UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-Q (Mark One)x
Quarterly report pursuant
  to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
  quarterly period ended March 31, 2007o
Transition report pursuant
  to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
  transition period from____ to____ Commission file number 0-15083 The
South Financial Group, Inc.(Exact Name of
Registrant as Specified in Its Charter) South
  Carolina

57-0824914(State
  or Other Jurisdiction of

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

29601(Address
  of Principal Executive Offices)

(Zip
  Code) (864)
255-7900Registrants telephone
number, including area code Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No o. Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
One): Large
  Accelerated Filer x
Accelerated
  filer o
Non-accelerated
  filer o Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No x. The number of outstanding
shares of the issuers $1.00 par value common stock as of May 7, 2007 was
74,151,226.    PART I. FINANCIAL INFORMATION


Item 1.
Financial StatementsTHE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (Unaudited)

March 31,December 31,2007

2006

2006AssetsCash and due from
banks

$
257,884

$
249,324

$
326,567Interest-bearing bank
balances


7,012


10,406


31,264Federal funds sold and
securities purchased to resell


50,000





SecuritiesAvailable for
sale, at fair
  value


2,546,047


2,982,574


2,743,456Held to
maturity (fair value $46,025,
  $57,263, and $52,101, respectively)


46,217


57,508


52,308Total
securities


2,592,264


3,040,082


2,795,764Loans held for sale


33,519


23,536


28,556Loans held for
investment


9,898,134


9,720,891


9,701,867Less:
Allowance for loan
  losses


(113,736
)

(111,219
)

(111,663
)Net loans
held for investment


9,784,398


9,609,672


9,590,204Premises and equipment,
net


223,738


203,953


219,163Accrued interest
receivable


72,801


69,739


77,523Goodwill


650,536


649,684


650,492Other intangible assets,
net


33,075


41,644


35,076Other assets


452,920


463,885


455,907Total
assets

$
14,158,147

$
14,361,925

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

$
1,286,800

$
1,468,825

$
1,280,908Interest-bearing


8,664,408


7,709,857


8,235,832Total
deposits


9,951,208


9,178,682


9,516,740Federal funds
purchased and
  repurchase agreements


1,496,168


1,534,680


1,421,099Other
short-term borrowings


111,365


36,356


347,620Long-term
debt


809,290


1,911,929


1,130,475Accrued
interest payable


77,380


58,000


68,940Other
liabilities


151,126


161,585


163,610Total
liabilities


12,596,537


12,881,232


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








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








Common
stock-par value $1 per
  share; authorized 200,000,000 shares; issued and outstanding 74,673,419,
  74,907,489, and 75,341,276 shares, respectively


74,673


74,907


75,341Surplus


1,150,288


1,153,056


1,167,685Retained
earnings


373,788


321,427


367,261Guarantee of
employee stock
  ownership plan debt


(95
)

(327
)

(151
)Accumulated
other
  comprehensive loss, net of tax


(37,044
)

(68,370
)

(48,104
)Total
shareholders equity


1,561,610


1,480,693


1,562,032Total
liabilities and
  shareholders equity

$
14,158,147

$
14,361,925

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

1

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

Three Months Ended 
  March 31,2007

2006Interest
  IncomeInterest and fees on loans

$
186,628

$
169,188Interest and dividends on
  securities:Taxable


28,825


32,543Exempt from
federal income
  taxes


3,048


3,344Total
interest and dividends
  on securities


31,873


35,887Interest on short-term
  investments


141


292Total
interest income


218,642


205,367Interest
  ExpenseInterest on deposits


88,479


62,479Interest on short-term
  borrowings


21,264


18,098Interest on long-term debt


14,361


21,878Total
interest expense


124,104


102,455Net
Interest
  Income


94,538


102,912Provision
  for Credit Losses


9,013


9,911Net interest
income after
  provision for credit losses


85,525


93,001Noninterest
  Income


30,844


29,320Noninterest
  Expenses


85,351


79,834Income before
income taxes


31,018


42,487Income taxes


10,500


14,680Net
Income

$
20,518

$
27,807Average
  Common Shares Outstanding, Basic


74,737


74,685Average
  Common Shares Outstanding, Diluted


75,245


75,339Net
  Income Per Common Share, Basic

$
0.27

$
0.37Net
  Income Per Common Share, Diluted


0.27


0.37See notes to consolidated financial statements (unaudited), which
are
an integral part of these statements.

2

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

Shares ofCommonStock

PreferredStock

CommonStock

Surplus

RetainedEarningsandOther*

AccumulatedOtherComprehensiveLoss, Net

TotalBalance, December 31,
2005


74,721,461

$


$
74,721

$
1,151,005

$
307,081

$
(45,900
)
$
1,486,907Net income














27,807





27,807Other comprehensive loss, net
of income tax of $13,083




















(22,470
)

(22,470
)Comprehensive income




















5,337Cash dividends declared ($0.17
per common share)














(12,735
)




(12,735
)Common stock
activity:Exercise of
stock options, including income tax benefit of $643


164,607





165


2,706








2,871Dividend
reinvestment plan


32,624





32


781








813Restricted
stock plan


(20,110
)




(20
)

(140
)







(160
)Employee
stock purchase plan


4,765





5


113








118Director
compensation


4,142





4


110








114Common stock released by trust
for deferred compensation














125





125Deferred compensation payable
in common stock














(125
)




(125
)Cumulative effect of initial
application of SAB 108, net of income
  tax of $1,858














(3,412
)




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











(2,301
)

2,301





Stock option expense











751








751Miscellaneous











31


58





89Balance, March 31,
2006


74,907,489

$


$
74,907

$
1,153,056

$
321,100

$
(68,370
)
$
1,480,693Balance, December 31,
2006


75,341,276

$


$
75,341

$
1,167,685

$
367,110

$
(48,104
)
$
1,562,032Net income














20,518





20,518Other comprehensive income, net
of income tax of $6,452

















11,060


11,060Comprehensive income




















31,578Cash dividends declared ($0.18
per common share)














(13,431
)




(13,431
)Common stock
activity:Repurchase of
stock


(1,000,000
)




(1,000
)

(24,989
)







(25,989
)Exercise of
stock options, including income tax benefit of $619


275,816





276


5,328








5,604Dividend
reinvestment plan


33,166





33


778








811Restricted
stock plan


11,390





11


208


(72
)




147Employee
stock purchase plan


5,250





5


123








128Director
compensation


4,905





5


125








130Acquisitions


1,616





2


42








44Common stock released by trust
for deferred compensation














21





21Deferred compensation payable
in common stock














(21
)




(21
)Cumulative effect of initial
application of FIN 48














(488
)




(488
)Stock option expense











971








971Miscellaneous











17


56





73Balance, March 31,
2007


74,673,419

$


$
74,673

$
1,150,288

$
373,693

$
(37,044
)
$
1,561,610*
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)

Three Months Ended March 31,2007

2006Cash Flows from Operating
ActivitiesNet income

$
20,518

$
27,807Adjustments to reconcile net
income to net cash provided by operating
  activitiesDepreciation,
amortization,
  and accretion, net


8,256


11,718Provision for
credit losses


9,013


9,911Share-based
compensation
  expense


1,755


1,019Loss (gain) on sale
of securities
  available for sale


1,385


(675)(Gain) loss
on derivative
  activities


(97
)

1,125Gain on sale
of loans


(1,550
)

(2,094
)Loss (gain)
on disposition of
  premises and equipment


49


(126
)Loss on
disposition of other
  real estate owned


136


572Excess tax
benefits from
  share-based compensation


(619
)

(643
)Increase in
trading account
  assets





(6
)Origination
of loans held for
  sale


(125,525
)

(104,066
)Sale of loans
held for sale and principal repayments


129,651


119,857Decrease
(increase) in other
  assets


8,298


(897
)(Decrease)
increase in other
  liabilities


(3,632
)

12,224Net cash
provided by
  operating activities


47,638


75,726Cash Flows from Investing
ActivitiesSale of securities available
for sale


125,057


13,085Maturity, redemption, call, or
principal repayments of securities
  available for sale


90,202


98,509Maturity, redemption, call, or
principal repayments of securities
  held to maturity


6,060


5,100Purchase of securities
available for sale


(4,370
)

(24,595
)Origination of loans held for
investment, net of principal repayments


(213,432
)

(292,533
)Sale of other real estate
owned


2,887


2,062Sale of premises and
equipment


108


453Purchase of premises and
equipment


(9,807
)

(15,434
)Net cash used
for investing
  activities


(3,295
)

(213,353
)Cash Flows from Financing
ActivitiesIncrease (decrease) in
deposits


428,981


(42,476
)Increase in federal funds
purchased and repurchase agreements


75,069


113,379Decrease in other short-term
borrowings


(236,700
)

(17,115
)Payment of long-term
debt


(321,091
)

(10,090
)Cash dividends paid on common
stock


(13,579
)

(12,708
)Repurchase of common
stock


(25,989
)

Excess tax benefits from
share-based compensation


619


643Other common stock
activity


5,412


3,019Net cash
(used for) provided
  by financing activities


(87,278
)

34,652Net change in cash and cash
equivalents


(42,935
)

(102,975
)Cash and cash equivalents at
beginning of year


357,831


362,705Cash and cash equivalents at
end of period

$
314,896

$
259,730Supplemental Cash Flow
DataInterest paid

$
115,564

$
98,438Income tax payments (refunds
received), net


4,823


(4,046
)Significant non-cash investing
and financing transactions:Change in
unrealized loss on
  available for sale securities


15,538


(31,425
)Loans
transferred to other
  real estate owned


2,385


1,033See notes to consolidated financial statements (unaudited), which
are
an integral part of these statements.

