|                                                                                                          
|----------------------------------------------------------------------------------------------------------
|UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
        Form 10-Q
        (Mark One)
|                                                                                                          

|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2007
|- | -----------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                          
|o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from____ to____       

|                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------
|Commission file number 0-15083
        The South Financial Group, Inc.(Exact Name of Registrant as Specified in Its Charter)
|                                                                                                                            

|South Carolina                                    | 57-0824914                       
|------------------------------------------------- | ---------------------------------
|(State or Other Jurisdiction of                   | (IRS Employer Identification No.)
|Incorporation or Organization)                    |                                  
|                                                  |                                  
|102 South Main Street, Greenville, South Carolina | 29601                            
|(Address of Principal Executive Offices)          | (Zip Code)                       

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(864) 255-7900Registrants telephone number, including area code
        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No  ̈.
        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check One):
        Large Accelerated Filer x                         Accelerated filer  ̈                        Non-accelerated filer  ̈
        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes  ̈  No x.
        The number of outstanding shares of the issuers $1.00 par value common stock as of November 6, 2007 was 72,432,157.

|
|



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

|                                                                                                                                                                    |          |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------- | ---------- | -
|**September 30,**                                                                                                                                                  
|**December 31,
      2006**                                                                                                                                        
|**2007**                                                                                                                                                            | **2006**
|
|**Assets**                                                                                                                                                          |          |            |  
|Cash and due from banks                                                                                                                                             | $        | 221,529    |  
|Interest-bearing bank balances                                                                                                                                      |          | 520        |  
|Federal funds sold and securities purchased to resell                                                                                                               |          |           |  
|Securities                                                                                                                                                          |          |            |  
|Available for sale, at fair value                                                                                                                                   |          | 2,323,241  |  
|Held to maturity (fair value $41,047, $52,678, and $52,101,
      respectively)                                                                                     |          | 41,174     |  
|                                                                                                                                                                   
|Total securities                                                                                                                                                    |          | 2,364,415  |  
|                                                                                                                                                                   
|Loans held for sale                                                                                                                                                 |          | 19,572     |  
|Loans held for investment                                                                                                                                           |          | 10,173,237 |  
|Less: Allowance for loan losses                                                                                                                                     |          | (118,861   | )
|                                                                                                                                                                   
|Net loans held for investment                                                                                                                                       |          | 10,054,376 |  
|                                                                                                                                                                   
|Premises and equipment, net                                                                                                                                         |          | 226,784    |  
|Accrued interest receivable                                                                                                                                         |          | 73,383     |  
|Goodwill                                                                                                                                                            |          | 650,637    |  
|Other intangible assets, net                                                                                                                                        |          | 29,032     |  
|Other assets                                                                                                                                                        |          | 459,973    |  
|                                                                                                                                                                   
|Total assets                                                                                                                                                        | $        | 14,100,221 |  
|                                                                                                                                                                   
|                                                                                                                                                                   
|**Liabilities and Shareholders Equity**                                                                                                                            |          |            |  
|Liabilities                                                                                                                                                         |          |            |  
|Deposits                                                                                                                                                            |          |            |  
|Noninterest-bearing                                                                                                                                                 | $        | 1,164,312  |  
|Interest-bearing                                                                                                                                                    |          | 8,337,357  |  
|                                                                                                                                                                   
|Total deposits                                                                                                                                                      |          | 9,501,669  |  
|Federal funds purchased and repurchase agreements                                                                                                                   |          | 1,194,293  |  
|Other short-term borrowings                                                                                                                                         |          | 876,288    |  
|Long-term debt                                                                                                                                                      |          | 732,203    |  
|Accrued interest payable                                                                                                                                            |          | 73,418     |  
|Other liabilities                                                                                                                                                   |          | 174,098    |  
|                                                                                                                                                                   
|Total liabilities                                                                                                                                                   |          | 12,551,969 |  
|                                                                                                                                                                   
|                                                                                                                                                                   
|Commitments and contingencies (Note 6)                                                                                                                              |          |           |  
|                                                                                                                                                                   
|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 72,971,394, 75,191,563, and
      75,341,276 shares, respectively |          | 72,971     |  
|Surplus                                                                                                                                                             |          | 1,116,361  |  
|Retained earnings                                                                                                                                                   |          | 391,019    |  
|Guarantee of employee stock ownership plan debt                                                                                                                     |          |           |  
|Accumulated other comprehensive loss, net of tax                                                                                                                    |          | (32,099    | )
|                                                                                                                                                                   
|Total shareholders equity                                                                                                                                          |          | 1,548,252  |  
|                                                                                                                                                                   
|Total liabilities and shareholders equity                                                                                                                          | $        | 14,100,221 |  
|                                                                                                                                                                   

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

|1
|-



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

|                                                      |   |        
|----------------------------------------------------- | - | -------
|
|
|
|**Interest Income**                                   |   |        
|Interest and fees on loans                            | $ | 195,393
|Interest and dividends on securities:                 |   |        
|Taxable                                               |   | 25,390 
|Exempt from federal income taxes                      |   | 2,856  
|
|Total interest and dividends on securities            |   | 28,246 
|Interest on short-term investments                    |   | 100    
|
|Total interest income                                 |   | 223,739
|
|**Interest Expense**                                  |   |        
|Interest on deposits                                  |   | 94,497 
|Interest on short-term borrowings                     |   | 20,503 
|Interest on long-term debt                            |   | 11,965 
|
|Total interest expense                                |   | 126,965
|
|**Net Interest Income**                               |   | 96,774 
|**Provision for Credit Losses**                       |   | 10,504 
|
|Net interest income after provision for credit losses |   | 86,270 
|**Noninterest Income**                                |   | 30,773 
|**Noninterest Expenses**                              |   | 79,595 
|
|Income before income taxes                            |   | 37,448 
|Income taxes                                          |   | 11,609 
|
|**Net Income**                                        | $ | 25,839 
|
|                                                     
|**Average Common Shares Outstanding, Basic**          |   | 73,146 
|**Average Common Shares Outstanding, Diluted**        |   | 73,606 
|**Net Income Per Common Share, Basic**                | $ | 0.35   
|**Net Income Per Common Share, Diluted**              |   | 0.35   
|                                                      |   |        
|Dividends per common share                            | $ | 0.18   

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

|2
|-



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

|                                                                                        |  |            |   |   |        |  
|--------------------------------------------------------------------------------------- |  | ---------- | - | - | ------ | -
|
|Balance, December 31, 2005                                                              |  | 74,721,461 |   | $ | 74,721 |  
|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    |   |   | 352    |  
|Dividend reinvestment plan                                                              |  | 95,723     |   |   | 96     |  
|Restricted stock plan                                                                   |  | (7,610     | ) |   | (8     | )
|Employee stock purchase plan                                                            |  | 14,045     |   |   | 14     |  
|Director compensation                                                                   |  | 13,439     |   |   | 14     |  
|Acquisitions                                                                            |  | 2,558      |   |   | 3      |  
|Common stock released by trust 
    for deferred compensation                           |  |           |   |   |       |  
|Deferred compensation payable 
   in common stock                                       |  |           |   |   |       |  
|Cumulative effect of initial 
   application of SAB 108, net of
   income tax of $1,858 |  |           |   |   |       |  
|Reversal of unearned 
   compensation upon adoption
   of SFAS 123R                     |  |           |   |   |       |  
|Stock option expense                                                                    |  |           |   |   |       |  
|Other, net                                                                              |  |           |   |   |       |  
|
|Balance, September 30, 2006                                                             |  | 75,191,563 |   | $ | 75,192 |  
|
|                                                                                       
|Balance, December 31, 2006                                                              |  | 75,341,276 |   | $ | 75,341 |  
|Net income                                                                              |  |           |   |   |       |  
|Other comprehensive income, 
   net of income tax of $9,133                             |  |           |   |   |       |  
|                                                                                        |  |            |   |   |        |  
|Comprehensive income                                                                    |  |           |   |   |       |  
|                                                                                        |  |            |   |   |        |  
|Cash dividends declared 
   ($0.54 per common share)                                    |  |           |   |   |       |  
|Common stock activity:                                                                  |  |            |   |   |        |  
|Repurchase of stock                                                                     |  | (3,000,000 | ) |   | (3,000 | )
|Exercise of stock options, 
      including income tax benefit 
      of $1,038         |  | 461,057    |   |   | 461    |  
|Dividend reinvestment plan                                                              |  | 108,030    |   |   | 108    |  
|Restricted stock plan                                                                   |  | 24,450     |   |   | 24     |  
|Employee stock purchase plan                                                            |  | 14,902     |   |   | 15     |  
|Director compensation                                                                   |  | 16,143     |   |   | 16     |  
|Acquisitions                                                                            |  | 6,025      |   |   | 6      |  
|Common stock released by trust 
    for deferred compensation                           |  |           |   |   |       |  
|Deferred compensation payable 
   in common stock                                       |  |           |   |   |       |  
|Cumulative effect of initial
   application of FIN 48                                   |  |           |   |   |       |  
|Stock option expense                                                                    |  |           |   |   |       |  
|Other, net                                                                              |  | (489       | ) |   |       |  
|
|Balance, September 30, 2007                                                             |  | 72,971,394 |   | $ | 72,971 |  
|

|                                                                                            
|--------------------------------------------------------------------------------------------
|*  Other includes guarantee of employee stock ownership plan debt and deferred compensation.

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

|3
|-



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

|                                                                                     |         
|------------------------------------------------------------------------------------ | --------
|
|**2007**                                                                             | **2006**
|
|**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 (gain) on securities                                                            |         
|Loss (gain) on derivative activities                                                 |         
|Gain on sale of mortgage loans                                                       |         
|Loss on early extinguishment of debt                                                 |         
|Loss (gain) on disposition of premises and equipment                                 |         
|Loss on disposition of other real estate owned                                       |         
|Excess tax benefits from share-based compensation                                    |         
|Loss on indirect auto loans                                                          |         
|Gain on disposition of assets and liabilities                                        |         
|Origination of loans held for sale                                                   |         
|Sale of loans held for sale and principal repayments                                 |         
|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                                            |         
|Purchase of securities held to maturity                                              |         
|Origination of loans held for investment, net of principal repayments                |         
|Sale of other real estate owned                                                      |         
|Sale of premises and equipment                                                       |         
|Purchase of premises and equipment                                                   |         
|Sale of loans originally held for investment                                         |         
|Disposition of assets and liabilities, net                                           |         
|Cash equivalents acquired, net of payment for purchase acquisition                   |         
|
|Net cash (used for) provided by investing activities                                 |         
|
|                                                                                    
|**Cash Flows from Financing Activities**                                             |         
|Decrease in deposits                                                                 |         
|(Decrease) increase in federal funds purchased and repurchase agreements             |         
|Increase in other short-term borrowings                                              |         
|Issuance of long-term debt                                                           |         
|Payment of long-term debt                                                            |         
|Cash dividends paid on common stock                                                  |         
|Repurchase of common stock                                                           |         
|Excess tax benefits from share-based compensation                                    |         
|Other common stock activity                                                          |         
|
|Net cash used for 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, net of amounts capitalized                                            | $       
|Income tax payments, net                                                             |         
|Significant non-cash investing and financing transactions:                           |         
|Decrease (increase) in unrealized loss on available for sale securities              |         
|Loans transferred to other real estate owned                                         |         
|Loans transferred from held for sale to held for investment                          |         

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

|4
|-



|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, 2006 should be referred to in connection with the reading of these unaudited interim Consolidated Financial Statements. The Consolidated Balance Sheet at December 31, 2006 is derived from TSFGs Consolidated Audited Financial Statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments necessary to present a fair statement of the results for the interim periods have been made. All such adjustments are of a normal, recurring nature.
        Nature of Operations
        TSFG is a financial holding company headquartered in Greenville, South Carolina that offers a broad range of financial products and services, including banking, merchant processing, mortgage, treasury services, and wealth management (which consists of benefits administration, insurance, private banking, retail investment, and trust and investment management). TSFGs banking subsidiary Carolina First Bank conducts banking operations in South Carolina and North Carolina (as Carolina First Bank) and in Florida (as Mercantile Bank). TSFG also owns several non-bank subsidiaries. At September 30, 2007, TSFG operated through 79 branch offices in South Carolina, 66 in Florida, and 27 in North Carolina. In South Carolina, the branches are primarily located in the states largest metropolitan areas. The Florida
operations are principally concentrated in the Jacksonville, Orlando, Tampa Bay, Southeast Florida, and Gainesville areas. The North Carolina branches are primarily located in the Hendersonville and Asheville areas of western North Carolina and in the Wilmington area of eastern North Carolina. Prior to July 1, 2007, TSFGs Florida banking operations were conducted through a separate banking subsidiary, Mercantile Bank. However, effective July 1, 2007, Mercantile Bank was merged with and into Carolina First Bank. Subsequent to the merger, the former Mercantile Bank operations now operate as a division of Carolina First Bank, under the name Mercantile Bank.
        Accounting Estimates and Assumptions
        The preparation of the Consolidated Financial Statements and accompanying notes requires management of TSFG to make a number of estimates and assumptions relating to reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the period. Actual results could differ significantly from these estimates and assumptions.
        Principles of Consolidation
        The Consolidated Financial Statements include the accounts of The South Financial Group, Inc. and all other entities in which it has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
        Reclassifications
        Certain prior year amounts have been reclassified to conform to the 2007 presentations. In particular, in second quarter 2007, TSFG began presenting its merchant income net of direct processing costs (see Note 2).
        In addition, TSFG reclassified certain deposit balances from time deposits under $100,000 to time deposits of $100,000 or more. Amounts for prior periods (including $408.8 million at December 31, 2006 and $314.9 million at September 30, 2006) have been reclassified to conform to the current presentation. The following summarizes deposit categories affected by the reclassification (in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                  |          |           | 
|--------------------------------- | -------- | --------- | 
|**December 31,
      2006**      
|**2007**                          | **2006**
|
|Time deposits under $100,000      | $        | 1,384,094 | 
|Time deposits of $100,000 or more |          | 1,515,417 | 

|5
|-



|THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements (unaudited)
Premises and Equipment
Premises
  and equipment are carried at cost including capitalized interest, when appropriate, less accumulated
  depreciation. During the nine months ended September 30, 2007, TSFG capitalized $188,000 of interest
  related to construction in progress.
Recently Adopted Accounting Pronouncements
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 adopted FIN
48 effective January 1, 2007. As a result, the Company recognized a $488,000 increase to reserves
for uncertain tax positions. This increase was accounted for as an adjustment to the beginning balance
of retained earnings; therefore, prior period results have not been restated. At the beginning of
2007, TSFG had approximately $13.2 million of total gross unrecognized tax benefits. Of this total,
$3.6 million represents the amount of unrecognized tax benefits that, if recognized, would favorably
affect the effective income tax rate in any future periods. During the first quarter 2007, unrecognized
tax benefits were reduced by approximately $4.7 million related to payments due on settlements with
South Carolina and the Internal Revenue Service during 2006. During the second quarter of 2007, unrecognized
tax benefits increased by approximately $917,000, which includes approximately $90,000 of accrued
interest, related to new information in connection with a potential understatement of Federal and
state income taxes in an open tax year. At September 30, 2007, approximately $3.1 million of the
unrecognized tax benefits are expected to be resolved during the next 12 months through the expiration
of the statute of limitations related to various federal and state filing positions. Approximately
$1.9 million of the unrecognized tax benefits relate to positions taken in connection with acquisitions
where favorable resolution would reduce the amount of goodwill recorded. Favorable resolution of
the remaining amounts would lower the Companys combined federal and state effective tax rate during 2008.
TSFG and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple
state jurisdictions. The Company has substantially concluded all U.S. federal income tax matters
for years through 2003. The Company is subject to state and local income tax examinations for the
tax years 2001 through 2006. A TSFG subsidiary is currently under examination by the state of North
Carolina for tax years 2003 through 2005.
TSFGs continuing practice is to recognize interest and/or penalties related to income tax
matters in income tax expense. The Company had approximately $1.1 million accrued for interest and
penalties at January 1, 2007.
Accounting for Purchases of Life Insurance
In September 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06-5, Accounting
for Purchases of Life Insurance -- Determining the Amount That Could Be Realized in Accordance with
FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. FASB Technical
Bulletin No. 85-4 requires that the amount that could be realized under the insurance contract as
of the date of the statement of financial position should be reported as an asset. Since the issuance
of FASB Technical Bulletin No. 85-4, there has been diversity in practice in the calculation of the
amount that could be realized under insurance contracts. Issue No. 06-5, which was effective January 1,
2007, concludes that the Company should consider any additional amounts (e.g., cash stabilization
reserves and deferred acquisition cost taxes) included in the contractual terms of the insurance
policy other than the cash surrender value in determining the amount that could be realized in accordance
with FASB Technical Bulletin No. 85-4. The adoption of this standard did not have a significant impact
on TSFGs shareholders equity or results of operations.
Accounting for Certain Hybrid Financial Instruments
In February 2006, the FASB issued SFAS No. 155 (SFAS 155), Accounting for Certain
Hybrid Financial Instruments  an amendment of FASB Statements No. 133 and 140. SFAS
155 permits an entity to measure at fair value any financial instrument that contains an embedded
derivative that otherwise would require bifurcation. In December 2006, the FASB issued a narrow
exception to SFAS 155 in the form of a Derivative Implementation Guide that would exempt most securitized
financial instruments that are subject to prepayment from the bifurcation
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6
|-



|THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements (unaudited)
requirements of SFAS 155 and SFAS 133. The Company adopted this standard in the first quarter of 2007
with no significant impact on its shareholders equity or results of operations.
Recently Issued Accounting Pronouncements
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value
Measurements, which defines fair value, establishes guidelines for measuring fair value and
expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the effect of adopting this standard on its Consolidated Financial
Statements.
Endorsement Split-Dollar Life Insurance Arrangements
In September 2006, the Emerging Issues Task Force (EITF) reached a final consensus on Issue
06-4 (EITF 06-4), Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 stipulates
that an agreement by the employer to share a portion of the proceeds of a life insurance policy with
the employee during the postretirement period is a postretirement benefit arrangement for which a
liability must be recorded. The consensus is effective for fiscal years beginning after December
15, 2007. Entities will have the option of applying the provisions of EITF 06-4 as a cumulative effect
adjustment to the opening balance of retained earnings or retrospectively to all prior periods. TSFG
currently has several arrangements as described by EITF 06-4. Adoption of this standard is not expected
to have a significant impact on the Consolidated Financial Statements.
Fair Value Option for Financial Assets and Financial Liabilities
On February 15, 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option
for Financial Assets and Financial Liabilities, which allows an entity the irrevocable option
to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities
on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities
would be recognized in earnings when they occur. SFAS 159 further establishes certain additional
disclosure requirements. SFAS 159 is effective for TSFGs financial statements for the year
beginning on January 1, 2008. The Company is currently evaluating the effect of adopting this standard
on its Consolidated Financial Statements.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7
|-



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

|                                              |   |       
|--------------------------------------------- | - | ------
|
|
|
|**Noninterest Income**                        |   |       
|Service charges on deposit accounts           | $ | 11,213
|Debit card income                             |   | 2,445 
|Customer service fee income                   |   | 1,533 
|
|Total customer fee income                     |   | 15,191
|
|Insurance income                              |   | 2,839 
|Retail investment services                    |   | 2,313 
|Trust and investment management income        |   | 1,642 
|Benefits administration fees                  |   | 889   
|
|Total wealth management income                |   | 7,683 
|
|Bank-owned life insurance income              |   | 2,974 
|Mortgage banking income                       |   | 834   
|Merchant processing income, net (1)           |   | 928   
|Gain (loss) on derivative activities          |   | 198   
|Gain (loss) on securities                     |   | 287   
|Gain on disposition of assets and liabilities |   |      
|Loss on indirect auto loans                   |   |      
|Other                                         |   | 2,678 
|
|Total noninterest income                      | $ | 30,773
|
|                                             
|**Noninterest Expenses**                      |   |       
|Salaries and wages                            | $ | 34,535
|Employee benefits                             |   | 8,862 
|Occupancy                                     |   | 8,723 
|Furniture and equipment                       |   | 6,543 
|Professional services                         |   | 4,278 
|Advertising and business development          |   | 1,443 
|Amortization of intangibles                   |   | 1,907 
|Telecommunications                            |   | 1,404 
|Loss on early extinguishment of debt          |   | 1,299 
|Other                                         |   | 10,601
|
|Total noninterest expenses                    | $ | 79,595
|

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In second quarter 2007, TSFG began presenting its merchant income net of direct processing costs. Direct

merchant processing costs totaled (in thousands) $4,131 and $11,081, respectively, for the three

and nine months ended September 30, 2007, and $2,830 and $7,673, respectively, for the three and

nine months ended September 30, 2006. Amounts presented for prior periods have been reclassified

to conform to the current presentation.

|8
|-



|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 income (loss), net of tax (in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                          

|                                                                     |   |        
|-------------------------------------------------------------------- | - | -------
|
|
|
|**Net Unrealized Losses on Securities Available for Sale**           |   |        
|Balance at beginning of period                                       | $ | (59,565
|Other comprehensive income (loss):                                   |   |        
|Unrealized holding gains (losses) arising during
         the period |   | 33,088 
|Income tax (expense) benefit                                         |   | (12,263
|Less: Reclassification adjustment for losses (gains)                 |   |        
|included in net income                                               |   | 36     
|Income tax expense (benefit)                                         |   | (13    
|
|                                                                     |   | 20,848 
|
|Balance at end of period                                             |   | (38,717
|
|                                                                    
|**Net Unrealized Gains (Losses) on Cash Flow Hedges**                |   |        
|Balance at beginning of period                                       |   | (3,806 
|Other comprehensive income (loss):                                   |   |        
|Unrealized gain on change in fair values                             |   | 16,046 
|Income tax expense                                                   |   | (5,616 
|Less: Amortization of terminated swaps                               |   | (9     
|Income tax expense                                                   |   | 3      
|
|                                                                     |   | 10,424 
|
|Balance at end of period                                             |   | 6,618  
|
|                                                                     | $ | (32,099
|
|                                                                    
|Total other comprehensive income (loss)                              | $ | 31,272 
|Net income                                                           |   | 25,839 
|
|Comprehensive income                                                 | $ | 57,111 
|

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

|                                  |                            
|--------------------------------- | ---------------------------
|
|**Less than 12 Months**           | **12 Months or Longer**    
|
|**Fair
      Value**              | **Unrealized
      Losses**
|
|**Securities Available for Sale** |                            
|U.S. Treasury                     | $                          
|U.S. Government agencies          |                            
|Agency mortgage-backed securities |                            
|State and municipals              |                            
|Corporate bonds                   |                            
|Equity investments                |                            
|
|                                  | $                          
|
|                                 
|**Securities Held to Maturity**   |                            
|State and municipals              | $                          
|

|9
|-



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

|                                  |                            
|--------------------------------- | ---------------------------
|
|**Less than 12 Months**           | **12 Months or Longer**    
|
|**Fair
      Value**              | **Unrealized
      Losses**
|
|**Securities Available for Sale** |                            
|U.S. Treasury                     | $                          
|U.S. Government agencies          |                            
|Agency mortgage-backed securities |                            
|State and municipals              |                            
|Corporate bonds                   |                            
|Equity investments                |                            
|
|                                  | $                          
|
|                                 
|**Securities Held to Maturity**   |                            
|State and municipals              | $                          
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|At
September 30, 2007, TSFG had 974 individual investments that were in an unrealized loss position.
The unrealized losses on investments summarized above, except for corporate bonds and equity investments,
were attributable to increases in interest rates, rather than deterioration in credit quality. The
majority of these securities are government or agency securities and, therefore, pose minimal credit
risk. TSFG believes it has the ability and intent to hold these debt securities until a market price
recovery or maturity. Therefore, at September 30, 2007, these investments are not considered impaired
on an other-than-temporary basis.
In
June 2007, TSFG recorded $2.9 million in other-than-temporary impairment on its corporate bond portfolio
due to a change in intent to hold the securities until a recovery in value based on a change in investment
strategy and related credit risk considerations. In July 2007, TSFG sold approximately $70 million
of corporate bonds and recognized an additional loss on sale of approximately $300,000. The remaining
$20.7 million are being held until the unrealized loss recovers or until maturity.
At
September 30, 2007, TSFGs equity investments with unrealized losses are not considered impaired
on an other-than-temporary basis due to the lack of severity of the impairment.
Note 5 Derivative Financial Instruments and Hedging Activities
The
fair value of TSFGs derivative assets and liabilities and their related notional amounts (in
thousands) are presented below.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                                           |   | **December 31, 2006**  | 
|---------------------------------------------------------- | - | ---------------------- | 
|                                                          
|**Fair Value**                                             |   |                       
|                                                           |   | **Notional****Amount**
|**Asset**                                                  |   | **Liability**          | 
|
|**Cash Flow Hedges**                                       |   |                        | 
|Interest rate swaps associated with
  borrowing activities | $ |                       | 
|Interest rate swaps associated with
  lending activities   |   | 9,323                  | 
|Interest rate floor associated with
  lending activities   |   | 2,586                  | 
|                                                          
|**Fair Value Hedges**                                      |   |                        | 
|Interest rate swaps associated with
  brokered CDs         |   |                       | 
|                                                          
|**Other Derivatives**                                      |   |                        | 
|Forward foreign currency contracts                         |   | 124                    | 
|Options, interest rate swaps and other                     |   | 7,721                  | 
|
|                                                           | $ | 19,754                 | 
|

|10
|--



|THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements (unaudited)
In the three and nine months ended September 30, 2007, noninterest income included a gain of $198,000
and a loss of $1.2 million, respectively, for derivative activities. In the three and nine months
ended September 30, 2006, noninterest income included gains of $3.9 million and $2.6 million, respectively,
for derivative activities. These amounts include the following: the change in fair value of
derivatives that do not qualify for hedge accounting under SFAS 133, as well as the net cash settlement
from these interest rate swaps; hedge ineffectiveness for fair value hedges, which totaled a gain
of $47,000 and a loss of $695,000, respectively, for the three and nine months ended September 30,
2007, and gains of $1.0 million and $125,000, respectively, for the three and nine months ended September
30, 2006; and other miscellaneous items.
Note 6  Commitments and Contingent Liabilities
Legal Proceedings
TSFG
is currently subject to various legal proceedings and claims that have arisen in the ordinary course
of its business. In the opinion of management based on consultation with external legal counsel,
any reasonably foreseeable outcome of such current litigation would not be expected to materially
affect TSFGs consolidated financial position or results of operations.
Recourse Reserve
As part of
its acquisition of Florida Banks, Inc. (Florida Banks), TSFG acquired a recourse reserve
associated with loans previously sold from Florida Banks wholesale mortgage operation. This
recourse requires the repurchase of loans at par plus accrued interest from the buyer, upon the occurrence
of certain events. At September 30, 2007, the estimated recourse reserve liability, included in other
liabilities, totaled $6.1 million. TSFG will continue to evaluate the reserve level and may make
adjustments through earnings as more information becomes known. There can be no guarantee that any
liability or cost arising out of this matter will not exceed any established reserves.
Expanded Corporate Facilities
During
2005, TSFG initiated plans for a corporate campus to meet current and future facility
needs and serve as the primary headquarters for its banking operations. Through September 30, 2007,
TSFG had invested approximately $20 million in the project and had entered into additional contractual
commitments of approximately $35 million.
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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11
|--



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

|                              |                      
|----------------------------- | ---------------------
|                             
|**September 30, 2007**        | **December 31, 2006**
|
|Commitment on loans           | $                    
|Standby letters of credit     |                      
|Unused credit card lines      |                      
|Documentary letters of credit |                      
|
|Total                         | $                    
|

|                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 7  Share Information
    The following is a summary of the basic and diluted average common shares outstanding and earnings per share calculations (in thousands, except share and per share data):
|                                                                                                                                                                                                         

|                                                 |          |           
|------------------------------------------------ | -------- | ----------
|
|**2007**                                         | **2006** | **2007**  
|
|                                                
|Net income (numerator)                           | $        | 25,839    
|**Basic**                                        |          |           
|Average common shares outstanding (denominator)  |          | 73,146,211
|Earnings per share                               | $        | 0.35      
|**Diluted**                                      |          |           
|Average common shares outstanding                |          | 73,146,211
|Average dilutive potential common shares         |          | 459,541   
|
|Average diluted shares outstanding (denominator) |          | 73,605,752
|
|Earnings per share                               | $        | 0.35      

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

|                               |  |          
|------------------------------ |  | ---------
|
|**For the Three Months Ended** |  |          
|September 30, 2007             |  | 2,136,454
|September 30, 2006             |  | 1,412,186
|                              
|**For the Nine Months Ended**  |  |          
|September 30, 2007             |  | 2,027,675
|September 30, 2006             |  | 1,397,686

|                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|On December 14, 2006, TSFGs board of directors authorized a stock repurchase program of up to 4 million shares. This authorization replaced TSFGs existing stock repurchase authorization. In the first nine months of 2007,

|12
|--



|THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements (unaudited)
TSFG repurchased 3.0 million shares for $71.3 million in connection with the aforementioned authorization. In August 2007, the board of directors amended and restated the authorization to be an additional $100 million, which expires if unused on or before June 30, 2008. Subsequent to quarter-end, TSFG repurchased an additional 600,000
shares for $12.0 million.
Note 8  Share-Based Compensation
In the second quarter 2007, TSFGs board of directors approved new Long-Term Incentive Plan (LTIP)
awards for the period 2007-2009. A total of 470,127 restricted stock units (RSUs) with
a per share fair value of $23.40 have been reserved for potential issuance for the 2007-2009 period,
which includes both service and performance-based awards. Of these units, the service award component
(97,623 RSUs) will be expensed ratably over the three-year vesting period, assuming continued employment
of the LTIP participant. The remaining RSUs are performance-based awards and will vest based on achieving,
during 2009, certain performance targets. Achieving target performance (100%) on the performance
goals will result in the issuance of 186,252 shares, although a maximum of 372,504 shares may be
issued if more stringent performance hurdles are met. The compensation expense related to the performance-based
RSUs will be recognized ratably over the period from the date of award through December 31, 2009,
based on managements assessment (with concurrence of the compensation committee of the board
of directors) of the probability that the performance targets will be met. If the performance targets
are not reached, the corresponding RSUs will be forfeited.
Note 9  Business Segments
South
Carolina Bank, North Carolina Bank, and Florida Bank are TSFGs primary reportable segments
for management financial reporting. Effective January 1, 2007, TSFG changed its segment methodology
from a legal entity structure (i.e., Carolina First Bank and Mercantile Bank) to a business segment
structure along geographic lines to maintain consistency with the way management internally reviews
financial information and allocates resources. Results for prior periods have been restated for comparability.
Each geographic bank segment consists of commercial and consumer lending and full service branches
in its geographic region with its own management team. The branches provide a full range of traditional
banking products as well as treasury services, merchant services, wealth management and mortgage
banking services. The Other column includes the investment securities portfolio, indirect
lending, treasury, parent company activities, bank-owned life insurance, net intercompany eliminations,
various nonbank subsidiaries, equity investments, and certain other activities not currently allocated
to the aforementioned segments.
The results for these segments are based on TSFGs management reporting process, which assigns
balance sheet and income statement items to each segment. Unlike financial reporting, there is no
authoritative guidance for management reporting equivalent to generally accepted accounting principles.
The Company uses an internal funding methodology to assign funding costs to assets and earning credits
to liabilities with an offset in Other. The management reporting process measures the
performance of the defined segments based on TSFGs management structure and is not necessarily
comparable with similar information for other financial services companies or representative of results
that would be achieved if the segments operated as stand-alone entities. If the management structure
and/or allocation process change, allocations, transfers and assignments may change. Segment information
(in thousands) is shown in the table below.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13
|--



