans secured by    first
      mortgages on one-to-four family residences valued at $398.0 million,
         commercial loans valued at $136.3 million, and
      mortgage-backed securities    valued at $118.4 million;
      initial maturity of one year or greater; interest
         payable quarterly |  |                         | 339,620   |                        |  
|Subordinated Notes; fixed and variable rates ranging from 6.33% to
      9.17%   due from 2006 to 2036, notwithstanding certain
      earlier call dates;    unsecured; interest payable
      quarterly or semi-annually and at maturity                                                                                                                                                                                                                                                                                                  |  |                         | 233,016   |                        |  
|Mandatory
      redeemable preferred stock of subsidiary; redeemable
         from 2011 to 2031; unsecured; dividends payable
      quarterly and at    maturity at fixed and variable
      rates per annum ranging from    8.485% to
    11.125%                                                                                                                                                                                                                                                                                         |  |                         | 89,800    |                        |  
|Employee
      stock ownership plan note payable to RBC/Centura Bank;
         due July 23, 2007; collateralized by 22,661 shares
      of TSFG stock    valued at approximately $590,000;
      interest at Centura Bank's prime   rate less 1.25% with
      monthly principal payments of $25,000                                                                                                                                                                                                                                       |  |                         | 275       |                        |  
|Note
      payable; interest at 12.50% due December 31, 2012; collateralized
         by a United States Treasury note valued at $2.1
      million; with    current annual payments of
      approximately $232,000                                                                                                                                                                                                                                                                                                                       |  |                         | 838       |                        |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                         |           |                        |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                         | 1,259,549 |                        |  
|Purchase
      accounting premiums, net of amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                         | 1,757     |                        |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                         |           |                        |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | $                       | 1,261,306 |                        | $
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                         |           |                        |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|During the second and third
      quarters of 2006, the FHLB and certain structured repurchase agreement
      counterparties exercised options to put certain long-term borrowings back
      to TSFG. The funding was repaid and replaced in the near-term with
      non-puttable funding, which is reflected on the September 30, 2006 balance
      sheet as an increase in federal funds purchased and repurchase agreements,
      and other short-term borrowings.
      Note
      9  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 September 30, 2006, 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.

|15
|--



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      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.
      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 Commitments |          
|------------------------------- | ----------------------- | ---------
|
|
|
|Commitment on loans             | $                       | 2,098,991
|Standby
      letters of credit |                         | 184,656  
|Unused
      credit card lines  |                         | 28,082   
|Documentary letters of credit   |                         | 610      
|
|Total                           | $                       | 2,312,339
|

|16
|--



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      Note
      10  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 EndedSeptember 30, |            | Nine
      Months EndedSeptember 30, |  
|------------------------------------------------------ | ------------------------------------- | ---------- | ------------------------------------ | -
|
|
|
|**Numerators**                                         |                                       |            |                                      |  
|Income
      from continuing operations                | $                                     | 32,165     |                                      | $
|                                                       |                                       |            |                                      |  
|Discontinued operations, net of income tax             |                                       |           |                                      |  
|
|Net income                                             | $                                     | 32,165     |                                      | $
|
|**Basic**                                              |                                       |            |                                      |  
|Average
      common shares outstanding (denominator)  |                                       | 75,003,605 |                                      |  
|
|Earnings
      per share:                              |                                       |            |                                      |  
|Income from continuing
      operations                | $                                     | 0.43       |                                      | $
|                                                       |                                       |            |                                      |  
|Discontinued operations                                |                                       |           |                                      |  
|
|Net
income                                             | $                                     | 0.43       |                                      | $
|
|**Diluted**                                            |                                       |            |                                      |  
|Average
      common shares outstanding                |                                       | 75,003,605 |                                      |  
|Average
      dilutive potential common shares         |                                       | 587,143    |                                      |  
|
|Average
      diluted shares outstanding (denominator) |                                       | 75,590,748 |                                      |  
|
|Earnings
      per share:                              |                                       |            |                                      |  
|Income from continuing
      operations                | $                                     | 0.43       |                                      | $
|                                                       |                                       |            |                                      |  
|Discontinued operations                                |                                       |           |                                      |  
|
|Net
income                                             | $                                     | 0.43       |                                      | $
|

|                                                                                                                                                                                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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:
|                                                                                                                                                                                                                                                      

|                               | Numberof Shares |           | Range
      ofExercise Prices | 
|------------------------------ | --------------- | --------- | ----------------------------- | 
|
|**For the Three Months Ended** |                 |           |                               | 
|September
      30, 2006       |                 | 1,412,186 |                               | 
|September
      30, 2005       |                 | 532,702   |                               | 
|                               |                
|**For the Nine Months Ended**  |                 |           |                               | 
|September
      30, 2006       |                 | 1,397,686 |                               | 
|September
      30, 2005       |                 | 504,202   |                               | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note
      11 Stock-Based Compensation Plans
      TSFG
      has a Long-Term Incentive Plan (the LTIP), a restricted stock plan, and
      various stock option plans. These plans provide for grants of restricted
      stock units (RSUs), restricted stock, options to purchase TSFG's $1 par
      value common stock, or other share-based awards. Grants of RSUs and
      restricted stock are expensed over the period the employee performs the
      related services, including the performance period (generally the
      three-year period preceding the grant) and the vesting period (typically
      three or five years following the grant date). For performance-based RSUs
      and restricted stock, TSFG estimates the degree to which performance
      conditions will be met to determine the number of shares which will vest
      and the related compensation expense prior to the vesting date.
      Compensation expense is adjusted in the period such estimates change.
      Income tax benefits related to stock compensation in excess of grant date
      fair value are recognized as an increase to surplus upon vesting and
      delivery of the stock. The compensation cost that was charged against
      income for these plans and the total income tax benefit recognized in the
      income statement for share-based compensation arrangements were as follows
      (in thousands):

|17
|--



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

|                                                                        | Three
      Months EndedSeptember 30, |       | Nine
      Months EndedSeptember 30, |  
|----------------------------------------------------------------------- | ------------------------------------- | ----- | ------------------------------------ | -
|
|
|
|
|Compensation cost charged against income                                | $                                     | 1,291 |                                      | $
|Total
      income tax benefit recognized in     income
      statement |                                       | 200   |                                      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Restricted Stock and Other Share-Based Awards
      TSFG's
      LTIP provides for incentive compensation in the form of stock options,
      restricted stock, RSUs, performance units (which may be stock based),
      stock appreciation rights and other stock-based forms of director
      compensation. These grants may be made to directors, officers, employees,
      prospective employees, and consultants of TSFG. At September 30, 2006,
      authorized shares under the LTIP totaled 2.0 million shares (subject to
      further limitation of 1.2 million shares for restricted stock), of which
      865,965 shares were available to be granted. TSFG also has a Restricted
      Stock Plan for awards to certain key employees. At September 30, 2006,
      authorized shares under the Restricted Stock Plan totaled 875,000 shares,
      of which 171,503 shares were available to be granted.
      During
      the nine months ended September 30, 2006, TSFG awarded 13,439 shares with
      a weighted-average fair value of $26.67 for director compensation under
      the LTIP and expensed $358,000 in directors' fees associated with these
      grants in the same period. During the nine months ended September 30,
      2005, TSFG awarded 10,608 shares with a weighted-average fair value of
      $30.11 for director compensation under the LTIP and expensed $320,000 in
      directors' fees associated with these grants in the same period.
      Shares
      of restricted stock granted to employees under both the LTIP and the
      Restricted Stock Plan are subject to restrictions as to continuous
      employment for a specified time period following the date of grant. During
      this period, the holder is entitled to full voting rights and dividends.
      In
      2006, TSFG's board of directors approved new LTIP awards for the period
      2006  2008. This is in addition to the awards associated with the 2004 
      2006 period, which resulted in a 52.25% payout in 2004 and 0% in 2005, and
      is expected to pay 0% in 2006. A total of 367,466 RSUs have been reserved
      for potential issuance for the 2006  2008 period, which includes both
      service and performance-based awards. Of these units, the service award
      component (96,366 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 2008 certain earnings per share targets relative to a
      broad regional bank peer group, and return on equity targets. Achieving
      target performance (100%) on both of the performance goals will result in
      the issuance of 180,734 shares, although a maximum of 90,366 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, 2008, based on management's assessment of the probability that the
      performance targets will be met. Based on its assessment at September 30,
      2006, management determined that it is not probable that the performance
      targets will be met. Consequently, TSFG reversed expense related to the
      performance targets in the third quarter of 2006. If the performance
      targets are not reached, the corresponding RSUs will be forfeited.
      Additionally,
      in the third quarter 2006, TSFG's board of directors issued 400,000 RSUs
      with a total grant date fair value of $10.8 million to the CEO/Chairman in
      connection with amending his employment agreement. The RSUs will be
      expensed ratably over the seven-year vesting period, unless certain events
      (including termination without cause, death, disability, or change of
      control) occur which would accelerate vesting (and thus expensing) of the
      RSUs.

|18
|--



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      The
      following is a summary of the status of TSFG's nonvested shares of
      restricted stock and RSUs as of September 30, 2006 and changes during the
      nine months ended September 30, 2006.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                 

|                                | LTIP |         | Restricted
      Stock Plan |    
|------------------------------- | ---- | ------- | --------------------------- | ---
|
|
|
|Nonvested
      at January 1    |      |        |                             |    
|Granted                         |      | 767,466 |                             | (1)
|Vested                          |      |        |                             |    
|Cancelled                       |      |        |                             |    
|
|Nonvested
      at September 30 |      | 767,466 |                             | (1)
|
|                                |      |         |                             |    

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) Assumes maximum performance targets are
      met for performance-based awards.
      As
      of September 30, 2006, there was $20.0 million of total unrecognized
      compensation cost related to nonvested shares of restricted stock and
      RSUs, assuming maximum performance targets are met for performance-based
      awards. At such date, the weighted-average period over which the service
      component of this unrecognized expense is expected to be recognized was
      3.1 years. The total fair value of shares vested during the nine months
      ended September 30, 2006 and 2005 was $1.7 million and $2.1 million,
      respectively.
      In
      2005, under the LTIP, TSFG issued cash-settled stand alone stock
      appreciation rights, which are accounted for as liability-classified
      awards pursuant to SFAS 123R. The strike price of each stock appreciation
      right equals the fair market value of TSFG's common stock on the date of
      grant. Stock appreciation rights issued to employees under this plan are
      exercisable on a cumulative basis for 20% of the shares on each of the
      first five anniversaries of the grant. The following is a summary of the
      stock appreciation rights activity under the LTIP for the nine months
      ended September 30, 2006.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                          | Shares |         | WeightedAverageExercisePrice |   | WeightedAverageRemainingContractualTerm
      (Years) |  | AggregateIntrinsicValue($000) |    
|------------------------- | ------ | ------- | ---------------------------- | - | ----------------------------------------------------- |  | ----------------------------- | ---
|
|Outstanding, January 1    |        | 271,550 |                              | $ | 29.40                                                 |  |                               |    
|Granted                   |        |        |                              |   |                                                      |  |                               |    
|Cancelled                 |        | (34,175 | )                            |   | 29.40                                                 |  |                               |    
|Exercised                 |        |        |                              |   |                                                      |  |                               |    
|                          |        |         |                              |   |                                                      
|
|Outstanding, September 30 |        | 237,375 |                              | $ | 29.40                                                 |  |                               | 9.2
|
|
|Exercisable, September 30 |        |        |                              | $ |                                                      |  |                               |   
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Unrecognized stock-based
      compensation expense related to stock appreciation rights totaled $488,000
      at September 30, 2006. At such date, the weighted-average period over
      which this unrecognized expense is expected to be recognized was 4.2
      years.
      Stock Option Plans
      TSFG
      has a Stock Option Plan, a Directors' Stock Option Plan, a Fortune 50
      Stock Option Plan, and various option plans assumed in connection with
      acquisitions (collectively referred to as stock-based option plans). At
      September 30, 2006, authorized shares under the Stock Option Plan totaled
      4.7 million shares, of which 3.5 million were available to be granted. The
      exercise price of each option either equals or exceeds the fair market
      value of TSFG's Common Stock on the date of grant. Options issued to
      employees under the Stock Option Plan are typically exercisable on a
      cumulative basis for 20% of the shares on each of the first five
      anniversaries of the grant. Under the Directors' Stock Option Plan, TSFG
      may grant options to its non-employee directors and advisory board
      members. At September 30, 2006, authorized shares under the Directors'
      Stock Option Plan totaled 650,000 shares, of which 396,000 were available
      to be granted. The exercise price of each director's option equals the
      fair market value of TSFG's common stock on the date of grant. Options
      issued to directors under the Directors' Stock Option Plan vest
      immediately on the grant date.

|19
|--



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      The fair value of TSFG's stock
      options granted is estimated at the date of grant using the Black-Scholes
      option-pricing model. This model requires the input of highly subjective
      assumptions, changes to which can materially affect the fair value
      estimate. Additionally, there may be other factors that would otherwise
      have a significant effect on the value of employee stock options granted
      but are not considered by the model. Accordingly, while management
      believes that the Black-Scholes option-pricing model provides a reasonable
      estimate of fair value, the model does not necessarily provide the best
      single measure of fair value for TSFG's employee stock options.
      Assumptions include, but are not limited to, TSFG's expected price
      volatility over the term of the awards, which is based on historical
      volatility of TSFG's common stock. The following is a summary of TSFG's
      weighted-average assumptions used to estimate the weighted-average per
      share fair value of options granted on the date of grant using the
      Black-Scholes option-pricing model:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                                                                    | Three
      Months EndedSeptember 30, |       | Nine
      Months EndedSeptember 30, |  
|----------------------------------------------------------------------------------- | ------------------------------------- | ----- | ------------------------------------ | -
|
|
|
|Expected
      life (in years)                                                      |                                       | 7.00  |                                      |  
|Expected
      volatility                                                           |                                       | 32.78 | %                                    |  
|Risk-free
      interest rate                                                       |                                       | 4.80  |                                      |  
|Expected
      dividend yield                                                       |                                       | 2.52  |                                      |  
|Weighted-average fair value of options
      granted        during the
      period | $                                     | 8.81  |                                      | $

|                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------
|The
      following is a summary of the activity under the stock-based option plans
      for the nine months ended September 30, 2006.
|                                                                                                                                       