4

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

Note 1  General

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

Nature of Operations

TSFG
is a financial holding company headquartered in Greenville, South Carolina that
offers a broad range of financial products and services, including banking,
treasury services, merchant processing, mortgage, and wealth management (which
consists of insurance, retail investment, benefits administration, and trust
and investment management). It has two bank subsidiaries, Carolina First Bank,
a South Carolina banking corporation headquartered in Greenville, South
Carolina, and Mercantile Bank, a Florida banking corporation headquartered in
Jacksonville, Florida. It also owns several non-bank subsidiaries. At March 31,
2007, TSFG operated through 78 branch offices in South Carolina, 66 in Florida,
and 26 in North Carolina. In South Carolina,
the branches are primarily located in the states largest metropolitan areas.
The Florida operations are principally concentrated in the Jacksonville,
Orlando, Tampa Bay, Southeast Florida, and Gainesville areas. The North
Carolina branches are primarily located in the Hendersonville and Asheville
areas of western North Carolina and in the Wilmington area of eastern North
Carolina.

Accounting Estimates and Assumptions

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

Principles of Consolidation

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

Reclassifications

Certain
prior year amounts have been reclassified to conform to the 2007 presentations.

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

5

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

due on
settlements with South Carolina and the Internal Revenue Service during 2006.
As of March 31, 2007, the Company does not expect a significant increase or
decrease in unrecognized tax benefits in the next 12 months.

TSFG
and its subsidiaries are subject to U.S. federal income tax as well as income
tax of multiple state jurisdictions. The Company has substantially concluded
all U.S. federal income tax matters for years through 2003. The Companys 2005
federal income tax return is currently under examination. In addition, the
Company is subject to state and local income tax examinations for the tax years
2001 through 2006.

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

Accounting for
Purchases of Life Insurance

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

Accounting for
Certain Hybrid Financial Instruments

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

Recently Issued Accounting Pronouncements

Fair
Value 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.

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.

6

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

Note 2  Supplemental Financial Information
to Consolidated Statements of Income

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

Three
  Months EndedMarch 31,2007

2006Noninterest
IncomeService charges on deposit
accounts

$
10,613

$
11,288Debit card income


2,177


1,921Customer service fee
income


1,291


1,009Total customer
fee income


14,081


14,218Insurance income


3,297


2,977Retail investment
services


1,958


2,023Trust and investment management
income


1,594


1,457Benefits administration
fees


742


667Total wealth
management income


7,591


7,124Merchant processing
income


3,755


2,686Bank-owned life insurance
income


2,851


2,819Mortgage banking
income


2,069


1,884Gain (loss) on derivative
activities


97


(1,125
)(Loss) gain on sale of
securities available for sale


(1,385
)

675Other


1,785


1,039Total
noninterest income

$
30,844

$
29,320Noninterest
ExpensesSalaries and wages

$
36,832

$
32,054Employee benefits


9,759


9,029Occupancy


8,608


7,313Furniture and
equipment


6,462


5,952Professional services


4,103


5,779Merchant processing
expense


3,020


2,165Advertising and business
development


1,931


2,506Amortization of
intangibles


2,001


2,207Telecommunications


1,393


1,418Other


11,242


11,411Total
noninterest expenses

$
85,351

$
79,8347

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

Note 3  Accumulated Other Comprehensive
Income (Loss)

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

Three
  Months Ended
  March 31,2007

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

$
(47,378
)
$
(46,350
)Other comprehensive income
(loss):Unrealized
holding gains (losses) arising during the period


14,153


(30,750
)Income tax
(expense) benefit


(5,276
)

11,405Less:
Reclassification
  adjustment for gains and losses included in net income


1,385


(675
)Income
  tax (benefit) expense


(485
)

2339,777


(19,787
)Balance at end of
period


(37,601
)

(66,137
)Net
  Unrealized Gains (Losses) on Cash Flow HedgesBalance at beginning of
period


(726
)

450Other comprehensive income
(loss):Unrealized
gain (loss) on change in fair values


2,405


(3,959
)Income tax
(expense) benefit


(842
)

1,386Less:
Amortization of
  terminated swaps


(431
)

(169
)Income
  tax expense


151


591,283


(2,683
)Balance at end of
period


557


(2,233
)$
(37,044
)
$
(68,370
)Total other comprehensive
income (loss)

$
11,060

$
(22,470
)Net income


20,518


27,807Comprehensive income

$
31,578

$
5,337Note 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):

March 31,
  2007Less than
  12 Months

12 Months
  or Longer

TotalFair
  Value

Unrealized
  Losses

Fair
  Value

Unrealized
  Losses

Fair
  Value

Unrealized
  LossesSecurities Available for
SaleU.S. Treasury

$


$


$
165,206

$
1,869

$
165,206

$
1,869U.S. Government
agencies


11,049


15


604,357


8,562


615,406


8,577Mortgage-backed
securities


10,026


100


1,213,352


46,195


1,223,378


46,295State and municipals


39,720


160


238,531


4,377


278,251


4,537Corporate bonds


7,507


42


71,198


1,737


78,705


1,779Equity investments


2,668


232








2,668


232$
70,970

$
549

$
2,292,644

$
62,740

$
2,363,614

$
63,289Securities Held to
MaturityState and municipals

$
999

$
3

$
17,822

$
400

$
18,821

$
4038

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

March 31, 2006Less than 12 Months

12 Months or Longer

TotalFairValue

UnrealizedLosses

FairValue

UnrealizedLosses

FairValue

UnrealizedLossesSecurities Available for
SaleU.S. Treasury

$
126,918

$
963

$
49,845

$
2,427

$
176,763

$
3,390U.S. Government
agencies


567,055


14,350


83,431


3,915


650,486


18,265Mortgage-backed
securities


469,895


15,553


1,115,726


58,580


1,585,621


74,133State and municipals


158,693


3,076


178,620


5,093


337,313


8,169Corporate bonds


74,303


2,479


39,938


1,634


114,241


4,113Equity investments


65


3


965


94


1,030


97$
1,396,929

$
36,424

$
1,468,525

$
71,743

$
2,865,454

$
108,167Securities Held to
MaturityState and municipals

$
5,256

$
109

$
18,958

$
514

$
24,214

$
623At March
31, 2007, TSFG had 1,111 individual investments that were in an unrealized loss
position. The unrealized losses on
investments summarized above, except for equity investments, were attributable
to increases in interest rates, rather than deterioration in credit quality.
The majority of these securities are government or agency securities and,
therefore, pose minimal credit risk. TSFG believes it has the ability and
intent to hold its debt securities until a market price recovery or maturity.
Therefore, at March 31, 2007, these investments are not considered impaired on
an other-than-temporary basis.

At
March 31, 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.

March 31,
  2007

December
  31, 2006Fair Value

Notional

Fair Value

NotionalAsset

Liability

Amount

Asset

Liability

AmountCash Flow HedgesInterest rate swaps associated
with
  borrowing activities

$
27

$


$
105,000

$
143

$


$
183,000Interest rate swaps associated
with lending
  activities


2,917


1,990


785,000


1,979


3,408


870,000Interest rate floor associated
with lending
  activities


1,652





200,000


1,564





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





27,079


1,117,585





33,541


1,167,585Other
DerivativesForward foreign currency
contracts


71


71


17,906


36


36


18,119Options, interest rate swaps
and other


6,987


6,651


289,112


6,236


5,922


278,846$
11,654

$
35,791

$
2,514,603

$
9,958

$
42,907

$
2,717,550For
the three months ended March 31, 2007 and 2006, noninterest income included a
gain of $97,000 and a loss of $1.1 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 $140,000 and $451,000, respectively, for
the three months ended March 31, 2007 and 2006; and other miscellaneous items.

9

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

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 March 31, 2007, the estimated recourse reserve liability, included
in other liabilities, totaled $6.1 million. TSFG will continue to evaluate the
reserve level and may make adjustments through earnings as more information
becomes known. There can be no guarantee that any liability or cost arising out
of this matter will not exceed any established reserves.

Loan Commitments

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

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

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

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

Outstanding CommitmentsMarch 31, 2007

December 31, 2006Commitment on loans

$
2,202,216

$
2,204,476Standby letters of credit


173,253


177,905Unused credit card lines


30,024


28,442Documentary letters of
  credit


560


944Total

$
2,406,053

$
2,411,76710

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

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):

Three Months EndedMarch 31,2007

2006Net income
(numerator)

$
20,518

$
27,807BasicAverage common shares
outstanding (denominator)


74,736,832


74,685,192Earnings per share

$
0.27

$
0.37DilutedAverage common shares
outstanding


74,736,832


74,685,192Average dilutive potential
common shares


508,136


654,091Average diluted shares
outstanding (denominator)


75,244,968


75,339,283Earnings per share

$
0.27

$
0.37The
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:

Number
  of Shares

Range of
  Exercise PricesFor the
Three Months EndedMarch 31,
  2007

1,354,004

$26.25 to $31.96March 31,
  2006

1,424,299

$26.55 to $31.96On
December 14, 2006, TSFGs Board of Directors authorized a stock repurchase
program of up to 4 million shares. This authorization replaced TSFGs existing
stock repurchase authorization. In first quarter 2007, TSFG repurchased 1
million shares in connection with the aforementioned authorization, under an
accelerated share repurchase agreement. Subsequent to quarter-end, TSFG
repurchased an additional 1 million shares.

Note 8  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 regional 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

11

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

structure
and/or allocation process changes, allocations, transfers and assignments may
change. Segment information (in thousands) is shown in the table below.