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

|                                                                |   |           |  |   |          
|--------------------------------------------------------------- | - | --------- |  | - | ---------
|
|**Three Months Ended September 30, 2007**                       |   |           |  |   |          
|Net interest income before inter-segment income (expense)       | $ | 43,059    |  | $ | 21,490   
|Inter-segment interest income (expense)                         |   | 754       |  |   | (6,965   
|
|Net interest income                                             |   | 43,813    |  |   | 14,525   
|Provision for credit losses - net charge-offs and allocated (1) |   | 4,570     |  |   | 1,949    
|Noninterest income                                              |   | 12,737    |  |   | 2,751    
|Noninterest expenses - direct (2)                               |   | 15,885    |  |   | 5,395    
|
|Segment contribution                                            | $ | 36,095    |  | $ | 9,932    
|
|Provision for credit losses not allocated to segments (1)       |   |           |  |   |          
|Noninterest expenses - unallocated (3)                          |   |           |  |   |          
|                                                                |   |           |  |   |          
|Income before income taxes                                      |   |           |  |   |          
|Income tax expense                                              |   |           |  |   |          
|                                                                |   |           |  |   |          
|Net income                                                      |   |           |  |   |          
|                                                                |   |           |  |   |          
|**Nine Months Ended September 30, 2007**                        |   |           |  |   |          
|Net interest income before inter-segment income (expense)       | $ | 127,960   |  | $ | 62,886   
|Inter-segment interest income (expense)                         |   | 1,623     |  |   | (20,377  
|
|Net interest income                                             |   | 129,583   |  |   | 42,509   
|Provision for credit losses - net charge-offs and allocated (1) |   | 7,808     |  |   | 12,975   
|Noninterest income                                              |   | 37,676    |  |   | 7,690    
|Noninterest expenses - direct (2)                               |   | 48,079    |  |   | 15,729   
|
|Segment contribution                                            | $ | 111,372   |  | $ | 21,495   
|
|Provision for credit losses not allocated to segments (1)       |   |           |  |   |          
|Noninterest expenses - unallocated (3)                          |   |           |  |   |          
|                                                                |   |           |  |   |          
|Income before income taxes                                      |   |           |  |   |          
|Income tax expense                                              |   |           |  |   |          
|                                                                |   |           |  |   |          
|Net income                                                      |   |           |  |   |          
|                                                                |   |           |  |   |          
|**September 30, 2007**                                          |   |           |  |   |          
|Total assets                                                    | $ | 4,086,441 |  | $ | 1,863,157
|Total loans held for investment                                 |   | 3,846,985 |  |   | 1,740,519
|Total deposits                                                  |   | 3,473,451 |  |   | 1,120,939
|Total goodwill                                                  |   | 119,222   |  |   | 87,961   

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In 2007, the provision for credit losses included in each segment represents the actual net charge-offs
  for the period and/or any provision specifically allocated to that segment for reporting purposes.
  Provision in excess of actual net charge-offs and specific allocation is not allocated to any of
  the segments, and is thus presented as a reconciling item. TSFG is refining its methodology for allocating
  provision to its segments and thus the presentation of the provision allocation may change in future
  periods.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(2) | Noninterest expenses  direct include the direct costs of the segments operations such as

facilities, personnel, and other operating expenses.                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(3) | Noninterest expenses  unallocated are managed on a centralized basis and thus are not included

in any segment column. This line item includes expenses not directly attributable to the segments,

such as information services, operations, human resources, accounting, finance, treasury, and corporate

incentive plans. TSFG is refining its methodology for allocating these expenses to its segments
  and
  thus the presentation of noninterest expenses may change in future periods.                                             

|14
|--



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

|                                                             |   |           |   |   |          
|------------------------------------------------------------ | - | --------- | - | - | ---------
|
|**Three Months Ended September 30, 2006**                    |   |           |   |   |          
|Net interest income before inter-segment income (expense)    | $ | 46,581    |   | $ | 22,017   
|Inter-segment interest income (expense)                      |   | (101      | ) |   | (7,117   
|
|Net interest income                                          |   | 46,480    |   |   | 14,900   
|Provision for credit losses - net charge-offs (1)            |   | 2,742     |   |   | 2,740    
|Noninterest income                                           |   | 12,446    |   |   | 2,495    
|Noninterest expenses - direct (2)                            |   | 16,467    |   |   | 5,243    
|
|Segment contribution                                         | $ | 39,717    |   | $ | 9,412    
|
|Provision for credit losses in excess of net charge-offs (1) |   |           |   |   |          
|Noninterest expenses - unallocated (3)                       |   |           |   |   |          
|                                                             |   |           |   |   |          
|Income before income taxes                                   |   |           |   |   |          
|Income tax expense                                           |   |           |   |   |          
|                                                             |   |           |   |   |          
|Net income                                                   |   |           |   |   |          
|                                                             |   |           |   |   |          
|**Nine Months Ended September 30, 2006**                     |   |           |   |   |          
|Net interest income before inter-segment income (expense)    | $ | 143,436   |   | $ | 62,326   
|Inter-segment interest income (expense)                      |   | (2,872    | ) |   | (17,361  
|
|Net interest income                                          |   | 140,564   |   |   | 44,965   
|Provision for credit losses - net charge-offs (1)            |   | 10,576    |   |   | 4,705    
|Noninterest income                                           |   | 37,896    |   |   | 7,565    
|Noninterest expenses - direct (2)                            |   | 46,688    |   |   | 15,259   
|
|Segment contribution                                         | $ | 121,196   |   | $ | 32,566   
|
|Provision for credit losses in excess of net charge-offs (1) |   |           |   |   |          
|Noninterest expenses - unallocated (3)                       |   |           |   |   |          
|                                                             |   |           |   |   |          
|Income before income taxes                                   |   |           |   |   |          
|Income tax expense                                           |   |           |   |   |          
|                                                             |   |           |   |   |          
|Net income                                                   |   |           |   |   |          
|                                                             |   |           |   |   |          
|**September 30, 2006**                                       |   |           |   |   |          
|Total assets                                                 | $ | 4,095,295 |   | $ | 1,682,655
|Total loans held for investment                              |   | 3,686,915 |   |   | 1,555,825
|Total deposits                                               |   | 3,630,915 |   |   | 1,046,053
|Total goodwill                                               |   | 119,231   |   |   | 87,900   

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In 2006,the provision for credit losses included in each segment represents the actual net charge-offs for
  the period. Provision in excess of actual net charge-offs is not allocated to any of the segments,
  and is thus presented as a reconciling item. TSFG is refining its methodology for allocating provision
  to its segments and thus the presentation of the provision allocation may change in future periods.                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(2) | Noninterest expenses  direct include the direct costs of the segments operations such as

facilities, personnel, and other operating expenses.                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(3) | Noninterest expenses  unallocated are managed on a centralized basis and thus are not included

in any segment column. This line item includes expenses not directly attributable to the segments,

such as information services, operations, human resources, accounting, finance, treasury, and corporate

incentive plans. TSFG is refining its methodology for allocating these expenses to its segments
  and
  thus the presentation of noninterest expenses may change in future periods.

|15
|--



|Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations
      The following discussion and analysis are presented to assist in understanding the financial condition, changes in financial condition, results of operations, and cash flows of The South Financial Group, Inc. and its subsidiaries (collectively, TSFG), except where the context requires otherwise. TSFG may also be referred to herein as we, us, or our. This discussion should be read in conjunction with the consolidated financial statements appearing in this report as well as the Annual Report of TSFG on Form 10-K for the year ended December 31, 2006. Results of operations for the nine months ended September 30, 2007 are not necessarily indicative of results that may be attained for any other period.
      Effective July 1, 2007, TSFG primarily operates through its subsidiary bank, Carolina First Bank, which conducts operations in South Carolina and North Carolina (as Carolina First Bank) and in Florida (as Mercantile Bank).
    Index to Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| | Page                                                                             
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| |                                                                                  
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| | Website Availability of Reports Filed with the Securities and Exchange Commission
| | Forward-Looking Statements                                                       
| | Non-GAAP Financial Information                                                   
| | Overview                                                                         
| | Critical Accounting Policies and Estimates                                       
| | Expanded Corporate Facilities                                                    
| | Balance Sheet Review                                                             
| | Earnings Review                                                                  
| | Enterprise Risk Management                                                       
| | Off-Balance Sheet Arrangements                                                   
| | Liquidity                                                                        
| | Recently Adopted/Issued Accounting Pronouncements                                

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 income at risk analysis and economic value of equity risk analysis) and
  inflation;                                                                                                                             
| |   |                                                                                                                                                                                                                                             
| |  | risks inherent in making loans including repayment risks and changes in the value of collateral;                                                                                                                                            
| |   |                                                                                                                                                                                                                                             
| |  | loan growth, the adequacy of the allowance for credit losses, provision for credit losses, and the
  assessment of problem loans (including loans acquired via acquisition and loans in a North Carolina
  development under investigation);
| |   |                                                                                                                                                                                                                                             
| |  | level, composition, and repricing characteristics of the securities portfolio;                                                                                                                                                              
| |   |                                                                                                                                                                                                                                             
| |  | deposit growth, change in the mix or type of deposit products and cost of deposits;                                                                                                                                                         
| |   |                                                                                                                                                                                                                                             
| |  | availability of wholesale funding;                                                                                                                                                                                                          

|16
|--



| |  | fluctuations in consumer spending;                                                             
| | - | -----------------------------------------------------------------------------------------------
| |   |                                                                                                
| |  | competition in the banking industry and demand for our products and services;                  
| |   |                                                                                                
| |  | continued availability of senior management;                                                   
| |   |                                                                                                
| |  | technological changes;                                                                         
| |   |                                                                                                
| |  | ability to increase market share;                                                              
| |   |                                                                                                
| |  | income and expense projections, ability to control expenses, and expense reduction initiatives;
| |   |                                                                                                
| |  | changes in the compensation, benefit, and incentive plans, including compensation accruals;    
| |   |                                                                                                
| |  | risks associated with income taxes, including the potential for adverse adjustments;           

| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | acquisitions, greater than expected deposit attrition or customer loss, inaccuracy of related cost
  savings estimates, inaccuracy of estimates of financial results, and unanticipated integration issues;
| |   |                                                                                                                                                                                                            

| |  | significant delay or inability to execute strategic initiatives designed to grow revenues;                  
| | - | ------------------------------------------------------------------------------------------------------------
| |   |                                                                                                             
| |  | changes in managements assessment of and strategies for lines of business, asset, and deposit
  categories;
| |   |                                                                                                             
| |  | changes in accounting policies and practices;                                                               
| |   |                                                                                                             
| |  | changes in the evaluation of the effectiveness of our hedging strategies;                                   
| |   |                                                                                                             
| |  | changes in regulatory actions, including the potential for adverse adjustments;                             
| |   |                                                                                                             
| |  | changes, costs, and effects of litigation, and environmental remediation; and                               
| |   |                                                                                                             
| |  | recently-enacted or proposed legislation.                                                                   
| |   |                                                                                                             

|Such
forward-looking statements speak only as of the date on which such statements are made and shall
be deemed to be updated by any future filings made by TSFG with the SEC. We undertake no obligation
to update any forward-looking statement to reflect events or circumstances after the date on which
such statement is made to reflect the occurrence of unanticipated events. In addition, certain statements
in future filings by TSFG with the SEC, in press releases, and in oral and written statements made
by or with the approval of TSFG, which are not statements of historical fact, constitute forward-looking
statements.
Non-GAAP Financial Information
This report also contains financial information determined by methods other than in accordance with
Generally Accepted Accounting Principles (GAAP). TSFGs management uses these non-GAAP
measures to analyze TSFGs performance. In particular, TSFG presents certain designated net
interest income amounts on a tax-equivalent basis (in accordance with common industry practice).
Management believes that these presentations of tax-equivalent net interest income aid in the comparability
of net interest income arising from both taxable and tax-exempt sources over the periods presented.
TSFG also presents loan and deposit growth, excluding loans/deposits acquired net of dispositions
(referred to herein as organic growth). In discussing its deposits, TSFG presents core
deposits, which are defined by TSFG as noninterest-bearing, interest-bearing checking, money
market accounts, and savings accounts, customer deposits, which are defined by TSFG as
total deposits less brokered deposits, and customer funding, which is defined by TSFG
as total deposits less brokered deposits plus customer sweeps. Wholesale borrowings include short-term
and long-term borrowings less customer sweeps plus brokered deposits. In addition, TSFG provides
data eliminating intangibles in order to present data on a tangible basis. The limitations
associated with operating measures are the risk that persons might disagree as to the appropriateness
of items comprising these measures and that different companies might calculate these measures differently.
Management compensates for these limitations by providing detailed reconciliations between GAAP and
operating measures. These disclosures should not be viewed as a substitute for GAAP measures, and
furthermore, TSFGs non-GAAP measures may not necessarily be comparable to non-GAAP performance measures of other companies.
Overview
The
South Financial Group is a financial holding company, headquartered in Greenville, South Carolina,
with $14.1 billion in total assets and 172 branch offices in South Carolina, Florida, and North Carolina
at September 30, 2007. Founded in 1986, TSFG focuses on fast-growing banking markets in the Southeast
and concentrates its growth in metropolitan statistical areas. TSFG operates Carolina First Bank,
which conducts banking operations in North Carolina and South Carolina (as Carolina First Bank),
in Florida (as Mercantile Bank), and on the Internet (as Bank Caroline). At September 30, 2007, approximately
46% of TSFGs customer deposits (total deposits less brokered deposits) were in South Carolina,
39% were in Florida, and 15% were in North Carolina. (See Noninterest Expenses for a
discussion of the merger of TSFGs two bank subsidiaries effective July 1, 2007.)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17
|--



|TSFG uses a super-community bank strategy and targets small and middle market businesses and retail
customers. As a super-community bank, TSFG strives to combine 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 $64.3 million, or $0.86 per diluted share, for the first nine months of
2007, compared with $89.3 million, or $1.18 per diluted share, for the first nine months of 2006.
The decline in net income is principally from lower net interest income and a second quarter 2007
additional provision for loan losses of $10.5 million pre-tax (or $7.0 million after-tax) related
to a well-publicized western North Carolina real estate development which was alleged by the North
Carolina attorney general to involve fraud (NC Development Loans). Average diluted shares
outstanding decreased 1.3% to 74.5 million shares, principally as a result of TSFGs repurchase
of 3.0 million shares during the first nine months of 2007, partially offset by shares issued pursuant
to the exercise of stock options.
TSFG continues to focus on improving its balance sheet mix by increasing the relative level and mix
of customer assets and liabilities. On the asset side, average loans as a percentage of average earning
assets increased to 79.1% for the first nine months of 2007 from 75.5% for the first nine months
of 2006. On the funding side, average customer funding (which includes deposits less brokered deposits
plus customer sweeps) as a percentage of average total funding increased to 67.1% for the first nine
months of 2007, up from 64.2% for the first nine months of 2006.
Using
period-end balances, TSFGs loans held for investment at September 30, 2007 increased 4.9% from
December 31, 2006, and total deposit balances decreased 0.2%. Customer funding (deposits less brokered
deposits plus customer sweeps) decreased 3.3% since December 31, 2006. At September 30, 2007, total
loans increased to 135.6% of customer deposits (deposits less brokered deposits), from 123.3% at
December 31, 2007.
Tax-equivalent net interest income was $292.6 million for the first nine months of 2007, a $17.4 million
decrease from $309.9 million for the first nine months of 2006. The net interest margin decreased
to 3.11% for the first nine months of 2007 from 3.25% for the first nine months of 2006. This margin
compression reflects customer preference for higher-cost deposit categories, higher wholesale borrowing
costs, and actions by management to reduce interest rate risk and optionality on the balance sheet.
The third quarter net interest margin of 3.12% remained unchanged from second quarter 2007, after
improving four basis points from first quarter 2007.
Noninterest income totaled $87.1 million for the first nine months of 2007, compared to $91.6 million
for the first nine months of 2006. The decrease in noninterest income was largely attributable to
a $3.3 million net loss on securities (versus a $4.3 million net gain for the prior year). In addition,
the change in noninterest income included a $3.8 million negative swing from the gain/loss associated
with derivative activities and a $2.5 million decline from a 2006 gain on the sale of a branch. These
items were partially offset by a $5.1 million increase from the 2006 loss on indirect auto loans
and a $1.6 million increase in bank-owned life insurance income from insurance proceeds received
in second quarter 2007. Mortgage banking income for the first nine months in 2007 declined $1.2 million
compared with the same period in the prior year as mortgage banking origination volumes slowed in
response to current market conditions. TSFGs wealth management income, merchant processing
income (net), and customer fee income for the first nine months of 2007 increased over the prior year amounts.
Noninterest expenses totaled $242.9 million for the first nine months of 2007, compared to $238.8 million
for the first nine months of 2006, an increase of 1.7%. This increase included $1.7 million for higher
employment contract buyouts and severance and $1.5 million for loss on early extinguishment of debt.
Salaries, wages and employee benefits (excluding contract buyouts and severance), which account for
54.2% of total noninterest expenses for the first nine months of 2007, increased 4.2% to $131.7 million.
The increase in noninterest expenses included higher incentive expense, higher salaries attributable
to annual salary increases, and higher occupancy expenses, partially offset by declines in professional
fees and most other categories of expense. TSFG continued to make progress in its expense reduction
initiative, as noninterest expenses declined for the third quarter in a row.
At
September 30, 2007, nonperforming assets as a percentage of loans held for investment and foreclosed
property increased to 0.58% from 0.38% at September 30, 2006, which included 0.09% for the NC Development
Loans. For the nine months ended September 30, 2007, annualized net loan charge-offs totaled 0.39%
of average loans held for investment, compared to 0.28% for the nine months ended September 30, 2006.
Net loan charge-offs increased to 0.66% for third quarter 2007, up from 0.21% for second quarter
2007. For the three and nine months ended September 30, 2007, net loan charge-offs included 0.30%
and 0.12%, respectively, for the NC Development Loans. TSFGs provision for credit losses increased
to $36.6 million for the first nine months of 2007 from $24.0 million for the first nine months of
2006, primarily as a result of an additional $10.5 million provision expense related to the
NC Development Loans.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18
|--