|                          | Shares |           | WeightedAverageExercisePrice |   | WeightedAverageRemainingContractualTerm
      (Years) |  | AggregateIntrinsicValue($000) |    
|------------------------- | ------ | --------- | ---------------------------- | - | ----------------------------------------------------- |  | ----------------------------- | ---
|
|Outstanding, January 1    |        | 4,245,664 |                              | $ | 21.45                                                 |  |                               |    
|Granted                   |        | 114,750   |                              |   | 26.77                                                 |  |                               |    
|Cancelled                 |        | (163,675  | )                            |   | 28.21                                                 |  |                               |    
|Exercised                 |        | (363,076  | )                            |   | 15.47                                                 |  |                               |    
|
|                          |        |           |                              |   |                                                       |  |                               |    
|Outstanding, September 30 |        | 3,833,663 |                              | $ | 21.88                                                 |  |                               | 5.2
|
|                          |        |           |                              |   |                                                       |  |                               |    
|Exercisable, September 30 |        | 2,759,547 |                              | $ | 19.45                                                 |  |                               | 4.2
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The
      total intrinsic value of options exercised during the nine months ended
      September 30, 2006 and 2005 was $1.3 million and $1.8 million,
      respectively. Unrecognized stock-based compensation expense related to
      stock options totaled $6.0 million at September 30, 2006. At such date,
      the weighted-average period over which this unrecognized expense is
      expected to be recognized was 2.9 years.
      Cash
      received from options exercised under all share-based payment arrangements
      for the nine months ended September 30, 2006 and 2005 was $5.3 million and
      $10.2 million, respectively. The actual tax benefit realized for the tax
      deductions from option exercise of the share-based payment arrangements
      totaled $1.2 million and $3.9 million, respectively, for the nine months
      ended September 30, 2006 and 2005. TSFG has a policy of issuing new shares
      to satisfy stock option exercises.
      Note
      12  Business Segments
      TSFG
      has two principal operating subsidiaries, Carolina First Bank and
      Mercantile Bank, which are evaluated regularly by the chief operating
      decision maker in deciding how to allocate resources and assess
      performance. Both of these subsidiaries, by virtue of exceeding certain
      quantitative thresholds, are reportable segments. The reportable segments
      engage in general banking business focusing on commercial, consumer and
      mortgage lending to small and middle market

|20
|--



|THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
      Financial Statements (unaudited)
      businesses and consumers in their market areas. The reportable
      segments also provide demand transaction accounts and time deposit
      accounts to businesses and individuals. Carolina First Bank offers
      products and services primarily to customers in South Carolina, North
      Carolina and on the Internet. Mercantile Bank offers products and services
      primarily to customers in its market areas in Florida. Revenues for
      Carolina First Bank and Mercantile Bank are derived primarily from
      interest and fees on loans, interest on investment securities, service
      charges on deposits, wealth management income, and other customer-related
      fees. No single customer accounts for a significant amount of the revenues
      of either reportable segment.
      TSFG evaluates performance
      based on budget to actual comparisons and segment profits. The accounting
      policies of the reportable segments are the same as those described in
      Note 1 and in TSFG's Annual Report on Form 10-K for the year ended
      December 31, 2005.
      Segment information (in
      thousands) is shown in the table below. The Other column includes all
      other business activities that did not meet the quantitative thresholds
      and therefore are not shown as a reportable segment. Effective December 1,
      2005, CF Technology Services Company, a wholly-owned subsidiary of TSFG,
      was merged into Carolina First Bank. Reclassifications have been made to
      the September 30, 2005 presentation in order to conform to the current
      presentation.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                          | CarolinaFirst Bank |           | MercantileBank |   | Other     |  | EliminatingEntries |           | Total |  
|----------------------------------------- | ------------------ | --------- | -------------- | - | --------- |  | ------------------ | --------- | ----- | -
|
|**Three Months Ended September 30, 2006** |                    |           |                |   |           |  |                    |           |       |  
|Net
      interest income                 | $                  | 61,779    |                | $ | 41,699    |  | $                  | (4,795    | )     | $
|Provision
      for credit losses         |                    | 4,328     |                |   | 2,225     |  |                    |          |       |  
|Noninterest income                        |                    | 33,418    |                |   | 12,438    |  |                    | 2,236     |       |  
|Noninterest expenses                      |                    | 58,637    |                |   | 31,479    |  |                    | 3,692     |       |  
|Income
      tax expense                  |                    | 9,896     |                |   | 6,273     |  |                    | (1,920    | )     |  
|Net
      income                          |                    | 22,336    |                |   | 14,160    |  |                    | (4,331    | )     |  
|                                          |                   
|**Nine Months Ended September 30, 2006**  |                    |           |                |   |           |  |                    |           |       |  
|Net
      interest income                 | $                  | 189,765   |                | $ | 126,866   |  | $                  | (11,914   | )     | $
|Provision
      for credit losses         |                    | 21,466    |                |   | 2,485     |  |                    |          |       |  
|Noninterest income                        |                    | 95,096    |                |   | 28,454    |  |                    | 8,635     |       |  
|Noninterest expenses                      |                    | 173,466   |                |   | 94,932    |  |                    | 11,056    |       |  
|Income
      tax expense                  |                    | 29,723    |                |   | 19,155    |  |                    | (4,696    | )     |  
|Net
      income                          |                    | 60,206    |                |   | 38,748    |  |                    | (9,639    | )     |  
|                                          |                   
|**September 30, 2006**                    |                    |           |                |   |           |  |                    |           |       |  
|Total
      assets                        | $                  | 8,713,664 |                | $ | 5,599,545 |  | $                  | 1,847,801 |       | $
|Total
      loans                         |                    | 5,780,449 |                |   | 3,859,539 |  |                    |          |       |  
|Total
      deposits                      |                    | 5,653,756 |                |   | 3,635,540 |  |                    |          |       |  

|21
|--



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

|                                           | CarolinaFirst Bank |           | MercantileBank |   | Other     |   | EliminatingEntries |           | Total |  
|------------------------------------------ | ------------------ | --------- | -------------- | - | --------- | - | ------------------ | --------- | ----- | -
|
|**Three Months Ended September 30, 2005**  |                    |           |                |   |           |   |                    |           |       |  
|Net
      interest income                  | $                  | 63,694    |                | $ | 42,689    |   | $                  | (2,794    | )     | $
|Provision
      for credit losses          |                    | 6,595     |                |   | 2,268     |   |                    | (10       | )     |  
|Noninterest income                         |                    | 16,770    |                |   | 5,323     |   |                    | 4,370     |       |  
|Noninterest expenses                       |                    | 54,919    |                |   | 30,751    |   |                    | 5,400     |       |  
|Income
      tax expense                   |                    | 6,407     |                |   | 4,977     |   |                    | (2,345    | )     |  
|Net
      income                           |                    | 12,543    |                |   | 10,016    |   |                    | (1,469    | )     |  
|                                           |                   
|**Nine Months Ended September 30, 2005**   |                    |           |                |   |           |   |                    |           |       |  
|Net
      interest income                  | $                  | 190,216   |                | $ | 121,573   |   | $                  | (7,666    | )     | $
|Provision
      for credit losses          |                    | 24,005    |                |   | 5,775     |   |                    | (21       | )     |  
|Noninterest income                         |                    | 71,146    |                |   | 23,805    |   |                    | 12,926    |       |  
|Noninterest expenses                       |                    | 154,667   |                |   | 84,816    |   |                    | 15,304    |       |  
|Income
      tax expense                   |                    | 27,212    |                |   | 18,082    |   |                    | (4,454    | )     |  
|Discontinued operations, net of income tax |                    |          |                |   | (396      | ) |                    |          |       |  
|Net
      income                           |                    | 55,478    |                |   | 36,309    |   |                    | (5,569    | )     |  
|                                           |                   
|**September 30, 2005**                     |                    |           |                |   |           |   |                    |           |       |  
|Total
      assets                         | $                  | 9,471,473 |                | $ | 5,746,282 |   | $                  | 1,718,187 |       | $
|Total
      loans                          |                    | 5,630,471 |                |   | 3,811,687 |   |                    | 98        |       |  
|Total
      deposits                       |                    | 5,531,450 |                |   | 3,656,087 |   |                    |          |       |  
|                                           |                    |           |                |   |          

|Note
      13  Subsequent
      Event                Subsequent to September 30, 2006, a $7 million loan secured by commercial real estate was classified by the
Company as impaired, and a probability of loss exists, although the amount of which has yet to be determined. Management has
initiated foreclosure proceedings and is currently evaluating the fair value of the collateral and other repayment alternatives.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22
|--



|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, 2005. Results of
      operations for the nine months ended September 30, 2006 are not
      necessarily indicative of results that may be attained for any other
      period.
      TSFG
      primarily operates through two wholly-owned subsidiary banks, Carolina
      First Bank and Mercantile Bank, which are collectively referred to as the
      Subsidiary Banks.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Index to Item 2,
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                                                                               | Page | 
| | --------------------------------------------------------------------------------------------- | ---- | 
|
| | Website
      Availability of Reports Filed with the Securities and Exchange
      Commission | 23   | 
| | Forward-Looking Statements                                                                    | 23   | 
| | Non-GAAP
      Financial Information                                                          | 24   | 
| | Overview                                                                                      | 24   | 
| | Critical
      Accounting Policies and Estimates                                              | 26   | 
| | Expanded
      Corporate Facilities                                                           | 27   | 
| | Acquisitions                                                                                  | 27   | 
| | Balance
      Sheet Review                                                                    | 27   | 
| | Earnings
      Review                                                                         | 41   | 
| | Enterprise Risk Management                                                                    | 48   | 
| | Off-Balance Sheet Arrangements                                                                | 50   | 
| | Liquidity                                                                                     | 50   | 
| | Recently
      Adopted Accounting Pronouncements                                              | 51   | 
| | Recently
      Issued Accounting Pronouncements                                               | 52   | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Website 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 interest 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);
| |   |                                                                                                                                                                                             
| |  | level, composition, and repricing characteristics of the securities
      portfolio;                                                                                                        
| |   |                                                                                                                                                                                             
| |  | deposit
      growth, change in the mix or type of deposit products;                                                                                                                        

|23
|--



| |  | availability of wholesale funding;                                                                                                                                                                                   
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                      
| |  | 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, and ability to control expenses;                                                                                                                                                     
| |   |                                                                                                                                                                                                                      
| |  | 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 Securities and Exchange Commission (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. In
      addition, TSFG presents certain tax-equivalent net interest income and
      margin comparisons including the net cash settlements on certain interest
      rate swaps for 2005 to use data more comparable to current year
      presentations in order to better highlight trends. 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, and customer deposits, which are defined by TSFG as
      total deposits less brokered deposits. Wholesale borrowings include
      short-term and long-term borrowings and brokered deposits. 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 $14.0 billion in total assets and 165
      branch offices in South Carolina, Florida, and North Carolina at September
      30, 2006. Founded in 1986, TSFG focuses on fast-growing banking markets in
      the Southeast and concentrates its growth in metropolitan statistical
      areas. TSFG operates primarily through two subsidiary
  banks:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |  | Carolina First Bank, the largest South Carolina-headquartered
      commercial bank, operating in South Carolina and North Carolina, and on
      the Internet under the brand name, Bank CaroLine; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                        
| |  | Mercantile Bank, a Florida-headquartered bank, operating in
      Florida.                                                                                                                             

|24
|--



|At
      September 30, 2006, approximately 47% of TSFG's customer deposits (total
      deposits less brokered deposits) were in South Carolina, 39% were in
      Florida, and 14% were in North Carolina.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                           

|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
      $89.3 million, or $1.18 per diluted share, for the first nine months of
      2006, compared with $86.2 million, or $1.16 per diluted share, for the
      first nine months of 2005. Average diluted shares outstanding increased
      1.6%, principally as a result of the May 2005 acquisition of Pointe
      Financial Corporation (Pointe).
      Since second quarter 2005,
      TSFG reduced its level of investment securities and wholesale borrowings
      in response to the flattening yield curve and lower profitability of
      investment securities. TSFG took these actions in an effort to reduce
      interest rate and capital risk. The interest spread compression related to
      these earning assets and associated funding, in addition to the lower
      level of investment securities, contributed to slower revenue growth for
      the first nine months of 2006 over the comparable time period in 2005.
      TSFG continues to focus on
      improving its balance sheet mix by increasing the relative level and mix
      of customer asset and liabilities. On the asset side, average loans as a
      percentage of average earning assets increased to 76.0% for third quarter
      2006 from 67.9% for third quarter 2005. On the funding side, average
      customer deposits (which exclude brokered deposits) as a percentage of
      average total funding increased to 63.1% for third quarter 2006, up from
      56.9% for third quarter 2005.
      Using
      period-end balances, TSFG's loans held for investment at September 30,
      2006 increased 2.4% from a year ago, and total deposit balances grew 0.6%.
      Customer deposit balances (which exclude brokered deposits) increased 0.5%
      since September 30, 2005. During the first nine months of 2006, TSFG sold
      $359.6 million of indirect auto loans and $2.6 million of loans in
      connection with the sale of the Mullins branch. Excluding these amounts,
      growth in loans held for investment totaled 6.3% from September 30, 2005
      to September 30, 2006.
      Tax-equivalent
      net interest income was $309.9 million for the first nine months of 2006,
      a $1.5 million increase over $308.4 million for the first nine months of
      2005. The net interest margin increased to 3.25% for the first nine months
      of 2006 from 3.11% for the first nine months of 2005. For the nine months
      ended September 30, 2005, tax-equivalent net interest income excluded
      $10.6 million of income for the net cash settlement of interest rate swaps
      that did not meet the criteria for hedge accounting treatment. Instead,
      the net cash settlement for these interest rate swaps was recorded in
      noninterest income.
      Adjusting the 2005 numbers for
      the net cash settlement described above, tax-equivalent net interest
      income for the nine months ended September 30, 2006 decreased $9.2 million
      to $309.9 million from $319.1 million for the year earlier period,
      principally from a 4.0% decline in average earning assets related to
      TSFG's continued reduction of investment securities. TSFG's earning asset
      mix improved with a 10.4% increase in average loans and a 31.9% decline in
      average securities. The net interest margin increased to 3.25% for the
      nine months ended September 30, 2006 from 3.21% (including the net cash
      settlement) for the year earlier period.
      During 2006, TSFG's net
      interest margin has declined to 3.18% for third quarter 2006 from 3.27%
      for second quarter 2006 and 3.31% for first quarter 2006. This margin
      compression reflects an ongoing change in 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.
      Noninterest income increased
      to $99.3 million for the first nine months of 2006 from $80.2 million for
      the first nine months of 2005. Noninterest income reflected double-digit
      growth for customer fee income, wealth management, and merchant
      processing. During 2005 and 2006, TSFG made additional investments in the
      leadership, products, and sales of these fee-based lines of businesses.
      Noninterest income for the first nine months of 2006 included a $2.6
      million gain on trading and derivative activities, compared with a
      $249,000 loss for the first nine months of 2005. In addition, noninterest
      income for the first nine months of 2006 included a $2.5 million gain on
      the sale of a branch and a $5.1 million loss on indirect auto loans.
      In June 2006, TSFG sold $359.6
      million of indirect auto loans previously held for investment. In
      addition, June 2006 and July 2006 production was originally classified as
      held for sale and required a lower of cost or market
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|25
|--