South
  Carolina
  Bank

North
  Carolina
  Bank

Florida
  Bank

Other

TotalThree Months Ended March 31,
2007Net interest income before
intersegment income (expense)

$
41,497

$
20,158

$
39,909

$
(7,026
)
$
94,538Intersegment interest income
(expense)


538


(6,600
)

(1,613
)

7,675


Net interest income


42,035


13,558


38,296


649


94,538Provision for credit losses -
net charge-offs (1)


2,194


(108
)

3,409


1,384


6,879Noninterest income


13,421


2,634


11,069


3,720


30,844Noninterest expenses - direct
(2)


17,682


5,472


18,507


795


42,456Segment contribution

$
35,580

$
10,828

$
27,449

$
2,190


76,047Provision for credit losses in
excess of net charge-offs (1)














2,134Noninterest expenses -
unallocated (3)














42,895Income before income
taxes














31,018Income tax expense














10,500Net income













$
20,518March 31, 2007Total assets

$
4,020,507

$
1,803,717

$
4,007,766

$
4,326,157

$
14,158,147Total loans held for
investment


3,781,314


1,687,102


3,468,494


961,224


9,898,134Total deposits


3,649,717


1,169,746


3,077,076


2,054,669


9,951,208Total goodwill


119,275


87,900


440,124


3,237


650,536Three Months Ended March 31,
2006Net interest income before
intersegment income (expense)

$
47,777

$
18,947

$
41,118

$
(4,930
)
$
102,912Intersegment interest income
(expense)


(673
)

(3,907
)

(1,297
)

5,877


Net interest income


47,104


15,040


39,821


947


102,912Provision for credit losses -
net charge-offs (1)


4,477


1,462


271


597


6,807Noninterest income


13,620


2,568


9,613


3,519


29,320Noninterest expenses - direct
(2)


15,997


5,219


17,224


757


39,197Segment contribution

$
40,250

$
10,927

$
31,939

$
3,112


86,228Provision for credit losses in
excess of net charge-offs (1)














3,104Noninterest expenses -
unallocated (3)














40,637Income before income
taxes














42,487Income tax expense














14,680Net income













$
27,807March 31, 2006Total assets

$
4,064,333

$
1,581,940

$
3,750,270

$
4,965,382

$
14,361,925Total loans held for
investment


3,813,204


1,456,087


3,183,906


1,267,694


9,720,891Total deposits


3,657,281


1,024,055


3,019,431


1,477,915


9,178,682Total goodwill


118,940


87,829


439,678


3,237


649,684(1)
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.12

Item 2.
Managements Discussion and Analysis of
  Financial Condition and Results of OperationsThe
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 three months ended March
31, 2007 are not necessarily indicative of results that may be attained for any
other period.

TSFG
primarily operates through Carolina First Bank and Mercantile Bank, which are
collectively referred to as the Subsidiary Banks.

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

PageWebsite Availability of Reports Filed with
  the Securities and Exchange Commission
13Forward-Looking Statements
13Non-GAAP Financial Information
14Overview
14Critical Accounting Policies and Estimates
15Expanded Corporate Facilities
16Balance Sheet Review
17Earnings Review
29Enterprise Risk Management
34Off-Balance Sheet Arrangements
35Liquidity
36Recently Adopted/Issued Accounting
  Pronouncements
37Website 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);
level, composition, and repricing characteristics of the securities
  portfolio;
deposit growth, change in the mix or type of deposit products;
availability of wholesale funding;
fluctuations in consumer spending;13


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 $14.2 billion in total assets and 170 branch offices in
South Carolina, Florida, and North Carolina at March 31, 2007. Founded in 1986,
TSFG focuses on fast-growing banking markets in the Southeast and
concentrates its growth in metropolitan statistical areas. TSFG operates primarily through:


Carolina First Bank, operating in South Carolina, North Carolina, and
  on the Internet as Bank CaroLine; and
Mercantile Bank, operating in Florida.At March 31, 2007, approximately 47% of TSFGs customer deposits (total
deposits less brokered deposits) were in South Carolina, 39% were in Florida,
and 14% were in North Carolina. (See Noninterest Expenses for a discussion of
the planned merger of TSFGs two bank subsidiaries subsequent to quarter-end.)

14

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

TSFG
reported net income of $20.5 million, or $0.27 per diluted share, for the first
three months of 2007, compared with $27.8 million, or $0.37 per diluted share,
for the first three months of 2006. Average diluted shares outstanding
decreased 0.1% to 75.2 million shares, principally as a result of TSFGs
repurchase of 1 million shares at the end of January 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 77.8% for
first quarter 2007 from 75.0% for first quarter 2006. On the funding side,
average customer funding (which includes deposits less brokered deposits plus
customer sweeps) as a percentage of average total funding increased to 67.3% for
first quarter 2007, up from 63.4% for first quarter 2006.

Using
period-end balances, TSFGs loans held for investment at March 31, 2007
increased 1.8% from a year ago, and total deposit balances grew 8.4%. Customer
funding (deposits less brokered deposits plus customer sweeps) increased 4.5%
since March 31, 2006. Since March 2006, TSFG sold $359.6 million of indirect
auto loans, as well as $2.6 million of loans and $27.9 million of deposits in
connection with the sale of the Mullins branch. Excluding these amounts, growth
in loans held for investment totaled 5.5% from March 31, 2006 to March 31,
2007.

Tax-equivalent
net interest income was $96.2 million for the first three months of 2007, an
$8.5 million decrease from $104.7 million for the first three months of 2006.
The net interest margin decreased to 3.08% for the first three months of 2007
from 3.29% for the first three months of 2006. This margin compression reflects an ongoing
change in customer preference for higher-cost deposit categories, higher
wholesale borrowing costs, and actions by management to reduce interest rate
risk and optionality on the balance sheet. Most recently, the net
interest margin declined 4 basis points to 3.08% for the first three months of
2007 from 3.12% for fourth quarter 2006.

Noninterest
income increased 5.2% to $30.8 million for the first three months of 2007
compared to $29.3 million for the first three months of 2006. Noninterest
income reflected growth in wealth management, mortgage banking, and merchant
processing income, offset by a decrease in service charges on deposits.

Noninterest
expenses totaled $85.4 million for the first three months of 2007, compared to
$79.8 million for the first three months of 2006, an increase of 6.9%.
Salaries, wages and employee benefits (excluding contract buyouts and
severance), which account for 52.5% of total noninterest expenses for the first
three months of 2007, increased 10.7% to $44.8 million. The increase in noninterest expenses included higher incentive expense,
higher salaries attributable to annual salary increases and TSFGs expansion of
its management team, higher occupancy expense, and higher merchant processing
expense. Noninterest expenses for the first three months of 2007 declined
to $85.4 million from $93.6 million for fourth quarter 2006, primarily from
TSFGs expense reduction initiatives implemented during the first quarter of
2007 as well as a $3.2 million decline in employment contract buyouts and
severance.

At
March 31, 2007, nonperforming assets as a percentage of loans held for
investment and foreclosed property increased to 0.47% from 0.46% at March 31,
2006. For the three months ended March 31, 2007 and 2006, annualized net loan
charge-offs were 0.29% of average loans held for investment. TSFGs provision
for credit losses decreased to $9.0 million for the first three months of 2007
from $9.9 million for the first three months of 2006, primarily as a result of
slower loan growth. The allowance for loan loss coverage of nonperforming loans
at March 31, 2007 decreased to 2.63 times, compared with 3.11 times at March
31, 2006.

TSFGs
tangible equity to tangible asset ratio totaled 6.52% at March 31, 2007, up
from 5.77% at March 31, 2006, primarily as a result of retention of earnings,
the continued runoff of the securities portfolio (which decreased tangible
assets), and a decrease in net unrealized losses on available for sale
securities. At March 31, 2007, the after-tax net unrealized loss on available
for sale securities totaled $37.6 million, down from $66.1 million at March 31,
2006.

Critical Accounting
Policies and Estimates

TSFGs
accounting policies are in accordance with accounting principles generally
accepted in the United States and with general practice within the banking
industry. TSFG makes a number of judgmental estimates and assumptions relating
to reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the Consolidated Financial Statements and
the reported amounts of revenues and expenses during periods presented.
Material

15

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

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

Expanded Corporate Facilities

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,  including  legal,  human  resources,  accounting,
finance,  certain loan  operations,  credit,  treasury,  internal  audit,  risk  management,  and other support and
administrative  functions.  The initial phase of the plans included the purchase of  approximately 68 acres of land
in Greenville  County,  South  Carolina,  for an aggregate  investment  of $10.4  million in early 2006.  While the
Company is still finalizing  details of the campus, it expects to make additional  investments of approximately $90
million  between now and 2011,  with the first phase being  completed  and occupied  during the first half of 2009.
The Company believes  assimilating the workforce at one location will provide certain  efficiencies through greater
interaction and communication as well as an increased ability to attract and retain employees.

In connection with this project,  the applicable  state,  county,  and city  governments and other sources
will provide the Company's banking subsidiary  certain tax and economic  incentives based on, among other things, a
total  investment of approximately  $100 million and the location of approximately  600 new positions at the campus
by  December  31,  2011.  The  requisite  new  positions  must be in  addition  to the  approximately  325  current
Greenville-based  positions  that will be relocated  from existing  leased  facilities  to the campus  beginning in
early 2009. The current  estimated  range of incentives  has a value  totaling  between $55 and $60 million ($30 to
$35  million  on a present  value  basis)  assuming  the  minimum  investment  and job  creation  requirements  are
achieved.  A  significant  portion  of the  incentives  require  one or both  of the  investment  and job  creation
requirements.

The new positions to be located at the campus will be derived from (i) the  management  and  consolidation
of existing  positions,  including  relocating some functions  currently  located  outside of South Carolina;  (ii)
growth and expansion of current and future business lines; and (iii) future acquisitions (if any).

Prior to 2009,  TSFG does not expect to recognize any  significant  expenses  associated  with the project
due  to the  capitalization  of  costs  during  the  construction  period.  However,  upon  completion  of  certain
infrastructure  elements  (roads,  sidewalks,  etc.),  the Company  will  contribute  its net  investment  in those
improvements  to the City of  Greenville  in 2008 or early 2009  (currently  estimated at $3 million to $5 million,
net of certain  economic  grants).  Additionally,  the Company  currently  estimates it will incur one-time  charges  totaling $3 million to $5 million
after-tax related to lease terminations and impairment of leasehold improvements.