|TSFGs
tangible equity to tangible asset ratio totaled 6.47% at September 30, 2007, a slight decrease from
6.48% at December 31, 2006, as retention of earnings and a decrease in net unrealized losses on available
for sale securities were offset by dividends and common stock repurchases. At September 30, 2007,
the after-tax net unrealized loss on available for sale securities totaled $38.7 million, down from
$47.4 million at December 31, 2006.
Strategic Plan.Earlier in the year, TSFG, with the assistance of First Manhattan Consulting Group, began a strategic
evaluation of each of its business lines to improve its overall profitability. This process focused
on developing tactical plans for each of its business lines. As the process evolved, the opportunity
to improve deposit levels, mix, and costs became the central point of focus relative to the Companys
overall profitability. This resulted in the development of key initiatives to improve funding and
thereby lower our funding costs, which include: (i) an increased focus on retail deposit activities,
(ii) leveraging the commercial base to grow deposits, and (iii) the expansion of private banking
efforts to support deposit growth. The funding initiatives are in addition to the following initiatives
to: (i) maintain balanced loan growth with asset quality and profitability, (ii) maintain credit
quality longer-term, (iii) increase noninterest income through growth in deposits and expansion of
private banking to increase wealth management revenues, (iv) manage operating noninterest expenses
and improve efficiency, and (v) actively manage capital levels and mix. In connection with the implementation
of these plans, TSFGs reportable segments may change.
Critical Accounting Policies and Estimates
TSFGs
accounting policies are in accordance with accounting principles generally accepted in the United
States and with general practice within the banking industry. TSFG makes a number of judgmental estimates
and assumptions relating to reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts
of revenues and expenses during periods presented. Material estimates that are particularly susceptible
to significant change relate to the determination of the allowance for loan losses and reserve for
unfunded lending commitments; the effectiveness of derivatives and other hedging activities; the
fair value of certain financial instruments (loans held for sale, securities, derivatives, and privately
held investments); income tax assets or liabilities; share-based compensation; and accounting for
acquisitions, including the fair value determinations, the analysis of goodwill for impairment and
the analysis of valuation allowances in the initial accounting of loans acquired. To a lesser extent,
significant estimates are also associated with the determination of contingent liabilities, discretionary
compensation, and other employee benefit agreements. Different assumptions in the application of
these policies could result in material changes in TSFGs Consolidated Financial Statements.
Accordingly, as this information changes, the Consolidated Financial Statements could reflect the
use of different estimates, assumptions, and judgments. Certain determinations inherently have a
greater reliance on the use of estimates, assumptions, and judgments, and as such have a greater
possibility of producing results that could be materially different than originally reported. TSFG
has procedures and processes in place to facilitate making these judgments.
For
additional information regarding critical accounting policies, refer to the Annual Report of TSFG
on Form 10-K for the year ended December 31, 2006, specifically Item 8, Note 1  Summary of
Significant Accounting Policies in the notes to the Consolidated Financial Statements and the
section captioned Critical Accounting Policies and Estimates in Managements Discussion
and Analysis of Financial Condition and Results of Operations.
As
discussed in the Critical Accounting Policies and Estimates of its 2006 10-K, TSFG evaluates
its goodwill for impairment annually on June 30th. The evaluation performed as of June 30, 2007 indicated that no impairment charge was required as
of that date. Subsequent to September 30, 2007, TSFGs common stock has, at times, traded below
book value. Due to the short duration of the decline and the lack of material changes to the estimates
and assumptions used in its goodwill impairment evaluation process, TSFG does not plan to perform
an interim evaluation of goodwill impairment unless additional facts or circumstances warrant such
an evaluation. Based on currently available information, TSFG does not have any goodwill impairment.
Expanded Corporate Facilities
There have been no material changes to the plans for TSFGs Expanded Corporate Facilities previously
disclosed on page 16 of TSFGs March 31, 2007 Quarterly Report on Form 10-Q. During the third
quarter 2007, TSFG started construction on these facilities.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|19
|--



|Balance Sheet Review
Loans
TSFG focuses its lending activities on small and middle market businesses and individuals in its geographic
markets. At September 30, 2007, outstanding loans totaled $10.2 billion, which equaled 107.3% of
total deposits (135.6% of customer deposits) and 72.3% of total assets. Loans held for investment
increased $471.4 million, or 4.9%, to $10.2 billion at September 30, 2007 from $9.7 billion at December
31, 2006. The major components of the loan portfolio were commercial loans, commercial real estate
loans, and consumer loans (including both direct and indirect loans). Substantially all loans were
to borrowers located in TSFGs market areas in South Carolina, Florida, and North Carolina.
At September 30, 2007, approximately 7% of the portfolio was unsecured.
As part of its portfolio and balance sheet management strategies, TSFG reviews its loans held for investment
and determines whether its intent for specific loans or classes of loans has changed. If management
changes its intent from held for investment to held for sale, the loans are transferred to the held
for sale portfolio and recorded at the lower of cost basis or fair value.
TSFG generally sells a majority of its residential mortgage loans in the secondary market. TSFG also
retains certain of its mortgage loans, based on predetermined criteria, in its held for investment
portfolio as part of its overall balance sheet management strategy. Loans held for sale decreased
to $19.6 million at September 30, 2007 from $28.6 million at December 31, 2006 and $36.2 million
at September 30, 2006, primarily due to lower mortgage loan volume and timing of mortgage 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 2 provides a more meaningful 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 1**                                                             
|------------------------------------------------------------------------
|                                                                        
|**Loan Portfolio Composition Based on Collateral Type or Borrower Type**
|                                                                        
|**(dollars in thousands)**                                              

|                                                
|------------------------------------------------
|
|
|
|                                                
|Commercial, financial and agricultural          
|Real estate - construction (1)                  
|Real estate - residential mortgages (1-4 family)
|Commercial secured by real estate (1)           
|Consumer                                        
|                                                
|Loans held for investment                       
|                                                

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

|20
|--



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

|                                        | September 30, |            |   |  
|--------------------------------------- | ------------- | ---------- | - | -
|
|
|                                        |               |            |   |  
|Commercial Loans                        |               |            |   |  
|Commercial and industrial               | $             | 2,693,973  |   | $
|Owner - occupied real estate (1)        |               | 1,042,131  |   |  
|Commercial real estate                  |               | 4,178,653  |   |  
|                                        |               |            |   |  
|                                        |               | 7,914,757  |   |  
|                                        |               |            |  
|                                        |               |            |   |  
|Consumer Loans (2)                      |               |            |   |  
|Indirect - sales finance                |               | 707,819    |   |  
|Consumer lot loans                      |               | 334,971    |   |  
|Direct retail                           |               | 97,289     |   |  
|Home equity                             |               | 532,640    |   |  
|                                        |               |            |   |  
|                                        |               | 1,672,719  |   |  
|                                        |               |            |  
|                                        |               |            |   |  
|Mortgage Loans (2)                      |               | 585,761    |   |  
|                                        |               |            |  
|                                        |               |            |   |  
|                                       
|Total loans held for investment         | $             | 10,173,237 |   | $
|                                        |               |            |  
|                                        |               |            |   |  
|                                       
|Percentage of Loans Held for Investment |               |            |   |  
|Commercial and industrial               |               | 26.5       | % |  
|Owner - occupied real estate (1)        |               | 10.2       |   |  
|Commercial real estate                  |               | 41.1       |   |  
|Consumer                                |               | 16.4       |   |  
|Mortgage                                |               | 5.8        |   |  
|                                        |               |            |   |  
|Total                                   |               | 100.0      | % |  
|                                        |               |            |   |  

|    |                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In Table 1, these loans are included in the Real estate  construction and Commercial
  secured by real estate categories, which also include loans to non-real estate industry borrowers.                                                                                              
|    |                                                                                                                                                                                                                                                                                             
|(2) | In second quarter 2007, TSFG reclassified certain loan balances from mortgage loans to consumer loans.
  Amounts for prior periods (including $146.5 million at December 31, 2006 and $140.7 million at September
  30, 2006) have been reclassified to conform to the current presentation.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Commercial and industrial loans  are loans to finance short-term and intermediate-term cash needs of businesses. Typical needs
include the need to finance seasonal or other temporary cash flow imbalances, growth in working assets
created by sales growth, and purchases of equipment and vehicles. Credit is extended in the form
of short-term single payment loans, lines of credit for periods up to a year, revolving credit facilities
for periods up to five years, and amortizing term loans for periods up to ten years.
Owner - occupied real estate loans  are loans to finance the purchase or expansion of operating facilities used by businesses not
engaged in the real estate business. Typical loans are loans to finance offices, manufacturing plants,
warehouse facilities, and retail shops. Depending on the property type and the borrowers cash
flows, amortization terms vary from ten years up to 20 years. Although secured by mortgages on the
properties financed, these loans are underwritten based on the cash flows generated by operations
of the businesses they house.
Commercial real estate loans  are loans to finance real properties that are acquired, developed, or constructed for sale or
lease to parties unrelated to the borrower. Included are loans to acquire land for development, land
development loans, construction loans, mini-perms for cash flow stabilization periods, and permanent
loans in situations where access to the secondary market is limited due to loan size.

|21
|--



|Indirect - sales finance loans  are loans to individuals to finance the purchase of motor vehicles. They are closed at the auto dealership but approved in advance by TSFG for immediate purchase. Loans are extended on new and used motor vehicles with terms varying from two years to six years.
Consumer lot loansare loans to individuals to finance the purchase of residential lots.
Direct retail consumer loans  are loans to individuals to finance personal, family, or household needs. Typical loans are
loans to finance auto purchases or home repairs and additions.
Home equity loans  are loans to homeowners, secured primarily by junior mortgages on their primary residences,
to finance personal, family, or household needs. These loans may be in the form of amortizing loans
or lines of credit with terms up to 15 years.
Mortgage loans  are loans to individuals, secured by first or second mortgages on single-family residences,
generally to finance the acquisition or construction of those residences. TSFG generally sells a
majority of its residential mortgage loans at origination in the secondary market. TSFG also retains
certain of its mortgage loans, based on predetermined criteria, in its held for investment portfolio
as part of its overall balance sheet management strategy. TSFGs mortgage portfolio is bank-customer
related, with no brokered loans or subprime exposure.
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. The risk attributable to the concentration in commercial real estate loans
is managed by focusing our lending on markets with which we are familiar and on borrowers with proven
track records whom we believe possess the financial means to weather adverse market conditions. Consequently,
although the analysis of reserve adequacy includes an adjustment to account for the risk inherent
in this concentration, management believes the loss potential in its commercial real estate loans
is not materially greater than that of any other segment of the portfolio. In addition, management
believes that diversification by geography, property type, and borrower partially mitigates the risk
of loss in its commercial real estate loan portfolio.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22
|--



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

|                                                           | September 30,2007 |           | December 31, 2006 | 
|---------------------------------------------------------- | ----------------- | --------- | ----------------- | 
|
|
|                                                           |                   |           |                   | 
|Commercial Real Estate Loans by Geographic Diversification |                   |           |                   | 
|Western North Carolina (Hendersonville/Asheville)          | $                 | 886,563   |                   | 
|Tampa Bay Florida                                          |                   | 547,895   |                   | 
|North Coastal South Carolina (Myrtle Beach)                |                   | 339,657   |                   | 
|Upstate South Carolina (Greenville)                        |                   | 344,959   |                   | 
|Northeast Florida (Jacksonville)                           |                   | 341,267   |                   | 
|Midlands South Carolina (Columbia)                         |                   | 305,671   |                   | 
|North Central Florida                                      |                   | 305,653   |                   | 
|Central Florida (Orlando)                                  |                   | 287,776   |                   | 
|South Florida (Ft. Lauderdale)                             |                   | 277,888   |                   | 
|South Coastal South Carolina (Charleston)                  |                   | 248,494   |                   | 
|Marion County, Florida (Ocala)                             |                   | 158,736   |                   | 
|Greater South Charlotte South Carolina (Rock Hill)         |                   | 134,094   |                   | 
|                                                           |                   |           |                   | 
|Total commercial real estate loans                         | $                 | 4,178,653 |                   | 
|                                                           |                   |           |                   | 

|                                       
|---------------------------------------
|
|                                       
|Income property                        
|Residential acquisition and development
|Commercial acquisition and development 
|Commercial construction                
|Residential construction               
|Undeveloped land                       
|                                       
|Total commercial real estate loans     
|                                       

| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Note:   At September 30, 2007 and December 31, 2006, average loan size for commercial
  real estate loans totaled $544,000 and $478,000, respectively.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Portfolio
risk is also managed by maintaining a house lending limit at a level significantly lower
than the legal lending limit of Carolina First Bank and by requiring Board of Director approval to
exceed this house limit. At September 30, 2007, TSFGs house lending limit was $35 million,
and 10 credit relationships totaling $426.7 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 $443.5 million, or 4.4% of total loans held for investment at September 30, 2007, up from
3.8% of total loans held for investment at December 31, 2006 and 4.0% of total loans held for investment
at September 30, 2006.
TSFG,
through its Corporate Banking group, participates in shared national credits (multi-bank
credit facilities of $20 million or more, or SNCs), primarily to borrowers who are headquartered
or conduct business in or near our markets. At September 30, 2007, the loan portfolio included commitments
totaling $1.3 billion in SNCs. Outstanding borrowings under these commitments totaled $603.6 million
at September 30, 2007, increasing from $413.2 million at December 31, 2006, and $343.2 million at
September 30, 2006. In addition to internal limits that control our credit exposure to individual
borrowers, we have established limits on the size of the overall SNC portfolio, and have established
a sub-limit for total credit exposure to borrowers located outside of our markets. All of our SNC
relationships are underwritten and managed in a centralized Corporate Banking Group staffed with
experienced bankers. Our strategy targets borrowers whose management teams are well known to us and
whose risk profile is above average. Our ongoing strategic plan is to maintain diversity in our portfolio
and expand the profitability of our relationships through the sale of non-credit products.