|adjustment. (See Loans for an explanation of the subsequent
      transfer to loans held for investment as of July 31, 2006.) In
      connection with the sale of loans previously included in loans held for
      investment, TSFG transferred $3.1 million out of its allowance for loan
      losses.
      Noninterest expenses totaled
      $246.5 million for the first nine months of 2006, compared to $227.1
      million for the first nine months of 2005, an increase of 8.6%. Salaries,
      wages and employee benefits (excluding contract buyouts), which account
      for 51.3% of total noninterest expenses for the first nine months of 2006,
      increased 15.7% to $126.4 million. The increase in noninterest expenses
      included the Pointe and various insurance company acquisitions, higher
      incentive accruals, commissions relating to fee-based businesses, higher
      salaries attributable to TSFG's expansion of its management team,
      additional stock-based compensation expense from the adoption of Statement
      of Financial Accounting Standards No. 123R (SFAS 123R), Share-Based
      Payment, and higher merchant processing expense.
      Nonperforming asset and
      charge-off ratios continued to improve in the first nine months of 2006.
      At September 30, 2006, nonperforming assets as a percentage of loans held
      for investment and foreclosed property declined to 0.38% from 0.49% at
      September 30, 2005. For the nine months ended September 30, 2006,
      annualized net loan charge-offs improved to 0.28% of average loans held
      for investment from 0.35% for the same period in 2005. TSFG's provision
      for credit losses decreased to $24.0 million for the first nine months of
      2006 from $29.8 million for the first nine months of 2005, primarily as a
      result of lower net loan charge-offs, improved credit quality measures,
      and slower loan growth. The allowance for loan loss coverage of
      nonperforming loans at September 30, 2006 increased to 3.48 times,
      compared with 3.15 times at September 30, 2005.
      TSFG's
      tangible equity to tangible asset ratio totaled 6.46% at September 30,
      2006, up from 5.69% at September 30, 2005, primarily as a result of a
      decrease in net unrealized losses on available for sale securities. At
      September 30, 2006, the after-tax net unrealized loss on available for
      sale securities totaled $48.6 million, down from $55.3 million at
      September 30, 2005.
      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 accounting for derivatives and other hedging activities, the fair
      value of certain financial instruments (securities, derivatives, and
      privately held investments), income tax assets or liabilities, and
      accounting for acquisitions, including the fair value determinations, the
      analysis of goodwill 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, stock-based and 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 on
      a consistent basis.
      For
      additional information regarding critical accounting policies, refer to
      the Annual Report of TSFG on Form 10-K for the year ended December 31,
      2005, 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. As more fully discussed in Note 1  General and Note 11 
      Stock-Based Compensation Plans in the accompanying notes to the
      Consolidated Financial Statements included in this report, TSFG changed
      its method of accounting for stock options in connection with the adoption
      of a new accounting standard which eliminated the ability to account for
      stock-based compensation using the intrinsic value method of Accounting
      Principles Board (APB) Opinion 25, Accounting for Stock Issued to
      Employees, (APB Opinion 25) and requires such transactions to be
      recognized in the income statement based on their fair values at the date
      of grant.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|26
|--



|Expanded Corporate Facilities
      On March 17, 2006, TSFG
      acquired approximately 68 acres of land in Greenville County, South
      Carolina for a purchase price of $10.4 million for the purpose of
      developing a corporate campus to consolidate existing office space and to
      meet TSFG's future employment needs. TSFG expects the maximum cost of this
      project to approximate $100 million, less certain economic incentives
      awarded by the state, city, and county governments, which will be fully
      realized assuming certain conditions are met, the majority of which
      require a minimum investment of $100 million and creation of 600 new jobs
      at the campus by December 31, 2011. The first buildings are expected to be
      occupied by the second quarter 2008.
      Acquisitions
      No significant acquisitions
      were completed during the first nine months of 2006.
      Balance Sheet
      Review
      Loans
      TSFG focuses its lending
      activities on small and middle market businesses and individuals in its
      geographic markets. At September 30, 2006, outstanding loans totaled $9.5
      billion, which equaled 104% of total deposits (122% of customer deposits)
      and 68% of total assets. 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 September 30, 2006, 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.
      Loans held for investment
      increased $220.8 million, or 2.4%, to $9.5 billion at September 30, 2006
      from $9.3 billion at September 30, 2005. Excluding the sale of indirect
      auto loans discussed below ($359.6 million) and the sale of the Mullins
      branch ($2.6 million), loan growth for the period from September 30, 2005
      to September 30, 2006 was 6.3% (based on period-end balances). Loan growth
      was concentrated primarily in commercial loans. TSFG's loan growth was
      more moderate during second and third quarters 2006, due to a slower pace
      of new loan production and an increase in customer payments and pay-offs.
      During
      second quarter 2006, TSFG performed an initial evaluation of indirect
      loans to determine their profitability versus certain internal hurdle
      rates. TSFG determined that its historical production had been generated
      at returns lower than its internal hurdle rate. As a result of this
      review, in June 2006, TSFG sold $359.6 million of indirect auto loans
      originated from August 2005 through the end of May 2006 and reduced
      wholesale funding levels. TSFG recorded a $3.5 million loss on the sale of
      these indirect auto loans. Also, TSFG attempted to improve the
      profitability of its indirect auto lending by intending to sell new
      production. Accordingly, TSFG classified its June 2006 and July 2006
      production of indirect auto loans as held for sale. For the nine months
      ended September 30, 2006, TSFG recorded a loss on indirect auto loans of
      $5.1 million, which included lower of cost or market adjustments on the
      loans held for sale, losses on interest rate swaps economically hedging
      the anticipated monthly sale of the loans, and the $3.5 million loss on
      sale mentioned above.
      Since
      undergoing its evaluation of indirect loans, TSFG has worked to increase
      its loan yield relative to the matched funding cost and negotiated lower
      dealer reserve ratios. Both of these actions are intended to improve the
      interest rate spread versus TSFG's historical experience. In addition,
      TSFG is evaluating the net benefit of the mix of new versus used auto
      loans and various credit score ranges. As a result of these actions, TSFG
      believes the profitability of its more recent indirect auto loan
      production has improved. Given this profitability improvement, combined
      with the challenges associated with selling indirect auto loans for a
      gain, TSFG decided to keep the more recent indirect auto loan production
      on its balance sheet as held for investment. As of July 31, 2006, TSFG
      transferred its indirect auto loan production originally classified as
      held for sale to held for investment. In addition, effective August 1,
      2006, TSFG recorded its new production of indirect auto loans as held for
      investment.
      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
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|27
|--



|balance
      sheet management strategy. Loans held for sale decreased to $36.2 million
      at September 30, 2006 from $37.2 million at December 31, 2005 and $59.1
      million at September 30, 2005, primarily related to mortgage loan volume
      and timing of mortgage loan sales.
      Table 1 summarizes outstanding
      loans by collateral type for real estate secured loans and by borrower
      type for all other loans. Collateral type represents the underlying assets
      securing the loan, rather than the purpose of the loan.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                
|--------------------------------
|Table 1                         
|Loan Portfolio
      Composition
|(dollars in thousands)          

|                                                       | September
      30, |           | December 31, 2005 |  
|------------------------------------------------------ | ------------------- | --------- | ----------------- | -
|
|
|
|Commercial, financial and agricultural                 | $                   | 2,073,865 |                   | $
|Real
      estate - construction(1)                    |                     | 1,555,373 |                   |  
|Real
      estate - residential mortgages (1-4 family) |                     | 1,457,077 |                   |  
|Commercial secured by real estate(1)                   |                     | 3,659,857 |                   |  
|Consumer                                               |                     | 767,661   |                   |  
|
|Loans held for investment                              | $                   | 9,513,833 |                   | $
|
|                                                       |                    
|**Percentage of Loans Held for Investment**            |                     |           |                   |  
|Commercial, financial and agricultural                 |                     | 21.8      | %                 |  
|Real
      estate - construction(1)                    |                     | 16.3      |                   |  
|Real
      estate - residential mortgages (1-4 family) |                     | 15.3      |                   |  
|Commercial secured by real estate(1)                   |                     | 38.5      |                   |  
|Consumer                                               |                     | 8.1       |                   |  
|
|Total                                                  |                     | 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.

|28
|--



|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 2                                               
|Loan Portfolio Composition
      Based on Loan Purpose
|(dollars in thousands)                                

|                                            | September
      30, |           | December 31, 2005 |  
|------------------------------------------- | ------------------- | --------- | ----------------- | -
|
|
|
|                                            |                    
|**Commercial Loans**                        |                     |           |                   |  
|Commercial and industrial                   | $                   | 2,281,352 |                   | $
|Owner -
      occupied real estate(1)       |                     | 909,075   |                   |  
|Commercial real estate                      |                     | 4,117,022 |                   |  
|
|                                            |                     | 7,307,449 |                   |  
|
|                                            |                    
|**Consumer Loans**                          |                     |           |                   |  
|Indirect
      - sales finance              |                     | 651,419   |                   |  
|Other
      consumer loans                  |                     | 1,026,567 |                   |  
|Home
      equity                           |                     | 528,398   |                   |  
|
|                                            |                     | 2,206,384 |                   |  
|
|                                            |                    
|Total loans held for investment             | $                   | 9,513,833 |                   | $
|
|                                            |                    
|**Percentage of Loans Held for Investment** |                     |           |                   |  
|Commercial and industrial                   |                     | 24.0      | %                 |  
|Owner -
      occupied real estate(1)       |                     | 9.6       |                   |  
|Commercial real estate                      |                     | 43.3      |                   |  
|Indirect
      - sales finance              |                     | 6.8       |                   |  
|Other
      consumer loans                  |                     | 10.8      |                   |  
|Home
      equity                           |                     | 5.5       |                   |  
|
|Total                                       |                     | 100.0     | %                 |  
|

|    |                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In
      Table 3, 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.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.
      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
      originated from August 2005 through the end of May 2006 and classified its
      June and July production of indirect auto loans as held for sale. See
      discussion above for an explanation of the transfer to loans held for
      investment as of July 31, 2006.
      Other consumer loans
       are loans to individuals to finance personal, family, or household
      needs, and also include residential mortgages. Typical loans are loans to
      finance auto purchases, home repairs and additions, and home

|29
|--



|purchases.  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.
      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.
      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 37.5% of the total
      commercial real estate loans at September 30, 2006, up from 35.9% at
      December 31, 2005. 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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|30
|--



|                                  
|----------------------------------
|Table 3                           
|Commercial Real Estate
      Loans
|(dollars in thousands)            

|                                                                     | **September 30, 2006** |           | **December 31, 2005** | 
|-------------------------------------------------------------------- | ---------------------- | --------- | --------------------- | 
|
|
|                                                                     |                        |           |                       | 
|**Commercial Real Estate Loans by Geographic
      Diversification** |                        |           |                       | 
|Western
      North Carolina (Hendersonville/Asheville)              | $                      | 840,676   |                       | 
|Tampa Bay
      Florida                                              |                        | 538,451   |                       | 
|Midlands
      South Carolina (Columbia)                             |                        | 363,500   |                       | 
|Northeast
      Florida (Jacksonville)                               |                        | 341,951   |                       | 
|Upstate
      South Carolina (Greenville)                            |                        | 340,621   |                       | 
|North
      Coastal South Carolina (Myrtle Beach)                    |                        | 303,272   |                       | 
|North
      Central Florida                                          |                        | 330,450   |                       | 
|Central
      Florida (Orlando)                                      |                        | 274,388   |                       | 
|South
      Florida (Ft. Lauderdale)                                 |                        | 263,158   |                       | 
|South
      Coastal South Carolina (Charleston)                      |                        | 246,061   |                       | 
|Marion
      County, Florida (Ocala)                                 |                        | 145,164   |                       | 
|Greater
      South Charlotte South Carolina (Rock Hill)             |                        | 129,330   |                       | 
|                                                                     |                        |           |                       | 
|Total commercial real estate loans                                   | $                      | 4,117,022 |                       | 
|                                                                     |                        |           |                       | 
|                                                                     |                        |           |                       | 
|**Commercial Real Estate Loans by Product Type**                     |                        |           |                       | 
|Commercial construction/development                                  | $                      | 1,544,599 |                       | 
|Mixed
      use                                                      |                        | 426,770   |                       | 
|Residential construction                                             |                        | 349,492   |                       | 
|1-4
      family residential investment property                     |                        | 326,418   |                       | 
|Undeveloped land                                                     |                        | 274,187   |                       | 
|Retail                                                               |                        | 272,094   |                       | 
|Multi-family residential                                             |                        | 254,165   |                       | 
|Hotel/motel                                                          |                        | 168,950   |                       | 
|Other
      (1)                                                      |                        | 500,347   |                       | 
|                                                                     |                        |           |                       | 
|Total commercial real estate loans                                   | $                      | 4,117,022 |                       | 
|                                                                     |                        |           |                       | 

|     
|-----
|(1)  
|     
|Note:

|
|

|Portfolio
      risk is also managed by maintaining a house lending limit at a level
      significantly lower than the legal lending limit of both Carolina First
      Bank and Mercantile Bank and by requiring Board of Director approval to
      exceed this house limit. At September 30, 2006, TSFG's house lending limit
      was $35 million, and three credit relationships totaling $128.1 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 $382.5 million, or 4.0% of total loans held for
      investment at September 30, 2006, up from 3.1% of total loans held for
      investment at September 30, 2005.
      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 September 30, 2006, the loan
      portfolio included commitments totaling $843.6 million in shared national
      credits. Outstanding borrowings under these commitments totaled $343.2
      million at September 30, 2006, increasing from $222.7 million at December
      31, 2005.
      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 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 Credit Committees of each banking subsidiary's
      Board of Directors, which meet monthly to review credit quality trends,
      new large credits,
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31
|--



|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
      4                  
|-------------------------------
|Credit Quality
      Indicators
|(dollars in
      thousands)   

|                                                                                                                       | **September 30,** |           | **December 31,**2005 |  
|---------------------------------------------------------------------------------------------------------------------- | ----------------- | --------- | -------------------- | -
|
|
|                                                                                                                       |                   |           |                      |  
|Loans
      held for investment                                                                                        | $                 | 9,513,833 |                      | $
|Allowance
      for loan losses                                                                                        |                   | 109,401   |                      |  
|Allowance
      for credit losses (1)                                                                                  |                   | 110,349   |                      |  
|                                                                                                                       |                   |           |                      |  
|Nonaccrual loans - commercial (2)                                                                                      |                   | 24,604    |                      |  
|Nonaccrual loans - consumer                                                                                            |                   | 3,341     |                      |  
|Nonaccrual loans - mortgage                                                                                            |                   | 3,451     |                      |  
|Restructured loans                                                                                                     |                   |          |                      |  
|                                                                                                                       |                   |           |                      |  
|Total nonperforming loans                                                                                              |                   | 31,396    |                      |  
|Foreclosed property (other real estate owned and
      personal     property
repossessions)                            |                   | 4,851     |                      |  
|                                                                                                                       |                   |           |                      |  
|Total nonperforming
      assets                                                                                       | $                 | 36,247    |                      | $
|                                                                                                                       |                   |           |                      |  
|                                                                                                                       |                   |           |                      |  
|Loans
      past due 90 days or more (mortgage and
      consumer     with interest
accruing)                          | $                 | 3,163     |                      | $
|                                                                                                                       |                   |           |                      |  
|                                                                                                                       |                   |           |                      |  
|Total
      nonperforming assets as a percentage of loans held
           for investment and foreclosed
      property |                   | 0.38      | %                    |  
|                                                                                                                       |                   |           |                      |  
|Allowance
      for loan losses to nonperforming loans                                                                 |                   | 3.48      | 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
      September 30, 2006, December 31, 2005 and September 30, 2005, nonaccrual
      loans  commercial included $661,000, $1.9 million, and $1.9 million,
      respectively, in restructured loans.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The improvement in TSFG's
      nonperforming asset ratio (nonperforming assets as a percentage of loans
      held for investment and foreclosed property) traces to a slowdown in the
      flow of loans into nonperforming status. The third quarter outflow (via
      payoffs, liquidations, and charge-offs) was comparable to that of prior
      quarters; but the inflow was significantly lower, reflecting
      less-than-normal problem loan deterioration in the period. Accordingly,
      nonperforming assets declined 20.4% and 17.6%, respectively, from on
      September 30, 2005 and December 31, 2005. And, despite modest loan growth,
      the nonperforming asset ratio improved to 0.38% as of September 30, 2006
      from 0.49% and 0.47%, respectively, on September 30, 2005 and December 31,
      2005.
      Table
      5 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 5               
|Impaired
  Loans      
|(dollars in thousands)

|                                           | At and For
      the Nine Months Ended September 30, |        | At and For theYear Ended December 31, 2005 |  
|------------------------------------------ | ---------------------------------------------------- | ------ | ------------------------------------------ | -
|
|
|                                           |                                                      |        |                                            |  
|Impaired
      loans (1)                   | $                                                    | 24,604 |                                            | $
|Average
      investment in impaired loans |                                                      | 25,684 |                                            |  
|Related
      allowance                    |                                                      | 3,987  |                                            |  
|Foregone
      interest                    |                                                      | 1,198  |                                            |  

|    |                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In
      second quarter 2006, TSFG enhanced its policy to include nonaccruing loans
      that are fully protected by collateral as impaired loans. This change
      added $6.2 million to impaired loans at September 30,
  2006.