Assuming all incentives are earned,  TSFG does not currently expect the incremental  occupancy costs to be
significant in future  periods.  Although not finalized,  the Company is also pursuing other  incentives as well as
managing the overall timing of the additional investments through 2011.


16

Balance Sheet Review

Loans

TSFG
focuses its lending activities on small and middle market businesses and
individuals in its geographic markets. At March 31, 2007, outstanding loans
totaled $9.9 billion, which equaled 99.8% of total deposits (124.6% of customer
deposits) and 70.1% of total assets. The major components of the loan portfolio
were commercial loans, commercial real estate loans, and consumer loans
(including both direct and indirect loans). Substantially all loans were to
borrowers located in TSFGs market areas in South Carolina, Florida, and North
Carolina. At March 31, 2007, approximately 8% of the portfolio was unsecured.

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

Loans
held for investment increased $177.2 million, or 1.8%, to $9.9 billion at March
31, 2007 from $9.7 billion at March 31, 2006. Excluding the sale of indirect
auto loans in the second quarter of 2006 ($359.6 million) and the third quarter
2006 sale of the Mullins branch ($2.6 million), loan growth was 5.5% since
March 31, 2006.

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 increased to $33.5 million at March 31, 2007 from $28.6 million at
December 31, 2006 and $23.5 million at March 31, 2006, partly due to TSFGs
decision to hold fewer mortgage loans in its held for investment portfolio.

Table 1 summarizes outstanding
loans by collateral type for real estate secured loans and by borrower type for
all other loans. Collateral type represents the underlying assets securing the
loan, rather than the purpose of the loan.


Table 1Loan Portfolio Composition(dollars in thousands)March 31,

December 31,2007

2006

2006Commercial, financial and
agricultural

$
2,231,572

$
1,986,588

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


1,718,783


1,478,931


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


1,369,196


1,524,957


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


3,797,868


3,658,755


3,727,316Consumer


780,715


1,071,660


775,805Loans held for
investment

$
9,898,134

$
9,720,891

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


22.5
%

20.5
%

22.2
%Real estate - construction
(1)


17.4


15.2


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


13.8


15.7


14.6Commercial secured by real
estate (1)


38.4


37.6


38.4Consumer


7.9


11.0


8.0Total


100.0
%

100.0
%

100.0
%(1)
These
  categories include loans to businesses other than real estate companies where
  owner-occupied real estate is pledged on loans to finance operations,
  equipment, and facilities.17

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

Table 2Loan Portfolio Composition Based on Loan Purpose(dollars in thousands)March 31,

December 31,2007

2006

2006Commercial LoansCommercial
  and industrial

$
2,596,705

$
2,371,946

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


883,738


754,229


830,179Commercial
  real estate


4,209,149


4,090,130


4,171,6317,689,592


7,216,305


7,493,020Consumer LoansIndirect -
  sales finance


666,801


928,633


660,401Direct
  retail


283,461


333,773


292,993Home equity


531,922


561,964


528,9091,482,184


1,824,370


1,482,303Mortgage Loans


726,358


680,216


726,544Total loans
held for investment

$
9,898,134

$
9,720,891

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


26.2
%

24.4
%

25.7
%Owner -
  occupied real estate (1)


8.9


7.7


8.6Commercial
  real estate


42.5


42.1


43.0Consumer


15.0


18.8


15.2Mortgage


7.4


7.0


7.5Total


100.0
%

100.0
%

100.0
%(1)
In Table 3,
  these loans are included in the Real estate  construction and Commercial
  secured by real estate categories, which also include loans to non-real
  estate industry borrowers.Commercial
and industrial loans are loans to finance short-term
and intermediate-term cash needs of businesses. Typical needs include the need
to finance seasonal or other temporary cash flow imbalances, growth in working
assets created by sales growth, and purchases of equipment and vehicles. Credit
is extended in the form of short-term single payment loans, lines of credit for
periods up to a year, revolving credit facilities for periods up to five years,
and amortizing term loans for periods up to ten years.

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

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

Indirect
- sales finance loans are loans to individuals to
finance the purchase of motor vehicles. They are closed at the auto dealership
but approved in advance by TSFG for immediate purchase. Loans are extended on
new and used

18

motor vehicles
with terms varying from two years to six years. During the second quarter of
2006, TSFG sold $359.6 million of indirect auto loans.

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

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

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

Table
3 sorts the commercial real estate portfolio by geography and property type.
The portfolios most significant concentration is in commercial real estate
loans. Real estate development and construction are major components of the
economic activity that occurs in TSFGs markets. By product type, commercial
construction and development loans, the largest component of commercial real
estate loans, represent 41.1% of the total commercial real estate loans at
March 31, 2007, up from 39.4% at December 31, 2006. The risk attributable to
the concentration in commercial real estate loans is managed by focusing our
lending on markets with which we are familiar and on borrowers with proven
track records whom we believe possess the financial means to weather adverse
market conditions. Consequently, although the analysis of reserve adequacy
includes an adjustment to account for the risk inherent in this concentration,
management believes the loss potential in its commercial real estate loans is
not materially greater than that of any other segment of the portfolio. In
addition, management believes that diversification by geography, property type,
and borrower partially mitigates the risk of loss in its commercial real estate
loan portfolio.

19

Table 3Commercial
  Real Estate Loans(dollars
  in thousands)March 31, 2007

December 31, 2006Balance

% of
  Total

Balance

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

$
904,448


21.5
%
$
913,742


21.9
%Tampa Bay Florida


561,538


13.3


562,905


13.5North Coastal South Carolina
(Myrtle Beach)


349,638


8.3


274,548


6.6Midlands South Carolina
(Columbia)


346,870


8.2


381,810


9.2Northeast Florida
(Jacksonville)


344,404


8.2


354,372


8.5Upstate South Carolina
(Greenville)


337,518


8.0


338,576


8.1North Central Florida


323,369


7.7


313,009


7.5Central Florida
(Orlando)


289,034


6.9


279,922


6.7South Florida (Ft.
Lauderdale)


243,457


5.8


263,807


6.3South Coastal South Carolina
(Charleston)


224,676


5.3


233,834


5.6Marion County, Florida
(Ocala)


143,175


3.4


147,098


3.5Greater South Charlotte South
Carolina (Rock Hill)


141,022


3.4


108,008


2.6Total
commercial real estate loans

$
4,209,149


100.0
%
$
4,171,631


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

$
1,727,974


41.1
%
$
1,642,221


39.4
%Mixed use


437,039


10.4


441,853


10.6Other real estate
structures


307,436


7.3


315,785


7.6Residential
construction


296,209


7.0


266,779


6.41-4 family residential
investment property


282,581


6.7


302,883


7.2Retail


270,424


6.4


280,817


6.7Undeveloped land


248,203


5.9


253,706


6.1Multi-family
residential


239,863


5.7


233,094


5.6Hotel/motel


164,507


3.9


178,845


4.3Other (1)


234,913


5.6


255,648


6.1Total
commercial real estate loans

$
4,209,149


100.0
%
$
4,171,631


100.0
%(1)
Other includes all loans
  in categories smaller than the lowest percentages shown above.Note: At March 31, 2007
  and December 31, 2006, average loan size for commercial real estate loans
  totaled $501,000 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 both Carolina First Bank
and Mercantile Bank and by requiring Board of Director approval to exceed this
house limit. At March 31, 2007, TSFGs house lending limit was $35 million, and
five credit relationships totaling $201.6 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 $416.7 million,
or 4.2% of total loans held for investment at March 31, 2007, up from 3.2% of
total loans held for investment at March 31, 2006.

TSFG
participates in shared national credits (multi-bank credit facilities of $20
million or more), primarily to borrowers who are headquartered or conduct
business in or near our markets. At March 31, 2007, the loan portfolio included
commitments totaling $1.0 billion in shared national credits. Outstanding
borrowings under these commitments totaled $468.2 million at March 31, 2007,
increasing from $413.2 million at December 31, 2006 and $237.3 million at March
31, 2006.

20

Credit Quality

A
willingness to take credit risk is inherent in the decision to grant credit.
Prudent risk-taking requires a credit risk management system based on sound
policies and control processes that ensure compliance with those policies.
TSFGs credit risk management system is defined by policies approved by the
Board of Directors that govern the risk underwriting, portfolio monitoring, and
problem loan administration processes. Adherence to underwriting standards is
managed through a multi-layered credit approval process and after-the-fact
review by credit risk management of loans approved by lenders. Through daily
review by credit risk managers, monthly reviews of exception reports, and
ongoing analysis of asset quality trends, compliance with underwriting and loan
monitoring policies is closely supervised. The administration of problem loans
is driven by policies that require written plans for resolution and quarterly
meetings with credit risk management to review progress. Credit risk management
activities are monitored by Credit Committees of each banking subsidiarys
Board of Directors, which meet monthly to review credit quality trends, new
large credits, loans to insiders, large problem credits, credit policy changes,
and reports on independent credit reviews of branch offices.

Table
4 presents our credit quality indicators.