|23
|--



|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 Directors Loan Committee of the Board, which meet monthly to review credit
quality trends, new large credits, loans to insiders, large problem credits, credit policy changes,
and reports on independent credit reviews of branch offices.
Table 4 presents our credit quality indicators.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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

|                                                                                                    | September 30, |            |   |  
|--------------------------------------------------------------------------------------------------- | ------------- | ---------- | - | -
|
|
|                                                                                                    |               |            |   |  
|Loans held for investment                                                                           | $             | 10,173,237 |   | $
|Allowance for loan losses                                                                           |               | 118,861    |   |  
|Allowance for credit losses (1)                                                                     |               | 120,424    |   |  
|                                                                                                   
|Nonaccrual loans - commercial and industrial(2)                                                     |               | 18,056     |   |  
|Nonaccrual loans - owner - occupied real estate (2)                                                 |               | 3,738      |   |  
|Nonaccrual loans - commercial real estate (2)                                                       |               | 14,818     |   |  
|Nonaccrual loans - consumer                                                                         |               | 10,521     |   |  
|Nonaccrual loans - mortgage                                                                         |               | 4,676      |   |  
|Restructured loans accruing interest                                                                |               | 1,448      |   |  
|                                                                                                    |               |            |   |  
|Total nonperforming loans                                                                           |               | 53,257     |   |  
|Foreclosed property (other real estate owned and personal
    property repossessions)               |               | 5,658      |   |  
|                                                                                                    |               |            |   |  
|Total nonperforming assets                                                                          | $             | 58,915     |   | $
|                                                                                                    |               |            |   |  
|                                                                                                   
|Loans past due 90 days or more (mortgage and consumer
    with interest accruing) (3)               | $             | 2,629      |   | $
|                                                                                                    |               |            |   |  
|                                                                                                   
|Total nonperforming assets as a percentage of loans held for
    investment and foreclosed property |               | 0.58       | % |  
|                                                                                                    |               |            |   |  
|Allowance for loan losses to nonperforming loans                                                    |               | 2.23       | 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, 2007, December 31, 2006, and September 30, 2006, commercial nonaccrual loans
  included $403,000, $500,000, and $661,000, respectively, in restructured loans.                                                                                                                
|    |                                                                                                                                                                                                                                                                                                
|(3) | ForTSFGs policy regarding mortgage and consumer loan charge-offs and nonaccrual status, refer to
  Item 8, Note 1  Summary of Significant Accounting Policies in the notes to the Consolidated
  Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2006.

|                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|TSFGs nonperforming asset ratio (nonperforming assets as a percentage of loans held for investment
and foreclosed property) increased to 0.58% at September 30, 2007 from 0.43% at December 31, 2006
and from 0.38% at September 30, 2006. The nonperforming asset ratio at September 30, 2007 included
0.09% for the NC Development Loans.

|24
|--



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

|Table 5               
|----------------------
|                      
|NC Development Loans  
|                      
|(dollars in thousands)
|

|                   | At and for the Nine Months Ended September 30, 2007 |   
|------------------ | --------------------------------------------------- | --
|
|
|                   |                                                     |   
|Lot loans:         |                                                     |   
|Performing (1)     |                                                     | 12
|Nonperforming pool |                                                     | 81
|Development loans  |                                                     | 2 
|                   |                                                     |   
|Total              |                                                     | 95
|                   |                                                     |   

|    |                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All loans are less than 60 days past due at September 30, 2007.                                                                                                
|    |                                                                                                                                                                
|(2) | Approximately 50% of the outstanding balance was charged-off in the third quarter of 2007. The pool
  may be adjusted in future periods as losses are realized.

|    |                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Charged-off in the second quarter of 2007.                                                                                                    
|    |                                                                                                                                               
|(4) | The $1.3 million allocated allowance may be applied against the performing loans or the development
  loans as well as the nonperforming pool.

|                                                                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|As indicated in the table above, at September 30, 2007, loans held for investment included $11.2 million
related to the NC Development Loans, of which $9.4 million was classified as nonperforming.
Table 6 summarizes information on impaired loans, all of which are commercial loans.
|                                                                                                                                                                                                                                                                                         

|Table 6               
|----------------------
|                      
|Impaired Loans        
|                      
|(dollars in thousands)
|

|                                     | At and For the 
      Nine Months 
      Ended September 30, |        | At and For the
Year Ended 
December 31,2006 |  
|------------------------------------ | ------------------------------------------------------------ | ------ | ------------------------------------------- | -
|
|
|                                     |                                                              |        |                                             |  
|Impaired loans                       | $                                                            | 38,060 |                                             | $
|Average investment in impaired loans |                                                              | 35,251 |                                             |  
|Related allowance                    |                                                              | 11,010 |                                             |  
|Foregone interest                    |                                                              | 2,142  |                                             |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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

|25
|--



|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, acquired loans, loan
  portfolio quality trends, and uncertainty in current economic and business conditions.
The
Allowance is then segregated into allocated and unallocated components. The allocated component is
the sum of the loss estimates at the lower end of the probable loss range for each category. The
unallocated component is the sum of the amounts by which final loss estimates exceed the lower end
estimates for each category. The unallocated component of the Allowance represents probable incurred
losses inherent in the portfolio based on our analysis that are not fully captured in the allocated
component. Allocation of the Allowance to respective loan portfolio components is not necessarily
indicative of future losses or future allocations. The entire Allowance is available to absorb probable
incurred losses in the loan portfolio.
Assessing
the adequacy of the Allowance is a process that requires considerable judgment. Managements
judgments are based on numerous assumptions about current events, which we believe to be reasonable,
but which may or may not be valid. Thus, there can be no assurance that loan losses in future periods
will not exceed the current Allowance amount or that future increases in the Allowance will not be
required. No assurance can be given that managements ongoing evaluation of the loan portfolio
in light of changing economic conditions and other relevant circumstances will not require significant
future additions to the Allowance, thus adversely affecting the operating results of TSFG.
The
Allowance is also subject to examination and adequacy testing by regulatory agencies, which may consider
such factors as the methodology used to determine adequacy and the size of the Allowance relative
to that of peer institutions, and other adequacy tests. In addition, such regulatory agencies could
require us to adjust our Allowance based on information available to them at the time of their examination.
The
methodology used to determine the reserve for unfunded lending commitments, which is included in
other liabilities, is inherently similar to that used to determine the allowance for loan losses
described above, adjusted for factors specific to binding commitments, including the probability
of funding and historical loss ratio.
Table 7
summarizes the changes in the allowance for loan losses, reserve for unfunded lending commitments,
and allowance for credit losses and provides certain related ratios.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|26
|--



|Table 7                                   
|------------------------------------------
|                                          
|Summary of Loan and Credit Loss Experience
|                                          
|(dollars in thousands)                    
|

|                                                                                      | At and For the 
      Nine Months 
      Ended September 30, |            | At and For the
Year Ended
December 31,
2006 |  
|------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------- | ------------------------------------------- | -
|
|
|                                                                                      |                                                              |            |                                             |  
|Allowance for loan losses, beginning of year                                          | $                                                            | 111,663    |                                             | $
|Allowance adjustment for loans sold                                                   |                                                              |           |                                             |  
|Net charge-offs:                                                                      |                                                              |            |                                             |  
|Loans charged-off                                                                     |                                                              | (34,159    | )                                           |  
|Loans recovered                                                                       |                                                              | 5,253      |                                             |  
|                                                                                      |                                                              |            |                                             |  
|                                                                                      |                                                              | (28,906    | )                                           |  
|Additions to allowance through provision expense                                      |                                                              | 36,104     |                                             |  
|                                                                                      |                                                              |            |                                             |  
|Allowance for loan losses, end of period                                              | $                                                            | 118,861    |                                             | $
|                                                                                      |                                                              |            |                                             |  
|                                                                                     
|Reserve for unfunded lending commitments, beginning of year                           | $                                                            | 1,025      |                                             | $
|Provision for unfunded lending commitments                                            |                                                              | 538        |                                             |  
|                                                                                      |                                                              |            |                                             |  
|Reserve for unfunded lending commitments, end of period                               | $                                                            | 1,563      |                                             | $
|                                                                                      |                                                              |            |                                             |  
|                                                                                     
|Allowance for credit losses, beginning of year                                        | $                                                            | 112,688    |                                             | $
|Allowance adjustment for loans sold                                                   |                                                              |           |                                             |  
|Net charge-offs:                                                                      |                                                              |            |                                             |  
|Loans charged-off                                                                     |                                                              | (34,159    | )                                           |  
|Loans recovered                                                                       |                                                              | 5,253      |                                             |  
|                                                                                      |                                                              |            |                                             |  
|                                                                                      |                                                              | (28,906    | )                                           |  
|Additions to allowance through provision expense                                      |                                                              | 36,642     |                                             |  
|                                                                                      |                                                              |            |                                             |  
|Allowance for credit losses, end of period                                            | $                                                            | 120,424    |                                             | $
|                                                                                      |                                                              |            |                                             |  
|                                                                                     
|Average loans held for investment                                                     | $                                                            | 9,925,410  |                                             | $
|Loans held for investment, end of period                                              |                                                              | 10,173,237 |                                             |  
|Net charge-offs as a percentage of average loans held for
    investment (annualized) |                                                              | 0.39       | %                                           |  
|Allowance for loan losses as a percentage of loans held
    for investment            |                                                              | 1.17       |                                             |  
|Allowance for credit losses as a percentage of loans held
    for investment          |                                                              | 1.18       |                                             |  
|Allowance for loan losses to nonperforming loans                                      |                                                              | 2.23       | x                                           |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|For the nine months ended September 30, 2007, TSFGs provision expense included $10.5 million
related to the NC Development Loans, and charge-offs included $9.2 million (or 0.09% of average loans
held for investment) related to the NC Development Loans (see Table 5).
Securities
TSFG
uses the investment securities portfolio for several purposes. It serves as a vehicle to manage interest
rate risk, to generate interest and dividend income, to provide liquidity to meet funding requirements,
and to provide collateral for pledges on public deposits, FHLB advances, and securities sold under
repurchase agreements. TSFG strives to provide adequate flexibility to proactively manage cash flow
as market conditions change. Cash flow may be used to pay-off borrowings, to fund loan growth, or
to reinvest in securities at then current market rates. Table 8 shows the carrying values of the
investment securities portfolio.

|27
|--



|Table 8                                    
|-------------------------------------------
|                                           
|Investment Securities Portfolio Composition
|                                           
|(dollars in thousands)                     
|

|                                                 | September 30, |           |   |  
|------------------------------------------------ | ------------- | --------- | - | -
|
|
|                                                 |               |           |   |  
|Available for Sale(at fair value)                |               |           |   |  
|U.S. Treasury                                    | $             | 168,614   |   | $
|U.S. Government agencies                         |               | 659,681   |   |  
|Agency mortgage-backed securities                |               | 1,119,547 |   |  
|State and municipal                              |               | 303,388   |   |  
|Other investments:                               |               |           |   |  
|Corporate bonds                                  |               | 20,680    |   |  
|Federal Home Loan Bank (FHLB) stock            |               | 43,060    |   |  
|Community bank stocks                            |               | 4,789     |   |  
|Other equity investments                         |               | 3,482     |   |  
|                                                 |               |           |   |  
|                                                 |               | 2,323,241 |   |  
|                                                 |               |           |   |  
|Held to Maturity(at amortized cost)              |               |           |   |  
|State and municipal                              |               | 40,934    |   |  
|Other investments                                |               | 240       |   |  
|                                                 |               |           |   |  
|                                                 |               | 41,174    |   |  
|                                                 |               |           |   |  
|Total                                            | $             | 2,364,415 |   | $
|                                                 |               |           |   |  
|                                                
|Total securities as a percentage of total assets |               | 16.8      | % |  
|                                                 |               |           |   |  
|                                                
|Percentage of Total Securities Portfolio         |               |           |   |  
|U.S. Treasury                                    |               | 7.1       | % |  
|U.S. Government agencies                         |               | 27.9      |   |  
|Agency mortgage-backed securities                |               | 47.3      |   |  
|State and municipal                              |               | 14.6      |   |  
|Other investments                                |               | 3.1       |   |  
|                                                 |               |           |   |  
|Total                                            |               | 100.0     | % |  
|                                                 |               |           |   |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Securities (i.e., securities available for sale and securities held to maturity) excluding the unrealized
loss on securities available for sale averaged $2.6 billion in the first nine months of 2007, 15.1%
below the average for the corresponding period in 2006 of $3.1 billion. TSFG has continued to decrease
securities by not reinvesting maturing investments and principal paydowns in an effort to reduce
its reliance on wholesale borrowings. In addition, in the first nine months of 2007, TSFG sold approximately
$190 million of securities available for sale, including $116 million in first quarter 2007 to manage
interest rate risk as determined by its new asset/liability management model and approximately $70
million of its corporate bond portfolio in third quarter 2007 due to a change in intent to hold
the securities until a recovery in value based on a change in investment strategy and related credit
risk considerations.
The average tax-equivalent portfolio yield increased for the nine months ended September 30, 2007 to
4.81% from 4.74% in the first nine months of 2006.
The
expected duration of the debt securities portfolio was approximately 3.5 years at September 30, 2007,
a decrease from approximately 3.8 years at December 31, 2006 and September 30, 2006. If interest
rates rise, the duration of the debt securities portfolio may extend. Conversely, if interest rates
fall, the duration of the debt securities portfolio may decline. Since total securities include some
callable bonds and mortgage-backed securities, security paydowns are likely to accelerate if interest
rates fall or decline if interest rates rise. Changes in interest rates and related prepayment activity
impact yields and fair values of TSFGs securities.
The
available for sale portfolio constituted 98.3% of total securities at September 30, 2007. Management
believes that maintaining most of its securities in the available for sale category provides greater
flexibility in the management of the overall investment portfolio. The majority of these securities
are government or agency securities and, therefore, pose minimal credit risk.

|28
|--



|Approximately
72% of MBS are collateralized mortgage obligations (CMOs) with an average duration of
5.6 years. At September 30, 2007, approximately 18% 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 one to ten years. All of TSFGs MBS are agency-backed.
TSFG
plans to continue to reduce the size of the portfolio to the $2 billion range, before reinvestment
in securities is needed to manage interest rate risk and support liquidity and collateral needs under
borrowing arrangements. Subsequent to September 30, 2007 and through November 7, 2007, the Company
has sold approximately $67 million of U.S. Treasury securities for an insignificant gain and approximately
$114 million of agency debt securities have been called. An additional $53 million of U.S. Treasury
securities is scheduled to mature in November 2007 and is not expected to be replaced.
The
net unrealized loss on securities available for sale (pre-tax) totaled $61.5 million at September
30, 2007, compared with a $75.3 million loss at December 31, 2006 and a $77.2 million loss at September
30, 2006, as long term interest rates decreased since September 30, 2006 and the reduction of the
securities portfolio continued. If interest rates increase, TSFG expects its net unrealized loss
on securities available for sale to increase. See Item 1, Note 4 to the Consolidated Financial Statements
for information about TSFGs securities in unrealized loss positions.
Community Bank Stocks. At September 30, 2007, TSFG had equity investments in five community banks located in the Southeast
with a cost basis of $4.2 million and a market value of $4.8 million. In each case, TSFG owns less
than 5% of the community banks outstanding common stock. These investments in community banks
are included in securities available for sale. During the first nine months of 2007, TSFG sold approximately
$6 million of such securities for a net gain of $1.7 million. Subsequent to September 30, 2007, TSFG
entered into a contract to sell approximately $2 million of additional community bank stocks to a
third party at no significant gain or lossthe transaction is subject to certain regulatory
approvals by the buyer and is expected to close in the first quarter of 2008, if approved.
Derivative Financial Instruments
Derivative
financial instruments used by TSFG may include interest rate swaps, caps, collars, floors, options,
futures and forward contracts. Derivative contracts are primarily used to hedge identified risks
and also to provide risk-management products to customers. TSFG has derivatives that qualify for
hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), derivatives that do not qualify for hedge accounting under SFAS 133 but otherwise
achieve economic hedging goals (economic hedges), as well as derivatives that are used
in customer hedging programs. See Note 5 to the Consolidated Financial Statements for disclosure
of the fair value of TSFGs derivative assets and liabilities (which are included in other assets
and other liabilities, respectively, in the Consolidated Financial Statements) and their related
notional amounts. TSFGs economic hedges and customer hedging programs are included in Other
Derivatives in the table in Note 5.
In the three and nine months ended September 30, 2007, noninterest income included a gain of $198,000
and a loss of $1.2 million, respectively, for derivative activities. In the three and nine months
ended September 30, 2006, noninterest income included gains of $3.9 million and $2.6 million, respectively,
for derivative activities. These amounts include the following: the change in fair value of
derivatives that do not qualify for hedge accounting under SFAS 133, as well as the net cash settlement
from these interest rate swaps; hedge ineffectiveness; and other miscellaneous items.
Deposits
Deposits
remain TSFGs primary source of funds. TSFG faces strong competition from other banking and
financial services companies in gathering deposits. TSFG also maintains short and long-term wholesale
sources including federal funds, repurchase agreements, brokered CDs, and FHLB advances to fund a
portion of loan demand and, if appropriate, any increases in investment securities.
Table
9 shows the breakdown of total deposits by type of deposit and the respective percentage of total
deposits, while Table 10 shows the breakdown of customer funding by type.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|29
|--