|Subsequent to September 30, 2006, a $7 million loan secured by commercial real estate
was classified by the Company as impaired, and a probability of loss exists, although the amount of which has yet
to be determined. Management has initiated foreclosure proceedings and is currently evaluating the fair value of
the collateral and other repayment alternatives. The Company believes that this is an isolated
situation and not representative of a specific market deterioration.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32
|--



|                                                                            
|----------------------------------------------------------------------------
|Allowance 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.
      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, loans acquired from acquisitions, 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|33
|--



|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 6
      summarizes the changes in the allowance for loan losses, reserve for
      unfunded lending commitments, and allowance for credit losses and provides
      certain related ratios.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                                
|------------------------------------------------
|Table 6                                         
|Summary of Loan and Credit
      Loss Experience
|(dollars in thousands)                          

|                                                                                                  | At and For
      the Nine Months Ended September 30, |           | At and For theYear Ended December 31, 2005 |  
|------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | --------- | ------------------------------------------ | -
|
|
|                                                                                                  |                                                      |           |                                            |  
|Allowance
      for loan losses, beginning of year                                                | $                                                    | 107,767   |                                            | $
|Purchase
      accounting adjustments                                                             |                                                      |          |                                            |  
|                                                                                                  |                                                      |           |                                            |  
|Allowance
      adjustment for loans sold                                                         |                                                      | (3,089    | )                                          |  
|                                                                                                  |                                                      |           |                                            |  
|Net
      charge-offs:                                                                            |                                                      |           |                                            |  
|Loans charged-off                                                                                 |                                                      | (27,426   | )                                          |  
|Loans recovered                                                                                   |                                                      | 7,563     |                                            |  
|                                                                                                  |                                                      |           |                                            |  
|                                                                                                  |                                                      | (19,863   | )                                          |  
|Additions
      to allowance through provision expense                                            |                                                      | 24,586    |                                            |  
|                                                                                                  |                                                      |           |                                            |  
|Allowance
      for loan losses, end of period                                                    | $                                                    | 109,401   |                                            | $
|                                                                                                  |                                                      |           |                                            |  
|                                                                                                  |                                                      |           |                                            |  
|Reserve
      for unfunded lending commitments, beginning of year                                 | $                                                    | 1,583     |                                            | $
|Provision
      for unfunded lending commitments                                                  |                                                      | (635      | )                                          |  
|                                                                                                  |                                                      |           |                                            |  
|Reserve
      for unfunded lending commitments, end of period                                     | $                                                    | 948       |                                            | $
|                                                                                                  |                                                      |           |                                            |  
|                                                                                                  |                                                      |           |                                            |  
|Allowance
      for credit losses, beginning of year                                              | $                                                    | 109,350   |                                            | $
|Purchase
      accounting adjustments                                                             |                                                      |          |                                            |  
|                                                                                                  |                                                      |           |                                            |  
|Allowance
      adjustment for loans sold                                                         |                                                      | (3,089    | )                                          |  
|                                                                                                  |                                                      |           |                                            |  
|Net
      charge-offs:                                                                            |                                                      |           |                                            |  
|Loans charged-off                                                                                 |                                                      | (27,426   | )                                          |  
|Loans recovered                                                                                   |                                                      | 7,563     |                                            |  
|                                                                                                  |                                                      |           |                                            |  
|                                                                                                  |                                                      | (19,863   | )                                          |  
|Additions
      to allowance through provision expense                                            |                                                      | 23,951    |                                            |  
|                                                                                                  |                                                      |           |                                            |  
|Allowance
      for credit losses, end of period                                                  | $                                                    | 110,349   |                                            | $
|                                                                                                  |                                                      |           |                                            |  
|                                                                                                  |                                                      |           |                                            |  
|Average
      loans held for investment                                                           | $                                                    | 9,578,862 |                                            | $
|Loans
      held for investment, end of period                                                    |                                                      | 9,513,833 |                                            |  
|Net
      charge-offs as a percentage of average loans held
      for     investment (annualized) |                                                      | 0.28      | %                                          |  
|Allowance
      for loan losses as a percentage of loans
      held     for investment            |                                                      | 1.15      |                                            |  
|Allowance
      for credit losses as a percentage of loans
      held     for investment          |                                                      | 1.16      |                                            |  
|Allowance
      for loan losses to nonperforming loans                                            |                                                      | 3.48      | x                                          |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Securities
      TSFG
      uses the investment securities portfolio for several purposes. It serves
      as a vehicle to manage interest rate and prepayment 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. Table 7
      shows the carrying values of the investment securities
      portfolio.

|34
|--



|                                                 
|-------------------------------------------------
|Table 7                                          
|Investment Securities
      Portfolio Composition
|(dollars in thousands)                           

|                                                             | September
      30, |           | December 31,2005 |  
|------------------------------------------------------------ | ------------------- | --------- | ---------------- | -
|
|
|                                                             |                     |           |                  |  
|**Trading** (at fair value)                                  |                     |           |                  |  
|U.S.
      Treasury                                          | $                   |          |                  | $
|U.S.
      Government agencies                               |                     |          |                  |  
|State and
      municipal                                    |                     |          |                  |  
|                                                             |                     |           |                  |  
|                                                             |                     |          |                  |  
|                                                             |                     |           |                  |  
|**Available for Sale** (at fair value)                       |                     |           |                  |  
|U.S.
      Treasury                                          |                     | 174,739   |                  |  
|U.S.
      Government agencies                               |                     | 655,447   |                  |  
|Mortgage-backed securities                                   |                     | 1,459,220 |                  |  
|State and
      municipal                                    |                     | 345,077   |                  |  
|Other
      investments:                                     |                     |           |                  |  
|Corporate bonds                                              |                     | 117,316   |                  |  
|Federal Home Loan Bank (FHLB) stock                        |                     | 52,763    |                  |  
|Federal Home Loan Mortgage Corporation preferred
      stock |                     |          |                  |  
|Community bank stocks                                        |                     | 11,917    |                  |  
|Other equity investments                                     |                     | 3,904     |                  |  
|                                                             |                     |           |                  |  
|                                                             |                     | 2,820,383 |                  |  
|                                                             |                     |           |                  |  
|**Held to Maturity** (at amortized cost)                     |                     |           |                  |  
|State and
      municipal                                    |                     | 52,690    |                  |  
|Other
      investments                                      |                     | 100       |                  |  
|                                                             |                     |           |                  |  
|                                                             |                     | 52,790    |                  |  
|                                                             |                     |           |                  |  
|Total                                                        | $                   | 2,873,173 |                  | $
|                                                             |                     |           |                  |  
|                                                             |                     |           |                  |  
|Total
      securities as a percentage of total assets       |                     | 20.5      | %                |  
|                                                             |                     |           |                  |  
|                                                             |                     |           |                  |  
|**Percentage of Total Securities Portfolio**                 |                     |           |                  |  
|U.S.
      Treasury                                          |                     | 6.1       | %                |  
|U.S.
      Government agencies                               |                     | 22.8      |                  |  
|Mortgage-backed securities                                   |                     | 50.8      |                  |  
|State and
      municipal                                    |                     | 13.8      |                  |  
|Other
      investments                                      |                     | 6.5       |                  |  
|                                                             |                     |           |                  |  
|Total                                                        |                     | 100.0     | %                |  
|                                                             |                     |           |                  |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Securities
      (i.e., trading securities, securities available for sale, and securities
      held to maturity) excluding the unrealized loss on securities available
      for sale averaged $3.1 billion in the first nine months of 2006, 31.9%
      below the average for the corresponding period in 2005 of $4.5 billion.
      Starting in second quarter 2005, TSFG reduced its securities in an effort
      to lower its interest rate risk in a rising rate and flattening yield
      curve environment and to reduce its reliance on wholesale borrowings.
      Since December 31, 2005, TSFG has continued to lower securities by not
      reinvesting maturing investments and principal paydowns.
      The
      average tax-equivalent portfolio yield increased for the nine months ended
      September 30, 2006 to 4.75% from 4.35% in the first nine months of 2005.
      The securities yield increased partially due to the balance sheet
      repositioning mentioned above, which reduced lower yielding securities
      held in TSFG's portfolio, compared with the first nine months of 2005.
      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.
      The
      expected duration of the debt securities portfolio was approximately 3.8
      years at September 30, 2006, consistent with the duration at December 31,
      2005 and a slight increase from approximately 3.6 years at September 30,
      2005. 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 98.2% of total securities at
      September 30, 2006. 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

|35
|--



|minimal
      credit risk. Approximately 72% of MBS are collateralized mortgage
      obligations (CMOs) with a total expected duration of 5.1 years. At
      September 30, 2006, 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. Many of these adjustable rate MBS are still in the fixed rate
      period, and are therefore anticipated to behave more like a fixed rate
      instrument over the next twelve months or more.
      Changes
      in interest rates and related prepayment activity impact yields and fair
      values of TSFG's securities, specifically MBS. 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
      $77.2 million at September 30, 2006, compared with a $134.5 million loss
      at June 30, 2006 and a $73.6 million loss at December 31, 2005. Although
      long-term interest rates increased during the first six months of 2006,
      thereby increasing the unrealized loss, these rates decreased during the
      third quarter of 2006. 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 September 30, 2006, TSFG had equity investments in 10
      community banks located in the Southeast with a cost basis of $9.6 million
      and a market value of $11.9 million. In each case, TSFG owns less than 5%
      of the community bank's outstanding common stock. TSFG made these
      investments to develop correspondent banking relationships and to promote
      community banking in the Southeast. These investments in community banks
      are included in securities available for sale.
      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
      trading and customer hedging programs. See Note 7 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 trading derivatives, economic
      hedges, and customer hedging programs are included in Other Derivatives in
      the table in Note 7.
      In the three and nine months
      ended September 30, 2006, noninterest income included gains of $3.9
      million and $2.6 million, respectively, for trading and derivative
      activities. These gains 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. TSFG is exploring
      ways to reduce the level of noninterest income volatility from hedge
      accounting.
      Customer Hedging Programs.TSFG offers programs that permit its customers to hedge various risks,
      including fluctuations in interest rates and foreign exchange rates.
      Through these programs, derivative contracts are executed between the
      customers and TSFG. Offsetting contracts are executed between TSFG and
      selected third parties to hedge the risk created through the customer
      contracts. The third party interest rate contracts are identical to the
      customer contracts, except for a fixed pricing spread or a fee paid to
      TSFG as compensation for administrative costs, credit risk and profit. As
      a result, the change in fair value of the customer contracts will
      generally be offset by the change in fair value of the related third-party
      contracts. These customer contracts generally take the form of interest
      rate swaps to hedge fixed rate loans made by TSFG to the customer and
      foreign exchange forward contracts to manage currency risk associated with
      non-dollar denominated transactions. All derivative contracts associated
      with these programs are carried at fair value and are not considered
      hedges under SFAS 133.
      Fair Value Hedges. TSFG enters into interest rate swaps to effectively convert its
      fixed rate brokered CDs to floating rates. The interest rate swaps are
      structured such that the notional amount, termination date, fixed rate and
      other relevant terms match those of the brokered CD it is hedging. These
      interest rate swaps are designated as fair value hedges under SFAS 133
      using the long-haul method of assessing hedge effectiveness. Upon
      entering into a brokered CD, TSFG pays a commission to the CD broker.
      These commissions are treated as prepaid fees and are amortized over the
      life of the related CD. Amortization of the prepaid fees on the brokered
      CDs, included in interest expense, was $566,000 and $1.8 million,
      respectively, for the three and nine months ended September 30, 2006.
      Amortization of the
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|36
|--



|prepaid
      fees on the brokered CDs, included in interest expense, was $523,000 and
      $2.5 million, respectively, for the three and nine months ended September
      30, 2005.
      TSFG has entered into interest
      rate swaps to hedge the risk created from certain indexed brokered CD
      products, including equity-linked CDs and inflation-indexed CDs. These
      interest rate swaps are designated as fair value hedges under SFAS 133
      using the long-haul method of assessing hedge effectiveness.
      In the three and nine months
      ended September 30, 2006, noninterest income includes $1.0 million and
      $125,000, respectively, of gains representing ineffectiveness of fair
      value hedges.
      Cash Flow Hedges. TSFG uses interest rate swaps and floors to hedge the repricing
      characteristics of certain floating rate assets and liabilities. The
      initial assessment of expected hedge effectiveness and the ongoing
      periodic measures of hedge ineffectiveness are based on the expected
      change in cash flows of the hedged item caused by changes in either the
      benchmark interest rate or overall cash flows, depending on the specific
      hedge relationship. TSFG has entered into pay-fixed interest rate swaps to
      convert a portion of its variable rate structured repurchase agreement
      portfolio and FHLB advances to fixed rates. In addition, TSFG has entered
      into receive-fixed interest rate swaps to hedge the forecasted interest
      income from prime-based commercial loans through 2011 and expects to enter
      into additional interest rate swaps on its prime-based commercial loans.
      TSFG has also purchased an interest rate floor which protects the Company
      from decreases in the hedged cash flows on its prime-based interest
      receipts below the strike rate on the floor. There were no cash flow
      hedging gains or losses, as a result of hedge ineffectiveness, recognized
      for the nine months ended September 30, 2006.
      Trading. From
      time to time, TSFG enters into derivative financial contracts that are not
      designed to hedge specific transactions or identified assets or
      liabilities and therefore do not qualify for hedge accounting, but are
      rather part of the Company's overall risk management strategy. Such
      contracts include interest rate futures, option contracts on certain U.S.
      agency debt securities, and certain other interest rate swaps that are not
      designated as hedges. The futures contracts are exchange-traded, while the
      option contracts are over-the-counter instruments with money center and
      super-regional financial institution counterparties. These contracts are
      marked to market through earnings each period and are generally short-term
      in nature. At September 30, 2006 there were no such contracts outstanding.
      Mortgage Loan Commitments
      and Forward Sales Commitments.As part of its mortgage lending
      activities, TSFG originates certain residential loans and commits these
      loans for sale. The commitments to originate residential loans (rate
      locks) and the sales commitments are freestanding derivative instruments
      and are generally funded within 90 days. During 2005, TSFG expanded its
      strategy to include selling mortgage loans on a pooled basis in addition
      to individual loan sales. As a result, the amount of time between
      origination date and sale date has increased, which has increased the
      amount of interest rate risk associated with these loans. The value of the
      rate locks (and of the forward sale commitments mentioned below) is
      estimated based on indicative market prices being bid on similarly
      structured mortgage backed securities. At September 30, 2006, the gross
      fair value of the rate locks was an asset of $246,000.
      The Company enters into
      forward sales commitments of closed mortgage loans to third parties at a
      specified price. The forward sales commitments are entered into to
      economically hedge the change in fair value of the underlying mortgage
      loans. The change in the value of the forward sales commitments is
      recognized through current period earnings. The loans are accounted for on
      the basis of the lower of cost or market guidelines. Fair value gains or
      losses related to the forward sales commitments were not material for the
      nine months ended September 30, 2006. The gross fair value of forward
      sales commitments was a liability of $325,000 at September 30, 2006.
      Indirect Auto Loan Sales.In June and July of 2006, the Company hedged the anticipated monthly
      sale of indirect auto loans with pay-fixed interest rate swaps. These
      swaps did not qualify for hedge accounting and were marked to market
      through earnings with no offsetting adjustment for the hedged item. TSFG
      terminated these hedges as of July 31, 2006 when it transferred its
      indirect auto loan production for June and July, originally classified as
      held for sale, to held for investment. For the three and nine months ended
      September 30, 2006, the loss on indirect auto loans includes losses of
      $412,000 and $150,000, respectively, on these swaps. (See Loans for an
      explanation of the transfer to loans held for investment as of July 31,
      2006.)
      Credit Risk of Derivative
      Financial Instruments.Entering into derivative financial contracts
      creates credit risk for potential amounts contractually due to TSFG from
      the derivative counterparties. Derivative credit risk is generally
      measured as the net replacement cost to TSFG in the event that a
      counterparty to a contract in a gain position to TSFG completely fails to
      perform under the terms of the contract. Derivative credit risk related to
      existing bank customers (in the case of customer loan swaps and foreign
      exchange contracts) is monitored through existing credit policies and
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|37
|--