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

2006

2006Loans held for
investment

$
9,898,134

$
9,720,891

$
9,701,867Allowance for loan
losses


113,736


111,219


111,663Allowance for credit losses
(1)


114,822


112,454


112,688Nonaccrual loans - commercial
(2)


36,403


28,367


28,733Nonaccrual loans -
consumer


4,195


3,818


5,250Nonaccrual loans -
mortgage


2,624


3,537


3,185Restructured loans
(2)








Total
nonperforming loans


43,222


35,722


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


3,572


9,323


4,341Total
nonperforming assets

$
46,794

$
45,045

$
41,509Loans past due 90 days or more
(mortgage and consumer with interest
  accruing) (3)

$
193

$
2,369

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


0.47
%

0.46
%

0.43
%Allowance for loan losses to
nonperforming loans


2.63
x

3.11
x

3.00
x(1)
The allowance for credit
  losses is the sum of the allowance for loan losses and the reserve for
  unfunded lending commitments.(2)
At March 31, 2007,
  December 31, 2006, and March 31, 2006, nonaccrual loans  commercial included
  $1.9 million, $500,000, and $693,000, respectively, in restructured loans.(3)
At March 31, 2007, there
  were no mortgage loans past due 90 days or more still accruing interest.TSFGs
nonperforming asset ratio (nonperforming assets as a percentage of loans held
for investment and foreclosed property) increased to 0.47% at March 31, 2007
from 0.43% at December 31, 2006 and 0.46% at March 31, 2006. Geographically,
South Carolina and North Carolina nonaccrual loans increased since year-end,
while Florida nonaccrual loans declined modestly since year-end.

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

21

Table 5Impaired
  Loans(dollars
  in thousands)At and For the
  Three Months
  Ended March 31,

At and For the
  Year Ended
  December 31,2007

2006

2006Impaired loans (1)

$
36,403

$
22,055

$

28,733Average investment in
  impaired loans


35,445


20,506



26,331Related allowance


7,716


4,904



6,686Foregone interest


882


269



1,665(1)
In second quarter 2006,
  TSFG enhanced its policy to include nonaccruing loans that are fully
  protected by collateral as impaired loans. This change increased impaired
  loans by $9.3 million and $6.0 million, respectively, at March 31, 2007 and
  December 31, 2006.Allowance for Loan Losses and
Reserve for Unfunded Lending Commitments

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

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

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

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

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

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

22

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

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

Table 6Summary of
  Loan and Credit Loss Experience(dollars
  in thousands)At and For the
  Three Months
  Ended March 31,

At and For the
  Year Ended
  December 31,2007

2006

2006Allowance for loan losses,
beginning of year

$
111,663

$
107,767

$
107,767Allowance adjustment for loans
sold








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


(8,611
)

(8,873
)

(36,623
)Loans
recovered


1,732


2,066


10,261(6,879
)

(6,807
)

(26,362
)Additions to allowance through
provision expense


8,952


10,259


33,347Allowance for loan losses, end
of period

$
113,736

$
111,219

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

$
1,025

$
1,583

$
1,583Provision for unfunded lending
commitments


61


(348
)

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

$
1,086

$
1,235

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

$
112,688

$
109,350

$
109,350Allowance adjustment for loans
sold








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


(8,611
)

(8,873
)

(36,623
)Loans
recovered


1,732


2,066


10,261(6,879
)

(6,807
)

(26,362
)Additions to allowance through
provision expense


9,013


9,911


32,789Allowance for credit losses,
end of period

$
114,822

$
112,454

$
112,688Average loans held for
investment

$
9,783,328

$
9,606,556

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


9,898,134


9,720,891


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


0.29
%

0.29
%

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


1.15


1.14


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


1.16


1.16


1.16Allowance for loan losses to
nonperforming loans


2.63
x

3.11
x

3.00
xSecurities

TSFG
uses the investment securities portfolio for several purposes. It serves as a
vehicle to manage interest rate and prepayment risk, to generate interest and
dividend income, to provide liquidity to meet funding requirements, and to
provide collateral for pledges on public deposits, FHLB advances, and
securities sold under repurchase agreements. Table 7 shows the carrying values
of the investment securities portfolio.

23

Table 7Investment
  Securities Portfolio Composition(dollars
  in thousands)March 31,December 31,2007

2006

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

$
167,295

$
178,864

$
166,719U.S. Government
agencies


657,708


648,264


653,034Mortgage-backed
securities


1,246,384


1,603,090


1,400,288State and municipal


315,372


356,057


341,488Other investments:Corporate
bonds


98,454


114,241


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


44,119


67,504


52,246Community bank
stocks


12,210


10,577


12,406Other equity
investments


4,505


3,977


3,9102,546,047


2,982,574


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


46,117


57,408


52,208Other investments


100


100


10046,217


57,508


52,308Total

$
2,592,264

$
3,040,082

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


18.3
%

21.2
%

19.7
%Percentage of Total
Securities PortfolioU.S. Treasury


6.5
%

5.9
%

6.0
%U.S. Government
agencies


25.4


21.3


23.3Mortgage-backed
securities


48.1


52.7


50.1State and municipal


13.9


13.6


14.1Other investments


6.1


6.5


6.5Total


100.0
%

100.0
%

100.0
%Securities
(i.e., securities available for sale and securities held to maturity) excluding
the unrealized loss on securities available for sale averaged $2.8 billion in
the first three months of 2007, 12.2% below the average for the corresponding
period in 2006 of $3.2 billion. TSFG has continued to decrease securities by
not reinvesting maturing investments and principal paydowns in an effort to
lower its interest rate risk in a rising rate and inverted yield curve
environment and to reduce its reliance on wholesale borrowings. In addition, in
first quarter 2007, TSFG sold approximately $116 million of securities
available for sale to manage interest rate risk as determined by our new
asset/liability management model.

The
average tax-equivalent portfolio yield increased for the three months ended
March 31, 2007 to 4.79% from 4.73% in the first three months of 2006.

TSFG
strives to provide adequate flexibility to proactively manage cash flow as
market conditions change. Cash flow may be used to pay-off borrowings, to fund
loan growth, or to reinvest in securities at then current market rates.

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

The
available for sale portfolio constituted 98.2% of total securities at March 31,
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.
Approximately 71% of MBS are collateralized mortgage obligations (CMOs) with
an average duration

24

of 5.5 years. At March 31,
2007, approximately 19.5% of the MBS portfolio was variable rate or hybrid
variable rate, where the rate adjusts on an annual basis after a specified
fixed rate period, generally ranging from three to ten years.

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

The
net unrealized loss on securities available for sale (pre-tax) totaled $59.8
million at March 31, 2007, compared with a $75.3 million loss at December 31,
2006 and a $105.1 million loss at March 31, 2006 as long term interest rates
decreased during this period and the runoff 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 March
31, 2007, TSFG had equity investments in 10 community banks located in the
Southeast with a cost basis of $9.6 million and a market value of $12.2
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.

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 months ended March 31, 2007 and 2006, noninterest income included a
gain of $97,000 and a loss of $1.1 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. Carolina First Bank and Mercantile Bank
face 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
8 shows the breakdown of total deposits by type of deposit and the respective
percentage of total deposits.

25

Table 8Type of Deposits(dollars in thousands)March 31,December 31,2007

2006

2006Noninterest-bearing demand
deposits

$
1,286,800

$
1,468,825

$
1,280,908Interest-bearing
checking


1,198,714


1,188,449


1,208,125Money market accounts


2,374,242


2,261,672


2,435,413Savings accounts


184,283


191,449


181,192Total core
deposits


5,044,039


5,110,395


5,105,638Time deposits under
$100,000


1,797,170


1,381,468


1,680,878Time deposits of $100,000 or
more


1,132,510


1,285,048


1,105,793Customer
deposits (1)


7,973,719


7,776,911


7,892,309Brokered deposits


1,977,489


1,401,771


1,624,431Total
deposits


9,951,208


9,178,682


9,516,740Less: Brokered
deposits


(1,977,489
)

(1,401,771
)

(1,624,431
)Add: Customer sweeps


479,698


311,992


500,288Customer
funding (2)

$
8,453,417

$
8,088,903

$
8,392,597Percentage of
DepositsNoninterest-bearing demand
deposits


12.9
%

16.0
%

13.4
%Interest-bearing
checking


12.0


12.9


12.7Money market accounts


23.9


24.6


25.6Savings accounts


1.8


2.1


1.9Core
deposits


50.6


55.6


53.6Time deposits under
$100,000


18.1


15.1


17.7Time deposits of $100,000 or
more


11.4


14.0


11.6Customer deposits
(1)


80.1


84.7


82.9Brokered deposits


19.9


15.3


17.1Total
deposits


100.0
%

100.0
%

100.0
%(1)
TSFG
defines customer deposits as total deposits less brokered deposits.(2)
TSFG
defines customer funding as total deposits less brokered deposits plus customer
sweeps.At March
31, 2007, period-end customer funding increased $364.5 million, or 4.5%, from
March 31, 2006, primarily due to increases in time deposits and customer sweeps
partially offset by a decrease in core deposits, as TSFGs deposit mix
continued to shift into higher-cost deposit categories.

TSFG uses
brokered deposits as an alternative funding source while continuing its efforts
to maintain and grow its local customer funding base. Brokered deposits
increased as a percentage of total deposits since March 31, 2006 as TSFG
replaced certain puttable funding with brokered deposits.

Table
11 in Earnings Review - Net Interest Income details average balances for the
deposit portfolio for the three months ended March 31, 2007 and 2006. Comparing
the three months ending March 31, 2007 and 2006, average customer funding
increased $264.7 million, or 3.3%. As stated above, within customer funding,
the mix continues to shift toward higher cost products, with increases in
average money market accounts and time deposits partially offset by a decrease
in noninterest-bearing deposits.

Average
customer funding equaled 67.3% of average total funding in the first three
months of 2007 and 63.4% in the first three months of 2006. As part of its
overall funding strategy, TSFG expects to continue its focus on lowering its
funding costs by trying to improve the level and mix of customer funding. TSFG
attempts to enhance its deposit mix by working to attract lower-cost
transaction accounts through actions such as new transaction account opening
goals, differentiating pricing for promotions and specific markets, and
changing incentive plans to place a greater emphasis on lower-cost customer
deposit growth. Deposit pricing is very competitive, and we expect this pricing
environment to continue.