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

|                                      | September 30, |           |   |  
|------------------------------------- | ------------- | --------- | - | -
|
|
|                                      |               |           |   |  
|Noninterest-bearing demand deposits   | $             | 1,164,312 |   | $
|Interest-bearing checking             |               | 1,100,428 |   |  
|Money market accounts                 |               | 2,184,822 |   |  
|Savings accounts                      |               | 169,091   |   |  
|                                      |               |           |   |  
|Total core deposits                   |               | 4,618,653 |   |  
|Time deposits under $100,000 (1)      |               | 1,384,094 |   |  
|Time deposits of $100,000 or more (1) |               | 1,515,417 |   |  
|                                      |               |           |   |  
|Customer deposits (2)                 |               | 7,518,164 |   |  
|Brokered deposits                     |               | 1,983,505 |   |  
|                                      |               |           |   |  
|Total deposits                        | $             | 9,501,669 |   | $
|                                      |               |           |   |  
|Percentage of Deposits                |               |           |   |  
|Noninterest-bearing demand deposits   |               | 12.2      | % |  
|Interest-bearing checking             |               | 11.6      |   |  
|Money market accounts                 |               | 23.0      |   |  
|Savings accounts                      |               | 1.8       |   |  
|                                      |               |           |   |  
|Core deposits                         |               | 48.6      |   |  
|Time deposits under $100,000          |               | 14.6      |   |  
|Time deposits of $100,000 or more     |               | 15.9      |   |  
|                                      |               |           |   |  
|Customer deposits (2)                 |               | 79.1      |   |  
|Brokered deposits                     |               | 20.9      |   |  
|                                      |               |           |   |  
|Total deposits                        |               | 100.0     | % |  
|                                      |               |           |   |  

|    |                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In second quarter 2007, TSFG reclassified certain deposit balances from time deposits under $100,000
  to time deposits of $100,000 or more. Amounts for prior periods (including $408.8 million at December
  31, 2006 and $314.9 million at September 30, 2006) have been reclassified to conform to the current
  presentation.
|    |                                                                                                                                                                                                                                                                                                                                   
|(2) | TSFG defines customer deposits as total deposits less brokered deposits.                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                   

|Table 10                
|------------------------
|                        
|Type of Customer Funding
|                        
|(dollars in thousands)  
|

|                      | September 30, |           |  |  
|--------------------- | ------------- | --------- |  | -
|
|
|                      |               |           |  |  
|Customer deposits (1) | $             | 7,518,164 |  | $
|Customer sweeps (2)   |               | 599,021   |  |  
|                      |               |           |  |  
|Customer funding      | $             | 8,117,185 |  | $
|                      |               |           |  |  

|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(1) | TSFG defines customer deposits as total deposits less brokered deposits.                 
|    |                                                                                          
|(2) | TSFG includes customer sweeps in short-term borrowings on its consolidated balance sheet.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|At September 30, 2007, period-end customer funding decreased $275.4 million, or 3.3%, from December
31, 2006, partly due to TSFGs focus on improving the net interest margin and profitability
rather than purely focusing on customer funding growth. TSFG continues to refine the mix and pricing
of its customer funding. Within customer funding, at September 30, 2007, core deposits decreased
$487.0 million, or 9.5%, from December 31, 2006.
TSFG uses brokered deposits and other borrowed funds as an alternative funding source while continuing
its efforts to maintain and grow its local customer funding base. Brokered deposits increased as
a percentage of total deposits since September 30, 2006 as TSFG replaced certain puttable funding
with brokered deposits.

|30
|--



|Table 13 in Earnings Review - Net Interest Income details average balances for the deposit portfolio for the nine months ended September 30, 2007 and 2006. Comparing the nine months ending September 30, 2007 and 2006,average customer funding increased $210.2 million, or 2.6%. Within customer funding, the mix continues
to shift toward higher cost products, with increases in average interest-bearing checking, time deposits,
and customer sweeps partially offset by a decrease in noninterest-bearing deposits and savings. As
a result, average core deposits for the nine months ending September 30, 2007 decreased $188.8 million,
or 3.7%, from the same period in 2006.
Average
customer funding equaled 67.1% of average total funding in the first nine months of 2007 and 64.2%
in the first nine months of 2006. As part of its overall funding strategy, TSFG expects to continue
its focus on lowering its funding costs by trying to improve the customer funding level, mix, and
rate paid. TSFG attempts to enhance its deposit mix by working to attract lower-cost transaction
accounts through actions such as new transaction account opening goals, new checking products, and
changing incentive plans to place a greater emphasis on lower-cost customer deposit growth. Deposit
pricing is very competitive, and we expect this pricing environment to continue, together with customer
behavior driving the mix towards higher rate deposit productsmoney markets and CDs.
Borrowed Funds
Table 11 shows the breakdown of borrowed funds by type.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|Table 11              
|----------------------
|                      
|Type of Borrowed Funds
|                      
|(dollars in thousands)
|

|                                                     | September 30, |           |   |  
|---------------------------------------------------- | ------------- | --------- | - | -
|
|
|                                                     |               |           |   |  
|Short-Term Borrowings                                |               |           |   |  
|Federal funds purchased and repurchase agreements    | $             | 595,272   |   | $
|Customer sweeps                                      |               | 599,021   |   |  
|FHLB advances                                        |               | 175,000   |   |  
|Commercial paper                                     |               | 32,601    |   |  
|Treasury, tax and loan note                          |               | 668,687   |   |  
|                                                     |               |           |   |  
|Total short-term borrowings                          |               | 2,070,581 |   |  
|                                                     |               |           |   |  
|                                                     |               |           |   |  
|Long-Term Borrowings                                 |               |           |   |  
|Repurchase agreements                                |               | 200,000   |   |  
|FHLB advances                                        |               | 223,093   |   |  
|Subordinated notes                                   |               | 242,478   |   |  
|Mandatorily redeemable preferred stock of subsidiary |               | 64,800    |   |  
|Note payable                                         |               | 797       |   |  
|Employee stock ownership plan note payable           |               |          |   |  
|Purchase accounting premiums, net of amortization    |               | 1,035     |   |  
|                                                     |               |           |   |  
|Total long term borrowings                           |               | 732,203   |   |  
|                                                     |               |           |   |  
|Total borrowings                                     |               | 2,802,784 |   |  
|Less: Customer sweeps                                |               | (599,021  | ) |  
|Add: Brokered deposits (1)                           |               | 1,983,505 |   |  
|                                                     |               |           |   |  
|Total wholesale borrowings                           | $             | 4,187,268 |   | $
|                                                     |               |           |   |  
|                                                     |               |           |   |  
|Wholesale borrowings as a % of total assets          |               | 29.7      | % |  

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|TSFG uses both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. In the first nine months of 2007, average borrowings totaled $2.5 billion, compared with $3.4 billion for the same period in 2006. Since mid-2006, the FHLB and certain structured repurchase agreement counterparties have exercised options to put certain borrowings back to TSFG. The termination of these borrowings was funded by issuance of 3 to 5-year brokered certificates of deposit combined with securities portfolio reductions. While the decision to issue

|31
|--



|brokered CDs rather than reissue similar puttable funding increased TSFGs current funding cost, removing the related funding optionality reduced future interest rate risk exposure.
Average wholesale borrowings totaled $4.0 billion in the first nine months of 2007, compared with $4.5
  billion in the first nine months of 2006. TSFG plans to reduce its reliance on wholesale borrowings
  by growth in customer funding and reductions in securities.
Daily funding needs are met through federal funds purchased and short-term brokered CDs, term TT&L,
repurchase agreements and FHLB advances. Balances in these accounts can fluctuate on a day-to-day
basis.
FHLB
advances are a source of funding that TSFG uses depending on the current level of deposits and the
availability of collateral to secure FHLB borrowings.
During the first nine months of 2007, TSFG recognized a loss on early extinguishment of debt of $1.5
million, which reflects the write-off of unamortized debt issuance costs associated with $97.7 million
of subordinated notes and mandatorily redeemable preferred stock with an average spread of 348 basis
points over LIBOR. TSFG replaced the debt with newly issued subordinated debt associated with trust
preferred securities totaling $126.3 million priced at an average spread of 138 basis points over LIBOR.
Subsequent to quarter-end, TSFG called $22.7 million of subordinated debt associated with trust preferred
securities and recognized a loss on extinguishment of debt of approximately $560,000. TSFG also plans
to call another $3.1 million of subordinated debt associated with trust preferred securities in fourth
quarter 2007.
Capital Resources and Dividends
Total shareholders equity totaled $1.5 billion, or 11.0% of total assets, at September 30, 2007
compared with $1.6 billion, or 11.0% of total assets, at December 31, 2006. Shareholders equity
remained basically flat as retention of earnings and the decrease in the net unrealized loss
on securities available for sale was offset by cash dividends paid and TSFGs repurchase of
3.0 million shares in the first nine months of 2007. In August 2007, the board of directors amended
and restated the existing stock repurchase authorization to be an additional $100 million, which
expires if unused on or before June 30, 2008. Subsequent to quarter-end, TSFG repurchased an additional
600,000 shares for $12.0 million in the open market.
TSFGs
unrealized loss on securities available for sale, net of income tax, which is included in accumulated
other comprehensive loss, was $38.7 million at September 30, 2007, compared with a $47.4 million
loss at December 31, 2006 due primarily to a decrease
in long-term interest rates as well as an approximately $400 million reduction in securities balances.
Book value per share at September 30, 2007 and December 31, 2006 was $21.22 and $20.73, respectively.
Tangible book value per share at September 30, 2007 and December 31, 2006 was $11.90 and $11.63,
respectively. Tangible book value was below book value as a result of goodwill and intangibles associated
with acquisitions of entities and assets accounted for as purchases. At September 30, 2007, goodwill
totaled $650.6 million, or $8.92 per share, and is not being amortized, while other intangibles totaled
$29.0 million and will continue to be amortized.
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 Carolina First Bank exceeded the well-capitalized regulatory requirements at September
30, 2007. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators, that, if undertaken, could have a direct material
effect on our Consolidated Financial Statements.
Table 12 sets forth various capital ratios for TSFG and Carolina First Bank. Under current regulatory
guidelines, debt associated with trust preferred securities qualifies for tier 1 capital treatment.
At September 30, 2007, trust preferred securities included in tier 1 capital totaled $225.5 million,
including $122.5 million of trust preferred securities issued in the first nine months of 2007. Specifically,
TSFG, through three newly-formed, unconsolidated subsidiaries
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32
|--



|(South Financial Capital Trust 2007-I, South Financial Capital Trust 2007-II, and South Financial Capital Trust 2007-III), issued $122.5 million of trust preferred securities to institutional investors during the first nine months of 2007. In connection with this transaction, TSFG contributed $3.8 million of capital and issued $126.3 million in unsecured subordinated notes to the subsidiaries.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                            

|Table 12      
|--------------
|              
|Capital Ratios
|              
|

| |                           | September 30, 2007 |       | Well 
      Capitalized
      Requirement | 
| | ------------------------- | ------------------ | ----- | ----------------------------------------- | 
| |                           |                    |       |                                           | 
| | TSFG                      |                    |       |                                           | 
| | Total risk-based capital  |                    | 11.28 | %                                         | 
| | Tier 1 risk-based capital |                    | 9.89  |                                           | 
| | Leverage ratio            |                    | 8.64  |                                           | 
| |                           |                    |       |                                           | 
| | Carolina First Bank       |                    |       |                                           | 
| | Total risk-based capital  |                    | 10.75 | %                                         | 
| | Tier 1 risk-based capital |                    | 9.13  |                                           | 
| | Leverage ratio            |                    | 7.97  |                                           | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|At
September 30, 2007, TSFGs tangible equity to tangible asset ratio totaled 6.47%, a decrease
from 6.48% at December 31, 2006, as retention of earnings and a decrease in the unrealized loss on
securities available for sale was offset by cash dividends and the repurchase of 3.0 million shares
of common stock in the first nine months of 2007. If interest rates increase, TSFG expects its unrealized
loss on securities available for sale to increase, leading to a lower tangible equity to tangible
asset ratio.
Carolina
First Bank is subject to certain regulatory restrictions on the amount of dividends it is permitted
to pay. TSFG has paid a cash dividend each quarter since the initiation of cash dividends on February 1,
1994. TSFG presently intends to pay a quarterly cash dividend on its common stock; however, future
dividends will depend upon TSFGs financial performance and capital requirements.
TSFG, through a real estate investment trust subsidiary, had 648 mandatorily redeemable preferred shares
outstanding at September 30, 2007 with a stated value of $100,000 per share. At September 30, 2007,
these preferred shares, which are reported as long-term debt on the consolidated balance sheet, totaled
$64.8 million. Under Federal Reserve Board guidelines, $26.4 million qualified as tier 1 capital,
and $30.8 million qualified as tier 2 capital. The terms for the preferred shares include certain
asset coverage and cash flow tests, which if not satisfied, may prohibit TSFGs real estate
trust subsidiary from paying dividends to Carolina First Bank, which in turn may limit its ability
to pay dividends to TSFG.
Earnings Review
Net Interest Income
Net interest income is TSFGs primary source of revenue. Net interest income is the difference
between the interest earned on assets, including loan fees and dividends on investment securities,
and the interest incurred for the liabilities to support such assets. The net interest margin measures
how effectively a company manages the difference between the yield on earning assets and the rate
incurred on funds used to support those assets. Fully tax-equivalent net interest income adjusts
the yield for assets earning tax-exempt income to a comparable yield on a taxable basis based on
a 35% marginal federal income tax rate. Table 13 presents average balance sheets and a net interest
income analysis on a tax-equivalent basis for the three and nine months ended September 30, 2007 and 2006.

|33
|--



|Table 13                                       
|-----------------------------------------------
|                                               
|Comparative Average Balances - Yields and Costs
|                                               
|(dollars in thousands)                         
|

|                                                        | Three Months Ended September 30, |           
|------------------------------------------------------- | -------------------------------- | ----------
|
|
|
|
|                                                        |                                  |           
|Earning assets                                          |                                  |           
|Loans (1)                                               | $                                | 10,065,454
|Investment securities, taxable (2)                      |                                  | 2,121,044 
|Investment securities, nontaxable (2) (3)               |                                  | 351,584   
|                                                        |                                  |           
|Total investment securities                             |                                  | 2,472,628 
|Federal funds sold and interest-bearing
  bank balances |                                  | 6,574     
|                                                        |                                  |           
|Total earning assets                                    |                                  | 12,544,656
|                                                        |                                  |           
|Non-earning assets                                      |                                  | 1,477,862 
|                                                        |                                  |           
|Total assets                                            | $                                | 14,022,518
|                                                        |                                  |           
|Liabilities and Shareholders Equity                    |                                  |           
|Liabilities                                             |                                  |           
|Interest-bearing liabilities                            |                                  |           
|Interest-bearing deposits                               |                                  |           
|Interest-bearing checking                               | $                                | 1,122,793 
|Savings                                                 |                                  | 172,110   
|Money market                                            |                                  | 2,236,493 
|Time deposits, excluding brokered 
     deposits        |                                  | 2,905,426 
|Brokered deposits                                       |                                  | 2,208,381 
|                                                        |                                  |           
|Total interest-bearing deposits                         |                                  | 8,645,203 
|Customer sweeps                                         |                                  | 559,906   
|Other borrowings (4)                                    |                                  | 1,858,800 
|                                                        |                                  |           
|Total interest-bearing liabilities                      |                                  | 11,063,909
|                                                        |                                  |           
|Noninterest-bearing liabilities                         |                                  |           
|Noninterest-bearing deposits                            |                                  | 1,198,350 
|Other noninterest-bearing liabilities                   |                                  | 240,771   
|                                                        |                                  |           
|Total liabilities                                       |                                  | 12,503,030
|Shareholders equity                                    |                                  | 1,519,488 
|                                                        |                                  |           
|Total liabilities and shareholders equity              | $                                | 14,022,518
|                                                        |                                  |           
|Net interest income (tax-equivalent)                    |                                  |           
|Less: tax-equivalent adjustment (3)                     |                                  |           
|                                                        |                                  |           
|Net interest income                                     |                                  |           
|                                                        |                                  |           
|Supplemental data:                                      |                                  |           
|Customer funding (5)                                    | $                                | 8,195,078 
|Wholesale borrowings (6)                                |                                  | 4,067,181 
|                                                        |                                  |           
|Total funding (7)                                       | $                                | 12,262,259
|                                                        |                                  |           

|                                                        |                                                                                                                                                                                                                                            
|------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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)                                                     | During third quarter 2007, TSFG capitalized $188,000 of interest in conjunction with the construction of its expanded corporate facilities.                                                                                                
|                                                        |                                                                                                                                                                                                                                            
|(5)                                                     | Customer funding includes total deposits (total interest-bearing plus noninterest-bearing deposits) less brokered deposits plus customer sweeps.                                                                                           
|                                                        |                                                                                                                                                                                                                                            
|(6)                                                     | Wholesale borrowings include borrowings less customer sweeps plus brokered deposits. For purposes of this table, wholesale borrowings equal the sum of other borrowings and brokered deposits, as customer sweeps are presented separately.
|                                                        |                                                                                                                                                                                                                                            
|(7)                                                     | Total funding includes customer funding and wholesale borrowings.                                                                                                                                                                          
|                                                        |                                                                                                                                                                                                                                            
|Note: Average balances are derived from daily balances.