|procedures. The effects of changes in interest rates or foreign
      exchange rates are evaluated across a range of possible options to limit
      the maximum exposures to individual customers. Customer loan swaps are
      generally cross-collateralized with the related loan. In addition,
      customers may also be required to provide margin collateral to further
      limit TSFG's derivative credit risk.
      Counterparty credit risk with
      other derivative counterparties (generally money-center and super-regional
      financial institutions) is evaluated through existing policies and
      procedures. This evaluation considers the total relationship between TSFG
      and each of the counterparties. Individual limits are established by
      management and approved by the credit department. Margin collateral in the
      form of cash or marketable securities is required if the exposure between
      TSFG and any counterparty exceeds established limits. Based on declines in
      the counterparties' credit rating, these limits are reduced and additional
      margin collateral is required.
      A deterioration of the credit
      standing of one or more of the counterparties to these contracts may
      result in the related hedging relationships being deemed ineffective or in
      TSFG not achieving its desired economic hedging outcome. This could occur
      if the credit standing of the counterparty deteriorated such that either
      the fair value of underlying collateral no longer supported the contract
      or the counterparty's ability to provide margin collateral was impaired.
      Deposits
      Deposits
      remain TSFG's primary source of funds. Average customer deposits equaled
      61.6% of average total funding in the first nine months of 2006 and 54.1%
      in the first nine months of 2005. Carolina First Bank and Mercantile Bank
      face strong competition from other banking and financial services
      companies in gathering deposits. TSFG has developed other sources, such as
      brokered CDs, FHLB advances, short-term borrowings, and long-term
      structured repurchase agreements, to fund a portion of loan demand and, if
      appropriate, any increases in investment securities.
      Table
      8 shows the breakdown of total deposits by type of deposit and the
      respective percentage of total deposits.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                      
|----------------------
|Table 8               
|Type of
    Deposits  
|(dollars in thousands)

|                                        | September
      30, |           | December 31,2005 |  
|--------------------------------------- | ------------------- | --------- | ---------------- | -
|
|
|
|Noninterest-bearing demand deposits     | $                   | 1,368,713 |                  | $
|Interest-bearing checking               |                     | 1,137,739 |                  |  
|Money
      market accounts             |                     | 2,478,118 |                  |  
|Savings
      accounts                  |                     | 188,629   |                  |  
|                                        |                     |           |                  |  
|Core deposits                           |                     | 5,173,199 |                  |  
|Time
      deposits under $100,000      |                     | 1,546,422 |                  |  
|Time
      deposits of $100,000 or more |                     | 1,088,827 |                  |  
|                                        |                     |           |                  |  
|Customer deposits (1)                   |                     | 7,808,448 |                  |  
|Brokered
      deposits                 |                     | 1,373,504 |                  |  
|                                        |                     |           |                  |  
|Total deposits                          | $                   | 9,181,952 |                  | $
|                                        |                     |           |                  |  
|                                        |                     |           |                  |  
|Percentage of Deposits                  |                     |           |                  |  
|Noninterest-bearing demand deposits     |                     | 14.9      | %                |  
|Interest-bearing checking               |                     | 12.4      |                  |  
|Money
      market accounts             |                     | 27.0      |                  |  
|Savings
      accounts                  |                     | 2.0       |                  |  
|                                        |                     |           |                  |  
|Core deposits                           |                     | 56.3      |                  |  
|Time
      deposits under $100,000      |                     | 16.8      |                  |  
|Time
      deposits of $100,000 or more |                     | 11.9      |                  |  
|                                        |                     |           |                  |  
|Customer deposits (1)                   |                     | 85.0      |                  |  
|Brokered
      deposits                 |                     | 15.0      |                  |  
|                                        |                     |           |                  |  
|Total deposits                          |                     | 100.0     | %                |  
|                                        |                     |           |                  |  

|(1) TSFG defines customer deposits as
      total deposits less brokered deposits.                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                             
|At
      September 30, 2006, period-end customer deposits increased $38.2 million,
      or 0.5%, from September 30, 2005. Excluding $27.9 million of deposits sold
      in conjunction with the sale of the Mullins branch, organic growth in
      customer deposits was 0.9%. TSFG uses brokered deposits as an alternative
      funding source while continuing its efforts to maintain

|38
|--



|and
      grow its local customer deposit base. Although brokered deposits were
      stable as a percentage of total deposits since September 30, 2005, these
      balances increased as a percentage of total deposits since December 31,
      2005 as TSFG elected to focus on core deposit categories (as opposed to
      time deposits) in the first nine months of 2006.
      Table 11 in Earnings Review -
      Net Interest Income details average balances for the deposit portfolio
      for the nine months ended September 30, 2006 and 2005. Comparing the nine
      months ending September 30, 2006 and 2005, average noninterest-bearing
      deposits increased $164.5 million, or 12.3%, and average interest-bearing
      checking deposits increased $140.0 million, or 15.3%. These increases
      reflect progress in TSFG's efforts to improve its mix of core deposits and
      the full-year impact of the Pointe acquisition. During the same period,
      average money market deposits decreased $401.2 million, or 14.8%, while
      average time deposits, excluding average brokered deposits, increased
      $727.3 million, or 37.3%. Average brokered deposits increased $27.7
      million, or 2.1%.
      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 deposits. 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. Third quarter 2006 results
      included average balance growth in total core deposits, up $54.6 million,
      or 4.3% linked-quarter annualized. However, within average core deposits,
      TSFG had a shift into higher-cost core deposits, consistent with industry
      trends, including customers' preferences. Core deposit growth included
      money market deposits (up $155.9 million or 27.3% linked quarter
      annualized) offset by decreases in noninterest-bearing deposits and
      interest checking deposits of $55.1 million and $54.0 million,
      respectively. Deposit pricing is very competitive, and we expect this
      pricing environment to continue.
      Time
      deposits of $100,000 or more are generally from customers within our local
      markets and include public deposits. Since the third quarter of 2005, time
      deposits of $100,000 or more decreased $148.2 million, or 12.0%, to $1.1
      billion. This decrease included $7.5 million in public deposits. Since
      December 31, 2005, time deposits of $100,000 or more decreased $306.4
      million, as TSFG generally elected not to price its certificates of
      deposit aggressively during the first nine months of 2006, instead
      focusing on its lower-cost deposits. TSFG utilizes these deposits to
      provide long-term fixed rate funding for the company at a price that is
      favorable relative to expected changes in the yield curve.
      Borrowed
      Funds
      Table 9 shows the breakdown of
      total wholesale borrowings by type.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                        
|------------------------
|Table 9                 
|Type of
      Borrowings
|(dollars in thousands)  

|                                                        | September
      30, |           | December 31,2005 |  
|------------------------------------------------------- | ------------------- | --------- | ---------------- | -
|
|
|
|Short-Term Borrowings                                   |                     |           |                  |  
|Federal
      funds purchased and repurchase agreements | $                   | 1,614,664 |                  | $
|FHLB
      advances                                     |                     | 175,000   |                  |  
|Commercial paper                                        |                     | 36,032    |                  |  
|Treasury,
      tax and loan note                       |                     | 9,334     |                  |  
|                                                        |                     |           |                  |  
|                                                        |                     | 1,835,030 |                  |  
|                                                        |                     |           |                  |  
|                                                        |                     |           |                  |  
|Long-Term Borrowings                                    |                     |           |                  |  
|Repurchase agreements                                   |                     | 596,000   |                  |  
|FHLB
      advances                                     |                     | 339,620   |                  |  
|Subordinated notes                                      |                     | 233,016   |                  |  
|Mandatorily redeemable preferred stock of subsidiary    |                     | 89,800    |                  |  
|Note
      payable                                      |                     | 838       |                  |  
|Employee
      stock ownership plan note payable        |                     | 275       |                  |  
|Purchase
      accounting premiums, net of amortization |                     | 1,757     |                  |  
|                                                        |                     |           |                  |  
|                                                        |                     | 1,261,306 |                  |  
|                                                        |                     |           |                  |  
|Total borrowings                                        | $                   | 3,096,336 |                  | $
|                                                        |                     |           |                  |  
|                                                       
|Brokered
      deposits (1)                             |                     | 1,373,504 |                  |  
|                                                        |                     |           |                  |  
|                                                       
|Total
      wholesale borrowings                        | $                   | 4,469,840 |                  | $
|                                                        |                     |           |                  |  
|                                                       
|Wholesale
      borrowings as a % of total assets       |                     | 31.8      | %                |  

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

|39
|--



|TSFG
      uses both short-term and long-term borrowings to fund growth of earning
      assets in excess of deposit growth. In the first nine months of 2006,
      average borrowings totaled $3.4 billion, compared with $4.7 billion for
      the same period in 2005. This decrease was primarily attributable to the
      balance sheet repositioning in late 2005, which reduced investment
      securities and wholesale borrowings. TSFG will continue to enter into
      derivative contracts to hedge interest rate risk related to
      borrowings.
      Federal funds purchased and
      short-term repurchase agreements are used to satisfy daily funding needs.
      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, its ability to raise deposits through market
      promotions, the Subsidiary Banks' unused FHLB borrowing capacity, and the
      availability of collateral to secure FHLB borrowings.
      TSFG's wholesale borrowings
      include funding with optionality, which provides a below-market rate for a
      guaranteed time period then gives the issuer of the debt the right to
      either (i) put the borrowings back to TSFG at the end of the lockout
      period or (ii) extend the borrowings at higher than market rates. From
      June to September 2006, the FHLB and certain structured repurchase
      agreement counterparties exercised options to put approximately $662
      million of borrowings back to TSFG. The funding was repaid and replaced
      with short-term borrowings at a cost of about 70 basis points higher.
      While this increases TSFG's current funding cost, removing this funding
      optionality reduces future interest rate risk exposure. In addition, TSFG
      plans to move this funding from short-term borrowings into longer-term,
      non-puttable funding to improve its liquidity. Through the end of October,
      TSFG has placed approximately $200 million in 3 to 5-year brokered
      certificates of deposit. The remaining puttable funding for which TSFG is
      paying a below-market interest rate totals approximately $500 million with
      a lockout period that will expire by mid-2007. Given the current rate
      outlook, TSFG expects this funding to be put back and is evaluating
      alternatives to replace.
      Capital Resources and
      Dividends
      Total
      shareholders' equity totaled $1.6 billion, or 11.0% of total assets, at
      September 30, 2006, compared with $1.5 billion, or 10.1% of total assets,
      at September 30, 2005 and $1.5 billion, or 10.4% of total assets, at
      December 31, 2005. Shareholders' equity increased from the retention
      of earnings, partially offset by cash dividends paid. Although TSFG has
      approximately 1.3 million shares remaining under its stock repurchase
      authorization, the Company has not repurchased any shares since 2003,
      except in connection with exercise of stock options or vesting of
      restricted stock.
      TSFG's
      unrealized loss on securities available for sale, net of income tax, which
      is included in accumulated other comprehensive loss, was $48.6 million at
      September 30, 2006, compared with an $84.7 million loss at June 30, 2006
      and a $46.4 million loss at December 31, 2005. For discussion on the
      primary reasons for the decrease in the unrealized loss on securities
      available for sale since June 30, 2006, see Securities.
      Book value per share at
      September 30, 2006 and 2005 was $20.62 and $20.17, respectively. Tangible
      book value per share at September 30, 2006 and 2005 was $11.48 and $10.88,
      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 and its Subsidiary Banks exceeded the
      well-capitalized regulatory requirements at September 30, 2006. 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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|40
|--



|Table 10 sets forth various
      capital ratios for TSFG and its Subsidiary Banks. Under current regulatory
      guidelines, debt associated with trust preferred securities qualifies for
      tier 1 capital treatment. At September 30, 2006, trust preferred
      securities included in tier 1 capital totaled $210.5 million, including
      $75.0 million of trust preferred securities issued in the second quarter
      of 2006. Specifically, TSFG, through two newly-formed, unconsolidated
      subsidiaries (South Financial Capital Trust 2006-I and South Financial
      Capital Trust 2006-II), issued $75.0 million of trust preferred securities
      to institutional investors during the second quarter of 2006. In
      connection with this transaction, TSFG contributed $2.3 million of capital
      and issued $77.3 million in unsecured subordinated notes to these
      subsidiaries. Subsequent to September 30, 2006, TSFG called for redemption
      $37.0 million of trust preferred securities associated with the two
      earliest trust preferred issuances which occurred in 2001. The redemptions
      will occur in December 2006.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                
|----------------
|Table 10        
|Capital
  Ratios
|                

| |                                | September
      30, 2006 |       | Well
      CapitalizedRequirement | 
| | ------------------------------ | ------------------------ | ----- | --------------------------------- | 
| |                                |                          |       |                                   | 
| | **TSFG**                       |                          |       |                                   | 
| | Total
      risk-based capital |                          | 11.74 | %                                 | 
| | Tier 1 risk-based capital      |                          | 10.17 |                                   | 
| | Leverage
      ratio           |                          | 8.62  |                                   | 
|
| | **Carolina First
      Bank**  |                          |       |                                   | 
| | Total
      risk-based capital |                          | 11.59 | %                                 | 
| | Tier 1 risk-based capital      |                          | 9.26  |                                   | 
| | Leverage
      ratio           |                          | 7.57  |                                   | 
|
| | **Mercantile
    Bank**        |                          |       |                                   | 
| | Total
      risk-based capital |                          | 11.81 | %                                 | 
| | Tier 1 risk-based capital      |                          | 8.88  |                                   | 
| | Leverage
      ratio           |                          | 7.83  |                                   | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|At
      September 30, 2006, TSFG's tangible equity to tangible asset ratio totaled
      6.46%, an increase from 5.69% at September 30, 2005, due primarily to a
      decrease in tangible assets attributable to the sale of securities in the
      fourth quarter of 2005 and the sale of indirect auto loans in the second
      quarter of 2006. 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.
      TSFG's
      Subsidiary Banks are subject to certain regulatory restrictions on the
      amount of dividends they are 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 898 mandatorily redeemable preferred
      shares outstanding at September 30, 2006 with a stated value of $100,000
      per share. At September 30, 2006, these preferred shares, which are
      reported as long-term debt on the consolidated balance sheet, totaled
      $89.8 million. Under Federal Reserve Board guidelines, $25.2 million, net
      of issuance costs, qualified as tier 1 capital, and $57.3 million, net of
      issuance costs, 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 11 presents average balance sheets and a net
      interest income analysis on a tax-equivalent basis for the three and nine
      months ended September 30, 2006 and 2005.