26

Time
deposits of $100,000 or more are generally from customers within our local
markets and include public deposits. Since the first quarter of 2006, time
deposits of $100,000 or more decreased $152.5 million, or 11.9%, to $1.1
billion. TSFG generally elected not to price its larger certificates of deposit
aggressively, instead focusing on its smaller time deposits in an attempt to
attract and retain longer-term relationships.

Borrowed
Funds

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

Table 9Type of Borrowings(dollars in thousands)March 31,December 31,2007

2006

2006Short-Term BorrowingsFederal funds purchased and repurchase agreements

$
1,016,470

$
1,222,688

$
920,811Customer sweeps


479,698


311,992


500,288FHLB advances


75,000





175,000Commercial paper


35,584


35,210


32,631Treasury, tax and loan note


781


1,146


139,989Total short-term borrowings


1,607,533


1,571,036


1,768,719Long-Term BorrowingsRepurchase agreements


200,000


821,000


521,000FHLB advances


328,107


842,134


328,113Subordinated notes


188,871


155,695


188,871Mandatorily redeemable preferred stock of subsidiary


89,800


89,800


89,800Note payable


818


856


828Employee stock ownership plan note payable


125


425


200Purchase accounting premiums, net of amortization


1,569


2,019


1,663Total long term borrowings


809,290


1,911,929


1,130,475Total borrowings


2,416,823


3,482,965


2,899,194Less: Customer sweeps


(479,698
)

(311,992
)

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


1,977,489


1,401,771


1,624,431Total wholesale borrowings

$
3,914,614

$
4,572,744

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


27.6
%

31.8
%

28.3
%(1)
TSFG
  includes brokered deposits in total deposits on its consolidated balance
  sheet.TSFG
uses both short-term and long-term borrowings to fund growth of earning assets
in excess of deposit growth. In the first three months of 2007, average
borrowings totaled $2.7 billion, compared with $3.6 billion for the same period
in 2006. Average wholesale borrowings totaled $4.0 billion in the first three
months of 2007, compared with $4.6 billion in the first three months of 2006.
TSFG continues to reduce its reliance on wholesale borrowings by growth in
customer funding and reductions in securities.

Sources
including federal funds purchased and short-term brokered CDs, repurchase
agreements and FHLB advances are used to satisfy daily funding needs. Balances
in these accounts can fluctuate on a day-to-day basis.

FHLB
advances are a source of funding that TSFG uses depending on the current level
of deposits, its ability to raise deposits through market promotions, and the
availability of collateral to secure FHLB borrowings.

Beginning
in mid-2006, the FHLB and certain structured repurchase agreement
counterparties exercised options to put certain borrowings back to TSFG. The
termination of these borrowings was offset by 3 to 5-year

27

brokered
certificates of deposit combined with growth in customer funding. While the
decision to issue 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. Given the current rate outlook,
TSFG expects another $105 million of funding to be put back by mid-2007 and is
evaluating alternatives to replace.

TSFG
plans to replace approximately $120 million of trust and real estate investment
trust preferred securities, which are callable during the last nine months of
2007, with more efficient sources of capital. These securities are priced at
approximately 300 to 350 basis points above LIBOR. The write-off of the
associated debt issuance costs, which total approximately $2 million, would
offset the majority of the benefit for 2007. Subsequent to quarter-end, TSFG
redeemed $29.0 million of the trust and real estate investment trust preferred shares.

Capital
Resources and Dividends

Total
shareholders equity totaled $1.6 billion, or 11.0% of total assets, at March
31, 2007 and December 31, 2006, compared with $1.5 billion, or 10.3% of total
assets, at March 31, 2006. Shareholders equity increased from the retention of
earnings and the decrease in the net unrealized loss on securities available
for sale, partially offset by cash dividends paid and TSFGs repurchase of 1
million shares in first quarter 2007. At March 31, 2007, TSFG had 3 million
shares remaining under its stock repurchase authorization. Subsequent to
quarter-end, TSFG repurchased an additional 1 million
shares in the open market.

TSFGs
unrealized loss on securities available for sale, net of income tax, which is
included in accumulated other comprehensive loss, was $37.6 million at March
31, 2007, compared with a $47.4 million loss at December 31, 2006 and a $66.1
million loss at March 31, 2006 due primarily to a decrease in long-term
interest rates.

Book
value per share at March 31, 2007 and 2006 was $20.91 and $19.77, respectively.
Tangible book value per share at March 31, 2007 and 2006 was $11.76 and $10.54,
respectively. Tangible book value was below book value as a result of the
purchase premiums associated with acquisitions of entities and assets accounted
for as purchases.

TSFG
is subject to the risk-based capital guidelines administered by bank regulatory
agencies. The guidelines are designed to make regulatory capital requirements
more sensitive to differences in risk profiles among banks and bank holding
companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Under these guidelines, assets and
certain off-balance sheet items are assigned to broad risk categories, each
with appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and certain off-balance sheet items.
TSFG and its Subsidiary Banks exceeded the well-capitalized regulatory
requirements at March 31, 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
10 sets forth various capital ratios for TSFG and its Subsidiary Banks. Under
current regulatory guidelines, debt associated with trust preferred securities
qualifies for tier 1 capital treatment. At March 31, 2007, trust preferred
securities included in tier 1 capital totaled $173.5 million, of which $4.0 million was called subsequent to quarter-end.

28

Table 10Capital RatiosMarch 31, 2007

Well 
  Capitalized 
  RequirementTSFGTotal
  risk-based capital

11.31
%

n/aTier 1
  risk-based capital

9.76


n/aLeverage
  ratio

8.28


n/aCarolina First BankTotal
  risk-based capital

11.43
%

10.00
%Tier 1
  risk-based capital

9.11


6.00Leverage
  ratio

7.57


5.00Mercantile BankTotal
  risk-based capital

12.29
%

10.00
%Tier 1
  risk-based capital

9.37


6.00Leverage
  ratio

8.18


5.00Subsequent
to quarter-end, TSFG began the process of merging Mercantile Bank into Carolina
First Bank (see Noninterest Expenses for further discussion). The combined
banks capital ratios exceeded the well-capitalized regulatory requirements at
March 31, 2007 on a pro-forma basis.

At
March 31, 2007, TSFGs tangible equity to tangible asset ratio totaled 6.52%,
an increase from 5.77% at March 31, 2006, due primarily to a decrease in
tangible assets attributable to the continued runoff of securities since first
quarter 2006, as well as a decrease in the unrealized loss on securities
available for sale. If interest rates increase, TSFG expects its unrealized
loss on securities available for sale to increase, leading to a lower tangible
equity to tangible asset ratio.

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

TSFG,
through a real estate investment trust subsidiary, had 898 mandatorily
redeemable preferred shares outstanding at March 31, 2007 with a stated value
of $100,000 per share. At March 31, 2007, these preferred shares, which are
reported as long-term debt on the consolidated balance sheet, totaled $89.9
million. Under Federal Reserve Board guidelines, $26.3 million qualified as
tier 1 capital, and $53.5 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. Subsequent to quarter-end, TSFG redeemed $25.0 million of
the preferred shares.

Earnings Review

Net
Interest Income

Net
interest income is TSFGs primary source of revenue. Net interest income is the
difference between the interest earned on assets, including loan fees and
dividends on investment securities, and the interest incurred for the
liabilities to support such assets. The net interest margin measures how
effectively a company manages the difference between the yield on earning
assets and the rate incurred on funds used to support those assets. Fully
tax-equivalent net interest income adjusts the yield for assets earning
tax-exempt income to a comparable yield on a taxable basis based on a 35%
marginal federal income tax rate. Table 11 presents average balance sheets and
a net interest income analysis on a tax-equivalent basis for the three months
ended March 31, 2007 and 2006.

29

Table 11Comparative
  Average Balances - Yields and Costs(dollars
  in thousands)Three Months Ended March 31,2007

2006Average

Income/

Yield/

Average

Income/

Yield/Balance

Expense

Rate

Balance

Expense

RateAssetsEarning assetsLoans
(1)

$
9,813,010

$
186,628


7.71
%
$
9,630,573

$
169,188


7.12
%Investment
securities,
  taxable (2)


2,414,896


28,825


4.78


2,752,345


32,543


4.73Investment
securities,
  nontaxable (2) (3)


383,804


4,689


4.89


434,980


5,145


4.73Total
investment securities


2,798,700


33,514


4.79


3,187,325


37,688


4.73Federal funds
sold and interest-bearing bank balances


8,331


141


6.86


21,509


292


5.51Total earning
assets


12,620,041

$
220,283


7.06


12,839,407

$
207,168


6.53Non-earning
  assets


1,528,013








1,527,849Total
  assets

$
14,148,054







$
14,367,256Liabilities and
Shareholders EquityLiabilitiesInterest-bearing liabilitiesInterest-bearing depositsInterest-bearing checking

$
1,187,239

$
5,935


2.03

$
1,140,738

$
4,406


1.57Savings


178,940


706


1.60


191,613


308


0.65Money
market


2,377,771


23,537


4.01


2,215,043


16,345


2.99Time
deposits, excluding
  brokered deposits


2,893,638


35,581


4.99


2,778,587


26,031


3.80Brokered
deposits


1,771,081


22,720


5.20


1,373,199


15,389


4.54Total
interest-bearing
  deposits


8,408,669


88,479


4.27


7,699,180


62,479


3.29Customer
sweeps


453,928


4,981


4.45


299,894


2,889


3.91Other
borrowings


2,270,120


30,644


5.47


3,272,395


37,087


4.60Total
interest-bearing
  liabilities


11,132,717

$
124,104


4.52


11,271,469

$
102,455


3.69Noninterest-bearing
  liabilitiesNoninterest-bearing deposits


1,230,320








1,431,304Other
noninterest-bearing
  liabilities


233,248








176,487Total liabilities


12,596,285








12,879,260Shareholders
equity


1,551,769








1,487,996Total liabilities and
shareholders equity

$
14,148,054







$
14,367,256Net interest income
(tax-equivalent)