|34
|--



|Table 13 (Continued)                           
|-----------------------------------------------
|                                               
|Comparative Average Balances - Yields and Costs
|                                               
|(dollars in thousands)                         
|

|                                                        | Nine Months Ended September 30, |           
|------------------------------------------------------- | ------------------------------- | ----------
|
|
|
|
|                                                        |                                 |           
|Earning assets                                          |                                 |           
|Loans (1)                                               | $                               | 9,955,125 
|Investment securities, taxable (2)                      |                                 | 2,259,935 
|Investment securities, nontaxable (2) (3)               |                                 | 364,692   
|                                                        |                                 |           
|Total investment securities                             |                                 | 2,624,627 
|Federal funds sold and interest-bearing
  bank balances |                                 | 7,087     
|                                                        |                                 |           
|Total earning assets                                    |                                 | 12,586,839
|                                                        |                                 |           
|Non-earning assets                                      |                                 | 1,500,585 
|                                                        |                                 |           
|Total assets                                            | $                               | 14,087,424
|                                                        |                                 |           
|Liabilities and Shareholders Equity                    |                                 |           
|Liabilities                                             |                                 |           
|Interest-bearing liabilities                            |                                 |           
|Interest-bearing deposits                               |                                 |           
|Interest-bearing checking                               | $                               | 1,161,835 
|Savings                                                 |                                 | 177,381   
|Money market                                            |                                 | 2,302,298 
|Time deposits, excluding brokered      deposits         |                                 | 2,903,159 
|Brokered deposits                                       |                                 | 2,008,977 
|                                                        |                                 |           
|Total interest-bearing deposits                         |                                 | 8,553,650 
|Customer sweeps                                         |                                 | 503,676   
|Other borrowings (4)                                    |                                 | 2,037,836 
|                                                        |                                 |           
|Total interest-bearing liabilities                      |                                 | 11,095,162
|                                                        |                                 |           
|Noninterest-bearing liabilities                         |                                 |           
|Noninterest-bearing deposits                            |                                 | 1,217,798 
|Other noninterest-bearing liabilities                   |                                 | 235,366   
|                                                        |                                 |           
|Total liabilities                                       |                                 | 12,548,326
|Shareholders equity                                    |                                 | 1,539,098 
|                                                        |                                 |           
|Total liabilities and shareholders equity              | $                               | 14,087,424
|                                                        |                                 |           
|Net interest income (tax-equivalent)                    |                                 |           
|Less: tax-equivalent adjustment (3)                     |                                 |           
|                                                        |                                 |           
|Net interest income                                     |                                 |           
|                                                        |                                 |           
|Supplemental data:                                      |                                 |           
|Customer funding (5)                                    | $                               | 8,266,147 
|Wholesale borrowings (6)                                |                                 | 4,046,813 
|                                                        |                                 |           
|Total funding (7)                                       | $                               | 12,312,960
|                                                        |                                 |           

|                                                        |                                                                                                                                                                                                                                            
|------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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)                                                     | During the nine months ended September 30, 2007, TSFG capitalized $188,000 of interest in conjunction with the construction of its expanded corporate facilities.                                                                          
|                                                        |                                                                                                                                                                                                                                            
|(5)                                                     | Customer funding includes total deposits (total interest-bearing plus noninterest-bearing deposits) less brokered deposits plus customer sweeps.                                                                                           
|                                                        |                                                                                                                                                                                                                                            
|(6)                                                     | Wholesale borrowings include borrowings less customer sweeps plus brokered deposits. For purposes of this table, wholesale borrowings equal the sum of other borrowings and brokered deposits, as customer sweeps are presented separately.
|                                                        |                                                                                                                                                                                                                                            
|(7)                                                     | Total funding includes customer funding and wholesale borrowings.                                                                                                                                                                          
|                                                        |                                                                                                                                                                                                                                            
|Note: Average balances are derived from daily balances.

|35
|--



|Fully tax-equivalent net interest income decreased 5.6% to $292.6 million for the first nine months
of 2007 from $309.9 million for the first nine months of 2006. TSFGs average earning assets
declined 1.2% to $12.6 billion for the first nine months of 2007 from $12.7 billion for the first
nine months of 2006 due primarily to the continued reduction of securities and the second quarter
2006 sale of indirect loans, partially offset by organic loan growth. As a result, average loans
as a percentage of average earning assets increased to 79.1% for the first nine months of 2007, up
from 75.5% for the first nine months of 2006, improving the earning asset mix and yield. At September
30, 2007, approximately 60% of TSFGs accruing loans were variable rate loans, the majority
of which are tied to the prime rate. TSFG has entered into receive-fixed interest rate swaps to hedge
the forecasted interest income from certain prime-based commercial loans as part of its overall interest
rate risk management. TSFG also has an interest rate floor that is designated as a hedge of commercial
loans and is intended to mitigate earnings exposure to falling interest rates.
The net interest margin for the first nine months of 2007 was 3.11%, compared with 3.25% for the first
nine months of 2006. The yield on average earning assets increased 34 basis points, aided by improved
loan yields, which were up 29 basis points. However, the improved yield on earning assets was more
than offset by a 52 basis point increase in the average cost of funding. This margin compression
reflects customer preferences for higher-cost deposit categories, competition for customer deposit
accounts within the industry, higher wholesale borrowing costs, and a continued challenging interest
rate environment, as well as TSFGs decision to replace puttable funding since mid-2006 primarily
with higher-cost non-puttable funding. The net interest margin stabilized in the third quarter 2007
at 3.12%, after increasing four basis points in second quarter 2007.
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 $36.6 million and $24.0 million in the first
nine months of 2007 and 2006, respectively. The provision for credit losses in the first nine months
of 2007 included $10.5 million related to the NC Development Loans (see discussion in Credit
Quality).
Net loan charge-offs were $28.9 million, or 0.39% of
average loans held for investment, for the first nine months of 2007, compared with $19.9 million,
or 0.28% of average loans held for investment, for the first nine months of 2006. Net loan charge-offs
for the first nine months of 2007 included $9.2 million, or 0.09% of average loans held for investment,
related to the aforementioned NC Development Loans. The allowance for credit losses equaled 1.18%,
1.16%, and 1.16% of loans held for investment as of September 30, 2007, December 31, 2006, and September
30, 2006. The September 30, 2007 allowance for credit losses included $1.3 million designated for
the NC Development Loans. See Loans, Credit Quality, and Allowance
for Loan Losses and Reserve for Unfunded Lending Commitments.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|36
|--



|Noninterest Income
Table
14 shows the components of noninterest income.
|-----------------------------------------------------------------------
|                                                                       

|Table 14                        
|--------------------------------
|                                
|Components of Noninterest Income
|                                
|(dollars in thousands)          
|

|                                              |  | Three Months Ended
      September 30, |        | Nine Months Ended
      September 30, |  
|--------------------------------------------- |  | -------------------------------------- | ------ | ------------------------------------- | -
|
|
|
|Service charges on deposit accounts           |  | $                                      | 11,213 |                                       | $
|Debit card income                             |  |                                        | 2,445  |                                       |  
|Customer service fee income                   |  |                                        | 1,533  |                                       |  
|
|Total customer fee income                     |  |                                        | 15,191 |                                       |  
|
|
|Insurance income                              |  |                                        | 2,839  |                                       |  
|Retail investment services                    |  |                                        | 2,313  |                                       |  
|Trust and investment management income        |  |                                        | 1,642  |                                       |  
|Benefits administration fees                  |  |                                        | 889    |                                       |  
|
|Total wealth management income                |  |                                        | 7,683  |                                       |  
|
|                                              |  |                                        |        |                                       |  
|Bank-owned life insurance income              |  |                                        | 2,974  |                                       |  
|Mortgage banking income                       |  |                                        | 834    |                                       |  
|Merchant processing income, net (1)           |  |                                        | 928    |                                       |  
|Gain (loss) on derivative activities          |  |                                        | 198    |                                       |  
|Gain (loss) on securities                     |  |                                        | 287    |                                       |  
|Gain on disposition of assets and liabilities |  |                                        |       |                                       |  
|Loss on indirect auto loans                   |  |                                        |       |                                       |  
|Other                                         |  |                                        | 2,678  |                                       |  
|
|Total noninterest income                      |  | $                                      | 30,773 |                                       | $
|

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In second quarter 2007, TSFG began presenting its merchant income net of direct processing costs. Direct

merchant processing costs totaled (in thousands) $4,131 and $11,081, respectively, for the three

and nine months ended September 30, 2007, and $2,830 and $7,673, respectively, for the three and

nine months ended September 30, 2006. Amounts presented for prior periods have been reclassified

to conform to the current presentation.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Total
customer fee income increased 1.6% in the first nine months of 2007 compared to the same period in
2006, as increases in debit card income and customer service fee income were partially offset by
a decrease in service charges on deposit accounts, which decreased primarily due to lower nonsufficient
funds charges and returned check fees. This decrease was driven by lower service chargeable balances
and customer convenience initiatives, including longer branch hours and all day deposit credit.
In
the first nine months of 2007 compared with the corresponding period in 2006, wealth management income
increased $1.6 million, or 7.6%, reflecting increases in each category of wealth management.
For
the first nine months of 2007, bank owned life insurance increased $1.6 million compared with the
same period in 2006 due to the receipt of life insurance proceeds in the second quarter of 2007.
Mortgage banking income decreased 19.4% in the first nine months of 2007 when compared to the same
period in 2006 due partially to a $514,000 gain on the sale of TSFGs mortgage servicing rights
portfolio in the second quarter of 2006 and lower origination volumes in response to industry conditions.
Mortgage loans originated by TSFG originators totaled $412.0 million and $556.2 million in the first
nine months of 2007 and 2006, respectively.
Merchant
processing income (net of direct processing costs) increased 36.7% in the first nine months of 2007
compared to the same period in 2006 as a result of increased transactions.

|37
|--



|Net losses on securities totaled $3.3 million for the first nine months of 2007 compared to a net gain of $4.3 million for first nine months of 2006. In the second quarter 2007, TSFG recorded $2.9 million in other-than-temporary impairment on its corporate bond portfolio and subsequently sold approximately $70 million of its corporate bond portfolio in third quarter 2007, with $20.7 million remaining in the portfolio at September 30, 2007.
      Noninterest Expenses
    Table 15 shows the components of noninterest expenses.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|Table 15                          
|----------------------------------
|                                  
|Components of Noninterest Expenses
|                                  
|(dollars in thousands)            
|

|                                                               |  | Three Months Ended
      September 30, |        | Nine Months Ended
      September 30, |  
|-------------------------------------------------------------- |  | -------------------------------------- | ------ | ------------------------------------- | -
|
|
|
|Salaries and wages, excluding contract buyouts
  and severance |  | $                                      | 34,535 |                                       | $
|Employee benefits                                              |  |                                        | 8,862  |                                       |  
|Occupancy                                                      |  |                                        | 8,723  |                                       |  
|Furniture and equipment                                        |  |                                        | 6,543  |                                       |  
|Professional services                                          |  |                                        | 4,278  |                                       |  
|Advertising and business development                           |  |                                        | 1,443  |                                       |  
|Amortization of intangibles                                    |  |                                        | 1,907  |                                       |  
|Telecommunications                                             |  |                                        | 1,404  |                                       |  
|Loss on early extinguishment of debt                           |  |                                        | 1,299  |                                       |  
|Employment contract buyouts and severance                      |  |                                        |       |                                       |  
|Other                                                          |  |                                        | 10,601 |                                       |  
|
|Total noninterest expenses                                     |  | $                                      | 79,595 |                                       | $
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In first quarter 2007, TSFG implemented an expense reduction initiative, the goal of which is to reduce
annual operating expenses by approximately $20 million from the fourth quarter 2006 run rate (excluding
employment contract buyouts and severance and loss on early extinguishment of debt). TSFG realized
these targeted savings in second and third quarter 2007 with a decline of $5.0 million and $6.9 million,
respectively, from fourth quarter 2006 run rate of $85.2 million (excluding changes in employment
contract buyouts and severance and loss on early extinguishment of debt). In fourth quarter 2007,
TSFG expects expenses associated with FDIC insurance premiums to increase approximately $1.2 million.
Previously, these premiums had been offset by related assessment credits which will be fully utilized
in the fourth quarter.
Effective July 1, 2007, TSFG merged Mercantile Bank into Carolina First Bank. Post-merger, TSFG continues
to conduct its Florida operations under the Mercantile Bank name.
Salaries and wages (excluding contract buyouts and severance) and employee benefits increased $5.4
million, or 4.2%, in the first nine months of 2007 compared with the same period in 2006, despite
the fact that full-time equivalent employees as of September 30, 2007 decreased to 2,457 from 2,563
at September 30, 2006. In addition to normal annual salary increases and increased insurance costs,
TSFG has invested in several key hires in an effort to strengthen its management team and has incurred
additional salary expense in order to attract and retain this talent. The increase in personnel expense
was also affected by higher incentive expense under TSFGs LTIP as a result of service awards
approved by the board of directors. The nature of certain incentive plans and accruals may result
in increased volatility in personnel expense in future periods, based on managements assessment
(with the concurrence of the compensation committee of the board of directors) of the probability
that certain performance targets will be met.
Occupancy
and furniture and equipment expense increased 9.1% for the first nine months of 2007 compared with
the corresponding period in 2006 due primarily to increased rent expense for new and expanded branch
locations. Professional services decreased by 16.0% for the first nine months of 2007 compared with
the first nine months of 2006. In the first nine months of 2006, professional services included outsourcing
costs for internal audit projects which are now performed by TSFGs staff; this decrease was
partially offset in 2007 with additional professional services related to the