|41
|--



|                                                     
|-----------------------------------------------------
|Table 11                                             
|Comparative Average
      Balances - Yields and Costs
|(dollars in thousands)                               

|                                                                | Three
      Months Ended September 30, |           
|--------------------------------------------------------------- | -------------------------------------- | ----------
|
|
|
|
|
|Earning
      assets                                            |                                        |           
|Loans (1)                                                       | $                                      | 9,523,286 
|Investment securities, taxable (2)                              |                                        | 2,586,438 
|Investment securities, nontaxable (2)(3)                        |                                        | 407,005   
|                                                                |                                        |           
|Total investment securities                                     |                                        | 2,993,443 
|Federal funds sold and
      interest-bearing     bank balances |                                        | 13,479    
|                                                                |                                        |           
|Total earning assets                                            |                                        | 12,530,208
|                                                                |                                        |           
|Non-earning assets                                              |                                        | 1,443,500 
|                                                                |                                        |           
|Total
      assets                                              | $                                      | 13,973,708
|                                                                |                                        |           
|                                                               
|**Liabilities and Shareholders'
      Equity**                  |                                        |           
|Liabilities                                                     |                                        |           
|Interest-bearing liabilities                                    |                                        |           
|Interest-bearing deposits                                       |                                        |           
|Interest-bearing checking                                       | $                                      | 1,020,421 
|Savings                                                         |                                        | 187,089   
|Money market                                                    |                                        | 2,420,898 
|Time deposits, excluding brokered
      deposits                |                                        | 2,620,505 
|                                                                |                                        |           
|Total interest-bearing
      customer deposits (4)              |                                        | 6,248,913 
|Brokered deposits                                               |                                        | 1,344,521 
|                                                                |                                        |           
|Total interest-bearing
      deposits                           |                                        | 7,593,434 
|Borrowings                                                      |                                        | 3,180,921 
|                                                                |                                        |           
|Total interest-bearing
      liabilities                        |                                        | 10,774,355
|                                                                |                                        |           
|Noninterest-bearing liabilities                                 |                                        |           
|Noninterest-bearing deposits                                    |                                        | 1,481,025 
|Other noninterest-bearing
    liabilities                       |                                        | 213,811   
|                                                                |                                        |           
|Total
      liabilities                                         |                                        | 12,469,191
|Shareholders' equity                                            |                                        | 1,504,517 
|                                                                |                                        |           
|Total
      liabilities and shareholders' equity                | $                                      | 13,973,708
|                                                                |                                        |           
|Net
      interest income (tax-equivalent)                      |                                        |           
|Less:
      tax-equivalent adjustment (3)                       |                                        |           
|                                                                |                                        |           
|Net
      interest income                                       |                                        |           
|                                                                |                                        |           
|                                                                |                                        |           
|Supplemental
      data:                                        |                                        |           
|Customer
      deposits (5)                                     |                                        | 7,729,938 
|Wholesale
      borrowings (6)                                  |                                        | 4,525,442 
|Total
      funding (7)                                         |                                        | 12,255,380
|                                                                |                                        |           

|                                                               |                                                                                                                                                                        
|-------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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)                                                            | TSFG
      defines interest-bearing customer deposits as total interest-bearing
      deposits less brokered deposits.                                                 
|                                                               |                                                                                                                                                                        
|(5)                                                            | Customer deposits
      include total deposits less brokered deposits.                                                                                                 
|                                                               |                                                                                                                                                                        
|(6)                                                            | Wholesale borrowings
      include borrowings and brokered deposits.                                                                                                   
|                                                               |                                                                                                                                                                        
|(7)                                                            | Total funding
      includes customer deposits and wholesale borrowings.                                                                                               
|                                                               |                                                                                                                                                                        
|Note:  Average balances are derived from daily
      balances.

|42
|--



|                                                     
|-----------------------------------------------------
|Table 11
      (Continued)                           
|Comparative Average
      Balances - Yields and Costs
|(dollars in thousands)                               

|                                                                         | Nine
      Months Ended September 30, |           
|------------------------------------------------------------------------ | ------------------------------------- | ----------
|
|
|
|
|
|Earning
      assets                                                     |                                       |           
|Loans (1)                                                                | $                                     | 9,621,441 
|Investment securities, taxable (2)                                       |                                       | 2,671,057 
|Investment securities, nontaxable (2)(3)                                 |                                       | 419,265   
|                                                                         |                                       |           
|Total investment securities                                              |                                       | 3,090,322 
|Federal funds sold and
      interest-bearing        bank
      balances |                                       | 33,073    
|                                                                         |                                       |           
|Total
      earning assets                                               |                                       | 12,744,836
|                                                                         |                                       |           
|Non-earning assets                                                       |                                       | 1,482,189 
|                                                                         |                                       |           
|Total
      assets                                                       | $                                     | 14,227,025
|                                                                         |                                       |           
|                                                                        
|**Liabilities and Shareholders'
      Equity**                           |                                       |           
|Liabilities                                                              |                                       |           
|Interest-bearing liabilities                                             |                                       |           
|Interest-bearing deposits                                                |                                       |           
|Interest-bearing checking                                                | $                                     | 1,053,180 
|Savings                                                                  |                                       | 185,957   
|Money market                                                             |                                       | 2,302,361 
|Time deposits, excluding brokered
      deposits                         |                                       | 2,679,724 
|                                                                         |                                       |           
|Total interest-bearing
      customer deposits (4)                       |                                       | 6,221,222 
|Brokered deposits                                                        |                                       | 1,375,431 
|                                                                         |                                       |           
|Total interest-bearing
      deposits                                    |                                       | 7,596,653 
|Borrowings                                                               |                                       | 3,438,532 
|                                                                         |                                       |           
|Total interest-bearing
      liabilities                                 |                                       | 11,035,185
|                                                                         |                                       |           
|Noninterest-bearing liabilities                                          |                                       |           
|Noninterest-bearing deposits                                             |                                       | 1,506,627 
|Other noninterest-bearing
    liabilities                                |                                       | 193,308   
|                                                                         |                                       |           
|Total
      liabilities                                                  |                                       | 12,735,120
|Shareholders' equity                                                     |                                       | 1,491,905 
|                                                                         |                                       |           
|Total
      liabilities and shareholders' equity                         | $                                     | 14,227,025
|                                                                         |                                       |           
|Net
      interest income (tax-equivalent)                               |                                       |           
|Less:
      tax-equivalent adjustment (3)                                |                                       |           
|                                                                         |                                       |           
|Net
      interest income                                                |                                       |           
|                                                                         |                                       |           
|Supplemental
      data:                                                 |                                       |           
|Customer
      deposits (5)                                              |                                       | 7,727,849 
|Wholesale
      borrowings (6)                                           |                                       | 4,813,963 
|Total
      funding (7)                                                  |                                       | 12,541,812
|                                                                         |                                       |           

|
|
|

|(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)                                                            | TSFG
      defines interest-bearing customer deposits as total interest-bearing
      deposits less brokered deposits.                                                 
|                                                               |                                                                                                                                                                        
|(5)                                                            | Customer deposits
      include total deposits less brokered deposits.                                                                                                 
|                                                               |                                                                                                                                                                        
|(6)                                                            | Wholesale borrowings
      include borrowings and brokered deposits.                                                                                                   
|                                                               |                                                                                                                                                                        
|(7)                                                            | Total funding
      includes customer deposits and wholesale borrowings.                                                                                               
|                                                               |                                                                                                                                                                        
|Note:  Average balances are derived from daily
      balances.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Fully tax-equivalent net
      interest income increased 0.5% to $309.9 million for the first nine months
      of 2006 from $308.4 million for the first nine months of 2005. During the
      first nine months of 2005, tax-equivalent net interest income excluded
      $10.6 million of income for the net cash settlement of interest rate swaps
      that did not meet the criteria for hedge accounting treatment. Instead,
      the net cash settlement for these interest rate swaps was recorded in
      noninterest

|43
|--



|income.
      If the impact of these net cash settlements were included in net interest
      income, tax-equivalent net interest income would have totaled $319.1
      million for the nine months ended September 30, 2005. Adjusting the 2005
      numbers for the net cash settlement described above, fully tax-equivalent
      net interest income for the nine months ended September 30, 2006 decreased
      $9.2 million to $309.9 million from $319.1 million for the year earlier
      period.
      TSFG's average earning assets
      declined 4.0% to $12.7 billion for the first nine months of 2006 from
      $13.3 billion for the first nine months of 2005. Comparing the first nine
      months of 2006 with the first nine months of 2005, average earning assets
      included the following changes:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |  | $909.0 million increase, or 10.4%, in average loans from loan
      growth                                                                                                                                                                                                              
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                         
| |  | $1.4
      billion decrease, or 31.9%, in average securities in connection with
      TSFG's 2005 sales of securities as part of its balance sheet repositioning
      (see Securities) and subsequent decision not to reinvest its paydowns
      and maturing investment securities.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|As a result of these actions,
      average loans as a percentage of average earning assets increased to 75.5%
      for the first nine months of 2006, up from 65.6% for the first nine months
      of 2005, improving the earning asset mix. At September 30, 2006,
      approximately 64% 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.
      During the second quarter
      2005, TSFG began repositioning its balance sheet by reducing investment
      securities and wholesale borrowings. Average investment securities for the
      nine months ended September 30, 2006 totaled $3.1 billion, down
      significantly from $4.5 billion at September 30, 2005. Accordingly, given
      the lower securities balances and the narrowing profitability of
      investment securities with higher short-term rates and the flattening
      yield curve, interest income from securities represented approximately 17%
      of TSFG's total tax-equivalent interest income for the first nine months
      of 2006, down from 26.6% for the first nine months of 2005.
      The net interest margin for
      the first nine months of 2006 was 3.25%, compared with 3.11% for the first
      nine months of 2005 (or 3.21% including the net cash settlement of certain
      interest rate swaps mentioned above). Growth in average
      noninterest-bearing deposits, which increased to $1.5 billion at September
      30, 2006 from $1.3 billion at September 30, 2005, or an increase of 12.3%,
      contributed to the net interest margin increase. The yield on average
      earning assets increased 119 basis points, aided by improved loan yields,
      which were also up 119 basis points. Average cost of funding increased by
      107 basis points, partially from a 154 basis point increase in wholesale
      borrowing costs.
      During 2006, TSFG's net
      interest margin has declined to 3.18% for third quarter 2006 from 3.27%
      for second quarter 2006 and 3.31% for first quarter 2006. This margin
      compression reflects an ongoing change in industry trends, including
      customer preferences for higher-cost deposit categories and higher
      wholesale borrowing costs.
      The Federal Reserve has
      increased the federal funds rate 6 times, by 25 basis points each time,
      since September 30, 2005. Furthermore, over the past year, short-term
      rates have increased more quickly than long-term rates, leading to a
      flattened yield curve.
      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 $24.0 million and $29.8 million in the first nine
      months of 2006 and 2005, respectively. The lower provision for credit
      losses was primarily attributable to lower net loan charge-offs (down $3.2
      million for the same time period), improved credit quality measures, and
      slower loan growth.
      Net loan
      charge-offs were $19.9 million, or 0.28% of average loans held for
      investment, for the first nine months of 2006, compared with $23.0
      million, or 0.35% of average loans held for investment, for the first nine
      months of 2005. The allowance for loan losses equaled 1.15%, 1.14%, and
      1.14% of loans held for investment as of September 30, 2006, December 31,
      2005, and September 30, 2005, respectively. See Loans, Credit Quality,
      and Allowance for Loan Losses.