$
96,179


3.08
%



$
104,713


3.29
%Less: tax-equivalent adjustment
(3)





1,641








1,801Net interest income




$
94,538







$
102,912Supplemental
data:Customer
funding(4)

$
8,321,836

$
70,740


3.45
%
$
8,057,179

$
49,979


2.52
%Wholesale
borrowings(5)


4,041,201


53,364


5.36


4,645,594


52,476


4.58Total
funding(6)


12,363,037


124,104


4.07


12,702,773


102,455


3.27(1)
Nonaccrual loans are included in average balances for
  yield computations.(2)
The average balances for investment securities
  exclude the unrealized loss recorded for available for sale securities.(3)
The tax-equivalent adjustment to net interest income
  adjusts the yield for assets earning tax-exempt income to a comparable yield
  on a taxable basis.(4)
Customer funding includes total deposits (total
  interest-bearing plus noninterest-bearing deposits) less brokered deposits
  plus customer sweeps.(5)
Wholesale borrowings include borrowings less customer
  sweeps plus brokered deposits. For purposes of this table, wholesale
  borrowings equal the sum of other borrowings and brokered deposits, as
  customer sweeps are presented separately.(6)
Total funding includes customer funding and wholesale
  borrowings.Note: Average balances are derived from daily
  balances.30

Fully
tax-equivalent net interest income decreased 8.1% to $96.2 million for the
first three months of 2007 from $104.7 million for the first three months of
2006. TSFGs average earning assets declined 1.7% to $12.6 billion for first
quarter 2007 from $12.8 billion for first quarter 2006 due primarily to the
continued securities runoff 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 77.8% for first quarter 2007,
up from 75.0% for first quarter 2006, improving the earning asset mix. At March
31, 2007, approximately 61% 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 first quarter 2007 was 3.08%, compared with 3.29% for
first quarter 2006. The yield on average earning assets increased 53 basis
points, aided by improved loan yields, which were up 59 basis points. However,
the improved yield on earning assets was more than offset by an 80 basis point
increase in the average cost of funding. This margin compression reflects an
ongoing change in industry trends, including customer preferences for
higher-cost deposit categories, higher wholesale borrowing costs, and a
continued challenging interest rate environment, as well as TSFGs decision to
replace puttable funding since mid-2006 with higher-cost short-term borrowings
and brokered deposits.


Provision
for Credit Losses

The
provision for credit losses is recorded in amounts sufficient to bring the
allowance for loan losses and the reserve for unfunded lending commitments to a
level deemed appropriate by management. Management determines this amount based
upon many factors, including its assessment of loan portfolio quality, loan
growth, changes in loan portfolio composition, net loan charge-off levels, and
expected economic conditions. The provision for credit losses was
$9.0 million and $9.9 million in the first three months of 2007 and 2006,
respectively. The lower provision for credit losses was primarily attributable
to slower loan growth.

Net
loan charge-offs were $6.9 million, or 0.29% of average loans held for
investment, for the first three months of 2007, compared with $6.8 million, or
0.29% of average loans held for investment, for the first three months of 2006.
The allowance for credit losses equaled 1.16% of loans held for investment as
of March 31, 2007, December 31, 2006, and March 31, 2006. See Loans, Credit
Quality, and Allowance for Loan Losses and Reserve for Unfunded Lending Commitments.

31

Noninterest
Income

Table
12 shows the components of noninterest income.

Table 12Components of Noninterest Income(dollars in thousands)Three
  Months Ended
  March 31,2007

2006Service
  charges on deposit accounts

$
10,613

$
11,288Debit card
  income


2,177


1,921Customer
  service fee income


1,291


1,009Total customer
fee income


14,081


14,218Insurance
  income


3,297


2,977Retail
  investment services


1,958


2,023Trust and
  investment management income


1,594


1,457Benefits
  administration fees


742


667Total wealth
management income


7,591


7,124Merchant
  processing income


3,755


2,686Bank-owned
  life insurance income


2,851


2,819Mortgage
  banking income


2,069


1,884Gain (loss)
  on certain derivative activities


97


(1,125
)(Loss) gain
  on sale of securities available for sale


(1,385
)

675Other


1,785


1,039Total
noninterest income

$
30,844

$
29,320Total
customer fee income decreased 1.0% in the first three months of 2007 compared
to the same period in 2006. Service charges on deposit accounts, the largest
component of customer fee income, decreased 6.0% during the first three months
of 2007 compared to the first three months of 2006 due primarily 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 three months of 2007 compared with the corresponding period in 2006,
wealth management income increased $467,000, or 6.6%, primarily due to an
increase in insurance income driven by higher contingency fee income, which is
generally earned during the first the quarter of the year.

Noninterest
income also included a gain on derivative activities of $97,000 in the first
three months of 2007 compared with a loss of $1.1 million in the first quarter
of 2006.

For
first quarter 2007, mortgage banking income increased 9.8%, compared with the
same period in 2006. The year over year comparison was positively affected by
the second quarter 2006 sale of the mortgage servicing rights portfolio, which
had a $208,000 loss in first quarter 2006. Mortgage loans originated by TSFG
originators totaled $152.7 million and $189.0 million in first quarter 2007 and
2006, respectively.

Merchant
processing income increased 39.8% in the first three months of 2007 compared to
the same period in 2006 as a result of increased transactions. (See
Noninterest Expenses for merchant processing expense, which increased 39.5%.)

Net
losses on securities totaled $1.4 million for first quarter 2007 compared to a
net gain of $675,000 for first quarter 2006. In first quarter 2007, TSFG sold
approximately $116 million of securities available for sale to manage interest
rate risk as determined by our new asset/liability management model.

32

Noninterest
Expenses

Table
13 shows the components of noninterest expenses.

Table 13Components of Noninterest Expenses(dollars in thousands)Three
  Months Ended 
  March 31,2007

2006Salaries and
  wages, excluding contract buyouts and severance

$
35,072

$
31,456Employment
  contract buyouts and severance


1,760


598Total salaries and wages


36,832


32,054Employee
  benefits


9,759


9,029Occupancy


8,608


7,313Furniture
  and equipment


6,462


5,952Professional
  services


4,103


5,779Merchant
  processing expense


3,020


2,165Amortization
  of intangibles


2,001


2,207Advertising
  and business development


1,931


2,506Telecommunications


1,393


1,418Other


11,242


11,411Total noninterest expenses

$
85,351

$
79,834In
first quarter 2007, TSFG implemented an expense reduction initiative, the goal
of which is to reduce annual expenses by approximately $20 million from the
fourth quarter 2006 run rate. Although many of these initiatives were in place
at the end of first quarter 2007, certain staff reductions which were effective
in late February and early March had less than one complete month of impact on
the first quarter 2007 results.

On
May 9, 2007, Carolina First Bank filed an application with the FDIC and the
South Carolina Department of Banking to merge Mercantile Bank into Carolina
First Bank. It is contemplated that the former operations of Mercantile Bank
will continue to operate under the brand name Mercantile Bank in Florida,
albeit as a division of Carolina First Bank. The merger is expected to close at
the end of the second quarter 2007. The merger was considered in TSFGs expense reduction initiative; however, TSFG does
not expect to realize the full benefit of the merger until system conversion
and full integration are accomplished in late 2007 or early 2008.

Salaries
and wages (excluding contract buyouts and severance) and employee benefits
increased $4.3 million, or 10.7%, in the first three months of 2007 compared
with the same period in 2006, despite the fact that full-time equivalent
employees as of March 31, 2007 decreased slightly to 2,516 from 2,526 at March
31, 2006. In addition to normal annual salary increases, 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 during the second and third quarters of 2006. The discretionary
nature of certain incentive plans and accruals may result in increased
volatility in personnel expense in future periods, based on managements
assessment of the probability that certain performance targets will be met.

Occupancy
and furniture and equipment expense increased 13.6% for the first three months
of 2007 compared with the corresponding period in 2006 due primarily to
increased rent expense. The increase in merchant processing expense of 39.5%
was in line with the increase in merchant processing income. Professional
services decreased by 29.0% for first quarter of 2007 compared with first
quarter of 2006. In first quarter of 2006, professional services included
outsourcing costs for internal audit projects which are now handled by TSFGs
staff. In addition, advertising and business development and telecommunications
decreased for the first three months of 2007 compared to the first three months
of 2006 due to the aforementioned expense reduction initiatives implemented in
first quarter of 2007.

33

Income
Taxes

The
effective income tax rate as a percentage of pretax income was 33.9% for the
first three months of 2007 and 34.6% for the first three months of 2006. The
blended statutory federal and state income tax rate was approximately 37% for
both of these periods.

Enterprise
Risk Management

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

Interest
Sensitivity Analysis. As discussed on page 56 of TSFGs 2006 Form 10-K, TSFG
uses a simulation model to analyze various interest rate scenarios in order to
monitor interest rate risk. The information presented in Tables 14 and 15 are
not projections, and are presented with static balance sheet positions. This
methodology allows for an analysis of our inherent risk associated with changes
in interest rates. There are some similar assumptions used in both Table 14 and
15. These include, but are not limited to, the following:


interest
  rate scenarios that assume an instantaneous and parallel change in interest
  rates along the entire yield curve;
a static balance sheet for net income analysis;
as assets and liabilities mature or reprice they are reinvested at
  current rates and keep the same characteristics (i.e., remain as either
  variable or fixed rate) for net income analysis;
mortgage backed securities prepayments are based on historical
  industry data;
loan prepayments are based upon historical bank-specific analysis and
  historical industry data;
deposit retention and average lives are based on historical
  bank-specific analysis;
whether callable/puttable assets and liabilities are called/put are
  based on the implied forward yield curve for each interest rate scenario; and
management takes no action to counter any change.Table
14 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
March 31, 2007 and 2006 levels, respectively.