|38
|--



|development of TSFGs strategic initiatives. In addition, most other categories decreased for
the first nine months of 2007 compared to the first nine months of 2006 due to the aforementioned
expense reduction initiatives implemented in first quarter of 2007.
During
the first nine months of 2007, TSFG recognized a loss on early extinguishment of debt of $1.5 million,
which reflects the write-off of unamortized debt issuance costs associated with $97.7 million of
subordinated notes and mandatorily redeemable preferred stock.
Income Taxes
The effective income tax rate as a percentage of pretax income was 32.6% for the first nine months
of 2007 and 33.1% for the first nine months of 2006. The blended statutory federal and state income
tax rate was approximately 37% for both of these periods.
On October 5, 2007, TSFG was awarded a $100 million allocation under the New Markets Tax Credits (NMTC)
program from the Community Development Financial Institution Fund (CDFI) of the Department
of the Treasury. This award, the first allocation TSFG has received under this initiative, is designed
to attract private-sector investment to help finance community development projects, stimulate economic
growth and create jobs in lower income communities by providing tax credits to lenders who have an
allocation. The NMTC provides tax credits aggregating 39% of the invested amount over seven years,
although a portion of the value gained via the tax credits must be used to benefit the respective projects.
Third Quarter Results
Net
income for the three months ended September 30, 2007 totaled $25.8 million, or $0.35 per diluted
share, compared with $32.2 million, or $0.43 per diluted share, for the three months ended September
30, 2006.
Fully tax-equivalent net interest income totaled $98.3 million, a decrease of $2.1 million, or 2.1%,
compared with the third quarter of 2006. Average earning assets decreased 0.1% principally as a result
of the continued reduction of investment securities, partially offset by loan growth.
The net interest margin for third quarter 2007 was 3.12%, compared with 3.19% for third quarter 2006.
The yield on average earning assets increased 15 basis points, aided by a continued shift into loans
and away from investment securities. However, the improved yield on earning assets was more than
offset by a 23 basis point increase in the average cost of funding. The net interest margin for third
quarter 2007 remained stable when compared to second quarter 2007.
The
provision for credit losses totaled $10.5 million in the third quarter of 2007, compared with $6.6
million in the third quarter of 2006. Net loan charge-offs as a percentage of average loans held
for investment increased to 0.66% for the third quarter of 2007 versus 0.27% for the third quarter
of 2006. Net loan charge-offs in third quarter 2007 included $7.7 million of NC Development Loans.
The allowance for credit losses as a percentage of loans held for investment increased to 1.18% at
September 30, 2007 from 1.16% at September 30, 2006.
Noninterest income included a net gain on derivatives of $198,000 for the third quarter of 2007, compared
with a net gain on derivatives of $3.9 million for the third quarter of 2006. Noninterest income
in the third quarter of 2006 included a gain on disposition of assets and liabilities of $2.5 million
related to the sale of a branch, partially offset by a loss on indirect auto loans of $667,000. Customer
fee income, wealth management income, and merchant processing income increased, while mortgage banking
income declined as loan origination volume slowed.
For
the third quarter of 2007, noninterest expenses decreased $1.2 million to $79.6 million from $80.8
million in third quarter 2006 as TSFG continued its focus on expenses in keeping with its expense
control initiative.
Enterprise Risk Management
There
have been no significant changes to the discussion of Enterprise Risk Management, including Market
Risk and Asset/Liability Management, Derivatives and Hedging Activities, Economic Risk, Credit Risk,
Liquidity Risks, Operational Risk, and Compliance and Litigation Risks, as presented in pages 55
through 60 of TSFGs Annual Report on Form 10-K for the year ended December 31, 2006.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|39
|--



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

| |  | interest rate scenarios that assume gradual as well as instantaneous parallel changes in interest rates
  along the entire yield curve;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                        
| |  | a static balance sheet for net income analysis;                                                                                        
| |   |                                                                                                                                        

| |  | as assets and liabilities mature or reprice they are reinvested at current rates and keep the same
  characteristics (i.e., remain as either variable or fixed rate) for net income analysis;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                              

| |  | mortgage backed securities prepayments are based on historical industry data;                  
| | - | -----------------------------------------------------------------------------------------------
| |   |                                                                                                
| |  | loan prepayments are based upon historical bank-specific analysis and historical industry data;
| |   |                                                                                                

| |  | deposit retention and average lives are based on historical bank-specific analysis;                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                   
| |  | whether callable/puttable assets and liabilities are called/put is based on the implied forward yield
  curve for each interest rate scenario; and
| |   |                                                                                                                                                   
| |  | management takes no action to counter any change.                                                                                                 

|                                                                                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Table
16 reflects the sensitivity of net income to changes in interest rates. It shows the effect that
the indicated changes in interest rates would have on net income over the next 12 months compared
with the base case or flat interest rate scenario. The base case or flat scenario assumes interest
rates stay at September 30, 2007 and 2006 levels, respectively.
|                                                                                                                                                                                                                                                                                                                                                                           

|Table 16                   
|---------------------------
|                           
|Net Income at Risk Analysis
|                           
|

|      |   |  |  | Annualized Hypothetical Percentage Change in
      Net Income |   
|----- | - |  |  | ------------------------------------------------------------- | --
|
|
|
|
|
|2.00  | % |  |  | (3.7                                                          | )%
|1.00  |   |  |  | (1.7                                                          | ) 
|Flat  |   |  |  |                                                              |   
|(1.00 | ) |  |  | 0.7                                                           |   
|(2.00 | ) |  |  | 1.8                                                           |   

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For September 30, 2006, the rising 100 and 200 basis points and falling 100 and 200 basis points interest
  rate scenarios assume an immediate and parallel change in interest rates along the entire yield curve.
  For September 30, 2007, net income sensitivity is shown for both immediate and gradual rate shifts
  over a 12 month period. For future periods, managements primary focus regarding net income
  sensitivity will be on gradual rate shifts, which TSFG views as providing a more realistic assessment
  of potential risk exposures.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Table
17 reflects the sensitivity of the economic value of equity (EVE) to changes in interest
rates. EVE is a measurement of the inherent, long-term balance sheet-related economic value of TSFG
(defined as the fair value of all assets minus the fair value of all liabilities and their associated
off balance sheet amounts) at a given point in time. Table 17 shows the effect that the indicated
changes in interest rates would have on the fair value of net assets at September 30, 2007 and 2006,
respectively, compared with the base case or flat interest rate scenario. The base case or flat scenario
assumes interest rates stay at September 30, 2007 and 2006 levels, respectively.

|40
|--



|Table 17                              
|--------------------------------------
|                                      
|Economic Value of Equity Risk Analysis
|                                      
|

|Interest Rate Scenario (1) |   |  | Annualized Hypothetical Percentage Change in
      Economic Value of Equity
    September 30, |   
|-------------------------- | - |  | --------------------------------------------------------------------------------------------- | --
|
|
|
|2.00                       | % |  | (10.2                                                                                         | )%
|1.00                       |   |  | (4.3                                                                                          | ) 
|Flat                       |   |  |                                                                                              |   
|(1.00                      | ) |  | 1.4                                                                                           |   
|(2.00                      | ) |  | (2.1                                                                                          | ) 

|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The rising 100 and 200 basis point and falling 100 and 200 basis point interest rate scenarios assume
  an instantaneous and parallel change in interest rates along the entire yield curve.

|                                                                                                                                      
|--------------------------------------------------------------------------------------------------------------------------------------
|There
are material limitations with TSFGs models presented in Tables 16 and 17, which include, but
are not limited to, the following:
|                                                                                                                                      

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Off-Balance Sheet Arrangements
In
the normal course of operations, TSFG engages in a variety of financial transactions that, in accordance
with generally accepted accounting principles, are not recorded in the financial statements, or are
recorded in amounts that differ from the notional amounts. These transactions involve, to varying
degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by TSFG
for general corporate purposes or for customer needs. Corporate purpose transactions are used to
help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions
are used to manage customers requests for funding.
Lending
Commitments.  Lending commitments include loan commitments, standby letters of credit, unused business credit
card lines, and documentary letters of credit. These instruments are not recorded in the consolidated
balance sheet until funds are advanced under the commitments. TSFG provides these lending commitments
to customers in the normal course of business. TSFG estimates probable losses related to binding
unfunded lending commitments and records a reserve for unfunded lending commitments in other liabilities
on the consolidated balance sheet. See Note 6 to the Consolidated Financial Statements for disclosure
of the amounts of lending commitments.
Derivatives.  In accordance with SFAS 133, TSFG records derivatives at fair value, as either assets or liabilities,
on the consolidated balance sheets. Derivative transactions are measured in terms of the notional
amount, but this amount is not recorded on the balance sheets and is not, when viewed in isolation,
a meaningful measure of the risk profile of the instrument. The notional amount is not exchanged,
but is used only as the basis upon which interest and other payments are calculated.
See
Derivative Financial Instruments under Balance Sheet Review and Note
5 to the Consolidated Financial Statements for additional information regarding derivatives.

|41
|--



|Liquidity
      Liquidity management ensures that adequate funds are available to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses, provide funds for dividends and debtservice, manage operations on an ongoing basis, and capitalize on new business opportunities. Funds are primarily provided by customer funding, wholesale borrowings, principal and interest payments on loans, loan sales, sales of securities available for sale, maturities and paydowns of securities, and earnings. Securities classified as available for sale which are not pledged may be sold in response to changes in interest rates or liquidity needs. A significant portion of TSFGs
securities are pledged as collateral for FHLB borrowings, repurchase agreements and public funds deposits. Management believes that cash flows from investments, in addition to its available borrowing capacity and efforts to grow deposits, are sufficient to provide the necessary funding for the remainder of 2007.
    In managing its liquidity needs, TSFG focuses on its existing assets and liabilities, as well as its ability to enter into additional borrowings, and on the manner in which they combine to provide adequate liquidity to meet our needs. Table 18 summarizes future contractual obligations based on maturity dates as of September 30, 2007. Table 18 does not include payments which may be required under employment and deferred compensation agreements. In addition, Table 18 does not include payments required for interest and income taxes (see Item 1, Consolidated Statements of Cash Flows for details on interest and income taxes paid for the nine months ended September 30, 2007).
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|Table 18               
|-----------------------
|                       
|Contractual Obligations
|                       
|
|

|                                        |  | Payments Due by Period |          
|--------------------------------------- |  | ---------------------- | ---------
|
|
|
|Time deposits                           |  | $                      | 4,883,016
|Short-term borrowings                   |  |                        | 2,070,581
|Long-term debt                          |  |                        | 731,168  
|Operating leases                        |  |                        | 186,284  
|Expanded corporate facilities contracts |  |                        | 35,354   
|
|Total contractual obligations           |  | $                      | 7,906,403
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Net cash provided by operations, deposits from customers, and wholesale borrowings have been the primary
sources of liquidity for TSFG. TSFG is focusing additional efforts aimed at acquiring new deposits
through TSFGs established branch network to enhance liquidity and reduce reliance on wholesale
borrowing. Liquidity needs are a factor in developing the deposit pricing structure, which may be
altered to retain or grow deposits if deemed necessary.
TSFG has the ability to borrow from the FHLB and maintain short-term lines of credit from unrelated
banks. FHLB advances outstanding as of September 30, 2007 totaled $398.1 million. At September 30,
2007, TSFG had $53.3 million of unused borrowing capacity from the FHLB. TSFG funds its short-term
needs principally with deposits, including brokered deposits, federal funds purchased, repurchase
agreements, FHLB advances, treasury tax and loan notes, and the principal runoff of investment securities.
At September 30, 2007, TSFG had unused short-term lines of credit totaling $1.7 billion (which may
be canceled at the lenders option).
The Federal Reserve Bank provides back-up funding for commercial banks. Collateralized borrowing relationships
with the Federal Reserve Banks of Richmond and Atlanta are in place for Carolina First Bank to meet
emergency funding needs. At September 30, 2007, TSFG had qualifying collateral to secure advances
up to $1.3 billion, of which none was outstanding.
At September 30, 2007, the parent company had three unused short-term lines of credit totaling $35.0
million. These lines of credit mature November 14, 2007 for $10.0 million, June 30, 2008 for $10.0
million, and August 10, 2008 for $15.0 million.
TSFG enters into agreements in the normal course of business to extend credit to meet the financial
needs of its customers. For amounts and types of such agreements at September 30, 2007, see Off-Balance
Sheet

|42
|--



|Arrangements. Increased demand for funds under these agreements would reduce TSFGs available liquidity and could require additional sources of liquidity.
Recently Adopted/Issued Accounting Pronouncements
See Note 1  Recently Adopted Accounting Pronouncements and Recently Issued Accounting Pronouncements
in the accompanying Notes to the Consolidated Financial Statements for details of recently adopted
and recently issued accounting pronouncements and their expected impact on the Companys Consolidated
Financial Statements.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|43
|--



|Item 3.    Quantitative and Qualitative Disclosures about Market Risk
See Enterprise Risk Management in Item 2, Management Discussion and Analysis of Financial
Condition and Results of Operations for quantitative and qualitative disclosures about market risk,
which information is incorporated herein by reference.
Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
At September 30, 2007, TSFGs management, under the supervision and with the participation of
its Chief Executive Officer and Chief Financial Officer, evaluated its disclosure controls and procedures
as currently in effect. Based on this evaluation, TSFGs management concluded that as of September
30, 2007, TSFGs disclosure controls and procedures were effective (1) to provide reasonable
assurance that information required to be disclosed by TSFG in the reports filed or submitted by
it under the Exchange Act was recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and (2) to provide reasonable assurance that information
required to be disclosed by TSFG in such reports is accumulated and communicated to TSFGs management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
TSFG
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 quarterly assessment during the quarter ended September 30, 2007 or through
the date of this Quarterly Report on Form 10-Q that have materially affected, or are reasonably
likely to materially affect, TSFGs internal control over financial reporting.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|44
|--



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

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed under Item 1A (pages
10-12) of TSFGs Annual Report on Form 10-K for the year ended December 31, 2006.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
TSFG has repurchased shares of our common stock in private transactions and open-market purchases,
as authorized by our Board. The amount and timing of stock repurchases will be based on factors,
including but not limited to, managements assessment of TSFGs capital structure and liquidity,
the market price of TSFGs common stock compared to managements assessment of the
stocks underlying value, and applicable regulatory, legal, and accounting matters. The following
table presents information about our stock repurchases for the three months ended September 30, 2007.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|Issuer Purchases of Equity Securities   |        
|--------------------------------------- | -------
|
|
|
|July 1, 2007 to July 31, 2007           | 850,000
|August 1, 2007 to August 31, 2007       | 16,092 
|September 1, 2007 to September 30, 2007 | 489    
|                                        |        
|Total                                   | 866,581
|                                        |        

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These shares were canceled in connection with exercise of options, vesting of restricted stock, or
  distribution from the deferred compensation plan. Pursuant to TSFGs stock option plans, participants
  may exercise stock options by surrendering shares of TSFG common stock the participants already own
  or, in some cases, by surrendering fully vested stock options as payment of the option exercise price.
  Pursuant to TSFGs restricted stock plans, participants may tender shares of vested restricted
  stock as payment for taxes due at the time of vesting. Pursuant to TSFGs Executive Deferred
  Compensation Plan, participants may tender shares of stock as payment for taxes due at the time of
  distribution. Shares surrendered by participants of these plans are repurchased at current market
  value pursuant to the terms of the applicable stock option, restricted stock, or deferred compensation
  plan and not pursuant to publicly announced share repurchase programs.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(2) | In December of 2006, TSFG announced a stock repurchase program authorizing TSFG to repurchase up to
  4 million shares of its common stock. This authorization replaced TSFGs existing stock repurchase
  authorizations. Through July 31, 2007, TSFG had repurchased 3 million shares pursuant to this authorization.
  In August 2007, the authorization was amended and restated to be an aggregate of $100 million, which
  expires if unused on or before June 30, 2008. Subsequent to quarter-end, TSFG repurchased an additional
  600,000 shares of its common stock in the open market at an average price per share of $19.96. As
  of the filing of this Form 10Q, there was $88.0 million remaining under the authorization.                                                                                                                                                                                                                                                                           

|                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|On August 2, 2007, we issued 1,738 shares to eight individuals relating to the earn-out provisions
of the prior acquisition of Bowditch Insurance Corporation, an insurance agency acquired by TSFG
in 2005. This issuance of shares was not registered under the Securities Act of 1933 in reliance
upon the exemption set forth in Section 4(2) thereof.

|45
|--



|Item 3.    Defaults upon Senior Securities
None.
Item 4.    Submission of Matters to a Vote of Securities Holders
None.
Item 5.    Other Information
None.
Item 6.    Exhibits
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                              

|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, 2007 Quarterly
Report on Form 10-Q with the Securities and Exchange Commission (SEC) and is accessible
at no cost on TSFGs web site, www.thesouthgroup.com, through the Investor Relations link. TSFGs
SEC filings are also available through the SECs web site at www.sec.gov.

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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, 2007 | /s/ James R. Gordon                                 
|                       |                                                     
|                       | James R. Gordon                                     
|                       | Executive Vice President and Chief Financial Officer
|                       | (Principal Accounting and Financial Officer)        

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