|44
|--



Noninterest Income

|Table
      12 shows the components of noninterest income.
|----------------------------------------------------------
|                                                          

|                                      
|--------------------------------------
|Table 12                              
|Components of Noninterest
      Income
|(dollars in thousands)                

|                                                              | Three
      Months EndedSeptember 30, |        | Nine
      Months EndedSeptember 30, |  
|------------------------------------------------------------- | ------------------------------------- | ------ | ------------------------------------ | -
|
|
|
|Service
      charges on deposit accounts                     | $                                     | 11,457 |                                      | $
|Debit
      card income                                       |                                       | 2,055  |                                      |  
|Customer
      service fee income                             |                                       | 1,117  |                                      |  
|
|Total customer fee income                                     |                                       | 14,629 |                                      |  
|
|                                                             
|Insurance
      income                                        |                                       | 2,831  |                                      |  
|Retail
      investment services                              |                                       | 1,689  |                                      |  
|Trust and
      investment management income                  |                                       | 1,483  |                                      |  
|Benefits
      administration fees                            |                                       | 795    |                                      |  
|
|Total wealth management income                                |                                       | 6,798  |                                      |  
|                                                              |                                       |        |                                      |  
|
|                                                             
|Change in
      fair value of interest rate swaps             |                                       |       |                                      |  
|                                                              |                                       |        |                                      |  
|Net cash
      settlement of interest rate swaps              |                                       |       |                                      |  
|Gain on
      trading and certain other derivative activities |                                       | 3,924  |                                      |  
|
|Total gain (loss) on trading and derivative
      activities  |                                       | 3,924  |                                      |  
|
|                                                             
|Merchant
      processing income                              |                                       | 3,449  |                                      |  
|Bank-owned life insurance income                              |                                       | 2,916  |                                      |  
|Mortgage
      banking income                                 |                                       | 1,969  |                                      |  
|Loss on
      sale of securities available for sale           |                                       |       |                                      |  
|                                                              |                                       |        |                                      |  
|Gain on
      equity investments                              |                                       |       |                                      |  
|Gain on
      disposition of assets and liabilities           |                                       | 2,498  |                                      |  
|                                                              |                                       |        |                                      |  
|Loss on
      indirect auto loans                             |                                       | (667   | )                                    |  
|Other                                                         |                                       | 2,396  |                                      |  
|
|Total noninterest income                                      | $                                     | 37,912 |                                      | $
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Total
      customer fee income rose 12.4% in the first nine months of 2006 compared
      to the same period in 2005. Service charges on deposit accounts, the
      largest component of customer fee income, rose 11.5% during the first nine
      months of 2006 compared to the first nine months of 2005, due primarily to
      higher nonsufficient funds charges and returned check fees, and improved
      collection of these fees.
      In
      the first nine months of 2006 compared with the corresponding period in
      2005, wealth management income increased $6.3 million, or 41.6%. Wealth
      management income includes retail investment services, insurance income,
      trust and investment management income, and benefit administration fees.
      The increase in wealth management income was the result of increases
      throughout each of these categories, driven primarily by acquisitions,
      increased focus and additions to the sales force.
      Noninterest income also
      included a gain on trading and derivative activities of $2.6 million in
      the first nine months of 2006 (see Derivative Financial Instruments for
      further detail on this line item), compared with a loss of $249,000 in the
      first nine months of 2005. As a result of not having the proper hedge
      documentation in place upon inception of certain hedging relationships,
      TSFG was not able to apply hedge accounting under SFAS 133 for those
      hedges in the first nine months of 2005. As a result, the related
      derivative instrument's gain or loss was included in noninterest income,
      with no offsetting fair value adjustment for the hedged item. This fair
      value adjustment was a loss of $11.2 million in the first nine months of
      2005. Since these swaps were subsequently either terminated or
      redesignated under the long-haul method of assessing hedge
      effectiveness, the fair value adjustments for both the derivative and the
      hedged item are included in noninterest income in the first nine months of
      2006.
      For
      the first nine months of 2006, mortgage banking income increased 3.8%,
      compared with the same period in 2005. Mortgage loans originated by TSFG
      originators totaled $556.2 million and $609.4 million in the first nine
      months of 2006 and 2005, respectively. The increase in mortgage banking
      income was principally the result of a $514,000 gain on the

|45
|--



|sale of
      TSFG's mortgage servicing rights portfolio in the second quarter of 2006.
      With this sale, TSFG no longer has any mortgage servicing rights on its
      balance sheet.
      Merchant
      processing income increased 24.1% in the first nine months of 2006
      compared to the same period in 2005 as a result of increased
      transactions.
      Net
      gains on securities totaled $4.3 million and $314,000, respectively, for
      the first nine months of 2006 and 2005. TSFG periodically evaluates its
      available for sale securities portfolio for other-than-temporary
      impairment. As discussed in Note 4 to the Consolidated Financial
      Statements, TSFG's unrealized losses were primarily attributable to
      increases in interest rates. For additional details, see
      Securities.
      In
      June 2006, TSFG identified and sold $359.6 million of indirect auto loans
      originally classified as loans held for investment and recorded a $3.5
      million loss on the sale. Indirect auto loan production after the sale was
      classified as held for sale at loan origination based on management's
      intent to sell these loans. For the nine months ended September 30, 2006,
      TSFG recorded a loss on indirect auto loans of $5.1 million, which
      included lower of cost or market adjustments on the loans held for sale,
      losses on swaps economically hedging the anticipated monthly sale of the
      loans, and the $3.5 million loss on sale mentioned above. (See Loans for
      an explanation of the transfer to loans held for investment as of July 31,
      2006.) TSFG retained servicing rights on indirect auto loans sold and will
      receive 60 basis points of servicing fees on these loans. There were no
      indirect auto loan sales in 2005.
      Noninterest
      Expenses
      TSFG
      continues to expand within its targeted geographic footprint in the
      Southeast, both through organic growth and acquisitions. TSFG also makes
      strategic investments in its products and services and technology systems.
      These factors contributed to TSFG's increases in noninterest expense,
      which increased 8.6% for the first nine months of 2006 over the first nine
      months of 2005. During the second quarter of 2005, TSFG acquired Pointe;
      the Koss Olinger group of companies, a wealth management advisory firm
      operating in North Florida; and Bowditch Insurance Corporation, a property
      and casualty company operating in Jacksonville, Florida. In the fourth
      quarter of 2005, TSFG acquired Lossing Insurance Agency, a property and
      casualty company operating in Ocala, Florida. The full impact of these
      acquisitions is reflected in noninterest expenses for the first nine
      months of 2006.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| | Table 13
      shows the components of noninterest expenses.
| | ------------------------------------------------------------
| |                                                             

|                                        
|----------------------------------------
|Table 13                                
|Components of Noninterest
      Expenses
|(dollars in thousands)                  

|                                                     | Three
      Months EndedSeptember 30, |        | Nine
      Months EndedSeptember 30, |  
|---------------------------------------------------- | ------------------------------------- | ------ | ------------------------------------ | -
|
|
|
|Salaries
      and wages, excluding contract buyouts | $                                     | 34,494 |                                      | $
|Employee
      benefits                              |                                       | 9,080  |                                      |  
|Occupancy                                            |                                       | 7,949  |                                      |  
|Furniture
      and equipment                        |                                       | 6,217  |                                      |  
|Professional services                                |                                       | 4,549  |                                      |  
|Merchant
      processing expense                    |                                       | 2,830  |                                      |  
|Advertising and business development                 |                                       | 2,264  |                                      |  
|Amortization of intangibles                          |                                       | 2,204  |                                      |  
|Telecommunications                                   |                                       | 1,407  |                                      |  
|Employment contract buyouts                          |                                       |       |                                      |  
|Merger-related costs                                 |                                       |       |                                      |  
|Impairment from write-down of assets                 |                                       |       |                                      |  
|Charitable contribution to foundation                |                                       |       |                                      |  
|Loss on
      early extinguishment of debt           |                                       |       |                                      |  
|Other                                                |                                       | 12,634 |                                      |  
|
|Total noninterest expenses                           | $                                     | 83,628 |                                      | $
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Salaries, wages, and employee
      benefits (excluding contract buyouts) increased $17.2 million, or 15.7%,
      in the first nine months of 2006 compared with the same period in 2005.
      Full-time equivalent employees as of September 30, 2006 decreased slightly
      to 2,563 from 2,573 at September 30, 2005. Since late 2005, 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 accruals under TSFG's short-term incentive plan and LTIP,
      and additional stock-based compensation expense from the adoption of SFAS
      123R. The expense increase

|46
|--



|associated with the LTIP is a result of service awards approved by
      the board of directors during 2006. The discretionary nature of TSFG's
      incentive accruals may result in increased volatility in personnel expense
      in future periods.
      Occupancy
      and furniture and equipment expense increased 10.5% for the first nine
      months of 2006 compared with the corresponding period in 2005, primarily
      from TSFG's acquisition of Pointe and additional de novo branches. The
      increase in merchant processing expense of 24.4% was in line with the
      increase in merchant processing income. Advertising and business
      development increased 9.6% for the first nine months of 2006 compared to
      the first nine months of 2005, primarily due to higher deposit campaign
      expenses.
      Amortization
      of intangibles increased 5.3% for the nine months ended September 30,
      2006, primarily attributable to the addition of core deposit intangibles
      from the Pointe acquisition, as well as identifiable intangibles acquired
      in connection with the insurance agency acquisitions.
      During
      the first nine months of 2006, TSFG opened two de novo branches, relocated
      one branch, sold one branch, and consolidated eight branches. In fourth
      quarter 2006, TSFG expects to open five de novo branches, relocate one
      branch, and consolidate one location.
      Income Taxes
      The effective income tax rate
      as a percentage of pretax income was 33.1% for the first nine months of
      2006 and 32.0% for the first nine months of 2005. During the first six
      months of 2006, TSFG recorded its tax accrual using a higher effective tax
      rate. For third quarter 2006, TSFG lowered its effective income tax rate
      to 30.7% to reduce the effective tax rate for the first nine months of
      2006 to 33.1%, due to a reduction in forecasted 2006 pre-tax earnings. The
      blended statutory federal and state income tax rate was approximately 37%
      for both of these periods.
      Third Quarter
      Results
      Net
      income for the three months ended September 30, 2006 totaled $32.2
      million, or $0.43 per diluted share, compared with $21.1 million, or $0.28
      per diluted share, for the three months ended September 30, 2005. Net
      income for the third quarter 2006 included a $3.9 million net gain on
      trading and derivative activities, compared to a $13.5 million loss for
      the third quarter 2005.
      Fully tax-equivalent net
      interest income totaled $100.4 million, a decrease of $4.8 million, or
      4.6%, compared with $105.2 million for the third quarter of 2005. During
      the third quarter of 2005, tax-equivalent net interest income excluded
      $2.4 million of income for the net cash settlement of interest rate swaps
      that did not meet the criteria for hedge accounting treatment. Instead,
      the net cash settlement for these interest rate swaps was recorded in
      noninterest income. If the impact of these net cash settlements were
      included in net interest income, tax-equivalent net interest income would
      have totaled $107.6 million for the three months ended September 30,
      2005.
      Average earning assets
      decreased 6.9% principally as a result of the balance sheet repositioning
      in fourth quarter 2005 which lowered investment securities, partially
      offset by loan growth.
      The net interest margin for
      third quarter 2006 was 3.18%, compared with 3.10% for third quarter 2005
      (or 3.17% including the net cash settlement of certain interest rate swaps
      mentioned above). Growth in average noninterest-bearing deposits, which
      increased to $1.5 billion at September 30, 2006 from $1.4 billion at
      September 30, 2005, or an increase of 2.4%, contributed to the net
      interest margin improvement. The yield on average earning assets increased
      118 basis points, aided by improved loan yields, which were up 119 basis
      points. Average cost of funding increased by 116 basis points, partially
      from a 162 basis point increase in wholesale borrowing costs. The third
      quarter 2006 net interest margin declined nine basis points to 3.18% from
      3.27% for second quarter 2006, principally from higher funding costs
      related to an ongoing change in customer preference for higher-cost
      deposit categories and higher wholesale borrowing costs.
      The provision for credit
      losses totaled $6.6 million in third quarter 2006, compared with $8.9
      million in third quarter 2005. The lower provision for credit losses was
      primarily attributable to lower loan growth and improved credit quality
      measures. Net loan charge-offs as a percentage of average loans held for
      investment declined to 0.27% for the third quarter of 2006 versus 0.31%
      for the third quarter of 2005. The allowance for loan losses as a
      percentage of loans held for investment increased to 1.15% at September
      30, 2006 from 1.14% at September 30, 2005.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|47
|--



|Noninterest income increased
      to $37.9 million for third quarter 2006 from $16.4 million for third
      quarter 2005. Noninterest income for the third quarter of 2006 included a
      gain on the disposition of assets and liabilities of $2.5 million.
      Noninterest income for the third quarter 2005 included a loss of $16.2
      million for the change in fair value of interest rate swaps and income of
      $2.4 million for the net cash settlement of interest rate swaps that did
      not meet the criteria for hedge accounting treatment. In addition, gain on
      trading and certain other derivative activities was $3.9 million for third
      quarter 2006 compared to $403,000 for the third quarter 2005. Wealth
      management income and merchant processing income showed double-digit
      growth when compared to the third quarter 2005. Customer fee income and
      mortgage banking income declined from third quarter 2005. Also, third
      quarter 2006 noninterest income included a $667,000 loss from the lower of
      cost or market adjustment and swap termination at July 31, 2006 for the
      indirect auto loans previously classified as held for sale. Subsequent
      indirect auto loan originations have been recorded as held for
      investment.
      For
      the third quarter of 2005, noninterest expenses included pre-tax other
      non-operating items of $1.6 million, consisting primarily of
      merger-related costs, employment contract buyouts, and loss on early
      extinguishment of debt. Noninterest expenses, excluding non-operating
      items, increased 5.3% to $83.6 million for the third quarter of 2006 from
      $79.4 million for the third quarter of 2005, which was primarily
      attributable to higher personnel and occupancy costs and incremental costs
      associated with growing the noninterest income. Salaries, wages, and
      employee benefits (excluding contract buyouts) increased to $43.6 million
      in the third quarter 2006 from $39.9 million in the third quarter 2005,
      primarily due to additions to TSFG's management team, higher discretionary
      incentives under the short-term incentive plans, additional
      stock-based compensation expense from the adoption of SFAS 123R, lower
      SFAS 91 salary deferrals resulting from lower loan originations, and the
      full impact of the insurance agency acquisitions.
      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 48 through 52 of TSFG's Annual Report on Form 10-K for the year
      ended December 31, 2005.
      Interest
      Sensitivity Analysis. As discussed on page 49 of TSFG's 2005 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
      14 and 15 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 14 and 15. These include, but are not
      limited to, the following:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |  | interest
      rate scenarios assume an instantaneous and parallel change in interest
      rates along the entire yield curve;                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                       
| |  | a static
      balance sheet for net interest 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 interest income analysis;
| |   |                                                                                                                                                                                                                       
| |  | mortgage
      backed securities prepayments are based on historical industry
    data;                                                                                                                               
| |   |                                                                                                                                                                                                                       
| |  | loan
      prepayments are based upon historical bank-specific analysis;                                                                                                                                              
| |   |                                                                                                                                                                                                                       
| |  | 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
      14 reflects the sensitivity of net interest income to changes in interest
      rates. It shows the effect that the indicated changes in interest rates
      would have on net interest income over the next twelve months compared
      with the base case or flat interest rate scenario. The base case or flat
      scenario assumes interest rates stay at September 30, 2006 and 2005
      levels, respectively.

|48
|--



|                                          
|------------------------------------------
|Table 14                                  
|Net Interest Income at Risk
      Analysis

|Interest
      Rate Scenario        | Annualized Hypothetical Percentage Change inNet Interest Income
      September 30, |          
|----------------------------------- | ----------------------------------------------------------------------------------- | ---------
|
|
|
|2.00          % shock          (1)  |                                                                                     | 2.25     
|1.00          % shock          (1)  |                                                                                     | 1.28     
|                                    |                                                                                     |          
|Flat                                |                                                                                     |         
|(1.00)          % shock         (1) |                                                                                     | (1.72    
|(2.00)          % shock         (1) |                                                                                     | (6.74    
|                                    |                                                                                     |          
|                                   
|**Forward Yield Curve (2)**         |                                                                                     | **(0.86**

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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. During the fourth quarter,
      TSFG expects to begin measuring net interest income sensitivity based on
      gradual rather than instantaneous interest rate shifts. Given the
      optionality in its balance sheet, TSFG believes these scenarios will more
      appropriately reflect its interest rate risk.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(2) | The
      forward yield curve represents market expectations for interest
      rates.                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Table
      15 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 15 shows the
      effect that the indicated changes in interest rates would have on the fair
      value of net assets at September 30, 2006 and 2005, respectively, compared
      with the base case or flat interest rate scenario. The base case scenario
      assumes interest rates stay at September 30, 2006 and 2005 levels,
      respectively.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                            
|--------------------------------------------
|Table 15                                    
|Economic Value of Equity
      Risk Analysis

|Interest
      Rate Scenario        | Annualized
      Hypothetical Percentage Change inEconomic Value of Equity
      September 30, |       
|----------------------------------- | ---------------------------------------------------------------------------------------------- | ------
|
|
|
|2.00          % shock          (1)  |                                                                                                | (3.33 
|1.00          % shock          (1)  |                                                                                                | (0.57 
|                                    |                                                                                                |       
|                                   
|Flat                                |                                                                                                |      
|(1.00)          % shock         (1) |                                                                                                | (4.24 
|(2.00)          % shock         (1) |                                                                                                | (13.01
|                                    |                                                                                                |       

|    |                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The
      generally improved risk profile versus September 30, 2005 was due
      primarily to the reduction in investment securities and wholesale
      borrowings during the fourth quarter 2005, the replacement of recently
      terminated puttable funding with non-puttable borrowings, and a recent
      interest rate floor purchase. Another component of the change in
      sensitivity for September 30, 2006 was the change in the absolute level of
      interest rates as compared to September 30, 2005. In addition, TSFG
      continually refines the modeling process through the use of more precise
      model assumptions. For the past year, the primary modeling refinement
      related to cash flows for loans with varying payment schedules. We are in
      the process of converting to a more advanced asset/liability management
      system, which will enhance our ability to measure and manage interest rate
      risk and liquidity risk.
      There
      are material limitations with TSFG's models presented in Tables 14 and 15,
      which include, but are not limited to, the following:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |  | they
      do not project an increase or decrease in net interest income or the fair
      value of net assets, but rather the risk to net interest income and the
      fair value of net assets because of changes in interest
    rates;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                            
| |  | the
      flat scenarios are base case and are not indicative of historical
      results;                                                                                                                                                 

|49
|--



| |  | 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 9 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 for
      additional information regarding derivatives.
      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 the Subsidiary
      Banks through customers' deposits, 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 and its loan portfolio, in
      addition to its available borrowing capacity and efforts to grow deposits,
      are sufficient to provide the necessary funding for the remainder of
      2006.
      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 16 summarizes future contractual obligations based
      on maturity dates as of September 30, 2006. Table 16 does not include
      payments which may be required under employment and deferred compensation
      agreements. In addition, Table 16 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 nine months
      ended September 30, 2006).