Table 14Net Income at Risk AnalysisAnnualized Hypothetical Percentage Change
  in
  Net IncomeInterest Rate Scenario


Gradual Rate Change
March 31,

Immediate Rate Change
March 31,2007


2007

20062.00%(1)

(0.8
) %


(6.0
) %

5.5
%1.00(1)

(0.3
)


(2.2
)

3.2Flat








(1.00)(1)

0.7



0.1


(4.8
)(2.00)(1)

1.4



(3.9
)

(20.0
)(1)
For March 31, 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 March 31,
  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.34

Table
15 reflects the sensitivity of the economic value of equity (EVE) to changes
in interest rates. EVE is a measurement of the inherent, long-term balance
sheet-related economic value of TSFG (defined as the fair value of all assets
minus the fair value of all liabilities and their associated off balance sheet
amounts) at a given point in time. Table 15 shows the effect that the indicated
changes in interest rates would have on the fair value of net assets at March
31, 2007 and 2006, respectively, compared with the base case or flat interest
rate scenario. The base case scenario assumes interest rates stay at March 31,
2007 and 2006 levels, respectively.

Table 15Economic Value of Equity Risk AnalysisInterest Rate Scenario


Annualized Hypothetical Percentage Change in
  Economic Value of Equity
  March 31,2007

20062.00% (1)

(11.8
) %

(5.9
) %1.00% (1)

(5.3
)

(1.9
)Flat




(1.00)% (1)

1.4


(2.7
)(2.00)% (1)

(3.4
)

(11.8
)(1)
The rising 100 and 200 basis point and falling 100 and 200 basis
  point interest rate scenarios assume an instantaneous and parallel change in
  interest rates along the entire yield curve.The
improved net income at risk profile over the past year is due primarily to the
reduction in investment securities and wholesale borrowings during the fourth
quarter 2005, continued securities runoff in 2006, the replacement of recently
terminated puttable funding with non-puttable borrowings, and a 2006 interest
rate floor purchase. During fourth quarter 2006, we successfully converted to a
more advanced asset/liability management system, which will enhance our ability
to measure and manage interest rate risk and liquidity risk. In addition, TSFG
continually refines the modeling process through the use of more precise model
assumptions. Since March 31, 2006, assumptions related to such areas as loan
prepayments and average non-maturity deposit lives were updated.

There
are material limitations with TSFGs models presented in Tables 14 and 15,
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

35

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.

Liquidity

Liquidity
management ensures that adequate funds are available to meet deposit
withdrawals, fund loan and capital expenditure commitments, maintain reserve
requirements, pay operating expenses, provide funds for dividends and debt
service, manage operations on an ongoing basis, and capitalize on new business
opportunities. Funds are primarily provided by the Subsidiary Banks through
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 16 summarizes future contractual obligations based on maturity
dates as of March 31, 2007. Table 16 does not include payments which may be
required under employment and deferred compensation agreements. In addition,
Table 16 does not include payments required for interest and income taxes (see
Item 1, Consolidated Statements of Cash Flows for details on interest and
income taxes paid for the three months ended March 31, 2007).

Table 16Contractual Obligations(dollars in thousands)Payments Due by PeriodTotal

Remainder
  of
  2007

2008
  and
  2009

2010
  and
  2011

After
  2011Time deposits

$
4,907,169

$
2,671,660

$
781,137

$
612,639

$
841,733Short-term borrowings


1,607,533


1,607,533








Long-term debt


807,721


177


182,954


65,180


559,410Operating leases


190,521


14,184


36,221


27,390


112,726Total
contractual obligations

$
7,512,944

$
4,293,554

$
1,000,312

$
705,209

$
1,513,869Net
cash provided by operations and deposits from customers have been the primary
sources of liquidity for TSFG. TSFG is focusing additional efforts aimed at
acquiring new deposits through the Subsidiary Banks established branch network
to enhance liquidity and reduce reliance on wholesale borrowing. Liquidity
needs are a factor in developing the Subsidiary Banks deposit pricing
structure, which may be altered to retain or grow deposits if deemed necessary.

The
Subsidiary Banks have the ability to borrow from the FHLB and maintain
short-term lines of credit from unrelated banks. FHLB advances outstanding as
of March 31, 2007 totaled $403.1 million. At March 31, 2007, the Subsidiary
Banks had $49.9 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 March
31, 2007, the Subsidiary Banks had unused short-term lines of credit totaling
$1.9 billion (which may be canceled at the lenders option).

36

The
Federal Reserve Bank provides back-up funding for commercial banks.
Collateralized borrowing relationships with the Federal Reserve Banks of
Richmond and Atlanta are in place for the Subsidiary Banks to meet emergency
funding needs. At March 31, 2007, the Subsidiary Banks had qualifying
collateral to secure advances up to $1.8 billion, of which none was outstanding.

At
March 31, 2007, the parent company had three unused short-term lines of credit
totaling $35.0 million. These lines of credit mature May 14, 2007 for $15.0
million, June 30, 2007 for $10.0 million, and November 14, 2007 for $10.0
million.

TSFG,
principally through the Subsidiary Banks, enters into agreements in the normal
course of business to extend credit to meet the financial needs of its
customers. For amounts and types of such agreements at March 31, 2007, see
Off-Balance Sheet Arrangements. Increased demand for funds under these
agreements would reduce TSFGs available liquidity and could require additional
sources of liquidity.

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.

Item 3.
Quantitative and
  Qualitative Disclosures about Market RiskSee
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
  ProceduresEvaluation of
Disclosure Controls and Procedures

At
March 31, 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 March 31, 2007,
TSFGs disclosure controls and procedures were effective (1) to provide
reasonable assurance that information required to be disclosed by TSFG in the
reports filed or submitted by it under the Exchange Act was recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and forms, and (2) to provide reasonable assurance that information required to
be disclosed by TSFG in such reports is accumulated and communicated to TSFGs
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.

Changes in
Internal Controls over Financial Reporting

TSFG
continually assesses the adequacy of its internal control over financial
reporting quarterly and strives to enhance its controls in response to internal
control assessments and internal and external audit and regulatory
recommendations. There were no changes in TSFGs internal control over
financial reporting identified in connection with the evaluation described in
the immediately preceding paragraph during the quarter ended March 31, 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.

37

PART II. OTHER INFORMATION

Item 1.
Legal ProceedingsSee
Note 6 to the Consolidated Financial Statements for a discussion of legal
proceedings.

Item 1A.
Risk FactorsThere
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 ProceedsTSFG
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 March 31, 2007.

Issuer Purchases of Equity SecuritiesPeriod

Total
  Number 
  of Shares 
  Purchased

Average
  Price
  Paid per
  Share

Total
  Number of 
  Shares Purchased 
  as Part
  of Publicly
  Announced Plans
  or Programs

Maximum
  Number of
  Shares that 
  May Yet Be
  Purchased
  Under Plans or
  Programs (2)January 1, 2007 to January 31,
2007


1,030,644
(1)
$
26.00


1,000,000


3,000,000February 1, 2007 to February
28, 2007


487
(1)

26.78





3,000,000March 1, 2007 to March 31,
2007


837
(1)

25.51





3,000,000Total


1,031,968

$
26.00


1,000,000


3,000,000(1)
Includes
  30,644 shares in January, 487 shares in February, and 837 shares in March
  canceled in connection with exercise of options or vesting of restricted
  stock. Pursuant to TSFGs stock option plans, participants may exercise stock
  options by surrendering shares of TSFG common stock the participants already
  own as payment of the option exercise price. Pursuant to TSFGs restricted
  stock plans, participants may tender shares of vested restricted stock as
  payment for taxes due at the time of vesting. Shares surrendered by
  participants of these plans are repurchased pursuant to the terms of the
  applicable stock option or restricted stock plan and not pursuant to publicly
  announced share repurchase programs.(2)
In December
  of 2006, TSFG announced a stock repurchase program authorizing TSFG to
  repurchase up to 4 million shares of its common stock. This authorization
  replaced TSFGs existing stock repurchase authorizations. This stock
  repurchase program has no expiration date and will expire upon completion of
  repurchases totaling the amount authorized to repurchase. Subsequent to
  quarter-end, TSFG repurchased an additional 1 million shares of its common
  stock in the open market at an average price per share of $23.07. As of the filing of this Form 10-Q, there were 2 million shares
  remaining under the authorization.Item 3.
Defaults upon Senior SecuritiesNone.

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

Item 5.
Other InformationNone.

38

Item 6.
Exhibits10.1
Form of Award Agreement for 2007-2009 Period of the TSFG Long Term Incentive Plan31.1
Certificate
  of the Principal Executive Officer pursuant to Rule 13a-14a/15(d)-14(a) of
  Securities Exchange Act of 1934, as amended, as adopted pursuant to Section
  302 of the Sarbanes-Oxley Act of 200231.2
Certificate
  of the Principal Financial Officer pursuant to Rule 13a-14a/15(d)-14(a) of
  Securities Exchange Act of 1934, as amended, as adopted pursuant to Section
  302 of the Sarbanes-Oxley Act of 200232.1+
Certificate
  of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
  Section 906 of the Sarbanes-Oxley Act of 200232.2+
Certificate
  of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002+ This exhibit
shall not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934, or otherwise subject to the liability of that section,
and shall not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934.

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

The above
exhibits may be found on TSFGs electronic filing of its March 31, 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.

39

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: May 9,
  2007
/s/ James R. GordonJames R.
  GordonExecutive
  Vice President and Chief Financial Officer(Principal
  Accounting and Financial Officer)40