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|                             
|-----------------------------
|Table 16                     
|Contractual
      Obligations
|(dollars in thousands)       

|                              | Payments
      Due by Period |          
|----------------------------- | ---------------------------- | ---------
|
|
|
|Time
      deposits           | $                            | 4,008,753
|                              |                              |          
|Short-term borrowings         |                              | 1,835,030
|Long-term
      debt          |                              | 1,259,549
|Operating
      leases        |                              | 186,288  
|                              |                              |          
|Total contractual obligations | $                            | 7,289,620
|                              |                              |          
|                              |                              |          

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Net 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 the Subsidiary Banks' established branch network to
      enhance liquidity and reduce reliance on wholesale borrowing. Liquidity
      needs are a factor in developing the Subsidiary Banks' deposit pricing
      structure, which may be altered to retain or grow deposits if deemed
      necessary.
      The Subsidiary Banks have the
      ability to borrow from the FHLB and maintain short-term lines of credit
      from unrelated banks. FHLB advances, outstanding as of September 30, 2006,
      totaled $514.6 million. At September 30, 2006, the Subsidiary Banks had
      $2.3 billion of unused borrowing capacity from the FHLB. This capacity may
      be used when the Subsidiary Banks have available collateral to pledge,
      subject to adjustments regarding acceptability by the FHLB. TSFG funds its
      short-term needs principally with deposits, including brokered deposits,
      federal funds purchased, repurchase agreements, FHLB advances, and the
      principal run-off on securities available for sale. In addition, the
      Subsidiary Banks may purchase securities or may repay repurchase
      agreements to provide additional FHLB-qualifying collateral. At September
      30, 2006, the Subsidiary Banks had unused short-term lines of credit
      totaling $1.5 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 the Subsidiary Banks to meet emergency funding needs. At
      September 30, 2006, the Subsidiary Banks had qualifying collateral to
      secure advances up to $730.0 million, of which none was
      outstanding.
      At September 30, 2006, the
      parent company had three unused short-term lines of credit totaling $35.0
      million. These lines of credit mature May 14, 2007 for $15.0 million, June
      30, 2007 for $10.0 million, and November 14, 2006 for $10.0
      million.
      TSFG, principally through the
      Subsidiary Banks, 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 September 30, 2006, 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.
      On March 17, 2006, TSFG
      acquired approximately 68 acres of land in Greenville County, South
      Carolina for the purpose of developing a corporate campus to consolidate
      existing office space and to meet TSFG's future employment needs. TSFG
      expects the maximum cost of this project to approximate $100 million, less
      certain economic incentives awarded by the state, city, and county
      governments. (See Expanded Corporate Facilities for further
      details.) The company is currently evaluating funding alternatives
      for this project.
      Recently Adopted Accounting Pronouncements
      Accounting Changes and
      Error Corrections
      In May 2005, the
      Financial Accounting Standards Board (FASB) issued Statement of
      Financial Accounting Standards (SFAS) No. 154 (SFAS 154), Accounting
      Changes and Error Corrections - a replacement of Accounting Principles
      Board (APB) Opinion No. 20 and FASB Statement No. 3, which eliminates
      the requirement to reflect changes in accounting principles as cumulative
      adjustments to net income in the period of the change and requires
      retrospective application to prior periods' financial statements for
      voluntary changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of
      the change. If it is impracticable to determine the cumulative effect of
      the change to all prior periods, SFAS 154 requires that the new accounting

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|principle be adopted prospectively. For new accounting
      pronouncements, the transition guidance in the pronouncement should be
      followed. Retrospective application refers to the application of a
      different accounting principle to previously issued financial statements
      as if that principle had always been used.
      SFAS 154 did not
      change the guidance for reporting corrections of errors, changes in
      estimates or for justification of a change in accounting principle on the
      basis of preferability. SFAS 154 is effective for accounting changes made
      in fiscal years beginning after December 15, 2005. TSFG adopted the
      provisions of SFAS 154 on January 1, 2006. The adoption of this Statement
      did not impact TSFG's financial position or results of
      operations.
      Share-Based
      Compensation
      In
      December 2004, the FASB issued SFAS No. 123R (SFAS 123R), Share-Based
      Payment, which requires companies to recognize in the income statement
      the grant-date fair value of stock options and other equity-based
      compensation issued to employees. SFAS 123R is an amendment of SFAS No.
      123 (SFAS 123), Accounting for Stock-Based Compensation, and its
      related implementation guidance. SFAS 123R does not change the accounting
      guidance for share-based payment transactions with parties other than
      employees provided in SFAS 123. Under SFAS 123R, the way an award is
      classified will affect the measurement of compensation cost.
      Liability-classified awards are remeasured to fair value at each
      balance-sheet date until the award is settled. Equity-classified awards
      are measured at grant-date fair value, amortized over the subsequent
      vesting period, and are not subsequently remeasured.
      At
      September 30, 2006, TSFG had several stock-based employee compensation
      plans, which are described more fully in Note 11 to the Consolidated
      Financial Statements. Prior to January 1, 2006, TSFG accounted for its
      option plans under the recognition and measurement principles of APB
      Opinion 25, Accounting for Stock Issued to Employees, and related
      Interpretations (APB Opinion 25), as permitted by SFAS 123. No
      stock-based employee compensation cost was recognized in net income
      related to these plans for the year ended December 31, 2005, as all
      options granted under those plans had an exercise price equal to the
      market value of the underlying common stock on the date of grant.
      Effective January 1, 2006, TSFG adopted SFAS 123R using the modified
      prospective transition method. Under that method of transition,
      compensation cost recognized in 2006 includes: (a) compensation cost
      for all share-based payments granted prior to, but not yet vested as of
      January 1, 2006, based on the grant date fair value estimated in
      accordance with the original provisions of SFAS 123, and (b) compensation
      cost for all share-based payments granted subsequent to January 1, 2006,
      based on the grant-date fair value estimated in accordance with the
      provisions of Statement 123R. Since this compensation cost is based on
      awards ultimately expected to vest, it has been reduced for estimated
      forfeitures. SFAS 123R requires forfeitures to be estimated at the time of
      grant and revised, if necessary, in subsequent periods if actual
      forfeitures differ from those estimates. TSFG has elected to expense
      future grants of awards with graded vesting on a straight-line basis over
      the requisite service period of the entire award. Results for prior
      periods have not been restated.
      Prior to the adoption of
      SFAS 123R, TSFG presented all tax benefits resulting from share-based
      compensation as cash flows from operating activities in the consolidated
      statements of cash flows. SFAS 123R requires cash flows resulting
      from tax deductions in excess of the grant-date fair value of share-based
      awards to be included in cash flows from financing activities. There was
      no excess tax benefit related to share-based compensation in the first
      nine months of 2006.
      Consolidation of Limited
      Partnerships
      In June 2005, the
      FASB ratified Emerging Issues Task Force (EITF) Issue No. 04-5,
      Determining Whether a General Partner, or the General Partners of a
      Group, Controls a Limited Partnership or Similar Entity When the Limited
      Partners Have Certain Rights. Issue No. 04-5 is effective for all limited
      partnerships created or modified after June 29, 2005, and is
      effective for all other limited partnerships at the beginning of the first
      interim period in fiscal years beginning after December 15, 2005
      (effective January 1, 2006, for TSFG). The adoption of this guidance
      had no material effect on TSFG's financial condition or results of
      operations.
      Recently Issued Accounting Pronouncements
      Accounting for Defined
      Benefit Pension and Other Postretirement Plans
      In September 2006, the FASB
      issued SFAS No. 158 (SFAS 158), Employers' Accounting for Defined
      Benefit Pension and Other Postretirement Plans, an amendment of FASB
      Statements No. 87, 88, 106 and 132-R. SFAS 158 requires an entity to
      recognize in its statement of financial condition the funded status of its
      defined benefit postretirement plans, measured as the difference between
      the fair value of the plan assets and the benefit obligation.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|SFAS 158 also requires an entity to recognize changes in the
      funded status of a defined benefit postretirement plan within accumulated
      other comprehensive income, net of tax, to the extent such changes are not
      recognized in earnings as components of periodic net benefit cost.
      SFAS 158 is effective as of the end of the fiscal year ending after
      December 15, 2006. Adoption of this standard is not expected to have
      a significant impact on TSFG's shareholders' equity or results of
      operations.
      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 is 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. Adoption of this standard is not expected to have a significant
      impact on TSFG's shareholders' equity or results of operations.
      Prior Year
      Misstatements
      In September 2006, the
      Securities and Exchange Commission (SEC) Office of the Chief Accountant
      and Divisions of Corporation Finance and Investment Management released
      Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of
      Prior Year Misstatements when Quantifying Misstatements in Current Year
      Financial Statements, that provides interpretive guidance on how the
      effects of the carryover or reversal of prior year misstatements should be
      considered in quantifying a current year misstatement. The SEC staff
      believes that registrants should quantify errors using both a balance
      sheet and an income statement approach and evaluate whether either
      approach results in quantifying a misstatement that, when all relevant
      quantitative and qualitative factors are considered, is material. SAB 108
      is effective for fiscal years ending after November 15, 2006. Adoption of
      this standard is not expected to have a significant impact on TSFG's
      shareholders' equity or results of operations.
      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 not in a position to
      determine the effect of adopting this standard on its Consolidated
      Financial Statements.
      Accounting for Uncertainty
      in Income Taxes
      In July 2006, the 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 will adopt this Interpretation in the first quarter of 2007.
      The cumulative effects, if any, of applying this Interpretation will be
      recorded as an adjustment to retained earnings as of the beginning of the
      period of adoption. The Company has commenced the process of evaluating
      the expected effect of FIN 48 on its Consolidated Financial Statements and
      is currently not in a position to determine such effects.
      Accounting for Servicing of
      Financial Assets
      In March 2006, the FASB issued
      SFAS No. 156 (SFAS 156), Accounting for Servicing of Financial Assets
      -an amendment of FASB Statement No. 140, which simplifies the accounting
      for servicing rights and reduces the
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|volatility that results from the use of different measurement
      attributes for servicing rights and the related financial instruments used
      to economically hedge risks associated with those servicing rights. SFAS
      156 clarifies when to separately account for servicing rights, requires
      separately recognized servicing rights to be initially measured at fair
      value, and provides the option to subsequently account for those servicing
      rights (by class) at either fair value or under the amortization method
      previously required under FASB Statement No. 140, Accounting for
      Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities. SFAS 156 is effective for fiscal years beginning after
      September 15, 2006. Adoption of this standard is not expected to 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 October 2006, the FASB proposed a narrow exception to
      SFAS 155 that would exempt most securitized financial instruments that are
      subject to prepayment from the bifurcation requirements of SFAS 155 and
      SFAS 133. FASB will expose this exemption for comment for a 30-day period.
      After the comment period and if ultimately approved by the FASB, the FASB
      will issue the exemption in the form of a Derivative Implementation Guide.
      The Company is currently evaluating the impact that the provisions of SFAS
      155 and the potential exemption may have, if any, on its Consolidated
      Financial Statements.
      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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|Item 4.
         Controls and Procedures
      Evaluation of
      Disclosure Controls and Procedures
      TSFG's management, with the
      participation of its principal executive officer and principal financial
      officer, has evaluated the effectiveness, as of September 30, 2006, of
      TSFG's disclosure controls and procedures, as such term is defined in
      Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
      Exchange Act). Based upon their evaluation, the principal executive
      officer and principal financial officer concluded that TSFG's disclosure
      controls and procedures, as of September 30, 2006, were effective to
      provide reasonable assurance that information required to be disclosed by
      TSFG in the reports filed or submitted by it under the Exchange Act is
      recorded, processed, summarized and reported within the time periods
      specified in the SEC's rules and forms, and 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 principal executive officer and principal financial officer, as
      appropriate to allow timely decisions regarding required disclosure.
      Changes
      in Internal Controls over Financial Reporting
      TSFG
      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 September
      30, 2006 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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|PART II.
      OTHER INFORMATION
      Item 1.
         Legal Proceedings
|-------------------------------------------------------------------------
|                                                                         

|See
      Note 9 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 9-11) of TSFG's Annual Report on Form 10-K for the
      year ended December 31, 2005.
      Item 2.
         Unregistered Sales of Equity Securities and Use of
      Proceeds
      None.
      Item 3.
         Defaults upon Senior Securities
      None.
      Item 4.
         Submission of Matters to a Vote of Securities
      Holders
      None.
      Item 5.
         Other Information
      None.

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|Item 6.
         Exhibits
|-------------------------
|                         

|10.1  | Third
      Amended and Restated Stock Option Plan.                                                                                                                                                                        
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                            
|10.2  | Amendment #2 to The South Financial Group 2004 Long-Term Incentive
      Plan.                                                                                                                                             
|      |                                                                                                                                                                                                                            
|31.1  | 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
      2002.
|      |                                                                                                                                                                                                                            
|31.2  | 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
      2002.
|      |                                                                                                                                                                                                                            
|32.1+ | Certificate of Chief Executive Officer pursuant to 18 U.S.C. 1350,
      as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.                                                                       
|      |                                                                                                                                                                                                                            
|32.2+ | 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 September
      30, 2006 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.

|57
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|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: November 8,
      2006 | /s/ Timothy K.
      Schools                        
|                             | Timothy K.
      Schools                            
|                             | Executive Vice
      President                      
|                             | (Principal Accounting and Chief Financial
  Officer)

|58
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